##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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(Mark One)

|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended September 30, 2005



| ̈ | 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



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B. F. SAUL REAL ESTATE INVESTMENT TRUST

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Maryland                                                       |  | 52-6053341                          
|(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)                          



Registrants
telephone number, including area code: (301) 986-6000



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Securities registered pursuant to Section 12(b) of Act:



|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|N/A                 |  | N/A                                      



Securities
registered pursuant to Section 12(g) of the Act:



N/A

(Title of class)



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Indicate by check mark whether 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 requires to file such reports), and
(2) has been subject to such filing requirement for the past 90 days.    Yes  x    No ̈



Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendments to this Form 10-K.  x



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



Indicate by check mark whether the registrant is a shell
company (as defined in Exchange Act Rule 12b-2).    Yes ̈No  x



There were no Common Shares of Beneficial
Interest held by non-affiliates of the registrant as of December 16, 2005.



The number of Common Shares of Beneficial Interest, $1 Par Value, outstanding as of December 16, 2005 was 4,807,510.



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##### Table of Contents

TABLE OF CONTENTS

|         |  |                                                                                                             |  |    
|-------- |  | ----------------------------------------------------------------------------------------------------------- |  | ---
|PART I   |  |                                                                                                            
|         |  |                                                                                                            
|ITEM 1.  |  | BUSINESS                                                                                                    |  | 3  
|         |  |                                                                                                            
|         |  | Overview                                                                                                    |  | 3  
|         |  | Real Estate                                                                                                 |  | 3  
|         |  | Banking                                                                                                     |  | 32 
|         |  | Federal Taxation                                                                                            |  |    
|         |  |                                                                                                            
|ITEM 2.  |  | PROPERTIES                                                                                                  |  | 33 
|         |  |                                                                                                            
|         |  | Real Estate                                                                                                 |  | 33 
|         |  | Banking                                                                                                     |  | 33 
|         |  |                                                                                                            
|ITEM 3.  |  | LEGAL PROCEEDINGS                                                                                           |  | 33 
|         |  |                                                                                                            
|ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                         |  | 33 
|         | 
|PART II  |  |                                                                                                            
|         |  |                                                                                                            
|ITEM 5.  |  | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES |  | 34 
|         |  |                                                                                                            
|ITEM 6.  |  | SELECTED FINANCIAL DATA                                                                                     |  | 34 
|         |  |                                                                                                            
|ITEM 7.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                       |  | 37 
|         |  |                                                                                                            
|         |  | Financial Condition                                                                                         |  | 38 
|         |  | Real Estate                                                                                                 |  | 38 
|         |  | Banking                                                                                                     |  | 39 
|         |  |                                                                                                            
|         |  | Liquidity and Capital Resources                                                                             |  | 49 
|         |  | Real Estate                                                                                                 |  | 49 
|         |  | Banking                                                                                                     |  | 52 
|         |  |                                                                                                            
|         |  | Results of Operations                                                                                       |  | 54 
|         |  | Fiscal 2005 Compared to Fiscal 2004                                                                         |  | 55 
|         |  | Real Estate                                                                                                 |  | 55 
|         |  | Banking                                                                                                     |  | 56 
|         |  |                                                                                                            
|         |  | Fiscal 2004 Compared to Fiscal 2003                                                                         |  | 61 
|         |  | Real Estate                                                                                                 |  | 61 
|         |  | Banking                                                                                                     |  | 62 
|         |  |                                                                                                            
|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                  |  | 64 
|         |  |                                                                                                            
|ITEM 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                 |  | 64 
|         |  |                                                                                                            
|ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                        |  | 112
|         |  |                                                                                                            
|ITEM 9A. |  | CONTROLS AND PROCEDURES                                                                                     |  | 112
|         | 
|PART III |  |                                                                                                            
|         |  |                                                                                                            
|ITEM 10. |  | TRUSTEES AND EXECUTIVES OFFICERS OF THE TRUST                                                               |  | 113
|         |  |                                                                                                            
|         |  | Executive Officers of the Trust Who Are Not Directors                                                       |  | 113
|         |  | Committees of the Board of Trustees                                                                         |  | 114
|         |  |                                                                                                            
|ITEM 11. |  | EXECUTIVE COMPENSATION                                                                                      |  | 114
|         |  |                                                                                                            
|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS              |  | 118
|         |  |                                                                                                            
|ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                              |  | 118
|         |  |                                                                                                            
|ITEM 14. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                      |  | 120
|         | 
|PART IV  |  |                                                                                                            
|         |  |                                                                                                            
|ITEM 15. |  | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                  |  | 121



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##### Table of Contents

PART I



ITEM 1. BUSINESS



OVERVIEW



B.F. Saul Real Estate Investment Trust
operates as a Maryland real estate investment trust. The Real Estate Trust began its operations in 1964 as an unincorporated business trust organized under a Declaration of Trust governed by District of Columbia law. The Real Estate Trust terminated
its status as a qualified real estate investment trust for federal income tax purposes in 1978 and is now taxable as a corporation. On October 24, 1988, the Real Estate Trust amended its Declaration of Trust to qualify as a statutory real
estate investment trust under Maryland law.



The principal business activities
of the Trust are the ownership of 80% of the outstanding common stock of Chevy Chase Bank, F.S.B. (Chevy Chase or the Bank), whose assets accounted for 97% of the Trusts consolidated assets at September 30, 2005,
and the ownership and development of income-producing properties. By virtue of its ownership of a majority interest in Chevy Chase, the Trust is a savings and loan holding company and subject to regulation, examination and supervision by the Office
of Thrift Supervision, also know as OTS. See BankingHolding Company Regulation.



The Trust recorded net income of $73.6 million in the fiscal year ended September 30, 2005, compared to a net income of $76.7 million in the fiscal year ended September 30, 2004.



The Trust has prepared its financial statements and other disclosures on a fully consolidated
basis. The term Trust used in the text and the financial statements included herein refers to the combined entity, which includes B.F. Saul Real Estate Investment Trust and its subsidiaries, including Chevy Chase and its subsidiaries.
The term Real Estate Trust refers to B.F. Saul Real Estate Investment Trust and its subsidiaries, excluding Chevy Chase and its subsidiaries. The operations conducted by the Real Estate Trust are designated as Real Estate,
while the business conducted by Chevy Chase and its subsidiaries is identified as Banking.



REAL ESTATE



The Real Estate Trusts
long-term objectives are to increase cash flow from operations and to maximize capital appreciation of its real estate. The properties owned by the Real Estate Trust are located predominantly in the mid-Atlantic and Southeastern regions of the
United States and consist principally of hotels, office projects, and undeveloped land parcels.



The Real Estate Trust has significant relationships with B.F. Saul Company (Saul Company) and its wholly owned subsidiary, B.F. Saul Property Company, (Saul Property Co.). Saul Company, founded
in 1892, specializes in commercial property management and leasing, hotel management, development and construction management, acquisitions, sales and financing of real estate property and insurance. Certain officers and trustees of the Real Estate
Trust are also officers and/or directors of Saul Company and Saul Property Co. Other than uncompensated officers, the Real Estate Trust has no employees. See Item 13. Certain Relationships and Related Transactions  Management
Personnel.



Saul Company acts as the Real Estate Trusts investment
advisor and manages the financial, accounting, information technology, insurance, legal, tax and other administrative affairs of the Real Estate Trust. Saul Property Co. acts as leasing and management agent for the income-producing properties owned
by the Real Estate Trust, and plans and oversees the development of new properties and the expansion and renovation of existing properties. Prior to October 1, 2005, the duties performed by Saul Company in its capacity as the Real Estate
Trusts investment advisor were performed by a wholly-owned subsidiary of Saul Company, Saul Advisory Company, L.L.C. (the Former Advisor).



BANKING



Chevy Chase Bank, F.S.B. is a federally
chartered and federally insured stock savings bank which at September 30, 2005 was conducting business from 251 full-service branch offices, including 54 grocery store banking centers, and 970 automated teller machines in Maryland, Delaware,
Virginia and the District of Columbia. The Bank has its home office in McLean, Virginia and its executive offices in Bethesda, Maryland, both suburban communities of Washington, DC. The Bank either directly or through a wholly owned subsidiary also
maintains two commercial loan production offices located in Baltimore, Maryland and Northern Virginia and six mortgage loan production offices in the mid-Atlantic region. In addition, the Bank utilizes third party originators in order to supplement
its direct origination of loans. At September 30, 2005, the Bank had total assets of $14.2 billion, total deposits of $9.8 billion and total stockholders equity of $745.3 million. Based on total assets at September 30, 2005, Chevy
Chase is the largest full-service bank headquartered in the Washington, DC metropolitan area.



Chevy Chase is a consumer oriented, full-service banking institution principally engaged in the business of attracting deposits from the public and using those deposits, together with borrowings and other funds, to
make loans secured by real estate, primarily residential mortgage loans, and other consumer loans. The Bank also has an active commercial lending program. The Banks principal deposit and retail lending markets are located in the Washington, DC
metropolitan area. The Banks wholesale activities include the acquisition of loans through third party originators. As a complement to its basic deposit and lending activities, the Bank provides related financial services to its customers,
including securities brokerage and insurance products offered through its subsidiaries. In addition, the Bank offers a variety of investment products and provides fiduciary services to a primarily institutional customer base through its subsidiary,
ASB Capital Management LLC, and to a primarily high net worth customer base through another subsidiary, Chevy Chase Trust Company.



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The Bank seeks to capitalize on its status as the largest full-service bank headquartered in the Washington, DC
metropolitan area by expanding its community banking operations. Accordingly, the Bank continues to build its branch and alternative delivery systems, to maintain and expand its mortgage banking operations, and to offer a broad range of consumer
products, including home equity loans and lines of credit and other consumer loans. In addition, the Bank continues to expand its commercial banking program, with an emphasis on businesses operating in the Washington, DC metropolitan area. The Bank
also continues to further develop the fee-based services it provides to customers, including securities brokerage, trust, asset management and insurance products offered through its subsidiaries.



Chevy Chase recorded operating income $189.7 million for the year ended September 30,
2005, compared to operating income of $231.2 million for the year ended September 30, 2004. At September 30, 2005, the Banks tangible, core, tier 1 risk-based and total risk-based regulatory capital ratios were 5.92%, 5.92%, 8.82%
and 10.95%, respectively. The Banks regulatory capital ratios exceeded the requirements under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, also known as FIRREA, as well as the standards established for
well-capitalized institutions under the prompt corrective action regulations established pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991, also known as FDICIA.



Chevy Chase is subject to comprehensive regulation, examination and supervision by the Office
of Thrift Supervision (the OTS) and, to a lesser extent, by the Federal Deposit Insurance Corporation (the FDIC). The Banks deposit accounts are fully insured up to $100,000 per insured depositor by the FDIC.



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##### Table of Contents

REAL ESTATE



Real Estate Investments



The Real Estate Trusts investment portfolio consists principally of seasoned operating properties. The Real Estate Trust expects to hold its properties as long-term investments and has no maximum period for
retention of any investment. It may acquire additional income-producing properties, expand and improve its properties, or sell such properties, as and when circumstances warrant. The Real Estate Trust also may participate with other entities in
property ownership, through joint ventures or other types of co-ownership.



The
following tables set forth, at and for the periods indicated, certain information regarding the properties in the Real Estate Trusts investment portfolio at September 30, 2005.



Hotels



|               |  |                                   |  |           |  |                          |   |  |                          |   |  |      |   |  |      |        |      |   |        |  |   |       
|-------------- |  | --------------------------------- |  | --------- |  | ------------------------ | - |  | ------------------------ | - |  | ---- | - |  | ---- | ------ | ---- | - | ------ |  | - | ------
|               |  |                                   |  |           |  | Average Occupancy (2)    |   |  | Average Room Rate       
|               |  |                                   |  |           |  | Year Ended September 30, |   |  | Year Ended September 30,
|Location       |  | Name                              |  | Rooms (1) |  | 2005                     |   |  | 2004                     |   |  | 2003 |   |  | 2005 |        | 2004 |   | 2003  
|FLORIDA        |  |                                   |  |           |  |                          |   |  |                          |   |  |      |   |  |      |        |      |   |        |  |   |       
|Boca Raton     |  | Boca Raton SpringHill Suites      |  | 146       |  | 75                       | % |  | 64                       | % |  | 55   | % |  | $    | 88.46  |      | $ | 79.78  |  | $ | 73.84 
|Boca Raton     |  | Boca Raton TownePlace Suites      |  | 91        |  | 79                       | % |  | 73                       | % |  | 67   | % |  | $    | 83.04  |      | $ | 68.70  |  | $ | 64.61 
|Ft. Lauderdale |  | Ft. Lauderdale TownePlace Suites  |  | 95        |  | 80                       | % |  | 83                       | % |  | 71   | % |  | $    | 81.41  |      | $ | 65.20  |  | $ | 64..69
|MARYLAND       |  |                                   |  |           |  |                          |   |  |                          |   |  |      |   |  |      |        |      |   |        |  |   |       
|Gaithersburg   |  | Gaithersburg Holiday Inn          |  | 300       |  | 68                       | % |  | 63                       | % |  | 58   | % |  | $    | 87.03  |      | $ | 82.91  |  | $ | 84.39 
|Gaithersburg   |  | Gaithersburg TownePlace Suites    |  | 91        |  | 70                       | % |  | 78                       | % |  | 71   | % |  | $    | 92.08  |      | $ | 77.63  |  | $ | 71.82 
|MICHIGAN       |  |                                   |  |           |  |                          |   |  |                          |   |  |      |   |  |      |        |      |   |        |  |   |       
|Auburn Hills   |  | Auburn Hills Holiday Inn Select   |  | 190       |  | 62                       | % |  | 63                       | % |  | 64   | % |  | $    | 97.92  |      | $ | 99.54  |  | $ | 98.70 
|NEW YORK       |  |                                   |  |           |  |                          |   |  |                          |   |  |      |   |  |      |        |      |   |        |  |   |       
|Rochester      |  | Rochester Airport Holiday Inn (3) |  | 279       |  | 65                       | % |  | 62                       | % |  | 66   | % |  | $    | 73.32  |      | $ | 71.66  |  | $ | 70.46 
|OHIO           |  |                                   |  |           |  |                          |   |  |                          |   |  |      |   |  |      |        |      |   |        |  |   |       
|Cincinnati     |  | Cincinnati Holiday Inn (3)        |  | 275       |  | 49                       | % |  | 51                       | % |  | 54   | % |  | $    | 70.12  |      | $ | 71.05  |  | $ | 68.66 
|VIRGINIA       |  |                                   |  |           |  |                          |   |  |                          |   |  |      |   |  |      |        |      |   |        |  |   |       
|Arlington      |  | National Airport Crowne Plaza     |  | 308       |  | 65                       | % |  | 65                       | % |  | 63   | % |  | $    | 137.10 |      | $ | 129.50 |  | $ | 124.04
|Arlington      |  | National Airport Holiday Inn      |  | 280       |  | 68                       | % |  | 70                       | % |  | 60   | % |  | $    | 120.03 |      | $ | 95.25  |  | $ | 90.50 
|Herndon        |  | Herndon Holiday Inn Express       |  | 115       |  | 74                       | % |  | 71                       | % |  | 61   | % |  | $    | 104.27 |      | $ | 89.69  |  | $ | 81.08 
|McLean         |  | Tysons Corner Courtyard           |  | 229       |  | 74                       | % |  | 74                       | % |  | 67   | % |  | $    | 151.02 |      | $ | 135.36 |  | $ | 127.57
|McLean         |  | Tysons Corner Holiday Inn         |  | 316       |  | 65                       | % |  | 60                       | % |  | 54   | % |  | $    | 124.22 |      | $ | 106.07 |  | $ | 91.53 
|Sterling       |  | Dulles Airport Hampton Inn        |  | 124       |  | 74                       | % |  | 71                       | % |  | 62   | % |  | $    | 114.97 |      | $ | 87.90  |  | $ | 76.26 
|Sterling       |  | Dulles Airport Holiday Inn        |  | 297       |  | 70                       | % |  | 70                       | % |  | 63   | % |  | $    | 113.90 |      | $ | 89.27  |  | $ | 79.36 
|Sterling       |  | Dulles Airport TownePlace Suites  |  | 95        |  | 72                       | % |  | 87                       | % |  | 80   | % |  | $    | 111.16 |      | $ | 74.42  |  | $ | 70.06 
|Sterling       |  | Dulles Town Center Hampton Inn    |  | 152       |  | 72                       | % |  | 78                       | % |  | 69   | % |  | $    | 113.30 |      | $ | 90.48  |  | $ | 80.06 
|COLORADO       |  |                                   |  |           |  |                          |   |  |                          |   |  |      |   |  |      |        |      |   |        |  |   |       
|Pueblo         |  | Pueblo Holiday Inn (4)            |  |          |  |                         |   |  | 50                       | % |  | 46   | % |  |      |       |      | $ | 58.12  |  | $ | 56.61 
|               |  |                                   |  |           |  |                          |   |  |                          |   |  |      |   |  |      |        |      |   |        |  |   |       
|               |  |                                   |  | 3,383     |  | 68                       | % |  | 66                       | % |  | 61   | % |  | $    | 106.81 |      | $ | 91.67  |  | $ | 85.93 
|               |  |                                   |  |           |  |                          |   |  |                          |   |  |      |   |  |      |        |      |   |        |  |   |       

---

|(1) | Available rooms as of September 30, 2005.
|--- | -----------------------------------------

|(2) | Average occupancy is calculated by dividing the rooms occupied by the rooms available.
|--- | --------------------------------------------------------------------------------------

|(3) | Asset held for sale as of September 30, 2005.
|--- | ---------------------------------------------

|(4) | Asset sold December 9, 2004.
|--- | ----------------------------



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Office and Industrial



|                |  |                           |               |                       |  |                          |   |  |                     |   |  |      |   |  |         |     |  |         |    
|--------------- |  | ------------------------- | ------------- | --------------------- |  | ------------------------ | - |  | ------------------- | - |  | ---- | - |  | ------- | --- |  | ------- | ---
|Location        |  | Name                      |               | GrossLeasableArea (1) |  | Leasing Percentages      |   |  | Expiring Leases (1) |  
|                |  |                           | September 30, |                       |  | Year EndingSeptember 30, |  
|                |  |                           | 2005          |                       |  | 2004                     |   |  | 2003                |   |  | 2006 |   |  | 2007    |    
|FLORIDA         |  |                           |               |                       |  |                          |   |  |                     |   |  |      |   |  |         |     |  |         |    
|Fort Lauderdale |  | Commerce CenterPhase II  |               | 61,149                |  | 92                       | % |  | 82                  | % |  | 85   | % |  | 11,332  |     |  | 17,111  |    
|GEORGIA         |  |                           |               |                       |  |                          |   |  |                     |   |  |      |   |  |         |     |  |         |    
|Atlanta         |  | 900 Circle 75 Parkway     |               | 345,502               |  | 84                       | % |  | 82                  | % |  | 78   | % |  | 73,370  |     |  | 49,233  |    
|Atlanta         |  | 1000 Circle 75 Parkway    |               | 89,412                |  | 87                       | % |  | 84                  | % |  | 88   | % |  | 10,941  |     |  | 11,418  |    
|Atlanta         |  | 1100 Circle 75 Parkway    |               | 269,049               |  | 90                       | % |  | 91                  | % |  | 90   | % |  | 59,289  |     |  | 88,800  |    
|MARYLAND        |  |                           |               |                       |  |                          |   |  |                     |   |  |      |   |  |         |     |  |         |    
|Bethesda        |  | 8001 Wisconsin Avenue (3) |               | 12,131                |  | 100                      | % |  |                    |   |  |     |   |  | NONE    |     |  | 6,771   |    
|Laurel          |  | Sweitzer Lane             |               | 150,020               |  | 100                      | % |  | 100                 | % |  | 100  | % |  | NONE    |     |  | NONE    |    
|VIRGINIA        |  |                           |               |                       |  |                          |   |  |                     |   |  |      |   |  |         |     |  |         |    
|McLean          |  | 8201 Greensboro Drive     |               | 360,854               |  | 99                       | % |  | 93                  | % |  | 75   | % |  | 14,797  |     |  | 31,795  |    
|McLean          |  | Tysons Park Place         |               | 247,581               |  | 96                       | % |  | 91                  | % |  | 97   | % |  | 25,696  |     |  | 32,827  |    
|Sterling        |  | Dulles North              |               | 59,886                |  | 100                      | % |  | 100                 | % |  | 100  | % |  | NONE    |     |  | 12,802  |    
|Sterling        |  | Dulles North Two          |               | 79,210                |  | 100                      | % |  | 100                 | % |  | 100  | % |  | 9,991   |     |  | NONE    |    
|Sterling        |  | Dulles North Four         |               | 100,207               |  | 100                      | % |  | 100                 | % |  | 100  | % |  | NONE    |     |  | 100,207 |    
|Sterling        |  | Dulles North Five         |               | 80,391                |  | 100                      | % |  | 100                 | % |  | 100  | % |  | NONE    |     |  | NONE    |    
|Sterling        |  | Dulles North Six          |               | 53,517                |  | 100                      | % |  | 100                 | % |  | 100  | % |  | NONE    |     |  | NONE    |    
|Sterling        |  | Loudoun Tech I            |               | 81,238                |  | 24                       | % |  | 24                  | % |  | 0    | % |  | NONE    |     |  | NONE    |    
|                |  |                           |               |                       |  |                          |   |  |                     |   |  |      |   |  |         |     |  |         |    
|                |  | Totals                    |               | 1,990,147             |  | 91                       | % |  | 89                  | % |  | 85   | % |  | 205,416 | (2) |  | 350,964 | (2)
|                |  |                           |               |                       |  |                          |   |  |                     |   |  |      |   |  |         |     |  |         |    

---

|(1) | Square feet
|--- | -----------

|(2) | Represents 10.3% and 17.6%, respectively, of the Real Estate Trusts office and industrial portfolio in terms of square footage as of September 30, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Acquired May 25, 2005.
|--- | ----------------------



Land Parcels



|                                                   |  |                                                                                                      |  |                        |  |                                                                                  
|-------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | ---------------------- |  | ---------------------------------------------------------------------------------
|Location                                           |  | Name                                                                                                 |  | Acres                  |  | Zoning                                                                           
|FLORIDA                                            |  |                                                                                                      |  |                        |  |                                                                                  
|Boca Raton                                         |  | Arvida Park of Commerce                                                                              |  | 6.5                    |  | Mixed Use                                                                        
|Fort Lauderdale                                    |  | Commerce Center                                                                                      |  | 1.6                    |  | Office and Warehouse                                                             
|GEORGIA                                            |  |                                                                                                      |  |                        |  |                                                                                  
|Atlanta                                            |  | Circle 75 (1)                                                                                        |  | 126.7                  |  | Office and Industrial                                                            
|KANSAS                                             |  |                                                                                                      |  |                        |  |                                                                                  
|Overland Park                                      |  | Overland Park                                                                                        |  | 136.6                  |  | Residential, Office and Retail                                                   
|MICHIGAN                                           |  |                                                                                                      |  |                        |  |                                                                                  
|Auburn Hills                                       |  | Auburn Hills Holiday Inn                                                                             |  | 0.5                    |  | Commercial                                                                       
|NEW YORK                                           |  |                                                                                                      |  |                        |  |                                                                                  
|Rochester                                          |  | Rochester Airport Holiday Inn (2)                                                                    |  | 2.8                    |  | Commercial                                                                       
|VIRGINIA                                           |  |                                                                                                      |  |                        |  |                                                                                  
|Ashburn McLean Sterling Sterling Sterling Sterling |  | Ashburn Village (3) Park Place II Cedar Green Church Road Sterling Boulevard (1) Loudoun Tech II (3) |  | 88.48.110.232.031.37.4 |  | Mixed useOffice and IndustrialCommercialOffice
and IndustrialIndustrialCommercial
|                                                   |  |                                                                                                      |  |                        |  |                                                                                  
|                                                   |  | Total                                                                                                |  | 452.1                  |  |                                                                                  
|                                                   |  |                                                                                                      |  |                        |  |                                                                                  

---

|(1) | Development will commence on a portion of the property in fiscal 2006.
|--- | ----------------------------------------------------------------------

|(2) | Real estate held for sale as of September 30, 2005
|--- | --------------------------------------------------

|(3) | Purchased in fiscal 2005
|--- | ------------------------



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##### Table of Contents

Other Real Estate Investments



PURCHASE-LEASEBACK PROPERTIES (1)



|                 |  |               |  |                       
|---------------- |  | ------------- |  | ----------------------
|APARTMENTS      
|                 |  |              
|Location         |  | Name          |  | Number of Units       
|LOUISIANA        |  |               |  |                       
|Metairie         |  | Chateau Dijon |  | 336                   
|TENNESSEE        |  |               |  |                       
|Knoxville        |  | Country Club  |  | 232                   
|                 |  |               |  |                       
|                 |  | Total         |  | 568                   
|                 |  |               |  |                       
|                
|SHOPPING CENTERS
|Location         |  | Name          |  | Gross Leasable Area(2)
|GEORGIA          |  |               |  |                       
|Warner Robbins   |  | Houston Mall  |  | 264,000               
|                 |  |               |  |                       

---

|(1) | The Real Estate Trust owns the land under certain income-producing properties and receives fixed ground rent, which is subject to periodic escalation, from the owners of the
improvements. In certain instances, the Real Estate Trust also receives percentage rent based upon the income generated by the properties.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Square feet.
|--- | ------------



Investment in Saul Holdings Limited Partnership and Saul Centers, Inc.



On August 26, 1993, the Real Estate Trust consummated a series of transactions in connection with the initial public offering of Saul Centers, Inc. (Saul Centers) in which it transferred 22 shopping
center properties and one of its office properties together with the $196 million of mortgage debt and deferred interest associated with such properties, to a newly organized limited partnership, Saul Holdings Limited Partnership (Saul
Holdings), and one of two newly organized subsidiary limited partnerships of Saul Holdings. In exchange for the transferred properties, the Real Estate Trust received securities representing a 21.5% limited partnership interest in Saul
Holdings. Entities under common control with the Trust received limited partnership interests collectively representing a 5.5% partnership interest in Saul Holdings in exchange for the transfer of property management functions and certain other
properties to Saul Holdings and its subsidiaries. Saul Centers received a 73.0% general partnership interest in Saul Holdings in exchange for the contribution of approximately $220.7 million to Saul Holdings. Affiliates of the Trust received certain
cash distributions from Saul Holdings and purchased 4.0% of the common stock of Saul Centers in a private offering consummated concurrently with the initial public offering of such common stock. Certain officers and trustees of the Trust are also
officers and/or directors of Saul Centers. See Item 13. Certain Relationships and Related Transactions  Management Personnel.



As of September 30, 2005, the Real Estate Trust owned, directly or through one of its wholly owned subsidiaries, 4,467,000 shares of Saul Centers representing 26.6%
of the companys outstanding common stock.



As of September 30, 2005
the Real Estate Trust owned, directly or through one of its wholly owned subsidiaries, 4,229,000 units of limited partnership interests in Saul Holdings, representing a 19.2% limited partnership interest. The Real Estate Trust owns rights enabling
it to convert its limited partnership interests in Saul Holdings into shares of Saul Centers common stock on the basis of one share of Saul Centers common stock for each partnership unit. However, under the terms of the limited
partnership agreement of Saul Holdings Limited Partnership, at the current time, the units may not be converted into shares of Saul Centers common stock because the conversion would cause the Real Estate Trust and certain affiliates of the
Trust to beneficially own collectively greater than 29.9% of the value of the outstanding equity securities of Saul Centers.



The shares of Saul Centers common stock are listed on the New York Stock Exchange under trading symbol BFS.



Saul Centers operates as a real estate investment trust for federal income tax purposes
under Sections 856 through 860 of the Internal Revenue Code. Under the Internal Revenue Code, REITs are subject to numerous organizational and operational requirements. If Saul Centers continues to qualify as a REIT, it generally will not be subject
to federal income tax, provided it makes certain distributions to its stockholders and meets certain organizational and other requirements. Saul Centers has made and has announced that it intends to continue to make regular quarterly dividend
distributions to its stockholders.



Allocations and Distributions of Saul
Holdings. The net income or net loss of Saul Holdings for tax purposes generally will be allocated to Saul Centers and the limited partners in accordance with their percentage interests, subject to compliance with the applicable provisions of the
Internal Revenue Code and the regulations promulgated thereunder. Net cash flow after reserves of Saul Holdings and after reimbursement of specified expenses will be distributed quarterly to the partners in proportion to their respective partnership
interests.



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##### Table of Contents

Competition



As an owner of, or investor in, commercial real estate properties, the Real Estate Trust is subject to competition from a variety of other owners of similar properties in
connection with their sale, lease or other disposition and use. Management believes that success in such competition is dependent upon the geographic location of the property, the performance of property managers, the amount of new construction in
the area and the maintenance and appearance of the property. Additional competitive factors with respect to commercial and industrial properties are the ease of access to the property, the adequacy of related facilities such as parking, and the
ability to provide rent concessions and additional tenant improvements while keeping rents competitive. Management believes that general economic circumstances and trends and new properties in the vicinity of each of the Real Estate Trusts
properties also will be competitive factors.



Environmental Matters



The Real Estate Trusts properties are subject to various laws and
regulations relating to environmental and pollution controls. The Real Estate Trust requires an environmental study to be performed with respect to a property that may be subject to possible environmental hazards prior to its acquisition to
ascertain that there are no material environmental hazards associated with such property. Although the effect upon the Real Estate Trust of the application of environmental and pollution laws and regulations cannot be predicted with certainty,
management believes that their application either prospectively or retrospectively will not have a material adverse effect on the Real Estate Trusts property operations.



Holding Company Regulation



The Trust, the Saul Company, Chevy Chase Property Company, referred to in this report as CCPC, and CCPCs wholly-owned subsidiary, Westminster Investing
Corporation, collectively referred to in this report as the Holding Companies, are registered as savings and loan holding companies because of their direct or indirect ownership interests in the Bank, and are subject to
regulation, examination and supervision by the OTS. The Bank is prohibited from making or guaranteeing loans or advances to or for the benefit of the Holding Companies or other affiliates engaged in activities beyond those permissible for bank
holding companies and from investing in the securities of the Holding Companies or other affiliates. Transactions between the Bank and the Holding Companies must be on terms substantially the same, or at least as favorable to the Bank, as those that
would be available to non-affiliates.



Recent revisions to the OTSs
Regulatory Handbook for Holding Companies suggest a more active role for the OTS in the direct regulation of thrift holding companies such as the Holding Companies. The current handbook places a greater emphasis on reviewing the adequacy of the
Holding Companies capital, their level of debt, and their ability to fund outstanding debt obligations, and suggests that particular scrutiny will be given to holding companies that, like the Holding Companies, are engaged in real estate
activities.



The Holding Companies must obtain OTS approval before acquiring
any federally insured savings institution or any savings and loan holding company. The status of the Holding Companies as unitary thrift holding companies and the activities in which the Holding Companies may engage have been
grandfathered under the Gramm-Leach-Bliley Act of 1999 (the GLB Act). As grandfathered unitary thrift holding companies, the Holding Companies are virtually unrestricted in the types of business activities in which they may engage
provided the Bank continues to meet the QTL test. See BankingQualified Thrift Lender (QTL) Test. The GLB Act prohibits the sale of grandfathered unitary thrift holding companies such as the Holding Companies (together
with their thrift subsidiaries) or their thrift subsidiaries alone to commercial companies. Corporate reorganizations are expressly permitted.



If the Holding Companies were to acquire one or more federally insured institutions and operate them as separate subsidiaries rather than merging them into the bank, the
Holding Companies would become multiple savings and loan holding companies. As multiple savings and loan holding companies, the Holding Companies would be subject to limitations on the types of business activities in which they would be
permitted to engage, unless the additional thrifts were troubled institutions acquired pursuant to certain emergency acquisition provisions and all subsidiary thrifts met the QTL test. The Holding Companies may acquire and operate additional savings
institution subsidiaries outside of Maryland and Virginia only if the laws of the target institutions state specifically permit such acquisitions or if the acquisitions are made pursuant to emergency acquisition provisions.



The Trust and the Saul Company entered into an agreement with OTSs predecessor, the
Federal Savings and Loan Insurance Corporation, to maintain the banks regulatory capital at the required levels, and, if necessary, to infuse additional capital to enable the bank to meet those requirements. Since the execution of this
agreement, the OTS has changed its policy and no longer requires such agreements from companies acquiring thrift institutions. In addition, the regulatory capital requirements applicable to the bank have changed significantly as a result of FIRREA.
The OTS has stated that capital maintenance agreements entered into prior to the modification of OTS policy and the enactment of FIRREA were not affected by those changes. The Trust and the Saul Company have not sought to modify the existing
agreement. To the extent the bank is unable to meet regulatory capital requirements in the future, the OTS could seek to enforce the obligations of the Trust and the Saul Company under the agreement.



If the bank were to become undercapitalized under the prompt corrective action
regulations, it would be required to file a capital restoration plan with the OTS setting forth, among other things, the steps the bank would take to become adequately capitalized. The OTS could not



8



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##### Table of Contents

accept the plan unless the Holding Companies guaranteed in writing the banks compliance with that plan. The
aggregate liability of the Holding Companies under such a commitment would be limited to the lesser of:



| |  |  | an amount equal to 5.0% of the banks total assets at the time the bank became undercapitalized, and
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | the amount necessary to bring the bank into compliance with all applicable capital standards as of the time the bank fails to comply with its capital plan.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



If the Holding Companies refused to provide the guarantee, the bank would be subject to
the more restrictive supervisory actions applicable to significantly undercapitalized institutions. See BankingPrompt Corrective Action.



BANKING



Regulation



Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank (the FHLB) of Atlanta, which is one of 12 FHLBs administered by the Federal Housing Finance Board, an independent
agency within the executive branch of the federal government. The FHLBs serve as central credit facilities for their members. Their primary credit mission is to facilitate residential mortgage lending and support community and economic development
activity in rural and urban communities. The Bank regularly obtains advances from the FHLB of Atlanta. At September 30, 2005, the Bank had outstanding advances of $2.5 billion. See Note 23 to the Consolidated Financial Statements in this report
and Deposits and Other Sources of Funds  Borrowings.



As a
member of the FHLB of Atlanta, the Bank is required to acquire and hold shares of capital stock in that bank in an amount equal to the greater of:



| |  |  | 1.0% of mortgage-related assets;
| | - |  | --------------------------------



| |  |  | $500; or
| | - |  | --------



| |  |  | 5.0% of outstanding advances.
| | - |  | -----------------------------



The Bank had an investment of $136.1 million in the capital stock of the FHLB of Atlanta at September 30, 2005. The Bank earned dividends on that stock of $6.1
million and $4.9 million during the years ended September 30, 2005 and 2004, respectively. Since 1999, membership in the FHLB has been voluntary rather than mandatory for federal thrifts like the Bank. Because membership is required to obtain
advances from the FHLB and the Bank continues to rely on FHLB advances as an important source of funds, the Bank currently intends to retain its voluntary membership in the FHLB of Atlanta.



Liquidity Requirements.The Bank is required to maintain sufficient liquidity to
ensure its safe and sound operation. Failure to meet this requirement could subject the Bank to monetary penalties imposed by the OTS. Management believes that the Banks ratio of cash and cash equivalents and other liquid assets to deposits
and short-term borrowings of 7.4% at September 30, 2005 was sufficient to ensure the Banks safe and sound operation.



Deposit Insurance Premiums. Under FDIC insurance regulations, the Bank is required to pay premiums to the Savings Association Insurance Fund (SAIF) for
insurance of its deposit accounts. The FDIC uses a risk-based premium system in which an institution pays premiums for deposit insurance on its insured deposits based on supervisory evaluation and on the institutions capital category under the
OTSs prompt corrective action regulations. See Prompt Corrective Action.



Although the FDIC insures commercial banks as well as thrifts, the insurance funds for commercial banks and thrifts have been segregated into the Bank Insurance Fund (the BIF) and the SAIF. The FDIC is
required to maintain the reserve levels of both the BIF and SAIF at 1.25% of insured deposits. If the reserve level of an insurance fund falls below 1.25%, the FDIC is required by law to impose a premium of at least 23 basis points on all
institutions whose accounts are insured by that fund until its ratio is restored above the 1.25% minimum. The BIFs reserve ratio was 1.26% and the SAIFs reserve ratio was 1.32% as of June 30, 2005.



As a result of the Banks assumption of deposits from a small commercial bank in August
2003, a small amount of the Banks deposits (less than 1%) are insured by the BIF.



Commercial banks and thrifts are required to share in the payment of interest due on Financing Corporation (FICO) bonds used to provide liquidity to the savings and loan industry in the 1980s. Annual FICO assessments added to
deposit insurance premiums ranged from 1.34 to 1.46 basis points during the Banks 2005 fiscal year.



Deposit insurance may be terminated by the FDIC, after notice and a 30-day corrective period, if the FDIC finds that the Bank has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations, or has violated any applicable law, regulation, order or condition imposed by the FDIC. The 30-day period may be eliminated by the FDIC with the approval of the OTS.



Congress is considering legislation that would reform the deposit insurance system. The House has passed its version of the legislation, and
a bill approved by the Senate Banking Committee is waiting a Senate vote. Although the House and Senate versions differ, both bills generally would, among other things, (i) increase FDIC insurance coverage limits (with the key difference being
that the House bill would increase the basic limit from $100,000 to $130,000 while the Senate bill would leave the basic limit unchanged); (ii) merge the BIF and the SAIF into a single new



9



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##### Table of Contents

Deposit Insurance Fund; (iii) permit the Funds required reserve ratio to float in a designated range;
(iv) eliminate the current prohibition against assessing risk-based premiums on well-capitalized institutions with high supervisory ratings, thus permitting the FDIC to assess ongoing premiums for all institutions based on their risk profile,
and allowing gradual increases in those premiums if the new Funds ratio falls below the lower end of the designated range; (v) authorize the payment of dividends to institutions if the ratio approaches or exceeds the upper end of the
designated range; and (vi) provide one time refunds or credits towards future assessments based on an institutions earlier contributions to the BIF or the SAIF. Because it remains unclear at this time whether, or in what form, any such
legislation ultimately may be enacted, the Bank is unable to assess the potential effects on the Bank.



REGULATORY CAPITAL



The Bank is subject
to:



| |  |  | a minimum tangible capital requirement;
| | - |  | ---------------------------------------



| |  |  | a minimum core (or leverage) capital requirement; and
| | - |  | -----------------------------------------------------



| |  |  | a minimum risk-based capital requirement.
| | - |  | -----------------------------------------



Each of these requirements generally must be no less stringent than the capital standards for national banks. At September 30, 2005, the Banks tangible capital
ratio was 5.92%, its core (or leverage) capital ratio was 5.92%, and its total risk-based capital ratio was 10.95%, compared to the minimum requirements of 1.50%, 4.00% and 8.00%, respectively.



The tangible capital requirement adopted by the OTS requires the Bank to maintain
tangible capital in an amount not less than 1.5% of tangible assets. Tangible capital is defined as core capital less investments in certain subsidiaries and any intangible assets (including supervisory goodwill), plus
qualifying servicing assets valued at the amount that can be included in core capital.



Under the minimum leverage capital requirement, Chevy Chase must maintain a ratio of core capital to tangible assets of not less than 4.0%. Core capital generally includes common shareholders equity,
noncumulative perpetual preferred stock and minority interests in consolidated subsidiaries, less investments in certain subsidiaries and certain intangible assets.



Under OTS regulations, servicing assets can be included in core capital in an amount up to 100% of core capital. Non-mortgage servicing
assets are subject to a sublimit of 25% of core capital. For these purposes, servicing assets are valued at the lesser of 90% of fair market value or 100% of the current unamortized book value. At September 30, 2005, the Bank had qualifying
servicing assets with a carrying value of $161.1 million, which constituted 19.2% of core capital at that date.



The OTSs risk-based capital requirements require the Bank to maintain varying amounts of capital for an asset based on the degree of credit risk associated with
that asset and to convert off-balance sheet items to on-balance sheet equivalent amounts in computing the Banks risk-based capital ratio.



There are currently four categories of risk-weightings:



| |  |  | 0% for cash and similar assets;
| | - |  | -------------------------------



| |  |  | 20% for qualifying mortgage-backed securities;
| | - |  | ----------------------------------------------



| |  |  | 50% for qualifying residential permanent real estate loans; and
| | - |  | ---------------------------------------------------------------



| |  |  | 100% for other assets, including consumer loans, commercial real estate loans, loans more than 90 days past due, and real estate acquired in settlement of loans.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



The Bank generally must maintain risk-based capital equal to
8.0% of risk-weighted assets, with at least half of that amount in the form of core capital.



Under OTS regulations, residential mortgage loans with negative amortization features that are initially assigned to the 50% risk-weighting may have to be reassigned to the 100% risk-weighting if, as a result of
negative amortization, the loan-to-value ratios are no longer commensurate with the risk associated with the loans. The OTS has indicated its intent to conduct a more comprehensive assessment of negatively amortizing loans and may issue
supervisory guidance on their capital treatment.



Capital also must be
maintained against assets sold with recourse despite the fact that the assets are accounted for as having been sold. The current rules:



| |  |  | require that risk-based capital be held in an amount equal to the amount of residual interests (which include interest-only certificates and/or interest-only strips receivable
(collectively, interest-only strips receivable), spread accounts, cash collateral accounts, over-collateralization of receivables, retained subordinated interests and other similar forms of on-balance sheet assets that function as credit
enhancements) that are retained on balance sheet following a securitization, net of any deferred tax liability (i.e., dollar-for-dollar), even if that amount exceeds the otherwise applicable capital requirement on the underlying loans;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | require a deduction from Tier 1 capital equal to the amount of credit enhancing interest-only strips receivable that exceeds 25% of Tier 1 capital; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | apply a ratings-based approach that sets capital requirements for positions in securitizations according to their relative risk exposure.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



At September 30, 2005, the Bank had credit enhancing interest-only strips receivable of
$1.0 million, which constituted 0.1% of Tier 1 capital.



10



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##### Table of Contents

The Bank may use supplementary capital to satisfy the risk-based capital requirement up to an amount equal to its core
capital. Supplementary capital includes cumulative perpetual preferred stock, qualifying non-perpetual preferred stock, qualifying subordinated debt, non-withdrawable accounts and pledged deposits, and allowances for loan losses up to a maximum of
1.25% of risk-weighted assets. At September 30, 2005, the Bank had $28.6 million in its allowance for loan losses, all of which was includable as supplementary capital.



Subordinated debt may be included in supplementary capital with OTS approval subject to a phase-out based on its remaining term to maturity.
The phase-out permits these instruments to be included in supplementary capital under one of two options:



| |  |  | at the beginning of each of the last five years prior to the maturity date of the instrument, the Bank must reduce the amount eligible to be included by 20% of the original amount,
or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | during the seven years immediately prior to an instruments maturity, the Bank may include only the aggregate amount of maturing capital instruments that mature in any one year
that does not exceed 20% of its capital.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Bank uses the
second option for its 67/8% subordinated debentures due 2013 and must continue to use that option for any future
issuances as long as the prior issuance remains outstanding. At September 30, 2005, the Bank had $175.0 million in maturing subordinated capital instruments, all of which was includable as supplementary capital.



All or a portion of the assets of each of the Banks subsidiaries are generally
consolidated with the assets of the Bank for regulatory capital purposes unless all of the Banks investments in, and extensions of credit to, those subsidiaries are deducted from capital. The Banks investments in, and loans to,
subsidiaries engaged in activities not permissible for a national bank are, with certain exceptions, deducted from capital under each of the three regulatory capital requirements. The Banks real estate development subsidiaries are its only
subsidiaries engaged in activities not permissible for a national bank. At September 30, 2005, the Banks investments in, and loans to, these non-includable subsidiaries totaled approximately $12.5 million, all of which
constituted a deduction from tangible capital.



OTS capital regulations also
require a 100% deduction from total capital of all equity investments that are not permissible for national banks. At September 30, 2005, the Bank had one property with a book value of $2.7 million which was treated as an equity investment for
regulatory capital purposes.



OTS capital regulations provide a five-year
holding period for real estate acquired in settlement of loans (REO or real estate held for sale) to qualify for an exception from treatment as an equity investment. The five year period may be extended by the OTS. If an REO
property is considered an equity investment, its then-current book value is deducted from total capital. Accordingly, if the Bank is unable to dispose of any REO property prior to the end of its applicable five-year holding period and is unable to
obtain an extension of that five-year holding period from the OTS, the Bank could be required to deduct the then-current book value of such REO property from risk-based capital. In 2005, the Bank received from the OTS additional extensions through
May 6, 2006, of the holding periods for certain of its REO properties acquired through foreclosure in fiscal years 1990 and 1995. See Managements Discussion and Analysis of Financial Condition and Results of Operations 
Financial Condition  Capital.



In June 2004, the Basel Committee on
Banking Supervision published a revised risk-based capital framework designed to replace its 1988 risk-based capital accord, which forms the basis for the risk-based capital requirements of the OTS and the other U.S. federal financial institution
regulators. Key components of what has become known as the Basel II framework include:



| |  |  | adding a fifth risk-weighting of 150 percent for loans to low-quality companies;
| | - |  | --------------------------------------------------------------------------------



| |  |  | using rating agency assessments to determine risk-weightings for claims on banks, commercial loans and securitization interests;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | liberalizing capital requirements for certain collateralized and guaranteed loans;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | authorizing regulators to use the supervisory review process to determine whether to impose increased capital requirements on individual institutions with high levels of
interest-rate risk or to require reduction of that risk;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | establishing a methodology for requiring that capital be maintained against operational risk; and
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | authorizing regulators to impose explicit capital requirements on managed or securitized assets.
| | - |  | ------------------------------------------------------------------------------------------------



In August 2003, the OTS, along with the other federal banking regulators, issued an Advance Notice of Proposed Rulemaking setting forth a
framework for adoption of Basel II. Under the notice, only the largest U.S. banks would be subject to the new accord, which could adversely affect the competitive position of smaller institutions like the Bank.



In part to address the competitive concerns raised by Basel II, on October 20, 2005, the
OTS and the other federal banking agencies issued an advanced notice of proposed rulemaking seeking comment on various possible changes to the existing Basel I risk-based capital requirements that would apply to the vast majority of U.S. banks not
subject to Basel II. Sometimes known as Basel IA or Basel 1.5, the notice suggests that smaller institutions may be able to choose to remain under the existing Basel I risk-based capital system, or some portions of it.



According to the October 2005 notice, proposed modifications to the Basel 1 system under
Basel 1A would include:



| |  |  | expanding the number of risk-weightings from 4 to 9, with the highest being 350%,
| | - |  | ---------------------------------------------------------------------------------



| |  |  | expanding the use of external credit ratings as an indicator of credit risk for externally-rated exposures,
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | expanding the range of collateral and guarantors that may qualify an exposure for a lower risk-weighting,
| | - |  | ---------------------------------------------------------------------------------------------------------



11



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##### Table of Contents

| |  |  | using loan-to-value ratios, credit assessments, and other broad measures of credit risk for assigning risk-weightings to residential mortgages,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | modifying the credit conversion factor for various commitments (including those with an original maturity of under one year),
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | requiring that certain loans 90 days or more past due or in non-accural status be assigned to a higher risk-weighting category,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | increasing the risk-based capital requirements for certain commercial real estate exposures,
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | increasing the risk sensitivity of capital requirements for other types of retail, multifamily, small business and commercial exposures, and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | assessing a risk-based capital charge to reflect the risks in securitizations backed by revolving retail exposures with early amortization provisions.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



U.S. banking regulators expect to publish proposed rules relating to Basel II in the first
quarter of 2006, with implementation of Basel II not scheduled to begin until January 2008. The regulators have not yet proposed a time frame for implementation of the Basel IA modifications. The Bank is unable to predict whether or in what form any
final changes will be adopted by the OTS or their potential impact on the Bank.



The Banks ability to maintain capital compliance depends on a number of factors, including, for example, changes in regulatory requirements, general economic conditions and the condition of local markets. See Managements
Discussion and Analysis of Financial Condition and Results of Operations  Financial Condition  Capital. The OTS has the authority to require the Bank to maintain capital at levels above the minimum levels generally required, based
on a variety of factors, including excessive exposure to interest rate risk, concentrations of credit risk, risks arising from non-traditional activities, and the Banks ability to manage those risks. The OTS has not imposed a higher
requirement on the Bank.



PROMPT CORRECTIVE ACTION. The OTS and the
other federal banking agencies have adopted regulations which apply to every FDIC-insured commercial bank and thrift institution a system of mandatory and discretionary supervisory actions, which generally become more severe as the capital levels of
an individual institution decline. The regulations establish five capital categories for purposes of determining an institutions treatment under these prompt corrective action provisions.



An institution is categorized as well capitalized under the regulations if
(i) it has a leverage 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%, and (ii) is not subject to any written agreement, order, capital directive or prompt
corrective action directive issued by the OTS to meet and maintain a specific capital level.



An institution is considered adequately capitalized if its leverage ratio is at least 4.0% (3.0% if rated in the highest supervisory category), its tier 1 risk-based capital ratio is at least 4.0% and its
total risk-based capital ratio is at least 8.0%.



An institution with a
leverage ratio below 4.0% (3.0% if rated in the highest supervisory category), a tier 1 risk-based capital ratio below 4.0% or a total risk-based capital ratio below 8.0% is considered undercapitalized. An institution with a leverage
ratio or tier 1 risk-based ratio under 3.0% or a total risk-based ratio under 6.0% is considered significantly undercapitalized. Finally, an institution is considered critically undercapitalized, and subject to provisions
mandating appointment of a conservator or receiver, if its ratio of tangible equity to total assets is 2.0% or less. Tangible equity generally includes core capital plus cumulative perpetual preferred stock.



An institutions classification category can be downgraded if, after notice and an
opportunity for a hearing, the OTS determines that the institution is in an unsafe or unsound condition or has received and has not corrected a less than satisfactory examination rating for asset quality, management, earnings or liquidity. The Bank
has not received notice from the OTS of any potential downgrade.



At
September 30, 2005, the Banks leverage ratio of 5.92%, its tier 1 risk-based ratio of 8.82%, and its total risk-based capital ratio of 10.95% exceeded the minimum ratios established for well-capitalized institutions.



QUALIFIED THRIFT LENDER TEST. The Bank must meet a Qualified Thrift
Lender (QTL) test to avoid imposition of certain restrictions. The QTL test requires the Bank to maintain a thrift investment percentage equal to a minimum of 65%. The numerator of the percentage is the Banks
qualified thrift investments and the denominator is the Banks portfolio assets. Portfolio assets is defined as total assets minus



| |  |  | the Banks premises and equipment used to conduct the Banks business;
| | - |  | ----------------------------------------------------------------------



| |  |  | liquid assets up to 20 percent of total assets; and
| | - |  | ---------------------------------------------------



| |  |  | intangible assets, including goodwill.
| | - |  | --------------------------------------



The QTL test must be met on a monthly average basis in nine out of every 12 months.



Qualified thrift investments consist of residential housing loans (including home equity loans and manufactured housing loans),
mortgage-backed securities, FHLB and Fannie Mae stock, small business loans, credit card loans and educational loans. Portions of other assets can also be included, provided that the total does not exceed 20% of portfolio assets. Assets in this
category include consumer loans (other than credit card and educational loans); 50% of residential housing loans originated and sold within 90 days; investments in real estate-oriented service corporations and 200% of mortgage loans for residences,
churches, schools, nursing homes and small businesses in low- or moderate-income areas where credit demand exceeds supply. Intangible assets, including goodwill, are specifically excluded from qualified thrift investments.



12



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The Bank had 91.0% of its assets invested in qualified thrift investments at September 30, 2005, and met the QTL
test in each of the previous 12 months.



An institution that fails to meet the
QTL test is subject to significant penalties. Immediately after failing the QTL test, the institution may not:



| |  |  | make any new investment or engage directly or indirectly in any other new activity unless the investment or activity would be permissible for a national bank;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | establish any new branch office at any location at which a national bank could not establish a branch office;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | obtain new advances from the FHLB; or
| | - |  | -------------------------------------



| |  |  | pay dividends beyond the amounts permissible if it were a national bank.
| | - |  | ------------------------------------------------------------------------



One year following an institutions failure to meet the QTL test, the institutions holding company parent must register and be subject to supervision as a bank
holding company. Three years after failure to meet the QTL test, an institution may not retain any investments or engage in any activities that would be impermissible for a national bank. Failure to meet the QTL test also could limit the Banks
ability to establish and maintain branches outside of its home state of Virginia.



Because the Bank is engaged in activities that are not currently permissible for national banks, such as investing in subsidiaries that engage in real estate development activities, failure to satisfy the QTL test would require the Bank to
terminate these activities and divest itself of any prohibited assets held at such time. Based on a review of the Banks current activities, management of the Bank believes that compliance with these restrictions would not have a significant
adverse effect on the Bank. However, the B.F. Saul Real Estate Investment Trust (the Trust), which owns 80% of the common stock of the Bank, is engaged in real estate ownership and development activities currently prohibited for bank and
financial holding companies. As a result, failure by the Bank to meet the QTL test, in the absence of a significant restructuring of the Trusts operations, would, in effect, require the Trust to reduce its ownership of the Bank to a level at
which it no longer would be deemed to control the Bank.



The Bank has taken,
and will continue to take, steps to meet the QTL test by structuring its balance sheet to include the required percentage of qualified thrift investments.



DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. OTS regulations limit the ability of the Bank to make capital distributions. Capital
distributions include payment of dividends, stock repurchases, cash-out mergers, repurchases of subordinated debt and other distributions charged against the capital accounts of an institution. The regulations do not apply to interest or
principal payments on debt, including interest or principal payments on the Banks outstanding subordinated debentures.



The Bank must notify the OTS before making any capital distribution. In addition, the Bank must apply to the OTS to make any capital distribution if the Bank does not
qualify for expedited treatment under OTS regulations. If the Bank qualifies for expedited treatment, an application is required only if the total amount of all of the Banks capital distributions for the year exceeds the sum of the Banks
net income for the year and its retained net income for the previous two years.



In considering a notice or application, the OTS will not permit a capital distribution if:



| |  |  | the Bank would be undercapitalized following the distribution;
| | - |  | --------------------------------------------------------------



| |  |  | the capital distribution raises safety and soundness concerns; or
| | - |  | -----------------------------------------------------------------



| |  |  | the capital distribution violates any statute, regulation, agreement with the OTS, or condition imposed by the OTS.
| | - |  | -------------------------------------------------------------------------------------------------------------------



In October 2003, the Bank issued $125 million of its 8% Preferred Stock and used the proceeds
to redeem all of the Banks then-outstanding 13% Preferred Stock on October 31, 2003. The OTS has conditioned the Banks recent payments of common stock dividends on the Banks maintaining its well-capitalized status and there
can be no assurance that the OTS will not impose a similar condition on payment of dividends on the 8% Preferred Stock.



Dividends paid on the 103/8%
Noncumulative Exchangeable Preferred Stock, Series A, (the REIT Preferred Stock) issued by the Chevy Chase Preferred Capital Corporation (the REIT Subsidiary) are not considered capital distributions provided the
Bank is classified as well capitalized. However, if the Bank were not classified as well capitalized, the entire amount of the REIT Subsidiary preferred dividends would be treated as a capital distribution. See
Managements Discussion and Analysis of Financial Condition and Results of Operations  Financial Condition  Capital.



Failure of the Bank to remain well capitalized therefore could have a material adverse effect on the Banks ability to pay dividends on its common stock, preferred
stock and REIT Preferred Stock.



13



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##### Table of Contents

In May 1988, in connection with the merger of a Virginia thrift into the Bank, the B.F. Saul Company (the Saul
Company) and the Trust entered into a capital maintenance agreement in which they agreed not to cause the Bank, without prior written approval of the OTS, to pay dividends in any fiscal year in excess of 50% of the Banks net income for
that fiscal year, provided that any dividends permitted under such limitation could be deferred and paid in a subsequent year.



The Bank is subject to other limitations on its ability to pay dividends. Under the indenture pursuant to which the Banks 2003 Debentures were issued, the Bank may
not pay dividends on its stock unless, after giving effect to the dividend, no default or event of default has occurred and is continuing under the indenture and the Bank is in compliance with its regulatory capital requirements. In addition, the
amount of the dividend (together with any other restricted payments under the indenture) may not exceed the sum of:



| |  |  | $50.0 million;
| | - |  | --------------



| |  |  | 662/3% of the Banks consolidated net
income (as defined) accrued on a cumulative basis commencing October 1, 2002; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | the aggregate cash proceeds received by the Bank after October 1, 2002 from the sale of qualified capital stock or certain debt securities, minus the aggregate amount of any
restricted payments (and certain amounts used to redeem securities) made by the Bank.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Dividends on the 8% Preferred Stock and the REIT Preferred Stock are excluded from this limit on restricted payments.



See Managements Discussion and Analysis of Financial Condition and Results of
Operations  Financial Condition  Capital and Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.



The payment of any dividends on the Banks common stock and preferred stock will be determined by the Board of Directors based on the
Banks liquidity, asset quality profile, capital adequacy and recent earnings history, as well as economic conditions and other factors that the Board of Directors determines are relevant, including applicable government regulations and
policies. See Deposits and Other Sources of Funds  Borrowings.



LENDING LIMITS. The Bank generally is prohibited from lending to one borrower and its related entities amounts in excess of 15% of unimpaired capital and unimpaired surplus. The Bank may lend an additional 10% for loans fully secured
by readily marketable collateral. The Banks regulatory lending limit was approximately $158.6 million at September 30, 2005, and no group relationships exceeded this limit at that date.



SAFETY AND SOUNDNESS STANDARDS. The federal financial institution regulators have
developed standards to evaluate the operations of depository institutions, as well as standards relating to asset quality, earnings and compensation. The operational standards cover internal controls and audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth and employee compensation. An institution that fails to meet a standard that is imposed through regulation may be required to submit a plan for corrective action within 30 days. If a savings
association fails to submit or implement an acceptable plan, the OTS must order it to correct the deficiency, and may:



| |  |  | restrict its rate of asset growth;
| | - |  | ----------------------------------



| |  |  | prohibit asset growth entirely;
| | - |  | -------------------------------



| |  |  | require the institution to increase its ratio of tangible equity to assets;
| | - |  | ---------------------------------------------------------------------------



| |  |  | restrict the interest rate paid on deposits to the prevailing rates of interest on deposits of comparable amounts and maturities; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | require the institution to take any other action the OTS determines will better carry out the purpose of prompt corrective action.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



Imposition of these sanctions is within the discretion of the OTS in most cases, but is
mandatory if the savings institution commenced operations or experienced a change in control during the 24 months preceding the institutions failure to meet these standards, or underwent extraordinary growth during the preceding 18 months.



The asset quality standards require that the Bank establish and maintain a
system to identify problem assets and prevent deterioration of those assets. The earnings standards require that the Bank establish and maintain a system to evaluate and monitor earnings and ensure that earnings are sufficient to maintain adequate
capital and reserves.



REGULATORY
ASSESSMENTS. The OTS imposes five separate fees to fund its operations:



| |  |  | semi-annual assessments for all savings institutions;
| | - |  | -----------------------------------------------------



| |  |  | examination fees for certain affiliates of savings institutions;
| | - |  | ----------------------------------------------------------------



| |  |  | application fees;
| | - |  | -----------------



| |  |  | securities filing fees; and
| | - |  | ---------------------------



| |  |  | publication fees.
| | - |  | -----------------



Of these fees, the semi-annual assessments are the most significant, totaling $2.2 million for the Bank for the 12 month period ending December 31, 2005.



14



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##### Table of Contents

The OTS formula for charging examination and supervisory assessments imposes a surcharge on institutions with a
supervisory rating of 3, 4 or 5. Surcharges are also imposed on complex institutions, which the OTS defines as any institution with over $1 billion of off-balance sheet assets consisting of loans serviced for others, trust assets and
recourse obligations or direct credit substitutes. The Bank is treated as a complex institution for these purposes.



ENVIRONMENTAL REGULATION. The Banks business and properties are subject to federal and state laws and regulations governing environmental matters, including
the regulation of hazardous substances and wastes. Under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA), and under some state laws, owners of properties and secured lenders
who take a deed-in-lieu of foreclosure, purchase a mortgaged property at a foreclosure sale, or operate a mortgaged property may become liable in some circumstances for the costs of cleaning up hazardous substances regardless of whether they have
contaminated the property. These costs could exceed the original or unamortized principal balance of a loan or the value of the property securing a loan. The Bank is eligible in many instances for an exemption from CERCLA liability as a secured
creditor, provided the Bank does not participate in the management of a property and only acts to protect its security interest in the property. Under this exemption, the Bank may foreclose on a mortgaged property, purchase it at a foreclosure sale
or accept a deed-in-lieu of foreclosure, provided it seeks to sell the mortgaged property at the earliest practicable commercially reasonable time on commercially reasonable terms. Other federal and state environmental laws may impose additional
liabilities in certain circumstances, including certain state laws that impose environmental liens that could be senior to the Banks prior recorded liens. These laws may influence the Banks decision whether to foreclose on property that
is found to be contaminated. The Banks general policy is to obtain an environmental assessment prior to foreclosing on commercial property.



OTHER REGULATIONS AND LEGISLATION. The Bank must obtain prior approval of the OTS before merging with another institution or before acquiring insured deposits
through certain transactions. Also, as a SAIF-insured institution, the Bank is subject to limitations on its ability to buy or sell deposits from or to, or to combine with, a BIF-insured institution. Despite these restrictions, SAIF-insured thrifts
may be acquired by banks or by bank holding companies under certain circumstances.



The federal agencies regulating financial institutions possess broad enforcement authority over the institutions they regulate, including the authority to impose civil money penalties of up to $1 million per day for violation of laws and
regulations.



Federally chartered thrifts like Chevy Chase generally are
permitted to operate branches anywhere in the United States, provided that they meet the QTL test and their regulatory capital requirements and have at least a satisfactory rating under the Community Reinvestment Act (CRA).



Amounts realized by the FDIC from the liquidation or other resolution of any insured
depository institution must be distributed to pay claims (other than secured claims to the extent of any such security) in the following order of priority:



| |  |  | administrative expenses of the receiver;
| | - |  | ----------------------------------------



| |  |  | any deposit liability of the institution;
| | - |  | -----------------------------------------



| |  |  | any other general or senior liability of the institution (which is not an obligation described below);
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | any obligation subordinated to depositors or general creditors which is not a stockholder obligation; and
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | any obligation to stockholders arising as a result of their status as stockholders.
| | - |  | -----------------------------------------------------------------------------------



In response to the September 11, 2001 terrorist attacks, on October 26, 2001, President Bush signed into law the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (the USA Patriot Act). Title III of the USA Patriot Act amends the Bank Secrecy Act and contains provisions designed to detect and
prevent the use of the U.S. financial system for money laundering and terrorist financing activities by, among other things, imposing new compliance obligations on savings associations, trust companies and securities broker-dealers. Several of these
compliance obligations focus on transactions between U.S. financial institutions and non-U.S. banks, entities and individuals, and therefore do not have a significant impact on the Banks operations. However, other anti-money laundering and
related compliance obligations impact the Bank more directly, and regulatory scrutiny and enforcement of these obligations has increased significantly. The Bank has taken steps to enhance its anti-money laundering policies and procedures following
enactment of the USA Patriot Act and continues to monitor developments regarding implementation of the Act and evolving regulatory policies and to make further adjustments to those policies and procedures as appropriate.



FEDERAL RESERVE SYSTEM



The Federal Reserve Board requires the Bank to maintain reserves against its transaction accounts and certain non-personal deposit accounts.
Because reserves generally must be maintained in cash or non-interest-bearing accounts, the effect of the reserve requirement is to decrease the Banks earnings.



Prior to November 23, 2004, the first $6.6 million of the Banks transaction accounts were subject to a 0% reserve requirement. A
3% reserve ratio was applied to new transaction accounts over $6.6 million, up to and including $45.5 million. Any net transaction accounts over $45.5 million were subject to a 10% reserve requirement. Effective November 23, 2004, the FRB
increased the amount of transaction accounts subject to a 0% reserve requirement from $6.6 million to $7.0 million and increased the low reserve tranche from $45.5 million to $47.6 million. Effective November 22, 2005, the first
$7.8 million of net transaction accounts will be exempt from reserve requirements. A 3% reserve ratio will be applied to net transaction accounts over $7.8 million up to and including $48.3 million. A 10% reserve ratio will be applied to net
transaction accounts in excess of $48.3 million. The Bank met its reserve requirements for each period during the year ended September 30, 2005.



15



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##### Table of Contents

The Bank may borrow from the Federal Reserves discount window. FDICIA imposes limitations on the
ability of the Federal Reserve to lend to undercapitalized institutions through the discount window. Chevy Chases capital ratios exceeded the ratios established for well-capitalized institutions.



COMMUNITY REINVESTMENT ACT



Under the Community Reinvestment Act (CRA) and OTS regulations, the Bank has a
continuing and affirmative obligation to help meet the credit needs of its local communities, including low- and moderate-income neighborhoods and low- and moderate-income individuals and families, consistent with the safe and sound operation of the
institution. The OTS is required to assess the institutions record in satisfying the intent of the CRA in connection with its examination of the Bank. In addition, the OTS is required to take into account the Banks record of meeting the
credit needs of its community in determining whether to grant approval for certain types of applications.



The Bank is committed to fulfilling its CRA obligation by providing access to a full range of credit-related products and services to all segments of its community. Based on the last OTS examination covering the
period from January 2003 through December 2004, the Bank received an Outstanding CRA rating. The Bank anticipates that its next CRA examination will take place in 2007.



OTHER ASPECTS OF FEDERAL LAW



The Bank is also subject to federal statutory provisions covering matters such as security procedures, currency transactions reporting, insider and affiliated party
transactions, management interlocks, truth-in-lending, electronic funds transfers, funds availability, equal credit opportunity and privacy of consumer information.



HOLDING COMPANY REGULATION



The Trust, the Saul Company, Chevy Chase Property Company, and Westminster Investing Corporation (collectively, the Holding Companies) are registered as
savings and loan holding companies because of their direct or indirect ownership interests in the Bank, and are subject to regulation, examination and supervision by the OTS. The Bank is prohibited from making or guaranteeing loans or
advances to or for the benefit of the Holding Companies or other affiliates engaged in activities beyond those permissible for bank holding companies and from investing in the securities of the Holding Companies or other affiliates. Transactions
between the Bank and the Holding Companies must be on terms substantially the same, or at least as favorable to the Bank, as those that would be available to non-affiliates.



OTS supervision of the Holding Companies includes a review of the adequacy of their capital, their level of debt, and their ability to fund
outstanding debt obligations, and OTS guidance suggests that particular scrutiny will be given to holding companies that, like the Holding Companies, are engaged in real estate activities.



The Holding Companies must obtain OTS approval before acquiring any federally insured savings
institution or any savings and loan holding company. The status of the Holding Companies as unitary thrift holding companies and the activities in which the Holding Companies may engage have been grandfathered under the
Gramm-Leach-Bliley Act of 1999 (the GLB Act). As grandfathered unitary thrift holding companies, the Holding Companies are virtually unrestricted in the types of business activities in which they may engage provided the Bank continues to
meet the QTL test. See Qualified Thrift Lender Test. The GLB Act prohibits the sale of grandfathered unitary thrift holding companies such as the Holding Companies (together with their thrift subsidiaries) or their thrift subsidiaries
alone to commercial companies. Corporate reorganizations are expressly permitted.



If the Holding Companies were to acquire one or more federally insured institutions and operate them as separate subsidiaries rather than merging them into the Bank, the Holding Companies would become multiple savings and loan
holding companies. As multiple savings and loan holding companies, the Holding Companies would be subject to limitations on the types of business activities in which they would be permitted to engage, unless the additional thrifts were troubled
institutions acquired pursuant to certain emergency acquisition provisions and all subsidiary thrifts met the QTL test. The Holding Companies may acquire and operate additional savings institution subsidiaries outside of Maryland and Virginia only
if the laws of the target institutions state specifically permit those acquisitions or if the acquisitions are made pursuant to emergency acquisition provisions.



The Trust and the Saul Company entered into an agreement with OTSs predecessor, the Federal Savings and Loan Insurance Corporation, to
maintain the Banks regulatory capital at the required levels, and, if necessary, to infuse additional capital to enable the Bank to meet those requirements. Since the execution of this agreement, the OTS has changed its policy and no longer
requires such agreements from companies acquiring thrift institutions. In addition, the regulatory capital requirements applicable to the Bank have changed significantly as a result of FIRREA. The OTS had stated that capital maintenance agreements
entered into prior to the modification of OTS policy and the enactment of FIRREA were not affected by those changes. The Trust and the Saul Company have not sought to modify the existing agreement. To the extent the Bank is unable to meet regulatory
capital requirements in the future, the OTS could seek to enforce the obligations of the Trust and the Saul Company under the agreement.



16



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##### Table of Contents

If the Bank were to become undercapitalized under the prompt corrective action regulations, it would be
required to file a capital restoration plan with the OTS setting forth, among other things, the steps the Bank would take to become adequately capitalized. The OTS could not accept the plan unless the Holding Companies guaranteed in
writing the Banks compliance with that plan. The aggregate liability of the Holding Companies under such a commitment would be limited to the lesser of:



| |  |  | an amount equal to 5.0% of the Banks total assets at the time the Bank became undercapitalized, or
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | the amount necessary to bring the Bank into compliance with all applicable capital standards as of the time the Bank fails to comply with its capital plan.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



If the Holding Companies refused to provide the guarantee, the Bank would be subject to
the more restrictive supervisory actions applicable to significantly undercapitalized institutions. See Regulation  Prompt Corrective Action.



MARKET AREA



The Banks principal deposit and lending markets are located in the Washington, DC metropolitan area. Service industries and federal, state and local governments
employ a significant portion of the Washington, DC area labor force, while a substantial number of the nations 500 largest corporations have some presence in the area. The Washington, DC areas seasonally unadjusted unemployment rate is
generally below the national rate and was 3.2% in September 2005, compared to the national rate of 5.1%.



Chevy Chase historically has relied on retail deposits originated in its branch network as its primary funding source. See Deposits and Other Sources of Funds. Chevy Chases principal market for
deposits consists of Montgomery and Prince Georges Counties in Maryland and Fairfax County in Virginia. Approximately 5.4% of the Banks deposits at September 30, 2005 were obtained from depositors residing outside of Maryland,
Virginia and the District of Columbia. Chevy Chase had the largest market share of deposits in Montgomery County, ranked third in market share of deposits in Prince Georges County and ranked sixth in market share in Fairfax County at
June 30, 2005, according to the most recently published industry statistics. The per capita incomes of Montgomery and Fairfax Counties rank among the highest of counties and equivalent jurisdictions nationally. These two counties are also the
Washington, DC areas largest suburban employment centers, with a substantial portion of their labor force consisting of federal, state and local government employees. Private employment is concentrated in service and retail trade centers. The
unemployment rate in each of Montgomery, Prince Georges and Fairfax Counties in September 2005 was 2.8%, 4.4% and 2.5%, respectively, each of which was below the national rate of 5.1%. The individual state rates were 3.9% for Maryland and 3.5%
for Virginia for the same month.



The Bank historically has concentrated its
lending activities in the Washington, DC metropolitan area. In recent years, the Bank has expanded its lending activities outside the Washington, DC metropolitan area. See Lending and Leasing Activities.



INVESTMENT AND OTHER SECURITIES



The Bank is required by OTS regulations to maintain sufficient liquidity to ensure its safe
and sound operations. See Regulation  Liquidity Requirements. To meet this requirement, the Bank maintains a portfolio of cash, federal funds, treasury securities and other readily marketable fixed-income securities.
Managements objective is to maintain liquidity at a level sufficient to assure adequate funds to meet expected and unexpected balance sheet fluctuations.



The Bank classifies its investment securities and mortgage-backed securities as either held-to-maturity, available-for-sale or
trading at the time such securities are acquired. All its investment securities and mortgage-backed securities were classified as held-to-maturity at September 30, 2005 and 2004.



As part of its mortgage banking activities, the Bank exchanges loans held for sale for
mortgage-backed securities and then sells the mortgage-backed securities, which are classified as trading securities, to third party investors in the month of issuance. Gains and losses on sales of trading securities are determined using the
specific identification method. There were no mortgage-backed securities classified as trading securities at September 30, 2005 and 2004.



17



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##### Table of Contents

LENDING AND LEASING ACTIVITIES



LOAN PORTFOLIO COMPOSITION. At September 30, 2005, the Banks loan portfolio totaled $11.0 billion, which represented 77.3%
of its total assets. All references in this report to the Banks loan portfolio refer to loans, whether they are held for sale and/or securitization or for investment, and exclude mortgage-backed securities. Loans collateralized by
single-family residences constituted 85.3% of the loan portfolio and 65.4% of total assets at that date. The following table sets forth information concerning the Banks loan portfolio, net of unfunded commitments, for the periods indicated.



Loan Portfolio



(Dollars in thousands)



|                                    |  |               |            |   |           |       |   |         |   |            |           |  |       |         |  |   |           |   |  |         |   |  |           |           |   |         |       |   |           |   |           |   |  |       |  
|----------------------------------- |  | ------------- | ---------- | - | --------- | ----- | - | ------- | - | ---------- | --------- |  | ----- | ------- |  | - | --------- | - |  | ------- | - |  | --------- | --------- | - | ------- | ----- | - | --------- | - | --------- | - |  | ----- | -
|                                    |  | September 30, |           
|                                    |  | 2005          |            |   | 2004      |       |   | 2003    |   |            | 2002      |  |       | 2001    | 
|                                    |  | Balance       |            |   | % ofTotal |       |   | Balance |   |            | % ofTotal |  |       | Balance |  |   | % ofTotal |   |  | Balance |   |  | % ofTotal |           |   | Balance |       |   | % ofTotal |  
|Single family residential (1)       |  | $             | 7,530,315  |   |           | 68.9  | % |         | $ | 7,166,935  |           |  | 68.6  | %       |  | $ | 5,761,993 |   |  | 64.7    | % |  | $         | 4,545,519 |   |         | 59.0  | % |           | $ | 4,519,269 |   |  | 60.9  | %
|Home equity (1)(2)                  |  |               | 1,796,489  |   |           | 16.4  |   |         |   | 1,721,999  |           |  | 16.5  |         |  |   | 1,336,776 |   |  | 15.0    |   |  |           | 1,090,325 |   |         | 14.1  |   |           |   | 646,390   |   |  | 8.7   |  
|Other real estate                   |  |               | 358,937    |   |           | 3.3   |   |         |   | 261,997    |           |  | 2.5   |         |  |   | 253,791   |   |  | 2.8     |   |  |           | 280,777   |   |         | 3.6   |   |           |   | 298,006   |   |  | 4.0   |  
|Commercial (2)                      |  |               | 1,035,972  |   |           | 9.5   |   |         |   | 920,178    |           |  | 8.8   |         |  |   | 888,847   |   |  | 10.0    |   |  |           | 803,168   |   |         | 10.4  |   |           |   | 769,443   |   |  | 10.4  |  
|Automobile loans (1)                |  |               | 149,253    |   |           | 1.4   |   |         |   | 300,516    |           |  | 2.9   |         |  |   | 589,024   |   |  | 6.6     |   |  |           | 855,735   |   |         | 11.0  |   |           |   | 1,021,523 |   |  | 13.9  |  
|Other consumer                      |  |               | 53,742     |   |           | 0.5   |   |         |   | 70,140     |           |  | 0.7   |         |  |   | 84,606    |   |  | 0.9     |   |  |           | 140,222   |   |         | 1.9   |   |           |   | 152,750   |   |  | 2.1   |  
|                                    |  |               |            |   |           |       |   |         |   |            |           |  |       |         |  |   |           |   |  |         |   |  |           |           |   |         |       |   |           |   |           |   |  |       |  
|                                    |  |               | 10,924,708 |   |           | 100.0 | % |         |   | 10,441,765 |           |  | 100.0 | %       |  |   | 8,915,037 |   |  | 100.0   | % |  |           | 7,715,746 |   |         | 100.0 | % |           |   | 7,407,381 |   |  | 100.0 | %
|                                    |  |               |            |   |           |       |   |         |   |            |           |  |       |         |  |   |           |   |  |         |   |  |           |           |   |         |       |   |           |   |           |   |  |       |  
|Unearned premiums and discounts     |  |               | 654        |   |           |       |   |         |   | 894        |           |  |       |         |  |   | 1,428     |   |  |         |   |  |           | 1,690     |   |         |       |   |           |   | 2,445     |   |  |       |  
|Net deferred loan origination costs |  |               | 125,210    |   |           |       |   |         |   | 116,124    |           |  |       |         |  |   | 80,320    |   |  |         |   |  |           | 57,627    |   |         |       |   |           |   | 40,554    |   |  |       |  
|Allowance for loan losses           |  |               | (28,640    | ) |           |       |   |         |   | (37,750    | )         |  |       |         |  |   | (58,397   | ) |  |         |   |  |           | (66,079   | ) |         |       |   |           |   | (57,018   | ) |  |       |  
|                                    |  |               |            |   |           |       |   |         |   |            |           |  |       |         |  |   |           |   |  |         |   |  |           |           |   |         |       |   |           |   |           |   |  |       |  
|                                    |  |               | 97,224     |   |           |       |   |         |   | 79,268     |           |  |       |         |  |   | 23,351    |   |  |         |   |  |           | (6,762    | ) |         |       |   |           |   | (14,019   | ) |  |       |  
|                                    |  |               |            |   |           |       |   |         |   |            |           |  |       |         |  |   |           |   |  |         |   |  |           |           |   |         |       |   |           |   |           |   |  |       |  
|Total loans receivable              |  | $             | 11,021,932 |   |           |       |   |         | $ | 10,521,033 |           |  |       |         |  | $ | 8,938,388 |   |  |         |   |  | $         | 7,708,984 |   |         |       |   |           | $ | 7,393,362 |   |  |       |  
|                                    |  |               |            |   |           |       |   |         |   |            |           |  |       |         |  |   |           |   |  |         |   |  |           |           |   |         |       |   |           |   |           |   |  |       |  

---

|(1) | Includes loans held for securitization and/or sale, if any.
|--- | -----------------------------------------------------------

|(2) | Net of undisbursed portion of loans.
|--- | ------------------------------------



The Bank adjusts the composition of its loan portfolio in response to a variety of factors, including regulatory requirements and asset and liability management
objectives. See Regulation  Regulatory Capital, Regulation  Qualified Thrift Lender Test and Managements Discussion and Analysis of Financial Condition and Results of Operations  Financial
Condition  Asset and Liability Management.



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CONTRACTUAL PRINCIPAL REPAYMENTS OF LOANS. The following table shows the scheduled contractual principal
repayments of the Banks loans at September 30, 2005. The entire balance of loans held for securitization and/or sale is shown in the year ending September 30, 2006, because such loans are expected to be sold in less than one year.



Contractual Principal Repayments



(In thousands)



|                                          |  |                                                        |            |                                                                    |   |                    |  |   |         |  |   |          
|----------------------------------------- |  | ------------------------------------------------------ | ---------- | ------------------------------------------------------------------ | - | ------------------ |  | - | ------- |  | - | ---------
|                                          |  | Principal Balance Outstanding at September 30, 2005(1) |            | Approximate Principal Repayments Due in Years Ending September 30,
|                                          |  | 2006                                                   |            | 2007-2010                                                          |   | 2011 andThereafter
|Single family residential                 |  | $                                                      | 5,843,205  |                                                                    | $ | 3,699              |  | $ | 25,507  |  | $ | 5,813,999
|Home equity                               |  |                                                        | 1,796,148  |                                                                    |   | 10,962             |  |   | 74,426  |  |   | 1,710,760
|Real estate construction and ground       |  |                                                        | 358,937    |                                                                    |   | 274,011            |  |   | 64,526  |  |   | 20,400   
|Commercial                                |  |                                                        | 1,035,972  |                                                                    |   | 802,072            |  |   | 117,627 |  |   | 116,273  
|Automobile loans                          |  |                                                        | 149,253    |                                                                    |   | 74,909             |  |   | 74,344  |  |   |         
|Other                                     |  |                                                        | 53,742     |                                                                    |   | 8,555              |  |   | 30,129  |  |   | 15,058   
|Loans held for securitization and/or sale |  |                                                        | 1,687,451  |                                                                    |   | 1,687,451          |  |   |        |  |   |         
|                                          |  |                                                        |            |                                                                    |   |                    |  |   |         |  |   |          
|Total loans receivable(2)                 |  | $                                                      | 10,924,708 |                                                                    | $ | 2,861,659          |  | $ | 386,559 |  | $ | 7,676,490
|                                          |  |                                                        |            |                                                                    |   |                    |  |   |         |  |   |          
|Fixed-rate loans                          |  | $                                                      | 1,651,549  |                                                                    | $ | 659,918            |  | $ | 370,442 |  | $ | 621,189  
|Adjustable-rate loans                     |  |                                                        | 7,585,708  |                                                                    |   | 514,290            |  |   | 16,117  |  |   | 7,055,301
|Loans held for securitization and/or sale |  |                                                        | 1,687,451  |                                                                    |   | 1,687,451          |  |   |        |  |   |         
|                                          |  |                                                        |            |                                                                    |   |                    |  |   |         |  |   |          
|Total loans receivable(2)                 |  | $                                                      | 10,924,708 |                                                                    | $ | 2,861,659          |  | $ | 386,559 |  | $ | 7,676,490
|                                          |  |                                                        |            |                                                                    |   |                    |  |   |         |  |   |          

---

|(1) | Of the total amount of loans outstanding at September 30, 2005, which were due after one year, an aggregate principal balance of approximately $1.0 billion had fixed interest
rates and an aggregate principal balance of approximately $7.1 billion had adjustable interest rates.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Before deduction of allowance for loan losses, unearned premiums and discounts and deferred loan origination fees (costs).
|--- | --------------------------------------------------------------------------------------------------------------------------



Actual payments may not reflect scheduled contractual principal repayments due to the effect
of loan refinancings, prepayments and enforcement of due-on-sale clauses. Although the Banks single-family residential loans historically have had stated maturities of generally 30 years, those loans normally have remained outstanding for
substantially shorter periods because of these factors. Due-on-sale clauses give the Bank the right to declare a conventional loan  one that is neither insured by the Federal Housing Administration nor partially guaranteed by the
Veterans Administration  immediately due and payable in the event, among other things, that the borrower sells the property securing the loan without the consent of the Bank. At September 30, 2005, excluding loans held for
securitization and/or sale, aggregate principal repayments of $1.2 billion against all loans are contractually due within the next year. Of this amount, $659.9 million is due on fixed-rate loans and $514.3 million is due on adjustable-rate loans.



ORIGINATION, PURCHASE AND SALE OF REAL ESTATE LOANS. The Bank has
general authority to make loans secured by real estate located throughout the United States. The following table shows changes in the composition of the Banks real estate loan portfolio and the net change in mortgage-backed securities.



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Origination, Purchase and Sale of Real Estate Loans



(In thousands)



|                                                                 |  |                                  |            |   |      |   |            |      |  |   |            |  
|---------------------------------------------------------------- |  | -------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                 |  | For the Year Ended September 30, |           
|                                                                 |  | 2005                             |            |   | 2004 |   |            | 2003 | 
|Real estate loan originations and purchases:                     |  |                                  |            |   |      |   |            |      |  |   |            |  
|Single family residential                                        |  | $                                | 8,815,453  |   |      | $ | 9,137,785  |      |  | $ | 9,009,575  |  
|Home equity(1)                                                   |  |                                  | 1,180,981  |   |      |   | 1,165,108  |      |  |   | 1,032,924  |  
|Other real estate(1)                                             |  |                                  | 393,470    |   |      |   | 273,478    |      |  |   | 276,087    |  
|                                                                 |  |                                  |            |   |      |   |            |      |  |   |            |  
|Total originations and purchases                                 |  |                                  | 10,389,904 |   |      |   | 10,576,371 |      |  |   | 10,318,586 |  
|                                                                 |  |                                  |            |   |      |   |            |      |  |   |            |  
|Principal repayments                                             |  |                                  | (2,998,545 | ) |      |   | (2,211,833 | )    |  |   | (2,767,214 | )
|Sales                                                            |  |                                  | (6,296,737 | ) |      |   | (5,795,564 | )    |  |   | (3,753,682 | )
|Loans transferred to real estate acquired in settlement of loans |  |                                  | (4,657     | ) |      |   | (3,377     | )    |  |   | (3,019     | )
|                                                                 |  |                                  |            |   |      |   |            |      |  |   |            |  
|                                                                 |  |                                  | (9,299,939 | ) |      |   | (8,010,774 | )    |  |   | (6,523,915 | )
|                                                                 |  |                                  |            |   |      |   |            |      |  |   |            |  
|Transfers to mortgage-backed securities(2)                       |  |                                  | (555,155   | ) |      |   | (767,226   | )    |  |   | (2,358,732 | )
|                                                                 |  |                                  |            |   |      |   |            |      |  |   |            |  
|Increase in real estate loans                                    |  | $                                | 534,810    |   |      | $ | 1,798,371  |      |  | $ | 1,435,939  |  
|                                                                 |  |                                  |            |   |      |   |            |      |  |   |            |  

---

|(1) | Net of undisbursed portion of loans.
|--- | ------------------------------------

|(2) | Represents real estate loans which were pooled and exchanged for mortgage-backed securities.
|--- | --------------------------------------------------------------------------------------------



SINGLE-FAMILY RESIDENTIAL REAL ESTATE LENDING (EXCLUDING HOME EQUITY LENDING). The Bank originates a variety of loans secured by
single-family residences. At September 30, 2005, $9.3 billion, or 85.3%, of the Banks loan portfolio consisted of loans secured by first or second mortgages on such properties, as compared to $8.9 billion, or 85.1%, at September 30,
2004. Of these amounts, $6.2 million and $9.4 million consisted of FHA-insured or VA-guaranteed loans at September 30, 2005 and 2004, respectively. At September 30, 2005 and 2004, the Bank had $1.7 billion and $2.0 billion, respectively,
of single-family residential loans held for securitization and/or sale to investors. Approximately 20.4% of the principal balance of the Banks single-family residential real estate loans at September 30, 2005 were secured by properties
located in California.



The Bank originates a wide variety of conventional
residential mortgage loans, as well as FHA and VA loans, through its wholly owned mortgage banking subsidiary, B.F. Saul Mortgage Company, and through Chevy Chase Mortgage, a division of the Bank. The Bank currently offers fixed-rate loans with
maturities of 10 to 40 years and adjustable-rate residential mortgage loans with maturities ranging from 30 to 40 years.



Most of the Banks single-family residential mortgage loans are originated by third parties. The Bank determines the specific loan products and rates under which the
third party originates the loan, and subjects the loan to the Banks underwriting criteria and review. During the year ended September 30, 2005, approximately $6.4 billion of loans settled under this program.



Interest rates on the majority of the Banks ARMs are adjusted based on changes in
either (a) the London Interbank Offered Rate (LIBOR) of varying maturities or (b) yields on U.S. Treasury securities. The interest rate adjustment provisions of the Banks ARMs may contain limitations on the frequency
and/or maximum amount of interest rate adjustments. These limitations are determined by a variety of factors, including mortgage loan competition in the Banks markets.



In recent years, the Bank has significantly expanded its origination of residential ARMs with interest rates that adjust monthly,
semi-annually and annually, most of which provide a borrower with a below-market introductory interest rate and a variety of monthly payment options. Certain of these loans have a payment option that could result in interest being added to the
principal of the loan, or negative amortization. Certain other of these loans have a payment option that allows the borrower to make an interest only payment. During fiscal years 2005 and 2004, the Bank originated $5.6 billion and $6.7
billion, respectively, of these ARMs, of which $5.1 billion and $4.1 billion, respectively, contained terms that permit negative amortization and, $0.4 billion and $2.5 billion, respectively, contain terms which allow the borrower to make an
interest only



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payment but do not permit negative amortization. At September 30, 2005, loans with this negative amortization option
totaled $3.4 billion, which includes approximately $6.5 million of outstanding principal in excess of the original principal balance of those loans. Each loan contains terms which limit the amount of negative amortization to a percentage of the
original loan amount, generally 10%. The Bank monitors the risks associated with these ARM products, and has established terms for loans it originates (including caps on the amount of negative amortization) designed to minimize credit risk without
adversely affecting the Banks competitive position. Increased emphasis on these ARM products is a key part of managements efforts to focus on originating mortgage loans with interest rates that adjust more frequently in order to reduce
the Banks interest-rate risk in the event market interest rates continue to rise from their current market levels. At September 30, 2005, 95.9% of the Banks single-family residential loans were comprised of ARMs and 50.5% of the
Banks single-family residential loans were comprised of ARMs that have interest rates which adjust annually or more frequently.



The OTS and the other federal banking regulators have announced plans to issue additional guidance concerning non-traditional mortgage products such as
interest-only and payment option ARMs. The Bank is unable to predict what effect, if any, such guidance may have on the Bank.



Loan securitizations and/or sales provide the Bank with liquidity and additional funds for lending, enabling the Bank to increase the volume of loans originated and
thereby increase loan interest and fee income as well as gains on sales of loans. Sales of mortgage loans totaled $6.5 billion during each of the fiscal years ended September 30, 2005 and 2004. The marketability of loans, loan participations
and mortgage-backed securities depends on purchasers investment limitations, general market and competitive conditions, mortgage loan demand and other factors.



The Banks conforming fixed-rate, single-family loans are originated on terms which conform to Freddie Mac, Fannie Mae or Ginnie Mae
guidelines in order to facilitate the securitization and/or sale of those loans. In order to manage its exposure to interest rate risk, the Bank hedges its fixed rate held for sale mortgage loan pipeline by entering into whole loan and
mortgage-backed security forward sale commitments. Sales of residential mortgage loans are generally made without recourse to the Bank.



From time to time, as part of its capital and liquidity management plans, the Bank may consider swapping loans held in its portfolio for lower risk-weighted
mortgage-backed securities and retaining those securities in its portfolio rather than selling them. During fiscal years 2005, 2004 and 2003, the Bank exchanged $364.6 million, $108.6 million and $88.5 million, respectively, of single-family
residential loans held in its portfolio for mortgage-backed securities, which the Bank retained for its own portfolio.



When the Bank sells a residential loan or loan participation and retains servicing, or purchases mortgage servicing assets from third parties, it collects and remits loan
payments, makes certain insurance and tax payments on behalf of borrowers and otherwise services the loans. The servicing fee generally ranges from 0.25% to 0.50% per year of the outstanding loan principal amount. The Bank also typically
derives income from temporary investment for its own account of loan collections pending remittance to the participation or loan purchaser. At September 30, 2005 and 2004, the Bank was servicing residential loans totaling $13.4 billion and
$11.3 billion, respectively, for other investors. See Loan Servicing.



SALES OF MORTGAGE-BACKED SECURITIES. The Bank originates and sells mortgage-backed securities pursuant to its normal mortgage banking operations. The securities are generally sold in the same month as they are issued. The securities
are formed from conforming mortgage loans originated for sale or from conforming mortgage loans resulting from the borrowers election to convert from an adjustable-rate loan to a fixed-rate loan. Mortgage-backed securities held for sale in
conjunction with mortgage banking activities are classified as trading securities. During the years ended September 30, 2005 and 2004, the Bank originated and sold $192.1 million and $668.5 million, respectively, of mortgage-backed securities
and recognized gains of $2.3 million and $5.4 million, respectively. As a result of the sale of trading securities in the month such securities are formed, the Consolidated Statements of Cash Flows in this report reflect proceeds from the sales of
trading securities, even though there are no balances of such securities at September 30, 2005.



HOME EQUITY LENDING. The Bank makes home equity loans and credit line loans, the majority of which are secured by a first or a second mortgage on the borrowers home. Home equity credit line loans provide
revolving credit, bear interest at a variable rate that adjusts monthly based on changes in the applicable interest rate index and generally are subject to a maximum annual interest rate of between 18.0% and 24.0%. Generally, except for any
amortization of principal that may occur as a result of monthly payments, there are no required payments of principal until maturity. Home equity loans have fixed rates of interest and amortize over their term, which ranges from five to 20 years.



From time to time, the Bank may purchase home equity and credit line loans
from other lenders as a way to supplement its direct origination of these loans. During fiscal years 2005 and 2004, the Bank made no such purchases.



From time to time, the Bank securitizes and sells home equity credit line receivables to enhance liquidity and to maintain compliance with regulatory capital
requirements. See Managements Discussion and Analysis of Financial Condition and Results of Operations  Financial Condition. The Bank transferred $3.9 million of home equity credit line receivables in existing trusts to
investors and recognized a gain of $0.2 million during the year ended September 30, 2004.



COMMERCIAL REAL ESTATE AND REAL ESTATE CONSTRUCTION LENDING. Commercial real estate, real estate construction and ground loans are originated directly by the Bank. The Bank also participates in loans originated
by other banks. Aggregate balances of residential and commercial construction, ground and commercial real estate and multifamily loans were $358.9 million and $262.0 million at September 30, 2005 and 2004, respectively. The Bank provides
financing, at market rates, to certain purchasers of its real estate owned.



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Additionally, the Bank finances the construction of residential real estate, principally single-family detached homes and
townhouses, with generally a specified number of pre-sales required. Loan concentrations among types of real estate are reviewed and approved by the Banks Credit Risk Management Committee.



COMMERCIAL LENDING. The Bank makes loans to business entities for a variety of
purposes, including working capital and acquisitions of real estate, machinery and equipment or other assets. A wide variety of products are offered, including revolving lines of credit, term loans, cash management services and other deposit and
investment products. Concentrations among industries and structure types, such as syndications, are reviewed and approved by the Bank s Credit Risk Management Committee.



Business development efforts of the Banks Commercial Banking Group have been concentrated in the major industry groups in the
metropolitan Washington, DC and Baltimore areas, as well as a broad base of businesses and community service organizations. In addition, management believes that the ability to offer a broader variety of investment products and fiduciary services to
institutional customers through the Banks subsidiaries, ASB Capital Management LLC and Chevy Chase Trust Company, will continue to enhance the operations of the Commercial Banking Group. Commercial loans increased $115.8 million (or 12.6%)
during fiscal year 2005 to $1.0 billion at September 30, 2005, from $920.2 million at September 30, 2004.



At September 30, 2005, the Bank held $115.4 million (11.1% of total commercial loans) of participations or syndications in commercial loans originated by other
financial institutions, a decrease from $168.2 million (18.3% of total commercial loans) at September 30, 2004.



Federal laws and regulations limit the Banks commercial loan portfolio to 20% of assets, with any excess over 10% consisting of small business loans. At
September 30, 2005, the Banks commercial loan portfolio represented 7.3% of its assets, with 2.9% consisting of small business loans.



OTHER CONSUMER LENDING ACTIVITIES. Effective March 2003, the Bank stopped originating indirect automobile loans. The Bank continues its collection efforts on the
existing portfolio, and continues to serve its customers by making direct prime automobile loans. In addition to the types of loans described above, Chevy Chase currently offers a variety of other consumer loans, including overdraft lines of credit
and other unsecured loans for traditional consumer purchases and needs. The Bank does not offer its own credit card loans, but has an agreement with another financial institution pursuant to which that institution issues credit cards in the
Banks name to the Banks local customers. The Banks portfolios of prime automobile loans, home improvement and related loans and overdraft lines of credit and other consumer loans totaled $145.3 million, $19.4 million and $34.4
million, respectively, at September 30, 2005, which accounted for a combined 1.8% of total loans at that date.



The Bank stopped originating subprime automobile loans in November 2000. The Banks subprime automobile lending portfolio, which totaled $3.9 million at
September 30, 2005, represents 0.47% of its Tier 1 capital. The Bank continues its collection efforts on the remaining portfolio.



Federal laws and regulations limit the Banks secured and unsecured consumer loans to 35% of its total assets. Home improvement, secured deposit account and
educational loans are not included in the 35% limit. At September 30, 2005, the Bank complied with this limit.



AUTOMOBILE LEASING. Effective March 2003, the Bank also stopped originating indirect automobile leases and the Bank continues its collection efforts on that
existing portfolio. At September 30, 2005 and 2004, the Banks portfolio of automobiles subject to lease totaled $185.0 million and $435.3 million, respectively. In addition to credit risk associated with a lessees possible default
under the lease, the Bank is exposed to the risk that the value of the vehicle at maturity of the lease may be less than the future residual value as estimated by the Bank at the inception of the lease. To reduce that risk, the Bank
(a) purchased insurance in the full amount of the estimated residual value to protect the Bank against possible future decreases in residual values, and (b) used estimates of residual value that did not exceed published industry estimates
unless that excess was also insured. Although the Bank insured residual values, limitations in the insurance policy and other factors have resulted and may continue to result in losses at lease maturity that may not be fully covered by that
insurance.



REAL ESTATE LOAN UNDERWRITING. In the loan approval process,
Chevy Chase assesses both the borrowers ability to repay the loan and the adequacy of the proposed security. The Board of Directors has delegated credit approval authority to the Officers Loan Committee, Executive Loan Committee and certain
senior officers. Generally, all construction and commercial real estate loans originated by the Banks commercial lending group are reviewed and approved by either the Officers Loan Committee or the Executive Loan Committee, or both, depending
on the size of the loan. Any significant loan not conforming to the Banks approved policies must be approved by the Executive Loan Committee or the Chief Executive Officer. All credit exposures in excess of $30 million are presented to the
Board of Directors for final approval.



The approval process for all types of
real estate loans includes appraisals or evaluations of the properties securing the loans and a review of all applicants and guarantors financial information and credit and payment history.



In an effort to minimize the increased risk of loss associated with construction and
development loans, Chevy Chase considers the reputation of the borrower and the contractor, reviews pre-construction sale and leasing information, and requires an independent inspecting engineer or architect to review the progress of multifamily and
commercial real estate projects. In addition, the Bank generally requires personal guarantees of developers for all development loans and, if a general contractor is used by the developer, may require the posting of a performance bond.



The Bank generally makes residential mortgage loans in amounts up to 95% of the value of
owner-occupied single-family homes. In some circumstances, the Bank originates a first and second residential mortgage loan simultaneously, provided that the aggregate loan amount does not



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exceed 100% of the value of the residential property. The Bank generally also lends up to 95% of the lesser of the
acquisition cost or the appraised value of the completed project to finance the construction of homes. The loan-to-value (LTV) ratio generally applied by the Bank to commercial real estate loans and multifamily residential loans has been
80% of the appraised value of the completed project. Currently, the Bank offers home equity loans and credit line loans up to 100% maximum LTV ratio. However, the Bank plans to insure all newly originated home equity loans and credit lines with an
LTV ratio equal to or greater than 90%.



LTV ratios are determined at the time
a loan is originated. Consequently, subsequent declines in the value of a loans collateral or increases in the balance of the loan, or both, could expose the Bank to losses. Loans with LTV ratios which exceed the established supervisory LTV
limits, without mortgage insurance, may not exceed 100 percent of the Banks total risk-based capital.



OTS regulations require institutions to adopt internal real estate lending policies, including LTV limitations conforming to specific guidelines established by the OTS. The Banks current lending policies conform
to these regulations.



On all loans secured by real estate, other than home
improvement and related loans and certain home equity credit line loans, Chevy Chase requires title insurance policies protecting the priority of the Banks liens. The Bank requires fire and casualty insurance for permanent loans, including
home equity credit line loans, and fire, casualty and builders risk insurance for construction loans. The borrower selects the insurance carrier, subject to Chevy Chases approval. Flood insurance is also required for all loans secured by
properties in designated flood zones. Generally, for any residential first mortgage loan in an amount exceeding 80% of the value of the security property, Chevy Chase requires mortgage insurance from an unaffiliated mortgage insurance company. The
majority of the Banks mortgage insurance is currently placed with four carriers.



Substantially all fixed-rate mortgage loans originated by the Bank contain a due-on-sale clause which provides that the Bank may declare a loan immediately due and payable in the event, among other things, that the borrower sells the
property securing the loan without the consent of the Bank. The Banks ARMs generally are assumable, subject to certain conditions.



COMMERCIAL LOAN UNDERWRITING.All commercial loan applications are underwritten and approved under authorities granted to specified committees and individuals as
outlined in the Banks credit policies. All credit exposures in excess of $30 million are presented to the Board of Directors for final approval. The scope and depth of the underwriting for a particular request are generally dictated by the
size and complexity of the proposed transaction. Generally, commercial loans for amounts greater than $100,000 are assigned a risk rating at inception, based on a risk-rating system established in the Banks credit policies.



Subsequent to origination, all commercial loans with credit exposures of $1 million or more
are reviewed at least annually. Changes in the credit quality of the loans are noted and the risk ratings are modified as appropriate.



OTHER CONSUMER LOAN AND LEASE UNDERWRITING.Other consumer loans, which include direct automobile loans, home improvement and related loans and overdraft lines of
credit are originated or purchased by the Bank after a review in accordance with established underwriting procedures.



The underwriting procedures are designed to provide a basis for assessing the borrowers ability and willingness to repay the loan. In conducting this assessment,
the Bank considers the borrowers ratio of debt to income, various credit scoring models and an evaluation of the borrowers credit history through a review of a credit report compiled by a recognized consumer credit reporting bureau. The
borrowers equity in the collateral and the terms of the loan are also considered. The Banks guidelines are intended only to provide a basis for lending decisions, and exceptions to the guidelines may, within certain limits, be made based
upon the credit judgment of the Banks lending officer. The Bank periodically conducts audits to ensure compliance with its established underwriting policies and procedures.



LOAN ORIGINATIONS, SECURITIZATIONS AND SALES  RETAINED INTEREST AND SERVICING ASSETS.During fiscal year 2005, the Bank reduced
the carrying value of its servicing assets and interest-only strips receivable as a result of higher actual and estimated prepayments of loans underlying these assets. Prepayments increased in fiscal year 2005 as a result of a flattening of the
yield curve, that is, a narrowing of the difference between short term interest rates, which determine the yields on the adjustable rate mortgages generated by the Bank, and long term interest rates, which determine the yields on
mortgages with interest rates fixed for longer periods. Presumably, more borrowers under adjustable rate mortgages chose to prepay those loans than in prior periods to refinance using mortgages with rates fixed for longer periods. In connection with
its loan origination, securitization and sale activities, the Bank generally retains various interests in the sold loans, including servicing assets, interest only certificates, and interest-only strips receivable. From time to time, the Bank may
also purchase servicing assets related to loans originated by third parties. The Bank records these interests as assets on its financial statements. In some cases, the Bank determines the carrying value of the asset based on expected future cash
flows to be received by the Bank from the underlying asset. 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 Banks policy is to limit the
aggregate amount of mortgage servicing rights and interest-only assets arising out of the securitization and sale of certain of the Banks ARMs to 75% of the Banks core capital. At September 30, 2005, those assets totaled 56% of the
Banks core capital. The tables below summarize the carrying value of these assets at September 30, 2005 and 2004.



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|                                |  |                    |         |              |   |        |  |   |        
|------------------------------- |  | ------------------ | ------- | ------------ | - | ------ |  | - | -------
|                                |  | September 30, 2005
|                                |  | Not Subordinated   |         | Subordinated |   | Total 
|                                |  | (in thousands)    
|Interest-only certificates      |  | $                  | 271,460 |              | $ |       |  | $ | 271,460
|Interest-only strips receivable |  |                    | 75,772  |              |   | 995    |  |   | 76,767 
|                                |  |                    |         |              |   |        |  |   |        
|Total interest-only assets      |  |                    | 347,232 |              |   | 995    |  |   | 348,227
|Servicing assets                |  |                    | 164,592 |              |   |       |  |   | 164,592
|Reserve accounts                |  |                    | 18,704  |              |   | 4,711  |  |   | 23,415 
|                                |  |                    |         |              |   |        |  |   |        
|Total                           |  | $                  | 530,528 |              | $ | 5,706  |  | $ | 536,234
|                                |  |                    |         |              |   |        |  |   |        
|                                | 
|                                |  | September 30, 2004
|                                |  | Not Subordinated   |         | Subordinated |   | Total 
|                                |  | (in thousands)    
|Interest-only certificates      |  | $                  | 184,305 |              | $ |       |  | $ | 184,305
|Interest-only strips receivable |  |                    | 102,495 |              |   | 1,040  |  |   | 103,535
|                                |  |                    |         |              |   |        |  |   |        
|Total interest-only assets      |  |                    | 286,800 |              |   | 1,040  |  |   | 287,840
|Servicing assets                |  |                    | 147,856 |              |   |       |  |   | 147,856
|Overcollateralization of loans  |  |                    |        |              |   | 1,519  |  |   | 1,519  
|Reserve accounts                |  |                    | 6,726   |              |   | 12,257 |  |   | 18,983 
|                                |  |                    |         |              |   |        |  |   |        
|Total                           |  | $                  | 441,382 |              | $ | 14,816 |  | $ | 456,198
|                                |  |                    |         |              |   |        |  |   |        



LOAN SERVICING.The Banks
investment in servicing assets is periodically evaluated for impairment. The Bank stratifies its servicing assets for purposes of evaluating impairment by taking into consideration relevant risk characteristics, including loan type and note rate.
The Bank evaluates its servicing assets for impairment based on fair value. To measure the fair value of its servicing assets, the Bank uses either third party market prices or discounted cash flow analyses using market-based assumptions for
servicing fee income, servicing costs, prepayment rates and discount rates.



If
actual prepayment or default rates significantly exceed the estimates used to calculate the carrying values of the servicing assets, the actual amount of future cash flow could be less than the expected amount and the value of the servicing assets,
as well as the Banks earnings, could be negatively impacted. No assurance can be given that underlying loans will not experience significant increases in prepayment or default rates or that the Bank may not have to write down the value of its
servicing assets. See Notes 3 and 16 to the Consolidated Financial Statements in this report.



The Bank receives income through servicing of loans and fees in connection with loan origination, loan modification, late payments, prepayments, changes of property ownership and miscellaneous services related to its
loans. Servicing income, earned on (a) single-family residential mortgage loans owned by third parties and (b) the Banks securitization and servicing of home equity, automobile and home loan receivables portfolios, is a source of
substantial earnings for the Bank. Income from these activities varies with the volume and type of loans originated and sold.



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##### Table of Contents

The following table sets forth certain information relating to the Banks servicing portfolio and servicing income
as of or for the years indicated.



|                                             |  |                                           |            |      |   |            |  |   |          
|-------------------------------------------- |  | ----------------------------------------- | ---------- | ---- | - | ---------- |  | - | ---------
|                                             |  | As of or for the Year Ended September 30,
|                                             |  | 2005                                      |            | 2004 |   | 2003      
|                                             |  | (in thousands)                           
|Residential                                  |  | $                                         | 13,445,665 |      | $ | 11,319,875 |  | $ | 8,025,206
|Home equity                                  |  |                                           | 7,244      |      |   | 10,815     |  |   | 38,675   
|Automobile                                   |  |                                           | 27,494     |      |   | 150,957    |  |   | 393,333  
|Home improvement loans                       |  |                                           |           |      |   |           |  |   | 18,363   
|                                             |  |                                           |            |      |   |            |  |   |          
|Total amount of loans serviced for others(1) |  | $                                         | 13,480,403 |      | $ | 11,481,647 |  | $ | 8,475,577
|                                             |  |                                           |            |      |   |            |  |   |          
|Servicing and securitization income          |  | $                                         | 150,934    |      | $ | 201,139    |  | $ | 103,422  
|                                             |  |                                           |            |      |   |            |  |   |          

---

|(1) | The carrying value of the Banks servicing assets and interest-only strips receivable at September 30, 2005, 2004 and 2003 was $512.8 million, $435.7
million and $236.0 million, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Banks level
of servicing and securitization income varies based in large part on the amount of the Banks securitization activities with respect to these loan types. As the Bank securitizes and sells assets, acquires servicing assets either through
origination or purchase, or sells mortgage loans and retains the servicing rights on those loans, the level of servicing and securitization income generally increases. During fiscal year 2005, the Bank securitized and sold $5.3 billion of loan
receivables through new securitization trusts compared to $4.9 billion during fiscal year 2004. Gains recognized from these securitizations represent a significant portion of the Banks earnings. See Managements Discussion and
Analysis of Financial Condition and Results of Operations  Results of Operations - Other Income.



INTEREST-ONLY STRIPS RECEIVABLE.Interest-only strips receivable are carried at fair value. The Bank estimates fair value by computing the present value of estimated future cash flows to be generated by the
underlying loans. The carrying value is adjusted and the adjustment is recognized as a gain or loss in the statement of operations in the period the change occurs. The present value is computed based on managements estimates of loan
prepayments, default rates and the discount rate.



If actual prepayments or
default rates significantly exceed the estimates used to calculate the values of the interest-only strips receivable, the actual future cash flow could be less than expected and the value of the interest-only strips receivable, as well as the
Banks earnings, could decline. No assurance can be given that underlying loans will not experience significant increases in prepayments or default rates or that the Bank may not have to write down the interest-only strips receivable value. See
Notes 3 and 17 to the Consolidated Financial Statements in this report.



OVERCOLLATERALIZATION OF LOANS AND RESERVE ACCOUNTS.Overcollateralization of loans and reserve accounts represent assets of the Bank which have been pledged to certain securitization trusts and which are subordinated to the
interests of the investors in those trusts. The Bank carries these assets at their estimated fair value, which is equal to the net present value of the future cash flows expected to be received from these assets.



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##### Table of Contents

DELINQUENCIES, FORECLOSURES AND ALLOWANCES FOR LOSSES



DELINQUENCIES AND FORECLOSURES.When a borrower fails to make a required payment on a
mortgage loan, the loan is considered delinquent and, after expiration of the applicable cure period, the borrower is charged a late fee. The Bank follows practices customary in the banking industry in attempting to cure delinquencies and in
pursuing remedies upon default. Generally, if the borrower does not cure the delinquency within 90 days, the Bank initiates foreclosure action. If the loan is not reinstated, paid in full or refinanced, the security property is sold. In some
instances, the Bank may be the purchaser. Thereafter, the acquired property is treated as real estate acquired in settlement of loans until it is sold. Deficiency judgments generally may be enforced against borrowers in Maryland, Virginia and the
District of Columbia, but may not be available or may be subject to limitation in other jurisdictions in which loans are originated by the Bank.



See Managements Discussion and Analysis of Financial Condition and Results of Operations  Financial Condition  Asset Quality  Delinquent
Loans for a discussion of the Banks delinquent loan portfolio at September 30, 2005.



ALLOWANCE FOR LOSSES.The allowance for loan losses represents managements estimate of credit losses inherent in the Banks loan portfolios as of the balance sheet date. The Banks methodology
for assessing the appropriate level of the 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, delinquent status, current economic conditions, internal risk ratings and current underwriting policies and procedures.



The allocated allowance is assessed on both homogeneous and non-homogeneous loan portfolios.
The range is calculated by applying loss and delinquency factors to the outstanding loan balances of these portfolios. Loss factors are based on analyses of the historical performance of each loan category and an assessment of portfolio trends and
conditions, as well as specific risk factors impacting the loan portfolios. Each homogeneous portfolio, such as single-family residential loans or automobile loans, is evaluated collectively.



Non-homogeneous type loans, such as commercial loans and non-residential real estate loans,
are analyzed and segregated by risk according to the Banks internal risk rating system. These loans are reviewed by the Banks credit and loan review groups on an individual loan basis to assign a risk rating. Industry loss factors are
applied based on the risk rating assigned to the loan. Industry loss factors are used because of the Banks lack of history of losses in these portfolios. A specific allowance may be assigned to non-homogeneous type loans that have been
individually determined to be impaired. Any specific allowance considers all available evidence including, as appropriate, the present value of payments expected to be received or, for loans that are solely dependent on collateral for repayment, the
estimated fair value of the collateral.



The unallocated allowance is based
upon managements evaluation and judgment of various conditions that are not directly measured in the determination of the allocated and specific allowances. The conditions evaluated in connection with the unallocated allowance may include
existing general economic and business conditions affecting the key lending areas of the Bank, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the loan portfolio, specific industry conditions within portfolio
segments, recent loss experience in particular segments of the portfolio, natural disasters, regulatory examination results and findings of the Banks internal credit evaluations. The Bank has assessed its exposure related to damage
toproperties securing loans caused by the recent hurricanes in the Gulf Coast Region and, at this time, believes its unallocated allowance is sufficient to cover incurred but not identified losses related to its various loan portfolios.



The allowance for losses is based on estimates and ultimate losses may vary from current
estimates. As adjustments to the allowance become necessary, provisions for losses are reported in operations in the periods they are determined to be necessary.



REO is carried at the lower of cost or fair value, less selling costs. To date, sales of REO, non-residential mortgage loans, commercial
loans and loans classified as investments in real estate have resulted in no material additional aggregate loss to the Bank above the amounts already reserved. However, these results do not necessarily assure that the Bank will not suffer losses in
the future beyond its level of allowances.



The Banks review of its
various asset portfolios takes place within the Asset Classification Committee, which meets quarterly. The Asset Classification Committee reviews risk performance trends within the Banks loan and REO portfolios and economic trends and
conditions which might impact those portfolios. This Committee also reviews the status of individual criticized and classified assets of $500,000 or more and the allowance for loan losses.



The Federal Financial Institutions Examination Council (FFIEC), which is composed
of the OTS and the other federal banking agencies, has issued guidelines regarding the appropriate levels of general valuation allowances that should be maintained by insured institutions and guidance on the design and implementation of loan loss
allowance methodologies and supporting documentation practices. The Bank believes that its levels of general valuation allowances at September 30, 2005, and its procedures, comply with the guidelines.



The Banks assets are subject to review and classification by the OTS upon examination.
Based on those examinations, the Bank could be required to establish additional valuation allowances or incur additional charge-offs.



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##### Table of Contents

DEPOSITS AND OTHER SOURCES OF FUNDS



GENERAL.Deposits are the primary source of the Banks funds for use in lending and for other general business purposes. In
addition to deposits, Chevy Chase receives funds from loan repayments and loan sales. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are influenced by general interest rates and money-market conditions.
Borrowings may be used to compensate for reductions in normal sources of funds, such as deposit inflows at less than projected levels or deposit outflows, or to support the Banks operating or investing activities, or planned growth. In recent
years, the Bank has relied to a greater degree on borrowed funds, particularly FHLB advances, to fund its planned asset growth. This source of funding is generally more volatile and expensive than traditional core deposits.



DEPOSITS.Chevy Chase offers a variety of deposit accounts with a range of interest
rates and maturities designed to attract both long-term and short-term deposits. Deposit programs include money market, savings, checking, certificates of deposit, and special programs for retirement accounts.



Chevy Chase attracts deposits through its branch network and advertisements, and offers
depositors access to their accounts through 970 ATMs, including 212 ATMs located in grocery stores. These ATMs significantly enhance the Banks position as a leading provider of convenient ATM service in its primary market area. The Bank is a
member of the STAR®ATM network which offers nationwide access, and the
PLUS®ATM network, which offers worldwide access. In addition, the Bank has a
partnership agreement with a regional grocery store chain that authorizes the Bank to provide in-store banking centers at potentially all of its Maryland, Virginia, Delaware and Washington, DC area stores. As of September 30, 2005, the Bank
operates 54 in-store banking centers as part of this agreement.



The Bank
obtains deposits primarily from customers residing in Montgomery and Prince Georges Counties in Maryland and in Northern Virginia. Approximately 37.5% of the Banks deposits at September 30, 2005 were obtained from depositors
residing outside of Maryland, with approximately 24.9% from depositors residing in Virginia.



The following table shows the amounts of Chevy Chases deposits by type of account at the dates indicated.



Deposit Analysis



(Dollars in thousands)



|                                       |  |               |           |           |       |   |         |      |           |  |       |         |  |           |           |  |         |   |           |   |           |         |       |           |  |   |           |  |       |  
|-------------------------------------- |  | ------------- | --------- | --------- | ----- | - | ------- | ---- | --------- |  | ----- | ------- |  | --------- | --------- |  | ------- | - | --------- | - | --------- | ------- | ----- | --------- |  | - | --------- |  | ----- | -
|                                       |  | September 30, |          
|                                       |  | 2005          |           |           | 2004  |   |         | 2003 |           |  | 2002  |         |  | 2001      |          
|                                       |  | Balance       |           | % ofTotal |       |   | Balance |      | % ofTotal |  |       | Balance |  | % ofTotal |           |  | Balance |   | % ofTotal |   |           | Balance |       | % ofTotal | 
|Non-interest bearing checking accounts |  | $             | 1,346,455 |           | 13.8  | % |         | $    | 1,181,722 |  | 13.3  | %       |  | $         | 951,844   |  | 11.8    | % |           | $ | 779,634   |         | 10.5  | %         |  | $ | 642,490   |  | 8.5   | %
|Interest-bearing checking accounts     |  |               | 2,438,147 |           | 24.9  |   |         |      | 2,244,724 |  | 25.4  |         |  |           | 1,951,281 |  | 24.0    |   |           |   | 1,656,522 |         | 22.3  |           |  |   | 1,428,486 |  | 18.9  |  
|Money market deposit accounts          |  |               | 2,521,949 |           | 25.8  |   |         |      | 2,364,768 |  | 26.7  |         |  |           | 2,321,026 |  | 28.7    |   |           |   | 1,953,312 |         | 26.3  |           |  |   | 1,570,297 |  | 20.8  |  
|Savings accounts                       |  |               | 1,153,152 |           | 11.8  |   |         |      | 1,214,307 |  | 13.7  |         |  |           | 1,150,444 |  | 14.2    |   |           |   | 1,028,262 |         | 13.8  |           |  |   | 897,862   |  | 11.8  |  
|Certificate accounts, less than $100   |  |               | 1,520,829 |           | 15.5  |   |         |      | 1,238,733 |  | 14.0  |         |  |           | 1,207,728 |  | 14.9    |   |           |   | 1,416,739 |         | 19.0  |           |  |   | 2,361,174 |  | 31.2  |  
|Certificate accounts, $100 or more     |  |               | 801,236   |           | 8.2   |   |         |      | 610,864   |  | 6.9   |         |  |           | 518,182   |  | 6.4     |   |           |   | 603,116   |         | 8.1   |           |  |   | 662,161   |  | 8.8   |  
|                                       |  |               |           |           |       |   |         |      |           |  |       |         |  |           |           |  |         |   |           |   |           |         |       |           |  |   |           |  |       |  
|Total deposits                         |  | $             | 9,781,768 |           | 100.0 | % |         | $    | 8,855,118 |  | 100.0 | %       |  | $         | 8,100,505 |  | 100.0   | % |           | $ | 7,437,585 |         | 100.0 | %         |  | $ | 7,562,470 |  | 100.0 | %
|                                       |  |               |           |           |       |   |         |      |           |  |       |         |  |           |           |  |         |   |           |   |           |         |       |           |  |   |           |  |       |  



Average Cost of
Deposits



|                      |  |                          |   |  |      |   |  |      |  
|--------------------- |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                      |  | Year Ended September 30, |  
|                      |  | 2005                     |   |  | 2004 |   |  | 2003 |  
|Checking deposits     |  | 0.22                     | % |  | 0.21 | % |  | 0.26 | %
|Money market deposits |  | 1.42                     | % |  | 0.74 | % |  | 1.01 | %
|Savings deposits      |  | 0.28                     | % |  | 0.27 | % |  | 0.45 | %
|Time deposits         |  | 2.59                     | % |  | 1.91 | % |  | 2.55 | %
|Total deposits        |  | 1.19                     | % |  | 0.79 | % |  | 1.15 | %
|                      |  |                          |   |  |      |   |  |      |  



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##### Table of Contents

The range of deposit account products offered by the Bank through its extensive branch and ATM network allows the Bank to
be competitive in obtaining funds from its local retail deposit market. At the same time, however, as customers have increasingly responded to changes in interest rates, the Bank has experienced some fluctuations in deposit flows. Chevy Chases
ability to attract and maintain deposits, and its cost of funds, will continue to be significantly affected by market conditions and its pricing strategy.



The following table sets forth Chevy Chases deposit flows during the periods indicated.



|                                 |  |                          |             |   |      |   |             |      |  |   |             |  
|-------------------------------- |  | ------------------------ | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                 |  | Year Ended September 30, |            
|                                 |  | 2005                     |             |   | 2004 |   |             | 2003 | 
|                                 |  | (in thousands)           |            
|Deposits to accounts             |  | $                        | 72,320,724  |   |      | $ | 53,155,374  |      |  | $ | 45,309,516  |  
|Withdrawals from accounts        |  |                          | (71,484,397 | ) |      |   | (52,459,012 | )    |  |   | (44,726,718 | )
|                                 |  |                          |             |   |      |   |             |      |  |   |             |  
|Net cash to accounts             |  |                          | 836,327     |   |      |   | 696,362     |      |  |   | 582,798     |  
|Interest credited to accounts    |  |                          | 90,323      |   |      |   | 58,251      |      |  |   | 80,122      |  
|                                 |  |                          |             |   |      |   |             |      |  |   |             |  
|Net increase in deposit balances |  | $                        | 926,650     |   |      | $ | 754,613     |      |  | $ | 662,920     |  
|                                 |  |                          |             |   |      |   |             |      |  |   |             |  



Deposit growth may be moderated by the
Bank from time to time either to take advantage of lower cost funding alternatives or in response to more modest expectations for loan and other asset growth.



The following table sets forth, by weighted average interest rates, the type and amounts of deposits as of September 30, 2005, which will mature during the fiscal
years indicated.



The following table summarizes maturities of certificate
accounts in amounts of $100,000 or greater as of September 30, 2005.



Weighted Average Interest Rates of Deposits



(Dollars in thousands)



|                                          |  |                                            |           |                     |                  |   |        |                      |                     |  |       |        |  |                     |           |  |        |   |                     |   |           |  |      |  
|----------------------------------------- |  | ------------------------------------------ | --------- | ------------------- | ---------------- | - | ------ | -------------------- | ------------------- |  | ----- | ------ |  | ------------------- | --------- |  | ------ | - | ------------------- | - | --------- |  | ---- | -
|                                          |  | Checking and Money Market Deposit Accounts |           |                     | Savings Accounts |   |        | Certificate Accounts |                     |  | Total |       
|Maturing During Year Ending
September 30, |  | Amount                                     |           | WeightedAverageRate |                  |   | Amount |                      | WeightedAverageRate |  |       | Amount |  | WeightedAverageRate |           |  | Amount |   | WeightedAverageRate |  
|2006                                      |  | $                                          | 6,306,551 |                     | 0.82             | % |        | $                    | 1,153,152           |  | 0.28  | %      |  | $                   | 1,676,464 |  | 3.03   | % |                     | $ | 9,136,167 |  | 1.15 | %
|2007                                      |  |                                            |          |                     |                 |   |        |                      |                    |  |      |        |  |                     | 468,055   |  | 3.96   |   |                     |   | 468,055   |  | 3.96 |  
|2008                                      |  |                                            |          |                     |                 |   |        |                      |                    |  |      |        |  |                     | 49,729    |  | 3.31   |   |                     |   | 49,729    |  | 3.31 |  
|2009                                      |  |                                            |          |                     |                 |   |        |                      |                    |  |      |        |  |                     | 82,287    |  | 3.72   |   |                     |   | 82,287    |  | 3.72 |  
|2010                                      |  |                                            |          |                     |                 |   |        |                      |                    |  |      |        |  |                     | 45,530    |  | 3.86   |   |                     |   | 45,530    |  | 3.86 |  
|                                          |  |                                            |           |                     |                  |   |        |                      |                     |  |       |        |  |                     |           |  |        |   |                     |   |           |  |      |  
|Total                                     |  | $                                          | 6,306,551 |                     | 0.82             | % |        | $                    | 1,153,152           |  | 0.28  | %      |  | $                   | 2,322,065 |  | 3.26   | % |                     | $ | 9,781,768 |  | 1.33 | %
|                                          |  |                                            |           |                     |                  |   |        |                      |                     |  |       |        |  |                     |           |  |        |   |                     |   |           |  |      |  



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##### Table of Contents

|                          |  |                        |         |                       |      |  
|------------------------- |  | ---------------------- | ------- | --------------------- | ---- | -
|Year Ending September 30, |  | Amount                 |         | Weighted Average Rate |     
|                          |  | (Dollars in thousands) |         |                       |     
|2006                      |  | $                      | 588,971 |                       | 3.19 | %
|2007                      |  |                        | 132,858 |                       | 4.05 | %
|2008                      |  |                        | 10,162  |                       | 3.22 | %
|2009                      |  |                        | 50,851  |                       | 3.76 | %
|2010                      |  |                        | 18,394  |                       | 3.78 | %
|                          |  |                        |         |                       |      |  
|Total                     |  | $                      | 801,236 |                       | 3.38 | %
|                          |  |                        |         |                       |      |  



The following table represents the
amounts of deposits by various interest rate categories as of September 30, 2005 maturing during the fiscal years indicated.



Maturities of Deposits by Interest Rates



(In thousands)



|                                            |  |                                                    |           |      |   |         |  |      |        |      |   |        |  |   |        |  |   |          
|------------------------------------------- |  | -------------------------------------------------- | --------- | ---- | - | ------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ |  | - | ---------
|                                            |  | Accounts Maturing During Year Ending September 30,
|Interest Rate                               |  | 2006                                               |           | 2007 |   | 2008    |  | 2009 |        | 2010 |   | Total 
|Non-interest bearing checking deposits (0%) |  | $                                                  | 1,346,455 |      | $ |        |  | $    |       |      | $ |       |  | $ |       |  | $ | 1,346,455
|0.01% to 1.99%                              |  |                                                    | 4,686,162 |      |   | 2,634   |  |      |       |      |   |       |  |   |       |  |   | 4,688,796
|2.00% to 2.99%                              |  |                                                    | 2,286,206 |      |   | 33,337  |  |      | 5,886  |      |   | 245    |  |   |       |  |   | 2,325,674
|3.00% to 3.99%                              |  |                                                    | 656,295   |      |   | 105,104 |  |      | 38,419 |      |   | 60,641 |  |   | 31,661 |  |   | 892,120  
|4.00% to 4.99%                              |  |                                                    | 148,662   |      |   | 325,585 |  |      | 5,422  |      |   | 21,401 |  |   | 13,869 |  |   | 514,939  
|5.00% to 5.99%                              |  |                                                    | 8,034     |      |   | 1,395   |  |      | 2      |      |   |       |  |   |       |  |   | 9,431    
|6.00% to 7.99%                              |  |                                                    | 4,353     |      |   |        |  |      |       |      |   |       |  |   |       |  |   | 4,353    
|                                            |  |                                                    |           |      |   |         |  |      |        |      |   |        |  |   |        |  |   |          
|Total                                       |  | $                                                  | 9,136,167 |      | $ | 468,055 |  | $    | 49,729 |      | $ | 82,287 |  | $ | 45,530 |  | $ | 9,781,768
|                                            |  |                                                    |           |      |   |         |  |      |        |      |   |        |  |   |        |  |   |          



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##### Table of Contents

BORROWINGS.The FHLB system functions as a central reserve bank providing credit for member institutions. As a
member of the FHLB of Atlanta, Chevy Chase is required to own capital stock in that FHLB and is authorized to apply for advances on the security of that stock and certain of its mortgages and other assets, principally securities which are
obligations of, or guaranteed by, the United States or its agencies, provided certain standards related to creditworthiness have been met.



Under the credit policies of the FHLB of Atlanta, credit may be extended to creditworthy institutions based upon their financial condition and the adequacy of collateral
pledged to secure the extension of credit. Extensions of credit may be obtained pursuant to several different credit programs, each of which has its own rate and range of maturities. Advances from the FHLB of Atlanta must be secured by certain types
of collateral with a value, as determined by the FHLB of Atlanta, at least equal to 100% of the borrowers outstanding advances. The Bank had outstanding FHLB advances of $2.5 billion at September 30, 2005.



From time to time the Bank enters into repurchase agreements, which are treated as
financings. The Bank sells securities, which are usually mortgage-backed securities, and agrees to buy back the same securities at a specified time, which is generally within seven to 90 days. The Bank pays a stated interest rate for the use of the
funds for the specified time period. The obligation to repurchase the securities sold is reflected as a liability and the securities underlying the agreements are included in assets in the Consolidated Statements of Financial Condition in this
report. These arrangements are, in effect, borrowings by the Bank secured by the securities sold. The Bank had outstanding repurchase agreements of $191.0 million at September 30, 2005.



The following table sets forth a summary of the repurchase agreements of the Bank as of the
dates and for the years indicated.



|                                                    |  |                        |         |   |      |   |        |  
|--------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------ | -
|                                                    |  | September 30,          |        
|                                                    |  | 2005                   |         |   | 2004 |  
|                                                    |  | (Dollars in thousands) |        
|Securities sold under repurchase agreements:        |  |                        |         |   |      |   |        |  
|Balance at year-end                                 |  | $                      | 191,034 |   |      | $ | 21,878 |  
|Average amount outstanding during the year          |  |                        | 119,791 |   |      |   | 23,994 |  
|Maximum amount outstanding at any month-end         |  |                        | 191,109 |   |      |   | 87,871 |  
|Weighted average interest rate during the year      |  |                        | 2.61    | % |      |   | 0.87   | %
|Weighted average interest rate on year-end balances |  |                        | 3.59    | % |      |   | 0.98   | %



In December 2003, the Bank issued $175
million aggregate principal amount of its 2003 Debentures. The OTS approved the inclusion of the 2003 Debentures in the Banks regulatory capital.



The Bank may redeem some or all of the 2003 Debentures at any time on or after December 1, 2008 at the following redemption prices plus accrued and unpaid interest:



|                                                             |  |                 |  
|------------------------------------------------------------ |  | --------------- | -
|If redeemed during the 12-month period
beginning December 1, |  | RedemptionPrice |  
|2008                                                         |  | 103.4375        | %
|2009                                                         |  | 102.2917        | %
|2010                                                         |  | 101.1458        | %
|2011 and thereafter                                          |  | 100.0000        | %



Under OTS capital regulations,
redemption of the 2003 Debentures prior to their stated maturity requires prior approval of the OTS unless the debentures are redeemed with the proceeds of, or replaced by, a like amount of a similar or higher quality capital instrument.



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##### Table of Contents

SUBSIDIARIES



OTS regulations generally permit the Bank to make investments in service corporation subsidiaries in an amount not to exceed 3.0% of the Banks assets, provided that
any investment in excess of 2.0% of assets serves primarily community, inner city or community development purposes. These regulations also permit the Bank to make conforming loans to those subsidiaries and joint ventures in an amount
not to exceed 50% of the Banks regulatory capital. At September 30, 2005, 2.0% and 3.0% of the Banks assets was equal to $285.2 million and $427.9 million, respectively, and the Bank had $34.7 million invested in its service
corporation subsidiaries.



The Bank may establish operating subsidiaries to
engage in any activities in which the Bank may engage directly. There are no regulatory limits on the amount the Bank can invest in operating subsidiaries. The Bank is required to provide 30 days advance notice to the OTS and to the FDIC before
establishing a new subsidiary or conducting a new activity in an existing subsidiary. The Bank engages in a variety of other activities through its subsidiaries, including those described below.



REAL ESTATE DEVELOPMENT ACTIVITIES.Manor Investment LLC, a subsidiary of the Bank,
engages in certain real estate development activities and manages the property it holds. See Managements Discussion and Analysis of Financial Condition and Results of Operations  Financial Condition  Asset Quality.



SECURITIES BROKERAGE SERVICES.Chevy Chase Securities, Inc., is a
wholly owned subsidiary of Chevy Chase Financial Services Corporation (CCFS), which is a wholly owned direct subsidiary of Chevy Chase. Chevy Chase Securities is a licensed broker-dealer, which sells securities on a retail basis to the
general public, including customers and depositors of the Bank.



INSURANCE
SERVICES.Chevy Chase Insurance Agency, Inc. (CCIA), a wholly owned subsidiary of CCFS, is a licensed insurance broker offering a variety of personal line property and casualty and life insurance programs to the general
public, including customers and depositors of the Bank. CCIAs primary programs consist of homeowner and automobile insurance in the property and casualty sector and mortgage and credit life and disability insurance in the life insurance
sector.



LENDING SUBSIDIARIES.Chevy Chase engages in significant
mortgage lending activities through B.F. Saul Mortgage Company. See Lending and Leasing Activities. CFC  Consumer Finance Corporation previously engaged in subprime automobile lending. In November 2000, the Bank stopped the
origination of subprime automobile loans. The Bank continues its collection efforts on the existing portfolio.



REIT SUBSIDIARY.Chevy Chase Preferred Capital Corporation invests in real estate loans, mortgage-backed securities and related assets and issued preferred stock to outside investors, which is included as Tier
1 capital of the Bank.



INVESTMENT, MANAGEMENT AND FIDUCIARY SERVICES.The Bank offers investment, management and fiduciary services through two wholly owned subsidiaries: Chevy Chase Trust Company, a licensed fiduciary and registered investment advisor, which serves primarily high net worth individuals, and ASB
Capital Management LLC, a registered investment adviser, which serves primarily institutional customers.



SPECIAL PURPOSE SUBSIDIARIES.At September 30, 2005, Chevy Chase Real Estate, LLC, (CCRE) a wholly owned subsidiary of Chevy Chase, held 100% of the common stock of nine subsidiaries, five of
which are active, and a majority of which were formed for the sole purpose of acquiring title to various real estate projects pursuant to foreclosure or deed-in-lieu of foreclosure. The Banks aggregate investment in these subsidiaries was
$15.5 million at September 30, 2005. CCRE is an operating subsidiary and, therefore, the Banks investment in CCRE is not subject to the 3.0% service corporation investment limit discussed above.



EMPLOYEES



The Bank and its subsidiaries had 3,840 full-time and 668 part-time employees at September 30, 2005. The Bank provides its employees
with a comprehensive range of employee benefit programs, including group health benefits, life insurance, disability insurance, paid sick leave, certain free deposit services and certain loan discounts. See Executive Compensation for a
discussion of certain compensation programs available to the Banks executive officers. None of the Banks employees is represented by a collective bargaining agreement. The Bank believes that its employee relations are good.



COMPETITION



Chevy Chase encounters strong competition both in attracting deposits and making loans in its markets. The Banks most direct
competition for deposits comes from other thrifts, commercial banks and credit unions, as well as from money market funds and corporate and government securities. In addition to offering competitive interest rates, Chevy Chase offers a variety of
services, convenient ATM locations and convenient office locations and business hours to attract deposits. Competition for real estate and other loans comes principally from other thrifts, banks, mortgage banking companies, insurance companies and
other institutional lenders. Chevy Chase competes for loans through interest rates, loan fees and the variety and quality of products and services provided to borrowers and brokers.



The Banks major competition comes from local, regional, national and international financial institutions and other providers of
financial services. The GLB Act amended federal law to permit broader affiliations among commercial banks, securities firms, insurance companies, and other financial services providers.



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The Bank competes with numerous depository institutions in its deposit-taking activities in the Washington, DC
metropolitan area. The Bank also competes with these institutions in the origination of single-family residential mortgage loans and home equity credit line loans. According to the most recently published industry statistics, at June 30, 2005,
Chevy Chase had the largest market share, with approximately 25.5% of deposits, in Montgomery County, Maryland, ranked third in market share, with approximately 14.2% of deposits, in Prince Georges County, Maryland, ranked fifth in market
share, with approximately 9.0% of deposits, in the Washington, DC metropolitan area and ranked sixth in market share, with approximately 4.7% of deposits in Fairfax County, Virginia, excluding single branch institutions. Based on publicly available
information, Chevy Chase estimates that, in the Washington, DC metropolitan area, it is one of the leaders in market share of single-family residential mortgage and home equity credit line loans.



FEDERAL TAXATION



Savings institutions, such as
the Bank, generally are taxed in the same manner as other corporations. There are, however, several special rules that apply principally to savings institutions and, in some cases, other financial institutions. Certain significant aspects of the
federal income taxation of the Bank are discussed below:



GENERAL.The
Bank and its subsidiaries are included in the consolidated federal income tax return filed by the Trust on a fiscal year basis. Each member of an affiliated group of corporations which files consolidated income tax returns is liable for the
groups federal income tax liability.



BAD DEBT RESERVE.In 1996,
Congress repealed the thrift bad debt provisions of the Internal Revenue Code effective for taxable years beginning after December 31, 1995. As a result, the Bank can deduct only those bad debts actually incurred during the respective taxable
years and was required to recapture and pay income tax on bad debt reserves accumulated since 1987 over a six year period, beginning with the Banks tax year ended September 30, 1999. Accumulated bad debt reserves since 1987 that were
subject to recapture were $101.3 million. As of September 30, 2005, all of the bad debt reserves have been recaptured.



CONSOLIDATED TAX RETURNS; TAX SHARING PAYMENTS.Generally, the operations of the Trust have generated net operating losses and the Banks taxable income
generally has been sufficient to fully utilize the losses of the Trust. Under the terms of a tax sharing agreement dated June 28, 1990, as amended, the Bank is obligated to make payments to the Trust based on its taxable income, as explained
more fully below.



The tax sharing agreement generally provides that each
member of the Trusts affiliated group is required to pay the Trust an amount equal to 100% of the tax liability that the member would have been required to pay to the IRS if the member had filed on a separate return basis. These amounts
generally must be paid even if the affiliated group has no overall tax liability or the groups tax liability is less than the sum of those amounts. Under the tax sharing agreement, the Trust, in turn, is obligated to pay to the appropriate tax
authorities the overall tax liability, if any, of the group. In addition, to the extent the net operating losses or tax credits of a particular member reduce the overall tax liability of the group, the Trust is required to reimburse that member on a
dollar-for-dollar basis, thereby compensating the member for the groups use of its net operating losses or tax credits. Under the tax sharing agreement, the Bank and its subsidiaries are treated as a single member of the Trusts
affiliated group.



The Bank made tax sharing payments to the Trust totaling
$2.1 million in fiscal year 2005. At September 30, 2005, the estimated net tax sharing payment payable to the Trust by the Bank was $1.8 million. There was no tax sharing payment payable to the Trust at September 30, 2004. It is expected
that the Bank will have taxable income in future years and additional operating losses of the Trust will be utilized to reduce the overall tax liability of the group which would otherwise arise from that taxable income of the Bank or from the
taxable income of other members of the Trusts affiliated group.



In
general, if the Bank has net operating losses or unused tax credits in any taxable year, under the tax sharing agreement the Trust is obligated to reimburse the Bank in an amount generally equal to (1) the tax benefit to the group of using
those tax losses or unused tax credits in the groups consolidated federal income tax return for that year, plus (2) to the extent those losses or credits are not used by the group in that year, the amount of the tax refunds which the Bank
would otherwise have been able to claim if it were not included in the consolidated federal income tax return of the group, but not in excess of the net amount paid by the Bank to the Trust pursuant to the tax sharing agreement. There is no
assurance that the Trust would be able to fulfill this obligation. If the Trust did not make the reimbursement, the OTS could attempt to characterize the nonpayment as an extension of credit by the Bank to the Trust which, as described above under
Holding Company Regulation, is prohibited under current law. The tax sharing agreement itself does not provide for any specific remedies upon a breach by any party of its obligations under the agreement.



The Bank, as a member of an affiliated group of corporations filing consolidated income tax
returns, is liable under the Internal Revenue Code for the groups tax liability. Although the Bank would be entitled to reimbursement under the tax sharing agreement for income tax paid with respect to the income of other members of the
affiliated group, there can be no assurance that the Trust or other members would be able to fulfill this obligation.



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STATE TAXATION



Many states, most significantly Maryland, do not allow the filing of combined or consolidated income tax returns, and thus the Trust and its subsidiaries, which includes
the Bank and its subsidiaries, that are subject to income taxes in those states are required to file separately. The Trust and its subsidiaries are also subject to income taxes in certain other states, some of which allow or require combined or
consolidated filings.



ITEM 2. PROPERTIES



REAL ESTATE



A list of the investment properties
of the Real Estate Trust is set forth under Item 1. BusinessReal EstateReal Estate Investments.



The Trust conducts its principal business from its executive offices at 7501 Wisconsin Avenue, Suite 1500, Bethesda, Maryland. The Saul Company leases all office
facilities on behalf of the Trust.



BANKING



At September 30, 2005, the Bank
conducted its business from its home office at 7926 Jones Branch Drive, McLean, Virginia and its executive offices at 7501 Wisconsin Avenue, Bethesda, Maryland; its operations centers at 6151 and 6200 Chevy Chase Drive, and 14601 Sweitzer Lane,
Laurel, Maryland; and 251 full-service offices located in Maryland, Virginia, Delaware and the District of Columbia. On that date, the Bank owned the building and land for 40 of its branch offices and leased its remaining 210 branch offices. Chevy
Chase leases the office facilities at 7926 Jones Branch Drive, 6200 Chevy Chase Drive and 14601 Sweitzer Lane. Chevy Chase leases office facilities at 1919 M Street, NW, Washington, DC, which previously housed a subsidiary that relocated to the
Banks executive offices during 2005. Chevy Chase owns the building and leases the land at 7501 Wisconsin Avenue. In addition, the Bank leases office space in which its subsidiaries are housed. The office facility leases have various terms
expiring from fiscal years 2006 to 2033 and the ground leases have terms expiring from fiscal years 2029 to 2081. The Bank owns the building and land for its operations center at 6151 Chevy Chase Drive, Laurel, Maryland. The Bank also owns the
office building and leases the land at 7700 Old Georgetown Road, Bethesda, Maryland, and leases the office facilities at 7735 Old Georgetown Road, Bethesda, Maryland. Both of these office facilities were occupied by Bank personnel prior to the
consolidation into the Banks corporate headquarters. The Bank has leased or is in the process of leasing or subleasing these facilities to third parties. See Note 20 to the Consolidated Financial Statements in this report for lease expense and
commitments.



At September 30, 2005, the net book value of the Banks
office facilities, including leasehold improvements, was $316.0 million, net of accumulated depreciation of $149.5 million. The Bank owns additional assets, including furniture and data processing equipment. At September 30, 2005, these other
assets had a book value of $218.4 million, net of accumulated depreciation of $168.5 million. The Bank also has operating leases, primarily for certain data processing equipment and software. Those leases have month-to-month or year-to-year terms.
See Note 18 to the Consolidated Financial Statements in this report.



As of
September 30, 2005, the Bank had notified the OTS of its plans to open 12 additional full-service branch offices. The branches, five in Virginia and seven in Maryland, are scheduled to open during fiscal year 2006.



The Bank also owns automobiles which are leased to third parties. The leases are accounted
for as operating leases with lease payments recognized as rental income. At September 30, 2005, automobiles subject to lease had a book value $185.0 million, net of accumulated depreciation of $142.4 million. See Note 19 to the Consolidated
Financial Statements in this report.



ITEM 3. LEGAL PROCEEDINGS



In the normal
course of business, the Trust is involved in litigation, which may include disputes with tenants and certain employment claims, and litigation arising from the continued development and marketing of certain of its real estate properties. In the
opinion of management, litigation which is currently pending will not have a material adverse impact on the financial condition or future operations of the Trust.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended September 30, 2005.



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##### Table of Contents

PART II



ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES



There currently is no established public trading market for Common Shares. At December 16, 2005, there were seven corporate holders of record of Common Shares. All
holders of Common Shares at such date were affiliated with the Trust. The Trust has no common share equivalents. On January 20, 2005, the Trust declared a dividend on its common shares of $0.248 per share, totaling approximately $1.2 million,
payable on January 21, 2005, to holders of record on December 30, 2004. In addition, on March 10, 2005, the Trust declared a dividend on its common shares of $0.4362 per share, totaling approximately $2.1 million, payable on
March 18, 2005, to holders of record on March 11, 2005. On June 23, 2005 the Trust declared a dividend on its common shares of $0.342 per share, totaling $1.6 million, payable on June 24, 2005, to holders of record on
June 20, 2005. On September 22, 2005 the Trust declared a dividend on its common shares of $0.342 per share, totaling $1.6 million, payable on September 23, 2005, to holders of record on September 20, 2005. In fiscal 2004 the
Trust declared a dividend on its Common Shares of approximately $0.092 per share, totaling approximately $440,000, on September 23, 2004, payable on September 24, 2004 to holders of record on September 20, 2004. No other Common Share
dividends were paid during the past two fiscal years. See Item 12. Security Ownership of Certain Beneficial Owners and Management.



ITEM 6. SELECTED FINANCIAL DATA



The
selected financial data of the Trust herein have been derived from the Consolidated Financial Statements of the Trust. The data should be read in conjunction with Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations and the Consolidated Financial Statements included elsewhere in this report.



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SELECTED FINANCIAL DATA



|                                                                            |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                            |  | Year Ended September 30, |        
|(In thousands, except per share amounts and other data)                     |  | 2005                     |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|STATEMENT OF OPERATIONS DATA:                                               |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                            |  |                          |         |   |     
|Real Estate:                                                                |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Revenues                                                                    |  | $                        | 139,811 |   |      | $ | 124,003 |      |  | $ | 112,996 |   |  | $    | 114,022 |   |  | $ | 128,034 |  
|Operating expenses                                                          |  |                          | 155,404 |   |      |   | 156,873 |      |  |   | 141,623 |   |  |      | 140,084 |   |  |   | 145,152 |  
|Equity in earnings of unconsolidated entities, net                          |  |                          | 8,246   |   |      |   | 7,788   |      |  |   | 7,248   |   |  |      | 8,811   |   |  |   | 7,169   |  
|Impairment loss on investments                                              |  |                          |        |   |      |   |        |      |  |   | (998    | ) |  |      | (188    | ) |  |   | (296    | )
|Gain on sales of property                                                   |  |                          | 263     |   |      |   | 2,769   |      |  |   | 9,079   |   |  |      |        |   |  |   | 11,077  |  
|                                                                            |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Real estate operating (loss) income                                         |  |                          | (7,084  | ) |      |   | (22,313 | )    |  |   | (13,298 | ) |  |      | (17,439 | ) |  |   | 832     |  
|                                                                            |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Banking:                                                                    |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Interest income                                                             |  |                          | 572,568 |   |      |   | 441,271 |      |  |   | 451,551 |   |  |      | 541,399 |   |  |   | 721,324 |  
|Interest expense                                                            |  |                          | 207,193 |   |      |   | 163,022 |      |  |   | 205,479 |   |  |      | 273,186 |   |  |   | 422,744 |  
|                                                                            |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net interest income                                                         |  |                          | 365,375 |   |      |   | 278,249 |      |  |   | 246,072 |   |  |      | 268,213 |   |  |   | 298,580 |  
|Provision for loan losses                                                   |  |                          | 11,569  |   |      |   | 14,522  |      |  |   | (18,422 | ) |  |      | (51,367 | ) |  |   | (59,496 | )
|                                                                            |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net interest income after provision for loan losses                         |  |                          | 376,944 |   |      |   | 292,771 |      |  |   | 227,650 |   |  |      | 216,846 |   |  |   | 239,084 |  
|                                                                            |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Other income:                                                               |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Deposit servicing fees                                                      |  |                          | 136,279 |   |      |   | 129,107 |      |  |   | 122,473 |   |  |      | 113,640 |   |  |   | 101,482 |  
|Servicing, securitization and mortgage banking income                       |  |                          | 172,037 |   |      |   | 216,052 |      |  |   | 144,158 |   |  |      | 100,522 |   |  |   | 66,448  |  
|Automobile rental income                                                    |  |                          | 81,963  |   |      |   | 157,034 |      |  |   | 235,360 |   |  |      | 242,646 |   |  |   | 167,379 |  
|Other                                                                       |  |                          | 52,516  |   |      |   | 37,301  |      |  |   | 37,850  |   |  |      | 32,094  |   |  |   | 39,967  |  
|                                                                            |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total other income                                                          |  |                          | 442,795 |   |      |   | 539,494 |      |  |   | 539,841 |   |  |      | 488,902 |   |  |   | 375,276 |  
|                                                                            |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Operating expenses                                                          |  |                          | 630,044 |   |      |   | 601,050 |      |  |   | 621,301 |   |  |      | 602,166 |   |  |   | 518,713 |  
|                                                                            |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Banking operating income                                                    |  |                          | 189,695 |   |      |   | 231,215 |      |  |   | 146,190 |   |  |      | 103,582 |   |  |   | 95,647  |  
|                                                                            |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total Company:                                                              |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income from continuing operations before income taxes and minority interest |  |                          | 182,611 |   |      |   | 208,902 |      |  |   | 132,892 |   |  |      | 86,143  |   |  |   | 96,479  |  
|Income tax provision                                                        |  |                          | 59,240  |   |      |   | 70,597  |      |  |   | 46,779  |   |  |      | 23,881  |   |  |   | 27,613  |  
|                                                                            |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income from continuing operations before minority interest                  |  |                          | 123,371 |   |      |   | 138,305 |      |  |   | 86,113  |   |  |      | 62,262  |   |  |   | 68,866  |  
|Minority interest held by affiliates                                        |  |                          | (19,516 | ) |      |   | (23,070 | )    |  |   | (13,926 | ) |  |      | (9,671  | ) |  |   | (8,660  | )
|Minority interest  other                                                   |  |                          | (29,071 | ) |      |   | (37,195 | )    |  |   | (26,160 | ) |  |      | (25,313 | ) |  |   | (25,313 | )
|                                                                            |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income from continuing operations                                           |  |                          | 74,784  |   |      |   | 78,040  |      |  |   | 46,027  |   |  |      | 27,278  |   |  |   | 34,893  |  
|Discontinued real estate operations, net of income taxes                    |  |                          | (1,186  | ) |      |   | (1,340  | )    |  |   | (1,037  | ) |  |      | (1,371  | ) |  |   | (974    | )
|Cumulative effect of change in accounting principle, net of income taxes    |  |                          |        |   |      |   |        |      |  |   | 897     |   |  |      |        |   |  |   |        |  
|                                                                            |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total company net income                                                    |  | $                        | 73,598  |   |      | $ | 76,700  |      |  | $ | 45,887  |   |  | $    | 25,907  |   |  | $ | 33,919  |  
|                                                                            |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income available to common shareholders                                 |  | $                        | 68,180  |   |      | $ | 71,282  |      |  | $ | 40,469  |   |  | $    | 20,489  |   |  | $ | 28,501  |  
|                                                                            |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income (loss) per common share:                                         |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income from continuing operations                                           |  | $                        | 14.43   |   |      | $ | 15.11   |      |  | $ | 8.43    |   |  | $    | 4.52    |   |  | $ | 6.10    |  
|Discontinued operations                                                     |  |                          | (0.25   | ) |      |   | (0.28   | )    |  |   | (0.22   | ) |  |      | (0.28   | ) |  |   | (0.20   | )
|Cumulative effect of change in accounting principle                         |  |                          |        |   |      |   |        |      |  |   | 0.19    |   |  |      |        |   |  |   |        |  
|                                                                            |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income per common share (Basis and Diluted)                             |  | $                        | 14.18   |   |      | $ | 14.83   |      |  | $ | 8.40    |   |  | $    | 4.24    |   |  | $ | 5.90    |  
|                                                                            |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Continued on following page.                                                |  |                          |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  



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SELECTED FINANCIAL DATA

(Continued)



|                                                        |  |                          |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|------------------------------------------------------- |  | ------------------------ | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | - |  | ---- | ---------- | - |  | - | ---------- | -
|                                                        |  | Year Ended September 30, |           
|(In thousands, except per share amounts and other data) |  | 2005                     |            |   | 2004 |   |            | 2003 |  |   | 2002       |   |  | 2001 |           
|BALANCE SHEET DATA:                                     |  |                          |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|                                                        |  |                          |            |   |     
|Assets:                                                 |  |                          |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Real estate assets                                      |  | $                        | 465,830    |   |      | $ | 458,169    |      |  | $ | 429,285    |   |  | $    | 437,514    |   |  | $ | 442,104    |  
|Income-producing properties, net (1)                    |  |                          | 270,828    |   |      |   | 273,360    |      |  |   | 275,005    |   |  |      | 285,308    |   |  |   | 282,984    |  
|Land parcels                                            |  |                          | 48,029     |   |      |   | 41,654     |      |  |   | 42,425     |   |  |      | 44,020     |   |  |   | 40,835     |  
|Banking assets                                          |  |                          | 14,244,961 |   |      |   | 13,270,847 |      |  |   | 11,779,440 |   |  |      | 11,273,252 |   |  |   | 11,408,707 |  
|Total company assets                                    |  |                          | 14,710,791 |   |      |   | 13,729,016 |      |  |   | 12,208,725 |   |  |      | 11,710,766 |   |  |   | 11,850,811 |  
|                                                        |  |                          |            |   |     
|Liabilities:                                            |  |                          |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Real estate liabilities                                 |  |                          | 660,219    |   |      |   | 676,301    |      |  |   | 652,856    |   |  |      | 663,376    |   |  |   | 667,176    |  
|Mortgage notes payable (1)                              |  |                          | 294,328    |   |      |   | 311,316    |      |  |   | 322,437    |   |  |      | 326,232    |   |  |   | 331,114    |  
|Notes payable - secured                                 |  |                          | 250,000    |   |      |   | 250,000    |      |  |   | 203,800    |   |  |      | 201,750    |   |  |   | 202,500    |  
|Notes payable - unsecured                               |  |                          | 57,760     |   |      |   | 56,428     |      |  |   | 55,349     |   |  |      | 55,156     |   |  |   | 50,717     |  
|Banking liabilities                                     |  |                          | 13,324,284 |   |      |   | 12,400,167 |      |  |   | 11,039,425 |   |  |      | 10,614,255 |   |  |   | 10,780,154 |  
|Minority interest held by affiliates                    |  |                          | 124,932    |   |      |   | 114,933    |      |  |   | 98,062     |   |  |      | 88,137     |   |  |   | 82,048     |  
|Minority interest - other                               |  |                          | 296,013    |   |      |   | 296,013    |      |  |   | 249,698    |   |  |      | 218,307    |   |  |   | 218,307    |  
|Total company liabilities                               |  |                          | 14,405,448 |   |      |   | 13,487,414 |      |  |   | 12,040,041 |   |  |      | 11,584,075 |   |  |   | 11,747,685 |  
|                                                        |  |                          |            |   |     
|Shareholders equity                                    |  |                          | 305,343    |   |      |   | 241,602    |      |  |   | 168,684    |   |  |      | 126,691    |   |  |   | 103,126    |  
|                                                        |  |                          |            |   |     
|OTHER DATA (1):                                         |  |                          |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|                                                        |  |                          |            |   |     
|Hotels:                                                 |  |                          |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Number of hotels                                        |  |                          | 17         |   |      |   | 18         |      |  |   | 18         |   |  |      | 18         |   |  |   | 18         |  
|Number of guest rooms                                   |  |                          | 3,383      |   |      |   | 3,573      |      |  |   | 3,574      |   |  |      | 3,578      |   |  |   | 3,578      |  
|Average occupancy                                       |  |                          | 68         | % |      |   | 66         | %    |  |   | 61         | % |  |      | 61         | % |  |   | 66         | %
|Average room rate                                       |  | $                        | 106.81     |   |      | $ | 91.67      |      |  | $ | 85.93      |   |  | $    | 86.92      |   |  | $ | 94.32      |  
|Office properties:                                      |  |                          |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Number of properties                                    |  |                          | 14         |   |      |   | 13         |      |  |   | 13         |   |  |      | 13         |   |  |   | 11         |  
|Leasable area (square feet)                             |  |                          | 1,990,147  |   |      |   | 1,978,016  |      |  |   | 1,978,016  |   |  |      | 1,978,016  |   |  |   | 1,796,571  |  
|Leasing percentages                                     |  |                          | 91         | % |      |   | 89         | %    |  |   | 85         | % |  |      | 86         | % |  |   | 92         | %
|Land parcels:                                           |  |                          |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Number of parcels                                       |  |                          | 12         |   |      |   | 10         |      |  |   | 10         |   |  |      | 10         |   |  |   | 10         |  
|Total acreage                                           |  |                          | 452        |   |      |   | 381        |      |  |   | 381        |   |  |      | 389        |   |  |   | 389        |  

---

|(1) | Includes real estate held for sale.
|--- | -----------------------------------



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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The Trust has prepared its financial statements and other disclosures on a consolidated basis. The term Trust used in the text and the financial statements
included herein refers to the combined entity, which includes B. F. Saul Real Estate Investment Trust and its subsidiaries, including Chevy Chase and its subsidiaries. The term Real Estate Trust refers to B. F. Saul Real Estate
Investment Trust and its subsidiaries, excluding Chevy Chase and its 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.



CRITICAL ACCOUNTING POLICIES



The Trusts accounting policies are in conformity with accounting
principles generally accepted in the United States (GAAP). The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and
assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the Trusts financial statements and the reported amounts of revenue and expenses during the
reporting periods. If judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation
of the financial statements. Below is a discussion of accounting policies which the Trust considers critical in that they may require judgment in their application or require estimates about matters which are inherently uncertain. Additional
discussion of accounting policies which the Trust considers significant, including further discussion of the critical accounting policies described below, can be found in the Notes to the Consolidated Financial Statements.



REAL ESTATE



Real Estate Properties: Income-producing properties are stated at the lower of depreciated cost (except those which were acquired
through foreclosure or equivalent proceedings, the carrying amounts of which are based on the lower of cost or fair value at the time of acquisition) or net realizable value. Management believes that these assets have generally appreciated in value
and, accordingly, the aggregate current value exceeds their aggregate net book value and also exceeds the value of the Real Estate Trusts liabilities as reported in these financial statements. Because these financial statements are prepared in
conformity with GAAP, they do not report the current value of the Real Estate Trusts real estate assets. The purchase price of real estate assets is allocated between land, building and in-place acquired leases based on the relative fair
values of the components at the date of acquisition. Buildings are depreciated on a straight-line basis over their estimated useful lives of 28 to 50 years. Intangibles associated with acquired leases are amortized over the remaining lease terms.



Long-lived assets and certain identifiable intangibles to be held and used are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows (undiscounted and without interest charges) is less than the carrying
amount of the asset, the Real Estate Trust recognizes an impairment loss. Measurement of an impairment loss for long-lived assets and identifiable intangibles that the Real Estate Trust expects to hold and use is based on the fair value of the
asset. Long-lived assets and certain intangibles to be disposed of are generally reported at the lower of carrying amount or fair value less the cost to sell.



Interest, real estate taxes and other carrying costs are capitalized on projects under construction. Once construction is completed and the assets are placed in
service, rental income, direct operating expenses, and depreciation associated with such properties are included in current operations. The Real Estate Trust considers a project to be substantially complete and held available for occupancy upon
completion of tenant improvements, but no later than one year from the cessation of major construction activity. Substantially completed portions of a project are accounted for as separate projects. Expenditures for repairs and maintenance are
charged to operations as incurred.



Depreciation is calculated using the
straight-line method and the estimated useful lives of 28 to 50 years for buildings and up to 20 years for certain other improvements. Tenant improvements are amortized on a straight-line basis over the lesser of their estimated useful lives or the
term of the related lease.



Income Recognition: The Real Estate Trust
derives room and other revenues from the operations of its hotel portfolio. Hotel revenue is recognized as earned. The Real Estate Trust derives rental income under noncancelable long-term leases from tenants at its commercial properties. Commercial
property rental income is recognized on a straight-line basis. When rental payments due under leases vary from a straight-line basis because of free rent periods or scheduled rent increases, income is recognized on a straight-line basis throughout
the initial term of the lease. Expense recoveries represent a portion of property operating expenses billed to tenants, including common area maintenance, real estate taxes and other recoverable costs. Expense recoveries are recognized in the period
when the expenses are incurred.



BANKING



General:The Bank has identified four policies that, due to estimates and assumptions
inherent in those policies, involve a relatively high degree of judgment and complexity.



Allowance for Losses:The Bank maintains allowances for possible losses on its loans at levels it believes to be adequate to absorb estimated probable losses in the loan portfolio at the balance sheet date.
Management reviews the adequacy of the allowance for losses using a variety of measures and tools appropriate for the asset type, including historical loss performance, delinquent status, current economic conditions, internal risk ratings, current
underwriting policies and practices and market values for similar assets.



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Derivative Instruments:The Bank uses a variety of derivative financial instruments in order to mitigate its
exposure to changes in market interest rates. To mitigate the risk that the value of fixed rate mortgage loans held for sale will change as interest rates change, the Bank generally enters into mortgage-backed security forward sales contracts. In
addition, the Bank issues commitments to make fixed-rate mortgage loans in which the customer locks in the interest rate before closing on the loan. These interest rate locks are treated as derivative instruments in the financial
statements. All derivative instruments are recorded on the balance sheet at their fair value, which generally represents the amount of money the Bank would receive or pay if the item were sold or bought in a current transaction. Fair market values
are based on market quotes when they are available. If market quotes are not available, fair values are based on market or dealer prices of similar items or discounted cash flows using market estimates of interest rates, prepayment speeds and other
assumptions.



When determining the extent to which interest rate exposures
should be hedged, the Bank makes certain estimates and judgments relating to, among other things, the probability that the interest-rate lock will become a loan, the timing of the loan closing and the timing of the subsequent sale of the loan
transaction. To the extent that the actual results are different from the Banks assumptions, the hedging strategy may not be effective in offsetting the changes in the values of the hedged items, and the Banks earnings may decline.



Interest-Only Strips Receivable and Certificates:The Bank sells loans
and retains an interest-only strip receivable or receives an interest-only certificate related to the sold items. The interest-only assets are initially recorded by allocating the previous carrying value of the assets involved in the transactions
between the assets sold and the interests retained, including the interest-only strips receivable. Subsequently, the interest-only assets are carried at their fair values, with changes in fair value reflected in income. Fair value of these
interest-only assets is based on discounted expected future cash flows, which are determined using market assumptions such as discount rates and prepayment speeds, and, in certain circumstances, an estimate of credit losses based on the Banks
historical experience. The Bank also engages an independent firm that has expertise in this area to evaluate these assets and render an opinion on their fair value. If actual prepayment or default rates significantly exceed the estimates, the actual
amount of future cash flow could be less than the expected amount and the value of the interest-only assets, as well as the Banks earnings, could decline.



Mortgage Servicing Rights:The Bank sells mortgage loans and retains the right to service those loans (originated MSR). Originated MSR are initially
recorded by allocating the previous carrying value of the loans between the portion sold and the retained originated MSR. Also, the Bank has purchased the right to service mortgage loans originated by third parties (purchased MSR and,
together with originated MSR, MSR). Purchased MSR are initially recorded at their acquisition cost. Subsequent to origination or purchase, MSR are carried at the lower of their amortized cost or at fair value. Fair value of MSR is based
on discounted expected future income, net of related expenses, to be generated by servicing the underlying loans. When determining fair value, the Bank uses several assumptions, the most significant of which are the estimated rate of repayment of
the underlying loans and the discount rate. The Bank also engages an independent firm that has expertise in this area to evaluate these assets and render an opinion on their fair value. If actual repayment rates significantly exceed the estimates,
the actual amount of future cash flow could be less than the expected amount and the value of the MSR, as well as the Banks earnings, could decline.



The Bank believes that the judgments, estimates and assumptions used in the preparation of the Consolidated Financial Statements are appropriate given the factual
circumstances at the time. However, given the sensitivity of the Consolidated Financial Statements to these items, the use of other judgments, estimates and assumptions, as well as differences between actual results and the estimates and
assumptions, could result in material differences in the Banks results of operations and financial condition.



FINANCIAL CONDITION



REAL ESTATE



The Real Estate Trusts
investment portfolio at September 30, 2005 consisted primarily of hotels, office and industrial properties, and land parcels. See Item 1. Business  Real Estate  Real Estate Investments.



Overall, the hotel portfolio, excluding the property sold December 2004, experienced an
average occupancy rate of 68% and an average room rate of $106.81 during fiscal 2005, compared to an average occupancy of 67% and an average room rate of $93.08 during the prior year. REVPAR (revenue per available room) was $72.07 for fiscal 2005, a
15.7% increase from REVPAR for fiscal 2004 of $62.31.



The Real Estate
Trusts hotel portfolio has experienced positive growth in occupancy and strong growth in average room rates, particularly the Northern Virginia and Florida properties, during fiscal year 2005 reflecting continued strength in general business
travel.



The Real Estate Trusts office and industrial property portfolio
was 91% leased at September 30, 2005, compared to a leasing rate of 89% at September 30, 2004. Although occupancy has increased in fiscal 2005, the Trust has been experiencing a downward trend in its rental rates commensurate with the
competitive commercial office markets in Northern Virginia and Atlanta, Georgia. At September 30, 2005, the Real Estate Trusts office and industrial property portfolio consisted of 14 properties and had a total gross leasable area of
1,990,147 square feet, of which 205,416 square feet (10.3%) and 350,964 square feet (17.6%) are subject to leases expiring in fiscal 2006 and fiscal 2007, respectively.



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##### Table of Contents

BANKING



General.The Banks assets
grew to $14.2 billion during fiscal year 2005, an increase of $1.0 billion from fiscal year 2004. The Bank recorded operating income of $189.7 million during fiscal year 2005, compared to operating income of $231.2 million during fiscal year 2004.
The decrease in income for fiscal year 2005 was primarily attributable to reductions in the carrying value of servicing assets and interest-only assets as a result of increased prepayment rates on securitized residential mortgage loans, decreased
automobile rental income as a result of the Banks prior decision to exit that business, and increased salaries and employee benefits. Partially offsetting these items were increases in net interest income and a decrease in depreciation and
amortization. See Results of Operations.



At September 30,
2005, the Banks tangible, core, tier 1 risk-based and total risk-based regulatory capital ratios were 5.92%, 5.92%, 8.82% and 10.95%, respectively. The Banks capital ratios exceeded regulatory requirements as well as the standards
established for well-capitalized institutions under OTS prompt corrective action regulations. See Capital.



During fiscal year 2005, the Bank declared and paid, out of the retained earnings of the Bank, cash dividends on its Common Stock in the aggregate amount of $4,900 per
share.



The Banks assets are subject to review and classification by the
OTS upon examination. The OTS concluded its most recent safety and soundness examination of the Bank in May 2005.



Asset Quality.Non-Performing Assets. The Banks overall level of non-performing assets increased during fiscal year 2005 due primarily to increased
delinquencies of residential mortgage loans. The following table sets forth information concerning the Banks non-performing assets at the dates indicated. The figures shown are after charge-offs and, in the case of real estate acquired in
settlement of loans, after all valuation allowances.



39



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##### Table of Contents

Non-Performing Assets



(Dollars in thousands)



|                                                                                                                 |  |               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                                 |  | September 30, |       
|                                                                                                                 |  | 2005          |        |   | 2004 |   |        | 2003 |  |   | 2002   |   |  | 2001 |        
|Non-performing assets:                                                                                           |  |               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Non-accrual loans:                                                                                               |  |               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Residential mortgage                                                                                             |  | $             | 20,874 |   |      | $ | 8,993  |      |  | $ | 6,567  |   |  | $    | 12,731  |   |  | $ | 6,011   |  
|Home equity                                                                                                      |  |               | 1,443  |   |      |   | 1,767  |      |  |   | 1,480  |   |  |      | 949     |   |  |   | 1,303   |  
|Real estate and construction and ground                                                                          |  |               |       |   |      |   |       |      |  |   | 1,004  |   |  |      | 653     |   |  |   |        |  
|                                                                                                                 |  |               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Total non-accrual real estate loans                                                                              |  |               | 22,317 |   |      |   | 10,760 |      |  |   | 9,051  |   |  |      | 14,333  |   |  |   | 7,314   |  
|Commercial                                                                                                       |  |               | 30     |   |      |   | 242    |      |  |   | 249    |   |  |      | 2,329   |   |  |   |        |  
|Subprime automobile                                                                                              |  |               | 375    |   |      |   | 1,164  |      |  |   | 4,372  |   |  |      | 7,755   |   |  |   | 13,379  |  
|Prime automobile                                                                                                 |  |               | 768    |   |      |   | 1,069  |      |  |   | 1,484  |   |  |      | 1,705   |   |  |   | 6,013   |  
|Other consumer                                                                                                   |  |               | 216    |   |      |   | 472    |      |  |   | 444    |   |  |      | 431     |   |  |   | 593     |  
|                                                                                                                 |  |               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Total non-accrual loans (1)                                                                                      |  |               | 23,706 |   |      |   | 13,707 |      |  |   | 15,600 |   |  |      | 26,553  |   |  |   | 27,299  |  
|                                                                                                                 |  |               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Real estate acquired in settlement of loans                                                                      |  |               | 20,265 |   |      |   | 20,357 |      |  |   | 21,820 |   |  |      | 94,665  |   |  |   | 115,931 |  
|Allowance for losses on real estate acquired in settlement of loans                                              |  |               |       |   |      |   |       |      |  |   |       |   |  |      | (71,293 | ) |  |   | (85,152 | )
|                                                                                                                 |  |               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Real estate acquired in settlement of loans, net                                                                 |  |               | 20,265 |   |      |   | 20,357 |      |  |   | 21,820 |   |  |      | 23,372  |   |  |   | 30,779  |  
|                                                                                                                 |  |               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Total non-performing assets                                                                                      |  | $             | 43,971 |   |      | $ | 34,064 |      |  | $ | 37,420 |   |  | $    | 49,925  |   |  | $ | 58,078  |  
|                                                                                                                 |  |               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Troubled debt restructurings                                                                                     |  | $             |       |   |      | $ |       |      |  | $ |       |   |  | $    |        |   |  | $ |        |  
|                                                                                                                 |  |               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Allowance for losses on loans                                                                                    |  | $             | 28,640 |   |      | $ | 37,750 |      |  | $ | 58,397 |   |  | $    | 66,079  |   |  | $ | 57,018  |  
|Allowance for losses on real estate held for investment                                                          |  |               |       |   |      |   | 202    |      |  |   | 202    |   |  |      | 202     |   |  |   | 202     |  
|Allowance for losses on real estate acquired in settlement of loans                                              |  |               |       |   |      |   |       |      |  |   |       |   |  |      | 71,293  |   |  |   | 85,152  |  
|                                                                                                                 |  |               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Total allowances for losses                                                                                      |  | $             | 28,640 |   |      | $ | 37,952 |      |  | $ | 58,599 |   |  | $    | 137,574 |   |  | $ | 142,372 |  
|                                                                                                                 |  |               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Interest income recorded                                                                                         |  |               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Non-accrual assets                                                                                               |  | $             | 449    |   |      | $ | 180    |      |  | $ | 39     |   |  | $    | 279     |   |  | $ | 358     |  
|                                                                                                                 |  |               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Restructured loans                                                                                               |  | $             |       |   |      | $ |       |      |  | $ |       |   |  | $    |        |   |  | $ |        |  
|                                                                                                                 |  |               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Interest income that would have been recorded had the loans been current in accordance with their original terms |  |               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Non-accrual assets                                                                                               |  | $             | 1,034  |   |      | $ | 1,206  |      |  | $ | 2,098  |   |  | $    | 3,141   |   |  | $ | 3,321   |  
|                                                                                                                 |  |               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Restructured loans                                                                                               |  | $             |       |   |      | $ |       |      |  | $ |       |   |  | $    |        |   |  | $ |        |  
|                                                                                                                 |  |               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Ratios:                                                                                                          |  |               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Non-performing assets to total assets                                                                            |  |               | 0.31   | % |      |   | 0.26   | %    |  |   | 0.32   | % |  |      | 0.44    | % |  |   | 0.51    | %
|Allowance for losses on real estate loans to non-accrual real estate loans (1)                                   |  |               | 47.48  | % |      |   | 91.02  | %    |  |   | 75.65  | % |  |      | 44.05   | % |  |   | 70.86   | %
|Allowance for losses on loans to non-accrual loans (1)                                                           |  |               | 120.81 | % |      |   | 275.41 | %    |  |   | 374.34 | % |  |      | 248.86  | % |  |   | 208.86  | %
|Allowance for losses on loans to total loans receivable (2)                                                      |  |               | 0.26   | % |      |   | 0.36   | %    |  |   | 0.65   | % |  |      | 0.85    | % |  |   | 0.77    | %

---

|(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 include non-accrual loans and REO, acquired either through foreclosure
or deed-in-lieu of foreclosure, or pursuant to in-substance foreclosure. Non-accrual loans consist of loans contractually past due 90 days or more or with respect to which other factors indicate that full payment of principal and interest is
unlikely.



Non-performing assets totaled $44.0 million at September 30,
2005, compared to $34.1 million, at September 30, 2004. The Bank maintained valuation allowances of $28.6 million and $37.8 million on its loan portfolio at September 30, 2005 and 2004, respectively. The $9.9 million increase in
non-performing assets reflected a net increase in non-accrual loans of $10.0 million partially offset by a decrease in REO of $0.1 million.



Non-accrual Loans. The Banks non-accrual loans totaled $23.7 million at September 30, 2005, an increase from $13.7 million at September 30, 2004.
At September 30, 2005, non-accrual loans consisted of $22.3 million of non-accrual real estate loans and $1.4 million of non-accrual prime automobile, subprime automobile, commercial and other consumer loans compared to non-accrual real estate
loans of $10.8 million and non-accrual prime automobile, subprime automobile, commercial and other consumer loans of $2.9 million at September 30, 2004. There were 28 non-accrual residential mortgage loans at September 30, 2005, compared
to 18 loans at September 30, 2004. The decrease in non-accrual prime automobile and subprime automobile loans reflects the winding down of those portfolios.



40



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REO. At September 30, 2005, the Banks REO totaled $20.3 million
compared to $20.4 million at September 30, 2004.



The Bank continues to
monitor closely its major non-performing and potential problem assets in light of current and anticipated market conditions. The Banks asset workout group focuses its efforts on resolving these problem assets as expeditiously as possible.



Potential Problem Assets. Although not considered non-performing
assets, primarily because the loans are not 90 or more days past due and the borrowers have not abandoned control of the properties, potential problem assets are experiencing problems sufficient to cause management to have serious doubts as to the
ability of the borrowers to comply with present repayment terms. At September 30, 2005 and 2004, potential problem assets totaled $0.4 million and $0.7 million, respectively.



The Banks Watch List Committee meets quarterly and reviews all commercial lending relationships which are rated vulnerable, criticized
or classified and have commitments of $1.0 million or greater. This committee reviews the current status of each relationship, recent changes, performance against the corrective action plan presented at the prior meeting, and the current action plan
for the relationship.



Delinquent Loans. At September 30, 2005,
delinquent loans totaled $29.2 million, or 0.3% of loans, compared to $32.4 million, or 0.3% of loans, at September 30, 2004. The following table sets forth information regarding the Banks delinquent loans at September 30, 2005.



|                                  |  |                                                               |        |   |            |   |       |       |  |   |        |  
|--------------------------------- |  | ------------------------------------------------------------- | ------ | - | ---------- | - | ----- | ----- |  | - | ------ | -
|                                  |  | Principal Balance (Dollars in thousands) Loans Delinquent for |       
|                                  |  | 30-59 days                                                    |        |   | 60-89 days |   |       | Total | 
|Residential Mortgage              |  | $                                                             | 9,536  |   |            | $ | 954   |       |  | $ | 10,490 |  
|Home Equity                       |  |                                                               | 5,115  |   |            |   | 547   |       |  |   | 5,662  |  
|Other Real Estate                 |  |                                                               | 530    |   |            |   | 1,865 |       |  |   | 2,395  |  
|Commercial                        |  |                                                               | 522    |   |            |   | 500   |       |  |   | 1,022  |  
|Subprime Automobile               |  |                                                               | 1,209  |   |            |   | 631   |       |  |   | 1,840  |  
|Other Consumer                    |  |                                                               | 5,714  |   |            |   | 2,047 |       |  |   | 7,761  |  
|                                  |  |                                                               |        |   |            |   |       |       |  |   |        |  
|Total                             |  | $                                                             | 22,626 |   |            | $ | 6,544 |       |  | $ | 29,170 |  
|                                  |  |                                                               |        |   |            |   |       |       |  |   |        |  
|Total as a Percentage of Loans(1) |  |                                                               | 0.21   | % |            |   | 0.06  | %     |  |   | 0.27   | %
|                                  |  |                                                               |        |   |            |   |       |       |  |   |        |  

---

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



Total residential mortgage loans delinquent 30-89 days
increased to $10.5 million at September 30, 2005 from $8.2 million at September 30, 2004. Home equity loans delinquent 30-89 days increased to $5.7 million at September 30, 2005 from $5.1 million at September 30, 2004.



Total delinquent commercial loans decreased to $1.0 million at
September 30, 2005, from $3.0 million at September 30, 2004.



Total
delinquent subprime automobile loans decreased to $1.8 million at September 30, 2005, from $8.9 million at September 30, 2004, primarily because the Banks portfolio of these loans continues to decline as a result of the Banks
prior decision to discontinue origination of these loans.



Troubled Debt
Restructurings. A troubled debt restructuring occurs when the Bank agrees to modify significant terms of a loan in favor of a borrower experiencing financial difficulties. The Bank had no troubled debt restructurings at September 30, 2005
and 2004.



Real Estate Held for Investment. At September 30, 2004,
real estate held for investment consisted of one property with book value of $0.9 million, net of a valuation allowance of $0.2 million. The property was sold during fiscal year 2005.



Allowances for Losses. The following tables show loss experience by asset type and the components of the allowance for losses on
loans and the allowance for losses on real estate held for investment or sale. These tables reflect charge-offs taken against assets during the years indicated and may include charge-offs taken against assets, which the Bank disposed of during such
years.



41



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##### Table of Contents

Analysis of Allowance for and Charge-offs of Loans



(Dollars in thousands)



|                                                           |  |                          |         |    |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|---------------------------------------------------------- |  | ------------------------ | ------- | -- | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                           |  | Year Ended September 30, |        
|                                                           |  | 2005                     |         |    | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|Balance at beginning of year                               |  | $                        | 37,750  |    |      | $ | 58,397  |      |  | $ | 66,079  |   |  | $    | 57,018  |   |  | $ | 52,518  |  
|                                                           |  |                          |         |    |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Provision for loan losses                                  |  |                          | (11,569 | )  |      |   | (14,522 | )    |  |   | 18,422  |   |  |      | 51,367  |   |  |   | 59,496  |  
|                                                           |  |                          |         |    |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Charge-offs:                                               |  |                          |         |    |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Single family residential                                  |  |                          | (752    | )  |      |   | (279    | )    |  |   | (273    | ) |  |      | (300    | ) |  |   | (99     | )
|Home equity                                                |  |                          | (818    | )  |      |   | (786    | )    |  |   | (759    | ) |  |      | (832    | ) |  |   | (687    | )
|Commercial real estate and multifamily                     |  |                          | (720    | )  |      |   |        |      |  |   | (382    | ) |  |      | (27     | ) |  |   |        |  
|Subprime automobile                                        |  |                          | (4,400  | )  |      |   | (15,596 | )    |  |   | (30,227 | ) |  |      | (40,695 | ) |  |   | (49,749 | )
|Other consumer                                             |  |                          | (7,832  | )  |      |   | (9,897  | )    |  |   | (13,316 | ) |  |      | (14,163 | ) |  |   | (13,706 | )
|                                                           |  |                          |         |    |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total charge-offs                                          |  |                          | (14,522 | )  |      |   | (26,558 | )    |  |   | (44,957 | ) |  |      | (56,017 | ) |  |   | (64,241 | )
|                                                           |  |                          |         |    |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Recoveries:                                                |  |                          |         |    |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Home equity                                                |  |                          | 321     |    |      |   | 340     |      |  |   | 248     |   |  |      | 76      |   |  |   | 80      |  
|Commercial real estate and multifamily                     |  |                          | 317     |    |      |   |        |      |  |   | 14      |   |  |      | 18      |   |  |   |        |  
|Subprime automobile                                        |  |                          | 9,005   |    |      |   | 14,613  |      |  |   | 13,384  |   |  |      | 11,311  |   |  |   | 7,104   |  
|Other consumer                                             |  |                          | 7,338   |    |      |   | 5,480   |      |  |   | 5,207   |   |  |      | 2,306   |   |  |   | 2,061   |  
|                                                           |  |                          |         |    |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total recoveries                                           |  |                          | 16,981  |    |      |   | 20,433  |      |  |   | 18,853  |   |  |      | 13,711  |   |  |   | 9,245   |  
|                                                           |  |                          |         |    |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net (charge-offs) recoveries                               |  |                          | 2,459   |    |      |   | (6,125  | )    |  |   | (26,104 | ) |  |      | (42,306 | ) |  |   | (54,996 | )
|                                                           |  |                          |         |    |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Balance at end of year                                     |  | $                        | 28,640  |    |      | $ | 37,750  |      |  | $ | 58,397  |   |  | $    | 66,079  |   |  | $ | 57,018  |  
|                                                           |  |                          |         |    |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Provision for loan losses to average loans(1)              |  |                          | (0.10   | %) |      |   | (0.14   | %)   |  |   | 0.22    | % |  |      | 0.70    | % |  |   | 0.76    | %
|Net loan charge-offs (recoveries) to average loans(1)      |  |                          | (0.02   | %) |      |   | 0.06    | %    |  |   | 0.31    | % |  |      | 0.58    | % |  |   | 0.70    | %
|Ending allowance for losses on loans to total loans(1)
(2) |  |                          | 0.26    | %  |      |   | 0.36    | %    |  |   | 0.65    | % |  |      | 0.85    | % |  |   | 0.77    | %

---

|(1) | Includes loans held for securitization and/or sale.
|--- | ---------------------------------------------------

|(2) | Before deduction of allowance for losses.
|--- | -----------------------------------------



42



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##### Table of Contents

Components of Allowance for Losses on Loans by Type



(Dollars in thousands)



|                                     |  |               |        |                               |      |   |        |   |                               |  |      |        |  |                               |        |  |        |   |                               |   |        |        |      |                               |  |   |        |  |      |  
|------------------------------------ |  | ------------- | ------ | ----------------------------- | ---- | - | ------ | - | ----------------------------- |  | ---- | ------ |  | ----------------------------- | ------ |  | ------ | - | ----------------------------- | - | ------ | ------ | ---- | ----------------------------- |  | - | ------ |  | ---- | -
|                                     |  | September 30, |       
|                                     |  | 2005          |        |                               |      |   | 2004   |   |                               |  |      | 2003   |  |                               |        |  | 2002   |   |                               |   |        | 2001   |      |                               | 
|                                     |  | Amount        |        | Percent ofLoans toTotal Loans |      |   | Amount |   | Percent ofLoans toTotal Loans |  |      | Amount |  | Percent ofLoans toTotal Loans |        |  | Amount |   | Percent ofLoans toTotal Loans |   |        | Amount |      | Percent ofLoans toTotal Loans | 
|Balance at end of year allocated to: |  |               |        |                               |      |   |        |   |                               |  |      |        |  |                               |        |  |        |   |                               |   |        |        |      |                               |  |   |        |  |      |  
|Single family residential            |  | $             | 5,100  |                               | 68.9 | % |        | $ | 4,275                         |  | 68.6 | %      |  | $                             | 2,161  |  | 64.7   | % |                               | $ | 1,953  |        | 59.0 | %                             |  | $ | 2,127  |  | 60.9 | %
|Home equity                          |  |               | 3,570  |                               | 16.4 |   |        |   | 3,350                         |  | 16.5 |        |  |                               | 2,426  |  | 15.0   |   |                               |   | 817    |        | 14.1 |                               |  |   | 1,007  |  | 8.7  |  
|Other real estate                    |  |               | 1,925  |                               | 3.3  |   |        |   | 2,169                         |  | 2.5  |        |  |                               | 2,260  |  | 2.8    |   |                               |   | 3,543  |        | 3.7  |                               |  |   | 2,049  |  | 4.0  |  
|Commercial                           |  |               | 6,775  |                               | 9.5  |   |        |   | 7,361                         |  | 8.8  |        |  |                               | 14,400 |  | 10.0   |   |                               |   | 16,934 |        | 10.4 |                               |  |   | 9,135  |  | 10.4 |  
|Prime automobile                     |  |               | 3,610  |                               | 1.3  |   |        |   | 5,400                         |  | 2.6  |        |  |                               | 7,013  |  | 5.5    |   |                               |   | 4,150  |        | 8.0  |                               |  |   | 7,034  |  | 8.1  |  
|Subprime automobile                  |  |               |       |                               | 0.1  |   |        |   | 4,920                         |  | 0.3  |        |  |                               | 16,000 |  | 1.1    |   |                               |   | 32,000 |        | 3.0  |                               |  |   | 32,000 |  | 5.8  |  
|Other consumer                       |  |               | 2,005  |                               | 0.5  |   |        |   | 3,415                         |  | 0.7  |        |  |                               | 3,069  |  | 0.9    |   |                               |   | 2,786  |        | 1.8  |                               |  |   | 2,014  |  | 2.1  |  
|Unallocated                          |  |               | 5,655  |                               |     |   |        |   | 6,860                         |  |     |        |  |                               | 11,068 |  |       |   |                               |   | 3,896  |        |     |                               |  |   | 1,652  |  |     |  
|                                     |  |               |        |                               |      |   |        |   |                               |  |      |        |  |                               |        |  |        |   |                               |   |        |        |      |                               |  |   |        |  |      |  
|Total                                |  | $             | 28,640 |                               |      |   |        | $ | 37,750                        |  |      |        |  | $                             | 58,397 |  |        |   |                               | $ | 66,079 |        |      |                               |  | $ | 57,018 |  |      |  
|                                     |  |               |        |                               |      |   |        |   |                               |  |      |        |  |                               |        |  |        |   |                               |   |        |        |      |                               |  |   |        |  |      |  



The Bank maintains allowances for
estimated losses on loans. The Banks total allowances for losses on loans decreased to $28.6 million at September 30, 2005, from $37.8 million at September 30, 2004. Management reviews the delinquent status of loans, current economic
conditions, internal risk ratings of loans and current underwriting policies and procedures. Using this analysis, management computes its estimate of the allowance for losses on loans. Managements prior decisions to discontinue subprime
automobile lending and indirect consumer lending, and focus more on residential mortgages, have contributed to the overall improvement in the credit quality of the Banks loan portfolio. As the balances of automobile loans continue to decline,
charge-offs and delinquencies have also declined. Potential problem assets also declined during the year ended September 30, 2005. The combination of these factors contributed to the Banks decision to reduce the amount of its allowance
for loan losses at September 30, 2005.



The allowance for losses on loans
secured by real estate totaled $10.6 million at September 30, 2005, a $0.8 million increase from the September 30, 2004 level of $9.8 million. The increase is consistent with the growth in the portfolio. The allowance represented 47.5% and
91.0% of the amount of non-performing real estate loans at September 30, 2005 and 2004, respectively.



The allowance for losses on other consumer loans, including automobile, home improvement, overdraft lines of credit and other consumer loans, decreased to $5.6 million at September 30, 2005 from $13.7 million at
September 30, 2004. The allowance for losses on subprime automobile loans was eliminated as a result of recoveries outpacing charge-offs during the year and outstanding balances declining to $3.9 million. The decrease in the allowance for prime
automobile loans and charge-offs was due to the decline in the Banks portfolio of these loans as a result of the Banks prior decision to discontinue origination of indirect automobile loans.



The unallocated allowance for losses decreased to $5.7 million at September 30, 2005
from $6.9 million at September 30, 2004. The unallocated allowance is based upon managements evaluation and judgment 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 Bank, credit quality trends, collateral values, 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 evaluations. At September 30, 2005 and 2004, most of the unallocated
allowance relates to risks inherent in the mortgage loan portfolio, including, for example, geographic concentration and negative amortization features. The Bank has assessed its exposure related to damage to properties securing loans caused by the
recent hurricanes in the Gulf Coast Region and any available insurance on those properties and, at this time, believes its unallocated allowances are sufficient to cover incurred but not identified losses related to its various loan portfolios.



43



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##### Table of Contents

The Banks allowance for losses on real estate held for investment or sale was $0.2 million at September 30,
2004. The allowance was eliminated following the sale of the property to which it related during fiscal year 2005.



Asset and Liability Management.A key element of banking is the monitoring and management of liquidity risk and interest-rate risk. The process of planning and
controlling asset and liability mix, volume and maturity to stabilize the net interest spread is referred to as asset and liability management. The objective of asset and liability management is to maximize the net interest yield within the
constraints imposed by prudent lending and investing practices, liquidity needs and capital planning.



The Banks assets and liabilities are inherently sensitive to changes in interest rates. These movements can result in variations to the overall level of income and market value of equity. Based on the
characteristic of a specific asset or liability (including maturity, repricing frequency and interest rate caps), a change in interest rates can significantly affect the contribution to net income by, and market value of, the instrument. If, in the
aggregate, the Banks assets mature or reprice more quickly or to a greater extent than its liabilities, the Bank is termed asset sensitive and will tend to experience an increase in interest income and market value during periods
of rising interest rates and declining interest income and market value during periods of falling interest rates. Conversely, if the Banks liabilities mature or reprice more quickly or to a greater extent than its assets, the Bank is termed
liability sensitive and will tend to experience a decrease in interest income and market value during periods of rising interest rates and increased interest income and market value during periods of falling interest rates.



The Bank pursues an asset-liability management strategy designed both to control risk from
changes in market interest rates and to maximize interest income in its investment and loan portfolios. To achieve this strategy, the Bank emphasizes the origination and retention of a mix of both adjustable-rate and fixed-rate loan products.



Throughout fiscal year 2005, the Bank continued to originate and hold in its
portfolio adjustable-rate loan products at a greater volume than those with fixed interest rates. At September 30, 2005, adjustable-rate loans accounted for 82.1% of total loans, compared to 80.8% at September 30, 2004. This increase was
primarily due to continued originations of adjustable-rate mortgage products, which typically reprice monthly and bear interest at rates which are tied to the one-month LIBOR.



A traditional measure of interest-rate risk within the banking industry is the interest sensitivity gap, which is the sum of all
interest-earning assets minus all interest-bearing liabilities subject to repricing within the same period. Gap analysis is a tool used by management to evaluate interest-rate risk which results from the difference between repricing and maturity
characteristics of the Banks assets and those of the liabilities that fund them. By analyzing these differences, management can attempt to estimate how changes in interest rates may affect the Banks future net interest income. The Bank
views control over interest rate sensitivity as a key element in its financial planning process and monitors interest rate sensitivity through its forecasting system. The Bank manages interest rate exposure and will narrow or widen its gap depending
on its perception of interest rate movements and the composition of its balance sheet.



A number of asset and liability management strategies are available to the Bank in structuring its balance sheet. These include selling or retaining certain portions of the Banks current residential mortgage loan production; altering
the Banks pricing on certain deposit products to emphasize particular maturity categories; altering the type and maturity of securities acquired for the Banks investment portfolio when replacing securities following normal portfolio
maturation and turnover; lengthening or shortening the maturity or repricing terms for any current period asset securitizations; and altering the maturity or interest rate reset profile of borrowed funds, if any, including funds borrowed from the
FHLB of Atlanta.



The following table presents the Banks interest rate
sensitivity gap at September 30, 2005. Balances of interest-earning assets and interest-bearing liabilities are shown in the earlier of the period where contractual payments are due, interest rates adjust or prepayment is anticipated to occur.
Adjustable and floating rate loans are included in the period in which their interest rates are next scheduled to adjust, and prepayment rates are assumed for all of the Banks loans based on managements estimates. The Banks
deposits with no stated maturity, including savings and transaction accounts, have 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.



44



---

##### Table of Contents

Interest Rate Sensitivity Table (Gap)



(Dollars in thousands)



|                                               |  |                   |           |   |                                     |   |           |                                     |  |   |                                        |   |  |                     |           |   |       |   |            |   |  |   |           
|---------------------------------------------- |  | ----------------- | --------- | - | ----------------------------------- | - | --------- | ----------------------------------- |  | - | -------------------------------------- | - |  | ------------------- | --------- | - | ----- | - | ---------- | - |  | - | ----------
|                                               |  | Six Monthsor Less |           |   | More thanSix Monthsthrough One Year |   |           | More thanOne YearthroughThree Years |  |   | More thanThree Yearsthrough Five Years |   |  | More thanFive Years |           |   | Total
|As of September 30, 2005                       |  |                   |           |   |                                     |   |           |                                     |  |   |                                        |   |  |                     |           |   |       |   |            |   |  |   |           
|Real estate loans:                             |  |                   |           |   |                                     |   |           |                                     |  |   |                                        |   |  |                     |           |   |       |   |            |   |  |   |           
|Adjustable-rate                                |  | $                 | 3,063,942 |   |                                     | $ | 529,802   |                                     |  | $ | 1,367,567                              |   |  | $                   | 1,107,598 |   |       | $ | 230        |   |  | $ | 6,069,139 
|Fixed-rate                                     |  |                   | 31,027    |   |                                     |   | 25,419    |                                     |  |   | 52,591                                 |   |  |                     | 21,739    |   |       |   | 6,664      |   |  |   | 137,440   
|Home equity credit lines and second mortgages  |  |                   | 1,559,936 |   |                                     |   | 10,874    |                                     |  |   | 41,416                                 |   |  |                     | 44,330    |   |       |   | 230,568    |   |  |   | 1,887,124 
|Commercial                                     |  |                   | 871,827   |   |                                     |   | 12,307    |                                     |  |   | 40,735                                 |   |  |                     | 29,884    |   |       |   | 80,010     |   |  |   | 1,034,763 
|Consumer and other                             |  |                   | 58,190    |   |                                     |   | 46,847    |                                     |  |   | 80,958                                 |   |  |                     | 6,888     |   |       |   | 11,091     |   |  |   | 203,974   
|Loans held for securitization and/or sale      |  |                   | 1,718,132 |   |                                     |   |          |                                     |  |   |                                       |   |  |                     |          |   |       |   |           |   |  |   | 1,718,132 
|Mortgage-backed securities                     |  |                   | 303,184   |   |                                     |   | 84,730    |                                     |  |   | 160,352                                |   |  |                     | 252,797   |   |       |   | 58,745     |   |  |   | 859,808   
|Other investments                              |  |                   | 230,496   |   |                                     |   |          |                                     |  |   | 200,902                                |   |  |                     |          |   |       |   |           |   |  |   | 431,398   
|                                               |  |                   |           |   |                                     |   |           |                                     |  |   |                                        |   |  |                     |           |   |       |   |            |   |  |   |           
|Total interest-earning assets                  |  |                   | 7,836,734 |   |                                     |   | 709,979   |                                     |  |   | 1,944,521                              |   |  |                     | 1,463,236 |   |       |   | 387,308    |   |  |   | 12,341,778
|Total non-interest earning assets              |  |                   |          |   |                                     |   |          |                                     |  |   |                                       |   |  |                     |          |   |       |   | 1,903,183  |   |  |   | 1,903,183 
|                                               |  |                   |           |   |                                     |   |           |                                     |  |   |                                        |   |  |                     |           |   |       |   |            |   |  |   |           
|Total assets                                   |  | $                 | 7,836,734 |   |                                     | $ | 709,979   |                                     |  | $ | 1,944,521                              |   |  | $                   | 1,463,236 |   |       | $ | 2,290,491  |   |  | $ | 14,244,961
|                                               |  |                   |           |   |                                     |   |           |                                     |  |   |                                        |   |  |                     |           |   |       |   |            |   |  |   |           
|Deposits:                                      |  |                   |           |   |                                     |   |           |                                     |  |   |                                        |   |  |                     |           |   |       |   |            |   |  |   |           
|Fixed maturity deposits                        |  | $                 | 1,174,711 |   |                                     | $ | 501,361   |                                     |  | $ | 518,143                                |   |  | $                   | 127,850   |   |       | $ |           |   |  | $ | 2,322,065 
|Checking and savings accounts                  |  |                   |          |   |                                     |   | 105,929   |                                     |  |   | 211,857                                |   |  |                     | 211,857   |   |       |   | 3,072,297  |   |  |   | 3,601,940 
|Money market deposit accounts                  |  |                   | 2,521,949 |   |                                     |   |          |                                     |  |   |                                       |   |  |                     |          |   |       |   |           |   |  |   | 2,521,949 
|Borrowings:                                    |  |                   |           |   |                                     |   |           |                                     |  |   |                                        |   |  |                     |           |   |       |   |            |   |  |   |           
|Capital notes - subordinated                   |  |                   |          |   |                                     |   |          |                                     |  |   |                                       |   |  |                     |          |   |       |   | 175,000    |   |  |   | 175,000   
|Other                                          |  |                   | 2,111,735 |   |                                     |   | 162,394   |                                     |  |   | 515,371                                |   |  |                     | 124,510   |   |       |   | 53,644     |   |  |   | 2,967,654 
|                                               |  |                   |           |   |                                     |   |           |                                     |  |   |                                        |   |  |                     |           |   |       |   |            |   |  |   |           
|Total interest-bearing liabilities             |  |                   | 5,808,395 |   |                                     |   | 769,684   |                                     |  |   | 1,245,371                              |   |  |                     | 464,217   |   |       |   | 3,300,941  |   |  |   | 11,588,608
|Minority interest                              |  |                   |          |   |                                     |   |          |                                     |  |   |                                       |   |  |                     |          |   |       |   | 175,391    |   |  |   | 175,391   
|Total non-interest bearing liabilities         |  |                   |          |   |                                     |   |          |                                     |  |   |                                       |   |  |                     |          |   |       |   | 1,718,906  |   |  |   | 1,718,906 
|Stockholders' equity                           |  |                   |          |   |                                     |   |          |                                     |  |   |                                       |   |  |                     |          |   |       |   | 762,056    |   |  |   | 762,056   
|                                               |  |                   |           |   |                                     |   |           |                                     |  |   |                                        |   |  |                     |           |   |       |   |            |   |  |   |           
|Total liabilities & stockholders' equity       |  | $                 | 5,808,395 |   |                                     | $ | 769,684   |                                     |  | $ | 1,245,371                              |   |  | $                   | 464,217   |   |       | $ | 5,957,294  |   |  | $ | 14,244,961
|                                               |  |                   |           |   |                                     |   |           |                                     |  |   |                                        |   |  |                     |           |   |       |   |            |   |  |   |           
|Gap                                            |  | $                 | 2,028,339 |   |                                     | $ | (59,705   | )                                   |  | $ | 699,150                                |   |  | $                   | 999,019   |   |       | $ | (2,913,633 | ) |  |   |           
|Cumulative gap                                 |  | $                 | 2,028,339 |   |                                     | $ | 1,968,634 |                                     |  | $ | 2,667,784                              |   |  | $                   | 3,666,803 |   |       | $ | 753,170    |   |  |   |           
|Cumulative gap as a percentage of total assets |  |                   | 14.2      | % |                                     |   | 13.8      | %                                   |  |   | 18.7                                   | % |  |                     | 25.7      | % |       |   | 5.3        | % |  |   |           



The Banks one-year gap, as a
percentage of total assets, was 13.8% at September 30, 2005, compared to 20.8% at September 30, 2004. The change in the Banks one-year gap during the year reflects an increase in shorter-term deposits and borrowings used to fund
adjustable rate residential mortgage loans with repricing terms greater than one year.



In addition to gap measurements, the Bank measures and manages interest-rate risk with the extensive use of computer simulation. This simulation includes calculations of Market Value of Portfolio Equity and Net Interest Margin. The Bank
established limits on the sensitivity of its net interest income and net portfolio value (NPV) to parallel changes in interest rates. Parallel changes in interest rates are defined as instantaneous and sustained movements of interest
rates in 100 basis point increments. The Bank calculates its ratio of NPV to the present value of total assets (NPV Ratio) for each interest rate shock scenario. The following table shows the estimated impact of parallel shifts in
interest rates at September 30, 2005.



45



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##### Table of Contents

(Dollars in thousands)



|                                        |         |                                    |    |        |                                   |         |         |           |       |        |  |   |          |   |  |      |  
|--------------------------------------- | ------- | ---------------------------------- | -- | ------ | --------------------------------- | ------- | ------- | --------- | ----- | ------ |  | - | -------- | - |  | ---- | -
|(Basis Points) Change
in Interest Rates |         | Changes in Net Interest Income (1) |    |        | Change in Net Portfolio Value (2) |         |         | NPV Ratio |      
|                                        | Percent |                                    |    | Amount |                                   |         | Percent |           |       | Amount |  |  
|+200                                    |         | 6.3                                | %  |        | $                                 | 28,046  |         |           | (11.2 | )%     |  | $ | (205,736 | ) |  | 10.3 | %
|+100                                    |         | 4.5                                | %  |        |                                   | 20,281  |         |           | (3.5  | )%     |  |   | (64,415  | ) |  | 11.1 | %
|-100                                    |         | (4.8                               | )% |        |                                   | (21,269 | )       |           | 2.2   | %      |  |   | 39,985   |   |  | 11.6 | %
|-200                                    |         | (4.0                               | )% |        |                                   | (17,694 | )       |           | 3.9   | %      |  |   | 72,691   |   |  | 11.7 | %

---

|(1) | Represents the difference between net interest income for 12 months in a stable interest rate environment and the various interest rate scenarios.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents the difference between net portfolio value (NPV) of the Banks equity in a
stable interest rate environment and the NPV in the various rate scenarios. NPV is defined as the present value of expected net cash flows from existing assets minus the present value of expected net cash flows from existing liabilities plus the
present value of expected net cashflows from existing off-balance sheet contracts.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Computations of prospective effects of hypothetical interest rate changes are based on many assumptions, including relative levels of market interest rates, prepayments and deposit runoff and, therefore, should not be
relied upon as indicative of actual results. Certain limitations are inherent in these computations. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes
in market interest rates. Certain assets, such as adjustable-rate mortgage loans, may have features which restrict interest rate changes on a short-term basis and over the life of the asset. In the event of a change in market interest rates, loan
prepayments and early deposit withdrawal levels could deviate significantly from those assumed in making the calculations set forth above. Additionally, credit risk may increase if an interest rate increase adversely affects the ability of borrowers
to service their debt.



Inflation.The impact of inflation on the Bank
is different from the impact on an industrial company because substantially all of the assets and liabilities of the Bank are monetary in nature. The most direct impact of an extended period of inflation would be to increase interest rates and to
place upward pressure on the operating expenses of the Bank. However, the actual effect of inflation on the net interest income of the Bank would depend on the extent to which the Bank was able to maintain a spread between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities, which would depend to a significant extent on its asset-liability sensitivity. The effect of inflation on the Banks results of operations for the past three fiscal
years has been minimal.



Deferred Taxes.At September 30, 2005, the
Bank recorded a net deferred tax liability of $40.5 million, which generally represents the cumulative excess of the Banks income tax expense for financial reporting purposes over its actual income tax liability. See Note 34 to the
Consolidated Financial Statements in this report.



Capital.At
September 30, 2005, the Bank was in compliance with all of its regulatory capital requirements under FIRREA, and its capital ratios exceeded the ratios established for well-capitalized institutions under OTS prompt corrective action
regulations.



The following table shows the Banks regulatory capital
levels at September 30, 2005, in relation to the regulatory requirements in effect at that date. The information below is based upon the Banks understanding of the regulations and interpretations currently in effect and may be subject to
change. The table contains information of the Bank only and does not include consolidation or elimination entries required for the Trusts financial presentation.



46



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##### Table of Contents

Regulatory Capital



(Dollars in thousands)



|                                                          |  |        |           |   |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|--------------------------------------------------------- |  | ------ | --------- | - | --------------------------- | ----- | - | -------------- | - | --------------- |  | ---- | ------ |  | --------------- | ------- |  | ---- | -
|                                                          |  | Actual |           |   | Minimum Capital Requirement |       |   | Excess Capital |  
|                                                          |  | Amount |           |   | As a %of Assets             |       |   | Amount         |   | As a %of Assets |  |      | Amount |  | As a %of Assets |        
|Stockholders equity per financial statements             |  | $      | 762,056   |   |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|Minority interest in REIT Subsidiary(1)                   |  |        | 144,000   |   |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|                                                          |  |        |           |   |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|                                                          |  |        | 906,056   |   |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|                                                          |  |        |           |   |                             |      
|Adjustments for tangible and core capital:                |  |        |           |   |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|Intangible assets                                         |  |        | (49,260   | ) |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|Non-includable subsidiaries                               |  |        | (12,522   | ) |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|Non-qualifying purchased/originated loan servicing rights |  |        | (3,416    | ) |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|                                                          |  |        |           |   |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|Total tangible capital                                    |  |        | 840,858   |   |                             | 5.92  | % |                | $ | 212,982         |  | 1.50 | %      |  | $               | 627,876 |  | 4.42 | %
|                                                          |  |        |           |   |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|Total core capital(2)                                     |  |        | 840,858   |   |                             | 5.92  | % |                | $ | 567,953         |  | 4.00 | %      |  | $               | 272,905 |  | 1.92 | %
|                                                          |  |        |           |   |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|Tier 1 risk-based capital(2)                              |  |        | 840,858   |   |                             | 8.82  | % |                | $ | 381,941         |  | 4.00 | %      |  | $               | 458,917 |  | 4.82 | %
|                                                          |  |        |           |   |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|Adjustments for total risk-based capital:                 |  |        |           |   |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|Subordinated capital debentures                           |  |        | 175,000   |   |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|Allowance for general loan losses                         |  |        | 28,640    |   |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|                                                          |  |        |           |   |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|Total supplementary capital                               |  |        | 203,640   |   |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|                                                          |  |        |           |   |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|Total available capital                                   |  |        | 1,044,498 |   |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|Equity investments(3)                                     |  |        | (2,657    | ) |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|                                                          |  |        |           |   |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  
|Total risk-based capital(2)                               |  | $      | 1,041,841 |   |                             | 10.95 | % |                | $ | 763,882         |  | 8.00 | %      |  | $               | 277,959 |  | 2.95 | %
|                                                          |  |        |           |   |                             |       |   |                |   |                 |  |      |        |  |                 |         |  |      |  

---

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

|(2) | Under 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%.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes one property classified as real estate held for sale which is treated as an equity investment for regulatory capital purposes.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Under the OTS prompt corrective action regulations, an institution is categorized as well capitalized if it has a
leverage, or core, capital ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0%, a total risk-based capital ratio of at least 10.0% and is not subject to any written agreement, order, capital directive or prompt corrective
action directive to meet and maintain a specific capital level. At September 30, 2005, the Banks leverage, tier 1 risk-based and total risk-based capital ratios were 5.92%, 8.82% and 10.95%, respectively, which exceeded the ratios
established for well-capitalized institutions. The OTS may reclassify an institution from one category to the next lower category, for example from well capitalized to adequately capitalized, if, after notice and an opportunity for a hearing, the
OTS determines that the institution is in an unsafe or unsound condition or has received and has not corrected a less than satisfactory examination rating for asset quality, management, earnings or liquidity. The Bank has not received notice from
the OTS of any potential downgrade.



OTS capital regulations provide a
five-year holding period, or such longer period as may be approved by the OTS, for REO to qualify for an exception from treatment as an equity investment. If an REO property is considered an equity investment, its then-current book value is deducted
from total risk-based capital. Accordingly, if the Bank is unable to dispose of any REO property, whether through bulk sales or otherwise, prior to the end of its applicable five-year holding period and is unable to obtain an extension of the
five-year holding period from the OTS, the Bank could be required to deduct the then-current book value of such REO property from total risk-based capital. In May 2005, the Bank received from the OTS an extension of the holding periods for certain
of its REO properties through May 6, 2006. The following table sets forth the Banks REO at September 30, 2005, by the fiscal year in which the property was acquired through foreclosure.



|            |  |                |        |    
|----------- |  | -------------- | ------ | ---
|Fiscal Year |  | (In thousands) |       
|1990        |  | $              | 2,656  | (1)
|1991        |  |                | 8,211  | (2)
|1995        |  |                | 6,001  | (2)
|2005        |  |                | 3,397  |    
|            |  |                |        |    
|Total REO   |  | $              | 20,265 |    
|            |  |                |        |    

---

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

|(2) | The Bank received an extension of the holding periods for these properties through May 6, 2006.
|--- | -----------------------------------------------------------------------------------------------



Failure to obtain further REO extensions could adversely affect the Banks regulatory
capital ratios. The Banks ability to maintain or increase its capital levels in future periods also will be subject to general economic conditions, particularly in the Banks local markets. Adverse general economic conditions or a
downturn in local real estate markets could require further additions to the Banks allowances for losses and further charge-offs. Any of those developments would adversely affect the Banks earnings and thus its regulatory capital levels.



The Bank has historically relied on preferred stock and subordinated debt as
significant components of its regulatory capital. Those instruments require significant fixed payments to holders, which increase the Banks expenses and reduce the amount of core capital that can be generated through retained earnings.



Failure by the Bank to remain well capitalized could have a material adverse
effect on certain aspects of the Banks operations, including its ability to pay dividends. See Dividends and Other Capital Distributions.



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##### Table of Contents

LIQUIDITY AND CAPITAL RESOURCES



REAL ESTATE



The Real Estate Trusts cash
flows from operating activities have been historically insufficient to meet all of its cash flow requirements. The Real Estate Trusts internal source of funds, primarily cash flow generated by its income-producing properties, generally have
been sufficient to meet its cash needs other than the repayment of principal on outstanding debt, including outstanding unsecured notes sold to the public, the payment of interest on its indebtedness, and the payment of capital improvement costs. In
the past, the Real Estate Trust funded such shortfalls through a combination of external funding sources, primarily new financings, the sale of unsecured notes, refinancing of maturing mortgage debt, proceeds from asset sales, and dividends and tax
sharing payments from the Bank. The Real Estate Trust receives quarterly distributions from its investment in Saul Holdings and dividends from its investment in Saul Centers. These amounts totaled $13.3 million in fiscal 2005. Historically these
amounts have been reinvested in the paying entities and the Real Estate Trust has received additional partnership units and common shares in lieu of cash. The Real Estate Trust has the ability, at its own option, to receive these distributions and
dividends in cash. The availability and amount of distributions and dividends in future periods is dependent upon, among other things, Saul Holdings and Saul Centers operating performance and income. Although cash flows from operating
activities have improved in fiscal 2005, 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. See also the discussion of potential limitations on the payment of dividends by the Bank contained
in Item 1. BusinessBankingDividends and Other Capital Distributions.



During fiscal 2005, the Bank made dividend payments totaling $39.2 million and tax sharing payments totaling $2.1 million to the Real Estate Trust. Dividend and tax sharing 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. The Trusts consolidation of the Banks operations into the Trusts
federal income tax return has resulted in the use of the Real Estate Trusts net operating losses to reduce the federal income taxes the Bank would otherwise have owed. If in any future year, the Bank has taxable losses or unused credits, the
Trust would be obligated to reimburse the Bank for the greater of (1) the tax benefit to the group using such tax losses or unused tax credits in the groups consolidated federal income tax returns or (2) the amount of the refund
which the Bank would otherwise have been able to claim if it were not being included in the consolidated federal income tax return of the group.



During fiscal 2005, the Real Estate Trust purchased, through dividend reinvestment and direct purchase, approximately 377,000 shares of common stock of Saul Centers, and
as of September 30, 2005, owned approximately 4,467,000 shares representing 26.6% of such companys outstanding common stock. As of September 30, 2005, the market value of these shares was approximately $160.7 million. Substantially
all of these shares have been pledged as collateral with the Real Estate Trusts revolving credit lenders.



As the owner, directly and through two wholly-owned subsidiaries, of a limited partnership interest in Saul Holdings, 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 provides for quarterly cash distributions to the partners out of net cash flow. See Item 1. Business  Real Estate
 Investment in Saul Holdings Limited Partnership and Saul Centers, Inc. In fiscal 2005, the Real Estate Trust received total cash distributions of $6.6 million from Saul Holdings. Substantially all of the Real Estate Trusts
ownership interest in Saul Holdings has been pledged as collateral with the Real Estate Trusts two revolving credit lenders.



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 secured 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, including accrued interest and a redemption premium, for early redemption of the notes, of $6.5 million, to fund
renovation and construction activities as well as for general corporate purposes.



During fiscal 2005, the Real Estate Trust sold unsecured notes, with a maturity ranging from one to ten years, primarily to provide funds to repay maturing unsecured notes. During fiscal 2005, the Real Estate Trust sold notes amounting to
$12.9 million, consisting of $5.7 million of new sales and $7.2 million of rollovers, at a weighted average interest rate of 7.1%. In addition, $4.3 million of unsecured notes were repaid during fiscal 2005. To the degree that the Real Estate Trust
does not sell new unsecured notes in an amount sufficient to finance completely the scheduled repayment of outstanding unsecured notes as they mature, it will finance such repayments from other sources of funds.



The Real Estate Trust has a $60.0 million secured revolving credit line with an unrelated
bank that matures on January 31, 2008, 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 and Saul Centers. Interest is computed by
reference to a floating rate index. At September 30, 2005, the Real Estate Trust had no outstanding borrowings and unrestricted availability of $60.0 million. The credit facility was increased on January 31, 2005 from $55.0 million to its
current $60.0 million availability. 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 from December 12, 2006 to
January 31, 2008, with provisions for extending the term for an additional year.



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##### Table of Contents

The Real Estate Trust has an additional $60.0 million revolving credit line with an unrelated bank that matures on
June 30, 2008, 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 Limited Partnership and Saul Centers. Interest is computed by
reference to a floating rate index. At September 30, 2005, the Real Estate Trust had no outstanding borrowings and unrestricted availability of $60.0 million. On June 30, 2005 this facility was expanded from $45.0 million to $60.0 million
and the term extended from September 26, 2006 to June 30, 2008, with provisions for extending the term for an additional year. The interest rate spread remained the same at 200 basis points over the floating rate index.



The maturity schedule for the Real Estate Trusts outstanding debt, including mortgage
notes payable for real estate held for sale, at September 30, 2005 for fiscal years commencing October 1, 2005 is set forth in the following table:



Debt Maturity Schedule



|            |  |                |         |                       |   |                         |  |       |        |  |   |        
|----------- |  | -------------- | ------- | --------------------- | - | ----------------------- |  | ----- | ------ |  | - | -------
|Fiscal Year |  | MortgageNotes  |         | NotesPayableSecured |   | NotesPayableUnsecured |  | Total
|            |  | (In thousands)
|2006 (1)    |  | $              | 95,042  |                       | $ |                        |  | $     | 8,490  |  | $ | 103,532
|2007        |  |                | 5,435   |                       |   |                        |  |       | 6,871  |  |   | 12,306 
|2008        |  |                | 5,670   |                       |   |                        |  |       | 5,231  |  |   | 10,901 
|2009        |  |                | 15,487  |                       |   |                        |  |       | 5,175  |  |   | 20,662 
|2010        |  |                | 10,079  |                       |   |                        |  |       | 6,040  |  |   | 16,119 
|Thereafter  |  |                | 162,615 |                       |   | 250,000                 |  |       | 25,953 |  |   | 438,568
|            |  |                |         |                       |   |                         |  |       |        |  |   |        
|Total       |  | $              | 294,328 |                       | $ | 250,000                 |  | $     | 57,760 |  | $ | 602,088
|            |  |                |         |                       |   |                         |  |       |        |  |   |        



Of the $294.3 million of mortgage
notes outstanding at September 30, 2005, $286.7 million was non-recourse to the Real Estate Trust.

---

|(1) | Included in the mortgage note obligations due in 2006 is a portfolio loan, secured by six operating properties, of approximately $86.0 million due on March 31, 2006. On
December 2, 2005 the Real Estate Trust refinanced one of the six properties with a new 10 year mortgage note of $76.0 million. The proceeds from this refinancing, along with available cash and line of credit borrowings were used to repay the
portfolio loan. As a result, the Real Estate Trust unlevered the remaining five properties.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Real Estate Acquisition, Disposition, Development and Capital Expenditures



In September 2003, the Real Estate Trust sold 7.7 acres located in Rockville, Maryland, for $11.3 million, and recognized a gain of $9.1 million on the transaction.



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 Commonwealth of Virginia has paid $3.6 million which has resulted in an initial gain of approximately $2.7 million.



In June 2004, the Real Estate Trust received a refund of approximately $117,000 for an expenditure relating to the 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 year ended September 30, 2004.



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, resulting in a loss of $327,000, $310,000 recognized in fiscal 2004 and $17,000 recognized in fiscal 2005.



On January 31, 2005, the Real Estate Trust sold one of its other real estate properties
because the property no longer met the Real Estate Trusts investment criteria. No adjustment to the carrying value of the property was required. The Real Estate Trust received proceeds from the sale of approximately $1.4 million, resulting in
a gain of $900,000.



On May 25, 2005, the Real Estate Trust acquired an
approximately 12,000 square foot office building located in Montgomery County, Maryland for approximately $5.3 million.



50



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##### Table of Contents

During fiscal 2005, the Real Estate Trust placed two of its hotel properties on the market for sale, as these properties
no longer meet its investment criteria. No adjustment to the carrying value of the properties was required. The sales are expected to close within the next twelve months.



On July 11, 2005, approximately 22 acres of the Real Estate Trusts 159 acre land parcel in Overland Park, Kansas was acquired by
the Kansas Department of Transportation through a condemnation proceeding. The Real Estate Trust was awarded approximately $1.2 million which resulted in a gain of $263,000.



On July 25, 2005, the Real Estate Trust closed on a $1.9 million purchase of a land parcel from the Bank located in Loudoun County, VA.
The purchase was funded from available cash on hand.



On September 13,
2005, the Real Estate Trust closed on a $6.2 million purchase of a land parcel from the Bank located in Loudoun County, VA. The purchase was funded from cash on hand.



On November 1, 2005, the Real Estate Trust acquired a 137 room hotel property located in Fairfax County, Virginia for a purchase price
of approximately $12.7 million, which included the assumption of a mortgage note of $5.8 million.



The Real Estate Trust owns various land parcels with approximately 452 acres of available land. These parcels offer potential development opportunities for the Trust. Subsequent to year end the Real Estate Trust has
commenced the ground-up development of a hotel property on a land parcel owned in Northern Virginia and is exploring development scenarios on several other land parcels.



The Real Estate Trust believes that the capital improvement costs for its income-producing properties will be in the range of $12.0 to $19.0
million per year for the next several years.



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##### Table of Contents

Liquidity Requirements  Real Estate Trust



The table below specifies the total contractual payment obligations as of September 30, 2005.



|                                   |  |            |         |                  |   |           |  |           |        |               |   |        |  |   |        
|---------------------------------- |  | ---------- | ------- | ---------------- | - | --------- |  | --------- | ------ | ------------- | - | ------ |  | - | -------
|(In thousands)                     |  | Total Cost |         | Less than 1 Year |   | 1-3 Years |  | 4-5 Years |        | After 5 Years
|Contractual Obligations            |  |            |         |                  |   |           |  |           |        |               |   |        |  |   |        
|Mortgage Notes Payable             |  | $          | 294,328 |                  | $ | 95,042    |  | $         | 11,105 |               | $ | 25,566 |  | $ | 162,615
|Notes Payable  Secured            |  |            | 250,000 |                  |   |          |  |           |       |               |   |       |  |   | 250,000
|Notes Payable  Unsecured          |  |            | 57,760  |                  |   | 8,490     |  |           | 12,102 |               |   | 11,215 |  |   | 25,953 
|Advisory Fee                       |  |            | 6,036   |                  |   | 6,036     |  |           |       |               |   |       |  |   |       
|Capital Leases                     |  |            | 1,886   |                  |   | 868       |  |           | 1,018  |               |   |       |  |   |       
|Development Obligations            |  |            | 15,913  |                  |   | 15,913    |  |           |       |               |   |       |  |   |       
|Other Obligations                  |  |            | 641     |                  |   | 641       |  |           |       |               |   |       |  |   |       
|                                   |  |            |         |                  |   |           |  |           |        |               |   |        |  |   |        
|Total Contractual Cash Obligations |  | $          | 626,564 |                  | $ | 126,990   |  | $         | 24,225 |               | $ | 36,781 |  | $ | 438,568
|                                   |  |            |         |                  |   |           |  |           |        |               |   |        |  |   |        



As of September 30, 2005, the
Real Estate Trusts current contractual obligations, excluding recurring operating obligations, due within one year total approximately $127 million. In addition to these contractual obligations the Real Estate Trust has other short-term
liquidity requirements consisting primarily of normal recurring operating expenses, regular debt service requirements (including debt service relating to additional and replacement debt), recurring corporate expenditures, non-recurring corporate
expenditures (such as tenant improvements and hotel improvements) and dividends to common and preferred shareholders. Overall capital requirements in fiscal year 2006 will depend on any acquisition and development opportunities as well as the level
of improvements and redevelopments on existing properties.



Included in the
mortgage note obligations due within one year is a portfolio loan, secured by six operating properties, of approximately $88.0 million due on March 31, 2006. On December 2, 2005 the Real Estate Trust refinanced one of the six properties
with a new 10 year mortgage note of $76.0 million. The proceeds from this refinancing, along with available cash and line of credit borrowings were used to repay the portfolio loan. As a result, the Real Estate Trust unlevered the remaining five
properties.



The Real Estate Trust expects to fund these capital requirements
and normal recurring operating costs through a combination of cash provided by operating activities, cash on hand, credit line availability, new financings, refinancing of maturing debt, proceeds from asset sales and dividends and tax sharing
payments from the Bank.



BANKING



Liquidity.The Bank is required
to maintain sufficient liquidity to ensure its safe and sound operation. A standard measure of liquidity in the savings industry is the ratio of cash and short-term U.S. Government and other specified securities to net withdrawable accounts and
borrowings payable in one year or less. See BUSINESS  Regulation  Liquidity Requirements.



The Banks primary sources of funds historically have consisted of:



| |  |  | principal and interest payments on loans and mortgage-backed securities;
| | - |  | ------------------------------------------------------------------------



| |  |  | savings deposits;
| | - |  | -----------------



| |  |  | sales of loans and trading securities;
| | - |  | --------------------------------------



| |  |  | securitizations and sales of loans; and
| | - |  | ---------------------------------------



| |  |  | borrowed funds, including funds borrowed from the FHLB of Atlanta.
| | - |  | ------------------------------------------------------------------



The Banks holdings of readily marketable securities and eligible loans constitute another important source of liquidity. Approximately $1.0 billion of these assets
are pledged to the Federal Reserve Bank of Richmond, although there were no outstanding borrowings during fiscal year 2005. As of September 30, 2005, the estimated remaining borrowing capacity, after market value and other adjustments, against
that portion of those assets that may be pledged to the FHLB of Atlanta and various securities dealers totaled $4.2 billion.



The Bank accesses the capital markets as an additional means of funding its operations and managing its capital ratios and asset growth. Specifically, the Bank has
securitized financial assets, including home equity, home loan and automobile loan receivables, as well as single-family residential loans, because the securitizations provide the Bank with a cost effective means to fund loans while maintaining
compliance with regulatory capital requirements. Additionally, the securitizations have permitted the Bank to limit the credit risk associated with these assets while continuing to earn servicing fees and other income associated with the securitized
assets.



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##### Table of Contents

Since 1988, the Bank has securitized approximately $28.8 billion of loan receivables. At September 30, 2005, the
Bank continues to service $9.0 billion and $27.5 million of securitized residential mortgages and automobile loan receivables, respectively. Chevy Chase derives fee-based income from servicing these securitized portfolios. However, that fee-based
income has been adversely affected in this and prior periods by increases in prepayments, delinquencies and charge-offs related to the receivables in these securitized pools.



The Bank securitized and sold $5.3 billion and $4.9 billion of loan receivables during fiscal year 2005 and 2004, respectively. At
September 30, 2005 and 2004, the Bank had $1.7 billion and $2.0 billion, respectively, of loan receivables held for securitization and/or sale. The proceeds from the securitization and sale of various types of loan receivables will continue to
be a significant source of liquidity for the Bank.



The Bank uses its liquidity
primarily to meet its commitments to fund maturing savings certificates and deposit withdrawals, fund existing and continuing loan commitments, repay borrowings and meet operating expenses. During fiscal year 2005, the Bank used the cash provided by
operating, investing and financing activities primarily to (i) fund maturing savings certificates and deposit withdrawals of $71.4 billion, (ii) fund existing and continuing loan commitments, including real estate held for investment or
sale, of $187.7 million, (iii) purchase investments and loans of $2.3 billion and (iv) meet operating expenses, before depreciation and amortization, of $526.7 million. These commitments were funded primarily through (i) proceeds from
customer deposits and sales of certificates of deposit of $72.3 billion, (ii) proceeds from sales of loans, trading securities and real estate of $6.5 billion, (iii) principal and interest collected on investments, loans, and securities of
$6.5 billion and (iv) proceeds from borrowings of $24.1 million, net of repayment of borrowings.



At September 30, 2005, repayments of borrowed money scheduled to occur during the next 12 months were $2.3 billion. Certificates of deposit maturing during the next 12 months amounted to $1.7 billion. The Bank
expects that a significant portion of these maturing certificates of deposit will remain with the Bank. In the event that deposit withdrawals are greater than anticipated, the Bank may have to increase deposit interest rates or rely on alternative
and potentially higher cost sources of funds in order to meet its liquidity needs.



The Banks liquidity requirements in years subsequent to fiscal year 2005 will continue to be affected both by the asset size of the Bank, the growth of which may be constrained by capital requirements, and the composition of the asset
portfolio. Management believes that the Banks primary sources of funds, described above, will be sufficient to meet the Banks foreseeable liquidity needs. The mix of funding sources utilized from time to time will be determined by a
number of factors, including capital planning objectives, lending and investment strategies and market conditions.



Commitments and Contingencies.The Bank periodically transfers loan receivables to special purpose entities that issue securities to investors. These investors are
entitled to a return of cash flows, based on the principal and interest provided by the loan receivables transferred. This process is referred to as securitization. Since 1988, the Bank has securitized approximately $28.8 billion of loan
receivables.



The Bank transfers receivables from time to time to a special
purpose entity commonly referred to as a depositor. The depositor then establishes a trust for each particular securitization, and transfers the related loans to that particular trust. The trust uses proceeds from the sale of the securities to pay
the depositor for the loans sold to the trust, and the depositor in turn pays the proceeds over to the Bank. These securitization vehicles are not consolidated within the Banks consolidated financial statements because they satisfy the
criteria established by Statement of Financial Accounting Standards No. 140, Accounting for the Transfers and Servicing of Financial Assets and Extinguishments of Liabilities to be treated as sales. In general, these criteria
require the securitization vehicles to be legally isolated from the transferor (the Bank), be limited to permitted activities, and have defined limits on the assets they can hold and the permitted sales, exchanges or distribution of its assets.



When the Bank sells or securitizes loans, it generally retains the right to
service the loans. At September 30, 2005, the Bank continues to service $9.0 billion and $27.5 million of securitized residential mortgages and automotive loan receivables, respectively. In addition, when the Bank sells or securitizes loans,
the Bank may retain a limited amount of recourse through one or more means, most often the establishment of reserve accounts, overcollateralization of receivables or retention of subordinated classes. At September 30, 2005 and 2004, total
recourse to the Bank related to loan securitization transactions was $5.7 million and $14.8 million, respectively. See Note 17 to the Consolidated Financial Statements for additional information concerning loan securitization transactions.



The Bank is also obligated under recourse provisions related to the servicing
of certain of its residential mortgage loans. At September 30, 2005 and 2004, the recourse to the Bank under these arrangements totaled $3.9 million and $4.0 million, respectively.



53



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##### Table of Contents

The Banks commitments to extend credit at September 30, 2005 are set forth in
the following table.



|                                         |  |                |          
|---------------------------------------- |  | -------------- | ---------
|                                         |  | (In thousands)
|Commitments to originate loans           |  | $              | 427,701  
|                                         |  |                |          
|Loans in process (collateralized loans): |  |                |          
|Home equity                              |  |                | 1,419,682
|Real estate construction and ground      |  |                | 257,687  
|Commercial                               |  |                | 462,301  
|                                         |  |                |          
|Subtotal                                 |  |                | 2,139,670
|                                         |  |                |          
|Loans in process (unsecured loans):      |  |                |          
|Overdraft lines                          |  |                | 145,994  
|Commercial                               |  |                | 385,239  
|                                         |  |                |          
|Subtotal                                 |  |                | 531,233  
|                                         |  |                |          
|Total commitments to extend credit       |  | $              | 3,098,604
|                                         |  |                |          



Based on historical experience, the
Bank expects to fund substantially less than the total amount of its outstanding overdraft line and home equity credit line commitments, which together accounted for 50.5% of commitments to extend credit at September 30, 2005.



The following table summarizes certain material contractual cash obligations associated with
operating, investing and financing activities as of September 30, 2005:



|                            |  |                                       |           |                 |   |           |  |           |           |                   |   |         |  |   |        
|--------------------------- |  | ------------------------------------- | --------- | --------------- | - | --------- |  | --------- | --------- | ----------------- | - | ------- |  | - | -------
|                            |  | Payments due by period (in thousands)
|                            |  | Total                                 |           | Less than1 year |   | 1-3 years |  | 3-5 years |           | More than 5 years
|Long term debt obligations  |  | $                                     | 2,328,671 |                 | $ | 855,169   |  | $         | 992,498   |                   | $ | 252,360 |  | $ | 228,644
|Operating lease obligations |  |                                       | 314,734   |                 |   | 30,949    |  |           | 56,540    |                   |   | 41,717  |  |   | 185,528
|                            |  |                                       |           |                 |   |           |  |           |           |                   |   |         |  |   |        
|Total                       |  | $                                     | 2,643,405 |                 | $ | 886,118   |  | $         | 1,049,038 |                   | $ | 294,077 |  | $ | 414,172
|                            |  |                                       |           |                 |   |           |  |           |           |                   |   |         |  |   |        



Additionally, the Banks 8%
Preferred Stock pays quarterly dividends in arrears at a yearly rate of $2.00 per share, totaling $10.0 million in preferred stock dividends to be paid by the Bank on an annual basis. The preferred stock is redeemable for cash, at $25.00 per share
plus any accrued and unpaid dividends, at the Banks option on or after October 1, 2008. The preferred stock has no stated maturity.



There were no material commitments for capital expenditures at September 30, 2005.



RESULTS OF OPERATIONS



The Real Estate
Trusts ability to generate revenues from property ownership and development is significantly influenced by a number of factors, including national and local economic conditions, the level of mortgage interest rates, governmental actions, such
as changes in real estate tax rates, and the type, location, size and stage of development of the Real Estate Trusts properties. Debt service payments and most of the operating expenses associated with income-producing properties are not
decreased by reductions in occupancy or rental income. Therefore, the ability of the Real Estate Trust to produce net income in any year from its income-producing properties is highly dependent on the Real Estate Trusts ability to maintain or
increase the properties levels of gross income. The relative illiquidity of real estate investments tends to limit the ability of the Real Estate Trust to vary its portfolio promptly in response to changes in economic, demographic, social,
financial and investment conditions. See Financial ConditionReal Estate.



The Banks operating results historically have depended primarily on its net interest spread, which is the difference between the rates of interest earned on its loans and securities investments and
the rates of interest paid on its deposits and borrowings. In recent periods, the Bank has generated significant income from loan servicing and securities activities and deposit fees. In addition to interest paid on its interest-bearing liabilities,
the Banks principal expenses are operating expenses.



54



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##### Table of Contents

FISCAL 2005 COMPARED TO FISCAL 2004



REAL ESTATE



The Real Estate Trust recorded an
operating loss from continuing operations of $7.1 million for fiscal 2005 compared to an operating loss from continuing operations of $22.3 million for fiscal 2004. The change reflects improved operating results in the hotel portfolio, the office
and industrial portfolio and lower interest and amortization of debt expense offset by a gain associated with a land sale in fiscal 2004, increased depreciation, advisory and management fees and general and administrative expenses. Included in the
fiscal 2004 period were a write-off of unamortized debt costs of $2.4 million and an early redemption premium of $6.5 million associated with the payoff of the Real Estate Trusts $200 million Senior Secured Notes.



Income after direct operating expenses from hotels, which excludes the two hotel properties
that are currently held for sale as well as the hotel property sold in December 2004, increased $7.0 million, or 22.3%, in fiscal 2005 from the level achieved in fiscal 2004. Total revenue increased approximately $14.1 million, or 16.7%, as the
average room rate increased $15.86, or 16.4%, from $96.55 in fiscal 2004 to $112.41 in fiscal 2005, reflecting the strong demand at the Real Estate Trusts hotel properties, particularly the Northern Virginia and Florida properties while the
overall occupancy percentage for the hotel properties increased from 69.0% for fiscal 2004 to 69.5% for fiscal 2005, a 0.7% increase. Room sales for fiscal 2005 increased $11.7 million, or 17.0%, from fiscal 2004, while food, beverage and other
sales increased $2.4 million, or 15.4%. Direct operating expenses increased $7.1 million, or 13.4%, reflecting increased operating costs, such as payroll costs, repairs and maintenance, hotel franchise and marketing costs and other operating costs
associated with the increased hotel occupancy and revenue.



Income after direct
operating expenses from office and industrial properties increased $989,000, or 3.7%, in fiscal 2005 compared to fiscal 2004. Total revenue increased $1.2 million, or 3.2%, in fiscal 2005. Successful leasing efforts during the period and the prior
fiscal year have increased the office and industrial overall occupancy percentage from 89.0% at September 30, 2004 to 91.0% at September 30, 2005. The revenue generated from the increased occupancy is slightly offset by lower rental rates
as leases turn over. In addition the Real Estate Trust acquired an approximately 12,000 square foot office building on May 25, 2005 which contributed revenue of $200,000 to fiscal 2005. Direct operating expenses increased $252,000, or 2.1%, as
higher property taxes, insurance, and utility costs offset lower bad debt expenses.



Other income, which includes interest income, income from other real estate properties and other miscellaneous income, increased $423,000, or 32.5%, principally due to higher interest income in the fiscal 2005 period reflecting the
Trusts increased invested cash balance in fiscal 2005 and the collection of a prior period bad debt which had been written off in a prior fiscal year.



Land parcels and other expense increased $95,000, or 9.6% in fiscal 2005 when compared to fiscal 2004 as a result of increased operating expenses at the Real Estate
Trusts other real estate properties.



Interest and amortization of debt
expense decreased $12.1 million in fiscal 2005 when compared to fiscal 2004. Included in fiscal 2004 were a write-off of unamortized debt costs of $2.4 million and an early redemption premium of $6.5 million associated with the payoff of the Real
Estate Trusts $200 million Senior Secured Notes. Interest expense in fiscal 2005 includes interest of approximately $18.8 million on the $250 million 7.50% Senior Secured Notes which were issued on February 25, 2004. Interest expense in
fiscal 2004 includes approximately $11.2 million of interest on the $250 million 7.50% Senior Secured Notes, for the period that the Notes were outstanding in the fiscal 2004 period, as well as approximately $9.8 million on the redeemed $200 million
9.75% Senior Secured Notes. Other interest expense was lower by approximately $1.0 million due to reduced mortgage interest expense, lower mortgage balances, lower line of credit interest expense and lower unsecured note interest. The average
balance of outstanding borrowings decreased to $608.9 million in fiscal 2005 from $638.1 million in fiscal 2004, reflecting the payoff of principal of the $200 million Senior Secured Note debt, and lower mortgage and line of credit balances. The
average cost of borrowings was 7.85% in fiscal 2005 and 9.06% in fiscal 2004. The decreased average cost of borrowings reflects the $6.5 million early redemption premium in the fiscal 2004 period as well as the 225 basis point reduction in the
outstanding Senior Secured Note debt.



Depreciation expense increased $1.2
million, or 7.0%, reflecting capital improvements in both the hotel and office and industrial portfolios that have been placed in service during fiscal 2005 and the prior fiscal year.



Advisory, management and leasing fees paid to related parties increased $1.0 million or 8.1%, in fiscal 2005 when compared to fiscal 2004.
The advisory fee in the fiscal 2005 period was $487,000 per month compared to $472,000 per month for the fiscal 2004 period, an aggregate increase of $180,000. The remainder of the increase, totaling $831,000, was due mainly to higher hotel
management fees reflecting the 16.7% increase in hotel revenue.



General and
administrative expense increased $986,000 from $2.4 million in fiscal 2004 to $3.4 million in fiscal 2005. The Real Estate Trust experienced higher accounting and legal costs in fiscal 2005 which were the major components of the increase.



Equity in earnings of unconsolidated entities reflected net earnings of $8.2
million in fiscal 2005 as compared to $7.8 million in fiscal 2004, an increase of $458,000, or 5.9%. Earnings from Saul Holdings Limited Partnership and Saul Centers were higher by $424,000 in fiscal 2005 period primarily due to increases in
operating income generated as a result of the acquisition activity of those entities which offset additional general and administrative costs incurred by the organization. Losses from other investments totaled $582,000 in fiscal 2005 compared to
$616,000 in fiscal 2004. These losses are a result of write-downs of a certain non-public investment accounted for under the equity method.



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##### Table of Contents

On July 11, 2005, approximately 22 acres of the Real Estate Trusts 159 acre land parcel in Overland Park,
Kansas was acquired by the Kansas Department of Transportation through a condemnation proceeding. The Real Estate Trust was awarded approximately $1.2 million which resulted in a gain of $263,000.



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 Commonwealth of Virginia has paid $3.6 million which has resulted in an initial gain of approximately $2.7 million. In addition, in June 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 fiscal 2003. This refund has been recorded as an additional gain on sale of this land parcel in fiscal 2004.



Included in loss from operations of discontinued real estate assets for fiscal 2005 and
2004 are three hotel properties and another real estate property. One of the hotel properties was sold in December 2004 and the other real estate property was sold in January 2005. During fiscal 2005, the Real Estate Trust determined that it would
sell two additional hotel properties. Operating losses from the three hotels totaled $1.1 million and $1.7 million for the year ended September 30, 2005 and 2004, respectively. Operating income for the other real estate property totaled
$911,000 (including gain on disposition of $900,000) for the year September 30, 2005 and an operating loss of $32,000 for the year ended September 30, 2004. Also included in the 2005 period loss from operations of discontinued real estate
assets are $1.6 million of costs associated with the defeasance of the mortgage which the hotel property secured, including a $1.5 million prepayment premium, and an additional loss of $17,000 which reflects the difference between the actual loss on
the sale of the hotel property and the estimated loss recorded in fiscal 2004. Included in the 2004 loss from operations of discontinued real estate assets, is a write down of $310,000 associated with the hotel that was sold in December 2004.



BANKING



Overview. The Bank recorded
operating income of $189.7 million for the year ended September 30, 2005, compared to operating income of $231.2 million for the year ended September 30, 2004. The decrease in income in fiscal year 2005 was primarily due to decreases in
automobile rental income and servicing, securitization and mortgage banking income, as well as increases in servicing assets amortization and other loan expenses and salaries and employee benefits. An increase in net interest income and a decrease
in depreciation and amortization partially offset the decreased income. The Banks net income in future periods will continue to be affected by increased operating expenses associated with expansion of the Banks branch network and other
areas of business and the fixed payments associated with the REIT preferred stock and 2003 debentures.



Net Interest Income. Net interest income, before the provision for loan losses, increased $87.1 million (or 31.3%) in fiscal year 2005 from fiscal year 2004. The Bank recorded $0.4 million of interest income on
non-accrual and restructured loans during fiscal year 2005. The Bank would have recorded additional interest income of $0.6 million in fiscal year 2005 if non-accrual assets and restructured loans had been current in accordance with their original
terms. The Banks net interest income in future periods will continue to be adversely affected by the Banks non-performing assets. See Financial Condition  Asset Quality  Non-Performing Assets.



The following table sets forth, for the periods indicated, information regarding the total
amount of income from interest-earning assets and the resulting yields, the interest expense associated with interest-bearing liabilities, expressed in dollars and rates, and the net interest spread and net yield on interest-earning assets. The
table contains information of the Bank only and does not include consolidation or elimination entries required for the Trusts financial presentation.



56



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##### Table of Contents

Net Interest Margin Analysis



(Dollars in thousands)



|                                                                       |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  
|---------------------------------------------------------------------- |  | ------------------------ | ---------- | -------- | ---- | ---------- |  | ------ | --------------- |  | -------- | ---------- | ---------- | - | ------- | --------------- | ------ | -------- |  | ---------- | ---------- |  | - | ------- |  | ----- | -
|                                                                       |  | Year Ended September 30, |           
|                                                                       |  | 2005                     |            |          | 2004 |            |  | 2003   |                
|                                                                       |  | AverageBalances          |            | Interest |      | Yield/Rate |  |        | AverageBalances |  | Interest |            | Yield/Rate |   |         | AverageBalances |        | Interest |  | Yield/Rate |           
|Assets:                                                                |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  
|Interest-earning assets:                                               |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  
|Loans receivable, net (1)                                              |  | $                        | 11,047,463 |          | $    | 531,859    |  | 4.81   | %               |  | $        | 10,081,196 |            | $ | 411,640 |                 | 4.08   | %        |  | $          | 8,512,601  |  | $ | 402,405 |  | 4.73  | %
|Mortgage-backed securities                                             |  |                          | 575,297    |          |      | 24,720     |  | 4.30   |                 |  |          | 435,313    |            |   | 20,505  |                 | 4.71   |          |  |            | 682,799    |  |   | 36,625  |  | 5.36  |  
|Federal funds sold and securities purchased under agreements to resell |  |                          | 84,134     |          |      | 2,296      |  | 2.73   |                 |  |          | 67,738     |            |   | 748     |                 | 1.10   |          |  |            | 70,282     |  |   | 885     |  | 1.26  |  
|Trading securities                                                     |  |                          | 6,534      |          |      | 364        |  | 5.57   |                 |  |          | 27,079     |            |   | 1,355   |                 | 5.00   |          |  |            | 87,247     |  |   | 4,801   |  | 5.50  |  
|Investment securities                                                  |  |                          | 182,794    |          |      | 4,741      |  | 2.59   |                 |  |          | 58,488     |            |   | 1,163   |                 | 1.99   |          |  |            | 46,399     |  |   | 1,192   |  | 2.57  |  
|Other interest-earning assets                                          |  |                          | 231,111    |          |      | 8,588      |  | 3.72   |                 |  |          | 219,553    |            |   | 5,860   |                 | 2.67   |          |  |            | 191,318    |  |   | 5,643   |  | 2.95  |  
|                                                                       |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  
|Total                                                                  |  |                          | 12,127,333 |          |      | 572,568    |  | 4.72   |                 |  |          | 10,889,367 |            |   | 441,271 |                 | 4.05   |          |  |            | 9,590,646  |  |   | 451,551 |  | 4.71  |  
|                                                                       |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  
|Non-interest earning assets:                                           |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  
|Cash                                                                   |  |                          | 347,513    |          |      |            |  |        |                 |  |          | 287,557    |            |   |         |                 |        |          |  |            | 298,697    |  |   |         |  |       |  
|Real estate held for investment or sale                                |  |                          | 22,079     |          |      |            |  |        |                 |  |          | 20,785     |            |   |         |                 |        |          |  |            | 24,597     |  |   |         |  |       |  
|Property and equipment, net                                            |  |                          | 510,716    |          |      |            |  |        |                 |  |          | 482,874    |            |   |         |                 |        |          |  |            | 471,845    |  |   |         |  |       |  
|Automobiles subject to lease, net                                      |  |                          | 294,198    |          |      |            |  |        |                 |  |          | 635,526    |            |   |         |                 |        |          |  |            | 1,039,802  |  |   |         |  |       |  
|Goodwill and other intangible assets, net                              |  |                          | 25,580     |          |      |            |  |        |                 |  |          | 24,181     |            |   |         |                 |        |          |  |            | 24,597     |  |   |         |  |       |  
|Other assets                                                           |  |                          | 696,546    |          |      |            |  |        |                 |  |          | 480,141    |            |   |         |                 |        |          |  |            | 355,771    |  |   |         |  |       |  
|                                                                       |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  
|Total assets                                                           |  | $                        | 14,023,965 |          |      |            |  |        |                 |  | $        | 12,820,431 |            |   |         |                 |        |          |  | $          | 11,805,955 |  |   |         |  |       |  
|                                                                       |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  
|Liabilities and stockholders equity:                                  |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  
|Interest-bearing liabilities:                                          |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  
|Deposit accounts:                                                      |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  
|Checking deposits                                                      |  | $                        | 2,323,065  |          |      | 5,040      |  | 0.22   |                 |  | $        | 2,094,878  |            |   | 4,351   |                 | 0.21   |          |  | $          | 1,799,489  |  |   | 4,601   |  | 0.26  |  
|Savings deposits                                                       |  |                          | 1,209,376  |          |      | 3,407      |  | 0.28   |                 |  |          | 1,200,609  |            |   | 3,294   |                 | 0.27   |          |  |            | 1,099,990  |  |   | 4,921   |  | 0.45  |  
|Time deposits                                                          |  |                          | 2,027,324  |          |      | 52,419     |  | 2.59   |                 |  |          | 1,746,956  |            |   | 33,447  |                 | 1.91   |          |  |            | 1,925,830  |  |   | 49,195  |  | 2.55  |  
|Money market deposits                                                  |  |                          | 2,456,603  |          |      | 34,765     |  | 1.42   |                 |  |          | 2,322,983  |            |   | 17,159  |                 | 0.74   |          |  |            | 2,114,947  |  |   | 21,405  |  | 1.01  |  
|                                                                       |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  
|Total deposits                                                         |  |                          | 8,016,368  |          |      | 95,631     |  | 1.19   |                 |  |          | 7,365,426  |            |   | 58,251  |                 | 0.79   |          |  |            | 6,940,256  |  |   | 80,122  |  | 1.15  |  
|Borrowings                                                             |  |                          | 3,443,406  |          |      | 111,562    |  | 3.24   |                 |  |          | 3,173,104  |            |   | 104,771 |                 | 3.30   |          |  |            | 2,769,252  |  |   | 125,357 |  | 4.53  |  
|                                                                       |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  
|Total liabilities                                                      |  |                          | 11,459,774 |          |      | 207,193    |  | 1.81   |                 |  |          | 10,538,530 |            |   | 163,022 |                 | 1.55   |          |  |            | 9,709,508  |  |   | 205,479 |  | 2.12  |  
|                                                                       |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  
|Non-interest-bearing items:                                            |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  
|Non-interest bearing deposits                                          |  |                          | 1,373,432  |          |      |            |  |        |                 |  |          | 1,146,484  |            |   |         |                 |        |          |  |            | 1,091,918  |  |   |         |  |       |  
|Other liabilities                                                      |  |                          | 293,797    |          |      |            |  |        |                 |  |          | 302,171    |            |   |         |                 |        |          |  |            | 317,225    |  |   |         |  |       |  
|Minority interest                                                      |  |                          | 175,391    |          |      |            |  |        |                 |  |          | 175,391    |            |   |         |                 |        |          |  |            | 146,580    |  |   |         |  |       |  
|Stockholders equity                                                   |  |                          | 721,571    |          |      |            |  |        |                 |  |          | 657,855    |            |   |         |                 |        |          |  |            | 540,724    |  |   |         |  |       |  
|                                                                       |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  
|Total liabilities and stockholders equity                             |  | $                        | 14,023,965 |          |      |            |  |        |                 |  | $        | 12,820,431 |            |   |         |                 |        |          |  | $          | 11,805,955 |  |   |         |  |       |  
|                                                                       |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  
|Net interest income                                                    |  |                          |            |          | $    | 365,375    |  |        |                 |  |          |            |            | $ | 278,249 |                 |        |          |  |            |            |  | $ | 246,072 |  |       |  
|                                                                       |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  
|Net interest spread (2)                                                |  |                          |            |          |      |            |  | 2.91   | %               |  |          |            |            |   |         |                 | 2.50   | %        |  |            |            |  |   |         |  | 2.59  | %
|                                                                       |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  
|Net yield on interest-earning assets (3)                               |  |                          |            |          |      |            |  | 3.01   | %               |  |          |            |            |   |         |                 | 2.56   | %        |  |            |            |  |   |         |  | 2.57  | %
|                                                                       |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  
|Interest-earning assets to interest-bearing liabilities                |  |                          |            |          |      |            |  | 105.83 | %               |  |          |            |            |   |         |                 | 103.33 | %        |  |            |            |  |   |         |  | 98.78 | %
|                                                                       |  |                          |            |          |      |            |  |        |                 |  |          |            |            |   |         |                 |        |          |  |            |            |  |   |         |  |       |  

---

|(1) | Includes loans held for sale and/or securitization. Interest on non-accruing loans has been included only to the extent reflected in the Consolidated Statements of Operations and
Comprehensive Income; 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.
|--- | -------------------------------------------------------------------------------------------------------



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The following table presents certain information regarding changes in interest income and interest expense of the Bank
during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to changes in volume (change in volume multiplied by old rate); changes in rate (change in
rate multiplied by old volume); and changes in rate and volume.



Volume and Rate Changes in Net Interest Income

(In thousands)



|                                                                       |  |                                                                                                                |        |   |                                                                                                                |   |        |             |  |   |         |   |  |      |         |   |             |   |         |   |  |   |         |  
|---------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------- | ------ | - | -------------------------------------------------------------------------------------------------------------- | - | ------ | ----------- |  | - | ------- | - |  | ---- | ------- | - | ----------- | - | ------- | - |  | - | ------- | -
|                                                                       |  | Year Ended September 30, 2005Compared to Year Ended September 30, 2004Increase (Decrease) Due to Change in (1) |        |   | Year Ended September 30, 2004Compared to Year Ended September 30, 2003Increase (Decrease) Due to Change in (1) |  
|                                                                       |  | Volume                                                                                                         |        |   | Rate                                                                                                           |   |        | TotalChange |  |   | Volume  |   |  | Rate |         |   | TotalChange |  
|Interest income:                                                       |  |                                                                                                                |        |   |                                                                                                                |   |        |             |  |   |         |   |  |      |         |   |             |   |         |   |  |   |         |  
|Loans (2)                                                              |  | $                                                                                                              | 41,918 |   |                                                                                                                | $ | 78,301 |             |  | $ | 120,219 |   |  | $    | 68,343  |   |             | $ | (59,108 | ) |  | $ | 9,235   |  
|Mortgage-backed securities                                             |  |                                                                                                                | 6,139  |   |                                                                                                                |   | (1,924 | )           |  |   | 4,215   |   |  |      | (12,065 | ) |             |   | (4,055  | ) |  |   | (16,120 | )
|Federal funds sold and securities purchased under agreements to resell |  |                                                                                                                | 219    |   |                                                                                                                |   | 1,329  |             |  |   | 1,548   |   |  |      | (31     | ) |             |   | (106    | ) |  |   | (137    | )
|Trading securities                                                     |  |                                                                                                                | (1,129 | ) |                                                                                                                |   | 138    |             |  |   | (991    | ) |  |      | (3,046  | ) |             |   | (400    | ) |  |   | (3,446  | )
|Investment securities                                                  |  |                                                                                                                | 3,130  |   |                                                                                                                |   | 448    |             |  |   | 3,578   |   |  |      | 273     |   |             |   | (302    | ) |  |   | (29     | )
|Other interest-earning assets                                          |  |                                                                                                                | 323    |   |                                                                                                                |   | 2,405  |             |  |   | 2,728   |   |  |      | 785     |   |             |   | (568    | ) |  |   | 217     |  
|                                                                       |  |                                                                                                                |        |   |                                                                                                                |   |        |             |  |   |         |   |  |      |         |   |             |   |         |   |  |   |         |  
|Total interest income                                                  |  |                                                                                                                | 50,600 |   |                                                                                                                |   | 80,697 |             |  |   | 131,297 |   |  |      | 54,259  |   |             |   | (64,539 | ) |  |   | (10,280 | )
|                                                                       |  |                                                                                                                |        |   |                                                                                                                |   |        |             |  |   |         |   |  |      |         |   |             |   |         |   |  |   |         |  
|Interest expense:                                                      |  |                                                                                                                |        |   |                                                                                                                |   |        |             |  |   |         |   |  |      |         |   |             |   |         |   |  |   |         |  
|Deposit accounts                                                       |  |                                                                                                                | 5,536  |   |                                                                                                                |   | 31,844 |             |  |   | 37,380  |   |  |      | 4,657   |   |             |   | (26,528 | ) |  |   | (21,871 | )
|Borrowings                                                             |  |                                                                                                                | 8,788  |   |                                                                                                                |   | (1,997 | )           |  |   | 6,791   |   |  |      | 16,549  |   |             |   | (37,135 | ) |  |   | (20,586 | )
|                                                                       |  |                                                                                                                |        |   |                                                                                                                |   |        |             |  |   |         |   |  |      |         |   |             |   |         |   |  |   |         |  
|Total interest expense                                                 |  |                                                                                                                | 14,324 |   |                                                                                                                |   | 29,847 |             |  |   | 44,171  |   |  |      | 21,206  |   |             |   | (63,663 | ) |  |   | (42,457 | )
|                                                                       |  |                                                                                                                |        |   |                                                                                                                |   |        |             |  |   |         |   |  |      |         |   |             |   |         |   |  |   |         |  
|Increase (decrease) in net interest income                             |  | $                                                                                                              | 36,276 |   |                                                                                                                | $ | 50,850 |             |  | $ | 87,126  |   |  | $    | 33,053  |   |             | $ | (876    | ) |  | $ | 32,177  |  
|                                                                       |  |                                                                                                                |        |   |                                                                                                                |   |        |             |  |   |         |   |  |      |         |   |             |   |         |   |  |   |         |  

---

|(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.
|--- | ---------------------------------------------------



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Interest income in fiscal year 2005 increased $131.3 million (or 29.8%) from fiscal year 2004 primarily as a result of
higher average yields on and higher average balances of loans receivable. Contributing to the increased interest income was an increase in interest income on mortgage-backed securities and other investments caused primarily by higher average
balances.



The Banks net interest spread increased to 2.91% in fiscal
year 2005 from 2.50% in fiscal year 2004. The 41 basis point increase was primarily the result of a 73 basis point increase in the average yield on loans, which was partially offset by a 26 basis point increase in the cost of deposits and
borrowings. The ratio of average interest-earning assets to average interest-bearing liabilities increased to 105.8% for fiscal year 2005 compared to 103.3% for fiscal year 2004.



Interest income on loans, the largest category of interest-earning assets, increased to $531.9 million for fiscal year 2005 from $411.6
million for fiscal year 2004, an increase of 29.2%, because of higher average yields on and higher average balances of loans receivable. The average yield on the loan portfolio increased to 4.81% from 4.08% from fiscal year 2004, reflecting
increases in the various indices on which interest rates of adjustable rate loans are based. Interest income on residential mortgage loans increased $85.0 million due to a $757.5 million increase in average balances as well as a 72 basis point
increase in the average yield (to 4.44% from 3.72%) during fiscal year 2005. Also contributing to the increased interest income on loans were higher average balances of and higher average yields on home equity loans, which resulted in a $29.1
million (or 46.0%) increase in interest income on those loans. Lower average yields on and lower average balances of automobile loans resulted in a $14.4 million (or 49.2%) decrease in interest income on those loans.



Interest income on mortgage-backed securities increased $4.2 million (or 20.6%) primarily due
to increased average balances which was partially offset by a decrease in the average yields on those securities to 4.30% from 4.71%.



Interest expense on deposits increased $37.4 million (or 64.2%) during fiscal year 2005. The increase resulted primarily from a 40 basis point increase in the average
rate on deposits (to 1.19% from 0.79%) due to increased rates paid by the Bank in response to higher market interest rates and, to a lesser extent, a $650.9 million increase in average deposit balances.



Interest expense on borrowings increased $6.8 million (or 6.5%) in fiscal year 2005 compared
to fiscal year 2004. Interest expense on securities sold under repurchase agreements and other borrowings increased $6.3 million and interest expense on advances from the FHLB of Atlanta increased $4.3 million due primarily to higher average
balances. The average balances of subordinated debentures decreased by $34.4 million, and the average rate on those borrowings decreased by 69 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 fiscal year 2005, the Bank recorded a negative provision for loan losses of $11.6 million, compared to a negative provision of $14.5 million in fiscal year 2004.
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
income decreased to $442.8 million in fiscal year 2005 from $539.5 million in fiscal year 2004. The $96.7 million (or 17.9%) decrease was primarily attributable to decreases in servicing, securitization and mortgage banking income and automobile
rental income, offset partially by an increase in other income.



Servicing,
securitization and mortgage banking income decreased to $172.0 million in fiscal year 2005, from $216.1 million in fiscal year 2004, a 20.4% decrease. The reduction resulted from a $121.0 million decrease in fair value of interest-only strips
receivables during the current period. Also contributing to this decrease was a decrease in gain on sales of loans. During fiscal year 2005, the Bank recognized gains of $185.5 million resulting from the securitization and/or sale of $6.5 billion of
loans compared to gains of $193.6 million resulting from the securitization and/or sale of $6.5 billion of loans during fiscal year 2004. Partially offsetting the decreased income were increases in fees related to the prepayments of certain
residential mortgage loans.



Automobile rental income decreased to $82.0
million during fiscal year 2005 from $157.0 million in the prior year, a 47.8% decrease. The $75.0 million decrease resulted primarily from a $341.3 million (or 53.7%) decrease in average outstanding leases as a result of the Banks prior
decision to discontinue origination of automobile leases.



Other income
increased to $52.5 million in fiscal year 2005 from $37.3 million in fiscal year 2004, a 40.8% increase. The $15.2 million increase in fiscal year 2005 was primarily due to earnings of $12.7 million on a joint venture investment.



Operating Expenses. Operating expenses during fiscal year 2005 increased $29.0 million
(or 4.8%) from fiscal year 2004. The increase was largely due to increases in servicing assets amortization and other loan expenses, salaries and employee benefits, property and equipment and marketing, which were partially offset by a reduction in
depreciation and amortization.



Servicing assets amortization and other loan
expenses increased to $96.6 million in fiscal year 2005 from $53.5 million in fiscal year 2004, an 80.5% increase. The increase resulted primarily from an increase in servicing assets amortization to $62.9 million and a $19.9 million increase in



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the mortgage servicing rights valuation allowance caused by a decrease in the value of the Banks servicing assets
during fiscal year 2005 compared to servicing assets amortization of $44.9 million and a decrease of $2.0 million in the mortgage servicing rights valuation allowance caused by an increase in the value of the Banks mortgage servicing assets
during fiscal year 2004.



Salaries and employee benefits increased $33.5
million (or 14.4%) in fiscal year 2005 due primarily to increased expenses in the retail branch network.



Property and equipment increased $7.6 million (or 19.4%) in fiscal year 2005 due to increased rent expense due to the addition of new branch offices.



Marketing expenses increased $7.1 million (or 58.2%) in the current period due to increased efforts to further promote the Banks
products and services.



Depreciation and amortization expense decreased $57.2
million (or 35.6%). Depreciation expense related to automobiles subject to lease decreased $60.2 million, to $60.7 million in fiscal year 2005, due to lower levels of outstanding leases resulting from the Banks prior decision to discontinue
origination of automobile leases.



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FISCAL 2004 COMPARED TO FISCAL 2003



REAL ESTATE



The Real Estate Trust recorded an
operating loss from continuing operations of $22.3 million for fiscal 2004, compared to an operating loss from continuing operations of $13.3 million for fiscal 2003. The change reflects improved operating results in the hotel portfolio and lower
write-downs of the Real Estate Trusts non-public investments which were offset by declining results in the office and industrial portfolio, increased interest expense, the write-off of unamortized debt costs of $2.4 million, the early
redemption premium of $6.5 million, included in interest and amortization of debt expense, associated with the payoff of the Real Estate Trusts $200 million Senior Secured Notes and differences in the respective gains recognized on property
sales, $9.1 million in fiscal 2003 compared to $2.8 million in fiscal 2004.



Income after direct operating expenses from hotels, which excludes the three hotel properties that are held for sale, increased $6.7 million, or 26.8%, in fiscal 2004 from the level achieved in fiscal 2003. Total revenue increased $11.7
million, or 16.0%, as the overall occupancy percentage for the hotel properties increased from 62.4% in fiscal 2003 to 69.0% in fiscal 2004 while the average room rate increased $6.09, or 6.7% from $90.46 in fiscal 2003 to $96.55 in fiscal 2004,
reflecting improved demand at the Real Estate Trusts hotel properties, particularly the Northern Virginia and Florida properties. Room sales for fiscal 2004 increased $10.6 million, or 18.1%, from fiscal year 2003, while food, beverage and
other sales increased $1.1 million, or 7.5%. Direct operating expenses increased $5.0 million, or 10.4%, reflecting increased operating costs, such as payroll, advertising and other operating costs associated with the increased hotel occupancy.



Income after direct operating expenses from office and industrial properties
decreased $1.2 million, or 4.4%, in fiscal 2004 compared to fiscal 2003. Total revenue decreased $896,000, or 2.3%, in fiscal 2004 as increased vacancy during the first and second fiscal quarters of 2004, 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 fiscal period. Direct operating expenses increased $321,000, or 2.8% in fiscal 2004 as increased bad debt, repair
and maintenance and utility costs were slightly offset by lower property taxes.



Other income, which includes interest income, income from other real estate properties and other miscellaneous income, increased $248,000, or 23.6%, in fiscal 2004 principally due to higher interest income in the 2004 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 remained relatively stable between the two periods at approximately $1.0 million in fiscal 2004 and fiscal 2003.



Interest and amortization of debt expense increased $9.6 million, or 19.8%, from $49.0
million in the fiscal 2003 period to $58.6 million in the fiscal 2004 period. The fiscal 2004 period includes the $6.5 million redemption premium paid as a result of the early redemption of the $200 million Senior Secured Notes. Other interest
expense, which increased $954,000 in the fiscal 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 fiscal 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 $638.1 million in the fiscal 2004 period from $585.1 million in the fiscal 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
9.06% in the fiscal 2004 period and 8.68% in the fiscal 2003 period, reflecting the $6.5 million redemption premium paid in fiscal 2004 which offset 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 2003 fiscal year.



Depreciation expense
decreased $92,000, or 0.5%, as a result of the retirement of certain office and hotel improvements in fiscal 2003 which offset the additional depreciation expense of new income-producing assets and tenant improvements placed into service in fiscal
2004.



Advisory, management and leasing fees paid to related parties increased
$753,000, or 6.4%, in the fiscal 2004 period when compared to the fiscal 2003 period. The advisory fee in fiscal 2004 was $472,000 per month compared to $458,000 per month for fiscal 2003, an aggregate increase of $168,000. The remainder of the cost
increase, totaling $585,000, was due to higher hotel management fees reflecting the 16.0% increase in hotel revenue and increased office leasing costs paid.



General and administrative expense decreased $380,000, or 13.5%, from $2.8 million in the fiscal 2003 period to $2.4 million in the fiscal 2004 period. Lower legal and
licensing costs were slightly offset by 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.



Equity in earnings of unconsolidated entities reflected net earnings of $7.8 million in the
fiscal 2004 period as compared to $7.2 million in the fiscal 2003 period, an increase of approximately $600,000. Earnings from Saul Holdings Limited Partnership and Saul Centers were lower by $239,000 in fiscal 2004 primarily due to the dilution
caused by the November 2003 Saul Centers preferred stock offering. Losses from other investments totaled $616,000 in fiscal 2004 as compared to losses of $1.4 million in fiscal 2003. These losses are a result of write-downs of a certain non-public
investment accounted for under the equity method.



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The Real Estate Trust recorded an impairment charge of $998,000 in the fiscal 2003 period due to write-downs of certain
non-public investments accounted for under the cost method. No impairment charges were recorded in the fiscal 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 Commonwealth of Virginia has
paid $3.6 million which has resulted in an initial gain of approximately $2.7 million. In addition, in June 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 fiscal 2003. This refund has been recorded as an additional gain on sale of this land parcel in fiscal 2004.



On September 25, 2003, the Real Estate Trust sold a land parcel in Rockville, Maryland for $11.3 million resulting in a gain of $9.1
million.



Included in loss from operations of discontinued real estate assets
for fiscal 2004 and 2003 are three hotel properties and an other real estate property. Operating losses from the three hotels totaled $1.7 million and $1.6 million for fiscal 2004 and 2003, respectively. Included in the 2004 loss from operations of
discontinued real estate assets, is a write down of $310,000 applicable to a hotel property to arrive at its estimated fair vale, less cost to sell. The sale of this hotel asset closed on December 9, 2004. The other real estate property has a
loss of $32,000 for fiscal 2004 and income of $60,000 for fiscal 2003. The sale of the other real estate asset closed in January 2005. The two remaining hotel properties continue to be held for sale.



BANKING



Overview.The Bank recorded
operating income of $231.2 million for the year ended September 30, 2004, compared to operating income of $146.2 million for the year ended September 30, 2003. The improvement in income in fiscal year 2004 was primarily due to increases in
servicing, securitization and mortgage banking income, as well as net interest income and decreases in the provision for loan losses and depreciation and amortization expense. A decrease in automobile rental income and increases in salaries and
employee benefits and other (non-interest) expenses partially offset the increased income. The Banks net income in future periods will continue to be affected by increased operating expenses associated with expansion of the Banks branch
network and other areas of business and potential use of relatively higher cost sources of funding to support continued growth.



Net Interest Income.Net interest income, before the provision for loan losses, increased $32.2 million (or 13.1%) in fiscal year 2004 from fiscal year 2003.
Interest income recorded on non-accrual assets and restructured loans totaled $0.2 million during fiscal year 2004. The Bank would have recorded interest income of $1.2 million in fiscal year 2004 if non-accrual assets and restructured loans had
been current in accordance with their original terms. The Banks net interest income in future periods will continue to be adversely affected by the Banks non-performing assets. See Financial Condition  Asset Quality 
Non-Performing Assets.



Interest Income in fiscal year 2004 decreased
$10.3 million (or 2.3%) from fiscal year 2003 primarily as a result of lower interest income on mortgage-backed securities, which resulted from lower average yields and lower average balances of those securities. Also contributing to the decreased
income were lower average yields on loans receivable, which was offset by a $1.6 billion increase in the average balances of loans receivable.



The Banks net interest spread decreased slightly to 2.50% in fiscal year 2004 from 2.59% in fiscal year 2003. The 9 basis point decrease 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 103.3% in fiscal year 2004 compared to 98.8% in
fiscal year 2003.



Interest income on loans, the largest category of
interest-earning assets, increased $9.2 million from fiscal year 2003 primarily because of higher balances of loans receivable which was partially offset by lower average yields caused by declines in the various indices on which interest rates on
adjustable rate loans are based. The average yield on the loan portfolio decreased 65 basis points (from 4.73% to 4.08%) from fiscal year 2003. Interest income on single-family residential loans increased $33.0 million due to $1.6 billion of higher
average balances, which was partially offset by lower average yields during fiscal year 2004. Lower average yields and lower average balances of automobile loans resulted in a $28.9 million (or 49.6%) decrease in interest income on those loans.



Interest income on mortgage-backed securities decreased $16.1 million (or
44.0%) primarily because of a $247.5 million reduction in average balances and, to a lesser extent, a decrease in the average interest rates on those securities from 5.36% to 4.71%.



Interest expense on deposits decreased $21.9 million (or 27.3%) during fiscal year 2004, due to decreased average rates. The 36 basis point
decrease in the average rate on deposits (from 1.15% to 0.79%) resulted from a reduction in the rates paid by the Bank in response to declines in market interest rates.



Interest expense on borrowings decreased $20.6 million (or 16.4%) in fiscal year 2004 compared to fiscal year 2003. The decrease resulted
from lower average rates paid on Federal Home Loan Bank advances (from 4.68% to 3.19%) which resulted in a decrease of $9.3 million in interest expense. Partially offsetting the decrease in interest expense on borrowings was an increase in the
average balance of Federal Home Loan Bank advances of $681.1 million (or 32.8%). In addition, the average rate on subordinated debentures decreased to 7.57% from 9.25% resulting in a decrease of $7.3 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.



62



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##### Table of Contents

Provision for Loan Losses.The Bank recorded a negative provision for loan losses of $14.5 million in fiscal year
2004 compared to a provision of $18.4 million in fiscal year 2003. Managements prior decisions to discontinue subprime automobile lending and indirect consumer lending, and focus more on residential mortgages, have contributed to the
improvement in 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. Potential problem assets also declined during the year ended
September 30, 2004. The combination of these factors contributed to the Banks decision to reduce the allowance for loan losses. See Financial Condition  Asset Quality  Allowances for Losses.



Other Income.Other non-interest income decreased slightly to $539.5 million in fiscal
year 2004 from $539.8 million in fiscal year 2003. The $0.3 million decrease resulted from decreases in automobile rental income and was mostly offset by increases in servicing, securitization and mortgage banking income and deposit servicing fees.



Automobile rental income decreased to $157.0 million during fiscal year 2004
from $235.4 million in the prior year. The decrease resulted primarily from a $404.3 million (or 38.9%) decrease in average outstanding leases as a result of the Banks prior decision to discontinue origination of automobile leases.



Servicing, securitization, and mortgage banking income increased to $216.1 million in
fiscal year 2004, from $144.2 million in fiscal year 2003, primarily as a result of an increase in the volume of loans securitized and sold. The Bank securitized and sold $4.9 billion of loans receivable during fiscal year 2004 compared to $2.6
billion in the prior year.



Deposit servicing fees increased $6.6 million (or
5.4%) during fiscal year 2004 primarily due to fees generated from the continued expansion of the Banks branch and ATM network.



Operating Expenses.Operating expenses for fiscal year 2004 decreased $20.3 million (or 3.3%) from fiscal year 2003. The decrease in operating expenses is largely
due to a decline in depreciation and amortization which was partially offset by increases in salaries and employee benefits and other (non-interest) expenses.



Depreciation and amortization decreased $55.5 million (or 25.7%) from fiscal year 2003, largely as a result of decreased depreciation expense of automobiles subject to
lease. Depreciation expense related to automobiles subject to lease decreased $50.0 million, to $120.9 million during fiscal year 2004, due to lower levels of outstanding leases. The reduced levels reflect the Banks prior decision to
discontinue origination of automobile leases.



Salaries and employee benefits
increased $20.4 million (or 9.6%) during fiscal year 2004 due primarily to increased expenses in the residential mortgage lending area and retail branch network.



Other (non-interest) expenses increased $8.7 million (or 14.8%) 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.



63



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##### Table of Contents

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Information required by this Item is included in Item 7. Managements Discussion and Analysis of Financial Condition and Results of
OperationsFinancial ConditionBankingAsset and Liability Management.



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



The financial statements of the Trust and its consolidated subsidiaries are included in this report on the pages indicated and are incorporated herein by reference:



|                                                                                           |  |                                                                                                                                            |  |       
|------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------ |  | ------
|(a)                                                                                        |  | Report of Independent Registered Public Accounting Firm.                                                                                   |  | 65    
|                                                                                           |  |                                                                                                                                           
|(b)                                                                                        |  | Consolidated Balance SheetsAs of September 30, 2005 and 2004.                                                                             |  | 66    
|                                                                                           |  |                                                                                                                                           
|(c)                                                                                        |  | Consolidated Statements of OperationsFor the years ended September 30, 2005, 2004 and 2003.                                               |  | 67-68 
|                                                                                           |  |                                                                                                                                           
|(d)                                                                                        |  | Consolidated Statements of Comprehensive Income and Changes in Shareholders EquityFor the years ended September 30, 2005, 2004 and 2003. |  | 69    
|                                                                                           |  |                                                                                                                                           
|(e)                                                                                        |  | Consolidated Statements of Cash FlowsFor the years ended September 30, 2005, 2004 and 2003.                                               |  | 70-71 
|                                                                                           |  |                                                                                                                                           
|(f)                                                                                        |  | Notes to Consolidated Financial Statements.                                                                                                |  | 72-111
|                                                                                           | 
|Summary financial information with respect to the bank is also included in Part I, Item 1. |  |                                                                                                                                           



64



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



TRUSTEES AND SHAREHOLDERS

B.F. SAUL REAL ESTATE INVESTMENT TRUST



We have
audited the accompanying consolidated balance sheets of B.F. Saul Real Estate Investment Trust (the Trust) as of September 30, 2005 and 2004, and the related consolidated statements of operations, comprehensive income and changes in
shareholders equity and cash flows for each of the three years in the period ended September 30, 2005. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These consolidated financial
statements and schedules are the responsibility of the Trusts management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the
Trusts internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Trusts internal control over financial reporting. Accordingly, we express no opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of B.F. Saul Real Estate Investment Trust as of September 30, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended September 30, 2005 in conformity with U. S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth therein.



As discussed in Note 3 to the consolidated financial statements, the Bank adopted Financial Accounting Standards Board Interpretation No. (FIN) 46, Consolidation of Variable Interest Entities, effective July 1,
2003.



/s/ Ernst & Young LLP



McLean, Virginia

December 6, 2005



65



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##### Table of Contents

Consolidated Balance Sheets



B. F. SAUL REAL
ESTATE INVESTMENT TRUST



|                                                                                                                                                                               |  |               |            |   |      |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                                               |  | September 30, |           
|(In thousands)                                                                                                                                                                 |  | 2005          |            |   | 2004 |  
|ASSETS                                                                                                                                                                         |  |               |            |   |      |   |            |  
|                                                                                                                                                                               |  |              
|Real Estate                                                                                                                                                                    |  |               |            |   |      |   |            |  
|Income-producing properties                                                                                                                                                    |  |               |            |   |      |   |            |  
|Hotel                                                                                                                                                                          |  | $             | 246,144    |   |      | $ | 237,969    |  
|Office and industrial                                                                                                                                                          |  |               | 194,643    |   |      |   | 184,454    |  
|Other                                                                                                                                                                          |  |               | 2,253      |   |      |   | 2,253      |  
|                                                                                                                                                                               |  |               |            |   |      |   |            |  
|                                                                                                                                                                               |  |               | 443,040    |   |      |   | 424,676    |  
|Accumulated depreciation                                                                                                                                                       |  |               | (182,255   | ) |      |   | (164,257   | )
|                                                                                                                                                                               |  |               |            |   |      |   |            |  
|                                                                                                                                                                               |  |               | 260,785    |   |      |   | 260,419    |  
|Land parcels                                                                                                                                                                   |  |               | 48,029     |   |      |   | 41,654     |  
|Real estate held for sale                                                                                                                                                      |  |               | 10,043     |   |      |   | 12,941     |  
|Investment in Saul Holdings and Saul Centers                                                                                                                                   |  |               | 75,323     |   |      |   | 61,767     |  
|Cash and cash equivalents                                                                                                                                                      |  |               | 13,920     |   |      |   | 31,842     |  
|Note receivable and accrued interest - related party                                                                                                                           |  |               | 13,100     |   |      |   | 7,677      |  
|Other assets                                                                                                                                                                   |  |               | 44,630     |   |      |   | 41,869     |  
|                                                                                                                                                                               |  |               |            |   |      |   |            |  
|Total real estate assets                                                                                                                                                       |  |               | 465,830    |   |      |   | 458,169    |  
|                                                                                                                                                                               |  |               |            |   |      |   |            |  
|Banking                                                                                                                                                                        |  |               |            |   |      |   |            |  
|                                                                                                                                                                               |  |              
|Cash and due from banks                                                                                                                                                        |  |               | 438,074    |   |      |   | 444,603    |  
|Interest-bearing deposits                                                                                                                                                      |  |               | 69,425     |   |      |   | 97,945     |  
|Loans held for securitization and/or sale                                                                                                                                      |  |               | 1,718,132  |   |      |   | 1,965,476  |  
|Investment securities (market value of $198,769 and $70,905, respectively)                                                                                                     |  |               | 200,902    |   |      |   | 71,192     |  
|Mortgage-backed securities (market value of $849,764 and $415,503, respectively)                                                                                               |  |               | 859,808    |   |      |   | 409,303    |  
|Loans receivable (net of allowance for losses of $28,640 and $37,750, respectively)                                                                                            |  |               | 9,303,800  |   |      |   | 8,555,557  |  
|Federal Home Loan Bank stock                                                                                                                                                   |  |               | 136,093    |   |      |   | 139,347    |  
|Real estate held for investment or sale (net of allowance for losses of $202 at September 30, 2004)                                                                            |  |               | 20,265     |   |      |   | 21,282     |  
|Property and equipment, net                                                                                                                                                    |  |               | 534,371    |   |      |   | 492,907    |  
|Automobiles subject to lease, net                                                                                                                                              |  |               | 185,036    |   |      |   | 435,307    |  
|Goodwill and other intangible assets, net                                                                                                                                      |  |               | 30,923     |   |      |   | 24,035     |  
|Interest-only strips receivable                                                                                                                                                |  |               | 348,227    |   |      |   | 287,840    |  
|Servicing assets, net                                                                                                                                                          |  |               | 164,592    |   |      |   | 147,856    |  
|Other assets                                                                                                                                                                   |  |               | 235,313    |   |      |   | 178,197    |  
|                                                                                                                                                                               |  |               |            |   |      |   |            |  
|Total banking assets                                                                                                                                                           |  |               | 14,244,961 |   |      |   | 13,270,847 |  
|                                                                                                                                                                               |  |               |            |   |      |   |            |  
|TOTAL ASSETS                                                                                                                                                                   |  | $             | 14,710,791 |   |      | $ | 13,729,016 |  
|                                                                                                                                                                               |  |               |            |   |      |   |            |  
|LIABILITIES                                                                                                                                                                    |  |               |            |   |      |   |            |  
|                                                                                                                                                                               |  |              
|Real Estate                                                                                                                                                                    |  |               |            |   |      |   |            |  
|Mortgage notes payable                                                                                                                                                         |  | $             | 278,411    |   |      | $ | 290,089    |  
|Mortgage notes payable - real estate held for sale                                                                                                                             |  |               | 15,917     |   |      |   | 21,227     |  
|Notes payable - secured                                                                                                                                                        |  |               | 250,000    |   |      |   | 250,000    |  
|Notes payable - unsecured                                                                                                                                                      |  |               | 57,760     |   |      |   | 56,428     |  
|Other liabilities and accrued expenses                                                                                                                                         |  |               | 22,180     |   |      |   | 22,109     |  
|Deferred tax liability, net                                                                                                                                                    |  |               | 35,951     |   |      |   | 36,448     |  
|                                                                                                                                                                               |  |               |            |   |      |   |            |  
|Total real estate liabilities                                                                                                                                                  |  |               | 660,219    |   |      |   | 676,301    |  
|                                                                                                                                                                               |  |               |            |   |      |   |            |  
|Banking                                                                                                                                                                        |  |               |            |   |      |   |            |  
|                                                                                                                                                                               |  |              
|Deposit accounts                                                                                                                                                               |  |               | 9,781,768  |   |      |   | 8,855,118  |  
|Securities sold under repurchase agreements and other short-term borrowings                                                                                                    |  |               | 498,914    |   |      |   | 206,579    |  
|Federal Home Loan Bank advances                                                                                                                                                |  |               | 2,468,740  |   |      |   | 2,736,938  |  
|Custodial accounts                                                                                                                                                             |  |               | 122,670    |   |      |   | 117,714    |  
|Amounts due to banks                                                                                                                                                           |  |               | 85,902     |   |      |   | 65,177     |  
|Other liabilities                                                                                                                                                              |  |               | 191,290    |   |      |   | 243,641    |  
|Capital notes - subordinated                                                                                                                                                   |  |               | 175,000    |   |      |   | 175,000    |  
|                                                                                                                                                                               |  |               |            |   |      |   |            |  
|Total banking liabilities                                                                                                                                                      |  |               | 13,324,284 |   |      |   | 12,400,167 |  
|                                                                                                                                                                               |  |               |            |   |      |   |            |  
|Commitments and contingencies                                                                                                                                                  |  |               |            |   |      |   |            |  
|Minority interest held by affiliates                                                                                                                                           |  |               | 124,932    |   |      |   | 114,933    |  
|Minority interest  other                                                                                                                                                      |  |               | 296,013    |   |      |   | 296,013    |  
|                                                                                                                                                                               |  |               |            |   |      |   |            |  
|TOTAL LIABILITIES                                                                                                                                                              |  |               | 14,405,448 |   |      |   | 13,487,414 |  
|                                                                                                                                                                               |  |               |            |   |      |   |            |  
|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                                                                                                                                                              |  |               | 249,083    |   |      |   | 185,342    |  
|                                                                                                                                                                               |  |               |            |   |      |   |            |  
|                                                                                                                                                                               |  |               | 349,184    |   |      |   | 285,443    |  
|Less cost of 1,834,088 common shares of beneficial interest in treasury                                                                                                        |  |               | (43,841    | ) |      |   | (43,841    | )
|                                                                                                                                                                               |  |               |            |   |      |   |            |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                                     |  |               | 305,343    |   |      |   | 241,602    |  
|                                                                                                                                                                               |  |               |            |   |      |   |            |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                     |  | $             | 14,710,791 |   |      | $ | 13,729,016 |  
|                                                                                                                                                                               |  |               |            |   |      |   |            |  



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



66



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##### Table of Contents

Consolidated Statements of Operations



B. F. SAUL
REAL ESTATE INVESTMENT TRUST



|                                                                                                                       |  |                                  |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                       |  | For the Year Ended September 30, |        
|(In thousands, except per share amounts)                                                                               |  | 2005                             |         |   | 2004 |   |         | 2003 | 
|REAL ESTATE                                                                                                            |  |                                  |         |   |      |   |         |      |  |   |         |  
|                                                                                                                       |  |                                  |        
|Income                                                                                                                 |  |                                  |         |   |      |   |         |      |  |   |         |  
|Hotels                                                                                                                 |  | $                                | 98,621  |   |      | $ | 84,477  |      |  | $ | 72,822  |  
|Office and industrial (including $5,391, $5,205 and $5,290 of rental income earned from banking segment, respectively) |  |                                  | 39,466  |   |      |   | 38,225  |      |  |   | 39,121  |  
|Other                                                                                                                  |  |                                  | 1,724   |   |      |   | 1,301   |      |  |   | 1,053   |  
|                                                                                                                       |  |                                  |         |   |      |   |         |      |  |   |         |  
|Total income                                                                                                           |  |                                  | 139,811 |   |      |   | 124,003 |      |  |   | 112,996 |  
|                                                                                                                       |  |                                  |         |   |      |   |         |      |  |   |         |  
|Expenses                                                                                                               |  |                                  |         |   |      |   |         |      |  |   |         |  
|Direct operating expenses:                                                                                             |  |                                  |         |   |      |   |         |      |  |   |         |  
|Hotels                                                                                                                 |  |                                  | 60,002  |   |      |   | 52,905  |      |  |   | 47,927  |  
|Office and industrial properties                                                                                       |  |                                  | 12,057  |   |      |   | 11,805  |      |  |   | 11,484  |  
|Land parcels and other                                                                                                 |  |                                  | 1,087   |   |      |   | 992     |      |  |   | 998     |  
|Interest and amortization of debt expense                                                                              |  |                                  | 46,503  |   |      |   | 58,645  |      |  |   | 48,969  |  
|Depreciation                                                                                                           |  |                                  | 18,878  |   |      |   | 17,646  |      |  |   | 17,738  |  
|Advisory, management and leasing fees - related parties                                                                |  |                                  | 13,448  |   |      |   | 12,437  |      |  |   | 11,684  |  
|General and administrative                                                                                             |  |                                  | 3,429   |   |      |   | 2,443   |      |  |   | 2,823   |  
|                                                                                                                       |  |                                  |         |   |      |   |         |      |  |   |         |  
|Total expenses                                                                                                         |  |                                  | 155,404 |   |      |   | 156,873 |      |  |   | 141,623 |  
|                                                                                                                       |  |                                  |         |   |      |   |         |      |  |   |         |  
|Equity in earnings (losses) of unconsolidated entities:                                                                |  |                                  |         |   |      |   |         |      |  |   |         |  
|Saul Holdings and Saul Centers                                                                                         |  |                                  | 8,828   |   |      |   | 8,404   |      |  |   | 8,643   |  
|Other, including impairment                                                                                            |  |                                  | (582    | ) |      |   | (616    | )    |  |   | (1,395  | )
|Impairment loss on investments                                                                                         |  |                                  |        |   |      |   |        |      |  |   | (998    | )
|Gain on sales of property                                                                                              |  |                                  | 263     |   |      |   | 2,769   |      |  |   | 9,079   |  
|                                                                                                                       |  |                                  |         |   |      |   |         |      |  |   |         |  
|REAL ESTATE OPERATING LOSS                                                                                             |  | $                                | (7,084  | ) |      | $ | (22,313 | )    |  | $ | (13,298 | )
|                                                                                                                       |  |                                  |         |   |      |   |         |      |  |   |         |  
|BANKING                                                                                                                |  |                                  |         |   |      |   |         |      |  |   |         |  
|                                                                                                                       |  |                                  |        
|Interest income                                                                                                        |  |                                  |         |   |      |   |         |      |  |   |         |  
|Loans                                                                                                                  |  | $                                | 531,859 |   |      | $ | 411,640 |      |  | $ | 402,405 |  
|Mortgage-backed securities                                                                                             |  |                                  | 24,720  |   |      |   | 20,505  |      |  |   | 36,625  |  
|Other                                                                                                                  |  |                                  | 15,989  |   |      |   | 9,126   |      |  |   | 12,521  |  
|                                                                                                                       |  |                                  |         |   |      |   |         |      |  |   |         |  
|Total interest income                                                                                                  |  |                                  | 572,568 |   |      |   | 441,271 |      |  |   | 451,551 |  
|                                                                                                                       |  |                                  |         |   |      |   |         |      |  |   |         |  
|Interest expense                                                                                                       |  |                                  |         |   |      |   |         |      |  |   |         |  
|Deposit accounts                                                                                                       |  |                                  | 95,631  |   |      |   | 58,251  |      |  |   | 80,122  |  
|Short-term borrowings                                                                                                  |  |                                  | 67,275  |   |      |   | 20,012  |      |  |   | 10,836  |  
|Long-term borrowings                                                                                                   |  |                                  | 44,287  |   |      |   | 84,759  |      |  |   | 114,521 |  
|                                                                                                                       |  |                                  |         |   |      |   |         |      |  |   |         |  
|Total interest expense                                                                                                 |  |                                  | 207,193 |   |      |   | 163,022 |      |  |   | 205,479 |  
|                                                                                                                       |  |                                  |         |   |      |   |         |      |  |   |         |  
|Net interest income                                                                                                    |  |                                  | 365,375 |   |      |   | 278,249 |      |  |   | 246,072 |  
|Provision for loan losses                                                                                              |  |                                  | (11,569 | ) |      |   | (14,522 | )    |  |   | 18,422  |  
|                                                                                                                       |  |                                  |         |   |      |   |         |      |  |   |         |  
|Net interest income after provision for loan losses                                                                    |  |                                  | 376,944 |   |      |   | 292,771 |      |  |   | 227,650 |  
|                                                                                                                       |  |                                  |         |   |      |   |         |      |  |   |         |  
|Other income                                                                                                           |  |                                  |         |   |      |   |         |      |  |   |         |  
|Deposit servicing fees                                                                                                 |  |                                  | 136,279 |   |      |   | 129,107 |      |  |   | 122,473 |  
|Servicing, securitization and mortgage banking income                                                                  |  |                                  | 172,037 |   |      |   | 216,052 |      |  |   | 144,158 |  
|Automobile rental income, net                                                                                          |  |                                  | 81,963  |   |      |   | 157,034 |      |  |   | 235,360 |  
|Other                                                                                                                  |  |                                  | 52,516  |   |      |   | 37,301  |      |  |   | 37,850  |  
|                                                                                                                       |  |                                  |         |   |      |   |         |      |  |   |         |  
|Total other income                                                                                                     |  |                                  | 442,795 |   |      |   | 539,494 |      |  |   | 539,841 |  
|                                                                                                                       |  |                                  |         |   |      |   |         |      |  |   |         |  



Continued on following page.



67



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##### Table of Contents

Consolidated Statements of Operations (Continued)



B. F. SAUL REAL ESTATE INVESTMENT TRUST



|                                                                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                                  |  | For the Year Ended September 30, |        
|(In thousands, except per share amounts)                                                                                          |  | 2005                             |         |   | 2004 |   |         | 2003 | 
|BANKING (Continued)                                                                                                               |  |                                  |         |   |      |   |         |      |  |   |         |  
|                                                                                                                                  |  |                                  |        
|Operating expenses                                                                                                                |  |                                  |         |   |      |   |         |      |  |   |         |  
|Salaries and employee benefits                                                                                                    |  | $                                | 266,601 |   |      | $ | 233,093 |      |  | $ | 212,697 |  
|Servicing assets amortization and other loan expenses                                                                             |  |                                  | 96,632  |   |      |   | 53,542  |      |  |   | 50,923  |  
|Property and equipment (including $5,391, $5,205 and $5,290 of rental expense paid to real estate segment, respectively)          |  |                                  | 46,615  |   |      |   | 39,032  |      |  |   | 38,309  |  
|Marketing                                                                                                                         |  |                                  | 19,248  |   |      |   | 12,171  |      |  |   | 9,516   |  
|Data processing                                                                                                                   |  |                                  | 34,664  |   |      |   | 35,452  |      |  |   | 35,301  |  
|Depreciation and amortization                                                                                                     |  |                                  | 103,319 |   |      |   | 160,509 |      |  |   | 215,961 |  
|Other                                                                                                                             |  |                                  | 62,965  |   |      |   | 67,251  |      |  |   | 58,594  |  
|                                                                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|Total operating expenses                                                                                                          |  |                                  | 630,044 |   |      |   | 601,050 |      |  |   | 621,301 |  
|                                                                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|BANKING OPERATING INCOME                                                                                                          |  | $                                | 189,695 |   |      | $ | 231,215 |      |  | $ | 146,190 |  
|                                                                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|TOTAL COMPANY                                                                                                                     |  |                                  |         |   |      |   |         |      |  |   |         |  
|Income from continuing operations before income taxes and minority interest                                                       |  | $                                | 182,611 |   |      | $ | 208,902 |      |  | $ | 132,892 |  
|Income tax provision                                                                                                              |  |                                  | 59,240  |   |      |   | 70,597  |      |  |   | 46,779  |  
|                                                                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|Income from continuing operations before minority interest                                                                        |  |                                  | 123,371 |   |      |   | 138,305 |      |  |   | 86,113  |  
|Minority interest held by affiliates                                                                                              |  |                                  | (19,516 | ) |      |   | (23,070 | )    |  |   | (13,926 | )
|Minority interest  other                                                                                                         |  |                                  | (29,071 | ) |      |   | (37,195 | )    |  |   | (26,160 | )
|                                                                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|INCOME FROM CONTINUING OPERATIONS                                                                                                 |  |                                  | 74,784  |   |      |   | 78,040  |      |  |   | 46,027  |  
|Discontinued real estate operations:                                                                                              |  |                                  |         |   |      |   |         |      |  |   |         |  
|Loss from operations of discontinued real estate assets (including net gain (loss) on disposal of $882, $(310), $,
respectively) |  |                                  | (1,821  | ) |      |   | (2,058  | )    |  |   | (1,595  | )
|Income tax benefit                                                                                                                |  |                                  | (635    | ) |      |   | (718    | )    |  |   | (558    | )
|                                                                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|LOSS ON DISCONTINUED REAL ESTATE OPERATIONS                                                                                       |  |                                  | (1,186  | ) |      |   | (1,340  | )    |  |   | (1,037  | )
|                                                                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|Income before cumulative effect of change in accounting principle                                                                 |  |                                  | 73,598  |   |      |   | 76,700  |      |  |   | 44,990  |  
|Cumulative effect of change in accounting principle, net of tax                                                                   |  |                                  |        |   |      |   |        |      |  |   | 897     |  
|                                                                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|TOTAL COMPANY NET INCOME                                                                                                          |  | $                                | 73,598  |   |      | $ | 76,700  |      |  | $ | 45,887  |  
|                                                                                                                                  |  |                                  |        
|Dividends: Real Estate Trusts preferred shares of beneficial interest                                                            |  |                                  | (5,418  | ) |      |   | (5,418  | )    |  |   | (5,418  | )
|                                                                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|NET INCOME AVAILABLE TO COMMON SHAREHOLDERS                                                                                       |  | $                                | 68,180  |   |      | $ | 71,282  |      |  | $ | 40,469  |  
|                                                                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|NET INCOME (LOSS) PER COMMON SHARE                                                                                                |  |                                  |         |   |      |   |         |      |  |   |         |  
|Income from continuing operations                                                                                                 |  | $                                | 14.43   |   |      | $ | 15.11   |      |  | $ | 8.43    |  
|Discontinued operations                                                                                                           |  |                                  | (0.25   | ) |      |   | (0.28   | )    |  |   | (0.22   | )
|Cumulative effect of change in accounting principle                                                                               |  |                                  |        |   |      |   |        |      |  |   | 0.19    |  
|                                                                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|NET INCOME PER COMMON SHARE (BASIC AND DILUTED)                                                                                   |  | $                                | 14.18   |   |      | $ | 14.83   |      |  | $ | 8.40    |  
|                                                                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|DISTRIBUTIONS DECLARED PER COMMON SHARE                                                                                           |  | $                                | 1.37    |   |      | $ | 0.09    |      |  | $ |        |  
|                                                                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  



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



68



---

##### Table of Contents

Consolidated Statements of Comprehensive Income and Changes in Shareholders Equity



B. F. SAUL REAL ESTATE INVESTMENT TRUST



|                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                  |  | For the Year Ended September 30, |        
|(Dollars in thousands)                                                            |  | 2005                             |         |   | 2004 |   |         | 2003 | 
|COMPREHENSIVE INCOME                                                              |  |                                  |         |   |      |   |         |      |  |   |         |  
|                                                                                  |  |                                  |        
|Net income                                                                        |  | $                                | 73,598  |   |      | $ | 76,700  |      |  | $ | 45,887  |  
|Other comprehensive income                                                        |  |                                  |        |   |      |   |        |      |  |   |        |  
|                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|TOTAL COMPREHENSIVE INCOME                                                        |  | $                                | 73,598  |   |      | $ | 76,700  |      |  | $ | 45,887  |  
|                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|CHANGES IN SHAREHOLDERS EQUITY                                                   |  |                                  |         |   |      |   |         |      |  |   |         |  
|                                                                                  |  |                                  |        
|PREFERRED SHARES OF BENEFICIAL INTEREST                                           |  |                                  |         |   |      |   |         |      |  |   |         |  
|Beginning and end of year (516,000 shares)                                        |  | $                                | 516     |   |      | $ | 516     |      |  | $ | 516     |  
|                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|COMMON SHARES OF BENEFICIAL INTEREST                                              |  |                                  |         |   |      |   |         |      |  |   |         |  
|Beginning and end of year (6,641,598 shares)                                      |  |                                  | 6,642   |   |      |   | 6,642   |      |  |   | 6,642   |  
|                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|PAID-IN SURPLUS                                                                   |  |                                  |         |   |      |   |         |      |  |   |         |  
|Beginning and end of year                                                         |  |                                  | 92,943  |   |      |   | 92,943  |      |  |   | 92,943  |  
|                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|RETAINED EARNINGS                                                                 |  |                                  |         |   |      |   |         |      |  |   |         |  
|Beginning of year                                                                 |  |                                  | 185,342 |   |      |   | 112,424 |      |  |   | 68,438  |  
|Net income                                                                        |  |                                  | 73,598  |   |      |   | 76,700  |      |  |   | 45,887  |  
|Adjustments:                                                                      |  |                                  |         |   |      |   |         |      |  |   |         |  
|Saul Holdings investment, net of taxes of $1,308, $1,120 and $1,894, respectively |  |                                  | 2,427   |   |      |   | 2,080   |      |  |   | 3,517   |  
|Other                                                                             |  |                                  | (284    | ) |      |   |        |      |  |   |        |  
|Dividends:                                                                        |  |                                  |         |   |      |   |         |      |  |   |         |  
|Real Estate Trust preferred shares of beneficial interest                         |  |                                  | (5,418  | ) |      |   | (5,418  | )    |  |   | (5,418  | )
|Real Estate Trust common shares of beneficial interest                            |  |                                  | (6,582  | ) |      |   | (444    | )    |  |   |        |  
|                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|End of year                                                                       |  |                                  | 249,083 |   |      |   | 185,342 |      |  |   | 112,424 |  
|                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|TREASURY SHARES                                                                   |  |                                  |         |   |      |   |         |      |  |   |         |  
|Beginning of year (1,834,088, 1,834,088 and 1,814,688 shares, respectively)       |  |                                  | (43,841 | ) |      |   | (43,841 | )    |  |   | (41,848 | )
|Purchases (19,400 shares)                                                         |  |                                  |        |   |      |   |        |      |  |   | (1,993  | )
|                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|End of year (1,834,088 shares)                                                    |  |                                  | (43,841 | ) |      |   | (43,841 | )    |  |   | (43,841 | )
|                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  
|TOTAL SHAREHOLDERS EQUITY                                                        |  | $                                | 305,343 |   |      | $ | 241,602 |      |  | $ | 168,684 |  
|                                                                                  |  |                                  |         |   |      |   |         |      |  |   |         |  



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



69



---

##### Table of Contents

Consolidated Statements of Cash Flows

B. F. SAUL REAL ESTATE INVESTMENT TRUST



|                                                                                                                       |  |                                  |            |   |      |   |            |      |  |   |            |  
|---------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                                       |  | For the Year Ended September 30, |           
|(In thousands)                                                                                                         |  | 2005                             |            |   | 2004 |   |            | 2003 | 
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                                   |  |                                  |            |   |      |   |            |      |  |   |            |  
|                                                                                                                       |  |                                  |           
|Real Estate                                                                                                            |  |                                  |            |   |      |   |            |      |  |   |            |  
|Net loss                                                                                                               |  | $                                | (4,465     | ) |      | $ | (15,580    | )    |  | $ | (9,815     | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                              |  |                                  |            |   |      |   |            |      |  |   |            |  
|Net gains on sale of property                                                                                          |  |                                  | (1,145     | ) |      |   | (2,459     | )    |  |   | (9,079     | )
|Impairment losses on investments                                                                                       |  |                                  |           |   |      |   |           |      |  |   | 998        |  
|Depreciation                                                                                                           |  |                                  | 19,857     |   |      |   | 19,053     |      |  |   | 19,330     |  
|Amortization of debt expense                                                                                           |  |                                  | 2,197      |   |      |   | 4,507      |      |  |   | 2,028      |  
|Equity in net earnings of unconsolidated entities, net of net distributions of $4,910, $6,527 and $6,527, respectively |  |                                  | (3,336     | ) |      |   | (1,262     | )    |  |   | (721       | )
|Deferred tax benefit                                                                                                   |  |                                  | (922       | ) |      |   | (1,123     | )    |  |   | (657       | )
|Increase in accounts receivable and accrued income                                                                     |  |                                  | (4,438     | ) |      |   | (10,766    | )    |  |   | (3,346     | )
|Decrease in accounts payable and accrued expenses                                                                      |  |                                  | (493       | ) |      |   | (6,023     | )    |  |   | (3,465     | )
|Dividends and tax sharing payments                                                                                     |  |                                  | 41,320     |   |      |   | 33,611     |      |  |   | 27,460     |  
|Other                                                                                                                  |  |                                  | 488        |   |      |   | (1,725     | )    |  |   | (2,435     | )
|                                                                                                                       |  |                                  |            |   |      |   |            |      |  |   |            |  
|                                                                                                                       |  |                                  | 49,063     |   |      |   | 18,233     |      |  |   | 20,298     |  
|                                                                                                                       |  |                                  |            |   |      |   |            |      |  |   |            |  
|Banking                                                                                                                |  |                                  |            |   |      |   |            |      |  |   |            |  
|Net income                                                                                                             |  |                                  | 78,063     |   |      |   | 92,280     |      |  |   | 55,702     |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities:                            |  |                                  |            |   |      |   |            |      |  |   |            |  
|Amortization of premiums, discounts and net deferred loan fees                                                         |  |                                  | 40,399     |   |      |   | 28,502     |      |  |   | 24,393     |  
|Deferred tax provision (benefit)                                                                                       |  |                                  | (44,853    | ) |      |   | (49,481    | )    |  |   | 42,812     |  
|Depreciation and amortization                                                                                          |  |                                  | 103,319    |   |      |   | 160,509    |      |  |   | 215,961    |  
|Provision for loan losses                                                                                              |  |                                  | (11,569    | ) |      |   | (14,522    | )    |  |   | 18,422     |  
|Minority interest held by affiliates                                                                                   |  |                                  | 19,516     |   |      |   | 23,070     |      |  |   | 13,926     |  
|Minority interest - other                                                                                              |  |                                  | 10,000     |   |      |   | 18,193     |      |  |   | 9,750      |  
|Proceeds from sales of trading securities                                                                              |  |                                  | 192,105    |   |      |   | 668,458    |      |  |   | 2,297,793  |  
|Purchases and net fundings of loans held for securitization and/or sale                                                |  |                                  | (5,620,487 | ) |      |   | (6,686,606 | )    |  |   | (6,438,614 | )
|Proceeds from sales of loans held for securitization and/or sale                                                       |  |                                  | 6,316,045  |   |      |   | 5,810,798  |      |  |   | 3,773,127  |  
|Increase in interest-only strips receivable                                                                            |  |                                  | (60,387    | ) |      |   | (148,059   | )    |  |   | (50,475    | )
|Increase in servicing assets                                                                                           |  |                                  | (16,737    | ) |      |   | (51,588    | )    |  |   | (35,838    | )
|(Increase) decrease in other assets                                                                                    |  |                                  | (88,963    | ) |      |   | (20,938    | )    |  |   | 4,570      |  
|Increase (decrease) in custodial accounts                                                                              |  |                                  | 4,956      |   |      |   | (56,128    | )    |  |   | (34,963    | )
|Increase (decrease) in other liabilities                                                                               |  |                                  | 19,255     |   |      |   | 10,267     |      |  |   | (38,936    | )
|Other                                                                                                                  |  |                                  | 18,633     |   |      |   | (12,938    | )    |  |   | (40,008    | )
|                                                                                                                       |  |                                  |            |   |      |   |            |      |  |   |            |  
|                                                                                                                       |  |                                  | 959,295    |   |      |   | (228,183   | )    |  |   | (182,378   | )
|                                                                                                                       |  |                                  |            |   |      |   |            |      |  |   |            |  
|Net cash provided by (used in) operating activities                                                                    |  |                                  | 1,008,358  |   |      |   | (209,950   | )    |  |   | (162,080   | )
|                                                                                                                       |  |                                  |            |   |      |   |            |      |  |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                                   |  |                                  |            |   |      |   |            |      |  |   |            |  
|                                                                                                                       |  |                                  |           
|Real Estate                                                                                                            |  |                                  |            |   |      |   |            |      |  |   |            |  
|Capital expenditures and acquisition - properties                                                                      |  |                                  | (29,946    | ) |      |   | (17,973    | )    |  |   | (9,855     | )
|Property sales, net                                                                                                    |  |                                  | 4,715      |   |      |   | 3,719      |      |  |   | 11,306     |  
|Note receivable and accrued interest  related party (Advances)/repayments, net                                        |  |                                  | (5,423     | ) |      |   | (4,690     | )    |  |   | 3,500      |  
|Equity investment in Saul Holdings and Saul Centers                                                                    |  |                                  | (5,901     | ) |      |   | (3,306     | )    |  |   | (2,314     | )
|Other investments                                                                                                      |  |                                  | (776       | ) |      |   | (800       | )    |  |   | (1,864     | )
|                                                                                                                       |  |                                  |            |   |      |   |            |      |  |   |            |  
|                                                                                                                       |  |                                  | (37,331    | ) |      |   | (23,050    | )    |  |   | 773        |  
|                                                                                                                       |  |                                  |            |   |      |   |            |      |  |   |            |  
|Banking                                                                                                                |  |                                  |            |   |      |   |            |      |  |   |            |  
|Proceeds from maturities of investment securities                                                                      |  |                                  |           |   |      |   | 10,000     |      |  |   |           |  
|Purchases of investment securities                                                                                     |  |                                  | (129,401   | ) |      |   | (34,917    | )    |  |   |           |  
|Proceeds from redemption of Federal Home Loan Bank stock                                                               |  |                                  | 282,492    |   |      |   | 287,599    |      |  |   | 152,625    |  
|Purchases of Federal Home Loan Bank stock                                                                              |  |                                  | (279,238   | ) |      |   | (319,573   | )    |  |   | (171,350   | )
|Net principal collected of loans                                                                                       |  |                                  | 5,451,943  |   |      |   | 3,558,267  |      |  |   | 3,200,940  |  
|Net funding and purchases of loans receivable                                                                          |  |                                  | (7,235,055 | ) |      |   | (5,046,003 | )    |  |   | (4,162,382 | )
|Principal collected on mortgage-backed securities                                                                      |  |                                  | 217,497    |   |      |   | 186,654    |      |  |   | 636,084    |  
|Purchases of mortgage-backed securities                                                                                |  |                                  | (299,866   | ) |      |   | (9,105     | )    |  |   |           |  
|Net repayments (purchases) of automobiles subject to lease                                                             |  |                                  | 189,540    |   |      |   | 299,199    |      |  |   | 84,603     |  
|Net purchases of property and equipment                                                                                |  |                                  | (84,577    | ) |      |   | (64,197    | )    |  |   | (32,175    | )
|Net proceeds from sales of property and equipment                                                                      |  |                                  |           |   |      |   | 23,320     |      |  |   |           |  
|Net proceeds from sales of real estate                                                                                 |  |                                  | 12,031     |   |      |   | 9,500      |      |  |   | 13,957     |  
|Disbursements for real estate held for investment or sale                                                              |  |                                  | (5,895     | ) |      |   | (3,272     | )    |  |   | (3,525     | )
|Other                                                                                                                  |  |                                  | (7,019     | ) |      |   |           |      |  |   |           |  
|                                                                                                                       |  |                                  |            |   |      |   |            |      |  |   |            |  
|                                                                                                                       |  |                                  | (1,887,548 | ) |      |   | (1,102,528 | )    |  |   | (281,223   | )
|                                                                                                                       |  |                                  |            |   |      |   |            |      |  |   |            |  
|Net cash used in investing activities                                                                                  |  |                                  | (1,924,879 | ) |      |   | (1,125,578 | )    |  |   | (280,450   | )
|                                                                                                                       |  |                                  |            |   |      |   |            |      |  |   |            |  



Continued on following page.



70



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##### Table of Contents

Consolidated Statements of Cash Flows (Continued)



B. F. SAUL REAL ESTATE INVESTMENT TRUST



|                                                                                                        |  |                                  |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                                        |  | For the Year Ended September 30, |            
|(In thousands)                                                                                          |  | 2005                             |             |   | 2004 |   |             | 2003 | 
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                    |  |                                  |             |   |      |   |             |      |  |   |             |  
|                                                                                                        |  |                                  |            
|Real Estate                                                                                             |  |                                  |             |   |      |   |             |      |  |   |             |  
|Proceeds from mortgage financing                                                                        |  | $                                |            |   |      | $ |            |      |  | $ | 46,000      |  
|Principal curtailments and repayments of mortgages                                                      |  |                                  | (15,793     | ) |      |   | (9,923      | )    |  |   | (48,600     | )
|Net secured note financings (repayments)                                                                |  |                                  |            |   |      |   | 46,200      |      |  |   | 2,050       |  
|Proceeds from sales of unsecured notes                                                                  |  |                                  | 5,674       |   |      |   | 6,877       |      |  |   | 5,539       |  
|Repayments of unsecured notes                                                                           |  |                                  | (4,342      | ) |      |   | (5,798      | )    |  |   | (5,346      | )
|Costs of obtaining financings                                                                           |  |                                  | (3,193      | ) |      |   | (7,676      | )    |  |   | (1,705      | )
|Purchase of treasury stock                                                                              |  |                                  |            |   |      |   |            |      |  |   | (1,993      | )
|Cash dividends paid on preferred stock                                                                  |  |                                  | (5,418      | ) |      |   | (11,556     | )    |  |   | (12,000     | )
|Cash dividends paid on common stock                                                                     |  |                                  | (6,582      | ) |      |   | (444        | )    |  |   |            |  
|                                                                                                        |  |                                  |             |   |      |   |             |      |  |   |             |  
|                                                                                                        |  |                                  | (29,654     | ) |      |   | 17,680      |      |  |   | (16,055     | )
|                                                                                                        |  |                                  |             |   |      |   |             |      |  |   |             |  
|Banking                                                                                                 |  |                                  |             |   |      |   |             |      |  |   |             |  
|Proceeds from customer deposits and sales of certificates of deposit                                    |  |                                  | 72,320,724  |   |      |   | 53,155,374  |      |  |   | 45,309,516  |  
|Customer withdrawals of deposits and payments for maturing certificates of deposit                      |  |                                  | (71,394,073 | ) |      |   | (52,400,761 | )    |  |   | (44,646,596 | )
|Net increase (decrease) in securities sold under repurchase agreements                                  |  |                                  | 169,156     |   |      |   | 16,062      |      |  |   | (499,324    | )
|Capital contribution from parent                                                                        |  |                                  | 1,418       |   |      |   |            |      |  |   |            |  
|Advances from the Federal Home Loan Bank                                                                |  |                                  | 23,046,342  |   |      |   | 17,470,676  |      |  |   | 13,445,065  |  
|Repayments of advances from the Federal Home Loan Bank                                                  |  |                                  | (23,314,541 | ) |      |   | (16,721,207 | )    |  |   | (13,160,560 | )
|Net increase (decrease) in other borrowings                                                             |  |                                  | 123,178     |   |      |   | 22,203      |      |  |   | 8,154       |  
|Issuance of 67/8% subordinated debentures                                                               |  |                                  |            |   |      |   | 171,938     |      |  |   |            |  
|Issuance of 8% Noncumulative Perpetual Preferred Stock, Series C                                        |  |                                  |            |   |      |   | 120,622     |      |  |   |            |  
|Redemption of 13% Noncumulative Perpetual Preferred Stock, Series A                                     |  |                                  |            |   |      |   | (81,750     | )    |  |   |            |  
|Redemption of 91/4% Subordinated Debentures                                                             |  |                                  |            |   |      |   | (252,775    | )    |  |   |            |  
|Cash dividends paid on preferred stock                                                                  |  |                                  | (10,000     | ) |      |   | (10,750     | )    |  |   | (9,750      | )
|Cash dividends paid on common stock                                                                     |  |                                  | (49,000     | ) |      |   | (31,000     | )    |  |   | (20,000     | )
|                                                                                                        |  |                                  |             |   |      |   |             |      |  |   |             |  
|                                                                                                        |  |                                  | 893,204     |   |      |   | 1,458,632   |      |  |   | 426,505     |  
|                                                                                                        |  |                                  |             |   |      |   |             |      |  |   |             |  
|Net cash provided by financing activities                                                               |  |                                  | 863,550     |   |      |   | 1,476,312   |      |  |   | 410,450     |  
|                                                                                                        |  |                                  |             |   |      |   |             |      |  |   |             |  
|Net (decrease) increase in cash and cash equivalents                                                    |  |                                  | (52,971     | ) |      |   | 140,784     |      |  |   | (32,080     | )
|Cash and cash equivalents at beginning of year                                                          |  |                                  | 574,390     |   |      |   | 433,606     |      |  |   | 465,686     |  
|                                                                                                        |  |                                  |             |   |      |   |             |      |  |   |             |  
|Cash and cash equivalents at end of year                                                                |  | $                                | 521,419     |   |      | $ | 574,390     |      |  | $ | 433,606     |  
|                                                                                                        |  |                                  |             |   |      |   |             |      |  |   |             |  
|Components of cash and cash equivalents at end of year as presented in the consolidated balance sheets: |  |                                  |             |   |      |   |             |      |  |   |             |  
|Real Estate                                                                                             |  |                                  |             |   |      |   |             |      |  |   |             |  
|Cash and cash equivalents                                                                               |  | $                                | 13,920      |   |      | $ | 31,842      |      |  | $ | 18,979      |  
|Banking                                                                                                 |  |                                  |             |   |      |   |             |      |  |   |             |  
|Cash and due from banks                                                                                 |  |                                  | 438,074     |   |      |   | 444,603     |      |  |   | 339,960     |  
|Interest-bearing deposits                                                                               |  |                                  | 69,425      |   |      |   | 97,945      |      |  |   | 74,667      |  
|                                                                                                        |  |                                  |             |   |      |   |             |      |  |   |             |  
|Cash and cash equivalents at end of year                                                                |  | $                                | 521,419     |   |      | $ | 574,390     |      |  | $ | 433,606     |  
|                                                                                                        |  |                                  |             |   |      |   |             |      |  |   |             |  
|Supplemental disclosures of cash flow information:                                                      |  |                                  |             |   |      |   |             |      |  |   |             |  
|Cash paid during the year for:                                                                          |  |                                  |             |   |      |   |             |      |  |   |             |  
|Interest                                                                                                |  | $                                | 253,831     |   |      | $ | 227,757     |      |  | $ | 248,372     |  
|Income taxes paid                                                                                       |  |                                  | 140,850     |   |      |   | 107,689     |      |  |   | 17,415      |  
|Shares of Saul Centers, Inc. common stock                                                               |  |                                  | 12,591      |   |      |   | 9,330       |      |  |   | 7,835       |  
|Cash received during the year from:                                                                     |  |                                  |             |   |      |   |             |      |  |   |             |  
|Dividends on shares of Saul Centers, Inc. common stock                                                  |  |                                  | 6,703       |   |      |   | 6,023       |      |  |   | 5,521       |  
|Distributions from Saul Holdings Limited Partnership                                                    |  |                                  | 6,569       |   |      |   | 6,527       |      |  |   | 6,527       |  
|                                                                                                        |  |                                  |            
|Supplemental disclosures of noncash activities:                                                         |  |                                  |             |   |      |   |             |      |  |   |             |  
|Rollovers of notes payable - unsecured                                                                  |  |                                  | 7,247       |   |      |   | 6,432       |      |  |   | 7,005       |  
|Loans held for securitization and/or sale exchanged for trading securities                              |  |                                  | 190,578     |   |      |   | 658,587     |      |  |   | 2,270,261   |  
|Loans receivable transferred to loans held for securitization and/or sale                               |  |                                  | 693,567     |   |      |   | 339,869     |      |  |   | 2,472,538   |  
|Loans receivable transferred to real estate acquired in settlement of loans                             |  |                                  | 4,657       |   |      |   | 3,376       |      |  |   | 3,019       |  
|Loans receivable exchanged for mortgage-backed securities held-to-maturity                              |  |                                  | 364,577     |   |      |   | 108,640     |      |  |   | 88,471      |  



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



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  TRUST:



GENERAL



B.F. Saul Real Estate Investment Trust operates as a
Maryland real estate investment trust. The principal business activities of B.F. Saul Real Estate Investment Trust and its consolidated subsidiaries (the Trust or Total Company) are the ownership of 80% of the outstanding
common stock of Chevy Chase Bank, F.S.B., whose assets accounted for 97% of the Trusts consolidated assets as of September 30, 2005, and the ownership and development of income-producing properties. The properties are located
predominantly in the mid-Atlantic and Southeastern regions of the United States and consist principally of hotels, office projects, and undeveloped land parcels. Chevy Chase Bank, F.S.B. is a federally chartered and federally insured stock savings
bank and, as such, is subject to comprehensive regulation, examination and supervision by the Office of Thrift Supervision (OTS) and by the Federal Deposit Insurance Corporation (FDIC). The bank is principally engaged in the
business of attracting deposits from the public and using such deposits, together with borrowings and other funds, to make loans secured by real estate, primarily residential mortgage loans, and various types of consumer loans and leases and
commercial loans. The banks principal deposit market is the Washington, DC metropolitan area.



Real Estate Trust or Real Estate refers to B.F. Saul Real Estate Investment Trust and its wholly owned subsidiaries. Chevy Chase Bank, F.S.B. and its subsidiaries are referred to in the
consolidated financial statements and notes thereto as Banking or the Bank or the Corporations. The accounting and reporting practices of the Trust conform to accounting principles generally accepted in the United
States and, as appropriate, predominant practices within the real estate and banking industries.



PRINCIPLES OF CONSOLIDATION



The
consolidated financial statements include the accounts of the Real Estate Trust and its subsidiaries. Accordingly, the accompanying financial statements reflect the assets, liabilities, operating results, and cash flows for two business segments:
Real Estate and Banking. Entities in which the Trust holds a non-controlling interest (generally 50% or less) are accounted for on the equity method. See Note 3. All significant inter-company transactions, except as disclosed elsewhere in the
financial statements, including inter-company office rental agreements, 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.



USE OF ESTIMATES



The financial statements have been prepared in conformity with accounting principles
generally accepted in the United States. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the
date of the balance sheet and revenues and expenses for the reporting period. Actual results could differ from those estimates.



ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS



Long-lived assets and certain identifiable intangibles to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the sum of the expected cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, the Trust recognizes an impairment loss.



Measurement of an impairment loss for long-lived assets and identifiable intangibles that the
Trust expects to hold and use is based on the fair value of the asset. Long-lived assets and certain identifiable intangibles to be disposed of are generally reported at the lower of carrying amount or fair value less the cost to sell.



INCOME TAXES



The Trust files a consolidated federal income tax return which includes operations of all 80% or more owned subsidiaries. It voluntarily
terminated its qualification as a real estate investment trust under the Internal Revenue Code during fiscal 1978.



The Trust uses an asset and liability approach in accounting for income taxes. Deferred income taxes are recorded using currently enacted tax laws and rates. To the
extent that realization of deferred tax assets is more likely than not, no valuation allowance is recorded to reduce the carrying value of the asset.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



NET INCOME PER COMMON SHARE



Net income per common share is determined by dividing net income, after deducting preferred
share dividend requirements, by the weighted average number of common shares outstanding during the year. For fiscal years 2005, 2004 and 2003 weighted average number of shares used in the calculation was 4,807,510, 4,807,510 and 4,819,628,
respectively. The Trust has no common share equivalents.



RECLASSIFICATIONS



Certain reclassifications of prior periods information have been
made to conform with the presentation of the consolidated financial statements for the year ended September 30, 2005, including the reclassification of certain income and expense amounts to loss from operations of discontinued real estate
assets to assure comparability of all periods presented.



2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIESREAL ESTATE TRUST:



CASH
EQUIVALENTS



The Real Estate Trust considers all highly liquid, temporary
investments with an original maturity of three months or less and money market accounts to be cash equivalents.



REAL ESTATE INVESTMENT PROPERTIES



Income-producing properties are stated at the lower of depreciated cost (except those which were acquired through foreclosure or equivalent proceedings, the carrying
amounts of which are based on the lower of cost or fair value at the time of acquisition) or net realizable value.



Interest, real estate taxes and other carrying costs are capitalized on projects under construction. Once construction is completed and the assets are placed in service,
rental income, direct operating expenses, and depreciation associated with such properties are included in current operations. The Real Estate Trust considers a project to be substantially complete and held available for occupancy upon completion of
tenant improvements, but no later than one year from the cessation of major construction activity. Substantially completed portions of a project are accounted for as separate projects. Expenditures for repairs and maintenance are charged to
operations as incurred.



Depreciation is calculated using the straight-line
method and estimated useful lives of 28 to 50 years for buildings and up to 20 years for certain other improvements. Tenant improvements are amortized over the lesser of their estimated useful lives or the lives of the related leases using the
straight-line method.



The Real Estate Trust purchases real estate investment
properties from time to time and allocates the purchase price to various components, such as land, buildings and intangibles related to in-place leases and customer relationships in accordance with Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards (SFAS) 141, Business Combinations. The purchase price is allocated based on the relative fair value of each component. The fair value of buildings is determined
as if the buildings were vacant upon acquisition and subsequently leased at market rates. As such, the determination of fair value considers the present value of all cash flows to be generated from the property including the initial lease up period.
The Real Estate Trust determines the fair value of above and below market intangibles associated with in-place leases by assessing the net effective rent and remaining term of the lease relative to market terms for similar leases at acquisition. In
the case of below market leases, the Real Estate Trust considers the remaining contractual lease period and renewal periods, taking into consideration the likelihood of the tenant exercising its renewal options. The fair value of a below market
lease component is recorded as deferred income and amortized as additional lease revenue over the remaining contractual lease period and any renewal options included in the valuation analysis. The fair value of above market lease intangibles is
recorded as a deferred asset and is amortized as a reduction of lease revenue over the remaining contractual lease term. The Real Estate Trust determines the fair value of at-market in-place leases considering the cost of acquiring similar leases,
foregone rents associated with the lease-up period and carrying costs associated with the lease-up period. Intangible assets associated with at-market in-place leases are amortized as additional lease expense over the remaining contractual lease
term. To the extent customer relationship intangibles are present in an acquisition, the fair value of the intangibles are amortized over the life of the customer relationship.



INCOME RECOGNITION



The Real Estate Trust derives room and other revenues from the operations of its hotel properties. Hotel revenue is recognized as earned. The Real Estate Trust derives
rental income under noncancelable long-term leases from tenants at its commercial properties. Commercial property rental income is recognized on a straight-line basis. Expense recoveries at the commercial properties represent a portion of property
expenses billed to tenants, including real estate taxes and operating expense recoveries, many of which are subject to base year limits as defined in the applicable lease agreements. Expense recoveries are recognized in the period in which the
related expenses are incurred.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



ACCOUNTS RECEIVABLE AND ACCRUED INCOME



Accounts receivable and accrued income of approximately $13.4 million and $12.6 million at
September 30, 2005 and 2004, respectively, included in other assets in the financial statements, primarily represents amounts due from commercial property tenants in accordance with the terms of the respective leases and hotel property accounts
based on contractual payment obligations. Receivables are reviewed monthly and reserves established with a charge to current period operations when, in the opinion of management, collection of the receivable is doubtful. Accounts receivable from
commercial property tenants includes minimum rental income accrued on a straight-line basis to be paid by tenants over the remaining term of their respective leases.



INVESTMENT IN SAUL CENTERS, INC.



The Real Estate Trust accounts for its investments in Saul Holdings Limited Partnership (Saul Holdings) and Saul Centers, Inc. (Saul Centers) on
the equity method of accounting because the Trust does not have effective control of the respective entities.



FAIR VALUE OF FINANCIAL INSTRUMENTS



The following are the fair values of each class of financial instruments and the methods and assumptions used to estimate the fair values.



Cash and Cash Equivalents and Notes Receivable  Related Party



The carrying amount approximates fair value because of the short-term maturity of these instruments.



Liabilities



The fair market value of notes payablesecured is approximately $250 million, based on
managements estimate of current market rates and conditions. The fair value of mortgage notes payable, which includes real estate held for sale, is based on managements estimate of current market rates for its debt. At September 30,
2005, and 2004, the fair value of mortgage notes payable was $312.0 and $331.9 million, respectively. The fair value of notes payableunsecured is based on the rates currently offered by the Real Estate Trust for similar notes. At
September 30, 2005 and 2004, the fair value of notes payableunsecured was $60.1 and $60.0 million.



NEW ACCOUNTING STANDARDS



In May 2005,
the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections, or SFAS 154, which replaces APB Opinion No. 20 and Statement of Financial Accounting Standards
No. 3, and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement is effective for accounting changes and corrections or errors made in fiscal years beginning after December 15,
2005, although early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after SFAS 154 was issued. The Trust does not anticipate that the adoption of SFAS 154 will have a material impact on its
financial condition or results of operations.



The Emerging Issues Task Force
(EITF) issued EITF 04-5, last updated on July 15, 2005, Investors Accounting for an Investment in a Limited Partnership when the Investor is the General Partner and the Limited Partners have Certain Rights, (EITF
04-5) which addresses the General Partner in a limited partnership who is presumed to control the partnership unless the Limited Partners have the ability, through a majority vote, to remove the General Partner without cause or the ability to
effectively participate in significant decisions that would be expected to be made in the ordinary course of business. EITF is effective as of June 29, 2005 for new limited partnerships and existing limited partnerships where the partnership
agreement has been modified after that date or for fiscal periods beginning after December 15, 2005. The Trust has not entered into any new agreements or made any amendments to existing agreements that are covered by EITF 04-5. The Trust is
evaluating the potential impact of EITF 04-5 with respect to existing agreements and does not anticipate that the adoption of EITF 04-5, if applicable, will have a material impact on its financial condition or results of operations.



3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  THE BANK:



Cash and Cash Equivalents:



For purposes of reporting cash flows, cash and cash equivalents include cash and due from
banks, interest-bearing deposits, federal funds sold and securities purchased under agreements to resell.



Federal Reserve Board regulations require the Bank to maintain reserves in the form of cash or deposits in its account at the Federal Reserve Bank of Richmond. The Banks average reserve requirements, before
credit for vault cash, were $87.8, $70.5 and $56.0 million during the years ended September 30, 2005, 2004 and 2003, respectively.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Loans Held for Securitization and/or Sale:



At September 30, 2005, loans held for securitization and/or sale were composed of
single-family residential and home equity loans of $1,717.8 million and $341,000 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. These loans are originated or purchased for sale in the secondary market and are carried at the lower of aggregate cost or aggregate market value. The Bank periodically securitizes and sells certain pools of loan
receivables in the public and private markets in transactions that are recorded as sales. Single-family residential loans held for sale will either be sold or will be exchanged for mortgage-backed securities and then sold.



Gains and losses on sales of loans held for securitization and/or sale are determined using
the specific identification method.



Investment and Mortgage-Backed
Securities:



The Bank classifies its investment and mortgage-backed
securities as either held-to-maturity, available-for-sale or trading at the time such securities are acquired. Investment and mortgage-backed securities classified as held-to-maturity are reported at
amortized cost. Investment and mortgage-backed securities classified as available-for-sale are reported at fair value, with unrealized gains and losses, net of the related tax effect, reported as a separate component of
stockholders equity. Investment and mortgage-backed securities classified as trading are reported at fair value, with unrealized gains and losses included in earnings. All investment securities and mortgage-backed securities are
classified as held-to-maturity at September 30, 2005 and 2004. Premiums and discounts on investment securities and mortgage-backed securities are amortized or accreted using the level-yield method.



Trading Securities:



As part of its mortgage banking activities, the Bank exchanges loans held for sale for
mortgage-backed securities and then sells the mortgage-backed securities, which are classified as trading securities, to third party investors in the month of issuance. Proceeds from sales of trading securities were $192.1, $668.5 and $2,297.8
million during the years ended September 30, 2005, 2004 and 2003, respectively. The Bank realized net gains of $2.3, $5.4 and $33.3 million on the sales of trading securities for the years ended September 30, 2005, 2004 and 2003,
respectively. Gains and losses on sales of trading securities are determined using the specific identification method and are included in servicing, securitization and mortgage banking income in the Consolidated Statements of Operations. There were
no mortgage-backed securities classified as trading securities at September 30, 2005 and 2004.



Loan Origination and Commitment Fees:



Nonrefundable loan fees, such as origination and commitment fees, and incremental loan origination costs relating to loans originated or purchased, are deferred. Net deferred fees (costs) related to loans held for investment are amortized
over the life of the loan using the straight-line method for line of credit loans and the level-yield method for all other loan types. Net fees (costs) related to loans held for sale are deferred until such time as the loan is sold, at which time
the net deferred fees (costs) become a component of the gain or loss on sale.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Impaired Loans:



A loan is considered impaired when, based on all current information and events, it is probable that the Bank will be unable to collect all
amounts due according to the contractual terms of the agreement, including all scheduled principal and interest payments. Loans reviewed by the Bank for impairment include real estate and commercial loans and loans modified in a troubled debt
restructuring. Large groups of smaller-balance homogeneous loans that have not been modified in a troubled debt restructuring are collectively evaluated for impairment, which for the Bank include residential mortgage loans and other consumer loans.
Impaired loans are measured based on the present value of expected future cash flows, discounted at the loans effective interest rate or, as a practical expedient, impairment may be measured based on the loans observable market price,
or, if the loan is collateral-dependent, the fair value of the collateral. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. Loans for which foreclosure
is probable continue to be classified as loans.



Each impaired real estate or
commercial loan is evaluated individually to determine the income recognition policy. Generally, payments received are applied as a reduction of principal.



At September 30, 2005, the Bank had no impaired loans. At September 30, 2004, the Bank had one impaired loan with a book value of $242,000 which was charged off
during the year ended September 30, 2005. The Bank did not recognize any interest income on impaired loans during the years ended September 30, 2005, 2004 and 2003.



Allowance for Loan Losses:



The allowance for loan losses represents managements estimate of credit losses inherent in the Banks loan portfolios as of the balance sheet date. The
Banks methodology for assessing the appropriate level of the 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 allowance for loan losses using a variety of measures and tools including historical loss performance, delinquent status, current economic conditions, internal risk ratings and current underwriting policies and procedures.



The allocated allowance is assessed on both homogeneous and non-homogeneous
loan portfolios. The range is calculated by applying loss and delinquency factors to the outstanding loan balances of these portfolios. Loss factors are based on analysis of the historical performance of each loan category and an assessment of
portfolio trends and conditions, as well as specific risk factors impacting the loan portfolios. Each homogeneous portfolio, such as single-family residential loans or automobile loans, is evaluated collectively.



Non-homogeneous type loans, such as commercial banking loans and real estate banking loans,
are analyzed and segregated by risk according to the Banks internal risk rating system. These loans are reviewed by the Banks credit and loan review groups on an individual loan basis to assign a risk rating. Industry loss factors are
applied based on the risk rating assigned to the loan. A specific allowance may be assigned to individually identified non-homogeneous type loans that have been determined to be impaired. Any specific allowance considers all available evidence
including, as appropriate, the present value of payments expected to be received, observable market price or, for loans that are solely dependent on collateral for repayment, the estimated fair value of the collateral.



The unallocated allowance is based upon managements evaluation and judgment of various
conditions that are not directly measured in the determination of the allocated and specific allowances. The conditions evaluated in connection with the unallocated allowance include existing general economic and business conditions affecting the
key lending areas of the Bank, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the loan portfolio, specific industry conditions within portfolio segments, recent loss experience in particular segments of the
portfolio, regulatory examination results and findings of the Banks internal credit evaluations. At September 30, 2005 and 2004, most of the unallocated allowance relates to risks inherent in the mortgage loan portfolio, including, for
example, geographic concentration and negative amortization features. The Bank has assessed its exposure related to damage to properties securing loans caused by the recent hurricanes in the Gulf Coast Region and, at this time, believes its
unallocated allowance is sufficient to cover incurred but not identified losses related to its various loan portfolios.



The allowance for losses is based on estimates and ultimate losses may vary from current estimates. As adjustments to the allowance become necessary, provisions for
losses are reported in operations in the periods they are determined to be necessary.



Accrued Interest Receivable on Loans:



Loans are
reviewed on a monthly basis and are placed on non-accrual status when, in the opinion of management, the full collection of principal or interest has become unlikely. Uncollectible accrued interest receivable on non-accrual loans is charged against
current period interest income.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Real Estate Held for Investment or Sale:



Real Estate Held for Investment:



At September 30, 2004, real estate held for investment consisted of one developed
property owned by one of the Banks subsidiaries. Real estate held for investment is carried at the lower of cost or net realizable value. During the year ended September 30, 2005, the property was sold. See Note 28.



Real Estate Held for Sale:



Real estate held for sale consists of real estate acquired in settlement of loans
(REO) and is carried at the lower of cost or fair value (less estimated selling costs). Costs relating to the development and improvement of property, including interest, are capitalized, whereas costs relating to the holding of property
are expensed.



Property and Equipment:



Property and equipment is stated at cost, net of accumulated depreciation and amortization.
Depreciation and amortization are computed using the straight-line method, which allocates the cost of the applicable assets over their estimated useful lives as set forth in Note 18. Major improvements and alterations to office premises and
leaseholds are capitalized. Leasehold and tenant improvements are amortized over the shorter of the terms of the respective leases (including renewal options that are expected to be exercised) or up to 40 years. Maintenance and repairs are charged
to operating expenses as incurred.



Automobiles Subject to Lease:



The Bank owns automobiles, which are leased to third parties. The
leases are accounted for as operating leases with lease payments recognized as rental income. Automobiles are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method which allocates the cost of the
automobile less estimated residual value over the term of the lease. The Bank periodically updates the estimated residual values of its automobile leases. If estimated residual values have declined from the prior estimate, the amount of the decline
is recorded as additional depreciation expense over the remaining term of the lease.



Goodwill and Other Intangible Assets:



In accordance
with Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS 142), the Bank does not amortize goodwill, but, instead, subjects it to impairment testing. An
impairment loss on goodwill is recognized if the fair value is less than the carrying amount. At September 30, 2005 and 2004, the fair value of the goodwill recorded on the Banks balance sheet exceeded its carrying value. At
September 30, 2005 and 2004, goodwill totaled $29.6 and $23.7 million, respectively.



In July 2005, a subsidiary of the Bank purchased an investment management company and recorded goodwill of $5.9 million and an intangible asset of $1.1 million. The intangible asset is being amortized over its
expected life. The subsidiary could be required to pay an additional $1.5 million for the company in future years if certain contingencies are satisfied.



The premium attributable to the value of home equity relationships related to certain home equity loans purchased in fiscal 1999, amounting to $221,000 and $320,000 at
September 30, 2005 and 2004, respectively, is included in goodwill and other intangible assets in the Consolidated Statements of Financial Condition. This premium is being amortized over the estimated term of the underlying relationships. The
Bank did not purchase any home equity loans during fiscal years 2005, 2004 and 2003.



Accumulated amortization of other intangible assets was $11.2 and $11.1 million at September 30, 2005 and 2004, respectively.



Servicing Assets:



Servicing assets are recorded when purchased and in conjunction with loan sale and securitization transactions. Servicing assets, which are stated net of accumulated
amortization, are amortized in proportion to the remaining net servicing revenues estimated to be generated by the underlying loans.



The Bank periodically evaluates its servicing assets for impairment based upon fair value. For purposes of evaluating impairment, the Bank stratifies its servicing assets
taking into consideration relevant risk characteristics including loan type and note rate. The fair value of servicing assets is estimated using projected cash flows, adjusted for the effect of anticipated prepayments, and a market discount rate. To
the extent the carrying value of servicing assets exceeds the fair value of such assets, a valuation allowance is recorded. See Note 16.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Interest-Only Strips Receivable:



The Bank accounts for its interest-only certificates and/or interest-only strips receivable
(collectively, interest-only assets) as trading securities and, accordingly, carries them at fair value. The Bank uses certain assumptions to calculate the carrying values of the interest-only assets, mainly estimates of prepayment
speeds, credit losses and interest rates, which are beyond the control of the Bank. To the extent actual results differ from the assumptions, the carrying values are adjusted accordingly. The fair value adjustments for interest-only assets are
included in servicing, securitization and mortgage banking income. Fair value write downs of $121.0, $30.3 and $12.5 million were recorded in the years ended September 30, 2005, 2004 and 2003, respectively.



Interest income on interest-only assets is recognized under Emerging Issues Task Force
(EITF) 99-20 Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets, over the estimated lives of the underlying loans.



Interest-only assets capitalized in the years ended September 30, 2005, 2004 and 2003
amounted to $275.4, $235.9 and $108.9 million, respectively, and were related to the securitization and sale of loan receivables. See Note 17.



Derivative Financial Instruments:



The Bank uses derivative financial instruments to reduce interest-rate risk with respect to its mortgage banking activities. At September 30, 2005 and 2004, all
derivatives are recorded on the balance sheet at their fair market value. See Note 29.



Marketing:



Advertising costs are expensed as incurred.



Adoption of New
Accounting Standard:



In January 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). 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 Bank is the primary beneficiary of one VIE, which holds the ground lease under the Banks
executive offices. The Bank adopted FIN 46 effective July 1, 2003 and, as a result, recorded a gain of $0.9 million as a cumulative effect of a change in accounting principle, net of tax. In addition, upon adoption, the Bank recorded $31.4
million each in property and equipment and minority interest related to the ground lease. See Note 33.



4. LIQUIDITY AND CAPITAL RESOURCESREAL ESTATE TRUST:



The Real Estate Trusts cash flow from operating activities, excluding dividends and tax sharing payments from the Bank, has been historically insufficient to meet all of its cash flow requirements. The Real
Estate Trusts internal sources of funds, primarily cash flow generated by its income-producing properties, generally have been sufficient to meet its cash needs other than the repayment of principal on outstanding debt, including outstanding
unsecured notes sold to the public, the payment of interest on its indebtedness, and the payment of capital improvement costs. In the past, the Real Estate Trust funded such shortfalls through a combination of external funding sources, primarily new
financing, the sale of unsecured notes, refinancing of maturing mortgage debt, proceeds from asset sales, and dividends and tax sharing payments from the bank. For the foreseeable future, the Real Estate Trusts ability to generate



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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. Dividend and tax sharing payments received by the Real
Estate Trust are presented as cash flows from operating activities in the Consolidated Statements of Cash Flows.



During fiscal 2005, 2004 and 2003, the Bank made dividend payments totaling $39.2, $24.8 and $16.0 million to the Real Estate Trust. During fiscal 2005, 2004 and 2003,
the Bank made tax sharing payments totaling $2.1, $8.8 and $11.5 million to the Real Estate Trust.



In recent years, the operations of the Real Estate Trust have generated net operating losses while the Bank has reported net income. The Trusts consolidation of the Banks operations into the Trusts
federal income tax return has resulted in the use of the Real Estate Trusts net operating losses to reduce the federal income taxes the Bank would otherwise have owed. If in any future year, the Bank has taxable losses or unused credits, the
Real Estate Trust would be obligated to reimburse the Bank for the greater of (i) the tax benefit to the group using such tax losses or unused tax credits in the groups consolidated federal income tax returns or (ii) the amount of
the refund which the Bank would otherwise have been able to claim if it were not being included in the consolidated federal income tax return of the group.



5. SAUL HOLDINGS LIMITED PARTNERSHIP AND SAUL CENTERS, INC.REAL ESTATE TRUST:



In fiscal 1993, the Real Estate Trust entered into a series of transactions undertaken in connection with an initial public offering of
common stock of a newly organized corporation, Saul Centers. The Real Estate Trust transferred its 22 shopping centers and one of its office properties together with the debt associated with such properties to a newly formed partnership, Saul
Holdings, in which as of September 30, 2005, the Real Estate Trust owns (directly or through one of its wholly owned subsidiaries) a 19.2% interest, other entities affiliated with the Real Estate Trust own a 4.7% interest, and Saul Centers owns
a 76.1% interest. Certain officers and trustees of the Trust are also officers and/or directors of Saul Centers.



In connection with the transfer of its properties to Saul Holdings, the Real Estate Trust was relieved of approximately $196 million in mortgage debt and deferred
interest. Pursuant to a reimbursement agreement among the partners of Saul Holdings and its subsidiary limited partnerships (collectively, the Partnerships), the Real Estate Trust and its subsidiaries that are partners in the
Partnerships have agreed to reimburse Saul Centers and the other partners in the event the Partnerships fail to make payments with respect to certain portions of the Partnerships debt obligations and Saul Centers or any such other partners
personally make payments with respect to such debt obligations. At September 30, 2005, the maximum potential obligations of the Real Estate Trust and its subsidiaries under this agreement totaled approximately $100 million. The Real Estate
Trust believes that Saul Holdings will be able to make all payments due with respect to its debt obligation.



The fair market value of each of the properties contributed to the Partnerships by the Real Estate Trust at the date of transfer (the FMV of each such property) exceeded the tax basis of such property (with respect to
each property, such excess is referred to as the FMV-Tax Difference). In the event Saul Centers, as general partner of the Partnerships, causes the Partnerships to dispose of one or more of such properties, a disproportionately large share of the
total gain for federal income tax purposes would be allocated to the Real Estate Trust or its subsidiaries. In general, if the gain recognized by the Partnerships on a property disposition is less than or equal to the FMV-Tax Difference for such
property (as previously reduced by the amounts of special tax allocations of depreciation deductions to the partners), a gain equal to the FMV-Tax Difference (as adjusted) will be allocated to the Real Estate Trust. To the extent the gain recognized
by the Partnerships on the property disposition exceeds the FMV-Tax Difference (as adjusted), such excess generally will be allocated among all the partners in Saul Holdings based on their relative percentage interests. In general, the amount of
gain allocated to the Real Estate Trust in the event of such a property disposition is likely to exceed, perhaps substantially, the amount of cash, if any, distributable to the Real Estate Trust as a result of the property disposition. In addition,
future reductions in the level of the Partnerships debt, or any release of the guarantees of such debt by the Real Estate Trust, could cause the Real Estate Trust to have taxable constructive distributions without the receipt of any
corresponding amounts of cash. Currently, management does not intend to seek a release of or a reduction in the guarantees or to convert its limited partner units in Saul Holdings into shares of Saul Centers common stock.



At the date of transfer of the Real Estate Trust properties to Saul Holdings, liabilities
exceeded assets transferred by approximately $104.3 million on an historical cost basis. The assets and liabilities were recorded by Saul Holdings and Saul Centers at their historical cost rather than market value because of affiliated ownership and
common management and because the assets and liabilities were the subject of the business combination between Saul Centers and Saul Holdings, newly formed entities with no prior operations.



Immediately subsequent to the business combination and initial public offering of common
stock by Saul Centers, Saul Centers had total owners equity of approximately $16.4 million of which approximately $3.5 million related to the Real Estate Trusts original 21.5% ownership interest. Changes in the Real Estate Trusts
equity investment balance resulting from capital transactions of the investee are recognized directly in the Trusts shareholders equity in the accompanying financial statements.



The management of Saul Centers has adopted a strategy of maintaining a ratio of total debt to
total asset value, as estimated by management, of fifty percent or less. The management of Saul Centers has concluded at September 30, 2005, that the total debt of Saul Centers remains below fifty percent of total asset value. The total asset
value is determined by the management of Saul Centers as the aggregate fair value of the portfolio of properties by reference to the properties aggregate cash flow. As a result, the management of the Real Estate Trust has concluded that
fundings under the reimbursement agreement are remote.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



As of September 30, 2005, the Real Estate Trusts investment in the consolidated
entities of Saul Centers, which is accounted for under the equity method, consisted of the following.



|                                                |  |                   |         |   |                   |   |         |  
|----------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | -
|(In thousands)                                  |  | September 30,2005 |         |   | September 30,2004 |  
|Saul Holdings:                                  |  |                   |         |   |                   |   |         |  
|Investment in partnership units                 |  | $                 | 13,718  |   |                   | $ | 12,045  |  
|Distributions in excess of allocated net income |  |                   | (22,425 | ) |                   |   | (21,169 | )
|Saul Centers:                                   |  |                   |         |   |                   |   |         |  
|Investment in common shares                     |  |                   | 99,004  |   |                   |   | 84,291  |  
|Distributions in excess of allocated net income |  |                   | (14,974 | ) |                   |   | (13,400 | )
|                                                |  |                   |         |   |                   |   |         |  
|Total                                           |  | $                 | 75,323  |   |                   | $ | 61,767  |  
|                                                |  |                   |         |   |                   |   |         |  



The Trusts investments in Saul
Centers exceeded the underlying book value of the investment at the time of the purchases. At September 30, 2005 and 2004, the cumulative excess totaled $91.4 and $79.0 million, respectively. This amount is being amortized over the estimated
remaining useful life of the underlying real estate assets. At September 30, 2005 and 2004, the unamortized balance was $80.7 and 70.3 million, respectively.



As of September 30, 2005, the Real Estate Trust, through its partnership interest in Saul Holdings of 19.2% and its ownership of common
shares of Saul Centers of 26.6% (market value of $160.7 million at September 30, 2005), effectively owns 39.5% of the consolidated entities of Saul Centers. Substantially all of these shares and/or units have been deposited as collateral for
the Trusts revolving lines of credit. See Note 9.



As of
September 30, 2004, the Real Estate Trust, through its partnership interest in Saul Holdings of 19.5% and its ownership of common shares of Saul Centers of 25.1% (market value of $134.5 million at September 30, 2004), effectively owned
38.5% of the consolidated entities of Saul Centers.



The unaudited Condensed
Consolidated Balance Sheets as of September 30, 2005 and 2004, and the unaudited Condensed Consolidated Statements of Operations for the twelve months ended September 30, 2005, 2004 and 2003 of Saul Centers follow.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



SAUL CENTERS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



|                                           |  |               |          |   |      |   |          |  
|------------------------------------------ |  | ------------- | -------- | - | ---- | - | -------- | -
|                                           |  | September 30, |         
|(In thousands)                             |  | 2005          |          |   | 2004 |  
|Assets                                     |  |               |          |   |      |   |          |  
|Real estate investments                    |  | $             | 717,167  |   |      | $ | 666,834  |  
|Accumulated depreciation                   |  |               | (191,699 | ) |      |   | (176,848 | )
|Other assets                               |  |               | 79,794   |   |      |   | 70,143   |  
|                                           |  |               |          |   |      |   |          |  
|Total assets                               |  | $             | 605,262  |   |      | $ | 560,129  |  
|                                           |  |               |          |   |      |   |          |  
|Liabilities and stockholders equity       |  |               |          |   |      |   |          |  
|Mortgage notes payable                     |  | $             | 461,416  |   |      | $ | 429,498  |  
|Other liabilities                          |  |               | 33,659   |   |      |   | 31,754   |  
|                                           |  |               |          |   |      |   |          |  
|Total liabilities                          |  |               | 495,075  |   |      |   | 461,252  |  
|Minority Interests                         |  |               | 1,484    |   |      |   |         |  
|Total stockholders equity                 |  |               | 108,703  |   |      |   | 98,877   |  
|                                           |  |               |          |   |      |   |          |  
|Total liabilities and stockholders equity |  | $             | 605,262  |   |      | $ | 560,129  |  
|                                           |  |               |          |   |      |   |          |  



SAUL CENTERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                  |  |                                           |         |   |      |   |         |      |  |   |        |  
|------------------------------------------------- |  | ----------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                  |  | For the Twelve Months Ended September 30, |        
|(In thousands)                                    |  | 2005                                      |         |   | 2004 |   |         | 2003 | 
|Revenue                                           |  |                                           |         |   |      |   |         |      |  |   |        |  
|Base rent                                         |  | $                                         | 97,438  |   |      | $ | 87,785  |      |  | $ | 76,900 |  
|Other revenue                                     |  |                                           | 26,372  |   |      |   | 21,617  |      |  |   | 19,363 |  
|                                                  |  |                                           |         |   |      |   |         |      |  |   |        |  
|Total revenue                                     |  |                                           | 123,810 |   |      |   | 109,402 |      |  |   | 96,263 |  
|                                                  |  |                                           |         |   |      |   |         |      |  |   |        |  
|Expenses                                          |  |                                           |         |   |      |   |         |      |  |   |        |  
|Operating expenses                                |  |                                           | 24,942  |   |      |   | 21,795  |      |  |   | 19,843 |  
|Interest expense and amortization of debt expense |  |                                           | 29,663  |   |      |   | 26,357  |      |  |   | 26,701 |  
|Depreciation and amortization                     |  |                                           | 24,137  |   |      |   | 20,458  |      |  |   | 16,815 |  
|General and administrative                        |  |                                           | 9,527   |   |      |   | 7,785   |      |  |   | 6,032  |  
|                                                  |  |                                           |         |   |      |   |         |      |  |   |        |  
|Total expenses                                    |  |                                           | 88,269  |   |      |   | 76,395  |      |  |   | 69,391 |  
|                                                  |  |                                           |         |   |      |   |         |      |  |   |        |  
|Operating income                                  |  |                                           | 35,541  |   |      |   | 33,007  |      |  |   | 26,872 |  
|Non-operating item                                |  |                                           |         |   |      |   |         |      |  |   |        |  
|Gain on sale of property                          |  |                                           |        |   |      |   | 754     |      |  |   |       |  
|                                                  |  |                                           |         |   |      |   |         |      |  |   |        |  
|Net income before minority interest               |  |                                           | 35,541  |   |      |   | 33,761  |      |  |   | 26,872 |  
|Minority interest                                 |  |                                           | (7,976  | ) |      |   | (8,100  | )    |  |   | (8,082 | )
|                                                  |  |                                           |         |   |      |   |         |      |  |   |        |  
|Net income                                        |  |                                           | 27,565  |   |      |   | 25,661  |      |  |   | 18,790 |  
|Preferred dividends                               |  |                                           | (8,000  | ) |      |   | (7,244  | )    |  |   |       |  
|                                                  |  |                                           |         |   |      |   |         |      |  |   |        |  
|Net income available to common shareholders       |  | $                                         | 19,565  |   |      | $ | 18,417  |      |  | $ | 18,790 |  
|                                                  |  |                                           |         |   |      |   |         |      |  |   |        |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



6. REAL ESTATE INVESTMENT PROPERTIESREAL ESTATE TRUST:



The following table summarizes the cost basis of income-producing properties and land
parcels together with their related debt.





|                                |  |     |  |      |        |                           |   |         |  |             |         |  |   |         |    
|------------------------------- |  | --- |  | ---- | ------ | ------------------------- | - | ------- |  | ----------- | ------- |  | - | ------- | ---
|(Dollars in thousands)          |  | No. |  | Land |        | Buildings andImprovements |   | Total   |  | RelatedDebt |        
|September 30, 2005              |  |     |  |      |        |                           |   |         |  |             |         |  |   |         |    
|Income-producing properties (1) |  |     |  |      |        |                           |   |         |  |             |         |  |   |         |    
|Hotels                          |  | 15  |  | $    | 17,291 |                           | $ | 228,853 |  | $           | 246,144 |  | $ | 137,214 |    
|Office and industrial           |  | 14  |  |      | 16,678 |                           |   | 177,965 |  |             | 194,643 |  | $ | 143,083 |    
|Other                           |  | 3   |  |      | 2,253  |                           |   |        |  |             | 2,253   |  |   |        |    
|                                |  |     |  |      |        |                           |   |         |  |             |         |  |   |         |    
|                                |  | 32  |  | $    | 36,222 |                           | $ | 406,818 |  | $           | 443,040 |  | $ | 280,297 | (2)
|                                |  |     |  |      |        |                           |   |         |  |             |         |  |   |         |    
|Land Parcels                    |  | 12  |  | $    | 48,029 |                           | $ |        |  | $           | 48,029  |  | $ |        |    
|                                |  |     |  |      |        |                           |   |         |  |             |         |  |   |         |    

---

|(1) | Excludes real estate held for sale.
|--- | -----------------------------------

|(2) | Amount includes $278.4 million of mortgage notes payable and approximately $1.9 million of capital leases.
|--- | ----------------------------------------------------------------------------------------------------------



|                                |  |     |  |      |        |                           |   |         |  |             |         |  |   |         |    
|------------------------------- |  | --- |  | ---- | ------ | ------------------------- | - | ------- |  | ----------- | ------- |  | - | ------- | ---
|(Dollars in thousands)          |  | No. |  | Land |        | Buildings andImprovements |   | Total   |  | RelatedDebt |        
|September 30, 2004:             |  |     |  |      |        |                           |   |         |  |             |         |  |   |         |    
|Income-producing properties (3) |  |     |  |      |        |                           |   |         |  |             |         |  |   |         |    
|Hotels                          |  | 15  |  | $    | 17,291 |                           | $ | 220,678 |  | $           | 237,969 |  | $ | 141,870 |    
|Office and industrial           |  | 13  |  |      | 14,786 |                           |   | 169,668 |  |             | 184,454 |  |   | 149,593 |    
|Other                           |  | 3   |  |      | 2,253  |                           |   |        |  |             | 2,253   |  |   |        |    
|                                |  |     |  |      |        |                           |   |         |  |             |         |  |   |         |    
|                                |  | 31  |  | $    | 34,330 |                           | $ | 390,346 |  | $           | 424,676 |  | $ | 291,463 | (4)
|                                |  |     |  |      |        |                           |   |         |  |             |         |  |   |         |    
|Land Parcels                    |  | 10  |  | $    | 41,654 |                           | $ |        |  | $           | 41,654  |  | $ |        |    
|                                |  |     |  |      |        |                           |   |         |  |             |         |  |   |         |    

---

|(3) | Excludes real estate held for sale.
|--- | -----------------------------------

|(4) | Amount includes $290.1 million of mortgage notes payable and $1.4 million of capital leases.
|--- | --------------------------------------------------------------------------------------------



On September 25, 2003, the Real Estate Trust sold 7.7 acres located in Rockville, Maryland, for $11.3 million, and recognized a gain of
$9.1 million on the transaction.



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 Commonwealth of Virginia has paid $3.6 million which has resulted in an initial gain of approximately $2.7 million.



In June 2004, the Real Estate Trust received a refund of approximately $117,000 for an
expenditure relating to the 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
year ended September 30, 2004.



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, resulting in a loss of $327,000, $310,000 recognized in fiscal 2004
and $17,000 recognized in fiscal 2005.



On January 31, 2005, the Real
Estate Trust sold one of its other real estate properties because the property no longer met the Real Estate Trusts investment criteria. The Real Estate Trust received proceeds from the sale of approximately $1.4 million, resulting in a gain
of $900,000.



On May 25, 2005, the Real Estate Trust acquired an
approximately 12,000 square foot office building located in Montgomery County, Maryland for approximately $5.3 million. See Note 7.



During fiscal 2005, the Real Estate Trust placed two of its hotel properties on the market for sale, as these properties no longer meet its investment criteria. No
adjustment to the carrying value of the properties was required. The sales are expected to close within the next twelve months.



On July 11, 2005, approximately 22 acres of the Real Estate Trusts 159 acre land parcel in Overland Park, Kansas was acquired by the Kansas Department of
Transportation through a condemnation proceeding. The Real Estate Trust was awarded approximately $1.2 million which resulted in a gain of $263,000.



On July 25, 2005, the Real Estate Trust closed on a $1.9 million purchase of a land parcel from the Bank located in Loudoun County, VA. The purchase was funded from
available cash on hand. See Note 11.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



On September 13, 2005, the Real Estate Trust closed on a $6.2 million purchase of a land
parcel from the Bank located in Loudoun County, VA. The purchase was funded from cash on hand. See Note 11.



On November 1, 2005, the Real Estate Trust acquired a 137 room hotel property located in Fairfax County, Virginia for a purchase price of approximately $12.7 million, which included the assumption of a mortgage
note of $5.8 million. See Note 38.



7. REAL ESTATE ACQUIRED  OPERATING
PROPERTIES  REAL ESTATE TRUST:



On May 25, 2005 the Real Estate
Trust acquired an approximately 12,000 square foot office building located in Montgomery County, Maryland for approximately $5.3 million. The Real Estate Trust accounted for the acquisition in accordance with SFAS No. 141, Business
Combinations. The Real Estate Trust allocates the purchase price to various components, such as land, building and intangibles related to in-place leases and customer relationships, if applicable, as described in Note 2. The $5.3 million total
cost includes both the propertys purchase price and closing costs. A total of $150,000 of the total cost was allocated as lease intangible assets and included in other assets at June 30, 2005. The lease intangible assets are being
amortized over the remaining periods of the leases acquired, a weighted average term of 2.6 years. The values of below market leases totaled $266,000 and are being amortized over a weighted average term of 2.1 years and included in other liabilities
and accrued expenses at June 30, 2005. There were no above market lease intangibles.



As of September 30, 2005 the gross carrying amount of the lease intangible assets included in lease acquisition costs was $150,000 and accumulated amortization was $25,000. Total amortization of this asset was
$25,000 for the year ended September 30, 2005. As of September 30, 2005 the gross carrying amount of the below market lease intangibles included in other liabilities and accrued expenses was $266,000 and accumulated amortization was
$50,000. Total amortization of this liability was $50,000 for the year ended September 30, 2005.



The following table summarizes the amortization of intangible (assets) liabilities related to in-places leases:



|            |  |                       |      |   |                    |   |       |  |   |    |  
|----------- |  | --------------------- | ---- | - | ------------------ | - | ----- |  | - | -- | -
|            |  | (In thousands)        |     
|Fiscal Year |  | Leaseacquisitioncosts |      |   | Belowmarket leases |   | Total | 
|2006        |  | $                     | (76  | ) |                    | $ | 153   |  | $ | 77 |  
|2007        |  |                       | (34  | ) |                    |   | 49    |  |   | 15 |  
|2008        |  |                       | (12  | ) |                    |   | 13    |  |   | 1  |  
|2009        |  |                       | (3   | ) |                    |   | 1     |  |   | (2 | )
|            |  |                       |      |   |                    |   |       |  |   |    |  
|Total       |  | $                     | (125 | ) |                    | $ | 216   |  | $ | 91 |  
|            |  |                       |      |   |                    |   |       |  |   |    |  



8. DISCONTINUED OPERATIONS 
REAL ESTATE TRUST:



During the quarter ended June 30, 2005 the Real
Estate Trust determined that it would sell two of its hotel properties which no longer met its investment criteria. Therefore, as of June 30, 2005, 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 for both properties. Accordingly, the Real Estate Trust has compared the carrying value of these assets to their estimated fair value, less cost to
sell, to determine if the assets are impaired. The Real Estate Trust has determined that no adjustments to the carrying amounts are required. The assets are classified as Real Estate Held for Sale on the Consolidated Balance Sheets. Mortgage notes
secured by these properties are classified as Mortgage notes payable  real estate held for sale on the Consolidated Balance Sheets. The combined operating loss of $905,000 for the year ended September 30, 2005 for the two properties is
included in Loss from Operations of Discontinued Real Estate Assets on the Consolidated Statements of Operations.



On January 31, 2005, the Real Estate Trust sold one of its other real estate properties resulting in a gain of approximately $900,000, which is included in Loss from
Operations of Discontinued Real Estate Assets on the Consolidated Statements of Operations. The Real Estate Trust received proceeds from the sale of approximately $1.4 million. The operating income, $11,000 for the year ended September 30,
2005, from this asset is also included in Loss from Operations of Discontinued Real Estate Assets on the Consolidated Statements of Operations.



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



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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 and therefore the debt is considered extinguished. Included
in the Loss from Operations of Discontinued Real Estate Assets on the Consolidated Statements of Operations for the year ended September 30, 2005 is an additional loss of $17,000 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 $201,000 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.



9. DEBTREAL ESTATE TRUST:



Mortgage notes payable are secured by various income-producing properties, land parcels, and properties under construction. Almost all mortgage notes are payable in
monthly installments, have maturity dates ranging to 2021 and accrue interest at annual rates from 3.1% to 9.1%. Certain mortgages contain a number of restrictions, including cross default provisions.



Notes payableunsecured includes notes which have been sold by the Real Estate Trust
directly to investors at varying interest rates with maturities of one to ten years. These notes do not contain any provisions for conversion, sinking fund or amortization, but are subject to a provision permitting the Real Estate Trust to call them
prior to maturity as long as the notes have been outstanding for over one year. The weighted average interest rates were 7.1% and 8.5% at September 30, 2005 and 2004, respectively. During fiscal 2005 and 2004, the Real Estate Trust sold notes
amounting to approximately $12.9 and $13.3 million, respectively.



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). A substantial portion of the net proceeds of the offering
were used to redeem 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. 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 debt costs of $2.4 million, included in interest and amortization of debt expense on the Consolidated Statements of Operations, 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.



On January 31, 2005, the Real Estate Trust executed an extension and expansion of its $55.0 million secured revolving credit facility with an unrelated bank. 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 rate index and the term of the credit facility was extended to January 31, 2008, 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 Limited Partnership and Saul Centers. At September 30, 2005, the Real Estate Trust had no outstanding borrowings and unrestricted
availability of $60.0 million.



On June 30, 2005, the Real Estate Trust
executed an extension and expansion of its $45.0 million secured revolving credit facility with an unrelated bank. The credit facility was increased to $60.0 million and the term of the credit facility was extended to June 30, 2008. The
interest rate spread remained the same at 200 basis points over the floating rate index. This facility is secured by a portion of the Real Estate Trusts ownership in Saul Holdings Limited Partnership and Saul Centers. At September 30,
2005, the Real Estate Trust had no outstanding borrowings and unrestricted availability of $60.0 million.



On August 2, 2005, the Real Estate Trust entered into a commitment with a lender for a prospective $76.0 million refinancing for one of its office properties. In connection with this refinancing the Real Estate
Trust has placed deposits of approximately $1.8 million with the lender.



At
September 30, 2005 the Real Estate Trust is in compliance with its debt covenants.



The maturity schedule for the Real Estate Trusts outstanding debt, including mortgage notes payable for real estate held for sale, at September 30, 2005 for the fiscal years commencing October 1, 2005 is set forth in the
following table:



Debt Maturity Schedule

(In thousands)



|            |  |                |         |                       |   |                         |  |       |        |  |   |        
|----------- |  | -------------- | ------- | --------------------- | - | ----------------------- |  | ----- | ------ |  | - | -------
|Fiscal Year |  | Mortgage Notes |         | Notes PayableSecured |   | Notes PayableUnsecured |  | Total
|2006        |  | $              | 95,042  |                       | $ |                        |  | $     | 8,490  |  | $ | 103,532
|2007        |  |                | 5,435   |                       |   |                        |  |       | 6,871  |  |   | 12,306 
|2008        |  |                | 5,670   |                       |   |                        |  |       | 5,231  |  |   | 10,901 
|2009        |  |                | 15,487  |                       |   |                        |  |       | 5,175  |  |   | 20,662 
|2010        |  |                | 10,079  |                       |   |                        |  |       | 6,040  |  |   | 16,119 
|Thereafter  |  |                | 162,615 |                       |   | 250,000                 |  |       | 25,953 |  |   | 438,568
|            |  |                |         |                       |   |                         |  |       |        |  |   |        
|Total       |  | $              | 294,328 |                       | $ | 250,000                 |  | $     | 57,760 |  | $ | 602,088
|            |  |                |         |                       |   |                         |  |       |        |  |   |        



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Of the $294.3 million of mortgage notes outstanding at September 30, 2005, $286.7
million was non-recourse to the Real Estate Trust.



Included in the mortgage
notes payable is a portfolio loan, secured by six operating properties, of approximately $86.0 million due on March 31, 2006. On December 2, 2005 the Real Estate Trust refinanced one of the six properties with a new 10 year mortgage note
of $76.0 million. The proceeds from this refinancing, along with available cash and line of credit borrowings were used to repay the portfolio loan. As a result the Real Estate Trust unlevered the remaining five properties. See Note 38.



10. INCOME FROM COMMERCIAL PROPERTIESREAL ESTATE TRUST:



Income from commercial properties includes minimum rent arising from non-cancelable
commercial leases. Minimum rent for fiscal years 2005, 2004 and 2003 amounted to $34.9, $33.9 and $34.5 million, respectively. Future minimum rentals as of September 30, 2005 under non-cancelable leases are as follows:



|            |  |                |        
|----------- |  | -------------- | -------
|Fiscal Year |  | (In thousands)
|2006        |  | $              | 34,134 
|2007        |  |                | 28,449 
|2008        |  |                | 24,683 
|2009        |  |                | 19,997 
|2010        |  |                | 12,870 
|Thereafter  |  |                | 39,171 
|            |  |                |        
|Total       |  | $              | 159,304
|            |  |                |        



11. TRANSACTIONS WITH RELATED
PARTIESREAL ESTATE TRUST:



TRANSACTIONS WITH B. F. SAUL COMPANY
AND ITS SUBSIDIARIES



The Real Estate Trust has been managed by B. F. Saul
Advisory Company, L.L.C., (the Advisor), a wholly-owned subsidiary of B. F. Saul Company (Saul Co.). All of the Real Estate Trust officers and four Trustees of the Trust are also officers and/or directors of Saul Co. The
Advisor is paid a fixed monthly fee which is subject to annual review by the Trustees. The monthly fee was $487,000 during fiscal 2005, $472,000 during fiscal 2004, and $458,000 during fiscal 2003. Effective October 1, 2005 the Advisors
obligations under the advisory contract were assigned to Saul Co. In addition the agreement was extended until September 30, 2006, and will continue thereafter unless canceled by either party at the end of any contract year.



Saul Co. and B.F. Saul Property Company (Saul Property Co.), a wholly-owned
subsidiary of Saul Co., provide services to the Real Estate Trust through commercial property management and leasing, hotel management, development and construction management, and acquisitions, sales and financings of real property agreements. Fees
paid to Saul Co. and Saul Property Co. amounted to $9.1, $8.6 and $7.7 million in fiscal 2005, 2004 and 2003, respectively, related to these services.



The Real Estate Trust reimburses the Advisor and Saul Property Co. for costs and expenses incurred on behalf of the Real Estate Trust, in-house legal expenses, and for
all travel expenses incurred in connection with the affairs of the Real Estate Trust.



The Real Estate Trust currently also pays the Advisor fees equal to 2% of the principal amount of the unsecured notes as they are issued to offset its costs of administering the program. These payments amounted to $267,000, $266,000 and
$251,000 in fiscal 2005, 2004 and 2003, respectively.



A subsidiary of Saul Co.
is a general insurance agency which receives commissions and countersignature fees in connection with the Real Estate Trusts insurance program. Such commissions and fees amounted to approximately $316,000, $288,000 and $302,000 in fiscal 2005,
2004 and 2003, respectively.



Under an unsecured demand note receivable from
Saul Co. not to exceed $15.3 million, the Real Estate Trust advanced an additional net amount of $5.4 million during the current year. During fiscal 2004, the Saul Co. borrowed an additional $4.7 million. During fiscal 2003 curtails of $3.5 million
were paid by the Saul Co. Interest on the loan is computed by reference to a floating rate index. At September 30, 2005 and 2004, the total due the Real Estate Trust was $13.1 million and $7.7 million, respectively. The balance of $7.7 million
at September 30, 2004 included accrued interest of $1.8 million. Interest earned on these loans amounted to $616,000, $108,000 and $151,000 during fiscal 2005, 2004 and 2003, respectively.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



TRANSACTIONS WITH CHEVY CHASE BANK AND ITS SUBSIDIARIES



On July 25, 2005 the Real Estate Trust closed on a $1.9 million purchase of a land
parcel from the Bank located in Loudoun County, VA. The purchase was funded from available cash on hand.



On September 13, 2005 the Real Estate Trust closed on a $6.2 million purchase of a land parcel from the Bank located in Loudoun County, VA. The purchase was funded from cash on hand.



The purchase price for the two acquisitions was established using independent appraisals. The
Bank realized gains totaling $2.3 million on the two sales. The gains are eliminated in consolidation and the Real Estate Trust has recorded these land parcels using the Banks carryover basis.



REMUNERATION OF TRUSTEES AND OFFICERS



For fiscal years 2005, 2004, and 2003, the Real Estate Trust paid the Trustees approximately
$104,000, $109,000 and $105,000, respectively, for their services. No compensation was paid to the officers of the Real Estate Trust for acting as such; however, one Trustee was paid by the Bank for his services as Chairman of the Board and Chief
Executive Officer of the Bank, and four others received payments for their services as directors of the Bank. Four of the Trustees and all of the officers of the Real Estate Trust receive compensation from Saul Co. as directors and/or officers.



SAUL HOLDINGS LIMITED PARTNERSHIP AND SAUL CENTERS, INC.



The Real Estate Trust accounts for these investments under the equity method. The Real
Estate Trusts share of earnings for fiscal 2005, 2004 and 2003 was $8.8, $8.4 and $8.6 million, respectively. See Note 5.



OTHER TRANSACTIONS



The Real Estate Trust leases space to the Bank and Saul Property Co. at several of its income-producing properties. Minimum rents and expense recoveries paid by these affiliates amounted to approximately $5.4, $5.2
and $5.3 million in fiscal 2005, 2004 and 2003, respectively.



12.
INVESTMENT AND MORTGAGE-BACKED SECURITIES  THE BANK:



|                                                        |  |               |           |                               |   |                                |  |                     |        |  |   |          
|------------------------------------------------------- |  | ------------- | --------- | ----------------------------- | - | ------------------------------ |  | ------------------- | ------ |  | - | ---------
|(In thousands)                                          |  | AmortizedCost |           | Gross UnrealizedHolding Gains |   | Gross UnrealizedHolding Losses |  | AggregateFair Value
|September 30, 2005                                      |  |               |           |                               |   |                                |  |                     |        |  |   |          
|Investment securities:                                  |  |               |           |                               |   |                                |  |                     |        |  |   |          
|Original maturity after one year, but within five years |  | $             | 200,902   |                               | $ |                               |  | $                   | 2,133  |  | $ | 198,769  
|Mortgage-backed securities:                             |  |               |           |                               |   |                                |  |                     |        |  |   |          
|FNMA                                                    |  |               | 283,709   |                               |   | 583                            |  |                     | 2,805  |  |   | 281,487  
|FHLMC                                                   |  |               | 544,695   |                               |   | 1,831                          |  |                     | 9,653  |  |   | 536,873  
|Private label, AAA-rated                                |  |               | 31,404    |                               |   |                               |  |                     |       |  |   | 31,404   
|                                                        |  |               |           |                               |   |                                |  |                     |        |  |   |          
|Total                                                   |  | $             | 1,060,710 |                               | $ | 2,414                          |  | $                   | 14,591 |  | $ | 1,048,533
|                                                        |  |               |           |                               |   |                                |  |                     |        |  |   |          
|                                                        |  |               |           |                              
|(In thousands)                                          |  |               |           |                               |   |                                |  |                    
|September 30, 2004                                      |  |               |           |                               |   |                                |  |                     |        |  |   |          
|Investment securities:                                  |  |               |           |                               |   |                                |  |                     |        |  |   |          
|Original maturity after one year, but within five years |  | $             | 71,192    |                               | $ |                               |  | $                   | 287    |  | $ | 70,905   
|Mortgage-backed securities:                             |  |               |           |                               |   |                                |  |                     |        |  |   |          
|FNMA                                                    |  |               | 222,953   |                               |   | 2,291                          |  |                     | 681    |  |   | 224,563  
|FHLMC                                                   |  |               | 130,926   |                               |   | 4,794                          |  |                     | 4      |  |   | 135,716  
|Private label, AAA-rated                                |  |               | 55,424    |                               |   |                               |  |                     | 200    |  |   | 55,224   
|                                                        |  |               |           |                               |   |                                |  |                     |        |  |   |          
|Total                                                   |  | $             | 480,495   |                               | $ | 7,085                          |  | $                   | 1,172  |  | $ | 486,408  
|                                                        |  |               |           |                               |   |                                |  |                     |        |  |   |          



There were no sales of investment
securities during the years ended September 30, 2005, 2004 and 2003.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The table above shows that some of the securities in the held-to-maturity investment
portfolio had unrealized losses, or were temporarily impaired, as of September 30, 2005 and 2004. This temporary impairment represents the amount of loss that would be realized if the securities were sold at the valuation date, and occurs as a
result of changes in overall bond yields between the date the bond was acquired and the valuation date. The unrealized losses associated with the U.S. Government and mortgage-backed securities are not considered to be other than temporary because
they relate to changes in interest rates and do not affect the expected cash flows of the securities. Securities which were temporarily impaired at September 30, 2005 and 2004 are shown below, along with the length of the impairment period.



|                                      |                     |                     |                     |                     |           |           |                  |                  |            |            |                  |                  |  |   |         |  |   |       
|------------------------------------- | ------------------- | ------------------- | ------------------- | ------------------- | --------- | --------- | ---------------- | ---------------- | ---------- | ---------- | ---------------- | ---------------- |  | - | ------- |  | - | ------
|                                      |                     | September 30, 2005 
|                                      |                     | Less than 12 months |                     | 12 months or longer |           | Total    
|(In thousands)                        |                     | Fair Value          |                     | UnrealizedLosses    |           | FairValue |                  | UnrealizedLosses |            | Fair Value |                  | UnrealizedLosses
|U.S. government securities            |                     | $                   | 68,945              |                     | $         | 892       |                  | $                | 69,902     |            | $                | 87               |  | $ | 138,847 |  | $ | 979   
|Agency debt securities                |                     |                     | 58,552              |                     |           | 1,155     |                  |                  |           |            |                  |                 |  |   | 58,552  |  |   | 1,155 
|Mortgage-backed securities            |                     |                     | 687,284             |                     |           | 12,247    |                  |                  | 8,396      |            |                  | 210              |  |   | 695,680 |  |   | 12,457
|                                      |                     |                     |                     |                     |           |           |                  |                  |            |            |                  |                  |  |   |         |  |   |       
|Total temporarily impaired securities |                     | $                   | 814,781             |                     | $         | 14,294    |                  | $                | 78,298     |            | $                | 297              |  | $ | 893,079 |  | $ | 14,591
|                                      |                     |                     |                     |                     |           |           |                  |                  |            |            |                  |                  |  |   |         |  |   |       
|                                      |                    
|(In Thousands)                        |                     | September 30, 2004 
|                                      | Less than 12 months |                     | 12 months or longer |                     | Total    
|                                      | Fair Value          |                     | UnrealizedLosses    |                     | FairValue |           | UnrealizedLosses |                  | Fair Value |            | UnrealizedLosses
|U.S. government securities            |                     | $                   | 70,905              |                     | $         | 287       |                  | $                |           |            | $                |                 |  | $ | 70,905  |  | $ | 287   
|Mortgage-backed securities            |                     |                     | 385,454             |                     |           | 794       |                  |                  | 23,848     |            |                  | 91               |  |   | 409,302 |  |   | 885   
|                                      |                     |                     |                     |                     |           |           |                  |                  |            |            |                  |                  |  |   |         |  |   |       
|Total temporarily impaired securities |                     | $                   | 456,359             |                     | $         | 1,081     |                  | $                | 23,848     |            | $                | 91               |  | $ | 480,207 |  | $ | 1,172 
|                                      |                     |                     |                     |                     |           |           |                  |                  |            |            |                  |                  |  |   |         |  |   |       



Contractual maturities of the
Banks mortgage-backed securities at September 30, 2005 are as follows:



|                                           |  |                |        
|------------------------------------------ |  | -------------- | -------
|                                           |  | (In thousands)
|Due within one year                        |  | $              | 13,596 
|Due after one year, but within five years  |  |                | 61,138 
|Due after five years, but within ten years |  |                | 93,094 
|Due after ten years                        |  |                | 691,980
|                                           |  |                |        
|Total                                      |  | $              | 859,808
|                                           |  |                |        



Accrued interest receivable on
investment and mortgage-backed securities totaled $1.0 million and $4.8 million at September 30, 2005, respectively, and $483,000 and $1.7 million at September 30, 2004, respectively, and is included in other assets in the Consolidated
Statements of Financial Condition.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



13. LOANS RECEIVABLE  THE BANK:



Loans receivable is composed of the following:



|                                                           |      |               |           |      |  |   |           |  
|---------------------------------------------------------- | ---- | ------------- | --------- | ---- |  | - | --------- | -
|(In thousands)                                             |      | September 30, |          
|                                                           | 2005 |               |           | 2004 | 
|Single-family residential                                  |      | $             | 5,843,205 |      |  | $ | 5,232,551 |  
|Home equity                                                |      |               | 1,796,148 |      |  |   | 1,721,605 |  
|Other real estate                                          |      |               | 358,937   |      |  |   | 261,997   |  
|Commercial                                                 |      |               | 1,035,972 |      |  |   | 920,178   |  
|Prime automobile                                           |      |               | 145,316   |      |  |   | 271,731   |  
|Other consumer                                             |      |               | 57,679    |      |  |   | 98,925    |  
|                                                           |      |               |           |      |  |   |           |  
|                                                           |      |               | 9,237,257 |      |  |   | 8,506,987 |  
|                                                           |      |               |           |      |  |   |           |  
|Unearned discounts and net deferred loan origination costs |      |               | 95,183    |      |  |   | 86,320    |  
|Allowance for losses on loans                              |      |               | (28,640   | )    |  |   | (37,750   | )
|                                                           |      |               |           |      |  |   |           |  
|                                                           |      |               | 66,543    |      |  |   | 48,570    |  
|                                                           |      |               |           |      |  |   |           |  
|Total                                                      |      | $             | 9,303,800 |      |  | $ | 8,555,557 |  
|                                                           |      |               |           |      |  |   |           |  



The Bank serviced loans owned by
others amounting to $13,480.4 and $11,481.6 million at September 30, 2005 and 2004, respectively.



Accrued interest receivable on loans totaled $41.3 and $30.0 million at September 30, 2005 and 2004, respectively, and is included in other assets in the Consolidated Statements of Financial Condition.



14. ALLOWANCE FOR LOSSES  THE BANK:



Activity in the allowance for losses on loans receivable is summarized as follows:



|                     |      |               |         |      |  |   |         |   |  |   |         |  
|-------------------- | ---- | ------------- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|(In thousands)       |      | September 30, |        
|                     | 2005 |               |         | 2004 |  |   | 2003    |  
|Beginning Balance    |      | $             | 37,750  |      |  | $ | 58,397  |   |  | $ | 66,079  |  
|Provision for losses |      |               | (11,569 | )    |  |   | (14,522 | ) |  |   | 18,422  |  
|Charge-offs          |      |               | (14,522 | )    |  |   | (26,558 | ) |  |   | (44,957 | )
|Recoveries           |      |               | 16,981  |      |  |   | 20,433  |   |  |   | 18,853  |  
|                     |      |               |         |      |  |   |         |   |  |   |         |  
|Ending Balance       |      | $             | 28,640  |      |  | $ | 37,750  |   |  | $ | 58,397  |  
|                     |      |               |         |      |  |   |         |   |  |   |         |  



15. REAL ESTATE HELD FOR INVESTMENT
OR SALE  THE BANK:



Real estate held for investment or sale is
composed of the following:



|                                                                                             |      |               |        |  |   |       
|-------------------------------------------------------------------------------------------- | ---- | ------------- | ------ |  | - | ------
|(In thousands)                                                                               |      | September 30,
|                                                                                             | 2005 |               | 2004  
|Real estate held for investment (net of allowance for losses of $202 for September 30, 2004) |      | $             |       |  | $ | 925   
|Real estate held for sale                                                                    |      |               | 20,265 |  |   | 20,357
|                                                                                             |      |               |        |  |   |       
|Total real estate held for investment or sale                                                |      | $             | 20,265 |  | $ | 21,282
|                                                                                             |      |               |        |  |   |       



Income (loss) on real estate held for
investment or sale is composed of the following:



|                                 |      |                          |       |  |      |       |  |   |      
|-------------------------------- | ---- | ------------------------ | ----- |  | ---- | ----- |  | - | -----
|(In thousands)                   |      | Year Ended September 30,
|                                 | 2005 |                          | 2004  |  | 2003
|Income from operating properties |      | $                        | 795   |  | $    | 842   |  | $ | 957  
|Net gain on sales                |      |                          | 917   |  |      | 1,400 |  |   | 5,823
|                                 |      |                          |       |  |      |       |  |   |      
|Total                            |      | $                        | 1,712 |  | $    | 2,242 |  | $ | 6,780
|                                 |      |                          |       |  |      |       |  |   |      



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



16. LOAN SERVICING RIGHTS  THE BANK:



During fiscal year 2005, the Bank reduced the carrying value of its servicing assets as a
result of higher actual and expected prepayments of loans underlying these assets.



Servicing assets are recorded when purchased and in conjunction with loan sales and securitization transactions when servicing rights are retained by the Bank. Activity in servicing assets is summarized as follows:



|                    |      |                          |         |      |  |   |         |   |  |   |         |  
|------------------- | ---- | ------------------------ | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|(In thousands)      |      | Year ended September 30, |        
|                    | 2005 |                          |         | 2004 |  |   | 2003    |  
|Beginning Balance   |      | $                        | 164,764 |      |  | $ | 121,594 |   |  | $ | 105,963 |  
|Additions           |      |                          | 99,551  |      |  |   | 97,415  |   |  |   | 77,485  |  
|Amortization        |      |                          | (62,916 | )    |  |   | (44,898 | ) |  |   | (31,198 | )
|Sales               |      |                          |        |      |  |   | (5,228  | ) |  |   |        |  
|Charge-offs         |      |                          | (243    | )    |  |   | (4,119  | ) |  |   | (30,656 | )
|                    |      |                          |         |      |  |   |         |   |  |   |         |  
|Ending Balance      |      |                          | 201,156 |      |  |   | 164,764 |   |  |   | 121,594 |  
|Valuation Allowance |      |                          | (36,564 | )    |  |   | (16,909 | ) |  |   | (25,326 | )
|                    |      |                          |         |      |  |   |         |   |  |   |         |  
|Carrying Value      |      | $                        | 164,592 |      |  | $ | 147,855 |   |  | $ | 96,268  |  
|                    |      |                          |         |      |  |   |         |   |  |   |         |  



Accumulated amortization was $270.6
and $207.7 million at September 30, 2005 and 2004, respectively. The aggregate fair value of servicing assets at September 30, 2005 and 2004 was $177.5 and $149.4 million, respectively.



Activity in the valuation allowance for servicing assets is summarized as follows:



|                                                |      |                          |        |      |  |   |        |   |  |   |         |  
|----------------------------------------------- | ---- | ------------------------ | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|(In thousands)                                  |      | Year Ended September 30, |       
|                                                | 2005 |                          |        | 2004 |  |   | 2003   |  
|Balance at beginning of year                    |      | $                        | 16,909 |      |  | $ | 25,326 |   |  | $ | 45,533  |  
|Additions (reductions) charged to loan expenses |      |                          | 19,898 |      |  |   | (1,962 | ) |  |   | 10,449  |  
|Charge-offs                                     |      |                          | (243   | )    |  |   | (4,119 | ) |  |   | (30,656 | )
|Sales                                           |      |                          |       |      |  |   | (2,336 | ) |  |   |        |  
|                                                |      |                          |        |      |  |   |        |   |  |   |         |  
|Balance at end of year                          |      | $                        | 36,564 |      |  | $ | 16,909 |   |  | $ | 25,326  |  
|                                                |      |                          |        |      |  |   |        |   |  |   |         |  



There were no sales of rights to
service mortgage loans during fiscal year 2005. During fiscal year 2004, the Bank sold $2.9 million of rights to service mortgage loans with principal balances of $214.9 million, which were originated by the Bank in connection with its mortgage
banking activities, and recognized a gain of $105,000. There were no sales of rights to service mortgage loans during fiscal year 2003. Servicing fees are included in servicing, securitization and mortgage banking income in the Consolidated
Statements of Operations.



At September 30, 2005 and 2004, key assumptions
and the sensitivity of the current value of originated servicing assets to an immediate 10 percent and 20 percent adverse change in those assumptions are as follows:



|                                             |                          |                    |         |                               |  |   |       |  
|-------------------------------------------- | ------------------------ | ------------------ | ------- | ----------------------------- |  | - | ----- | -
|(Dollars in thousands)                       |                          | September 30, 2005 |        
|                                             | Single-FamilyResidential |                    |         | Home Equity/ Home Improvement | 
|Carrying value                               |                          | $                  | 159,178 |                               |  | $ | 89    |  
|Weighted average life (in years)             |                          |                    | 3.1     |                               |  |   | 2.9   |  
|Prepayment speed assumption (annual rate)(1) |                          |                    | 23.13   | %                             |  |   | 34.01 | %
|Impact on fair value at 10% adverse change   |                          | $                  | (7,770  | )                             |  | $ | (6    | )
|Impact on fair value at 20% adverse change   |                          | $                  | (11,241 | )                             |  | $ | (11   | )
|Discount rate (annual)                       |                          |                    | 8.52    | %                             |  |   | 8.12  | %
|Impact on fair value at 10% adverse change   |                          | $                  | (2,987  | )                             |  | $ | (2    | )
|Impact on fair value at 20% adverse change   |                          | $                  | (5,865  | )                             |  | $ | (3    | )



89



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



|                                             |                          |                    |         |                               |  |   |       |  
|-------------------------------------------- | ------------------------ | ------------------ | ------- | ----------------------------- |  | - | ----- | -
|(Dollars in thousands)                       |                          | September 30, 2004 |        
|                                             | Single-FamilyResidential |                    |         | Home Equity/ Home Improvement | 
|Carrying value                               |                          | $                  | 143,041 |                               |  | $ | 113   |  
|Weighted average life (in years)             |                          |                    | 4.0     |                               |  |   | 2.1   |  
|Prepayment speed assumption (annual rate)(1) |                          |                    | 19.37   | %                             |  |   | 47.07 | %
|Impact on fair value at 10% adverse change   |                          | $                  | (4,872  | )                             |  | $ | (8    | )
|Impact on fair value at 20% adverse change   |                          | $                  | (9,370  | )                             |  | $ | (14   | )
|Discount rate (annual)                       |                          |                    | 8.50    | %                             |  |   | 8.42  | %
|Impact on fair value at 10% adverse change   |                          | $                  | (2,716  | )                             |  | $ | (2    | )
|Impact on fair value at 20% adverse change   |                          | $                  | (5,652  | )                             |  | $ | (3    | )

---

|(1) | Represents Constant Prepayment Rate.
|--- | ------------------------------------



17. LOAN SECURITIZATION TRANSACTIONS  THE BANK:



During fiscal year 2005, the Bank reduced the carrying value of its interest-only strips receivable as a result of higher actual and expected prepayments of loans
underlying these assets.



The Bank periodically sells various loan receivables
through asset-backed securitizations, in which receivables are transferred to trusts, and certificates are sold to investors. The following chart summarizes the Banks securitization activities:



|                                      |      |                                           |           |  |      |           |  |   |          
|------------------------------------- | ---- | ----------------------------------------- | --------- |  | ---- | --------- |  | - | ---------
|(In thousands)                        |      | As of or for the year ended September 30,
|                                      | 2005 |                                           | 2004      |  | 2003
|Single-Family Residential             |      |                                           |           |  |      |           |  |   |          
|Loans sold into new trusts            |      | $                                         | 5,320,133 |  | $    | 4,853,624 |  | $ | 2,551,634
|Outstanding trust certificate balance |      |                                           | 9,446,395 |  |      | 7,246,410 |  |   | 3,509,029
|Gains recognized                      |      |                                           | 178,580   |  |      | 182,821   |  |   | 92,901   
|                                      |      |                                           |          
|Automobile                            |      |                                           |           |  |      |           |  |   |          
|Loans sold into new trusts            |      | $                                         |          |  | $    |          |  | $ |         
|Outstanding trust certificate balance |      |                                           | 27,494    |  |      | 149,345   |  |   | 389,678  
|Gains recognized                      |      |                                           |          |  |      |          |  |   |         
|                                      |      |                                           |          
|Home Equity                           |      |                                           |           |  |      |           |  |   |          
|Loans sold into existing trusts       |      | $                                         |          |  | $    | 3,929     |  | $ | 11,457   
|Outstanding trust certificate balance |      |                                           |          |  |      |          |  |   | 20,097   
|Gains recognized                      |      |                                           |          |  |      | 195       |  |   | 540      
|                                      |      |                                           |          
|Home Improvement                      |      |                                           |           |  |      |           |  |   |          
|Loans sold into existing trusts       |      | $                                         |          |  | $    |          |  | $ |         
|Outstanding trust certificate balance |      |                                           |          |  |      |          |  |   | 19,205   
|Gains recognized                      |      |                                           |          |  |      |          |  |   |         



The Bank continues to service, and
receive servicing fees on, the outstanding balance of securitized receivables. The Bank also retains rights, which may be subordinated, to future cash flows arising from the receivables. The Bank generally estimates the fair value of these retained
interests based on the estimated present value of expected future cash flows from securitized and sold receivables, using managements best estimates of the key assumptions  credit losses, prepayment speeds and discount rates commensurate
with the risks involved.



The following table summarizes certain cash flows
received from securitization trusts:



|                                                |      |                          |           |  |   |          
|----------------------------------------------- | ---- | ------------------------ | --------- |  | - | ---------
|(In thousands)                                  |      | Year Ended September 30,
|                                                | 2005 |                          | 2004     
|Proceeds from new securitizations               |      | $                        | 5,221,409 |  | $ | 4,774,686
|Servicing fees received                         |      |                          | 31,576    |  |   | 20,290   
|Other cash flows received on retained interests |      |                          | 145,074   |  |   | 73,891   



90



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Servicing, securitization and mortgage banking income includes the initial gains on current
securitization and sale transactions and income from interest-only strips receivable recognized in connection with current and prior period securitization and sale transactions.



At September 30, 2005 and 2004, key assumptions and the sensitivity of the current fair value of the retained interests to an immediate
10 percent and 20 percent adverse change in those assumptions are as follows:



|                                                  |                          |                    |         |            |  |   |        |     
|------------------------------------------------- | ------------------------ | ------------------ | ------- | ---------- |  | - | ------ | ----
|(Dollars in thousands)                            |                          | September 30, 2005 |        
|                                                  | Single-FamilyResidential |                    |         | Automobile | 
|Carrying value(1)(fair value)                     |                          | $                  | 368,594 |            |  | $ | 3,048  |     
|Weighted average life (in years)                  |                          |                    | 2.6     |            |  |   | 0.2    |     
|Prepayment speed assumption (average annual rate) |                          |                    | 24.91   | %(2)       |  |   | 1.50   | %(3)
|Impact on fair value at 10% adverse change        |                          | $                  | (33,396 | )          |  | $ | (1     | )   
|Impact on fair value at 20% adverse change        |                          | $                  | (44,457 | )          |  | $ | (10    | )   
|Expected credit losses (annual rate)              |                          |                    | 0.00    | %          |  |   | 4.73   | %   
|Impact on fair value at 10% adverse change        |                          | $                  |        |            |  | $ | (29    | )   
|Impact on fair value at 20% adverse change        |                          | $                  |        |            |  | $ | (57    | )   
|Discount rate (annual rate)                       |                          |                    | 8.50    | %          |  |   | 8.00   | %   
|Impact on fair value at 10% adverse change        |                          | $                  | (7,755  | )          |  | $ |       |     
|Impact on fair value at 20% adverse change        |                          | $                  | (15,228 | )          |  | $ |       |     
|                                                  |                         
|(Dollars in thousands)                            |                          | September 30, 2004 |        
|                                                  | Single-FamilyResidential |                    |         | Automobile | 
|Carrying value(1)(fair value)                     |                          | $                  | 295,805 |            |  | $ | 12,537 |     
|Weighted average life (in years)                  |                          |                    | 3.8     |            |  |   | 0.5    |     
|Prepayment speed assumption (average annual rate) |                          |                    | 19.91   | %(2)       |  |   | 1.50   | %(3)
|Impact on fair value at 10% adverse change        |                          | $                  | (21,328 | )          |  | $ | (22    | )   
|Impact on fair value at 20% adverse change        |                          | $                  | (39,206 | )          |  | $ | (37    | )   
|Expected credit losses (annual rate)              |                          |                    | 0.01    | %          |  |   | 4.53   | %   
|Impact on fair value at 10% adverse change        |                          | $                  | (22     | )          |  | $ | (338   | )   
|Impact on fair value at 20% adverse change        |                          | $                  | (43     | )          |  | $ | (677   | )   
|Discount rate (annual rate)                       |                          |                    | 8.50    | %          |  |   | 8.00   | %   
|Impact on fair value at 10% adverse change        |                          | $                  | (7,593  | )          |  | $ | (3     | )   
|Impact on fair value at 20% adverse change        |                          | $                  | (13,586 | )          |  | $ | (5     | )   

---

|(1) | Fiscal year 2005 includes interest-only assets of $348.2 million and reserve accounts of $23.4 million. Fiscal year 2004 includes interest-only assets of $287.8
million, reserve accounts of $19.0 million and overcollateralization of receivables of $1.5 million.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Expected weighted average life and prepayment speed assumptions are based on life of securitization.
|--- | ----------------------------------------------------------------------------------------------------

|(3) | Represents Constant Prepayment Rate. Certain loans may require the payment of a fee if the
borrower prepays the loan during the period up to three years after origination. The Bank uses a lower prepayment assumption during these periods.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Key assumptions used in measuring retained interest at the date of securitizations completed during fiscal year 2005 and 2004 are as follows:



|                                                  |  |                          |     
|------------------------------------------------- |  | ------------------------ | ----
|                                                  |  | Single-FamilyResidential |     
|Year Ended September 30, 2005                     |  |                          |     
|Prepayment speed assumption (average annual rate) |  | 22.20                    | %(1)
|Expected credit losses (annual rate)              |  | 0.00                     | %   
|Discount rate (annual rate)                       |  | 8.50                     | %   
|                                                  | 
|Year Ended September 30, 2004                     |  |                          |     
|Prepayment speed assumption (average annual rate) |  | 20.43                    | %(1)
|Expected credit losses (annual rate)              |  | 0.01                     | %   
|Discount rate (annual rate)                       |  | 8.50                     | %   

---

|(1) | Expected weighted average life and prepayment speed assumptions are based on life of securitization.
|--- | ----------------------------------------------------------------------------------------------------



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



These sensitivities are hypothetical and should be used with caution. Changes in fair value
based on variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. The effects shown in the above tables of a variation in a particular assumption
on the fair value of interest-only strips receivable is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another factor, which might magnify or counteract the sensitivities.



Principal balances, delinquent amounts and net credit losses for securitized loans were as
follows:



|                                                |                                |                                                |                                                                   |  |                               |        |  |   |       |  
|----------------------------------------------- | ------------------------------ | ---------------------------------------------- | ----------------------------------------------------------------- |  | ----------------------------- | ------ |  | - | ----- | -
|(In thousands)                                  |                                | As of or for the year ended September 30, 2005 |                                                                  
|                                                | Total PrincipalAmount of Loans |                                                | Principal Amount ofLoans Past Due 90Days or More orNon-Performing |  | Net Credit Losses(Recoveries) |       
|Single-family residential                       |                                | $                                              | 8,989,069                                                         |  | $                             | 22,934 |  | $ | (1    | )
|Automobile                                      |                                |                                                | 27,494                                                            |  |                               | 268    |  |   | 1,273 |  
|                                                |                                |                                                |                                                                   |  |                               |        |  |   |       |  
|Total                                           |                                | $                                              | 9,016,563                                                         |  | $                             | 23,202 |  | $ | 1,272 |  
|                                                |                                |                                                |                                                                   |  |                               |        |  |   |       |  
|                                                |                               
|(In thousands)                                  |                                | As of or for the year ended September 30, 2004 |                                                                  
|                                                | Total PrincipalAmount of Loans |                                                | Principal Amount ofLoans Past Due 90Days or More orNon-Performing |  | Net Credit Losses(Recoveries) |       
|Single-family residential                       |                                | $                                              | 7,140,749                                                         |  | $                             | 12,104 |  | $ | (239  | )
|Automobile                                      |                                |                                                | 150,957                                                           |  |                               | 2,300  |  |   | 8,612 |  
|Home equity, home improvement and related loans |                                |                                                |                                                                  |  |                               |       |  |   | (342  | )
|                                                |                                |                                                |                                                                   |  |                               |        |  |   |       |  
|Total                                           |                                | $                                              | 7,291,706                                                         |  | $                             | 14,404 |  | $ | 8,031 |  
|                                                |                                |                                                |                                                                   |  |                               |        |  |   |       |  



18. PROPERTY AND EQUIPMENT 
THE BANK:



Property and equipment is
composed of the following:



|                                          |  |                       |  |               |         |  |   |        
|----------------------------------------- |  | --------------------- |  | ------------- | ------- |  | - | -------
|(Dollars in thousands)                    |  | EstimatedUseful Lives |  | September 30,
|                                          |  | 2005                  |  | 2004         
|Land                                      |  |                      |  | $             | 101,700 |  | $ | 87,175 
|Projects in progress                      |  |                      |  |               | 13,252  |  |   | 13,144 
|Buildings and improvements                |  | 10-65 years           |  |               | 290,187 |  |   | 281,488
|Leasehold and tenant improvements         |  | 7-40 years            |  |               | 175,275 |  |   | 147,762
|Furniture and equipment                   |  | 5-10 years            |  |               | 266,590 |  |   | 241,341
|Automobiles                               |  | 3-5 years             |  |               | 5,331   |  |   | 6,813  
|                                          |  |                       |  |               |         |  |   |        
|                                          |  |                       |  |               | 852,335 |  |   | 777,723
|Less:                                     |  |                       |  |               |         |  |   |        
|Accumulated depreciation and amortization |  |                       |  |               | 317,964 |  |   | 284,816
|                                          |  |                       |  |               |         |  |   |        
|Total                                     |  |                       |  | $             | 534,371 |  | $ | 492,907
|                                          |  |                       |  |               |         |  |   |        



Depreciation and amortization expense
related to property and equipment amounted to $42.5, $39.3 and $44.5 million for the years ended September 30, 2005, 2004 and 2003, respectively.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



19. AUTOMOBILES SUBJECT TO LEASE  THE BANK:



Automobiles subject to lease is composed of the following:



|                         |  |                       |  |               |         |  |   |        
|------------------------ |  | --------------------- |  | ------------- | ------- |  | - | -------
|(Dollars in thousands)   |  | EstimatedUseful Lives |  | September 30,
|                         |  | 2005                  |  | 2004         
|Automobiles              |  | 3-5 years             |  | $             | 327,432 |  | $ | 673,891
|Less:                    |  |                       |  |               |         |  |   |        
|Accumulated depreciation |  |                       |  |               | 142,396 |  |   | 238,584
|                         |  |                       |  |               |         |  |   |        
|Total                    |  |                       |  | $             | 185,036 |  | $ | 435,307
|                         |  |                       |  |               |         |  |   |        



Depreciation expense related to
automobile leases amounted to $60.8, $120.9 and $170.9 million for the years ended September 30, 2005, 2004, and 2003, respectively. Automobile rental income amounted to $82.0, $157.0 and $235.4 million for the years ended September 30,
2005, 2004 and 2003, respectively.



The
following is a schedule by years of future minimum automobile rental income at September 30, 2005:



|                          |  |                |       
|------------------------- |  | -------------- | ------
|Year Ending September 30, |  | (In thousands)
|2006                      |  | $              | 38,977
|2007                      |  |                | 11,858
|2008                      |  |                | 1,275 
|                          |  |                |       
|Total                     |  | $              | 52,110
|                          |  |                |       



20. LEASES  THE BANK:



The Bank has noncancelable, long-term leases for office premises and
retail space which have a variety of terms expiring from fiscal year 2006 to fiscal year 2033 and ground leases which have terms expiring from fiscal year 2029 to fiscal year 2081. These leases are accounted for as operating leases. Some of the
leases are subject to rent adjustments in the future based upon changes in the Consumer Price Index and some also contain renewal options.



The following is a schedule by years of future minimum lease payments required at September 30, 2005:



|                          |  |                |        
|------------------------- |  | -------------- | -------
|Year Ending September 30, |  | (In thousands)
|2006                      |  | $              | 30,949 
|2007                      |  |                | 30,809 
|2008                      |  |                | 25,731 
|2009                      |  |                | 23,373 
|2010                      |  |                | 18,344 
|Thereafter                |  |                | 185,528
|                          |  |                |        
|Total                     |  | $              | 314,734
|                          |  |                |        



Rent expense totaled $27.4, $24.0 and
$31.5 million for the years ended September 30, 2005, 2004 and 2003, respectively. For operating leases with fixed escalation amounts, rent expense is recognized on a straight-line basis over the term of the lease.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



21. DEPOSIT ACCOUNTS  THE BANK:



An analysis of deposit accounts and the related weighted average effective interest rates at
year end are as follows:



|                                       |        |               |                     |      |      |        |  |                     |           |  |      |  
|-------------------------------------- | ------ | ------------- | ------------------- | ---- | ---- | ------ |  | ------------------- | --------- |  | ---- | -
|(Dollars in thousands)                 |        | September 30, |                    
|                                       | 2005   |               |                     | 2004 |     
|                                       | Amount |               | WeightedAverageRate |      |      | Amount |  | WeightedAverageRate |          
|Non-interest bearing checking accounts |        | $             | 1,346,455           |      |     |        |  | $                   | 1,181,722 |  |     |  
|Interest bearing checking accounts     |        |               | 2,438,147           |      | 0.22 | %      |  |                     | 2,244,724 |  | 0.21 | %
|Money market deposit accounts          |        |               | 2,521,949           |      | 1.83 | %      |  |                     | 2,364,768 |  | 0.90 | %
|Savings accounts                       |        |               | 1,153,152           |      | 0.28 | %      |  |                     | 1,214,307 |  | 0.28 | %
|Certificate accounts, less than $100   |        |               | 1,520,829           |      | 3.20 | %      |  |                     | 1,238,733 |  | 2.09 | %
|Certificate accounts, $100 or more     |        |               | 801,236             |      | 3.38 | %      |  |                     | 610,864   |  | 2.16 | %
|                                       |        |               |                     |      |      |        |  |                     |           |  |      |  
|Total                                  |        | $             | 9,781,768           |      | 1.33 | %      |  | $                   | 8,855,118 |  | 0.77 | %
|                                       |        |               |                     |      |      |        |  |                     |           |  |      |  



The Banks deposits are insured
by the FDIC up to $100,000 for each insured depositor.



Interest expense on
deposit accounts is composed of the following:



|                              |      |                          |        |  |      |        |  |   |       
|----------------------------- | ---- | ------------------------ | ------ |  | ---- | ------ |  | - | ------
|(In thousands)                |      | Year Ended September 30,
|                              | 2005 |                          | 2004   |  | 2003
|Checking accounts             |      | $                        | 5,012  |  | $    | 4,320  |  | $ | 4,562 
|Money market deposit accounts |      |                          | 34,765 |  |      | 17,159 |  |   | 21,405
|Savings accounts              |      |                          | 3,435  |  |      | 3,326  |  |   | 4,960 
|Certificate accounts          |      |                          | 52,419 |  |      | 33,446 |  |   | 49,195
|                              |      |                          |        |  |      |        |  |   |       
|Total                         |      | $                        | 95,631 |  | $    | 58,251 |  | $ | 80,122
|                              |      |                          |        |  |      |        |  |   |       



Outstanding certificate accounts at
September 30, 2005 mature in the years indicated as follows:



|                          |  |                |          
|------------------------- |  | -------------- | ---------
|Year Ending September 30, |  | (In thousands)
|2006                      |  | $              | 1,676,464
|2007                      |  |                | 468,055  
|2008                      |  |                | 49,729   
|2009                      |  |                | 82,287   
|2010                      |  |                | 45,530   
|                          |  |                |          
|Total                     |  | $              | 2,322,065
|                          |  |                |          



At
September 30, 2005, certificate accounts of $100,000 or more have contractual maturities as indicated below:



|                                     |  |                |        
|------------------------------------ |  | -------------- | -------
|                                     |  | (In thousands)
|Three months or less                 |  | $              | 333,692
|Over three months through six months |  |                | 114,931
|Over six months through 12 months    |  |                | 140,348
|Over 12 months                       |  |                | 212,265
|                                     |  |                |        
|Total                                |  | $              | 801,236
|                                     |  |                |        



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



22. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER SHORT-TERM BORROWINGS  THE
BANK:



Short-term borrowings are
summarized as follows:



|                                                    |      |               |         |      |  |   |         |   |  |   |         |  
|--------------------------------------------------- | ---- | ------------- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|(Dollars in thousands)                              |      | September 30, |        
|                                                    | 2005 |               |         | 2004 |  |   | 2003    |  
|Securities sold under repurchase agreements:        |      |               |         |      |  |   |         |   |  |   |         |  
|Balance at year end                                 |      | $             | 191,034 |      |  | $ | 21,878  |   |  | $ | 5,816   |  
|Average amount outstanding during the year          |      |               | 119,791 |      |  |   | 23,994  |   |  |   | 268,870 |  
|Maximum amount outstanding at any month end         |      |               | 191,109 |      |  |   | 87,871  |   |  |   | 506,065 |  
|Amount maturing within 30 days                      |      |               | 191,034 |      |  |   | 18,878  |   |  |   | 2,816   |  
|Weighted average interest rate during the year      |      |               | 2.61    | %    |  |   | 0.87    | % |  |   | 1.44    | %
|Weighted average interest rate on year end balances |      |               | 3.59    | %    |  |   | 0.98    | % |  |   | 0.77    | %
|                                                    |      |               |        
|Other short-term borrowings:                        |      |               |         |      |  |   |         |   |  |   |         |  
|Balance at year end                                 |      | $             | 307,880 |      |  | $ | 184,701 |   |  | $ | 162,498 |  
|Average amount outstanding during the year          |      |               | 221,691 |      |  |   | 178,748 |   |  |   | 170,385 |  
|Maximum amount outstanding at any month end         |      |               | 307,880 |      |  |   | 227,365 |   |  |   | 209,805 |  
|Amount maturing within 30 days                      |      |               | 307,880 |      |  |   | 184,701 |   |  |   | 162,498 |  
|Weighted average interest rate during the year      |      |               | 1.79    | %    |  |   | 0.34    | % |  |   | 0.55    | %
|Weighted average interest rate on year end balances |      |               | 2.88    | %    |  |   | 0.52    | % |  |   | 0.32    | %



The investment and mortgage-backed
securities underlying the dealer repurchase agreements were delivered to the dealers who arranged the transactions. The dealers may have loaned such securities to other parties in the normal course of their operations and agreed to resell to the
Bank the identical securities upon the maturities of the agreements.



At
September 30, 2005, the Bank had pledged mortgage-backed securities and investment securities with a combined book value of $199.8 and $323.9 million to secure securities sold under repurchase agreements and certain other short-term borrowings,
respectively. Also at September 30, 2005, the Bank had pledged, but did not borrow against, other loans with a total principal balance of $1,017.1 million.



23. FEDERAL HOME LOAN BANK ADVANCES  THE BANK:



At September 30, 2005 and 2004, advances from the Federal Home Loan Bank of Atlanta (FHLB) totaled $2,468.7 and $2,736.9 million, repectively. The
interest rate on each FHLB advance is fixed for the term of the advance and the weighted average interest rate for all advances is 3.79% at September 30, 2005. The advances mature over varying periods as follows:



|                                         |  |                |          
|---------------------------------------- |  | -------------- | ---------
|                                         |  | (In thousands)
|Six months or less                       |  | $              | 1,612,821
|More than six months through one year    |  |                | 162,394  
|More than one year through three years   |  |                | 515,371  
|More than three years through five years |  |                | 124,510  
|More than five years                     |  |                | 53,644   
|                                         |  |                |          
|Total                                    |  | $              | 2,468,740
|                                         |  |                |          



Under a Specific Collateral Agreement
with the FHLB, advances are secured by the FHLB stock owned by the Bank and qualifying first mortgage loans and certain second mortgage loans and/or lines with a total principal balance of $6,519.4 million. The FHLB requires that members maintain
qualifying collateral at least equal to 100% of the members outstanding advances at all times. The collateral held by the FHLB in excess of the amount of the September 30, 2005 advances is available to secure additional advances from the
FHLB, subject to its collateralization guidelines.



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24. 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), which are subordinated to the interest of
deposit account holders and other senior debt. The Bank may redeem some or all of the 2003 Debentures at any time on and after December 1, 2008 at the following redemption prices plus accrued and unpaid interest:



|                                                             |  |                 |  
|------------------------------------------------------------ |  | --------------- | -
|If redeemed during the 12-month period
beginning December 1, |  | RedemptionPrice |  
|2008                                                         |  | 103.4375        | %
|2009                                                         |  | 102.2917        | %
|2010                                                         |  | 101.1458        | %
|2011 and thereafter                                          |  | 100.0000        | %



The Bank received OTS approval to
include the principal amount of the 2003 Debentures in the Banks supplementary capital for regulatory capital purposes.



The indenture pursuant to which the 2003 Debentures were sold (the Indenture) provides that the Bank may not pay dividends on its capital stock unless, after
giving effect to the dividend, no event of default shall have occurred and be continuing and the Bank is in compliance with its regulatory capital requirements. In addition, the amount of the proposed dividend may not exceed the sum of
(i) $50.0 million, (ii) 662/3% of the Banks consolidated net income (as defined in the
Indenture) accrued on a cumulative basis commencing on October 1, 2002 and (iii) the aggregate net cash proceeds received by the Bank after October 1, 2002 from the sale of qualified capital stock or certain debt securities, minus the
aggregate amount of any restricted payments made by the Bank. Notwithstanding the above restrictions on dividends, provided no event of default has occurred or is continuing, the Indenture does not restrict the payment of dividends on the Series C
Preferred Stock (as defined below).



Deferred debt issuance costs, net
of accumulated amortization, amounted to $3.2 and $3.5 million at September 30, 2005 and 2004, respectively, and are included in other assets in the Consolidated Statements of Financial Condition.



25. PREFERRED STOCK  THE BANK:



In October 2003, the Bank sold $125.0 million of its 8% Noncumulative Perpetual Preferred
Stock, Series C (the Series C Preferred Stock). The Series C Preferred Stock trades on the New York Stock Exchange under the symbol CCX PrC. Dividends are payable quarterly 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. 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.



26. COMPENSATION PLANS  THE BANK:



The Bank participates in a defined contribution profit sharing retirement plan (the
Plan), which can be modified or discontinued at any time, and which covers those full-time employees who meet the requirements as specified in the Plan.



Corporate contributions, at the discretionary amount of up to six percent of the employees cash compensation, subject to certain
limits, were $10.2, $9.2 and $8.8 million for the years ended September 30, 2005, 2004 and 2003, respectively. There are no past service costs associated with the Plan and the Bank has no liability under the Plan other than its current
contributions. The Plan owns 4.0% of the Banks common stock.



The Bank
provides a supplemental defined contribution profit sharing retirement plan (the SERP), which covers certain highly-compensated full-time employees who meet the requirements as specified in the SERP. The SERP, which can be modified or
discontinued at any time, requires participating employees to contribute 2.0% of their compensation in excess of a specified amount. Corporate contributions, equal to three times the employees contribution, were $1.5, $1.2 and $1.1 million for
the years ended September 30, 2005, 2004 and 2003, respectively.



There
are no past service costs associated with the SERP. The Banks liability under the SERP, which includes contributions from employees and is not funded, was $16.3 and $13.3 million at September 30, 2005 and 2004, respectively.



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The Bank has granted awards under a deferred compensation plan to certain qualified
employees. The deferred compensation plan provides that, as of the end of each fiscal year in the ten-year period prior to vesting, the Bank will add to or deduct from the account of each employee who has received an award, a contribution or
deduction, which represents hypothetical interest (which may be positive or negative) earned on the principal contribution, based on the Banks rate of return on average assets as defined in the deferred compensation plan for the fiscal year
then ended. The deferred compensation plan is unfunded. At September 30, 2005, the Bank had recorded a liability totaling $27.7 million reflecting the Banks obligations under the plan. The Banks expense under the deferred
compensation plan totaled $7.2, $7.5 and $5.3 million during the years ended September 30, 2005, 2004 and 2003, respectively.



Certain officers have entered into agreements with the Bank regarding confidentiality, nonsolicitation, ownership of certain works and termination upon change of control.
Each of those officers has agreed not to compete with, solicit customers of or solicit the employees of the Bank for stated periods following any termination of employment with the Bank. In addition, the Bank has agreed to pay each such officer a
specified amount if the officer is terminated without cause in the three-year period following a change of control of the Bank. The amount payable varies depending upon the officers base compensation and most recent bonus, the length of the
officers employment with the Bank and the per share price at which the triggering change of control has occurred.



Certain executive officers have also entered into Special Retirement Compensation Agreements under which the executive could receive an amount up to three
times his base compensation if he retires from the Bank after reaching age 63. These agreements are unfunded. As of September 30, 2005, the Bank had recorded a liability totaling $2.7 million. The Banks expense under the special
retirement agreements totaled $527,000, $696,000, and $1.5 million during the years ended September 30, 2005, 2004 and 2003, respectively.



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27. REGULATORY MATTERS  THE BANK:



The Banks regulatory capital requirements at September 30, 2005 and 2004 were a
1.5% tangible capital requirement, a 4.0% core capital requirement and an 8.0% total risk-based capital requirement. Under the OTS prompt corrective action regulations, the Bank must maintain minimum leverage, tier 1 risk-based and total
risk-based capital ratios of 4.0%, 4.0% and 8.0%, respectively, to meet the ratios established for adequately capitalized institutions. At September 30, 2005 and 2004, the Bank was in compliance with its regulatory capital
requirements and exceeded the capital standards established for well capitalized institutions under the prompt corrective action regulations. The information below is based upon the Banks understanding of the applicable
regulations and related interpretations. The tables contain information of the Bank only and does not include consolidation or elimination entries required for the Trusts financial presentation.



|                                                     |        |                    |           |                             |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|---------------------------------------------------- | ------ | ------------------ | --------- | --------------------------- |  | ----- | -------------- |  | -------------- | ------- |  | ------ | - | ---------------- | - | ------- |  | ---- | -
|(Dollars in thousands)                               |        | September 30, 2005 |          
|                                                     | Actual |                    |           | Minimum Capital Requirement |  |       | Excess Capital | 
|                                                     | Amount |                    |           | As a %ofAssets              |  |       | Amount         |  | As a %ofAssets |         |  | Amount |   | As a % of Assets |  
|Stockholders equity per financial statements        |        | $                  | 762,056   |                             |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Minority interest in REIT Subsidiary(1)              |        |                    | 144,000   |                             |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|                                                     |        |                    |           |                             |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Adjusted capital                                     |        |                    | 906,056   |                             |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|                                                     |        |                    |           |                             |  |      
|Adjustments for tangible and core capital:           |        |                    |           |                             |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Intangible assets                                    |        |                    | (49,260   | )                           |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Non-includable subsidiaries                          |        |                    | (12,522   | )                           |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Non-qualifying purchased / originated loan servicing |        |                    | (3,416    | )                           |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|                                                     |        |                    |           |                             |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Total tangible capital                               |        |                    | 840,858   |                             |  | 5.92  | %              |  | $              | 212,982 |  | 1.50   | % |                  | $ | 627,876 |  | 4.42 | %
|                                                     |        |                    |           |                             |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Total core capital(2)                                |        |                    | 840,858   |                             |  | 5.92  | %              |  | $              | 567,953 |  | 4.00   | % |                  | $ | 272,905 |  | 1.92 | %
|                                                     |        |                    |           |                             |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Tier 1 risk-based capital(2)                         |        |                    | 840,858   |                             |  | 8.82  | %              |  | $              | 381,941 |  | 4.00   | % |                  | $ | 458,917 |  | 4.82 | %
|                                                     |        |                    |           |                             |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Adjustments for total risk-based capital:            |        |                    |           |                             |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Subordinated capital debentures                      |        |                    | 175,000   |                             |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Allowance for general loan losses                    |        |                    | 28,640    |                             |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|                                                     |        |                    |           |                             |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Total supplementary capital                          |        |                    | 203,640   |                             |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|                                                     |        |                    |           |                             |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Total available capital                              |        |                    | 1,044,498 |                             |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Equity investments(3)                                |        |                    | (2,657    | )                           |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|                                                     |        |                    |           |                             |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Total risk-based capital(2)                          |        | $                  | 1,041,841 |                             |  | 10.95 | %              |  | $              | 763,882 |  | 8.00   | % |                  | $ | 277,959 |  | 2.95 | %
|                                                     |        |                    |           |                             |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  

---

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

|(2) | Under 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%.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes one property classified as real estate held for sale which is treated as an equity investment for regulatory capital purposes.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------



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|                                                     |        |                    |           |                            |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|---------------------------------------------------- | ------ | ------------------ | --------- | -------------------------- |  | ----- | -------------- |  | -------------- | ------- |  | ------ | - | ---------------- | - | ------- |  | ---- | -
|(Dollars in thousands)                               |        | September 30, 2004 |          
|                                                     | Actual |                    |           | Minimum CapitalRequirement |  |       | Excess Capital | 
|                                                     | Amount |                    |           | As a %ofAssets             |  |       | Amount         |  | As a %ofAssets |         |  | Amount |   | As a % of Assets |  
|Stockholders equity per financial statements        |        | $                  | 711,861   |                            |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Minority interest in REIT Subsidiary(1)              |        |                    | 144,000   |                            |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|                                                     |        |                    |           |                            |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Adjusted capital                                     |        |                    | 855,861   |                            |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|                                                     |        |                    |           |                            |  |      
|Adjustments for tangible and core capital:           |        |                    |           |                            |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Intangible assets                                    |        |                    | (42,372   | )                          |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Non-includable subsidiaries(2)                       |        |                    | (929      | )                          |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Non-qualifying purchased / originated loan servicing |        |                    | (7,048    | )                          |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|                                                     |        |                    |           |                            |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Total tangible capital                               |        |                    | 805,512   |                            |  | 6.09  | %              |  | $              | 198,556 |  | 1.50   | % |                  | $ | 606,956 |  | 4.59 | %
|                                                     |        |                    |           |                            |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Total core capital(3)                                |        |                    | 805,512   |                            |  | 6.09  | %              |  | $              | 529,482 |  | 4.00   | % |                  | $ | 276,030 |  | 2.09 | %
|                                                     |        |                    |           |                            |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Tier 1 risk-based capital(3)                         |        |                    | 805,512   |                            |  | 8.61  | %              |  | $              | 374,882 |  | 4.00   | % |                  | $ | 430,630 |  | 4.61 | %
|                                                     |        |                    |           |                            |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Adjustments for total risk-based capital:            |        |                    |           |                            |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Subordinated capital debentures                      |        |                    | 175,000   |                            |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Allowance for general loan losses                    |        |                    | 37,750    |                            |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|                                                     |        |                    |           |                            |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Total supplementary capital                          |        |                    | 212,750   |                            |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|                                                     |        |                    |           |                            |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Total available capital                              |        |                    | 1,018,262 |                            |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Equity investments(2)(4)                             |        |                    | (2,360    | )                          |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|                                                     |        |                    |           |                            |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  
|Total risk-based capital(3)                          |        | $                  | 1,015,902 |                            |  | 10.91 | %              |  | $              | 749,764 |  | 8.00   | % |                  | $ | 266,138 |  | 2.91 | %
|                                                     |        |                    |           |                            |  |       |                |  |                |         |  |        |   |                  |   |         |  |      |  

---

|(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 $202,000 representing the allowance for losses maintained against the Banks equity investments and non-includable subsidiaries
which, pursuant to OTS guidelines, is available as a credit against the deductions from capital otherwise required for such investments.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(4) | Includes one property classified as real estate held for sale which is treated as an equity investment 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. Accordingly, if the Bank
is unable to dispose of any REO property (through bulk sales or otherwise) prior to the end of its applicable five-year holding period and is unable to obtain an extension of such five-year holding period from the OTS, the Bank could be required to
deduct the then-current book value of such REO property from total risk-based capital. In May 2005, the Bank received from the OTS an extension of the holding periods for certain of its REO properties through May 6, 2006.



The following table sets forth the Banks REO at September 30, 2005, by the fiscal
year in which the property was acquired through foreclosure.



|            |  |                |        |    
|----------- |  | -------------- | ------ | ---
|Fiscal Year |  | (In thousands) |       
|1990        |  | $              | 2,656  | (1)
|1991        |  |                | 8,211  | (2)
|1995        |  |                | 6,001  | (2)
|2005        |  |                | 3,397  |    
|            |  |                |        |    
|Total REO   |  | $              | 20,265 |    
|            |  |                |        |    

---

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

|(2) | The Bank received an extension of the holding periods for these properties through May 6, 2006.
|--- | -----------------------------------------------------------------------------------------------



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28. TRANSACTIONS WITH RELATED PARTIES  THE BANK:



Loans Receivable:



From time to time, in the normal course of business, the Bank may make loans to executive
officers and directors, their immediate family members or companies with which they are affiliated. These loans are on substantially the same terms as similar loans with unrelated parties. An analysis of activity with respect to these loans for the
year ended September 30, 2005 is as follows:



|                  |      |               |        |      |  |   |        |   |  |   |        |  
|----------------- | ---- | ------------- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|(In thousands)    |      | September 30, |       
|                  | 2005 |               |        | 2004 |  |   | 2003   |  
|Beginning balance |      | $             | 18,382 |      |  | $ | 17,200 |   |  | $ | 20,106 |  
|Additions         |      |               | 5,335  |      |  |   | 2,847  |   |  |   | 3,444  |  
|Reductions        |      |               | (8,631 | )    |  |   | (1,665 | ) |  |   | (6,350 | )
|                  |      |               |        |      |  |   |        |   |  |   |        |  
|Ending balance    |      | $             | 15,086 |      |  | $ | 18,382 |   |  | $ | 17,200 |  
|                  |      |               |        |      |  |   |        |   |  |   |        |  



Services:



B.F. Saul Company, which is a shareholder of the Trust, and its subsidiaries provide certain
services to the Bank. These services include property management, insurance brokerage and leasing. Fees for these services were $1.4, $2.4 and $4.7 million for the years ended September 30, 2005, 2004 and 2003, respectively.



For each of the years ended September 30, 2005, 2004 and 2003, a director of the Bank
was paid $100,000 for consulting services rendered to the Bank and $5,000 for service on the Boards of Directors for two of the Banks subsidiaries. Another director of the Bank was paid $100,000 for services as Chairman of the Banks
Audit Committee. A third director of the Bank was paid total fees of $100,000 for consulting services rendered to two subsidiaries of the Bank and $5,000 for services as Chairman of the Board of Directors of those subsidiaries.



Tax Sharing Agreement:



The Bank and the other companies in the Trusts affiliated group are parties to a tax
sharing agreement (the Tax Sharing Agreement). The Tax Sharing Agreement provides for payments to be made by members of the Trusts affiliated group to the Trust based on their separate company tax liabilities. The Tax Sharing
Agreement also provides that, to the extent net operating losses or tax credits of a particular member are used to reduce the overall tax liability of the Trusts affiliated group, such member will be reimbursed by the other members of the
affiliated group that have taxable income in an amount equal to such tax reduction. The Bank paid $2.1, $8.8 and $11.5 to the Trust during fiscal 2005, 2004 and 2003, respectively, under the Tax Sharing Agreement. At September 30, 2005, the
estimated net tax sharing payment payable to the Trust by the Bank was $1.8 million. There was no tax sharing payment payable to the Trust at September 30, 2004.



Other:



During the year ended September 30, 2005, two subsidiaries of the Bank each sold a property to the Trust. A gain of $1.4 million, net of taxes, was recorded as a
capital contribution because these transfers were between entities under common control.



The Bank paid $8.9, $9.0 and $9.3 for office space leased from or managed by companies affiliated with the Bank or its directors during the years ended September 30, 2005, 2004 and 2003, respectively.



The Trust, the B.F. Saul Company, Chevy Chase Lake Corporation and Van Ness Square
Corporation, affiliates of the Bank, from time to time maintain interest-bearing deposit accounts with the Bank. Those accounts had aggregate balances of $49.0 and $65.8 at September 30, 2005 and 2004, respectively. The Bank paid interest on
the accounts amounting to $952,000, $436,000 and $342,000 during fiscal years ended 2005, 2004 and 2003, respectively.



29. FINANCIAL INSTRUMENTS  THE BANK:



The Bank, in the normal course of business, is a party to financial instruments with off-balance-sheet risk and other derivative financial instruments to meet the
financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit at both fixed and variable rates, letters of credit, interest-rate cap agreements and
assets sold with limited recourse. All such financial instruments are held or issued for purposes other than trading.



These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the Consolidated Statements of Financial
Condition.



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The contractual or notional amount of these instruments reflects the extent of involvement
the Bank has in particular classes of financial instruments. For interest-rate cap agreements, assets sold with limited recourse and forward purchase and sale commitments, the contractual or notional amounts do not represent exposure to credit loss
in the event of nonperformance by the other party. At September 30, 2005 and 2004, the Banks exposure for these financial instruments was equal to their carrying amount of $14.6 and $21.9 million, respectively. The Bank uses the same
credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.



Commitments to Extend Credit:



The Bank had $3,098.6 million of commitments to extend credit at September 30, 2005. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the agreement.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. These commitments are subject to the Banks normal underwriting and credit evaluation policies and procedures.



Standby Letters of Credit:



Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. At September 30, 2005, the Bank
had issued standby letters of credit in the amount of $122.9 million to guarantee the performance of and irrevocably assure payment by customers under construction projects. In accordance with FASB Interpretation No. (FIN) 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, the Bank recorded a liability for the fair value of its guarantee equal to $411,000.



Of the total, $65.9 million will expire in fiscal 2006 and the remainder will expire over
time through fiscal 2012. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan commitments to customers. At September 30, 2005, the Bank holds mortgage-backed securities with a
book value of $6.2 million that have been pledged as collateral for certain of these letters of credit.



Recourse Arrangements:



The Bank
is obligated under various recourse provisions (primarily related to credit losses) related to the securitization and sale of receivables. As a result of these recourse provisions, the Bank maintained restricted cash accounts amounting to $23.4
million at September 30, 2005. The Bank maintained restricted cash accounts and overcollateralization of receivables amounting to $19.0 and $1.5 million, respectively, at September 30, 2004, both of which are included in other assets in
the Consolidated Statements of Financial Condition.



At September 30,
2004, the Bank was obligated under various recourse provisions related to the swap of single-family residential loans for mortgage-backed securities issued by the Bank. Recourse to the Bank under these arrangements was $3.8 million, consisting of
restricted cash accounts of $2.0 million and overcollateralization of receivables of $1.8 million. There were no such obligations at September 30, 2005.



The Bank is also obligated under recourse provisions related to the servicing of certain of its residential mortgage loans. Recourse to the Bank under these agreements
was $3.9 million and $4.0 million at September 30, 2005 and 2004, respectively.



Derivative Financial Instruments:



In accordance with
SFAS 133, the Bank assigns derivatives to one of these categories at the purchase date: fair value hedge, cash flow hedge or non-designated hedge. SFAS 133 requires an assessment of the expected and ongoing effectiveness of any derivative assigned
to a fair value hedge or cash flow hedge relationship.



Fair Value Hedges
For derivatives designated as fair value hedges, the derivative instrument and related hedged item are marked to market through earnings. Derivatives are included in other assets in the Consolidated Statements of Financial Condition.



During fiscal 2004, the Bank discontinued hedging the change in fair value of
its mortgage servicing rights.



At September 30, 2005, the Bank had
certain forward sale commitments, which were designated as fair value hedges of loans held for sale. The net unrealized gain in value of these commitments was $468,000 at September 30, 2005. The net unrealized loss in the value of the related
hedged item was $528,000. The net unrealized gains and losses are included in other income in the Consolidated Statement of Operations. There was no ineffectiveness during the year ended September 30, 2005.



101



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Derivative Financial Instruments (Continued):



At September 30, 2004, the Bank had certain forward sale commitments, which were
designated as fair value hedges of loans held for sale. The net unrealized loss in value of these commitments was $1,114 at September 30, 2004. The net unrealized gain in the value of the related hedged item was $1.2 million. The net unrealized
gains and losses are included in other income in the Consolidated Statement of Operations. Hedge ineffectiveness during the year ended September 30, 2004 was $75,000.



Cash Flow Hedges For derivatives designated as cash flow hedges, mark to market adjustments are recorded as a component of
equity. At September 30, 2005 and 2004, the Bank did not have any derivatives designated as cash flow hedges.



Non-Designated Hedges  Certain economic hedges are not designated as cash flow hedges or as fair value hedges for accounting purposes. As a result, changes
in their fair value are recorded in other income in the Consolidated Statements of Operations. The fair value of these derivatives is included in other assets in the Consolidated Statements of Financial Condition.



At September 30, 2005, the Bank had $110.8 million in forward sale commitments. The net
unrealized gain in the value of these commitments was $403,000 at September 30, 2005. At September 30, 2005, the Bank had interest rate locks (IRLs) with a notional amount of $145.5 million. The net unrealized loss in the value
of the IRLs was $393,000.



At September 30, 2004, the Bank had $61.0
million in forward sale commitments. The net unrealized loss in the value of these commitments was $30,000 at September 30, 2004. At September 30, 2004, the Bank had IRLs with a notional amount of $101.4 million. The net unrealized gain in
the value of the IRLs was $27,000.



Concentrations of Credit:



The Banks principal market is the metropolitan Washington, DC
area. In addition, a significant portion of the Banks residential mortgage loans are secured by properties in California. Service industries and federal, state and local governments employ a significant portion of the Washington, DC area labor
force. Adverse changes in economic conditions in these areas could have a direct impact on the timing and amount of payments by borrowers.



30. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS  THE BANK:



The majority of the Banks assets and liabilities are financial instruments; however, certain of these financial instruments lack an available trading market.
Significant estimates, assumptions and present value calculations were therefore used for the purposes of the following disclosure, resulting in a great degree of subjectivity inherent in the indicated fair value amounts. Because fair value is
estimated as of the balance sheet date, the amount which would actually be realized or paid upon settlement or maturity could be significantly different. Comparability of fair value amounts among financial institutions may be difficult due to the
wide range of permitted valuation techniques and the numerous estimates and assumptions which must be made.



102



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The estimated fair values of the Banks financial instruments are as follows:



|                                                                                                                        |                |               |           |            |  |                |           |  |            |           |     |  |   |          
|----------------------------------------------------------------------------------------------------------------------- | -------------- | ------------- | --------- | ---------- |  | -------------- | --------- |  | ---------- | --------- | --- |  | - | ---------
|(In thousands)                                                                                                          |                | September 30,
|                                                                                                                        | 2005           |               | 2004     
|                                                                                                                        | CarryingAmount |               |           | Fair Value |  | CarryingAmount |           |  | Fair Value
|Financial assets:                                                                                                       |                |               |           |            |  |                |           |  |            |           |     |  |   |          
|Cash, due from banks, interest-bearing deposits, federal funds sold and securities purchased under agreements to resell |                | $             | 507,499   |            |  | $              | 507,499   |  | $          | 542,548   |     |  | $ | 542,548  
|Loans held for securitization and/or sale                                                                               |                |               | 1,718,132 |            |  |                | 1,804,230 |  |            | 1,965,476 |     |  |   | 2,036,520
|U.S. Government securities                                                                                              |                |               | 200,902   |            |  |                | 198,769   |  |            | 71,192    |     |  |   | 70,905   
|Mortgage-backed securities                                                                                              |                |               | 859,808   |            |  |                | 849,764   |  |            | 409,303   |     |  |   | 415,503  
|Loans receivable, net                                                                                                   |                |               | 9,303,800 |            |  |                | 9,312,435 |  |            | 8,555,557 |     |  |   | 8,723,302
|Other financial assets                                                                                                  |                |               | 531,030   |            |  |                | 531,030   |  |            | 456,884   |     |  |   | 456,884  
|                                                                                                                        |                |               |           |           
|Financial liabilities:                                                                                                  |                |               |           |            |  |                |           |  |            |           |     |  |   |          
|Deposit accounts with no stated maturities                                                                              |                |               | 7,459,703 |            |  |                | 7,459,703 |  |            | 7,005,521 |     |  |   | 7,005,521
|Deposit accounts with stated maturities                                                                                 |                |               | 2,322,065 |            |  |                | 2,328,642 |  |            | 1,849,597 |     |  |   | 1,866,692
|Securities sold under repurchase agreements and other short-term borrowings and Federal Home Loan Bank advances         |                |               | 2,967,654 |            |  |                | 2,969,599 |  |            | 2,943,517 |     |  |   | 2,954,544
|Capital notes-subordinated                                                                                              |                |               | 171,770   | (1)        |  |                | 176,583   |  |            | 171,489   | (1) |  |   | 171,500  
|Other financial liabilities                                                                                             |                |               | 208,572   |            |  |                | 208,572   |  |            | 182,891   |     |  |   | 182,891  

---

|(1) | Net of deferred debt issuance costs which are included in other assets in the Consolidated Statements of Financial Condition.
|--- | -----------------------------------------------------------------------------------------------------------------------------



The following methods and assumptions were used to estimate the fair value amounts at
September 30, 2005 and 2004:



Cash, due from banks,
interest-bearing deposits, federal funds sold and securities purchased under agreements to resell: Carrying amount approximates fair value.



Loans held for securitization and/or sale:The fair value of loans held for securitization and/or sale is determined using discounted cash flow analysis,
using quoted prices for loans or securities backed by loans with similar characteristics, or outstanding commitment prices from investors.



U.S. Government securities:Fair value is based on quoted market prices.



Mortgage-backed securities: Fair value is based on quoted market prices, dealer
quotes or estimates using dealer quoted market prices for similar securities.



Loans receivable, net: Fair value of certain homogeneous groups of loans (e.g., single-family residential, automobile loans, home improvement loans and fixed-rate commercial and multifamily loans) is estimated using discounted
cash flow analyses based on contractual repayment schedules and managements estimate of future prepayment rates. The discount rates used in these analyses are based on either the interest rates paid on U.S. Treasury securities of comparable
maturities adjusted for credit risk and non-interest operating costs, or the interest rates currently offered by the Bank for loans with similar terms to borrowers of similar credit quality. For loans, which reprice frequently at market rates (e.g.,
home equity, variable-rate commercial and multifamily, real estateconstruction and ground loans), the carrying amount approximates fair value. The fair value of the Banks loan portfolio as presented above does not include the value of
established credit line customer relationships, or the value relating to estimated cash flows from future receivables and the associated fees generated from existing customers.



Other financial assets: The carrying amount of Federal Home Loan Bank stock, accrued interest receivable, interest-bearing
deposits maintained pursuant to various asset securitizations and other short-term receivables approximates fair value. Interest-only strips receivable and derivative financial instruments are carried at fair value.



Deposit accounts with no stated maturities: Deposit liabilities payable on
demand, consisting of NOW accounts, money market deposits, statement savings and other deposit accounts, are assumed to have an estimated fair value equal to carrying value. The indicated fair value does not consider the value of the Banks
established deposit customer relationships.



Deposit accounts with stated
maturities:Fair value of fixed-rate certificates of deposit is estimated based on the remaining maturity of the underlying accounts and interest rates currently offered on certificates of deposits with similar maturities.



Securities sold under repurchase agreements and other short-term borrowings and Federal
Home Loan Bank advances:For these borrowings, which either reprice frequently to market interest rates or are short-term in duration, the carrying amount approximates fair value.



103



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Fair value of the remaining amounts borrowed is estimated based on discounted cash flow
analyses using interest rates currently charged by the lender for comparable borrowings with similar remaining maturities.



Capital notes-subordinated: Fair value of the Banks subordinated debentures is based on quoted market prices.



Other financial liabilities: The carrying amount of custodial accounts, amounts
due to banks, accrued interest payable, notes payable and other short-term payables approximates fair value.



31. BUSINESS 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.



Selected segment information is as follows:



|                              |  |                |            |   |           |   |           |  |   |           
|----------------------------- |  | -------------- | ---------- | - | --------- | - | --------- |  | - | ----------
|(In thousands)                |  | Retail Banking |            |   | Other (1) |   | Total    
|Year ended September 30, 2005 |  |                |            |   |           |   |           |  |   |           
|Operating income              |  | $              | 736,977    |   |           | $ | 63,663    |  | $ | 800,640   
|Operating expense             |  |                | 589,953    |   |           |   | 50,548    |  |   | 640,501   
|                              |  |                |            |   |           |   |           |  |   |           
|Core earnings                 |  |                | 147,024    |   |           |   | 13,115    |  |   | 160,139   
|Non-core items                |  |                | 28,711     |   |           |   | 845       |  |   | 29,556    
|                              |  |                |            |   |           |   |           |  |   |           
|Operating income              |  | $              | 175,735    |   |           | $ | 13,960    |  | $ | 189,695   
|                              |  |                |            |   |           |   |           |  |   |           
|Average assets                |  | $              | 12,723,216 |   |           | $ | 1,300,749 |  | $ | 14,023,965
|                              |  |                |            |   |           |   |           |  |   |           
|Year ended September 30, 2004 |  |                |            |   |           |   |           |  |   |           
|Operating income              |  | $              | 762,495    |   |           | $ | 51,585    |  | $ | 814,080   
|Operating expense             |  |                | 557,697    |   |           |   | 43,981    |  |   | 601,678   
|                              |  |                |            |   |           |   |           |  |   |           
|Core earnings                 |  |                | 204,798    |   |           |   | 7,604     |  |   | 212,402   
|Non-core items                |  |                | 11,680     |   |           |   | 7,133     |  |   | 18,813    
|                              |  |                |            |   |           |   |           |  |   |           
|Operating income              |  | $              | 216,478    |   |           | $ | 14,737    |  | $ | 231,215   
|                              |  |                |            |   |           |   |           |  |   |           
|Average assets                |  | $              | 11,625,320 |   |           | $ | 1,195,111 |  | $ | 12,820,431
|                              |  |                |            |   |           |   |           |  |   |           
|Year ended September 30, 2003 |  |                |            |   |           |   |           |  |   |           
|Operating income              |  | $              | 718,471    |   |           | $ | 48,152    |  | $ | 766,623   
|Operating expense             |  |                | 581,487    |   |           |   | 41,884    |  |   | 623,371   
|                              |  |                |            |   |           |   |           |  |   |           
|Core earnings                 |  |                | 137,984    |   |           |   | 6,268     |  |   | 143,252   
|Non-core items                |  |                | (456       | ) |           |   | 3,394     |  |   | 2,938     
|                              |  |                |            |   |           |   |           |  |   |           
|Operating income              |  | $              | 136,528    |   |           | $ | 9,662     |  | $ | 146,190   
|                              |  |                |            |   |           |   |           |  |   |           
|Average assets                |  | $              | 10,658,508 |   |           | $ | 1,147,447 |  | $ | 11,805,955
|                              |  |                |            |   |           |   |           |  |   |           

---

|(1) | Includes commercial banking and non-banking services.
|--- | -----------------------------------------------------



104



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The financial information for each segment is reported on the basis used internally by the
Banks management to evaluate performance. Pre-tax core earnings excludes certain items such as gains and losses related to certain securitization transactions, adjustments to loan loss reserves in excess of net chargeoffs, amortization of
intangible assets, and certain other nonrecurring items. Items excluded from pre-tax 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.



At September 30, 2005, goodwill of $17.2 million related to the retail banking segment
and $30.8 million related to two reporting units within the asset management segment.



32. LITIGATION  THE BANK:



In the normal course of
business, the Bank is involved in litigation, which may include litigation arising out of its lending activities, the enforcement or defense of the priority of its security interests, the continued development and marketing of certain of its real
estate properties and certain employment claims. Although the amounts claimed in some of these suits in which the Bank is a defendant may be material, the Bank denies liability and, in the opinion of management, litigation currently pending will not
have a material impact on the financial condition or future operations of the Bank.



33. MINORITY INTERESTTHE TRUST:



At September 30,
2005 and 2004, minority interest held by affiliates of $124.9 and $114.9 million represent the 20% minority interest in the Banks common shares.



Minority interest  other consists of the following:



|                                                 |      |               |         |  |   |        
|------------------------------------------------ | ---- | ------------- | ------- |  | - | -------
|(In thousands)                                   |      | September 30,
|                                                 | 2005 |               | 2004   
|Preferred Stock of Chevy Chases REIT subsidiary |      | $             | 144,000 |  | $ | 144,000
|Chevy Chases Preferred Stock (See Note 25)      |      |               | 120,622 |  |   | 120,622
|Chevy Chases ground lease (See below)           |      |               | 31,391  |  |   | 31,391 
|                                                 |      |               |         |  |   |        
|Total minority interestother                    |      | $             | 296,013 |  | $ | 296,013
|                                                 |      |               |         |  |   |        



In April 1998, the Bank entered into a
ground lease agreement with a single purpose LLC. The LLCs only significant asset is the land on which the Banks executive office building was constructed. Lease payments made to the LLC are presented as minority interest in the
Consolidated Statements of Operations beginning July 1, 2003. The following is a schedule by years of the future lease payments under the agreement as of September 30, 2005:



|                          |  |                |        
|------------------------- |  | -------------- | -------
|Year Ending September 30, |  | (In thousands)
|2006                      |  | $              | 3,579  
|2007                      |  |                | 3,650  
|2008                      |  |                | 3,723  
|2009                      |  |                | 3,798  
|2010                      |  |                | 3,874  
|Thereafter                |  |                | 270,309
|                          |  |                |        
|Total                     |  | $              | 288,933
|                          |  |                |        



The lease, which expires in year 2062,
is subject to fixed rent adjustments. At the end of the lease term, the Bank has the option to purchase the land for $84.1 million from the LLC. The lease also allows the owners of the LLC to put their equity interests in the LLC to the Bank,
subject to certain limitations.



Effective July 1, 2003, the Bank adopted
FIN 46. FIN 46 requires companies to identify variable interest entities and consolidate them if it is determined that the company is the primary beneficiary of the variable interest entity. Pursuant to FIN 46, the Bank consolidated the assets and
liabilities of the LLC. As a result, property and equipment and minority interest on the Consolidated Balance Sheets each include $31.4 million at September 30, 2004 and 2003 related to the Banks involvement with the LLC. See Note 3.



Minority interest also includes the net cash proceeds received by a subsidiary
of the Bank (the REIT Subsidiary) from the sale of $150.0 million of its Noncumulative Exchangeable Preferred Stock, Series A, par value $5 per share (the REIT Preferred Stock). Cash dividends on the REIT Preferred Stock are
payable quarterly in arrears at an annual rate of 103/8%. The liquidation value of each share of REIT Preferred
Stock is $50 plus accrued and unpaid dividends. Except under certain limited circumstances, the holders of the REIT Preferred Stock have no voting rights. The REIT Preferred Stock is automatically exchangeable for a new series of Preferred Stock of
the Bank upon the occurrence of certain events.



105



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The REIT Preferred Stock is redeemable at the option of the REIT subsidiary at any time on or
after January 15, 2007, in whole or in part, at the following per share redemption prices plus accrued and unpaid dividends:



|                                                             |  |                  |       
|------------------------------------------------------------ |  | ---------------- | ------
|If redeemed during the 12-month
period beginning January 15, |  | Redemption Price
|2007                                                         |  | $                | 52.594
|2008                                                         |  | $                | 52.075
|2009                                                         |  | $                | 51.556
|2010                                                         |  | $                | 51.038
|2011                                                         |  | $                | 50.519
|2012 and thereafter                                          |  | $                | 50.000



The Bank received OTS approval to
include the net proceeds from the sale of the REIT Preferred Stock in the core capital of the Bank for regulatory capital purposes in an amount up to 25% of the Banks core capital. Dividends on the REIT Preferred Stock are presented as
minority interest in the Consolidated Statements of Operations.



34. INCOME
TAXESTHE TRUST:



The Trust voluntarily terminated its qualification
as a real estate investment trust under the Internal Revenue Code during fiscal 1978.



The provisions for income taxes for the years ended September 30, 2005, 2004 and 2003, consist of the following:



|                                        |      |                          |         |      |  |   |         |   |  |   |       
|--------------------------------------- | ---- | ------------------------ | ------- | ---- |  | - | ------- | - |  | - | ------
|(In thousands)                          |      | Year Ended September 30,
|                                        | 2005 |                          |         | 2004 |  |   | 2003   
|Current provision (benefit):            |      |                          |         |      |  |   |         |   |  |   |       
|Federal                                 |      | $                        | 97,517  |      |  | $ | 114,214 |   |  | $ | 1,257 
|State                                   |      |                          | 6,983   |      |  |   | 6,389   |   |  |   | 2,809 
|                                        |      |                          |         |      |  |   |         |   |  |   |       
|                                        |      |                          | 104,500 |      |  |   | 120,603 |   |  |   | 4,066 
|                                        |      |                          |         |      |  |   |         |   |  |   |       
|Deferred provision (benefit):           |      |                          |         |      |  |   |         |   |  |   |       
|Federal                                 |      |                          | (46,926 | )    |  |   | (55,982 | ) |  |   | 35,936
|State                                   |      |                          | 1,031   |      |  |   | 5,258   |   |  |   | 6,219 
|                                        |      |                          |         |      |  |   |         |   |  |   |       
|                                        |      |                          | (45,895 | )    |  |   | (50,724 | ) |  |   | 42,155
|                                        |      |                          |         |      |  |   |         |   |  |   |       
|Total                                   |      | $                        | 58,605  |      |  | $ | 69,879  |   |  | $ | 46,221
|                                        |      |                          |         |      |  |   |         |   |  |   |       
|Tax effect of other equity transactions |      | $                        | 1,309   |      |  | $ | 1,120   |   |  | $ | 1,894 
|                                        |      |                          |         |      |  |   |         |   |  |   |       



The Trusts effective income tax
rate varies from the statutory Federal income tax rate as a result of the following factors:



|                                                                                     |      |                          |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------ | ---- | ------------------------ | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|(In thousands)                                                                       |      | Year Ended September 30, |       
|                                                                                     | 2005 |                          |        | 2004 |  |   | 2003   |  
|Computed tax at statutory Federal income tax rate                                    |      | $                        | 63,276 |      |  | $ | 72,396 |   |  | $ | 45,657 |  
|Increase (reduction) in taxes resulting from:                                        |      |                          |        |      |  |   |        |   |  |   |        |  
|Minority interest                                                                    |      |                          | (6,675 | )    |  |   | (6,651 | ) |  |   | (5,447 | )
|Change in valuation allowance for deferred tax asset allocated to income tax expense |      |                          | (1,414 | )    |  |   | (707   | ) |  |   | 169    |  
|State income taxes                                                                   |      |                          | 7,241  |      |  |   | 7,573  |   |  |   | 5,863  |  
|Tax credits                                                                          |      |                          | (2,374 | )    |  |   | (1,316 | ) |  |   | (977   | )
|Other                                                                                |      |                          | (1,449 | )    |  |   | (1,416 | ) |  |   | 956    |  
|                                                                                     |      |                          |        |      |  |   |        |   |  |   |        |  
|                                                                                     |      | $                        | 58,605 |      |  | $ | 69,879 |   |  | $ | 46,221 |  
|                                                                                     |      |                          |        |      |  |   |        |   |  |   |        |  



106



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The components of the net deferred tax asset (liability)
were as follows:



|                                               |      |               |         |      |  |   |          |  
|---------------------------------------------- | ---- | ------------- | ------- | ---- |  | - | -------- | -
|(In thousands)                                 |      | September 30, |        
|                                               | 2005 |               |         | 2004 | 
|Deferred tax assets:                           |      |               |         |      |  |   |          |  
|Unrealized gains on loans and investments, net |      | $             | 32,988  |      |  | $ | 30,061   |  
|State net operating loss carry forwards        |      |               | 20,740  |      |  |   | 29,211   |  
|Asset securitizations, net                     |      |               | 20,532  |      |  |   | 4,656    |  
|Allowance for loan and real estate losses      |      |               | 18,400  |      |  |   | 22,285   |  
|Deferred compensation                          |      |               | 19,169  |      |  |   | 15,740   |  
|Other                                          |      |               | 5,893   |      |  |   | 7,533    |  
|                                               |      |               |         |      |  |   |          |  
|Gross deferred tax assets                      |      |               | 117,722 |      |  |   | 109,486  |  
|                                               |      |               |         |      |  |   |          |  
|Deferred tax liabilities:                      |      |               |         |      |  |   |          |  
|Automobile leasing                             |      |               | 44,000  |      |  |   | 94,750   |  
|Saul Holdings and Saul Centers                 |      |               | 47,530  |      |  |   | 46,771   |  
|Originated servicing rights                    |      |               | 44,634  |      |  |   | 38,094   |  
|Property and depreciation                      |      |               | 16,383  |      |  |   | 16,611   |  
|Deferred expenses and other                    |      |               | 33,687  |      |  |   | 23,518   |  
|                                               |      |               |         |      |  |   |          |  
|Gross deferred tax liabilities                 |      |               | 186,234 |      |  |   | 219,744  |  
|                                               |      |               |         |      |  |   |          |  
|                                               |      |               | (68,512 | )    |  |   | (110,258 | )
|Valuation allowance                            |      |               | (9,404  | )    |  |   | (12,244  | )
|                                               |      |               |         |      |  |   |          |  
|Net deferred tax liability                     |      | $             | (77,916 | )    |  | $ | (122,502 | )
|                                               |      |               |         |      |  |   |          |  



At September 30, 2005, the Real
Estate Trust and the Bank had state net operating loss carryovers totaling approximately $228.4 million and 133.9 million, respectively. The state net operating loss carryovers will expire in the years 2005 through 2024.



The Trust establishes a valuation allowance against the gross deferred tax asset to the
extent the Trust cannot determine that it is more likely than not such assets will be realized through taxes available in carryback years, future reversals of existing taxable temporary differences or projected future taxable income. Such a
valuation allowance has been established to reduce the gross deferred asset for state net operating loss carryforwards to an amount that is considered more likely than not to be realized. In fiscal year 2005, the Real Estate Trust determined it will
be able to utilize currently some of its state net operating loss carryforwards and, as a result, decreased the valuation allowance by $1.4 million. In addition, at the Real Estate Trust, state net operating loss carryforwards in excess of state
deferred tax liabilities are fully reserved due to expected future state tax losses.



Management believes the existing net deductible temporary differences will reverse during periods in which the Bank generates taxable income in excess of Real Estate Trust taxable losses. Management believes that the positive consolidated
earnings will continue as a result of the Banks earnings.



TAX SHARING
AGREEMENT



The Trusts affiliated group, including the Bank, entered
into a tax sharing agreement dated June 28, 1990, as amended. This agreement provides that payments be made by members of the affiliated group to the Trust based on their respective allocable shares of the overall federal income tax liability
of the affiliated group for taxable years and partial taxable years beginning on or after that date.



Allocable shares of the overall tax liability are prorated among the members with taxable income calculated on a separate return basis. The agreement also provides that, to the extent net operating losses or tax
credits of a particular member are used to reduce overall tax liability of the Trusts affiliated group, such member will be reimbursed on a dollar-for-dollar basis by the other members of the affiliated group that have taxable income in an
amount equal to such tax reduction. Under the tax sharing agreement, the Bank paid $2.1, $8.8 and $11.5 million, to the Real Estate Trust during fiscal 2005, 2004 and 2003. At September 30, 2005, the Real Estate Trust was due $1.8 million from
the Bank under the tax sharing agreement.



In recent years, the operations of
the Real Estate Trust have generated net operating losses while the Bank has reported net income. It is anticipated that the Trusts consolidation of the Banks operations into the Trusts federal income tax return will result in the
use of the Real Estate Trusts net operating losses to reduce the federal income taxes the Bank would otherwise owe. If in any future year, the Bank has taxable losses or unused credits, the Trust would be obligated to reimburse the Bank for
the greater of (i) the tax benefit to the group using such tax losses or unused tax credits in the groups consolidated Federal income tax returns or (ii) the amount of tax refund which the Bank would otherwise have been able to claim
if it were not being included in the consolidated Federal income tax return of the group.



107



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



35. SHAREHOLDERS EQUITYTHE TRUST:



In June 1990, the Trust acquired from affiliated companies an additional equity interest in
the Bank, which raised the Trusts ownership share of the Bank to 80%. In exchange for the interest acquired, the Trust issued 450,000 shares of a new class of $10.50 cumulative preferred shares of beneficial interest with a par value of $1
(the preferred shares). The transaction has been accounted for at historical cost in a manner similar to the pooling of interests method because the entities are considered to be under common control. In addition, the Trust acquired two
real estate properties from an affiliate in exchange for 66,000 preferred shares.



The Trust paid preferred dividends of $5.4, $11.6 and $12.0 million per year in fiscal 2005, 2004 and 2003, respectively. At September 30, 2005 and 2004, there were no dividends in arrears on the preferred shares. At September 30,
2003, the amount of dividends in arrears on the preferred shares was $6.1 million ($11.90 per share).



36. INDUSTRY SEGMENT INFORMATIONREAL ESTATE TRUST:



Industry segment information with regard to the Real Estate Trust is presented below. For information regarding the Bank, please refer to the Banking sections of the accompanying financial statements.



|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                            |  | Year Ended September 30 |        
|(In thousands)                                                              |  | 2005                    |         |   | 2004 |   |         | 2003 | 
|INCOME (from continuing operations)                                         |  |                         |         |   |      |   |         |      |  |   |         |  
|Hotels                                                                      |  | $                       | 98,621  |   |      | $ | 84,477  |      |  | $ | 72,822  |  
|Office and industrial properties                                            |  |                         | 39,466  |   |      |   | 38,225  |      |  |   | 39,121  |  
|Other                                                                       |  |                         | 1,724   |   |      |   | 1,301   |      |  |   | 1,053   |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|                                                                            |  | $                       | 139,811 |   |      | $ | 124,003 |      |  | $ | 112,996 |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|OPERATING PROFIT (LOSS) (from continuing operations) (1)                    |  |                         |         |   |      |   |         |      |  |   |         |  
|Hotels                                                                      |  | $                       | 27,316  |   |      | $ | 20,811  |      |  | $ | 14,129  |  
|Office and industrial properties                                            |  |                         | 19,857  |   |      |   | 19,558  |      |  |   | 20,688  |  
|Other                                                                       |  |                         | 614     |   |      |   | 286     |      |  |   | 32      |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|                                                                            |  |                         | 47,787  |   |      |   | 40,655  |      |  |   | 34,849  |  
|Equity earnings of unconsolidated entities                                  |  |                         | 8,246   |   |      |   | 7,788   |      |  |   | 7,248   |  
|Impairment loss on investments                                              |  |                         |        |   |      |   |        |      |  |   | (998    | )
|Gain on sales of property                                                   |  |                         | 263     |   |      |   | 2,769   |      |  |   | 9,079   |  
|Interest and amortization of debt expense                                   |  |                         | (46,503 | ) |      |   | (58,645 | )    |  |   | (48,969 | )
|Advisory fee, management and leasing feesrelated parties                   |  |                         | (13,448 | ) |      |   | (12,437 | )    |  |   | (11,684 | )
|General and administrative                                                  |  |                         | (3,429  | ) |      |   | (2,443  | )    |  |   | (2,823  | )
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Operating loss from continuing operations                                   |  | $                       | (7,084  | ) |      | $ | (22,313 | )    |  | $ | (13,298 | )
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|IDENTIFIABLE ASSETS (AT YEAR END)                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Hotels                                                                      |  | $                       | 186,484 |   |      | $ | 184,697 |      |  | $ | 178,068 |  
|Office and industrial properties                                            |  |                         | 130,268 |   |      |   | 124,966 |      |  |   | 126,102 |  
|Other                                                                       |  |                         | 149,078 |   |      |   | 148,506 |      |  |   | 125,115 |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|                                                                            |  | $                       | 465,830 |   |      | $ | 458,169 |      |  | $ | 429,285 |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|INTEREST AND AMORTIZATION OF DEBT EXPENSE (from continuing operations)      |  |                         |         |   |      |   |         |      |  |   |         |  
|Hotels                                                                      |  | $                       | 10,538  |   |      | $ | 11,000  |      |  | $ | 10,756  |  
|Office and industrial properties                                            |  |                         | 11,616  |   |      |   | 12,000  |      |  |   | 12,396  |  
|Other                                                                       |  |                         | 24,349  |   |      |   | 35,645  |      |  |   | 25,817  |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|                                                                            |  | $                       | 46,503  |   |      | $ | 58,645  |      |  | $ | 48,969  |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|DEPRECIATION (from continuing operations)                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Hotels                                                                      |  | $                       | 11,303  |   |      | $ | 10,761  |      |  | $ | 10,766  |  
|Office and industrial properties                                            |  |                         | 7,552   |   |      |   | 6,862   |      |  |   | 6,949   |  
|Other                                                                       |  |                         | 23      |   |      |   | 23      |      |  |   | 23      |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|                                                                            |  | $                       | 18,878  |   |      | $ | 17,646  |      |  | $ | 17,738  |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|CAPITAL EXPENDITURES AND PROPERTY ACQUISITIONS (from continuing operations) |  |                         |         |   |      |   |         |      |  |   |         |  
|Hotels                                                                      |  | $                       | 8,174   |   |      | $ | 11,421  |      |  | $ | 3,698   |  
|Office and industrial properties                                            |  |                         | 11,070  |   |      |   | 4,782   |      |  |   | 3,956   |  
|Other                                                                       |  |                         | 9,980   |   |      |   | 247     |      |  |   | 782     |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|                                                                            |  | $                       | 29,224  |   |      | $ | 16,450  |      |  | $ | 8,436   |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  

---

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



108



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



37. CONDENSED FINANCIAL STATEMENTS  THE TRUST:



These condensed financial statements reflect the Real Estate Trust and all its consolidated
subsidiaries except for the Bank which has been reflected on the equity method.



CONDENSED BALANCE SHEETS



|                                                     |  |              |          |   |      |   |          |  
|---------------------------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                                     |  | September 30 |         
|(In thousands)                                       |  | 2005         |          |   | 2004 |  
|ASSETS                                               |  |              |          |   |      |   |          |  
|Income-producing properties                          |  | $            | 443,040  |   |      | $ | 424,676  |  
|Accumulated depreciation                             |  |              | (182,255 | ) |      |   | (164,257 | )
|                                                     |  |              |          |   |      |   |          |  
|                                                     |  |              | 260,785  |   |      |   | 260,419  |  
|Land parcels                                         |  |              | 48,029   |   |      |   | 41,654   |  
|Real estate held for sale - net of depreciation      |  |              | 10,043   |   |      |   | 12,941   |  
|Equity investment in bank                            |  |              | 499,895  |   |      |   | 459,897  |  
|Equity investment in Saul Holdings and Saul Centers  |  |              | 75,323   |   |      |   | 61,767   |  
|Cash and cash equivalents                            |  |              | 13,920   |   |      |   | 31,842   |  
|Note receivable and accrued interest - related party |  |              | 13,100   |   |      |   | 7,677    |  
|Other assets                                         |  |              | 44,467   |   |      |   | 41,706   |  
|                                                     |  |              |          |   |      |   |          |  
|TOTAL ASSETS                                         |  | $            | 965,562  |   |      | $ | 917,903  |  
|                                                     |  |              |          |   |      |   |          |  
|LIABILITIES                                          |  |              |          |   |      |   |          |  
|Mortgage notes payable                               |  | $            | 278,411  |   |      | $ | 290,089  |  
|Mortgage notes payable - real estate held for sale   |  |              | 15,917   |   |      |   | 21,227   |  
|Notes payable  secured                              |  |              | 250,000  |   |      |   | 250,000  |  
|Notes payable  unsecured                            |  |              | 57,760   |   |      |   | 56,428   |  
|Other liabilities and accrued expenses               |  |              | 58,131   |   |      |   | 58,557   |  
|                                                     |  |              |          |   |      |   |          |  
|Total liabilities                                    |  |              | 660,219  |   |      |   | 676,301  |  
|                                                     |  |              |          |   |      |   |          |  
|TOTAL SHAREHOLDERS EQUITY                           |  |              | 305,343  |   |      |   | 241,602  |  
|                                                     |  |              |          |   |      |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY           |  | $            | 965,562  |   |      | $ | 917,903  |  
|                                                     |  |              |          |   |      |   |          |  

---

|* | See Consolidated Statements of Shareholders Equity
|- | ---------------------------------------------------



CONDENSED STATEMENTS OF OPERATIONS



|                                                      |  |                                 |          |   |      |   |          |      |  |   |          |  
|----------------------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                      |  | For the Year Ended September 30 |         
|(In thousands)                                        |  | 2005                            |          |   | 2004 |   |          | 2003 | 
|Total income                                          |  | $                               | 139,811  |   |      | $ | 124,003  |      |  | $ | 112,996  |  
|Total expenses                                        |  |                                 | (155,404 | ) |      |   | (156,873 | )    |  |   | (141,623 | )
|Equity in earnings of unconsolidated entities, net    |  |                                 | 8,246    |   |      |   | 7,788    |      |  |   | 7,248    |  
|Gain on sales of property                             |  |                                 | 263      |   |      |   | 2,769    |      |  |   | 9,079    |  
|Impairment loss on investments                        |  |                                 |         |   |      |   |         |      |  |   | (998     | )
|                                                      |  |                                 |          |   |      |   |          |      |  |   |          |  
|Real estate operating loss from continuing operations |  |                                 | (7,084   | ) |      |   | (22,313  | )    |  |   | (13,298  | )
|Equity in earnings of Bank                            |  |                                 | 78,063   |   |      |   | 92,280   |      |  |   | 55,702   |  
|                                                      |  |                                 |          |   |      |   |          |      |  |   |          |  
|Total company operating income                        |  |                                 | 70,979   |   |      |   | 69,967   |      |  |   | 42,404   |  
|Income tax benefit                                    |  |                                 | 3,805    |   |      |   | 8,073    |      |  |   | 4,520    |  
|Discontinued operations-net of income tax benefit     |  |                                 | (1,186   | ) |      |   | (1,340   | )    |  |   | (1,037   | )
|                                                      |  |                                 |          |   |      |   |          |      |  |   |          |  
|TOTAL COMPANY NET INCOME                              |  | $                               | 73,598   |   |      | $ | 76,700   |      |  | $ | 45,887   |  
|                                                      |  |                                 |          |   |      |   |          |      |  |   |          |  



109



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



CONDENSED STATEMENTS OF CASH FLOWS



|                                                                                  |  |                                 |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                  |  | For the Year Ended September 30 |        
|(In thousands)                                                                    |  | 2005                            |         |   | 2004 |   |         | 2003 | 
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |                                 |         |   |      |   |         |      |  |   |         |  
|Net income                                                                        |  | $                               | 73,598  |   |      | $ | 76,700  |      |  | $ | 45,887  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                 |         |   |      |   |         |      |  |   |         |  
|Depreciation                                                                      |  |                                 | 19,857  |   |      |   | 19,053  |      |  |   | 19,330  |  
|Amortization of debt expense                                                      |  |                                 | 2,197   |   |      |   | 4,507   |      |  |   | 2,028   |  
|Equity in earnings of Bank, net of distributions                                  |  |                                 | (38,863 | ) |      |   | (67,480 | )    |  |   | (39,702 | )
|Equity in earnings of unconsolidated entities, net of distributions               |  |                                 | (3,336  | ) |      |   | (1,262  | )    |  |   | (721    | )
|Impairment loss on investments                                                    |  |                                 |        |   |      |   |        |      |  |   | 998     |  
|Gain on sale of property                                                          |  |                                 | (1,146  | ) |      |   | (2,459  | )    |  |   | (9,079  | )
|Deferred tax benefit                                                              |  |                                 | (922    | ) |      |   | (1,123  | )    |  |   | (657    | )
|Increase (decrease) in accounts receivable and accrued income                     |  |                                 | (2,318  | ) |      |   | (1,955  | )    |  |   | 8,114   |  
|Decrease in accounts payable and accrued expenses                                 |  |                                 | (493    | ) |      |   | (6,023  | )    |  |   | (3,465  | )
|Other                                                                             |  |                                 | 489     |   |      |   | (1,725  | )    |  |   | (2,435  | )
|                                                                                  |  |                                 |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                         |  |                                 | 49,063  |   |      |   | 18,233  |      |  |   | 20,298  |  
|                                                                                  |  |                                 |         |   |      |   |         |      |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |                                 |         |   |      |   |         |      |  |   |         |  
|Capital expenditures and acquisitions - properties                                |  |                                 | (29,946 | ) |      |   | (17,973 | )    |  |   | (9,855  | )
|Property sales                                                                    |  |                                 | 4,715   |   |      |   | 3,719   |      |  |   | 11,306  |  
|Note receivable and accrued interest  (advances)/repayments, net                 |  |                                 | (5,423  | ) |      |   | (4,690  | )    |  |   | 3,500   |  
|Equity investment in Saul Holdings and Saul Centers                               |  |                                 | (5,901  | ) |      |   | (3,306  | )    |  |   | (2,314  | )
|Other investments                                                                 |  |                                 | (776    | ) |      |   | (800    | )    |  |   | (1,864  | )
|                                                                                  |  |                                 |         |   |      |   |         |      |  |   |         |  
|Net cash (used in) provided by investing activities                               |  |                                 | (37,331 | ) |      |   | (23,050 | )    |  |   | 773     |  
|                                                                                  |  |                                 |         |   |      |   |         |      |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |  |                                 |         |   |      |   |         |      |  |   |         |  
|Proceeds from mortgage financing                                                  |  |                                 |        |   |      |   |        |      |  |   | 46,000  |  
|Principal curtailments and repayments of mortgages                                |  |                                 | (15,793 | ) |      |   | (9,923  | )    |  |   | (48,600 | )
|Net secured note financings (repayments)                                          |  |                                 |        |   |      |   | 46,200  |      |  |   | 2,050   |  
|Proceeds from sales of unsecured notes                                            |  |                                 | 5,674   |   |      |   | 6,877   |      |  |   | 5,539   |  
|Repayments of unsecured notes                                                     |  |                                 | (4,342  | ) |      |   | (5,798  | )    |  |   | (5,346  | )
|Costs of obtaining financings                                                     |  |                                 | (3,193  | ) |      |   | (7,676  | )    |  |   | (1,705  | )
|Purchase of treasury stock                                                        |  |                                 |        |   |      |   |        |      |  |   | (1,993  | )
|Dividends paidpreferred shares of beneficial interest                            |  |                                 | (12,000 | ) |      |   | (12,000 | )    |  |   | (12,000 | )
|                                                                                  |  |                                 |         |   |      |   |         |      |  |   |         |  
|Net cash (used in) provided by financing activities                               |  |                                 | (29,654 | ) |      |   | 17,680  |      |  |   | (16,055 | )
|                                                                                  |  |                                 |         |   |      |   |         |      |  |   |         |  
|Net (decrease) increase in cash and cash equivalents                              |  |                                 | (17,922 | ) |      |   | 12,863  |      |  |   | 5,016   |  
|Cash and cash equivalents at beginning of year                                    |  |                                 | 31,842  |   |      |   | 18,979  |      |  |   | 13,963  |  
|                                                                                  |  |                                 |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of year                                          |  | $                               | 13,920  |   |      | $ | 31,842  |      |  | $ | 18,979  |  
|                                                                                  |  |                                 |         |   |      |   |         |      |  |   |         |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



38. SUBSEQUENT EVENTS  THE REAL ESTATE TRUST:



Effective October 1, 2005 the Advisors obligations under the advisory contract were
assigned to Saul Co. In addition the agreement was extended until September 30, 2006, and will continue thereafter unless canceled by either party at the end of any contract year.



On November 1, 2005 the Real Estate Trust acquired a 137 room hotel property located in Fairfax County, Virginia for a purchase price
of approximately $12.7 million, which included the assumption of a mortgage note of $5.8 million.



Included in the mortgage notes payable at September 30, 2005 is a portfolio loan secured by six operating properties of approximately $86.0 million due on March 31, 2006. On December 2, 2005 the Real
Estate Trust refinanced one of the six properties with a new 10 year mortgage note of $76.0 million. The proceeds from this refinancing, along with available cash and line of credit borrowings were used to repay the portfolio loan. As a result the
Real Estate Trust unlevered the remaining five properties.



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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



None.



ITEM 9A. CONTROLS AND PROCEDURES



The Trust
maintains disclosure controls and procedures that are designed 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 September 30, 2005. 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 September 30, 2005.



During the three months ended September 30, 2005, 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.



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PART III



ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST



The Declaration of Trust provides that there shall be no fewer than three nor more than twelve trustees, as determined from time to time by the trustees in office. The Board of Trustees has fixed its permanent
membership at seven trustees divided into three classes with overlapping three-year terms. The term of each class expires at the Annual Meeting of Shareholders, which is usually held on the last Friday of January.



The following list sets forth the name, age, position with the Trust, present principal
occupation or employment and material occupations, positions, offices or employments during the past five years of each trustee and executive officer of the Trust. Unless otherwise indicated, each individual has held an office with the Trust for at
least the past five years.



Class One TrusteesTerms End at the 2006
Annual Meeting



Philip D. Caraci, age 67, was elected a Trustee in
2003. For the previous five years he served as Senior Vice President and Secretary of the Trust, Executive Vice President of Saul Company, Senior Vice President of the Advisor, Chairman of the Board of Saul Property Co., and a Director and President
of Saul Centers. Mr.Caraci is also a member of the ASB Real Estate Advisory Committee, a subsidiary of Chevy Chase.



Gilbert M. Grosvenor, age 74, has served as a Trustee since 1971. Mr. Grosvenor also serves as Chairman of the Board of Trustees of the National Geographic
Society and as a Director of Chevy Chase and Saul Centers.



B. Francis Saul
II, age 73, serves as Chairman of the Board, Chief Executive Officer and Trustee of the Trust. Since 1969, Mr. Saul has been the President and Chief Operating Officer of B.F. Saul Company. He also serves as Chairman of the Board and Chief
Executive Officer of Chevy Chase Bank. Mr. Saul is the President and Chairman of the Board of Chevy Chase Property Company, Westminster Investing Company, and Chevy Chase Lake Corporation. He serves as Chairman of the Board and Chief Executive
Officer of Saul Centers, Inc. Mr. Saul serves as a Trustee of the National Geographic Society and the John Hopkins Medicine Board. He also serves as a member of the Trustees Council of the National Gallery of Art and is an Honorary Trustee of
the Brookings Institute. In addition, Mr. Saul is Director Emeritus of Colonial Williamsburg Hotel Properties, Inc., a member of the Folger Shakespeare Library and the Board of Visitors and Governors of Washington College. Mr. Saul is the
father of B. Francis Saul III.



Class Two TrusteesTerms End at the
2007 Annual Meeting



George M. Rogers, Jr., age 72, has served as a
Trustee since 1969. Mr. Rogers is a Senior Counsel in the law firm of Pillsbury Winthrop Shaw Pittman LLP, Washington, DC, which serves as counsel to the Trust and Chevy Chase. Mr. Rogers serves as a Director of Chevy Chase, Saul Company,
Chevy Chase Property Company, Westminster Investing Corporation, and Chevy Chase Lake Corporation.



B. Francis Saul III, age 43, has served as a Trustee since 1997 and is currently a Senior Vice President of the Trust. Mr. Saul also serves as a Director and Vice Chairman of Chevy Chase and as a Director
and/or Officer of Saul Company, Saul Property Co., Chevy Chase Property Company, Westminster Investing Corporation, and as President and Director of Saul Centers. He is also a Director and past Chairman of the Boys & Girls Clubs of Greater
Washington. He serves on the Boards of Childrens National Medical Center, The Conservation Fund and The Economic Club of Washington. Mr. Saul is the son of B. Francis Saul II.



Class Three TrusteeTerm Ends at the 2008 Annual Meeting



John R. Whitmore, age 72, has served as a Trustee since 1984. He also has served as Senior Advisor to The Bessemer Group,
Incorporated (a financial management and banking firm) and its Bessemer Trust Company subsidiaries since 1998. Mr. Whitmore is a director of Chevy Chase, Chevy Chase Property Company, Saul Company and Saul Centers. During the period 1975-1998,
Mr. Whitmore was President and Chief Executive Officer of Bessemer Group, Incorporated and its Bessemer Trust Company subsidiaries and a director of Bessemer Securities Corporation.



Executive Officers of the Trust Who Are Not Directors



Stephen R. Halpin, Jr., age 50, serves as Vice President and Chief Financial Officer of the Trust, and Senior Vice President and Chief Financial Officer of Saul Company. He also serves as Executive Vice President and Chief Financial
Officer of Chevy Chase.



Thomas H. McCormick, age 55, joined the Trust
in February 2005 and serves as General Counsel of the Trust, Executive Vice President and General Counsel of Chevy Chase, Senior Vice President and General Counsel and a Director of B F Saul Company and Senior Vice President and General Counsel of
Saul Centers. Prior to joining the Trust, Mr. McCormick was a senior partner with the law firm Shaw Pittman LLP, now know as Pillsbury Winthrop Shaw Pittman. He also served as the Chair if Shaw Pittmans Board of Directors and its
Corporate and Securities group.



Patrick T. Connors, age 43, has served
as a Vice President of the Trust and Senior Vice President of Saul Company since January 2000. For the previous four years, he was an attorney with the law firm of Shaw Pittman LLP, Washington, DC.



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Kenneth D. Shoop,age 46, joined the Trust in September 2003 and serves as Vice President, Chief Accounting
Officer and Treasurer, of the Trust, Treasurer and Vice President of Saul Company, the Advisor, Saul Property Company and Chief Accounting Officer and Vice President of Saul Centers. Prior to joining the Trust, Mr. Shoop was Vice President and
Controller of Federal Realty Investment Trust.



Ross E. Heasley, age 66,
serves as Vice President of the Trust, Saul Company, the Advisor, Saul Property Co. and Saul Centers.



Henry Ravenel, Jr., age 71, serves as Vice President of the Trust, Saul Company, the Advisor and Saul Centers.



John A. Spain, age 42, has served as Vice President
of the Trust and Saul Company since August 2001.



Committees of the Board of Trustees



The Board of
Trustees met four times during fiscal 2005. Each member of the Board attended at least 75% of the aggregate number of meetings of the Board and of the committees of the Board on which he served.



The Board of Trustees has two standing committees: the Audit Committee and the Executive
Committee.



The Audit Committee is composed of Messrs. Caraci and Grosvenor.
The Audit Committees duties include nominating the Trusts independent registered public accounting firm, discussing with them the scope of their examination of the Trust, reviewing with them the Trusts financial statements and
accompanying report, and reviewing their recommendations regarding internal controls and related matters. This committee met four times during fiscal 2005.



None of the members of the Audit Committee qualify as an audit committee financial expert as such term is defined in the Exchange Act and the rules and
regulations thereunder. A substantial portion of the Trusts consolidated assets are held, and operations are performed, at the Bank level. As of September 30, 2005, the Bank accounted for 97% of the Trusts assets on a consolidated
basis and, for the year ended September 30, 2005. the Bank accounted for 88% of the Trusts revenue on a consolidated basis. Because the Bank operates in a highly regulated industry and has audited financial statements that are reviewed
and approved by its own audit committee, which includes two persons that are deemed financial experts, the Board of Trustees has determined that it is not necessary for the Audit Committee of the Trust to include an audit committee financial expert
at this time. In addition, the Board of Trustees has noted that Mr. Caraci, in his previous position as President of Saul Centers, gained substantial experience regarding accounting issues of the breadth and complexity that typically arise in
connection with the Real Estate Trusts business.



The Executive Committee
is composed of Messrs. Rogers, Saul II and Whitmore. It is empowered to oversee day-to-day actions of the Advisor and Saul Property Co. in connection with the operations of the Trust, including the acquisition, administration, sale or disposition of
investments. No meetings of this committee were necessary during fiscal 2005.



Trustees of the Trust are currently paid an annual retainer of $12,500 and a fee of $600 for each board or committee meeting attended. Trustees from outside the Washington, D.C. area are also reimbursed for out-of-pocket expenses in
connection with their attendance at meetings. Mr. Saul II is not paid for attending Executive Committee meetings. For the fiscal year ended September 30, 2005, the Real Estate Trust paid total fees of $104,000 to the Trustees, including
$15,000 to Mr. Saul II.



Code of Ethics



The Trusts officers and trustees are governed by a code of ethics. The code of ethics
will be made available free of charge to any person upon request.



ITEM 11. EXECUTIVE COMPENSATION



The Real
Estate Trust pays no compensation to its executive officers for their services in such capacity. Mr. Saul II receives compensation from Chevy Chase for his services as the banks Chairman of the Board of Directors and Chief Executive
Officer, Mr. Halpin receives compensation from Chevy Chase for his services as Executive Vice President and Chief Financial Officer, and since 2000, Mr. Saul III receives compensation from Chevy Chase for his services as Vice Chairman of
the Board of Directors. No other executive officers of the Real Estate Trust received any compensation from the Real Estate Trust or its subsidiaries with respect to any of the fiscal years ended September 30, 2005, 2004 and 2003.



The following table sets forth the cash compensation paid by Chevy Chase to Mr. Saul
II, Mr. Halpin, and Mr. Saul III for or with respect to the fiscal years ended September 30, 2005, 2004 and 2003 for all capacities in which they served during such fiscal years.



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SUMMARY COMPENSATION TABLE



Annual Compensation



|                                           |  |      |  |        |           |       |   |                              |  |                       |         |  |   |           |    
|------------------------------------------ |  | ---- |  | ------ | --------- | ----- | - | ---------------------------- |  | --------------------- | ------- |  | - | --------- | ---
|Name and Principal Position                |  | Year |  | Salary |           | Bonus |   | Long-TermCompensationPayouts |  | All OtherCompensation |        
|B. Francis Saul II,                        |  | 2005 |  | $      | 1,865,385 |       | $ | 2,500,000                    |  | $                     | 836,521 |  | $ | 1,254,225 | (1)
|Chairman and Chief                         |  | 2004 |  |        | 1,678,078 |       |   | 2,000,000                    |  |                       | 655,206 |  |   | 1,399,311 | (2)
|Executive Officer of Chevy Chase           |  | 2003 |  |        | 1,607,311 |       |   | 1,550,000                    |  |                       | 440,496 |  |   | 753,545   | (3)
|Stephen R. Halpin, Jr.,                    |  | 2005 |  | $      | 590,385   |       | $ | 182,500                      |  | $                     | 191,205 |  | $ | 307,480   | (1)
|Executive Vice President                   |  | 2004 |  |        | 517,311   |       |   | 75,000                       |  |                       | 163,801 |  |   | 521,964   | (2)
|and Chief Financial Officer of Chevy Chase |  | 2003 |  |        | 490,197   |       |   | 72,750                       |  |                       | 88,099  |  |   | 156,673   | (3)
|B. Francis Saul III,                       |  | 2005 |  | $      | 269,231   |       | $ | 37,500                       |  | $                     |        |  | $ | 44,724    | (1)
|Vice Chairman of Chevy Chase               |  | 2004 |  |        | 240,199   |       |   | 35,250                       |  |                       |        |  |   | 42,676    | (2)
|                                           |  | 2003 |  |        | 228,469   |       |   | 33,750                       |  |                       |        |  |   | 25,633    | (3)

---

|(1) | The total amounts shown in the All Other Compensation column for fiscal year 2005 consist of the following: (i) contributions made by Chevy Chase to its
Supplemental Executive Retirement Plan on behalf of Mr. Saul II ($312,114), Mr. Halpin ($45,245) and Mr. Saul III ($18,404); (ii) the taxable benefit of premiums paid for group term insurance on behalf of Mr. Saul II
($11,539), Mr. Halpin ($2,465) and Mr. Saul III ($1,056); (iii) contributions to the B.F. Saul Company Employees Profit Sharing Retirement Plan (the Retirement Plan), a defined contribution plan, on behalf of Mr. Halpin
($12,600); (iv) accrued earnings on awards previously made under Chevy Chases Deferred Compensation Plan on behalf of Mr. Saul II ($930,572), Mr. Halpin ($201,269), and Mr. Saul III ($25,264); and (v) accrued
compensation on behalf of Mr. Halpin ($45,901) for the Special Retirement Compensation Agreements under which the executive could receive an amount of up to three times his base compensation if he retires from the bank after
reaching age 63.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The total amounts shown in the All Other Compensation column for fiscal year 2004 consist of the following: (i) contributions made by Chevy Chase to its
Supplemental Executive Retirement Plan on behalf of Mr. Saul II ($259,997), Mr. Halpin ($33,067) and Mr. Saul III ($16,527); (ii) the taxable benefit of premiums paid for group term insurance on behalf of Mr. Saul II
($16,341), Mr. Halpin ($1,698) and Mr. Saul III ($899); (iii) contributions to the B.F. Saul Company Employees Profit Sharing Retirement Plan (the Retirement Plan), a defined contribution plan, on behalf of Mr. Halpin ($12,300);
(iv) accrued earnings on awards previously made under Chevy Chases Deferred Compensation Plan on behalf of Mr. Saul II ($1,122,973), Mr. Halpin ($244,804), and Mr. Saul III ($25,250). ); and (v) accrued compensation on
behalf of Mr. Halpin ($230,095) for the Special Retirement Compensation Agreements under which the executive could receive an amount of up to three times his base compensation if he retires from the bank after reaching age 63.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The total amounts shown in the All Other Compensation column for fiscal year 2003 consist of the following: (i) contributions made by Chevy Chase to its
Supplemental Executive Retirement Plan on behalf of Mr. Saul II ($215,868), Mr. Halpin ($27,063) and Mr. Saul III ($15,733); (ii) the taxable benefit of premiums paid for group term insurance on behalf of Mr. Saul II
($14,466), Mr. Halpin ($1,698) and Mr. Saul III ($784); (iii) contributions to the B.F. Saul Company Employees Profit Sharing Retirement Plan (the Retirement Plan), a defined contribution plan, on behalf of Mr. Halpin ($12,000);
and (iv) accrued earnings on awards previously made under Chevy Chases Deferred Compensation Plan on behalf of Mr. Saul II ($523,211), Mr. Halpin ($115,912), and Mr. Saul III ($9,116).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

LONG-TERM INCENTIVE PLAN AWARDS. The following table sets forth certain information concerning the principal
contributions (the Principal Contributions) credited by the Bank to the accounts (the Accounts) of the executive officers named above for fiscal year 2005 under the Banks Deferred Compensation Plan (the
Plan).



LONG-TERM INCENTIVE PROGRAMAWARDS
IN LAST FISCAL YEAR



|                       |  |                                                     |  |                                                                |         |         |   |           |  |   |          
|---------------------- |  | --------------------------------------------------- |  | -------------------------------------------------------------- | ------- | ------- | - | --------- |  | - | ---------
|Name                   |  | Performance orOther PeriodUntil Maturationor Payout |  | Estimated Future Payouts (1) Under Non-Stock Price-Based Plans
|                       |  | Threshold                                           |  | Target(2)                                                      |         | Maximum
|B. Francis Saul II (3) |  | 2005                                                |  | $                                                              | 805,000 |         | $ | 2,639,971 |  | $ | 5,262,976
|Stephen R. Halpin, Jr. |  | 2014                                                |  | $                                                              | 180,000 |         | $ | 559,053   |  | $ | 1,114,513

---

|(1) | The estimated future payouts shown in the table are based on assumed performance rates for the Bank during each year in the ten-year performance period. The actual payouts under the
Plan may vary substantially from the payouts shown in the table, depending upon the Banks actual rate of return on average assets for each fiscal year in the ten-year performance period ending September 30, 2014.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The Plan does not establish any target performance levels. The payout amounts shown in this column have been calculated assuming that the Banks rate of return on average
assets during each of the years in the performance period are the same as the Banks rate of return during the fiscal year ended September 30, 2005.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The payout amounts shown for all participants are the estimated amounts that would be payable to such participants if their employment continued with the Bank for the entire
ten-year performance period of the Plan. Mr. Saul attained the age of 72 in 2004, at which time he became fully vested in the Account maintained for his benefit under the Plan. As of September 30, 2005, the vested account balance
maintained for Mr. Sauls benefit under the Plan was $9,289,719. Under the Plan, if Mr. Saul were to retire after that date, he could elect to have the Bank pay out the net contribution (as defined) in the Account prior to the year
2014.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of September 30, 2005, the following individuals
have vested amounts that are payable within 120 days after September 30, 2005: Mr. Saul ($956,024); Mr. Halpin ($215,105).



The Plan provides that, as of the end of each fiscal year in the ten-year period ending September 30, 2014 (or the executive officers earlier termination of
employment with the Bank), the Bank will add to or deduct from each executive officers Account a contribution or deduction, as the case may be, which represents the hypothetical interest (which may be positive or negative) earned on the
Principal Contribution, based on the Banks rate of return on average assets (as computed under the Plan) for the fiscal year then ended. (The Principal Contribution, plus or minus any interest credited or deducted, is referred to as the
Net Contribution.)



Executive officers are entitled to receive the
Net Contribution in their respective Account only upon full or partial vesting. Plan participants become fully vested in their Account under the Plan, provided that they remain continuously employed by the Bank during the vesting period, upon the
earliest to occur of any of the following:



| |  |  | September 30, 2014;
| | - |  | -------------------



| |  |  | attainment of age 65;
| | - |  | ---------------------



| |  |  | death;
| | - |  | ------



| |  |  | total and permanent disability; or
| | - |  | ----------------------------------



| |  |  | a change in control of the Bank (as defined in the Plan).
| | - |  | ---------------------------------------------------------



Plan participants become partially vested, to the extent of 50% of the Net Contribution in the Account, upon the termination of their employment by the Bank without cause
(as defined in the Plan) after September 30, 2009.



Payouts are made under
the Plan within 120 days after September 30, 2014, or the earlier termination of the executive officers employment with the Bank, provided that vesting or partial vesting has occurred under the Plan.



OTHER COMPENSATION AGREEMENTS. Mr. Halpin has entered into an agreement with the Bank
entitled Agreement For Executive Level Officers Governing Confidentiality, Nonsolicitation, Ownership of Certain Works and Termination Upon Change in Control under which the executive officer has agreed not to compete with, solicit
customers of or solicit the employees of the Bank for stated periods following any termination of employment with the Bank. In addition, the Bank agrees to pay the executive a specified amount if the executive is terminated without cause in the
three-year period following a change of control of the Bank. The amount payable varies depending upon the executives base compensation and most recent bonus, the length of the executives employment with the Bank and the per share price
at which the triggering change of control has occurred.



Mr. Halpin also
has entered into Special Retirement Compensation Agreements under which the executive could receive an amount up to three times his base compensation if he retires from Chevy Chase after reaching age 63. As of September 30, 2005,
accrued compensation on behalf of Mr. Halpin totaled $275,996.



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Report of the Banks Compensation Committee



The Compensation Committee of the Bank reviews compensation of the Banks senior
officers, which include Messrs. Saul II, Saul III and Halpin. The components of compensation reviewed by the Committee include salary, bonuses and deferred compensation. Because the Banks common stock is privately held, the Bank does not offer
stock options as part of its compensation program. As part of its review of compensation, the Committee considers a variety of factors, including each individuals tenure, level of responsibility and performance, as well as factors relating to
the overall performance of the Bank, the results of regulatory examinations, and the Banks overall compliance status.



The Committee also informs itself generally of executive level compensation of banks of comparable size to the Bank. In determining compensation of the Banks senior
officers, the Committee seeks to maintain a competitive position in the marketplace, taking into account that the Bank does not offer equity based compensation programs.



With respect to officers other than Mr. Saul II, the Committee takes into account the recommendations of Mr. Saul II. The
Committee is aware that Mr. Saul II is, indirectly, a significant shareholder of the Bank and thus has a strong incentive to act in the best interest of the shareholders. Mr. Saul II does not participate in the discussion of his own
compensation and similarly abstains from voting on his own compensation.



The
Committee has not adopted any specific policies concerning the relationship of corporate performance to executive compensation. Instead, the Committee follows a more flexible approach which it believes to be better suited to the specific
circumstances of the Bank.



| |  |                                             
| |  | --------------------------------------------
| |  | Members of the Banks Compensation Committee
| | 
| |  | Garland P. Moore, Jr., Chair                
| |  | George M. Rogers, Jr.                       
| |  | B. Francis Saul II                          



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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS



The following table sets forth certain information, as of December 16, 2005, concerning beneficial ownership of Common Shares and preferred shares of beneficial
interest, referred to in this report as the Preferred Shares, by (a) each person known by the Trust to be the beneficial owner of more than 5% of the Common Shares and the Preferred Shares, (b) each member of the Board of
Trustees, (c) each executive officer of the Trust named in the Summary Compensation Table under Item 11. Executive Compensation and (d) all trustees and executive officers of the Trust as a group.



|                                                           |  |                                                  |  |                     |  
|---------------------------------------------------------- |  | ------------------------------------------------ |  | ------------------- | -
|Name of Beneficial Owner                                   |  | Aggregate Number ofShares Beneficially Owned (1) |  | Percent ofClass (1) |  
|B. Francis Saul II                                         |  | Preferred: 516,000 (2)                           |  | 100.00              | %
|                                                           |  | Common: 4,807,510 (3)                            |  | 100.00              | %
|All Trustees and executive officers as a group (9 persons) |  | Preferred: 516,000 (2)                           |  | 100.00              | %
|                                                           |  | Common: 4,807,510 (3)                            |  | 100.00              | %

---

|(1) | Beneficial owner and percent of class are calculated pursuant to rule 13d-3 under the Securities Exchange Act of 1934.
|--- | ----------------------------------------------------------------------------------------------------------------------

|(2) | Consists of Preferred Shares owned of record by Saul Company and other companies of which Mr. Saul is an officer, director and/or more than 10% shareholder, comprising 270,000
Preferred Shares owned by Saul Company, 90,000 Preferred Shares owned by Franklin Development Company, Inc., 90,000 Preferred Shares owned by The Klingle Corporation, and 66,000 Preferred Shares owned by Westminster Investing Corporation. The
address of each person listed in this footnote is 7501 Wisconsin Avenue, Bethesda, Maryland 20814. Pursuant to Rule 13d-3, the Preferred Shares described above are considered to be beneficially owned by Mr. Saul because he has or may be deemed
to have sole or shared voting and/or investment power in respect thereof.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Consists of Common Shares owned of record by Saul Company and other companies of which Mr. Saul is an officer and director and/or more than 10% shareholder, comprising
1,125,739 Common Shares owned by Westminster Investing Corporation, 43,673 Common Shares owned by Derwood Investment Corporation, a subsidiary of Westminster Investing Corporation, 34,400 Common Shares owned by Somerset Investment Company, Inc., a
subsidiary of Westminster Investing Corporation, 2,751,662 Common Shares owned by Saul Company, 283,400 Common Shares owned by Columbia Securities Company of Washington, D.C., 172,918 Common Shares owned by Franklin Development Company, Inc., and
395,718 Common Shares owned by The Klingle Corporation. The address of each person listed in this footnote is 7501 Wisconsin Avenue, Bethesda, Maryland 20814. Pursuant to Rule 13d-3, the Common Shares described above are considered to be
beneficially owned by Mr. Saul because he has or may be deemed to have sole or shared voting and/or investment power in respect thereof.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Preferred Shares were issued in June 1990 in connection with the transaction in which the Trust increased its equity interest in Chevy Chase from 60% to 80%. The
dividend rate on the Preferred Shares is $10.50 per share per annum. Dividends are cumulative and are payable annually or at such other times as the Trustees may determine, as and when declared by the Trustees out of any assets legally available
therefor. The Preferred Shares have a liquidation preference of $100 per share. Subject to limits in certain of the Trusts loan agreements, the Preferred Shares are subject to redemption at the option of the Trust at a redemption price equal
to their liquidation preference. Except as otherwise required by applicable law, the holders of Preferred Shares are entitled to vote only in certain limited situations, such as the merger of the Trust or a sale of all or substantially all of the
assets of the Trust.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



Management Personnel



All of the
officers of the Trust and Messrs. Saul II, Saul III, Rogers and Whitmore, each of whom is a trustee of the Trust, are also officers and/or directors of Saul Company and/or its subsidiaries. In addition, Messrs. Saul II, Saul III, Whitmore,
Grosvenor, Caraci, McCormick, Heasley and Shoop are also officers and/or directors of Saul Centers and/or its subsidiaries.



Transactions with Saul Company and its Subsidiaries



The Real Estate Trust has been managed by B. F. Saul Advisory Company, L.L.C., (the Advisor), a wholly-owned subsidiary of B. F. Saul Company (Saul
Co.). All of the Real Estate Trust officers and four Trustees of the Trust are also officers and/or directors of Saul Co. The Advisor is paid a fixed monthly fee which is subject to annual review by the Trustees. The monthly fee was $487,000
during fiscal 2005, $472,000 during fiscal 2004, and $458,000 during fiscal 2003. Effective October 1, 2005 the Advisors obligations under the advisory contract were assigned to Saul Co. In addition the agreement was extended until
September 30, 2006, and will continue thereafter unless canceled by either party at the end of any contract year. Certain loan agreements prohibit termination of this contract.



Saul Company and Saul Property Co., a wholly owned subsidiary of Saul Company, provide services to the Real Estate Trust in the areas of
commercial property management and leasing, hotel management, development and construction management, and acquisitions, sales and financings of real property. Fees to the two companies amounted to $9.1 million in fiscal 2005.



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The Real Estate Trust reimburses the Advisor and Saul Property Co. for costs and expenses incurred in connection with the
acquisition and development of real property on behalf of the Real Estate Trust, in-house legal expenses, and all travel expenses incurred in connection with the affairs of the Real Estate Trust.



The Real Estate Trust pays the Advisor fees equal to 2% of the principal amount of publicly
offered unsecured notes as they are issued to offset the Advisors costs of administering the program. The Advisor received $267,000 in such fees in fiscal 2005.



B. F. Saul Insurance Agency of Maryland, Inc., a subsidiary of Saul Company, is a general insurance agency that receives commissions and
counter-signature fees in connection with the Real Estate Trusts insurance program. Such commissions and fees amounted to approximately $316,000 in fiscal 2005.



Under an existing unsecured note receivable from B.F. Saul Company not to exceed $15.3 million, the Real Estate Trust advanced an additional
net amount of $5.4 million during the current year, a $9.1 million advance offset by reimbursements of $3.7 million. During fiscal 2004, the Saul Co. borrowed an additional $4.7 million. During fiscal 2003 curtails of $3.5 million were paid by the
Saul Co. Interest on the loan is computed by reference to a floating rate index. At September 30, 2005 and 2004, the total due the Real Estate Trust was $13.1 million and $7.7 million, respectively. The balance of $7.7 million at
September 30, 2004 included accrued interest of $1.8 million. Interest earned on these loans amounted to $616,000, $108,000 and $151,000 during fiscal 2005, 2004 and 2003, respectively.



The Trust has retained the law firm of Pillsbury Winthrop Shaw Pittman LLP, at which
Mr. Rogers is senior counsel, to perform legal services for the Trust in fiscal 2004 and 2005.



The Board of Trustees of the Trust, including the independent trustees, reviews the fees and compensation arrangements between the Real Estate Trust and Saul Company and its related entities and affiliates and
believes that such fees and compensation arrangements are as favorable to the Real Estate Trust as would be obtainable from unaffiliated sources.



Transactions with Saul Centers



Shared Services. The Trust shares with Saul Centers certain personnel and ancillary functions at cost, such as computer hardware, software and support services,
payroll services, benefits administration, in-house legal services and other direct and indirect administrative payroll. In addition the Trust shares insurance expense with Saul Centers on a pro rata basis. Depending on the service, the method of
determining the cost of the shared services is based upon head count, estimates of usage or estimates of time incurred, as applicable. Although the Trust believes that the amounts allocated to it for such shared services represent a fair allocation
between the Trust and Saul Centers, the Trust has not obtained a third party appraisal of the value of these services.



Exclusivity Agreement and Right of First Refusal. The Real Estate Trust has entered into an Exclusivity Agreement with, and has granted a right of first refusal
to, Saul Centers and Saul Holdings Limited Partnership. The purpose of these agreements is to minimize potential conflicts of interest between the Real Estate Trust, Saul Centers and Saul Holdings Limited Partnership.



Saul Holdings Limited Partnership. The exclusivity agreement and right of first
refusal generally require the Real Estate Trust to conduct its shopping center business exclusively through Saul Centers and Saul Holdings Limited Partnership and to grant these entities a right of first refusal to purchase commercial properties and
development sites that become available to the Real Estate Trust in the District of Columbia or adjacent suburban Maryland. Subject to the exclusivity agreement and right of first refusal, the Real Estate Trust will continue to develop, acquire, own
and manage commercial properties and own land suitable for development as, among other things, shopping centers and other commercial properties.



Reimbursement Agreement. Pursuant to a reimbursement agreement among the partners of the Saul Holdings Limited Partnership and certain of their affiliates, the
Real Estate Trust and two of its subsidiaries have agreed to reimburse Saul Centers and the other partners in the event the Saul Holdings Limited Partnership fails to make payments with respect to certain portions of its debt obligations and Saul
Centers or any such other partners personally make payments with respect to such debt obligations. As of September 30, 2005, the maximum potential obligation of the Real Estate Trust and its subsidiaries under the agreement was approximately
$100 million. See Note 5 to the Consolidated Financial Statements in this report. The Real Estate Trust believes that Saul Holdings Limited Partnership will be able to make all payments due with respect to its debt obligations.



Tax Conflicts. The fair market value of each of the properties contributed to Saul
Holdings Limited Partnership and its subsidiaries by the Real Estate Trust and its subsidiaries in connection with the formation of Saul Centers and Saul Holdings Limited Partnership in 1993 exceeded the tax basis of such properties. In the event
Saul Centers or its wholly owned subsidiary, Saul QRS, Inc., acting as general partner, causes Saul Holdings Limited Partnership to dispose of, or there is an involuntary disposition of, one or more of such properties, a disproportionately large
share of the total gain for federal income tax purposes would be allocated to the Real Estate Trust and its subsidiaries as a result of the property disposition. See Note 5 to the Consolidated Financial Statements in this report.



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Other related party transactions



Remuneration of Trustees and Officers. For fiscal 2005, the Trust paid the trustees $104,000 in fees for their services. See
Item 10. Trustees and Executive Officers of the Trust. No compensation was paid to the officers of the Trust for acting as such; however, Mr. Saul II was paid by Chevy Chase for his services as the banks Chairman and Chief
Executive Officer, Mr. Halpin was paid by Chevy Chase for his services as Executive Vice President and Chief Financial Officer, and Mr. Saul III was paid by Chevy Chase for his services as Vice Chairman. See Item 11. Executive
Compensation. Messrs. Grosvenor, Rogers, Saul II and Saul III receive compensation for their services as directors of Chevy Chase and Messrs. Rogers, Saul II, Saul III and Whitmore and all of the officers of the Real Estate Trust receive
compensation from Saul Company and/or its affiliated corporations as directors or officers thereof.



Related Party Rents. The Real Estate Trust leases space to Chevy Chase and the Saul Property Co. at two of its income-producing properties. Minimum rents and expense recoveries paid under these leases amounted
to approximately $5.4 million in fiscal 2005. Chevy Chase leases space in several of the shopping centers owned by Saul Centers. The total rental payments made to Saul Centers by Chevy Chase in fiscal 2005 was $1.7 million. On September 24,
2001 Chevy Chase entered into an agreement to lease to Saul Company approximately 46,000 square feet of office space at its new corporate headquarters at 7501 Wisconsin Avenue, Bethesda, Maryland. Total payments under the lease for fiscal 2005 were
$2.2 million. In addition, Chevy Chase has retained Saul Company as its leasing agent to secure tenants for additional space that will be available in the new corporate headquarters. The Trust believes that these leases have comparable terms to
leases that would have been entered into with unaffiliated parties.



ITEM 14. PRINCIPAL INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEES AND SERVICES



Fees Paid to Independent Registered Public Accounting Firm



During fiscal years 2005 and 2004, The Trust retained Ernst & Young LLP to provide services in the following categories and amounts:



|                       |  |                  |         |                  |   |        
|---------------------- |  | ---------------- | ------- | ---------------- | - | -------
|                       |  | Fiscal Year 2005 |         | Fiscal Year 2004
|Audit Fees (1)         |  | $                | 485,172 |                  | $ | 403,004
|Audit Related Fees (2) |  |                  | 15,180  |                  |   | 3,300  
|                       |  |                  |         |                  |   |        
|Subtotaled             |  |                  | 500,352 |                  |   | 406,304
|                       |  |                 
|Tax Fees (3)           |  |                  | 25,106  |                  |   | 24,910 
|All Other Fees         |  |                  |        |                  |   |       
|                       |  |                  |         |                  |   |        
|Total Fees             |  | $                | 525,458 |                  | $ | 431,214
|                       |  |                  |         |                  |   |        

---

|(1) | Audit fees include the audit fee and fees for comfort letters, attest services and consents.
|--- | --------------------------------------------------------------------------------------------

|(2) | Audit related fees consist of fees incurred for consultation concerning financial accounting and reporting standards, performance of agreed-upon procedures, and other audit or
attest services not required by statute or regulation.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Tax fees consist of fees for tax consultation and tax compliance services.
|--- | --------------------------------------------------------------------------



Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm.



The Audit Committee has responsibility for appointing, setting compensation and overseeing
the work of the independent registered public accounting firm. In recognition of this responsibility, the Audit Committee has established a policy to pre-approve all audit and permissible non-audit services provided by the independent registered
public accounting firm.



Prior to engagement of the independent registered
public accounting firm for the next years audit, management will submit to the Audit Committee for approval an aggregate of services expected to be rendered during that year for the services listed above.



Prior to engagement, the Audit Committee pre-approves these services by types of service. The
fees are budgeted and the Audit Committee requires the independent registered public accounting firm and management to report actual fees versus the budget periodically throughout the year by category of service. During the year, circumstances may
arise when it may become necessary to engage the independent registered public accounting firm for additional services not contemplated in the original pre-approval. In those instances, the Audit Committee requires specific pre-approval before
engaging them.



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Pursuant to the Trusts Audit Committee Charter, the Audit Committee may delegate pre-approval authority to the
chairman of the Audit Committee, who shall promptly advise the remaining members of the Audit Committee of such approval at the next regularly scheduled meeting.



PART IV



ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



(a) The following documents are filed as part of this report:



|                                                        |  |                                                                                                                                            |  | 
|------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------ |  | 
|1. Financial Statements                                 |  |                                                                                                                                           
|                                                        |  |                                                                                                                                           
|                                                        |  | The following consolidated financial statements of the Trust are incorporated by reference in Part II, Item 8.                             |  | 
|                                                        |  |                                                                                                                                           
|(a)                                                     |  | Report of Independent Auditors.                                                                                                            |  | 
|                                                        |  |                                                                                                                                           
|(b)                                                     |  | Consolidated Balance SheetsAs of September 30, 2005 and 2004.                                                                             |  | 
|                                                        |  |                                                                                                                                           
|(c)                                                     |  | Consolidated Statements of OperationsFor the years ended September 30, 2005, 2004 and 2003.                                               |  | 
|                                                        |  |                                                                                                                                           
|(d)                                                     |  | Consolidated Statements of Comprehensive Income and Changes in Shareholders EquityFor the years ended September 30, 2005, 2004 and 2003. |  | 
|                                                        |  |                                                                                                                                           
|(e)                                                     |  | Consolidated Statements of Cash FlowsFor the years ended September 30, 2005, 2004 and 2003.                                               |  | 
|                                                        |  |                                                                                                                                           
|(f)                                                     |  | Notes to Consolidated Financial Statements.                                                                                                |  | 
|                                                        | 
|2. Financial Statement Schedules and Supplementary Data |  |                                                                                                                                           
|                                                        |  |                                                                                                                                           
|                                                        |  | (a) Schedules of the Real Estate Trust:                                                                                                    |  | 
|                                                        |  |                                                                                                                                           
|                                                        |  | Schedule ICondensed Financial InformationFor the years ended September 30, 2005, 2004 and 2003.                                          |  | 
|                                                        |  |                                                                                                                                           
|                                                        |  | Schedule IIIConsolidated Schedule of Investment Properties As of September 30, 2005.                                                      |  | 



(b) Exhibits



|                                                                             |  |                                                                                                                                                                                                                                                                                                                                                                         
|---------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBITS                                                                     |  | DESCRIPTION                                                                                                                                                                                                                                                                                                                                                             
|3. ORGANIZATIONAL DOCUMENTS                                                 
|                                                                             | 
|(a)                                                                          |  | Second Amended and Restated Declaration of Trust filed with the Maryland State Department of Assessments and Taxation on May 23, 2002 as Exhibit 3(a) to Registration Statement 333-70753 is
hereby incorporated by reference.                                                                                                                                          
|                                                                             | 
|(b)                                                                          |  | Second Amended and Restated By-Laws of the Trust dated as of May 23, 2002 as Exhibit 3(b) to Registration Statement 333-70753 is hereby incorporated by reference.                                                                                                                                                                                                      
|                                                                            
|4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
|                                                                             | 
|(a)                                                                          |  | Indenture, dated as of February 25, 2004, by and between the Trust and Wells Fargo Bank, National Association, as Trustee, with respect to the Trusts 71/2% Senior Secured Notes due 2014 and 71/2% Series B Senior Secured Notes due 2014, including Form of Note, as filed as Exhibit 4 (a) to Registration Statement 333-113640 is hereby incorporated by
reference.
|                                                                             | 
|(b)                                                                          |  | Indenture, dated as of April 14, 2003, between the Trust and U.S. Bank National Association, as Trustee, with respect to the Trusts Unsecured Notes Due for One Year to Ten Years from Date
of Issue, as filed as Exhibit 4 (a) to Registration Statement 333-104068 is hereby incorporated by reference.                                                              
|                                                                             | 
|(c)                                                                          |  | Indenture dated as of September 1, 1992 with respect to the Trusts Notes due from One to Ten Years form Date of Issue filed as Exhibit 4(a) to Registration Statement No. 33-34930 is hereby
incorporated by reference.                                                                                                                                                
|                                                                             | 
|(d)                                                                          |  | First Supplemental Indenture dated as of January 16, 1997 with respect to the Trusts Notes due from One to Ten years from Date of Issue filed as Exhibit 4(b) to Registration Statement No.
33-34930 is hereby incorporated by reference.                                                                                                                              
|                                                                             | 
|(e)                                                                          |  | Second Supplemental Indenture dated as of January 13, 1999 with respect to the Trusts Notes due from One to Ten Years from Date of Issuance as filed as Exhibit 4(l) to Registration
Statement No. 333-70753 is hereby incorporated by reference.                                                                                                                      



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|                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBITS               |  | DESCRIPTION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|10. MATERIAL CONTRACTS
|                       | 
|(a)                    |  | Amended and Restated Advisory Contract dated as of October 1, 2005 by and among the Trust, B.F. Saul Company and B.F. Saul Advisory Company, LLC, filed as Exhibit 10(a) to Trusts September
30 2005 Form 8-K is hereby incorporated by reference.                                                                                                                                                                                                                                                                                                                                             
|                       | 
|(b)                    |  | Form of Commercial Asset Management and Leasing Agreement between the Trust and B.F. Saul Property Company filed as Exhibit 10(c) to the Trusts September 30, 2005 Form 8-K is hereby
incorporated by reference.                                                                                                                                                                                                                                                                                                                                                                               
|                       | 
|(c)                    |  | 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.                                                                                                                                                                                                                                                                                                                                                                         
|                       | 
|(d)                    |  | 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.                                                                                                                                                                                                                                                                             
|                       | 
|(e)                    |  | 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.                                                                                                                                                                  
|                       | 
|(f)                    |  | 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.                                                                                                                                                                                                                                                             
|                       | 
|(g)                    |  | 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.                                                                                                                                                                                                                       
|                       | 
|(h)                    |  | First Amendment to Registration Rights and Lock-Up Agreement dated September 29, 1999 by and among Saul Centers, Inc., the Trust, Westminster Investing Corporation, Van Ness Square Corporation,
Dearborn Corporation, Franklin Property Company and Avenel Executive Park Phase II, Inc., as filed as Exhibit 10(b) to the Trusts Annual Report on Form 10-K (File No. 1-7184) for the fiscal year ended September 30, 2001 is hereby incorporated
by reference.                                                                                                                             
|                       | 
|(i)                    |  | 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.                                                                                                                                                                                                                               
|                       | 
|(j)                    |  | 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.
|                       | 
|(k)                    |  | 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.                                                                                                                                                                                                                                                                                                                                       
|                       | 
|(l)                    |  | Amended and Restated Note Administration Fee Agreement dated as of October 1, 2005, between the Trust, B.F. Saul Company and B.F. Saul Advisory Company L.L.C., as filed as Exhibit 10(n) to the
Trusts September 30, 2005 Form 8-K is hereby incorporated by reference.                                                                                                                                                                                                                                                                                                                       
|                       | 
|(m)                    |  | Development Agreement dated as of October 1, 2005 between the Trust and B.F. Saul Property Company, as filed as Exhibit 10(o) to the Trusts September 30, 2005 Form 8-K is hereby
incorporated by reference.                                                                                                                                                                                                                                                                                                                                                                                   
|                       | 
|12.                    |  | Ratio of Earnings to Fixed Charges (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                       | 
|21.                    |  | List of Subsidiaries of the Trust (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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



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SCHEDULE I



B.F. SAUL REAL
ESTATE INVESTMENT TRUST

CONDENSED FINANCIAL INFORMATION



|(a) | Required condensed financial information on the Trust is disclosed in the audited consolidated financial statements included herewith.
|--- | --------------------------------------------------------------------------------------------------------------------------------------



|(b) | Amounts of cash dividends paid to the Trust by consolidated subsidiaries were as follows:
|--- | -----------------------------------------------------------------------------------------



|                        |  |      |            |      |   |           
|----------------------- |  | ---- | ---------- | ---- | - | ----------
|Year Ended September 30
|2005                    |  | 2004 |            | 2003
|$39,200,000             |  | $    | 24,800,000 |      | $ | 16,000,000



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SCHEDULE III



CONSOLIDATED SCHEDULE OF
INVESTMENT PROPERTIES  REAL ESTATE TRUST

September 30, 2005

(Dollars in Thousands)



|                                                |  |                       |         |                                           |   |         |      |  |                                                  |        |       |   |         |  |   |        
|----------------------------------------------- |  | --------------------- | ------- | ----------------------------------------- | - | ------- | ---- |  | ------------------------------------------------ | ------ | ----- | - | ------- |  | - | -------
|Hotels (1)                                      |  | Initial Basis toTrust |         | CostsCapitalizedSubsequent toAcquisitions |   |         | Land |  | Basis at Close ofPeriodBuildings andImprovements |        | Total
|Courtyard - Tysons Corner, McLean VA           |  | $                     | 31,077  |                                           | $ | (184    | )    |  | $                                                | 843    |       | $ | 30,050  |  | $ | 30,893 
|Crown Plaza - National Airport, Arlington VA    |  |                       | 26,979  |                                           |   | 7,365   |      |  |                                                  | 4,229  |       |   | 30,116  |  |   | 34,344 
|Hampton Inn - Dulles Airport, Sterling VA       |  |                       |        |                                           |   | 7,289   |      |  |                                                  | 290    |       |   | 6,999   |  |   | 7,289  
|Hampton Inn - Dulles Town Center, Sterling VA   |  |                       | 11,379  |                                           |   | 51      |      |  |                                                  | 795    |       |   | 10,636  |  |   | 11,430 
|Holiday Inn, Cincinnati OH                      |  |                       | 6,859   |                                           |   | 4,682   |      |  |                                                  | 245    |       |   | 11,296  |  |   | 11,541 
|Holiday Inn - Dulles Airport, Sterling VA       |  |                       | 6,950   |                                           |   | 24,865  |      |  |                                                  | 862    |       |   | 30,952  |  |   | 31,815 
|Holiday Inn, Gaithersburg MD                    |  |                       | 3,849   |                                           |   | 18,879  |      |  |                                                  | 1,781  |       |   | 20,947  |  |   | 22,728 
|Holiday Inn - National Airport, Arlington VA    |  |                       | 10,187  |                                           |   | 10,896  |      |  |                                                  | 1,183  |       |   | 19,901  |  |   | 21,083 
|Holiday Inn - Rochester Airport, Rochester NY   |  |                       | 3,340   |                                           |   | 11,891  |      |  |                                                  | 605    |       |   | 14,626  |  |   | 15,231 
|Holiday Inn - Tysons Corner, McLean VA          |  |                       | 6,976   |                                           |   | 20,100  |      |  |                                                  | 2,265  |       |   | 24,811  |  |   | 27,076 
|Holiday Inn Express, Herdon VA                  |  |                       | 5,259   |                                           |   | 1,154   |      |  |                                                  | 1,178  |       |   | 5,234   |  |   | 6,413  
|Holiday Inn Select - Auburn Hills MI            |  |                       | 10,450  |                                           |   | 3,329   |      |  |                                                  | 1,031  |       |   | 12,747  |  |   | 13,779 
|SpringHill Suites, Boca Raton FL                |  |                       | 10,942  |                                           |   | 598     |      |  |                                                  | 1,220  |       |   | 10,320  |  |   | 11,540 
|TownePlace Suites, Boca Raton FL                |  |                       | 7,527   |                                           |   | 259     |      |  |                                                  | 869    |       |   | 6,917   |  |   | 7,786  
|TownePlace Suites - Dulles Airport, Sterling VA |  |                       | 5,849   |                                           |   | 327     |      |  |                                                  | 219    |       |   | 5,957   |  |   | 6,176  
|TownePlace Suites - Ft. Lauderdale FL           |  |                       | 7,059   |                                           |   | 177     |      |  |                                                  | 420    |       |   | 6,816   |  |   | 7,236  
|TownePlace Suites, Gaithersburg MD              |  |                       | 6,382   |                                           |   | 174     |      |  |                                                  | 107    |       |   | 6,449   |  |   | 6,556  
|                                                |  |                       |         |                                           |   |         |      |  |                                                  |        |       |   |         |  |   |        
|Subtotal - Hotels (1)                           |  | $                     | 161,064 |                                           | $ | 111,852 |      |  | $                                                | 18,142 |       | $ | 254,774 |  | $ | 272,916
|                                                |  |                       |         |                                           |   |         |      |  |                                                  |        |       |   |         |  |   |        



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SCHEDULE III

(continued)



CONSOLIDATED SCHEDULE OF
INVESTMENT PROPERTIESREAL ESTATE TRUST

September 30, 2005

(Dollars in Thousands)



|                                         |  |                       |         |                                           |   |        |      |  |                                                  |        |       |   |         |  |   |        
|---------------------------------------- |  | --------------------- | ------- | ----------------------------------------- | - | ------ | ---- |  | ------------------------------------------------ | ------ | ----- | - | ------- |  | - | -------
|Commercial                               |  | Initial Basis toTrust |         | CostsCapitalizedSubsequent toAcquisitions |   |        | Land |  | Basis at Close ofPeriodBuildings andImprovements |        | Total
|900 Circle 75 Pkway, Atlanta GA          |  | $                     | 33,434  |                                           | $ | 5,263  |      |  | $                                                | 563    |       | $ | 38,134  |  | $ | 38,697 
|1000 Circle 75 Pkway, Atlanta GA         |  |                       | 2,820   |                                           |   | 1,991  |      |  |                                                  | 248    |       |   | 4,563   |  |   | 4,811  
|1100 Circle 75 Pkway, Atlanta GA         |  |                       | 22,746  |                                           |   | 4,657  |      |  |                                                  | 419    |       |   | 26,984  |  |   | 27,403 
|8001 Wisconsin Avenue, Bethesda, MD      |  |                       | 5,408   |                                           |   |       |      |  |                                                  | 1,893  |       |   | 3,515   |  |   | 5,408  
|8201 Greensboro, Tysons Corner VA        |  |                       | 28,890  |                                           |   | 6,338  |      |  |                                                  | 1,633  |       |   | 33,595  |  |   | 35,228 
|Commerce Ctr - Ph II, Ft. Lauderdale FL  |  |                       | 4,266   |                                           |   | 768    |      |  |                                                  | 782    |       |   | 4,252   |  |   | 5,034  
|Dulles North, Loudoun County VA          |  |                       | 5,882   |                                           |   | 162    |      |  |                                                  | 507    |       |   | 5,537   |  |   | 6,044  
|Dulles North Two, Loudoun County VA      |  |                       | 7,729   |                                           |   | 92     |      |  |                                                  | 404    |       |   | 7,417   |  |   | 7,821  
|Dulles North Four, Loudoun County VA     |  |                       | 11,093  |                                           |   | 178    |      |  |                                                  | 2,208  |       |   | 9,063   |  |   | 11,271 
|Dulles North Five, Loudoun County VA     |  |                       | 5,078   |                                           |   | (76    | )    |  |                                                  | 535    |       |   | 4,467   |  |   | 5,002  
|Dulles North Six, Loudoun County VA      |  |                       | 2,667   |                                           |   | 1,719  |      |  |                                                  | 257    |       |   | 4,129   |  |   | 4,386  
|Loudoun Tech Center I, Loudoun County VA |  |                       | 5,334   |                                           |   | 909    |      |  |                                                  | 1,075  |       |   | 5,168   |  |   | 6,243  
|Sweitzer Lane, Laurel MD                 |  |                       | 13,703  |                                           |   |       |      |  |                                                  | 3,701  |       |   | 10,002  |  |   | 13,703 
|Tysons Park Place, Tysons Corner VA      |  |                       | 21,811  |                                           |   | 1,781  |      |  |                                                  | 2,453  |       |   | 21,139  |  |   | 23,592 
|                                         |  |                       |         |                                           |   |        |      |  |                                                  |        |       |   |         |  |   |        
|Subtotal - Commercial                    |  | $                     | 170,861 |                                           | $ | 23,782 |      |  | $                                                | 16,678 |       | $ | 177,965 |  | $ | 194,643
|                                         |  |                       |         |                                           |   |        |      |  |                                                  |        |       |   |         |  |   |        



125



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SCHEDULE III

(continued)



CONSOLIDATED SCHEDULE OF
INVESTMENTS PROPERTIESREAL ESTATE TRUST

September 30, 2005

(Dollars in Thousands)



|                                            |  |                       |         |                                           |   |         |      |  |                                                  |        |       |   |         |  |   |        
|------------------------------------------- |  | --------------------- | ------- | ----------------------------------------- | - | ------- | ---- |  | ------------------------------------------------ | ------ | ----- | - | ------- |  | - | -------
|Purchase - Leasebacks and other             |  | Initial Basis toTrust |         | CostsCapitalizedSubsequent toAcquisitions |   |         | Land |  | Basis at Close ofPeriodBuildings andImprovements |        | Total
|Chateau di Jon, Metairie, LA                |  | $                     | 1,125   |                                           | $ |        |      |  | $                                                | 1,125  |       | $ |        |  | $ | 1,125  
|Country Club, Knoxville, TN                 |  |                       | 500     |                                           |   | (22     | )    |  |                                                  | 478    |       |   |        |  |   | 478    
|Houston Mall, Warner Robbins, GA            |  |                       | 650     |                                           |   |        |      |  |                                                  | 650    |       |   |        |  |   | 650    
|                                            |  |                       |         |                                           |   |         |      |  |                                                  |        |       |   |         |  |   |        
|Subtotal - Purchase - Leasebacks and other  |  | $                     | 2,275   |                                           | $ | (22     | )    |  | $                                                | 2,253  |       | $ |        |  | $ | 2,253  
|                                            |  |                       |         |                                           |   |         |      |  |                                                  |        |       |   |         |  |   |        
|Total Income - Producing Properties         |  | $                     | 334,200 |                                           | $ | 135,612 |      |  | $                                                | 37,073 |       | $ | 432,739 |  | $ | 469,812
|                                            |  |                       |         |                                           |   |         |      |  |                                                  |        |       |   |         |  |   |        
|                                            |  |                       |         |                                           |  
|Land Parcels                                |  | Initial Basis toTrust |         | CostsCapitalizedSubsequent toAcquisitions |   |         | Land |  | Basis at Close ofPeriodBuildings andImprovements |        | Total
|Arvida Park of Commerce, Boca Raton, FL     |  | $                     | 7,378   |                                           | $ | (1,945  | )    |  | $                                                | 5,433  |       | $ |        |  | $ | 5,433  
|Ashburn Village, Loudoun Co., VA            |  |                       | 4,919   |                                           |   | 199     |      |  |                                                  | 4,919  |       |   | 199     |  | $ | 5,118  
|Cedar Green, Loudoun Co., VA                |  |                       | 3,314   |                                           |   | 88      |      |  |                                                  | 2,832  |       |   | 570     |  |   | 3,402  
|Church Road, Loudoun Co., VA                |  |                       | 2,586   |                                           |   | 1,248   |      |  |                                                  | 3,834  |       |   |        |  |   | 3,834  
|Circle 75, Atlanta, GA                      |  |                       | 12,927  |                                           |   | 4,310   |      |  |                                                  | 16,049 |       |   | 1,188   |  |   | 17,237 
|Holiday Inn - Auburn Hills, Auburn Hills MI |  |                       | 218     |                                           |   |        |      |  |                                                  | 218    |       |   |        |  |   | 218    
|Holiday Inn - Rochester, Roch., NY          |  |                       | 68      |                                           |   |        |      |  |                                                  | 68     |       |   |        |  |   | 68     
|Loudoun Tech II, Sterling, VA               |  |                       | 939     |                                           |   | 17      |      |  |                                                  | 956    |       |   |        |  |   | 956    
|Overland Park, Overland Park, KA            |  |                       | 2,842   |                                           |   | 766     |      |  |                                                  | 3,568  |       |   | 40      |  |   | 3,608  
|Prospect Indust. Pk, Ft. Laud., FL          |  |                       | 2,203   |                                           |   | (1,943  | )    |  |                                                  | 260    |       |   |        |  |   | 260    
|Sterling Blvd., Loudoun Co., VA             |  |                       | 505     |                                           |   | 4,449   |      |  |                                                  | 2,618  |       |   | 2,336   |  |   | 4,954  
|Tysons Park Place II, Fairfax, VA           |  |                       |        |                                           |   | 3,009   |      |  |                                                  |       |       |   | 3,009   |  |   | 3,009  
|                                            |  |                       |         |                                           |   |         |      |  |                                                  |        |       |   |         |  |   |        
|Subtotal                                    |  | $                     | 37,899  |                                           | $ | 10,198  |      |  | $                                                | 40,755 |       | $ | 7,342   |  | $ | 48,097 
|                                            |  |                       |         |                                           |   |         |      |  |                                                  |        |       |   |         |  |   |        
|Total Investment Properties (1)             |  | $                     | 372,099 |                                           | $ | 145,810 |      |  | $                                                | 77,828 |       | $ | 440,081 |  | $ | 517,909
|                                            |  |                       |         |                                           |   |         |      |  |                                                  |        |       |   |         |  |   |        



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SCHEDULE III

(continued)



CONSOLIDATED SCHEDULE OF
INVESTMENT PROPERTIESREAL ESTATE TRUST

September 30, 2005

(Dollars in Thousands)



|                                                |  |                         |         |                  |   |                     |  |                           |  |                                                   |  |     
|----------------------------------------------- |  | ----------------------- | ------- | ---------------- | - | ------------------- |  | ------------------------- |  | ------------------------------------------------- |  | ----
|Hotels (1)                                      |  | AccumulatedDepreciation |         | (2) Related Debt |   | Date ofConstruction |  | Date Acquired/Transferred |  | Buildings andImprovementsDepreciable Lives(Years)
|Courtyard - Tysons Corner, McLean VA           |  | $                       | 8,951   |                  | $ | 25,438              |  | 2000                      |  | 12/00                                             |  | 40  
|Crown Plaza - National Airport, Arlington VA    |  |                         | 9,832   |                  |   | 15,292              |  | 1959                      |  | 12/97                                             |  | 39  
|Hampton Inn - Dulles Airport, Sterling VA       |  |                         | 3,901   |                  |   | 5,854               |  | 1987                      |  | 4/87                                              |  | 31.5
|Hampton Inn - Dulles Town Center, Sterling VA   |  |                         | 4,429   |                  |   | 7,722               |  | 2000                      |  | 11/00                                             |  | 40  
|Holiday Inn, Cincinnati OH                      |  |                         | 7,696   |                  |   | 5,400               |  | 1975                      |  | 2/76                                              |  | 40  
|Holiday Inn - Dulles Airport, Sterling VA       |  |                         | 21,068  |                  |   | 10,799              |  | 1971                      |  | 11/84                                             |  | 28  
|Holiday Inn, Gaithersburg MD                    |  |                         | 11,726  |                  |   | 6,093               |  | 1972                      |  | 6/75                                              |  | 45  
|Holiday Inn - National Airport, Arlington VA    |  |                         | 11,700  |                  |   | 11,351              |  | 1973                      |  | 11/83                                             |  | 30  
|Holiday Inn - Rochester Airport, Rochester NY   |  |                         | 9,101   |                  |   | 10,943              |  | 1975                      |  | 3/76                                              |  | 40  
|Holiday Inn - Tysons Corner, McLean VA          |  |                         | 12,311  |                  |   | 12,892              |  | 1971                      |  | 6/75                                              |  | 47  
|Holiday Inn Express, Herdon VA                  |  |                         | 1,604   |                  |   | 4,396               |  | 1987                      |  | 10/96                                             |  | 40  
|Holiday Inn Select - Auburn Hills MI            |  |                         | 5,210   |                  |   | 10,886              |  | 1989                      |  | 11/94                                             |  | 31.5
|SpringHill Suites, Boca Raton FL                |  |                         | 2,280   |                  |   | 5,817               |  | 1999                      |  | 9/99                                              |  | 40  
|TownePlace Suites, Boca Raton FL                |  |                         | 1,375   |                  |   | 5,261               |  | 1999                      |  | 6/99                                              |  | 40  
|TownePlace Suites - Dulles Airport, Sterling VA |  |                         | 1,369   |                  |   | 6,055               |  | 1998                      |  | 8/98                                              |  | 40  
|TownePlace Suites - Ft. Lauderdale FL           |  |                         | 1,421   |                  |   | 4,320               |  | 1999                      |  | 10/99                                             |  | 40  
|TownePlace Suites, Gaithersburg MD              |  |                         | 1,390   |                  |   | 4,613               |  | 1999                      |  | 6/99                                              |  | 40  
|                                                |  |                         |         |                  |   |                     |  |                           |  |                                                   |  |     
|Subtotal - Hotels (1)                           |  | $                       | 115,364 |                  | $ | 153,132             |  |                           |  |                                                   |  |     
|                                                |  |                         |         |                  |   |                     |  |                           |  |                                                   |  |     



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SCHEDULE III

(continued)



CONSOLIDATED SCHEDULE OF
INVESTMENT PROPERTIESREAL ESTATE TRUST

September 30, 2005

(Dollars in Thousands)



|                                         |  |                         |        |                  |   |                     |  |                           |  |                                                   |  |     
|---------------------------------------- |  | ----------------------- | ------ | ---------------- | - | ------------------- |  | ------------------------- |  | ------------------------------------------------- |  | ----
|Commercial                               |  | AccumulatedDepreciation |        | (2) Related Debt |   | Date ofConstruction |  | Date Acquired/Transferred |  | Buildings andImprovementsDepreciable Lives(Years)
|900 Circle 75 Pkway, Atlanta GA          |  | $                       | 22,256 |                  | $ | 18,931              |  | 1985                      |  | 12/85                                             |  | 35  
|1000 Circle 75 Pkway, Atlanta GA         |  |                         | 3,171  |                  |   | 4,680               |  | 1974                      |  | 4/76                                              |  | 40  
|1100 Circle 75 Pkway, Atlanta GA         |  |                         | 16,710 |                  |   | 11,562              |  | 1982                      |  | 9/82                                              |  | 40  
|8001 Wisconsin Avenue, Bethesda, MD      |  |                         | 30     |                  |   |                    |  | 1986                      |  | 5/05                                              |  | 40  
|8201 Greensboro, Tysons Corner VA        |  |                         | 17,420 |                  |   | 31,111              |  | 1985                      |  | 4/86                                              |  | 35  
|Commerce Ctr - Ph II, Ft. Lauderdale FL  |  |                         | 2,200  |                  |   | 3,556               |  | 1986                      |  | 1/87                                              |  | 35  
|Dulles North, Loudoun County VA          |  |                         | 2,631  |                  |   | 4,709               |  | 1990                      |  | 10/90                                             |  | 31.5
|Dulles North Two, Loudoun County VA      |  |                         | 2,588  |                  |   | 8,121               |  | 1999                      |  | 10/99                                             |  | 40  
|Dulles North Four, Loudoun County VA     |  |                         | 2,659  |                  |   | 8,330               |  | 2002                      |  | 4/02                                              |  | 40  
|Dulles North Five, Loudoun County VA     |  |                         | 973    |                  |   | 6,380               |  | 2000                      |  | 3/00                                              |  | 40  
|Dulles North Six, Loudoun County VA      |  |                         | 435    |                  |   | 4,480               |  | 2000                      |  | 10/00                                             |  | 40  
|Loudoun Tech Center I, Loudoun County VA |  |                         | 427    |                  |   | 3,599               |  | 2001                      |  | 12/01                                             |  | 40  
|Sweitzer Lane, Laurel MD                 |  |                         | 1,229  |                  |   | 10,187              |  | 1995                      |  | 11/00                                             |  | 40  
|Tysons Park Place, Tysons Corner VA      |  |                         | 10,863 |                  |   | 27,436              |  | 1976                      |  | 12/99                                             |  | 30  
|                                         |  |                         |        |                  |   |                     |  |                           |  |                                                   |  |     
|Subtotal - Commercial                    |  | $                       | 83,592 |                  | $ | 143,082             |  |                           |  |                                                   |  |     
|                                         |  |                         |        |                  |   |                     |  |                           |  |                                                   |  |     



|                                    |  |                         |         |             |   |                     |  |                          |  |      
|----------------------------------- |  | ----------------------- | ------- | ----------- | - | ------------------- |  | ------------------------ |  | -----
|Purchase - Leasebacks               |  | AccumulatedDepreciation |         | RelatedDebt |   | Date ofConstruction |  | DateAcquired/Transferred
|Chateau di Jon, Metairie, LA        |  | $                       |        |             | $ |                    |  |                          |  | 11/73
|Country Club, Knoxville, TN         |  |                         |        |             |   |                    |  |                          |  | 5/76 
|Houston Mall, Warner Robbins, GA    |  |                         |        |             |   |                    |  |                          |  | 2/72 
|Old National, Atlanta, GA (Other)   |  |                         |        |             |   |                    |  |                          |  | 8/71 
|                                    |  |                         |         |             |   |                     |  |                          |  |      
|Subtotal - Purchase - Leasebacks    |  | $                       |        |             | $ |                    |  |                          |  |      
|                                    |  |                         |         |             |   |                     |  |                          |  |      
|Total Income - Producing Properties |  | $                       | 198,956 |             | $ | 296,214             |  |                          |  |      
|                                    |  |                         |         |             |   |                     |  |                          |  |      



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SCHEDULE III

(continued)



CONSOLIDATED SCHEDULE OF
INVESTMENT PROPERTIESREAL ESTATE TRUST

September 30, 2005

(Dollars in Thousands)



|                                            |  |                         |         |              |   |                     |  |                           |  |                 
|------------------------------------------- |  | ----------------------- | ------- | ------------ | - | ------------------- |  | ------------------------- |  | ----------------
|Land Parcels                                |  | AccumulatedDepreciation |         | Related Debt |   | Date ofConstruction |  | Date Acquired/Transferred
|Arvida Park of Commerce, Boca Raton, FL     |  | $                       |        |              | $ |                    |  |                           |  | 12/84 & 5/85    
|Ashburn Village, Loudoun Co., VA            |  |                         |        |              |   |                    |  |                           |  | 9/05            
|Cedar Green, Loudoun Co., VA                |  |                         |        |              |   |                    |  |                           |  | 10/00           
|Church Road, Loudoun Co., VA                |  |                         |        |              |   |                    |  |                           |  | 9/84 & 4/85     
|Circle 75, Atlanta, GA                      |  |                         | 96      |              |   |                    |  |                           |  | 2/77 & 1/84     
|Holiday Inn - Auburn Hills, Auburn Hills MI |  |                         |        |              |   |                    |  |                           |  | 8/85            
|Holiday Inn - Rochester, Roch., NY          |  |                         |        |              |   |                    |  |                           |  | 7/97            
|Loudoun Tech II, Sterling, VA               |  |                         |         |              |   |                     |  |                           |  | 7/05            
|Overland Park, Overland Park, KA            |  |                         |        |              |   |                    |  |                           |  | 9/86            
|Prospect Indust. Pk, Ft. Laud., FL          |  |                         |        |              |   |                    |  |                           |  | 1/77 & 2/85     
|Sterling Blvd., Loudoun Co., VA             |  |                         |        |              |   |                    |  |                           |  | 10/83 & 8/84    
|Tysons Park Place II, Fairfax, VA           |  |                         |        |              |   |                    |  |                           |  | 4/84, 2/00, 3/00
|                                            |  |                         |         |              |   |                     |  |                           |  |                 
|Subtotal                                    |  | $                       | 96      |              | $ |                    |  |                           |  |                 
|                                            |  |                         |         |              |   |                     |  |                           |  |                 
|Total Investment Properties (1)             |  | $                       | 199,052 |              | $ | 296,214             |  |                           |  |                 
|                                            |  |                         |         |              |   |                     |  |                           |  |                 

---



|NOTES: | 
|------ | 



|(1) | Includes real estate held for sale
|--- | ----------------------------------

|(2) | Includes hotel capital lease obligations of approximately $1.9 million.
|--- | -----------------------------------------------------------------------

|(3) | See Summary of Significant Accounting Policies for basis of recording investment properties and computing depreciation. Investment properties are discussed in Note 6 to Consolidated
Financial Statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | A reconciliation of the basis of investment properties and accumulated depreciation follows.
|--- | --------------------------------------------------------------------------------------------



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SCHEDULE III

(continued)



CONSOLIDATED SCHEDULE OF
INVESTMENT PROPERTIESREAL ESTATE TRUST

BASIS OF INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION - REAL ESTATE TRUST

(In thousands)



|                                                                  |  |                                 |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                  |  | For the year ended September 30 |        
|                                                                  |  | 2005                            |         |   | 2004 |   |         | 2003 | 
|Basis of investment properties (1)                                |  |                                 |         |   |      |   |         |      |  |   |         |  
|Balance at beginning of period                                    |  | $                               | 498,873 |   |      | $ | 483,673 |      |  | $ | 479,309 |  
|Additions (reductions during the period):                         |  |                                 |         |   |      |   |         |      |  |   |         |  
|Capital expenditures and property acquisitions from nonaffiliates |  |                                 | 21,770  |   |      |   | 17,973  |      |  |   | 9,855   |  
|Capital expenditures and property acquisitions from affiliates    |  |                                 | 5,874   |   |      |   |        |      |  |   | (1,873  | )
|Sales to nonaffiliates                                            |  |                                 | (7,353  | ) |      |   |        |      |  |   |        |  
|Other                                                             |  |                                 | (1,255  | ) |      |   | (2,773  | )    |  |   | (3,618  | )
|                                                                  |  |                                 |         |   |      |   |         |      |  |   |         |  
|Balance at end of period                                          |  | $                               | 517,909 |   |      | $ | 498,873 |      |  | $ | 483,673 |  
|                                                                  |  |                                 |         |   |      |   |         |      |  |   |         |  
|Accumulated depreciation (1)                                      |  |                                 |         |   |      |   |         |      |  |   |         |  
|Balance at beginning of period                                    |  | $                               | 183,859 |   |      | $ | 166,243 |      |  | $ | 149,981 |  
|Additions (reductions during the period):                         |  |                                 |         |   |      |   |         |      |  |   |         |  
|Depreciation expense                                              |  |                                 | 19,857  |   |      |   | 19,053  |      |  |   | 19,330  |  
|Sales to nonaffiliates                                            |  |                                 | (3,784  | ) |      |   |        |      |  |   |        |  
|Other                                                             |  |                                 | (880    | ) |      |   | (1,437  | )    |  |   | (3,068  | )
|                                                                  |  |                                 |         |   |      |   |         |      |  |   |         |  
|Balance at end of period                                          |  | $                               | 199,052 |   |      | $ | 183,859 |      |  | $ | 166,243 |  
|                                                                  |  |                                 |         |   |      |   |         |      |  |   |         |  

---

|(1) | Includes real estate held for sale.
|--- | -----------------------------------



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Trust has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.



|                  |  |                                        |  |                                         
|----------------- |  | -------------------------------------- |  | ----------------------------------------
|                  |  | B.F. SAUL REAL ESTATE INVESTMENT TRUST
|                  |  |                                       
|December 16, 2005 |  | By:                                    |  | /s/ B. FRANCIS SAUL II                  
|                  |  |                                        |  | B. Francis Saul II Chairman of the
Board



Pursuant to the requirements of the
Securities Exchanges Act of 1934. This report had been signed below by the following persons on behalf of the registrant and in the capacities indicated on the dates shown. Each person whose signature appears below hereby constitutes and appoints
Stephen R. Halpin, Jr. and John A. Spain as his attorney-in-fact and agent, with full power of substitution and resubstitution for him in any and all capacities, to sign any or all amendments to this Report and to file same, with exhibits thereto
and other documents in connection therewith, granting unto such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and
confirming all that such attorney-in-fact and agent of his substitutes may do or cause to be done by virtue hereof.



|                                                 |  |                                                                                       |  |                  
|------------------------------------------------ |  | ------------------------------------------------------------------------------------- |  | -----------------
|Signature                                        |  | Title                                                                                 |  | Date             
|/s/ B. FRANCIS SAUL IIB. Francis Saul II         |  | Trustee, Chairman of the Board (Principal Executive Officer)                          |  | December 16, 2005
|                                                 |  |                                                                                      
|/s/ STEPHEN R. HALPIN, JR.Stephen R. Halpin, Jr. |  | Vice President and Chief Financial Officer (Principal Financial Officer)              |  | December 16, 2005
|                                                 |  |                                                                                      
|/s/ Kenneth D. ShoopKenneth D. Shoop             |  | Vice President, Treasurer and Chief Accounting Officer (Principal Accounting Officer) |  | December 16, 2005
|                                                 |  |                                                                                      
|/s/ Philip D. CaraciPhilip D. Caraci             |  | Trustee                                                                               |  | December 16, 2005
|                                                 |  |                                                                                      
|/s/ GILBERT M. GROSVENORGilbert M. Grosvenor     |  | Trustee                                                                               |  | December 16, 2005
|                                                 |  |                                                                                      
|/s/ GEORGE M. ROGERS, JR.George M. Rogers, Jr.   |  | Trustee                                                                               |  | December 16, 2005
|                                                 |  |                                                                                      
|/s/ B. FRANCIS SAUL IIIB. Francis Saul III       |  | Trustee                                                                               |  | December 16, 2005
|                                                 |  |                                                                                      
|/s/ JOHN R. WHITMOREJohn R. Whitmore             |  | Trustee                                                                               |  | December 16, 2005



131