SAUL B F REAL ESTATE INVESTMENT TRUST, 10-K, 1995-12-29

SAUL B F REAL ESTATE INVESTMENT TRUST
10-K, 1995-12-29
SAVINGS INSTITUTION, FEDERALLY CHARTERED

Previous: REVCO D S INC, SC 14D9/A, 1995-12-29

Next: SAUL B F REAL ESTATE INVESTMENT TRUST, POS AM, 1995-12-29

<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20552

FORM 10-K

(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, 1995

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

For the transition period from ____________________ to ____________________

COMMISSION FILE NUMBER 1-7184

B.F. SAUL REAL ESTATE INVESTMENT TRUST
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

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

8401 CONNECTICUT AVENUE
CHEVY CHASE, MARYLAND 20815
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

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

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

Name of each exchange on which
Title of each class registered
------------------- ------------------------------

N/A N/A
- ---------------------------------------- ------------------------------

Securities registered pursuant to Section 12(g) of the Act:
N/A
- --------------------------------------------------------------------------------
(Title of class)

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 required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----

There were no Common Shares of Beneficial Interest held by non-affiliates
of the registrant as of December 15, 1995.

The number of Common Shares of Beneficial Interest, $1 Par Value,
outstanding as of December 15, 1995 was 4,826,910.

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
amendment to this Form 10-K. /X/

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . 57

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . 58

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . 59

ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . 59

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . 63

Financial Condition. . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Liquidity and Capital Resources. . . . . . . . . . . . . . . . . . . . . 84
Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Liquidity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . 91
Fiscal 1995 Compared to Fiscal 1994. . . . . . . . . . . . . . . . . . . 92
Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

Fiscal 1994 Compared to Fiscal 1993. . . . . . . . . . . . . . . . . . . 102
Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . . F-1

Management's Statement on Responsibility . . . . . . . . . . . . . . . . 107

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . 107

PART III

ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST . . . . . . . . . . 107

Executive Officers of the Trust Who Are Not Directors. . . . . . . . . . 108
Committees of the Board of Trustees. . . . . . . . . . . . . . . . . . . 108

ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . 109
</TABLE>

-i-
<PAGE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 110

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . 111

Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . 113
</TABLE>

-ii-

<PAGE>
PART I

ITEM 1. BUSINESS

GENERAL

B.F. Saul Real Estate Investment Trust (the "Trust") operates as a Maryland
real estate investment trust. The Trust began its operations in 1964 as an
unincorporated business trust organized under a Declaration of Trust governed by
District of Columbia law. The 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 Trust amended its
Declaration of Trust to qualify the Trust as a statutory real estate investment
trust under Maryland law.

The principal business activity of the Trust and its real estate
subsidiaries is the ownership and development of income-producing properties.
The Trust owns 80% of the outstanding common stock of Chevy Chase Bank, F.S.B.
("Chevy Chase" or the "Bank"), whose assets accounted for 94% of the Trust's
consolidated assets at September 30, 1995. The Trust is a thrift holding
company by virtue of its ownership of a majority interest in Chevy Chase. See
"Real Estate - Holding Company Regulation."

The Trust recorded net income of $10.9 million in the fiscal year ended
September 30, 1995, compared to net income of $23.1 million in the fiscal year
ended September 30, 1994 and net income of $4.5 million in the fiscal year ended
September 30, 1993.

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 Trust and its subsidiaries, including Chevy Chase and Chevy
Chase's subsidiaries. "Real Estate Investment Trust" refers to B.F. Saul Real
Estate Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy
Chase's subsidiaries. The operations conducted by the Real Estate Trust are
designated as "Real Estate," while the business conducted by Chevy Chase and its
subsidiaries is identified by "Banking."

The principal offices of the Trust are located at 8401 Connecticut Avenue,
Chevy Chase, Maryland 20815, and the Trust's telephone number is (301)
986-6000.

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 office and industrial projects, hotels and undeveloped land
parcels.

BANKING. Chevy Chase Bank is a federally chartered and federally insured
stock savings bank which at September 30, 1995 was conducting business from 88
full-service offices and 439 automated teller machines ("ATMs") in Maryland,
Virginia and the District of Columbia. The Bank, which is headquartered in
Montgomery County, Maryland, a suburban community of Washington, D.C., also
maintains 18 mortgage loan production offices in Maryland, Virginia and the
District of Columbia, 17 of which are operated by a wholly-owned mortgage
banking subsidiary. At September 30, 1995, the Bank had total assets of $4.9
billion and total deposits of $4.2 billion. Based on total consolidated assets
at September 30, 1995, Chevy Chase is the largest bank headquartered in the
Washington, D.C. metropolitan area.

<PAGE>

Chevy Chase 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 credit card and other types of consumer loans. As a complement to
its basic deposit and lending activities, the Bank provides a number of related
financial services to its customers, including securities brokerage and
insurance products offered through its subsidiaries.

Chevy Chase recorded operating income of $55.7 million for the year ended
September 30, 1995, compared to operating income of $53.2 million for the year
ended September 30, 1994. At September 30, 1995, the Bank's tangible, core,
tier 1 risk-based and total risk-based regulatory capital ratios were 5.77%,
5.77%, 6.65% and 11.63%, respectively. The Bank's capital ratios exceeded the
requirements under the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA") as well as the standards established for "well
capitalized" institutions under the prompt corrective action regulations
established pursuant to the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"). On the basis of its balance sheet at September 30,
1995, the Bank met the FIRREA-mandated fully phased-in capital requirements and,
on a fully phased-in basis, met the capital standards established for "well
capitalized" institutions under the prompt corrective action regulations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Banking - Capital."

Chevy Chase is subject to comprehensive regulation, examination and
supervision by the Office of Thrift Supervision ("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 Savings
Association Insurance Fund (the "SAIF"), which is administered by the FDIC.

<PAGE>

REAL ESTATE

REAL ESTATE INVESTMENTS

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, 1995.

<PAGE>

HOTELS

Average Occupancy (1) Average Room Rate
--------------------- ----------------------
Year Ended Year Ended
September 30, September 30,
Available ------------------- ---------------------
Location Name Rooms 1995 1994 1993 1995 1994 1993
- --------------------------------------------------- ------------------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Colorado
Pueblo Holiday Inn - Pueblo 193 81% 79% 76% $50.97 $48.75 $46.37

Maryland
Gaithersburg Holiday Inn - Gaithersburg 304 65% 57% 59% $61.76 $60.12 $58.58

Michigan
Auburn Hills Holiday Inn - Auburn Hills (2) 192 67% -- -- $75.17 -- --

New York
Rochester Holiday Inn - Rochester 282 73% 64% 69% $65.38 $64.24 $63.61

Ohio
Cincinnati Holiday Inn - Cincinnati 278 52% 52% 52% $62.37 $58.77 $55.83

Virginia
Arlington Howard Johnsons - National Airport 276 66% 70% 73% $66.08 $65.27 $58.48
McLean Holiday Inn - Tysons Corner 314 72% 74% 78% $72.23 $64.41 $57.79
Norfolk Howard Johnsons - Norfolk (3) 344 50% 42% 33% $34.14 $36.00 $40.80
Sterling Hampton Inn - Dulles Airport (4) 128 75% 73% 81% $58.06 $54.10 $46.12
Holiday Inn - Dulles Airport 297 71% 65% 66% $59.53 $56.84 $54.17
----- --- --- --- ------ ------ ------
2,608 67% 62% 63% $60.82 $57.57 $54.94
</TABLE>

- ------------------------------------------------------------------
(1) Average occupancy is calculated by dividing the rooms occupied
by the rooms available.
(2) Acquired November 30, 1994.
(3) Sold October 6, 1995.
(4) A Real Estate Trust subsidiary owns a 99% interest in this hotel.

4
<PAGE>

OFFICE AND INDUSTRIAL

Leasing Percentages Expiring Leases (1)
---------------------- ------------------------
Gross September 30, Year Ending September 30,
Leasable ---------------------- -------------------------
Location Name Area (1) 1995 1994 1993 1996 1997
- ----------------------------------------------- --------- ---------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Florida
Fort Lauderdale Commerce Center -- Phase II 64,040 83% 72% 53% 9,168 11,500

Georgia
Atlanta 900 Circle 75 Parkway 345,502 94% 100% 85% 112,830 83,243
1000 Circle 75 Parkway 89,412 100% 96% 97% 20,157 27,819
1100 Circle 75 Parkway 267,460 100% 98% 49% 33,201 38,461
Perimeter Way 57,605 47% 52% 50% 26,325 716

Louisiana
Metairie Metairie Tower 91,372 98% 92% 90% 28,984 26,116

Virginia
Chantilly Dulles South (2) 38,502 74% 63% 55% 6,948 8,331
McLean 8201 Greensboro Drive 353,742 59% 98% 90% 42,826 20,600
Sterling Dulles North (3) 59,886 100% 87% 86% 24,235 18,708
--------- --------------------- ------- -------
1,367,521 84% 93% 77% 304,674 235,494
</TABLE>

- ------------------------------------------------------------------------------
(1) Square feet.
(2) A Real Estate Trust subsidiary owns a 50% interest in this office building.
(3) A Real Estate Trust subsidiary owns a 99% interest in this office building.

<PAGE>

LAND PARCELS

Location Name Acres Zoning
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Florida
Boca Raton Arvida Park of Commerce (1) 20 Mixed Use
Fort Lauderdale Commerce Center 14 Office & Warehouse

Georgia
Atlanta Circle 75 137 Office & Industrial
Perimeter Way 2 Office & Industrial

Kansas
Overland Park Overland Park 162 Residential, Office and
Retail

Maryland
Gaithersburg Avenel Business Park 8 Commercial
Rockville Flagship Centre 8 Commercial

New York
Rochester Holiday Inn -- Rochester Airport 3 Commercial

Virginia
Loudoun County Church Road 40 Office & Industrial
Sterling Boulevard (2) 48 Industrial
---
Total 442
</TABLE>

- --------------------------------------------------------------------------
(1) A Real Estate Trust subsidiary owns a 50% interest in 11 acres of this
parcel.
(2) A Real Estate Trust subsidiary owns a 99% interest in this parcel.

<PAGE>

OTHER REAL ESTATE INVESTMENTS

Location Name
- -------------------------------------------------------------------------
<S> <C> <C>

PURCHASE -- LEASEBACK PROPERTIES (1)

Number
APARTMENTS of Units
--------
Louisiana
Metairie Chateau Dijon 336

Tennessee
Knoxville Country Club 232
--------
Total 568

Gross
Leasable
Area (2)
---------

SHOPPING CENTERS

Georgia
Atlanta Old National 160,000
Warner Robbins Houston Mall 264,000

Wyoming
Casper Beverly Plaza 150,000
--------
Total 574,000

APARTMENT PROJECT

Number
TEXAS of Units
--------
Dallas San Simeon 124

MISCELLANEOUS PROPERTY (RETAIL)

Gross
Leasable
MARYLAND Area (2)
---------
Oxon Hill Wheeler Road 24,000
</TABLE>

- --------------------------------------------------------------------
(1) The Trust owns the ground 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.

7
<PAGE>

The 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.

INVESTMENT IN SAUL HOLDINGS LIMITED PARTNERSHIP

On August 26, 1993 the Real Estate Trust consummated a series of
transactions (together with related transactions, the "Formation Transactions")
in which it transferred its 22 shopping center properties and one of its office
properties (the "Transferred Properties"), together with the debt associated
with such properties, to a newly organized limited partnership, Saul Holdings
Limited Partnership ("Saul Holdings Partnership"), and one of two newly
organized subsidiary limited partnerships of Saul Holdings Partnership (the
"Subsidiary Partnerships" and, collectively with Saul Holdings Partnership, the
"Partnerships"). In exchange for the Transferred Properties, the Real Estate
Trust received securities representing a 21.5% limited partnership interest in
Saul Holdings Partnership, which it holds directly and through two wholly owned
subsidiaries. Saul Centers, Inc. ("Saul Centers"), a newly organized, publicly
held real estate investment trust, received a 73.0% general partnership interest
in Saul Holdings Partnership in exchange for the contribution of approximately
$220.7 million to Saul Holdings Partnership. Entities under common control with
the Trust (the "Trust Affiliates") received limited partnership interests
collectively representing a 5.5% partnership interest in Saul Holdings
Partnership in exchange for the transfer of property management functions (the
"Management Functions") and certain other properties to the Partnerships. In
addition, the Trust Affiliates received certain cash distributions from Saul
Holdings Partnership 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. B. Francis Saul II, the Chairman of the Board of Trustees
and Chief Executive Officer of the Trust, also serves as Chairman of the Board
of Directors and Chief Executive Officer of Saul Centers.

The Real Estate Trust and the Trust Affiliates own rights (the "Rights")
enabling them to convert their limited partnership interests in Saul Holdings
Partnership into shares of Saul Centers common stock on the basis of one share
of Saul Centers common stock for each partnership unit at the end of a 36-month
period commencing after the initial public offering, provided that they do not
own rights to the extent that they collectively would be treated as owning,
directly or indirectly, more than 24.9% 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 (trading symbol "BFS").

In July 1994, Saul Centers established Saul QRS, Inc. and SC Finance
Corporation, as wholly owned subsidiaries of Saul Centers. Saul QRS, Inc. was
established to succeed to the interest of Saul Centers as the sole general
partner of one of the Subsidiary Partnerships, Saul Subsidiary I Limited
Partnership, and SC Finance Corporation was established for the purpose of
issuing $128 million of collateralized floating rate mortgage notes (the
"Mortgage Notes"). In connection with these transactions, Saul Holdings
Partnership transferred ten shopping centers previously owned by it to Saul
Subsidiary I Limited Partnership as an additional capital contribution and the
second Subsidiary Partnership, Saul Subsidiary II Limited Partnership,
transferred one shopping center previously owned by it to Saul Subsidiary I
Limited Partnership as an initial capital contribution in return for a limited
partnership interest in Saul Subsidiary I Limited Partnership. As a consequence
of these transfers, Saul Subsidiary I Limited Partnership currently owns a total
of 17 shopping centers (the "Mortgaged Properties"). The Mortgaged Properties,

<PAGE>

which continue to be managed by Saul Holdings Partnership, secure the mortgage
purchased with the proceeds of issuance of the Mortgage Notes.

As a consequence of the Formation Transactions and the later transactions
described above undertaken in connection with the Mortgage Note financing, Saul
Centers serves as the sole general partner of Saul Subsidiary II Limited
Partnership, and Saul QRS, Inc. serves as the sole general partner of Saul
Subsidiary I Limited Partnership. Each such general partner holds a 1% general
partnership interest in the applicable Subsidiary Partnership. The remaining
99% interest in Saul Subsidiary II Limited Partnership is held by Saul Holdings
Partnership as the sole limited partner. The remaining 99% interest in Saul
Subsidiary I Limited Partnership is held by Saul Holdings Partnership and Saul
Subsidiary II Limited Partnership as limited partners.

At September 30, 1995, Saul Holdings Partnership owned, directly or
indirectly through the Subsidiary Partnerships, 29 community and neighborhood
shopping centers (including the 22 shopping centers transferred by the Real
Estate Trust) located in seven states and the District of Columbia, one office
property and one office/retail property located in the District of Columbia and
one research park located in a Maryland suburb of Washington, D.C.
(collectively, the "Portfolio Properties).

SAUL CENTERS. Saul Centers made an election to be treated as a real estate
investment trust ("REIT") for federal income tax purposes under Sections 856
through 860 of the Internal Revenue Code commencing with the year ended December
31, 1993. Under the Internal Revenue Code, REITs are subject to numerous
organizational and operational requirements. If Saul Centers continues to
qualify, 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 announced that it intends to make
regular quarterly dividend distributions to its stockholders.

MANAGEMENT OF THE PROPERTIES. The Partnerships manage the Portfolio
Properties and any subsequently acquired properties through the Management
Functions, which include personnel and such functions as property management,
leasing, design, renovation, development and accounting. The Management
Functions provide the Partnerships with a fully integrated property management
capability through approximately 150 professionals and staff personnel and with
an extensive and mature network of relationships with tenants and potential
tenants as well as with members of the brokerage and property owners'
communities.

Saul Centers shares with the Trust Affiliates certain ancillary functions
at cost, such as computer and payroll services, benefit administration and
in-house legal services, and shares insurance expense on a pro rata basis. The
Trust Affiliates sublease office space to Saul Centers at their cost. The terms
of all sharing arrangements, including payments related thereto, are reviewed
periodically by the independent directors of Saul Centers, who constitute five
of the nine members of the board of directors.

EXCLUSIVITY AGREEMENT AND RIGHT OF FIRST REFUSAL. The Real Estate Trust
has entered into an Exclusivity Agreement (the "Exclusivity Agreement") with,
and has granted a right of first refusal (the "Right of First Refusal") to, Saul
Centers and the Partnerships (collectively, the "Company"). The purpose of these
agreements is to minimize potential conflicts of interest between the Real
Estate Trust and the Company. The Exclusivity Agreement and Right of First
Refusal generally require the Real Estate Trust to conduct its shopping center
business exclusively through the Company and to grant the Company 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

<PAGE>

own land suitable for development as, among other things, shopping centers and
other commercial properties.

ALLOCATIONS AND DISTRIBUTIONS OF SAUL HOLDINGS PARTNERSHIP. The net income
or net loss of Saul Holdings Partnership 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 Partnership and after reimbursement of
specified expenses will be distributed quarterly to the partners in proportion
to their respective partnership interests.

REIMBURSEMENT AGREEMENT. Pursuant to a reimbursement agreement among the
partners of the Partnerships, the Real Estate Trust and two of 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. The maximum potential obligations of the Real Estate Trust and
its subsidiaries under this agreement total $115.5 million. See Note 2 to the
Consolidated Financial Statements in this report. The Real Estate Trust
believes that the Partnerships will be able to make all payments due with
respect to their debt obligations.

TAX CONFLICTS. The fair market value of each of the properties contributed
to the Partnerships by the Real Estate Trust and its subsidiaries at the date of
the Formation Transactions (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 or Saul QRS, Inc.,
acting as general partner of a Partnership, causes such 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 or its subsidiaries as a result of
the property disposition. In general, if the gain recognized by the Partnership
on such 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), all such gain will be
allocated to the Real Estate Trust or its subsidiaries. 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
partners in Saul Holdings based on their relative percentage interests. In
general, the amount of federal income tax liability in respect of gain allocated
to the Real Estate Trust or its subsidiaries 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 or its subsidiaries as a result of
the property disposition. In addition, future reductions in the level of the
Partnerships' debt, any release of the guarantees of such debt by the Real
Estate Trust or its subsidiaries (described above under "Reimbursement
Agreement") or any refinancings in which the Real Estate Trust or its
subsidiaries do not assume a comparable obligation to that contained in the
Reimbursement Agreement could cause the Real Estate Trust or its subsidiaries to
have taxable constructive distributions without the receipt of any corresponding
amounts of cash. See Note 2 to the Consolidated Financial Statements in this
report.

REGISTRATION RIGHTS. Saul Centers has granted the Real Estate Trust and
the Trust Affiliates certain "demand" and "piggyback" registration rights
(collectively, the "Registration Rights") with respect to the shares of Saul
Centers common stock acquired in connection with the Formation Transactions or
as a consequence of exercise of the Rights (the "Registration Shares"). Subject
to certain limitations. the Registration Rights grant the holders of
Registration Shares the opportunity to cause Saul Centers to register all or any
portion of their respective Registration Shares once in each calendar year and
to have such

<PAGE>

Shares registered incidentally to any registration, by Saul Centers, of
shares of common stock or other securities substantially similar to common
stock. Except with respect to the Registration Rights incident to a pledge of
Registration Shares or Saul Holdings Partnership interests, the demand
Registration Rights may be exercised only prior to such time, if any, as the
holder is permitted to sell the Registration Shares pursuant to Rule 144 (k)
under the Securities Act of 1933. Saul Centers will bear expenses incident
to its registration obligations upon exercise of the Registration Rights,
except that it will not bear any underwriting discounts or commissions,
Securities and Exchange Commission or state Blue Sky registration fees, or
transfer taxes relating to registration of Registration Shares.

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 without increasing rent. 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.

RELATIONSHIPS WITH THE B. F. SAUL COMPANY

The Real Estate Trust has significant relationships with B. F. Saul Company
(the "Saul Company") and two of the Saul Company's wholly-owned subsidiaries, B.
F. Saul Advisory Company (the "Advisor") and Franklin Property Company
("Franklin"). The Saul Company, founded in 1892, specializes in real estate
investment services, including acquisitions, financing, management and leasing,
and insurance. B. Francis Saul II, Chairman of the Board of Trustees and Chief
Executive Officer of the Trust, is Chairman of the Board and President of the
Saul Company and the Advisor.

The Advisor acts as the Real Estate Trust's investment advisor and manages
the day-to-day financial, accounting, legal and administrative affairs of the
Real Estate Trust. Franklin acts as leasing and management agent for most of
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.

The Trustees, including the two independent Trustees, review the fees and
compensation arrangements between the Real Estate Trust and the Saul Company and
its related entities and affiliates and believe that such fees and compensation

<PAGE>

arrangements are as favorable to the Real Estate Trust as would be obtainable
from unaffiliated sources. See "Certain Relationships and Related
Transactions."

HOLDING COMPANY REGULATION

The Trust and the Saul Company, by virtue of their direct and indirect
control of the Bank, and Chevy Chase Property Company ("CCPC") and CCPC's
wholly-owned subsidiary Westminster Investing Corporation ("Westminster"), by
virtue of Westminster's direct and indirect ownership of 24.9% of the common
stock of the Trust (collectively the "Holding Companies"), are "savings and loan
holding companies" 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.
Further, 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.

The Holding Companies must obtain the prior approval of the OTS before
acquiring by merger, consolidation or purchase of assets any federally insured
savings institution or any savings and loan holding company. As unitary savings
and loan 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 qualified thrift lender test. See "Banking - Regulation -
Qualified Thrift Lender ("QTL") Test." 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 now accepts more
limited agreements from those 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 such modification of OTS policy and
the enactment of FIRREA were not affected by such 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. The Bank's business plan does not contemplate any future
capital contributions from the Trust or the Saul Company.

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 (i) an amount equal to 5.0% of the Bank's total
assets at the time the Bank became "undercapitalized" and (ii) the amount

12
<PAGE>

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.

Congress is considering legislation that would significantly restrict the
operations of unitary thrift holding companies. See "Banking - Regulation -
Pending Legislation - Balanced Budget Act of 1995."

FEDERAL TAXATION

The Trust terminated its status as a real estate investment trust for
federal income tax purposes in 1978 and is now taxable as a corporation. The
Trust's real estate operations have generated sizable depreciation, interest and
other deductions in excess of its total income, and as a result the Trust has
had substantial net operating loss carryovers for federal income tax purposes
("NOLs"). The Trust and its subsidiaries join in the filing of a consolidated
federal income tax return using the accrual method of accounting on the basis of
a fiscal year ending September 30.

Since June 28, 1990 the Bank and its subsidiaries have joined in the
consolidated federal income tax returns filed by the Trust on a fiscal year
basis. Prior to June 28, 1990, the Bank and its subsidiaries filed a
consolidated federal income tax return on a calendar-year basis.

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.

The Internal Revenue Service ("IRS") has completed audits of the federal
income tax returns of the Bank for the taxable years ended December 31, 1988,
December 31, 1989 and June 27, 1990, and September 30, 1990. The Trust was
included in the audit for the taxable year ended September 30, 1990. The IRS is
currently conducting audits of the federal income tax returns of the Trust for
the taxable years ended September 30, 1992 and September 30, 1993. The
Commonwealth of Virginia is currently conducting audits of the consolidated
state income tax returns of the Trust for the taxable years ended September 30,
1991, September 30, 1992 and September 30, 1994.

BAD DEBT RESERVE. Savings institutions that satisfy certain requirements
(so-called "qualifying institutions" as defined by the Internal Revenue Code)
are permitted to establish reserves for bad debts and to deduct each year
reasonable additions to those reserves in lieu of taking a deduction for bad
debts actually sustained during the taxable year. To be treated as a qualifying
institution, at least 60% of a savings institution's assets must be "qualifying
assets," which include cash, certain U.S. Government and state government
securities, obligations of certain deposit insurance corporations, loans secured
by interests in residential real property and loans made for the improvement of
residential real property.

A qualifying institution may deduct in each taxable year the sum of (i) an
addition to a reserve for losses on "qualifying real property loans" (generally,
loans secured by interests in real property) and (ii) an addition to a reserve
for losses on "nonqualifying loans" (such as credit card loans). A qualifying
institution generally may compute the amount of the addition to the reserve for
losses on qualifying real property loans under the more favorable of the
"experience method," which is based on the institution's actual loan loss
experience over a prescribed period, or the "percentage of taxable income
method," which is based on a fixed percentage (i.e., 8%) of the institution's

<PAGE>

taxable income. The Bank has calculated the bad debt deduction for tax purposes
under the experience method since calendar year 1988.

The Bank has calculated its bad debt deduction for tax purposes under the
experience method since calendar year 1988. If the Bank were not treated as a
qualifying institution for any taxable year, it would be required to recapture
its bad debt reserve (for 1995, approximately $81.7 million) into taxable
income. In addition, the Bank would be allowed to deduct only those bad debts
that actually were sustained during the taxable year. If the Bank were no
longer permitted to use the reserve method, the change would not have a
significant adverse effect on the Bank's reported earnings under generally
accepted accounting principles.

The Balanced Budget Act of 1995, which was passed by Congress but vetoed by
President Clinton on December 6, 1995, contained provisions that would have
repealed the special bad debt reserve methods used by thrift institutions so
that in future taxable years thrifts (like banks) generally would be able to
deduct only those bad debts actually incurred during the taxable year. This
legislation also would have required thrifts to recapture and pay tax on bad
debt reserves accumulated since 1987 ("excess base year reserves") over a six-
year period, beginning with a thrift's first taxable year starting after
December 31, 1995 (or, if the thrift meets a mortgage origination test,
beginning up to two years later). Reserves accumulated prior to 1988 would not
have been recaptured under this legislation. Should this legislation ultimately
be enacted into law in its current form, it would not have a material impact on
the Trust's financial statements.

CONSOLIDATED TAX RETURNS; TAX SHARING PAYMENTS. On June 28, 1990, the
Trust increased its ownership of Chevy Chase common stock from 60% to 80%.
As a result of the Trust's 80% ownership of the common stock of the Bank, for
federal income tax purposes Chevy Chase became a member of the Trust's
affiliated group filing consolidated federal income tax returns for taxable
years beginning on and after June 28, 1990. In recent years, the operations
of the Trust have generated significant net operating losses ("NOLS"), while
during the same period Chevy Chase has reported taxable income. The fiscal
1995 taxable income of Chevy Chase was sufficient to utilize all NOL
carryforwards and the fiscal 1995 tax loss of the Trust. It is anticipated
that, because Chevy Chase's operations will continue to be included in the
Trust's consolidated returns, NOLs and any other operating losses generated
by the Trust or its other subsidiaries will be available to reduce the
federal income taxes that otherwise would be payable by Chevy Chase (and the
other members of the Real Estate Trust's affiliated group that have taxable
income). Under the terms of a tax sharing agreement dated June 28, 1990 (the
"Tax Sharing Agreement"), Chevy Chase is obligated to make payments to the
Trust based on its taxable income, as explained more fully below. However,
under the written agreement between Chevy Chase and the OTS (see "Banking -
Regulation - Regulatory Capital"), Chevy Chase has agreed not to make tax
sharing payments without the prior approval of the OTS.

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 tax liability or the group's tax
liability is less than the sum of such amounts. Under the Tax Sharing
Agreement, the Trust, in turn, is obligated to pay to the applicable 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 such
member on a dollar-for-dollar basis, thereby compensating the member for the
group's use of its net operating losses or tax credits.

<PAGE>

The Bank made a tax sharing payment of $20.6 million in fiscal 1990, tax
sharing payments totaling $29.6 million in fiscal 1991 and a tax sharing payment
of $5.0 million in fiscal 1993. OTS approval of the $5.0 million payment made
in 1993 was conditioned on a pledge by the Trust of certain Trust assets to
secure certain of its obligations under the Tax Sharing Agreement. Following
execution of such a pledge, the OTS approved, and the Bank made during fiscal
1994 and 1995, additional tax sharing payments of $9.6 and $20.5 million,
respectively, to the Trust. It is expected that the Bank will have taxable
income over the next several years and that the Trust's NOLs and any additional
operating losses will be utilized to reduce the overall tax liability of the
group which would otherwise arise from such taxable income of the Bank (or from
the taxable income of other members of the Trust's affiliated group). At
September 30, 1995, the amount of tax sharing payments due to the Trust, but
then unpaid, was $17.7 million. Subsequent to such date, the Bank made a tax
sharing payment of $10.0 million to the Trust.

If the Bank has net operating losses or unused tax credits in the current
or any future year, under the Tax Sharing Agreement the Trust would be obligated
to reimburse the Bank in an amount generally equal to (i) the tax benefit to the
group of using such tax losses or unused tax credits in the group's consolidated
federal income tax return for such year, plus (ii) to the extent such losses or
credits are not used by the group in such year, the amount of the tax refunds
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 (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 such nonpayment as an unsecured 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 remedies upon a breach by any party of its obligations
under the Agreement. Any reimbursement obligation of the Trust should be
available to be offset against any obligation of the Bank to the Trust under the
Tax Sharing Agreement that is unpaid at the time the reimbursement obligation
arises.

STATE TAXATION

Maryland law does not allow the filing of consolidated income tax returns,
and thus the Trust and its subsidiaries, which includes the Bank, subject to
Maryland income tax are required to file separately in Maryland. The Trust and
its subsidiaries are also subject to income taxes in other states, some of which
allow or require combined or consolidated filing.

BANKING

REGULATION

FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the Federal Home
Loan Bank ("FHLB") of Atlanta. The 12 FHLBs are administered by the Federal
Housing Finance Board, an independent agency within the executive branch of the
federal government. The FHLBs serve as a central credit facility for member
savings institutions. Their primary credit mission is to enhance the
availability of residential mortgages. From time to time, the Bank obtains
advances from the FHLB. At September 30, 1995, the Bank had outstanding $155.1
million of advances from the FHLB of Atlanta. See Note 22 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:
(i) 1.0% of mortgage-related assets (i.e., home mortgage loans, home-purchase

<PAGE>

contracts and similar obligations); (ii) 0.3% of total assets; (iii) $500; or
(iv) 5.0% of outstanding advances. Pursuant to this requirement, the Bank had an
investment of $31.9 million in FHLB stock at September 30, 1995. The Bank
earned dividends of $2.3 million during each of the years ended September 30,
1995 and 1994, at weighted average annual rates of 7.19% and 5.65%,
respectively, during such years.

LIQUIDITY REQUIREMENTS. The Bank is required to maintain a daily average
balance of liquid assets (including cash, federal funds, certain time deposits,
certain bankers' acceptances, certain corporate debt securities and commercial
paper, securities of certain mutual funds and specified U.S. Government, state
government and federal agency obligations) equal to a specified percentage of
its average daily balance of deposits (based upon the preceding month's average
balances), plus borrowings (or portions thereof) payable in one year or less.
This liquidity requirement is currently 5.0%. Federal regulations also require
that each institution maintain an average daily balance of short-term liquid
assets equal to at least 1.0% of its average daily balance of deposits, plus
borrowings payable in one year or less. If an institution's liquid assets or
short-term liquid assets at any time do not at least equal (on an average daily
basis for the month) the amount required by the OTS, the institution could be
subject to various monetary penalties imposed by the OTS. At September 30,
1995, the Bank was in compliance with both requirements, with a liquid assets
ratio of 17.5% and a short-term liquid assets ratio of 5.8%.

DEPOSIT INSURANCE PREMIUMS. Under FDIC insurance regulations, the Bank is
required to pay premiums to SAIF for insurance of its accounts. The FDIC
utilizes a risk-based premium system in which an institution pays premiums for
deposit insurance on its SAIF-insured deposits ranging from 0.23% to 0.31% based
on supervisory evaluations 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 reserve funds for commercial banks and thrifts have been segregated
into the Bank Insurance Fund ("BIF") and the SAIF, respectively. The FDIC is
required to increase the reserve levels of both the BIF and the SAIF to 1.25% of
insured deposits over a reasonable period of time and thereafter to maintain
such valuation allowances at not less than that level. During fiscal 1995, the
BIF reserve reached the mandated 1.25% of insured deposits. Accordingly,
although the FDIC previously had applied the same premium rates to BIF and SAIF
deposits, the FDIC board, in August 1995, approved lower BIF premium rates for
all but the riskiest institutions. On the other hand, the SAIF, of which Chevy
Chase is a member, is not expected to achieve the required 1.25% level until at
least 2002 without Congressional action to provide additional funding or to
merge the BIF and SAIF. The resulting disparity in insurance premiums for
commercial banks and thrifts could lead to a competitive disadvantage for the
thrift industry in the pricing of loans and deposits and the incurrence of
operating costs.

Congress is considering legislation that would either reduce or eliminate
the anticipated disparity between BIF and SAIF insurance premiums. See "Pending
Legislation - Balanced Budget Act of 1995."

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

REGULATORY CAPITAL. Under OTS regulations implementing the capital
requirements imposed by FIRREA, savings institutions, such as the Bank, are
subject to a minimum tangible capital requirement, a minimum core (or leverage)
capital requirement, and a minimum total risk-based capital requirement. Each

<PAGE>

of these requirements generally must be no less stringent than the capital
standards for national banks. At September 30, 1995, the Bank's tangible, core
and total risk-based regulatory capital ratios were 5.77%, 5.77% and 11.63%,
respectively, compared to the minimum requirements under FIRREA of 1.50%, 3.00%
and 8.00%, respectively, in effect at that date.

Under the minimum leverage ratio under FIRREA, Chevy Chase must maintain a
ratio of "core capital" to tangible assets of not less than 3.0%. However,
under the OTS "prompt corrective action" regulations, an institution that is not
in the highest supervisory category must maintain a minimum leverage ratio of
4.0% to be considered an "adequately capitalized" institution. See "Prompt
Corrective Action." "Core capital" generally includes common shareholders'
equity, noncumulative perpetual preferred stock and minority interests in
consolidated subsidiaries, less certain intangible assets, except that purchased
mortgage servicing rights and originated mortgage servicing rights (collectively
"MSRs") and purchased credit card relationships ("PCCRs") may be included up to
an aggregate amount of 50% of core capital. PCCRs are also subject to a
sublimit of 25% of core capital. For these purposes, MSRs and PCCRs are valued
at the lesser of 90% of fair market value or 100% of the current unamortized
book value. At September 30, 1995, the Bank had qualifying MSRs of $27.2
million, which constituted 9.6% of core capital at that date, and had no PCCRs.

The amount of qualifying supervisory goodwill includable as core capital
decreased from 0.375% to 0% effective January 1, 1995. Deductions or phase-outs
from capital also apply for investments in, and loans to, subsidiaries engaged
in activities not permissible for national banks, for equity investments that
are not permissible for national banks and for the portion of land loans and
non-residential construction loans in excess of an 80% loan-to-value ratio.

The tangible capital requirement adopted by the OTS requires a savings
institution to maintain "tangible capital" in an amount not less than 1.5% of
tangible assets, which is the minimum limit permitted by FIRREA. "Tangible
capital" is defined as core capital less any intangible assets (including
supervisory goodwill), plus qualifying MSRs valued at the amount includable in
core capital.

The risk-based capital requirements issued by the OTS provide that the
capital ratio applicable to an asset is adjusted to reflect the degree of credit
risk associated with that asset and that the asset base for computing a savings
institution's capital requirement includes off-balance-sheet assets. Capital
must be maintained against the full amount of assets sold with recourse despite
the fact that the assets are treated as having been sold under GAAP. However,
the amount of capital required need not exceed the amount of recourse retained.

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 loans,
including credit card loans, commercial real estate loans and loans more than 90
days past due and for real estate acquired in settlement of loans. Savings
institutions generally are required to 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.

A savings institution's supplementary capital may be used to satisfy the
risk-based capital requirement only to the extent of the institution's core
capital. Supplementary capital includes cumulative perpetual preferred stock,
qualifying non-perpetual preferred stock, qualifying subordinated debt,
nonwithdrawable accounts and pledged deposits, and allowances for loan and lease
losses (up to a maximum of 1.25% of risk-weighted assets). At September 30,
1995, the Bank had $53.3 million in allowances for loan and lease losses, of
which $53.1 million was includable as supplementary capital.

<PAGE>

Subordinated debt may be included in supplementary capital with OTS
approval subject to a phase-out based on its term to maturity. The phase-out
established for such maturing capital instruments by the OTS permits an
institution to include such instruments in supplementary capital under one of
two phase-out options: (i) at the beginning of each of the last five years
prior to the maturity date of the instrument, the institution may reduce the
amount eligible to be included by 20% of the original amount or (ii) the
institution may include only the aggregate amount of maturing capital
instruments that mature in any one year during the seven years immediately prior
to an instrument's maturity that does not exceed 20% of the institution's
capital. Once an institution selects either the first or second option, it must
continue to select the same option for all subsequent issuances of maturing
capital instruments as long as there is any outstanding balance of such
instruments for which an option has been selected. The Bank has a $10.0 million
capital note outstanding which is treated in accordance with the rules in effect
at November 7, 1989, the date of issuance of the new regulation. At September
30, 1995, the Bank had $160.0 million in maturing subordinated capital
instruments, of which $151.4 million was includable as supplementary capital.
See "Deposits and Other Sources of Funds - Borrowings."

FDICIA required OTS and the other regulators to revise their risk-based
capital standards to take into account interest-rate risk, concentration of
credit risk and the risks of non-traditional activities. The OTS amended its
risk-based capital rules to incorporate interest-rate risk measures to
complement measures already established for credit risk. An institution that
would experience a change in "portfolio equity" in an amount in excess of 2.0%
of the institution's assets as a result of a 200 basis point increase or
decrease in the general level of interest rates would be required to maintain
additional amounts of risk-based capital based on the lowest interest rate
exposure at the end of the three previous quarters. In August 1995, the OTS
indefinitely delayed implementation of its interest-rate risk regulation pending
the testing of an OTS appeals process. At September 30, 1995, the Bank would
not have been required to maintain additional amounts of risk-based capital had
the interest-rate risk component of the capital regulations been in effect.

Under regulations effective January 17, 1995, the OTS must consider
concentration of credit risk and risks arising from non-traditional activities,
as well as a thrift's ability to manage these risks, in evaluating whether the
thrift should be subject to an individual minimum capital requirement.

OTS regulations contain special rules affecting savings institutions with
certain kinds of subsidiaries. For purposes of determining compliance with each
of the capital standards, a savings institution's investments in, and extensions
of credit to, subsidiaries engaged in activities not permissible for a national
bank ("non-includable subsidiaries") are, with certain exceptions, deducted from
the savings institution's capital. At September 30, 1995, investments in
non-includable subsidiaries were subject to a 60% phase-out from all three
FIRREA capital requirements. This phase-out will increase to 100% on July 1,
1996. All or a portion of the assets of each of a savings institution's
subsidiaries are generally consolidated with the assets of the savings
institution for regulatory capital purposes unless all of the savings
institution's investments in, and extensions of credit to, such subsidiary are
deducted from capital. Chevy Chase's real estate development subsidiaries are
its only subsidiaries engaged in activities not permissible for a national bank.
At September 30, 1995, the Bank's investments in, and extensions of credit to,
its non-includable subsidiaries had been reduced to approximately $3.9 million,
of which $2.1 million constituted a deduction from tangible capital.

OTS capital regulations also require the 100% deduction from total capital
of all equity investments that are not permissible for national banks and the
portion of land loans and non-residential construction loans in excess of an 80%
loan-to-value ratio. The Bank's only equity investments at September 30, 1995

<PAGE>

are certain properties classified as real estate held for sale which the Bank
has agreed to treat as equity investments for regulatory capital purposes. At
September 30, 1995, the book value of these properties after subsequent
valuation allowances was $29.2 million, of which $25.7 million was required to
be deducted from total capital. The Bank had no land loans or non-residential
construction loans with loan-to-value ratios greater than 80% at September 30,
1995.

OTS capital regulations provide a five-year holding period (or such longer
period as may be approved by the OTS) 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. 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 risk-based capital. In September 1995, the Bank
received from the OTS an extension through September 29, 1996 of the five-year
holding period for certain of its REO properties acquired through foreclosure in
fiscal 1990 and 1991. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition - Banking - Capital -
Regulatory Action and Requirements."

The Bank in recent periods has actively managed its levels of investments
in, and loans to, non-includable subsidiaries and equity investments to minimize
the impact of the deductions from capital for these investments. The Bank's
ability to maintain capital compliance is dependent on a number of factors,
including, for example, general economic conditions and the condition of local
real estate markets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition - Banking - Capital -
Regulatory Action and Requirements."

The OTS has the authority to require an institution to maintain capital at
levels above the minimum levels generally required, but has not indicated any
intention to exercise its authority to do so with respect to the Bank.

PROMPT CORRECTIVE ACTION. Pursuant to FDICIA, the OTS and the other
federal agencies regulating financial institutions 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 to which institutions are assigned
for purposes of determining their 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 such capital ratios are at least 4.0% (3.0% if rated in the
highest supervisory category), 4.0% and 8.0%, respectively. 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" and an institution with ratios under
3.0%, 3.0% or 6.0%, respectively, 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" (generally defined by
the OTS as core capital plus cumulative perpetual preferred stock) to total
assets is 2.0% or less. An institution's classification category could be
downgraded if, after notice and an opportunity for a hearing, the OTS determined
that the institution is in an unsafe or unsound condition or has received and
has not corrected a less than

<PAGE>

satisfactory examination rating for asset quality, management, earnings or
liquidity.

At September 30, 1995, the Bank's leverage, tier 1 risk-based and total
risk-based regulatory capital ratios were 5.77%, 6.65% and 11.63%, respectively,
which exceeded the ratios established for "well capitalized" institutions, and
the Bank was not subject to any applicable written agreement, order or directive
to maintain a specific capital level. On a fully phased-in basis, at September
30, 1995, the Bank would also exceed the capital standards established for "well
capitalized" institutions.

REGULATORY AGREEMENT. In October 1993, the Bank and the OTS amended a
written agreement dated September 30, 1991 that imposed certain restrictions on
the Bank. As amended, the agreement continues to address transactions with
affiliates, reduction of real estate acquired in settlement of loans, and asset
quality. Specifically, the Bank has agreed that it will not, without receiving
the prior approval of the OTS, (i) increase its investment in certain of its
planned unit developments ("Communities"), including the four Communities which
are under active development, beyond specified levels, (ii) make any additional
tax sharing payments to the Trust or (iii) engage in any other transaction with
the Trust. In addition, the Bank must (i) provide the OTS with 15 days notice
prior to selling any asset with a value over $20 million, (ii) make every effort
to reduce its exposure in certain of its Communities, including the four active
Communities, (iii) notify the OTS 15 days prior to rejecting any purchase offers
for the Communities and (iv) sell any single-family permanent loans for
purchases of homes in the Communities if the terms of those loans are more
favorable to the borrowers than terms prevailing in the general market. The
amended agreement also requires the Bank to submit various periodic reports to
the OTS. A material violation of the agreement could subject the Bank to
additional regulatory sanctions. Management believes the Bank is in material
compliance with the agreement.

GROWTH RESTRICTIONS. Primarily because of its level of non-performing
assets, the Bank remains subject to restrictions on asset growth. Under the
applicable OTS requirements, the Bank may not increase its total assets during
any calendar quarter in excess of an amount equal to net interest credited on
deposit liabilities during the quarter without prior written approval from OTS.
On December 29, 1994, the OTS notified the Bank that it would not object to an
increase in the Bank's total assets of approximately $75 million for the period
October 1, 1994 through December 31, 1994. In addition, the OTS notified the
Bank on March 21, 1995 that it would waive the growth restriction for the period
from January 1, 1995 through March 31, 1995 to allow for an increase in total
assets of up to $125 million, subject to the conditions that the Bank maintain
sufficient capital to meet the "well capitalized" ratios under the OTS's prompt
corrective action regulations as well as all fully phased-in regulatory capital
requirements.

QUALIFIED THRIFT LENDER ("QTL") TEST. Insured savings institutions like
the Bank must meet a QTL test to avoid imposition of certain restrictions. The
QTL test requires thrifts to maintain a "thrift investment percentage" equal to
a minimum of 65%. The numerator of such percentage is the thrift's "qualified
thrift investments" and the denominator is the thrift's "portfolio assets."
"Portfolio assets" is defined as total assets minus (i) the thrift's premises
and equipment used to conduct its business, (ii) liquid assets, as defined, and
(iii) intangible assets, including goodwill. The QTL test must be met on a
monthly average basis in nine out of every 12 months.

At September 30, 1995, the Bank had 74.6% of its portfolio assets invested
in qualified thrift investments. Additionally, the Bank met the QTL test in
each of the previous 12 months.

<PAGE>

At least 55% of a thrift's "qualified thrift investments" must consist of
residential housing loans (including home equity loans and manufactured housing
loans), mortgage-backed securities and FHLB and Federal National Mortgage
Association stock. Portions of other assets are also includable, provided that
the total of these assets does not exceed 20% of portfolio assets. Assets in
this category include 50% of residential housing loans originated and sold
within 90 days, investments in real estate-oriented service corporations, 200%
of mortgage loans for residences, churches, schools, nursing homes and small
businesses in areas with unmet credit needs (low or moderate income areas where
credit demand exceeds supply) and loans for personal, family household or
educational purposes (which may not exceed 10% of portfolio assets). Intangible
assets, including goodwill, are specifically excluded from qualified thrift
investments.

An institution that fails to meet the QTL test is subject to significant
penalties. Immediately after an institution ceases to be a QTL, it (i) 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, (ii) may not establish any new branch office at any location at which a
national bank could not establish a branch office, (iii) may not obtain new
advances from the applicable FHLB and (iv) may not pay dividends beyond the
amounts permissible if it were a national bank. One year following an
institution's failure to meet the test, the institution's holding company parent
must register and be subject to supervision as a bank holding company. Three
years after failure to remain a QTL, an institution may not retain any
investments or engage in any activities that would be impermissible for a
national bank, and must repay any outstanding FHLB advances as promptly as
possible consistent with the safe and sound operation of the institution.

Because Chevy Chase 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 Chevy Chase 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. In
addition, because the Trust is engaged in real estate ownership and development,
which are activities that are currently prohibited for bank holding companies,
failure by Chevy Chase to remain a QTL, in the absence of a significant
restructuring of the Trust's operations, would, in effect, require the Trust to
reduce its ownership of Chevy Chase to a level at which it no longer would be
deemed to control the Bank.

The Bank has received permission from the OTS to include a specified
percentage of the Bank's credit card portfolio as "housing-related" qualified
thrift investments if the Bank otherwise would not meet the 65% requirement.
The specified percentage is based on a statistical methodology approved by the
OTS which must be updated annually. The only time the Bank has needed to
include housing-relating credit card balances to meet the QTL test was in the
quarter ended March 31, 1989.

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. The Bank's credit card loan securitization and sales
activity to date has been undertaken, in part, to meet these objectives.

DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. Under OTS regulations, the
ability of thrift institutions such as the Bank to make "capital distributions"
(defined to include payment of dividends, stock repurchases, cash-out mergers
and other distributions charged against the capital accounts of an institution)
varies depending primarily on the institution's regulatory capital level. The
regulations do not apply to interest or principal payments on debt, including
interest or principal payments on the Bank's outstanding subordinated
debentures.

<PAGE>

Institutions are divided into three tiers for purposes of these
regulations. Tier 1 institutions are those in compliance with their "fully
phased-in" capital requirements and which have not been notified by the OTS that
they are "in need of more than normal supervision." Tier 1 institutions may make
capital distributions without regulatory approval in amounts up to the greater
of (i) 100% of net income for the calendar year to date, plus up to one-half of
the institution's surplus capital (i.e., the excess of capital over the fully
phased-in requirement) at the beginning of the calendar year in which the
distribution is made or (ii) 75% of net income for the most recent four
quarters.

Tier 2 institutions are those in compliance with their current, but not
their fully phased-in, capital requirements. Tier 2 institutions may make
distributions without regulatory approval of up to 75% of their net income for
the most recent four quarters. Tier 1 and Tier 2 institutions that make capital
distributions under the foregoing rules must continue to meet the applicable
capital requirements on a pro forma basis after giving effect to such
distributions. Tier 1 and Tier 2 institutions may seek OTS approval to pay
dividends beyond these amounts.

Tier 3 institutions have capital levels below their current required
minimum levels and may not make any capital distributions without the prior
written approval of the OTS.

The OTS retains general discretion to prohibit any otherwise permitted
capital distributions on general safety and soundness grounds and must be given
30 days advance notice of all capital distributions. The OTS has approved the
payment of dividends on the Bank's outstanding 13% Noncumulative Perpetual
Preferred Stock, Series A (the "Preferred Stock"), provided that (i) immediately
after giving effect to the dividend payment, the Bank's core and risk-based
regulatory capital ratios would not be less than 4.0% and 8.0%, respectively,
(ii) dividends are earned and payable in accordance with the OTS capital
distribution regulation and (iii) the Bank continues to make progress in the
disposition and reduction of its non-performing loans and real estate owned.

At September 30, 1995, the Bank had sufficient levels of capital to be a
Tier 1 institution. However, the OTS retains discretion under its capital
distribution regulation to treat an institution that is in need of more than
normal supervision (after written notice) as a Tier 2 or Tier 3 institution. In
December 1994, the OTS proposed to amend its capital distribution regulation to
simplify it and to conform it to the system of "prompt corrective action"
established by FDICIA. The proposal would replace the current "tiered" approach
with one that, in accordance with the OTS's "prompt corrective action" rule,
would allow associations to make only those capital distributions that would not
cause capital to drop below the level required to remain adequately capitalized.
Those associations that are held by a savings and loan holding company, such as
the Bank, or that receive a composite supervisory rating lower than "2" would
continue to be required to notify the OTS prior to making any capital
distributions. Those associations that are undercapitalized or that would be
undercapitalized following a capital distribution, or that are not
undercapitalized but are in "troubled condition "(defined generally to include
institutions subject to a formal written agreement relating to safety and
soundness), could make a capital distribution only upon application to and
approval by the OTS. The proposal would delete from the OTS regulations the
current numerical restrictions on the amount of permissible capital
distributions.

In May 1988, in connection with the merger of a Virginia thrift into the
Bank, 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 its federal regulator 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. However,

<PAGE>

under both the current and the proposed OTS capital
distribution rule, with the approval of the OTS, the Bank could substitute the
requirements of the OTS capital distribution rule for any more stringent
requirements imposed on it by a previous written agreement.

The Bank is subject to other limitations on its ability to pay dividends.
The indenture pursuant to which $150 million principal amount of the Bank's 9
1/4% Subordinated Debentures due 2005 was issued in 1993 (the "Indenture")
provides that the Bank may not pay dividends on its capital stock unless, after
giving effect to the dividend, no event of a continuing default shall have
occurred 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)
$15 million, (ii) 66 2/3% of the Bank's consolidated net income (as defined)
accrued on a cumulative basis commencing on October 1, 1993 and (iii) the
aggregate net cash proceeds received by the Bank after October 1, 1993 from the
sale of qualified capital stock or certain debt securities, minus the aggregate
amount of any restricted payments made by the Bank. Notwithstanding these
restrictions on dividends, provided no event of default has occurred or is
continuing under the Indenture, the Indenture does not restrict the payment of
dividends on the Preferred Stock or any payment-in-kind preferred stock issued
in lieu of cash dividends on the Preferred Stock or the redemption of any such
payment-in-kind preferred stock.

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 deemed relevant by the Bank's Board of
Directors, including applicable government regulations and policies. See
"Deposits and Other Sources of Funds - Borrowings."

LENDING LIMITS. Since FIRREA, thrift institutions have been subject to the
same loans-to-one-borrower limits that apply to national banks. With certain
exceptions, the limits prohibit an institution from lending to one borrower
(including certain related entities of the borrower) in an amount in excess of
15% of the institution's unimpaired capital and unimpaired surplus, plus an
additional 10% for loans fully secured by readily marketable collateral. The
Bank's loans-to-one-borrower limit was approximately $73.4 million at September
30, 1995, and no group relationships exceeded this limit at that date.

SAFETY AND SOUNDNESS STANDARDS. FDICIA requires the federal financial
institution regulators to devise standards to evaluate the operations of
depository institutions, as well as standards relating to asset quality,
earnings and compensation. In July 1995, the OTS and the federal bank
regulatory agencies jointly issued final safety and soundness standards. The
operational standards adopted 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.

In addition, the OTS and the federal bank regulators also published
proposed safety and soundness standards for asset quality and earnings. The

<PAGE>

asset quality standards would require that an insured depository institution
establish and maintain a system to identify problem assets and prevent
deterioration in those assets. The earnings standards would require that an
insured depository institution establish and maintain a system to evaluate and
monitor earnings and ensure that earnings are sufficient to maintain adequate
capital and reserves. Based on its review of the proposed regulation,
management does not believe that these new requirements, if adopted
substantially in the form proposed, would have a material adverse effect on the
Bank's operations.

REGULATORY ASSESSMENTS. Pursuant to authority under FIRREA, the OTS has
adopted the following fees to fund its operations: (i) asset-based assessments
for all savings institutions, (ii) examination fees for certain affiliates of
savings associations, (iii) application fees, (iv) securities filing fees and
(v) publication fees. Of these fees, the semi-annual asset-based assessments
(which totaled $352,000 for the six-month period ending December 31, 1995) are
the most significant.

OTHER REGULATIONS AND LEGISLATION. As a thrift institution, Chevy Chase
continues to be subject to a requirement that it obtain prior approval of the
OTS before merging with another institution or before increasing its insured
accounts through merger, consolidation, purchase of assets or assumption of
liabilities. 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
violations of laws and regulations.

Federally chartered thrifts like Chevy Chase generally are permitted to
establish new branches anywhere in the United States, provided that they (i)
meet their regulatory capital requirements; (ii) either have a satisfactory
record under the OTS's regulations implementing the Community Reinvestment Act
("CRA") or have committed to improve their investment-related practices and
performance to the satisfaction of the OTS; (iii) meet the domestic building and
loan test of section 7701(a)(19) of the Internal Revenue Code or the asset
composition test of subparagraph (C) of that section; and (iv) meet the domestic
building and loan test or the asset composition test with respect to each state
outside of its home state where the association has established branches.

Under legislation adopted in 1993, 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: (i) administrative expenses of the
receiver; (ii) any deposit liability of the institution; (iii) any other general
or senior liability of the institution (which is not an obligation described in
clause (iv) or (v)); (iv) any obligation subordinated to depositors or general
creditors (which is not an obligation described in clause (v)); and (v) any
obligation to stockholders arising as a result of their status as stockholders.

PENDING LEGISLATION. Balanced Budget Act of 1995. In November 1995,
Congress passed and presented to President Clinton the Balanced Budget Act of
1995 (the "Budget Act"), which would, among other things, capitalize the SAIF
and either reduce or eliminate the disparity between the BIF and SAIF insurance
rates. Under the Budget Act, (i) thrift institutions would pay a one-time
assessment estimated to be up to 85 basis points on their SAIF-insured deposits,
as measured on March 31, 1995, to increase the SAIF's reserve ratio to 1.25%,
and (ii) effective January 1, 1996, the assessment base for interest on
Financing Corporation bonds, which were issued in the late 1980's to resolve
troubled thrifts, would be expanded to cover all FDIC-insured institutions,
including

<PAGE>

members of both BIF and SAIF. If the legislation is enacted in its current
form, the Bank would be required to pay a one-time assessment of up to $35
million in the first quarter of calendar year 1996; however, the Bank's
semi-annual risk-based deposit insurance premiums should be reduced in future
years.

The Budget Act also would repeal the thrift bad debt reserve provisions of
the Internal Revenue Code. See "Federal Taxation - Bad Debt Reserve." In
addition, although the Budget Act does not require savings associations to
convert to bank charters, it does provide for a merger of the BIF and the SAIF
on January 1, 1998, if no insured depository institution remains chartered as a
savings association on that date.

On December 6, 1995, President Clinton vetoed the Budget Act for reasons
that are unrelated to the above-described provisions, and it cannot be
determined whether, or in what form, the Budget Act will eventually be enacted.

THRIFT CHARTER LEGISLATION. In September 1995, the Financial Institutions
Subcommittee of the House Banking Committee approved the Thrift Charter
Conversion Act of 1995 (the "Conversion Act"). The Conversion Act would, among
other things, eliminate the federal thrift charter by requiring all federally
chartered thrifts, including the Bank, to convert to national bank, state bank,
or state thrift charters by January 1, 1998. Any institution with a federal
thrift charter on January 1, 1998, would be converted to a national bank by
operation of law. Effective January 1, 1998, the Conversion Act also would,
among other things, (i) abolish the OTS and transfer its functions to other
agencies, (ii) repeal the Home Owners Loan Act, the federal statute governing
the operations of thrift institutions and their holding companies and (iii)
merge the SAIF and BIF.

Following conversion, a federal thrift generally would be required to
conform its activities to those permissible under its new charter. However,
existing non-conforming activities could be continued for up to four years (two
years, with two possible one year extensions) from the date that the thrift
converts to a new charter. Accordingly, if the Conversion Act were enacted in
its current form and Chevy Chase were to become a national bank, the Bank could
be required, within as little as two years after its conversion date, to
restrict its sales of non-credit-related insurance and to divest itself of
certain limited real estate investments.

The Conversion Act would permanently grandfather the existing interstate
branches of a converted thrift, but the converted thrift could establish
additional interstate branches only in conformity with federal and state law
applicable to national and state-chartered commercial banks without regard to
any grandfathered interstate branches. Because Maryland and Virginia have
enacted interstate banking laws, the principal impact on the Bank of this
provision of the Conversion Act would be to eliminate the flexibility the Bank
now has under federal law to open interstate branches in any state, regardless
of state law. Conversion of the Bank to a commercial bank charter also would
change (i) the primary federal regulator of the Bank and (ii) certain of the
regulatory capital and accounting policies and rules applicable to the Bank.
Application of different capital and accounting policies and rules without an
appropriate transition period could have an adverse effect on the Bank's
earnings and regulatory capital ratios.

Upon the Bank's conversion to a commercial bank, the Bank's four registered
savings and loan holding companies would become bank holding companies regulated
at the holding company level by the Federal Reserve Board ("FRB"). Current
rules and regulations of the FRB subject bank holding companies to capital
requirements and activities restrictions that are not currently generally
applicable to savings and loan holding companies under OTS regulations. The
Conversion Act would permit holding companies of converted thrifts that meet
certain requirements ("Qualified Bank Holding Companies" or "QBHCs") to continue
to

<PAGE>

engage in nonconforming activities so long as their subsidiary converted
thrift continued to satisfy the qualified thrift lender test and continued to
comply with all limitations and restrictions on the types and amounts of
loans and investments (such as the 10% of assets limitation on commercial
loans) that were applicable to such institutions on the Conversion Act's
enactment date. However, QBHC status would be lost if (i) the QBHC underwent
a change in control, or were the subject of any merger or consolidation with
a company not under common control with the QBHC or (ii) either the QBHC or
its subsidiary converted thrift acquired more than 5% of the shares or assets
of any insured depository institution. Under the Conversion Act, QBHCs
generally would not be subject to the FRB's bank holding company capital
requirements.

In November 1995, legislation identical to the Conversion Act was
introduced in the Senate, and the Senate Banking Committee has announced plans
to hold hearings on the bill and to approve its version of a bill by April 1996.
Chevy Chase cannot determine whether, or in what form, such legislation will
eventually be enacted.

FEDERAL RESERVE SYSTEM. The FRB requires depository institutions,
including federal savings banks, to maintain valuation allowances against their
transaction accounts and certain non-personal deposit accounts. Because
valuation allowances generally must be maintained in cash or
non-interest-bearing accounts, the effect of the reserve requirement is to
decrease the Bank's earning asset base. FRB regulations generally require that
valuation allowances be maintained against net transaction accounts. Prior to
December 19, 1995, the first $4.2 million of a depository institution's
transaction accounts were subject to a 0% reserve requirement. The next $49.8
million in net transaction accounts were subject to a 3.0% reserve requirement
and any net transaction accounts over $54.0 million were subject to a 10.0%
reserve requirement. Effective December 19, 1995, the FRB increased the amount
of transaction accounts subject to a 0% reserve requirement from $4.2 million to
$4.3 million and decreased the "low reserve tranche" from $49.8 million to $47.7
million. The Bank met its reserve requirements for each period during the year
ended September 30, 1995. The balances maintained to meet the reserve
requirements imposed by the FRB also may be used to satisfy liquidity
requirements which are imposed by the OTS.

The FRB also has a clearing balance requirement which may be established at
a depository institution's request in order to, among other things, generate
earnings credits at market rates which are used to offset service charges
resulting from the use of FRB services. An institution that has a reserve
account with the FRB may also elect to maintain a clearing balance requirement
with its reserve requirement in a single account. The maintenance period for
the clearing balance requirement is the same as that for the reserve maintenance
period. Therefore, an institution is expected to maintain a daily average
balance equal to the sum of its reserve balance and clearing balance
requirements. In order to take advantage of being able to use earnings credits
to offset FRB service charges, the Bank began to participate in the clearing
balance requirement program, in the maintenance period beginning November 9,
1995. These additional balances may also be used to satisfy the liquidity
requirements imposed by the OTS.

Savings institutions may borrow from the FRB "discount window," although
FRB regulations require these institutions to exhaust all reasonable alternate
sources of funds, including FHLB sources, before borrowing from the FRB. FDICIA
imposes additional limitations on the ability of the FRB to lend to
undercapitalized institutions through the discount window.

COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act and the
OTS's implementing regulations, a savings association has a continuing and
affirmative obligation to help meet the credit needs of its local communities,
including low- and moderate-income neighborhoods, consistent with the safe and

<PAGE>

sound operation of the institution. In connection with its examination of a
savings association, the OTS is required to assess the institution's record in
satisfying the intent of the CRA. In addition, the OTS is required to take into
account the institution'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. In April 1995, the OTS issued a final CRA evaluation, based on an
examination dated January 9, 1995, and assigned the Bank a "satisfactory"
rating.

In April 1995, the federal bank regulatory agencies issued amendments to
the CRA regulations that are designed to focus the CRA examination process on an
institution's actual performance in meeting the credit needs of low- and
moderate-income neighborhoods rather than on its CRA compliance procedures.
Specifically, institutions like the Bank, with more than $250 million in assets,
will be evaluated on the basis of their lending and investment in, and provision
of services, to low- and moderate-income areas unless they request designation
and receive approval as wholesale or limited purpose institutions or have been
approved for evaluation under a strategic plan. The Bank does not contemplate
employing any of these options. Additionally, large retail banks will be
required to collect and report additional data concerning small business loans.
Data collection will become effective January 1, 1996 and reporting requirements
will become effective on January 1, 1997. Beginning on January 1, 1996, the
Bank could be evaluated under the new examination procedures if it provided the
necessary data; however, the new procedures are not required to be applied until
July 1, 1997.

OTHER ASPECTS OF FEDERAL LAW. The Bank is also subject to federal
statutory provisions covering other items, including security procedures,
currency transactions reporting, insider and affiliated party transactions,
management interlocks, truth-in-lending, electronic funds transfers, funds
availability and equal credit opportunity.

RECENT ACCOUNTING PRONOUNCEMENTS. Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), was issued in March
1995. SFAS 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets, to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. It addresses how impairment losses
should be measured and when such losses should be recognized. Under SFAS 121,
long-lived assets and certain identifiable intangibles to be held and used shall
be 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 entity shall recognize an impairment loss.
Measurement of an impairment loss for long-lived assets and identifiable
intangibles that an entity expects to hold and use should be based on the fair
value of the asset. Long-lived assets and certain identifiable intangibles to
be disposed of should generally be reported at the lower of carrying amount or
fair value less the cost to sell. SFAS 121 is effective for financial
statements for fiscal years beginning after December 15, 1995. The adoption of
SFAS 121 is not anticipated to have a material impact on the Bank's financial
condition on the results of operations. See "Summary of Significant Accounting
Policies - the Bank" in the Notes to the Consolidated Financial Statements in
this report.

<PAGE>

about certain significant estimates and current vulnerability to
risk due to certain concentrations. SOP 94-6 is effective for financial
statements for fiscal years ending after December 15, 1995, and for financial
statements for interim periods in fiscal years subsequent to the year for which
SOP 94-6 is first applied. See "Summary of Significant Accounting Policies -
the Bank" in the Notes to the Consolidated Financial Statements in this report.

MARKET AREA

The Bank's principal deposit and lending markets are located in the
Washington, D.C. metropolitan area. Service industries and federal, state and
local governments employ a significant portion of the Washington, D.C. area
labor force, while a substantial number of the nation's 500 largest corporations
have some presence in the area. The Washington, D.C. area's seasonally
unadjusted unemployment rate is generally below the national rate and was 4.1%
in September 1995, compared to the national rate of 5.4%.

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, to a lesser extent, Fairfax County
in Virginia. Approximately 27.4% of the Bank's deposits at September 30, 1995
were obtained from depositors residing outside of Maryland, primarily in
Northern Virginia. Chevy Chase had the largest market share of deposits in
Montgomery County at June 30, 1995, according to preliminary published industry
statistics. The per capita income of each of Montgomery and Fairfax Counties
ranks among the highest of counties and equivalent jurisdictions nationally.
These two counties are also the Washington, D.C. 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 services and retail trade centers. Unemployment in Montgomery
and Fairfax Counties in September 1995 (2.8% and 2.9%, respectively) was below
the national rate (5.4%) and state rates (5.0% for Maryland and 4.5% for
Virginia) for the same month.

The Bank historically has concentrated its lending activities in the
Washington, D.C. metropolitan area. See "Lending Activities."

INVESTMENTS AND OTHER SECURITIES

The Bank is required by OTS regulations to maintain a specific minimum
amount of liquid assets and short-term liquid assets invested in certain
qualifying types of investments. See "Regulation - Liquidity Requirements." To
meet these requirements, the Bank maintains a portfolio of cash, federal funds
and mortgage-backed securities with final maturities of five years or less. The
balance of investments in excess of regulatory requirements reflects
management's objective of maintaining liquidity at a level sufficient to assure
adequate funds to meet expected and unexpected balance sheet fluctuations.

During fiscal 1995, the Bank transferred at fair value all of its
investment securities and mortgage-backed securities previously classified as
available-for-sale to held-to-maturity and, as a result, all such securities are
classified as held-to-maturity at September 30, 1995. Net unrealized holding
losses, net of the related income tax effect, continue to be reported as a
separate component of stockholders' equity and are being amortized to income
over the remaining lives of the securities.

The OTS has adopted guidelines governing investment securities held by
SAIF-insured institutions. The guidelines require that investments in
securities be accounted for in accordance with GAAP, summarize the applicable
accounting principles and provide guidance regarding the application of GAAP in
determining whether securities are properly classified as held-to-maturity,
available-for-sale or trading.

<PAGE>

LENDING ACTIVITIES

LOAN PORTFOLIO COMPOSITION. At September 30, 1995, the Bank's loan
portfolio totaled $2.9 billion, which represented 59.0% 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 48.3% of the loan portfolio at that date.

The following table sets forth information concerning the Bank's loan
portfolio (net of unfunded commitments) for the periods indicated.

<PAGE>

LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------------- ------------------- ------------------- ------------------- --------------------
% of % of % of % of % of
Balance Total Balance Total Balance Total Balance Total Balance Total
----------- ------- ----------- ------- ----------- ------- ----------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential (1) $1,391,694 47.3 % $1,369,571 53.8 % $1,287,333 53.6 % $ 933,867 41.6 % $1,345,409 41.7 %

Home equity (1) 29,024 1.0 34,708 1.4 60,549 2.5 223,148 9.9 289,976 9.0

Commercial and
multifamily 85,781 2.9 84,210 3.3 94,079 3.9 61,522 2.7 69,097 2.1

Real estate
construction and
ground 32,652 1.1 52,350 2.0 62,637 2.6 92,215 4.1 133,852 4.2

Credit card (1) 1,012,548 34.4 650,199 25.5 754,520 31.4 872,672 38.9 1,302,008 40.4

Automobile (1) 239,217 8.1 289,346 11.4 106,725 4.4 19,910 0.9 16,924 0.5

Other 152,897 5.2 66,851 2.6 38,048 1.6 42,019 1.9 67,659 2.1
----------- ------- ----------- ------- ----------- ------- ----------- ------- ----------- --------
2,943,813 100.0 % 2,547,235 100.0 % 2,403,891 100.0 % 2,245,353 100.0 % 3,224,925 100.0 %
----------- ======= ----------- ======= ----------- ======= ----------- ======= ----------- ========
Less:

Unearned premiums
and discounts 1,103 1,438 1,543 2,589 6,002

Deferred loan
origination fees
(costs) (13,687) (10,604) (3,472) 1,889 6,612

Reserve for loan
losses 60,496 50,205 68,040 78,818 89,745
----------- ----------- ----------- ----------- -----------
47,912 41,039 66,111 83,296 102,359
----------- ----------- ----------- ----------- -----------
Total loans
receivable $2,895,901 $2,506,196 $2,337,780 $2,162,057 $3,122,566
=========== =========== =========== =========== ===========
</TABLE>

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

<PAGE>

The Bank will continue to adjust 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" and
"- Qualified Thrift Lender ("QTL") Test," "Real Estate - Federal Taxation - Bad
Debt Reserve" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Financial Condition - Banking - Asset and Liability
Management."

CONTRACTUAL PRINCIPAL REPAYMENTS OF LOANS. The following table shows the
scheduled contractual principal repayments of the Bank's loans at September 30,
1995. The entire balance of loans held for sale and/or securitization is shown
in the year ending September 30, 1996, because such loans are expected to be
sold in less than one year.

<PAGE>

CONTRACTUAL PRINCIPAL REPAYMENTS
(IN THOUSANDS)
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Balance Approximate Principal Repayments Due in Years Ending September 30,
Outstanding at -----------------------------------------------------------------------------------
September 30, 2011 and
1995 (1) 1996 1997 1998 1999-2000 2001-2005 2006-2010 Thereafter
--------------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $ 1,323,015 $ 26,421 $ 24,059 $ 25,926 $ 81,108 $ 195,282 $ 174,353 $ 795,866
Home equity 29,024 2,013 - - - - - 27,011
Commercial and multifamily 85,781 7,197 1,506 680 15,723 48,060 12,615 -
Real estate construction
and ground 32,652 13,993 17,479 1,180 - - - -
Credit card (2) 712,548 41,872 39,411 37,095 70,429 137,522 101,594 284,625
Automobile 39,217 8,178 8,909 9,705 12,425 - - -
Other 152,897 21,880 23,169 23,068 29,431 55,349 - -
Loans held for sale 68,679 68,679 - - - - - -
Loans held for
securitization and sale 500,000 500,000 - - - - - -
--------------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Total loans
receivable (3) $ 2,943,813 $ 690,233 $ 114,533 $ 97,654 $ 209,116 $ 436,213 $ 288,562 $1,107,502
=============== ========== ========== ========== ========== ========== ========== ===========

Fixed-rate loans $ 366,988 $ 33,756 $ 35,100 $ 37,750 $ 91,332 $ 144,675 $ 6,356 $ 18,019
Adjustable-rate loans 2,008,146 87,798 79,433 59,904 117,784 291,538 282,206 1,089,483
Loans held for sale 68,679 68,679 - - - - - -
Loans held for
securitization and sale 500,000 500,000 - - - - - -
--------------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Total loans
receivable (3) $ 2,943,813 $ 690,233 $ 114,533 $ 97,654 $ 209,116 $ 436,213 $ 288,562 $1,107,502
=============== ========== ========== ========== ========== ========== ========== ===========
</TABLE>

- -------------------------------------------------------------------------------

(1) Of the total amount of loans outstanding at September 30, 1995 which were
due after one year, an aggregate principal balance of approximately
$333.2 million had fixed interest rates and an aggregate principal balance
of approximately $1.9 billion had adjustable interest rates.

(2) Estimated repayments of credit card loans reflect the required minimum
payments.

(3) Before deduction of reserve for loan losses, unearned discounts and
deferred loan origination fees (costs).

32
<PAGE>

Actual payments may not reflect scheduled contractual principal repayments
due to the effect of loan refinancings, prepayments and enforcement of
due-on-sale clauses, which give the Bank the right to declare a "conventional
loan" -- one that is neither insured by the Federal Housing Administration
("FHA") nor partially guaranteed by the Veterans' Administration ("VA") --
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid.
Although the Bank's single-family residential loans historically have had stated
maturities of generally 30 years, such loans normally have remained outstanding
for substantially shorter periods because of these factors. At September 30,
1995, principal repayments of $121.6 million are contractually due to the Bank
within the next year. Of the $121.6 million, $33.8 million is contractually due
on fixed-rate loans and $87.8 million is contractually due on adjustable-rate
loans.

ORIGINATION, PURCHASE AND SALE OF REAL ESTATE LOANS. The following table
shows changes in the composition of the Bank's real estate loan portfolio and
the net change in mortgage-backed securities.

<PAGE>

ORIGINATION, PURCHASE AND SALE OF REAL ESTATE LOANS
(IN THOUSANDS)
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Real estate loan originations and purchases: (1)

Residential and home equity $ 742,560 $ 1,570,155 $ 1,758,484
Commercial and multifamily 4,023 9,582 42,718
Real estate construction and ground 37,510 47,693 41,675
------------ ------------ ------------

Total originations and purchases 784,093 1,627,430 1,842,877
------------ ------------ ------------

Principal repayments (248,109) (389,847) (346,645)
Sales (2) (371,681) (800,506) (785,255)
Loans transferred to real estate acquired
in settlement of loans (9,822) (4,106) (23,158)
Other - (869) -
------------ ------------ ------------
(629,612) (1,195,328) (1,155,058)

Transfers to mortgage-backed securities (3) (156,169) (396,189) (493,973)
------------ ------------ ------------

Increase (decrease) in real estate loans $ (1,688) $ 35,913 $ 193,846
============ ============ ============
</TABLE>

- -------------------------------------------------------------------------------
(1) Excludes unfunded commitments.

(2) Includes securitization and sale of home equity credit line receivables
of $150.5 millon, $181.9 million and $340.4 million for the years ended
September 30, 1995, 1994 and 1993, respectively.

(3) Represents real estate loans which were pooled and exchanged for FHLMC,
FNMA and private label, AA-rated mortgage-backed securities.

34
<PAGE>

As a federally chartered savings institution, the Bank has general
authority to make loans secured by real estate located throughout the United
States. Approximately 96.0% of the Bank's real estate loans at September 30,
1995 by principal balance were secured by properties located in Maryland,
Virginia or the District of Columbia.

The Bank originates VA, FHA and a wide variety of conventional residential
mortgage loans through its wholly-owned mortgage banking subsidiary, B. F. Saul
Mortgage Company, or directly through Chevy Chase Mortgage, a division of the
Bank. Commercial, real estate construction and ground and home equity credit
line loans are originated directly by the Bank.

The Bank maintains a wholesale network of correspondents, including loan
brokers and financial institutions, in order to supplement its direct
origination of single-family adjustable-rate residential mortgage loans in the
Washington, D.C. metropolitan area. The Bank determines the specific loan
products and rates under which the correspondents originate the loans, and
subjects the loans to the Bank's underwriting criteria and review. During the
year ended September 30, 1995, approximately $88.5 million of loans settled
under the correspondent program.

Loan 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, and in recent periods have
produced additional non-interest income in the form of gains on sales of loans.
In fiscal 1995, sales of mortgage loans originated or purchased for sale by the
Bank totaled $223.9 million. 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 originates fixed-rate, single-family, long-term loans on
terms which conform to Federal Home Loan Mortgage Corporation ("FHLMC") and
Federal National Mortgage Association ("FNMA") guidelines in order to ensure the
salability of the loan in the public secondary mortgage market. In order to
manage its interest-rate exposure, the Bank hedges its fixed-rate 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. At September 30, 1995, the Bank had $68.7 million of
single-family residential loans held for sale to investors.

When the Bank sells a whole loan or loan participation and retains
servicing, or purchases mortgage servicing rights from third parties, it
continues to collect and remit loan payments, inspect the properties, make
certain insurance and tax payments on behalf of borrowers and otherwise service
the loans. The normal servicing fee, generally ranging from 0.25% to 0.50% of
the outstanding loan principal amount per annum, is recognized as income over
the life of the loans. The Bank also typically derives income from temporary
investment for its own account of loan collections pending remittance to the
participation or whole loan purchaser. At September 30, 1995, the Bank was
servicing residential permanent loans totaling $1.4 billion for other investors.

SALES OF MORTGAGE-BACKED SECURITIES. A significant portion of the Bank's
sales of mortgage-backed securities involve sales pursuant to the Bank's normal
mortgage banking operations. Generally, the Bank's policy is to sell its
fixed-rate mortgage production which, in the case of most conforming fixed-rate
loans, is accomplished by first pooling such loans into mortgage-backed
securities. The mortgage-backed securities sold as part of the Bank's mortgage
banking operations are generally issued in the same month as the sale of such
securities. The securities are formed from conforming fixed-rate loans
originated for sale or from fixed-rate loans resulting from the borrower's
election to convert from a variable-rate loan to a fixed-rate loan. In
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," mortgage-backed

<PAGE>

securities held for sale in conjunction with mortgage banking activities are
classified as trading securities. As a result, the Consolidated Statements of
Cash Flows in this report reflect significant proceeds from the sales of
securities, even though there are no balances of trading securities at September
30, 1995. Fixed-rate loans are designated as held for sale in the Consolidated
Statements of Financial Condition in this report.

SINGLE-FAMILY RESIDENTIAL REAL ESTATE LENDING. The Bank originates a
variety of loans secured by single-family residential structures. At September
30, 1995, $1.4 billion (or 48.3%) of the Bank's loan portfolio consisted of
loans secured by first or second mortgages on such properties, including $36.1
million of FHA-insured or VA-guaranteed loans.

Chevy Chase currently offers fixed-rate loans with maturities of 15 to 30
years and adjustable-rate residential mortgage loans ("ARMs"), principally with
maturities of 30 years. At September 30, 1995, 39.3% of the Bank's loans
consisted of ARMs scheduled to have interest rate adjustments within five years.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Banking - Asset and Liability Management."
Interest rates on the majority of the Bank's ARMs are adjusted based on changes
in yields on U.S. Treasury securities of varying maturities. The interest rate
adjustment provisions of the Bank's ARMs contain limitations on the frequency
and maximum amount of interest rate adjustments, although such limitations are
not required by law. These limitations are determined by a variety of factors,
including mortgage loan competition in the Bank's markets. The ARMs currently
offered by the Bank are generally subject to a limitation on the annual increase
in the interest rate of 2.0% and a limitation on the increase in the interest
rate over the term of the loan ranging from 6.0% to 9.0%.

During the current fiscal year, the Bank continued to fulfill its 1994
five-year commitment of $1.0 billion to meet the credit needs of low- and
moderate-income borrowers in the various communities which it serves. As
part of this commitment, the Community Development Mortgage Program is
providing $140.0 million of mortgage financing over a five-year period, with
$7.0 million in subsidies for below-market mortgage loans, to families in
minority neighborhoods in the District of Columbia and Prince George's
County, Maryland.

The Bank's home equity credit line loan provides revolving credit secured
principally by a second mortgage on the borrower's home. Home equity credit
line loans bear interest at a variable rate that adjusts quarterly 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%. Except for any
amortization of principal that may occur as a result of monthly payments, there
are no required payments of principal until maturity. In order to promote its
home equity credit line loan program, the Bank currently offers prospective
borrowers a below-market interest rate for an introductory period and settlement
without closing costs.

Securitizations of home equity credit line receivables have been an
integral element of the Bank's strategies 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 - Banking." The Bank transferred $150.5 million, $181.9 million and
$340.4 million of home equity credit line receivables in fiscal 1995, fiscal
1994 and fiscal 1993, respectively, to trusts for securitization and sale to
investors. Gains of $7.6 million, $9.5 million and $16.8 million were
recognized by the Bank as a result of these transactions. The Bank continues to
service the underlying accounts.

COMMERCIAL REAL ESTATE AND CONSTRUCTION LENDING. Aggregate balances of
residential construction, commercial construction, ground and commercial and
multifamily loans decreased 13.3% in fiscal 1995 to $118.4 million at September

<PAGE>

30, 1995 from $136.6 million at September 30, 1994. In the past three fiscal
years, the Bank has provided financing, generally at market rates, to certain
purchasers of its commercial REO. Additionally, the Bank finances the
construction of residential real estate, principally single-family detached
homes and townhouses, but generally only when a home is under contract for sale
by the builder to a consumer.

CREDIT CARD LENDING. Chevy Chase provides consumer credit through its
credit card program, which offers VISAr and MasterCardr credit cards and
includes Gold and Classic cards. Chevy Chase issues the credit cards and
receives interest income on credit extended, a fee based on a percentage of
credit sales paid by merchants accepting card purchases, and an annual
membership fee for use of the cards. Chevy Chase's credit card loan portfolio
accounted for 34.4% of Chevy Chase's total loans at September 30, 1995.
According to statistics published in Sheshunoff S&L Quarterly, Chevy Chase is
the second largest issuer of credit cards among thrift institutions, based on
total credit card loans outstanding at March 31, 1995. At September 30, 1995,
credit card loans outstanding totaled $1.0 billion and managed credit card
receivables, including receivables owned by the Bank and receivables
securitized, sold and serviced by the Bank, totaled $4.2 billion.

The Bank emphasizes credit card lending in recent years because the
shorter term and normally higher interest rates on such loans help it maintain a
profitable spread between its average loan yield and its cost of funds. In
addition, credit card accounts typically may be sold at a premium over their
receivables balances, thus further enhancing their potential value to the Bank.
Chevy Chase also believes its credit card program contributes to market share
growth in its local markets by attracting new depositors, promoting a high
degree of customer loyalty and providing opportunities to cross-market other
products of the Bank. For this reason, the Bank has not sold any credit card
accounts maintained by cardholders having addresses in Maryland, Virginia or the
District of Columbia, the Bank's primary market area.

Chevy Chase's internal data processing systems are capable of handling a
broad range of credit card program operations, including processing of credit
applications and collection functions. Certain data processing and
administrative functions associated with the servicing of the credit card
accounts are performed on behalf of the Bank by First Data Resources
Incorporated from its facilities in Omaha, Nebraska.

Changes in credit card use and payment patterns by cardholders, including
increased defaults, may result from a variety of social, legal and economic
factors. Chevy Chase currently offers introductory periodic interest rates for
varying initial periods which, at the conclusion of such periods, revert to the
Bank's regular variable interest rate. If account holders choose to utilize
competing sources of credit, the rate at which new receivables are generated may
be reduced and certain purchase and payment patterns with respect to the
receivables may be affected. Economic factors affecting credit card use include
the rate of inflation and relative interest rates offered for various types of
loans. Adverse changes in economic conditions could have a direct impact on the
timing and amount of payments by borrowers. During times of economic recession,
default rates on credit card loans generally may be expected to exceed default
rates on residential mortgage loans. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Financial Condition - Banking
- - Asset Quality - Delinquent Loans" and "- Allowances for Losses."

Certain issuers of credit cards have adjusted their pricing to provide for
the different credit risks among customers based upon card usage, repayment
habits and other criteria. The Bank has implemented such risk-based pricing by
increasing the interest rates charged to high-risk customers and by continuing
to allow premium-credit customers a more favorable rate. The Bank currently
offers premium-credit customers the option to convert to a variable-rate product

<PAGE>

which currently provides the cardholder with a lower interest rate than the
Bank's fixed-rate product. Periodically, the Bank offers promotional discounts
to certain customers to encourage increased usage of the Bank's credit cards.

Certain jurisdictions and their residents may attempt to require
out-of-state credit card issuers to comply with such jurisdictions' consumer
protection laws (including laws limiting the charges imposed by such credit card
issuers) in connection with their operations in such jurisdictions. For
example, in recent years a number of lawsuits and administrative actions have
been filed in several states against out-of-state credit card issuers (including
both federally chartered and state chartered insured depository institutions)
challenging various fees and charges (such as late fees, over-the-limit fees,
returned check fees and annual membership fees) assessed against residents of
the states in which such lawsuits were filed, based on restrictions or
prohibitions under the laws of such states. Several state and federal courts
that have considered this issue have ruled in favor of the issuing institutions;
however, courts in some states, notably Pennsylvania and New Jersey, have
determined that certain laws of those states that prohibit certain fees and
charges are applicable to out-of-state credit card issuers. If it were
determined that out-of-state credit card issuers must comply with a
jurisdiction's laws limiting the charges imposed by credit card issuers, such
action could have an adverse impact on the Bank's credit card operations.

Securitizations of credit card receivables and sales of credit card
relationships have been integral elements of the Bank's strategies to enhance
liquidity, to further asset and liability management objectives and to maintain
compliance with regulatory capital and "qualified thrift lender" requirements.
In fiscal 1994, 1992 and 1991, the Bank sold approximately 150,000 credit card
relationships at a premium over their receivables balances of $96.5 million,
$14.9 million and $273.4 million, respectively. No such sales occurred during
fiscal 1995 and fiscal 1993. The Bank transferred $1.6 billion, $1.4 billion,
$350.0 million and $280.0 million of credit card receivables in fiscal 1995,
fiscal 1994, fiscal 1993 and fiscal 1992, respectively, to trusts for
securitization and sale to investors. No gain or loss was recognized by the
Bank as a result of these transactions; however, the Bank continues to service
the underlying accounts, and excess servicing fees are recognized over the
related lives of the transactions. These excess servicing fees represent the
contractual interest and fees paid by the cardholders less certificate interest
paid to the certificateholders and administrative fees paid to providers of
services to the trusts.

Chevy Chase plans to securitize an additional $750.0 million of credit card
receivables during the first and second quarters of fiscal 1996. Certain of
these receivables at September 30, 1995 were classified as loans held for
securitization and sale in the Consolidated Statements of Financial Condition in
this report.

Credit card loans are not subject to those provisions of federal laws and
regulations that limit to 35% of an institution's total assets the amount of
consumer loans that a federally chartered savings institution may make.

CONSUMER AND OTHER LENDING. Chevy Chase currently offers a variety of
consumer loans other than credit card loans, including automobile loans,
overdraft lines of credit, home improvement loans and other unsecured loans for
traditional consumer purchases and needs. The largest areas of recent growth
have been in automobile loans and home improvement loans. During fiscal 1995,
the Bank purchased or originated $256.7 million of automobile loans, which was
offset in part by the transfer of $252.2 million of receivables to a trust for
securitization and sale to investors. Home improvement loans increased $75.2
million during fiscal 1995 as a result of an increase in the number of dealers
selling such loans to the Bank. The Bank's portfolio of automobile loans, home
improvement loans and other consumer loans totaled $239.2 million, $112.7
million

<PAGE>

and $40.2 million, respectively, at September 30, 1995. Automobile loans,
home improvement loans and other consumer loans (other than credit card
loans) accounted for 13.3% of total loans at that date.

Federal laws and regulations permit a federally chartered savings
institution to make secured and unsecured consumer loans up to 35% of the
institution's total assets. In addition, a federally chartered savings
institution has lending authority above the 35% limit for certain consumer loans
which include, in addition to credit card loans, home improvement, secured
deposit account and educational loans.

REAL ESTATE LOAN UNDERWRITING. In the loan approval process, Chevy Chase
assesses both the borrower's ability to repay the loan and, in appropriate
cases, the adequacy of the proposed security. Credit approval is vested with
the Board of Directors and delegated to the Executive Loan Committee and certain
senior officers in accordance with the credit authorizations approved by the
Board of Directors. All construction and commercial real estate loans are
reviewed and approved by the Executive Loan Committee. 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 loans of $15 million or more
are presented to the Board of Directors for final approval.

The approval process for all types of real estate loans includes on-site
appraisals of the properties securing such loans and a review of the applicant's
financial statements and credit, payment and banking history, financial
statements of any guarantors, and tax returns of guarantors of construction and
commercial real estate loans.

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 lends up to 95% of the appraised value of single-family
residential dwellings to be owner-occupied. The Bank also lends up to 85% of
the appraised value of the completed project to finance the construction of such
dwellings, and, on a case-by-case basis, the Bank occasionally may lend up to
90% of such appraised value when such financing is limited to pre-sold units.
The loan-to-value 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 generally does not originate a
second mortgage loan (excluding home equity credit line loans) if the aggregate
loan-to-value ratio of the second loan and the related first mortgage loan
exceeds 80% of the appraised value of the property. In February 1994, the Bank
increased the maximum loan-to-value ratio for home equity credit line loans to
90% from 80% provided that private mortgage insurance is obtained for the amount
over 80% of the value of the underlying property. Loan-to-value ratios are
determined at the time a loan is originated. Consequently, subsequent declines
in the value of the loans' collateral could expose the Bank to losses.

OTS regulations require institutions to adopt internal real estate lending
policies, including loan-to-value 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 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

<PAGE>

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. Generally, for any
residential loan (including home equity credit line loans) in an amount
exceeding 80% of the appraised value of the security property, Chevy Chase
currently requires mortgage insurance from an independent mortgage insurance
company. The majority of the Bank's mortgage insurance is placed with four
carriers.

Substantially all fixed-rate mortgage loans originated by the Bank contain
a "due on sale" clause providing 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.

CREDIT CARD LOAN UNDERWRITING. The Bank generates new credit card accounts
through various methods, including direct-mail. The Bank identifies potential
cardholders for preapproved solicitations by supplying a list of credit criteria
to a credit bureau, which generates a list of individuals who meet such
criteria. When the Bank receives an acceptance certificate from an individual
that received a preapproved solicitation, the Bank obtains a credit report on
such individual issued by an independent credit reporting agency, and the credit
limit and terms of the account are subject to certain post-screening
underwriting reviews performed by the Bank.

The Bank's underwriting approach to account approval supplements a
computerized credit scoring system with an individual evaluation of each
completed application for creditworthiness. In the underwriting process, the
Bank considers the prospective cardholder's income, credit history, outstanding
debt as a percentage of gross income and other factors intended to provide a
general indication of the applicant's willingness and ability to repay his
obligations. The Bank also reviews a credit report on each applicant issued by
an independent credit reporting agency and, for certain applicants,
independently verifies employment, income or other information contained in the
credit application.

If an application is approved, the Bank establishes an initial credit limit
on the cardholder's account based on the limit requested in the credit
application and the Bank's evaluation of the cardholder's creditworthiness.
This credit limit is adjusted from time to time based on the Bank's continuing
evaluation of the cardholder's repayment ability as evidenced by the
cardholder's payment history and other factors. The Bank also may increase the
credit limit at the cardholder's request after completion of an evaluation
comparable to that performed during the initial underwriting.

Management reviews credit losses on a monthly basis and adjusts the Bank's
underwriting standards as appropriate.

OTHER CONSUMER LOAN UNDERWRITING. Other consumer loans (which include
automobile loans and home improvement loans) are originated or purchased by the
Bank after a review by the Bank in accordance with its 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 and
evaluates the borrower's credit history through a review of a written 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 such guidelines may, within certain limits,
be made based upon the credit judgment of the Bank's lending officer. The Bank
periodically conducts quality audits to ensure compliance with its established
policies and procedures.

<PAGE>

The Bank also makes automobile loans through one of its operating
subsidiaries. The underwriting guidelines for this subsidiary apply to a
category of lending in which loans may be made to applicants who have
experienced certain adverse credit events (and therefore would not necessarily
meet all of the Bank's guidelines for its traditional loan program), but who
meet certain other creditworthiness tests. Such loans may experience higher
rates of delinquencies, repossessions and losses, especially under adverse
economic conditions, compared with loans originated pursuant to the Bank's
traditional lending program. See "Subsidiaries - Operating Subsidiaries."

LOAN SERVICING. In addition to interest earned on loans, the Bank receives
income through servicing of loans and fees in connection with loan origination,
loan modification, late payments, changes of property ownership and
miscellaneous services related to its loans. Loan servicing income, principally
servicing income earned on the Bank's securitized credit card, home equity
credit line and automobile receivables portfolios, has been a source of
substantial earnings for the Bank in recent periods. Income from these
activities varies with the volume and type of loans originated and sold.

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

<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1995 1994 1993
------------ ------------ ------------
(In thousands)
<S> <C> <C> <C>
Residential . . . . . . . . $1,350,423 $1,495,120 $2,022,033
Credit Card . . . . . . . . 3,226,316 1,953,792 841,828
Home Equity . . . . . . . . 455,791 485,428 530,092
Automobile . . . . . . . . 218,287 9,506 29,625
---------- ---------- ----------
Total amount of loans
serviced for others (1). $5,250,817 $3,943,846 $3,423,578
---------- ---------- ----------
---------- ---------- ----------
Loan servicing fee
income (2) . . . . . . . . $ 184,275 $ 69,878 $ 46,631
---------- ---------- ----------
---------- ---------- ----------

<FN>

(1) The Bank's basis in its servicing rights at September 30, 1995, 1994 and
1993 was $54.2 million, $40.5 million and $48.0 million, respectively.

(2) In each of the years ended September 30, 1995, 1994 and 1993, loan
servicing fee income as a percentage of net interest income before
provision for loan losses was 104.6%, 41.4% and 25.7%, respectively.

</TABLE>

The Bank earns fees in connection with the servicing of home equity credit
line loans, credit card loans, automobile loans and single-family residential
mortgage loans. The Bank's level of servicing fee income increases or decreases
with increases or decreases in securitized balances of these loan types. The
substantial increase in loan servicing fee income in fiscal 1995 from the level
achieved in fiscal 1994 was principally attributable to an increase in
securitized credit card receivables outstanding and decreased charge-offs, which
combined to increase the amount of servicing income earned on credit card
securitizations. The Bank's level of servicing fee income declines upon
repayment of assets previously securitized and sold and repayment of mortgage
loans serviced for others. As the Bank securitizes and sells assets, acquires

<PAGE>

mortgage servicing rights either through purchase or origination, or sells
mortgage loans and retains the servicing rights on those loans, the level of
servicing fee income increases. During fiscal 1995, the Bank securitized and
sold $1.6 billion of credit card receivables, $150.5 million of home equity
credit line receivables and $252.2 million of automobile loan receivables. In
fiscal 1995, the Bank also sold the rights to service mortgage loans with an
aggregate principal balance of $148.1 million, which were originated by the Bank
in connection with its mortgage banking activities.

The Bank's investment in loan servicing rights (including purchased and
originated mortgage servicing rights (collectively "mortgage servicing rights")
and excess loan servicing assets), and the amortization of such rights, are
evaluated for impairment. Excess loan servicing assets are evaluated quarterly
based on the discounted value of estimated future net cash flows to be generated
by the underlying loans. Changes in the discounted value of these assets are
recorded as a reduction of fee income in the period in which the change occurs.
Several estimates are used when determining the discounted value, the most
significant of which is the estimated rate of repayment of the underlying loans.
In accordance with Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights" ("SFAS 122"), the Bank evaluates its
mortgage servicing rights for impairment based on fair value. To measure fair
value of its mortgage servicing rights, the Bank uses either quoted market
prices or discounted cash flow analyses using appropriate assumptions for
servicing fee income, servicing fee costs, prepayment rates and discount rates.
Additionally, the Bank stratifies its capitalized mortgage servicing rights for
purposes of evaluating impairment by taking into consideration relevant risk
characteristics, including loan type, note rate and date of acquisition. See
"Summary of Significant Accounting Policies - The Bank" in the Notes to the
Consolidated Financial Statements in this report.

The Bank's current origination fees on its single-family mortgage loans
generally range from 1.0% to 3.0% of the principal amount of the loan. Its
current origination fees on construction and multifamily residential and
commercial real estate loans generally range from 0.5% to 2.0% of the principal
amount of the loan.

Loan origination and commitment fees, and the related costs associated with
making the loans, are deferred in accordance with Statement of Financial
Accounting Standards No. 91, "Accounting for Nonrefundable Fees Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases." For fully
amortizing loans originated for the Bank's portfolio, the net deferred fees are
accreted to interest income over the estimated life of the loans using the
level-yield method. Fees deferred on revolving credit lines or loans which have
no scheduled amortization originated for the Bank's portfolio are accreted to
income over the estimated lives of the underlying loans using the straight-line
method.

Fees deferred on loans originated and held for sale are not accreted to
income but instead are used in determining the gain or loss on the sale of the
loans.

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, such acquired property is listed in the Bank's account
for real

<PAGE>

estate acquired in settlement of loans until the property 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 limitations in other jurisdictions in which loans are originated by
the Bank.

The total outstanding balance of a credit card loan (the largest category
of the Bank's consumer loans) is considered contractually delinquent if the
minimum payment indicated on the cardholder's statement is not received by the
due date indicated on such statement. Efforts to collect contractually
delinquent credit card receivables currently are made by the Bank's service
center personnel or the Bank's designees. Collection activities include
statement messages, formal collection letters and telephone calls. The Bank
may, at its option, enter into arrangements with cardholders to extend or
otherwise change payment schedules. Delinquency levels are monitored by
collection managers, and information is reported regularly to senior management.
Accounts are charged off when they become 180 days contractually delinquent,
although the Bank continues to attempt to collect balances due and, in some
cases, may refer the accounts to outside collection agencies.

See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financial Condition - Banking - Asset Quality -
Delinquent Loans" for a discussion of the Bank's delinquent loan portfolio at
September 30, 1995.

ALLOWANCES FOR LOSSES. It is the Bank's policy to maintain adequate
allowances for estimated losses on loans and real estate. Generally, the
allowances are based on, among other things, historical loan loss experience,
evaluation of economic conditions in general and in various sectors of the
Bank's customer base, and periodic reviews of loan portfolio quality by Bank
personnel. Allowances for losses on loans and real estate are based on current
events or facts that may ultimately lead to future losses. The Bank's actual
losses may vary from management's current estimates. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Financial Condition - Banking - Asset Quality - Allowances for Losses."

The Bank's specific methods for establishing the appropriate levels of
allowances vary depending upon the assets involved. The Bank's allowance on
credit card loans is based on a number of factors, including historical
charge-off and repayment experience and the age of the portfolio. The Bank has
developed a static pool model to extrapolate its allowance needs based on an
analysis of the characteristics of the portfolio and trends at any particular
time. In this regard, the Bank considers historical charge-off information
relative to origination date, borrower profiles, age of accounts, delinquencies,
bankruptcies and other factors. Although industry standards are considered,
they are given comparatively less weight due to management's belief that
comparisons among different institutions' portfolios are potentially misleading
because of significant differences in underwriting standards, curing and
re-aging procedures and charge-off policies. Chevy Chase's policy is to charge
off credit card receivables when they become 180 days contractually delinquent.
The Bank's actual charge-off experience for credit card loans may vary from the
levels forecasted by the Bank's static pool model because credit card loans
typically are more sensitive to general economic conditions than certain other
types of loans. For example, an unforeseen decline in economic activity may
result in increased bankruptcy losses which the model is unable to forecast.
Nevertheless, because the Bank's model employs a rolling 12-month base, such
unforeseen losses are incorporated into the model as they occur and allowances
are adjusted accordingly. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition - Banking -
Asset Quality - Allowances for Losses."

The Bank's methods for determining the allowance on loans secured by real
estate vary depending on whether the loans are secured by residential homes or

<PAGE>

by other real estate. For residential mortgage loans, management computes the
allowance by stratifying residential permanent loans on a state by state and
ownership (i.e., investor or homeowner) basis. After the residential permanent
portfolio has been stratified by state, historical loss ratios (as adjusted for
predictable or quantifiable trends, if known) for the specific states are
applied to delinquent loans. The sum of these calculations is the component
assigned to residential permanent loans. In the Bank's experience, this
approach has resulted in timely recognition of necessary allowances, which has
been generally supported by the Bank's favorable results on the ultimate
disposition of the underlying collateral.

The Bank assesses the adequacy of its general valuation allowances on
non-residential (i.e., other than single-family residential) mortgage loans, REO
and real estate held for investment based primarily on an ongoing evaluation of
individual assets. This evaluation takes into consideration a variety of
factors, including cash flow analyses, independent appraisals, market studies,
economic trends and management's knowledge of the market and experience with
particular borrowers. The Bank obtains current appraisals when properties are
classified as REO. The Bank periodically reviews appraisals and orders new
appraisals as appropriate based on a number of factors, including the date of
the previous appraisal, changes in market conditions and regulatory
requirements.

The Bank's individualized asset review takes place within its Asset Review
Committee and the Asset Classification Committee (the "Committee"). The Asset
Review Committee accumulates and analyzes data relating to classified and
potential problem assets of $5.0 million or more and makes appropriate
recommendations regarding asset classifications to the Committee. The Committee
meets on a regular basis to discuss classifications of such assets and to review
the allowances for losses. The Committee generally reviews the status of
various projects, including, for example, data on recent lot sales for
residential development projects and leasing activity on commercial projects.
Actual progress is compared to projections made when the related loan was
underwritten. Local economic conditions and known trends are also reviewed.
The Committee also considers steps being taken by borrowers to address problems,
and reviews financial information relating to borrowers and guarantors as well
as reports by loan officers who are responsible for continually evaluating the
projects. The actions of the Committee are reported to the Board of Directors.

The Federal Financial Institution Examination Council, 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. The Bank believes that its levels of general valuation
allowances at September 30, 1995 comply with the guidelines.

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

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.

DEPOSITS. Chevy Chase currently offers a variety of deposit accounts with
a range of interest rates and maturities designed to attract both long-term and

<PAGE>

short-term deposits. Deposit programs include Super Statement Savings, Super
NOW, Insured Money Fund, Checking, Simple Statement Savings, Young Savers,
Certificate, and special programs for Individual Retirement and Keogh
self-employed retirement accounts. All jumbo certificates of deposit are sold
directly by the Bank to depositors, either through its branches or through its
money desk operation.

Chevy Chase attracts deposits through its branch network and
advertisements, and offers depositors access to their accounts through 439
ATMs, including 129 ATMs located in Safeway Inc. stores and 48 ATMs located
in Superfresh Food Markets. The Bank also has the right to install ATMs in
Safeway stores in the greater Washington, D.C./Baltimore/Richmond area which
do not currently have ATM service. These ATMs and installation rights
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 regional
"MOST"-Registered Trademark- ATM network which offers over 5,900 locations in
the middle-Atlantic region. The Bank is also a member of the
"PLUS"-Registered Trademark- ATM network, which offers over 213,000 locations
worldwide.

The Bank obtains deposits primarily from customers residing in Montgomery
and Prince George's Counties in Maryland and Northern Virginia. Approximately
27.4% of the Bank's deposits at September 30, 1995 were obtained from depositors
residing outside of Maryland, with approximately 12.6% of the Bank's deposits
being obtained from depositors residing in Northern Virginia.

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

<PAGE>

DEPOSIT ANALYSIS
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------------- ------------------- ------------------- ------------------- -------------------
% of % of % of % of % of
Balance Total Balance Total Balance Total Balance Total Balance Total
----------- ------- ----------- ------- ----------- ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand and NOW accounts $ 950,118 22.8% $ 918,227 22.9% $ 835,084 21.6% $ 743,214 19.0% $ 729,559 17.1%

Money market deposit
accounts 984,257 23.7 1,104,730 27.6 1,196,690 30.9 1,292,779 33.0 1,364,390 32.0

Statement savings
accounts 872,366 21.0 1,201,141 30.0 941,289 24.3 690,328 17.6 595,181 14.0

Jumbo certificate
accounts 219,304 5.3 85,110 2.1 56,218 1.5 42,423 1.1 128,288 3.0

Other certificate
accounts 1,072,196 25.8 641,857 16.0 790,465 20.4 1,099,833 28.1 1,400,853 32.9

Other deposit accounts 61,011 1.4 57,696 1.4 50,277 1.3 47,381 1.2 44,759 1.0
----------- ------- ----------- ------- ----------- ------- ----------- ------- ----------- -------

Total deposits 4,159,252 100.0% 4,008,761 100.0% 3,870,023 100.0% 3,915,958 100.0% 4,263,030 100.0%
----------- ======= ----------- ======= ----------- ======= ----------- ======= ----------- =======

Deferred premium on
certificate accounts -- -- -- -- 3
----------- ----------- ----------- ----------- -----------

Total $4,159,252 $4,008,761 $3,870,023 $3,915,958 $4,263,033
=========== =========== =========== =========== ===========
</TABLE>

AVERAGE COST OF DEPOSITS
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Demand and NOW accounts 2.71% 2.74% 2.47%
Money market accounts 3.96% 3.24% 3.17%
Statement savings and
other deposit accounts 3.35% 3.37% 3.25%
Certificate accounts 5.17% 3.96% 4.33%

Total deposit accounts 3.84% 3.31% 3.35%
====== ====== ======
</TABLE>

46
<PAGE>

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 become increasingly responsive 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. During
fiscal 1995, the Bank periodically solicited brokered deposits through entities
registered with the FDIC as deposit brokers. Under FDIC regulations, the Bank
is permitted to accept brokered deposits as long as it remains well capitalized
or (with FDIC approval) adequately capitalized under the prompt correction
action regulations.

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

Deposit Flows
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
(In thousands)
1995 1994 1993
------------- ------------ -------------

Deposits . . . . . . . . . . . . $ 14,086,575 $ 12,308,342 $ 10,801,085

Withdrawals from
accounts . . . . . . . . . . . (14,089,444) (12,305,196) (10,985,541)

------------- ------------- -------------
Net cash to (from)
accounts . . . . . . . . . . . (2,869) 3,146 (184,456)

Interest credited to
accounts . . . . . . . . . . . 153,360 135,592 138,521

------------- ------------- -------------

Net increase (decrease)
in deposit balances . . . . . . $ 150,491 $ 138,738 $ (45,935)

------------- ----------- -------------
------------- ----------- -------------

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
types and amounts of deposits as of September 30, 1995 which will mature during
the fiscal years indicated.

<PAGE>

WEIGHTED AVERAGE INTEREST RATES OF DEPOSITS
AS OF SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Demand, NOW
and Money Market Statement Passbook and Other Certificate
Deposit Accounts Savings Accounts Core Accounts Accounts Total
--------------------- -------------------- -------------------- --------------------- ----------------------
Maturing During Weighted Weighted Weighted Weighted Weighted
Year Ending Average Average Average Average Average
September 30, Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
- --------------- ----------- --------- ---------- --------- ---------- --------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>

1996 $1,934,375 3.29% $ 872,366 3.48% $ 61,011 2.98% $ 885,430 5.68% $3,753,182 3.89%

1997 - - - - - - 224,455 6.09 224,455 6.09

1998 - - - - - - 66,429 5.97 66,429 5.97

1999 - - - - - - 29,078 5.43 29,078 5.43

2000 - - - - - - 86,108 6.71 86,108 6.71

----------- ---------- ---------- ----------- -----------
Total $1,934,375 3.29% $ 872,366 3.48% $ 61,011 2.98% $1,291,500 5.83% $4,159,252 4.11%
=========== ========== ========== =========== ===========
</TABLE>

48
<PAGE>

The following table summarizes maturities of certificate accounts in
amounts of $100,000 or greater as of September 30, 1995.

YEAR ENDING SEPTEMBER 30, AMOUNT WEIGHTED AVERAGE RATE
- ------------------------- ---------- --------------------
(Dollars in thousands)
1996 . . . . . . . . . . . . . $ 143,572 5.89%
1997 . . . . . . . . . . . . . 20,397 6.55%
1998 . . . . . . . . . . . . . 4,194 5.73%
1999 . . . . . . . . . . . . . 3,500 5.30%
2000 . . . . . . . . . . . . . 7,020 6.81%
----------
Total. . . . . . . . . . . . $ 178,683 5.99%
---------- -----
---------- -----

The following table represents the amounts of deposits by various interest
rate categories as of September 30, 1995 maturing during the fiscal years
indicated.

<PAGE>

MATURITIES OF DEPOSITS BY INTEREST RATES
AS OF SEPTEMBER 30, 1995
(IN THOUSANDS)
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Accounts Maturing During Year Ending September 30,
-----------------------------------------------------------------------------
Interest Rate 1996 1997 1998 1999 2000 Total
- -------------------- ----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>

Demand deposits (0%) $ 123,141 $ - $ - $ - $ - $ 123,141

0.00% to 1.99% 413 - - - - 413

2.00% to 2.99% 30,304 - - - - 30,304

3.00% to 3.99% 2,101,543 - - - - 2,101,543

4.00% to 4.99% 733,662 17,383 1,351 - - 752,396

5.00% to 5.99% 368,320 52,839 27,490 25,102 1,212 474,963

6.00% to 7.99% 395,766 154,233 37,560 3,976 84,896 676,431

8.00% to 9.99% 33 - 28 - - 61
----------- ---------- ---------- ---------- ---------- -----------
Total $3,753,182 $ 224,455 $ 66,429 $ 29,078 $ 86,108 $4,159,252
=========== ========== ========== ========== ========== ===========
</TABLE>

50
<PAGE>

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 the FHLB of Atlanta and is authorized to
apply for advances on the security of such 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 the financial condition, and the adequacy
of collateral pledged to secure the extension of credit. Such extensions of
credit or borrowings 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 $155.1 million
at September 30, 1995.

From time to time, the Bank enters into repurchase agreements, which are
treated as financings. The Bank sells securities (usually mortgage-backed
securities) to a dealer and agrees to buy back the same securities at a
specified time (generally within seven to 90 days). The Bank pays a stated
interest rate for the use of the funds for the specified time period to the
dealer. 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. There were no repurchase agreements outstanding at September 30, 1995.

<PAGE>

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,
--------------------------
1995 1994
(Dollars in thousands)
Securities sold under repurchase
agreements:

Balance at year-end. . . . . . . . . . . . . . . $ -- $ --

Average amount outstanding during
the year. . . . . . . . . . . . . . . . . . . . 159,044 103,299

Maximum amount outstanding at any
month-end . . . . . . . . . . . . . . . . . . . 353,615 202,256

Weighted average interest rate
during year-end balances . . . . . . . . . . . 6.02% 3.78%

Weighted average interest rate on year-
end balances . . . . . . . . . -- % -- %

On November 23, 1993, the Bank sold $150 million principal amount of its 9
1/4% Subordinated Debentures due 2005 (the "Debentures"). Interest on the
Debentures is payable semiannually on December 1 and June 1 of each year. The
OTS approved the inclusion of the principal amount of the Debentures in the
Bank's supplementary capital for regulatory capital purposes. On or after
December 1, 1998, the Debentures will be redeemable, in whole or in part, at any
time at the option of the Bank. Under the OTS capital regulations, redemption
of the Debentures prior to their stated maturity would be subject to 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.

In December 1986, the Bank issued an unsecured ten-year subordinated
capital note in the original principal amount of $10.0 million to BACOB Bank,
s.c., a foreign private savings bank. Unless the note is earlier redeemed, the
note principal is payable in one payment on December 31, 1996. Interest is
payable in arrears on May 15 and November 15 of each year at a variable rate of
3% over the six-month London Interbank Offered Rate ("LIBOR"). The note may be
redeemed at the Bank's option, at par, without premium or penalty, together with
accrued interest.

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. Such regulations also
permit the Bank to make "conforming loans" to such subsidiaries and joint
ventures in an amount not to exceed 50% of the Bank's regulatory capital. At
September 30, 1995, 2.0% and 3.0% of the Bank's assets was equal to $98.9
million and $148.4 million, respectively, and the Bank had $22.8 million
invested in its service corporation subsidiaries, $5.1 million of which was in
the form of conforming loans. 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. With prior written approval
from the OTS, the Bank may also establish operating subsidiaries to engage in
any activities in which the Bank may engage directly.

<PAGE>

Chevy Chase engages in significant activities through B. F. Saul Mortgage
Company. See "Lending Activities." The Bank engages in other activities
through its subsidiaries, including those described below.

REAL ESTATE DEVELOPMENT ACTIVITIES. Manor Investment Company ("Manor")
previously engaged in certain real estate development activities as the result
of activities commenced prior to the enactment of FIRREA and continues to manage
the two remaining assets it holds. As a result of the stringent capital
requirements that FIRREA applies to investments in subsidiaries such as Manor
that engage in activities impermissible for national banks, Manor has not
entered, and does not intend to enter, into any new real estate development
arrangements. In fiscal 1995, Manor sold two of its largest projects. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Banking - Asset Quality."

SECURITIES BROKERAGE SERVICES. Chevy Chase Securities, Inc., a licensed
broker-dealer, sells securities on a retail basis to the general public,
including customers and depositors of the Bank.

INSURANCE SERVICES. Chevy Chase Insurance Agency, Inc. is a licensed
insurance broker offering a variety of "personal line" insurance programs in the
property and casualty field (primarily homeowner and automobile insurance) and
in the life insurance field (primarily mortgage and credit card life and
disability programs).

SPECIAL PURPOSE SUBSIDIARIES. At September 30, 1995, Chevy Chase owned 20
active subsidiaries that 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 investment in the active subsidiaries was $252.2
million at September 30, 1995. The Bank's investments in these subsidiaries are
not subject to the 3.0% service corporation investment limit discussed above.
See "Regulation - Regulatory Capital."

OPERATING SUBSIDIARIES. CCB Holding Corporation is a Delaware corporation
created by the Bank as an operating subsidiary in September 1994 in connection
with its asset securitization activities. The subsidiary owns a seller
certificate issued by two credit card trusts formed by the Bank and certain
other related assets. Consumer Finance Corporation was formed as an operating
subsidiary in December 1994 to engage in automobile lending.

EMPLOYEES

The Bank and its subsidiaries had 2,905 full-time and 687 part-time
employees at September 30, 1995. The Bank provides its employees with a
comprehensive range of employee benefit programs, including group health
benefits, life insurance, disability insurance, paid sick leave and an employee
loan program. The Bank offers home mortgage and credit card loans to employees
at prevailing market rates, but waives up to one point of any loan origination
fees on home mortgage loans and the annual fee on credit card loans, and
provides a yearly rebate equal to 0.5% of the outstanding loan balance of home
mortgage loans at calendar year-end. The Bank also offers employees a one
percent discount on the interest rate on overdraft lines of credit. None of the
Bank's employees is represented by a collective bargaining agent. The Bank
believes that its employee relations are good.

COMPETITION

Chevy Chase encounters strong competition both in attracting deposits and
making real estate and other loans in its markets. The Bank's most direct
competition for deposits has come from other thrift institutions, 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

<PAGE>

Chase offers a variety of services, convenient ATM locations and
convenient office locations and 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 services provided to borrowers and brokers.

The Bank's major competition historically has come from local depository
institutions, but deregulation of the financial services industry and changing
market demands in recent years have eroded distinctions between providers of
financial services. In addition, both depository and non-depository
institutions have greater nationwide access to attractive markets, such as the
Washington, D.C. area, than they have had in past years. Chevy Chase now
competes with regional financial institutions and national providers of
investment alternatives, as well as with a number of large money center and
regional banks that have acquired subsidiary institutions in the area.

The Bank estimates that it competes principally with approximately 12
depository institutions in its deposit-taking activities, with approximately ten
institutions in the origination of single-family residential mortgage loans
(other than home equity credit line loans) and with approximately three
depository institutions in the origination of home equity credit line loans. At
June 30, 1995, according to preliminary published industry statistics, Chevy
Chase had the largest market share (approximately 19.6%) of deposits in
Montgomery County, Maryland, and Chevy Chase ranked third in market share of
deposits in Prince George's County, Maryland. Based on publicly available
information, Chevy Chase estimates that, in the Washington, D.C. metropolitan
area, it maintains a significant market share of single-family residential
mortgage loans and the leading market share of home equity credit line loans.

The credit card industry is highly competitive and characterized by
increasing use of advertising, target marketing, pricing competition in interest
rates and annual membership fees, and other features (such as buyer protection
plans), as both established and new credit card issuers seek to expand or to
enter the market. Management anticipates that competitive pressures will
continue to require adjustments, from time to time, to the pricing of the Bank's
credit card products.

Interstate banking laws enacted by Congress and various states have
intensified the competition faced by the Bank in attracting deposits and making
loans. A number of large out-of-state financial institutions have established
or acquired banking operations in Maryland, Virginia and the District of
Columbia pursuant to these provisions.

ITEM 2. PROPERTIES

REAL ESTATE

A list of the investment properties of the Real Estate Trust is set forth
under "Business - Real-Estate - Real Estate Investments."

The Trust conducts its principal business from its executive offices at
8401 Connecticut Avenue, Chevy Chase, Maryland. The Trust sells its unsecured
notes due one year to ten years from date of issue from a sales office located
at 7200 Wisconsin Avenue, Suite 903, Bethesda, Maryland. The Saul Company
leases both office facilities on behalf of the Trust.

BANKING

At September 30, 1995, the Bank conducted its business from its executive
offices at 8401 Connecticut Avenue, Chevy Chase, Maryland; its operations
centers at 6200 Chevy Chase Drive, Laurel, Maryland, 7215 Corporate Court,
Frederick,

<PAGE>

Maryland, 5300, 5310 and 5340 Spectrum Drive, Frederick, Maryland and
7430 New Technology Way, Frederick, Maryland; its office facilities at 7700 Old
Georgetown Road, Bethesda, Maryland; 7926 Jones Branch Drive, McLean, Virginia
and 88 full-service offices located in Maryland, Virginia and the District of
Columbia. On that date, the Bank owned the building and land for 16 of its
branch offices and leased its remaining 72 branch offices. Chevy Chase leases
the office facilities at 8401 Connecticut Avenue, 6200 Chevy Chase Drive and
7215 Corporate Court and the land at 7700 Old Georgetown Road. Chevy Chase owns
the building at 7700 Old Georgetown Road. In addition, the Bank leases office
space in which its subsidiaries are housed. The office facility leases have
various terms expiring from 1996 to 2019 and the ground leases have terms
expiring from 2029 to 2080. See Note 17 to the Consolidated Financial
Statements in this report for lease expense and commitments.

At November 30, 1995, the Bank had received OTS approval to open six
additional branches. The branches, two in Virginia and four in Maryland, are
scheduled to open during fiscal 1996.

The following table sets forth the location of the Bank's 88 full-service
offices at September 30, 1995.

8401 Connecticut Avenue 7340 Westlake Terrace
Chevy Chase, MD 20815 Bethesda, MD 20817

5424 Western Avenue 11261 New Hampshire Avenue
Chevy Chase, MD 20815 Silver Spring, MD 20904

13641 Connecticut Avenue 1327 Lamberton Drive
Wheaton, MD 20906 Silver Spring, MD 20902

8401 Georgia Avenue 1661 Rockville Pike
Silver Spring, MD 20910 Rockville, MD 20852

4701 Sangamore Road 2215 Bel Pre Road
Bethesda, MD 20816 Wheaton, MD 20906

Landover Mall 2807 University Blvd.
Landover, MD 20785 West Kensington, MD 20895

11325 Seven Locks Road 11305 Rockville Pike
Potomac, MD 20854 Kensington, MD 20895

6200 Annapolis Road 7500 Old Georgetown Road
Landover Hills, MD 20784 Bethesda, MD 20814

33 West Franklin Street 26001 Ridge Road
Hagerstown, MD 21740 Damascus, MD 20872

6400 Belcrest Road 5370 Westbard Avenue
Hyattsville, MD 20782 Bethesda, MD 20816

8740 Arliss Street 3601 St. Barnabas Road
Silver Spring, MD 20901 Silver Hill, MD 20746

2409 Wootton Parkway 17831 Georgia Avenue
Rockville, MD 20850 Olney, MD 20832

8889 Woodyard Road 6107 Greenbelt Road
Clinton, MD 20735 Berwyn Heights, MD 20740

1181 University Boulevard 4 Bureau Drive
Langley Park, MD 20783 Gaithersburg, MD 20878

<PAGE>

12921 Wisteria Drive 19610 Club House Road
Germantown, MD 20874 Gaithersburg, MD 20879

1009 West Patrick Street 812 Muddy Branch Road
Frederick, MD 21701 Gaithersburg, MD 20878

7937 Ritchie Hwy. 10211 River Road
Glen Burnie, MD 21061 Potomac, MD 20854

19781 Frederick Road 12331-C Georgia Avenue
Germantown, MD 20874 Wheaton, MD 20906

16823 Crabbs Branch Way 14113 Baltimore Avenue
Rockville, MD 20855 Laurel, MD 20707

2331-A Forest Drive 7290-A Cradlerock Way
Annapolis, MD 21401 Columbia, MD 21045

3244 Superior Lane 1151 Maryland Route 3
Bowie, MD 20716 North Gambrills, MD 21054

20000 Goshen Road 12228 Viers Mill Road
Gaithersburg, MD 20879 Silver Spring, MD 20906

12097 Rockville Pike 317 Kentlands Blvd.
Rockville, MD 20852 Gaithersburg, MD 20878

10159 New Hampshire Avenue 215 N. Washington Street
Hillandale, MD 20903 Rockville, MD 20850

6264 Central Avenue 1336 Crain Highway South
Seat Pleasant, MD 20743 Mitchellville, MD 20716

7700 Old Georgetown Road 543 Ritchie Highway
Bethesda, MD 20814 Severna Park, MD 21146

15777 Columbia Pike 4745 Dorsey Hall Drive
Burtonsville, MD 20866 Ellicott City, MD 21043

18104 Town Center Drive 1130 Smallwood Drive
Olney, MD 20832 Waldorf, MD 20603

6197 Oxon Hill Road 10985 Baltimore Avenue
Oxon Hill, MD 20745 Beltsville, MD 20705

980 E. SwanCreek Road 1040 Largo Center Drive
Fort Washington, MD 20744 Landover, MD 20785

1 Catoctin Circle 14245-R Lee Highway
Leesburg, VA 22075 Centreville, VA 22020

8251 Greensboro Drive 1100 W. Broad Street
McLean, VA 22102 Falls Church, VA 22046

234 Maple Avenue East 3941 Pickett Road
Vienna, VA 22180 Fairfax, VA 22031

8436 Old Keene Mill Road 1401 Chain Bridge Road
Springfield, VA 22152 McLean, VA 22101

75 West Lee Highway 12002 N. Shore Drive
Warrenton, VA 22186 Reston, VA 22090

<PAGE>

6212 Leesburg Pike 8120 Sudley Road
Falls Church, VA 22044 Manassas, VA 22110

11800 Sunrise Valley Drive 1100 S. Hayes Street
Reston, VA 22091 Arlington, VA 22202

2952-H Chain Bridge Road 13344-A Franklin Farm Road
Oakton, VA 22124 Herndon, VA 22071

6756 Richmond Highway 20970 Southbank Street
Alexandria, VA 22306 Sterling, VA 20165

5613 Stone Road 21800 Town Center Plaza
Centerville, VA 22020 Sterling, VA 22170

44151 Ashburn Village Way 7030 Little River Turnpike
Ashburn, VA 22011 Annandale, VA 22003

3537 S. Jefferson Street 210 Michigan Avenue, N.E.
Bailey's Crossroads, VA 22041 Washington, DC 20017

2626-T Naylor Road 4455 Connecticut Avenue, N.W.
Washington, D.C. 20020 Washington, D.C. 20008

4860 Massachusetts Avenue, N.W. 318A Riggs Road, N.E.
Washington, D.C. 20016 Washington, D.C. 20011

At September 30, 1995, the net book value of the Bank's office facilities
(including leasehold improvements) was $120.8 million. See Note 16 to the
Consolidated Financial Statements in this report.

The Bank currently plans to build facilities in Frederick, Maryland and in
Laurel, Maryland to consolidate the Bank's employees and operations in those
areas. At September 30, 1995, the Bank had invested $4.8 million in the land
and $3.2 million for capital expenditures relating to these facilities.

During fiscal 1995, the Bank transferred an office building, which was
previously classified as real estate held for investment, to property and
equipment. Management plans to use a significant portion of the building to
satisfy the Bank's current and anticipated need for additional office space.

In fiscal 1991, the Bank purchased an historic office building and the
underlying land in downtown Washington, D.C. with plans to establish a deposit
branch office and a trust office in the building. Although the Bank terminated
its trust business in fiscal 1991, it still plans to establish a branch in the
building.

The Bank owns additional assets, including furniture and data processing
equipment. At September 30, 1995, these other assets had a net book value of
$59.7 million. The Bank also has operating leases, primarily for certain
automobiles and data processing equipment and software. The leases for
automobiles are generally for periods of less than four years; the leases for
the data processing equipment and software have month-to-month or year-to-year
terms.

ITEM 3. LEGAL PROCEEDINGS

In the normal course of business, the Trust is involved in certain
litigation, including litigation arising out of the collection of loans, the
enforcement or defense of the priority of its security interests, and the
continued development and marketing of certain of its real estate properties.

<PAGE>

In the opinion of management, litigation which is currently pending will not
have a material impact on the financial condition or future operations of the
Trust.

In August 1994, Chevy Chase and its subsidiary, B. F. Saul Mortgage Company
(together, the "Companies"), entered into an agreement with the United States
Department of Justice (the "Department") which commits them to continue the
types of lending practices, branching strategies and promotional programs that
are designed to increase the level of banking services available to
traditionally underserved areas of the Washington, D.C. metropolitan area.
Specifically, the Companies have agreed to invest $11.0 million in the
African-American community of the Washington, D.C. metropolitan area over a
five-year period. This commitment obligates the Companies to: (i) provide $7.0
million over the five-year period in subsidies for below-market mortgage loans
to residents of designated majority African-American neighborhoods in
Washington, D.C. and Prince George's County, Maryland; (ii) open two additional
mortgage offices in majority African-American neighborhoods in the metropolitan
Washington, D.C. area; and (iii) open one new deposit branch in the Anacostia
area of Washington, D.C. The Companies also have agreed over the same five-year
period, among other things, to continue efforts to increase their advertising
and promotional efforts targeted to residents of African-American neighborhoods,
to continue efforts to recruit African-Americans for loan production positions,
and to continue various employee training programs. The Companies view these
efforts as continuations of their existing programs.

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

No matters were submitted to a vote of security holders of the Trust during
the fourth quarter of the fiscal year ended September 30, 1995.

<PAGE>

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

There currently is no established public trading market for the Trust's
Common Shares of Beneficial Interest (the "Common Shares"). At December 1, 1995,
there were nine corporate or individual holders of record of Common Shares. All
holders of Common Shares at such date were affiliated with the Trust. See
"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 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements included
elsewhere in this report.

<PAGE>

SELECTED FINANCIAL DATA
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OTHER DATA) 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:

Real Estate:
Revenues $ 77,285 $ 66,044 $ 93,245 $ 100,179 $ 102,013
Operating expenses 109,971 102,087 137,256 127,936 142,144
Equity in earnings (losses) of partnership investments 3,681 1,738 (668) (208) (212)
Gain (loss) on sales of property 1,664 -- 184 (546) 20,308
----------------------------------------------------------------
Real estate operating loss (27,341) (34,305) (44,495) (28,511) (20,035)
----------------------------------------------------------------

Banking:
Interest income 365,315 334,464 348,814 403,033 487,572
Interest expense 189,114 165,544 167,518 214,761 325,711
----------------------------------------------------------------
Net interest income 176,201 168,920 181,296 188,272 161,861
Provision for loan losses (54,979) (29,222) (60,372) (89,062) (147,141)
----------------------------------------------------------------
Net interest income after provision for loan losses 121,222 139,698 120,924 99,210 14,720
----------------------------------------------------------------
Other income:
Credit card, loan servicing and deposit service fees 218,572 111,279 91,216 92,291 105,441
Earnings (loss) on real estate held for investment (5,057) 835 (12,722) (50,649) (47,495)
Gain on sales of assets 12,282 32,217 40,270 44,259 81,927
Gain on sale of mortgage servicing rights 1,397 5,833 4,828 3,750 9,137
Other 5,923 9,885 7,161 10,766 12,133
----------------------------------------------------------------
Total other income 233,117 160,049 130,753 100,417 161,143
----------------------------------------------------------------
Operating expenses 298,656 246,560 187,828 156,218 181,975
----------------------------------------------------------------
Banking operating income (loss) 55,683 53,187 63,849 43,409 (6,112)
----------------------------------------------------------------

Total Company:
Operating income (loss) before income taxes, 28,342 18,882 19,354 14,898 (26,147)
extraordinary items, cumulative effect of change in
accounting principle, and minority interest
Provision for income taxes 2,021 7,025 11,703 7,385 3,225
----------------------------------------------------------------
Income (loss) before extraordinary items, cumulative
effect of change in accounting principle and
minority interest 26,321 11,857 7,651 7,513 (29,372)
Extraordinary items:
Adjustment for tax benefit of operating loss
carryovers -- -- 7,738 3,817 --
Loss on early extinguishment of debt, net of taxes -- (11,315) -- (132) --
----------------------------------------------------------------
Income (loss) before cumulative effect of change in
accounting principle and minority interest 26,321 542 15,389 11,198 (29,372)
Cumulative effect of change in accounting principle -- 36,260 -- -- --
----------------------------------------------------------------
Income (loss) before minority interest 26,321 36,802 15,389 11,198 (29,372)
Minority interest held by affiliates (5,721) (3,963) (6,582) (5,261) 2,113
Minority interest -- other (9,750) (9,750) (4,334) -- --
----------------------------------------------------------------
Total company net income (loss) $ 10,850 $ 23,089 $ 4,473 $ 5,937 $ (27,259)
================================================================

Net income (loss) available to common shareholders $ 5,430 $ 17,669 $ (947) $ 517 $ (32,679)

Net income (loss) per common share:
Income (loss) before extraordinary items, cumulative
effect of change in accounting principle and
minority interest $ 4.33 $ 1.33 $ 0.46 $ 0.43 $ (7.21)
Extraordinary items:
Adjustment for tax benefit of operating loss
carryovers - - 1.60 0.79 -
Loss on early extinguishment of debt, net of taxes - (2.34) - (0.03) -
----------------------------------------------------------------
Income (loss) before cumulative effect of change in
accounting principle and minority interest 4.33 (1.01) 2.06 1.19 (7.21)
Cumulative effect of change in accounting principle - 7.51 - - -
----------------------------------------------------------------
Income (loss) before minority interest 4.33 6.50 2.06 1.19 (7.21)
Minority interest held by affiliates (1.19) (0.82) (1.36) (1.08) 0.44
Minority interest -- other (2.02) (2.02) (0.90) - -
----------------------------------------------------------------
Total company net income (loss) $ 1.12 $ 3.66 $ (0.20) $ 0.11 $ (6.77)
================================================================
</TABLE>

- -------------------------------------------------------------------------------
Continued on following page.

60
<PAGE>

SELECTED FINANCIAL DATA
(Continued)
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------

Assets:
Real estate assets $ 313,412 $ 327,739 $ 220,556 $ 334,378 $ 346,088
Income-producing properties, net 163,787 159,529 162,356 254,700 261,822
Land parcels 38,458 38,455 38,411 50,981 56,353
Banking assets 4,911,536 4,666,298 4,872,771 4,998,756 4,821,407
Total company assets 5,224,948 4,994,037 5,093,327 5,333,134 5,167,495

Liabilities:
Real estate liabilities 555,814 558,109 450,153 522,760 505,793
Mortgage notes payable 184,502 185,730 264,776 429,968 350,693
Notes payable - unsecured 41,057 40,288 38,661 50,417 86,532
Bank borrowings -- -- -- -- 38,273
Banking liabilities 4,619,451 4,413,832 4,634,001 4,885,189 4,747,715
Minority interest held by affiliates 43,556 35,632 34,495 27,912 22,651
Minority interest - other 74,307 74,307 74,307 -- --
Total company liabilities 5,293,128 5,081,880 5,192,956 5,435,861 5,276,159

Shareholders' deficit (68,180) (87,843) (99,629) (102,727) (108,664)
- ----------------------------------------------------------------------------------------------------------------------------

CASH FLOW DATA:

Net cash flows provided by (used in) operating activities:
Real estate $ 4,324 $ (10,859) $ (3,149) $ (884) $ (16,374)
Banking 2,095,663 2,218,262 1,137,686 1,026,705 1,521,024
----------------------------------------------------------------
Total Company 2,099,987 2,207,403 1,134,537 1,025,821 1,504,650
----------------------------------------------------------------
Net cash flows provided by (used in) investing activities:
Real estate (17,143) (29,118) (2,999) (1,333) 25,731
Banking (2,269,444) (1,777,281) (879,178) (1,224,100) (1,183,033)
----------------------------------------------------------------
Total Company (2,286,587) (1,806,399) (882,177) (1,225,433) (1,157,302)
----------------------------------------------------------------
Net cash flows provided by (used in) financing activities:
Real estate (271) 75,723 3,230 169 (41,709)
Banking 160,966 (260,094) (190,850) 157,183 (348,624)
----------------------------------------------------------------
Total Company 160,695 (184,371) (187,620) 157,352 (390,333)
----------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (25,905) 216,633 64,740 (42,260) (42,985)
- ----------------------------------------------------------------------------------------------------------------------------

OTHER DATA:

Hotels:
Number of hotels 10 9 9 9 9
Number of guest rooms 2,608 2,415 2,356 2,400 2,418
Average occupancy 67% 62% 68% 63% 66%
Average room rate $60.82 $57.57 $54.02 $56.54 $57.88
Shopping centers:
Number of properties N/A N/A 23 23 23
Leasable area (square feet) N/A N/A 4,408,000 4,416,000 4,809,000
Average occupancy N/A N/A 95% 95% 95%
Office properties:
Number of properties 9 9 10 10 10
Leasable area (square feet) 1,368,000 1,363,000 1,537,000 1,537,000 1,537,000
Leasing percentages 84% 93% 85% 92% 90%
Land parcels
Number of parcels 10 10 12 12 13
Total acreage 433 433 1,496 9,529 9,535
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>

61
<PAGE>

The following table sets forth certain additional financial data with
respect to the Bank.

<TABLE>
<CAPTION>
At or For Year Ended
September 30
----------------------------------------------
1995 1994 1993 1992 1991
-------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Selected Ratios:
Return on average assets . . . . 0.78% 0.60% 0.77% 0.55% (0.20%)

Return on average
stockholders' equity . . . . . 14.87% 11.19% 19.31% 19.33% (7.57%)

Average stockholders' equity
to average assets. . . . . . . 5.27% 5.34% 3.98% 2.84% 2.69%

Net yield on interest-earning
assets . . . . . . . . . . . . 4.24% 4.06% 4.59% 4.98% 3.81%

Net loan charge-offs to
average loans. . . . . . . . . 1.51% 1.74% 3.33% 4.04% 3.60%

Non-performing assets, net to
total assets . . . . . . . . . 3.80% 5.40% 6.03% 8.48% 10.37%

Average interest-earning
assets to average
interest-bearing liabilities . 91.91% 90.81% 86.44% 82.76% 85.64%

Regulatory Capital Ratios:

Tangible . . . . . . . . . . . . 5.77% 4.96% 4.60% 2.22% 1.58%

Core (or leverage) . . . . . . . 5.77% 5.34% 5.35% 3.22% 2.82%

Tier 1 risk-based . . . . . . . 6.65% 6.95% 7.29% N/A N/A

Total risk-based . . . . . . . . 11.63% 12.19% 11.70% 7.72% 5.51%
</TABLE>

<PAGE>

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
fully consolidated basis. The term "Trust" used in the text and the financial
statements included herein refers to the combined entity, which includes B.F.
Saul Real Estate Investment Trust and its subsidiaries, including Chevy Chase
and Chevy Chase's subsidiaries. "Real Estate Trust" refers to B.F. Saul Real
Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy Chase's
subsidiaries. The operations conducted by the Real Estate Trust are designated
as "Real Estate," while the business conducted by the Bank and its subsidiaries
is identified by the term "Banking."

FINANCIAL CONDITION

REAL ESTATE

The Real Estate Trust's investment portfolio at September 30, 1995
consisted primarily of hotels, office and industrial projects, and land
parcels. See "Business - Real Estate - Real Estate Investments." In August
1993, the Real Estate Trust transferred its 22 shopping center properties and
one of its office properties, together with the debt associated with such
properties, to Saul Holdings Partnership and a subsidiary limited partnership of
Saul Holding Partnership in exchange for securities representing a 21.5% limited
partnership interest in Saul Holdings Partnership. See "Business - Real Estate
- - Investment in Saul Holdings Limited Partnership."

Office space in the Real Estate Trust's office property portfolio was 84%
leased at September 30, 1995, compared to a leasing rate of 93% at September 30,
1994. At September 30, 1995, the Real Estate Trust's office property portfolio
had a total gross leasable area of approximately 1.37 million square feet, of
which 305,000 square feet (27%) and 235,000 square feet (21%) are subject to
leases whose terms expire in fiscal 1996 and fiscal 1997, respectively. Due to
a decline in market leasing rates for office space over the past several years,
the terms of certain of the new leases may be less favorable to the Real Estate
Trust than the terms of the expiring leases.

For the fiscal year ended September 30, 1995, the nine hotel properties
owned by the Real Estate Trust throughout the period experienced an average
occupancy rate of 66% and an average room rate of $59.71, compared to an average
occupancy rate of 62% and an average room rate of $57.57 in fiscal 1994. Seven
of the hotels registered improved occupancy rates and eight of the hotels
registered higher average room rates in the most recent fiscal year. Adjusted
for the inclusion of the new hotel acquired on November 30, 1994, the hotel
portfolio experienced an average room rate of $60.82 and an average occupancy
rate of 67% during the most recent fiscal year. Subsequent to September 30,
1995, the Real Estate Trust sold a hotel which had experienced average occupancy
rates and average room rates considerably below those of the other properties in
the portfolio for the past several years.

BANKING

GENERAL. The Bank recorded operating income of $55.7 million during fiscal
1995, compared to operating income of $53.2 million in fiscal 1994. The
increase in income for fiscal 1995 resulted primarily from the continued
expansion of the Bank's credit card program and other loan products and
services, which contributed to the $114.4 million increase in loan servicing
fees over the prior year. The operating results for the current year also
reflected an increase in net interest income. The positive effect of these
items on income was partially offset by a $52.1 million increase in operating
expenses and a $25.8 million increase in the provision for loan losses resulting
from increased consumer and credit card loan originations. See "Results of
Operations."

<PAGE>

At September 30, 1995, the Bank's tangible, core, tier 1 risk-based and
total risk-based regulatory capital ratios were 5.77%, 5.77%, 6.65% and 11.63%,
respectively. The Bank's capital ratios exceeded the requirements under FIRREA
as well as the standards established for "well capitalized" institutions under
the prompt corrective action regulations issued pursuant to FDICIA. On the
basis of its balance sheet at September 30, 1995, the Bank met the
FIRREA-mandated fully phased-in capital requirements and, on a fully phased-in
basis, met the capital standards established for "well capitalized" institutions
under the prompt corrective action regulations. See "Capital."

Effective July 1, 1995, the Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS
122"), an amendment of SFAS No. 65, "Accounting for Certain Mortgage Banking
Activities." SFAS 122 requires that a mortgage banking enterprise recognize, as
separate assets, rights to service mortgage loans for others, however those
servicing rights are acquired. SFAS 122 also requires that a mortgage banking
enterprise evaluate its mortgage servicing rights for impairment based upon fair
value. See "Summary of Significant Accounting Policies - The Bank" in the Notes
to the Consolidated Financial Statements in this report.

SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments" ("SFAS 119"), was issued in October 1994. This
new statement requires certain disclosures about financial derivatives,
including amounts, nature and terms of the instruments. Disclosures required by
SFAS 119 are effective for fiscal years ended after December 15, 1994 and are
therefore reflected in the Bank's audited financial statements. See "Summary of
Significant Accounting Policies - The Bank" in the Notes to the Consolidated
Financial Statements in this report.

The Bank's assets are subject to review and classification by the OTS upon
examination. The OTS is currently conducting an examination of the Bank.

ASSET QUALITY. Non-Performing Assets. The Bank's level of non-performing
assets continued to decline during fiscal 1995. 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.

<PAGE>

NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Residential $ 8,593 $ 8,306 $ 9,108 $ 12,865 $ 17,913
Commercial and multifamily 194 - - 3,694 -
Residential construction and ground - - - 11,196 30,469
Commercial construction and ground - - - 3,413 15,629
---------- ---------- ---------- ---------- ----------
Total non-accrual real estate loans 8,787 8,306 9,108 31,168 64,011
Credit card 18,569 16,229 20,557 26,780 33,682
Consumer and other 595 498 314 3,572 3,331
---------- ---------- ---------- ---------- ----------
Total non-accrual loans (1) 27,951 25,033 29,979 61,520 101,024
---------- ---------- ---------- ---------- ----------

Non-accrual real estate held for investment (1) - 8,915 8,898 8,892 8,892
---------- ---------- ---------- ---------- ----------

Real estate acquired in settlement of loans 354,277 387,024 434,616 541,352 537,490
Reserve for losses on real estate acquired in
settlement of loans (135,043) (109,074) (101,462) (94,125) (53,337)
---------- ---------- ---------- ---------- ----------
Real estate acquired in settlement of loans, net 219,234 277,950 333,154 447,227 484,153
---------- ---------- ---------- ---------- ----------

Total non-performing assets $ 247,185 $ 311,898 $ 372,031 $ 517,639 $ 594,069
========== ========== ========== ========== ==========

Reserve for losses on loans $ 60,496 $ 50,205 $ 68,040 $ 78,818 $ 89,745
Reserve for losses on real estate held for investment 193 9,899 10,182 14,919 4,161
Reserve for losses on real estate acquired in
settlement of loans 135,043 109,074 101,462 94,125 53,337
---------- ---------- ---------- ---------- ----------

Total reserves for losses $ 195,732 $ 169,178 $ 179,684 $ 187,862 $ 147,243
========== ========== ========== ========== ==========
</TABLE>

- -------------------------------------------------------------------------------
(1) Before deduction of reserves for losses.

<PAGE>

NON-PERFORMING ASSETS (CONTINUED)
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------

Non-performing assets, net to total assets (1) (4) 3.80% 5.40% 6.03% 8.48% 10.37%

Reserve for losses on real estate loans to non-accrual
real estate loans (2) 123.82% 169.58% 219.29% 53.16% 23.72%

Reserve for losses on credit card loans to non-accrual
credit card loans (2) 249.47% 212.77% 228.08% 214.96% 209.73%

Reserve for losses on consumer and other loans to
non-accrual consumer and other loans (2) 553.11% 319.28% 376.11% 131.10% 117.68%

Reserve for losses on loans to non-accrual loans (2) 216.44% 200.56% 226.96% 128.12% 88.84%

Reserve for losses on loans to total loans receivable (3) 2.05% 1.97% 2.83% 3.52% 2.79%
</TABLE>

- -------------------------------------------------------------------------------
(1) Non-performing assets is presented after all reserves for losses on loans
and real estate held for investment or sale.

(2) Before deduction of reserves for losses.

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

(4) In November 1995, the Bank sold approximately 2,000 residential lots in
the Communities to a single purchaser. If this sale had occurred prior to
September 30, 1995, the ratio of non-performing assets, net to total assets
would have been 2.80% at September 30, 1995. See "Disposition of REO."

66
<PAGE>

Non-performing assets include non-accrual loans (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-accrual real estate
held for investment ("non-accrual REI"), and real estate acquired in
settlement of loans, either through foreclosure or deed-in-lieu of
foreclosure, or pursuant to in-substance foreclosure (prior to the adoption
of SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," in
fiscal 1994).

Non-performing assets totaled $247.2 million, after valuation allowances
on REO of $135.0 million, at September 30, 1995, compared to $311.9 million,
after valuation allowances on REO of $109.1 million, at September 30, 1994.
In addition to the valuation allowances on REO, the Bank maintained $2.3
million of valuation allowances on its non-accrual loans at September 30,
1995, compared to $4.0 million of valuation allowances on its non-accrual
loans and non-accrual real estate held for investment at September 30, 1994.
The decrease in non-performing assets was primarily attributable to a net
decrease in REO of $58.7 million. During fiscal 1995, non-accrual REI with a
balance of $6.7 million at September 30, 1995 was transferred to REO. See
"Real Estate Held for Investment."

The Bank's non-performing real estate assets, which include non-accrual
real estate loans, REO and non-accrual REI, totaled $228.0 million at
September 30, 1995, or 92.2% of total non-performing assets at that date. As
shown in the following table, the Bank's non-performing real estate assets,
after valuation allowances on such assets, have declined from their peak of
$567.6 million in February 1992 to $227.6 million at September 30, 1995,
reflecting both additional write-downs on non-performing assets during that
period and, in more recent periods, asset sales.

67
<PAGE>

DECLINE IN NON-PERFORMING

REAL ESTATE ASSETS

<TABLE>
<CAPTION>
TOTAL
VALUATION
ALLOWANCES
ON NON-
ACCRUAL CUMULATIVE
TOTAL NON- REAL ESTATE TOTAL NON- DECLINE FROM
PERFORMING LOANS AND PERFORMING FEBRUARY 29, 1992
REAL ESTATE NON-ACCRUAL REAL ESTATE -------------------
ASSETS(1) REI(2) ASSETS, NET AMOUNT PERCENT
----------- ----------- ----------- -------- -------
<S> <C> <C> <C> <C> <C>
December 31, 1991...... $559,665 $ 6,692 $552,973 - -
February 29, 1992...... 574,321 6,712 567,609 - -
March 31, 1992......... 551,960 5,490 546,470 ($21,139) -3.7%
June 30, 1992.......... 512,729 10,224 502,505 (65,104) -11.5%
September 30, 1992..... 487,287 7,147 480,140 (87,469) -15.4%
December 31, 1992...... 427,113 2,332 424,781 (142,828) -25.2%
March 31, 1993......... 394,672 2,635 392,037 (175,572) -30.9%
June 30, 1993.......... 382,657 2,634 380,023 (187,586) -33.1%
September 30, 1993..... 351,160 2,427 348,733 (218,876) -38.6%
December 31, 1993...... 345,968 3,493 342,475 (225,134) -39.7%
March 31, 1994......... 323,185 3,487 319,698 (247,911) -43.7%
June 30, 1994.......... 310,506 3,620 306,886 (260,723) -45.9%
September 30, 1994..... 295,171 2,390 292,781 (274,828) -48.4%
December 31, 1994...... 283,375 2,388 280,987 (286,622) -50.5%
March 31, 1995......... 270,546 2,407 268,139 (299,470) -52.8%
June 30, 1995.......... 240,243(3) 348(3) 239,895 (327,714) -57.7%
September 30, 1995..... 228,021(3)(4) 439(3) 227,582 (340,027) -59.9%
</TABLE>
- -----------------------

(1) Represents total non-accrual real estate loans and non-accrual REI before
deduction of valuation allowances and REO after valuation allowances.
(2) Represents valuation allowances on non-accrual real estate loans and
non-accrual REI.
(3) The Bank had no non-accrual REI at these dates.
(4) In November, 1995, the Bank sold approximately 2,000 residential lots in
the Communities to a single purchaser. If this sale had occurred prior to
September 30, 1995, total non-performing assets would have been $178.9
million. See "Disposition of REO."

At September 30, 1995, $209.5 million or 91.9% of the Bank's total
non-performing real estate assets related to residential real estate
properties, including the Bank's Communities. The Bank has disposed of the
majority of its commercial REO and is continuing to effect the orderly
disposition of the remainder of its REO. See "REO" and "Disposition of REO."

NON-ACCRUAL LOANS. The Bank's non-accrual loans totaled $28.0 million
at September 30, 1995, compared to $25.0 million at September 30, 1994. At
September 30, 1995, non-accrual loans consisted primarily of $8.8 million of
non-accrual real estate loans and $18.6 million of non-accrual credit card
loans.

At September 30, 1995, the $18.6 million of non-accrual credit card
loans were classified for regulatory purposes as substandard and disclosed as
non-performing assets because they were 90 days or more past due. At that
date,

<PAGE>

the Bank also had $14.8 million of credit card loans classified for
regulatory purposes as substandard which were not either non-performing
assets (i.e., credit card loans which are 90 days or more past due) or
potential problem assets. The amount classified as substandard but not
non-performing assets ($14.8 million) primarily related to accounts for which
the customers have agreed to modified payment terms, but which were 30-89
days past due. Of the $14.8 million, $3.7 million was current, $6.4 million
was 30-59 days past due and $4.7 million was 60-89 days past due at September
30, 1995. All delinquent amounts are included in the table of delinquent
loans under "Delinquent Loans."

NON-ACCRUAL REI. At September 30, 1995, the Bank had no non-accrual
REI. At September 30, 1994, a participating loan to a developer with a
balance of $8.9 million, before valuation allowances of $2.0 million, was
non-performing. During fiscal 1995, this loan with a balance of $6.7 million
at September 30, 1995 was transferred to REO. See "Real Estate Held for
Investment."

REO. At September 30, 1995, the Bank's REO totaled $219.2 million,
after valuation allowances on such assets of $135.0 million. The principal
component of REO consists of the Communities, which had an aggregate book
value of $162.0 million at that date. Four of the Communities are under
active development.

During fiscal 1995, REO decreased $58.7 million. This decrease was
primarily attributable to the sale of three retail center properties and two
commercial ground properties and sales of residential lots or units in the
Communities and other smaller residential properties. This decrease was
partially offset by the transfer from REI to REO of a participating loan to a
developer referred to above under "Non-accrual REI." The transfer resulted
from the Bank's acquisition of title to the property. See "Disposition of
REO."

The Bank capitalizes costs relating to development and improvement of
REO. Interest costs are capitalized on real estate properties under
development. See "Disposition of REO" and "Allowances for Losses." The Bank
capitalized interest in the amount of $4.5 million in fiscal 1995, of which
$4.4 million was related to the Bank's four active Communities.

DISPOSITION OF REO. During fiscal 1995, the Bank received proceeds of
approximately $90.1 million upon the disposition of REO consisting of three
retail centers ($10.1 million), two commercial ground properties ($1.8
million), 1,347 residential lots or units in the Communities and other
smaller residential properties ($72.1 million), approximately 3.2 acres of
land in three of the Communities ($1.7 million) and various single-family
residential properties ($4.4 million).

The Bank's objective with respect to its REO is to sell such properties
as expeditiously as possible and in a manner which will best preserve the
value of the Bank's assets. The Bank's ability to achieve this objective
will depend on a number of factors, some of which are beyond its control,
such as the general economic conditions in the Washington, D.C. metropolitan
area. In addition, under its written agreement with OTS, the Bank is
required to make every effort to reduce its exposure in certain of its real
estate development properties, including the four active Communities. In
accordance with this requirement, management of the Bank is pursuing several
strategies. First, the Bank has focused its efforts on marketing building
lots directly to homebuilders. The Bank is proceeding with lot development
to meet the requirements of existing and new contracts with builders. Second,
the Bank continues to seek and negotiate with potential purchasers of retail
and commercial ground in the Communities. Third, the Bank continues to seek
potential investors concerning the possibility of larger scale or bulk
purchases of ground at the Communities.

The following table sets forth information about the Bank's REO at
September 30, 1995.

69
<PAGE>

Balance Before Balance After
Valuation All Valuation Valuation Percent of
Allowances Allowances Allowances Total
-------------- ------------- ------------- ----------
(Dollars in thousands)

Communities............ $270,630 $108,656 $161,974 73.9%

Residential ground
and construction...... 56,187 20,737 35,450 16.2%

Commercial ground...... 23,742 5,464 18,278 8.3%

Single-family resi-
dential properties... 3,718 186 3,532 1.6%
-------- -------- -------- -----
Total REO............ $354,277 $135,043 $219,234 100.0%
-------- -------- -------- -----
-------- -------- -------- -----

On November 13, 1995, the Bank sold its remaining residential lots
(approximately 2,000 lots) in two of its Communities at an amount that
approximated its net carrying value, after utilization of applicable
valuation allowances. The impact of the transaction was to reduce REO, net
of all valuation allowances, by $49.2 million. In connection with this sale,
the Bank provided financing of $33.4 million net of participations.

At September 30, 1995 and before the November sale discussed above, the
four active Communities consisted of 12,928 residential lots or units and
197.6 acres of land designated for retail use. At September 30, 1995, 9,273
residential units (71.7%) had been sold to builders, consisting of 8,170
units (63.2%) which had been settled and 1,103 units (8.5%) which were under
contract and pending settlement. At the same date, approximately 115.0 acres
(58.2%) of retail land had been sold to developers, including 26.5 acres
which were under contract and pending settlement. In addition, at September
30, 1995, the Bank was engaged in discussions with potential purchasers
regarding the sale of additional residential units and retail land.

The rate of residential lot sales in the Bank's four active Communities
increased 31.6% to 1,298 lots during fiscal 1995 from 986 lots during the
prior year. The rate of home sales in the Bank's four active Communities
declined to 944 units during fiscal 1995 from 1,370 units during fiscal 1994.
The decline in home sales in the four active Communities is consistent with
changes in general economic conditions.

The Bank will continue to make financing available to homebuilders and
home purchasers in an attempt to facilitate sales of lots in the remaining
two Communities under active development. The following table presents, at
the periods indicated, the outstanding balances of loans provided by the Bank
(subsequent to its acquisition of title to the properties) to facilitate
sales of lots in such Communities.

<PAGE>

SEPTEMBER 30,
------------------------------------
1995 1994 1993
------- -------- --------
(In thousands)
Residential construction loans.......... $12,615 $13,367 $10,386

Single-family permanent loans(1)........ 50,096 54,642 79,104
------- ------- -------

Total................................. $62,711 $68,009 $89,490
------- ------- -------
------- ------- -------

- ----------------------------
(1) Includes $2.3 million, $4.4 million and $8.8 million of loans classified as
held for sale at September 30, 1995, September 30, 1994 and September 30,
1993, respectively.

The Bank anticipates that it will provide construction financing for
approximately 20% of the remaining unsold lot inventory in the Communities.
The Bank also expects that it will provide permanent financing for
approximately 25% of the homes to be sold in the Communities. The Bank's
current policy is to sell all such single-family loans for which it provides
permanent financing. At September 30, 1995, $2.3 million of such loans are
classified as held for sale and generally are expected to be sold in the
first quarter of fiscal 1996.

In furtherance of its objective of facilitating sales, the Bank has
continued to develop some of the Communities. The following table presents
the net decrease in the balances of the five Communities for the periods
indicated.

SEPTEMBER 30,
----------------------------------
1995 1994 1993
-------- ------- -------
(In thousands)
Sales proceeds.......................... $65,211 $78,057 $66,291

Development costs....................... 32,626 44,264 52,118

Net cash flow......................... 32,585 33,793 14,173
------- ------- -------
Increase (decrease) in reserves and
other non-cash items................... 16,884 (4,337) 7,899
------- ------- -------
Net decrease in balances of the
Communities............................ $49,469 $29,456 $22,072
------- ------- -------
------- ------- -------

The Bank currently anticipates that sales proceeds will continue to
exceed development costs in future periods. The sale of the 2,000
residential lots in two of the Bank's Communities consummated in November
1995 eliminates the requirement for the Bank to incur additional substantial
costs related to these lots. In the event development costs exceed sales
proceeds in future periods, the Bank believes that adequate funds will be
available from its primary liquidity sources to fund such costs. See
"Liquidity."

In addition to the four active Communities, REO includes a fifth
Community, consisting of approximately 2,400 acres, in Loudoun County,
Virginia, which is in the pre-development stage and was to be developed into
approximately 4,200 residential units at September 30, 1995. At September
30, 1995, this property had a book value of $23.8 million, after valuation
allowances. Subsequent to September 30, 1995, a zoning agreement was amended
which increased the number of authorized residential units from 4,200 units
to 6,200 units.

Under its written agreement with the OTS, the Bank may not increase its
investments in certain of its large REO properties beyond levels existing at

<PAGE>

September 30, 1991 without OTS approval. In addition, in accordance with the
OTS extension of the five-year holding period for certain of its REO, the
Bank is required to submit a quarterly status report. See "Capital -
Regulatory Action and Requirements."

The Bank will continue 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 in resolving
these problem assets as expeditiously as possible. The Bank does not
anticipate any significant increases in non-performing and potential problem
assets.

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. The majority of the Bank's potential problem assets involve
borrowers or properties experiencing cash flow problems.

At September 30, 1995, potential problem assets totaled $8.2 million,
before valuation allowances of $1.5 million, as compared to $34.1 million,
before valuation allowances of $11.2 million, at September 30, 1994. The
$25.9 million decrease in potential problem assets was primarily attributable
to $12.5 million of loans incurred by borrowers whose financial condition is
such that management no longer has serious doubts as to such borrowers'
ability to comply with present repayment terms. The repayment of one
residential ground loan with a principal balance of $8.8 million, the
repayment of one commercial collateralized loan with a principal balance of
$1.7 million and other net principal reductions of $2.9 million also
contributed to the decrease in potential problem assets.

DELINQUENT LOANS. At September 30, 1995, delinquent loans totaled
$39.7 million (or 1.3% of loans) compared to $31.8 million (or 1.2% of loans)
at September 30, 1994. The following table sets forth information regarding
the Bank's delinquent loans at September 30, 1995.

Principal Balance
-------------------------------------------------
Total as a
Mortgage Non-Mortgage Percentage
Loans Loans Total of Loans (1)
-------- ------------ -------- ------------
(Dollars in thousands)

Loans delinquent for:

30-59 days.............. $ 4,024 $ 21,077 $ 25,101 0.8%

60-89 days.............. 1,940 12,621 14,561 0.5%
------- -------- -------- ----
Total................. $ 5,964 $ 33,698 $ 39,662 1.3%
------- -------- -------- ----
------- -------- -------- ----

(1) Includes loans held for sale and/or securitization, before deduction of
valuation allowances.

Mortgage loans classified as delinquent 30-59 days includes one
residential construction loan with a principal balance of $1.5 million. The
remaining balance of loans delinquent 30-89 days consists of single-family
permanent residential mortgage loans and home equity credit line loans. The
increase in total delinquent mortgage loans, from $4.3 million at September
30, 1994 to $6.0 million at September 30, 1995, was primarily attributable to
the decline in the financial condition of one borrower whose residential
construction loan, with a principal balance of $1.5 million, became 30-59
days delinquent during the fourth quarter of fiscal 1995.

<PAGE>

Non-mortgage loans (principally credit card loans) delinquent 30-89 days
increased to $33.7 million at September 30, 1995 from $27.5 million at September
30, 1994, but decreased as a percentage of total non-mortgage loans outstanding
to 2.4% at September 30, 1995 from 2.7% at September 30, 1994.

TROUBLED DEBT RESTRUCTURINGS. A troubled debt restructuring occurs when
the Bank agrees to modify significant terms of a loan in favor of the borrower
when the borrower is experiencing financial difficulties. The following table
sets forth loans accounted for as troubled debt restructurings, before deduction
of valuation allowances, at the dates indicated.

<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1995 1994
-------- --------
(In thousands)
<S> <C> <C>
Troubled debt restructurings . . . . . . . . . . . $17,344 $29,141
======= =======
</TABLE>

At September 30, 1995, loans accounted for as troubled debt restructurings
included two commercial permanent loans with principal balances totaling $13.2
million, one residential ground loan with a principal balance of $3.4 million
and one commercial collateralized loan with a principal balance of $0.7 million.
The $11.8 million decrease in loans accounted for as troubled debt
restructurings from September 30, 1994 resulted from the principal repayment of
one residential ground loan with a principal balance of $8.8 million, which was
accounted for as a troubled-debt restructuring and classified as a potential
problem asset at September 30, 1994 and other net principal reductions. At
September 30, 1995, the Bank had commitments to lend $1.1 million of additional
funds on loans that have been restructured.

REAL ESTATE HELD FOR INVESTMENT. At September 30, 1995, real estate held
for investment consisted of two properties with an aggregate book value of $3.6
million, net of valuation allowances of $0.2 million, as compared to seven
properties with an aggregate book value of $52.7 million, net of accumulated
depreciation of $13.6 million and valuation allowances of $9.9 million at
September 30, 1994. During fiscal 1995, the Bank sold two apartment buildings
previously classified as real estate held for investment which had an aggregate
net book value of $25.4 million and recognized a net gain of $5.4 million, and
sold its limited partnership interest in an office building which resulted in a
net gain of $4.5 million. Also during the current year, a loan to a developer
with a profit participation feature was transferred to REO and an office
building was transferred to property and equipment.

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.

<PAGE>

ANALYSIS OF ALLOWANCE FOR AND CHARGE-OFFS OF LOANS
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>

Balance at beginning of year $ 50,205 $ 68,040 $ 78,818 $ 89,745 $ 58,339
--------- --------- --------- --------- ---------

Provision for loan losses 54,979 29,222 60,372 86,453 143,544
--------- --------- --------- --------- ---------

Charge-offs:
Residential 1,174 1,641 45 581 78
Commercial and multifamily 112 766 1,855 1,500
Ground 1,768 2,027 4,274 1,650 16,899
Residential construction 1,971 3,564
Commercial construction 447 1,431 13,421
Credit card 50,172 55,754 76,141 100,391 85,554
Consumer and other 3,463 1,058 3,664 1,898 1,695
--------- --------- --------- --------- ---------
Total charge-offs 56,577 61,039 84,890 109,777 122,711
--------- --------- --------- --------- ---------

Recoveries:
Residential 20
Credit card 11,219 13,525 13,438 12,038 10,475
Other 650 457 302 359 98
--------- --------- --------- --------- ---------
Total recoveries 11,889 13,982 13,740 12,397 10,573
--------- --------- --------- --------- ---------

Charge-offs, net of recoveries 44,688 47,057 71,150 97,380 112,138
--------- --------- --------- --------- ---------

Balance at end of year $ 60,496 $ 50,205 $ 68,040 $ 78,818 $ 89,745
========= ========= ========= ========= =========

Provision for loan losses to
average loans (1) 1.85% 1.08% 2.83% 3.59% 4.61%
Net loan charge-offs to average loans (1) 1.51% 1.74% 3.33% 4.04% 3.60%
Ending reserve for losses on loans
to total loans (1) (2) 2.06% 1.97% 2.83% 3.52% 2.79%
</TABLE>

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

(2) Before deduction of reserves.

74
<PAGE>

COMPONENTS OF ALLOWANCE FOR LOSSES ON LOANS BY TYPE
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------------- ------------------- ------------------- ------------------- ------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Balance at end of
year allocated to:

Residential permanent $ 929 47.3% $ 1,384 53.8% $ 4,235 53.6% $ 2,335 41.6% $ 2,326 41.7%

Home equity 164 1.0 133 1.4 250 2.5 504 9.9 597 9.0

Commercial and
multifamily 8,523 2.9 8,506 3.3 9,606 3.9 5,907 2.7 4,655 2.1

Residential construction 1,159 0.8 1,455 1.2 4,125 1.5 4,470 2.6 3,683 2.2

Commercial construction 56 0.2 245 0.2 345 0.4 729 0.5 1,754 0.7

Ground 49 0.1 2,362 0.6 1,412 0.7 2,624 1.0 2,168 1.3

Credit card 46,325 34.4 34,530 25.5 46,886 31.4 57,566 38.9 70,642 40.4

Consumer and other 3,291 13.3 1,590 14.0 1,181 6.0 4,683 2.8 2,997 2.6
--------- --------- --------- --------- ---------

Subtotal 60,496 50,205 68,040 78,818 88,822
Unallocated - - - - 923
--------- --------- --------- --------- ---------

Total $ 60,496 $ 50,205 $ 68,040 $ 78,818 $ 89,745
========= ========= ========= ========= =========
</TABLE>

75
<PAGE>

ANALYSIS OF ALLOWANCE FOR AND CHARGE-OFFS OF
REAL ESTATE HELD FOR INVESTMENT OR SALE
(IN THOUSANDS)
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>

Balance at beginning of year:
Real estate held for investment $ 9,899 $ 10,182 $ 14,919 $ 4,161 $ 2,800
Real estate held for sale 109,074 101,462 94,125 53,337 10,078
--------- --------- ---------- ---------- ----------
Total 118,973 111,644 109,044 57,498 12,878
--------- --------- ---------- ---------- ----------

Provision for real estate losses:
Real estate held for investment (6,974) (283) 1,470 12,673 4,724
Real estate held for sale 33,295 14,335 28,945 47,923 43,259
--------- --------- ---------- ---------- ----------
Total 26,321 14,052 30,415 60,596 47,983
--------- --------- ---------- ---------- ----------

Charge-offs:
Real estate held for investment:
Commercial ground 2,732 -- -- 1,550 3,363
Commercial permanent -- -- -- 365 --
Commercial construction -- -- 6,207 -- --
--------- --------- ---------- ---------- ----------
Total 2,732 -- 6,207 1,915 3,363
--------- --------- ---------- ---------- ----------

Real estate held for sale:
Residential -- -- -- 3,002 --
Residential construction 1,924 911 79 -- --
Residential ground 103 -- 259 348 --
Commercial ground 2,827 -- 1,353 3,785 --
Commercial permanent -- 5,812 761 -- --
Commercial construction 2,472 -- 19,156 -- --
--------- --------- ---------- ---------- ----------
Total 7,326 6,723 21,608 7,135
--------- --------- ---------- ---------- ----------

Total charge-offs on real estate
held for investment or sale 10,058 6,723 27,815 9,050 3,363
--------- --------- ---------- ---------- ----------

Balance at end of year:
Real estate held for investment 193 9,899 10,182 14,919 4,161
Real estate held for sale 135,043 109,074 101,462 94,125 53,337
--------- --------- ---------- ---------- ----------

Total $135,236 $118,973 $ 111,644 $ 109,044 $ 57,498
========= ========= ========== ========== ==========
</TABLE>

76
<PAGE>

COMPONENTS OF ALLOWANCE FOR LOSSES
ON REAL ESTATE HELD FOR INVESTMENT OR SALE
(IN THOUSANDS)
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for losses on real estate
held for investment:
Commercial and multifamily $ -- $ 7,793 $ 7,945 $ 8,037 $ 2,389
Commercial construction -- -- -- 4,995 506
Ground -- 1,975 1,972 1,682 1,266
Other 193 131 265 205 --
--------- --------- ---------- ---------- ----------
Total 193 9,899 10,182 14,919 4,161
--------- --------- ---------- ---------- ----------

Allowance for losses on real estate
held for sale:
Residential 184 66 102 447 2,813
Home equity 2 4 53 21 4
Commercial and multifamily -- 142 4,678 1,705 1,564
Commercial construction -- 1,216 1,387 15,439 6,899
Residential construction -- 1,942 2,924 2,294 1,664
Ground 134,857 105,704 92,318 74,219 40,393
--------- --------- ---------- ---------- ----------
Total 135,043 109,074 101,462 94,125 53,337
--------- --------- ---------- ---------- ----------

Total allowance for losses on
real estate held for investment
or sale $135,236 $118,973 $ 111,644 $ 109,044 $ 57,498
========= ========= ========== ========== ==========

</TABLE>

77
<PAGE>

The Bank maintains valuation allowances for estimated losses on loans and
real estate. The Bank's total valuation allowances for losses on loans and real
estate held for investment or sale increased by $26.5 million from the level at
September 30, 1994 to $195.7 million at September 30, 1995. The $26.5 million
increase was primarily attributable to increased valuation allowances on the
Communities and credit card loans. During fiscal 1995, the Bank recorded net
charge-offs of $13.0 million on loans secured by real estate and real estate
held for investment or sale and provided an additional $26.0 million of
valuation allowances on these assets.

The following table shows valuation allowances for losses on performing and
non-performing assets at the dates indicated.

<TABLE>
<CAPTION>
September 30, 1995
----------------------------------------------
Performing Non-performing Total
---------------- -------------- ---------
(In thousands)
<S> <C> <C> <C>
Allowances for losses on:

Loans:
Real estate. . . . . . . . $10,441 $ 439 $ 10,880
Credit card. . . . . . . . 44,468 1,857 46,325
Consumer and other . . . . 3,287 4 3,291
-------- --------- ---------
Total allowance for losses
and loans . . . . . . . . 58,196 2,300 60,496
-------- --------- ---------

Real estate held for
investment. . . . . . . . . 193 - 193

Real estate held for sale. . - 135,043 135,043
-------- --------- ---------

Total allowance for losses
on real estate held for
investment for sale . . . . 193 135,043 135,236
-------- --------- ---------

Total allowance for losses . $58,389 $137,343 $195,732
-------- --------- ---------
-------- --------- ---------
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
September 30, 1994
----------------------------------------------
Performing Non-performing Total
---------------- -------------- --------
<S> <C> <C> <C>
Allowances for losses on:

Loans:
Real estate. . . . . . . . $13,670 $ 415 $ 14,085
Credit card. . . . . . . . 32,907 1,623 34,530
Consumer and other . . . . 1,588 2 1,590
-------- --------- --------
Total allowance for losses
and loans . . . . . . . . 48,165 2,040 50,205
-------- --------- --------

Real estate held for
investment. . . . . . . . . 7,924 1,975 9,899

Real estate held for sale. . - 109,074 109,074
-------- --------- --------

Total allowance for losses
on real estate held for
investment for sale . . . . 7,924 111,049 118,973
-------- --------- --------

Total allowance for losses . $56,089 $113,089 $169,178
-------- --------- --------
-------- --------- --------
</TABLE>

The allowance for losses on loans secured by real estate and real estate
held for investment or sale totaled $146.1 million at September 30, 1995, which
constituted 40.2% of total non-performing real estate assets, before valuation
allowances. This amount represented a $13.0 million increase from the September
30, 1994 level of $133.1 million, or 32.9% of total non-performing real estate
assets, before valuation allowances at that date.

Beginning October 1, 1994, the Bank has provided additional general
valuation allowances which are equal to, or exceed, the amount of the net
earnings generated by the development and sale of land in the Communities.
During fiscal 1995, the Bank provided an additional $16.1 million of general
valuation allowances against its Communities pursuant to this policy.

When real estate collateral securing an extension of credit is initially
recorded as REO, it is recorded at the lower of cost or written down to fair
value, less estimated selling costs, on the basis of an appraisal. Such initial
write-downs represent management's best estimate of exposure to the Bank at the
time that the collateral becomes REO and in effect substitutes for valuation
allowances that would otherwise be recorded if the collateral had not become
REO. As circumstances change, it may be necessary to provide additional
valuation allowances based on new information. Depending on the nature of the
information, these new valuation allowances may be valuation allowances, which
reflect additional impairment with respect to a specific asset, or may be
unallocated valuation allowances, which provide protection against changes in
asset valuation factors. The allowance for losses on real estate held for sale
at September 30, 1995 is in addition to approximately $57.9 million of
cumulative charge-offs previously taken against assets remaining in the Bank's
portfolio at September 30, 1995.

The Bank from time to time obtains updated appraisals on its real estate
acquired in settlement of loans. As a result of such updated appraisals, the
Bank could be required to increase its valuation allowances.

Net charge-offs of credit card loans for fiscal 1995 were $39.0 million,
compared to $42.2 million for fiscal 1994. The decrease in net charge-offs
resulted primarily from increased securitization activity of such loans. The
allowance at any balance sheet date relates only to receivable balances that
exist as of that date. Because of the nature of a revolving credit card
account,

<PAGE>

the cardholder may enter into transactions (such as retail purchases and cash
advances) subsequent to a balance sheet date which increase the outstanding
balance of the account. Accordingly, charge-offs in any fiscal period relate
both to balances that existed at the beginning of the period and to balances
created during the period, and may therefore exceed the levels of valuation
allowances established at the beginning of the fiscal period.

The allowance for losses on credit card loans increased to $46.3 million at
September 30, 1995 from $34.5 million at September 30, 1994, primarily because
of the increased volume of credit card loans. The ratios of the allowance for
such losses to non-performing credit card loans and to outstanding credit card
loans were 249.5% and 4.6%, respectively, at September 30, 1995, compared to
212.8% and 5.3%, respectively, at September 30, 1994.

The allowance for losses on consumer and other loans increased to $3.3
million at September 30, 1995 from $1.6 million at September 30, 1994, primarily
because of the increased volume of consumer and other loans. The ratios of the
allowances for losses on consumer and other loans to non-performing consumer and
other loans and to outstanding consumer and other loans increased to 553.1% and
0.8%, respectively, at September 30, 1995 from 319.3% and 0.4%, respectively, at
September 30, 1994.

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 mixes, volumes and maturities 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 is pursuing an asset-liability management strategy to control its
risk from changes in market interest rates principally by originating
interest-sensitive loans for its portfolio. In furtherance of this strategy,
the Bank emphasizes the origination and retention of ARMs, adjustable-rate home
equity credit line loans and adjustable-rate credit card loans. At September
30, 1995, adjustable-rate loans accounted for 79.1% of total loans, of which
44.7% (including all credit card loans) will adjust in one year or less.

In recent periods, the Bank's policy has generally been to sell all of its
long-term fixed-rate mortgage production, thereby reducing its exposure to
market interest rate fluctuations typically associated with long-term fixed-rate
lending.

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. A negative gap like that shown below for the Bank implies that, if
market interest rates rise, the Bank's average cost of funds will increase more
rapidly than the concurrent increase in the average yield on interest-earning
assets. In a period of rising market interest rates, a negative gap implies
that the differential effect on the average yield on interest-earning assets and
the average cost of interest-bearing liabilities will decrease the Bank's net
interest spread and thereby adversely affect the Bank's operating results.
Conversely, in a period of declining interest rates, a negative gap may result
in an increase in the Bank's net interest spread. This analysis assumes a
parallel shift in interest rates for instruments of different maturities and
does not reflect the possibility that retail deposit pricing changes may lag
those of wholesale market funds which, in a period of rising interest rates,
might serve to mitigate the decline in net interest spread.

The Bank views control over interest rate sensitivity as a key element in
its financial planning process and monitors its interest rate sensitivity
through

<PAGE>

its forecasting system. The Bank manages its 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. For the reasons
discussed above, the Bank might take action to narrow its gap if it believes
that market interest rates will experience a significant prolonged increase,
and might widen its gap if it believes that market interest rates will
decline or remain relatively stable. 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 or de-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 interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities at September 30, 1995,
which reflects management's estimate of mortgage loan prepayments and
amortization and provisions for adjustable interest rates. 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 the Bank's loans
based on recent actual experience. Statement savings and passbook accounts with
balances under $20,000 are classified based upon management's assumed attrition
rate of 17.5%, and those with balances of $20,000 or more, as well as all NOW
accounts, are assumed to be subject to repricing within six months or less.

81
<PAGE>

INTEREST RATE SENSITIVITY TABLE (GAP)
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
More than More than More than
Six Months One Year Three Years
Six Months through through through More than
or Less One Year Three Years Five Years Five Years Total
----------- ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1995
Mortgage loans:
Adjustable-rate $ 351,726 $ 189,286 $ 486,269 $ 214,348 $ 27,440 $1,269,069
Fixed-rate 10,630 9,776 36,525 52,599 75,146 184,676
Loans held for sale 68,679 - - - - 68,679
Home equity credit lines and second
mortgages 35,472 29 24 - - 35,525
Credit card and other 760,948 24,369 60,079 32,779 20,273 898,448
Loans held for securitization and sale 500,000 - - - - 500,000
Mortgage-backed securities 125,223 182,312 550,472 6,353 15,848 880,208
Other investments 296,749 - 4,370 - - 301,119
----------- ----------- ------------ ------------ ----------- -----------
Total interest-earning assets 2,149,427 405,772 1,137,739 306,079 138,707 4,137,724
Total non-interest earning assets - - - - 773,812 773,812
----------- ----------- ------------ ------------ ----------- -----------
Total assets $2,149,427 $ 405,772 $ 1,137,739 $ 306,079 $ 912,519 $4,911,536
=========== =========== ============ ============ =========== ===========
Deposits:
Fixed maturity deposits $ 565,357 $ 320,472 $ 290,536 $ 115,134 $ - $1,291,499
NOW, statement and passbook accounts 1,310,419 39,369 131,125 89,247 190,195 1,760,355
Money market deposit accounts 984,257 - - - - 984,257
Borrowings:
Capital notes - subordinated 10,000 - - - 150,000 160,000
Other 160,551 121 3,544 2,709 6,076 173,001
----------- ----------- ------------ ------------ ----------- -----------
Total interest-bearing liabilities 3,030,584 359,962 425,205 207,090 346,271 4,369,112
Total non-interest bearing liabilities - - - - 250,339 250,339
Stockholders' equity - - - - 292,085 292,085
----------- ----------- ------------ ------------ ----------- -----------
Total liabilities & stockholders'
equity $3,030,584 $ 359,962 $ 425,205 $ 207,090 $ 888,695 $4,911,536
=========== =========== ============ ============ =========== ===========

Gap ($881,157) $45,810 $712,534 $98,989 ($207,564)
Cumulative gap ($881,157) ($835,347) ($122,813) ($23,824) ($231,388)
Cumulative gap as a percentage
of total assets (17.9)% (17.0)% (2.5)% (0.5)% (4.7)%
</TABLE>

82
<PAGE>

The one-year gap, as a percentage of total assets, was a negative 17.0% at
September 30, 1995, compared to a negative 27.1% at September 30, 1994. As
noted above, the Bank's negative one-year gap might adversely affect the Bank's
net interest spread and earnings if interest rates rise and the Bank is unable
to take steps to reduce its gap. The improvement in the Bank's one-year gap was
primarily attributable to an increase in short-term assets at September 30, 1995
resulting from the scheduled securitizations and sales of credit card and
automobile loan receivables.

During fiscal 1995, the Bank purchased a series of interest rate caps which
management believes will limit significantly its exposure to rising short-term
interest rates during a four-year period beginning July 1, 1995 and ending June
30, 1999. The initial level of the protection was a notional principal amount
of $600 million, and such protection will decline to $200 million by March 31,
1998. The remaining $200 million of protection will expire on June 30, 1999.
In the event that the one-month London Inter-Bank Offered Rate ("LIBOR") exceeds
7.00% on certain predetermined dates, the Bank is entitled to receive
compensatory payments from the cap provider, which is a counterparty receiving
the highest investment rating from Standard & Poor's Corporation. Such payments
would be equal to the product of (a) the amount by which the one-month LIBOR
rate exceeds 7.00% and (b) the then outstanding notional principal amount for a
predetermined period of time. The Bank has no obligation to make payments to
the provider of the cap or any other party.

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 as promulgated by the OTS's Thrift Bulletin 13.

At September 30, 1995, the Bank would not have been required to maintain
additional amounts of risk-based capital had the interest-rate risk component of
the OTS capital regulations been in effect. See "Business - Banking -
Regulation - Regulatory Capital."

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 TAX ASSET. At September 30, 1995, the Bank recorded a net
deferred tax asset of $42.0 million, which generally represents the cumulative
excess of the Bank's actual income tax liability over its income tax expense for
financial reporting purposes. This net deferred tax asset is reported on the
Bank's financial statements in accordance with SFAS No. 109, "Accounting for
Income Taxes" ("SFAS 109").

TAX SHARING PAYMENTS. During fiscal 1995, after receiving OTS approval,
the Bank made tax sharing payments totaling $20.5 million to the Trust. The
Bank made an additional tax sharing payment of $10.0 million subsequent to
September 30, 1995.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

REAL ESTATE

GENERAL. The Real Estate Trust's primary cash requirements fall into four
categories: operating expenses (exclusive of interest on outstanding debt),
capital improvements, interest on outstanding debt and repayment of outstanding
debt.

Historically, the Real Estate Trust's total cash requirements have exceeded
the cash generated by its operations. This condition is expected to continue
for the foreseeable future. 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 ("Unsecured Notes") sold
to the public, the payment of interest on its Senior Secured Notes, and the
payment of capital improvement costs. In the past, the Real Estate Trust had
funded such shortfalls through a combination of external funding sources,
primarily new financings (including the sale of Unsecured Notes), refinancings
of maturing mortgage debt, asset sales and tax sharing payments from the Bank.
See the Consolidated Statements of Cash Flows included in the Consolidated
Financial Statements in this report.

The Real Estate Trust's current program of public Unsecured Note sales was
initiated in the 1970's as a vehicle for supplementing other external funding
sources. In fiscal 1995, the Real Estate Trust sold $8.0 million of Unsecured
Notes. The table under "Recent Liquidity Trends" below provides information at
September 30, 1995 with respect to the maturities of Unsecured Notes
outstanding at such date.

RECENT LIQUIDITY TRENDS. In fiscal 1994, the Real Estate Trust refinanced
a significant portion of its outstanding secured indebtedness with the proceeds
of the issuance of $175.0 million aggregate principal amount of 11 5/8% Senior
Secured Notes due 2002 (the "Senior Secured Notes"). See Note 4 to the
Consolidated Financial Statements in this report. The Indenture pursuant to
which the Senior Secured Notes were issued contains covenants that, among other
things, restrict the ability of the Trust and/or its subsidiaries (excluding, in
most cases, the Bank and the Bank's subsidiaries) to incur additional
indebtedness, make investments, sell assets or pay dividends and make other
distributions to holders of the Trust's capital stock.

In fiscal 1995, the Trust purchased 501,000 shares of common stock of Saul
Centers (representing 4.2% of such company's outstanding common stock) for
approximately $7.8 million. These shares have been deposited with the Trustee
for the Senior Secured Notes to satisfy in part the collateral requirements for
those securities, thereby permitting release to the Trust of a portion of the
cash on deposit with the Trustee.

In the fourth quarter of fiscal 1995, the Real Estate Trust established a
$15.0 million secured revolving credit line with an unrelated bank. This
facility is for a two-year period and may be extended for one or more additional
one-year terms. Interest is computed by reference to a floating rate index. As
collateral for the facility, the Real Estate Trust has pledged 30.5% of its
partnership interest in Saul Holdings Partnership. At September 30, 1995,
borrowings under the facility were $500,000 and unrestricted availability was
$14.5 million.

The Real Estate Trust is currently selling Unsecured Notes principally to
provide funds to pay outstanding Unsecured Notes as they mature. In paying
maturing Unsecured Notes with proceeds of Unsecured Note sales, the Real Estate
Trust effectively is refinancing its outstanding Unsecured Notes with similar
new unsecured debt at the lower interest rates prevailing in today's market. To
the

<PAGE>

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 maturity schedule for the Real Estate Trust's outstanding debt at
September 30, 1995 for the fiscal years commencing October 1, 1995 is set forth
in the following table:

<TABLE>
<CAPTION>
Debt Maturity Schedule
(In thousands)
- -----------------------------------------------------------------------
Mortgage Notes Payable- Notes Payable-
Fiscal Year Notes Secured Unsecured Total
- ----------- -------- -------------- -------------- --------
<S> <C> <C> <C> <C>
1996 $ 7,463 $ -- $ 6,123 $ 13,586
1997 21,690 500 5,606 27,796
1998 7,413 -- 7,262 14,675
1999 17,076 -- 12,984 30,060
2000 18,855 -- 5,864 24,719
Thereafter 112,005 175,000 3,218 290,223
-------- -------- ------- --------
Total $184,502 $175,500 $41,057 $401,059
======== ======== ======= ========
</TABLE>

Of the $184.5 million of mortgage debt outstanding at September 30,
1995, $137.5 million was nonrecourse to the Real Estate Trust.

The Real Estate Trust believes that its capital improvement costs in the
next several fiscal years will be in range of $5.0 to $8.0 million per year.

The Real Estate Trust's ability to meet its liquidity needs, including debt
service payments in fiscal 1996 and subsequent years, will depend in significant
part on its receipt of dividends from the Bank and tax sharing payments from the
Bank pursuant to the tax sharing agreement among the Trust, the Bank, and their
subsidiaries. The availability and amount of tax sharing payments and dividends
in future periods is dependent upon, among other things, the Bank's operating
performance and income, regulatory restrictions on such payments and (in the
case of tax sharing payments) the continued consolidation of the Bank and the
Bank's subsidiaries with the Trust for federal income tax purposes.

The Real Estate Trust believes that the improved financial condition and
operating results of the Bank in recent periods should enhance prospects for the
Real Estate Trust of receiving tax sharing payments and dividends from the Bank.
The Bank made tax sharing payments of $20.5 million to the Real Estate Trust
during fiscal 1995. Under the terms of the Bank's written agreement with the
OTS, any tax sharing payments by the Bank must approved by the OTS. Subsequent
to September 30, 1995, the OTS approved, and the Bank made, a tax sharing
payment of $10.0 million to the Real Estate Trust.

The Real Estate Trust to date has not relied on cash dividends from Chevy
Chase to meet its cash needs. OTS regulations tie Chevy Chase's ability to pay
dividends to specific levels of regulatory capital and earnings. See "Business
- - Banking - Regulation - Dividends and Other Capital Distributions."

As the owner, directly and through two wholly-owned subsidiaries, of a
21.5% limited partnership interest in Saul Holdings Partnership, the Real Estate
Trust will share in cash distributions from operations and from capital
transactions involving the sale or refinancing of the properties of Saul
Holdings Partnership. The partnership agreement of Saul Holdings Partnership
provides for quarterly cash distributions to the partners out of net cash flow.
See "Business - Real Estate - Investment in Saul Holdings Limited Partnership."
In fiscal 1995, the Real Estate Trust received total cash distributions of
$5.45 million from Saul Holdings Partnership.

<PAGE>

BANKING

LIQUIDITY. The 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.

The OTS has established a minimum liquidity requirement, which may vary
from time to time depending upon economic conditions and deposit flows. The
required liquidity level is currently 5.0%. The Bank's average liquidity ratio
for the month ended September 30, 1995 was 17.5%, compared to 18.6% for the
month ended September 30, 1994. The Bank met the liquidity level requirements
for each month of fiscal 1995.

The Bank's primary sources of funds historically have consisted of (i)
principal and interest payments on loans and mortgage-backed securities, (ii)
savings deposits, (iii) sales of loans and trading securities, (iv)
securitizations and sales of loans and (v) borrowed funds (including funds
borrowed from the FHLB of Atlanta). The Bank's holdings of readily marketable
securities constitute another important source of liquidity. At September 30,
1995, the Bank's portfolio included mortgage loans, U.S. Government securities
and mortgage-backed securities with outstanding principal balances of $1.0
billion, $4.4 million and $877.6 million, respectively. The estimated borrowing
capacity against mortgage loans, U.S. Government securities and mortgage-backed
securities that are available to be pledged to the FHLB of Atlanta and various
security dealers totaled $1.4 billion at September 30, 1995, after market-value
and other adjustments.

In recent periods, the proceeds from sales of credit card relationships and
other assets and securitization and sale of credit card, home equity credit line
and automobile loan receivables have been significant sources of liquidity for
the Bank. The Bank securitized and sold $1.6 billion of credit card
receivables, $252.2 million of automobile loan receivables and $150.5 million of
home equity credit line receivables during fiscal 1995. Additionally, during
fiscal 1995, the Bank securitized and sold $59.2 million of amounts on deposit
in certain spread accounts established in connection with certain of the Bank's
outstanding credit card securitizations. At September 30, 1995, the Bank was
considering the securitization and sale of the following receivables: (i)
approximately $750.0 million of credit card receivables, including $300.0
million of receivables outstanding at September 30, 1995 and $450.0 million of
receivables which the Bank expects to become available, either through
additional fundings or amortization of existing trusts, during the six months
ending March 31, 1996; (ii) approximately $250.0 million of automobile loan
receivables, including $200.0 million of receivables outstanding at September
30, 1995 and $50.0 million of receivables which the Bank expects to become
available through additional fundings during the six months ending March 31,
1996; and (iii) approximately $30.0 million of amounts on deposit in certain
spread accounts during the six months ending March 31, 1996. As part of its
operating strategy, the Bank will continue to explore opportunities to sell
assets and to securitize and sell credit card, home equity credit line and
automobile loan receivables to meet liquidity and other balance sheet
objectives.

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. For
fiscal 1995, the Bank used the cash provided by operating, investing and
financing activities primarily to meet its commitments to fund maturing savings
certificates and deposit withdrawals of $13.9 billion, repay borrowings of $3.3
billion, fund existing and continuing loan commitments (including real estate
held for investment or sale) of $2.9 billion, purchase investments and loans of
$195.6 million and meet operating expenses, before depreciation and
amortization, of $271.7 million. These commitments were funded primarily
through proceeds from customer deposits and sales of certificates of deposit of
$14.1 billion, proceeds

<PAGE>

from borrowings of $3.4 billion, proceeds from sales of
loans, trading securities and real estate of $2.6 billion, and principal and
interest collected on investments, loans, mortgage-backed securities and
securities of $744.3 million.

The Bank is obligated under various recourse provisions related to the
securitization and sale of credit card, home equity credit line and automobile
loan receivables. Of the $3.9 billion of outstanding trust certificate balances
at September 30, 1995, the primary recourse to the Bank was approximately $93.1
million.

The Bank also is obligated under various recourse provisions related to the
swap of single-family residential loans for participation certificates issued to
the Bank by FHLMC. At September 30, 1995, recourse to the Bank under these
arrangements was approximately $4.4 million.

The Bank's commitments at September 30, 1995 are set forth in the following
table:

<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Commitments to originate loans $ 38,762
-----------

Loans in process (collateral loans):
Home equity . . . . . . . . . . . . . . . . 541,610
Real estate construction. . . . . . . . . . 21,088
Commercial and multifamily. . . . . . . . . 226
-----------

Loans in process (unsecured loans): 562,924
-----------
Credit cards. . . . . . . . . . . . . . . . 10,990,408
Overdraft lines . . . . . . . . . . . . . . 63,113
Commercial. . . . . . . . . . . . . . . . . 6,833
-----------
11,060,354
-----------
Total commitments to extend credit. . . . . 11,662,040
-----------

Letters of credit . . . . . . . . . . . . . . 38,604
Recourse arrangements on asset-backed
securitizations. . . . . . . . . . . . . . . 93,059
Recourse arrangments on mortgage-backed
securities . . . . . . . . . . . . . . . . . 4,364
-----------
Total commitments . . . . . . . . . . . . . . $11,798,067
-----------
-----------
</TABLE>

Based on historical experience, the Bank expects to fund substantially less
than the total amount of its outstanding credit card and home equity credit line
commitments, which together accounted for 97.7% of commitments at September 30,
1995.

At September 30, 1995, repayments of borrowed money scheduled to occur
during the next 12 months were $152.7 million. Certificates of deposit maturing
during the next 12 months amounted to $885.8 million, of which a substantial
portion is expected to remain with the Bank.

There were no material commitments for capital expenditures at
September 30, 1995.

The Bank's liquidity requirements in years subsequent to fiscal 1995 will
continue to be affected both by the asset size of the Bank, the growth of which
will be constrained by capital and other regulatory 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 long-term liquidity needs. The mix of funding sources utilized from
time to time will be determined by a number of factors, including capital
planning objectives, lending and investment strategies and market conditions.

87
<PAGE>

CAPITAL. At September 30, 1995, 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. On the basis of its September 30, 1995 balance
sheet, the Bank also would meet the fully phased-in capital requirements under
FIRREA that will apply as certain deductions from capital are phased in and,
after giving effect to those deductions, would meet the capital standards for
"well capitalized" institutions under the prompt corrective action regulations.

The following table shows the Bank's regulatory capital levels at
September 30, 1995 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.

88
<PAGE>

REGULATORY CAPITAL
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Minimum Excess
Actual Capital Requirement Capital
------------------------ --------------------- ---------------------
As a % As a % As a %
Amount of Assets(4) Amount of Assets Amount of Assets
--------- ------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Capital per financial statements $328,544
Net unrealized holding losses (1) 3,112
---------
Adjusted capital 331,656

Adjustments for tangible and core
capital:
Intangible assets (45,697)
Non-includable subsidiaries (2) (2,122)
Non-qualifying purchased/originated
loan servicing (1,493)
---------
Total tangible capital 282,344 5.77% $ 73,438 1.50% $208,906 4.27%
Supervisory goodwill (3) - ============ ========= ========= ========= =========
---------
Total core capital (4) 282,344 5.77% $195,835 4.00% $ 86,509 1.77%
--------- ============ ========= ========= ========= =========

Total tier 1 risk-based
capital (4) 282,344 6.65% $169,873 4.00% $112,471 2.65%
--------- ============ ========= ========= ========= =========

Adjustments for risk-based capital:
Subordinated capital debentures 151,400
Allowance for general loan losses 53,264
---------
Total supplementary capital 204,664
Excess allowance for loan losses (176)
---------
Adjusted supplementary capital 204,488
---------
Total available capital 486,832
Equity investments (2) (25,702)
---------
Total risk-based capital (4) $461,130 11.63% $339,746 8.00% $121,384 3.63%
========= ============ ========= ========= ========= =========
</TABLE>

- -------------------------------------------------------------------------------
(1) Pursuant to OTS policy, net unrealized holding gains (losses) are
excluded from regulatory capital.

(2) Reflects an aggregate offset of $3.7 million representing the allowance
for general loan losses maintained against the Bank's equity investments
and non-includable subsidiaries which, pursuant to OTS guidelines, is
available as a "credit" against the deductions from capital otherwise
required for such investments.

(3) Effective January 1, 1995, the amount of supervisory goodwill includable
as core capital under OTS regulations decreased from 0.375% to 0% of
tangible assets.

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

89
<PAGE>

REGULATORY ACTION AND REQUIREMENTS. The Bank is subject to a written
agreement with the OTS, as amended in October 1993, which imposes certain
restrictions on the Bank's operations and requires certain affirmative actions
by the Bank. Primarily because of its level of non-performing assets, the Bank
is also subject to restrictions on asset growth. Under the applicable OTS
requirements, the Bank may not increase its total assets during any calendar
quarter in excess of an amount equal to net interest credited on deposit
liabilities during such quarter without prior written approval from the OTS.
The Bank complied with these growth limitations during fiscal 1995.

The Bank has been able to maintain capital compliance in recent periods
despite the gradual phase-out of various assets from regulatory capital. As of
September 30, 1995, the Bank had $45.7 million in supervisory goodwill, all of
which was excluded from core capital, and $29.2 million in equity investments,
all of which was excluded from total risk-based capital, pursuant to phase-outs
that had reached 100%. In addition, at September 30, 1995, the Bank had $3.9
million, after subsequent valuation allowances, of extensions of credit to, and
investments in, subsidiaries engaged in activities impermissible to national
banks ("non-includable subsidiaries") which were subject at that date to a 60%
phase-out from all three FIRREA capital requirements. Pursuant to OTS
guidelines, $3.7 million of general valuation allowances maintained against the
Bank's non-includable subsidiaries and equity investments is available as a
"credit" against the deduction from capital otherwise required for such
investments. The phase-out for non-includable subsidiaries will increase to
100% on July 1, 1996.

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 September 1995,
the Bank received from the OTS an extension through September 29, 1996 of the
five-year holding period for certain of its REO properties acquired through
foreclosure in fiscal 1990 and fiscal 1991. The following table sets forth the
Bank's REO at September 30, 1995, after valuation allowances of $135.0 million,
by the fiscal year in which the property was acquired through foreclosure.

Fiscal Year (In thousands)
<S> <C>
1990(1)(2). . . . . . . . . . . . . . . . . . $ 89,070
1991(2) . . . . . . . . . . . . . . . . . . . 90,207
1992. . . . . . . . . . . . . . . . . . . . . 15,080
1993. . . . . . . . . . . . . . . . . . . . . 4,809
1994. . . . . . . . . . . . . . . . . . . . . 8,389
1995. . . . . . . . . . . . . . . . . . . . . 11,679
---------
Total REO . . . . . . . . . . . . . . . . . . $ 219,234
---------
---------
</TABLE>

- ----------
(1) Includes REO with an aggregate net book value of $29.2 million, which the
Bank treats as equity investments for regulatory capital purposes.

(2) Includes REO, with an aggregate net book value of $153.5 million, for which
the Bank received an extension of the five-year holding period through
September 29, 1996.

<PAGE>

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, 1995, the Bank's
leverage, tier 1 risk-based and total risk-based capital ratios were 5.77%,
6.65% and 11.63%, respectively, which exceeded the ratios established for "well
capitalized" institutions, and the Bank was not subject to any applicable
written agreement, order or directive to meet and maintain a specific capital
level. The OTS has the discretion to 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's ability to maintain or increase its capital levels in future
periods will be subject to general economic conditions, particularly in the
Bank's local markets. Adverse general economic conditions or a renewed downturn
in local real estate markets could require further additions to the Bank's
allowances for losses and further charge-offs. Any such developments would
adversely affect the Bank's earnings and thus its regulatory capital levels. In
addition, legislation is expected to be enacted shortly which would require the
Bank to pay as early as January 1, 1996 a one-time assessment estimated to be up
to 85 basis points on its SAIF-insured deposits and thereby reduce the Bank's
regulatory capital levels. See "Business - Banking - Regulation - Pending
Legislation - Balanced Budget Act of 1995."

As a result of these factors, although the Bank's regulatory capital ratios
on a fully phased-in basis at September 30, 1995, would meet the ratios
established for "well capitalized" institutions, there can be no assurance that
the Bank will be able to maintain levels of capital sufficient to continue to
meet the standards for classification as "well capitalized" under the prompt
corrective action standards.

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.

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 the last three fiscal years, non-interest
income from securitizations of credit card, home equity credit line and
automobile receivables and gains on sales of credit card accounts (or
"relationships"), loans and mortgage-backed securities have had a significant
effect on net income. In addition to interest paid on its interest-bearing
liabilities, the Bank's principal expenses are operating expenses.

<PAGE>

FISCAL 1995 COMPARED TO FISCAL 1994

REAL ESTATE

The following table sets forth, for the fiscal years ended September 30,
1995, 1994 and 1993, direct operating results for the Real Estate Trust's (i)
office and shopping center properties, (ii) commercial properties, which combine
office and shopping center property results, and (iii) hotel properties. On
August 26, 1993, the Real Estate Trust transferred its 22 shopping center
properties and one of its office properties (the "Transferred Properties") to
Saul Holdings Partnership and a subsidiary limited partnership of Saul Holdings
Partnership in exchange for securities representing a 21.5% limited partnership
interest in Saul Holdings Partnership (the "Saul Centers Transaction"). See
"Business - Real Estate - Investment in Saul Holdings Limited Partnership" and
Note 2 to the Consolidated Financial Statements in this report. As a result of
the Saul Centers Transaction, the fiscal 1995 and 1994 operating results of
commercial properties, which did not include the Transferred Properties, and the
fiscal 1993 operating results, which included such commercial properties for
less than the entire fiscal year, are not entirely comparable.

<PAGE>

Year Ended September 30,
--------------------------------
1995 1994 1993
--------------------------------
(in thousands)
<S> <C> <C> <C>

OFFICE AND INDUSTRIAL PROPERTIES (1)
Revenue
Base rent ............................... $17,490 $15,345 $16,975
Expense recoveries ...................... 930 967 1,272
Other ................................... 392 503 410
------- ------- -------
Total revenues ...................... 18,812 16,815 18,657
------- ------- -------
Direct operating expenses
Utilities ............................... 2,364 2,324 2,261
Repairs and maintenance ................. 2,028 1,792 1,718
Real estate taxes ....................... 1,337 1,383 1,508
Payroll ................................. 579 566 548
Insurance ............................... 263 256 282
Other ................................... 838 651 906
------- ------- -------
Total direct operating expenses ..... 7,409 6,972 7,223
------- ------- -------
Income after direct operating expenses ........ $11,403 $ 9,843 $11,434
------- ------- -------
------- ------- -------

SHOPPING CENTERS (1)
Revenue
Base rent ................................ $ -- $ -- $19,635
Percentage rent .......................... -- -- 4,488
Expense recoveries ....................... -- -- 2,231
Other .................................... -- -- 725
------- ------- -------
-- -- 27,079
------- ------- -------
Direct operating expenses
Utilities ................................ -- -- 929
Repairs and maintenance .................. -- -- 1,186
Real estate taxes ........................ -- -- 1,977
Payroll .................................. -- -- 891
Insurance ................................ -- -- 304
Ground rent .............................. -- -- 429
Other .................................... -- -- 769
------- ------- -------
Total direct operating expenses ..... -- -- 6,485
------- ------- -------
Income after direct operating expenses ........ $ -- $ -- $20.594
------- ------- -------
------- ------- -------

COMMERCIAL PROPERTIES (1)
(COMBINED RESULTS OF OFFICE AND
INDUSTRIAL PROPERTIES AND SHOPPING CENTERS)
Revenue
Base rent ................................ $17,490 $15,345 $36,610
Percentage rent .......................... -- -- 4,488
Expense recoveries ....................... 930 967 3,503
Other .................................... 392 503 1,135
------- ------- -------
18,812 16,815 45,736
------- ------- -------
Direct operating expenses
Utilities ................................ 2,364 2,324 3,190
Repairs and maintenance .................. 2,028 1,792 2,904
Real estate taxes ........................ 1,337 1,383 3,485
Payroll .................................. 579 566 1,439
Insurance ................................ 263 256 586
Ground rent .............................. -- -- 429
Other .................................... 838 651 1,675
------- ------- -------
Total direct operating expenses ..... 7,409 6,972 13,708
------- ------- -------
Income after direct operating expenses ........ $11,403 $ 9,843 $32,028
------- ------- -------
------- ------- -------
</TABLE>

- -----------------------------------------------------------------------------
(1) Reflects the Real Estate Trust's transfer, in August 1993, of 22 shopping
center properties and one office property to Saul Holdings Partnership and a
subsidiary limited partnership of Saul Holdings Partnership.

93
<PAGE>

<TABLE>
<CAPTION> Year Ended September 30,
--------------------------------
1995 1994 1993
--------------------------------
(in thousands)
<S> <C> <C> <C>
HOTELS (1)
Revenue
Room sales .............................. $37,984 $31,676 $30,517
Food sales .............................. 10,235 8,696 8,885
Beverage sales .......................... 2,739 2,648 2,985
Other ................................... 3,146 3,026 2,998
------- ------- -------
Total revenue ...................... 54,104 46,046 45,385
------- ------- -------
Direct operating expenses
Payroll .................................. 16,687 14,989 14,887
Cost of sales ............................ 4,645 4,269 4,729
Utilities ................................ 3,216 3,181 3,027
Repairs and maintenance .................. 2,836 2,468 2,426
Advertising and promotion ................ 2,510 2,276 2,301
Property taxes ........................... 1,354 943 1,194
Insurance ................................ 624 583 543
Other .................................... 6,166 5,165 4,390
------- ------- -------
Total direct operating expenses ..... 38,038 33,874 33,497
------- ------- -------
Income after direct operating expenses ........ $16,066 $12,172 $11,888
------- ------- -------
------- ------- -------
</TABLE>

(1) Includes the results of the Real Estate Trust's acquisition
of a 192 room hotel on November 30, 1994.

94
<PAGE>

The Real Estate Trust recorded a loss before depreciation and amortization
of debt expense of $17.2 million and an operating loss of $27.3 million for
fiscal 1995, compared to a loss before depreciation and amortization of debt
expense of $24.0 million and an operating loss of $34.3 million for fiscal 1994.
The improvement was largely attributable to higher income after direct operating
expenses for hotels and office and industrial properties, increased income from
Saul Holdings Partnership and other partnership investments, and recognition of
gain on the condemnation of a portion of a land parcel.

Income after direct operating expenses from commercial properties increased
$1.6 million (15.8%) from such income in fiscal 1994. Gross income increased
$2.0 million (11.9%) in fiscal 1995, while expenses increased $0.4 million
(6.3%). The performance of the office and industrial portfolio was adversely
affected during the first half of fiscal 1994 by vacancies at one of the Atlanta
properties.

Income after direct operating expenses from hotel properties increased $3.9
million (31.9%) in fiscal 1995. Room sales increased by $6.3 million (19.9%) as
a result of increases in both average room rates and average occupancy rates.
The higher occupancy rates contributed to an increase of $1.6 million (14.4%) in
food and beverage sales. Total revenues increased by $8.1 million (17.5%),
while expenses were higher by $4.2 million (12.3%).

Interest expense increased $1.2 million (3.0%) in fiscal 1995, largely as
result of higher average borrowings, which were $403.7 million in fiscal 1995,
compared to $358.4 million during fiscal 1994.

Amortization of debt expense decreased $730,000 (60.5%) in fiscal 1995,
largely due to the amortization of a credit arising from a lender's forgiveness
of debt for a full year as compared to a partial year in fiscal 1994.

Depreciation increased $669,000 (7.4%) in fiscal 1995 as a result of new
tenant improvements, acquisition of a new hotel property and property
renovations.

Advisory, management and leasing fees paid to related parties increased
$583,000 (8.6%) in fiscal 1995. The advisory fee in fiscal 1995 was $292,000
per month, compared to fiscal 1994 monthly fees of $250,000 from October 1993
through March 1994 and $292,000 from April through September 1994. Higher gross
income from hotels and office and industrial properties in fiscal 1995 also
resulted in higher management fees.

General and administrative expense increased $292,000 (14.4%) in fiscal
1995, largely as a result of higher legal costs incurred in litigation with a
tenant.

The fiscal 1995 write-down of real estate to net realizable value reflects
a $1.2 million reduction in the carrying value of a hotel property and a $1.5
million write-off of restaurant assets. The Real Estate Trust sold the hotel
property on October 6, 1995.

Equity in earnings (losses) of unconsolidated entities represents the Real
Estate Trust's share of earnings or losses in its partnership investments. For
fiscal 1995, the Real Estate Trust recorded earnings of $3.7 million from such
investments, compared to earnings of $1.8 million in the prior year.

BANKING

OVERVIEW. The Bank recorded operating income of $55.7 million for fiscal
1995, compared to operating income of $53.2 million for fiscal 1994. The
increase in income for fiscal 1995 was primarily attributable to a $73.1 million
increase in other (non-interest) income resulting primarily from an increase in
loan
95

<PAGE>

servicing fees and a $7.3 million increase in net interest income. The
positive effect of these items on income was partially offset by a $52.1
million increase in operating expenses and a $25.8 million increase in the
provision for loan losses.

NET INTEREST INCOME. Net interest income, before the provision for loan
losses, increased $7.3 million (or 4.3%) in fiscal 1995. The Bank would have
recorded interest income of $7.2 million in fiscal 1995 if the Bank's
non-accrual assets and restructured loans had been current in accordance with
their original terms. Interest income of $2.0 million was actually recorded on
non-accrual assets and restructured loans during the fiscal year. 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 - Banking - 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.

<PAGE>

NET INTEREST MARGIN ANALYSIS
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------------------------------------
1995 1994 1993
September 30, ----------------------------- ----------------------------- -----------------------------
1995 Average Yield/ Average Yield/ Average Yield/
Yield/Rate Balances Interest Rate Balances Interest Rate Balances Interest Rate
------------- ----------- --------- ------- ----------- --------- ------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning
assets:
Loans receivable,
net (1) 11.06% $2,968,376 $294,554 9.92% $2,706,132 $255,328 9.44% $2,136,157 $240,443 11.26%
Mortgage-backed
securities 6.39 981,253 60,623 6.18 1,229,898 70,937 5.77 1,508,948 95,085 6.30
Federal Funds sold and
securities purchased
under agreements
to resell 6.31 65,865 3,756 5.70 63,050 2,277 3.61 30,415 927 3.05
Trading securities -- 4,843 373 7.70 15,655 1,019 6.51 -- -- --
Investment securities 4.37 4,405 194 4.40 4,594 197 4.29 125,255 7,929 6.33
Other interest-earning
assets 6.18 126,792 5,815 4.59 138,163 4,706 3.41 152,300 4,430 2.91
---------- -------- ---------- -------- ---------- --------
Total 9.70 4,151,534 365,315 8.80 4,157,492 334,464 8.04 3,953,075 348,814 8.82
--------- -------- ------- -------- ------ -------- ------

Non-interest earning
assets:
Cash 131,345 116,388 104,195
Real estate held for
investment or sale 287,564 356,993 466,717
Property and equipment,
net 161,109 138,489 141,690
Cost in excess of net
assets acquired, net 5,470 8,110 11,117
Other assets 156,172 163,766 172,178
---------- ---------- ----------
Total assets $4,893,194 $4,941,238 $4,848,972
========== ========== ==========

Liabilities and
stockholders' equity:
Interest-bearing
liabilities:
Deposit accounts:
Demand deposits 2.91 $ 875,551 23,721 2.71 $ 847,158 23,176 2.74 $ 750,816 18,569 2.47
Savings deposits 3.45 1,048,783 35,125 3.35 1,208,041 40,720 3.37 860,280 27,980 3.25
Time deposits 5.83 1,025,111 53,033 5.17 751,299 29,723 3.96 964,926 41,813 4.33
Money market deposits 4.02 1,070,531 42,420 3.96 1,149,671 37,305 3.24 1,242,175 39,430 3.17
---------- -------- ---------- -------- ---------- --------
Total deposits 4.24 4,019,976 154,299 3.84 3,956,169 130,924 3.31 3,818,197 127,792 3.35
Borrowings 7.69 496,938 34,815 7.01 622,010 34,620 5.57 755,111 39,726 5.26
---------- -------- ---------- -------- ---------- --------
Total liabilities 4.50 4,516,914 189,114 4.19 4,578,179 165,544 3.62 4,573,308 167,518 3.66
-------- -------- ------- --------- ----- -------- ------
Non interest-bearing
items:
Non-interest bearing
deposits 69,734 61,895 46,670
Other liabilities 48,702 37,059 36,145
Stockholders' equity 257,844 264,105 192,849
---------- ---------- ----------
Total liabilities
and stockholders'
equity $4,893,194 $4,941,238 $4,848,972
========== ========== ==========

Net interest income $176,201 $168,920 $ 181,296
======== ======== ==========
Net interest spread (2) 4.61% 4.42% 5.16%
======= ======= =======
Net yield on
interest-earning
assets (3) 4.24% 4.06% 4.59%
======= ======= =======
Interest-earning assets
to interest-bearing
liabilities 91.91% 90.81% 86.44%
======= ======= =======
</TABLE>

- -------------------------------------------------------------------------------

(1) Includes loans held for sale and/or securitization. Interest on
non-accruing loans has been included only to the extent reflected in the
consolidated statements of operations; however, the loan balance is
included in the average amount outstanding until transferred to real
estate acquired in settlement of loans. Includes ($10,083), ($4,093), and
$19 of amortized loan fees, premiums and discounts in interest income for
the years ended September 30, 1995, 1994 and 1993.

(2) Equals weighted average yield on total interest-earning assets less
weighted average rate on total interest-bearing liabilities.

(3) Equals net interest income divided by the average balances of total
interest-earning assets.

97
<PAGE>

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.

<PAGE>

VOLUME AND RATE CHANGES IN NET INTEREST INCOME
(IN THOUSANDS)
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended September 30, 1995 Year Ended September 30, 1994
Compared to Compared to
Year Ended September 30, 1994 Year Ended September 30, 1993
Increase (Decrease) Increase (Decrease)
Due to Change in (1) Due to Change in (1)
------------------------------- -------------------------------
Total Total
Volume Rate Change Volume Rate Change
--------- -------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans (2) $ 25,727 $13,499 $ 39,226 $ 57,693 $(42,808) $ 14,885
Mortgage-backed securities (15,094) 4,780 (10,314) (16,598) (7,550) (24,148)
Federal funds sold and securities
purchased under agreements to resell 106 1,373 1,479 1,153 197 1,350
Trading securities (405) (241) (646) 1,019 -- 1,019
Investment securities (8) 5 (3) (5,794) (1,938) (7,732)
Other interest-earning assets (413) 1,522 1,109 (437) 713 276
--------- -------- ---------- --------- --------- ---------
Total interest income 9,913 20,938 30,851 37,036 (51,386) (14,350)
--------- -------- ---------- --------- --------- ---------

Interest expense:
Deposit accounts 2,139 21,236 23,375 4,650 (1,518) 3,132
Borrowings (7,752) 7,947 195 (7,335) 2,229 (5,106)
--------- -------- ---------- --------- --------- ---------
Total interest expense (5,613) 29,183 23,570 (2,685) 711 (1,974)
--------- -------- ---------- --------- --------- ---------

Increase (decrease) in
net interest income $ 15,526 $(8,245) $ 7,281 $ 39,721 $(52,097) $(12,376)
========= ======== ========== ========= ========= =========
</TABLE>

- -------------------------------------------------------------------------------
(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 rates.

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

99
<PAGE>

Interest income in fiscal 1995 increased $30.9 million from the level in
fiscal 1994, primarily as a result of higher average balances of loans
receivable. Higher average yields earned by the Bank on all of its
interest-earning asset categories also contributed to the increase in interest
income. The effect on interest income of higher average balances of loans and
higher average yields was offset in part by lower average balances of
mortgage-backed securities.

The Bank's net yield on interest-earning assets increased to 4.24% in
fiscal 1995 from 4.06% in fiscal 1994. The increase primarily resulted from the
upward adjustment of interest rates on certain of the Bank's adjustable-rate
products to reflect increases in market interest rates to which rates on such
products are indexed. The effect of higher yields was offset in part by an
increase in the rates paid by the Bank on its interest-bearing liabilities.

Interest income on loans, the largest category of interest-earning assets,
increased by $39.2 million (or 15.4%) from fiscal 1994. The increase in
interest income on loans was primarily attributable to higher average balances.
Average balances of consumer loans (other than credit card loans), principally
automobile loans, increased $150.4 million (or 63.6%) in fiscal 1995. The
higher balances were largely responsible for the increase of $15.3 million (or
78.2%) in interest income on consumer loans. Average balances of credit card
loans increased $81.4 million (or 8.9%) during fiscal 1995, largely as a result
of new account originations. The increase in balances of such loans contributed
to an $18.8 million (or 14.0%) increase in interest income from these assets.
Average balances of single-family residential permanent loans increased $68.2
million (or 5.2%) as a result of increased originations of such loans during the
current year. Interest income on these loans increased $10.0 million (or 11.2%)
from fiscal 1994. Average balances of home equity credit line loans declined in
fiscal 1995, largely as a result of the Bank's securitization and sale activity.
The securitization and sale of $181.9 million and $150.5 million of home equity
credit line receivables in September 1994 and 1995, respectively, more than
offset the originations of $128.9 million of such loans during fiscal 1995, and
resulted in a decline of $25.9 million (or 19.1%) in average balances of home
equity credit line receivables.

Higher average yields on the loan portfolio also contributed to the
increase in interest income on loans. The average yield on the loan portfolio
in fiscal 1995 increased by 48 basis points (to 9.92% from 9.44%) from the
average yield in fiscal 1994. An increase in the average yield on credit card
loans to 15.34% from 14.65% and on consumer loans to 8.99% from 8.25%
contributed to the increase in loan portfolio interest income. Increases in the
average yields on single-family residential permanent loans (to 7.20% from
6.81%), home equity credit line loans (to 8.74% from 6.96%), commercial
permanent loans (to 6.78% from 6.37%) and construction loans (to 10.46% from
6.98%) also contributed to the increased income on such assets. The increase in
the average yields on these loans reflected the upward adjustment of interest
rates on such loans to reflect increases in market interest rates to which rates
on such products are indexed.

Interest income on mortgage-backed securities decreased $10.3 million (or
14.5%) primarily because of lower average balances. The reduced balances in
fiscal 1995 reflected the effects of scheduled principal paydowns and
unscheduled principal prepayments. The negative effect of the lower average
balances was offset in part by an increase in the average interest rates on
these securities to 6.18% from 5.77%, primarily as a result of higher market
interest rates in fiscal 1995.

Other interest income increased by $2.6 million (or 37.1%) in fiscal 1995
primarily as a result of higher average yields on federal funds sold and
securities purchased under agreements to resell, and, to a lesser extent,
Federal Home Loan Bank stock.

100

<PAGE>

Interest expense increased $23.6 million in fiscal 1995 primarily because
of an increase of $23.4 million in interest expense on deposits, the largest
category of interest-bearing liabilities. Interest expense on deposits increased
as a result of an increase in average rates (to 3.84% from 3.31%), which
reflected higher market interest rates in fiscal 1995 and a shift in the
composition of the Bank's deposits to higher yielding certificates of deposit
(average rates on certificates of deposits increased 30.8%, to 5.17% from 3.96%)
as well as, to a lesser extent, an increase in average deposit balances of $63.8
million. See "Financial Condition - Banking - Asset and Liability Management."

The increase in interest expense paid on borrowings was primarily
attributable to an increase in the average cost of these borrowings (to 7.01%
from 5.57%), which reflected higher market interest rates in fiscal 1995. This
was particularly true for securities sold under repurchase agreements for which
the weighted average interest rate increased 226 basis points over the rate for
fiscal 1994. The increase in interest expense resulting from higher interest
rates was partially offset by a $125.1 million decrease in the average balances
of borrowings from $622.0 million for fiscal 1994 to $496.9 million for fiscal
1995.

PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses increased
to $55.0 million in fiscal 1995 from $29.2 million in fiscal 1994. The $25.8
million increase over the prior year was attributable to increases of $20.9
million in the provision for losses on credit card loans, $3.5 million in the
provision for losses on consumer loans and $1.4 million in the provision for
losses on real estate loans. The higher provisions on credit card and consumer
loans resulted from increased origination volume of such loans. See "Financial
Condition - Banking - Asset Quality - Allowances for Losses."

OTHER INCOME. The increase in other (non-interest) income to $233.1
million in fiscal 1995 from $160.0 million in fiscal 1994 was primarily
attributable to an increase in loan servicing fees. The positive effect of this
item on other income was partially offset by decreases in most other categories
of non-interest income.

An increase of $77.7 million in excess servicing fees and $32.6 million of
servicing fees earned by the Bank for servicing its portfolios of securitized
credit card loans contributed to an increase of $114.4 million (or 163.7%) in
loan servicing fees. Such excess servicing fees and servicing fees have
increased in recent periods as a result of greater securitization activity by
the Bank.

Credit card fees, consisting of membership fees, late charges, interchange
fees and cash advance charges, decreased $11.2 million (53.2%) in fiscal 1995
from the level in fiscal 1994. The decrease was primarily attributable to a $3.0
million and $9.2 million decrease in late charges and interchange fees,
respectively. The decrease was partially offset by an increase in cash advance
charges as a result of increased account activity, which reflects the increase
in new account originations.

Gain on sales of credit card relationships, loans and mortgage-backed
securities decreased by $17.6 million primarily because the Bank realized a
significant gain from the sale of credit card relationships (or accounts) in
fiscal 1994, but did not consummate any such sale in fiscal 1995.

Gain on sales of mortgage servicing rights decreased by $4.4 million as a
result of a decline in the volume of mortgage servicing rights sold during the
current period. During fiscal 1995 and 1994, the Bank sold the rights to
service mortgage loans with principal balances of approximately $148.1 million
and $383.9 million, respectively.

101

<PAGE>

The $5.9 million decrease in earnings on real estate held for investment or
sale was primarily attributable to an increase of $12.3 million in the provision
for losses on such assets and a decrease of $1.1 million in the operating income
generated by the REO properties. See "Financial Condition - Banking - Asset
Quality - Allowances for Losses." Partially offsetting these items was a $4.1
million increase in partnership earnings recorded on real estate held for
investment and a $3.2 million increase in the gain recorded on sales of the
Bank's REO properties.

The $4.0 million decline in other income was primarily a result of the
establishment of a reserve on a fixed asset. A $6.2 million reserve, previously
established as a reserve against an REI property, was transferred with such
property to property and equipment. See "Financial Condition - Banking - Real
Estate Held for Investment."

OPERATING EXPENSES. Operating expenses for fiscal 1995 increased $52.1
million (21.1%) from the level in fiscal 1994. The main components of the
higher operating expenses were increases in salaries and employee benefits, data
processing and other expenses. The $21.0 million increase in salaries and
employee benefits resulted primarily from the addition of staff to the Bank's
credit card operations. The $12.5 million increase in data processing expenses
was principally attributable to an increase in the number of credit card
accounts outstanding and the activity generated by such accounts during fiscal
1995. The $15.6 million increase in other operating expenses was primarily a
result of increased credit card fraud losses during the current period.

FISCAL 1994 COMPARED TO FISCAL 1993

REAL ESTATE

The Real Estate Trust recorded a loss before depreciation and amortization
of debt expense of $24.0 million and an operating loss of $34.3 million for
fiscal 1994, compared to a loss before depreciation and amortization of debt
expense of $29.0 million and an operating loss of $44.5 million for fiscal 1993.
The improvement was largely attributable to the decline in interest expense due
to refinancings and the Saul Centers Transaction and to the absence in fiscal
1994 of a charge comparable to the charge for abandoned development costs of
$13.1 million in fiscal 1993.

Income after direct operating expenses from commercial properties, which
included only office properties in fiscal 1994, decreased $22.2 million (69.3%)
from such income in fiscal 1993, which included income from both shopping
centers and office properties. Because of the Saul Centers Transaction, the
Real Estate Trust received no income from shopping centers in fiscal 1994.
Income after direct operating expenses from commercial properties in the
portfolio during both years increased $61,000 (0.6%). The performance of the
office portfolio in fiscal 1994 was adversely affected by a reduction in rental
income during the first half of the year, although office rents largely
recovered in the last two quarters. Income after direct operating expenses for
office properties increased $442,000 in the fourth quarter of fiscal 1994 from
the level in the prior corresponding period.

Income after direct operating expenses from hotel properties increased
$284,000 (2.4%) in fiscal 1994. Room sales increased by $1,159,000 (3.8%) as a
result of increases in average room rates. This increase was offset in part by
a decreases in average occupancy rates. The lower occupancy rates contributed
to a decrease of $526,000 (4.4%) in food and beverage sales. Total revenues
increased by $661,000 (1.5%), while expenses were higher by $377,000 (1.1%).

Interest expense decreased $11.1 million (22.0%) in fiscal 1994, largely as
result of the transfer of the mortgage debt associated with the properties
conveyed in the Saul Centers Transaction. Primarily for the same reason,
average

102

<PAGE>

balances of the Real Estate Trust's outstanding borrowings declined to $358.4
million in fiscal 1994 from $452.7 in the prior year.

Amortization of debt expense decreased $1.8 million (60.2%) and
depreciation decreased $3.4 million (27.1%), primarily as a result of the
transfer of properties in the Saul Centers Transaction.

Advisory, management and leasing fees paid to related parties declined
$456,000 (6.3%) in fiscal 1994. The advisory fee in fiscal 1994 was $250,000
per month from October 1993 through March 1994 and $292,000 per month from April
1994 through September 1994, compared to $97,000 per month from October through
December 1992 and $157,000 per month from January through September 1993. The
effect of this increase was offset by decreases in management and leasing fees,
which resulted principally from the transfer of properties in the Saul Centers
Transaction.

General and administrative expense decreased $92,000 (4.3%) in fiscal 1994,
largely because of a reduction in overhead expenses. Legal expense increased
slightly from the fiscal 1993 level.

The fiscal 1994 write-down of real estate to net realizable value reflects
a $1.4 million reduction in the carrying value of a hotel property. The Real
Estate Trust reduced the carrying value of the asset based on management's
evaluation of the hotel's location, recent operating history and unlikely
prospects for a near-term recovery.

Equity in earnings (losses) of unconsolidated entities represents the Real
Estate Trust's share of earnings or losses in its partnership investments. For
fiscal year 1994 the Real Estate Trust recorded earnings of $1.7 million from
such investments, compared to a loss of $0.7 million in the prior year.

BANKING

OVERVIEW. The Bank recorded operating income of $53.2 million for fiscal
1994, compared to operating income of $63.8 million for fiscal 1993. The
decline in income for fiscal 1994 was primarily attributable to a $58.7 million
increase in operating expenses, a $12.4 million decrease in total net interest
income, a $5.0 million decrease in credit card fees and an $8.9 million decrease
in gain on sale of investment securities. The decrease in income for the year
was offset in part by a $31.2 million decrease in the provision for loan losses
and a $29.3 million increase in other (non-interest) income resulting primarily
from a $25.0 million increase in loan and deposit servicing fees and improved
results on real estate held for investment or sale.

The Bank's net income for the 1994 period reflected a $6.3 million
extraordinary loss, net of related income taxes, resulting from the Bank's
redemption of $128.5 million principal amount of subordinated capital debentures
in December 1993. See Note 23 to the Consolidated Financial Statements in this
report.

The Bank adopted SFAS 109 effective October 1, 1993. The cumulative effect
of this change in accounting principle of $5.1 million was recognized as a
benefit in the operating results for fiscal 1994. See "Summary of Significant
Accounting Policies - The Bank" in the Notes to the Consolidated Financial
Statements in this report.

NET INTEREST INCOME. Net interest income, before the provision for loan
losses, decreased $12.4 million (or 6.8%) in fiscal 1994, as the average yield
on interest-earning assets decreased at a rate greater than the decrease in the
average rate on interest-bearing liabilities. See "Financial Condition -
Banking - Asset and Liability Management."

103

<PAGE>

The Bank would have recorded interest income of $9.1 million in fiscal 1994
if the Bank's non-accrual assets and restructured loans had current in
accordance with their original terms. Interest income of $2.7 million was
actually recorded on non-accrual assets and restructured loans during the fiscal
year. 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 1994 decreased $14.4 million from the level in
fiscal 1993 as a result of lower average yields earned by the Bank on the
principal categories of its interest-earning assets. The effect of the lower
average yields on interest income was offset in part by higher average balances
of loans receivable and, to a lesser extent, trading securities and other
interest-earning assets.

The Bank's net interest spread declined to 4.42% in fiscal 1994 from 5.16%
in fiscal 1993. The decline reflected the effects of marketing strategies which
included the offering of lower introductory rates for certain loan products,
primarily credit card and home equity credit line loans, and the increased
origination of credit card loans; the higher level of asset securitization
activities; and the downward adjustment of interest rates on certain of the
Bank's adjustable-rate products to reflect previous declines in market interest
rates to which the loan rates on such products are indexed.

Interest income on loans, the largest category of interest-earning assets,
increased by $14.9 million (or 6.2%) from fiscal 1993. The increase in interest
income on loans was attributable to higher average balances of the loan
portfolio. Average balances of single-family residential permanent loans
increased $326.7 million (or 33.0%) as a result of increased origination of such
loans, during the current year. Interest income on these loans increased $17.1
million (or 23.6%) from fiscal 1993. Average balances of credit card loans
increased $82.3 million (or 9.9%) in fiscal 1994, largely as a result of new
account originations in connection with the Bank's resumption of active national
solicitation of credit card accounts. An increase of $11.1 million (or 132.0%)
in interest income on consumer loans (other than credit card loans) was
attributable to increased originations of automobile loans, which resulted in an
increase in the average balances of such consumer loans to 236.5 million from
$89.7 million. Average balances of commercial permanent loans increased $14.4
million (or 18.0%), primarily as a result of an increase in loans made to
purchasers of certain of the Bank's REO in connection with the sales of such
REO. Average balances of home equity credit line loans declined in fiscal 1994,
largely as a result of the Bank's securitization and sale activity. The
securitization and sale of $194.2 million, $146.2 million and $181.9 million of
home equity credit line receivables in December 1992, September 1993 and
September 1994, respectively, contributed to a decline of $19.5 million (or
12.6%) in average balances of home equity credit line receivables, which was
largely responsible for a $1.5 million decline in interest income.

Lower average yields on the loan portfolio partially offset the effect of
higher average balances. The average yield on the loan portfolio in fiscal 1994
decreased by 182 basis points (to 9.44% from 11.26%) from the average yield in
fiscal 1993. Special introductory and promotional interest rates to new and
existing credit card holders contributed to a decline in the average yield on
credit card loans to 14.65% from 17.68% and to a decline of $13.2 million in
interest income on these loans. The average yield on home equity credit line
loans decreased to 6.96% from 7.05%, primarily as a result of introductory rates
offered on new home equity credit line loans. The average yield on
single-family residential loans declined to 6.81% from 7.33%, as customers
continued to refinance higher rate mortgage loans into mortgage loans with lower
rates.

Interest income on mortgage-backed securities decreased $24.1 million
because of lower average interest rates and lower average balances. The reduced

104

<PAGE>

mortgage-backed security balances in fiscal 1994 reflected the effects of the
sale of $127.8 million of such securities during fiscal 1993. Average interest
rates on these securities declined to 5.77% from 6.30%, primarily as a result of
the prepayment of higher rate mortgage-backed securities and the purchase of
mortgage-backed securities with lower rates.

Interest income on investment securities decreased $7.7 million as a result
of the sale in June 1993 of U.S. Government securities with a book balance of
$172.9 million, which resulted in lower average, balances of such securities in
fiscal 1994.

Interest expense decreased $2.0 million (or 1.2%) for the year ended
September 30, 1994 because of a decline of $5.1 million in interest expense on
borrowings. The decrease in interest paid on borrowings was primarily
attributable to a $4.2 million decrease in interest expense on repurchase
agreement transactions and a $2.0 million decrease interest expense on the
Bank's subordinated debentures. A decrease of $160.8 million (or 60.6%) in the
average balances of repurchase agreements contributed to the reduced interest
expense on repurchase agreement transactions. The decline in interest expense
on the Bank's subordinated debentures reflected the effects of the refinancing
of two outstanding debenture issues in the first quarter of fiscal 1994 with the
proceeds of a new, lower-rate debenture issue. As a result of such refinancing,
the annual interest rate paid by the Bank on its debentures decreased to 10.02%
in fiscal 1994 from 13.55% in fiscal 1993. See Note 23 to the Consolidated
Financial Statements in this report.

The decrease in interest expense on borrowings was partially offset by a
$3.1 million increase in interest expense on deposits, the largest category of
interest-bearing liabilities. Interest expense on deposits increased
principally as a result of an increase of $138.0 million in average deposit
balances. See "Financial Condition - Banking - Asset and Liability Management."

PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses decreased
to $29.2 million in fiscal 1994 from $60.4 million in the prior fiscal year.
The decrease was primarily attributable to a decrease of $20.5 million in the
provision for losses on credit card loans. The lower provision resulted in part
from a decline in net charge-offs of credit card loans in fiscal 1994. In
addition, the securitization and sale of $850 million of credit card receivables
in the fourth quarter of fiscal 1994 and of $200.0 million and $300.0 million of
credit card receivables in the March 1994 and June 1994 quarters, respectively,
reduced the amount of such receivables against which the Bank maintains the
reserve. The provision for losses on real estate loans decreased $10.2 million,
reflecting the Bank's implementation of SOP 92-3 during the December 1992
quarter. See "Financial Condition - Banking - Asset Quality - Valuation
Allowances for Losses."

OTHER INCOME. The increase in other (non-interest) income to $160.0
million in fiscal 1994 from $130.8 million in fiscal 1993 was primarily
attributable to an increase in loan and deposit servicing fees. In addition,
the Bank recorded earnings on real estate held for investment or sale, compared
to a loss in fiscal 1993. The positive effect of these items on other income
was partially offset by a decrease in credit card fees and a decrease in gain on
sale of investment securities.

An increase of $21.8 million in excess servicing fees and $4.4. million of
servicing fees earned by the Bank for servicing its portfolios of securitized
credit card loans contributed to an increase of $25.0 million (or 38.4%) in loan
and deposit servicing fees. such excess servicing fees and servicing fees have
increased in recent periods as a result of greater securitization activity by
the Bank. The increase in loan and deposit servicing fees also reflected a $4.6
million increase in excess servicing fees related to home equity credit line
securitizations. The excess servicing fee level rose because of a decrease in

105

<PAGE>

the average prepayment rate with respect to the underlying home equity credit
line receivables. See "Summary of Significant Accounting Policies - The Bank"
in the Notes to the Consolidated Financial Statements in this report.

The improved results on real estate held for investment or sale were
primarily attributable to a decrease of $16.4 million in the provision for
losses on such assets. The Bank's implementation of SOP 92-3 in the quarter
ended December 31, 1992 resulted in $19.0 Million of additional provisions for
real estate losses in that period which was required to reduce the book value of
the Bank's foreclosed assets to fair value. An increase of $2.0 million in the
gain recorded on sales of the Bank's REO properties also contributed to the
earnings on real estate held for investment or sale. These results were
partially offset by a $3.0 million decrease in the operating income generated by
the Bank's REO properties.

Credit card fees, consisting of membership fees, late charges, inter-change
fees and cash advance charges, decreased $5.0 million (19.4%) in fiscal year
1994 from the level in fiscal 1993). The decrease was primarily attributable to
a $7.3 million increase in rebate expense on credit card retail purchases, which
the Bank incurred in connection with promotional activities undertaken beginning
in 1993. The decrease was partially offset by an increase in interchange fees
and cash advance charges as a result of increased account activity. The
increased number of accounts reflected the increase in new account originations
in connection with the Bank's resumption of active national solicitation of new
credit card accounts.

Gain on sale of investment securities decreased by $8.9 million as a result
of the sale in the June 1993 quarter of U.S. Government securities with a book
value of $172.9 million.

OPERATING EXPENSES. Operating expenses for the year ended September 30,
1994 increased $58.7 million (31.3%) from the level in fiscal 1993. The main
components of the higher operating expenses were increases in marketing
expenses, salaries and employee benefits, and data processing expenses. The
$31.3 million increase in marketing expenses was primarily incurred in
connection with the Bank's expanded marketing program for its credit card
products and services initiated in June 1993 with the resumption of active
national solicitation of new credit card accounts. See "Business - Banking -
Lending - Credit Card Lending." The $17.7 million increase in salaries and
employee benefits resulted primarily from the addition of staff to the Bank's
credit card operations and discretionary bonuses paid to substantially all
employees in December 1993. The $8.5 million increase in data processing
expense was principally attributable to an increase in the number of credit card
accounts outstanding and the activity generated by such accounts during fiscal
1994. In order to take advantage of additional opportunities to enhance
profitability, the Bank may be required to incur increased expenditures for
salaries and employee benefits, loan expenses and marketing expenses, which will
contribute to higher operating expenses in future periods.

106

<PAGE>

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:
PAGE
----
(a) Reports of Independent Public Accountants . . . . F-2
(b) Consolidated Balance Sheets - As of September
30, 1995 and 1994 . . . . . . . . . . . . . . . . F-3
(c) Consolidated Statements of Operations - For the
years ended September 30, 1995, 1994 and 1993 . . F-4
(d) Consolidated Statements of Shareholders' Deficit
- For the years ended September 30, 1995, 1994
and 1993. . . . . . . . . . . . . . . . . . . . . F-6
(e) Consolidated Statements of Cash Flows - For the
years ended September 30, 1995, 1994 and 1993 . . F-7
(f) Notes to Consolidated Financial Statements. . . . F-9

The selected quarterly financial data included in Note 35 of Notes to the
Consolidated Financial Statements referred to above are incorporated herein by
reference.

Summary financial information with respect to the Bank is also included in
Part I, Item 1.

F-1

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Trustees and Shareholders of
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") and subsidiaries as of September 30,
1995 and 1994, and the related consolidated statements of operations,
shareholders' deficit and cash flows for the years then ended. These financial
statements are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of B.F. Saul Real Estate
Investment Trust and subsidiaries as of September 30, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.

As explained in the Organization and Summary of Significant Accounting
Policies in the notes to the financial statements, effective October 1, 1993,
the Trust changed its method of accounting for income taxes, impaired loans, and
investments in securities and mortgage-backed securities. In addition, as
explained in the note to the financial statements, effective July 1, 1995, the
Trust changed its method of accounting for mortgage servicing rights.

ARTHUR ANDERSEN LLP

Washington, D.C.
December 5, 1995

F-2

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Trustees and Shareholders of
B.F. Saul Real Estate Investment Trust

We have audited the accompanying consolidated statements of operations,
shareholders' deficit, and cash flows of B.F. Saul Real Estate Investment Trust
for the year ended September 30, 1993. These financial statements are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of B.F. Saul Real Estate Investment Trust for the year ended September 30,
1993, in conformity with generally accepted accounting principles.

As explained in Summary of Significant Accounting Policies--the Bank,
effective December 31, 1992, the Bank changed its method of accounting for
foreclosed assets.

STOY, MALONE & COMPANY, P.C.

Bethesda, Maryland
November 4, 1993

F-3

<PAGE>

CONSOLIDATED BALANCE SHEETS
B. F. SAUL REAL ESTATE INVESTMENT TRUST
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
September 30
---------------------------
(IN THOUSANDS) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
REAL ESTATE
Income-producing properties
Hotel $ 122,649 $ 112,160
Commercial 111,646 110,895
Other 4,632 4,585
------------- -------------
238,927 227,640
Accumulated depreciation (75,140) (68,111)
------------- -------------
163,787 159,529
Land parcels 38,458 38,455
Cash and cash equivalents 17,355 30,445
Other assets 93,812 99,310
------------- -------------
Total real estate assets 313,412 327,739
- -----------------------------------------------------------------------------------------------------------------------------
BANKING
Cash and due from banks 198,096 166,752
Interest-bearing deposits 51,186 14,345
Federal funds sold and securities purchased under agreements to resell 110,000 191,000
Loans held for sale 68,679 33,598
Loans held for securitization and sale 500,000 115,000
Investment securities (market value $4,371 and $4,364, respectively) 4,370 4,364
Mortgage-backed securities (market value $879,720 and $1,025,525, respectively) 880,208 1,025,525
Loans receivable (net of reserve for losses of $60,496 and $50,205, respectively) 2,327,222 2,357,598
Federal Home Loan Bank stock 31,940 31,940
Real estate held for investment or sale (net of reserve for losses of $135,236
and $118,973, respectively) 222,860 330,655
Property and equipment, net 180,438 144,408
Cost in excess of net assets acquired, net 4,173 6,582
Excess servicing assets, net 25,640 25,198
Mortgage servicing rights, net 28,573 15,304
Other assets 278,151 204,029
------------- -------------
Total banking assets 4,911,536 4,666,298
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $5,224,948 $4,994,037
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
REAL ESTATE
Mortgage notes payable $ 184,502 $ 185,730
Notes payable - secured 175,500 175,000
Notes payable - unsecured 41,057 40,288
Deferred gains - real estate 112,883 112,883
Other liabilities and accrued expenses 41,872 44,208
------------- -------------
Total real estate liabilities 555,814 558,109
- -----------------------------------------------------------------------------------------------------------------------------
BANKING
Deposit accounts 4,159,252 4,008,761
Securities sold under repurchase agreements and other short-term borrowings 10,435 8,907
Bonds payable -- 24,030
Notes payable 7,514 7,729
Federal Home Loan Bank advances 155,052 100,000
Custodial accounts 7,413 19,523
Amounts due to banks 32,240 30,373
Other liabilities 87,545 54,509
Capital notes -- subordinated 160,000 160,000
------------- -------------
Total banking liabilities 4,619,451 4,413,832
- -----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interest held by affiliates 43,556 35,632
Minority interest -- other 74,307 74,307
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 5,293,128 5,081,880
- -----------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' DEFICIT
Preferred shares of beneficial interest, $10.50 cumulative, $1 par value,
90 million shares authorized, 516,000 shares issued and outstanding,
liquidation value $51.6 million 516 516
Common shares of beneficial interest, $1 par value, 10 million shares authorized,
6,641,598 shares issued 6,642 6,642
Paid-in surplus 92,943 92,943
Deficit (123,943) (134,793)
Net unrealized holding loss (2,490) (11,303)
------------- -------------
(26,332) (45,995)
Less cost of 1,814,688 common shares of beneficial interest in treasury (41,848) (41,848)
------------- -------------
TOTAL SHAREHOLDERS' DEFICIT (68,180) (87,843)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $5,224,948 $4,994,037
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

F-4

<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS
B. F. SAUL REAL ESTATE INVESTMENT TRUST
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
For the Year Ended September 30
-----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REAL ESTATE
INCOME
Hotels $ 54,104 $ 46,046 $ 45,385
Commercial properties 18,812 16,815 45,736
Other 4,369 3,183 2,124
------------- ------------- -------------
Total income 77,285 66,044 93,245
- ---------------------------------------------------------------------------------------------------------------------------
EXPENSES
Direct operating expenses:
Hotels 38,038 33,874 33,497
Commercial properties 7,409 6,972 13,708
Land parcels and other 1,348 1,383 1,623
Interest expense 40,564 39,370 50,470
Amortization of debt expense 476 1,206 3,029
Depreciation 9,714 9,082 12,457
Advisory, management and leasing fees - related parties 7,376 6,793 7,249
General and administrative 2,319 2,027 2,119
Abandoned development costs -- -- 13,104
Write-down of real estate to net realizable value 2,727 1,380 --
------------- ------------- -------------
Total expenses 109,971 102,087 137,256
- ---------------------------------------------------------------------------------------------------------------------------
Equity in earnings (losses) of unconsolidated entities 3,681 1,738 (668)
Gain on sale of property 1,664 -- 184
- ---------------------------------------------------------------------------------------------------------------------------
REAL ESTATE OPERATING LOSS $(27,341) $(34,305) $(44,495)
- ---------------------------------------------------------------------------------------------------------------------------
BANKING
INTEREST INCOME
Loans $294,554 $255,328 $240,443
Mortgage-backed securities 60,623 70,937 95,085
Trading securities 373 1,019 --
Investment securities 194 197 7,929
Other 9,571 6,983 5,357
------------- ------------- -------------
Total interest income 365,315 334,464 348,814
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposit accounts 154,299 130,924 127,792
Short-term borrowings 18,094 11,439 13,333
Long-term borrowings 16,721 23,181 26,393
------------- ------------- -------------
Total interest expense 189,114 165,544 167,518
------------- ------------- -------------
Net interest income 176,201 168,920 181,296
Provision for loan losses (54,979) (29,222) (60,372)
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 121,222 139,698 120,924
- ---------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Credit card fees 9,855 21,054 26,010
Loan servicing fees 184,275 69,878 46,631
Deposit servicing fees 24,442 20,347 18,575
Gain on sale of investment securities, net -- -- 8,895
Gain (loss) on sales of trading securities, net (600) 1,695 --
Earnings (loss) on real estate held for investment or sale, net (5,057) 835 (12,722)
Gain on sales of credit card relationships, loans and mortgage-backed
securities, net 12,882 30,522 31,375
Gain on sales of mortgage servicing rights, net 1,397 5,833 4,828
Other 5,923 9,885 7,161
------------- ------------- -------------
Total other income 233,117 160,049 130,753
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>

Continued on following page.

F-5

<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
B. F. SAUL REAL ESTATE INVESTMENT TRUST
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 5,430 $ 17,669 $ (947)

NET INCOME (LOSS) PER COMMON SHARE
Income before extraordinary items, cumulative effect
of change in accounting principle and minority interest $ 4.33 $ 1.33 $ 0.46
Extraordinary items:
Adjustment for tax benefit of operating loss carryovers -- -- 1.60
Loss on early extinguishment of debt, net of taxes -- (2.34) --
------------- ------------- -------------
Income (loss) before cumulative effect of change in accounting
principle and minority interest 4.33 (1.01) 2.06
Cumulative effect of change in accounting principle -- 7.51 --
------------- ------------- -------------
Income before minority interest 4.33 6.50 2.06
Minority interest held by affiliates (1.19) (0.82) (1.36)
Minority interest -- other (2.02) (2.02) (0.90)
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE $ 1.12 $ 3.66 $ (0.20)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

F-6
<PAGE>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
B. F. SAUL REAL ESTATE INVESTMENT TRUST
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
For the Year Ended September 30
-----------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
------------- ------------- -------------

DEFICIT
Beginning of year (134,793) (157,882) (160,980)

Net income 10,850 23,089 4,473

Dividend distributions:
Redeemable preferred (per share: 1993 - $550.00) -- -- (1,375)
------------- ------------- -------------
End of year (123,943) (134,793) (157,882)
------------- ------------- -------------

Net unrealized holding losses (2,490) (11,303) --
------------- ------------- -------------

TREASURY SHARES
Beginning and end of year (1,814,688 shares) (41,848) (41,848) (41,848)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' DEFICIT $ (68,180) $ (87,843) $ (99,629)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

F-7
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
B. F. SAUL REAL ESTATE INVESTMENT TRUST
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
For the Year Ended September 30
-----------------------------------------
(IN THOUSANDS) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
REAL ESTATE
Net income (loss) $ (12,032) $ 7,239 $ (21,857)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation 9,714 9,082 12,457
Gain on sale of property (1,654) -- (184)
Abandoned development costs -- -- 13,104
Write-down of real estate to net realizable value 2,727 1,380 --
Increase in accounts receivable and accrued income (224) (516) 98
(Increase) decrease in deferred tax asset 10,836 (19,028) --
(Increase) decrease in accounts payable and accrued expenses 317 (5,473) 7,047
Increase in tax sharing receivable (5,685) (12,015) (22,984)
Amortization of debt expense 476 1,206 3,029
Equity in (earnings) losses of unconsolidated entities (3,681) (1,738) 668
Loss on early extinguishment of debt -- 4,982 --
Other 3,530 4,022 5,473
------------- ------------- -------------
4,324 (10,859) (3,149)
------------- ------------- -------------
BANKING
Net income 22,882 15,850 26,330
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Accretion of premiums, discounts and net deferred loan fees (435) (1,301) (7,896)
Depreciation and amortization 21,690 18,292 16,191
Amortization of cost in excess of net assets acquired and purchased mortgage
servicing rights 4,590 8,857 14,963
Loss on extinguishment of debt -- 10,476 --
Provision for loan losses 54,979 29,222 60,372
Net fundings of loans held for sale and/or securitization (390,634) (874,917) (903,941)
Proceeds from sales of trading securities 239,147 688,811 --
Proceeds from sales of loans and securities held for sale and/or securitization 2,188,531 2,276,391 1,946,826
Equity earnings from investments in limited partnerships (4,470) (391) (1,694)
Provision for losses on real estate held for investment or sale 26,321 14,052 30,415
(Gain) loss on sales of real estate held for investment or sale, net (14,412) (10,975) (9,503)
Gain on sale of investment securities, net -- -- (8,895)
(Gain) loss on sales of trading securities, net 600 (1,695) --
Gain on sales of credit card relationships, loans and mortgage-backed securities,
net (12,882) (30,522) (31,375)
Gain on sales of mortgage servicing rights, net (1,397) (5,833) (4,828)
Minority interest held by affiliates 5,721 3,963 6,582
Minority interest - other 9,750 9,750 4,334
(Increase) decrease in excess servicing assets (442) 2,375 1,976
(Increase) decrease in other assets (86,718) 25,441 (41,710)
Increase in other liabilities and accrued expenses 23,981 18,125 9,635
Increase in tax sharing payable 5,685 12,015 22,984
Other, net 3,176 10,276 6,920
------------- ------------- -------------
2,095,663 2,218,262 1,137,686
------------- ------------- -------------
Net cash provided by operating activities 2,099,987 2,207,403 1,134,537
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
REAL ESTATE
Capital expenditures - properties (6,270) (6,717) (7,465)
Property acquisitions (10,193) -- --
Property sales -- -- 3,780
Equity investment in unconsolidated entities (733) (9,769) (150)
Notes receivable - affiliates -- (12,675) --
Other investing activities 53 43 836
------------- ------------- -------------
(17,143) (29,118) (2,999)
------------- ------------- -------------
BANKING
Proceeds from maturities of investment securities 100 300 --
Proceeds from sales of loans 8 -- 4,954
Net proceeds from sales of real estate 133,300 94,308 150,115
Net proceeds from sales of mortgage servicing rights 2,232 5,833 5,978
Net fundings of loans receivable (2,295,077) (1,700,831) (463,919)
Principal collected on mortgage-backed securities 183,166 447,666 447,951
Purchases of investment securities -- -- (4,682)
Purchases of mortgage-backed securities (107,127) (291,335) (664,284)
Purchases of loans receivable (88,518) (256,608) (259,770)
Purchases of property and equipment (55,924) (22,503) (4,602)
Purchases of mortgage servicing rights (3,847) (888) (20,716)
Disbursements for real estate held for investment or sale (37,346) (58,063) (74,320)
Other investing activities, net (411) 4,840 4,117
------------- ------------- -------------
(2,269,444) (1,777,281) (879,178)
------------- ------------- -------------
Net cash used in investing activities (2,286,587) (1,806,399) (882,177)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Continued on following page.

F-8
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
B. F. SAUL REAL ESTATE INVESTMENT TRUST
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

Supplemental schedule of noncash investing and financing activities:
Rollovers of notes payable - unsecured 3,588 6,062 5,681
Loans receivable exchanged for mortgage-backed securities -- -- 51,956
Loans held for sale exchanged for trading securities 133,014 396,189 --
Loans held for sale exchanged for mortgage-backed securities held for sale -- -- 442,017
Mortgage-backed securities available-for-sale transferred to mortgage-backed
securities held-to-maturity 942,085 -- --
Mortgage-backed securities transferred to mortgage-backed securities
available-for-sale -- 1,501,192 --
Mortgage-backed securities transferred to loans and securities held for sale -- -- 131,390
Investment securities transferred to loans and securities held for sale -- -- 173,036
Investment securities transferred to investment securities available-for-sale -- 4,789 --
Investment securities available-for-sale transferred to investment securities
held-to-maturity 4,354 -- --
Real estate acquired in settlement of loans transferred to loans receivable -- 15,008 --
Real estate held for investment transferred to real estate held for sale 9,273 -- --
Loans receivable transferred to loans held for sale and/or securitization 2,387,690 1,446,924 440,361
Loans made in connection with the sale of real estate 10,826 16,401 54,061
Loans receivable transferred to real estate acquired in settlement of loans 9,822 4,106 23,158
Loans receivable exchanged for mortgage-backed securities held-to-maturity 23,155 -- --
Loans held for sale and/or securitization transferred to loans receivable 50,000 3,507 --
Loans classified as in-substance foreclosed transferred to loans receivable -- 15,008 --
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

F-9

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

B.F. Saul Real Estate Investment Trust and its wholly owned
subsidiaries (collectively, the "Real Estate Trust") operate as a
Maryland real estate investment trust. The principal business activity
of the Real Estate Trust is the ownership and development of
income-producing properties. 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 various undeveloped land parcels.

B.F. Saul Real Estate Investment Trust also owns 80% of the
outstanding common stock of Chevy Chase Bank, F.S.B., and its
subsidiaries (the "Bank" or the "Corporations"), whose assets
accounted for approximately 94% of the consolidated assets of the B.F.
Saul Real Estate Investment Trust and its consolidated subsidiaries
(the "Trust") at September 30, 1995. The Bank is a federally
chartered and federally insured stock savings bank. The B. F. Saul
Real Estate Investment Trust is a thrift holding company by virtue of
its ownership of a majority interest in the Bank and is subject to
regulation by the Office of Thrift Supervision ("OTS"). The accounting
and reporting practices of the Trust conform to generally accepted
accounting principles and, as appropriate, predominant practices
within the real estate and banking industries.

PRINCIPLES OF CONSOLIDATION

The accompanying financial statements include the accounts of the Real
Estate Trust and the Bank. 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 2.

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.

In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes" ("SFAS 109"). SFAS 109 establishes financial accounting
and reporting standards for the effects of income taxes that result
from the Trust's activities during the current and preceding years. It
requires an asset and liability approach in accounting for income
taxes versus the deferred method previously used under Accounting
Principles Board Opinion No. 11, "Accounting for Income Taxes" ("APB
11"). Under SFAS 109, deferred income taxes are recorded using
enacted tax laws and rates for the years in which taxes are expected
to be paid. To the extent that realization of such assets is more
likely than not, SFAS 109 provides for the recognition of deferred tax
assets based on tax loss and tax credit carryforwards. The Trust
adopted SFAS 109 on October 1, 1993 and recorded a cumulative effect
of a change in accounting principle of approximately $36.3 million.
The income tax provision for fiscal year 1993 was determined under APB
11 and has not been restated to reflect adoption of SFAS 109.

NET INCOME (LOSS) PER COMMON SHARE

Net income (loss) per common share is determined by dividing net
income (loss), after deducting preferred share dividend requirements,
by the weighted average number of common shares outstanding during the
year. For fiscal years 1995, 1994 and 1993, the weighted average
number of shares used in the calculation was 4,826,910.

F-10
<PAGE>

RECLASSIFICATIONS

Certain reclassifications have been made to the consolidated financial
statements for the years ended September 30, 1994 and 1993 to conform
with the presentation used for the year ended September 30, 1995.

ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED

SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), was
issued in March 1995. SFAS 121 establishes accounting standards
for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets, to be held and
used and for long-lived assets and certain identifiable intangibles
to be disposed of. It addresses how impairment losses should be
measured and when such losses should be recognized. Under SFAS
121, long-lived assets and certain identifiable intangibles to be
held and used shall be 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 entity shall recognize an
impairment loss. Measurement of an impairment loss for long-lived
assets and identifiable intangibles that an entity expects to hold
and use should be based on the fair value of the asset. Long-lived
assets and certain identifiable intangibles to be disposed of
should generally be reported at the lower of carrying amount or
fair value less the cost to sell. SFAS 121 is effective for
financial statements for fiscal years beginning after December 15,
1995. The adoption of SFAS 121 is not anticipated to have a
material impact on the Bank's financial condition or the results of
operations.

Statement of Position 94-6, "Disclosures of Significant Risks and
Uncertainties" ("SOP 94-6"), was issued in January 1995. SOP 94-6
requires an entity to disclose certain information about the nature
of its operations and use of estimates in the preparation of its
financial statements. In addition, if specified criteria are met,
it requires an entity to disclose certain information about certain
significant estimates and current vulnerability to risk due to
certain concentrations. SOP 94-6 is effective for financial
statements for fiscal years ending after December 15, 1995, and for
financial statements for interim periods in fiscal years subsequent
to the year for which SOP 94-6 is first applied.

F-11
<PAGE>

B. 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 to be
cash equivalents.

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 based on management's intent and ability to hold such
properties on a long term basis. Under the net realizable value
approach, management evaluates, on an ongoing basis, the
recoverability of the investment in each property by analyzing cash
flow after capital improvements to determine that such cash flow is
sufficient to recover the recorded investment in the property over its
expected useful life.

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. Expenditures for repairs and
maintenance are charged to operations as incurred.

In the initial rental operations of development projects, 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.

Depreciation is calculated using the straight-line method and
estimated useful lives of 31.5 to 47 years for buildings and up to 20
years for certain other improvements. Tenant improvements are
amortized over the lives of the related leases using the straight-line
method.

INCOME RECOGNITION

Rental and interest income are accrued as earned except when doubt
exists as to their collectibility, in which case accrual is
discontinued. When rentals vary from a straight-line basis due to
free rent periods or scheduled increases, income is recognized on a
straight-line basis. Additional rental income based on tenants' gross
revenues ("overage rent") is accrued on the basis of the prior year's
overage rents adjusted to give effect to currently available sales
data.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

CASH AND CASH EQUIVALENTS

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

F-12
<PAGE>

LIABILITIES

The carrying amount of mortgage notes payable and notes payable -
secured approximates their fair value since most of the debt has been
financed in recent periods at prevailing market interest rates. 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, 1995 and 1994 the fair value of Notes payable -
unsecured was $42.6 and $42.1 million, respectively.

F-13
<PAGE>

C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - THE BANK

The Bank 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, primarily credit
card loans.

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.

The Bank is required to maintain reserve balances with the Federal
Reserve Bank. Average reserves maintained at the Federal Reserve
Bank were $11.6, $20.6 and $21.8 million during the years ended
September 30, 1995, 1994 and 1993, respectively.

LOANS HELD FOR SALE:

The Bank engages in mortgage banking activities. At September 30,
1995 and 1994, loans held for sale are composed of single-family
residential loans originated or purchased for sale in the secondary
market and are carried at aggregate cost which is lower than
aggregate market value. 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 whole loans
held for sale are determined using the specific identification
method. See "Trading Securities" and Note 28.

LOANS HELD FOR SECURITIZATION AND SALE:

The Bank periodically securitizes and sells certain pools of loan
receivables in the public and private markets. These
securitizations are recorded as sales. Gains on the sale of loans
are limited to amounts related to loans existing at the date of sale
and do not include amounts related to future loans expected to be
sold during the reinvestment period, if any. In the case of credit
card receivables, because of the relatively short average life of
the loans, no gain or loss is recorded at the time of sale. Rather,
loan servicing fees are recognized monthly over the life of the
transaction when earned and transaction expenses are deferred and
amortized over the reinvestment period of the transaction as a
reduction of loan servicing fees. In the case of home equity credit
line and automobile loan receivables, gains or losses, net of
related transaction expenses, are recorded at the time of the sale
and the resultant excess servicing assets are amortized over the
life of the transaction.

Loans held for securitization and sale are the lesser of loans
eligible for securitization or loans that management contemplates to
securitize within six months. Such loans held for securitization
and sale are reported at the lower of aggregate cost or aggregate
market value for each asset type.

INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES:

Prior to October 1, 1993, the Bank's investment and mortgage-backed
securities were held for investment and stated at cost, adjusted for
amortization of premiums and accretion of discounts. These
securities were carried at amortized cost because the Bank had the
ability to hold such securities until maturity and it was
management's intent to hold such securities for the foreseeable
future. When management determined that certain securities might be
sold in response to changes in interest rates, changes in prepayment
risks or the need to increase regulatory capital, such securities
were transferred from the held for investment category to the held
for sale category. Such held for sale securities were transferred
in and carried at the lower of aggregate cost or aggregate market
value. Gains and losses resulting from the sale of investment and

F-14
<PAGE>

mortgage-backed securites were determined using the specific
identification method.

Prior to October 1, 1993, securities to be held for indefinite
periods of time, including securities that management intended to
use as part of its asset-liability management, or that could be sold
in response to changes in interest rates, changes in prepayment
risks, the need to increase regulatory capital or other similar
factors, were classified as held for sale and were carried at the
lower of aggregate cost or aggregate market value. Gains and losses
on sales of securities held for sale were determined using the
specific identification method.

Effective October 1, 1993, the Bank adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115") which was
issued in May 1993. SFAS 115 required institutions to classify and
account for debt and equity securities as either "held-to-maturity",
"available-for-sale" or "trading." Simultaneous with the adoption
of SFAS 115, the Bank classified all of the investment securities
and mortgage-backed securities it held on October 1, 1993, as
available-for-sale.

During fiscal 1995, the Bank transferred all of its investment
securities and mortgage-backed securities previously classified as
available-for-sale to held-to-maturity and, as a result, all
investment securities and mortgage-backed securities are classified
as held-to-maturity at September 30, 1995. These securities were
transferred at their fair value. Net unrealized holding losses, net
of the related income tax effect, amounting to $3.5 million as of
the date of the transfer, and $3.1 million as of September 30, 1995,
continue to be reported as a separate component of stockholders'
equity and are being amortized to income over the remaining lives of
the securities using the level-yield method.

Premiums and discounts on investment securities and mortgage-backed
securities are amortized or accreted using the level-yield method.
Realized gains and losses are determined using the specific
identification 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 to third party investors in the month of
issuance. In accordance with SFAS 115, these mortgage-backed
securities are classified as trading securities. Proceeds from
sales of trading securities were $239.1 and $688.8 million during
the years ended September 30, 1995 and 1994, respectively. The Bank
realized a net loss of $600,000 and a net gain of $1.7 million on
the sales of trading securities for the years ended September 30,
1995 and 1994, respectively. Gains and losses on sales of trading
securities are determined using the specific identification method.
There were no securities classified as trading securities at
September 30, 1995 and 1994.

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 level-yield or straight-line method. 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.

CREDIT CARD FEES AND COSTS:

Credit card membership fees are deferred and recognized as income on
a straight-line basis over the period the fee entitles the
cardholder to use the card, which is one year. Credit card
origination costs are deferred and recognized as a reduction of
income on a straight-line basis over the privilege period which is
generally one year.

F-15
<PAGE>

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. Such
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 accounted for
as loans. Certain credit card loans for which customers have agreed
to modified payment terms are also classified as impaired loans.

Each impaired real estate loan is evaluated individually to
determine the income recognition policy. Generally, payments
received are applied in accordance with the contractual terms of the
note or as a reduction of principal.

Interest income on impaired credit card loans is recognized using
the current interest rate of the loan and the accrual method. When
loans become 90 days past due, all accrued interest is reserved and
the loan is placed on non-accrual status. Interest income on
non-accrual credit card loans is recognized when received.

At September 30, 1995, the Bank had one impaired real estate loan
with a book value of $698,000. At September 30, 1994, the Bank had
no impaired real estate loans. At September 30, 1995 and 1994, the
Bank had impaired credit card loans with a carrying value of $36.7
million, before the related allowance for losses of $3.7 million,
and $35.3 million, before the related allowance for losses of $3.5
million, respectively. The Bank calculates its allowance for losses
on all credit card loans based upon historical charge-offs and
repayment experience and the age of the portfolio. The average
recorded investment in impaired credit card and real estate loans
for the year ended September 30, 1995 and 1994 was $33.5 and $39.0
million, respectively. The Bank recognized interest income of $5.3
and $2.4 million on its impaired loans for the years ended September
30, 1995 and 1994, respectively.

ALLOWANCES FOR LOSSES:

Management reviews the loan, real estate held for investment and
real estate held for sale portfolios to establish allowances for
estimated losses. The allowances for losses are reviewed
periodically, and allowances are provided after consideration of the
borrower's financial condition and/or the estimated value of
collateral, including estimated selling and holding costs.
Allowances are also provided by management after considering such
factors as the economy in lending areas, delinquency statistics,
past loss experience and estimated future loss experience.

The allowances for losses are based on estimates, and ultimate
losses may vary from current estimates. As adjustments to the
allowances 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.

F-16
<PAGE>

REAL ESTATE HELD FOR INVESTMENT OR SALE:

REAL ESTATE HELD FOR INVESTMENT:

At September 30, 1995, real estate held for investment consists of
developed land, which is owned by one of the Bank's subsidiaries.
At September 30, 1994, real estate held for investment consisted of
an office building, two apartment buildings, developed land and an
investment in a limited partnership all of which were owned by one
of the Bank's subsidiaries. Also included in real estate held for
investment at September 30, 1994, was a loan to a developer with a
50% profit participation feature. This investment in a real estate
venture, which was non-performing at September 30, 1994, was
accounted for as an acquisition, development and construction
("ADC") arrangement. Real estate held for investment is carried at
the lower of aggregate cost or net realizable value. See Note 12.

REAL ESTATE HELD FOR SALE:

Real estate held for sale consists of real estate acquired in
settlement of loans ("REO") and is recorded at the lower of cost or
fair value at acquisition. Effective December 31, 1992, OTS
regulations required that foreclosed assets be carried at the lower
of cost or fair value which required the Bank to adopt Statement of
Position 92-3, "Accounting for Foreclosed Assets" ("SOP 92-3"),
issued by the Accounting Standards Division of the American
Institute of Certified Public Accountants. Prior to December 31,
1992, real estate acquired in settlement of loans was carried at the
lower of adjusted cost or net realizable value. Costs relating to
the development and improvement of property, including interest, are
capitalized, whereas costs relating to the holding of property are
expensed. Capitalized interest amounted to $4.5, $4.4 and $10.2
million for the years ended September 30, 1995, 1994 and 1993,
respectively.

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. Major
improvements and alterations to office premises and leaseholds are
capitalized. Leasehold improvements are amortized over the shorter
of the terms of the respective leases (including renewal options
that are expected to be exercised) or 20 years. Maintenance and
repairs are charged to operating expenses as incurred.

COST IN EXCESS OF NET ASSETS ACQUIRED:

Cost in excess of net assets acquired is stated net of accumulated
amortization and is being amortized using the straight-line method
generally over a period of 15 years. Accumulated amortization was
$33.4 and $31.0 million at September 30, 1995 and 1994,
respectively.

MORTGAGE SERVICING RIGHTS:

Effective July 1, 1995, the Bank adopted SFAS No. 122, "Accounting
for Mortgage Servicing Rights" ("SFAS 122"), an amendment of SFAS
No. 65, "Accounting for Certain Mortgage Banking Activities." SFAS
122 requires that a mortgage banking enterprise recognize, as
separate assets, rights to service mortgage loans for others,
however those servicing rights are acquired. Under previous
accounting guidance, separate mortgage servicing assets were
generally recognized only when purchased. A mortgage banking
enterprise that acquires mortgage servicing rights through either
purchase or origination of mortgage loans and sells or securitizes
those loans with servicing rights retained must allocate the total
cost of the mortgage loans to the mortgage servicing rights and the
loans (without the mortgage servicing rights) based on their
relative fair values.

Mortgage servicing rights, which are stated net of accumulated
amortization, are being amortized in proportion to the remaining net
revenues estimated to be generated by the underlying mortgage
servicing

F-17
<PAGE>

rights. Amortization of these assets amounted to $2.2, $6.1
and $12.1 million for the years ended September 30, 1995, 1994
and 1993, respectively. Accumulated amortization was $39.9 and
$37.7 million at September 30, 1995 and 1994, respectively.
During fiscal 1995, 1994 and 1993, the Bank capitalized $16.3,
$0.9 and $20.7 million, respectively, related to the acquisition
of mortgage servicing rights. In fiscal 1993, the Bank sold
approximately $1.2 million of rights previously purchased to
service mortgage loans with principal balances of approximately
$76.1 million and recognized a loss of $380,000. There were no
sales of previously purchased mortgage servicing rights during
the years ended September 30, 1995 and 1994.

In fiscal 1995, 1994 and 1993, the Bank sold the rights to service
mortgage loans with principal balances of approximately $148.1,
$383.9 and $476.1 million, respectively, which were originated by
the Bank in connection with its mortgage banking activities, and
recognized gains of $1.4, $5.8, and $5.2 million, respectively.

SFAS 122 requires that a mortgage banking enterprise evaluate its
mortgage servicing rights for impairment based upon fair value. To
measure fair value of its mortgage servicing rights, the Bank uses
either quoted market prices or discounted cash flow analyses using
appropriate assumptions for servicing fee income, servicing fee
costs, prepayment rates and discount rates. Additionally, the Bank
stratifies its capitalized mortgage servicing rights for the purpose
of evaluating impairment taking into consideration relevant risk
characteristics including loan type, note rate and date of
acquisition. The fair value of capitalized mortgage servicing rights
at September 30, 1995 was $31.2 million and no impairment allowance
was required.

EXCESS SERVICING ASSETS:

When loans are sold with the servicing rights retained by the Bank,
the net present value of estimated future servicing income in excess
of normal servicing income is recorded as an adjustment to the sales
price of the loans. Estimated future losses are deducted in the
computation of such excess servicing income. The resulting assets
are amortized using the level-yield ("interest") method over the
estimated lives of the underlying loans. Amortization of these
assets amounted to $14.5, $13.5 and $21.4 million for the years
ended September 30, 1995, 1994 and 1993, respectively. Accumulated
amortization was $80.5 and $65.9 million at September 30, 1995 and
1994, respectively. Excess servicing assets capitalized in fiscal
1995, 1994 and 1993 of $15.0, $11.1 and $19.5 million respectively,
were the result of the servicing retained upon the securitization
and sale of home equity credit line receivables and automobile loan
receivables. See Note 15.

Management periodically evaluates the carrying value of excess
servicing assets taking into consideration current portfolio factors
such as prepayment rates. The Bank's analyses are performed on a
discounted basis based on pools of loans with similar
characteristics. Any adjustments to the carrying value of such
assets as a result of this evaluation are included in the
amortization for the respective period.

INTEREST RATE CAP AGREEMENTS:

Premiums paid for interest rate cap agreements are included in other
assets in the Consolidated Balance Sheets and are amortized to
expense over the terms of the interest rate caps on a straight-line
basis. Funds payable to the Bank are recognized as income in the
month such funds are earned. At September 30, 1995 unamortized
premiums amounted to $10.0 million. There were no interest rate cap
agreements in effect at September 30, 1994.

ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS:

SFAS No. 119, "Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments" ("SFAS 119"), was issued in
October 1994. This new statement requires certain disclosures about
financial derivatives, including amounts, nature and terms of the
instruments. The disclosure requires the description of the
objectives, strategies and classes of derivatives and related gains
and losses in the financial statements or in the notes thereto. It
also requires that a distinction be made between financial
instruments held or issued for trading purposes and those held or
issued for purposes other than trading. Disclosures required by SFAS 119
are effective for fiscal years ended after December 15, 1994. The Bank has
presented such disclosures in Note 28.

F-18
<PAGE>

1. LIQUIDITY AND CAPITAL RESOURCES - REAL ESTATE TRUST

Historically, the Real Estate Trust's total cash requirements have
exceeded the cash generated by its operations. As described below,
this condition persisted in 1995 and is expected to continue for the
foreseeable future. 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 ("Unsecured Notes") sold to the public (see Note 4),
interest payable on the Senior Secured Notes (as defined below), and
the payment of capital improvement costs. In the past, the Real Estate
Trust has funded such shortfalls through a combination of external
funding sources, primarily new financings (including sale of Unsecured
Notes), refinancings of maturing mortgage debt, asset sales and tax
sharing payments from the Bank.

The Real Estate Trust's ability to meet its liquidity needs, including
debt service payments, will depend in significant part on its receipts
of tax sharing payments from the Bank (pursuant to the Tax Sharing
Agreement dated June 28, 1990, as amended, among the Trust, the Bank
and their subsidiaries) and dividends from the Bank. The availability
and amount of dividends and tax sharing payments in future periods, is
dependent upon, among other things, the Bank's operating performance,
regulatory restrictions on such payments and (in the case of tax
sharing payments) the continued consolidation of the Bank and the
Trust for federal income tax purposes.

Management anticipates that the Trust will continue to file a
consolidated federal income tax return and that the Bank will operate
in a profitable manner enabling it to generate tax sharing payments.
Management also anticipates that such tax sharing payments will be
approved by the OTS in amounts sufficient to enable the Real Estate
Trust to meet its debt service and other liquidity needs. Nonetheless,
should tax sharing payments not be paid during the next twelve months,
management estimates that the Real Estate Trust has adequate liquidity,
including unencumbered cash balances and debt service escrow balances
related to the Senior Secured Notes sufficient to fund its cash flow
requirements, including debt service.

The Real Estate Trust's liquidity position was positively affected by
the issuance on March 30, 1994 of $175.0 million aggregate principal
amount of 11 5/8% Senior Secured Notes due 2002 (the "Senior Secured
Notes"). After paying offering expenses of $8.9 million, third-party
mortgage indebtedness of $74.1 million, and affiliate indebtedness of
$8.9 million, the Real Estate Trust retained $83.1 million of the net
proceeds of the offering for application to general corporate
purposes, including a loan to an affiliate of $15.0 million.
Approximately $25.8 million was deposited with the Trustee for the
Senior Secured Notes to satisfy one of the initial collateral
requirements. See Note 4. Concurrently with the application of the
net proceeds of the offering to repay third-party mortgage
indebtedness, the terms of certain of the mortgage loans repaid in
part were modified to waive deferred interest, reduce interest rates
and extend maturities. After the application of such net proceeds and
the modification of such loans, the final maturity of loans with total
balances of $111.1 million was 12 years and the final maturity of a
loan with a balance of $15.1 million was 15 years.

During fiscal 1994 and 1995, the Trust purchased 1,074,900 shares of
common stock of Saul Centers, Inc. (representing 9.0% of such
company's outstanding common stock) for approximately $18.1 million.
These shares have been deposited with the Trustee for the Senior
Secured Notes to satisfy in part the collateral requirements for those
securities, thereby permitting release to the Trust of a portion of
the cash on deposit with the Trustee.

The Senior Secured Notes are secured, general obligations of the
Trust ranking pari passu with all other unsubordinated obligations
of the Trust, including the Unsecured Notes. The Senior Secured
Notes are secured by a first-priority perfected security interest
in 80% of the issued and outstanding common stock of the Bank,
which 80% is owned by the Trust. The Indenture pursuant to which
the Senior Secured Notes were issued contains convenants that,
among other things, restrict the ability of the Trust and/or its
subsidiaries (excluding, in most cases, the Bank and the Bank's
subsidiaries) to incur additional indebtedness, make loans to
affiliates, make investments, sell assets, pay dividends or make
distributions to holders of the Trust's capital stock.

The Real Estate Trust's current program of public Unsecured Note sales
was initiated in the 1970's as a vehicle

F-19
<PAGE>

for supplementing other external funding sources. Unsecured Note
sales were suspended in June 1990, but resumed in November 1992.
The Real Estate Trust is currently selling Unsecured Notes
principally to pay outstanding Unsecured Notes as they mature. In
paying maturing Unsecured Notes with proceeds of new Unsecured Note
sales, the Real Estate Trust effectively is refinancing its
outstanding Unsecured Notes with similar new unsecured debt at
lower interest rates currently prevailing in today's market. 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 be
required to finance such repayments from other sources of funds.

The Bank has agreed not to make any additional tax sharing payments to
the Real Estate Trust without the prior approval of the OTS. In April
1993, the Bank successfully completed a $75 million offering of
preferred stock, which significantly strengthened the Bank's
regulatory capital ratios. This capital infusion, together with the
Bank's improved operating results, should enhance the prospects of the
Real Estate Trust to receive tax sharing payments and dividends from
the Bank in the future. In June 1993, after receiving approval of the
OTS, the Bank made a $5.0 million payment to the Real Estate Trust
pursuant to the tax sharing agreement between the Bank and the Real
Estate Trust. OTS approval of this payment was conditioned on a
pledge by or on behalf of the Real Estate Trust of certain assets to
secure certain of its obligations under the Tax Sharing Agreement.
Following execution of the pledge, the OTS approved, and the Bank made
tax sharing payments to the Real Estate Trust of $9.6 and $20.5
million during fiscal 1994 and 1995, respectively.

The Real Estate Trust has never received cash dividends from the Bank.
Receipt of cash dividends in the future will depend on the Bank's
earnings and regulatory capital levels, among other factors. The
Bank's written agreement with the OTS was amended in October 1993 to
eliminate the requirement that the Bank obtain the written approval of
the OTS before declaring or paying any dividends on its common stock.
Nonetheless, the OTS must be notified regarding dividends declared or
paid.

As the owner, directly and through a wholly owned subsidiary, of a
21.5% limited partnership interest in Saul Holdings Limited
Partnership (see Note 2), the Real Estate Trust shares in cash
distributions from operations and from capital transactions involving
the sale of properties. The partnership agreement provides for
quarterly cash distributions to the partners out of net cash flow.
During fiscal 1994 and 1995, the Real Estate Trust received
distributions in the amount of $4.6 and $5.5 million, respectively,
from Saul Holdings Limited Partnership.

In the fourth quarter of fiscal 1995, the Real Estate Trust
established a $15.0 million secured revolving credit line to provide
it with additional liquidity. The terms of this line are described in
Note 4.

While the Real Estate Trust's ability to satisfy its liquidity
requirements is contingent on future events, which include the sale of
new Unsecured Notes in amounts sufficient to finance most of the
scheduled maturities of outstanding unsecured Notes and the Bank's
ability to pay tax sharing payments and dividends, the Real Estate
Trust believes it will be able to consummate the transactions
described above as well as explore other financing opportunities in
order to raise sufficient proceeds to fund its liquidity requirements.

2. SAUL HOLDINGS LIMITED PARTNERSHIP - REAL ESTATE TRUST

In late August 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, Inc.
("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 Limited Partnership ("Saul Holdings"), in which the Real
Estate Trust owns (directly or through one of its wholly owned
subsidiaries) a 21.5% interest, other entities affiliated with the
Real Estate Trust own a 5.5% interest, and Saul Centers owns a 73.0%
interest. B. Francis Saul II, Chairman of the Board of Trustees of
the Trust, is also Chairman of the Board of Directors and Chief
Executive Officer of Saul Centers, which is the sole general partner
of Saul Holdings. The Real Estate Trust has pledged 62% of its
interest in Saul Holdings to the Bank related to payments under the
Tax Sharing Agreement.

F-20
<PAGE>

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 those of 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, 1995, the maximum
potential obligations of the Real Estate Trust and its subsidiaries
under this agreement totalled approximately $115.5 million.

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 as a result of the property disposition. 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), an amount of
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 21.5% ownership
interest. Recognition by the Real Estate Trust of the change in its
investment in the properties of approximately $107.8 million, from a
deficit of $104.3 million to $3.5 million, has been deferred due to
the Real Estate Trust's guarantee of $115.5 million under the Saul
Centers reimbursement agreement. The deferred gain of $107.8 million
is included in "Deferred gains - real estate" in the financial
statements. The gain will be recognized in future periods to the
extent the Real Estate Trust's obligations are terminated under the
reimbursement agreement.

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, 1995 that the total debt of Saul Centers remains
below fifty percent of total asset value. As a result, the Real Estate
Trust has concluded that fundings under the reimbursement agreement
are remote.

F-21
<PAGE>

In addition to the deferred gains, as of September 30, 1995, 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.

<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
Saul Holdings:
Distributions in excess of allocated net income $ (1,482)

Saul Centers:
Acquisition of common shares 18,052
Distributions in excess of allocated net income (963)
-----------
Total $ 15,607
===========
</TABLE>

The $15.6 million balance is included in "Other assets" in the
financial statements.

As of September 30, 1995, the Real Estate Trust, through its
partnership interest in Saul Holdings and its ownership of
1,074,900 common shares of Saul Centers, effectively owns 28.1% of
the consolidated entities of Saul Centers.

The Condensed Consolidated Balance Sheet at September 30, 1995 and
1994, and the Condensed Consolidated Statements of Operations for
the twelve-month periods ended September 30, 1995 and 1994, and
for the period August 27, 1993 through September 30, 1993 of Saul
Centers follow.

F-22
<PAGE>

SAUL CENTERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

<TABLE>
<CAPTION>
September 30,
-----------------------
(IN THOUSANDS) 1995 1994
- ------------------------------------------------------------- ----------- -----------
<S> <C> <C>
ASSETS
Real estate investments $ 315,221 $ 286,575
Accumulated depreciation (89,871) (81,307)
Other assets 44,181 47,667
----------- -----------
TOTAL ASSETS $ 269,531 $ 252,935
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 268,100 $ 237,517
Other liabilities 13,882 17,062
----------- -----------
Total liabilities 281,982 254,579
Total stockholders' equity (12,451) (1,644)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 269,531 $ 252,935
=========== ===========
</TABLE>

SAUL CENTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
For the August 27,
Twelve 1993
Months Ended through
September 30, September
----------------------- 30,
(IN THOUSANDS) 1995 1994 1993
- ------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
REVENUE
Base rent $ 46,606 $ 42,757 $ 3,854
Other revenue 14,173 13,192 1,014
----------- ----------- -----------
TOTAL REVENUE 60,779 55,949 4,868
----------- ----------- -----------

EXPENSES
Operating expenses 13,703 14,496 1,137
Interest expense 17,271 12,213 1,122
Amortization of deferred debt expense 2,254 2,599 275
Depreciation and amortization 9,996 9,101 806
General and administrative 2,967 2,789 181
----------- ----------- -----------
TOTAL EXPENSES 46,191 41,198 3,521
----------- ----------- -----------

Operating income before extraordinary
item and minority interest 14,588 14,751 1,347
Extraordinary item - loss on early
extinguishment of debt -- (3,341) (3,519)
----------- ----------- -----------
Net income (loss) before minority interest 14,588 11,410 (2,172)
Minority interest (6,855) (3,524) 586
----------- ----------- -----------
NET INCOME (LOSS) $ 7,733 $ 7,886 $ (1,586)
=========== =========== ===========
</TABLE>

F-23
<PAGE>

3. INVESTMENT PROPERTIES - REAL ESTATE TRUST

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

<TABLE>
<CAPTION>
Buildings
and Leashold Related
No. Land Improvements Interests Total Debt
--- ---------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
September 30, 1995:
Income-producing
properties
Hotels 10 $ 9,885 $ 112,764 $ -- $ 122,649 $ 79,745
Office and industrial 8 5,670 105,976 -- 111,646 81,871
Other 7 3,575 908 149 4,632 308
--- ---------- ------------ ----------- ----------- -----------
25 $ 19,130 $ 219,648 $ 149 $ 238,927 $ 161,924
=== ========== ============ =========== =========== ===========

Land parcels 10 $ 38,458 $ -- $ -- $ 38,458 $ 26,202
=== ========== ============ =========== =========== ===========

September 30, 1994:
Income-producing
properties
Hotels 9 $ 8,862 $ 103,298 $ -- $ 112,160 $ 74,911
Office and industrial 8 5,670 105,225 -- 110,895 85,433
Other 7 3,575 861 149 4,585 395
--- ---------- ------------ ----------- ----------- -----------
24 $ 18,107 $ 209,384 $ 149 $ 227,640 $ 160,739
=== ========== ============ =========== =========== ===========

Land parcels 10 $ 38,455 $ -- $ -- $ 38,455 $ 28,572
=== ========== ============ =========== =========== ===========
</TABLE>

4. DEBT - REAL ESTATE TRUST

Mortgage notes payable are secured by various income-producing
properties and land parcels. Almost all mortgage notes are payable in
monthly installments, have maturity dates ranging to 2009 and accrue
interest at annual rates from 7.6% to 10.0%. Certain mortgages contain
a number of restrictions, including cross default provisions.

The Real Estate Trust obtained a $5.0 million secured loan from an
affiliate in August 1992. Interest accrued at prime plus 1.5%. The
loan was repaid during fiscal 1994.

In December 1992, the Trust completed the sale to an institutional
investor, for $25 million, of 100% of the preferred stock of a newly
organized Trust subsidiary to which the Trust contributed certain real
estate and other assets. The assets contributed included six shopping
centers and one office building, several parcels of unencumbered raw
land, and a capital note in the amount of $58 million secured by a
junior lien on 30% of the Bank's stock. The net proceeds of the
transaction were lent by the subsidiary to the Trust in exchange for
notes of the Trust secured by specified real estate properties and other
assets of the Trust (the "Trust Notes"). Such proceeds were applied by
the Trust for its general corporate purposes, with approximately $2.3
million of such proceeds being reserved for capital improvements to
certain of the real estate properties contributed to the new subsidiary.
In late August 1993, the Real Estate Trust was relieved of approximately
$196 million in mortgage debt and deferred interest in connection with
the formation of Saul Holdings (See Note 2). As a part of this
transaction, the preferred stock issued to the institutional investor
was redeemed in exchange for the Trust Notes and the pledge of all of
the stock of the Trust subsidiary, together with $60 million, at their
then-market value, of the Real Estate Trust's partnership interests in
Saul Holdings. During fiscal 1994, the Trust Notes were repaid and the
collateral was released.

On March 30, 1994, the Real Estate Trust issued $175.0 million aggregate
principal amount of its Senior Secured

F-24
<PAGE>

Notes. The Senior Secured Notes are general obligations of the Real
Estate Trust ranking pari passu with all other unsubordinated
obligations of the Trust and are secured by a first priority
perfected security interest in 80% (8,000 shares) of the issued and
outstanding common stock of the Bank and by certain other assets of
the Trust as described herein. After paying offering expenses of
$8.9 million, third-party mortgage indebtedness of $74.1 million,
and affiliate indebtedness of $8.9 million, the Real Estate Trust
retained $83.1 million of the net proceeds of the offering for
application to general corporate purposes, including a loan to an
affiliate of $15.0 million. Of the remaining amount, approximately
$25.8 million was deposited with the Trustee for the Senior Secured
Notes to satisfy one of the initial collateral requirements with
respect to such securities. This collateral requirement, which will
remain in effect as long as any Senior Secured Notes are
outstanding, will be recalculated each calendar quarter based on
the estimated amount of one year's interest payments on then
outstanding Senior Secured Notes and Unsecured Notes. Concurrently
with the application of the net proceeds of the offering to repay
third-party mortgage indebtedness, the terms of certain of the
mortgage loans repaid in part were modified to waive deferred
interest, reduce interest rates and extend maturities. After the
application of such net proceeds and the modification of such
loans, the final maturity of loans with total balances of $111.1
million was 12 years and the final maturity of a loan with a
balance of $15.1 million was 15 years. During fiscal 1994 and
fiscal 1995, the Real Estate Trust purchased 1,074,900 shares of
common stock of Saul Centers (representing 9.0% of such company's
outstanding stock) for approximately $18.1 million. These shares
have been deposited with the Trustee for the Senior Secured Notes
to satisfy in part the collateral requirements for those
securities, thereby permitting release to the Trust of a portion of
the cash on deposit with the Trustee. The Senior Secured Notes may be
redeemed in whole or in part at any time on or after April 1, 1998,
subject to, among other things, prepayment premiums.

In the fourth quarter of fiscal 1995, the Real Estate Trust established
a $15.0 million secured revolving credit line with a bank. This facility
is for a two-year period and may be extended for one or more additional
one- year terms. Interest is computed by reference to a floating rate
index. As collateral for the facility, the Real Estate Trust has pledged
30.5% of its interest in Saul Holdings. Borrowings under the facility at
year end totalled $500,000 and unrestricted availability amounted to
$14.5 million.

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. Notes sold
after November 14, 1986, are subject to a provision permitting the Real
Estate Trust to call them prior to maturity. The weighted average
interest rates at September 30, 1995 and 1994 were 10.5% and 11.1%,
respectively. During fiscal 1994 and 1995, the Real Estate Trust sold
notes amounting to approximately $15.7 and $8.0 million, respectively.

The maturity schedule for the Real Estate Trust's outstanding debt at
September 30, 1995 for the fiscal years commencing October 1, 1995 is
set forth in the following table.

<TABLE>
<CAPTION>
Debt Maturity Schedule
(In thousands)
------------------------------------------------------------------
Notes Notes
Fiscal Mortgage Payable- Payable-
Year Notes Secured Unsecured Total
--------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
1996 $ 7,463 $ -- $ 6,123 $ 13,586
1997 21,691 500 5,606 27,797
1998 7,413 -- 7,262 14,675
1999 17,076 -- 12,984 30,060
2000 18,855 -- 5,864 24,719
Thereafter 112,004 175,000 3,218 290,222
---------- ------------ ----------- -----------
Total $ 184,502 $ 175,500 $ 41,057 $ 401,059
========== ============ =========== ===========
</TABLE>

5. LONG-TERM LEASE OBLIGATIONS - REAL ESTATE TRUST

The Real Estate Trust has one noncancelable long-term lease which
provides for periodic adjustments of the basic annual rent. This lease
will expire in 2061. The minimum future rental commitments under
this lease

F-25
<PAGE>

amount to $101,000 per year for the next five fiscal years; thereafter,
the total commitment is $6.0 million.

The Consolidated Statements of Operations contain minimum ground rent
expense of $101,000, $102,000 and $286,000 in fiscal 1995, 1994 and
1993, respectively. In addition to the minimum ground rent payments,
real estate taxes on the land are an obligation of the Real Estate Trust.

6. INCOME FROM COMMERCIAL PROPERTIES - REAL ESTATE TRUST

This income classification includes minimum and overage rent arising
from noncancelable commercial leases. Minimum rent for fiscal years
1995, 1994, and 1993 amounted to $17.9, $15.9 and $38.0 million,
respectively. Overage rent for these periods amounted to $0.3, $0.3 and
$2.7 million, respectively. Future minimum rentals as of September 30,
1995 under noncancelable leases are as follows:

<TABLE>
<CAPTION>
Fiscal
Year (In thousands)
--------------------------------------------
<S> <C>
1996 $ 12,554
1997 9,756
1998 7,275
1999 4,956
2000 2,281
Thereafter 5,185
--------------------------------------------
</TABLE>

7. TRANSACTIONS WITH RELATED PARTIES - REAL ESTATE TRUST

TRANSACTIONS WITH B. F. SAUL COMPANY AND ITS SUBSIDIARIES

The Real Estate Trust is managed by B. F. Saul Advisory Company (the
"Advisor"), a wholly-owned subsidiary of B. F. Saul Company ("Saul
Co."). All of the Real Estate Trust officers and three 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 $97,000 during the period October through December
1992, $157,000 during the period January 1993 through September 1993,
$250,000 during the period October 1993 through March 1994, and $292,000
during the period April 1994 through September 1995. The advisory
contract has been extended until September 30, 1996, and will continue
thereafter unless cancelled by either party at the end of any contract
year. Certain loan agreements prohibit termination of this contract.

Saul Co. and Franklin Property Company ("Franklin"), a wholly-owned
subsidiary of Saul Co., 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. The fee schedules for providing those
services by Saul Co. and Franklin are reviewed and approved by the
Trustees after comparison with rates charged by competitive firms for
comparable services in the various market areas. Fees paid to Saul Co.
and Franklin amounted to $4.8, $4.5 and $7.7 million in fiscal 1995,
1994 and 1993, respectively. The Real Estate Trust reimburses the
Advisor and Franklin 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 for all travel expenses
incurred in connection with the affairs of the Real Estate Trust.

The Real Estate Trust pays the Advisor fees equal to 1% of the principal
amount of the unsecured notes as they are issued to offset its costs of
administering the program. These payments amounted to $80,000, $157,000
and $118,000 in fiscal 1995, 1994 and 1993, 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 $158,000, $157,000 and $221,000 in fiscal 1995, 1994 and
1993, respectively.

F-26
<PAGE>

The Real Estate Trust had a working capital loan from the Saul Co.
of approximately $3.3 million as of September 30, 1993, bearing
interest of 1/2 percent over prime per annum. The funds were used
for general operating purposes and the loan was satisfied in March
1994. Interest paid on this loan in fiscal 1994 and 1993 amounted
to $139,000 and $365,000, respectively. In April 1994 the Real
Estate Trust made an unsecured loan to the Saul Company of $15.0
million bearing interest at 1/2 percent over prime and due on
demand. In fiscal 1995 the loan balance was reduced to $12.7
million. Interest paid on this loan in fiscal 1995 and 1994
amounted to $1,180,000 and $565,000, respectively.

TRANSACTIONS WITH OTHER AFFILIATES

The Real Estate Trust obtained a $5.0 million secured loan from The
Klingle Corporation in August 1992, which was repaid during fiscal 1994.
It accrued interest at a rate of prime plus 1.5%. The Real Estate Trust
incurred interest expense of $193,000 and $365,000 during fiscal 1994
and 1993, respectively.

REMUNERATION OF TRUSTEES AND OFFICERS

For fiscal years 1995, 1994, and 1993, the Real Estate Trust paid the
Trustees $81,000, $76,000 and $79,000, 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 and Chief Executive Officer of the Bank, and two
received payments for their services as directors of the Bank. Three of
the Trustees and all of the officers of the Real Estate Trust receive
compensation from Saul Co. as directors and/or officers.

LEGAL SERVICES

The law firm in which one of the Trustees is a partner received $0.8,
$1.3 and $1.2 million, excluding expense reimbursements, during fiscal
1995, 1994, and 1993, respectively, for legal services to the Real
Estate Trust and its wholly-owned subsidiaries.

SALE OF AVENEL BUSINESS PARK-PHASE I

In 1984, the Real Estate Trust sold Avenel Business Park-Phase I to an
affiliate, Avenel Associates Limited Partnership (the"Partnership"), for
$8.9 million based on an independent appraisal. The managing general
partner of the Partnership was a subsidiary of Saul Co., and a
subsidiary of the Bank owned a 45% interest in the Partnership. The
Real Estate Trust received the sales price for the property in the form
of cash, a purchase money note in the amount of $1,735,000 and the
assumption of a first trust loan. The net gain realized upon the sale
was $3,023,000, after deducting a $781,000 discount of the purchase
money note due to its below market interest rate. The Real Estate Trust
has continued to defer recognition of this gain pending a sale of the
property to an unaffiliated entity.

In late August 1993, the Partnership sold Avenel Business Park-Phase I
to Saul Holdings and redeemed the purchase money note held by the Real
Estate Trust. The gain has continued to be deferred in accordance with
the accounting policy for gain recognition described in Note 2.

SAUL HOLDINGS LIMITED PARTNERSHIP

See Note 2 for a description of this partnership. The Real Estate Trust
accounts for this investment under the equity method. The Real Estate
Trust's share of earnings for fiscal 1995 and 1994 were $3.1 and $2.4
million, respectively. The Real Estate Trust's share of losses for Saul
Holdings for its initial period of operations, August 27, 1993 through
September 30, 1993, was $467,000.

F-27
<PAGE>

OTHER TRANSACTIONS

The Real Estate Trust leases space to the Bank, Franklin and Saul Co. at
several of its income-producing properties. Minimum rents and
recoveries paid by these affiliates amounted to approximately $55,000,
$51,000 and $460,000, in fiscal 1995, 1994 and 1993, respectively.

8. LOANS HELD FOR SECURITIZATION AND SALE - THE BANK

Loans held for securitization and sale are composed of the following:

<TABLE>
<CAPTION>
September 30, September 30,
(In thousands) 1995 1994
---------------------------- ------------ -----------
<S> <C> <C>
Credit card receivables $ 300,000 $ 115,000
Automobile loan receivables 200,000 --
------------ -----------
Total $ 500,000 $ 115,000
============ ===========
</TABLE>

9. INVESTMENT SECURITIES - THE BANK

At September 30, 1995, all investment securities are classified as
held-to-maturity. Gross unrealized holding gains and losses on the
Bank's investment securities at September 30, 1995 are as follows:

<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
(In thousands) Cost Gains Losses Value
- --------------------------------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
September 30, 1995
U.S. Government securities
Maturing within one year $ 4,370 $ 1 $ -- $ 4,371
============ =========== =========== ===========
</TABLE>

As discussed in Note 1, at September 30, 1994, investment securities
were classified as available-for-sale and carried at fair value. Gross
unrealized holding gains and losses on the Bank's investment securities
at September 30, 1994 are as follows:

<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
(In thousands) Cost Gains Losses Value
- --------------------------------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
September 30, 1994
U.S. Government securities $ 4,399 $ -- $ (135) $ 4,264
Other securities 100 -- -- 100
------------ ----------- ----------- -----------
Total $ 4,499 $ -- $ (135) $ 4,364
============ =========== =========== ===========
</TABLE>

Proceeds from sales of investment securities, including securities held
for sale, during fiscal 1993 were $181.8 million. Gross gains of $8.9
million and gross losses of $0 were realized on sales during fiscal 1993.
There were no sales of investment securities during the years ended
September 30, 1995 and 1994.

At September 30, 1995, certain investment securities were pledged as
collateral for certain letters of credit. See Note 28.

F-28
<PAGE>

10. MORTGAGE-BACKED SECURITIES - THE BANK

At September 30, 1995, all mortgage-backed securities are classified as
held-to-maturity. Gross unrealized holding gains and losses on the
Bank's mortgage-backed securities at September 30, 1995 are as follows:

<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
(In thousands) Cost Gains Losses Value
- --------------------------------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
September 30, 1995
FNMA $ 27,182 $ 50 $ (13) $ 27,219
FHLMC 718,640 833 (1,689) 717,784
Private label, AA-rated 134,386 364 (33) 134,717
------------ ----------- ----------- -----------
Total $ 880,208 $ 1,247 $ (1,735) $ 879,720
============ =========== =========== ===========
</TABLE>

As discussed in Note 1, at September 30, 1994, mortgage-backed
securities were classified as available-for-sale and carried at fair
value. Gross unrealized holding gains and losses on the Bank's
mortgage-backed securities at September 30, 1994 are as follows:

<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
(In thousands) Cost Gains Losses Value
- --------------------------------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
September 30, 1994
FNMA $ 34,896 $ 39 $ (454) $ 34,481
FHLMC 834,516 545 (24,143) 810,918
Private label, AA-rated 179,349 798 (21) 180,126
------------ ----------- ----------- -----------
Total $ 1,048,761 $ 1,382 $ (24,618) $1,025,525
============ =========== =========== ===========
</TABLE>

Proceeds from sales of mortgage-backed securities, including
mortgage-backed securities held for sale, were $810.8 million during the
year ended September 30, 1993. Gross gains of $10.2 million and gross
losses of $4.4 million were realized on the sale of mortgage-backed
securities, including mortgage-backed securities held for sale, during
the year ended September 30, 1993. There were no sales of
mortgage-backed securities from the available-for-sale or the
held-to-maturity portfolios during the years ended September 30, 1995
and 1994. See "Summary of Significant Accounting Policies - Trading
Securities."

Accrued interest receivable on mortgage-backed securities totaled $5.7
and $6.3 million at September 30, 1995 and 1994, respectively, and is
included in other assets in the Consolidated Balance Sheets.

At September 30, 1995, certain mortgage-backed securities were pledged
as collateral for securities sold under repurchase agreements, other
short-term borrowings and other recourse arrangements. See Notes 19 and
28. Other mortgage-backed securities with a book value of $22.3 million
were pledged as collateral primarily for credit card settlement
obligations.

F-29
<PAGE>

11. LOANS RECEIVABLE - THE BANK

Loans receivable is composed of the following:

<TABLE>
<CAPTION>
September 30,
-----------------------
(In thousands) 1995 1994
-------------------------------------------------- ----------- -----------
<S> <C> <C>
Single-family residential $1,322,772 $1,335,645
Home equity 29,024 34,708
Commercial and multifamily 86,007 84,639
Real estate construction 46,848 66,909
Ground 6,892 18,935
Credit card 712,548 535,199
Automobile 39,217 289,346
Overdraft lines of credit 15,049 8,365
Home improvement 112,705 37,526
Other 31,975 22,572
----------- -----------
2,403,037 2,433,844
----------- -----------
Less:
Undisbursed portion of loans 28,147 35,535
Unearned discounts 1,101 1,438
Net deferred loan origination costs (13,929) (10,932)
Reserve for losses on loans 60,496 50,205
----------- -----------
75,815 76,246
----------- -----------
Total $2,327,222 $2,357,598
=========== ===========
</TABLE>

The Bank serviced loans owned by others amounting to $5,250.8 and $3,943.8
million at September 30, 1995 and 1994, respectively.

Accrued interest receivable on loans totaled $21.9 and $17.1 million at
September 30, 1995 and 1994, respectively, and is included in other assets
in the Consolidated Balance Sheets.

12. REAL ESTATE HELD FOR INVESTMENT OR SALE - THE BANK

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

<TABLE>
<CAPTION>
September 30,
-----------------------
(In thousands) 1995 1994
-------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Land, development, construction
and rental properties $ 3,819 $ 69,767
Investment in limited partnership -- (2,478)
Investment in real estate venture -- 8,915
----------- -----------
Total real estate held for investment 3,819 76,204
----------- -----------

Real estate held for sale 354,277 387,024
----------- -----------

Less:
Reserve for losses on real estate held
for investment 193 9,899
Reserve for losses on real estate held for sale 135,043 109,074
Accumulated depreciation and amortization -- 13,600
----------- -----------
135,236 132,573
----------- -----------

Total real estate held for investment or sale $ 222,860 $ 330,655
=========== ===========
</TABLE>

F-30
<PAGE>

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

<TABLE>
<CAPTION>
September 30,
-----------------------------------
(In thousands) 1995 1994 1993
-------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Provision for losses $ (26,321) $ (14,052) $ (30,415)
Net income from operating properties 2,382 3,521 6,496
Equity earnings from investments in
limited partnerships 4,470 391 1,694
Net gain on sales 14,412 10,975 9,503
----------- ----------- -----------
Total $ (5,057) $ 835 $ (12,722)
=========== =========== ===========
</TABLE>

During fiscal 1995, the Bank sold two residential apartment buildings which
were previously classified as real estate held for investment and had an
aggregate net book value of $25.3 million and recognized a net gain of $5.3
million. Also during fiscal 1995, an office building, previously
classified as real estate held for investment, which had a book value of
$24.5 million at September 30, 1995, was transferred to property and
equipment as management plans to use a significant portion of the building
to satisfy the Bank's current and anticipated need for additional office
space. In addition, during fiscal 1995, the investment in real estate
venture was transferred to REO and the Bank sold its limited partnership
interest in an office building at an amount that exceeded its net carrying
value.

During fiscal 1994, the Bank sold its interests in three limited
partnerships to other partners at an aggregate amount that exceeded the net
carrying values of these assets.

At September 30, 1994, the Bank had an ADC arrangement with, and held a
partnership interest in, a limited partnership. As discussed above, the
Bank sold its limited partnership interest and transferred its ADC
arrangement to REO during fiscal 1995. The partnership and ADC arrangement
were initially formed for the purpose of acquiring, developing, operating
and selling real estate and were accounted for under the equity method with
profits and losses allocated proportionately among the partnership
interests. At September 30, 1994, there were no outstanding commitments,
lines of credit or other arrangements between the Bank and the partnership
relating to these investments other than reflected below. Combined,
condensed financial information for the partnerships and ADC arrangement is
presented below:

BALANCE SHEETS

<TABLE>
<CAPTION>
September 30,
(In thousands) 1994
- ---------------------------------------------------------------- ------------
<S> <C>
ASSETS
Land, buildings, construction in progress
and other assets $ 49,567
============
LIABILITIES AND PARTNERSHIP EQUITY
Notes payable to the Corporations $ 8,915
Other liabilities 46,546
Partnership (deficit) equity:
-Corporations (2,920)
-Others (2,974)
------------
$ 49,567
============
</TABLE>

F-31
<PAGE>

STATEMENTS OF OPERATIONS (1)

<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------
(In thousands) 1994 1993
- ---------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Income $ 7,280 $ 12,492
Expenses (7,360) (13,669)
Gain on sales of property -- 4,892
----------- -----------
Net income (loss) $ (80) $ 3,715
=========== ===========
</TABLE>

(1) There were no significant operations during fiscal 1995.

Prior to fiscal 1995, with respect to the ADC arrangement, the limited
partnership classified the Bank's investment in the real estate project as
a liability payable to the Bank rather than as equity.

13. ALLOWANCES FOR LOSSES - THE BANK

Activity in the allowances for losses on loans receivable and real estate
held for investment or sale is summarized as follows:

<TABLE>
<CAPTION>
Real Estate
Held for
Loans Investment
(In thousands) Receivable or Sale
-------------------------------------------------- ----------- -----------
<S> <C> <C>
Balance, September 30, 1992 $ 78,818 $ 109,044
Provision for losses 60,372 30,415
Charge-offs (84,890) (27,815)
Recoveries 13,740 --
----------- -----------
Balance, September 30, 1993 68,040 111,644
Provision for losses 29,222 14,052
Charge-offs (61,039) (6,723)
Recoveries 13,982 --
----------- -----------
Balance, September 30, 1994 50,205 118,973
Provision for losses 54,979 26,321
Charge-offs (56,577) (10,058)
Recoveries 11,889 --
----------- -----------
Balance, September 30, 1995 $ 60,496 $ 135,236
=========== ===========
</TABLE>

The allowances for losses at September 30, 1995 are based on management's
estimates of the amount of allowances required to reflect the risks in the
loan and real estate portfolios based on circumstances and conditions known
at the time. As adjustments to the allowances become necessary, provisions
for losses are reported in operations in the periods they are determined to
be necessary.

F-32
<PAGE>

14. NON-PERFORMING ASSETS - THE BANK

Non-performing assets are composed of the following at September 30, 1995:

<TABLE>
<CAPTION>
Non-accrual Real
(Dollars in thousands) Loans Estate (1) Total
-------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Single-family residential $ 8,593 $ 3,532 $ 12,125
Residential land, development and construction -- 197,424 197,424
Office building 194 -- 194
Commercial land -- 18,278 18,278
----------- ----------- -----------
Total real estate assets 8,787 219,234 228,021
Credit card 18,569 -- 18,569
Other 595 -- 595
----------- ----------- -----------
Total non-performing assets $ 27,951 $ 219,234 $ 247,185
=========== =========== ===========
Reserves for Losses
Real estate $ 10,880 $ 135,236 $ 146,116
Credit card 46,325 -- 46,325
Other 3,291 -- 3,291
----------- ----------- -----------
Total $ 60,496 $ 135,236 $ 195,732
=========== =========== ===========

Reserves for Losses as a Percentage of
Non-Performing Assets (2)
Real estate 123.82% 38.17% 40.25%
Credit card 249.47% -- 249.47%
Other 553.11% -- 553.11%
----------- ----------- -----------
Total 216.44% 38.17% 51.21%
=========== =========== ===========
</TABLE>

(1) Real estate acquired in settlement of loans is shown net of valuation
allowances.
(2) The ratio of reserves for losses to non-performing assets is calculated
before the deduction of such reserves.

Approximately 24.7% of the Bank's non-performing credit card loans are
located in the Washington, D.C. metropolitan area. In general, the Bank's
remaining non-performing assets are located in the Washington, D.C.
metropolitan area, including approximately 58.4% located in Loudoun County,
Virginia.

The ultimate collection or realization of the Bank's non-performing assets
will be primarily dependent on the general economic conditions in the
Washington, D.C. metropolitan area. Based upon current economic conditions
and other factors, the Bank has provided loss allowances and initial
write-downs for real estate acquired in settlement of loans. See Note 13.
As circumstances change, it may be necessary to provide additional
allowances based on new information.

At September 30, 1995 and 1994, the Bank had $15.8 and $29.1 million,
respectively, of loans accounted for as troubled debt restructurings, all
of which were included as performing loans. At September 30, 1995, the
Bank had commitments to lend $1.1 million of additional funds on loans
which have been restructured.

The amount of interest income that would have been recorded if non-accrual
assets and restructured loans had been current in accordance with their
original terms was $7.2, $9.1 and $10.5 million for the years ended
September 30, 1995, 1994 and 1993, respectively. The amount of interest
income that was recorded on these loans was $2.0, $2.7 and $3.0 million for
the years ended September 30, 1995, 1994 and 1993, respectively.

F-33
<PAGE>

15. SIGNIFICANT SALES TRANSACTIONS - THE BANK

The Bank periodically sells credit card receivables through asset-backed
securitizations, in which credit card receivables are transferred to
trusts, and the Bank sells certificates to investors representing ownership
interests in the trusts. The Bank sold and received gross proceeds of
$1,550.0, $1,350.0 and $350.0 million for these asset-backed certificates
during the years ended September 30, 1995, 1994 and 1993, respectively. No
gains or losses were recorded on the transactions; however, excess
servicing fees are recognized over the related lives of the transactions.
Outstanding trust certificate balances related to these and previous
securitizations were $3,226.3 and $1,953.8 million at September 30, 1995
and 1994, respectively. The related receivable balances contained in the
trusts were $3,776.9 and $2,330.9 million at September 30, 1995 and 1994,
respectively. The Bank continues to service the underlying loans and is
contingently liable under various credit enhancement facilities related to
these transactions. See Note 28.

During fiscal 1995, the Bank sold amounts on deposit in certain spread
accounts associated with certain outstanding credit card securitizations
through an asset-backed securitization, in which amounts on deposit in such
spread accounts were transferred to a trust, and the Bank sold certificates
to investors representing ownership interests in the trust. The amount of
the asset-backed certificates sold and gross proceeds received was $59.2
million. No gain or loss was recorded on the transaction. The outstanding
trust certificate balance related to this securitization was $58.7 million
at September 30, 1995.

During fiscal 1994, the Bank sold credit card relationships with related
outstanding receivable balances of $96.5 million. Gains of $16.9 million
were recorded in connection with this sale for the year ended September 30,
1994, and the Bank is no longer servicing these relationships. No such
sales occurred during the years ended September 30, 1995 and 1993.

The Bank periodically sells home equity credit line receivables through
asset-backed securitizations, in which home equity credit line receivables
are transferred to trusts, and the Bank sells certificates to investors
representing ownership interests in the trusts. The amount of asset-backed
certificates sold and gross proceeds received was $150.5, $181.9 and $340.4
million, during the years ended September 30, 1995, 1994 and 1993,
respectively. Gains recognized on these transactions were $7.6, $9.5 and
$16.8 million, during the years ended September 30, 1995, 1994 and 1993,
respectively, and the Bank continues to service the underlying loans. The
outstanding trust certificate balances and the related receivable balances
contained in the trusts were $455.8 and $464.7 million, respectively, at
September 30, 1995. The outstanding trust certificate balances and the
related receivable balances contained in the trusts were $485.4 million at
September 30, 1994. The Bank is contingently liable under various credit
enhancement facilities related to these transactions. See Note 28.

During fiscal 1995, the Bank sold automobile loan receivables through an
asset-backed securitization, in which automobile loan receivables were
transferred to a trust, and the Bank sold certificates to investors
representing ownership interests in the trust. The amount of asset-backed
certificates sold and gross proceeds received was $252.2 million. The gain
recognized on this transaction was $4.0 million, and the Bank continues to
service the underlying loans. The outstanding trust certificate balances
and the related receivable balances contained in the trust were $218.3
million at September 30, 1995. The Bank is contingently liable under a
credit enhancement facility related to this transaction. See Note 28.

F-34
<PAGE>

16. PROPERTY AND EQUIPMENT - THE BANK

Property and equipment is composed of the following:

<TABLE>
<CAPTION>
Estimated September 30,
Useful -----------------------
(Dollars in thousands) Lives 1995 1994
------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Land - $ 38,616 $ 24,035
Construction in progress - 6,446 1,532
Buildings and improvements 10-45 years 63,189 48,411
Leasehold improvements 5-20 years 66,043 52,987
Furniture and equipment 5-10 years 131,001 121,947
Automobiles 3-5 years 1,801 1,366
----------- -----------
307,096 250,278
Less:
Accumulated depreciation and amortization 126,658 105,870
----------- -----------
Total $ 180,438 $ 144,408
=========== ===========
</TABLE>

Depreciation expense amounted to $19.1, $18.5 and $14.8 million for the
years ended September 30, 1995, 1994 and 1993, respectively.

During fiscal 1995, an office building previously classified as real estate
held for investment was transferred to property and equipment as management
plans to use a significant portion of the building to satisfy the Bank's
current and anticipated need for additional office space. This asset had a
book value of $24.5 million at September 30, 1995.

17. LEASES - THE BANK

The Corporations have noncancelable, long-term leases for office premises
and retail space, which have a variety of terms expiring from 1996 to 2019
and ground leases which have terms expiring from 2029 to 2080. 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, 1995:

<TABLE>
<CAPTION>
Year Ending
September 30, (In thousands)
------------- --------------
<S> <C>
1996 $ 14,772
1997 11,954
1998 10,020
1999 8,028
2000 6,763
Thereafter 54,934
----------
Total $ 106,471
==========
</TABLE>

Rent expense totaled $11.2, $9.7 and $9.2 million for the years ended
September 30, 1995, 1994 and 1993, respectively.

F-35
<PAGE>

18. DEPOSIT ACCOUNTS - THE BANK

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

<TABLE>
<CAPTION>
September 30,
------------------------------------------------
1995 1994
------------------------ -----------------------
Weighted Weighted
Average Average
(Dollars in thousands) Amount Rate Amount Rate
------------------------------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Demand accounts $ 123,141 -- $ 94,600 --
NOW accounts 826,977 2.91% 823,627 2.95%
Money market deposit accounts 984,257 4.02% 1,104,730 3.84%
Statement savings accounts 872,366 3.48% 1,201,141 3.49%
Other deposit accounts 61,011 2.98% 57,696 2.99%
Certificate accounts, less than $100 1,112,817 5.80% 657,134 4.13%
Certificate accounts, $100 or more 178,683 5.99% 69,833 4.52%
------------ -----------
Total $ 4,159,252 4.11% $4,008,761 3.51%
============ ===========
</TABLE>

Interest expense on deposit accounts is composed of the following:

<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
(In thousands) 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
NOW accounts $ 23,692 $ 23,147 $ 18,523
Money market deposit accounts 42,420 37,305 39,430
Statement savings accounts 33,394 39,147 26,598
Other deposit accounts 1,731 1,573 1,381
Certificate accounts 53,033 29,723 41,813
----------- ----------- -----------
154,270 130,895 127,745
Custodial accounts 29 29 47
----------- ----------- -----------
Total $ 154,299 $ 130,924 $ 127,792
=========== =========== ===========
</TABLE>

Outstanding certificate accounts at September 30, 1995 mature in the years
indicated as follows:

<TABLE>
<CAPTION>
Year Ending
September 30, (In thousands)
------------- --------------
<S> <C>
1996 $ 885,430
1997 224,455
1998 66,429
1999 29,078
2000 86,108
--------------
Total $ 1,291,500
==============
</TABLE>

At September 30, 1995, certificate accounts of $100,000 or more have
contractual maturities as indicated below:

<TABLE>
<CAPTION>
(In thousands)
---------------------------------------------
<S> <C>
Three months or less $ 75,571
Over three months through six months 31,405
Over six months through 12 months 36,596
Over 12 months 35,111
-----------
Total $ 178,683
===========
</TABLE>

F-36
<PAGE>

19. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER
SHORT-TERM BORROWINGS - THE BANK

Short-term borrowings are summarized as follows:

<TABLE>
<CAPTION>
September 30,
-----------------------------------
(Dollars in thousands) 1995 1994 1993
- ---------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Securities sold under repurchase agreements:
Balance at year-end $ -- $ -- $ 83,151
Average amount outstanding during the year 159,044 103,299 265,176
Maximum amount outstanding at any month-end 353,615 202,256 478,534
Amount maturing within 30 days -- -- 83,151
Weighted average interest rate during the year 6.02% 3.78% 3.28%
Weighted average interest rate on year-end
balances -- -- 3.23%

Other short-term borrowings:
Balance at year-end $ 10,435 $ 8,907 $ 5,115
Average amount outstanding during the year 20,451 13,336 2,212
Maximum amount outstanding at any month-end 53,242 51,992 5,115
Amount maturing within 30 days 10,435 8,907 5,115
Weighted average interest rate during the year 5.59% 3.42% 2.77%
Weighted average interest rate on year-end
balances 5.70% 4.87% 3.71%
</TABLE>

The investment and mortgage-backed securities underlying the 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 at the maturities of the agreements.

At September 30, 1995, the Bank had pledged mortgage-backed securities with
a book value of $18.8 million to secure certain other short-term borrowings.

20. BONDS PAYABLE - THE BANK

At September 30, 1994, bonds payable represented bonds (term and serial)
issued through a local housing finance agency secured by land and two
residential apartment buildings having an aggregate net book value of $25.7
million. The assets securing these bonds were included in real estate
held for investment or sale. During fiscal 1995, the Bank sold the
apartment buildings. See Note 12. In connection with the sale, the bonds
were assumed by the purchaser.

The term bonds amounting to $23.7 million at September 30, 1994 bore
interest at 9.7% The serial bonds amounting to $305,000 at September 30,
1994 bore interest at 9.3%.

Deferred debt issuance costs, net of accumulated amortization, amounted to
$504,000 at September 30, 1994 and were included in other assets in the
Consolidated Balance Sheets. These amounts were amortized using the
level-yield method over the life of the related debt. In connection with
the sale discussed above, the remaining unamortized amounts became a
component of the gain on sale during fiscal 1995.

At September 30, 1994, $3.0 million of bond proceeds were held in a
restricted cash account by the trustee for the purpose of paying principal
and interest on the bonds in the event that the Corporations were unable to
fund payments. This amount was included in interest-bearing deposits in
the Consolidated Balance Sheets. In connection with the sale discussed
above, the proceeds were released from the restrictions during fiscal 1995.

F-37
<PAGE>

21. NOTES PAYABLE - THE BANK

Notes payable bear interest at rates ranging from 8.9% to 13.0% and are due
in varying installments through 2004.

Scheduled repayments of notes payable at September 30, 1995 are as follows:

<TABLE>
<CAPTION>
Year Ending
September 30, (In thousands)
------------- --------------
<S> <C>
1996 $ 236
1997 260
1998 286
1999 314
2000 346
Thereafter 6,072
----------
Total $ 7,514
==========
</TABLE>

22. FEDERAL HOME LOAN BANK ADVANCES - THE BANK

At September 30, 1995, the advances from the Federal Home Loan Bank of
Atlanta totaled $155.1 million. Of the total advances at September 30,
1995, (a) $50.0 million have a current interest rate of 6.75%, reprice
daily and mature in October 1995, and (b) $100.0 million have a current
interest rate of 5.77%, adjust quarterly based on the three-month London
Interbank Offered Rate ("LIBOR") and mature in August 1996. The weighted
average interest rate on the remaining $5.1 million is 7.51% which is fixed
for the term of the advances and matures over varying periods ending
between December 1996 and September 2000.

Under a Specific Collateral Agreement with the FHLB, advances are secured
by all of the Bank's FHLB stock, qualifying first mortgage loans with a
total principal balance of $309.7 million and mortgage-backed securities
with a book value of $138.6 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 September 30, 1995 advances is available to secure additional
advances from the FHLB, subject to its collateralization guidelines.

23. CAPITAL NOTES - SUBORDINATED - THE BANK

Capital notes, which are subordinated to the interest of deposit account
holders, are composed of the following:

<TABLE>
<CAPTION>
September 30,
------------------------ Interest
(Dollars in thousands) 1995 1994 Rate
- --------------------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
Private placement:
BACOB Bank, s.c.,
due 1996 $ 10,000 $ 10,000 LIBOR + 3.0%

Public placement:
Subordinated debentures due 2005 150,000 150,000 9 1/4%
------------ -----------
Total $ 160,000 $ 160,000
============ ===========
</TABLE>

On November 23, 1993, the Bank sold $150.0 million 9 1/4% Subordinated
Debentures due 2005 (the "Debentures"). The Bank received net proceeds of
$143.6 million from the sale of the Debentures, of which approximately
$134.2 million was used to redeem $78.5 million of debentures due in 2002
and $50.0 million of debentures due in 2003 on December 23, 1993 and
December 24, 1993, respectively. The remaining net proceeds were used for
general corporate purposes. The Bank incurred a loss of $6.3 million,
after related income taxes, in connection with the redemption of these
debentures. The OTS approved the inclusion of the principal

F-38
<PAGE>

amount of the Debentures in the Bank's supplementary capital for regulatory
capital purposes.

The indenture pursuant to which the 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) $15.0 million, (ii) 66 2/3% of the
Bank's consolidated net income (as defined in the Indenture) accrued on a
cumulative basis commencing on October 1, 1993 and (iii) the aggregate net
cash proceeds received by the Bank after October 1, 1993 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 Preferred Stock or any payment-in-kind preferred stock issued in
lieu of cash dividends on the Preferred Stock or the redemption of any such
payment-in-kind preferred stock.

Deferred debt issuance costs, net of accumulated amortization, amounted to
$5.9 and $6.2 million at September 30, 1995 and 1994, respectively, and are
included in other assets in the Consolidated Balance Sheets.

24. PREFERRED STOCK - THE BANK

In April 1993, the Bank sold $75.0 million of its Noncumulative Perpetual
Preferred Stock, Series A ("Preferred Stock") in a private offering. Cash
dividends on the Preferred Stock are payable quarterly in arrears at an
annual rate of 13%. If the Board of Directors does not declare the full
amount of the noncumulative cash dividend accrued in respect of any
quarterly dividend period, in lieu thereof the Board of Directors will be
required to declare (subject to regulatory and other restrictions) a stock
dividend in the form of a new series of payment-in-kind preferred stock of
the Bank.

The OTS has approved the inclusion of the Preferred Stock as tier 1 or core
capital and has approved the payment of dividends on the Preferred Stock,
provided certain conditions are met. The Preferred Stock is not redeemable
until May 1, 2003 and is redeemable thereafter at the option of the Bank.
The holders of the Preferred Stock have no voting rights, except in certain
limited circumstances.

Holders of the Preferred Stock will be entitled to receive a liquidating
distribution in the amount of $25 per share, plus accrued and unpaid
dividends for the then-current dividend period in the event of any
voluntary liquidation of the Bank, after payment of the deposit accounts
and other liabilities of the Bank, and out of the assets available for
distribution to shareholders. The Preferred Stock ranks superior and prior
to the issued and outstanding common stock of the Bank with respect to
dividend and liquidation rights.

25. RETIREMENT PLAN - THE BANK

The Bank participates in a defined contribution profit sharing retirement
plan (the "Plan") which covers those full-time employees who meet the
requirements as specified in the Plan. The Plan, which can be modified or
discontinued at any time, requires participating employees to contribute
2.0% of their compensation. Corporate contributions, at the discretionary
amount of three times the employee contribution, were $3.9, $3.5 and $3.1
million for the years ended September 30, 1995, 1994 and 1993,
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.

26. REGULATORY MATTERS - THE BANK

Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), the Bank's regulatory capital requirements at September
30, 1995 were a 1.5% tangible capital requirement, a 3.0% 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

F-39
<PAGE>

ratios of 4.0%, 4.0% and 8.0%, respectively, to meet the ratios established
for "adequately capitalized" institutions. At September 30, 1995, the Bank
was in compliance with its tangible, core and total risk-based regulatory
capital requirements. In addition, on the basis of its balance sheet at
September 30, 1995, the Bank met the FIRREA-mandated fully phased-in capital
requirements and, on a fully phased-in basis, met 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 FIRREA and "prompt corrective action"
regulations and related interpretations.

<TABLE>
<CAPTION>
MINIMUM EXCESS
ACTUAL CAPITAL REQUIREMENT CAPITAL
-------------------- ------------------------ -----------------------
As a % of As a % of As a % of
(Dollars in thousands) Amount Assets(4) Amount Assets Amount Assets
- ---------------------- --------- --------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Capital per financial statements $328,544
Net unrealized holding losses(1) 3,112
--------
Adjusted capital 331,656

Adjustments for tangible and
core capital:
Intangible assets (45,697)
Non-includable subsidiaries (2) (2,122)
Non-qualifying purchased/
originated loan servicing (1,493)
--------
Total tangible capital 282,344 5.77% $ 73,438 1.50% $ 208,906 4.27%
-------- ========= =========== ========== ========== ==========
Supervisory goodwill (3) 0
--------
Total core capital(4) 282,344 5.77% $ 195,835 4.00% $ 86,509 1.77%
-------- ========= =========== ========== ========== ==========
Tier 1 risk-based capital (4) 282,344 6.65% $ 169,873 4.00% $ 112,471 2.65%
-------- ========= =========== ========== ========== ==========

Adjustments for risk-based capital:
Subordinated capital debentures 151,400
Allowance for general loan losses 53,264
--------
Total supplementary capital 204,664
--------
Excess allowance for loan losses (176)
--------
Adjusted supplementary capital 204,488
--------
Total available capital 486,832
Equity investments (2) (25,702)
--------
Total risk-based capital (4) $461,130 11.63% $ 339,746 8.00% $ 121,384 3.63%
======== ========= =========== ========== ========== ==========
</TABLE>

(1) Pursuant to OTS policy, net unrealized holding gains (losses) are
excluded from regulatory capital.

(2) Reflects an aggregate offset of $3.7 million representing the allowance
for general loan losses maintained against the Bank's equity
investments and non-includable subsidiaries which, pursuant to OTS
guidelines, is available as a "credit" against the deductions from
capital otherwise required for such investments.

(3) Effective January 1, 1995, the amount of supervisory goodwill
includable as core capital under OTS regulations decreased from 0.375%
to 0% of tangible assets.

At September 30, 1995, the Bank had $3.9 million in loans to and
investments in subsidiaries engaged in activities impermissible for
national banks ("non-includable subsidiaries") which are required to be
phased-out from all three capital requirements according to the following
schedule (which reflects OTS approval of the Bank's use of

F-40
<PAGE>

a delayed phase-in period pursuant to legislation enacted in October
1992): 60% beginning July 1, 1995 and 100% beginning July 1, 1996. At
September 30, 1995, the Bank also had two equity investments with an
aggregate balance, after subsequent valuation allowances, of $29.2
million which were fully phased-out from total risk-based capital.

As of September 30, 1995, the Bank had $45.7 million in supervisory
goodwill, all of which was excluded from core capital pursuant to statutory
provisions.

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 September 1995, the Bank received from the OTS a
one-year extension of the five-year holding period for certain of its REO
properties. The following table sets forth the Bank's REO at September 30,
1995, after valuation allowances of $135.0 million, by the fiscal year in
which the property was acquired through foreclosure.

<TABLE>
<CAPTION>
Fiscal Year (In thousands)
----------- --------------
<S> <C>
1990 $ 89,070 (1)(2)
1991 90,207 (2)
1992 15,080
1993 4,809
1994 8,389
1995 11,679
----------
Total REO $ 219,234
==========
</TABLE>

(1) Includes REO with an aggregate net book value of $29.2 million, which
the Bank treats as equity investments for regulatory capital purposes.
(2) Includes REO with an aggregate net book value of $153.5 million, for
which the Bank received an extension of the five-year holding period
through September 29, 1996.

Under the OTS "prompt corrective action" regulations, an institution is
categorized as "well capitalized" if 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%. The Bank's regulatory capital
ratios exceeded the requirements for a "well capitalized" institution at
September 30, 1995. Additionally, on a fully phased-in basis at September
30, 1995, the Bank's regulatory capital ratios would exceed the ratios
established for "well capitalized" institutions.

The Bank is subject to a written agreement with the OTS dated September 30,
1991. The agreement, which was amended on October 29, 1993, addresses,
among other things, transactions with affiliates, reductions of real estate
acquired in settlement of loans and asset quality. Specifically, the Bank
agreed that, without receiving the prior approval of the OTS, it would not
increase its investment in certain real estate projects beyond specified
levels. In addition, the Bank must provide the OTS with 15 days notice
prior to selling certain significant business assets.

In November 1995, Congress passed and presented to President Clinton, the
Balanced Budget Act of 1995 (the "Budget Act") which could, among other
things, capitalize the Savings Association Insurance Fund ("SAIF") and
either reduce or eliminate the anticipated disparity between Bank Insurance
Fund ("BIF") and SAIF insurance premiums. Under the Budget Act: (i) thrift
institutions would pay a one-time assessment estimated to be up to 85 basis
points on their SAIF-insured deposits to increase the SAIF's reserve ratio
to 1.25%; and (ii) effective January 1, 1996, the assessment base for
interest payments on Financing Corporation bonds, which were issued in the
late 1980s to resolve troubled thrifts, would be expanded to cover all
FDIC-insured institutions, including members

F-41
<PAGE>

of both BIF and SAIF. If the legislation is enacted in its current form,
the Bank would be required to pay a one-time assessment of up to $35
million in the first quarter of calendar year 1996; however, the Bank's
semi-annual risk-based deposit insurance premiums should be reduced in
future years.

27. 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, 1995 is as follows:

<TABLE>
<CAPTION>
(In thousands)
------------------------------------------------
<S> <C>
Balance, September 30, 1994 $ 4,702
Additions 1,553
Reductions (2,350)
-------------
Balance, September 30, 1995 $ 3,905
=============
</TABLE>

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, cafeteria management, insurance brokerage
and leasing. Fees for these services were $460,000, $548,000 and
$630,000 for the years ended September 30, 1995, 1994 and 1993,
respectively.

The law firm in which one director of the Bank is a partner received
$2.8, $2.4 and $2.7 million for legal services rendered to the Bank
during the years ended September 30, 1995, 1994 and 1993, respectively.

For the years ended September 30, 1995, 1994 and 1993, one of the
directors of the Bank was paid $30,000, $30,000 and $28,000,
respectively, for consulting services rendered to the Bank. Another
director of the Bank was paid total fees of $75,000 and $50,000 for the
years ended September 30, 1995 and 1994, respectively, for consulting
services.

A former director of the Bank and his wife are entitled to $125,000 per
year in supplemental retirement benefits under an agreement entered into
by the Bank in 1990 in connection with the director's former employment
as a Vice Chairman of the Bank. The director also received compensation
under an agreement for ongoing services provided to the Bank. Amounts
paid to the director under these agreements totaled $165,000, $167,000
and $165,000 in fiscal 1995, 1994 and 1993, respectively.

TAX SHARING AGREEMENT:

The Bank and the other companies in the Trust's affiliated group are
parties to a tax sharing agreement dated June 28, 1990 (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 $20.5, $9.6 and $5.0 million
to the Trust during fiscal 1995, 1994 and 1993, respectively, under the
Tax Sharing Agreement. OTS approval of the tax sharing payments during
fiscal 1995, 1994 and 1993 was conditioned on a pledge by the Trust of
certain assets to secure certain of its obligations under the Tax Sharing
Agreement. Under the terms of the Bank's written agreement with the OTS
dated September 30, 1991, as amended, the Bank has agreed not to make any
tax sharing payments to the Trust

F-42
<PAGE>

unless such payments are approved by the OTS. However, the Bank
continues to account for income taxes in accordance with the Tax Sharing
Agreement. At September 30, 1995 and 1994, the estimated tax sharing
payment payable to the Trust by the Bank was $17.7 and $12.0 million,
respectively.

OTHER:

The Bank paid $4.2, $3.9 and $3.5 million for office space leased from or
managed by companies affiliated with the Bank or its directors during the
years ended September 30, 1995, 1994 and 1993, respectively.

The Trust, the B. F. Saul Company and Chevy Chase Lake Corporation
("Lake"), an affiliate of the Bank, from time to time maintain
interest-bearing deposit accounts with the Bank. Those accounts totaled
$26.6 million at September 30, 1995. The Bank paid interest on the
accounts amounting to $1.1 million in fiscal 1995.

During fiscal 1995, the Bank purchased land and building plans from Lake
for $1.3 million for the purpose of contructing a building to house some
of the Bank's operations.

During fiscal 1994, the Bank sold 12.70 acres of retail land to Saul
Holdings, L.P., at an amount equal to its net carrying value.

The Bank owned approximately 45% of Avenel Associates Limited Partnership
("Avenel"), which owned a commercial property. The general partner in
the partnership was a subsidiary of the B. F. Saul Company. In August
1993, Avenel sold this property and the Bank sold two real estate
properties to Saul Holdings, L.P., a newly formed partnership in which
the Trust, other affiliated entities of the Trust and public
shareholders, directly and indirectly, own partnership interests. These
assets were sold at amounts that exceeded their net carrying values.
During fiscal 1994, upon payment of a final distribution to its partners,
Avenel was dissolved.

28. 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
Balance Sheets.

The contract or notional amounts of these instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party is represented by the contractual notional amount of these
instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
The Bank is also a party to derivative financial instruments that do not
have off-balance-sheet risk (e.g. interest-rate cap agreements).

COMMITMENTS TO EXTEND CREDIT:

The Bank had $11,662.0 million of commitments to extend credit at
September 30, 1995. Commitments to extend credit are agreements to lend
to a customer as long as there is no violation of any condition
established in the contract. 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.

F-43
<PAGE>

Loans approved but not closed are commitments for fixed or
adjustable-rate residential loans which are secured by real estate.
The Bank currently requires borrowers to obtain private mortgage
insurance on all loans where the loan-to-value ratio exceeds 80%.

FORWARD COMMITMENTS:

To manage the potentially adverse impact of interest rate movements on
the fixed-rate mortgage loan pipeline, the Bank hedges its pipeline by
entering into whole loan and mortgage-backed security forward sale
commitments. Forward sale commitments are used to sell specific
financial instruments (whole loans or mortgage-backed securities) at a
future date for a specified price. Forward sale commitments generally
settle within 90 days. Gains and loans are deferred and recorded as a
component of the gain on sales of loans at the time the forward sale
commitment matures. At September 30, 1995, the Bank had whole loan and
mortgage-backed security forward sale commitments of $9.0 and $87.6
million, respectively. In addition, at September 30, 1995, the Bank had
$9.4 million in mortgage-backed security forward purchase commitments
related to its hedging activities.

LETTERS OF CREDIT:

Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. At September
30, 1995, the Bank had written letters of credit in the amount of $38.6
million, which were issued to guarantee the performance of and
irrevocably assure payment by customers under construction projects.

Of the total, $21.7 million will expire in fiscal 1996 and the remainder
will expire over time through fiscal 1999. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan commitments to customers. Investment and mortgage-backed
securities with a book value of $10.9 million were pledged as collateral
for certain of these letters of credit at September 30, 1995.

RECOURSE ARRANGEMENTS:

The Bank is obligated under various recourse provisions (primarily
related to credit losses) related to the securitization and sale of
credit card receivables, home equity credit line receivables, automobile
loan receivables and amounts on deposit in certain spread accounts
through the asset-backed securitizations described in Note 9. At
September 30, 1995 and 1994, the primary recourse to the Bank was $93.1
and $65.9 million, respectively. As a result of these recourse
provisions, the Bank maintained restricted cash accounts amounting to
$98.4 and $73.1 million, at September 30, 1995 and 1994, respectively,
which are included in other assets in the Consolidated Balance Sheets.

The Bank is obligated under various recourse provisions related to the
swap of single-family residential loans for participation certificates
and mortgage-backed securities issued to the Bank by FHLMC and FNMA. At
September 30, 1995, recourse to the Bank under these arrangements was
$4.4 million. As security for the payment of funds due under certain of
the FHLMC recourse obligations, the Bank is required to post collateral.
At September 30, 1995, mortgage-backed securities pledged as collateral
under these obligations had a book value of $5.1 million.

INTEREST RATE CAP AGREEMENTS:

Interest rate cap agreements are used to limit the Bank's exposure to
rising short-term interest rates related to certain of its asset-backed
securitizations. At September 30, 1995, the Bank was a party to nine
interest rate cap agreements with an aggregate notional amount of $600.0
million with maturity dates ranging from June 30, 1996 through June 30,
1999. The interest rate cap agreements entitle the Bank to receive
compensatory payments from the cap provider, which is a AAA-rated (by
Standard & Poor's) counterparty,

F-44
<PAGE>

equal to the product of (a) the amount by which the one-month LIBOR
exceeds 7.00% and (b) the then outstanding notional principal amount for
a predetermined period of time. The Bank has no obligation to make
payments to the provider of the cap or any other party. The Bank is
exposed to credit losses in the event of nonperformance by the
counterparty, but does not expect the counterparty to fail to meet its
obligation given its credit rating.

CONCENTRATIONS OF CREDIT:

The Bank's principal real estate lending market is the metropolitan
Washington, D.C. area. In addition, approximately 17.6% of the Bank's
outstanding credit card loans at September 30, 1995 were generated by
cardholders residing in the metropolitan Washington, D.C. area. Service
industries and Federal, state and local governments employ a significant
portion of the Washington, D.C. area labor force. Adverse changes in
economic conditions could have a direct impact on the timing and amount
of payments by borrowers.

F-45
<PAGE>

29. 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. Comparability 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. The
estimated fair values of the Bank's financial instruments at September 30,
1995 and 1994 are as follows:

<TABLE>
<CAPTION>
September 30, 1995 September 30, 1994
------------------------ -----------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- --------------------------------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash, due from banks,
interest-bearing deposits, Federal
funds sold and securities purchased
under agreements to resell $ 359,282 $ 359,282 $ 372,097 $ 372,097
Loans held for sale 68,679 68,729 33,598 33,771
Loans held for securitization and sale 500,000 500,000 115,000 115,000
Investment securities 4,370 4,371 4,364 4,364
Mortgage-backed securities 880,208 879,720 1,025,525 1,025,525
Loans receivable, net of reserve 2,327,222 2,351,729 2,357,598 2,334,515
Interest rate cap agreements 9,986 3,255 -- --
Other financial assets 298,077 299,561 236,934 238,417

Financial liabilities:
Deposit accounts with
no stated maturities 2,867,752 2,867,752 3,281,794 3,281,794
Deposit accounts with
stated maturities 1,291,500 1,295,816 726,967 734,547
Securities sold under
repurchase agreements and other
short-term borrowings, bonds payable,
notes payable and Federal Home Loan
Bank advances 173,001 173,813 140,162(1) 142,027
Capital notes-subordinated 154,102(1) 159,250 153,777(1) 146,500
Other financial liabilities 80,149 80,149 72,111 72,111
</TABLE>

(1) Net of deferred debt issuance costs which are included in other assets
in the Consolidated Balance Sheets.

The following methods and assumptions were used to estimate the fair value
amounts at September 30, 1995 and 1994:

CASH, DUE FROM BANKS, INTEREST-BEARING DEPOSITS AND FEDERAL FUNDS SOLD:
Carrying amount approximates fair value.

LOANS HELD FOR SALE: Fair value is determined using quoted prices for
loans, or securities backed by loans with similar characteristics, or
outstanding commitment prices from investors.

LOANS HELD FOR SECURITIZATION AND SALE: The carrying value of loans held
for securitization and sale approximates fair value because such
receivables are sold at face value.

F-46
<PAGE>

INVESTMENT 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 OF RESERVE: 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. 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 estate construction and ground loans), the carrying
amount approximates fair value. Because credit card receivables are
generally sold at face value through the Bank's securitization program,
such face value is used as the estimated fair value of these receivables.
The fair value of the Bank's loan portfolio as presented above does not
include the value of established credit card and home equity credit line
customer relationships, or the value relating to estimated cash flows from
future receivables and the associated fees generated from existing
customers.

INTEREST RATE CAP AGREEMENTS: Fair value is based on dealer quotes.

OTHER FINANCIAL ASSETS: The carrying amount of Federal Home Loan Bank
stock, accrued interest receivable, excess servicing assets,
interest-bearing deposits maintained pursuant to various asset
securitizations and other short-term receivables approximates fair value.
The fair value of one of the Bank's investments is based on quoted market
prices.

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 discounted cash flow analyses
using the remaining maturity of the underlying accounts and interest rates
currently offered on certificates of deposit with similar maturities.

BORROWINGS: These instruments consist of securities sold under repurchase
agreements and other short-term borrowings, bonds payable, notes payable
and Federal Home Loan Bank advances. For borrowings which either reprice
frequently to market interest rates or are short-term in duration, the
carrying amount approximates fair value. 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 Debentures is based on
quoted market prices. The carrying amount of the $10.0 million private
placement capital note approximates fair value.

OTHER FINANCIAL LIABILITIES: The carrying amount of custodial accounts,
amounts due to banks, accrued interest payable and other short-term
payables approximates fair value.

OFF-BALANCE SHEET INSTRUMENTS: The difference between the original fees
charged by the Bank for commitments to extend credit and letters of credit
and the current fees charged to enter into similar agreements is
immaterial. Fair value of forward commitments is based on the estimated
amount that the Bank would pay to terminate the arrangements at the
reporting date, taking into account the remaining terms of the arrangements
and the counterparties' credit standing, where applicable, which is
immaterial.

F-47
<PAGE>

30. LITIGATION - THE BANK

During the normal course of business, the Bank is involved in certain
litigation, including litigation arising out of the collection of loans,
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 are material, the Bank
denies liability and, in the opinion of management, litigation which is
currently pending will not have a material impact on the financial
condition or future operations of the Bank.

31. SUBSEQUENT EVENTS - THE BANK

On November 13, 1995, the Bank sold approximately 2,000 residential lots in
its Planned Unit Developments at an amount that approximated its net
carrying value. The impact of the transaction was to reduce real estate
held for sale, net of allowance for losses, by approximately $49.2 million.

32. COMMITMENTS AND CONTINGENCIES - THE TRUST

The Trust is involved in a number of lawsuits arising from the normal
course of its business. On the basis of consultations with counsel,
management does not believe that any material loss will result.

F-48
<PAGE>

33. INCOME TAXES - THE TRUST

The Trust voluntarily terminated its qualification as a real estate
investment trust under the Internal Revenue Code during fiscal 1978.

As discussed in Organization and Summary of Significant Accounting
Policies, the Trust adopted SFAS 109 effective October 1, 1993, which had
the effect of increasing the Trust's net deferred tax asset by
approximately $36.3 million. For fiscal 1993 the Trust accounted for income
taxes in accordance with APB 11. The provisions for income taxes for the
years ended September 30, 1995, 1994 and 1993, consist of the following:

<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
(In thousands) 1995 1994 1993
- ---------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Current provision (benefit):
Federal $ (37) $ 13,480 $ (1,057)
State (4,186) 4,421 3,971
----------- ----------- -----------
(4,223) 17,901 2,914
----------- ----------- -----------
Deferred provision (benefit):
Federal 5,964 (10,390) 8,795
State 280 (486) (6)
----------- ----------- -----------
6,244 (10,876) 8,789
----------- ----------- -----------

Subtotal 2,021 7,025 11,703

Tax effect of other items:
Cumulative effect of adoption of
SFAS 109 -- (36,260) --
Extraordinary item -- (6,160) (7,738)
Tax effect of net unrealized holding
gains (losses) reported in
stockholders' equity (1) 7,207 (9,243) --
----------- ----------- -----------

Total $ 9,228 $ (44,638) $ 3,965
=========== =========== ===========
</TABLE>

(1) Net unrealized holding gains (losses) on securities-available-for-sale
recorded in conjunction with SFAS 115 are reflected net of related taxes
in the shareholders' deficit section in the accompanying Consolidated
Balance Sheets.

On August 10, 1993, Congress passed the Tax Revenue Reconciliation Act of
1993, retroactively increasing the Federal corporate income tax rate from
34% to 35% effective January 1, 1993. As a result, the Trust's income tax
rate for fiscal years 1995, 1994 and 1993 was 35.00%, 35.00% and 34.75%,
respectively.

The Trust's effective income tax rate varies from the statutory Federal
income tax rate as a result of the following factors:

<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
(In thousands) 1995 1994 1993
- ---------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Computed tax at statutory Federal income tax rate $ 9,920 $ 6,609 $ 6,726
Increase (reduction) in taxes resulting from:
Goodwill and other purchase accounting adjustments 1,164 1,311 1,965
State income taxes (3,540) 2,570 2,705
Other (5,523) (3,465) 307
----------- ----------- -----------
$ 2,021 $ 7,025 $ 11,703
=========== =========== ===========
</TABLE>

F-49
<PAGE>

Under SFAS 109, the components of the net deferred tax asset were as
follows:

<TABLE>
<CAPTION>
September 30,
-----------------------
(In thousands) 1995 1994
- ---------------------------------------------------- ----------- -----------
<S> <C> <C>
Deferred tax assets:
Provision for losses in excess of deductions $ 65,072 $ 54,903
Unrealized losses on real estate owned 2,744 --
Property 8,079 8,496
Deferred loan fees -- 3,309
Real estate mortgage investment conduit 675 3,655
State net operating losses 2,593 1,333
Partnership investments 1,328 1,471
Alternative minimum tax 1,979 1,979
Forgiveness of debt 4,822 5,267
Depreciation 2,015 1,410
Net operating losses -- 15,790
Other 2,842 1,855
----------- -----------
Gross deferred tax assets 92,149 99,468
----------- -----------

Deferred tax liabilities:
Net unrealized holding gains on securities
available-for-sale (8,833) (10,324)
Deferred loan fees (4,691) --
Saul Holdings (7,685) (8,685)
Real estate taxes (335) (346)
Depreciation (8,970) (7,639)
FHLB stock dividends (5,376) (5,658)
Other (3,955) (4,668)
----------- -----------
Gross deferred tax liabilities (39,845) (37,320)
----------- -----------

Valuation allowance (3,400) (7,000)
----------- -----------

Net deferred tax asset $ 48,904 $ 55,148
=========== ===========
</TABLE>

Under APB 11, the tax effect of each timing difference resulting in
a deferred income tax benefit for the year ended September 30, 1993
is as follows:

(In thousands)
- ----------------------------------------------------------------------------------------
<S> <C>
Provision for losses in excess of deductions $ 14,437
Depreciation (2,864)
Deferred loan fees (938)
Valuation allowances 19
Real Estate mortgage investment conduit (1,454)
State taxes (211)
State net operating losses (1,577)
Other 1,377
-----------
Total $ 8,789
===========
</TABLE>

F-50
<PAGE>

Under SFAS 109, a valuation allowance is provided when it is more
likely than not that some portion of the deferred tax asset will
not be realized. As of September 30, 1995, management has
maintained a valuation allowance in part to reduce the net deferred
tax asset for net operating loss carryforwards related to state
taxes. Historically, the Bank has generated taxable income while
the Real Estate Trust has generated taxable losses. Net operating
loss carryforwards are realizable through future taxable income of
the Bank since the Trust files a consolidated tax return for
federal purposes. The net operating loss carryforwards are not
expected to be realizable for state tax purposes since a
consolidated return is not filed with state tax authorities.

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.
See further discussion in Notes 2 and 3.

TAX SHARING AGREEMENT

The Trust's affiliated group, including the Bank, entered into a tax
sharing agreement dated June 28, 1990. 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 $20.5, $9.6 and
$5.0 million, respectively, to the Trust during fiscal 1995, 1994 and 1993.
Subsequent to September 30, 1995, the OTS approved and the Bank made a
tax sharing payment of $10.0 million. Effective June 30, 1991, the Bank
agreed with the OTS not to make any further tax sharing payments to the
Trust without permission of the OTS.

In recent years, the operations of the Trust have generated net operating
losses while the Bank has reported net income. It is anticipated that the
Trust's consolidation of the Bank's operations into the Trust's federal
income tax return will result in the use of the Trust's net operating
losses to reduce the federal income taxes the Bank would otherwise owe. If
in any future year, the Bank has taxable losses or unused credits, the
Trust would be obligated to reimburse the Bank for the greater of (i) the
tax benefit to the group using such tax losses or unused tax credits in the
group's consolidated Federal income tax returns or (ii) the amount of 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.

As of September 30, 1995, the alternative minimum tax carryforward was $2.0
million.

F-51
<PAGE>

34. 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 ("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.

At September 30, 1995, 1994, and 1993, the amount of dividends in arrears
on the preferred shares was $26,644,500 ($51.64 per share), $21,226,500
($41.14 per share) and $15,808,500 ($30.64 per share), respectively.

F-52
<PAGE>

35. QUARTERLY FINANCIAL DATA (UNAUDITED) - THE TRUST

<TABLE>
<CAPTION>
Year Ended September 30, 1995
------------------------------------------------
(In thousands, except per share amounts) December March June September
- --------------------------------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Real Estate Trust
Total income $ 17,324 $ 17,541 $ 21,754 $ 20,666
Operating loss (7,217) (6,574) (4,581) (8,969)
The Bank
Interest income 81,783 91,310 97,147 95,075
Interest expense 42,641 46,819 51,277 48,377
Provision for loan losses (8,607) (13,618) (13,604) (19,150)
Gain (loss) on real estate held for
investment or sale, net (3,529) 957 5,048 (8,180)
Gain on sales of credit card
relationships and loans 210 28 4,483 8,161
Operating income 6,034 12,371 23,592 13,686
Total Company
Operating income (loss) before income
taxes and minority interest (1,183) 5,797 19,011 4,717
Income (loss) before minority interest (742) 4,923 12,415 9,725
Net income (loss) (3,480) 1,135 7,379 5,816
Net income (loss) per common share (1.00) (0.05) 1.25 0.92
- ----------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Year Ended September 30, 1994
------------------------------------------------
(In thousands, except per share amounts) December March June September
- --------------------------------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Real Estate Trust
Total income $ 14,854 $ 14,183 $ 19,010 $ 17,997
Operating loss (10,092) (9,261) (5,468) (9,484)
The Bank
Interest income 81,656 86,794 83,191 82,823
Interest expense 42,220 42,136 40,204 40,984
Provision for loan losses (11,683) (3,216) (10,349) (3,974)
Gain (loss) on real estate held for
investment or sale, net (284) (2,357) 2,566 910
Gain (loss) on sales of credit card
relationships and loans 2,490 18,968 (684) 9,748
Operating income 5,995 24,617 2,645 19,930
Total Company

Operating income (loss) before income
taxes, extraordinary items, cumulative
effect of change in accounting principle,
and minority interest (4,097) 15,356 (2,823) 10,446
Income (loss) before extraordinary items,
cumulative effect of change in accounting
principle and minority interest (3,389) 8,453 (2,823) 9,616
Extraordinary items (6,333) (4,982) -- --
Income (loss) before cumulative effect of
change in accounting principle and
minority interest (9,722) 3,471 (2,823) 9,616
Cumulative effect of change in accounting
principle 36,260 -- -- --
Net income (loss) 23,595 (1,342) (5,052) 5,888
Net income (loss) per common share 4.61 (0.56) (1.33) 0.94
- ----------------------------------------------------------------------------------------
</TABLE>

F-53
<PAGE>

36. INDUSTRY SEGMENT INFORMATION - 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.

<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
(In thousands) 1995 1994 1993
- ---------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
INCOME
Hotels $ 54,104 $ 46,046 $ 45,385
Commercial properties 18,812 16,815 45,736
Other 4,369 3,183 2,124
----------- ----------- -----------
$ 77,285 $ 66,044 $ 93,245
=========== =========== ===========

OPERATING PROFIT (LOSS)
Hotels $ 10,836 $ 7,488 $ 7,228
Commercial properties 6,951 5,473 24,316
Other 6,670 3,510 (252)
----------- ----------- -----------
24,457 16,471 31,292
Gain on sales of property 1,664 -- 184
Interest and debt expense (net of interest
capitalized) (41,040) (40,576) (53,499)
Advisory fee, management and leasing fees -
related parties (7,376) (6,793) (7,249)
General and administrative (2,319) (2,027) (2,119)
Abandoned development costs -- -- (13,104)
Write-down of assets to net realizable value (2,727) (1,380) --
----------- ----------- -----------
Operating loss $ (27,341) $ (34,305) $ (44,495)
=========== =========== ===========

IDENTIFIABLE ASSETS (AT YEAR END)
Hotels $ 87,143 $ 79,183 $ 82,472
Commercial properties 81,821 83,937 87,142
Other 144,448 164,619 50,942
----------- ----------- -----------
$ 313,412 $ 327,739 $ 220,556
=========== =========== ===========

DEPRECIATION
Hotels $ 5,230 $ 4,684 $ 4,660
Commercial properties 4,452 4,370 7,712
Other 32 28 85
----------- ----------- -----------
$ 9,714 $ 9,082 $ 12,457
=========== =========== ===========

CAPITAL EXPENDITURES
Hotels $ 13,815 $ 3,586 $ 1,458
Commercial properties 2,544 2,486 5,996
Other 103 645 11
----------- ----------- -----------
$ 16,462 $ 6,717 $ 7,465
=========== =========== ===========
</TABLE>

F-54
<PAGE>

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

<TABLE>
<CAPTION>
September 30,
-----------------------
(In thousands) 1995 1994
- ---------------------------------------------------- ----------- -----------
<S> <C> <C>
ASSETS
Income-producing properties $ 238,927 $ 227,640
Accumulated depreciation (75,140) (68,111)
----------- -----------
163,787 159,529
Land Parcels 38,458 38,455
Equity investment in bank 174,222 142,527
Cash and cash equivalents 17,355 30,445
Other assets 93,812 99,310
----------- -----------
Total assets $ 487,634 $ 470,266
=========== ===========
LIABILITIES
Mortgage notes payable $ 184,502 $ 185,730
Notes payable - secured 175,500 175,000
Notes payable - unsecured 41,057 40,288
Deferred gains - real estate 112,883 112,883
Other liabilities and accrued expenses 41,872 44,208
----------- -----------
Total liabilities 555,814 558,109
TOTAL SHAREHOLDERS' DEFICIT* (68,180) (87,843)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 487,634 $ 470,266
=========== ===========
</TABLE>

* See Consolidated Statements of Shareholders' Deficit

CONDENSED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
(In thousands) 1995 1994 1993
- ---------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Total income $ 77,285 $ 66,044 $ 93,245
Total expenses (109,971) (102,087) (137,256)
Equity in earnings (losses) of partnership
investments 3,681 1,738 (668)
Gain (loss) on sales of property 1,664 -- 184
----------- ----------- -----------
Real estate operating loss (27,341) (34,305) (44,495)
Equity in earnings of bank 22,882 15,850 49,314
----------- ----------- -----------
Total company operating income (loss) (4,459) (18,455) 4,819
Provision for income taxes (income tax benefit) (15,309) (15,369) 346
----------- ----------- -----------
Income (loss) before extraordinary item and
cumulative effect of change in accounting principle 10,850 (3,086) 4,473
Extraordinary item: loss on early extinguishment of
debt -- (4,982) --
----------- ----------- -----------
Income (loss) before cumulative effect of change in
accounting principle 10,850 (8,068) 4,473
Cumulative effect of change in accounting principle -- 31,157 --
----------- ----------- -----------
TOTAL COMPANY NET INCOME (LOSS) $ 10,850 $ 23,089 $ 4,473
=========== =========== ===========
</TABLE>

F-55
<PAGE>

CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
(In thousands) 1995 1994 1993
- ---------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,850 $ 23,089 $ 4,473
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation 9,714 9,082 12,457
Abandoned development costs -- -- 13,104
Write-down of real estate to net realizable value 2,727 1,380 --
Loss (gain) on sales of property (1,654) -- (184)
Equity in earnings of bank (22,882) (15,850) (49,314)
(Increase) decrease in deferred tax asset 10,836 (19,028) --
Loss on early extinguishment of debt -- 4,982 --
Decrease (increase) in accounts receivable and
accrued income (224) (516) 98
Increase (decrease) in accounts payable and
accrued expenses 317 (5,473) 7,047
Other (5,360) (8,525) 9,170
----------- ----------- -----------
Net cash provided by (used in) operating activities 4,324 (10,859) (3,149)
----------- ----------- -----------

CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures - properties (6,270) (6,717) (7,465)
Property acquisitions (10,193) -- --
Property sales -- -- 3,780
Equity investment in unconsolidated entities (733) (17,780) 4,850
Notes receivable - affiliates -- (12,675) --
Other investing activities 53 43 836
----------- ----------- -----------
Net cash provided by (used in) investing activities (17,143) (37,129) 2,001
----------- ----------- -----------

CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from long-term debt 16,328 185,080 8,787
Repayments of long-term debt (16,083) (74,161) (24,519)
Financing proceeds placed in liquidity maintenance
escrow -- (25,792) --
Costs of obtaining financings (516) (9,404) (1,170)
Proceeds from the issuance of redeemable preferred
stock -- -- 21,507
Dividends paid -- -- (1,375)

Net cash provided by financing activities (271) 75,723 3,230
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (13,090) 27,735 2,082
Cash and cash equivalents at beginning of year 30,445 2,710 628
----------- ----------- -----------
Cash and cash equivalents at end of year $ 17,355 $ 30,445 $ 2,710
=========== =========== ===========
</TABLE>

F-56
<PAGE>

MANAGEMENT'S STATEMENT ON RESPONSIBILITY

The Consolidated Financial Statements and related financial information in
this report have been prepared by the Advisor (management) in accordance with
generally accepted accounting principles appropriate in the circumstances, based
on best estimates and judgments, with consideration given to materiality.

The Trust maintains a system of internal accounting control supported by
documentation to provide reasonable assurance that the books and records reflect
authorized transactions of the Trust, and that the assets of the Trust are
safeguarded.

The Board of Trustees exercises its responsibility for the Trust's
financial statements through its Audit Committee, which is composed of two
outside Trustees who meet periodically with the Trust's independent accountants
and management. The Committee considers the audit scope, discusses financial
and reporting subjects, and reviews management actions on these matters. The
independent accountants have full access to the Audit Committee.

The independent accountants are recommended by the Audit Committee and
confirmed by the Board of Trustees. They provide an objective assessment of
the fairness and accuracy of the financial statements, consider the adequacy
of the system of internal accounting controls, and perform such tests and
other procedures as they deem necessary to express an opinion on the fairness
of the financial statements. Management believes that the policies and
procedures it has established provide reasonable assurance that its
operations are conducted in conformity with law and a high standard of
business conduct.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

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 five
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 THREE TRUSTEES --TERMS END AT 1996 ANNUAL MEETING

GARLAND J. BLOOM, JR., age 64, has served as a Trustee since 1964. He is
currently a real estate consultant. He was formerly Executive Vice President
and Principal of GMB Associates, Inc. (a real state finance and management firm)
from 1988 to 1990 and Vice Chairman and Chief Operating Officer of
Smithy-Braedon Company (a real estate finance and management firm) from 1985 to
1987.

JOHN R. WHITMORE, age 62, has served as a Trustee since 1984. He also
serves as Director, President and Chief Executive Office of The Bessemer Group,
Incorporated (a financial management and banking firm) and its Bessemer Trust

107

<PAGE>

Company subsidiaries with which he has been an associated since 1975, and as a
Director of Bessemer Securities Corporation, Chevy Chase Property Company, B. F.
Saul Company and Saul Centers, Inc.

CLASS ONE TRUSTEES -- TERMS END AT 1997 ANNUAL MEETING

GILBERT M. GROSVENOR, age 64, has served as a Trustee since 1971. He also
serves as President and Chairman of the Board of Trustees of the National
Geographic Society and as a Director of the Bank, Saul Centers, Inc., Marriott
International Corp., Chesapeake and Potomac Telephone Company, Ethyl Corporation
and Charles Allmon Trust, Inc.

B. FRANCIS SAUL II, age 63, has served as Chairman and Chief Executive
Officer of the Trust since 1969 and as a Trustee since 1964. He also serves as
President and Chairman of the Board of Directors of B. F. Saul Company, B. F.
Saul Advisory Company, Chevy Chase Property Company, Westminster Investing
Corporation, and Chevy Chase Lake Corporation, as Chairman of the Board of the
Bank, as Chairman of the Board and Chief Executive Officer of Saul Centers,
Inc., and as a Trustee of the National Geographic Society and the Brookings
Institute.

CLASS TWO TRUSTEE -- TERM ENDS AT 1998 ANNUAL MEETING

GEORGE M. ROGERS, JR., age 62, has served as a Trustee since 1969. His
professional corporation is a partner in the law firm of Shaw, Pittman, Potts &
Trowbridge, Washington, D.C., which serves as counsel to the Trust and the Bank.
Mr. Rogers serves as a Director of the Bank, B. F. Saul Company, Chevy Chase
Property Company, Westminster Investing Corporation, and Chevy Chase Lake
Corporation.

EXECUTIVE OFFICERS OF THE TRUST WHO ARE NOT DIRECTORS

PHILIP D. CARACI, age 57, serves as Senior Vice President and Secretary of
the Trust, Executive Vice President of B.F. Saul Company, Senior Vice President
of B. F. Saul Advisory Company, President of Franklin Property Company and a
Director and President of Saul Centers, Inc.

STEPHEN R. HALPIN, JR., age 40, serves as Vice President and Chief
Financial Officer of the Trust. He also serves as Executive Vice President and
Chief Financial Officer of the Bank.

ROSS E. HEASLEY, age 56, serves as Vice President of the Trust, B. F. Saul
Company, B. F. Saul Advisory Company, Franklin Property Company and Saul
Centers, Inc.

HENRY RAVENEL, JR., age 61, serves as Vice President of the Trust, B. F.
Saul Company, B. F. Saul Advisory Company and Saul Centers, Inc.

WILLIAM K. ALBRIGHT, age 64, serves as Vice President and Treasurer of the
Trust, B. F. Saul Company, Franklin Property Company and B. F. Saul Advisory
Company, and as Vice President of Saul Centers, Inc.

COMMITTEES OF THE BOARD OF TRUSTEES

The Board of Trustees met five times during fiscal 1995. 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 three standing committees: the Audit Committee,
the Executive Committee and the Nominating Committee.

The Audit Committee is composed of Messrs. Bloom and Grosvenor. Its duties
include nominating the Trust's independent auditors, discussing with them the

108

<PAGE>

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 1995.

The Executive Committee is composed of Messrs. Rogers, Saul and Whitmore.
It is empowered to oversee day-to-day actions of the Advisor and Franklin in
connection with the operations of the Trust, including the acquisition,
administration, sale or disposition of investments. This Committee did not meet
during during fiscal 1995.

The Nominating Committee is composed of Messrs. Rogers and Whitmore. Its
function is to screen and make recommendations to the Board of Trustees
regarding potential candidates for membership on the Board and to perform such
other duties as may be assigned to it from time to time. This Committee did not
meet during fiscal 1995.

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 is not paid for
attending Executive Committee meetings. For the fiscal year ended September 30,
1995, the Real Estate Trust paid total fees of $81,100 to the Trustees,
including $15,500 to Mr. Saul.

ITEM 11. EXECUTIVE COMPENSATION

The Trust pays no compensation to its executive officers for their services
in such capacity. Mr. Saul receives compensation from the Bank for his services
as the Bank's Chairman of the Board of Directors and Chief Executive Officer,
and Mr. Halpin, who became an executive officer of the Trust in fiscal 1994,
receives compensation from the the Bank for his services as Executive Vice
President and Chief Financial Officer. No other executive officers of the Trust
received any compensation from the Trust or its subsidiaries with respect to any
of the fiscal years ended September 30, 1995, 1994 or 1993.

The following table sets forth the cash compensation paid by the Bank to
Mr. Saul for or with respect to the fiscal years ended September 30, 1995,
1994 and 1993 and the cash compensation paid by the Bank to Mr. Halpin for or
with respect to the fiscal years ended September 30, 1995 and 1994 for all
capacities in which they served during such fiscal years.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Annual Compensation
-----------------------------------
Name and Principal Position Other Annual All Other
with Bank Year Salary Bonus Compensation Compensation
- --------------------------- ------ ------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
B. Francis Saul II 1995 $830,441 $400,000 $--- $228,138(1)
Chairman and Chief 1994 $682,966 $300,000 $--- $109,860(2)
Executive Officer 1993 $432,504 $ --- $--- $128,048(3)

Stephen R. Halpin, Jr. 1995 $304,627 $ 44,250 $--- $ 51,830(1)
Executive Vice President and 1994 $281,369 $ 41,400 $--- $ 31,993(2)
Chief Financial Officer

</TABLE>

- ----------
(1) The total amounts shown in the "All Other Compensation" column for
fiscal 1995 consist of the following: (i) contributions made by the
Bank to the Bank's Supplemental Executive Retirement Plan on behalf of
Mr. Saul ($73,847) and Mr. Halpin ($5,193); (ii) the taxable benefit of
premiums paid by the Bank for group term insurance on behalf of Mr.
Halpin ($1,450); (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 ($15,763); and (iv) accrued
earnings on awards previously made under the Bank's Deferred
Compensation Plan on behalf of Mr. Saul ($154,291) and Mr. Halpin
($29,424).

(2) The total amounts shown in the "All Other Compensation" column for
fiscal 1994 consist of the following: (i) contributions made by the
Bank to the Bank's Supplemental Executive Retirement Plan on behalf of
Mr. Saul ($42,337) and Mr. Halpin ($4,177); (ii) the taxable benefit of
premiums paid by the Bank for group term life insurance on behalf of Mr.
Halpin ($500); (iii) contributions to the Retirement Plan on behalf of
Mr. Halpin ($15,189); and (iv) accrued earnings on awards previously
made under the Bank's Deferred Compensation Plan on behalf of Mr. Saul
($67,523) and Mr. Halpin ($12,127).

(3) The total amounts shown in the "All Other Compensation" column for
fiscal 1993 consist of the following: (i) contributions made by the
Bank to the Bank's Supplemental Executive Retirement Plan on behalf of
Mr. Saul ($25,740); and (ii) accrued earnings on awards previously made
under the Bank's Deferred Compensation Plan on behalf of Mr. Saul
($102,308).

109

<PAGE>

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 of the Bank named above for fiscal 1995 under the Bank's
Deferred Compensation Plan (the "Plan").

LONG-TERM INCENTIVE PROGRAM - AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>

Estimated Future Payouts(1)
Performance Under Non-Stock Price-Based Plans
or Other Period --------------------------------------
Until Maturation
Name or Payout Threshold Target(2) Maximum
- ---- ----------------- --------- ---------- ----------
<S> <C> <C> <C> <C>
B. Francis Saul II (3)(4) 1995 $ -- $1,037,497 $ 2,476,695
Stephen R. Halpin, Jr. 2005 -- 233,437 557,256
</TABLE>

- ------------------------
(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, 2005.

(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, 1995.

(3) The payout amount shown for Mr. Saul is the estimated amount that
would be payable to Mr. Saul if his employment continued with the Bank
for the entire ten-year performance period of the Plan. As of September
30, 1995, Mr. Saul was fully vested in the Account maintained for his
benefit under the Plan. As of September 30, 1995, the Account balance
maintained for Mr. Saul's benefit under the Plan was $1,312,424.

(4) In addition, in fiscal 1995, the Bank also credited Mr. Saul's
Account under the plan with a Principal Contribution with respect to
fiscal 1993. Mr. Saul had previously elected to forego a Principal
Contribution to his Account for such fiscal year. The threshold,
target and maximum estimated future payouts under the Plan with
respect to such Principal Contribution are $0, $749,827 and $1,378,736.
The payout amounts have been calculated using the Bank's actual rate of
return on average assets during each of fiscal years 1993, 1994 and
1995 and assuming that the Bank's rate of return on average assets
during each of the remaining years in the performance period is the
same as the Bank's rate of return during the fiscal year ended
September 30, 1995.

The Plan provides that, as of the end of each fiscal year in the
ten-year period ending September 30, 2005 (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 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: (i) September 30, 2005; (ii)
attainment of age 60; (iii) death; (iv) total and permanent disability; or
(v) 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, 2000.

Payouts are made under the Plan within 120 days after September 30,
2005, or the earlier termination of the executive officer's employment with
the Bank, provided that vesting or partial vesting has occurred under the
Plan.

110
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information, as of December 15,
1995, concerning beneficial ownership of Common Shares and Preferred Shares of
Beneficial Interest ("Preferred Shares") by (i) each person known by the Trust
to be the beneficial owner of more than 5% of the Common Shares and the
Preferred Shares, (ii) each member of the Board of Trustees, (iii) each
executive officer of the Trust named in the Summary Compensation Table under
"Executive Compensation" and (iv) all Trustees and executive officers of the
Trust as a group.

Name of Aggregate Number of Shares Percent of
Beneficial Owner Beneficially Owned (1) Class
- ------------------ -------------------------- ----------
<S> <C> <C>
B. Francis Saul II Preferred: 100.00%
516,000(2) 99.60%
Common:
4,807,510(3)

Philip D. Caraci Common: 0.40%
19,400(4)

All Trustees and Preferred: 100.00%
executive officers as 516,000(2)
a group (10 persons)
Common: 100.00%
4,826,910
</TABLE>

- ----------
(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 B. F.
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 B. F. 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 8401
Connecticut Avenue, Chevy Chase, Maryland 20815.
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 B. F. 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

111

<PAGE>

Corporation (a subsidiary of Westminster Investing
Corporation), 34,400 Common Shares owned by Somerset
Investment Company, Inc. (a subsidiary of Westminster
Investing Corporation), 2,545,362 Common Shares owned by
B. F. Saul Company, 206,300 Common Shares owned by
Columbia Credit Company (a subsidiary of B.F. 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
8401 Connecticut Avenue, Chevy Chase, Maryland 20815.
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.

(4) Mr. Caraci has entered into an agreement with the Trust
under which he is required to sell all Common Shares he
then owns to the Trust when his employment by B. F. Saul
Company and any of its affiliates ceases for any reason,
including retirement, termination, death or disability.
The price Mr. Caraci will receive for his Common Shares
will be the greater of $28.00 per Share or the price the
Trust determines at the time is the fair market value
thereof.

The Preferred Shares were issued in June 1990 in connection with the
transaction in which the Trust increased its equity interest in the Bank 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 any time on or after the fifth anniversary of their issuance 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

REAL ESTATE

TRANSACTIONS WITH B. F. SAUL COMPANY AND ITS SUBSIDIARIES. The Real Estate
Trust is managed by the Advisor, a wholly-owned subsidiary of the Saul Company.
All of the officers of the Trust and B. Francis Saul II, George M. Rogers, Jr.
and John R. Whitmore, each of whom is a Trustee of the Trust, are also officers
and/or directors of the Saul Company and/or its subsidiary corporations. The
Advisor is paid a fixed monthly fee subject to annual review by the Trustees.
The monthly fee was $250,000 for the period October 1993 through March 1994 and
$292,000 for the period April 1994 through September 1995. The advisory contract
has been extended until September 30, 1996, and will continue thereafter unless
canceled by either party at the end of any contract year. Certain loan
agreements prohibit termination of this contract.

The Saul Company and Franklin, a wholly-owned subsidiary of the 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. The fee
schedules of the Saul Company and Franklin are reviewed and approved by the
Trustees. The Trustees believe that these fees are as favorable to the Real
Estate Trust as would be obtainable from unaffiliated sources. Fees to the Saul
Company and Franklin amounted to $4.8 million in fiscal 1995.

The Real Estate Trust reimburses the Advisor and Franklin for costs and
expenses incurred in connection with the acquisition and development of real

112

<PAGE>

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 Advisory fees equal to 1% 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 $80,000 in
such fees in fiscal 1995.

B. F. Saul Insurance Agency of Maryland, Inc., a subsidiary of the 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 $158,000 in
fiscal 1995.

In April 1994, the Real Estate Trust made a $15.0 million demand loan to the
Saul Company. This loan accrues interest at an annual rate of prime plus 1/2%.
During fiscal 1995, Saul Company made principal and interest payments on such
loan of $2.3 million and $1.2 million respectively.

REMUNERATION OF TRUSTEES AND OFFICERS. For fiscal 1995, the Real Estate
Trust paid the Trustees $81,100 in fees for their services. See "Trustees and
Executive Officers of the Trust." No compensation was paid to the officers of
the Real Estate Trust for acting as such; however, Mr. Saul was paid by the Bank
for his services as the Bank's Chairman and Chief Executive Officer and Mr.
Halpin was paid by the Bank for his services as Senior Vice President and Chief
Financial Officer of the Bank. See "Executive Compensation." Messrs. Grosvenor,
Rogers, and Saul receive compensation for their services as directors of the
Bank and Messrs. Rogers, Saul and Whitmore and all of the officers of the Real
Estate Trust receive compensation from the Saul Company and/or its affiliated
corporations as directors or officers thereof.

LEGAL SERVICES. For legal services to the Real Estate Trust and its
subsidiaries, the law firm in which the professional corporation of George M.
Rogers, Jr., a Trustee of the Trust, is a partner received $0.8 million in
fiscal 1995, excluding expense reimbursements.

OTHER TRANSACTIONS. The Real Estate Trust leases space to Franklin at one
of its income-producing properties. Amounts paid by Franklin under this lease
amounted to $55,000 in fiscal 1995.

BANKING

Set forth below are certain transactions between the Bank and its executive
officers and directors of the Trust and certain of their affiliates. Management
believes that the transactions with related parties described herein have been
conducted on substantially the same terms as similar transactions with unrelated
parties.

SERVICES. The Saul Company and its subsidiaries provide certain services to
the Bank and its subsidiaries. These services have included property
management, cafeteria management, leasing, insurance brokerage and data
processing. The Bank paid the Saul Company fees for these services totaling
$460,000 in fiscal 1995. Subject to certain restrictions under applicable OTS
conflict of interest rules, the Bank intends to continue using the Saul Company
and its subsidiaries for many of these services, provided that the fees remain
competitive with fees charged for similar services by unrelated parties.

LEGAL SERVICES. The law firm of Shaw, Pittman, Potts & Trowbridge, of which
the professional corporation of Mr. Rogers is a member, has rendered legal
services to the Bank, for which the firm received $2.8 million during fiscal
1995, excluding reimbursement of expenses.

113

<PAGE>

OTHER TRANSACTIONS. The Bank or a wholly-owned subsidiary leases certain
branch offices from affiliates of which Mr. Saul is an officer, director and may
be deemed to own beneficially more than 10% of the equity. In fiscal 1995,
total payments under such leases were $951,000.

The Bank leases its operations center from Chevy Chase Lake Corporation
("Lake"), an affiliate of which Mr. Saul is an officer, director and may be
deemed to own beneficially more than 10% of the equity. Payments under this
lease totaled approximately $1.5 million in fiscal 1995.

Lake, the Trust and the Saul Company from time to time maintain
interest-bearing deposit accounts with the Bank. Those accounts totaled $26.6
million at September 30, 1995. The Bank paid interest on the accounts amounting
to $1.1 million in fiscal 1995.

During fiscal 1995, the Bank purchased land and building plans from Lake for
$1.3 million for the purpose of constructing a building to house some of the
Bank's operations.

The Bank leases a portion of its main offices and one branch from a company
in which Mr. Gavin Malloy Farr, a director of the Bank, serves as president and
a director. Total payments under the leases were $1.8 million in fiscal 1995.

The Bank traditionally has offered home mortgage loans, home equity credit
line loans, automobile loans and credit card loans to its executive officers and
directors and to executive officers and directors of its subsidiaries.
Management does not believe these loans involve more than the normal risk of
collectibility. Each loan bears interest at prevailing market rates. All such
loans are currently made to executive officers and directors of the Bank on
substantially the same terms prevailing at the time for comparable transactions
with unrelated parties. FIRREA imposes certain limits on loans, including
prohibitions on preferential loans, by the Bank to its directors, executive
officers, principal shareholders and their related interests.

As of September 30, 1995, the aggregate dollar amount of the indebtedness to
the Bank of executive officers and directors of the Bank and their immediate
family members or companies with which they are affiliated was $3.1 million.
This amount represented 1.0% of the Bank's stockholders' equity as of that date.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) The following documents are filed as part of this report:

1. FINANCIAL STATEMENTS

(a) Report of Independent Public Accountant.
(b) Consolidated Balance Sheets - As of September 30, 1995 and 1994.
(c) Consolidated Statements of Operations - For the years ended September
30, 1995, 1994 and 1993.
(d) Consolidated Statements of Shareholders' Deficit - For the years
ended September 30, 1995, 1994 and 1993.
(e) Consolidated Statements of Cash Flows - For the years ended September
30, 1995, 1994 and 1993.
(f) Notes to Consolidated Financial Statements.

2. FINANCIAL STATEMENT SCHEDULES AND SUPPLEMENTARY DATA

(a) Selected Quarterly Financial Data for the Real Estate Trust are
incorporated by reference in Part II, Item 8.
(b) Report of Independent Public Accountant.
(c) Schedules of the Real Estate Trust:

Schedule I - Condensed Financial Information - For the years ended
September 30, 1995, 1994 and 1993.

Schedule III - Consolidated Schedule of Investment Properties.

114

<PAGE>

All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.

EXHIBITS DESCRIPTION
- ------------ ---------------------------------------------------------------------------------------------
<C> <S>
3. (a) Amended and Restated Declaration of Trust filed with the Maryland State Department of
Assessments and Taxation on June 22, 1990 as filed as Exhibit 3(a) to Registration Statement
No. 33-34930 is hereby incorporated by reference.
(b) Amendment to Amended and Restated Declaration of Trust reflected in Secretary Certificate
filed with the Maryland State Department of Assessments and Taxation on June 26, 1990 as
filed as Exhibit 3(b) to Registration Statement No. 33-34930 is hereby incorporated by
reference.
(c) Amended and Restated By-Laws of the Trust dated as of February 28, 1991 as filed as Exhibit
T3B to the Trust's Form T-3 Application for Qualification of Indentures under the Trust
Indenture Act of 1939 (File No. 22-20838) is hereby incorporated by reference.
4. (a) Indenture dated as of March 30, 1994 between the Trust and Norwest Bank Minnesota, National
Association, as Trustee, with respect to the Trust's 11 5/8% Series B Senior Secured Notes
due 2002, as filed as Exhibit 4(a) to Registration Statement 33-52995 is hereby incorporated
by reference.
(b) Indenture with respect to the Trust's Senior Notes Due from One Year to Ten Years from Date
of Issue as filed as Exhibit 4(a) to Registration Statement No. 33-19909 is hereby
incorporated by reference.
(c) First Supplemental Indenture with respect to the Trust's Senior Notes due from One Year to
Ten Years from Date of Issue as filed as Exhibit T-3C to the Trust's Form T-3 Application for
Qualification of Indentures under the Trust Indenture Act of 1939 (File No. 22-20838) is
hereby incorporated by reference.
(d) Indenture with respect to the Trust's Senior Notes due from One Year to Ten Years from Date
of Issue as filed as Exhibit 4(a) to Registration Statement No. 33-9336 is hereby
incorporated by reference.
(e) Fourth Supplemental Indenture with respect to the Trust's Senior Notes due from One Year to
Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No. 2-95506
is hereby incorporated by reference.
(f) Third Supplemental Indenture with respect to the Trust's Senior Notes due from One Year to
Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No. 2-91126
is hereby incorporated by reference.
(g) Second Supplemental Indenture with respect to the Trust's Senior Notes due from One Year to
Ten Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No. 2-80831
is hereby incorporated by reference.
(h) Supplemental Indenture with respect to the Trust's Senior Notes due from One Year to Ten
Years from Date of Issue as filed as Exhibit 4(a) to Registration Statement No. 2-68652 is
hereby incorporated by reference.
(i) Indenture with respect to the Trust's Senior Notes due from One Year to Five Years from Date
of Issue as filed as Exhibit T-3C to the Trust's Form T-3 Application for Qualification of
Indentures under the Trust Indenture Act of 1939 (File No. 22-10206) is hereby incorporated
by reference.
(j) Indenture dated as of September 1, 1992 with respect to the Trust's Notes due from One to Ten
Years from Date of Issue filed as Exhibit 4(a) to Registration Statement No. 33-34930 is
hereby incorporated by reference.
10. (a) Advisory Contract with B. F. Saul Advisory Company effective October 1, 1982 filed as Exhibit
10(a) to Registration Statement No. 2-80831 is hereby incorporated by reference.
(b) Commercial Property Leasing and Management Agreement effective October 1, 1982 between the
Trust and Franklin Property Company filed as Exhibit 10(b) to Registration Statement No.
2-80831 is hereby incorporated by reference.
(c) Tax Sharing Agreement dated June 28, 1990 among the Trust, Chevy Chase Savings 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) 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 Savings Bank, F.S.B. and certain real property to the Trust
in exchange for preferred shares of beneficial interest of the Trust filed as Exhibit 10(d)
to Registration Statement No. 33-34930 is hereby incorporated by reference.
(e) 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.
(f) Written Agreement dated September 30, 1991 between the Office of Thrift Supervision and Chevy
Chase Savings Bank, F.S.B. filed on Exhibit 10(f) to Registration Statement No. 33-34930 is
hereby incorporated by reference.

</TABLE>

-115-
<PAGE>

EXHIBITS DESCRIPTION
- ------------ ---------------------------------------------------------------------------------------------
<C> <S>
(g) Amendments to Commercial Property Leasing and Management Agreement between the Trust and
Franklin Property Company dated as of December 31, 1992 (Amendment No. 5), July 1, 1989
(Amendment No. 4), October 1, 1986 (Amendment No. 3), January 1, 1985 (Amendment No. 2) and
July 1, 1984 (Amendment No. 1) filed as Exhibit 10(o) to Registration Statement No. 33-34930
is hereby incorporated by reference.
(h) Advisory Contract between B. F. Saul Advisory Company and Dearborn Corporation dated as of
December 31, 1992 filed as Exhibit 10(p) to Registration Statement No. 33-34930 is hereby
incorporated by reference.
(i) Commercial Property Leasing and Management Agreement between Dearborn Corporation and
Franklin Property Company dated as of December 31, 1992 filed as Exhibit 10(q) to
Registration Statement No. 33-34930 is hereby incorporated by reference.
(j) 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
Corporation, Franklin 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.
(k) Exclusivity and Right of First Refusal Agreement dated August 26, 1993 among Saul Centers,
Inc., the Trust, B. F. Saul Company, Westminster Investing Corporation, Franklin 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 is hereby incorporated by reference.
(l) First Amended and Restated Reimbursement Agreement dated as of August 1, 1994 by and among
Saul Centers, Inc., Saul Holdings Limited Partnership, Saul Subsidiary I Limited Partnership,
Saul Subsidiary II Limited Partnership, Avenel Executive Park Phase II, Inc., Franklin
Property Company, Westminster Investing Corporation, Van Ness Square Corporation, Dearborn
Corporation and the Trust filed as Exhibit 10(l) to the Trust's Annual Report on Form 10-K
(File No. 1-7184) for the fiscal year ended September 30, 1995 is hereby incorporated by
reference.
(m) Amendment to Written Agreement dated October 29, 1993 between the Office of Thrift
Supervision and Chevy Chase Savings Bank, F.S.B. filed as Exhibit 10(u) to Registration
Statement No. 33-34930 is hereby incorporated by reference.
(n) Registration Rights Agreement dated as of March 30, 1994 among the Trust, Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Friedman, Billings, Ramsey & Co.,
Inc. as filed as Exhibit 4(c) to Registration Statement No. 33-52995 is hereby incorporated
by reference.
(o) Bank Stock Registration Rights Agreement dated as of March 30, 1994 between the Trust and
Norwest Bank Minnesota, National Association, as Trustee, as filed as Exhibit 4(d) to
Registration Statement No. 33-52995 is hereby incorporated by reference.
*21. List of Subsidiaries of the Trust.
*27. Financial Data Schedule.

<FN>
- ------------------------
* Filed herewith.

</TABLE>

(b) Reports on Form 8-K.

None.

-116-
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES

To the Trustees and Shareholders of
B.F. Saul Real Estate Investment Trust

We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of B.F. Saul Real Estate Investment Trust (the
"Trust") as of September 30, 1995 and 1994 and for the years then ended and have
issued our report thereon dated December 5, 1995. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The
schedules listed in Item 14 are the responsibility of the Trust's management and
are presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audit of
the basic financial statements, and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Washington, D.C.
December 5, 1995

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES

To the Trustees and Shareholders of
B.F. Saul Real Estate Investment Trust

We have audited the consolidated financial statements of B.F. Saul Real Estate
Investment Trust for the year ended September 30, 1993, and have issued our
report thereon dated November 4, 1993; such consolidated financial statements
and report are included elsewhere in this Form 10-K. Our audit also included
the consolidated financial statement schedules of B.F. Saul Real Estate
Investment Trust for the year ended September 30, 1993, listed in Item 14.
These financial statement schedules are the responsibility of the Trust's
management. Our responsibility is to express an opinion based on our audit. In
our opinion, such consolidated financial statement schedules for the year ended
September 30, 1993, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.

STOY, MALONE & COMPANY, P.C.

Bethesda, Maryland
November 4, 1993

<PAGE>

B.F. SAUL REAL ESTATE INVESTMENT TRUST
CONDENSED FINANCIAL INFORMATION (RULE 12-04) SCHEDULE I

(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
-------------------------------------
1995 1994 1993
-------------------------------------
None None None

<PAGE>

Schedule III

Consolidated Schedule of Investment Properties - Real Estate Trust
September 30, 1995
(DOLLARS IN THOUSANDS)

Costs Basis at Close of Period
Capitalized ------------------------------------------
Initial Subsequent Buildings
Basis to to and Leasehold
Trust Acquisition Land Improvements Interests Total
--------- ------------ -------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
HOTELS
Hampton Inn-Dulles, Sterling VA $ -- $ 5,815 $ 290 $ 5,525 $ -- $ 5,815
Holiday Inn, Auburn Hills MI 10,450 357 1,023 9,784 -- 10,807
Holiday Inn, Cincinnati OH 6,859 1,714 245 8,328 -- 8,573
Holiday Inn, Dulles VA 6,950 18,804 862 24,892 -- 25,754
Holiday Inn, Gaithersburg MD 3,849 13,878 1,781 15,946 -- 17,727
Holiday Inn, Pueblo CO 3,458 1,743 561 4,640 -- 5,201
Holiday Inn, Rochester NY 3,340 9,358 605 12,093 -- 12,698
Holiday Inn, Tysons Corner VA 6,976 11,551 3,107 15,420 -- 18,527
Howard Johnsons, Arlington VA 10,187 1,979 1,183 10,983 -- 12,166
Howard Johnsons, Norfolk VA 5,275 106 228 5,153 -- 5,381
--------- ------------ -------- ------------- ---------- ---------
Subtotal - Hotels $ 57,344 $65,305 $9,885 $112,764 $ -- $122,649
--------- ------------ -------- ------------- ---------- ---------

COMMERCIAL
900 Circle 75 Pkway, Atlanta GA $ 33,434 $ 563 $ 563 $ 33,434 $ -- $ 33,997
1000 Circle 75 Pkway, Atlanta GA 2,820 935 248 3,507 -- 3,755
1100 Circle 75 Pkway, Atlanta GA 22,746 1,748 419 24,075 -- 24,494
8201 Greensboro, Tysons Corner VA 28,890 3,169 1,633 30,426 -- 32,059
Commerce Ctr-Ph II, Ft Lauderdale FL 4,266 488 782 3,972 -- 4,754
Dulles North, Loudon County VA -- 5,485 421 5,064 -- 5,485
Metairie Tower, Metairie LA 2,729 468 403 2,794 -- 3,197
Perimeter Way, Atlanta GA 6,950 (3,045) 1,201 2,704 -- 3,905
--------- ------------ -------- ------------- ---------- ---------
Subtotal - Commercial $101,835 $ 9,811 $5,670 $105,976 $ -- $111,646
--------- ------------ -------- ------------- ---------- ---------
</TABLE>

Buildings
and
Improvements
Accumulated Related Date of Date Depreciable
Depreciation Debt Construction Acquired Lives (Years)
------------- --------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
HOTELS
Hampton Inn-Dulles, Sterling VA $ 1,854 $ 2,182 1987 4/87 31.5
Holiday Inn, Auburn Hills MI 288 7,587 1989 11/94 31.5
Holiday Inn, Cincinnati OH 3,784 3,395 1975 2/76 40
Holiday Inn, Dulles VA 8,819 12,809 1971 11/84 28
Holiday Inn, Gaithersburg MD 5,577 7,324 1972 6/75 45
Holiday Inn, Pueblo CO 2,023 4,344 1973 3/76 40
Holiday Inn, Rochester NY 4,948 14,240 1975 3/76 40
Holiday Inn, Tysons Corner VA 5,732 16,615 1971 6/75 47
Howard Johnsons, Arlington VA 4,290 9,620 1973 11/83 30
Howard Johnsons, Norfolk VA 3,438 1,629 1960 2/79 33
------------- ---------
Subtotal - Hotels $40,753 $79,745
------------- ---------

COMMERCIAL
900 Circle 75 Pkway, Atlanta GA $10,068 $22,070 1985 12/85 35
1000 Circle 75 Pkway, Atlanta GA 1,738 2,230 1974 4/76 40
1100 Circle 75 Pkway, Atlanta GA 8,476 16,033 1982 9/82 40
8201 Greensboro, Tysons Corner VA 9,836 36,581 1985 4/86 35
Commerce Ctr-Ph II, Ft Lauderdale FL 1,034 1,340 1986 1/87 35
Dulles North, Loudon County VA 773 3,617 1990 10/90 31.5
Metairie Tower, Metairie LA 1,360 -- 1974 11/76 40
Perimeter Way, Atlanta GA 874 -- 1973 & 1974 6/84 35
------------- ---------
Subtotal - Commercial $34,159 $81,871
------------- ---------
</TABLE>

<PAGE>

Schedule III - Continued

Consolidated Schedule of Investment Properties - Real Estate Trust (Continued)
September 30, 1995
(DOLLARS IN THOUSANDS)

Miscellaneous investments $ 633 $ 674 $ 250 $ 908 $149 $ 1,307
--------- ------------ -------- ------------- ---------- ---------

Total Income-Producing Properties $163,137 $75,790 $19,130 $219,648 $149 $238,927
--------- ------------ -------- ------------- ---------- ---------

LAND PARCELS
Arvida Park of Commerce,
Boca Raton FL $ 7,378 $ 140 $ 7,518 $ -- $-- $ 7,518
Avenel, Gaithersburg MD 361 4 365 -- -- 365
Church Road, Loudoun Co. VA 2,586 2,256 4,842 -- -- 4,842
Circle 75, Atlanta GA 10,006 1,165 11,171 -- -- 11,171
Flagship Centre, Rockville MD 1,729 39 1,768 -- -- 1,768
Holiday Inn - Rochester, Roch. NY 68 0 68 -- -- 68
Overland Park, Overland Park KA 3,771 397 4,168 -- -- 4,168
Perimeter Way Land, Atlanta GA 2,921 0 2,921 -- -- 2,921
Prospect Indust. Pk, Ft. Laud. FL 2,203 9 2,212 -- -- 2,212
Sterling Blvd., Loudoun Co. VA -- 3,425 3,425 -- -- 3,425
--------- ------------ -------- ------------- ---------- ---------
Subtotal $ 31,023 $ 7,435 $38,458 $ -- $-- $ 38,458
--------- ------------ -------- ------------- ---------- ---------

Total Investment Properties $194,160 $83,225 $57,588 $219,648 $149 $277,385
========= ============ ======== ============= ========== =========
</TABLE>

Buildings
and
Improvements
Accumulated Related Date of Date Depreciable
Depreciation Debt Construction Acquired Lives (Years)
------------- --------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
PURCHASE-LEASEBACKS
Beverly Plaza, Casper WY $ -- $ -- 4/74
Chateau di Jon, Metairie LA -- -- 11/73
Country Club, Knoxville TN -- -- 5/76
Houston Mall, Warner Robbins GA -- -- 2/72
Old National, Atlanta GA -- -- 8/71
------------- ---------
Subtotal - Purchase-Leasebacks $ -- $ --
------------- ---------

Miscellaneous investments $ 228 $ 308
------------- ---------

Total Income-Producing Properties $75,140 $161,924
------------- ---------

LAND PARCELS
Arvida Park of Commerce,
Boca Raton FL $ -- $ 19,000 12/84 & 5/85
Avenel, Gaithersburg MD -- -- 12/76
Church Road, Loudoun Co. VA -- -- 9/84 & 4/85
Circle 75, Atlanta GA -- 6,312 2/77 & 1/84
Flagship Centre, Rockville MD -- -- 8/85
Holiday Inn - Rochester, Roch. NY -- -- 9/86
Overland Park, Overland Park KA -- -- 1/77 & 2/85
Perimeter Way Land, Atlanta GA -- -- 10/86
Prospect Indust. Pk, Ft. Laud. FL -- 890 10/83 & 8/84
Sterling Blvd., Loudoun Co. VA -- -- 4/84
------------- ---------
Subtotal $ -- $ 26,202
------------- ---------

Total Investment Properties $75,140 $188,126
============= =========

</TABLE>

<PAGE>

Schedule III - Continued

CONSOLIDATED SCHEDULE OF INVESTMENT PROPERTIES - REAL ESTATE TRUST

NOTES:

(1) See Summary of Significant Accounting Policies for basis of
recording investment properties and computing depreciation.
Investment properties are discussed in Note 3 to Consolidated
Financial Statements.

(2) A reconciliation of the basis of investment properties and
accumulated depreciation follows.

BASIS OF INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION
(In thousands)

For The Year Ended September 30
--------------------------------
1995 1994 1993
---------- ---------- ----------

BASIS OF INVESTMENT PROPERTIES
Balance at beginning of period $266,095 $263,393 $401,147

Additions (reductions) during
the period:
Capital expenditures 16,462 6,717 7,465
Sales - nonaffiliates -- -- (4,414)
Abandoned development costs -- -- (13,104)
Properties exchanged for
partnership investment -- -- (127,995)
Write-down of assets to net
realizable value (2,727) (1,380) --
Other (2,445) (2,635) 294
---------- ---------- ----------
Balance at end of period $277,385 $266,095 $263,393
========== ========== ==========

ACCUMULATED DEPRECIATION
Balance at beginning of period $68,111 $62,626 $95,466

Additions (reductions) during
the period:
Depreciation expense 9,714 9,082 12,457
Sales - nonaffiliates -- -- (820)
Properties exchanged for
partnership investment -- -- (40,870)
Other (2,685) (3,597) (3,607)
---------- ---------- ----------
Balance at end of period $75,140 $68,111 $62,626
========== ========== ==========

<PAGE>

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.

December 28, 1995 B.F. Saul Real Estate Investment Trust

/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.

<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/S/B. FRANCIS SAUL II Trustee, Chairman of the Board
- --------------------- (Principal Executive Officer) December 28, 1995
B. Francis Saul II

/S/STEPHEN R. HALPIN, JR. Vice President and Chief
- ------------------------ Financial Officer (Principal December 28, 1995
Stephen R. Halpin Financial Officer

/S/ROSS E. HEASLEY Vice President (Principal) December 28, 1995
- ------------------ Accounting Officer
Ross E. Heasely

/S/GARLAND J. BLOOM, JR. Trustee December 28, 1995
- ------------------------
Garland J. Bloom, Jr.

/S/GILBERT M. GROSVENOR Trustee December 28, 1995
- -----------------------
Gilbert M. Grosvernor

/S/GEORGE M. ROGERS, JR. Trustee December 28, 1995
- ------------------------
George M.Rogers, Jr.

/S/JOHN R. WHITMORE Trustee December 28, 1995
- -------------------
John R. Whitmore

</TABLE>

<PAGE>
EXHIBIT 21

B.F. SAUL REAL ESTATE INVESTMENT TRUST
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
Site of Date of Current
Incorporation Acquisition/ Principal Business
Formation Activity
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
100% OWNED SUBSIDIARIES

Auburn Hills Hotel Corporation Michigan 1994 Hotel Owner

Avenel Executive Park Phase II, Inc. Maryland 1987 Real Estate Investor

Commerce Center Development Corp. Florida 1980 Office Park Owner

Crabtree Hotel Corp. North Carolina 1995 Inactive

Crystal City Hospitality Corp. Virginia 1986 Hotel Owner

Dallas San Simeon Incorporated Texas 1993 Apartment Project Owner

Dearborn Corporation Delaware 1992 Office Bldg. & Land Owner

Dulles Airport Hotel Corporation Virginia 1986 Inactive

Flagship Centre Corporation Maryland 1985 Land Owner

MHC Airport Inn, Inc. (a) New York 1980/1976 Hotel Operator

MHC Corporation Maryland 1980/1974 Hotel Operator

NVA Development Corporation Virginia 1984 Gen'l Part/Real Est. P./ship

Peachtree/Northeast Corp. Georgia 1979 Office Park Owner

Pueblo Hotel Corp. Colorado 1985 Hotel Owner

Rochester Airport Hotel Corporation New York 1986 Inactive

Scope Hospitality Corp. Virginia 1986 Hotel Owner

Sharonville Hotel Corporation Ohio 1986 Inactive

Timber Resources, Inc. Delaware 1988 Inactive

Tysons Corner Hospitality Corp. Virginia 1986 Inactive

University Avenue Hotel Corporation Arkansas 1995 Inactive

Wheeler Road, Inc. Maryland 1992 Inactive

900 Corporation Georgia 1981 Office Bldg Owner

1100 Corporation Georgia 1979 Office Bldg Owner

1113 Corporation Florida 1984 Gen'l Part/Real Est. P/ship
</TABLE>

- ---------------------------
(a) Subsidiary of MHC Corporation

<PAGE>
EXHIBIT 21

B.F. SAUL REAL ESTATE INVESTMENT TRUST
LIST OF SUBSIDIARIES (Continued)
<TABLE>
<CAPTION>
Date of Current
Site of Acquisition/ Principal Business
Note Corporation Formation Activity
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
80% OWNED SUBSIDIARIES
Ashburn Village Development Corporation (A) Maryland 1991 Real Estate Owned (REO)
Bailey's Corporation (A) Maryland 1993 REO
Balmoral Golf Corporation (C) Maryland 1992 Inactive
B.F. Saul Mortgage Company (A) Maryland 1984 Residential Loan Origination
Bondy Way Development (A) Maryland 1990 REO
Brambleton Land Corporation (A) Maryland 1977 REO
Brooke Manor Land Corporation (A) Maryland 1990 REO
CCB Holding Corporation (A) Delaware 1994 Investments
CCRE, Inc. (B) Maryland 1984 Inactive
Cherrytree Corporation (A) Maryland 1993 REO
Chevy Chase Insurance Agency, Inc. (A) Maryland 1985/1971 Insurance Agency
Chevy Chase Mortgage Company (A) Maryland 1972 Inactive
Chevy Chase Bank, F.S.B. United States 1969 Savings Bank
Chevy Chase Securities, Inc. (A) Maryland 1984 Securities Broker/Dealer
Consumer Finance Corporation (A) Virginia 1994 Consumer Loan Origination
Duvall Village Corporation (A) Maryland 1992 REO
First Balmoral Corp. (A) Maryland 1991 REO
Goldsboro Heights Property Corp. (A) Maryland 1992 Inactive
Great Seneca Development Corporation (A) Maryland 1991 REO
Group Investment Corporation (formerly
C.I.G. International, Ltd.) (B) Maryland 1986 Inactive
Inglewood Corporation (A) Maryland 1990 REO
Manor Investment Company (A) Maryland 1971 Real Estate Ownership/Development
Marbury I Corporation (A) Maryland 1991 REO
Marbury II Corporation (A) Maryland 1991 REO
Marlboro Square, Inc. (A) Maryland 1992 Inactive
NML Corporation (formerly Glen Road
Property Corp.) (A) Maryland 1992 Inactive
North Ode Street Development
Corporation (B) Maryland 1981 Real Estate Finance/Development
Oak Den, Inc. (A) Maryland 1991 Inactive
Old Chapel Corporation (A) Maryland 1992 REO
PMC Corporation (A) Maryland 1991 Inactive
Presley Corporation (A) Maryland 1993 Real Estate Ownership
Primrose Development Corporation (A) Maryland 1990 REO
Ridgeview Centre Corp. (A) Maryland 1992 REO
Ronam Corporation, Inc. (B) Maryland 1986 Real Estate Finance/Development
Seven Lakes Development Corporation (A) Maryland 1991 Inactive
Shoppes of Jefferson, Ltd. (A) Virginia 1991 Inactive
Six Commerce Park Corp. (A) Virginia 1991 Inactive
Sully Park Corporation (A) Maryland 1990 REO
Sully Station Corporation (A) Maryland 1990 REO
Sycolin - Leesburg Corporation (A) Maryland 1992 REO
Terminal Drive Properties Corporation (A) Maryland 1991 REO
</TABLE>

- ---------------------------
(A) Subsidiary of Chevy Chase Bank, F.S.B.
(B) Subsidiary of Manor Investment Company
(C) Subsidiary of First Balmoral Corporation

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS, SCHEDULES AND OTHER DISCLOSURE CONTAINED IN
FORM 10-K FOR THE PERIOD ENDED SEPTEMBER 30, 1995 OF B. F. SAUL REAL
ESTATE INVESTMENT TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS, SCHEDULES AND OTHER DISCLOSURE.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 17355
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 277385
<DEPRECIATION> 75140
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 82630
<CGS> 0
<TOTAL-COSTS> 46795
<OTHER-EXPENSES> 22612
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40564
<INCOME-PRETAX> (27341)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>

<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS, SCHEDULES AND OTHER DISCLOSURE CONTAINED IN
FORM 10-K FOR THE PERIOD ENDED SEPTEMBER 30, 1995 OF B. F. SAUL REAL
ESTATE INVESTMENT TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS, SCHEDULES AND OTHER DISCLOSURE.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 198096
<INT-BEARING-DEPOSITS> 51186
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 4370
<INVESTMENTS-MARKET> 4371
<LOANS> 2895901
<ALLOWANCE> 195732
<TOTAL-ASSETS> 0
<DEPOSITS> 4159252
<SHORT-TERM> 100088
<LIABILITIES-OTHER> 87545
<LONG-TERM> 272566
<COMMON> 0
0
0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 0
<INTEREST-LOAN> 294554
<INTEREST-INVEST> 61190
<INTEREST-OTHER> 9571
<INTEREST-TOTAL> 365315
<INTEREST-DEPOSIT> 154299
<INTEREST-EXPENSE> 189114
<INTEREST-INCOME-NET> 176201
<LOAN-LOSSES> 54979
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 298656
<INCOME-PRETAX> 55683
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.61
<LOANS-NON> 27951
<LOANS-PAST> 0
<LOANS-TROUBLED> 17344
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 50205
<CHARGE-OFFS> 56577
<RECOVERIES> 11889
<ALLOWANCE-CLOSE> 60496
<ALLOWANCE-DOMESTIC> 60496
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0

</TABLE>

<PAGE>
<ARTICLE> CT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS, SCHEDULES AND OTHER DISCLOSURE CONTAINED IN
FORM 10-K FOR THE PERIOD ENDED SEPTEMBER 30, 1995 OF B. F. SAUL REAL
ESTATE INVESTMENT TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS, SCHEDULES AND OTHER DISCLOSURE.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<TOTAL-ASSETS> 5224948
<COMMON> 6642
0
516
<OTHER-SE> (75338)
<TOTAL-LIABILITY-AND-EQUITY> 5224948
<TOTAL-REVENUES> 0
<INCOME-TAX> 2021
<INCOME-CONTINUING> 26321
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10850
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.12

</TABLE>