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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                               ------------------
                                    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, 2001

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

    For the transition period from                      to
                                   --------------------    ---------------------

                          Commission File number 1-7184

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

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

   8401 Connecticut Avenue, Chevy Chase, Maryland            20815
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(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:

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

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

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

                                     N/A
--------------------------------------------------------------------------------
                              (Title of class)

Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
requires to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.   Yes X   No
                                       ---     ---

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

There were no Common Shares of Beneficial Interest held by non-affiliates of the
registrant as of December 15, 2001.

The number of Common Shares of Beneficial Interest, $1 Par Value, outstanding as
of December 15, 2001 was 4,826,910.

                                TABLE OF CONTENTS

                                     PART I

ITEM 1.  BUSINESS

    Overview ..........................................................
    Real Estate .......................................................
    Banking ...........................................................
    Federal Taxation ..................................................

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

    Real Estate .......................................................
    Banking ...........................................................

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

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

                                     PART II

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

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

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

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

    Liquidity and Capital Resources ...................................
         Real Estate ..................................................
         Banking ......................................................

    Results of Operations .............................................
         Fiscal 2001 Compared to Fiscal 2000 ..........................
              Real Estate .............................................
              Banking .................................................

         Fiscal 2000 Compared to Fiscal 1999 ..........................
              Real Estate .............................................
              Banking .................................................

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ..................

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

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

                                    PART III

ITEM 10. TRUSTEES AND EXECUTIVES OFFICERS OF THE TRUST ................

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

ITEM 11. EXECUTIVE COMPENSATION .......................................

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
          OWNERS AND MANAGEMENT .......................................

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ...............
              Real Estate .............................................
              Banking .................................................

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
          AND REPORTS ON FORM 8-K .....................................

                                     PART I

ITEM 1.  BUSINESS

Overview

B.F. Saul Real Estate Investment 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 activities of the Trust are the ownership of 80% of the
outstanding common stock of Chevy Chase Bank, F.S.B., whose assets accounted for
96% of the Trust's consolidated assets at September 30, 2001, and the ownership
and development of income-producing properties. By virtue of its ownership of a
majority interest in Chevy Chase, the Trust is a savings and loan holding
company and subject to regulation, examination and supervision by the Office of
Thrift Supervision, also know as "OTS." See "Banking -- Holding Company
Regulation."

The Trust recorded net income of $43.7 million in the fiscal year ended
September 30, 2001, compared to a net income of $22.4 million in the fiscal year
ended September 30, 2000.

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

Real Estate

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

The Real Estate Trust has significant relationships with B.F. Saul Company (the
"Saul Company") and two of its wholly owned subsidiaries, B.F. Saul Advisory
Company L.L.C., formerly known as B.F. Saul Advisory Company, referred to in
this report as the "Advisor," and B. F. Saul Property Company, formerly known as
Franklin Property Company. Saul Company, founded in 1892, specializes in real
estate investment services including acquisitions, financing, management and
leasing, and insurance. Certain officers and trustees of the Trust are also
officers and/or directors of Saul Company, the Advisor and B. F. Saul Property
Company. Other than uncompensated officers, the Trust has no employees. See
"Item 13. Certain Relationships and Related Transactions -- Management
Personnel."

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. B. F. Saul Property Company acts as leasing and management agent
for the income-producing properties owned by the Real Estate Trust, and plans
and oversees the development of new properties and the expansion and renovation
of existing properties.

Banking

Chevy Chase Bank is a federally chartered and federally insured stock savings
bank which at September 30, 2001 was conducting business from 183 full service
offices, including 50 grocery store banking centers, and 853 automated teller
machines in Maryland, Delaware, Virginia and the District of Columbia. The bank
has its home office in McLean, Virginia and its executive offices in Bethesda,
Maryland, both suburban communities of Washington, D.C. The bank also maintains
one commercial loan production office located in Baltimore, Maryland, nine
mortgage loan production offices in the mid-Atlantic region, eight of which are
operated by a wholly-owned mortgage banking subsidiary, and five consumer loan
production offices. At September 30, 2001, the bank had total assets of $11.4
billion and total deposits of $7.6 billion. Based on total consolidated assets
at September 30, 2001, Chevy Chase is the largest bank headquartered in the
Washington, DC metropolitan area.

Chevy Chase is a consumer oriented, full service banking institution principally
engaged in the business of attracting deposits from the public and using such
deposits, together with borrowings and other funds, to make loans secured by
real estate, primarily residential mortgage loans, and consumer loans. The bank
also has an active commercial lending program. The bank's principal deposit and
lending markets are located in the Washington, DC metropolitan area. 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. In addition,
the bank offers a variety of investment products and provides fiduciary services
to a primarily institutional customer base through its subsidiary, ASB Capital
Management, Inc. and to a primarily high net worth customer base through its
subsidiary, Chevy Chase Trust Company.

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

On November 9, 2000, CFC - Consumer Finance Corporation, formerly Consumer Finance
Corporation ("CFC"), a wholly owned subsidiary of the bank engaged in indirect
subprime automobile lending stopped originating new loans. CFC continues to own
its existing portfolio of loans and continues to service and collect those
loans.

Chevy Chase recorded operating income of $114.3 million for the year ended
September 30, 2001, compared to operating income of $81.3 million for the year
ended September 30, 2000. At September 30, 2001, the bank's tangible, core, tier
1 risk-based and total risk-based regulatory capital ratios were 5.44%, 5.44%,
6.84% and 10.52%, respectively. The bank's regulatory capital ratios exceeded
the requirements under the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989, amended, also known "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, as amended, also known "FDICIA."

Chevy Chase is subject to comprehensive regulation, examination and supervision
by OTS and, to a lesser extent, by the Federal Deposit Insurance Corporation.
The bank's deposit accounts are fully insured up to $100,000 per insured
depositor by the Saving Association Insurance Fund, also known as SAIF, which is
administered by the FDIC.

REAL ESTATE

Real Estate Investments

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

The following tables set forth, at and for the periods indicated, certain
information regarding the properties in the Real Estate Trust's investment
portfolio at September 30, 2001.

HOTELS

                                                                             Average Occupancy (2)     Average Room Rate
                                                                             --------------------- -----------------------------
                                                                                Year Ended
                                                                               September 30,        Year Ended September 30,
                                                                             ------------------  -------------------------------
       Location                          Name                    Rooms (1)   2001  2000   1999     2001       2000      1999
----------------------- ---------------------------------------  ----------  ----- -----  -----  ---------  --------- ----------

       COLORADO
        Pueblo                    Pueblo Holiday Inn                   191   52%   63%    66%     $58.47     $51.59    $48.80

       FLORIDA
      Boca Raton           Boca Raton SpringHill Suites (3)            146   64%   60%     NA     $83.91     $82.94    $64.35
      Boca Raton           Boca Raton TownePlace Suites (4)             91   78%   73%     NA     $71.79     $75.57    $70.35
    Ft. Lauderdale       Ft. Lauderdale TownePlace Suites (5)           95   81%   64%     NA     $64.00     $68.45      NA

       MARYLAND
     Gaithersburg              Gaithersburg Holiday Inn                300   67%   68%    65%     $88.99     $80.28    $80.25
     Gaithersburg         Gaithersburg TownePlace Suites (6)            91   75%   75%     NA     $78.04     $70.90    $73.25

       MICHIGAN
     Auburn Hills          Auburn Hills Holiday Inn Select             190   64%   76%    78%    $111.20    $117.67    $106.05

       NEW YORK
      Rochester              Rochester Airport Holiday Inn             280   61%   65%    61%     $72.22     $72.97    $76.47

         OHIO
      Cincinnati                Cincinnati Holiday Inn                 275   55%   63%    66%     $70.28     $72.08    $70.59

       VIRGINIA
      Arlington           National Airport Crowne Plaza (7)            308   72%   68%    60%    $105.55    $107.49    $104.32
      Arlington            National Airport Holiday Inn (8)            280   71%   74%    58%    $101.99     $89.12    $80.26
       Herndon               Herndon Holiday Inn Express               115   69%   79%    81%    $101.48     $91.64    $84.49
        McLean               Tysons Corner Courtyard (9)               229   61%    NA     NA    $136.35       NA        NA
        McLean                 Tysons Corner Holiday Inn               316   68%   73%    72%    $112.94    $112.71    $104.22
       Sterling               Dulles Airport Hampton Inn               127   71%   81%    82%     $95.04     $91.62    $82.97
       Sterling               Dulles Airport Holiday Inn               297   66%   81%    77%    $106.14     $99.74    $90.44
       Sterling            Dulles Airport TownePlace Suites             95   71%   83%    74%     $93.73     $85.57    $78.08
       Sterling          Dulles Town Center Hampton Inn (10)           152   57%    NA     NA     $98.80       NA          NA
                                                                 ----------  ----- -----  -----  ---------  --------- ----------
                                        Totals                       3,578   66%   71%    68%     $94.32     $89.16    $85.45

(1)    Available rooms as of September 30, 2001.
(2)    Average occupancy is calculated by dividing the rooms occupied by the rooms available.
(3)    Opened July 9, 1999.
(4)    Opened June 28, 1999.
(5)    Opened October 25, 1999.
(6)    Opened June 24, 1999.
(7)    Operated as a Holiday Inn in fiscal 1999. Converted to a Crowne Plaza in October 1999.
(8)    Operated as a  Howard Johnson in  fiscal 1999.  Converted to a Holiday Inn in October 1999.
(9)    Opened December 15, 2000.
(10)   Opened November 27, 2000.

OFFICE AND INDUSTRIAL

                                                                              Leasing Percentages      Expiring Leases (1)
                                                                             ---------------------  ----------------------------
                                                                   Gross         September 30,       Year Ending September 30,
                                                                 Leasable    ---------------------  ----------------------------
       Location                          Name                    Area (1)     2001   2000    1999        2002           2003
----------------------- ---------------------------------------  ----------  ------ ------  ------  -------------  -------------

       FLORIDA
   Fort Lauderdale            Commerce Center - Phase II            61,149    90%    90%     89%          15,286         11,230

       GEORGIA
       Atlanta                  900 Circle 75 Parkway              345,502    87%    98%     99%          90,777         39,218
       Atlanta                  1000 Circle 75 Parkway              89,412   100%    98%     93%          21,573         13,086
       Atlanta                  1100 Circle 75 Parkway             269,049    93%    99%     77%          56,655         26,678

       MARYLAND
        Laurel                    Sweitzer Lane (2)                150,020   100%    NA      NA               NA             NA

       VIRGINIA
        McLean                  8201 Greensboro Drive              360,854    86%    95%     93%           9,510         95,837
        McLean                  Tysons Park Place (3)              247,581    87%   100%     NA           19,152          6,456
       Sterling                      Dulles North                   59,886   100%    99%    100%          34,373         16,943
       Sterling                  Dulles North Two (4)               79,210   100%   100%     NA               NA             NA
       Sterling                 Dulles North Five (5)               80,391   100%   100%     NA               NA             NA
       Sterling                  Dulles North Six (6)               53,517   100%   100%     NA               NA             NA
                                                                 ----------  ------ ------  ------  -------------  -------------
                                        Totals                   1,796,571    92%    98%     92%         247,326(7)     209,448(7)

(1)  Square feet
(2)  Acquired November 15, 2000.
(3)  Acquired December 13, 1999.
(4)  Operational October 1, 1999.
(5)  Operational March 1, 2000.
(6)  Operational October 1, 2000.
(7)  Represents 13.8% and 11.7%, respectively, of the Real Estate Trust's
     office and industrial portfolio in terms of square footage as of
     September 30, 2002 and 2003, respectively.

LAND PARCELS

    Location                     Name                 Acres              Zoning
------------------  --------------------------------  ------  ------------------------------

     FLORIDA
   Boca Raton           Arvida Park of Commerce         6.5             Mixed Use
 Fort Lauderdale            Commerce Center             1.6        Office and Warehouse

     GEORGIA
     Atlanta                   Circle 75              124.9        Office and Industrial

     KANSAS
  Overland Park              Overland Park            161.9   Residential, Office and Retail

    MARYLAND
    Rockville               Flagship Centre             7.7            Commercial

    MICHIGAN
  Auburn Hills         Auburn Hills Holiday Inn         0.5            Commercial

    NEW YORK
    Rochester        Rochester Airport Holiday Inn      2.9            Commercial

    VIRGINIA
    Sterling                  Cedar Green              10.7            Commercial
    Sterling                  Church Road              39.9        Office and Industrial
    Sterling              Sterling Boulevard           28.1            Industrial
                                                      ------
                                 Total                384.7

OTHER REAL ESTATE INVESTMENTS

            PURCHASE-LEASEBACK PROPERTIES (1)
-----------------------------------------------------------

                     APARTMENTS

    Location           Name            Number of Units
-----------------  --------------  ------------------------

   LOUISIANA
    Metairie       Chateau Dijon             336

   TENNESSEE
   Knoxville       Country Club              232
                                             ---
                       Total                 568

                  SHOPPING CENTERS

    Location           Name        Gross Leasable Area (2)
-----------------  --------------  ------------------------

    GEORGIA
    Atlanta        Old National            160,000
 Warner Robbins    Houston Mall            264,000
                                           -------
                       Total               424,000

(1) The Real Estate 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.

Investment in Saul Holdings Limited Partnership

On August 26, 1993, the Real Estate Trust consummated a series of transactions
in which it transferred 22 shopping center properties and one of its office
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.

In exchange for the transferred properties, the Real Estate Trust received
securities representing a 21.5% limited partnership interest in Saul Holdings
Partnership. Entities under common control with the Trust received limited
partnership interests collectively representing a 5.5% partnership interest in
Saul Holdings Partnership in exchange for the transfer of property management
functions and certain other properties to Saul Holdings Partnership and its
subsidiaries. Saul Centers, Inc., a newly organized, publicly held real estate
investment trust ("Saul Centers"), 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.

Affiliates of the Trust 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. Certain officers and trustees of the Trust are also officers
and/or directors of Saul Centers. See "Item 13. Certain Relationships and
Related Transactions -- Management Personnel."

The Real Estate Trust and affiliates of the Trust own 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 provided, subject to Saul Centers'
articles of incorporation and subsequent waiver issued in March 2001, that they
do not own rights to the extent that they collectively would be treated as
owning, directly or indirectly, more than 29.9% of the value of the outstanding
equity securities of Saul Centers.

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

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

Allocations and Distributions of Saul Holdings 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.

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.

Holding Company Regulation

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

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

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

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

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

o an amount equal to 5.0% of the bank's total assets at the time the bank became
"undercapitalized," and
o the amount necessary to bring the bank into compliance with all applicable
capital standards as of the time the bank fails to comply with its capital plan.

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

BANKING

Regulation

Federal Home Loan Bank System. The bank is a member of the Federal Home Loan
Bank (the "FHLB") of Atlanta. 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 their
members. Their primary credit mission is to facilitate residential mortgage
lending and support community and economic development activity in rural and
urban communities. From time to time, the bank obtains advances from the FHLB of
Atlanta. At September 30, 2001, the bank had outstanding advances of $2.2
billion. See Note 20 to the Consolidated Financial Statements in this report and
"Banking - 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:

o 1.0% of mortgage-related assets;
o 0.3% of total assets;
o $500; or
o 5.0% of outstanding advances.

The bank had an investment of $113.0 million in FHLB of Atlanta stock at
September 30, 2001. The bank earned dividends on that stock of $8.1 million and
$7.7 million during the years ended September 30, 2001 and 2000, respectively.
Since 1999, membership in the FHLB has been voluntary rather than mandatory for
federal thrifts like the bank. Since membership is required to obtain
advances from the FHLB and the bank continues to rely on FHLB advances as an
important source of funds, the bank currently intends to retain its voluntary
membership in the FHLB of Atlanta.

Liquidity Requirements. On March 15, 2001, the OTS amended its regulations to
repeal the minimum liquidity ratio of 4% and adopted an interim rule that
requires thrifts to maintain sufficient liquidity to ensure their safe and sound
operation. Prior to that, the bank was required to maintain a quarterly average
balance of liquid assets equal to 4.0% of its average daily balance of deposits,
plus borrowings payable in one year or less. A standard measure of liquidity
in the savings industry is the ratio 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,
certain mortgage-related securities, certain mortgage loans and U.S. Government,
state government and federal agency obligations, to net withdrawable accounts
and borrowings payable in one year or less. Failure to meet this requirement
could subject the bank to monetary penalties imposed by the OTS.

Deposit Insurance Premiums. Under FDIC insurance regulations, the bank is
required to pay premiums to the SAIF for insurance of its deposit accounts. The
FDIC utilizes a risk-based premium system in which an institution pays premiums
for deposit insurance on its SAIF-insured deposits 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
funds for commercial banks and thrifts have been segregated into the bank
Insurance Fund (the "BIF") and the SAIF, respectively. The FDIC is required to
maintain the reserve levels of both the BIF and the SAIF at 1.25% of insured
deposits.

Beginning in 1997, commercial banks have been required to share in the payment
of interest due on Financing Corporation ("FICO") bonds used to provide
liquidity to the savings and loan industry in the 1980s. Annual FICO assessments
added to deposit insurance premiums equaled 1.93 basis points for SAIF and BIF
members for the first semi-annual period of 2001 and 1.86 basis points for SAIF
and BIF members for the second semi-annual period of 2001.

SAIF insurance may be terminated by the FDIC, after notice and a 30-day
corrective period, if the FDIC finds that a financial 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, order or condition
imposed by the FDIC. The 30-day period may be eliminated by the FDIC with the
approval of the OTS.

On April 5, 2001, the FDIC published its recommendations to reform the deposit
insurance system. The recommendations include (i) the FDIC's continued support
for the merger of the BIF and SAIF into a single insurance fund, (ii) permitting
the FDIC to charge risk-based premiums on all depository institutions based on
their risk profile, (iii) allowing for gradual increases or decreases in
premiums if the fund's reserves fall outside a specific range of reserves, (iv)
providing rebates to institutions based on historical contributions, and (v)
indexing the fund's coverage amounts against the rate of inflation to maintain
its real value. Each of these reforms would require Congressional approval.
Legislation aimed at addressing some or all of these issues has been introduced
in Congress in various forms. Since it is uncertain at this time whether, or
in what form, any reform of the deposit insurance system will be adopted, the
bank is unable to assess the potential effects on the bank.

Regulatory Capital

The bank is subject to:

o a minimum tangible capital requirement,
o a minimum core (or leverage) capital requirement, and
o a minimum risk-based capital requirement.

Each of these requirements generally must be no less stringent than the capital
standards for national banks. At September 30, 2001, the bank's tangible capital
ratio was 5.44%, its core (or leverage) ratio was 5.44%, and its total
risk-based capital ratio was 10.52%, compared to the minimum requirements of
1.50%, 4.00% and 8.00%, respectively.

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

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

Under OTS regulations, servicing assets can be included in core capital in an
amount up to 100% of core capital. Non-mortgage servicing assets are subject to
a sublimit of 25% of core capital. For these purposes, servicing assets are
valued at the lesser of 90% of fair market value or 100% of the current
unamortized book value. At September 30, 2001, the bank had qualifying servicing
assets of $62.3 million, which constituted 10.1% of core capital at that date.
In December 2000, the President signed into law legislation which, among other
things, provides federal banking agencies the flexibility to permit inclusion in
core capital of up to 100 percent of the fair market value of readily marketable
purchased mortgage servicing rights. However, the agencies have not modified the
existing 90% standard.

The risk-based capital requirements imposed by the OTS vary the amount of
capital required for an asset based on the degree of credit risk associated with
that asset and include off-balance sheet assets in the asset base used to
compute the bank's risk-based capital ratio.

There are currently four categories of risk-weightings:

o 0% for cash and similar assets;
o 20% for qualifying mortgage-backed securities;
o 50% for qualifying residential permanent real estate loans; and
o 100% for other assets, including consumer loans, commercial real estate loans,
loans more than 90 days past due, and real estate acquired in settlement of
loans.

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

On March 15, 2001, the OTS proposed an amendment to its capital regulations that
would permit residential mortgage loans with a loan-to-value ("LTV") ratio up to
90% to qualify for the 50% risk weighting currently available only to loans with
LTVs not exceeding 80%. In addition, mortgage loans that do not meet the LTV
ratio at origination, but are later paid down to the appropriate LTV ratio may
qualify for the 50% risk weighting if they satisfy all other requirements.
However, a qualifying residential mortgage loan that negatively amortizes above
the 90% LTV ratio would be required to be reassigned to the 100% risk-weighting
category. Management does not believe that adoption of the amendments as
proposed would have a material effect on the bank.

Capital also must be maintained against assets sold with recourse despite the
fact that the assets are accounted for as having been sold. Under the OTS's
capital requirements, the bank maintains dollar-for-dollar capital against
securitized assets up to the otherwise applicable capital requirement on the
underlying loans in an amount equal to the sum of:

o the amounts on deposit in spread accounts;
o the amount of any interest-only strips relating to the securitized assets; and
o certain other items representing recourse for regulatory capital purposes.

On November 29, 2001, the OTS and the other federal bank regulatory agencies
revised their risk-based capital regulations to address the regulatory capital
treatment of certain residual interests in asset securitizations. The rule will
become effective January 1, 2002 and will apply to those transactions that
settle on or after that date. For those transactions entered into prior to the
effective date, the bank may delay the application of the rule until December
31, 2002. Residual interests include interest-only strips receivable, spread
accounts, cash collateral accounts, over-collateralization of receivables,
retained subordinated interests and other similar forms of on-balance sheet
assets that function as credit enhancements. The most significant revisions
will:

o require that risk-based capital be held in an amount equal to the amount of
residual interest that is retained on balance sheet following a securitization;
o require a deduction from Tier 1 capital equal to the amount of certain
interest-only strips that exceeds 25 percent of Tier 1 capital; and
o apply a "ratings based approach" that sets capital requirements for positions
in securitizations according to their relative risk exposure.

At September 30, 2001, the bank had $101.2 million in residual interests that,
under the rule, would require a dollar-for-dollar deduction from Tier 1 capital.
Of this amount, $69.7 million is currently subject to a dollar-for-dollar
deduction from Tier 1 capital. At September 30, 2001, the bank had interest-only
strips of $47.1 million, which constituted 7.6% of Tier 1 capital at that date.
The remainder of these residual interests to the extent still retained by the
bank, will not be subject to the dollar-for-dollar deduction from Tier 1 capital
until December 31, 2002.

The bank may use supplementary capital to satisfy the risk-based capital
requirement to the extent of its 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, 2001, the bank had $63.0 million in allowances for loan
and lease losses, all of which was includable as supplementary capital.

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

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

o the bank 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 its capital.

The bank has selected the second option for its subordinated debentures due 2005
and must continue to use that option for its subordinated debentures due 2008
and any future issuances as long as the prior issuance remains outstanding. At
September 30, 2001, the bank had $250.0 million in maturing subordinated capital
instruments, all of which was includable as supplementary capital. Of that
amount, $150.0 million matures in 2005 and $100.0 million matures in 2008. See
"Deposits and Other Sources of Funds - Borrowings."

On March 15, 2001, the OTS proposed the repeal of the interest-rate risk
component of its risk-based capital regulation. Under that component, which has
never been implemented by the OTS, 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. The bank continues to monitor its interest-rate exposure in
accordance with OTS guidance. See "Banking - Asset and Liability Management."

The OTS also considers 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 increased capital
requirements.

All or a portion of the assets of each of the bank's subsidiaries are generally
consolidated with the assets of the bank for regulatory capital purposes unless
all of the bank's investments in, and extensions of credit to, such subsidiary
are deducted from capital. The bank's investments in, and loans to, subsidiaries
engaged in activities not permissible for a national bank, are, with certain
exceptions, deducted from capital under each of the three regulatory capital
requirements. The bank's real estate development subsidiaries are its only
subsidiaries engaged in activities not permissible for a national bank. At
September 30, 2001, the bank's investments in, and loans to, these
"non-includable subsidiaries" totaled approximately $1.6 million, of which $1.4
million constituted a deduction from tangible capital.

OTS capital regulations also require a 100% deduction from total capital of all
equity investments that are not permissible for national banks and the portion
of land loans and non-residential construction loans in excess of an 80% LTV
ratio. On March 15, 2001, the OTS proposed an amendment to its capital
regulations that would repeal the requirement for thrifts to deduct from their
total capital that portion of a non-residential construction loan in excess of
an 80% LTV ratio. The bank's only asset at September 30, 2001 that is treated as
an equity investment for regulatory capital purposes is a property classified as
real estate held for sale. At September 30, 2001, the book value of this
property was $2.4 million, which 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, 2001. The bank has $0.2
million of valuation allowances maintained against its non-includable
subsidiaries and equity investments, which, pursuant to OTS guidelines, are
available as a credit against the otherwise required deductions from capital.

OTS capital regulations provide a five-year holding period for real estate
acquired in settlement of loans ("REO" or "real estate held for sale") to
qualify for an exception from treatment as an equity investment. The five year
period may be extended by the OTS. If an REO property is considered an equity
investment, its then-current book value is deducted from total capital.
Accordingly, if the bank is unable to dispose of any REO property prior to the
end of its applicable five-year holding period and is unable to obtain an
extension of that five-year holding period from the OTS, the bank could be
required to deduct the then-current book value of such REO property from
risk-based capital. In December 2001, the bank received from the OTS additional
extensions through December 19, 2002, of the holding periods for certain of its
REO properties acquired through foreclosure in fiscal years 1990, 1991 and 1995.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Banking - Financial Condition - Capital."

The bank's ability to maintain capital compliance depends on a number of
factors, including, for example, general economic conditions and the condition
of local markets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition - Capital." The OTS
has the authority to require an institution to maintain capital at levels above
the minimum levels generally required, but has not done so for the bank.

On January 31, 2001, the OTS and the other federal bank regulatory agencies
issued supplemental guidance for supervision of institutions with subprime
lending portfolios that exceed 25% of Tier 1 capital. Among other things, the
guidance suggests that these institutions generally will be expected to hold
capital against those portfolios in an amount that is 1 1/2 to 3 times the
amount required for non-subprime assets of the same type. However, examiners are
given broad discretion over how to apply the guidelines to a particular
institution. Although the bank's subprime automobile lending portfolio (held
through a subsidiary) exceeded the 25% threshold at September 30, 2001, the
subsidiary stopped originating new loans effective November 9, 2000. As a
result, it is unclear how the new guidelines may be applied to the bank.

In January 2001, the Basle Committee on Banking Supervision published a revised
proposal to amend its 1988 risk-based capital accord, which forms the basis for
the risk-based capital requirements of the OTS and the other U.S. federal
financial institution regulators. Key components of the revised proposal
include:

o adding a fifth risk-weighting of 150 percent for loans to low-quality
companies;
o using rating agency assessments to determine risk-weightings for claims on
banks, commercial loans and securitization interests;
o liberalizing capital requirements for certain collateralized and guaranteed
loans;
o authorizing regulators to use the supervisory review process to determine
whether to impose increased capital requirements on individual institutions with
high levels of interest-rate risk or to require reduction of that risk;
o establishing a methodology for requiring that capital be maintained against
operational risk; and
o authorizing regulators to impose explicit capital requirements on managed or
securitized assets.

Comments on the January 2001 release, as amended, were due May 31, 2001 and
final regulations are expected to be adopted late in 2002. The bank is unable to
predict whether, or in what form, any final changes will be adopted by the Basle
Committee, or the extent to which any changes actually adopted will be reflected
in the capital requirements that apply to the bank.

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

An institution is categorized as "well capitalized" under the regulations if (i)
it has a leverage ratio of at least 5.0%, a tier 1 risk-based capital ratio of
at least 6.0% and a total risk-based capital ratio of at least 10.0%, and (ii)
is not subject to any written agreement, order, capital directive or prompt
corrective action directive issued by the OTS to meet and maintain a specific
capital level.

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

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

At September 30, 2001, the bank's leverage ratio of 5.44%, its tier 1 risk-based
ratio of 6.84%, and its total risk-based capital ratio of 10.52% exceeded the
minimum ratios established for "well-capitalized" institutions.

Qualified Thrift Lender ("QTL") Test. The bank must meet a QTL test to avoid
imposition of certain restrictions. The QTL test requires the bank to maintain a
"thrift investment percentage" equal to a minimum of 65%. The numerator of the
percentage is the bank's "qualified thrift investments" and the denominator is
the bank's "portfolio assets." "Portfolio assets" is defined as total assets
minus

o the bank's premises and equipment used to conduct the bank's business,
o liquid assets up to 20 percent of total assets, and
o intangible assets, including goodwill.

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

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

The bank had 86.4% of its assets invested in qualified thrift investments at
September 30, 2001, and met the QTL test in each of the previous 12 months.

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

o 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,
o establish any new branch office at any location at which a national bank could
not establish a branch office,
o obtain new advances from the FHLB, and
o 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 meet the QTL test, an institution
may not retain any investments or engage in any activities that would be
impermissible for a national bank. Failure to meet the QTL test also could limit
the bank's ability to establish and maintain branches outside of its home state
of Virginia.

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

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

Dividends and Other Capital Distributions. OTS regulations limit the ability of
the bank to make "capital distributions." "Capital distributions" include
payment of dividends, stock repurchases, cash-out mergers, repurchases of
subordinated debt and other distributions charged against the capital accounts
of an institution. The regulations do not apply to interest or principal
payments on debt, including interest or principal payments on the bank's
outstanding subordinated debentures.

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

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

o the bank would be undercapitalized following the distribution;
o the capital distribution raises safety and soundness concerns; or
o the capital distribution violates any statute, regulation, agreement with the
OTS, or condition imposed by the OTS.

The OTS has approved the payment of dividends on the bank's outstanding 13%
Noncumulative Perpetual Preferred Stock, Series A (the "13% Preferred Stock"),
provided that:

o 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;
o dividends are earned and payable in accordance with the OTS capital
distribution regulation; and
o the bank continues to make progress in the disposition and reduction of its
non-performing loans and real estate owned.

Dividends paid on the 10 3/8% Noncumulative Exchangeable Preferred Stock, Series
A, (the "REIT Preferred Stock") issued by Chevy Chase Preferred Capital
Corporation (the "REIT Subsidiary") are not considered "capital distributions"
provided the bank is classified as "well capitalized." However, if the bank were
not classified as "well capitalized," the entire amount of the REIT Subsidiary
preferred dividends would be treated as a capital distribution. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Banking - Financial Condition - Capital."

In addition, the OTS conditioned a recent payment of common stock dividends by
the bank on the bank's maintaining its well capitalized status. Failure of the
bank to remain well capitalized therefore could have a material adverse effect
on the bank's ability to pay dividends on both its common and REIT Preferred
Stock.

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

The bank is subject to other limitations on its ability to pay dividends. The
indenture pursuant to which $150 million principal amount of the bank's 9 1/4%
Subordinated Debentures due 2005 was issued in 1993 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:

o $15 million,
o 66 2/3% of the bank's consolidated net income (as defined) accrued on a
cumulative basis commencing on October 1, 1993, and
o 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 1993 Indenture, the 1993 Indenture does
not restrict the payment of dividends on the 13% Preferred Stock or any
payment-in-kind preferred stock issued in lieu of cash dividends on the 13%
Preferred Stock or the redemption of any such payment-in-kind preferred stock.
The indenture pursuant to which $100 million principal amount of the bank's 1996
Debentures was issued provides that the proposed dividend may not exceed the sum
of the restrictions discussed above for the 1993 Indenture and the aggregate
liquidation preference of the bank's 10 3/8% Noncumulative Preferred Stock,
Series B (the "Series B Preferred Stock"), if issued in exchange for the
outstanding REIT Preferred Stock. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Banking - Financial
Condition - Capital" and "Item 12. Security Ownership of Certain Beneficial
Owners and Management."

The payment of any dividends on the bank's common stock and preferred stock will
be determined by the bank's board of directors based on the bank's liquidity,
asset quality profile, capital adequacy and recent earnings history, as well as
economic conditions and other factors that the bank's board of directors
determines are relevant, including applicable government regulations and
policies. See "Banking - Deposits and Other Sources of Funds - Borrowings."

Lending Limits. The bank generally is prohibited from lending to one borrower
and its related entities amounts in excess of 15% of unimpaired capital and
unimpaired surplus. The bank may lend an additional 10% for loans fully secured
by readily marketable collateral. The bank's regulatory lending limit was
approximately $139.8 million at September 30, 2001, and no group relationships
exceeded this limit at that date.

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

o restrict its rate of asset growth,
o prohibit asset growth entirely,
o require the institution to increase its ratio of tangible equity to assets,
o restrict the interest rate paid on deposits to the prevailing rates of
interest on deposits of comparable amounts and maturities, or
o require the institution to take any other action the OTS determines will
better carry out the purpose of prompt corrective action.

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

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

Regulatory Assessments.  The OTS imposes five separate fees to fund its operations:

o semi-annual assessments for all savings institutions;
o examination fees for certain affiliates of savings associations;
o application fees;
o securities filing fees; and
o publication fees.

Of these fees, the semi-annual assessments are the most significant, totaling
$1.6 million for the bank for the 12 month period ending December 31, 2001.

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

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

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

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

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

o administrative expenses of the receiver,
o any deposit liability of the institution,
o any other general or senior liability of the institution (which is not an
obligation described below),
o any obligation subordinated to depositors or general creditors which is not a
stockholder obligation, and
o any obligation to stockholders arising as a result of their status as
stockholders.

The OTS and the other federal bank regulatory agencies adopted changes to the
regulatory classification policies for retail credit, which took effect December
31, 2000, including:

o a revised charge-off policy for open-end credit at 180 days delinquency and
closed-end credit at 120 days delinquency;
o a charge-off policy for loans affected by bankruptcy, fraudulent activity,
and/or death of a borrower;
o a revised policy for treatment of partial payments;
o a revised re-aging policy for past due accounts; and
o a classification policy for delinquent residential mortgage and home equity
loans.

Federal Reserve System

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

Prior to November 28, 2000, the first $5 million of the bank's transaction
accounts were subject to a 0% reserve requirement. The next $39.3 million in net
transaction accounts were subject to a 3% reserve requirement and any net
transaction accounts over $44.3 million were subject to a 10% reserve
requirement. Effective November 28, 2000, the FRB increased the amount of
transactions accounts subject to a 0% reserve requirement from $5 million to
$5.5 million and decreased the "low reserve tranche" from $39.3 million to $37.3
million, which brings the net transaction amount that was subject to the 10%
reserve requirement to amounts over $42.8 million. The bank met its reserve
requirements for each period during the year ended September 30, 2001. Effective
November 27, 2001, the first $5.7 million of the bank's transaction accounts
will be subject to a 0% reserve requirement. The next $35.6 million in net
transaction accounts will be subject to a 3% reserve requirement over the $41.3
million will be subject to a 10% reserve requirement.

The bank may borrow from the FRB "discount window," although FRB regulations
require it 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 CRA and the OTS's regulations, the bank has a continuing and
affirmative obligation to help meet the credit needs of its local communities,
including low- and moderate-income neighborhoods and low- and moderate-income
individuals and families, consistent with the safe and sound operation of the
institution. The OTS is required to assess the institution's record in
satisfying the intent of the CRA in connection with its examination of the bank.
In addition, the OTS is required to take into account the bank's record of
meeting the credit needs of its community in determining whether to grant
approval for certain types of applications.

The bank is committed to fulfilling its CRA obligation by providing access to a
full range of credit-related products and services to all segments of its
community. Based on the last OTS examination covering the period from June 1997
through January 2000, the bank received a "satisfactory" CRA rating. The bank is
scheduled for its next CRA examination in the year 2002.

Under the CRA, the bank is tested in three areas:

o Lending - how well the bank meets the credit needs of low- and moderate-income
borrowers and neighborhoods in its defined assessment area(s);
o Service - the bank's ability to deliver reasonable and accessible financial
products and services, such as retail banking branches and ATMs, and support
community development services, such as financial literacy education and
homebuyers counseling; and
o Investment - the bank's ability to commit to innovative and qualified CRA
investments such as equity investments which support and promote affordable
housing and economic development in low- and moderate-income neighborhoods in
the bank's assessment area(s).

Recent examples of qualified CRA investments are the bank's investment in the
Mid Atlantic Affordable Housing Fund I in January 2000 for $5 million and in the
Mid Atlantic Affordable Housing Fund II in March 2001 for $5 million. These
investments allowed the bank to provide equity financing to several multifamily
housing projects located in Maryland, Delaware, Northern Virginia and the
District of Columbia, which provide rental housing for low- and moderate-income
seniors and families. Because the bank's investments qualify for the low-income
housing tax credits under federal tax laws, the bank will receive tax benefits
relating to these investments over the next 15 years.

On July 19, 2001, the OTS and the other federal banking regulators issued a
joint advance notice of proposed rulemaking, seeking public comment on a broad
range of issues under the agencies' current CRA regulations in an effort to
assess how the regulations should be amended to better analyze a financial
institution's performance under the CRA. Comments on the notice of proposed
rulemaking were due October 17, 2001. The bank is unable to predict whether, and
in what form, any final changes will be adopted, or the extent to which any
changes actually adopted will be reflected in the CRA obligations that apply to
the bank.

Other Aspects of Federal Law

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

Recent Accounting Pronouncements

The bank adopted Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") effective October 1, 2000. SFAS
133 was amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of Effective Date of Financial Accounting
Standards Board Statement No. 133" ("SFAS 137") and SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities - an amendment
of FASB Statement No. 133" ("SFAS 138"). SFAS 133, as amended by SFAS 137 and
SFAS 138, establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS 133 requires an entity to recognize all
derivative instruments as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. Changes in the
fair value of those instruments are reported in earnings or other comprehensive
income depending on the use of the derivative and whether it qualifies for hedge
accounting. The accounting for gains and losses associated with changes in the
fair value of the derivative instrument and the effect on the consolidated
financial statements depends on its hedge designation and whether the hedge is
effective in achieving offsetting changes in the fair value of cash flows of the
asset or liability hedged. The impact of the adoption of SFAS 133, as amended,
was not material to the bank's financial condition or results of operations. On
October 1, 2000, the bank recorded an after tax loss of $476 in Other
Comprehensive Income representing its transition adjustment from the adoption of
these standards.

SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" - a replacement of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 140"), was issued in September 2000 and replaces SFAS No. 125. SFAS No.
140 provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. Under SFAS
140, after a transfer of financial assets, an entity recognizes the financial
and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. SFAS 140 is effective for transfers
after March 31, 2001, except that the effective date for the isolation standards
was suspended for financial institutions until January 1, 2002, and is effective
for disclosures about securitizations and collateral and for recognition and
reclassification of collateral for fiscal years ending after December 15, 2000.
The adoption of SFAS 140 did not have a material impact on the bank's financial
condition or results of operations.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS
141"). SFAS 141 supersedes Accounting Principles Board ("APB"), Opinion No. 16,
"Business Combinations" and requires that all business combinations be accounted
for as purchases and prohibits further usage of the pooling-of-interests method.
In addition, SFAS 141 establishes new rules concerning recognition of intangible
assets (apart from goodwill) arising in a purchase business combination. SFAS
141 is applied prospectively to all business combinations initiated and
accounted for using the purchase method for which the date of acquisition is
after June 30, 2001.

In July 2000, the Emerging Issues Task Force ("EITF") of the FASB issued
Consensus No. 99-20, "Recognition of Interest Income and Impairment on Purchased
and Retained Beneficial Interests in Securitized Financial Assets." This
consensus requires that all changes in assumptions regarding expected future
cash flows related to such assets that are used to calculate income yields be
recognized prospectively through revised income yields unless impairment is
required to be recognized, at which time an investment is written down to fair
value. Consensus No. 99-20 was effective on April 1, 2001 and did not have a
material impact on the Bank's financial condition or results of operations.

SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") was issued in
June 2001. SFAS 142 supersedes APB Opinion No. 17, "Intangible Assets." SFAS 142
establishes new guidance on accounting for goodwill and other assets acquired in
a business combination and reaffirms that acquired intangible assets should
initially be recognized at fair value and the costs of internally developed
intangible assets should be charged to expense as incurred. SFAS 142 also
requires that goodwill arising in a business combination should no longer be
amortized, but subject to impairment testing. Potential impairment is identified
by comparing the fair value with its carrying amount and if fair value is less
than the carrying amount, an impairment loss is recognized. SFAS 142 is
effective for fiscal years beginning after December 15, 2001 and must be applied
as of the beginning of the fiscal year. The bank is currently assessing the
impact that the adoption of SFAS 142 may have on the bank's financial condition
or results of operations.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 provides guidance on the initial measurement
and subsequent accounting for obligations associated with the sale, abandonment,
or other type of disposal of long-lived tangible assets. SFAS 143 requires an
entity to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. The liability is initially
recorded by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. SFAS
143 is effective for fiscal years beginning after June 15, 2002. The bank
believes that the adoption of SFAS 143 will not have a material impact on the
bank's financial position or results of operations in future periods.

Market Area

The bank's principal deposit and lending markets are located in the Washington,
DC metropolitan area. Service industries and federal, state and local
governments employ a significant portion of the Washington, DC area labor force,
while a substantial number of the nation's 500 largest corporations have some
presence in the area. The Washington, DC area's seasonally unadjusted
unemployment rate is generally below the national rate and was 3.2% in September
2001, compared to the national rate of 4.9%.

Chevy Chase historically has relied on retail deposits originated in its branch
network as its primary funding source. See "Deposits and Other Sources of
Funds." Chevy Chase's principal market for deposits consists of Montgomery and
Prince George's Counties in Maryland and Fairfax County in Virginia.
Approximately 18.4% of the bank's deposits at September 30, 2001 were obtained
from depositors residing outside of Maryland, Northern Virginia and the District
of Columbia. Chevy Chase had the largest market share of deposits in Montgomery
County, and ranked third in market share of deposits in Prince George's County
at June 30, 2000, according to the most recently 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, DC area's largest suburban employment centers, with a
substantial portion of their labor force consisting of federal, state and local
government employees. Private employment is concentrated in services and retail
trade centers. The unemployment rate in Montgomery and Fairfax Counties in
September 2001 of 2.6% and 2.5%, respectively, was below the national rate of
4.9% and state rates of 4.0% for Maryland and 3.3% for Virginia for the same
month.

The bank historically has concentrated its lending activities in the Washington,
DC metropolitan area. In recent years, the bank has expanded its lending
activities outside the Washington, DC Metropolitan area. See "Banking - Lending
Activities."

Investment and Other Securities

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

The bank classifies its investment and mortgage-backed securities as either
"held-to-maturity," "available-for-sale" or "trading" at the time such
securities are acquired. All investment securities and mortgage-backed
securities were classified as held-to-maturity at September 30, 2001 and 2000.

As part of its mortgage banking activities, the bank exchanges loans held for
sale for mortgage-backed securities and then sells the mortgage-backed
securities, which are classified as trading securities, to third party investors
in the month of issuance. Gains and losses on sales of trading securities are
determined using the specific identification method. There were no
mortgage-backed securities classified as trading securities at September 30,
2001 and 2000.

At September 30, 2001 and 2000, the bank held automobile receivables-backed
securities which were classified as trading securities. These securities were
created as part of two automobile loan securitizations and represent subordinate
classes of certificates retained by the bank.

Lending Activities

Loan and Lease Portfolio Composition. At September 30, 2001, the bank's loan and
lease portfolio totaled $8.5 billion, which represented 74.9% of its total
assets. All references in this report to the bank's loan portfolio refer to
loans and leases, whether they are held for sale and/or securitization or for
investment, and exclude mortgage-backed securities. Loans collateralized by
single-family residences constituted 55.9% of the loan and lease portfolio at
that date.

The following table sets forth information concerning the bank's loan and lease
portfolio net of unfunded commitments for the periods indicated.

Loan and Lease Portfolio
(Dollars in thousands)

                                                                      September 30,
                       -------------------------------------------------------------------------------------------------------------
                               2001                    2000                 1999                  1998                 1997
                       --------------------- --------------------- -------------------- ---------------------- ---------------------

                                     % of                  % of                  % of                 % of                   % of
                         Balance     Total     Balance     Total     Balance     Total    Balance     Total      Balance     Total
                       ----------- --------- ----------- --------- ----------- -------- ----------- ---------- ----------- ---------

Single family
 residential (1)       $4,788,083    55.9 %  $5,012,556    60.3 %  $4,098,523    63.4 % $1,821,982     65.7$%    $849,955    33.2$%
Home equity (1)           372,095     4.4       274,355     3.3       239,673     3.7      135,122      4.9        94,088     3.7
Commercial real
 estate and
 multifamily               30,703     0.4        39,230     0.5        57,051     0.9       74,164      2.7        53,551     2.1
Real estate
 construction
 and ground               267,303     3.1       296,705     3.6       228,464     3.5      108,379      3.9        54,998     2.2
Commercial                769,443     9.0       596,384     7.2       394,142     6.1      174,076      6.3        98,346     3.9
Credit card (1)                 -       -             -       -             -       -            -        -     1,077,149    42.3
Automobile loans (1)      643,930     7.5       789,276     9.5       717,712    11.1      121,350      4.4       113,241     4.4
Automobile leases       1,124,106    13.1       568,091     6.8       109,724     1.7           22        -             -       -
Subprime
 automobile (1)           420,658     4.9       620,588     7.4       480,533     7.4      236,454      8.5       116,627     4.6
Home improvement
 and related loans (1)    113,218     1.3        86,973     1.0       106,847     1.7       67,355      2.4        55,453     2.2
Overdraft lines of
 credit and other
 consumer                  36,356     0.4        31,608     0.4        31,645     0.5       33,484      1.2        36,029     1.4

                       ----------- --------- ----------- --------- ----------- -------- ----------- ---------- ----------- ---------
                        8,565,895   100.0  %  8,315,766   100.0  %  6,464,314   100.0 %  2,772,388    100.0  %  2,549,437   100.0  %
                       ----------- ========= ----------- ========= ----------- ======== ----------- ========== ----------- =========
Less:

Unearned premiums
 and discounts             (3,147)               (4,558)               (6,562)              (2,163)                   308
Net deferred loan
 origination fees
 (costs)                  (40,554)              (34,833)              (16,133)                (850)                (2,098)
Allowance for loan
 and lease losses          63,018                54,018                58,139               60,157                105,679

                       -----------           -----------           -----------          -----------            -----------
                           19,317                14,627                35,444               57,144                103,889
                       -----------           -----------           -----------          -----------            -----------

Total loans and
 leases receivable     $8,546,578            $8,301,139            $6,428,870           $2,715,244             $2,445,548
                       ===========           ===========           ===========          ===========            ===========

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

The bank adjusts the composition of its loan and lease portfolio in response to
a variety of factors, including regulatory requirements and asset and liability
management objectives. See "Item 7. Banking - Regulatory Capital," "Qualified
Thrift Lender Test" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition - Asset and Liability
Management."

Contractual Principal Repayments of Loans and Leases. The following table shows
the scheduled contractual principal repayments of the bank's loans and leases at
September 30, 2001. The entire balance of loans held for sale and/or
securitization is shown in the year ending September 30, 2002, because such
loans are expected to be sold in less than one year.

Contractual Principal Repayments
(In thousands)

                                Principal                           Approximate Principal Repayments
                                 Balance                            Due in Years Ending September 30,
                             Outstanding at    ---------------------------------------------------------------------------------
                              September 30,                                                                            2017 and
                                 2001(1)           2002       2003       2004      2005-2006  2007-2011   2012-2016   Thereafter
                            ------------------ ------------ ---------- ---------- ----------- ---------- ----------- -----------
Single family residential   $       4,555,814   $   70,337  $  79,948  $  84,416  $  187,197  $ 580,617  $  765,425  $2,787,874
Home equity                           372,095        1,230        431        681       1,156      7,956      63,109     297,532
Commercial real estate
 and multifamily                       30,703        6,337      6,764      7,276       7,660      2,666           -           -
Real estate construction
 and ground                           267,303      177,575     71,482     17,617          14        615           -           -
Commercial                            769,443      259,980     89,208     98,776      45,175    100,359     132,572      43,373
Subprime automobile                   420,658      118,772    127,311    111,122      63,453          -           -           -
Prime automobile                      361,930       99,778    111,158     88,287      36,433     26,274           -           -
Automobile leases                   1,124,106      154,083    302,749    350,273     306,792     10,209           -           -
Home improvement and
 related loans                        100,494        5,378      5,480      5,590      11,558     27,521      25,549      19,418
Overdraft lines of credit
 and other consumer                    36,356        6,881      6,171      6,460      14,890      1,954           -           -
Loans held for sale                   244,993      244,993          -          -           -          -           -           -
Loans held for
 securitization and sale              282,000      282,000          -          -           -          -           -           -
                            ------------------ ------------ ---------- ---------- ----------- ---------- ----------- -----------
     Total loans and
      leases receivable(2)  $       8,565,895   $1,427,344  $ 800,702  $ 770,498  $  674,328  $ 758,171  $  986,655  $3,148,197
                            ================== ============ ========== ========== =========== ========== =========== ===========

Fixed-rate loans and leases $       3,885,831   $  763,218  $ 667,678  $ 639,365  $  514,560  $ 325,341  $  392,831  $  582,838
Adjustable-rate loans               4,153,071      137,133    133,024    131,133     159,768    432,830     593,824   2,565,359
Loans held for sale                   244,993      244,993          -          -           -          -           -           -
Loans held for
 securitization and sale              282,000      282,000          -          -           -          -           -           -
                            ------------------ ------------ ---------- ---------- ----------- ---------- ----------- -----------
     Total loans and
      leases receivable(2)  $       8,565,895   $1,427,344  $ 800,702  $ 770,498  $  674,328  $ 758,171  $  986,655  $3,148,197
                            ================== ============ ========== ========== =========== ========== =========== ===========

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

(1) Of the total amount of loans and leases outstanding at September 30, 2001,
which were due after one year, an aggregate principal balance of approximately
$3.1 billion had fixed interest rates and an aggregate principal balance of
approximately $4.0 billion had adjustable interest rates.
(2) Before deduction of allowance for loan and lease losses, unearned premiums
and discounts and deferred loan origination fees (costs).

Actual payments may not reflect scheduled contractual principal repayments due
to the effect of loan refinancings, prepayments and enforcement of due-on-sale
clauses. Due-on-sale clauses give the bank the right to declare a "conventional
loan" -- one that is neither insured by the Federal Housing Administration nor
partially guaranteed by the Veterans' Administration -- immediately due and
payable in the event, among other things, that the borrower sells the 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, 2001,
principal repayments of $900.3 million are contractually due within the next
year. Of this amount, $763.2 million is due on fixed-rate loans and $137.1
million is due on adjustable-rate loans.

Origination, Purchase and Sale of Real Estate Loans. The bank has general
authority to make loans secured by real estate located throughout the United
States. The following table shows changes in the composition of the bank's real
estate loan portfolio and the net change in mortgage-backed securities.

Origination, Purchase and Sale of Real Estate Loans
(In thousands)

                                                                                 For the Year Ended September 30,
                                                                  ---------------------------------------------------------------
                                                                       2001                   2000                    1999
                                                                  ----------------       ----------------        ----------------

Real estate loan originations and purchases: (1)

Single family residential                                         $     3,184,380        $     1,666,639         $     3,526,750
Home equity                                                               528,450                267,694                 331,371
Commercial real estate and multifamily                                          -                  4,602                  28,416
Real estate construction and ground                                       259,130                259,537                 289,228
                                                                  ----------------       ----------------        ----------------

Total originations and purchases                                        3,971,960              2,198,472               4,175,765
                                                                  ----------------       ----------------        ----------------

Principal repayments                                                   (1,784,311)              (507,558)               (710,376)
Sales                                                                    (674,652)              (383,824)                (52,914)
Loans transferred to real estate acquired
  in settlement of loans                                                     (774)                (5,695)                 (1,909)

                                                                  ----------------       ----------------        ----------------
                                                                       (2,459,737)              (897,077)               (765,199)
                                                                  ----------------       ----------------        ----------------

Transfers to mortgage-backed securities (2)                            (1,676,885)              (302,260)               (926,502)
                                                                  ----------------       ----------------        ----------------

Increase (decrease) in real estate loans                          $      (164,662)       $       999,135         $     2,484,064
                                                                  ================       ================        ================

(1) Excludes unfunded commitments.
(2) Represents real estate loans which were pooled and exchanged for
    mortgage-backed securities.

Single-Family Residential Real Estate Lending. The bank originates a variety of
loans secured by single-family residences. At September 30, 2001, $5.2 billion,
or 60.3%, of the bank's loan and lease portfolio consisted of loans secured by
first or second mortgages on such properties, as compared to $5.3 billion, or
63.6%, at September 30, 2000. Of these amounts, $34.5 million and $20.5 million
consisted of FHA-insured or VA-guaranteed loans at September 30, 2001 and 2000,
respectively. Approximately 38.8% of the principal balance of the bank's
single-family residential real estate loans at September 30, 2001 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, and through Chevy Chase Mortgage, a division of the bank. The
bank currently offers fixed-rate loans with maturities of 10 to 30 years and
adjustable-rate residential mortgage loans, principally with maturities of 30
years.

The bank maintains a wholesale network of correspondents, including loan brokers
and financial institutions, in order to supplement its direct origination of
single-family residential mortgage loans. 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, 2001, approximately $2.0 billion of loans settled under
the correspondent program.

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 bank has significantly expanded its origination of residential one-month
ARMs that provide a borrower with a below-market introductory rate and a variety
of monthly payment features, one of which (if regularly chosen by a borrower)
could result in interest being added to the principal of the loan or "negative
amortization." During fiscal 2001, the bank originated $937.1 million of these
one-month ARMs, all of which contained terms that limit the amount of negative
amortization to no more than 10% of the original loan amount. Also during fiscal
year 2001, the bank purchased approximately $477.8 million in one-month ARMs
from another lender, 53.4% of which are secured by properties in California. A
substantial portion of the purchased one-month ARMs have terms that limit the
amount of negative amortization to no more than 25% of the original loan amount.
The bank is monitoring the risks associated with these one-month ARM products,
and has established terms for loans it originates (including caps on the amount
of negative amortization) designed to minimize credit risks without adversely
affecting the bank's competitive position. Increased emphasis of the one-month
ARM product is a key part of management's efforts to focus on originating
mortgage loans with interest rates that adjust more frequently in order to
reduce the bank's interest-rate risk in the event market interest rates rise
from their current relatively low levels. At September 30, 2001, 70.5% of the
bank's residential mortgage loans were comprised of ARMs and 33.9% of the bank's
residential mortgage loans were comprised of one-month ARMs.

Since negative amortization on the one-month ARMs originated by the bank is
limited to 10% of the original loan amount, and the bank requires private
mortgage insurance in specified amounts for any loan with a LTV ratio above 80%,
the bank does not believe that adoption of the OTS's proposed amendments to the
risk-based capital treatment of "qualifying mortgage loans" would have a
material adverse effect on the bank. See, "Banking - Regulatory Capital."

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 as well as gains on sales of loans. In
fiscal 2001, sales of mortgage loans originated or purchased for sale by the
bank totaled $674.7 million compared to $383.8 million during fiscal 2000. The
marketability of loans, loan participations and mortgage-backed securities
depends on purchasers' investment limitations, general market and competitive
conditions, mortgage loan demand and other factors.

The bank's conforming fixed-rate, single-family loans are originated on terms
which conform to Federal Home Loan Mortgage Corporation, Federal National
Mortgage Association and Government National Mortgage Association guidelines in
order to facilitate the sale and/or securitization of those loans. In order to
manage its interest-rate exposure, the bank hedges its held for sale mortgage
loan pipeline by entering into whole loan and mortgage-backed security forward
sale commitments. Sales of residential mortgage loans are generally made without
recourse to the bank. At September 30, 2001, the bank had $233.4 million of
single-family residential loans held for sale to investors.

From time to time, as part of its capital and liquidity management plans, the
bank may consider exchanging loans held in its portfolio for lower risk-weighted
mortgage-backed securities and retaining those securities in its portfolio
rather than selling them. During fiscal year 2001, the bank exchanged $837.7
million of single-family residential loans held in its portfolio for
mortgage-backed securities, which the bank retained for its own portfolio. The
bank did not exchange any of its loans held in its portfolio for mortgage-backed
securities during fiscal year 2000.

When the bank sells a residential whole loan or loan participation and retains
servicing, or purchases mortgage servicing assets from third parties, it
collects and remits loan payments, inspects the properties, makes certain
insurance and tax payments on behalf of borrowers and otherwise services the
loans. The servicing fee, generally ranging from 0.25% to 0.50% per year of the
outstanding loan principal amount, 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, 2001, the bank was servicing residential
permanent loans totaling $5.9 billion for other investors. See "Banking - Loan
Servicing."

Sales of Mortgage-Backed Securities. The bank originates and sells
mortgage-backed securities pursuant to its normal mortgage banking operations.
The securities are generally issued in the same month as they are sold. The
securities are formed from conforming mortgage loans originated for sale or from
conforming mortgage loans resulting from the borrower's election to convert from
an adjustable-rate loan to a fixed-rate loan. Mortgage-backed securities held
for sale in conjunction with mortgage banking activities are classified as
trading securities. During the years ended September 30, 2001 and 2000, the bank
originated and sold $839.2 million and $297.5 million, respectively, of
mortgage-backed securities and recognized gains of $4.0 million and $1.5
million, respectively. As a result of the sale of trading securities in the
month such securities are formed, the Consolidated Statements of Cash Flows in
this report reflect significant proceeds from the sales of trading securities,
even though there are no balances of such securities at September 30, 2001.

Home Equity Lending. The bank's home equity credit line loans, the majority of
which are secured by a second mortgage on the borrower's home, provide revolving
credit. Home equity credit line loans bear interest at a variable rate that
adjusts monthly based on changes in the applicable interest rate index and
generally are subject to a maximum annual interest rate of between 18.0% and
24.0%. Generally, except for any amortization of principal that may occur as a
result of monthly payments, there are no required payments of principal until
maturity.

From time to time, the bank may purchase home equity credit line loans from
other lenders as a way to supplement its direct origination of these loans.
During fiscal 2001, the bank made no such purchases.

Securitization and sale of home equity credit line receivables has been an
important 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." The bank transferred $46.2 million and $64.4 million of home equity
credit line receivables in existing trusts to investors and recognized gains of
$1.8 million and $2.3 million during the years ended September 30, 2001 and
2000, respectively. The bank continues to service the underlying accounts.

Commercial Real Estate and Real Estate Construction Lending. Commercial real
estate, real estate construction and ground loans are originated directly by the
bank. Aggregate balances of residential and commercial construction, ground and
commercial real estate and multifamily loans decreased 11.3% in fiscal 2001 to
$298.0 million at September 30, 2001, from $335.9 million at September 30, 2000.
The bank provides financing, generally at market rates, to certain purchasers of
its real estate owned. 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.

Commercial Lending. The bank makes loans to business entities for a variety of
purposes, including working capital, acquisitions of machinery and equipment or
other assets, and facilitating cash flows. The bank also provides acquisition,
construction and permanent financing of real estate used in the borrower's
business. A wide variety of products are offered, including revolving lines of
credit for working capital or seasonal needs; term loans for the financing of
fixed assets; letters of credit; cash management services; and other deposit and
investment products.

Business development efforts originated by the bank's Business Banking Group
have been concentrated in the major industry groups in the metropolitan
Washington, DC and Baltimore areas, as well as a broad base of businesses and
community service organizations. Commercial loans increased $173.0 million (or
29.0%) during fiscal 2001 from $596.4 million at September 30, 2000 to $769.4
million at September 30, 2001. During fiscal year 2001, the bank purchased
commercial loan participations to a greater extent than in previous years. At
September 30, 2001, approximately one-third of the bank's $769.4 million of
commercial loans consisted of participations by the bank in commercial loans
which were originated by other financial institutions. The bank believes its
balances of commercial loans will continue to increase as it further expands
this aspect of its business, which may involve an increase in the proportion of
loans outside the bank's principal market and lower spreads. In addition,
management believes that the ability to offer a broader variety of investment
products and fiduciary services to institutional customers through the bank's
subsidiaries, ASB Capital Management, Inc. and Chevy Chase Trust Company, will
continue to enhance the operations of the Business Banking Group.

Federal laws and regulations limit the bank's commercial loan portfolio to 20%
of assets, with at least 10% consisting of small business loans. At September
30, 2001 the bank was in compliance with this limit.

Consumer Lending. Chevy Chase currently offers a variety of consumer loans,
including automobile loans and leases, overdraft lines of credit, home
improvement loans and other unsecured loans for traditional consumer purchases
and needs. Following the sale of the credit card portfolio on September 30,
1998, the bank no longer offers its own credit card loans, but has an agreement
with the purchaser pursuant to which the purchaser issues credit cards in the
bank's name to the bank's local customers. The bank's portfolios of automobile
loans and automobile leases, home improvement and related loans and other
consumer loans totaled $2.2 billion, $113.2 million and $36.4 million,
respectively, at September 30, 2001, which accounted for a combined 27.2% of
total loans at that date. The largest area of recent growth has been in prime
automobile leases. During fiscal 2001, the bank purchased or originated $1.7
billion of automobile loans and leases.

On November 9, 2000, the bank stopped originating subprime automobile loans.
However, the bank's subprime automobile lending portfolio at September 30, 2001
continued to exceed 25% of its Tier 1 capital. As a result, the bank remains
potentially subject to the recently issued supplemental guidance for subprime
lending. See, "Banking -  Regulatory Capital." The bank will continue its
collection efforts on the remaining portfolio.

Federal and state lawmakers and regulators are considering, and in some cases
have adopted, a variety of additional requirements relating to subprime and
perceived abusive or "predatory" lending practices. Those requirements range
from increased reporting and capital requirements to prohibition of specific
lending practices. For example, legislation recently enacted in Washington, DC
imposes new and potentially onerous restrictions on the bank's residential
mortgage lending activities in the District. However, at the request of the bank
and other lenders active in the District, the Council of the District of
Columbia temporarily suspended the applicability of the legislation from
November 6, 2001 through March 6, 2002 to allow time to consider amendments to
simplify the legislation and to ameliorate some of its particularly onerous
effects. The bank is unable to predict whether, or in what form, any amendments
or revisions will be adopted. Moreover, in light of the bank's decision to stop
originating new subprime automobile loans, management currently believes that
any other enactments of new regulatory requirements for these types of loans
should not have a material adverse effect on the bank's financial condition.

Federal laws and regulations limit the bank's secured and unsecured consumer
loans to 35% of its total assets. Home improvement, secured deposit account and
educational loans are not included in the 35% limit. At September 30, 2001, the
bank was in compliance with this limit.

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. The Board of Directors has
delegated credit approval authority to the Executive Loan Committee and certain
senior officers based on credit authorizations approved by the Board of
Directors. Generally, 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 $30 million or more
are presented to the Board of Directors for final approval.

The approval process for all types of real estate loans includes appraisals or
evaluations of the properties securing 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 on its residential mortgage loans up to 95% of the
appraised value of owner-occupied single-family homes. The bank generally also
lends up to 80% of the appraised value of the completed project to finance the
construction of such homes. 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. In some circumstances, the
bank originates a first and second mortgage loan simultaneously where the total
loan value does not exceed 95% of the appraised value of the property.
Currently, the bank offers home equity credit line loans up to a 125% maximum
loan-to-value ratio.

LTV ratios are determined at the time a loan is originated. Consequently,
subsequent declines in the value of a loan's collateral could expose the bank to
losses. The bank's ability to make loans with a loan-to-value ratio above 90
percent without mortgage insurance is limited to 100 percent of the bank's total
risk-based capital.

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 home improvement and related
loans and certain home equity credit line loans, Chevy Chase requires title
insurance policies protecting the priority of the bank's liens. The bank
requires fire and casualty insurance for permanent loans including home equity
credit line loans and fire, casualty and builders' risk insurance for
construction loans. The borrower selects the insurance carrier, subject to Chevy
Chase's approval. 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 six 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.

Commercial Loan Underwriting. All commercial loan applications are underwritten
and approved under authorities granted to specified committees and individuals
as outlined in the bank's credit policies. The scope and depth of the
underwriting for a particular request are generally dictated by the size of the
proposed transaction. All commercial loans greater than $100,000 are assigned a
risk rating at inception, based on a risk-rating system established in the
bank's credit policies.

Consumer Loan and Lease Underwriting. Consumer loans and leases, which include
automobile loans and leases, home improvement and related loans and overdraft
lines of credit, are originated or purchased by the bank after a review in
accordance with established underwriting procedures.

The underwriting procedures are designed to provide a basis for assessing the
borrower's ability and willingness to repay the loan or lease. In conducting
this assessment, the bank considers the borrower's ratio of debt to income,
various credit scoring models 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 or lease are also considered. The bank's guidelines are intended
only to provide a basis for lending decisions, and exceptions to the guidelines
may, within certain limits, be made based upon the credit judgment of the bank's
lending officer. The bank periodically conducts audits to ensure compliance with
its established underwriting policies and procedures.

Prior to November 9, 2000, the bank also originated subprime automobile loans
through one of its operating subsidiaries. The underwriting guidelines for this
subsidiary applied 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. These 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. On November 9, 2000, the bank stopped
the origination of subprime automobile loans. The bank continues its collection
efforts on the remaining portfolio.

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. Servicing income earned on
single-family residential mortgage loans owned by third parties and the bank's
securitization and servicing of home equity, automobile and home loan
receivables portfolios, is a source of substantial earnings for the bank. Income
from these activities varies with the volume and type of loans originated and
sold.

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

                                                                         As of or for the Year Ended September 30,
                                                           -----------------------------------------------------------------------
                                                                  2001                      2000                     1999
                                                           -------------------       -------------------      --------------------
                                                                                       (in thousands)
Residential........................................              $  5,943,737              $  5,229,971              $  3,459,750
Home equity........................................                   171,438                   249,785                   195,296
Automobile.........................................                 1,190,979                   867,046                   556,238
Home Improvement loans.............................                    57,313                    81,847                   111,831
                                                                                     -------------------      --------------------
                                                           -------------------
   Total amount of loans
   serviced for others (1).........................              $  7,363,467              $  6,428,649              $  4,323,115
                                                                                     ===================
                                                           ===================                                ====================
Servicing and securitization
   income (2)......................................                $   69,792                $   36,847                $   31,509
                                                           ===================       ===================      ====================
 --------------------
(1) The bank's basis in its servicing assets and interest-only strips at
    September 30, 2001, 2000 and 1999 was $109.5 million, $91.7 million and
    $38.0 million, respectively.
(2) In each of the years ended September 30, 2001, 2000 and 1999, servicing and
    securitization income as a percentage of net interest income before
    provision for loan and lease losses was 19.2%, 10.8% and 11.5%.

The bank earns fees in connection with the servicing of home equity loans, home
improvement loans, automobile loans and single-family residential mortgage
loans. The bank's level of servicing and securitization income varies based in
large part on the amount of the bank's securitization activities with respect to
these loan types. As the bank securitizes and sells assets, acquires servicing
assets either through purchase or origination, or sells mortgage loans and
retains the servicing rights on those loans, the level of servicing and
securitization income generally increases. During fiscal 2001, the bank
securitized and sold $851.1 million of loan receivables into new and existing
revolving trusts compared to $732.5 million during fiscal 2000.

The bank's investment in servicing assets, which includes, interest-only strips,
is periodically evaluated for impairment. Interest-only strips are evaluated
quarterly based on the discounted value of estimated future net cash flows to be
generated by the underlying loans. The difference between the book value of
these assets and the discounted value is recognized as an unrealized gain or
loss in the period in which the change occurs. Several estimates are used when
determining the discounted value, the most significant of which are the
estimated rate of repayment of the underlying loans and estimated credit losses.
The bank evaluates its servicing assets for impairment based on fair value. To
measure fair value of its servicing assets, the bank uses either quoted market
prices or discounted cash flow analyses using appropriate assumptions for
servicing fee income, servicing costs, prepayment rates and discount rates. If
actual prepayment or default rates significantly exceed the estimates used to
calculate the carrying values of the servicing assets, the actual amount of
future cash flow could be less than the expected amount and the value of the
servicing assets, as well as the bank's earnings, could be negatively impacted.
No assurance can be given that underlying loans will not experience significant
increases in prepayment or default rates or that the bank may not have to write
down the value of its servicing assets. Additionally, the bank stratifies its
servicing assets 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
and Note 15 to the Consolidated Financial Statements in this report.

The bank prices its single-family mortgage loans to achieve a competitive yield.
Loan origination and commitment fees, and the related costs associated with
making the loans, are deferred. 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, the acquired
property is listed in the bank's account for real estate acquired in settlement
of loans until it is sold. Deficiency judgments generally may be enforced
against borrowers in Maryland, Virginia and the District of Columbia, but may
not be available or may be subject to limitations in other jurisdictions in
which loans are originated by the bank.

See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Banking - Financial Condition - Asset Quality -
Delinquent Loans" for a discussion of the bank's delinquent loan portfolio at
September 30, 2001.

Allowances for Losses. It is the bank's policy to maintain adequate allowances
for estimated losses on loans and leases and real estate. Generally, the
allowances are based on, among other things, historical loan and lease loss
experience, evaluation of economic conditions in general and in various sectors
of the bank's customer base, and periodic reviews of loan and lease portfolio
quality by bank personnel. The bank's specific methods for establishing the
appropriate levels of allowances vary depending upon the assets involved.

Allowances for losses on loans and leases and real estate are based on current
events or facts that may ultimately lead to future losses. In addition to
reviews of individual portfolio segments, the bank regularly reviews its overall
loan and lease portfolio consisting of performing non-classified assets and,
based on that review, may establish additional allowances for losses. The bank's
actual losses may vary from management's current estimates. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Banking - Asset Quality - Allowances for
Losses."

The bank's allowance for losses on its consumer loans and leases is based on a
number of factors, including historical charge-off and repayment experience. The
bank's reserve methodology is based on an analysis of the characteristics of the
portfolio and trends at any particular time. The bank considers various
historical information relative to the origination date, borrower profiles,
delinquencies and other factors. In the case of automobile loans, management
also considers the value of the underlying collateral, which can be adversely
impacted by the time required to liquidate the collateral as well as the age and
type of the collateral, and geographic trends.

The bank's methods for determining the allowance for losses on loans secured by
real estate vary depending on whether the loans are secured by residences or by
other real estate. For residential mortgage loans, management analyzes the
allowance by stratifying residential permanent loans on a state by state basis
by type of ownership and on whether the property is occupied by the owner. After
the residential permanent portfolio has been stratified by state, historical
loss ratios, as adjusted for any known predictable or quantifiable trends for
the specific states are applied to delinquent loans. Based on this analysis, a
reserve component is 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 allowance for losses on non-residential
mortgage loans, commercial 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, internal risk ratings, 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.

In addition to the allowance for losses described above, allowance for losses
are provided for individual loans where the ultimate collection is considered
questionable by management after reviewing the current status of loans which are
contractually past due and considering the net realizable value of the
collateral or guarantees, if applicable.

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

The bank's review of its various asset portfolios takes place within its Asset
Review and Asset Classification Committees, which meet on a quarterly basis. The
Asset Classification Committee reviews risk performance trends within the bank's
loan and REO portfolios and economic trends and conditions which might impact
those portfolios. This Committee also reviews the status of individual
criticized and classified assets from $500,000 up to $5,000,000 and the
allowance for loan and lease losses. The Asset Review Committee, which meets in
conjunction with the Asset Classification Committee, reviews the status of
individual criticized and classified assets of $5,000,000 and greater.

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, 2001 comply with the guidelines. In July 2001, the
FFIEC adopted a policy statement providing additional guidance on the design and
implementation of loan loss allowance methodologies and supporting documentation
practices. The bank believes its procedures conform to this policy statement.

The bank's assets are subject to review and classification by the OTS 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, or planned growth. In recent years,
the bank has relied to a greater degree on borrowed funds -- particularly FHLB
advances -- and brokered deposits to fund its planned asset growth. Those
sources of funding generally are more volatile and expensive than traditional
core deposits.

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
short-term deposits. Deposit programs include Super Money Fund, 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.

Chevy Chase attracts deposits through its branch network and advertisements, and
offers depositors access to their accounts through 853 ATMs, including 244 ATMs
located in grocery stores. These ATMs significantly enhance the bank's position
as a leading provider of convenient ATM service in its primary market area. The
bank is a member of the "STAR"(R) ATM network which offers nationwide access,
and the "PLUS"(R) ATM network, which offers worldwide access. In addition, the
bank has a partnership agreement with a regional grocery store chain that
authorizes the bank to provide in-store banking centers at potentially all
Maryland, Virginia, Delaware and Washington, DC area stores. As of September 30,
2001, the bank has opened 50 in-store banking centers as part of this agreement.

Chevy Chase accepted brokered deposits in fiscal 2001 as a way to diversify the
bank's funding sources and provide additional funding for planned growth. The
bank had $1.1 billion of brokered deposits at September 30, 2001. Under FDIC
regulations, the bank can accept brokered deposits as long as it meets the
capital standards established for well capitalized institutions or, with FDIC
approval, adequately-capitalized institutions, under the prompt corrective
action regulations. Brokered deposits typically have higher interest rates and
are more volatile than traditional retail deposits. However, during fiscal year
2001, management determined that they represented a viable alternative source of
funds for the bank, particularly in light of the bank's need to fund its planned
rate of growth. The bank will continue to evaluate the use of brokered deposits
as a source of funds in the future.

The bank obtains deposits primarily from customers residing in Montgomery and
Prince George's Counties in Maryland and Northern Virginia. Approximately 44.1%
of the bank's deposits at September 30, 2001 were obtained from depositors
residing outside of Maryland, with approximately 19.5% 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.

Deposit Analysis
(Dollars in thousands)

                                                                         September 30,
                              -----------------------------------------------------------------------------------------------------
                                      2001                2000                1999                1998                1997
                              ------------------- ------------------- ------------------- ------------------- ---------------------

                                            % of                 % of               % of                 % of               % of
                                 Balance    Total    Balance    Total    Balance    Total    Balance    Total    Balance    Total
                              ----------- ------- ----------- ------- ----------- ------- ----------- ------- ----------- ---------

Demand and NOW accounts       $2,070,976   27.4 % $1,849,203   26.3 % $1,606,169   27.9 % $1,329,839   27.2 % $1,120,375   22.9 %
Money market deposit accounts  1,570,297   20.8    1,156,829   16.4    1,125,405   19.5    1,019,569   20.9      983,016   20.1
Statement savings accounts       780,655   10.3      779,344   11.1      888,212   15.4      913,467   18.7      907,141   18.5
Jumbo certificate accounts       620,453    8.2      636,750    9.0      486,245    8.4      358,913    7.3      358,737    7.3
Brokered certificate accounts    941,409   12.5    1,306,419   18.6      532,588    9.3            -      -      315,142    6.4
Other certificate accounts     1,461,473   19.3    1,195,999   17.0    1,016,118   17.6    1,168,746   23.9    1,130,274   23.2
Other deposit accounts           117,207    1.5      113,245    1.6      108,749    1.9       97,696    2.0       79,071    1.6
                              ----------- ------- ----------- ------- ----------- ------- ----------- ------- ----------- ---------

     Total deposits           $7,562,470  100.0 % $7,037,789  100.0 % $5,763,486  100.0 % $4,888,230  100.0 % $4,893,756  100.0 %
                              =========== ======= =========== ======= =========== ======= =========== ======= =========== =========

Average Cost of Deposits

                                                    Year Ended September 30,
                                          ----------------------------------------------
                                           2001                 2000               1999
----------------------------------------------------------------------------------------

Demand and NOW accounts                   0.60%               0.88%               1.04%
Money market accounts                     3.56%               3.55%               3.36%
Statement savings and
   other deposit accounts                 1.52%               1.86%               2.07%
Certificate accounts                      5.99%               5.69%               4.88%

  Total deposit accounts                  3.79%               3.71%               3.04%
                                          ======              ======              ======

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.

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

                                                                                     Deposit Flows
                                                                                Year Ended September 30,
                                                         -----------------------------------------------------------------------
                                                                                     (in thousands)
                                                                2001                      2000                     1999
                                                         -------------------       -------------------      --------------------
Deposits to accounts...............................            $ 43,408,719              $ 38,470,514              $ 40,084,375
Withdrawals from
   accounts........................................              (43,131,644)              (37,418,474)              (39,355,464)
                                                         -------------------       -------------------      --------------------
Net cash to (from)
   accounts........................................                 277,075                 1,052,040                   728,911
Interest credited to
   accounts........................................                 247,606                   222,263                   146,345
                                                         -------------------       -------------------      --------------------
Net increase (decrease) in deposit
   balances........................................             $   524,681              $  1,274,303               $   875,256
                                                         ===================       ===================      ====================

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, 2001 which will mature during the
fiscal years indicated.

Weighted Average Interest Rates of Deposits
As of September 30, 2001
(Dollars in thousands)

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

   2002         $  3,641,273   1.39 %   $   780,655   1.26 %   $    117,207    0.99 %  $ 2,709,719    4.97 %   $ 7,248,854   2.71 %
   2003             -           -             -        -             -          -          238,065    5.98         238,065   5.98
   2004             -           -             -        -             -          -           29,091    4.71          29,091   4.71
   2005             -           -             -        -             -          -           33,081    5.91          33,081   5.91
   2006             -           -             -        -             -          -           13,379    5.32          13,379   5.32
                -------------           ------------           -------------           ------------           -------------
  Total         $  3,641,273   1.39 %   $   780,655   1.26 %   $    117,207    0.99 %  $ 3,023,335    5.06 %   $ 7,562,470   2.84 %
                =============           ============           =============           ============           =============

The following table summarizes maturities of certificate accounts in amounts of
$100,000 or greater as of September 30, 2001.

  Year Ending September 30,                                    Amount                   Weighted Average Rate
  -------------------------                              -----------------              ---------------------
                                                      (Dollars in thousands)
  2002........................................                   $ 623,486                       4.49%
  2003........................................                      30,375                       6.02%
  2004........................................                       1,877                       4.60%
  2005........................................                       5,356                       6.05%
  2006........................................                       1,067                       4.97%
                                                          -----------------             ---------------------
     Total....................................                  $  662,161                       4.57%
                                                          =================             =====================

The following table represents the amounts of deposits by various interest rate
categories as of September 30, 2001 maturing during the fiscal years indicated.

Maturities of Deposits by Interest Rates
As of September 30, 2001
(In thousands)

                                                  Accounts Maturing During Year Ending September 30,
                                ---------------------------------------------------------------------------------------

Interest Rate                       2002           2003           2004          2005           2006           Total
--------------------            ------------   ------------   -----------   ------------   -----------    -------------

Demand deposits (0%)            $   641,163    $      -       $      -      $      -       $      -       $    641,163

0.01% to 1.99%                    2,480,050           -              -             -              -          2,480,050

2.00% to 2.99%                      454,894            951           -             -              -            455,845

3.00% to 3.99%                    1,779,605         20,570         3,377             41           -          1,803,593

4.00% to 4.99%                      775,067         38,664        18,265          1,921         5,439          839,356

5.00% to 5.99%                      283,855         30,576         2,493          6,790         3,618          327,332

6.00% to 7.99%                      834,220        147,304         4,956         24,329         4,322        1,015,131
                                ------------   ------------   -----------   ------------   -----------    -------------

     Total                      $ 7,248,854    $   238,065    $   29,091    $    33,081    $   13,379     $  7,562,470
                                ============   ============   ===========   ============   ===========    =============

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 that stock and certain of its mortgages and
other assets, principally securities which are obligations of, or guaranteed by,
the United States or its agencies, provided certain standards related to
creditworthiness have been met.

Under the credit policies of the FHLB of Atlanta, credit may be extended to
creditworthy institutions based upon their financial condition, and the adequacy
of collateral pledged to secure the extension of credit. Extensions of credit
may be obtained pursuant to several different credit programs, each of which has
its own rate and range of maturities. Advances from the FHLB of Atlanta must be
secured by certain types of collateral with a value, as determined by the FHLB
of Atlanta, at least equal to 100% of the borrower's outstanding advances. The
bank had outstanding FHLB advances of $2.2 billion at September 30, 2001.

From time to time the bank enters into repurchase agreements, which are treated
as financings. The bank sells securities, which are usually mortgage-backed
securities, to a dealer and agrees to buy back the same securities at a
specified time, which is generally within seven to 90 days. The bank pays a
stated interest rate for the use of the funds for the specified time period 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 Balance Sheets in this report. These arrangements
are, in effect, borrowings by the bank secured by the securities sold. The bank
had outstanding repurchase agreements of $110.8 million at September 30, 2001.

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,
                                                                ---------------------------------------------------------
                                                                       2001                                 2000
                                                                --------------------                 --------------------
                                                                                 (Dollars in thousands)

Securities sold under repurchase Agreements:
Balance at year-end.....................................                $   110,837                          $   369,628
Average amount outstanding during
   the year.............................................                    397,842                              490,333
Maximum amount outstanding at any
   Month-end............................................                    534,170                              647,779
Weighted average interest rate during
   the year.............................................                      5.74%                                6.27%
Weighted average interest rate
   on year-end balances.................................                      3.21%                                6.74%

On November 23, 1993, the bank sold $150 million principal amount of its 9 1/4%
Subordinated Debentures due 2005. Interest on the 1993 Debentures is payable
semiannually on December 1 and June 1 of each year. The OTS approved the
inclusion of the principal amount of the 1993 Debentures in the bank's
supplementary capital for regulatory capital purposes. Since December 1, 1998,
the 1993 Debentures have been redeemable, in whole or in part, at any time at
the option of the bank.

On December 3, 1996, the bank sold $100 million principal amount of its 9 1/4%
Subordinated Debentures due 2008. Interest on the 1996 Debentures is payable
semiannually on December 1 and June 1 of each year. The OTS approved the
inclusion of the principal amount of the 1996 Debentures in the bank's
supplementary capital for regulatory capital purposes. On December 1, 2001, the
1996 Debentures became redeemable, in whole or in part, at any time at the
option of the bank.

Under the OTS capital regulations, redemption of the 1993 Debentures or the 1996
Debentures prior to their stated maturity requires prior approval of the OTS
unless the debentures are redeemed with the proceeds of, or replaced by, a like
amount of "a similar or higher quality" capital instrument.

Subsidiaries

OTS regulations generally permit the bank to make investments in service
corporation subsidiaries in an amount not to exceed 3.0% of the bank's assets,
provided that any investment in excess of 2.0% of assets serves primarily
community, inner city or community development purposes. These regulations also
permit the bank to make "conforming loans" to those subsidiaries and joint
ventures in an amount not to exceed 50% of the bank's regulatory capital. At
September 30, 2001, 2.0% and 3.0% of the bank's assets was equal to $228.2
million and $342.2 million, respectively, and the bank had $8.0 million invested
in its service corporation subsidiaries, $5.0 million of which was in the form
of conforming loans.

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

Real Estate Development Activities. Manor Investment Company was engaged in
certain real estate development activities commenced prior to the enactment of
FIRREA and continues to manage the remaining property 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. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Banking -
Financial Condition - Asset Quality."

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

Insurance Services. Chevy Chase Insurance Agency, Inc., ("CCIA") a wholly owned
subsidiary of CCFS, is a licensed insurance broker offering a variety of
"personal line" property and casualty and life insurance programs to the general
public, including customers and depositors of the bank. CCIA's primary programs
consist of home owner and automobile insurance in the property and casualty
sector and mortgage and credit life and disability insurance in the life
insurance sector.

Special Purpose Subsidiaries. At September 30, 2001, Chevy Chase Real Estate,
LLC, ("CCRE") a wholly owned subsidiary of Chevy Chase, held 100% of the common
stock of 24 subsidiaries, 12 of which are active, a majority of which were
formed for the sole purpose of acquiring title to various real estate projects
pursuant to foreclosure or deed-in-lieu of foreclosure. The bank's investment in
the subsidiaries was $39.3 million at September 30, 2001. The bank's investment
in CCRE is an operating subsidiary and is not subject to the 3.0% service
corporation investment limit discussed above.

Operating Subsidiaries. Chevy Chase engages in significant mortgage lending
activities through B. F. Saul Mortgage Company. See "Lending Activities."
Consumer Finance Corporation was formed as an operating subsidiary in December
1994 to engage in subprime automobile lending. On November 9, 2000, the bank
stopped the origination of subprime automobile loans. The bank continues its
collection efforts on the existing portfolio. Chevy Chase Preferred Capital
Corporation was formed in August 1996 as an operating subsidiary to invest in
real estate loans, mortgage-backed securities and related assets, and to serve
as the vehicle for raising additional Tier 1 capital for the bank.

On November 12, 1997, a newly formed operating subsidiary of the bank acquired
ASB Capital Management, Inc. As a result of an internal reorganization that took
effect on October 1, 2000, the bank offers investment, management and fiduciary
services through two wholly owned operating subsidiaries: Chevy Chase Trust
Company, a licensed fiduciary and registered investment adviser, which primarily
caters to high net worth individuals, and ASB Capital Management, Inc., a
registered investment adviser, which serves primarily institutional customers.

Employees

The bank and its subsidiaries had 3,328 full-time and 481 part-time employees at
September 30, 2001. The bank provides its employees with a comprehensive range
of employee benefit programs, including group health benefits, life insurance,
disability insurance, paid sick leave, certain free deposit services and certain
loan discounts. See "Item 11. Executive Compensation" for a discussion of
certain compensation programs available to the bank's executive officers. None
of the bank's employees is represented by a collective bargaining agent. The
bank believes that its employee relations are good.

Competition

Chevy Chase encounters strong competition both in attracting deposits and making
loans in its markets. The bank's most direct competition for deposits comes from
other thrifts, commercial banks and credit unions, as well as from money market
funds and corporate and government securities. In addition to offering
competitive interest rates, Chevy Chase offers a variety of services, convenient
ATM locations and convenient office locations and 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 comes from local depository institutions and, as a
result of deregulation of the financial services industry and changing market
demands over recent years, regional, national and international financial
institutions and other providers of financial services. The GLB Act amended
federal law to permit broader affiliations among commercial banks, securities
firms, insurance companies, and other financial services providers.

The bank estimates that it competes principally with approximately 13 depository
institutions in its deposit-taking activities in the Washington, DC metropolitan
area. The bank also competes with these institutions in the origination of
single-family residential mortgage loans and home equity credit line loans.
According to the most recently published industry statistics, at June 30, 2000,
Chevy Chase had the largest market share, with approximately 30% of deposits, in
Montgomery County, Maryland, and ranked third in market share, with
approximately 15% of deposits, in Prince George's County, Maryland. Based on
publicly available information, Chevy Chase estimates that, in the Washington,
DC metropolitan area, it maintains the leading market share of single-family
residential mortgage and home equity credit line loans.

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 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. Each member of an affiliated group of corporations which files
consolidated income tax returns is liable for the group's federal income tax
liability. 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.

Bad Debt Reserve. For taxable years beginning before December 31, 1995, savings
institutions that satisfied certain requirements were 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 qualify for this treatment, at least 60% of a savings
institution's assets had to be "qualifying assets," including cash, certain U.S.
and state government securities, and loans secured by interests in residential
real property.

In establishing its reserves from calendar year 1988 through fiscal year 1996,
the bank calculated its bad debt deduction for tax purposes using the experience
method. The experience method was based on the institution's actual loan loss
experience over a prescribed period. As of September 30, 1996, accumulated
reserves were approximately $111.8 million.

In 1996, Congress repealed the thrift bad debt provisions of the Internal
Revenue Code effective for taxable years beginning after December 31, 1995. As a
result, for fiscal 2001 and fiscal 2000 taxable years, the bank is no longer
able to use the "reserve method" for computing its bad debt deduction and can
deduct only those bad debts actually incurred during the respective taxable
years. The bad debt provisions of the 1996 legislation also require thrifts to
recapture and pay income tax on bad debt reserves accumulated since 1987 over a
six year period, beginning with a thrift's taxable year starting after December
31, 1995 or, if the thrift meets a loan origination test, beginning up to two
years later. The bank's accumulated reserves since 1987 which are subject to
recapture under this rule are $101.3 million. Of this amount, $16.9 million was
recaptured in each of 1999, 2000 and 2001, and $50.7 million remains subject to
recapture over the remainder of the six year recapture period which ends
September 2004. The tax liability related to the recapture of the bad debt
reserves accumulated since 1987 has been reflected in the bank's financial
statements.

Consolidated Tax Returns; Tax Sharing Payments. Generally, the operations of the
Real Estate Trust have generated significant net operating losses and the bank's
taxable income generally has been sufficient to fully utilize the losses of the
Real Estate Trust. Under the terms of a tax sharing agreement dated June 28,
1990, as amended, the bank is obligated to make payments to the Trust based on
its taxable income, as explained more fully below.

The tax sharing agreement generally provides that each member of the Trust's
affiliated group is required to pay the Trust an amount equal to100% of the tax
liability that the member would have been required to pay to the IRS if the
member had filed on a separate return basis. These amounts generally must be
paid even if the affiliated group has no overall tax liability or the group's
tax liability is less than the sum of such amounts. Under the tax sharing
agreement, the Trust, in turn, is obligated to pay to the appropriate tax
authorities the overall tax liability, if any, of the group. In addition, to the
extent the net operating losses or tax credits of a particular member reduce the
overall tax liability of the group, the Trust is required to reimburse that
member on a dollar-for-dollar basis, thereby compensating the member for the
group's use of its net operating losses or tax credits. Under the tax sharing
agreement, the bank and its subsidiaries are treated as a single member of the
Trust's affiliated group.

The bank made tax sharing payments of $3.4 million in fiscal 2001. At September
30, 2001, the amount of tax sharing payments due to the Trust from the bank was
$4.9 million. It is expected that the bank will have taxable income in future
years and additional operating losses of the Trust will be utilized to reduce
the overall tax liability of the group which would otherwise arise from such
taxable income of the bank or from the taxable income of other members of the
Trust's affiliated group.

In general, if the bank has net operating losses or unused tax credits in any
taxable year, under the tax sharing agreement the Trust is obligated to
reimburse the bank in an amount generally equal to (1) the tax benefit to the
group of using those tax losses or unused tax credits in the group's
consolidated federal income tax return for such year, plus (2) to the extent
those losses or credits are not used by the group in that year, the amount of
the tax refunds which the bank would otherwise have been able to claim if it
were not 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 the 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 specific remedies upon a breach by any party of its
obligations under the agreement.

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

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 and its
subsidiaries, that are 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 filings.

ITEM 2.  PROPERTIES

Real Estate

A list of the investment properties of the Real Estate Trust is set forth under
"Item 1. Business -- Real Estate -- Real Estate Investments."

The Trust conducts its principal business from its executive offices at 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. In March 2002, the Trust
expects to move its principal place of business, executive offices and the sales
office for its unsecured notes to a new building located at 7501 Wisconsin
Avenue, Bethesda, Maryland. The Saul Company leases all office facilities on
behalf of the Trust.

Banking

During fiscal year 2001, the bank completed the development of a new office
building to use as its corporate headquarters at 7501 Wisconsin Avenue,
Bethesda, Maryland. In August 2001, the bank began the process of relocating its
executive offices to the new headquarters from 8401 Connecticut Avenue, Chevy
Chase, Maryland. As part of this process, the bank is consolidating the
locations of many of its activities into its new headquarters. This will be
completed during fiscal year 2002. At September 30, 2001, the bank conducted its
business from its home office at 7926 Jones Branch Drive, McLean, Virginia and
its executive offices at 7501 Wisconsin Avenue, Bethesda, Maryland; its
operations centers at 6151 and 6200 Chevy Chase Drive, Laurel, Maryland, and
14601 Sweitzer Lane, Laurel, Maryland; its office facilities at 7700 and 7735
Old Georgetown Road, Bethesda, Maryland, 8401 Connecticut Avenue, Chevy Chase,
Maryland and 1101 Pennsylvania Avenue, NW, Washington, DC; and 183 full-service
offices located in Maryland, Virginia, Delaware and the District of Columbia. On
that date, the bank owned the building and land for 30 of its branch offices and
leased its remaining 153 branch offices. Chevy Chase leases the office
facilities at 8401 Connecticut Avenue, 6200 Chevy Chase Drive, 14601 Sweitzer
Lane, 7735 Old Georgetown Road, 1101 Pennsylvania Avenue, NW and the land at
7501 Wisconsin Avenue and 7700 Old Georgetown Road. Chevy Chase owns the
building at 7501 Wisconsin Avenue and 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 fiscal 2002 to 2021 and the
ground leases have terms expiring from fiscal 2029 to 2081. The bank also owns
the building and land at 5202 President's Court, Frederick, Maryland, the site
of its former credit card operations center, which is now leased to third
parties. See Note 17 to the Consolidated Financial Statements in this report for
lease expense and commitments.

The following table sets forth the location of the bank's 183 full-service
branch offices at September 30, 2001.

1 Catoctin Circle                           8201 Greensboro Drive                     1100 Wilson Boulevard
Leesburg, VA  20176                         McLean, VA  22102                         Arlington, VA  22209

1100 W. Broad Street                        234 Maple Avenue East                     4229 Merchant Plaza
Falls Church, VA  22046                     McLean, VA  22180                         Woodbridge, VA  22192

3941 Pickett Road                           8436 Old Keene Mill Road                  14125 St. Germain Drive
Fairfax, VA  22031                          Springfield, VA  22152                    Centreville, VA  20121

1439 Chain Bridge Road                      8120 Sudley Road                          3532 Columbia Pike
McLean, VA  22101                           Manassas, VA  20109                       Arlington, VA 22204

6367 Seven Corners Center                   13344-A Franklin Farms Road               11200 Main Street
Falls Church, VA  22044                     Herndon, VA  20171                        Fairfax, VA 22030

1100 S. Hayes Street                        20970 Southbank Street                    13043 Lee Jackson Memorial Highway
Arlington, VA  22202                        Potomac Falls, VA 20165                   Fairfax, VA 22033

2932 Chain Bridge Road                      7030 Little River Turnpike                2079 Daniel Stuart Square
Oakton, VA  22124                           Annandale, VA  22003                      Woodbridge, VA 22191

1201 Elden Street                           3095 Nutley Street                        2901-11 South Glebe Road
Herndon, VA  20170                          Fairfax, VA 22031                         Arlington, VA 22206

5613 Stone Road                             4700 Lee Highway                          7501 Huntsman Boulevard
Centreville, VA  20120                      Arlington, VA 22207                       Springfield, VA 22153

44151 Ashburn Shopping Plaza                5851 Crossroads Center Way                1230 West Broad Street
Ashburn, VA  20147                          Falls Church, VA  22041                   Falls Church, VA 22047

3690-A King Street                          6800 Richmond Highway                     10346 Courthouse Road
Alexandria, VA  22302                       Alexandria, VA  22306                     Spotsylvania, VA 22553

6609 Springfield Mall                       7935 L Tysons Corner Center               3480 South Jefferson Street
Springfield, VA  22150                      McLean, VA  22102                         Falls Church, VA 22041

500 South Washington Street                 11874 Spectrum Center                     1459 North Point Village
Alexandria, VA  22314                       Reston, VA  20190                         Reston, VA 20194

10100 Dumfries Road                         5230-A Port Royal Road                    61 Catoctin Circle, NE
Manassas, VA  22110                         Springfield, VA  22151                    Leesburg, VA 20175

5870 Kingstowne Boulevard                   8628 Richmond Highway                     6426 Springfield Plaza
Alexandria, VA  22310                       Alexandria, VA  22309                     Springfield, VA 22150

3499 S. Jefferson Street                    3046 Gatehouse Plaza                      21800 Town Center Plaza, #255
Baileys Crossroads, VA 22041                Falls Church, VA  22042                   Sterling, VA 20164

1621 B Crystal Square Arcade                46160 Potomac Run Plaza                   5740 Union Mills Road
Arlington, VA  22202                        Sterling, VA  20164                       Clifton, VA 20124

21100 Dulles Town Circle                    9863 Georgetown Pike                      8110 Fletcher Avenue
Dulles, VA 20166                            Great Falls, VA 22066                     McLean, VA 22101

7575 Newlinton Hall Road                    2251 John Milton Drive                    3501 Plank Road
Gainesville, VA  20155                      Herndon, VA 20171                         Fredericksburg, VA 22407

12445 Hedges Run Drive                      7137 Columbia Pike                        6011 Burke Center Parkway
Lakeridge, VA 22192                         Annandale, VA 22003                       Burke, VA 22015

8025 Sudley Road                            1228 Elden Street                         4309 Dale Boulevard
Manassas, VA 22110                          Herndon, VA 22070                         Dale City, VA 22193

41 West Lee Highway                         3131 Duke Street                          26001 Ridge Road
Warrenton, VA 22186                         Alexandria, VA 22314                      Damascus, MD 20872

17831 Georgia Avenue                        4701 Sangamore Road                       317 Kentlands Boulevard
Olney, MD 20832                             Bethesda, MD 20816                        Gaithersburg, MD 20878

8315 Georgia Avenue                         2185 Brightseat Road                      215 N. Washington Street
Silver Spring, MD 20910                     Landover, MD 20785                        Rockville, MD 20850

11261 New Hampshire Avenue                  6200 Annapolis Road                       573 Governor Ritchie Highway
Silver Spring, MD 20904                     Landover Hills, MD 20784                  Severna Park, MD 21146

101 Halpine Road                            33 West Franklin Street                   4745 Dorsey Hall Drive
Rockville, MD 20852                         Hagerstown, MD 21740                      Ellicott City, MD 21042

6107 Greenbelt Road                         6400 Belcrest Road                        1130 Smallwood Drive
Berwyn Heights, MD 20740                    Hyattsville, MD 20782                     Waldorf, MD 20603

4 Bureau Drive                              8740 Arliss Street                        1040 Largo Center Drive
Gaithersburg, MD 20878                      Silver Spring, MD 20901                   Largo, MD 20785

19610 Club House Road                       2409 Wooton Parkway                       6335 Marlboro Pike
Gaithersburg, MD 20886                      Rockville, MD 20850                       District Heights, MD 20747

812 Muddy Branch Road                       8845 Branch Avenue                        7530 Annapolis Road
Gaithersburg, MD 20878                      Clinton, MD 20735                         Lanham, MD 20784

10211 River Road                            1181 University Boulevard                 11241 Georgia Avenue
Potomac, MD 20854                           Langley Park, MD 20783                    Wheaton, MD 20902

14113 Baltimore Avenue                      19801 Century Boulevard                   13484 New Hampshire Avenue
Laurel, MD 20707                            Germantown, MD 20874                      Silver Spring, MD 20904

7290-A Cradlerock Way                       1009 West Patrick Street                  7101 Democracy Boulevard
Columbia, MD 21045                          Frederick, MD 21701                       Bethesda, MD 20817

1151 Maryland Route 3 North                 7937 Ritchie  Highway                     4825 Cordell Avenue
Gambrills, MD 21054                         Glen Burnie, MD 21061                     Bethesda, MD 20814

12228 Viers Mill Road                       19781-83 Frederick Road                   7515 Greenbelt Road
Silver Spring, MD 20906                     Germantown, MD 20876                      Greenbelt, MD 20770

115 University Boulevard West               16827 Crabbs Branch Way                   15777 Columbia Pike
Silver Spring, MD 20901                     Rockville, MD 20855                       Burtonsville, MD 20866

9707 Old Georgetown Road                    2321-E Forest Drive                       509 N. Frederick Avenue
Bethesda, MD 20814                          Annapolis, MD 21401                       Gaithersburg, MD 20877

7941 Tuckerman Lane                         15460 Annapolis Road                      5823 Eastern Avenue
Potomac, MD 20854                           Bowie, MD 20715                           Chillum, MD 20782

Stamp Student Union                         20000 Goshen Road                         3355 Corridor Market Place
College Park, MD 20742                      Gaithersburg, MD 20879                    Laurel, MD 20724

5400 Corporate Drive                        12097 Rockville Pike                      10400 Old Georgetown Road
Frederick, MD 21703                         Rockville, MD 20852                       Bethesda, MD 20814

20944 Frederick Road                        10159 New Hampshire Avenue                6020 Marshalee Drive
Germantown, MD 20876                        Hillandale, MD 20903                      Elkridge, MD 21075

3601 St. Barnabas Road                      10800 Baltimore Avenue                    135 East Baltimore Street
Silver Hill, MD 20746                       Beltsville, MD 20705                      Baltimore, MD 21202

18331 Leaman Farm Road                      6264 Central Avenue                       2801 University Boulevard West
Germantown, MD 20876                        Seat Pleasant, MD 20743                   Kensington, MD 20895

1734 York Road                              7700 Old Georgetown Road                  4624 Edmondson Avenue
Lutherville, MD 21093                       Bethesda, MD 20814                        Baltimore, MD 21229

11399 York Road                             18104 Town Center Drive                   6000 Greenbelt Road
Cockeysville, MD 21030                      Olney, MD 20832                           Greenbelt, MD 20704

751 South Salisbury Boulevard               6197 Oxon Hill Road                       9730 Groffs Mill Drive
Salisbury, MD 21801                         Oxon Hill, MD 20745                       Owings Mills, MD 21117

5700 Southeast Crain Highway                10821 Connecticut Avenue                  6340 York Road
Upper Marlboro, MD 20772                    Kensington, MD 20895                      Towson, MD 21212

5476 Wisconsin Avenue                       18006 Mateny Road                         4622 Wilkens Avenue
Chevy Chase, MD 20815                       Germantown, MD 20874                      Baltimore, MD 21229

8100 Loch Raven Boulevard                   7406 Baltimore Avenue                     11301 Rockville Pike
Towson, MD 21286                            College Park, MD 20740                    Kensington, MD  20895

842 Muddy Branch Road                       980 E. Swan Creek Road                    7500 Old Georgetown Road
Gaithersburg, MD 20878                      Fort Washington, MD 20744                 Bethesda, MD  20814

229 Kentlands Boulevard                     3828 International Drive                  5370 Westbard Avenue
Gaithersburg, MD 20878                      Silver Spring, MD 20906                   Bethesda, MD 20816

12051 Rockville Pike                        3400 Crain Highway                        7340 Westlake Terrace
Rockville, MD 20852                         Bowie, MD 20716                           Bethesda, MD 20817

15791 Columbia Pike                         2315 Randolph Road                        1327 Lamberton Drive
Burtonsville, MD 20866                      Silver Spring, MD 20906                   Silver Spring, MD 20902

2215 Bel Pre Road                           45101 First Colony Way                    13490 New Hampshire Avenue
Wheaton, MD 20906                           California, MD 20619                      Silver Spring, MD 20904

8401 Connecticut Avenue                     802 Pleasant Drive                        2611 Brandermill Boulevard
Chevy Chase, MD 20815                       Rockville, MD 20850                       Gambrills, MD 21054

5424 Western Avenue                         8000 York Road                            4701 Sangamore Road
Chevy Chase, MD 20815                       Towson, MD 21252                          Bethesda, MD 20816

13641 Connecticut Avenue                    7940 Crain Highway                        4000 Wisconsin Avenue, NW
Wheaton, MD 20906                           Glen Burnie, MD 21061                     Washington, DC 20016

4455 Connecticut Avenue, NW                 1545 Wisconsin Avenue, NW                 1717 Pennsylvania Avenue, NW
Washington, DC  20008                       Washington, DC 20007                      Washington, DC  20006

2831 Alabama Avenue, SE                     4860 Massachusetts Avenue, NW             925 15th Street, NW
Washington, DC 20020                        Washington, DC 20016                      Washington, DC 20005

1800 M Street, NW                           210 Michigan Avenue, NE                   1299 Pennsylvania Avenue, NW
Washington, DC 20036                        Washington, DC  20017                     Washington, DC 20005

5714 Connecticut Avenue, NW                 1850 K Street, NW                         22 Lighthouse Plaza
Washington, DC 20015                        Washington, DC 20006                      Rehoboth Beach, DE 19971

At September 30, 2001, the net book value of the bank's office facilities,
including leasehold improvements, was $289.4 million, net of accumulated
depreciation of $81.7 million. See Note 17 to the Consolidated Financial
Statements in this report.

As of October 2001, the bank had received OTS approval to open eight additional
full-service branch offices. The branches, three in Virginia, three in Maryland
and two in Washington, D.C., are scheduled to open during fiscal 2002.

The bank owns additional assets, including furniture and data processing
equipment. At September 30, 2001, these other assets had a book value of $144.8
million, net of accumulated depreciation of $134.0 million. The bank also has
operating leases, primarily for certain data processing equipment and software.
Those leases have month-to-month or year-to-year terms.

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

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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 2001.

                                     PART II

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

There currently is no established public trading market for Common Shares. At
December 6, 2001, 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. The Trust did not pay any cash dividends on its Common Shares during
the past two fiscal years. See "Item 12. Security Ownership of Certain
Beneficial Owners and Management."

ITEM 6.  SELECTED FINANCIAL DATA

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

                             SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA

======================================================================================================================

                                                                           Year Ended September 30
                                                         -------------------------------------------------------------

(In thousands, except per share amounts and other data)     2001         2000        1999        1998        1997
----------------------------------------------------------------------------------------------------------------------

STATEMENT OF OPERATIONS DATA:

Real Estate:
Revenues                                                   $ 142,952    $ 132,858   $ 106,025    $ 98,592    $ 84,569
Operating expenses                                           161,802      145,484     121,676     118,636     108,601
Equity in earnings of partnership investments                  8,314        7,711       5,360       1,918       4,150
Gain (loss) on sales of property                              11,077          994          --        (331)        895
                                                         -------------------------------------------------------------
Real estate operating loss                                       541       (3,921)    (10,291)    (18,457)    (18,987)
                                                         -------------------------------------------------------------

Banking:
Interest income                                              786,855      736,659     519,493     437,404     454,352
Interest expense                                             422,744      394,400     245,507     238,410     239,815
                                                         -------------------------------------------------------------
Net interest income                                          364,111      342,259     273,986     198,994     214,537
Provision for loan losses                                    (67,852)     (49,930)    (22,880)   (150,829)   (125,115)
                                                         -------------------------------------------------------------
Net interest income after provision for loan and
 lease losses                                                296,259      292,329     251,106      48,165      89,422
                                                         -------------------------------------------------------------
Other income:
    Servicing and securitization income                       69,792       38,441      31,670     231,674     303,216
    Credit card fees                                              --           --          --      53,881      57,381
    Deposit servicing fees                                   101,482       88,253      69,570      51,997      41,893
    Gain on sales of trading securities, net                   3,954        1,490       7,243         982       1,203
    Net unrealized gains (losses) on trading securities          448           --       1,192      (1,258)         --
    Gain (loss) on real estate held for investment or
     sale, net                                                 2,815       (1,523)     34,049     (16,539)    (18,688)
    Gain on sales of assets                                    4,904        1,486       3,779     290,434       1,527
    Other                                                     32,242       26,112      22,693      29,089      22,573
                                                         -------------------------------------------------------------
Total other income                                           215,637      154,259     170,196     640,260     409,105
                                                         -------------------------------------------------------------
Operating expenses                                           407,897      365,316     325,322     504,018     418,346
                                                         -------------------------------------------------------------
Banking operating income                                     103,999       81,272      95,980     184,407      80,181
                                                         -------------------------------------------------------------

Total Company:
Operating income                                             104,540       77,351      85,689     165,950      61,194
Provision for income taxes                                    34,963       23,217      29,302      42,869      12,810
                                                         -------------------------------------------------------------

Income before extraordinary item and minority interest        69,577       54,134      56,387     123,081      48,384
Extraordinary item:
    Loss on early extinguishment of debt, net of taxes            --         (166)         --      (9,601)         --
                                                         -------------------------------------------------------------
Income before minority interest                               69,577       53,968      56,387     113,480      48,384
Minority interest held by affiliates                         (10,899)      (6,298)     (7,604)    (22,043)     (6,848)
Minority interest -- other                                   (25,313)     (25,313)    (25,313)    (25,313)    (22,676)
                                                         -------------------------------------------------------------
Total company net income (loss)                             $ 33,365     $ 22,357    $ 23,470    $ 66,124    $ 18,860
                                                         =============================================================

Net income (loss) available to common shareholders          $ 38,241     $ 16,939    $ 18,052    $ 60,706    $ 13,442

Net income (loss) per common share:
Income before extraordinary item and minority interest       $ 15.42      $ 10.08     $ 10.56     $ 24.38      $ 8.90
Extraordinary item:
    Loss on early extinguishment of debt, net of taxes            --        (0.03)         --       (1.99)         --
                                                         -------------------------------------------------------------
Income before minority interest                                15.42        10.05       10.56       22.39        8.90
Minority interest held by affiliates                           (2.26)       (1.30)      (1.58)      (4.57)      (1.42)
Minority interest -- other                                     (5.24)       (5.24)      (5.24)      (5.24)      (4.70)
                                                         -------------------------------------------------------------
Total company net income (loss)                               $ 7.92       $ 3.51      $ 3.74     $ 12.58      $ 2.78
                                                         =============================================================

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

SELECTED FINANCIAL DATA
(Continued)
======================================================================================================================

                                                                           Year Ended September 30
                                                         -------------------------------------------------------------

(In thousands, except per share amounts and other data)     2001         2000        1999        1998        1997
----------------------------------------------------------------------------------------------------------------------

BALANCE SHEET DATA:

Assets:
Real estate assets                                         $ 448,130    $ 430,864   $ 365,071   $ 323,432   $ 300,573
    Income-producing properties, net                         282,984      238,249     207,407     183,879     156,535
    Land parcels                                              40,835       39,716      39,448      40,110      42,160
Banking assets                                            11,388,466   10,689,529   9,146,769   6,721,149   6,057,413
Total company assets                                      11,836,596   11,120,393   9,511,840   7,044,581   6,357,986

Liabilities:
Real estate liabilities                                      748,189      738,367     663,638     636,036     590,910
    Mortgage notes payable                                   325,750      307,214     213,447     198,874     180,204
    Notes payable - secured                                  202,500      200,000     216,000     200,000     175,000
    Notes payable - unsecured                                 50,717       47,463      46,122      50,335      46,633
Banking liabilities                                       10,738,608   10,071,545   8,562,284   6,141,636   5,582,167
Minority interest held by affiliates                          86,310       79,028      73,236      72,242      51,388
Minority interest - other                                    218,307      218,307     218,307     218,306     218,306
Total company liabilities                                 11,791,414   11,111,782   9,517,465   7,068,220   6,442,771

Shareholders' equity (deficit)                                45,182        8,611      (5,625)    (23,639)    (84,785)
----------------------------------------------------------------------------------------------------------------------

CASH FLOW DATA:

Net cash flows provided by (used in) operating activities:
    Real estate                                             $ (2,657)    $ 24,980    $ 30,388    $ 14,738     $ 6,911
    Banking                                                1,011,568      887,985     (10,534)  2,211,589   2,368,287
                                                         -------------------------------------------------------------
Total Company                                              1,008,911      912,965      19,854   2,226,327   2,375,198
                                                         -------------------------------------------------------------

Net cash flows provided by (used in) investing activities:
    Real estate                                              (12,441)     (88,665)    (44,237)    (45,115)    (11,664)
    Banking                                               (1,619,796)  (2,475,266) (2,995,105) (2,202,225) (2,276,165)
                                                         -------------------------------------------------------------
Total Company                                             (1,632,237)  (2,563,931) (3,039,342) (2,247,340) (2,287,829)
                                                         -------------------------------------------------------------

Net cash flows provided by (used in) financing activities:
    Real estate                                               10,829       63,957      17,756      26,079       7,485
    Banking                                                  589,990    1,425,368   2,379,329     555,201     293,344
                                                         -------------------------------------------------------------
Total Company                                                600,819    1,489,325   2,397,085     581,280     300,829
                                                         -------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents         (22,507)    (161,641)   (622,403)    560,267     388,198
----------------------------------------------------------------------------------------------------------------------

OTHER DATA:

Hotels:
    Number of hotels                                              18           16          15          12          10
    Number of guest rooms                                      3,578        3,196       3,103       2,772       2,370
    Average occupancy                                            66%          71%         68%         68%         70%
    Average room rate                                         $94.32       $89.16      $85.45      $81.01      $72.21
Office properties:
    Number of properties                                          11           10           7           7           8
    Leasable area (square feet)                            1,796,571    1,684,425   1,277,243   1,270,087   1,308,000
    Leasing percentages                                          92%          98%         92%        100%         99%
Land parcels:
    Number of parcels                                             10            9          10          10          10
    Total acreage                                                385          399         417         434         439

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

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. The term "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, 2001 consisted
primarily of hotels, office projects, and land parcels. See "Item 1. Business --
Real Estate -- Real Estate Investments." During fiscal 2001, the Real Estate
Trust added a 152-unit Hampton Inn and a 229-unit Courtyard by Marriott to its
hotel portfolio, which at year-end included 18 properties containing 3,578
available rooms. Also during fiscal 2001, the Real Estate Trust acquired a
150,000 square foot office/warehouse building and developed a single-story
building containing 54,000 square feet of gross leasable area.

Overall, the hotel portfolio experienced an average occupancy rate of 66% and an
average room rate of $94.32 during fiscal 2001, compared to an average occupancy
of 71% and an average room rate of $89.16 during the prior year. For the 15
hotels owned throughout both periods, the average occupancies were 66% and 71%,
and the average rates were $93.01 and $89.70. REVPAR (revenue per available
room) for the 15 hotels was $61.33 for fiscal 2001, a 3.9% decrease from REVPAR
for fiscal 2000 of $63.83.

The Real Estate Trust was directly affected by the terrorist attacks of
September 11 because of its concentration of hotels in the Washington, DC
metropolitan area, one of the sites of the attacks. Eleven of the Real Estate
Trust's eighteen hotels are located in the Washington, DC metropolitan area. In
addition, five of these eleven hotels are within minutes from either Washington
Reagan National Airport or Dulles International Airport, and thus, were more
directly affected by the sharp decline in air travel. The two hotels located
close to Reagan National were especially affected by Reagan National's prolonged
closure and current limited flight schedule.

The sharp reduction in travel following the terrorist attacks has resulted in
declines in REVPAR and average occupancy during fiscal 2001 as compared to
fiscal 2000. Our REVPAR in September and October was down 32.21% and 29.40%,
respectively, from the same months last year. Since the September 11 tragedy,
the hotels' occupancy, as well as the occupancy of the hotel industry in
general, has continued to be lower on a year over year basis. The average
occupancy in September and October was down 27.56% and 20.52%, respectively,
from the same months last year.

The Real Estate Trust has developed strategies to manage its hotel operations
through this downturn. The Real Estate Trust has focused on reducing its direct
operating expenses related to the hotels and has reevaluated its hotel capital
expenditure budget for 2002.

Office space in the Real Estate Trust's office property portfolio was 92% leased
at September 30, 2001, compared to a leasing rate of 98% at September 30, 2000.
At September 30, 2001, the Real Estate Trust's office property portfolio
consisted of 11 properties and had a total gross leasable area of 1,797,000
square feet, of which 247,000 square feet (13.8%) and 209,000 square feet
(11.7%) are subject to leases expiring in fiscal 2002 and fiscal 2003.

Banking

General. The bank's assets grew to $11.4 billion during fiscal 2001, an increase
of $703 million from fiscal 2000. The bank recorded operating income of $114.3
million during fiscal 2001, compared to operating income of $81.3 million during
fiscal 2000. The increase in income for fiscal 2001 was attributable to a $21.9
million increase in net interest income, a $32.9 million increase in servicing
and securitization income, a $10.3 million gain on other investment and a $13.2
million increase in deposit service fees. Partially offsetting the increase in
income were a $42.6 million increase in operating expenses, and a $17.9 million
increase in the provision for loan and lease losses. See "Banking - Results of
Operations."

Servicing and securitization income increased $32.9 million, or 89.4%, during
fiscal 2001 primarily as a result of increased securitization activity. During
fiscal 2001, the bank securitized and sold $804.9 million of automobile loan
receivables and recognized a gain of $27.9 million compared to securitization of
$668.1 million for a gain of $4.6 million fiscal 2000. See Summary Of
Significant Accounting Policies - The bank and Note 15 to the Consolidated
Financial Statements in this report. See "Liquidity." The bank recognized a net
unrealized loss of $0.1 million during fiscal 2001 on its interest-only strips
receivables and a net unrealized gain of $2.6 million on interest-only strips
receivables during fiscal 2000. In addition, amortization of interest-only
strips receivable related to prior sales of loans totaled $2.8 million during
fiscal 2001 compared to $7.3 million during fiscal 2000.

Real estate owned, net of valuation allowances, decreased from $48.5 million at
September 30, 2000 to $30.8 million at September 30, 2001. This reduction was
primarily due to sales in the Communities and other properties and to provisions
for losses, partially offset by capitalized costs. See "Banking - Asset
Quality - REO."

At September 30, 2001, the bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 5.44%, 5.44%, 6.84% and 10.52%,
respectively. The bank's capital ratios exceeded regulatory requirements as well
as the standards established for well-capitalized institutions under OTS prompt
corrective action regulations. See "Banking - Capital."

During fiscal 2001, the bank declared and paid, out of the retained earnings of
the bank, cash dividends on its Common Stock in the aggregate amount of $1,600
per share. Subsequent to September 30, 2001, the bank declared and paid, out of
the retained earnings of the bank, cash dividends on its Common Stock in the
amount of $500 per share.

The bank's assets are subject to review and classification by the OTS upon
examination. The OTS concluded its most recent examination of the bank in March
2001.

Although the bank does not have any significant exposure to the industries
directly affected by the tragic events of September 11, 2001, those events have
exacerbated what was already a weakening U.S. economy, the effects of which may
be experienced well into 2002. As a result, the credit quality of the bank's
loan and lease portfolio may decline from the levels reported at September 30,
2001.

Asset Quality. Non-Performing Assets. The bank's level of non-performing assets
decreased during fiscal 2001. 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.

Non-Performing Assets
(Dollars in thousands)

                                                                                     September 30,
                                                        ------------------------------------------------------------------------
                                                            2001            2000          1999           1998           1997
                                                        -------------  ------------- -------------- -------------- -------------

Non-performing assets:
    Non-accrual loans:
      Residential                                       $      7,314          5,171  $       4,756  $       8,106  $ $    9,617
      Real estate and construction and ground                      -             70              -              -             -
                                                        -------------  ------------- -------------- -------------- -------------
         Total non-accrual real estate loans                   7,314          5,241          4,756          8,106         9,617
      Commercial                                                   -              -            269              -             -
      Subprime automobile                                     13,379         12,026          6,640          3,563         3,154
      Other consumer                                           7,028          5,399          1,607            938         1,072
                                                        -------------  ------------- -------------- -------------- -------------
         Total non-accrual loans (1)                          27,721         22,666         13,272         12,607        13,843
                                                        -------------  ------------- -------------- -------------- -------------

    Real estate acquired in settlement of loans              115,931        129,213        133,157        218,972       231,407
    Allowance for losses on real estate acquired in
     settlement of loans                                     (85,152)       (80,752)       (84,405)      (153,564)     (140,738)
                                                        -------------  ------------- -------------- -------------- -------------
      Real estate acquired in settlement of loans, net        30,779         48,461         48,752         65,408        90,669
                                                        -------------  ------------- -------------- -------------- -------------

         Total non-performing assets                          58,500         71,127         62,024         78,015       104,512

    Accruing loans past due 90 days (2) (3)                        -              -              -              -        25,700
                                                        -------------  ------------- -------------- -------------- -------------
Total non-performing assets and accruing loans past
 due 90 days                                            $     58,500         71,127   $     62,024   $     78,015   $ $ 130,212
                                                        =============  ============= ============== ============== =============

Troubled debt restructurings                            $          -              -   $     11,714   $     11,800   $ $  11,861
                                                        =============  ============= ============== ============== =============

Allowance for losses on loans and leases                $     63,018         54,018   $     58,139   $     60,157   $ $ 105,679
Allowance for losses on real estate held for investment          202            202            202            202           198
Allowance for losses on real estate acquired in
 settlement of loans                                          85,152         80,752         84,405        153,564       140,738
                                                        -------------  ------------- -------------- -------------- -------------

    Total allowances for losses                         $    148,372        134,972   $    142,746   $    213,923   $ $ 246,615
                                                        =============  ============= ============== ============== =============

Interest income recorded
    Non-accrual assets                                  $        358              4  $          17  $          38  $ $      441
                                                        =============  ============= ============== ============== =============
    Restructured loans                                  $          -            340  $         229  $         367  $ $      265
                                                        =============  ============= ============== ============== =============

Interest income that would have been recorded had the
 loans been current in accordance with their original
 terms
    Non-accrual assets                                  $      3,321          2,434  $       1,769  $       1,081  $ $    5,692
                                                        =============  ============= ============== ============== =============
    Restructured loans                                  $          -          1,323  $       1,261  $       1,244  $ $    1,244
                                                        =============  ============= ============== ============== =============

--------------------------------------------------------------------------------------------------------------------------------
(1)  Before deduction of allowances for losses.
(2)  The bank sold its credit card portfolio and
     related operations on September 30, 1998.
(3)  Effective June 30, 1997, the bank stopped
     placing credit card loans on non-accrual
     status.

Non-Performing Assets (Continued)

                                                                                     September 30,
                                                          ----------------------------------------------------------------------
                                                             2001          2000           1999           1998           1997
                                                          ------------- ------------ -------------- -------------- -------------

Ratios:

    Non-performing assets and accruing credit card
      loans past due 90 days, net to total
      assets (1) (2)                                             N/M          0.16%          0.04%          0.26%         0.40%

    Allowance for losses on real estate loans to
      non-accrual real estate loans (3)                       70.86%        205.76%        361.35%        204.18%        99.81%

    Allowance for losses on consumer loans to
      non-accrual consumer and other loans (3)(4)            230.55%        208.49%        440.52%        758.08%       148.37%

    Allowance for losses on loans and leases to
      non-accrual loans (3)                                  227.33%        238.32%        438.06%        477.17%       763.41%

    Allowance for losses on loans and leases to
      total loans and leases receivable (5)                    0.73%          0.65%          0.90%          2.17%         4.14%

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

Non-performing assets totaled $58.5 million, after valuation allowances on REO
of $85.2 million, at September 30, 2001, compared to $71.1 million, after
valuation allowances on REO of $80.8 million, at September 30, 2000. The bank
also maintained valuation allowances of $63.0 million and $54.0 million on its
loan and lease portfolio at September 30, 2001 and 2000, respectively. The $12.6
million decrease in non-performing assets reflected a net decrease in REO of
$17.7 million which was partially offset by an increase in non-accrual loans of
$5.1 million.

Non-accrual Loans. The bank's non-accrual loans totaled $27.7 million at
September 30, 2001, an increase from $22.6 million at September 30, 2000. At
September 30, 2001, non-accrual loans consisted of $7.3 million of non-accrual
real estate loans and $20.4 million of non-accrual subprime automobile and other
consumer loans compared to non-accrual real estate loans of $5.2 million and
non-accrual subprime automobile and other consumer loans of $17.4 million at
September 30, 2000.

REO. At September 30, 2001, the bank's REO totaled $30.8 million, after
valuation allowances on such assets of $85.2 million as set forth in the
following table:

                                                                  Balance                                Balance
                   Number of                                       Before                                 After          Percent
                   Properties     Gross          Charge-offs     Valuation           Valuation          Valuation           of
                                   Balance                       Allowances         Allowances         Allowances          Total
                  -------------   -----------    ----------    ---------------    ----------------   ----------------    ----------
                                                               (Dollars in thousands)
Communities            4              $137,722    $32,509            $105,213            $79,833             $25,380         82.5%

Residential ground     2                 3,607          -               3,607              1,689               1,918          6.2%

Commercial ground      1                 9,499      2,732               6,767              3,630               3,137         10.2%

Single-family
residential
properties             2                   397         53                 344                 -                  344          1.1%

                  -------------   -----------    ----------    ---------------    ---------------    ----------------    ----------
   Total REO           9              $151,224    $35,294            $115,931            $85,152             $30,779        100.0%
                  =============   ===========    ==========    ===============    ===============    ================    ==========

During fiscal 2001, REO decreased $17.7 million, primarily as a result of sales
in the Communities and other properties and additional provisions for losses,
but partially offset by an increase in the bank's ownership interest in two of
the Communities and additional capitalized costs.

During fiscal 2001, the bank received revenues of $34.9 million resulting from
dispositions of 332 residential lots or units in the Communities ($16.4
million), approximately 25.0 acres of commercial land in the Communities ($7.3
million), one commercial permanent property ($9.7 million) and various
single-family residential properties ($1.5 million). In addition, the bank
provided $4.2 million for losses on one of its properties. During fiscal
2001, the bank also purchased from investors additional interests in two of the
Communities for $5.7 million. The bank's ownership interest in one of the
Communities increased from 90% to 100% and in the other community from 84% to
91% as a result of the purchases.

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, DC metropolitan area.

The principal component of REO consists of the four Communities, all of which
are under active development. At September 30, 2001, two of the active
Communities had 543 remaining residential lots, of which 463 lots, or 85.3%,
were under contract and pending settlement. The four active Communities had
approximately 197 remaining acres of land designated for commercial use, of
which 5.34 acres, or 2.7%, were under contract and pending settlement. In
addition, at September 30, 2001, the bank was engaged in discussions with
potential purchasers regarding the sale of additional residential units and
retail land.

The following chart provides historical sales information regarding the four
remaining Communities:

                                             Residential Lots                            Commercial Ground (Acres)
                                             ----------------                            -------------------------
                                                                   Under                                            Under
Property Location                 Total            Sold           Contract          Total            Sold          Contract
---------------------------- ---------------- ---------------  --------------- ---------------- ---------------- -------------

Loudoun County, VA                     5,051           4,182              463           213.00            42.00            --
Loudoun County, VA                     2,042           2,042               --            31.00            10.00            --
Montgomery County, MD                  1,805           1,789               --            71.15            67.55          3.60
Loudoun County, VA                     4,352           4,352               --           116.02           114.28          1.74
                             ---------------- ---------------  --------------- ---------------- ---------------- -------------

                Total                 13,250          12,365              463           431.17           233.83          5.34
                             ================ ===============  =============== ================ ================ =============

The bank capitalizes costs relating to development and improvement of REO.
Interest costs are capitalized on real estate properties under development.
During fiscal 2001, the bank capitalized interest in the amount of $2.0 million
relating to its four active Communities.

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.

Potential Problem Assets. Although not considered non-performing assets,
primarily because the loans are not 90 or more days past due and the borrowers
have not abandoned control of the properties, potential problem assets are
experiencing problems sufficient to cause management to have serious doubts as
to the ability of the borrowers to comply with present repayment terms. At
September 30, 2001 and 2000, none of the bank's assets were deemed by management
to be potential problem assets.

The bank's Watch List Committee meets quarterly and reviews all relationships in
Commercial Lending which are rated as vulnerable, criticized or classified with
commitments of $1.0 million and greater. This Committee reviews the current
status of each relationship, recent changes, performance against the correction
action plan presented at the prior meeting, and the current action plan to deal
with the relationship. On December 17, 2001, the Committee reviewed loans with
commitments of $49.6 million at September 30, 2001.

Delinquent Loans. At September 30, 2001, delinquent loans totaled $111.2
million, or 1.3% of loans, compared to $89.4 million, or 1.1% of loans, at
September 30, 2000. The following table sets forth information regarding the
bank's delinquent loans at September 30, 2001.

                                                                Principal Balance
                                                       (Dollars in Thousands)
                        -------------------------------------------------------------------------------------
                                                    Subprime                 Other                                Total as a
                           Real Estate             Automobile            Consumer Loans                           Percentage
                              Loans                   Loans                                       Total           of Loans(1)
                        ------------------     --------------------     -----------------    ----------------     -----------------

Loans delinquent for:
30-59 days......                  $ 13,755                $  55,385              $ 17,132             $86,272            1.0%
60-89 days......                     2,209                   17,285                 5,385              24,879            0.3%
                                                                                                                  -----------------
                        ------------------     --------------------     -----------------    ----------------
  Total............               $ 15,964                $  72,670              $ 22,517            $111,151            1.3%
                        ==================     ====================     =================    ================     =================
-----------------------
(1)        Includes loans held for sale and/or securitization, before deduction
           of valuation allowances, unearned premiums and discounts and deferred
           loan origination fees (costs).

Real estate loans classified as delinquent 30-89 days consists entirely of
single-family permanent residential mortgage loans and home equity loans. Total
delinquent real estate loans increased to $16.0 million at September 30, 2001,
from $7.2 million at September 30, 2000, largely as a result of deteriorating
economic conditions.

Total delinquent subprime automobile loans increased to $72.7 million at
September 30, 2001, from $68.1 million at September 30, 2000. On November 9,
2000, the bank stopped the origination of subprime automobile loans. The bank
continues its collection efforts on the existing loan portfolio.

Other consumer loans delinquent 30-89 days increased to $22.5 million at
September 30, 2001 from $14.1 million at September 30, 2000, largely as a result
of deteriorating economic conditions.

Troubled Debt Restructurings. A troubled debt restructuring occurs when the bank
agrees to modify significant terms of a loan in favor of a borrower experiencing
financial difficulties. The bank had no troubled debt restructurings at
September 30, 2001 and 2000.

Real Estate Held for Investment. At September 30, 2001 and 2000, real estate
held for investment consisted of one property with book value of $1.1 million,
net of valuation allowances of $0.2 million.

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

Analysis of Allowance for and Charge-offs of Loans and Leases
(Dollars in thousands)

                                                                               Year Ended September 30,
                                                     -----------------------------------------------------------------------------
                                                          2001            2000           1999             1998           1997
                                                     -------------- --------------  --------------  --------------  --------------

Balance at beginning of year                         $      54,018   $     58,139    $     60,157    $    105,679    $     95,523
                                                     -------------- --------------  --------------  --------------  --------------

Provision for loan and lease losses                         67,852         49,930          22,880         150,829         125,115
                                                     -------------- --------------  --------------  --------------  --------------

Increase due to acquisition of loans                             -              -               -               -             118
                                                     -------------- --------------  --------------  --------------  --------------

Reduction due to sale of credit card portfolio                   -              -               -         (87,609)              -
                                                     -------------- --------------  --------------  --------------  --------------

Charge-offs:
    Single family residential and home equity                 (786)          (807)           (617)         (1,629)         (1,014)
    Commercial real estate and multifamily                       -         (7,120)              -               -               -
    Credit card                                                  -              -               -        (108,289)       (115,835)
    Subprime automobile                                    (49,749)       (40,110)        (21,169)         (7,298)         (3,309)
    Other                                                  (17,685)       (10,847)         (4,988)         (5,436)         (6,348)
                                                     -------------- --------------  --------------  --------------  --------------
        Total charge-offs                                  (68,220)       (58,884)        (26,774)       (122,652)       (126,506)
                                                     -------------- --------------  --------------  --------------  --------------

Recoveries (1):
    Single family residential and home equity                   80             78              85              49              34
    Credit card                                                  -              -               -          12,732          10,365
    Subprime automobile                                      7,104          3,074             744             297             104
    Other                                                    2,184          1,681           1,047             832             926
                                                     -------------- --------------  --------------  --------------  --------------
        Total recoveries                                     9,368          4,833           1,876          13,910          11,429
                                                     -------------- --------------  --------------  --------------  --------------

Charge-offs,  net of recoveries                            (58,852)       (54,051)        (24,898)       (108,742)       (115,077)
                                                     -------------- --------------  --------------  --------------  --------------

Balance at end of year                               $      63,018   $     54,018    $     58,139    $     60,157    $    105,679
                                                     ============== ==============  ==============  ==============  ==============

Provision for loan and lease losses to average
     loans and leases (2)                                    0.78%          0.66%           0.48%           5.43%           3.50%
Net loan and lease charge-offs to average loans
     and leases (2)                                          0.68%          0.71%           0.52%           3.92%           3.22%
Ending allowance for losses on loans and leases to
     total loans and leases  (2) (3)                         0.73%          0.65%           0.90%           2.17%           4.15%

(1) Includes proceeds received from the sale of charged-off loans.
(2) Includes loans held for sale and/or securitization.
(3) Before deduction of allowance for losses.

Components of Allowance for Losses on Loans and Leases by Type
(Dollars in thousands)

                                                                  September 30,
                   --------------------------------------------------------------------------------------------------------------
                            2001                  2000                  1999                  1998                  1997
                   --------------------- --------------------- --------------------- --------------------- ----------------------
                             Percent of            Percent of            Percent of            Percent of            Percent of
                             Loans to              Loans to              Loans to              Loans to               Loans to
                     Amount  Total Loans   Amount  Total Loans   Amount  Total Loans   Amount  Total Loans   Amount   Total Loans
                   -------- ------------ --------- ----------- --------- ----------- --------- ----------- --------- ------------

Balance at end
 of year allocated
 to:

Single family
 residential       $  2,686     55.9 %   $  2,686     60.3 %   $  3,187     63.4 %   $  1,822     65.7 %   $    661      33.2 %
Home equity             448      4.4          448      3.3          947      3.7          676      4.9          683       3.7
Commercial real
 estate and
 multifamily            197      0.4          893      0.5       10,580      0.9       10,828      2.7        7,705       2.1
Real estate
 construction and
 ground               1,852      3.1        4,757      3.6        2,472      3.5        3,225      3.9          550       2.2
Commercial            9,135      9.0        6,904      7.2        4,623      6.1        3,623      6.3          364       3.9
Credit card               -        -            -        -            -        -            -        -       89,446      42.3
Automobile loans      7,034      7.5        6,034      9.5        3,334     11.1        3,034      4.4          340       4.4
Automobile leases     6,000     13.1        1,500      6.8            -      1.7            -        -            -         -
Subprime automobile  32,000      4.9       28,782      7.4       28,782      7.4       26,010      8.5        2,740       4.6
Home improvement
 and related loans    1,523      1.3        1,523      1.0        3,523      1.7        3,403      2.4        2,415       2.2
Overdraft lines of
 credit and other
 consumer               491      0.4          491      0.4          691      0.5        1,674      1.2          775       1.4
Unallocated           1,652        -            -        -            -        -        5,862        -            -         -
                   ---------             ---------             ---------             ---------             ---------
    Total          $ 63,018              $ 54,018              $ 58,139              $ 60,157              $105,679
                   =========             =========             =========             =========             =========

Analysis of Allowance for and Charge-offs of
Real Estate Held for Investment or Sale
(In thousands)

                                                                           Year Ended September 30,
                                                   --------------------------------------------------------------------------
                                                      2001               2000           1999            1998           1997
                                                   ------------   -------------   ------------   -------------   ------------

Balance at beginning of year:
    Real estate held for investment                $       202     $       202     $      202     $       198     $      191
    Real estate held for sale                           92,179          95,832        164,991         146,135        126,519
                                                   ------------   -------------   ------------   -------------   ------------
      Total                                             92,381          96,034        165,193         146,333        126,710
                                                   ------------   -------------   ------------   -------------   ------------

Provision for real estate losses:
    Real estate held for investment                          -               -              -               4              7
    Real estate held for sale                            4,200           1,400              -          18,856         19,616
                                                   ------------   -------------   ------------   -------------   ------------
      Total                                              4,200           1,400              -          18,860         19,623
                                                   ------------   -------------   ------------   -------------   ------------

Charge-offs, net of recoveries :

    Real estate held for sale:
      Residential ground                                     -             (64)        (1,703)              -              -
      Commercial ground                                      -          (3,397)             -          (6,030)        (5,397)
      Communities                                          200          (1,592)       (67,456)              -              -
                                                   ------------   -------------   ------------   -------------   ------------
        Total net (charge-offs) recoveries                 200          (5,053)       (69,159)              -              -
                                                   ------------   -------------   ------------   -------------   ------------

      Total (charge-offs) recoveries on real estate
         held for investment or sale                       200          (5,053)       (69,159)              -              -
                                                   ------------   -------------   ------------   -------------   ------------

Balance at end of year:
    Real estate held for investment                        202             202            202             202            198
    Real estate held for sale                           96,579          92,179         95,832         164,991        146,135
                                                   ------------   -------------   ------------   -------------   ------------
      Total                                        $    96,781     $    92,381     $   96,034     $   165,193     $  146,333
                                                   ============   =============   ============   =============   ============

Components of Allowance for Losses
on Real Estate Held for Investment or Sale
(In thousands)

                                                                                 September 30,
                                                   --------------------------------------------------------------------------
                                                     2001               2000           1999            1998           1997
                                                   ------------   -------------   ------------   -------------   ------------

Allowance for losses on real estate
  held for investment                              $       202     $       202     $      202     $       202     $      198
                                                   ------------   -------------   ------------   -------------   ------------

Allowance for losses on real estate held for sale:
    Residential ground                                   1,689           1,689          1,520           3,123          1,040
    Commercial ground                                    3,631           3,631          5,800           5,800          6,793
    Communities                                         79,832          75,432         77,085         144,641        132,905
                                                   ------------   -------------   ------------   -------------   ------------
       Total                                            85,152          80,752         84,405         153,564        140,738
                                                   ------------   -------------   ------------   -------------   ------------

       Total allowance for losses on real
           estate held for investment or sale      $    85,354     $    80,954     $   84,607     $   153,766     $  140,936
                                                   ============   =============   ============   =============   ============

The bank maintains valuation allowances for estimated losses on loans and leases
and real estate. The bank's total valuation allowances for losses on loans and
leases and real estate held for investment or sale increased to $148.4 million
at September 30, 2001, from $135.0 million at September 30, 2000. The $13.4
million increase was primarily attributable to increased valuation allowances on
the automobile and subprime automobile loan portfolios as well as additional
valuation on the REO Communities. The increase in valuation allowances for the
current fiscal year reflects the deterioration in general economic conditions
and resulting increasing levels of delinquencies and charge-offs in the bank's
non-commercial loan portfolios. Management reviews the adequacy of the valuation
allowances on loans and leases and real estate using a variety of measures and
tools including historical loss performance, delinquent status, current economic
conditions, internal risk ratings and current underwriting policies and
procedures. Using this analysis, management determines a range of acceptable
valuation allowances. Management believes that the overall level of the
allowance is appropriate.

The allowance for losses on loans secured by real estate and real estate held
for investment or sale totaled $90.5 million at September 30, 2001, which
constituted 73.5% of total non-performing real estate assets before valuation
allowances. This amount represented a $0.8 million increase from the September
30, 2000 level of $89.7 million, or 66.7% of total non-performing real estate
assets before valuation allowances at that date.

When real estate collateral securing an extension of credit is initially
recorded as REO, it is recorded at the lower of cost or fair value, less
estimated selling costs, on the basis of an appraisal. As circumstances change,
it may be necessary to provide additional valuation allowances based on new
information. The allowance for losses on real estate held for sale at September
30, 2001 is in addition to approximately $35.3 million of cumulative charge-offs
previously taken against assets remaining in the bank's portfolio at September
30, 2001.

The bank from time to time obtains updated appraisals on its real estate
acquired in settlement of loans, including the Communities. As a result of such
updated appraisals, the bank could be required to increase its valuation
allowances. The bank may also increase its allowances for losses after
considering local market conditions, including the bank's efforts to sell
individual properties or portions of properties. In addition to ongoing sales of
lots, management periodically receives and reviews offers to purchase various
parcels of these Communities. If information is deemed credible and can be
supported with market comparables, additional allowances for losses may be
provided.

Consistent with regulatory requirements, the bank performs ongoing real estate
evaluations for all REO as a basis for substantiating the carrying values in
accordance with accounting principles generally accepted in the United States.
As indicated, as of September 30, 2001, the bank's REO consisted primarily of
residential Communities under active development. As a part of its development
activities, the bank maintains and updates real estate project evaluations in
accordance with regulatory requirements which include analyses of lot and
acreage sales, status and budgets for development activities and consideration
of project market trends. These real estate evaluations are reviewed
periodically as part of management's review and evaluation of the carrying
values of REO. Following a review of the real estate assets and the related
carrying values, management reports its actions to the bank's board of
directors.

The allowance for losses on consumer loans and leases, including automobile,
home improvement, overdraft lines of credit and other consumer loans, increased
to $47.0 million at September 30, 2001 from $38.3 million at September 30, 2000.
Net charge-offs of subprime automobile loans for fiscal 2001 were $42.6 million,
compared to $37.0 million for fiscal 2000 primarily due to adverse trends in
delinquencies related to the deterioration of general economic conditions. On
November 9, 2000, the bank stopped the origination of subprime automobile loans.

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

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

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

Throughout fiscal 2001, the bank continued to originate and hold in its
portfolio adjustable rate loan products at a greater volume than those with
fixed interest rates. At September 30, 2001, adjustable-rate loans accounted for
48.5 % of total loans and leases, compared to 42.0% at September 30, 2000. This
increase was primarily due to increased originations of adjustable-rate mortgage
products, which typically reprice monthly and are tied to either an index based
on the one-year average Constant Maturity Treasury (or "CMT") for the previous
twelve months or one-month LIBOR and an increase in payoffs of fixed-rate
mortgage loans due to refinancing activity.

A traditional measure of interest-rate risk within the banking industry is the
interest sensitivity "gap," which is the sum of all interest-earning assets
minus all interest-bearing liabilities subject to repricing within the same
period. Gap analysis is a tool used by management to evaluate interest-rate risk
which results from the difference between repricing and maturity characteristics
of the bank's assets and those of the liabilities that fund them. By analyzing
these differences, management can attempt to estimate how changes in interest
rates affect the bank's future net interest income.

The bank views control over interest rate sensitivity as a key element in its
financial planning process and monitors interest rate sensitivity through its
forecasting system. The bank manages interest rate exposure and will narrow or
widen its gap depending on its perception of interest rate movements and the
composition of its balance sheet. 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, 2001,
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.

Interest Rate Sensitivity Table (Gap)
(Dollars in thousands)

                                                           More than       More than       More than
                                                           Six Months      One Year      Three Years
                                            Six Months      through         through        through       More than
                                              or Less       One Year      Three Years     Five Years     Five Years       Total
                                          -------------- -------------  -------------- --------------- ------------- --------------
As of September 30, 2001
Real estate loans:
    Adjustable-rate                       $   2,130,802  $    236,154   $     655,666  $      339,071  $    286,874  $   3,648,567
    Fixed-rate                                   80,005        75,107         247,803         182,950       575,934      1,161,799
    Home equity credit lines and second
     mortgages                                  310,704        13,917          41,884          26,751        66,138        459,394
Commercial                                      611,562        20,789          65,843          44,224        24,928        767,346
Consumer and other                              525,411       376,175         944,159         158,062        40,600      2,044,407
Loans held for sale                             246,083                         -   -               -             -        246,083
Loans held for securitization and sale          282,000                   -         -               -             -        282,000
Mortgage-backed securities                      186,020       213,364         276,198         177,683       621,230      1,474,495
Trading securities                                6,690             -               -               -             -          6,690
Other investments                               236,843             -          45,794               -             -        282,637
                                          -------------- -------------  -------------- --------------- ------------- --------------

   Total interest-earning assets              4,616,120       935,506       2,277,347         928,741     1,615,704     10,373,418
Total non-interest earning assets                     -             -               -               -     1,015,048      1,015,048
                                          -------------- -------------  -------------- --------------- ------------- --------------

    Total assets                          $   4,616,120  $    935,506   $   2,277,347  $      928,741  $  2,630,752  $  11,388,466
                                          ============== =============  ============== =============== ============= ==============

Deposits:
    Fixed maturity deposits               $   1,667,956  $  1,023,521   $     276,612  $       55,245  $          -  $   3,023,334
    NOW, statement and passbook accounts      1,828,120        43,595         145,199          98,826       210,609      2,326,349
    Money market deposit accounts             1,570,297             -               -               -             -      1,570,297
Borrowings:
    Capital notes - subordinated                      -             -               -         150,000       100,000        250,000
    Other                                       926,004         9,331       1,231,938         301,066        54,842      2,523,181
                                          -------------- -------------  -------------- --------------- ------------- --------------
   Total interest-bearing liabilities         5,992,377     1,076,447       1,653,749         605,137       365,451      9,693,161
Minority interest                                     -             -               -               -       144,000        144,000
Total non-interest bearing liabilities                -             -               -               -     1,025,881      1,025,881
Stockholders' equity                                  -             -               -               -       525,424        525,424
                                          -------------- -------------  -------------- --------------- ------------- --------------
    Total liabilities and stockholders'
     equity                               $   5,992,377  $  1,076,447   $   1,653,749  $      605,137  $  2,060,756  $  11,388,466
                                          ============== =============  ============== =============== ============= ==============

Gap                                       $  (1,376,257) $   (140,941)  $     623,598  $      323,604  $  1,250,253
Cumulative gap                            $  (1,376,257) $ (1,517,198)  $    (893,600) $     (569,996) $    680,257
Adjusted cumulative gap as a percentage
    of total assets                              (12.1)%       (13.3)%          (7.8)%          (5.0)%         6.0 %

The bank's one-year gap as a percentage of total assets was negative 13.3% at
September 30, 2001, compared to negative 18.9% at September 30, 2000. The
improvement in the bank's one-year gap was attributable primarily to an increase
during fiscal year 2001 in origination and retention of adjustable-rate
mortgages, consumer loans, and commercial loans with repricing terms of one year
or less. The increase in assets with repricing characteristics of one year or
less was partially offset by an increase in fixed rate and non-contractual
deposits with similar maturities. The bank continues to consider a variety of
strategies to manage its interest rate risk position.

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 13a. Under this regulation,
institutions are required to establish limits on the sensitivity of their net
interest income and net portfolio value ("NPV") to parallel changes in interest
rates. Those changes in interest rates are defined as instantaneous and
sustained movements of interest rates in 100 basis point increments. In
addition, the bank is required to calculate its ratio of NPV to the present
value of total assets ("NPV Ratio") for each interest rate shock scenario. The
following table shows the estimated impact of parallel shifts in interest rates
at September 30, 2001, calculated in a manner consistent with the requirements
of TB 13a.

                                                        (Dollars in thousands)
-----------------------------------------------------------------------------------------------------------------------------------
                                        Changes in                                   Change in
   (Basis Points)                      Net Interest                                Net Portfolio
 Change in Interest                     Income(1)                                    Value(2)                               NPV
        Rates                                                                                                              Ratio
                           -------------------------------------     ------------------------------------------
                              Percent              Amount                Percent                 Amount
----------------------     --------------     ------------------     -----------------     --------------------       -------------
        + 200                   0.56%               $   2,144              -15.14%                $  (165,547)             8.39%
        + 100                   2.01%                   7,772               -7.64%                    (83,558)             8.95%
        - 100                  -3.98%                   (15,358)             4.23%                    46,216               9.78%
        - 200                  -7.15%                  (27,580)              3.17%                    34,669               9.59%

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

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

(2) Represents the difference between net portfolio value (NPV) of the bank's
equity in a stable interest rate environment and the NPV in the various rate
scenarios. The OTS defines NPV as the present value of expected net cash flows
from existing assets minus the present value of expected net cash flows from
existing liabilities plus the present value of expected net cash flows from
existing off-balance sheet contracts.

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

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

Deferred Taxes. At September 30, 2001, the bank recorded a net deferred tax
liability of $93.9 million, which generally represents the cumulative excess of
the bank's actual income tax liability over its income tax expense for financial
reporting purposes. The bank establishes a valuation allowance against gross
deferred tax assets to the extent the bank cannot determine that it is more
likely than not that such assets will be realized through taxes available in
carryback years, future reversals of existing taxable temporary differences or
projected future taxable income. A valuation allowance has been established to
reduce the gross deferred tax asset for state net operating loss carryforwards
to an amount that is considered more likely than not to be realized. The state
net operating losses relate primarily to costs associated with the support of
the bank's retail activities, most significantly its former credit card
operations. Having reduced these costs through the sale of its credit card
operations in 1998 and subsequent actions, management believes that the
likelihood that the bank will generate sufficient state taxable income to
utilize a significant portion of the state net operating losses before their
expiration beginning 2010 has increased since the prior period. As a result, the
valuation allowance has declined. See Note 32 to the Consolidated Financial
Statements in this report.

Capital. At September 30, 2001, the bank was in compliance with all of its
regulatory capital requirements under FIRREA, and its capital ratios exceeded
the ratios established for "well-capitalized" institutions under OTS prompt
corrective action regulations.

The following table shows the bank's regulatory capital levels at September 30,
2001, in relation to the regulatory requirements in effect at that date. The
information below is based upon the bank's understanding of the regulations and
interpretations currently in effect and may be subject to change.

Regulatory Capital
(Dollars in thousands)

                                                                                       Minimum                       Excess
                                                         Actual                 Capital Requirement                Capital
                                               ---------------------------  ---------------------------  ---------------------------
                                                                 As a %                       As a %                        As a %
                                                  Amount        of Assets       Amount       of Assets       Amount        of Assets
                                               --------------   ----------  ---------------  ----------  ---------------   ---------

Stockholders' equity per financial statements  $     525,424
    Minority interest in REIT Subsidiary (1)         144,000
    Accumulated other comprehensive loss (2)           2,087
                                               --------------
                                                     671,511

Adjustments for tangible and core capital:
    Intangible assets                                (48,990)
    Non-includable subsidiaries  (3)                  (1,414)
    Non-qualifying purchased/originated loan
     servicing rights                                 (3,592)
                                               --------------
       Total tangible capital                        617,515        5.44%   $      170,348       1.50%   $      447,167       3.94%
                                               --------------   ==========  ===============  ==========  ===============   =========

       Total core capital (4)                        617,515        5.44%   $      454,262       4.00%   $      163,253       1.44%
                                               --------------   ==========  ===============  ==========  ===============   =========

       Tier 1 risk-based capital (4)                 617,515        6.84%   $      361,283       4.00%   $      256,232       2.84%
                                               --------------   ==========  ===============  ==========  ===============   =========

Adjustments for total risk-based capital:
    Subordinated capital debentures                  250,000
    Allowance for general loan and lease
     losses                                           63,018
                                               --------------
       Total supplementary capital                   313,018
                                               --------------
       Total available capital                       930,533
    Equity investments (3)                            (2,365)
                                               --------------
       Total risk-based capital (4)            $     928,168       10.52%   $      722,566       8.00%   $      205,602       2.52%
                                               ==============   ==========  ===============  ==========  ===============   =========

(1) Eligible for inclusion in core capital in an amount up to 25% of the bank's
core capital pursuant to authorization from the OTS.
(2) Under OTS policy, accumulated other comprehensive loss is included in
regulatory capital.
(3) Reflects an aggregate offset of $0.2 million representing the allowance for
general loan losses maintained against the bank's equity investments and
non-includable subsidiaries which, pursuant to OTS guidelines, is available as a
"credit" against the deductions from capital otherwise required for such
investments.
(4) Under the OTS "prompt corrective action" regulations, the standards for
classification as "well capitalized" are a leverage (or "core capital") ratio of
at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0% and a total
risk-based capital ratio of at least 10.0%.

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, 2001, the bank's
leverage, tier 1 risk-based and total risk-based capital ratios were 5.44%,
6.84% and 10.52%, respectively, which exceeded the ratios established for
well-capitalized institutions. The OTS may reclassify an institution from one
category to the next lower category, for example from well capitalized to
adequately capitalized, if, after notice and an opportunity for a hearing, the
OTS determines that the institution is in an unsafe or unsound condition or has
received and has not corrected a less than satisfactory examination rating for
asset quality, management, earnings or liquidity.

OTS capital regulations provide a five-year holding period, or such longer
period as may be approved by the OTS, for REO to qualify for an exception from
treatment as an equity investment. If an REO property is considered an equity
investment, its then-current book value is deducted from total risk-based
capital. Accordingly, if the bank is unable to dispose of any REO property,
whether through bulk sales or otherwise, prior to the end of its applicable
five-year holding period and is unable to obtain an extension of the five-year
holding period from the OTS, the bank could be required to deduct the
then-current book value of such REO property from total risk-based capital. In
December 2001, the bank received from the OTS an extension of the holding
periods for certain of its REO properties through December 19, 2002. The
following table sets forth the bank's REO at September 30, 2001, after valuation
allowances of $85.2 million, by the fiscal year in which the property was
acquired through foreclosure.

                                             Fiscal Year                                 (In thousands)
                                             -----------                               --------------------
                                                 1990                                        $  5,134(1)(2)
                                                 1991                                          20,247(2)
                                                 1992                                              -
                                                 1993                                              -
                                                 1994                                              -
                                                 1995                                           5,054(2)
                                                 1996                                              -
                                                 1997                                              -
                                                 1998                                              -
                                                 1999                                              -
                                                 2000                                              -
                                                 2001                                             344
                                                                                       --------------------
                                                          Total REO                          $ 30,779
                                                                                       ====================

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

(1) Includes REO with an aggregate net book value of $2.4 million, which the
bank treats as equity investments for regulatory capital purposes.
(2) Includes REO, with an aggregate net book value of $28.1 million, for which
the bank received an extension of the holding periods through December 19, 2002.

Failure to obtain the REO extensions discussed above could adversely affect the
bank's regulatory capital ratios. The bank's ability to maintain or increase its
capital levels in future periods also will be subject to general economic
conditions, particularly in the bank's local markets. Adverse general economic
conditions or a downturn in local real estate markets could require further
additions to the bank's allowances for losses and further charge-offs. Any of
those developments would adversely affect the bank's earnings and thus its
regulatory capital levels. The bank has historically relied on preferred stock
and subordinated debt as significant components of its regulatory capital. Those
instruments require significant fixed payments to holders, which increase the
bank's expenses and make it more difficult for the bank to generate additional
core capital through retained earnings.

The OTS has amended its capital rules to increase the amount of capital the bank
will be required to maintain against certain of its residual interests. As of
September 30, 2001, the bank had $31.5 million in residual interests that would
be subject to dollar-for-dollar reduction from Tier 1 capital beginning December
31, 2001 under the amendments. See "Item 1. - Business - Banking - Regulatory
Capital."

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

LIQUIDITY AND CAPITAL RESOURCES

REAL ESTATE

The Real Estate Trust's cash flow from operating activities has been
historically insufficient to meet all of its cash flow requirements. The Real
Estate Trust's internal source of funds, primarily cash flow generated by its
income-producing properties, generally have been sufficient to meet its cash
needs other than the repayment of principal on outstanding debt, including
outstanding unsecured notes sold to the public, the payment of interest on its
indebtedness, and the payment of capital improvement costs. In the past,
the Real Estate Trust funded such shortfalls through a combination of external
funding sources, primarily new financings, the sale of unsecured notes,
refinancing of maturing mortgage debt, proceeds from asset sales, and dividends
and tax sharing payments from the bank. For the foreseeable future, the Real
Estate Trust's ability to generate positive cash flow from operating activities
and to meet its liquidity needs, including debt service payments, repayment of
debt principal and capital expenditures, will continue to depend on these
available external sources. Dividends received from the bank are a component of
funding sources available to the Real Estate Trust. The availability and amount
of dividends in future periods is dependent upon, among other things, the bank's
operating performance and income, and regulatory restrictions on such payments.
See also the discussion of potential limitations on the payment of dividends by
the bank contained in "Item 1. Business - Banking - Dividends and Other
Capital Distributions."

The Real Estate Trust believes that the financial condition and operating
results of the bank in recent periods should enhance prospects for the Real
Estate Trust to receive tax sharing payments and dividends from the bank. See
"Item 1. Business - Banking - Regulation - Regulatory Capital." During fiscal
2001, the bank made tax sharing payments totaling $3.4 million and dividend
payments totaling $12.8 million to the Real Estate Trust. Tax sharing and
dividend payments received by the Real Estate Trust are presented as cash flows
from operating activities in the Consolidated Statements of Cash Flows.

Although the Real Estate Trust generated net income in fiscal 2001, in recent
years, the operations of the Real Estate Trust have generated net operating
losses while the bank has reported net income. The Trust's consolidation of the
bank's operations into the Trust's federal income tax return has resulted in the
use of the Real Estate Trust's net operating losses to reduce the federal income
taxes the bank would otherwise have owed. If in any future year, the bank has
taxable losses or unused credits, the Trust would be obligated to reimburse the
bank for the greater of (1) the tax benefit to the group using such tax losses
or unused tax credits in the group's consolidated federal income tax returns or
(2) the amount of the refund which the bank would otherwise have been able to
claim if it were not being included in the consolidated federal income tax
return of the group.

During fiscal 2001, the Real Estate Trust purchased either in the open market or
through dividend reinvestment approximately 452,000 shares of common stock of
Saul Centers, and as of September 30, 2001, owns approximately 3,029,000 shares
representing 21.1% of such company's outstanding common stock. As of September
30, 2001, the market value of these shares was approximately $57.6 million.
Substantially all of these shares have been pledged as collateral with the Real
Estate Trust's revolving credit lenders.

As the owner, directly and through two wholly-owned subsidiaries, of a limited
partnership interest in Saul Holdings Partnership, the Real Estate Trust shares
in cash distributions from operations and from capital transactions involving
the sale of properties. The partnership agreement of Saul Holdings Partnership
provides for quarterly cash distributions to the partners out of net cash flow.
See "Item 1. Business -- Real Estate -- Investment in Saul Holdings Limited
Partnership." In fiscal 2001, the Real Estate Trust received total cash
distributions of $6.5 million from Saul Holdings Partnership. Substantially all
of the Real Estate Trust's ownership interest in Saul Holdings Partnership has
been pledged as collateral with the Real Estate Trust's two revolving credit
lenders.

In March 1998, the Trust issued $200.0 million aggregate principal amount of
9 3/4% Senior Secured Notes due 2008. These Notes are nonrecourse obligations of
the Trust and are secured by a first priority perfected security interest in
8,000 shares, or 80%, of the issued and outstanding common stock of the bank,
which constitute all of the bank common stock held by the Trust.

The Real Estate Trust is currently selling unsecured notes, with a maturity
ranging from one to ten years, primarily to provide funds to repay maturing
unsecured notes. During fiscal 2001, the Real Estate Trust sold notes amounting
to $9.3 million at a weighted average interest rate of 9.7%. To the degree that
the Real Estate Trust does not sell new unsecured notes in an amount sufficient
to finance completely the scheduled repayment of outstanding unsecured notes as
they mature, it will finance such repayments from other sources of funds.

In fiscal 1995, the Real Estate Trust established a $15.0 million revolving
credit line with an unrelated bank. This facility was for a two-year term
subject to extension for one or more additional one-year terms. In fiscal 1997,
the facility was increased to $20.0 million and was renewed for an additional
two-year period. In September 1999, this facility was increased to $50.0 million
and its term was set at three years with provisions for extending the term
annually. The current maturity date for this line is September 29, 2002. This
facility is secured by a portion of the Real Estate Trust's ownership in Saul
Holdings Partnership and Saul Centers. Interest is computed by reference to a
floating rate index. At September 30, 2001, the Real Estate Trust had
outstanding borrowings under the facility of $2.5 million and unrestricted
availability of $35.4 million. The Real Estate Trust is currently negotiating
modifications to this loan, including a one-year extension of the term of the
loan, with the lender. The Real Estate Trust anticipates that the amendments to
the loan will become effective in the second fiscal quarter of 2002.

In fiscal 1996, the Real Estate Trust established an $8.0 million revolving
credit line with an unrelated bank. This facility was for a one-year term, after
which any outstanding loan amount would amortize over a two-year period. During
fiscal 1997, 1998 and 2000, the line of credit was increased to $10.0, $20.0, and
$25.0 million. The current maturity date for this line is November 15, 2003.
This facility is secured by a portion of the Real Estate Trust's ownership in
Saul Holdings Partnership and Saul Centers. Interest is computed by reference to
a floating rate index. At September 30, 2001, the Real Estate Trust had no
outstanding borrowings and unrestricted availability was $22.8 million.

The maturity schedule for the Real Estate Trust's outstanding debt at September
30, 2001 for fiscal years commencing October 1, 2001 is set forth in the
following table:

                             Debt Maturity Schedule
                                 (In thousands)
         --------------------------------------------------------------
                                    Notes       Notes
             Fiscal     Mortgage  Payable --  Payable --
              Year       Notes     Secured    Unsecured        Total
         ------------- --------- ----------- ----------- --------------
              2002     $ 33,162    $  2,500    $  8,022     $  43,684
              2003       27,296         --       11,681        38,977
              2004        9,008         --       11,482        20,490
              2005       13,604         --        8,157        21,761
              2006       94,406         --        5,523        99,929
           Thereafter   148,274     200,000       5,852       354,126
                       --------- ----------- ----------- --------------
             Total     $325,750    $202,500    $ 50,717     $ 578,967
         --------------------------------------------------------------
Of the $325.8 million of mortgage notes outstanding at September 30, 2001,
$258.6 million was nonrecourse to the Real Estate Trust.

In May 2001, the Real Estate Trust paid off its construction loan on Dulles
North Six with the proceeds of a $5.0 million permanent loan. The interest rate
is 7.88% and the term is 20 years. In July 2001, the Real Estate Trust closed a
$10.8 million permanent loan on the Sweitzer Lane office/warehouse building. The
interest rate is 7.98% and the term is 15 years. In August 2001, the Real Estate
Trust closed three permanent loans on its three Florida hotel properties. The
loans aggregate $16.1 million, have a 7.77% interest rate and a 10-year term.
From all of its permanent financings in fiscal 2001, the Real Estate Trust
obtained approximately $8.5 million in additional funds after construction loan
payoffs and expenses.

Development and Capital Expenditures

During the quarter ended June 30, 1999, the Real Estate Trust commenced the
development of an 11-story 229-room hotel on a site adjacent to its Tysons
Corner Holiday Inn in McLean, Virginia. The new hotel was franchised as a
Courtyard by Marriott and cost approximately $30.0 million. Financing of $25.0
million has been obtained for an initial period of three years with options for
two one-year extensions. This hotel opened for business on December 15, 2000.

On December 16, 1999, the Real Estate Trust purchased a 4.6 acre site located in
Cascades Town Center in Sterling, Virginia, for the purpose of constructing a
152-room Hampton Inn. The purchase price was $1.1 million and the seller was
Chevy Chase. Development costs for the hotel were $11.4 million. The hotel has
been financed with the proceeds of a $9.15 million mortgage loan, which has a
three-year term, a floating interest rate and two one-year renewal options. This
hotel opened for business on November 27, 2000.

During the quarter ended March 31, 2000, the Real Estate Trust began the
development of a 30,000 square foot office/flex building located on a 2.2 acre
site in the Avenel Business Park in Gaithersburg, Maryland. The development cost
$3.2 million, which the Real Estate Trust financed with its revolving credit
lines. The project is 100% leased to a single tenant. In July 2000, the Real
Estate Trust agreed to sell its interest in this project to Saul Centers at a
price of $4.2 million, as determined by an independent appraisal. The sale was
completed in October 2000 and the Trust recognized a current year gain of
$383,000 and a deferred gain of $211,000 on this transaction.

On June 29, 2000, the Real Estate Trust purchased a 6.17 acre site in the
Loudoun Tech Center, a 246-acre business park located in Loudoun County,
Virginia, for $1.1 million. The site was purchased for the purpose of developing
an 81,000 square foot office/flex building to be known as Loudoun Tech Phase I.
The cost of development was approximately $8.4 million and has been financed by
a $7.4 million construction loan, which has a five-year term, a floating
interest rate and one two-year renewal option. Construction was completed in
December 2000. No leases have been signed as yet for space in the building.

During the quarter ended September 30, 2000, the Real Estate Trust began the
development of a 100,000 square foot office/flex building located on an 8.3 acre
site in Dulles North Corporate Park near other Real Estate Trust projects. The
new building is known as Dulles North Four. Development costs are projected to
be $10.8 million and will be financed with the proceeds of a $9.5 million
construction loan, which has a three-year term, a floating interest rate and two
one-year renewal options. Construction of the base building has been completed.
The Real Estate Trust has obtained a tenant for the entire building and
occupancy is expected during the third quarter of fiscal 2002.

On November 15, 2000, the Real Estate Trust purchased a 19.1 acre land parcel in
Laurel, Maryland, which contains a 105,000 square foot office/warehouse building
know as Sweitzer Lane. The purchase price was $13.8 million and was financed
from the Real Estate Trust's revolving credit lines. The entire building has
been leased to Chevy Chase under a long-term agreement. As noted above, the Real
Estate Trust obtained permanent loan financing in July 2001 of $10.8 million.

On December 18, 2000, the Real Estate Trust sold its 124-unit San Simeon
apartment project in Dallas, Texas. The sales price was $3.1 million and the
Real Estate Trust recognized a gain of $2.2 million on the transaction. The
proceeds of the sales were used to acquire a 10.7 acre parcel of land in Loudoun
County, Virginia, for $2.8 million.

On June 13, 2001, the Real Estate Trust sold a 4.79 acre section of its Circle
75 land parcel located in Atlanta, Georgia for $3.0 million. The Real Estate
Trust recognized a gain of $2.4 million on this transaction.

On August 8, 2001, the Real Estate Trust sold Metairie Tower, a 91,000 square
foot office building located in Metairie, Louisiana for $7.2 million. The Real
Estate Trust recognized a gain of $5.2 million on this transaction.

On September 7, 2001, the Real Estate Trust sold 9.5 acres of its Commerce
Center land parcel located in Ft. Lauderdale, Florida for approximately $2.0
million, and recognized a gain of $245,000 on the transaction.

During fiscal 2001, the Real Estate Trust also received net proceeds of $2.0
million and recognized a gain of $620,000 from the condemnation of portions of
two land parcels in Colorado and Michigan.

The Real Estate Trust believes that the capital improvement costs for its
income-producing properties will be in the range of $9.0 to $11.0 million per
year for the next several years.

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. On March
15, 2001, the OTS amended its regulations to repeal the minimum liquidity ratio
of 4% and adopted an interim rule that requires thrifts to maintain sufficient
liquidity to ensure their safe and sound operation. See "Item 1. Business -
Banking - Regulation - Liquidity Requirements."

The bank's primary sources of funds historically have consisted of:

o principal and interest payments on loans and mortgage-backed securities;
o savings deposits;
o sales of loans and trading securities;
o securitizations and sales of loans; and
o borrowed funds, including funds borrowed from the FHLB of Atlanta.

The bank's holdings of readily marketable securities constitute another
important source of liquidity. As of September 30, 2001, the estimated remaining
borrowing capacity, after market value and other adjustments, against that
portion of those assets that may be pledged to the FHLB of Atlanta and various
securities dealers totaled $1.4 billion. Assets available to be pledged to the
Federal Reserve bank of Richmond totaled $1.0 billion. A portion of these assets
may also be available to be pledged to the FHLB of Atlanta.

In addition, the bank from time to time accesses the capital markets as an
additional means of funding its operations and managing its capital ratios and
asset growth. Specifically, the bank has securitized financial assets, including
home equity, home loan and automobile loan receivables, as well as single-family
residential loans, because the securitizations provide the bank with a source
of financing at competitive rates and assist the bank in maintaining compliance
with regulatory capital requirements. Additionally, the securitizations have
permitted the bank to limit the credit risk associated with these assets while
continuing to earn servicing fees and other income associated with the
securitized assets.

Since 1988, the bank has securitized approximately $14.5 billion of loan
receivables. These transactions depend on sophisticated back-office systems to
service complex securitization structures and on personnel with the experience
to design, install and manage those systems. At September 30, 2001, the bank
continues to service $91.7 million, $1.2 billion and $57.6 million of
securitized home equity, automobile and home loan receivables, respectively.
Chevy Chase derives fee-based income from servicing these securitized
portfolios. However, that fee-based income has been adversely affected in prior
periods by increases in delinquencies and charge-offs related to the receivables
placed in these securitized pools.

The bank's securitization transactions transfer the risk of repayment on
securitized assets to a trust, which holds the receivables and issues the
asset-backed certificates, and ultimately the risk of repayment is transferred
to the holders of those certificates. The bank retains risk with respect to the
assets transferred to the trust only to the extent that it retains recourse
based on the performance of the assets or holds certificates issued by the
trust, such as a seller certificate. In its securitizations, the bank typically
retains a limited amount of recourse through one or more means, most often
through the establishment of spread accounts. Other structures, such as
overcollateralization of receivables or subordinated asset-backed certificates,
are occasionally used. Spread accounts are funded by initial deposits, if
required, and by amounts generated by the securitized assets over and above the
amount required to pay interest, defaults and other charges and fees on the
investors' interests in the securitization transaction. Because amounts on
deposit in the spread accounts are at risk depending upon performance of the
securitized receivables, those amounts represent recourse to the bank.

Under the OTS low-level recourse rule in effect during fiscal 2001, which sets
capital requirements for assets sold with recourse at the lower of the
applicable capital requirement or the amount of recourse retained, the bank
maintains dollar-for-dollar capital against the securitized assets in the amount
of the recourse retained up to the otherwise applicable capital requirement.
Even if defaults on outstanding receivables significantly exceed projected and
historical levels so that a pay out event is triggered, the immediate
consequence is that investors will begin receiving payments of principal from
the securitized assets earlier than originally scheduled. Even if payments are
insufficient to repay investors in full, the bank's assets are not exposed to
risk of loss beyond the relevant amount of recourse retained, including amounts
outstanding in the spread accounts and the amount of any overcollateralization
of receivables or subordinated interest, which, as noted above, constitute a
dollar-for-dollar capital requirement for the bank. The bank also retains risk
through the bank's interest in any seller certificate. Seller certificates share
collections on the securitized assets on an unsubordinated basis with the
investor certificates, unless and to the extent recourse is retained through an
express subordination, and are on-balance sheet assets against which the bank
must maintain capital. The OTS has amended its capital rules to increase the
amount of capital the bank is required to maintain against certain of its
residual interests for transactions that close on or after January 1, 2002. See
"Item 1. Business - Banking - Regulatory Capital."

The bank securitized and sold $804.9 million and $668.1 million of automobile
loan receivables during fiscal 2001 and 2000, respectively. At September 30,
2001 and 2000, the bank had $282.0 million and $70.0 million, respectively, of
automobile loan receivables held for securitization and sale. The proceeds from
the securitization and sale of home equity, automobile and home loan receivables
will continue to be a significant source of liquidity for the Bank.

As part of its operating strategy, the bank continues to explore opportunities
to sell assets and to securitize and sell mortgage, home equity, automobile and
home loan receivables and automobile leases 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. During fiscal 2001,
the bank used the cash provided by operating, investing and financing activities
primarily to meet its commitments (i) to fund maturing savings certificates and
deposit withdrawals of $42.9 billion, (ii) repay borrowings, fund existing and
continuing loan commitments, including real estate held for investment or sale,
of $3.5 billion, (iii) purchase investments and loans of $2.0 billion and (iv)
meet operating expenses, before depreciation and amortization, of $371.3
million. These commitments were funded primarily through (i) proceeds from
customer deposits and sales of certificates of deposit of $43.4 billion, (ii)
proceeds, net of repayments, from borrowings of $35.9 million, (iii) proceeds
from sales of loans, trading securities and real estate of $2.4 billion, and
(iv) principal and interest collected on investments, loans, and securities of
$2.7 billion.

The bank is obligated under various recourse provisions, primarily related to
credit losses, related to the securitization and sale of receivables. As a
result of these recourse provisions, the bank maintained restricted cash
accounts and overcollateralization of receivables amounting to $24.3 million and
$28.5 million, respectively, at September 30, 2001, and $42.1 million and $18.9
million, respectively, at September 30, 2000. In addition, the bank owned
subordinated automobile receivables-backed securities with carrying values of
$1.2 million and $3.4 million at September 30, 2001 and 2000, respectively,
which were classified as trading securities in the Consolidated Balance Sheets
in this report.

The bank is also obligated under various recourse provisions related to the swap
of single-family residential loans for mortgage-backed securities issued by the
bank. At September 30, 2001, recourse to the bank under these arrangements was
$6.6 million, consisting of restricted cash accounts amounting to $4.2 million
and overcollateralization of receivables of $2.4 million.

The bank is also obligated under a recourse provision related to the servicing
of certain of its residential mortgage loans. At September 30, 2001, recourse to
the bank under this arrangement totaled $3.4 million.

The bank's commitments to extend credit at September 30, 2001 are set forth in
the following table.

                                                                                            (In thousands)
        Commitments to originate loans.............................................                 $   488,945
                                                                                            --------------------

        Loans in process (collateralized loans):
          Home equity..............................................................                     563,525
          Real estate construction and ground......................................                     205,186
          Commercial...............................................................                     293,465
                                                                                            --------------------
                Subtotal                                                                              1,062,176
                                                                                            --------------------
        Loans in process (unsecured loans):
          Overdraft lines..........................................................                     124,173
          Commercial...............................................................                     313,674
                                                                                            --------------------
                Subtotal                                                                                437,847
                                                                                            --------------------
        Total commitments to extend credit.........................................                $  1,988,968
                                                                                            ====================

Based on historical experience, the bank expects to fund substantially less than
the total amount of its outstanding overdraft line and home equity credit line
commitments, which together accounted for 34.6% of commitments to extend credit
at September 30, 2001.

At September 30, 2001, repayments of borrowed money scheduled to occur during
the next 12 months were $935.3 million. Certificates of deposit maturing during
the next 12 months amounted to $2.7 billion, including $1.1 billion of brokered
deposits. The bank expects that a significant portion of these maturing
certificates of deposit will remain with the bank. In the event that deposit
withdrawals are greater than anticipated, particularly among the more volatile
brokered deposits, the bank may have to increase deposit interest rates or rely
on alternative and potentially higher cost sources of funds in order to meet its
liquidity needs.

There were no material commitments for capital expenditures at September 30,
2001.

The bank's liquidity requirements in years subsequent to fiscal 2001 will
continue to be affected both by the asset size of the bank, the growth of which
may be constrained by capital requirements, and the composition of the asset
portfolio. Management believes that the bank's primary sources of funds,
described above, will be sufficient to meet the bank's foreseeable liquidity
needs. The mix of funding sources utilized from time to time will be determined
by a number of factors, including capital planning objectives, lending and
investment strategies and market conditions.

RESULTS OF OPERATIONS

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

The bank's operating results historically have depended primarily on its "net
interest spread," which is the difference between the rates of interest earned
on its loans and securities investments and the rates of interest paid on its
deposits and borrowings. In addition to interest paid on its interest-bearing
liabilities, the bank's principal expenses are operating expenses.

Fiscal 2001 Compared to Fiscal 2000

Real Estate

The Real Estate Trust recorded income before depreciation and amortization of
debt expense of $20.1 million and operating income of $0.5 million for fiscal
2001, compared to income before depreciation and amortization of debt expense of
$11.0 million and an operating loss of $3.9 million for fiscal 2000. The
improvement was largely attributable to higher income after direct operating
expenses for hotels and office and industrial properties, increased equity in
the earnings of unconsolidated entities, and increased gains on sale of
property.

Income after direct operating expenses from hotels increased $791,000, or 2.2%,
in fiscal 2001 over the level achieved in fiscal 2000. This net increase
resulted from $4,731,000 generated from three newly constructed properties,
while the results from 15 hotels owned throughout both periods reflected a
decrease in income after operating expenses of $3,940,000. The increase in total
revenue of $4,933,000 exceeded the increase of $4,142,000 in direct operating
expenses. However, the percentage increase in direct operating expenses of 7.0%
exceeded the percentage increase in total revenue of 5.2%. Room sales for fiscal
2001 increased $5,460,000 or 7.4%, over fiscal 2000, while food and beverage
sales decreased $749,000 or 4.4%, over the prior year. For the 15 hotels owned
throughout both periods, the decrease in total revenue was $4,591,000 or 4.9%,
and the decrease in direct operating expense was $651,000 or 1.1%.

Income after direct operating expenses from office and industrial properties
increased $3,840,000, or 15.5%, in fiscal 2001 compared to such income in fiscal
2000. Gross income increased $6,058,000, or 17.6%, in fiscal 2001, while
expenses increased $2,218,000, or 23.0%. The improvement was largely due to the
addition of four new properties during the two-year period.

Other income, which includes interest income, income from other real estate
properties and miscellaneous receipts, declined by $897,000, or 28.6%, in fiscal
2001 due to lower interest income and the sale early in the year of the Real
Estate Trust's only apartment project.

Land parcels and other expense decreased $128,000, or 9.8%, in fiscal 2001
primarily due to the sale of the Real Estate Trust's apartment project.

Interest expense increased $3,726,000, or 8.0%, in fiscal 2001, primarily
because of the higher level of outstanding borrowings. The average balance of
outstanding borrowings increased to $560.1 million for fiscal 2001 from $513.9
million for the prior year. The change in average borrowings occurred as a
result of mortgage loan refinancings and unsecured note sales. The average cost
of borrowings was 9.26% in fiscal 2001 and 9.35% in fiscal 2000.

Capitalized interest decreased $606,000 or 51.5%, during fiscal 2001 due to the
lower level of development activity in the current year.

Amortization of debt expense increased $328,000, or 50.1%, primarily due to new
financings completed during the year.

Depreciation increased $3,677.000, or 24.6%, in fiscal 2001 as a result of the
additions of new income-producing properties, new tenant improvements and
capital replacements.

Advisory, management and leasing fees paid to related parties increased
$749,000, or 6.8%, in fiscal 2001. The advisory fee in fiscal 2001 was $363,000
per month compared to $349,000 per month for fiscal 2000, which resulted in an
aggregate increase of $167,000, or 4.0%. Management and leasing fees were higher
by $582,000, or 8.5%, in fiscal 2001 as a result of increased gross income on
which fees are based.

General and administrative expense increased $332,000, or 8.6%, in fiscal 2001
as a result of more projects being abandoned in fiscal 2001 than in fiscal 2000.

Equity in earnings of unconsolidated entities reflected earnings of $8,314,000
in fiscal 2001 and earnings of $7,711,000 in fiscal 2000, an increase of
$603,000 or 7.8%. The improvement was due to increased period-to-period earnings
of Saul Centers.

Gain on sale of property was $11,077,000 in fiscal 2001 and consisted of a $2.2
million gain on the sale of an apartment project in Texas, a gain of $5.2
million on an office project in Louisiana, and an aggregate gain of $3.7 million
on the sales of land parcels in Florida, Georgia, and Maryland, and the
condemnation of two land parcels in Colorado and Michigan. Gain on sale of
property was $994,000 in fiscal 2000 due to the condemnation of a small section
of a land parcel in Georgia.

Banking

Overview. The bank recorded operating income of $114.3 million during fiscal
2001, compared to operating income of $81.3 million during fiscal 2000. The
increase in income in fiscal 2001 was primarily due to an increase in interest
income from loans and leases of $60.2 million. Also contributing to increased
income were a $32.9 million increase in servicing and securitization income, a
$10.3 million gain on other investment and $13.2 million increase in deposit
service fees. Partially offsetting the increase in income were a $42.6 million
increase in operating expenses, a $28.3 million increase in total interest
expense and a $17.9 million increase in the provision for loan and lease losses.
The bank's net income in future periods will continue to be affected by
increased operating expenses associated with expansion of the bank's branch
network and other areas of business and reliance on relatively higher cost
sources of funding to support continued growth.

Net Interest Income. Net interest income, before the provision for loan and
lease losses, increased $21.9 million (or 6.4%) in fiscal 2001 over fiscal 2000.
Included in interest income during fiscal 2000 was $0.5 million recorded on
non-accrual assets and restructured loans. The bank would have recorded
additional interest income of $3.2 million in fiscal 2001 if non-accrual assets
and restructured loans had been current in accordance with their original terms.
The bank's net interest income in future periods will continue to be adversely
affected by the bank's non-performing assets. See "Financial Condition - Asset
Quality - Non-Performing Assets."

The following table sets forth, for the periods indicated, information regarding
the total amount of income from interest-earning assets and the resulting
yields, the interest expense associated with interest-bearing liabilities,
expressed in dollars and rates, and the net interest spread and net yield on
interest-earning assets.

Net Interest Margin Analysis
(Dollars in thousands)

                                                                       Year Ended September 30,
                                    ------------------------------------------------------------------------------------------------
                                                  2001                            2000                             1999
                      September 30, ------------------------------  -------------------------------  -------------------------------
                          2001        Average              Yield/     Average              Yield/      Average              Yield/
                       Yield/Rate    Balances    Interest   Rate      Balances   Interest   Rate      Balances   Interest    Rate
                       ------------ ------------ --------- -------  ------------ --------- --------  ----------- ---------- --------
Assets:
 Interest-earning
  assets:
  Loans and leases
   receivable, net (1)       7.58%  $ 8,670,266  $695,399    8.02%  $ 7,590,197  $635,246     8.37%  $4,791,302   $402,263     8.40%
  Mortgage-backed
   securities                6.30     1,143,471    71,685    6.27     1,187,094    74,614     6.29    1,631,711     96,589     5.92
  Federal funds sold
   and securities
   purchased under
   agreements to
   resell                       -        42,745     2,257    5.28       141,814     8,105     5.72       58,234      2,953     5.07
  Trading securities         9.14        40,459     2,508    6.20        18,964     1,288     6.79       50,759      3,553     7.00
  Investment
   securities                5.97        45,693     2,746    6.01        45,386     2,643     5.82       44,473      2,466     5.54
  Other interest-
   earning assets            5.28       188,484    12,260    6.50       220,134    14,763     6.71      204,548     11,669     5.70
                                    ------------ ---------          ------------ ---------           ----------- ----------
   Total                     7.34    10,131,118   786,855    7.77     9,203,589   736,659     8.00    6,781,027    519,493     7.66
                       -----------               --------- -------               --------- --------              ---------- --------

 Non-interest
  earning assets:
  Cash                                  276,389                         273,878                         234,320
  Real estate held
   for investment
   or sale                               44,356                          49,685                          60,346
  Property and
   equipment, net                       395,357                         321,705                         292,322
  Goodwill and
   other intangible
   assets, net                           33,578                          26,635                          23,741
  Other assets                          250,959                         249,503                         252,316
                                    ------------                    ------------                     -----------
   Total assets                     $11,131,757                     $10,124,995                      $7,644,072
                                    ============                    ============                     ===========

Liabilities and
 stockholders'
 equity:
 Interest-bearing
 liabilities:
  Deposit accounts:
   Demand deposits           0.30   $ 1,311,067     7,851    0.60   $ 1,212,789    10,644     0.88   $1,121,970     11,648     1.04
   Savings deposits          1.22       883,756    13,392    1.52       942,985    17,531     1.86    1,023,744     21,218     2.07
   Time deposits             5.06     2,964,052   177,619    5.99     2,721,138   154,737     5.69    1,578,571     77,084     4.88
   Money market
    deposits                 2.83     1,370,774    48,744    3.56     1,107,338    39,351     3.55    1,084,273     36,395     3.36
                                    ------------ ---------          ------------ ---------           ----------- ----------
   Total deposits            2.84     6,529,649   247,606    3.79     5,984,250   222,263     3.71    4,808,558    146,345     3.04
  Borrowings                 5.13     3,076,350   175,138    5.69     2,843,834   172,137     6.05    1,718,721     99,162     5.77
                                    ------------ ---------          ------------ ---------           ----------- ----------
   Total
    liabilities              3.45     9,605,999   422,744    4.40     8,828,084   394,400     4.47    6,527,279    245,507     3.76
                       -----------               --------- ---------             --------- ----------            ---------- --------
 Non interest-bearing
  items:
  Non-interest
   bearing deposits                     690,883                         523,882                         457,832
  Other liabilities                     199,260                         172,334                          78,322
  Minority interest                     144,000                         144,000                         144,000
  Stockholders'
   equity                               491,615                         456,695                         436,639
                                    ------------                    ------------                     -----------
   Total liabilities
    and stockholders'
    equity                          $11,131,757                     $10,124,995                      $7,644,072
                                    ============                    ============                     ===========

Net interest income                              $364,111                        $342,259                         $273,986
                                                 =========                       =========                       ==========
Net interest spread (2)                                     3.37%                            3.53%                            3.90%
                                                           =======                         ========                         ========
Net yield on interest-
 earning assets (3)                                         3.59%                            3.72%                            4.04%
                                                           =======                         ========                         ========
Interest-earning assets
 to interest-bearing
 liabilities                                               105.47%                          104.25%                         103.89%
                                                           =======                         ========                         ========

(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 ($6,321), $3,847, and $4,196 of amortized loan fees, premiums
and discounts in interest income for the years ended September 30, 2001, 2000
and 1999.
(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.

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

Volume and Rate Changes in Net Interest Income
(In thousands)

                                                     Year Ended September 30, 2001             Year Ended September 30, 2000
                                                              Compared to                               Compared to
                                                     Year Ended September 30, 2000             Year Ended September 30, 1999
                                                          Increase (Decrease)                       Increase (Decrease)
                                                         Due to Change in (1)                      Due to Change in (1)
                                                ----------------------------------------  ----------------------------------------
                                                                                Total                                     Total
                                                  Volume          Rate         Change       Volume          Rate         Change
                                                -----------   -----------   ------------  -----------   -----------   ------------

Interest income:
      Loans and leases (2)                      $   87,555    $  (27,402)   $    60,153   $  234,425    $   (1,442)   $   232,983
      Mortgage-backed securities                    (2,696)         (233)        (2,929)     (27,697)        5,722        (21,975)
      Federal funds sold and securities
        purchased under agreements  to resell       (5,268)         (580)        (5,848)       4,730           422          5,152
      Trading securities                             1,341          (121)         1,220       (2,161)         (104)        (2,265)
      Investment securities                             18            85            103           51           126            177
      Other interest-earning assets                 (2,056)         (447)        (2,503)         930         2,164          3,094
                                                -----------   -----------   ------------  -----------   -----------   ------------
          Total interest income                     78,894       (28,698)        50,196      210,278         6,888        217,166
                                                -----------   -----------   ------------  -----------   -----------   ------------

Interest expense:
      Deposit accounts                              20,494         4,849         25,343       39,927        35,991         75,918
      Borrowings                                    13,588       (10,587)         3,001       67,939         5,036         72,975
                                                -----------   -----------   ------------  -----------   -----------   ------------
          Total interest expense                    34,082        (5,738)        28,344      107,866        41,027        148,893
                                                -----------   -----------   ------------  -----------   -----------   ------------

Increase (decrease) in net interest income      $   44,812    $  (22,960)   $    21,852   $  102,412    $  (34,139)   $    68,273
                                                ===========   ===========   ============  ===========   ===========   ============

----------------------------------------------------------------------------------------------------------------------------------
(1)    The net change attributable to the combined impact of volume and rate has
       been allocated in proportion to the absolute value of the change due to
       volume and the change due to rate.
(2)    Includes loans held for sale and/or securitization.

Interest income in fiscal 2001 increased $50.2 million (or 6.8%) from the level
in fiscal 2000 as a result of higher average balances of loans and leases
receivable, which was slightly offset by lower average yields on loans and
leases receivable.

The bank's net interest spread decreased to 3.37% in fiscal 2001 from 3.53% in
fiscal 2000. The 16 basis point reduction in the net interest spread primarily
reflected a shift in the mix of consumer loans to lower yielding prime
automobile loans and leases from higher yielding subprime automobile loans.
Partially offsetting this decline was an increase in the average balances of
earning assets, which was funded primarily with Federal Home Loan Bank advances
and deposits. Average interest-earning assets as a percentage of average
interest bearing liabilities increased slightly to 105.47% in fiscal 2001
compared to 104.25% in fiscal 2000.

Interest income on loans and leases, the largest category of interest-earning
assets, increased by $60.2 million from fiscal 2000 primarily because of higher
average balances. Higher average balances of the bank's single-family
residential loans, which increased $463.9 million (or 10.2%), resulted in a
$28.3 million (or 8.8%) increase in interest income from those loans. Average
balances of automobile loans and leases, commercial loans and home equity loans
increased $363.4 million, $186.2 million and $58.3 million, respectively, and
contributed to a $20.4 million, $10.3 million and $2.2 million increase in
interest income from those loans, respectively. Lower average yields on these
loans partially offset the effects of the higher average balances.

The average yield on the loan portfolio in fiscal 2001 decreased 35 basis points
(from 8.37% to 8.02%) from the average yield in fiscal 2000. Contributing to the
lower average yield was a decrease in the yield on automobile loans which
resulted from management's decision to shift from higher yielding subprime loans
which have higher risks of default to lower yielding prime automobile loans and
leases with relatively lower risk of default. Average subprime automobile loans
as a percentage of total automobile loans and leases declined to 23.9% during
fiscal 2001 from 29.2% during fiscal 2000, reflecting the bank's decision in
November 2000 to stop origination of subprime automobile loans. Also
contributing to the decreased average yield on the loan and lease portfolio were
decreases in commercial loans, construction loans and home equity loans
resulting from decreases in the index on which the interest rates on such loans
are based.

Interest income on mortgage-backed securities decreased $2.9 million (or 3.9%)
primarily because of lower average balances. Also contributing to the $43.6
million decrease in average balances was a slight decrease in the average
interest rates on those securities from 6.29% to 6.27%.

Interest expense on deposits increased $25.3 million (or 11.4%) during fiscal
2001 due to increased average rates and average balances. The eight basis point
increase in the average rate on deposits (from 3.71% to 3.79%) resulted from a
shift in the deposit mix towards higher cost certificates of deposits and money
market deposits. During fiscal 2001, the bank decreased its use of brokered
deposits as an alternative funding source.

Interest expense on borrowings increased $3.0 million (or 1.7%) in fiscal 2001
over fiscal 2000. A $294.0 million (or 15.0%) increase in average balances on
Federal Home Loan Bank advances was partially offset by a decrease in the
average rate on such borrowings (from 5.68% to 5.43%) which resulted in an
increase of $11.1 million in interest expense. Partially offsetting the increase
in interest expense on borrowings was a decrease in the average balance of $93.6
million and average yield (from 6.08% to 5.48%) in securities sold under
repurchase agreements.

Provision for Loan and Lease Losses. The bank's provision for loan and lease
losses increased to $67.9 million in fiscal 2001 from $49.9 million in fiscal
2000. The $17.9 million increase primarily reflected increased charge-offs as a
result of the maturation of the bank's loan and lease portfolio following recent
growth and a deterioration in general economic conditions. See "Item 7.
Financial Condition - Banking - Asset Quality - Allowances for Losses."

Other Income. Other income increased to $225.9 million in fiscal 2001 from
$154.3 million in fiscal 2000. The $71.6 million (or 46.5%) increase was
primarily attributable to increased servicing and securitization income of $32.9
million, deposit service fees of $13.2 million and gain on other investment of
$10.3 million.

Servicing and securitization income during fiscal 2001 increased $32.9 million
(or 89.4%) from fiscal 2000, primarily as a result of gains of $27.9 million
resulting from the securitization and sale of $804.9 million of automobile loan
receivables during year 2001. Prior securitizations also contributed to
increased servicing income for the current year.

Deposit servicing fees increased $13.2 million (or 15.0%) during the current
year primarily due to fees generated from the continued expansion of the bank's
branch and ATM networks.

Gain on other investment income was $10.3 million in fiscal 2001. The $10.3
million gain was the result of a pre-tax gain of $10.3 million from the sale of
the bank's interest in Star Systems, Inc. to Concord EFS, Inc.

Operating Expenses. Operating expenses for fiscal 2001 increased $42.6 million
(or 11.7%) from fiscal 2000. The increase in operating expenses is largely
attributable to an increase in loan expenses. Loan expenses increased $29.4
million primarily due to a $12.9 million write down in the market value of the
bank's mortgage servicing assets as a result of increased prepayments during
fiscal 2001 resulting from lower mortgage interest rates and increased
amortization of purchased and originated mortgage servicing rights acquired in
the latter half of fiscal 2000. In addition, fiscal 2000 included a reduction in
loan expenses as a result of a $6.3 million recovery of prior valuation
adjustments recorded against the bank's mortgage servicing assets. Salaries and
employee benefits increased $5.3 million (or 2.7%) in fiscal 2001, which
includes $3.0 million of expenses related to the closing of the subprime
origination network in the first quarter of fiscal 2001. Also contributing to
the increase in operating expenses was an increase in property and equipment of
$5.0 million primarily due to increased rent expense and related property taxes
associated with the addition of new deposit branches during fiscal 2001.

Fiscal 2000 Compared to Fiscal 1999

Real Estate

The Real Estate Trust recorded income before depreciation and amortization of
debt expense of $11.0 million and an operating loss of $3.9 million for fiscal
2000, compared to a loss before depreciation and amortization of debt expense of
$2.5 million and an operating loss of $10.3 million for fiscal 1999. The
improvement was largely attributable to higher income after direct operating
expenses for hotels and office properties, increased equity in the earnings of
unconsolidated entities, partially reduced by increased net interest expense and
general and administrative expense.

Income after direct operating expenses from hotels increased $7,070,000, or
24.5%, in fiscal 2000 over the level achieved in fiscal 1999. $3,351,000 of this
increase reflected improved results from 12 hotels owned throughout both
periods, and $3,719,000 reflected results from four newly constructed
properties. The increase in total revenue of $16,467,000, or 20.9%, exceeded the
increase of $9,397,000 or 18.8%, in direct operating expenses. Room sales for
fiscal 2000 increased $14,143,000, or 23.7%, over fiscal 1999, while food and
beverage sales increased $1,579,000, or 10.3%, over the prior year. For the 12
hotels owned throughout both periods, the increase in total revenue was
$8,934,000, or 11.4%, and the increase in direct operating expense was
$5,582,000, or 11.3%. The revenue increase was attributable to market conditions
which permitted the Real Estate Trust to raise average room rates without
adversely affecting occupancy levels at a majority of the hotels.

Income after direct operating expenses from office properties increased
$8,488,000, or 52.3%, in fiscal 2000 compared to such income in fiscal 1999.
Gross income increased $10,052,000, or 41.4%, in fiscal 2000, while expenses
increased $1,564,000, or 19.4%. For the seven office properties owned throughout
both periods, the increase in total revenue was $1,744,000 or 7.2%, and the
increase in direct operating expenses was $170,000 or 2.1%. The improvement was
largely due to the acquisition of one new building and the development of two
new properties.

Other income, which includes interest income, income from other real estate
properties and miscellaneous receipts, increased by $313,000, or 11.1%, in
fiscal 2000 primarily due to higher interest earnings.

Land parcels and other expense increased $429,000, or 48.8%, in fiscal 2000
largely as the result of a real estate tax refund at one property in the prior
year.

Interest expense increased $6,248,000, or 15.5%, in fiscal 2000, primarily
because of increases in average outstanding borrowings. The average balance of
outstanding borrowings increased to $513.9 million for fiscal 2000 from $444.9
million for the prior year. The change in average borrowings occurred as a
result of mortgage loan refinancings and new construction loans. The average
cost of borrowings was 9.35% in fiscal 2000 and 9.26%, in fiscal 1999.

Capitalized interest increased $214,000, or 22.3%, during fiscal 2000 due to the
higher level of development activity in the current year.

Amortization of debt expense increased $355,000, or 118.7%, due to new
financings completed during the past two years.

Depreciation increased $1,801,000, or 14.4%, in fiscal 2000 as a result of new
tenant improvements, capital replacements, and the additions of new
income-producing properties.

Advisory, management and leasing fees paid to related parties increased
$1,582,000, or 16.8%, in fiscal 2000. The advisory fee in fiscal 2000 was
$349,000 per month compared to $337,000 per month for fiscal 1999, which
resulted in an aggregate increase of $142,000, or 3.5%. Management and leasing
fees were higher by $1,440,000, or 26.7%, in fiscal 2000 as a result of
increased gross income on which fees are based.

General and administrative expense increased $2,646,000, or 227.8%, in fiscal
2000, principally as a result of a $1.2 million payment to terminate the Howard
Johnson franchise at one hotel, higher legal and accounting costs, start-up
expenses for new hotels, and the write-off of abandoned development expenses.

Equity in earnings of unconsolidated entities reflected earnings of $7,711,000
in fiscal 2000 and earnings of $4,409,000 in fiscal 1999, an increase of
$2,351,000 (43.9%). The improvement was due to increased period-to-period
earnings of Saul Centers.

In April 2000, the Real Estate Trust received $1.3 million from Cobb County,
Georgia, in payment on the condemnation for road improvements of a 3.4 acre
piece of its Circle 75 land parcel. The gain on this transaction was $994,000.

Banking

Overview. The bank recorded operating income of $81.3 million for fiscal 2000,
compared to opearting income of $96.0 million for fiscal 1999. The decrease in
income for the period was primarily attributable to a decrease in other
(non-interest) income resulting from the inclusion in last year's results of a
$31.6 million gain from the sale of one of the bank's REO properties.
Contributing to the decrease in net income were increases in operating
(non-interest) expense of $40.0 million and in the provision for loan and lease
losses of $27.1 million. Partially offsetting the reduction of income were
increases in net interest income of $68.3 million and deposit service fees of
$18.7 million. The bank's net income in future periods will continue to be
affected by increased operating expenses associated with expansion of the bank's
branch network and other areas of business and reliance on relatively higher
cost sources of funding to support continued growth.

Net Interest Income. Net interest income, before the provision for loan and
lease losses, increased $68.3 million (or 24.9%) in fiscal 2000 over fiscal
1999. Included in interest income during fiscal 2000 was $0.3 million recorded
on non-accrual assets and restructured loans. The bank would have recorded
additional interest income of $3.4 million in fiscal 2000 if non-accrual assets
and restructured loans had been current in accordance with their original terms.
The bank's net interest income in future periods will continue to be adversely
affected by the bank's non-performing assets. See "Item 7. Financial Condition -
Banking - Asset Quality - Non-Performing Assets."

Interest income in fiscal 2000 increased $217.2 million (or 41.8%) from the
level in fiscal 1999 as a result of higher average balances of loans and leases
receivable, which was slightly offset by lower average yields on loans and
leases receivable.

The bank's net interest spread decreased to 3.53% in fiscal 2000 from 3.90% in
fiscal 1999. The 37 basis point reduction in the net interest spread primarily
reflected a shift in the mix of consumer loans to lower yielding prime
automobile loans from higher yielding subprime automobile loans. Partially
offsetting this decline was an increase in the average balances of earning
assets, which was funded primarily with higher cost Federal Home Loan Bank
advances and brokered deposits. Average interest-earning assets as a percentage
of average interest bearing liabilities increased slightly to 104.25% in fiscal
2000 compared to 103.89% in fiscal 1999.

Interest income on loans and leases, the largest category of interest-earning
assets, increased by $233.0 million from fiscal 1999 primarily because of higher
average balances. Higher average balances of the bank's single-family
residential loans, which increased $1.3 billion (or 40.9%), resulted in a $95.3
million (or 42.0%) increase in interest income from such loans. Average balances
of automobile loans, commercial loans and real estate construction loans
increased $1.1 billion, $223.4 million and $88.4 million, respectively, and
contributed to a $103.1 million, $19.6 million and $9.8 million increase in
interest income from such loans, respectively. Lower average yields on
automobile loans partially offset the effects of the higher average balances.

The average yield on the loan portfolio in fiscal 2000 decreased 3 basis points
(from 8.40% to 8.37%) from the average yield in fiscal 1999. Contributing to the
lower net yield was a decrease in the yield on automobile loans which resulted
from management's decision to shift from higher yielding subprime loans which
have higher risks of default to lower yielding prime automobile loans and leases
with relatively lower risk of default. Average subprime automobile loans as a
percentage of total automobile loans and leases declined to 29.2% during fiscal
2000 from 44.1% during fiscal 1999. Effective November 9, 2000, the bank stopped
the originations of subprime automobile loans. The bank will continue servicing
and collecting the existing portfolio of those loans. Also contributing to the
decreased average yield on the loan portfolio was a decrease in the average
yield on home improvement loans (from 10.05% to 9.11%). An increase in the
average yield on home equity loans (from 7.22% to 8.68%) resulting from
increases in the index on which the interest rates on such loans are based
offset the decreases in the average yield on the loan portfolio.

Interest income on mortgage-backed securities decreased $22.0 million (or 22.8%)
primarily because of lower average balances. The effect of the $444.6 million
decrease in average balances was partially offset by an increase in the average
interest rates on those securities from 5.92% to 6.29%.

Interest expense on deposits increased $75.9 million (or 51.9%) during fiscal
2000 due to increased average rates and average balances. The 67 basis point
increase in the average rate on deposits (from 3.04% to 3.71%) resulted from a
shift in the deposit mix towards higher cost certificates of deposits. During
fiscal 2000, the bank increased its use of brokered deposits as an alternative
funding source.

Interest expense on borrowings increased $73.0 million (or 73.6%) in fiscal 2000
over fiscal 1999. A $967.0 million (or 96.9%) increase in average balances on
Federal Home Loan Bank advances and, to a lesser extent, the increase in the
average rate on such borrowings (from 5.29% to 5.69%) resulted in an increase of
$58.9 million in interest expense. Also contributing to the increase in interest
expense on borrowings was an increase in the average balance of $120.2 million
and average yield (from 5.07% to 6.08%) in securities sold under repurchase
agreements.

Provision for Loan and Lease Losses. The bank's provision for loan and lease
losses increased to $49.9 million in fiscal 2000 from $22.9 million in fiscal
1999. The $27.1 million increase was primarily due to increased delinquencies in
subprime automobile loans and increased charge-offs as a result of the
maturation of the bank's loan portfolio. See "Item 7. Financial Condition -
Banking - Asset Quality - Allowances for Losses."

Other Income. Other non-interest income decreased to $154.3 million in fiscal
2000 from $170.2 million in fiscal 1999. The $15.9 million (or 9.4%) decrease
was primarily attributable to a gain of $31.6 million included in fiscal 1999
resulting from the sale of one of the bank's REO properties. In addition, the
bank had gains on sales of trading securities of $1.5 million during fiscal 2000
compared to gains of $7.2 million during fiscal 1999. Partially offsetting this
decrease was a $18.7 million (or 26.9%) increase in deposit service fees during
the 2000 period primarily due to fees generated from the continued expansion of
the bank's branch and ATM network.

Operating Expenses. Operating expenses for fiscal 2000 increased $40.0 million
(or 12.3%) from the level in fiscal 1999. Salaries and employee benefits
increased $18.1 million (or 10.3%) as a result of additions of staff to the
bank's consumer lending department and branch operations. Also contributing to
increased operating expenses for fiscal 2000 was an increase in other operating
expenses of $14.1 million (or 36.1%). The increase is partially related to
increased other operating expenses associated with the expansion of the branch
network. Also contributing to the increase in other operating expenses was a
fiscal 1999 reduction to other operating expenses of $6.5 million related to
services the bank provided to First USA following the sale of the credit card
portfolio on September 30, 1998. In addition, property and equipment increased
$5.3 million primarily due to increased rent expense associated with the
addition of new deposit branches during fiscal 2000.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information required by this Item is included in Item "7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Financial
Condition - Banking - Asset and Liability Management."

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

    (a)  Report of Independent Public Accountants.

    (b)  Consolidated Balance Sheets - As of September 30,
         2001 and 2000.

    (c)  Consolidated Statements of Operations - For the
         years ended September 30, 2001, 2000 and 1999.

    (d)  Consolidated Statements of Comprehensive Income
         and Changes in Shareholders' Equity (Deficit) - For the
         years ended September 30, 2001, 2000 and 1999.

    (e)  Consolidated Statements of Cash Flows - For the
         years ended September 30, 2001, 2000 and 1999.

    (f)  Notes to Consolidated Financial Statements.

The selected quarterly financial data included in Note 34 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.

             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, 2001
and 2000, and the related consolidated statements of operations, comprehensive
income and changes in shareholders' equity (deficit), and cash flows for each of
the three years in the period ended September 30, 2001. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. 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, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2001, in conformity with accounting principles
generally accepted in the United States.

Arthur Andersen LLP

Vienna, Virginia
December 21, 2001

Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST
====================================================================================================================================
                                                                                                             September 30
                                                                                                    --------------------------------
(In thousands)                                                                                           2001             2000
------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Real Estate
Income-producing properties
    Hotel                                                                                               $  254,165       $  209,861
    Office and industrial                                                                                  157,653          148,581
    Other                                                                                                    2,825            3,991
                                                                                                    ---------------  ---------------
                                                                                                           414,643          362,433
    Accumulated depreciation                                                                              (131,659)        (124,184)
                                                                                                    ---------------  ---------------
                                                                                                           282,984          238,249
Land parcels                                                                                                40,835           39,716
Construction in progress                                                                                    15,681           49,096
Cash and cash equivalents                                                                                   13,860           18,129
Note receivable and accrued interest -- related party                                                        7,787           11,787
Other assets                                                                                                86,983           73,887
                                                                                                    ---------------  ---------------
                    Total real estate assets                                                               448,130          430,864
------------------------------------------------------------------------------------------------------------------------------------
Banking
Cash and other deposits                                                                                    325,610          357,792
Interest-bearing deposits                                                                                   84,385           30,441
Federal funds sold and securities purchased under agreements to resell                                          --           40,000
Loans held for sale                                                                                        246,083          126,108
Loans held for securitization and sale                                                                     282,000           70,000
Investment securities (market value $46,181 and $45,559, respectively)                                      45,794           45,648
Trading securities                                                                                           6,690            3,380
Mortgage-backed securities (market value $1,489,835 and $1,025,540, respectively)                        1,474,495        1,046,809
Loans and leases receivable (net of allowance for losses of $63,018 and $54,018, respectively)           8,018,495        8,105,031
Federal Home Loan Bank stock                                                                               113,030           97,676
Real estate held for investment or sale (net of allowance for losses of $85,354 and $80,954,
 respectively)                                                                                              31,704           49,386
Property and equipment, net                                                                                437,795          362,469
Goodwill and other intangible assets, net                                                                   27,058           25,270
Interest only strips, net                                                                                   47,146           16,763
Servicing assets, net                                                                                       62,434           75,045
Other assets                                                                                               185,747          233,176
                                                                                                    ---------------  ---------------
                    Total banking assets                                                                11,388,466       10,684,994
------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                                          $ 11,836,596     $ 11,115,858
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Real Estate
Mortgage notes payable                                                                                  $  325,750       $  307,214
Notes payable - secured                                                                                    202,500          200,000
Notes payable - unsecured                                                                                   50,717           47,463
Deferred gains - real estate                                                                               113,045          112,834
Accrued dividends payable - preferred shares of beneficial interest                                         19,303           25,885
Other liabilities and accrued expenses                                                                      36,874           44,971
                                                                                                    ---------------  ---------------
                    Total real estate liabilities                                                          748,189          738,367
------------------------------------------------------------------------------------------------------------------------------------
Banking
Deposit accounts                                                                                         7,562,470        7,037,789
Securities sold under repurchase agreements and other short-term borrowings                                282,350          540,042
Federal Home Loan Bank advances                                                                          2,240,598        1,946,971
Custodial accounts                                                                                         119,349           64,152
Amounts due to banks                                                                                        58,167           51,902
Other liabilities                                                                                          225,674          180,689
Capital notes -- subordinated                                                                              250,000          250,000
                                                                                                    ---------------  ---------------
                    Total banking liabilities                                                           10,738,608       10,071,545
------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interest held by affiliates                                                                        86,310           79,028
Minority interest -- other                                                                                 218,307          218,307
------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES                                                                                       11,791,414       11,107,247
------------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred shares of beneficial interest, $10.50 cumulative, $1 par value, 90 million shares
    authorized, 516,000 shares issued and outstanding, liquidation value $51.6 million                         516              516
Common shares of beneficial interest, $1 par value, 10 million shares authorized,
    6,641,598 shares issued                                                                                  6,642            6,642
Paid-in surplus                                                                                             92,943           92,943
Deficit                                                                                                    (11,401)         (49,642)
Accumulated other comprehensive loss                                                                        (1,670)              --
                                                                                                    ---------------  ---------------
                                                                                                            87,030           50,459
Less cost of 1,814,688 common shares of beneficial interest in treasury                                    (41,848)         (41,848)
                                                                                                    ---------------  ---------------
TOTAL SHAREHOLDERS' EQUITY                                                                                  45,182            8,611
------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                            $ 11,836,596     $ 11,115,858
------------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these statements.

Consolidated Statements of Operations
B. F. SAUL REAL ESTATE INVESTMENT TRUST
====================================================================================================================================

                                                                                            For the Year Ended September 30
                                                                                   -------------------------------------------------
(In thousands, except per share amounts)                                                2001             2000             1999
------------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE
Income
Hotels                                                                                 $  100,314       $   95,381       $   78,914
Office and industrial (including $3,983, $2,672 and $203
    of rental income from banking segment, respectively)                                   40,399           34,341           24,289
Other                                                                                       2,239            3,136            2,822
                                                                                   ---------------  ---------------  ---------------
Total income                                                                              142,952          132,858          106,025
------------------------------------------------------------------------------------------------------------------------------------
Expenses
Direct operating expenses:
    Hotels                                                                                 63,578           59,436           50,039
    Office and industrial properties                                                       11,852            9,635            8,071
    Land parcels and other                                                                  1,181            1,309              880
Interest expense, net                                                                      49,652           45,320           39,286
Amortization of debt expense                                                                  982              654              299
Depreciation                                                                               18,600           14,309           12,508
Advisory, management and leasing fees - related parties                                    11,762           11,013            9,431
General and administrative                                                                  4,195            3,808            1,162
                                                                                   ---------------  ---------------  ---------------
Total expenses                                                                            161,802          145,484          121,676
------------------------------------------------------------------------------------------------------------------------------------
Equity in earnings of unconsolidated entities                                               8,314            7,711            5,360
Gain on sale of property                                                                   11,077              994               --
------------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE OPERATING INCOME (LOSS)                                                     $     541       $   (3,921)      $  (10,291)
------------------------------------------------------------------------------------------------------------------------------------
BANKING
Interest income
Loans and leases                                                                       $  695,399       $  635,246       $  402,263
Mortgage-backed securities                                                                 71,685           74,614           96,589
Trading securities                                                                          2,508            1,288            3,553
Investment securities                                                                       2,746            2,643            2,466
Other                                                                                      14,517           22,868           14,622
                                                                                   ---------------  ---------------  ---------------
Total interest income                                                                     786,855          736,659          519,493
------------------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposit accounts                                                                          247,606          222,263          146,345
Short-term borrowings                                                                      63,225           55,977           38,446
Long-term borrowings                                                                      111,913          116,160           60,716
                                                                                   ---------------  ---------------  ---------------
Total interest expense                                                                    422,744          394,400          245,507
                                                                                   ---------------  ---------------  ---------------
Net interest income                                                                       364,111          342,259          273,986
Provision for loan and lease losses                                                       (67,852)         (49,930)         (22,880)
------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses                                       296,259          292,329          251,106
------------------------------------------------------------------------------------------------------------------------------------
Other income
Servicing and securitization income                                                        69,792           38,441           31,670
Deposit servicing fees                                                                    101,482           88,253           69,570
Gain on sales of trading securities, net                                                    3,954            1,490            7,243
Net unrealized holding gains on trading securities                                            448               --            1,192
Gain (loss) on real estate held for investment or sale, net                                 2,815           (1,523)          34,049
Gain on sales of loans, net                                                                 4,904            1,486            4,152
Gain on other investment                                                                   10,294               --               --
Other                                                                                      32,242           26,112           22,320
                                                                                   ---------------  ---------------  ---------------
Total other income                                                                        225,931          154,259          170,196
------------------------------------------------------------------------------------------------------------------------------------
Continued on following page.

Consolidated Statements of Operations (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST
====================================================================================================================================

                                                                                            For the Year Ended September 30
                                                                                   -------------------------------------------------
(In thousands, except per share amounts)                                                2001             2000             1999
------------------------------------------------------------------------------------------------------------------------------------
BANKING (Continued)
Operating expenses
Salaries and employee benefits                                                         $  198,480       $  193,204       $  175,149
Loan                                                                                       43,819           14,441           13,292
Property and equipment (including $3,983, $2,672 and $203
    of rental expense paid to real estate segment, respectively)                           36,347           31,347           26,089
Marketing                                                                                  11,353           11,424           12,664
Data processing                                                                            28,316           24,447           18,247
Depreciation and amortization                                                              34,197           32,434           33,362
Deposit insurance premiums                                                                  1,413            2,291            4,431
Amortization of goodwill and other intangible assets                                        2,390            2,632            3,083
Other                                                                                      51,582           53,096           39,005
                                                                                   ---------------  ---------------  ---------------
Total operating expenses                                                                  407,897          365,316          325,322
------------------------------------------------------------------------------------------------------------------------------------
BANKING OPERATING INCOME                                                               $  114,293       $   81,272       $   95,980
------------------------------------------------------------------------------------------------------------------------------------

TOTAL COMPANY
Operating income                                                                       $  114,834       $   77,351       $   85,689
Income tax provision                                                                       34,963           23,217           29,302
                                                                                   ---------------  ---------------  ---------------
Income before extraordinary item and minority interest                                     79,871           54,134           56,387
Extraordinary item:
    Loss on early extinguishment of debt, net of taxes                                         --             (166)              --
                                                                                   ---------------  ---------------  ---------------
Income before minority interest                                                            79,871           53,968           56,387
Minority interest held by affiliates                                                      (10,899)          (6,298)          (7,604)
Minority interest -- other                                                                (25,313)         (25,313)         (25,313)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY NET INCOME                                                               $   43,659       $   22,357       $   23,470
------------------------------------------------------------------------------------------------------------------------------------

NET INCOME AVAILABLE TO COMMON
    SHAREHOLDERS                                                                       $   38,241       $   16,939       $   18,052

NET INCOME PER COMMON SHARE
Income before extraordinary item and minority interest                                 $    15.42       $    10.08       $    10.56
Extraordinary item:
    Loss on early extinguishment of debt, net of taxes                                         --            (0.03)              --
                                                                                   ---------------  ---------------  ---------------
Income before minority interest                                                             15.42            10.05            10.56
Minority interest held by affiliates                                                        (2.26)           (1.30)           (1.58)
Minority interest -- other                                                                  (5.24)           (5.24)           (5.24)
------------------------------------------------------------------------------------------------------------------------------------

NET INCOME PER COMMON SHARE                                                             $    7.92        $    3.51        $    3.74
------------------------------------------------------------------------------------------------------------------------------------

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

Consolidated Statements of Comprehensive Income and Changes in Shareholders' Equity (Deficit)
B. F. SAUL REAL ESTATE INVESTMENT TRUST
====================================================================================================================================

                                                                                            For the Year Ended September 30
                                                                                   -------------------------------------------------
(Dollars in thousands)                                                                  2001             2000             1999
------------------------------------------------------------------------------------------------------------------------------------

COMPREHENSIVE INCOME

Net income                                                                             $   43,659       $   22,357       $   23,470
Other comprehensive income:
    Net unrealized holding losses                                                          (1,670)              (6)             (38)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME                                                             $   41,989       $   22,351       $   23,432
------------------------------------------------------------------------------------------------------------------------------------

CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)

PREFERRED SHARES OF BENEFICIAL INTEREST
Beginning and end of period (516,000 shares)                                            $     516        $     516        $     516
                                                                                   ---------------  ---------------  ---------------

COMMON SHARES OF BENEFICIAL INTEREST
Beginning and end of period (6,641,598 shares)                                              6,642            6,642            6,642
                                                                                   ---------------  ---------------  ---------------

PAID-IN SURPLUS
Beginning and end of period                                                                92,943           92,943           92,943
                                                                                   ---------------  ---------------  ---------------

DEFICIT
Beginning of period                                                                       (49,642)         (63,884)         (81,936)
Net income                                                                                 43,659           22,357           23,470
Minority interest in capital contribution                                                      --           (2,697)              --
Dividends:
    Real Estate Trust preferred shares of beneficial interest:
        Distributions payable                                                              (5,418)          (5,418)          (5,418)
                                                                                   ---------------  ---------------  ---------------
End of period                                                                             (11,401)         (49,642)         (63,884)
                                                                                   ---------------  ---------------  ---------------

ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning of period                                                                            --                6               44
Net unrealized holding losses                                                              (1,670)              (6)             (38)
                                                                                   ---------------  ---------------  ---------------
End of period                                                                              (1,670)              --                6
                                                                                   ---------------  ---------------  ---------------

TREASURY SHARES
Beginning and end of period (1,814,688 shares)                                            (41,848)         (41,848)         (41,848)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)                                                   $   45,182       $    8,611       $   (5,625)
------------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these statements.

Consolidated Statements of Cash Flows
B. F. SAUL REAL ESTATE INVESTMENT TRUST
====================================================================================================================================

                                                                                           For the Year Ended September 30
                                                                                   -------------------------------------------------
(In thousands)                                                                          2001             2000             1999
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net income (loss)                                                                       $      62       $   (2,836)      $   (6,946)
Adjustments to reconcile net income (loss) to net cash provided by
  operating activities:
    Depreciation                                                                           18,600           14,308           12,481
    Gain on sale of property                                                              (11,077)            (994)              --
    Early extinguishment of debt, net of taxes                                                 --              166               --
    Decrease in accounts receivable and accrued income                                     (9,301)            (691)          (3,046)
    (Increase) decrease in deferred tax asset                                               5,323            5,205             (803)
    Increase (decrease) in accounts payable and accrued expenses                           (5,711)           1,892            3,346
    (Increase) decrease in tax sharing receivable                                          (1,889)             (88)           3,794
    Amortization of debt expense                                                            1,717            1,620            1,270
    Equity in earnings of unconsolidated entities                                          (8,314)          (7,711)          (5,360)
    Other                                                                                   7,933           10,359           24,152
                                                                                   ---------------  ---------------  ---------------
                                                                                           (2,657)          21,230           28,888
                                                                                   ---------------  ---------------  ---------------
Banking
Net income                                                                                 42,749           25,193           30,416
Adjustments to reconcile net income to net cash provided by (used in)
    operating activities:
    Amortization (accretion) of premiums, discounts and net deferred loan fees              9,210           (2,817)           1,578
    Depreciation and amortization                                                          34,148           32,434           33,362
    Provision for loan and lease losses                                                    67,852           49,930           22,880
    Capitalized interest on real estate under development                                  (2,017)          (3,786)          (3,391)
    Proceeds from sales of trading securities                                             834,745          299,881          933,596
    Net fundings of loans held for sale and/or securitization                          (1,629,837)        (710,549)      (1,035,602)
    Proceeds from sales of loans held for sale and/or securitization                    1,484,481        1,056,200           57,337
    Gain on sales of real estate held for sale                                             (6,241)          (9,257)         (30,791)
    Provision for losses on real estate held for investment or sale                         4,200            1,400               --
    Gain on sales of trading securities, net                                               (3,954)          (1,533)          (7,243)
    (Increase) decrease in interest-only strips                                           (30,383)          (9,137)           5,882
    (Increase) decrease in servicing assets                                                12,602          (44,577)          (3,336)
    (Increase) decrease in goodwill and other intangible assets                             3,296            2,643            2,990
    (Increase) decrease in other assets                                                    43,575           12,993          (14,283)
    Increase (decrease) in other liabilities                                               51,323           80,447           (5,335)
    Increase (decrease) in tax sharing payable                                              1,889               88           (3,794)
    Minority interest held by affiliates                                                   10,899            6,298            7,604
    Minority interest - other                                                               9,750            9,750            9,750
    Other                                                                                  73,281           92,384          (12,154)
                                                                                   ---------------  ---------------  ---------------
                                                                                        1,011,568          887,985          (10,534)
                                                                                   ---------------  ---------------  ---------------
Net cash provided by operating activities                                               1,008,911          909,215           18,354
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties                                                         (22,546)         (77,571)         (46,987)
Property acquisitions                                                                     (16,535)         (19,518)              --
Property sales                                                                             19,702            1,897               --
Note receivable and accrued interest -- related party
  Repayments                                                                                4,000            3,750            1,500
Equity investment in unconsolidated entities                                                2,935            6,527            2,748
Other                                                                                           3              --                 2
                                                                                   ---------------  ---------------  ---------------
                                                                                          (12,441)         (84,915)         (42,737)
                                                                                   ---------------  ---------------  ---------------
Banking
Net proceeds from maturities of investment securities                                          --           44,000               --
Net proceeds from redemption of Federal Home Loan Bank stock                               58,894           11,877           24,165
Net proceeds from sales of real estate                                                     31,183           28,590           36,479
Net fundings of loans receivable                                                           37,373       (1,110,357)      (1,361,713)
Principal collected on mortgage-backed securities                                         410,739          267,273          710,426
Purchases of Federal Home Loan Bank stock                                                 (74,248)         (22,371)         (62,311)
Purchases of investment securities                                                           (119)         (45,231)            (394)
Purchases of loans receivable                                                          (1,970,548)      (1,549,508)      (2,278,834)
Purchases of property and equipment                                                      (109,644)        (107,336)         (52,766)
Disbursements for real estate held for investment or sale                                  (8,723)          (9,607)          (6,911)
Increase in goodwill                                                                       (4,178)              --               --
Other                                                                                       9,475           17,404           (3,246)
                                                                                   ---------------  ---------------  ---------------
                                                                                       (1,619,796)      (2,475,266)      (2,995,105)
                                                                                   ---------------  ---------------  ---------------
Net cash used in investing activities                                                  (1,632,237)      (2,560,181)      (3,037,842)
------------------------------------------------------------------------------------------------------------------------------------
Continued on following page.

Consolidated Statements of Cash Flows (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST
====================================================================================================================================

                                                                                           For the Year Ended September 30
                                                                                   -------------------------------------------------
(In thousands)                                                                          2001             2000             1999
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing                                                       $   50,978       $  130,802       $   25,562
Principal curtailments and repayments of mortgages                                        (32,442)         (37,035)         (10,989)
Proceeds from secured note financings                                                      20,500           24,200           16,000
Repayments of secured note financings                                                     (18,000)         (40,200)              --
Proceeds from sales of unsecured notes                                                      9,310           10,246            5,355
Repayments of unsecured notes                                                              (6,056)          (8,905)          (9,568)
Costs of obtaining financings                                                              (1,461)          (2,651)          (2,104)
Dividends paid - preferred shares of beneficial interest                                  (12,000)         (12,500)          (6,500)
                                                                                   ---------------  ---------------  ---------------
                                                                                           10,829           63,957           17,756
                                                                                   ---------------  ---------------  ---------------
Banking
Proceeds from customer deposits and sales of certificates of deposit                   43,408,719       38,470,514       40,084,375
Customer withdrawals of deposits and payments for maturing certificates of deposit    (42,884,038)     (37,196,211)     (39,209,119)
Net increase (decrease) in securities sold under repurchase agreements                   (258,791)        (156,943)         139,267
Advances from the Federal Home Loan Bank                                               19,932,789        2,348,672        2,926,366
Repayments of advances from the Federal Home Loan Bank                                (19,639,162)      (2,144,889)      (1,535,205)
Net proceeds from other borrowings                                                          1,025           66,148             (307)
Cash dividends paid on preferred stock                                                     (9,750)          (9,750)          (9,750)
Cash dividends paid on common stock                                                       (16,000)         (16,000)         (33,000)
Other                                                                                      55,198           63,827           16,702
                                                                                   ---------------  ---------------  ---------------
                                                                                          589,990        1,425,368        2,379,329
                                                                                   ---------------  ---------------  ---------------
Net cash provided by financing activities                                                 600,819        1,489,325        2,397,085
------------------------------------------------------------------------------------------------------------------------------------

Net decrease in cash and cash equivalents                                                 (22,507)        (161,641)        (622,403)
Cash and cash equivalents at beginning of year                                            446,362          608,003        1,230,406
                                                                                   ---------------  ---------------  ---------------
Cash and cash equivalents at end of year                                               $  423,855       $  446,362       $  608,003
------------------------------------------------------------------------------------------------------------------------------------

Components of cash and cash equivalents at end of year as presented in the
 consolidated balance sheets:
    Real Estate
        Cash and cash equivalents                                                      $   13,860       $   18,129       $   17,857
    Banking
        Cash and due from banks                                                           325,610          357,792          326,758
        Interest-bearing deposits                                                          84,385           30,441           69,388
        Federal funds sold and securities purchased under agreements to resell                 --           40,000          194,000
                                                                                   ---------------  ---------------  ---------------
    Cash and cash equivalents at end of year                                           $  423,855       $  446,362       $  608,003
------------------------------------------------------------------------------------------------------------------------------------

Supplemental disclosures of cash flow information:
    Cash paid during the year for:
        Interest (net of amount capitalized)                                              480,083       $  449,449       $  261,664
        Income taxes paid (refunded)                                                      (23,889)         (69,691)          95,417
        Shares of Saul Centers, Inc. common stock                                           7,878            3,770            3,393
        Limited partnership units of Saul Holdings Limited Partnership                         --               --            6,120
        Transfer of Tysons Park Place to real estate segment from banking segment              --           37,000               --
    Cash received during the year from:
        Dividends on shares of Saul Centers, Inc. common stock                              4,287            3,770            3,393
        Distributions from Saul Holdings Limited Partnership                                6,527            6,527            6,120

Supplemental disclosures of noncash activities:
    Rollovers of notes payable - unsecured                                                  4,022            5,335            6,581
    Loans held for sale exchanged for trading securities                                  839,224          297,462          924,710
    Loans receivable exchanged for mortgage-backed securities held-to-maturity            837,661            4,798            1,792
    Loans receivable transferred to (from) loans held for sale and/or securitization      766,861          744,823         (125,000)
    Loans made in connection with the sale of real estate                                      --            1,260           31,615
    Loans receivable transferred to real estate acquired in settlement of loans               774            5,695            1,909

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

B.F. Saul Real Estate Investment Trust operates as a Maryland real estate
investment trust. The principal business activities of B.F. Saul Real Estate
Investment Trust and its consolidated subsidiaries (the "Trust") are the
ownership of 80% of the outstanding common stock of Chevy Chase Bank, F.S.B.,
whose assets accounted for 96% of the Trust's consolidated assets as of
September 30, 2001, and the ownership and development of income-producing
properties. The properties are located predominantly in the mid-Atlantic and
Southeastern regions of the United States and consist principally of hotels,
office projects, and undeveloped land parcels. Chevy Chase Bank, F.S.B. is a
federally chartered and federally insured stock savings bank and, as such, is
subject to comprehensive regulation, examination and supervision by the Office
of Thrift Supervision ("OTS") and by the Federal Deposit Insurance Corporation
("FDIC"). The bank is principally engaged in the business of attracting deposits
from the public and using such deposits, together with borrowings and other
funds, to make loans secured by real estate, primarily residential mortgage
loans, and various types of consumer loans and leases and commercial loans. The
bank's principal deposit market is the Washington, DC metropolitan area.

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

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Real Estate
Trust and its subsidiaries. Accordingly, the accompanying financial statements
reflect the assets, liabilities, operating results, and cash flows for two
business segments: Real Estate and Banking. Entities in which the Trust holds a
non-controlling interest (generally 50% or less) are accounted for on the equity
method. See Note 2. All significant intercompany transactions, except as
disclosed elsewhere in the financial statements, have been eliminated in
consolidation. Tax sharing and dividend payments between the Real Estate Trust
and the bank are presented gross in the Consolidated Statements of Cash Flows.

Although the financial results of Trust subsidiaries are included in these
consolidated financial statements, each Trust subsidiary, including, but not
limited to, Arlington Hospitality Corp., Auburn Hills Hotel Corporation, Dulles
Hospitality Corp., Herndon Hotel Corporation, Pueblo Hotel Corp. and Sharonville
Hotel Corporation, is a separate legal entity whose assets are not available to
pay the claims of creditors of other entities included in these consolidated
financial statements.

USE OF ESTIMATES

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

ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS

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

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

INCOME TAXES

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

The Trust uses an asset and liability approach in accounting for income taxes.
Deferred income taxes are recorded using currently enacted tax laws and rates.
To the extent that realization of deferred tax assets is more likely than not,
such assets are recognized.

NET INCOME PER COMMON SHARE

Net income per common share is determined by dividing net income, after
deducting preferred share dividend requirements, by the weighted average number
of common shares outstanding during the year. For fiscal years 2001, 2000 and
1999, the weighted average number of shares used in the calculation was
4,826,910. The Trust has no common share equivalents.

RECLASSIFICATIONS

Certain reclassifications have been made to the consolidated financial
statements for the years ended September 30, 2000 and 1999 to conform with the
presentation used for the year ended September 30, 2001.

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.

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

Depreciation is calculated using the straight-line method and estimated useful
lives of 28 to 47 years for buildings and up to 20 years for certain other
improvements. Tenant improvements are amortized over the lesser of their
estimated useful lives or the lives of the related leases using the
straight-line method.

INCOME RECOGNITION

The Real Estate Trust derives room and other revenues from the operations of its
hotel properties. Hotel revenue is recognized as earned. The Real Estate Trust
derives rental income under noncancelable long-term leases from tenants at its
commercial properties. Commercial property rental income is recognized on a
straight-line basis.

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.

Liabilities

The carrying amount of 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 mortgage notes payable is based on
management's estimate of current market rates for its debt. At September 30,
2001, and 2000, the fair value of mortgage notes payable was $328.3 and $297.8
million. 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,
2001 and 2000, the fair value of notes payable - unsecured was $51.9 and $48.6
million.

C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - THE BANK

CASH AND CASH EQUIVALENTS

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

Federal Reserve Board regulations require the bank to maintain reserves in the
form of cash or deposits in its account at the Federal Reserve Bank of
Richmond. The average reserve requirements, before credit for vault cash, were
$185.1, $190.2 and $161.1 million during the years ended September 30, 2001,
2000 and 1999, respectively.

LOANS HELD FOR SALE

The bank engages in mortgage banking activities. At September 30, 2001 and 2000,
loans held for sale are composed of single-family residential loans and home
improvement and related loans originated or purchased for sale in the secondary
market and are carried at the lower of aggregate cost or 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."

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 loans expected to be sold
during any future reinvestment period.

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

The bank classifies its investment and mortgage-backed securities as either
"held-to-maturity," "available-for-sale" or "trading" at the time such
securities are acquired. Investment and mortgage-backed securities classified as
"held-to-maturity" are reported at amortized cost. Investment and
mortgage-backed securities classified as "available-for-sale" are reported at
fair value, with unrealized gains and losses, net of the related tax effect,
reported as a separate component of stockholders' equity. Investment and
mortgage-backed securities classified as "trading" are reported at fair value,
with unrealized gains and losses included in earnings. All investment securities
and mortgage-backed securities are classified as held-to-maturity at September
30, 2001 and 2000. 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, which are classified as trading securities, to third party investors
in the month of issuance. Proceeds from sales of trading securities were $834.7,
$299.9 and $933.6 million during the years ended September 30, 2001, 2000 and
1999, respectively. The bank realized net gains of $4.0, $1.5 and $7.2 million
on the sales of trading securities for the years ended September 30, 2001, 2000
and 1999, respectively. Gains and losses on sales of trading securities are
determined using the specific identification method. There were no
mortgage-backed securities classified as trading securities at September 30,
2001 and 2000.

At September 30, 2001 and 2000, the bank held automobile receivables-backed
securities with carrying amounts of $1.2 and $3.4 million, respectively, which
were classified as trading securities. These securities were established in
conjunction with two automobile loan securitization transactions and represent
subordinate classes of certificates retained by the bank. There were no changes
in unrealized gains or losses during fiscal 2001 and 2000. The bank recognized
net unrealized holding gains on these securities of $1.2 million during fiscal
1999. See Note 15.

At September 30, 2001, the bank held stock in Concord EFS, Inc. with a carrying
amount of $5.5 million, which was also classified as trading securities. The
bank recognized net unrealized holding gains of $448,000 and net realized gains
of $10.3 million on this investment during the year ended September 30, 2001.

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.

IMPAIRED LOANS

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

Each impaired real estate or commercial 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.

At September 30, 2001 and 2000, the bank did not have any impaired loans. The
average recorded investment in impaired commercial and real estate loans for the
year ended September 30, 2000 and 1999 was $51,000 and $65,000, respectively.
The bank did not recognize any interest income on its impaired loans for the
years ended September 30, 2001, 2000 and 1999.

ALLOWANCES FOR LOSSES

Management reviews the loan and lease, 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 or real estate, including estimated selling and holding
costs. Allowances are also provided by management after considering such factors
as the economy in lending areas, delinquency statistics and past 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.

REAL ESTATE HELD FOR INVESTMENT OR SALE

Real Estate Held for Investment

At September 30, 2001 and 2000, real estate held for investment consists of
developed land owned by one of the bank's subsidiaries. Real estate held for
investment is carried at the lower of cost or net realizable value. See Note 13.

Real Estate Held for Sale

Real estate held for sale consists of real estate acquired in settlement of
loans ("REO") and is carried at the lower of cost or fair value (less estimated
selling costs). Costs relating to the development and improvement of property,
including interest, are capitalized, whereas costs relating to the holding of
property are expensed. Capitalized interest amounted to $2.0, $3.8 and $3.4
million for the years ended September 30, 2001, 2000 and 1999, 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. Capitalized interest amounted to $4.7, $2.1
and $0.4 million during the years ended September 30, 2001, 2000 and 1999,
respectively. The bank has developed an office building to use as its new
corporate headquarters and began to occupy it in late summer of 2001.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is stated net of accumulated amortization and is being amortized using
the straight-line method over 15 years. At September 30, 2001 and 2000, goodwill
totaled $25.0 and $22.0 million, respectively. In February 2001, the bank
purchased an investment management firm and recorded $4.2 million of goodwill.
The acquisition was accounted for using the purchase method and the operating
results have been included in the bank's Consolidated Statements of Operations
since the date of acquisition.

The premium attributable to the value of the home equity relationships from home
equity loans purchased in fiscal 1999, amounting to $2.1 and $3.3 million at
September 30, 2001 and 2000, respectively, is included in goodwill and other
intangible assets in the Consolidated Balance Sheets. The bank did not purchase
any home equity loans in fiscal 2001 and 2000. This premium is being amortized
over the estimated term of the underlying relationships.

Accumulated amortization of goodwill and other intangible assets was $51.7 and
$49.3 million at September 30, 2001 and 2000, respectively.

SERVICING ASSETS

Servicing assets are recorded when purchased and in conjunction with loan sales
and securitization transactions. Servicing assets, which are stated net of
accumulated amortization, are amortized in proportion to the remaining net
servicing revenues estimated to be generated by the underlying loans.
Amortization of these assets amounted to $16.5, $10.9 and $12.3 million for the
years ended September 30, 2001, 2000 and 1999, respectively. Accumulated
amortization was $107.5 and $91.0 million at September 30, 2001 and 2000,
respectively. During fiscal 2001, 2000 and 1999, the bank recorded $24.0, $49.4
and $14.8 million, respectively, of servicing assets.

The bank periodically evaluates its servicing assets for impairment based upon
fair value. For purposes of evaluating impairment, the bank stratifies its
servicing assets taking into consideration relevant risk characteristics
including loan type, note rate and date of acquisition. To the extent the
carrying value of servicing assets exceeds the fair value of such assets, a
valuation allowance is recorded. The aggregate fair value of servicing assets at
September 30, 2001 and 2000 was $62.8 and $78.0 million, respectively.

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

                                                    Year Ended September 30,
                                   -----------------------------------------------------------
  (In thousands)                         2001                 2000                  1999
                                   ---------------       ---------------       ---------------

  Balance at beginning of year          $   3,591        $       9,724              $  13,498

  Additions charged / (reductions
     credited) to loan expenses            20,042               (6,133)                (3,774)
                                   ---------------       ---------------       ---------------

  Balance at end of year                $  23,633        $       3,591              $   9,724
                                   ===============       ===============       ===============

There were no sales of rights to service mortgage loans during fiscal 2001, 2000
and 1999. Servicing fees are included in servicing and securitization income in
the Consolidated Statements of Operations.

INTEREST-ONLY STRIPS

Interest-only strips capitalized in the years ended September 30, 2001 and 2000
amounted to $33.2 and $13.8 million, respectively, and were related to the
securitization and sale of automobile receivables. Interest-only strips
capitalized in the year ended September 30, 1999 amounted to $2.7 million and
were primarily related to the sale of new home equity receivables to existing
trusts. See Note 15.

Interest-only strips are amortized using the effective yield method over the
estimated lives of the underlying loans. Amortization amounted to $2.8, $7.3 and
$8.7 million for the years ended September 30, 2001, 2000 and 1999,
respectively, and is included in servicing and securitization income in the
Consolidated Statements of Operations and Comprehensive Income. The bank uses
certain assumptions to calculate amortization of the interest-only strips,
mainly estimates of prepayment speeds, credit losses and interest rates. To the
extent actual results differ from the assumptions, amortization is adjusted
accordingly. See Note 15.

The bank accounts for its interest-only strips as trading securities and,
accordingly, carries them at fair value. The bank estimates the fair value of
the interest-only strips on a discounted cash flow basis using appropriate
discount and prepayment rates. The fair value adjustments for interest-only
strips are included in servicing and securitization income. The fair value
adjustments amounted to a net loss of $34,000 in fiscal 2001 and a net gain of
$2.6 million in fiscal 2000. There were no fair value adjustments during fiscal
year 1999. Certain assumptions inherent in the determination of the amortization
and fair value of interest-only strips are influenced by factors outside the
bank's control, and actual performance could differ materially from such
assumptions. See Note 15.

DERIVATIVE FINANCIAL INSTRUMENTS

The bank uses various strategies to minimize interest-rate risk and fluctuations
in the fair value of mortgage servicing rights, including interest-rate cap
agreements, forward sale or purchase commitments and futures and options
contracts. 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. There were no
unamortized premiums at September 30, 2001 and 2000. Gains and losses on forward
sale commitments are deferred and recorded as a component of the gain on sales
of loans at the time the forward sale commitment matures. Gains and losses on
forward purchase commitments are recorded as a component of the gain on sales of
loans in the month the transaction occurs. Gains and losses on hedges of
mortgage servicing rights are recorded as a component of loan expenses in the
Consolidated Statements of Operations and Comprehensive Income. See Note 27. The
bank does not hold any derivative financial instruments for trading purposes.

ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS

The bank adopted Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") effective October 1, 2000. SFAS
133 was amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of Effective Date of Financial Accounting
Standards Board Statement No. 133" ("SFAS 137") and SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities - an amendment
of FASB Statement No. 133" ("SFAS 138"). SFAS 133, as amended by SFAS 137 and
SFAS 138, establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS 133 requires an entity to recognize all
derivative instruments as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. Changes in the
fair value of those instruments are reported in earnings or other comprehensive
income depending on the use of the derivative and whether it qualifies for hedge
accounting. The accounting for gains and losses associated with changes in the
fair value of the derivative instrument and the effect on the consolidated
financial statements depends on its hedge designation and whether the hedge is
effective in achieving offsetting changes in the fair value of cash flows of the
asset or liability hedged. The impact of the adoption of SFAS 133, as amended,
was not material to the bank's financial condition or results of operations. On
October 1, 2000, the bank recorded an after tax loss of $476,000 in Other
Comprehensive Income representing its transition adjustment from the adoption of
these standards.

SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" - a replacement of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
("SFAS 140") was issued in September 2000 and replaces SFAS No. 125. SFAS 140
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. Under SFAS 140, after
a transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. SFAS 140 is effective for transfers after March 31, 2001, except
that the effective date for the isolation standards was suspended for financial
institutions until January 1, 2002, and is effective for disclosures about
securitizations and collateral and for recognition and reclassification of
collateral for fiscal years ending after December 15, 2000. The adoption of SFAS
140 did not have a material impact on the bank's financial condition or results
of operations.

In July 2000, the Emerging Issues Task Force of the FASB issued Consensus No.
99-20, "Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets." This consensus requires
that all changes in assumptions regarding expected future cash flows related to
such assets that are used to calculate income yields be recognized prospectively
through revised income yields unless impairment is required to be recognized, at
which time an investment is written down to fair value. Consensus No. 99-20 was
effective on April 1, 2001 and did not have a material impact on the bank's
financial condition or results of operations.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS
141"). SFAS 141 supersedes Accounting Principles Board ("APB"), Opinion No. 16,
"Business Combinations" and requires that all business combinations be accounted
for as purchases and prohibits further usage of the pooling-of-interests method.
In addition, SFAS 141 establishes new rules concerning recognition of intangible
assets (apart from goodwill) arising in a purchase business combination. SFAS
141 is applied prospectively to all business combinations initiated and
accounted for using the purchase method for which the date of acquisition is
after June 30, 2001.

ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED

SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") was issued in
June 2001. SFAS 142 supersedes APB Opinion No. 17, "Intangible Assets." SFAS 142
establishes new guidance on accounting for goodwill and other assets acquired in
a business combination and reaffirms that acquired intangible assets should
initially be recognized at fair value and the costs of internally developed
intangible assets should be charged to expense as incurred. SFAS 142 also
requires that goodwill arising in a business combination should no longer be
amortized, but subject to impairment testing. Potential impairment is identified
by comparing the fair value with its carrying amount and if fair value is less
than the carrying amount, an impairment loss is recognized. SFAS 142 is
effective for fiscal years beginning after December 15, 2001 and must be applied
as of the beginning of the fiscal year. The bank is currently assessing the
impact that the adoption of SFAS 142 may have on the bank's financial condition
or results of operations.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 provides guidance on the initial
measurement and subsequent accounting for obligations associated with the sale,
abandonment, or other type of disposal of long-lived tangible assets. SFAS 143
requires an entity to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. The liability is
initially recorded by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The
bank believes that the adoption of SFAS 143 will not have a material impact on
the bank's financial position or results of operations in future periods.

1.  LIQUIDITY AND CAPITAL RESOURCES - REAL ESTATE TRUST

The Real Estate Trust's cash flow from operating activities has been
historically insufficient to meet all of its cash flow requirements. The Real
Estate Trust's internal sources of funds, primarily cash flow generated by its
income-producing properties, generally have been sufficient to meet its cash
needs other than the repayment of principal on outstanding debt, including
outstanding unsecured notes sold to the public, the payment of interest on its
indebtedness, and the payment of capital improvement costs. In the past,
the Real Estate Trust funded such shortfalls through a combination of external
funding sources, primarily new financing, the sale of unsecured notes,
refinancing of maturing mortgage debt, proceeds from asset sales, and dividends
and tax sharing payments from the bank. For the foreseeable future, the Real
Estate Trust's ability to generate positive cash flow from operating activities
and to meet its liquidity needs, including debt service payments, repayment of
debt principal and capital expenditures, will continue to depend on these
available external sources. Dividends received from the bank are a component of
funding sources available to the Real Estate Trust. The availability and amount
of dividends in future periods is dependent upon, among other things, the bank's
operating performance and income, and regulatory restrictions on such payments.
Tax sharing and dividend payments received by the Real Estate Trust are
presented as cash flows from operating activities in the Consolidated Statements
of Cash Flows.

The Real Estate Trust believes that the financial condition and operating
results of the bank in recent periods, as well as the bank's board resolution
adopted in connection with the release of its written agreement with the OTS
should enhance prospects for the Real Estate Trust to receive dividends from the
bank. During fiscal 2001, 2000 and 1999, the bank made tax sharing payments
totaling $3.4, $6.6 and $6.6 million to the Real Estate Trust. During fiscal
2001, 2000 and 1999, the bank made dividend payments totaling $12.8, $12.8 and
$26.4 million to the Real Estate Trust.

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

2.  SAUL HOLDINGS LIMITED PARTNERSHIP - REAL ESTATE TRUST

In fiscal 1993, the Real Estate Trust entered into a series of transactions
undertaken in connection with an initial public offering of common stock of a
newly organized corporation, Saul Centers, 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 as of September 30, 2001, the Real Estate Trust owns (directly or through
one of its wholly owned subsidiaries) a 26.6% interest, other entities
affiliated with the Real Estate Trust own a 7.9% interest, and Saul Centers owns
a 65.5% interest. Certain officers and trustees of the Trust are also officers
and/or directors of Saul Centers.

In connection with the transfer of its properties to Saul Holdings, the Real
Estate Trust was relieved of approximately $196 million in mortgage debt and
deferred interest. Pursuant to a reimbursement agreement among the partners of
Saul Holdings and its subsidiary limited partnerships (collectively, the
"Partnerships"), the Real Estate Trust and its subsidiaries that are partners in
the Partnerships have agreed to reimburse Saul Centers and the other partners in
the event the Partnerships fail to make payments with respect to certain
portions of the Partnerships' debt obligations and Saul Centers or any such
other partners personally make payments with respect to such debt obligations.
At September 30, 2001, the maximum potential obligations of the Real Estate
Trust and its subsidiaries under this agreement totaled 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. In general, if the gain recognized by the Partnerships on a
property disposition is less than or equal to the FMV-Tax Difference for such
property (as previously reduced by the amounts of special tax allocations of
depreciation deductions to the partners), a gain equal to the FMV-Tax Difference
(as adjusted) will be allocated to the Real Estate Trust. To the extent the gain
recognized by the Partnerships on the property disposition exceeds the FMV-Tax
Difference (as adjusted), such excess generally will be allocated among all the
partners in Saul Holdings based on their relative percentage interests. In
general, the amount of gain allocated to the Real Estate Trust in the event of
such a property disposition is likely to exceed, perhaps substantially, the
amount of cash, if any, distributable to the Real Estate Trust as a result of
the property disposition. In addition, future reductions in the level of the
Partnerships' debt, or any release of the guarantees of such debt by the Real
Estate Trust, could cause the Real Estate Trust to have taxable constructive
distributions without the receipt of any corresponding amounts of cash.
Currently, management does not intend to seek a release of or a reduction in the
guarantees or to convert its limited partner units in Saul Holdings into shares
of Saul Centers common stock.

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

Immediately subsequent to the business combination and initial public offering
of common stock by Saul Centers, Saul Centers had total owners' equity of
approximately $16.4 million of which approximately $3.5 million related to the
Real Estate Trust's original 21.5% ownership interest. Recognition by the Real
Estate Trust of the change in its investment in the properties of approximately
$107.8 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, 2001, that
the total debt of Saul Centers remains below fifty percent of total asset value.
As a result, the management of the Real Estate Trust has concluded that fundings
under the reimbursement agreement are remote.

In addition to the deferred gains, as of September 30, 2001, the Real Estate
Trust's investment in the consolidated entities of Saul Centers, which is
accounted for under the equity method, consisted of the following.

     (In thousands)
     -------------------------------------------------------------------
     Saul Holdings:
       Acquisition of partnership units                         $ 9,011
       Distributions in excess of allocated net income          (14,954)

     Saul Centers:
       Acquisition of common shares                              48,877
       Distributions in excess of allocated net income          (10,038)
                                                           -------------

     Total                                                     $ 32,896
                                                           =============

The $32.9 million balance is included in "Other assets" in the financial
statements.

As of September 30, 2001, the Real Estate Trust, through its partnership
interest in Saul Holdings and its ownership of common shares of Saul Centers,
effectively owns 36.9% of the consolidated entities of Saul Centers.
Substantially all of these shares and/or units have been deposited as collateral
for the Trust's revolving lines of credit. See Note 4.

The unaudited Condensed Consolidated Balance Sheet as of September 30, 2001 and
2000, and the unaudited Condensed Consolidated Statements of Operations for the
twelve-month periods ended September 30, 2001, 2000 and 1999 of Saul Centers
follow.

Saul Centers, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
                                                        September 30,
                                                -----------------------------
(In thousands)                                       2001           2000
----------------------------------------------- -------------- --------------
Assets
    Real estate investments                         $ 426,520      $ 384,923
    Accumulated depreciation                         (133,938)      (120,660)
    Other assets                                       49,855         61,418
                                                -------------- --------------
Total assets                                        $ 342,437      $ 325,681
                                                ============== ==============

Liabilities and stockholders' deficit
    Notes payable                                   $ 350,247      $ 335,995
    Other liabilities                                  19,118         21,016
                                                -------------- --------------
    Total liabilities                                 369,365        357,011
    Total stockholders' deficit                       (26,928)       (31,330)
                                                -------------- --------------
Total liabilities and stockholders' deficit         $ 342,437      $ 325,681
                                                ============== ==============

Saul Centers, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)                                         For the Twelve Months
                                                      Ended September 30
                                                -----------------------------
(In thousands)                                    2001      2000      1999
----------------------------------------------- --------  --------- ---------
Revenue
    Base rent                                   $68,823    $62,763   $57,789
    Other revenue                                15,775     14,754    14,704
                                                --------  --------- ---------
Total revenue                                    84,598     77,517    72,493
                                                --------  --------- ---------

Expenses
    Operating expenses                           16,021     14,741    14,363
    Interest expense                             24,898     23,529    22,389
    Amortization of deferred debt expense           543        434       416
    Depreciation and amortization                15,259     12,817    12,883
    General and administrative                    4,074      3,871     3,551
                                                --------  --------- ---------
Total expenses                                   60,795     55,392    53,602
                                                --------  --------- ---------

Operating income                                 23,803     22,125    18,891
Non-operating item
    Gain on sale of property                        --         553       --
                                                --------  --------- ---------
Net income before minority interest              23,803     22,678     18,891
Minority interest                                (8,069)    (8,068)   (7,779)
                                                --------  --------- ---------
Net income                                      $15,734    $14,610   $11,112
                                                ========  ========= =========

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.

(Dollars in                               Buildings and               Related
  thousands)            No.      Land      Improvements    Total        Debt
---------------------- ------  --------- --------------- ----------  ----------

September 30, 2001:
Income-producing
 properties
  Hotels                  18    $18,684        $235,481   $254,165    $169,722
  Office and industrial   11     11,503         146,150    157,653     149,257
  Other                    4      2,825              --      2,825          --
                       ------  --------- --------------- ----------  ----------
                          33    $33,012        $381,631   $414,643    $318,979
                       ======  ========= =============== ==========  ==========

Land Parcels              10    $40,835        $     --   $ 40,835    $     --
                       ======  ========= =============== ==========  ==========

September 30, 2000
Income-producing
 properties:
  Hotels                  16    $17,068        $192,793   $209,861    $144,012
  Office and industrial   10      7,883         140,698    148,581     137,153
  Other                    5      3,075             916      3,991       1,790
                       ------  --------- --------------- ----------  ----------
                          31    $28,026        $334,407   $362,433    $282,955
                       ======  ========= =============== ==========  ==========

Land Parcels               9    $39,716            $ --   $ 39,716    $    206
                       ======  ========= =============== ==========  ==========

On December 18, 2000, the Real Estate Trust sold its 124-unit San Simeon
apartment project in Dallas, Texas. The sales price was $3.1 million and the
Real Estate Trust recognized a gain of $2.2 million on the transaction. The
proceeds of the sales were used to acquire a 10.7 acre parcel of land in Loudoun
County, Virginia, for $2.8 million.

On June 13, 2001, the Real Estate Trust sold a 4.79 acre section of its Circle
75 land parcel located in Atlanta, Georgia for $3.0 million. The Real Estate
Trust recognized a gain of $2.4 million on this transaction.

On August 8, 2001, the Real Estate Trust sold Metairie Tower, a 91,000 square
foot office building located in Metairie, Louisiana for $7.2 million. The Real
Estate Trust recognized a gain of $5.2 million on this transaction.

On September 7, 2001, the Real Estate Trust sold 9.5 acres of its Commerce
Center land parcel located in Ft. Lauderdale, Florida for approximately $2.0
million, and recognized a gain of $245,000 on the transaction.

During fiscal 2001, the Real Estate Trust also received net proceeds of $2.0
million and recognized a gain of $620,000 from the condemnation of portions of
two land parcels in Colorado and Michigan.

4.  DEBT - REAL ESTATE TRUST

Mortgage notes payable are secured by various income-producing properties, land
parcels, and properties under construction. Almost all mortgage notes are
payable in monthly installments, have maturity dates ranging to 2021 and accrue
interest at annual rates from 4.9% to 10.0%. Certain mortgages contain a number
of restrictions, including cross default provisions.

Notes payable - unsecured includes notes which have been sold by the Real Estate
Trust directly to investors at varying interest rates with maturities of one to
ten years. These notes do not contain any provisions for conversion, sinking
fund or amortization, but are subject to a provision permitting the Real Estate
Trust to call them prior to maturity. The weighted average interest rates were
10.1% at September 30, 2001 and 2000. During fiscal 2001 and 2000, the Real
Estate Trust sold notes amounting to approximately $9.3 and $10.2 million.

In March 1998, the Real Estate Trust issued $200.0 million aggregate principal
amount of the 9 3/4% Senior Secured Notes. These Notes are nonrecourse
obligations of the Real Estate Trust and are secured by a first priority
perfected security interest in 8,000 shares, or 80% of the issued and
outstanding common stock of the bank, which constitute all of the bank common
stock held by the Real Estate Trust.

In fiscal 1995, the Real Estate Trust established a $15.0 million secured
revolving credit line with an unrelated bank. This facility was for an initial
two-year period subject to extension for one or more additional one-year terms.
In fiscal 1997, the facility was increased to $20.0 million and was renewed for
an additional two-year period. In September 1999, this facility was increased to
$50.0 million and its term was set at three years with provisions for extending
the term annually. The current maturity date for this line is September 29,
2002. This facility is secured by a portion of the Real Estate Trust's ownership
in Saul Holdings Partnership and Saul Centers. Interest is computed by reference
to a floating rate index. At September 30, 2001, the Real Estate Trust had
borrowings under the facility of $2.5 million and unrestricted availability of
$35.4 million. At September 30, 2001 the interest rate under this facility was
4.91%.

In fiscal 1996, the Real Estate Trust established an $8.0 million revolving
credit line with an unrelated bank, secured by a portion of the Real Estate
Trust's ownership interest in Saul Holdings Partnership. This facility was
initially for a one-year term, after which any outstanding loan amount would
amortize over a two-year period. During fiscal 1997, 1998 and 2000, the line of
credit was increased to $10.0, $20.0 and $25.0 million. The current maturity
date for this line is November 15, 2003. Interest is computed by reference to a
floating rate index. At September 30, 2001, the Real Estate Trust had no
outstanding borrowings and unrestricted availability was $22.8 million. At
September 30, 2001 the interest rate under this facility was 4.66%.

The maturity schedule for the Real Estate Trust's outstanding debt at September
30, 2001 for the fiscal years commencing October 1, 2001 is set forth in the
following table.

                             Debt Maturity Schedule
                                 (In thousands)
         --------------------------------------------------------------
                                    Notes       Notes
             Fiscal     Mortgage  Payable --  Payable --
              Year       Notes     Secured    Unsecured        Total
         ------------- --------- ----------- ----------- --------------
              2002     $ 33,162    $  2,500    $  8,022     $  43,684
              2003       27,296         --       11,681        38,977
              2004        9,008         --       11,482        20,490
              2005       13,604         --        8,157        21,761
              2006       94,406         --        5,523        99,929
           Thereafter   148,274     200,000       5,852       354,126
                       --------- ----------- ----------- --------------
             Total     $325,750    $202,500    $ 50,717     $ 578,967
         --------------------------------------------------------------
Of the $325.8 million of mortgage notes outstanding at September 30, 2001,
$258.6 million was nonrecourse to the Real Estate Trust.

5.  LONG-TERM LEASE OBLIGATIONS - REAL ESTATE TRUST

The Real Estate Trust has no minimum future rental commitments and no long term
leases.

6.  INCOME FROM COMMERCIAL PROPERTIES - REAL ESTATE TRUST

Income from commercial properties includes minimum rent arising from
noncancelable commercial leases. Minimum rent for fiscal years 2001, 2000, and
1999 amounted to $37.0, $32.1 and $23.2 million. Future minimum rentals as of
September 30, 2001 under noncancelable leases are as follows:

            Fiscal Year                                   (In thousands)
            ------------------------------------------------------------
                 2002                                          $ 31,188
                 2003                                            28,459
                 2004                                            24,680
                 2005                                            20,925
                 2006                                            17,065
              Thereafter                                         70,610
                                                             -----------
                Total                                          $192,927
            ------------------------------------------------------------

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, L.L.C.,
formerly 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
four Trustees of the Trust are also officers and/or directors of Saul Co. The
Advisor is paid a fixed monthly fee which is subject to annual review by the
Trustees. The monthly fee was $363,000 during fiscal 2001, $349,000 during
fiscal 2000, and $337,000 during fiscal 1999. The advisory contract has been
extended until September 30, 2002, and will continue thereafter unless canceled
by either party at the end of any contract year. Certain loan agreements
prohibit termination of this contract.

Saul Co. and B.F. Saul Property Company ("Saul Property Co."), formerly known as
Franklin Property Company, a wholly-owned subsidiary of Saul Co., provide
services to the Real Estate Trust through commercial property management and
leasing, hotel management, development and construction management, and
acquisitions, sales and financings of real property. Fees paid to Saul Co. and
Saul Property Co. amounted to $7.4, $7.2 and $5.7 million in fiscal 2001, 2000
and 1999.

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

The Real Estate Trust 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 $93,000, $102,000 and $120,000 in
fiscal 2001, 2000 and 1999.

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 $171,000,
$200,000 and $167,000 in fiscal 2001, 2000 and 1999.

At October 1, 1999, the Real Estate Trust had an unsecured note receivable from
the Saul Co. with an outstanding balance of $13.8 million. During fiscal 2001
and 2000, curtails of $4.0 and $3.8 million were paid by the Saul Co. Interest
on the loans is computed by reference to a floating rate index. At September 30,
2001, the total due the Real Estate Trust was $6.0 million in principal and
$1.75 million in deferred interest. Interest accrued on these loans amounted to
$0.7, $1.1 and $1.1 million during fiscal 2001, 2000 and 1999.

REMUNERATION OF TRUSTEES AND OFFICERS

For fiscal years 2001, 2000, and 1999, the Real Estate Trust paid the Trustees
approximately $94,000 each year 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 four received payments for their services as directors of the
bank. Four of the Trustees and all of the officers of the Real Estate Trust
receive compensation from Saul Co. as directors and/or officers.

SAUL HOLDINGS LIMITED PARTNERSHIP AND SAUL CENTERS, INC.

The Real Estate Trust accounts for these investments under the equity method.
The Real Estate Trust's share of earnings for fiscal 2001, 2000 and 1999 was
$8.3, $7.7 and $6.1 million. See Note 2.

OTHER TRANSACTIONS

The Real Estate Trust leases space to the bank and Saul Property Co. at two of
its income-producing properties. Minimum rents and expense recoveries paid by
these affiliates amounted to approximately $4.0, $2.7 and $0.3 million in fiscal
2001, 2000 and 1999.

8. LOANS HELD FOR SALE - THE BANK

Loans held for sale are composed of the following:

(In thousands)                              September 30,
                           ------------------------------------------------
                                   2001                      2000
                           ----------------------    ----------------------
Single-family residential          $     233,359             $     116,480
Home improvement and
   related loans                          12,724                     9,628
                           ----------------------    ----------------------
Total                              $     246,083             $     126,108
                           ======================    ======================

9. LOANS HELD FOR SECURITIZATION AND SALE - THE BANK

At September 30, 2001 and 2000, loans held for securitization and sale totaled
$282.0 and $70.0 million, respectively, and were composed of automobile loans.

10. INVESTMENT SECURITIES - THE BANK

At September 30, 2001 and 2000, all investment securities are classified as held-to-maturity.  Gross unrealized holding
gains and losses on the bank's investment securities at September 30, 2001 and 2000 are as follows:
(In thousands)                                                        Gross                  Gross
                                                                    Unrealized             Unrealized          Aggregate Fair
                                            Amortized Cost        Holding Gains          Holding Losses            Value
                                           -----------------     -----------------      -----------------     -----------------
September 30, 2001
------------------
   U.S. Government securities:
      Original maturity after
      one year, but within five years      $         45,794      $            387                $     -            $   46,181
                                           =================     =================      =================     =================

September 30, 2000
------------------
   U.S. Government securities:
      Original maturity after
      one year, but within five years      $         45,648             $      84        $         (173)            $   45,559
                                           =================     =================      =================     =================

There were no sales of investment securities during the years ended September
30, 2001, 2000 and 1999.

11. MORTGAGE-BACKED SECURITIES - THE BANK

At September 30, 2001 and 2000, 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, 2001 and 2000 are as follows:

(In thousands)                                                 Gross Unrealized       Gross Unrealized
                                                                    Holding            Holding Losses            Aggregate
                                        Amortized Cost               Gains                                          Fair
                                                                                                                   Value
                                       ------------------      ------------------     ------------------     ------------------
September 30, 2001
   FNMA                                      $   295,712              $    2,295             $   (2,354)           $   295,653
   FHLMC                                         909,429                  12,536                 (1,608)               920,357
   Private label, AAA-rated                      269,354                   5,517                 (1,046)               273,825
                                       ------------------      ------------------     ------------------     ------------------
        Total                               $  1,474,495              $   20,348             $   (5,008)          $  1,489,835
                                       ==================      ==================     ==================     ==================

September 30, 2000
   FNMA                                      $   349,258               $      84             $  (19,171)           $   330,171
   FHLMC                                         170,894                     745                 (2,007)               169,632
   Private label, AAA-rated                      522,192                  10,657                (11,555)               521,294
   Private label, AA-rated                         4,465                      -                     (22)                 4,443
                                                               ------------------
                                       ------------------                             ------------------     ------------------
        Total                               $  1,046,809              $   11,486             $  (32,755)          $  1,025,540
                                       ==================      ==================     ==================     ==================

Accrued interest receivable on mortgage-backed securities totaled $8.3 and $5.6
million at September 30, 2001 and 2000, respectively, and is included in other
assets in the Consolidated Balance Sheets.

12. LOANS AND LEASES RECEIVABLE - THE BANK

Loans receivable is composed of the following:

(In thousands)                                                                   September 30,
                                                                     --------------------------------------
                                                                          2001                   2000
                                                                     ----------------       ---------------
Single-family residential                                                $ 4,555,814           $ 4,896,439
Home equity                                                                  372,095               274,355
Real estate construction and ground                                          472,489               507,461
Commercial real estate and  multifamily                                       30,703                39,917
Commercial                                                                 1,376,582             1,015,146
Automobile                                                                   361,930               719,276
Subprime automobile                                                          420,658               620,588
Automobile leasing                                                         1,124,106               568,091
Home improvement and related loans                                           100,494                77,345
Overdraft lines of credit and
    other consumer                                                            36,356                31,608
                                                                     ----------------       ---------------
                                                                           8,851,227             8,750,226
                                                                     ----------------       ---------------

Less:
 Undisbursed portion of loans                                                812,325               630,205
 Unearned discounts and net
     deferred loan origination costs                                         (42,611)              (39,028)
Allowance for losses on loans and leases                                      63,018                54,018
                                                                     ----------------       ---------------
                                                                             832,732               645,195
                                                                     ----------------       ---------------
   Total                                                                 $ 8,018,495           $ 8,105,031
                                                                     ================       ===============

The bank serviced loans owned by others amounting to $7.4 and $6.4 billion at
September 30, 2001 and 2000, respectively.

Accrued interest receivable on loans totaled $39.0 and $43.4 million at
September 30, 2001 and 2000, respectively, and is included in other assets in
the Consolidated Balance Sheets.

13. REAL ESTATE HELD FOR INVESTMENT OR SALE - THE BANK

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

                                                                                                      September 30,
                                                                                             ---------------------------------
(In thousands)                                                                                   2001               2000
                                                                                             --------------    ---------------

Real estate held for investment (net of allowance for losses
 of $202 for both periods)                                                                         $   925            $   925
Real estate held for sale (net of allowance for losses of
 $85,152 and $80,752, respectively)                                                                 30,779             48,461
                                                                                             --------------    ---------------
Total real estate held for investment or sale                                                     $ 31,704           $ 49,386
                                                                                             ==============    ===============

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

                                                                                       Year Ended September 30,
                                                                         -----------------------------------------------------
(In thousands)                                                                2001               2000               1999
                                                                         ---------------     --------------    ---------------
Provision for losses                                                         $  (4,200)          $  (1,400)          $   -
Net gain (loss) from operating properties                                          774                (260)            1,519
Net gain on sales                                                                6,241                 137            32,530
                                                                         ---------------     --------------    ---------------
     Total gain (loss)                                                        $  2,815           $  (1,523)        $  34,049
                                                                         ===============     ==============    ===============

14. ALLOWANCE FOR LOSSES - THE BANK

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

(In thousands)                                            Loans and
                                                            Leases
                                                          Receivable
                                                       ----------------

Balance, September 30, 1998                                 $   60,157
   Provision for losses                                         22,880
   Charge-offs                                                 (26,774)
   Recoveries                                                    1,876
                                                       ----------------
Balance, September 30, 1999                                     58,139
   Provision for losses                                         49,930
   Charge-offs                                                 (58,883)
   Recoveries                                                    4,832
                                                       ----------------
Balance, September 30, 2000                                     54,018
   Provision for losses                                         67,852
   Charge-offs                                                 (68,220)
   Recoveries                                                    9,368
                                                       ----------------
Balances, September 30, 2001                                $   63,018
                                                       ================

The allowance for losses at September 30, 2001 is based on management's
estimates of the amount of allowance required to reflect the losses incurred in
the loan and lease portfolio based on circumstances and conditions known at the
time. As adjustments to the allowance become necessary, provisions for losses
are reported in operations in the periods they are determined to be necessary.

15. ASSET-BACKED TRANSACTIONS - THE BANK

The bank periodically sells various receivables through asset-backed
securitizations, in which receivables are transferred to trusts, and
certificates are sold to investors.

The bank sold automobile loan receivables and issued notes in the amount of
$804.9 million during the year ended September 30, 2001 and recognized gains of
$27.9 million. The bank sold automobile loan receivables and issued notes in the
amount of $668.1 million during the year ended September 30, 2000 and recognized
gains of $4.6 million. The bank did not sell automobile loan receivables during
the year ended September 30, 1999. The outstanding trust certificate balances
were $1.2 billion at September 30, 2001, $1.3 million of which represents
subordinate classes of certificates retained by the bank. The outstanding trust
certificate balances were $857.8 million at September 30, 2000, $3.5 million of
which represents subordinate classes of certificates retained by the bank. The
retained certificates were classified as trading securities at September 30,
2001 and 2000 and had carrying values of $1.2 million and $3.4 million,
respectively. See Summary of Significant Accounting Policies - The Bank. The
bank continues to service the underlying loans related to these transactions.
See Note 27.

The bank did not sell any home equity credit line receivables into new trusts
during the years ended September 30, 2001 and 2000. The bank sold home equity
credit line receivables of $46.2, $64.4 and $79.4 million into existing trusts
and recognized gains of $1.8, $2.3 and $2.9 million during the years ended
September 30, 2001, 2000 and 1999, respectively. The outstanding trust
certificate balances were $86.2 million at September 30, 2001 and $141.2 million
at September 30, 2000. The bank continues to service the underlying loans
related to these transactions. See Note 27.

The bank did not sell any home loan receivables into new trusts during the years
ended September 30, 2001, 2000 and 1999. The bank sold home loan receivables of
$2.6 million into an existing trust during the year ended September 30, 2001 and
did not recognize a gain or loss on this transaction. The bank sold home loan
receivables of $1.9 million into an existing trust during the year ended
September 30, 2000 and recognized a gain of $27,000. The bank sold home loan
receivables of $1.8 million into an existing trust during the year ended
September 30, 1999 and did not recognize a gain or loss on this transaction. The
outstanding trust certificate balances were $57.6 million at September 30, 2001
and $82.1 million at September 30, 2000. The bank continues to service the
underlying loans related to these transactions. See Note 27.

The bank continues to service, and receive servicing fees on, the outstanding
balance of securitized receivables. The bank also retains rights to future cash
flows arising from the receivables after the expenses of the securitization
trust are paid. With the securitization and sale of receivables transactions,
the bank typically retains subordinated interests, which include an
interest-only strip receivable. Gain or loss on sale of the receivables depends
in part on the previous carrying amount of the financial assets involved in the
transfer, allocated between the assets sold and the retained interests based on
their relative fair value at the date of transfer. To obtain fair values, quoted
market prices are used if available. However, quotes are generally not available
for retained interests, so the bank generally estimates fair value based on the
estimated present value of the future residual cash flows from securitized and
sold receivables, using management's best estimates of the key assumptions -
credit losses, prepayment speeds and discount rates commensurate with the risks
involved.

Securitization and sale revenue on a managed basis includes the gross initial
gains on current securitization and sale transactions less amortization of
interest-only strips recognized in connection with current and prior period
securitization and sale transactions. The following table represents the
components of securitization and sale related income on a managed basis which is
included in servicing and securitization income in the Consolidated Statements
of Operations:

                                                                                     Year Ended
                    (In thousands)                                               September 30, 2001
                                                                            -----------------------------
                    Gross initial gains                                                   $       33,308
                    Amortization                                                                  (4,842)
                                                                            -----------------------------
                    Securitization and sale related income                                $       28,466
                                                                            =============================

At September 30, 2001, key economic assumptions and the sensitivity of the
current fair value of interest-only strip receivables to an immediate 10 percent
and 20 percent adverse change in those assumptions are as follows:

(Dollars in thousands)                                                   Automobile                       Home Equity/
                                                                                                        Home Improvement
                                                                 ----------------------------      ---------------------------

Carrying value (fair value)                                                        $43,260                          $3,886
Weighted average life (in years)                                                      1.52                            2.00

Prepayment speed assumption (annual rate)                                             1.46%(1)                       35.92%(2)
   Impact on fair value at 10% adverse change                                      $(1,449)                        $(1,029)
   Impact on fair value at 20% adverse change                                      $(2,803)                        $(1,408)

Expected credit losses (annual rate)                                                  0.89%                           0.30%
   Impact on fair value at 10% adverse change                                      $(1,594)                          $(789)
   Impact on fair value at 20% adverse change                                      $(3,190)                        $(1,142)

Residual cash flows discount rate (annual)                                            9.44%                           8.88%
   Impact on fair value at 10% adverse change                                        $(617)                          $(512)
   Impact on fair value at 20% adverse change                                      $(1,223)                          $(588)

Key economic assumptions used in measuring interest-only strip receivables at
the date of securitizations completed during fiscal year 2001 are as follows:

Prepayment speed assumption (annual rate)                                             1.55%(1)                              -
Expected credit losses (annual rate)                                                  0.99%                                 -
Residual cash flows discount rate (annual)                                           10.00%                                 -

(1)    Represents absolute prepayment model or ABS - an assumed rate of prepayment each month relative to the original number
       of automobile loans in a pool.
(2)    Represents Constant Prepayment Rate.

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

The following table summarizes certain cash flows received from securitization
trusts during the year ended September 30, 2001:

                   (In thousands)
                   Proceeds from new securitizations                                   $  804,861
                   Servicing fees received                                                 11,991
                   Other cash flows received on retained interests                         28,837

Portfolio balances, delinquent amounts and net credit losses for securitized
loans for the year ended September 30, 2001 were as follows:

                                                                September 30, 2001
                                                 -------------------------------------------------
(In thousands)                                     Total Principal          Principal Amount of              Year Ended
                                                                          Loans Past Due 90 Days
                                                 Amount of Loans and            or More or               September 30, 2001
                                                        Leases                Non-Performing              Net Credit Losses
                                                 ---------------------    ------------------------    --------------------------

Automobile                                       $         1,171,618      $               11,380     $                  10,084
Home equity, home improvement and
 related loans                                               149,280                       1,729                         1,124
                                                 ---------------------    ------------------------    --------------------------
Total                                             $        1,320,898      $               13,109      $                 11,208
                                                 =====================    ========================    ==========================

16. PROPERTY AND EQUIPMENT - THE BANK

Property and equipment is composed of the following:

                                                                Estimated
                                                                 Useful                          September 30,
                                                                                    -----------------------------------------
(Dollars in thousands)                                            Lives                   2001                    2000
                                                             ----------------       -----------------        ----------------
Land                                                                -                     $   46,948              $   46,813
Construction in progress                                            -                         29,885                  97,569
Buildings and improvements                                     10-45 years                   268,956                 117,220
Leasehold improvements                                         5-20 years                    112,069                 103,925
Furniture and equipment                                        5-10 years                    198,747                 188,918
Automobiles                                                     3-5 years                      3,162                   4,000
                                                                                    -----------------        ----------------
                                                                                             659,767                 558,445
Less:
   Accumulated depreciation and amortization                                                 221,972                 195,976
                                                                                    -----------------        ----------------
       Total                                                                              $  437,795              $  362,469
                                                                                    =================        ================

Depreciation and amortization expense amounted to $34.0, $32.2 and $33.1 million
for the years ended September 30, 2001, 2000 and 1999, respectively. Capitalized
interest amounted to $4.7, $2.1 and $0.4 million during the years ended
September 30, 2001, 2000 and 1999, respectively.

17. LEASES - THE BANK

The bank has noncancelable, long-term leases for office premises and retail
space which have a variety of terms expiring from fiscal 2002 to 2021 and ground
leases which have terms expiring from fiscal 2029 to 2081. These leases are
accounted for as operating leases. Some of the leases are subject to rent
adjustments in the future based upon changes in the Consumer Price Index and
some also contain renewal options. The following is a schedule by years of
future minimum lease payments required at September 30, 2001:

                                 Year Ending                (In thousands)
                                September 30,
                            -----------------------
                                     2002                        $ 23,922
                                     2003                          22,827
                                     2004                          21,992
                                     2005                          21,151
                                     2006                          20,470
                                  Thereafter                      136,620
                                                       -------------------
                                    Total                       $ 246,982
                                                       ===================

Rent expense totaled $26.9, $23.2 and $17.9 million for the years ended
September 30, 2001, 2000 and 1999, respectively.

18. DEPOSIT ACCOUNTS - THE BANK

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

                                                                                    September 30,
                                                       -------------------------------------------------------------------------
                                                                     2001                                  2000
                                                       ----------------------------------   ------------------------------------
(Dollars in thousands)                                                      Weighted                           Weighted Average
                                                                             Average
                                                            Amount            Rate              Amount               Rate
                                                       ----------------- ----------------   ----------------   -----------------
Demand accounts                                        $        642,490         -            $      559,320           -
NOW accounts                                                  1,428,486       0.44%               1,289,883         0.88%
Money market deposit accounts                                 1,570,297       2.83%               1,156,829         3.98%
Statement savings accounts                                      780,655       1.26%                 779,344         1.90%
Other deposit accounts                                          117,207       0.99%                 113,245         1.66%
Certificate accounts, less than $100                          2,361,174       5.20%               2,524,769         6.21%
Certificate accounts, $100 or more                              662,161       4.57%                 614,399         6.30%
                                                       -----------------                    ----------------
    Total                                                   $ 7,562,470       2.84%             $ 7,037,789         3.83%
                                                       =================                    ================

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

Interest expense on deposit accounts is composed of the following:

                                                                               Year Ended September 30,
                                                                -------------------------------------------------------
(In thousands)                                                       2001                2000                1999
                                                                ---------------     ---------------      --------------
NOW accounts                                                         $   7,773           $  10,585           $  11,598
Money market deposit accounts                                           48,744              39,351              36,395
Statement savings accounts                                              11,963              15,684              19,226
Certificate accounts                                                   177,619             154,738              77,084
Other deposit accounts                                                   1,507               1,905               2,042
                                                                ---------------     ---------------      --------------
    Total                                                           $  247,606          $  222,263          $  146,345
                                                                ===============     ===============      ==============

Outstanding certificate accounts at September 30, 2001 mature in the years
indicated as follows:

                                 Year Ending               (In thousands)
                                September 30,
                            -----------------------
                                     2002                      $2,709,720
                                     2003                         238,064
                                     2004                          29,091
                                     2005                          33,081
                                     2006                          13,379
                                                        ------------------
                                    Total                      $3,023,335
                                                        ==================

At September 30, 2001, certificate accounts of $100,000 or more have contractual
maturities as indicated below:

                                      (In thousands)
       Three months or less                                      $ 324,722
       Over three months through six months                        123,838
       Over six months through 12 months                           174,926
       Over 12 months                                               38,675
                                                             --------------
          Total                                                  $ 662,161
                                                             ==============

19. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER
               SHORT-TERM BORROWINGS - THE BANK

Short-term borrowings are summarized as follows:

                                                                                       September 30,
                                                                ------------------------------------------------------------
(Dollars in thousands)                                                2001                 2000                  1999
                                                                -----------------     ----------------      ----------------
Securities sold under repurchase agreements:
   Balance at year end                                                $  110,837           $  369,628            $  526,571
   Average amount outstanding during the year                            397,842              490,333               371,660
   Maximum amount outstanding at any month end                           534,170              647,779               526,571
   Amount maturing within 30 days                                        110,837              369,628               526,571
   Weighted average interest rate during the year                          5.74%                6.27%                 5.22%
   Weighted average interest rate on year end balances                     3.21%                6.74%                 5.78%

Other short-term borrowings:
   Balance at year end                                                $  171,513           $  170,414            $  104,200
   Average amount outstanding during the year                            169,820              137,607                99,593
   Maximum amount outstanding at any month end                           181,942              170,414               134,313
   Amount maturing within 30 days                                        171,513              170,414               104,200
   Weighted average interest rate during the year                          4.39%                5.42%                 4.46%
   Weighted average interest rate on year end balances                     2.18%                5.87%                 4.62%

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 upon
the maturities of the agreements.

At September 30, 2001, the bank had pledged mortgage-backed securities with a
book value of $200.5 million to secure certain other short-term borrowings. Also
at September 30, 2001, the bank had pledged, but did not borrow against,
automobile loans with a total principal balance of $299.9 million and commercial
loans with a total principal balance of $929.8 million.

20. FEDERAL HOME LOAN BANK ADVANCES - THE BANK

At September 30, 2001, advances from the Federal Home Loan Bank of Atlanta
("FHLB") totaled $2.2 billion. The advances bear interest at a weighted average
interest rate of 4.99%, which is fixed for the term of the advances, and mature
over varying periods between October 2001 and August 2016.

Under a Specific Collateral Agreement with the FHLB, advances are secured by the
bank's FHLB stock, qualifying first mortgage loans with a total principal
balance of $3.1 billion and certain mortgage-backed securities with a book value
of $396.7 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, 2001 advances is
available to secure additional advances from the FHLB, subject to its
collateralization guidelines.

21. CAPITAL NOTES - SUBORDINATED - THE BANK

Capital notes, which are subordinated to the interest of deposit account holders
and other senior debt, are composed of the following:
                                                       Issue                       September 30,                 Interest
                                                                           -------------------------------
(Dollars in thousands)                                  Date                   2001              2000              Rate
                                               -----------------------     -------------     -------------     --------------

Subordinated debentures due 2005               November 23, 1993               $150,000          $150,000              9 1/4%
Subordinated debentures due 2008               December 3, 1996                 100,000           100,000              9 1/4%
                                                                           -------------     -------------
         Total                                                                 $250,000          $250,000
                                                                           =============     =============

The 9 1/4% Subordinated Debentures due 2005 (the "1993 Debentures") are subject
to redemption at any time on or after December 1, 1998, at the option of the
bank, in whole or in part, at the following redemption prices plus accrued and
unpaid interest:

         If redeemed during the
       12-month period beginning                   Redemption
              December 1,                            Price
                                                 (In thousands)
      -----------------------------           ---------------------
               2000.........................             $ 102.775
               2001.........................             $ 101.850
               2002.........................             $ 100.925
               2003 and thereafter..........             $ 100.000

The 9 1/4% Subordinated Debentures due 2008 (the "1996 Debentures") are subject
to redemption at any time on or after December 1, 2001, at the option of the
bank, in whole or in part, at the following redemption prices plus accrued and
unpaid interest:

          If redeemed during the
        12-month period beginning                   Redemption
               December 1,                            Price
                                                  (In thousands)
       -----------------------------           ---------------------
                2001.........................             $ 104.625
                2002.........................             $ 103.700
                2003.........................             $ 102.775
                2004.........................             $ 101.850
                2005.........................             $ 100.925
                2006 and thereafter..........             $ 100.000

The indenture pursuant to which the 1993 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) 662/3% 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 13% Preferred Stock (as defined below) 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 indenture pursuant to which the 1996 Debentures were sold provides that the
proposed dividend may not exceed the sum of the restrictions discussed above for
the 1993 Indenture and the aggregate liquidation preference of the new series of
preferred stock of the bank, if issued in exchange for the outstanding REIT
Preferred Stock (as defined below). See Note 22.

The bank received OTS approval to include the principal amount of the 1996
Debentures and the 1993 Debentures in the bank's supplementary capital for
regulatory capital purposes.

Deferred debt issuance costs, net of accumulated amortization, amounted to $6.3
and $6.9 million at September 30, 2001 and 2000, respectively, and are included
in other assets in the Consolidated Balance Sheets.

22. REAL ESTATE INVESTMENT TRUST SUBSIDIARY - THE BANK

On December 3, 1996, a new real estate investment trust subsidiary of the bank
(the "REIT Subsidiary") sold $150,000 of its Noncumulative Exchangeable
Preferred Stock, Series A, par value $5.00 per share (the "REIT Preferred
Stock"), and received net cash proceeds of $144.0 million. Cash dividends on the
REIT Preferred Stock are payable quarterly in arrears at an annual rate of
10 3/8%. The liquidation value of each share of REIT Preferred Stock is $50,000
plus accrued and unpaid dividends. Except under certain limited circumstances,
the holders of the REIT Preferred Stock have no voting rights. The REIT
Preferred Stock is automatically exchangeable for a new series of Preferred
Stock of the bank upon the occurrence of certain events.

The REIT Preferred Stock is redeemable at the option of the REIT subsidiary at
any time on or after January 15, 2007, in whole or in part, at the following per
share redemption prices plus accrued and unpaid dividends:

        If redeemed during the
      12-month period beginning                Redemption
             January 15,                          Price
                                             (In thousands)
     -----------------------------      --------------------------
              2007....................                  $  52.594
              2008....................                  $  52.075
              2009....................                  $  51.556
              2010....................                  $  51.038
              2011....................                  $  50.519
              2012 and thereafter.....                  $  50.000

The bank received OTS approval to include the proceeds from the sale of the REIT
Preferred Stock in the core capital of the bank for regulatory capital purposes
in an amount up to 25% of the bank's core capital. The net cash proceeds from
the sale of the REIT Preferred Stock are reflected as minority interest in the
Consolidated Balance Sheets. Dividends on the REIT Preferred Stock are
presented as a reduction of net income in the Consolidated Statements of
Operations.

23. PREFERRED STOCK - THE BANK

Cash dividends on the bank's Noncumulative Perpetual Preferred Stock, Series A
(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 core capital and
has not objected to the payment of dividends on the Preferred Stock, provided
certain conditions are met. 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 $25,000 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.

The Preferred Stock is redeemable by the bank at its option at any time on and
after May 1, 2003, in whole or in part, at the following per share redemption
prices in cash, plus, in each case, an amount in cash equal to accrued and
unpaid dividends for the then-current dividend period:

                If redeemed during the
              12-month period beginning                Redemption
                        May 1,                            Price
                                                     (In thousands)
             -----------------------------      --------------------------
                      2003....................                  $  27.250
                      2004....................                  $  27.025
                      2005....................                  $  26.800
                      2006....................                  $  26.575
                      2007....................                  $  26.350
                      2008....................                  $  26.125
                      2009....................                  $  25.900
                      2010....................                  $  25.675
                      2011....................                  $  25.450
                      2012....................                  $  25.225
                      2013 and thereafter.....                  $  25.000

24. 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 $8.9, $8.0 and $7.2 million for the years ended September 30,
2001, 2000 and 1999, 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.

25. REGULATORY MATTERS - THE BANK

The bank's regulatory capital requirements at September 30, 2001 were a 1.5%
tangible capital requirement, a 4.0% core capital requirement and an 8.0% total
risk-based capital requirement. Under the OTS "prompt corrective action"
regulations, the bank must maintain minimum leverage, tier 1 risk-based and
total risk- based capital ratios of 4.0%, 4.0% and 8.0%, respectively, to meet
the ratios established for "adequately capitalized" institutions. At September
30, 2001, the bank was in compliance with its tangible, core and total
risk-based regulatory capital requirements and exceeded the capital standards
established for "well capitalized" institutions under the "prompt corrective
action" regulations. The information below is based upon the bank's
understanding of the applicable regulations and related interpretations.

Regulatory Capital
(Dollars in thousands)

                                                                                       Minimum                       Excess
                                                         Actual                 Capital Requirement                Capital
                                               ---------------------------  ---------------------------  ---------------------------
                                                                 As a %                       As a %                        As a %
                                                  Amount        of Assets       Amount       of Assets       Amount        of Assets
                                               --------------   ----------  ---------------  ----------  ---------------   ---------

Stockholders' equity per financial statements  $     525,424
    Minority interest in REIT Subsidiary (1)         144,000
    Accumulated other comprehensive loss (2)           2,087
                                               --------------
                                                     671,511

Adjustments for tangible and core capital:
    Intangible assets                                (48,990)
    Non-includable subsidiaries  (3)                  (1,414)
    Non-qualifying purchased/originated loan
     servicing rights                                 (3,592)
                                               --------------
       Total tangible capital                        617,515        5.44%   $      170,348       1.50%   $      447,167       3.94%
                                               --------------   ==========  ===============  ==========  ===============   =========

       Total core capital (4)                        617,515        5.44%   $      454,262       4.00%   $      163,253       1.44%
                                               --------------   ==========  ===============  ==========  ===============   =========

       Tier 1 risk-based capital (4)                 617,515        6.84%   $      361,283       4.00%   $      256,232       2.84%
                                               --------------   ==========  ===============  ==========  ===============   =========

Adjustments for total risk-based capital:
    Subordinated capital debentures                  250,000
    Allowance for general loan and lease
     losses                                           63,018
                                               --------------
       Total supplementary capital                   313,018
                                               --------------
       Total available capital                       930,533
    Equity investments (3)                            (2,365)
                                               --------------
       Total risk-based capital (4)            $     928,168       10.52%   $      722,566       8.00%   $      205,602       2.52%
                                               ==============   ==========  ===============  ==========  ===============   =========

(1) Eligible for inclusion in core capital in an amount up to 25% of the bank's
core capital pursuant to authorization from the OTS.
(2) Under OTS policy, accumulated other comprehensive loss is included in
regulatory capital.
(3) Reflects an aggregate offset of $0.2 million representing the allowance for
general loan losses maintained against the bank's equity investments and
non-includable subsidiaries which, pursuant to OTS guidelines, is available as a
"credit" against the deductions from capital otherwise required for such
investments.
(4) Under the OTS "prompt corrective action" regulations, the standards for
classification as "well capitalized" are a leverage (or "core capital") ratio of
at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0% and a total
risk-based capital ratio of at least 10.0%.

At September 30, 2000, the bank was in compliance with its tangible, core and
total risk-based regulatory capital requirements and exceeded the capital
standards established for "well capitalized" institutions under the "prompt
corrective action" regulations. The information below is based upon the bank's
understanding of the applicable regulations and related interpretations.

                                                                      SEPTEMBER 30, 2000
                                      ------------------------------------------------------------------------------------
(Dollars in thousands)                                                      MINIMUM                       EXCESS
                                                ACTUAL                CAPITAL REQUIREMENT                CAPITAL
                                      ----------- -- ----------     ----------- -- ----------    ----------- --- ---------
                                                                                                                 As a %
                                                     As a %                        As a %                        of
                                        Amount       of Assets        Amount       of Assets       Amount         Assets
                                      -----------    ----------     -----------    ----------    -----------     ---------
Capital per financial statements        $492,406
Minority interest in REIT
  Subsidiary(1)                          144,000
                                      -----------
Adjusted capital                         636,406

Adjustments for tangible and core capital:
Intangible assets                        (50,797)
Non-includable subsidiaries(2)            (1,424)
Non-qualifying purchased/
     originated loan servicing              (188)
                                      -----------
Total tangible capital                   583,997         5.48%        $159,840         1.50%       $424,157         3.98%
                                      -----------    ==========
                                                                    ===========    ==========    ===========     =========
Total core capital(3)                    583,997         5.48%        $426,239         4.00%       $157,758         1.48%
                                      -----------    ==========     ===========    ==========    ===========     =========

Tier 1 risk-based capital(3)             583,997         7.21%        $324,089         4.00%       $259,908         3.21%
                                      -----------    ==========     ===========    ==========    ===========     =========
Adjustments for total risk-based capital:
Subordinated capital debentures          250,000
Allowance for general loan and
      lease losses                        54,018
                                      -----------
    Total supplementary capital          304,018
                                      -----------
    Total available capital              888,015
Equity investments(2)                     (6,463)
                                      -----------
Total risk-based capital(3)            $ 881,552        11.01%        $648,178         8.00%       $233,374         3.01%
                                      ===========    ==========     ===========    ==========    ===========     =========

(1)    Eligible for inclusion in core capital in an amount up to 25% of the
       bank's core capital pursuant to authorization from the OTS.
(2)    Reflects an aggregate offset of $2.0 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)    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%.

At September 30, 2001 and 2000, the bank had $1.6 and $1.6 million,
respectively, in loans to and investments in subsidiaries engaged in activities
impermissible for national banks ("non-includable subsidiaries") which were
fully deducted from all three capital requirements. At September 30, 2001 and
2000, the bank also had an equity investment with a balance, after subsequent
valuation allowances, of $2.4 and $8.3 million, respectively, which was fully
deducted from total risk-based capital.

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 December 2001, the
bank received from the OTS an extension of the holding periods for certain of
its REO properties through December 19, 2002. The following table sets forth the
bank's REO at September 30, 2001, after valuation allowances of $85.2 million,
by the fiscal year in which the property was acquired through foreclosure.

          Fiscal Year                    (In thousands)
   --------------------------
            1990                              $ 5,134(1)(2)
            1991                               20,247(2)
            1992                                    -
            1993                                    -
            1994                                    -
            1995                                5,054(2)
            1996                                    -
            1997                                    -
            1998                                    -
            1999                                    -
            2000                                    -
            2001                                  344
                                --------------------------
            Total REO                        $ 30,779
                                ==========================

(1) Includes REO with an aggregate net book value of $2.4 million, which the
bank treats as an equity investment for regulatory capital purposes.
(2) Includes REO with an aggregate net book value of $28.1 million, for which
the bank received an extension of the holding periods through December 19, 2002.

26. 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, 2001 is as follows:

                                                         (In thousands)
             Balance, September 30, 2000                      $   4,952
               Additions                                            709
               Reductions                                          (134)
                                                       -----------------
             Balance, September 30, 2001                      $   5,527
                                                       =================
Services:

B. F. Saul Company, which is a shareholder of the Trust, and its subsidiaries
provide certain services to the bank. These services include property
management, insurance brokerage and leasing. Fees for these services were $1.7
million, $850,000 and $35,000 for the years ended September 30, 2001, 2000 and
1999, respectively.

The law firm in which one director of the bank is a senior counsel received
$2.4, $2.1 and $4.7 million for legal services rendered to the bank during the
years ended September 30, 2001, 2000 and 1999, respectively.

For the years ended September 30, 2001, 2000 and 1999, one of the directors of
the bank was paid $100,000, $100,000 and $50,000, respectively, for consulting
services rendered to the bank. Another director of the bank was paid total fees
of $100,000 for each of the years ended September 30, 2001, 2000 and 1999 for
consulting services. A third director of the bank was paid $50,000, $50,000 and
$100,000 for consulting services rendered to the bank for the years ended
September 30, 2001, 2000 and 1999, 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 $3.4, $6.6 and $6.6 million to the
Trust during fiscal 2001, 2000 and 1999, respectively, under the Tax Sharing
Agreement. At September 30, 2001 and 2000, the estimated tax sharing payment
payable to the Trust by the bank was $4.9 and $3.5 million, respectively.

Other:

The bank sold an office building located in McLean, Virginia to its parent
company, the B.F. Saul Real Estate Investment Trust, in December 1999. Because
this transfer was between entities under common control, the $13.5 million of
proceeds in excess of the bank's carrying value, net of related income taxes of
$8.8 million, was accounted for as a capital contribution.

The bank paid $5,.8, $5.2 and $5.0 million for office space leased from or
managed by companies affiliated with the bank or its directors during the years
ended September 30, 2001, 2000 and 1999, respectively.

The Trust, the B. F. Saul Company, Chevy Chase Lake Corporation ("Lake") and Van
Ness Square Corporation, affiliates of the bank, from time to time maintain
interest-bearing deposit accounts with the bank. Those accounts totaled $28.0
and $16.8 million at September 30, 2001 and 2000, respectively. The bank paid
interest on the accounts amounting to $989,000, $736,000 and $716,000 during
fiscal years ended 2001, 2000 and 1999, respectively.

27. 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 contractual or notional amount of these instruments reflect the extent of
involvement the bank has in particular classes of financial instruments. For
interest-rate cap agreements, assets sold with limited recourse and forward
purchase and sale commitments, the contract or notional amounts do not represent
exposure to credit loss in the event of nonperformance by the other party. The
bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.

Commitments to Extend Credit:

The bank had approximately $2.0 billion of commitments to extend credit at
September 30, 2001. 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.

Standby Letters of Credit:

Standby letters of credit are conditional commitments issued by the bank to
guarantee the performance of a customer to a third party. At September 30, 2001,
the bank had issued standby letters of credit in the amount of $56.5 million to
guarantee the performance of and irrevocably assure payment by customers under
construction projects.

Of the total, $34.1 million will expire in fiscal 2002 and the remainder will
expire over time through fiscal 2006. The credit risk involved in issuing
standby letters of credit is essentially the same as that involved in extending
loan commitments to customers. Mortgage-backed securities with a book value of
$2.4 million were pledged as collateral for certain of these letters of credit
at September 30, 2001.

Recourse Arrangements:

The bank is obligated under various recourse provisions (primarily related to
credit losses) related to the securitization and sale of receivables. As a
result of these recourse provisions, the bank maintained restricted cash
accounts and overcollateralization of receivables amounting to $24.3 and $28.5
million, respectively, at September 30, 2001, and $42.1 and $18.9 million,
respectively, at September 30, 2000, both of which are included in other assets
in the Consolidated Balance Sheets. In addition, the bank owned subordinated
automobile receivables-backed securities with carrying values of $1.2 and $3.4
million at September 30, 2001 and 2000, respectively, which were classified as
trading securities in the Consolidated Balance Sheets.

The bank is also obligated under various recourse provisions related to the swap
of single-family residential loans for mortgage-backed securities issued by the
bank. At September 30, 2001, recourse to the bank under these arrangements was
$6.6 million, consisting of restricted cash accounts amounting to $4.2 million
and overcollateralization of receivables of $2.4 million.

The bank is also obligated under a recourse provision related to the servicing
of certain of its residential mortgage loans. The recourse to the bank under
this arrangement was $3.4 million for both September 30, 2001 and 2000.

Derivative Financial Instruments:

Interest-rate cap agreements may be used to limit the bank's exposure to rising
short-term interest rates related to the retained portion of certain of its
asset-backed securitizations. At September 30, 2001, the bank was not a party to
any interest-rate cap agreements.

To manage the potentially adverse impact of interest rate movements on its held
for sale fixed-rate mortgage loan pipeline, the bank hedges its pipeline by
entering into whole loan and mortgage-backed security forward sale commitments
and mortgage-backed security forward purchase 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 purchase commitments are used to purchase specific financial instruments
(whole loans or mortgage-backed securities) at a future date for a specified
price.

At September 30, 2001, the bank had mortgage-backed security forward sale
commitments of $226.3 million and mortgage-backed security forward purchase
commitments of $5.8 million related to its hedging activities. These hedges are
accounted for as cash flow hedges and gains and losses are recorded in other
comprehensive income in the Consolidated Balance Sheets. The total net
unrealized loss in value of cash flow hedges, net of tax, was $2.1 million at
September 30, 2001. In addition, the bank had whole loan forward sale
commitments of $45.4 million at September 30, 2001. Forward commitments
generally settle within 90 days. Gains and losses are deferred and recorded as a
component of the gain on sales of loans at the time the forward sale commitment
matures. Gains and losses on forward purchase commitments are recorded as a
component of the gain on sales of loans in the month the transaction occurs.

The bank owns mortgage servicing rights which are subject to large fluctuations
in their fair value due to changes in the benchmark Treasury index, as well as
changes inherent to mortgage loans such as prepayment speeds, escrow earning
rates, discount rates and returns required by investors. As a result of the
potentially significant risk of these fair value fluctuations, the bank hedges
these changes in fair value in mortgage servicing rights through treasury
futures and options. The bank evaluates the mortgage servicing portfolio daily
at the pool level and monthly at the loan level to insure a high degree of
correlation between hedging instruments and the underlying asset. Management
expects that the cumulative change in the value of the hedging instrument will
be between 80% and 120% of the inverse cumulative change in the fair value of
the hedged mortgage servicing rights asset. The effectiveness of hedging
relationships is assessed on a cumulative basis every three months and whenever
financial statements or earnings are reported by the bank.

At September 30, 2001, the bank had treasury futures representing a notional
amount of $65.0 million, call options on the treasury futures representing a
notional amount of $43.0 million and put options on treasury futures
representing a notional amount of $47.0 million related to its mortgage
servicing rights fair value hedges. At September 30, 2001 the gain on these
hedges was $2.5 million and is included as a reduction to loan expenses on the
Consolidated Statements of Operations and Comprehensive Income.

Concentrations of Credit:

The bank's principal real estate lending market is the metropolitan Washington,
DC area. In addition, a significant portion of the bank's consumer loan
portfolio was generated by customers residing in the metropolitan Washington, DC
area. Service industries and federal, state and local governments employ a
significant portion of the Washington, DC area labor force. Adverse changes in
economic conditions could have a direct impact on the timing and amount of
payments by borrowers.

28. 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. Since
fair value is estimated as of the balance sheet date, the amount which would
actually be realized or paid upon settlement or maturity could be significantly
different. Comparability of fair value amounts among financial institutions may
be difficult due to the wide range of permitted valuation techniques and the
numerous estimates and assumptions which must be made. The estimated fair values
of the bank's financial instruments at September 30, 2001 and 2000 are as
follows:

                                                                                September 30,
                                                  --------------------------------------------------------------------------
                                                                 2001                                   2000
                                                  ------------------------------------   -----------------------------------
(In thousands)                                        Carrying              Fair         Carrying Amount          Fair
                                                       Amount              Value                                 Value
                                                  -----------------    ---------------   -----------------   ---------------
Financial assets:
   Cash, due from banks,
      interest-bearing deposits, federal
      funds sold and securities purchased
      under agreements to resell                      $ 409,995             $ 409,995        $ 428,233            $ 428,233
   Loans held for sale                                  246,083               249,842          126,108              126,577
   Loans held for securitization and sale                32,000                32,000           70,000               70,000
   Trading securities                                     6,690                 6,690            3,380                3,380
   Investment securities                                 45,794                46,181           45,648               45,559
   Mortgage-backed securities                         1,474,495             1,489,835        1,046,809            1,025,540
   Loans and leases receivable, net                   8,268,495             8,366,675        8,105,031            7,993,260
   Other financial assets                               318,715               318,715          327,211              327,211

Financial liabilities:
   Deposit accounts with no stated maturities         4,539,135             4,539,135        3,898,621            3,898,621
   Deposit accounts with stated maturities            3,023,335             2,920,234        3,139,168            3,124,362
   Securities sold under
      repurchase agreements and other
      short-term borrowings and Federal Home
      Loan bank advances                              2,522,948             2,443,395        2,487,013            2,515,551
   Capital notes-subordinated                           243,744(1)            250,000          243,102(1)           235,750
   Other financial liabilities                          383,743               383,743          292,802              292,802

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

(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, 2001 and 2000:

Cash, due from banks, interest-bearing deposits, federal funds sold and
securities purchased under agreements to resell: Carrying amount approximates
fair value.

Loans held for 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.

Trading securities: Fair value is equal to carrying value.

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 and leases receivable, net: Fair value of certain homogeneous groups of
loans (e.g., single-family residential, automobile loans, home improvement loans
and fixed-rate commercial and multifamily loans) is estimated using discounted
cash flow analyses based on contractual repayment schedules and management's
estimate of future prepayment rates. The discount rates used in these analyses
are based on either the interest rates paid on U.S. Treasury securities of
comparable maturities adjusted for credit risk and non-interest operating costs,
or the interest rates currently offered by the bank for loans with similar terms
to borrowers of similar credit quality. For loans which reprice frequently at
market rates (e.g., home equity, variable-rate commercial and multifamily, real
estate construction and ground loans), the carrying amount approximates fair
value. The fair value of the bank's loan portfolio as presented above does not
include the value of established credit line customer relationships, or the
value relating to estimated cash flows from future receivables and the
associated fees generated from existing customers.

Other financial assets: The carrying amount of Federal Home Loan Bank stock,
accrued interest receivable, interest-bearing deposits maintained pursuant to
various asset securitizations and other short-term receivables approximates fair
value. Interest-only strips and derivative financial instruments are carried at
fair value.

Deposit accounts with no stated maturities: Deposit liabilities payable on
demand, consisting of NOW accounts, money market deposits, statement savings and
other deposit accounts, are assumed to have an estimated fair value equal to
carrying value. The indicated fair value does not consider the value of the
bank's established deposit customer relationships.

Deposit accounts with stated maturities: Fair value of fixed-rate certificates
of deposit is estimated based on discounted cash flow analyses using the
remaining maturity of the underlying accounts and interest rates currently
offered on certificates of deposit with similar maturities.

Securities sold under repurchase agreements and other short-term borrowings and
Federal Home Loan Bank advances: For these borrowings which either reprice
frequently to market interest rates or are short-term in duration, the carrying
amount approximates fair value. 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 1993 Debentures and the 1996
Debentures is based on quoted market prices.

Other financial liabilities: The carrying amount of custodial accounts, amounts
due to banks, accrued interest payable, notes payable and other short-term
payables approximates fair value.

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.

29. LITIGATION - THE BANK

During the normal course of business, the bank is involved in certain
litigation, including litigation arising out of its lending activities, the
enforcement or defense of the priority of its security interests, the continued
development and marketing of certain of its real estate properties and certain
employment claims. Although the amounts claimed in some of these suits in which
the bank is a defendant may be material, the bank denies liability and, in the
opinion of management, litigation which is currently pending will not have a
material impact on the financial condition or future operations of the bank.

30. 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 from the resolution of these matters.

31. MINORITY INTEREST - THE TRUST

At September 30, 2001 and 2000, minority interest held by affiliates of $86.3
and $79.0 million represent the 20% minority interest in the bank's common
shares.

Minority interest -- other consists of the following:

                                                      September 30,
                                          --------------------------------------
(In thousands)                                 2001                   2000
----------------------------------------  ----------------       ---------------
Preferred Stock of Chevy Chase's
  REIT subsidiary (See Note 22)           $       144,000        $      144,000
Chevy Chase's Preferred Stock
  (See Note 23)                                    74,307                74,307
                                          ----------------       ---------------
Total minority interest -- other          $       218,307        $      218,307
                                          ================       ===============

The proceeds paid by the Real Estate Trust to the bank for Tysons Park Place
exceeded the bank carrying value. The $2.7 million minority interest in
capital contribution shown on the Consolidated Statements of Comprehensive
Income and Changes in Shareholders' Equity (Deficit) for fiscal 2000 represents
the 20% minority interest in the excess of proceeds over the carrying value, net
of related income taxes.

32. INCOME TAXES - THE TRUST

The Trust voluntarily terminated its qualification as a real estate investment
trust under the Internal Revenue Code during fiscal 1978.

The provisions for income taxes for the years ended September 30, 2001, 2000 and
1999, consist of the following:

                                                                      Year Ended September 30,
                                                             --------------------------------------------
(In thousands)                                                   2001           2000            1999
-----------------------------------------------------------  -------------  -------------   -------------
Current provision (benefit):
  Federal                                                         $ 3,314      $ (43,603)      $ (50,552)
  State                                                             2,578         (1,071)            619
                                                             -------------  -------------   -------------
                                                                    5,892        (44,674)        (49,933)
                                                             -------------  -------------   -------------

Deferred provision (benefit):
  Federal                                                          31,327         65,044          73,415
  State                                                            (2,256)         2,847           5,820
                                                             -------------  -------------   -------------
                                                                   29,071         67,891          79,235
                                                             -------------  -------------   -------------

Subtotal                                                           34,963         23,217          29,302

Tax effect of other items:
  Tax effect of extraordinary item                                     --            (89)             --
  Tax effect of other comprehensive income
    reported in stockholders' equity                               (1,365)           (12)            (26)
                                                             -------------  -------------   -------------

Total                                                            $ 33,598       $ 23,116        $ 29,276
                                                             =============  =============   =============

The Trust's effective income tax rate varies from the statutory Federal income
tax rate as a result of the following factors:

                                                                      Year Ended September 30,
                                                             --------------------------------------------
(In thousands)                                                   2001           2000            1999
-----------------------------------------------------------  -------------  -------------   -------------
Computed tax at statutory Federal income tax rate                $ 40,192       $ 27,073        $ 29,990
Increase (reduction) in taxes resulting from:
 Minority interest                                                 (5,447)        (5,447)         (5,447)
 Goodwill and other purchase accounting adjustments                    71            124             189
 Change in valuation allowance for deferred
   tax asset allocated to income tax expense                       (6,565)        (1,979)            366
 State income taxes                                                 5,804          2,635           3,952
 Other                                                                908            811             252
                                                             -------------  -------------   -------------
                                                                 $ 34,963       $ 23,217        $ 29,302
                                                             =============  =============   =============

The components of the net deferred tax asset (liability) were as follows:

                                                                                   September 30,
                                                                            -----------------------------
(In thousands)                                                                  2001            2000
--------------------------------------------------------------------------  -------------   -------------
Deferred tax assets:
  Provision for loan and lease losses in excess of tax deductions                $ 6,892         $   293
  Intangible assets and goodwill, net                                              6,847           6,669
  Deferred compensation                                                            6,033           4,441
  Unrealized losses on servicing assets                                            2,076           2,076
  Net unrealized holding gains and losses                                         12,753              --
  State net operating loss carry forwards                                         42,127          42,524
  Partnership investments                                                          1,560           1,338
  Forgiveness of debt                                                              2,121           2,583
  Unrealized losses on property, net                                              12,514           9,155
  Other                                                                           10,559          11,106
                                                                            -------------   -------------
  Gross deferred tax assets                                                      103,482          80,185
                                                                            -------------   -------------

Deferred tax liabilities:
  Net unrealized holding losses                                                       --         (40,454)
  Mortgage servicing rights                                                      (13,265)         (6,004)
  Asset securitizations, net                                                      (8,695)           (860)
  Saul Holdings                                                                   (4,606)         (4,606)
  Lease financing                                                               (110,872)        (40,456)
  Depreciation                                                                   (24,891)        (17,657)
  FHLB stock dividends                                                            (1,285)         (1,957)
  Deferred Expenses                                                              (10,017)         (4,395)
  Other                                                                           (5,962)         (3,889)
                                                                            -------------   -------------
  Gross deferred tax liabilities                                                (179,593)       (120,278)
                                                                            -------------   -------------

Valuation allowance                                                               (9,145)        (15,709)
                                                                            -------------   -------------

Net deferred tax liability                                                     $ (85,256)      $ (55,802)
                                                                            =============   =============

The Trust establishes a valuation allowance against the gross deferred tax asset
to the extent the Trust cannot determine that it is more likely than not that
such assets will be realized through taxes available in carryback years, future
reversals of existing taxable temporary differences or projected future taxable
income. Such a valuation allowance has been established to reduce the gross
deferred asset for state net operating loss carryforwards to an amount that is
considered more likely than not to be realized. The state net operating losses
relate primarily to costs associated with the support of the bank's retail
activities, most significantly the credit card operations. Having reduced the
bank's costs through the sale of its former credit card operations in 1998 and
subsequent actions, management believes that the likelihood that the bank will
generate sufficient state taxable income to utilize a significant portion of the
state net operating losses, before their expirations beginning in 2010, has
increased since the prior period. As a result, the valuation allowance has
declined.

Management believes the existing net deductible temporary differences will
reverse during periods in which the bank generates taxable income in excess of
Real Estate Trust taxable losses. Management believes that the positive
consolidated earnings will continue as a result of the bank's earnings.

TAX SHARING AGREEMENT

The Trust's affiliated group, including the bank, entered into a tax sharing
agreement dated June 28, 1990, as amended. This agreement provides that payments be made by
members of the affiliated group to the Trust based on their respective allocable
shares of the overall federal income tax liability of the affiliated group for
taxable years and partial taxable years beginning on or after that date.

Allocable shares of the overall tax liability are prorated among the members
with taxable income calculated on a separate return basis. The agreement also
provides that, to the extent net operating losses or tax credits of a particular
member are used to reduce overall tax liability of the Trust's affiliated group,
such member will be reimbursed on a dollar-for-dollar basis by the other members
of the affiliated group that have taxable income in an amount equal to such tax
reduction. Under the tax sharing agreement, the bank paid $3.4, $6.6 and $6.6
million, to the Trust during fiscal 2001, 2000 and 1999.

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

As of September 30, 2001, there was no alternative minimum tax carryforward.

33.  SHAREHOLDERS' EQUITY - THE TRUST

In June 1990, the Trust acquired from affiliated companies an additional equity
interest in the bank, which raised the Trust's ownership share of the bank to
80%. In exchange for the interest acquired, the Trust issued 450,000 shares of a
new class of $10.50 cumulative preferred shares of beneficial interest with a
par value of $1 (the "preferred shares"). The transaction has been accounted for
at historical cost in a manner similar to the pooling of interests method
because the entities are considered to be under common control. In addition, the
Trust acquired two real estate properties from an affiliate in exchange for
66,000 preferred shares.

The Trust paid preferred dividends of $12.0, $12.5 and $6.5 million in fiscal
2001, 2000 and 1999. At September 30, 2000, 1999, and 1998, the amount of
dividends in arrears on the preferred shares was $19.3 million ($37.41 per
share), $25.9 million ($50.16 per share) and $33.0 million ($63.88 per share).

34. QUARTERLY FINANCIAL DATA (UNAUDITED) - THE TRUST

                                                               Year Ended September 30, 2001
                                           ----------------------------------------------------------------------
(In thousands, except per share amounts)      December            March             June            September
----------------------------------------   ----------------  ----------------  ----------------   ---------------
Real Estate Trust:
 Total income                                     $ 34,039          $ 36,461          $ 39,568          $ 32,884
 Operating income (loss)                               831              (804)            4,462            (3,948)
The Bank:
 Interest income                                   198,582           201,031           194,011           193,231
 Interest expense                                  113,018           109,799           101,457            98,470
 Provision for loan losses                         (15,923)          (18,016)          (16,683)          (17,230)
 Other income                                       46,716            68,134            53,607            57,474
 Operating income                                   18,653            36,772            30,080            28,788
Total Company:
Operating income                                    19,484            35,968            34,542            24,840
Income before minority interest                     14,793            23,806            23,807            17,465
Net income                                           7,010            13,743            14,552             8,354
Net income per common share                           1.17              2.57              2.73              1.45

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

                                                               Year Ended September 30, 2000
                                           ----------------------------------------------------------------------
(In thousands, except per share amounts)      December            March             June            September
----------------------------------------   ----------------  ----------------  ----------------   ---------------
Real Estate Trust:
 Total income                                     $ 28,434          $ 32,247          $ 37,020          $ 35,157
 Operating income (loss)                            (4,060)           (1,886)            2,221              (196)
The Bank:
 Interest income                                   168,751           178,288           192,926           196,694
 Interest expense                                   87,374            92,166           104,242           110,618
 Provision for loan losses                         (10,988)          (12,774)          (10,760)          (15,408)
 Other income                                       32,170            30,540            43,468            48,081
 Operating income                                   16,758            13,352            25,901            25,261
Total Company:
Operating income                                    12,698            11,466            28,122            25,065
Income before minority interest                      9,081             8,364            19,587            17,102
Net income                                           1,679             1,368            10,898             8,412
Net income per common share                           0.07              0.00              1.98              1.46

35. INDUSTRY SEGMENT INFORMATION - THE TRUST

Industry segment information with regard to the Real Estate Trust is presented
below. For information regarding the bank, please refer to the "Banking"
sections of the accompanying financial statements.

                                                                                    Year Ended September 30
                                                                      -----------------------------------------------------
(In thousands)                                                             2001              2000               1999
-------------------------------------------------------------------   ----------------  ----------------   ----------------
INCOME
Hotels                                                                      $ 100,314          $ 95,381           $ 78,914
Office and industrial properties                                               40,399            34,341             24,289
Other                                                                           2,239             3,136              2,822
                                                                      ----------------  ----------------   ----------------
                                                                            $ 142,952         $ 132,858          $ 106,025
                                                                      ================  ================   ================

OPERATING PROFIT (LOSS)
Hotels                                                                       $ 24,896          $ 27,013           $ 21,167
Office and industrial properties                                               21,805            19,380             11,465
Other                                                                           9,354             9,487              7,255
                                                                      ----------------  ----------------   ----------------
                                                                               56,055            55,880             39,887
Gain (loss) on sales of property                                               11,077               994                 --
Interest and debt expense                                                     (50,634)          (45,974)           (39,585)
Advisory fee, management and leasing fees - related parties                   (11,762)          (11,013)            (9,431)
General and administrative                                                     (4,195)           (3,808)            (1,162)
                                                                      ----------------  ----------------   ----------------
Operating profit ( loss)                                                        $ 541          $ (3,921)         $ (10,291)
                                                                      ================  ================   ================

IDENTIFIABLE ASSETS (AT YEAR END)
Hotels                                                                      $ 189,170         $ 151,615          $ 146,585
Office and industrial properties                                              114,270           105,493             73,613
Other                                                                         144,690           173,756            144,873
                                                                      ----------------  ----------------   ----------------
                                                                            $ 448,130         $ 430,864          $ 365,071
                                                                      ================  ================   ================

DEPRECIATION
Hotels                                                                       $ 11,840           $ 8,932            $ 7,708
Office and industrial properties                                                6,742             5,326              4,753
Other                                                                              18                51                 47
                                                                      ----------------  ----------------   ----------------
                                                                             $ 18,600          $ 14,309           $ 12,508
                                                                      ================  ================   ================

CAPITAL EXPENDITURES AND PROPERTY ACQUISITIONS
Hotels                                                                       $ 12,406          $ 37,681           $ 40,803
Office and industrial properties                                               23,180            32,947              5,249
Other                                                                           3,495             3,805                935
                                                                      ----------------  ----------------   ----------------
                                                                             $ 39,081          $ 74,433           $ 46,987
                                                                      ================  ================   ================

36. CONDENSED FINANCIAL STATEMENTS - THE TRUST

These condensed financial statements reflect the Real Estate Trust and all its
consolidated subsidiaries except for the bank which has been reflected on the
equity method.

CONDENSED BALANCE SHEETS

                                                                                           September 30
                                                                                ------------------------------------
(In thousands)                                                                        2001              2000
------------------------------------------------------------                    ------------------------------------
ASSETS
Income-producing properties                                                             $ 414,643         $ 362,433
Accumulated depreciation                                                                 (131,659)         (124,184)
                                                                                ------------------------------------
                                                                                          282,984           238,249
Land parcels                                                                               40,835            39,716
Construction in progress                                                                   15,681            49,096
Equity investment in bank                                                                 345,241           316,114
Cash and cash equivalents                                                                  13,860            18,129
Note receivable and accrued interest -- related party                                       7,787            11,787
Other assets                                                                               86,983            73,887
                                                                                                  ------------------
                                                                                ------------------
    TOTAL ASSETS                                                                        $ 793,371         $ 746,978
                                                                                ====================================

LIABILITIES
Mortgage notes payable                                                                  $ 325,750         $ 307,214
Notes payable - secured                                                                   202,500           200,000
Notes payable - unsecured                                                                  50,717            47,463
Deferred gains - real estate                                                              113,045           112,834
Accrued dividends payable - preferred shares of beneficial interest                        19,303            25,885
Other liabilities and accrued expenses                                                     36,874            44,971
                                                                                ------------------------------------
    Total liabilities                                                                     748,189           738,367
                                                                                ------------------------------------
TOTAL SHAREHOLDERS' DEFICIT*                                                               45,182             8,611
                                                                                ------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                                             $ 793,371         $ 746,978
                                                                                ====================================

* See Consolidated Statements of Shareholders' Deficit

CONDENSED STATEMENTS OF OPERATIONS

                                                                        For the Year Ended September 30
                                                             -------------------------------------------------------
(In thousands)                                                     2001               2000              1999
------------------------------------------------------------ ------------------ ------------------------------------
Total income                                                         $ 142,952          $ 132,858         $ 106,025
Total expenses                                                        (161,802)          (145,484)         (121,676)
Equity in earnings of unconsolidated entities                            8,314              7,711             5,360
Gain on sales of property                                               11,077                994                --
                                                             ------------------ ------------------------------------
Real estate operating income (loss)                                        541             (3,921)          (10,291)
Equity in earnings of bank                                              43,597             25,193            30,416
                                                             ------------------ ------------------------------------
Total company operating income                                          44,138             21,272            20,125
Income tax provision (benefit)                                             479             (1,251)           (3,345)
                                                             ------------------ ------------------------------------
Income before extraordinary item                                        43,659             22,523            23,470
Extraordinary item: loss on early extinguishment of debt                    --               (166)               --
                                                             ------------------ ------------------------------------

TOTAL COMPANY NET INCOME                                              $ 43,659           $ 22,357          $ 23,470
                                                             ================== ====================================

CONDENSED STATEMENTS OF CASH FLOWS

                                                                        For the Year Ended September 30
                                                             -------------------------------------------------------
(In thousands)                                                     2001               2000              1999
------------------------------------------------------------ ------------------ ------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                            $ 43,659           $ 22,357          $ 23,470
Adjustments to reconcile net income to net cash provided
  by (used in) operating activities:
      Depreciation                                                      18,600             14,308            12,481
      Gain on sales of property                                        (11,077)              (994)               --
      Early extinguishment of debt, net of taxes                            --                166                --
      Equity in earnings of bank                                       (43,597)           (25,193)          (30,416)
      (Increase) decrease in deferred tax asset                          5,323              5,205              (803)
      Decrease in accounts receivable and accrued income                (9,301)              (691)           (3,046)
      Increase (decrease) in accounts payable and accrued expenses      (5,711)             1,892             3,346
      (Increase) decrease in tax sharing receivable                     (1,889)               (88)            3,794
      Other                                                              1,336              4,268            20,062
                                                             ------------------ ------------------------------------
Net cash provided by (used in) operating activities                     (2,657)            21,230            28,888
                                                             ------------------ ------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - properties                                      (22,546)           (54,915)          (46,987)
Property acquisitions                                                  (16,535)           (19,518)               --
Property sales                                                          19,702              1,897                --
Equity investment in bank                                                   --            (22,302)               --
Note receivable and accrued interest repayments -- related party         4,000              3,750             1,500
Equity investment in unconsolidated entities                             2,935              6,527             2,748
Other                                                                        3               (354)                2
                                                             ------------------ ------------------------------------
Net cash used in investing activities                                  (12,441)           (84,915)          (42,737)
                                                             ------------------ ------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt                                            80,788            165,248            53,498
Repayments of long-term debt                                           (56,498)           (86,140)          (27,138)
Costs of obtaining financings                                           (1,461)            (2,651)           (2,104)
Dividends paid - preferred shares of beneficial interest               (12,000)           (12,500)           (6,500)
                                                             ------------------ ------------------------------------
Net cash provided by financing activities                               10,829             63,957            17,756
                                                             ------------------ ------------------------------------
Net increase (decrease) in cash and cash equivalents                    (4,269)               272             3,907
Cash and cash equivalents at beginning of year                          18,129             17,857            13,950
                                                             ------------------ ------------------------------------
Cash and cash equivalents at end of year                              $ 13,860           $ 18,129          $ 17,857
                                                             ================== ====================================

MANAGEMENT'S STATEMENT ON RESPONSIBILITY

The Consolidated Financial Statements and related financial information in this
report have been prepared by the Advisor 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

                                      None.

                                    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 six 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 the 2002 Annual Meeting

Garland J. Bloom, Jr., age 70, has served as a Trustee since 1964. He is
currently a real estate consultant. Mr. Bloom was formerly Executive Vice
President and Principal of GMB Associates, Inc. (a real estate 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 68, has served as a Trustee since 1984. He also has served
as Senior Advisor to The Bessemer Group, Incorporated (a financial management
and banking firm) and its Bessemer Trust Company subsidiaries since 1998. Mr.
Whitmore is a director of Chevy Chase, Chevy Chase Property Company, Saul
Company and Saul Centers. During the period 1975-1998, Mr. Whitmore was
President and Chief Executive Officer of Bessemer Group, Incorporated and its
Bessemer Trust Company subsidiaries and a director of Bessemer Securities
Corporation.

Class One Trustees --Terms End at the 2003 Annual Meeting

Gilbert M. Grosvenor, age 70, has served as a Trustee since 1971. Mr. Grosvenor
also serves as Chairman of the Board of Trustees of the National Geographic
Society and as a Director of Chevy Chase, Saul Centers, Marriott International
Corp., and Ethyl Corporation.

B. Francis Saul II, age 69, has served as Chairman and Chief Executive Officer
of the Trust since 1969 and as a Trustee since 1964. Mr. Saul also serves as
President and Chairman of the Board of Directors of Saul Company, the Advisor,
Chevy Chase Property Company, Westminster Investing Corporation, and Chevy Chase
Lake Corporation, as Chairman of the Board and Chief Executive Officer of Chevy
Chase and Saul Centers, and as a Trustee of the National Geographic Society, the
Brookings Institute, the Johns Hopkins Medicine Board and Washington College.
Mr. Saul is the father of B. Francis Saul III.

Class Two Trustees --Terms End at the 2004 Annual Meeting

George M. Rogers, Jr., age 68, has served as a Trustee since 1969. Mr. Rogers is
a Senior Counsel in the law firm of Shaw Pittman LLP, Washington, DC, which
serves as counsel to the Trust and Chevy Chase, Mr. Rogers serves as a Director
of Chevy Chase, Saul Company, Chevy Chase Property Company, Westminster
Investing Corporation, and Chevy Chase Lake Corporation.

B. Francis Saul III, age 39, has served as Trustee and Vice President of the
Trust since 1997. Mr. Saul also serves as a Director and/or Officer of Chevy
Chase, Saul Company, the Advisor, Saul Property Co., Chevy Chase
Property Company, Westminster Investing Corporation, and Saul Centers. He is
also a Director of Children's Hospital, the Boys and Girls Club of Greater
Washington, and The Heights School. Mr. Saul is the son of B. Francis Saul II.

Executive Officers of the Trust Who Are Not Directors

Philip D. Caraci, age 63, serves as Senior Vice President and Secretary of the
Trust, Executive Vice President of Saul Company, Senior Vice President of the
Advisor, Chairman of the Board of Saul Property Co., and a Director
and President of Saul Centers.

Stephen R. Halpin, Jr., age 46, serves as Vice President and Chief Financial
Officer of the Trust, and Senior Vice President and Chief Financial Officer of
Saul Company. He also serves as Executive Vice President and Chief Financial
Officer of Chevy Chase.

Patrick T. Connors, age 39, has served as Vice President of the Trust and Senior
Vice President of Saul Company since January 2000. For the previous four years,
he was an attorney with Shaw Pittman LLP, Washington, DC.

Ross E. Heasley, age 62, serves as Vice President of the Trust, Saul Company,
the Advisor, Saul Property Co. and Saul Centers.

Henry Ravenel, Jr., age 67, serves as Vice President of the Trust, Saul Company,
the Advisor and Saul Centers.

Bill D. Tzamaras, age 40, has served as Vice President and Treasurer of the
Trust, Saul Company, Saul Property Co. and the Advisor since August
2001, and as Vice President of Saul Company since October 2000. For the period
September 1996 to October 2000, Mr. Tzamaras was a principal with Reznick,
Fedder and Silverman, Certified Public Accountants, in Bethesda, Maryland.

Committees of the Board of Trustees

The Board of Trustees met four times during fiscal 2001. Each member of the
board attended at least 75% of the aggregate number of meetings of the board and
of the committees of the board on which he served.

The Board of Trustees has two standing committees: the Audit Committee and the
Executive Committee.

The Audit Committee is composed of Messrs. Bloom and Grosvenor. Its duties
include nominating the Trust's independent auditors, discussing with them the
scope of their examination of the Trust, reviewing with them the Trust's
financial statements and accompanying report, and reviewing their
recommendations regarding internal controls and related matters. This committee
met four times during fiscal 2001.

The Executive Committee is composed of Messrs. Rogers, Saul II and Whitmore. It
is empowered to oversee day-to-day actions of the Advisor and Saul Property Co.
in connection with the operations of the Trust, including the acquisition,
administration, sale or disposition of investments. This committee did not meet
during fiscal 2001.

Trustees of the Trust are currently paid an annual retainer of $12,500 and a fee
of $600 for each board or committee meeting attended. Trustees from outside the
Washington, D.C. area are also reimbursed for out-of-pocket expenses in
connection with their attendance at meetings. Mr. Saul II is not paid for
attending Executive Committee meetings. For the fiscal year ended September 30,
2001, the Real Estate Trust paid total fees of $94,000 to the trustees,
including $15,000 to Mr. Saul II.

ITEM 11.  EXECUTIVE COMPENSATION

The Trust pays no compensation to its executive officers for their services in
such capacity. Mr. Saul II receives compensation from the bank for his services
as the bank's Chairman of the Board of Directors and Chief Executive Officer,
Mr. Halpin receives compensation from the bank for his services as Executive
Vice President and Chief Financial Officer, and since 2000, Mr. Saul III
receives compensation from the bank for his services as Vice Chairman of the
Board of Directors. 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, 2001, 2000 and 1999

The following table sets forth the cash compensation paid by the bank to Mr.
Saul II, Mr. Halpin and Mr. Saul III for or with respect to the fiscal years
ended September 30, 2001, 2000 and 1999 for all capacities in which they served
during such fiscal years.

SUMMARY COMPENSATION TABLE
Annual Compensation

                                                                     Other Annual         All Other
Name and Principal Position    Fiscal     Salary         Bonus        Compensation      Compensation
------------------------------ ------- ------------- --------------- -------------- ----------------

B. Francis Saul II             2001      $1,562,320      $1,550,000      $ ---          $384,731(1)
     Chairman and Chief        2000       1,553,504       1,500,000        ---           331,604(2)
     Executive Officer         1999       1,426,944       1,500,000        ---           339,860(3)

Stephen R. Halpin, Jr.
     Executive Vice            2001        $478,092        $ 71,250      $ ---          $ 75,487(1)
     President                 2000         458,666          67,500        ---            62,341(2)
     and Chief                 1999         419,240         160,000        ---            68,405(3)
     Financial
     Officer

B. Francis Saul III            2001        $207,694        $ 30,000      $ ---          $ 14,262(1)
     Vice Chairman             2000          56,154             ---        ---             3,369(2)

----------------------------------------------------------------------------------------------------
(1) The total amounts shown in the "All Other Compensation" column for fiscal
2001 consist of the following:

(i) contributions made by the bank to the bank's Supplemental Executive
Retirement Plan on behalf of Mr. Saul II in the amount of $213,168, Mr. Halpin
in the amount of $28,046, and Mr. Saul III in the amount of $14,262; (ii) the
taxable benefit of premiums paid by the bank for group term insurance on behalf
of Mr. Saul II in the amount of $14,466 and Mr.Halpin in the amount of $1,457;
(iii) contributions to the Retirement Plan, a defined contribution plan, on
behalf of Mr. Halpin in the amount of $10,200; and (iv) accrued earnings on
awards previously made under the bank's Deferred Compensation Plan on behalf of
Mr. Saul II in the amount of $157,097 and Mr. Halpin in the amount of $35,784.

(2) The total amounts shown in the "All Other Compensation" column for fiscal
2000 consist of the following: (i) contributions made by the bank to the bank's
Supplemental Executive Retirement Plan on behalf of Mr. Saul II in the amount of
$213,258, Mr. Halpin in the amount of $27,421 and Mr. Saul III in the amount of
$3,369; (ii) the taxable benefit of premiums paid by the bank for group term
insurance on behalf of Mr. Saul II in the amount of $19,197 and Mr. Halpin in
the amount of $1,527; (iii) contributions to the Retirement Plan, a defined
contribution plan, on behalf of Mr.Halpin in the amount of $10,200; and (iv)
accrued earnings on awards previously made under the bank's Deferred
Compensation Plan on behalf of Mr. Saul II in the amount of $99,149 and Mr.
Halpin in the amount of $23,193.

(3) The total amounts shown in the "All Other Compensation" column for fiscal
1999 consist of the following: (i) contributions made by the bank to the bank's
Supplemental Executive Retirement Plan on behalf of Mr. Saul II in the amount of
$193,839 and Mr. Halpin in the amount of $29,059; (ii) the taxable benefit of
premiums paid by the bank for group term insurance on behalf of Mr. Saul II in
the amount of $23,940 and Mr. Halpin in the amount of $2,157; (iii)
contributions to the Retirement Plan, a defined contribution plan, on behalf of
Mr. Halpin in the amount of $9,600; and (iv) accrued earnings on awards
previously made under the bank's Deferred Compensation Plan on behalf of Mr.
Saul II in the amount of $122,081 and Mr. Halpin in the amount of $27,589.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                  AND MANAGEMENT

The following table sets forth certain information, as of December 1, 2001,
concerning beneficial ownership of Common Shares and preferred shares of
beneficial interest, referred to in this report as the "Preferred Shares," by
(a) each person known by the Trust to be the beneficial owner of more than 5% of
the Common Shares and the Preferred Shares, (b) each member of the Board of
Trustees, (c) each executive officer of the Trust named in the Summary
Compensation Table under "Item 11. Executive Compensation" and (d) all trustees
and executive officers of the Trust as a group.

                        Aggregate Number of          Percent
       Name of               Shares                     of
   Beneficial Owner     Beneficially Owned (1)        Class (1)
----------------------- ---------------------- ------------------
B. Francis Saul II           Preferred:
                             516,000 (2)               100.00%
                             Common:
                             4,807,510 (3)              99.60%

Philip D. Caraci             Common:
                             19,400 (4)                  0.40%

All Trustees and             Preferred:
executive officers           516,000 (2)               100.00%
as a group (10 persons)      Common:
                             4,826,910                 100.00%
-----------------------

(1) Beneficial owner and percent of class are calculated pursuant to rule 13d-3
under the Securities Exchange Act of 1934.

(2) Consists of Preferred Shares owned of record by Saul Company and other
companies of which Mr. Saul is an officer, director and/or more than 10%
shareholder, comprising 270,000 Preferred Shares owned by Saul Company,
90,000 Preferred Shares owned by Franklin Development Company, Inc., 90,000
Preferred Shares owned by The Klingle Corporation, and 66,000 Preferred Shares
owned by Westminster Investing Corporation. The address of each person listed in
this footnote is 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 Saul Company and other
companies of which Mr. Saul is an officer and director and/or more than 10%
shareholder, comprising 1,125,739 Common Shares owned by Westminster Investing
Corporation, 43,673 Common Shares owned by Derwood Investment Corporation, a
subsidiary of Westminster Investing Corporation, 34,400 Common Shares owned by
Somerset Investment Company, Inc., a subsidiary of Westminster Investing
Corporation, 2,545,362 Common Shares owned by Saul Company, 206,300 Common
Shares owned by Columbia Credit Company, a subsidiary of 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 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 a
redemption price equal to their liquidation preference. Except as otherwise
required by applicable law, the holders of Preferred Shares are entitled to vote
only in certain limited situations, such as the merger of the Trust or a sale of
all or substantially all of the assets of the Trust.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Management Personnel

All of the officers of the Trust and each of Messrs. Saul II, Saul III, Rogers
and Whitmore, each of whom is a trustee of the Trust, are also officers and/or
directors of Saul Company and/or its subsidiaries. In addition, Messrs.
Saul II, Saul III, Whitmore, Grosvenor, Caraci and Heasley are also officers
and/or directors of Saul Centers and/or its subsidiaries.

Transactions with Saul Company and its Subsidiaries. The Real Estate Trust
is managed by the Advisor, a wholly owned subsidiary of Saul Company. The
Advisor is paid a fixed monthly fee subject to annual review by the trustees.
The monthly fee was $363,000 for fiscal 2001. The advisory contract has been
extended until September 30, 2002, will continue thereafter unless cancelled by
either party at the end of any contract year. The monthly fee for fiscal 2002
will be $475,000. Certain loan agreements prohibit termination of this contract.

Saul Company and Saul Property Co., a wholly owned subsidiary of Saul Company,
provide services to the Real Estate Trust in the areas of commercial property
management and leasing, hotel management, development and construction
management, and acquisitions, sales and financings of real property. Fees to the
two companies amounted to $7.4 million in fiscal 2001.

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

The Real Estate Trust pays the Advisor fees equal to 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 $93,000 in such fees in
fiscal 2001.

B. F. Saul Insurance Agency of Maryland, Inc., a subsidiary of Saul Company, is
a general insurance agency that receives commissions and counter-signature fees
in connection with the Real Estate Trust's insurance program. Such commissions
and fees amounted to approximately $200,000 in fiscal 2001.

At October 1, 1999, the Real Estate Trust had an unsecured note receivable from
Saul Company with an outstanding balance of $15.5 million. During fiscal 2000
and 2001, curtails of $3.75 and $4.0 million were paid. Interest on the loans is
computed by reference to floating rate index. At September 30, 2001, the total
due the Real Estate Trust was $6.0 million in principal and $1.75 million in
deferred interest. Interest accrued on this note amounted to $705,000 in fiscal
2001.

The Board of Trustees of the Trust, including the two independent trustees,
reviews the fees and compensation arrangements between the Real Estate Trust and
Saul Company and its related entities and affiliates and believes that such fees
and compensation arrangements are as favorable to the Real Estate Trust as would
be obtainable from unaffiliated sources.

Transactions with Saul Centers.

Shared Services. The Trust shares with Saul Centers certain ancillary functions
at cost, such as computer and payroll services, benefits administration, and
in-house legal services. In addition, the Trust shares insurance expense with
Saul Centers on a pro rata basis. The Trust believes that the amounts allocated
to it for such shared services represents a fair allocation between the Trust
and Saul Centers.

Exclusivity Agreement and Right of First Refusal. The Real Estate Trust has
entered into an Exclusivity Agreement with, and has granted a right of first
refusal to, Saul Centers and Saul Holdings Partnership. The purpose of these
agreements is to minimize potential conflicts of interest between the Real
Estate Trust, Saul Centers and Saul Holdings Partnership. The exclusivity
agreement and right of first refusal generally require the Real Estate Trust to
conduct its shopping center business exclusively through Saul Centers and Saul
Holdings Partnership and to grant these entities a right of first refusal to
purchase commercial properties and development sites that become available to
the Real Estate Trust in the District of Columbia or adjacent suburban Maryland.
Subject to the exclusivity agreement and right of first refusal, the Real Estate
Trust will continue to develop, acquire, own and manage commercial properties
and own land suitable for development as, among other things, shopping centers
and other commercial properties.

Reimbursement Agreement. Pursuant to a reimbursement agreement among the
partners of the Saul Holdings Partnership and certain of their affiliates, the
Real Estate Trust and two of its subsidiaries have agreed to reimburse Saul
Centers and the other partners in the event the Saul Holdings Partnership fails
to make payments with respect to certain portions of its debt obligations and
Saul Centers or any such other partners personally make payments with respect to
such debt obligations. As of September 30, 2001, the maximum potential
obligation of the Real Estate Trust and its subsidiaries under the agreement was
$115.5 million. See Note 2 to the Consolidated Financial Statements in this
report. The Real Estate Trust believes that Saul Holdings Partnership will be
able to make all payments due with respect to its debt obligations.

Tax Conflicts. The fair market value of each of the properties contributed to
Saul Holdings Partnership and its subsidiaries by the Real Estate Trust and its
subsidiaries in connection with the formation of Saul Centers and Saul Holdings
Partnership in 1993 exceeded the tax basis of such properties. In the event,
Saul Centers or its wholly owned subsidiary, Saul QRS, Inc., acting as general
partner, causes Saul Holdings Partnership to dispose of, or there is an
involuntary disposition of, one or more of such properties, a disproportionately
large share of the total gain for federal income tax purposes would be allocated
to the Real Estate Trust and its subsidiaries as a result of the property
disposition. See Note 2 to the Consolidated Financial Statements in this report.

Property Dispositions. In October 2000, the Real Estate Trust sold a newly
constructed 30,000 square foot office/flex building located on a 2.2 acre site
in the Avenel Business Park in Gaithersburg, Maryland to Saul Centers. The $4.2
million purchase price was paid in cash. The price for the property was
determined by an independent third party appraisal. Management believes that the
disposition of this property was on terms no less favorable than those that
could have been obtained in a comparable transaction with an unaffiliated third
party.

Remuneration of Trustees and Officers. For fiscal 2001, the Trust paid the
trustees $94,000 in fees for their services. See "Item 10. Trustees and
Executive Officers of the Trust." No compensation was paid to the officers of
the Trust for acting as such; however, Mr. Saul II was paid by the bank for his
services as the bank's Chairman and Chief Executive Officer, Mr. Halpin was paid
by the bank for his services as Executive Vice President and Chief Financial
Officer, and Mr. Saul III was paid by the bank for his services as the bank's
Vice Chairman. See "Item 11. Executive Compensation." Messrs. Grosvenor, Rogers,
Saul II and Saul III receive compensation for their services as directors of the
bank and Messrs. Rogers, Saul II , Saul III and Whitmore and all of the officers
of the Real Estate Trust receive compensation from Saul Company and/or its
affiliated corporations as directors or officers thereof.

Related Party Rents. The Real Estate Trust leases space to the bank and B. F.
Saul Property Company at two of its income-producing properties. Minimum rents
and expense recoveries paid under these leases amounted to approximately $4.0
million in fiscal 2001. The bank leases space in several of the shopping centers
owned by Saul Centers. The total rental payments made to Saul Centers by the
bank in fiscal 2001 was $1.3 million. On September 24, 2001 the bank entered
into an agreement to lease to Saul Company approximately 40,000 square feet of
office space at its new corporate headquarters at 7501 Wisconsin Avenue,
Bethesda, Maryland. Total payments under the lease for fiscal 2002 will be $1.1
million. In addition, the bank has retained Saul Company as its leasing agent to
secure tenants for additional space that will be available in the bank's new
corporate headquarters. The Trust believes that these leases have comparable
terms to leases that would have been entered into with unaffiliated parties.

                                     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

     The following consolidated financial statements of the Trust are
     incorporated by reference in Part II, Item 8.

           (a) Report of Independent Public Accountants.

           (b) Consolidated Balance Sheets - As of September 30, 2001 and 2000.

           (c) Consolidated Statements of Operations - For the years ended
                      September 30, 2001, 2000 and 1999.

           (d) Consolidated Statements of Comprehensive Income and Changes in
                      Shareholders' Equity (Deficit) - For the years ended
                      September 30, 2001, 2000 and 1999.

           (e) Consolidated Statements of Cash Flows - For the years ended
                      September 30, 2001, 2000 and 1999.

           (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 Accountants on Financial Statement
                      Schedules.

           (c) Schedules of the Real Estate Trust:

               Schedule I - Condensed Financial Information - For the years
                      ended September 30, 2001, 2000 and 1999.

               Schedule III - Consolidated Schedule of Investment Properties
                      As of September 30, 2001.

(b)  Reports on Form 8-K
           None

(c)  Exhibits

EXHIBITS      DESCRIPTION
--------      -----------------------------------------------------------------
  3.          ORGANIZATIONAL DOCUMENTS

      (a)     Amended and Restated Declaration of Trust filed with the Maryland
              State Department of Assessments and Taxation on June 22, 1990 as
              filed as Exhibit 3(a) to Registration Statement No. 33-34930 is
              hereby incorporated by reference.

      (b)     Amendment to Amended and Restated Declaration of Trust reflected
              in Secretary Certificate filed with the Maryland State Department
              of Assessments and Taxation on June 26, 1990 as filed as Exhibit
              3(b) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.

      (c)     Amended and Restated By-Laws of the Trust dated as of February
              28, 1991 as filed as Exhibit T3B to the Trust's Form T-3
              Application for Qualification of Indentures under the Trust
              Indenture Act of 1939 (File No. 22-20838) is hereby incorporated
              by reference.

  4.          INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
              INDENTURES

      (a)     Indenture dated as of March 25, 1998 between the Trust and
              Norwest Bank Minnesota, National Association, as Trustee, with
              respect to the Trust's 9 3/4% Series B Senior Secured Notes due
              2008, as filed as Exhibit 4(a) to Registration Statement
              333-49937 is hereby incorporated by reference.

      (b)     Indenture with respect to the Trust's Senior Notes Due from One
              Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to
              Registration No. 33-19909 is hereby incorporated by reference.

      (c)     First Supplemental Indenture with respect to the Trust's Senior
              Notes due from One Year to Ten Years from Date of Issue as filed
              as Exhibit T-3C to the Trust's Form T-3 Application for
              Qualification of Indentures under the Trust Indenture Act of 1939
              (File No. 22-20838) is hereby incorporated by reference.

      (d)     Indenture with respect to the Trust's Senior Notes due from One
              Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to
              Registration Statement No. 33-9336 is hereby incorporated by
              reference.

      (e)     Fourth Supplemental Indenture with respect to the Trust's Senior
              Notes due from One Year to Ten Years from Date of Issue as filed
              as Exhibit 4(a) to Registration Statement No. 2-95506 is hereby
              incorporated by reference.

      (f)     Third Supplemental Indenture with respect to the Trust's Senior
              Notes due from One Year to Ten Years from Date of Issue as filed
              as Exhibit 4(a) to Registration Statement No. 2-91126 is hereby
              incorporated by reference.

      (g)     Second Supplemental Indenture with respect to the Trust's Senior
              Notes due from One Year to Ten Years from Date of Issue as filed
              as Exhibit 4(a) to Registration Statement No. 2-80831 is hereby
              incorporated by reference.

      (h)     Supplemental Indenture with respect to the Trust's Senior Notes
              due from One Year to Ten Years from Date of Issue as filed as
              Exhibit 4(a) to Registration Statement No. 2-68652 is hereby
              incorporated by reference.

      (i)     Indenture with respect to the Trust's Senior Notes due from One
              Year to Five Years from Date of Issue as filed as Exhibit T-3C to
              the Trust's Form T-3 Application for Qualification of Indentures
              under the Trust Indenture Act of 1939 (file No. 22-10206) is
              hereby incorporated by reference

      (j)     Indenture dated as of September 1, 1992 with respect to the
              Trust's Notes due from One to Ten Years form Date of Issue filed
              as Exhibit 4(a) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.

      (k)     First Supplemental Indenture dated as of January 16, 1997 with
              respect to the Trust's Notes due from One to Ten years from Date
              of Issue filed as Exhibit 4(b) to Registration Statement No.
              33-34930 is hereby incorporated by reference.

      (l)     Second Supplemental Indenture dated as of January 13, 1999 with
              respect to the Trust's Notes due from One to Ten Years from Date
              of Issuance as filed as Exhibit 4(l) to Registration Statement No.
              333-70753 is hereby incorporated by reference.

  10.         MATERIAL CONTRACTS

      (a)*    Amended and Restated Advisory Contract by and among the Trust,
              B.F. Saul Company and B.F. Saul Advisory Company effective
              October 1, 1992, as amended.

      (b)*    Assignment and Guaranty Agreement effective May 1 , 1972 by and
              among the Trust, B.F. Saul Company and B.F. Saul Advisory Company.

      (c)     Commercial Property Leasing and Management Agreement effective
              October 1, 1982 between the Trust and B.F. Saul Property Company
              filed as Exhibit 10(b) to Registration Statement No. 2-80831 is
              hereby incorporated by reference.

      (d)     Amendments to Commercial Property Leasing and Management
              Agreement between the Trust and B.F. Saul Property Company dated
              as of December 31, 1992 (Amendment No. 5), July 1, 1989
              (Amendment No. 4), October 1, 1986 (Amendment No. 3), January 1,
              1985 (Amendment No. 2) and July 1, 1984 (Amendment No. 1) filed
              as Exhibit 10(o) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.

      (e)     Tax Sharing Agreement dated June 28, 1990 among the Trust, Chevy
              Chase Bank F.S.B. and certain of their subsidiaries filed
              as Exhibit 10(c) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.

      (f)*    First Amendment to Tax Sharing Agreement effective May 16, 1995
              among the Trust, Chevy Chase Bank F.S.B. and certain of their
              subsidiaries.

      (g)     Agreement dated June 28, 1990 among the Trust, B.F. Saul Company,
              Franklin Development Co., Inc., The Klingle Corporation and
              Westminster Investing Corporation relating to the transfer of
              certain shares of Chevy Chase Bank, F.S.B. and certain
              real property to the Trust in exchange for Preferred Shares of
              the Trust filed as Exhibit 10(d) to Registration Statement
              No. 33-34930 is hereby incorporated by reference.

      (h)     Regulatory Capital Maintenance/Dividend Agreement dated May 17,
              1988 among B.F. Saul Company, the Trust and the Federal Savings
              and Loan Insurance Corporation filed as Exhibit 10(e) to the
              Trust's Annual Report on Form 10-K (File No. 1-7184) for the
              fiscal year ended September 30, 1991 is hereby incorporated by
              reference.

      (i)     Registration Rights and Lock-Up Agreement dated August 26, 1993
              by and among Saul Centers, Inc. and the Trust, Westminster
              Investing Corporation, Van Ness Square Corporation, Dearborn,
              L.L.C., B.F. Saul Property Company and Avenel Executive Park
              Phase II, Inc. as filed as Exhibit 10.6 to Registration Statement
              No. 33-64562 is hereby incorporated by reference.

      (j)*    First Amendment to Registration Rights and Lock-Up Agreement dated
              September 29, 1999 by and among Saul Centers, Inc., the Trust,
              Westminster Investing Corporation, Van Ness Square Corporation,
              Dearborn Corporation, Franklin Property Company and Avenel
              Executive Park Phase II, Inc.

      (k)     Exclusivity and Right of First Refusal Agreement dated August 26,
              1993 among Saul Centers, Inc., the Trust, B.F. Saul Company,
              Westminster Investing Corporation, B.F. Saul Property Company, Van
              Ness Square Corporation, and Chevy Chase Savings Bank, F.S.B. as
              filed as Exhibit 10.7 to Registration Statement No. 33-64562 is
              hereby incorporated by reference.

      (l)     Fourth Amended and Restated Reimbursement Agreement dated as of
              April 25, 2000 by and among Saul Centers, Inc., Saul Holdings
              Limited Partnership, Saul Subsidiary I Limited Partnership, Saul
              Subsidiary II Limited Partnership, Saul QRS, Inc.,  B.F. Saul
              Property Company, Westminster Investing Corporation, Van Ness
              Square Corporation, Dearborn, L.L.C., Avenel Executive Park
              Phase II, L.L.C., and the Trust, as filed as Exhibit 10(k) to the
              Trust's Quarterly Report on Form 10-Q (File No. 1-7184) for the
              fiscal quarter ended March 31, 2000 is hereby incorporated by
              reference.

      (m)     Bank Stock Registration Rights Agreement dated as of March 25,
              1998 between the Trust and Norwest Bank Minnesota, National
              Association, as Trustee, as filed as Exhibit 4(d) to Registration
              Statement No. 333-49937 is hereby incorporated by reference.

  21.*        List of Subsidiaries of the Trust.

---------------------
* Filed herewith.

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of B.F. Saul Real Estate
Investment Trust (the "Trust") included in this Form 10-K and have issued our
report thereon dated December 21, 2001. Our audit was made for the purpose of
forming an opinion on the basic financial 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

Vienna, Virginia
December 21, 2001

B.F. SAUL REAL ESTATE INVESTMENT TRUST
CONDENSED FINANCIAL INFORMATION                              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
                    ----------------------------------------
                      2001            2000           1999

                    $12,800,000    $12,800,000    $26,400,000

Consolidated Schedule of Investment Properties - Real Estate Trust                                                     Schedule III
September 30, 2001
(Dollars in Thousands)

                                                                   Costs
                                                                Capitalized            Basis at Close of Period
                                                                              -----------------------------------------
                                                   Initial      Subsequent                    Buildings
                                                   Basis to         to                           and                    Accumulated
Hotels                                              Trust       Acquisition      Land        Improvements      Total    Depreciation
------------------------------------------------ ------------- -------------- ------------ ----------------- ---------- ------------
Courtyard -- Tysons Corner, McLean VA                $ 31,077           $ --        $ 843          $ 30,234   $ 31,077      $ 1,554
Crown Plaza -- National Airport, Arlington VA          26,979          5,265        4,229            28,015     32,244        4,319
Hampton Inn -- Dulles Airport, Sterling VA                 --          6,241          290             5,951      6,241        2,736
Hampton Inn -- Dulles Town Center, Sterling VA         11,379             --          795            10,584     11,379          782
Holiday Inn -- Cincinnati OH                            6,859          3,771          245            10,385     10,630        6,041
Holiday Inn -- Dulles Airport, Sterling VA              6,950         21,451          862            27,539     28,401       15,835
Holiday Inn -- Gaithersburg MD                          3,849         15,733        1,781            17,801     19,582        8,486
Holiday Inn -- National Airport, Arlington VA          10,187          7,451        1,183            16,455     17,638        8,471
Holiday Inn -- Pueblo CO                                3,458          2,780          542             5,696      6,238        3,154
Holiday Inn -- Rochester Airport, Rochester NY          3,340          9,997          605            12,732     13,337        6,986
Holiday Inn -- Tysons Corner, McLean VA                 6,976         13,660        2,265            18,371     20,636        8,850
Holiday Inn Express, Herndon VA                         5,259            426        1,178             4,507      5,685          831
Holiday Inn Select, Auburn Hills MI                    10,450          2,159        1,031            11,578     12,609        2,770
SpringHill Suites -- Boca Raton FL                     10,942            378        1,220            10,100     11,320          779
TownePlace Suites -- Boca Raton FL                      7,527             13          869             6,671      7,540          489
TownePlace Suites -- Dulles Airport, Sterling VA        5,849            283          219             5,913      6,132          649
TownePlace Suites -- Ft. Lauderdale FL                  7,059              5          420             6,644      7,064          445
TownePlace Suites, Gaithersburg MD                      6,382             30          107             6,305      6,412          482
                                                 ------------- -------------- ------------ ----------------- ---------- ------------
Subtotal - Hotels                                   $ 164,522       $ 89,643     $ 18,684         $ 235,481  $ 254,165     $ 73,659
                                                 ------------- -------------- ------------ ----------------- ---------- ------------

Commercial
------------------------------------------------
900 Circle 75 Pkway, Atlanta GA                      $ 33,434        $ 2,202        $ 563          $ 35,073   $ 35,636     $ 16,631
1000 Circle 75 Pkway, Atlanta GA                        2,820          1,348          248             3,920      4,168        2,278
1100 Circle 75 Pkway, Atlanta GA                       22,746          2,269          419            24,596     25,015       12,644
8201 Greensboro, Tysons Corner VA                      28,890          2,274        1,633            29,531     31,164       13,381
Commerce Ctr-Ph II, Ft Lauderdale FL                    4,266            521          782             4,005      4,787        1,782
Dulles North, Loudoun County VA                         5,882             70          507             5,445      5,952        1,903
Dulles North Two, Loudoun County VA                     7,729             --          404             7,325      7,729          789
Dulles North Five, Loudoun County VA                    5,078            (76)         535             4,467      5,002          276
Dulles North Six, Loudoun County VA                     2,667             --          257             2,410      2,667           81
Sweitzer Lane, Laurel MD                               13,703             --        3,701            10,002     13,703          229
Tysons Park Place, Tysons Corner VA                    19,459          2,371        2,454            19,376     21,830        8,001
                                                 ------------- -------------- ------------ ----------------- ---------- ------------
Subtotal - Commercial                               $ 146,674       $ 10,979     $ 11,503         $ 146,150  $ 157,653     $ 57,995
                                                 ------------- -------------- ------------ ----------------- ---------- ------------

Consolidated Schedule of Investment Properties - Real Estate Trust (Continued)                               Schedule III-Continued
September 30, 2001
(Dollars in Thousands)
                                                                   Costs
                                                                Capitalized            Basis at Close of Period
                                                                              -----------------------------------------
                                                   Initial      Subsequent                    Buildings
                                                   Basis to         to                           and                    Accumulated
Purchase-Leasebacks                                 Trust       Acquisition      Land        Improvements      Total    Depreciation
------------------------------------------------ ------------- -------------- ------------ ----------------- ---------- ------------
Chateau di Jon, Metairie, LA                          $ 1,125           $ --      $ 1,125              $ --    $ 1,125         $ --
Country Club, Knoxville, TN                               500             --          500                --        500           --
Houston Mall, Warner Robbins, GA                          650             --          650                --        650           --
Old National, Atlanta, GA                                 550             --          550                --        550           --
                                                 ------------- -------------- ------------ ----------------- ---------- ------------
Subtotal - Purchase-Leasebacks                        $ 2,825           $ --      $ 2,825              $ --    $ 2,825         $ --
                                                 ------------- -------------- ------------ ----------------- ---------- ------------

Total Income-Producing Properties                   $ 314,021      $ 100,622     $ 33,012         $ 381,631  $ 414,643    $ 131,654
                                                 ------------- -------------- ------------ ----------------- ---------- ------------

Land Parcels
------------------------------------------------
Arvida Park of Commerce,
    Boca Raton, FL                                    $ 7,378         (1,873)     $ 5,505              $ --    $ 5,505         $ --
Cedar Green, Loudoun Co., VA                            3,314             --        3,314                --      3,314           --
Church Road, Loudoun Co., VA                            2,586          2,194        4,780                --      4,780           --
Circle 75, Atlanta, GA                                 12,927          3,123       16,050                --     16,050            5
Flagship Centre, Rockville, MD                          1,729             39        1,768                --      1,768           --
Holiday Inn - Auburn Hills, Auburn Hills MI               218             --          218                --        218           --
Holiday Inn - Rochester, Roch., NY                         68             --           68                --         68           --
Overland Park, Overland Park, KA                        3,771            726        4,497                --      4,497           --
Prospect Indust. Pk, Ft. Laud., FL                      2,203         (1,943)         260                --        260           --
Sterling Blvd., Loudoun Co., VA                           505          3,870        4,375                --      4,375           --
                                                 ------------- -------------- ------------ ----------------- ---------- ------------
Subtotal                                             $ 34,699        $ 6,136     $ 40,835              $ --   $ 40,835          $ 5
                                                 ------------- -------------- ------------ ----------------- ---------- ------------

Total Investment Properties                         $ 346,789      $ 108,689     $ 73,847         $ 381,631  $ 455,478    $ 131,659
                                                 ============= ============== ============ ================= ========== ============

Consolidated Schedule of Investment Properties - Real Estate Trust (Continued)                         Schedule III-Continued
September 30, 2001
(Dollars in Thousands)

                                                                                                  Buildings
                                                                                                     and
                                                                                     Date        Improvements
                                                       Related        Date of      Acquired/     Depreciable
Hotels                                                   Debt      Construction   Transferred   Lives (Years)
---------------------------------------------------- ------------- -------------- ------------ -----------------
Courtyard -- Tysons Corner, McLean VA                    $ 24,692      2000          12/00            40
Crown Plaza -- National Airport, Arlington VA              16,854      1959          12/97            39
Hampton Inn -- Dulles Airport, Sterling VA                  6,455      1987          4/87            31.5
Hampton Inn -- Dulles Town Center, Sterling VA              9,189      2000          11/00            40
Holiday Inn -- Cincinnati OH                                5,914      1975          2/76             40
Holiday Inn -- Dulles Airport, Sterling VA                 13,181      1971          11/84            28
Holiday Inn -- Gaithersburg MD                              7,338      1972          6/75             45
Holiday Inn -- National Airport, Arlington VA               6,403      1973          11/83            30
Holiday Inn -- Pueblo CO                                    4,465      1973          3/76             40
Holiday Inn -- Rochester Airport, Rochester NY             14,263      1975          3/76             40
Holiday Inn -- Tysons Corner, McLean VA                    16,849      1971          6/75             47
Holiday Inn Express -- Herndon VA                           4,795      1987          10/96            40
Holiday Inn Select -- Auburn Hills MI                      11,896      1989          11/94           31.5
SpringHill Suites -- Boca Raton FL                          6,101      1999          9/99             40
TownePlace Suites -- Boca Raton FL                          5,550      1999          6/99             40
TownePlace Suites -- Dulles Airport, Sterling VA            6,382      1998          8/98             40
TownePlace Suites -- Ft. Lauderdale FL                      4,550      1999          10/99            40
TownePlace Suites -- Gaithersburg MD                        4,845      1999          6/99             40
                                                     -------------
Subtotal - Hotels                                       $ 169,722
                                                     -------------

Commercial
----------------------------------------------------
900 Circle 75 Pkway, Atlanta GA                          $ 23,041      1985          12/85            35
1000 Circle 75 Pkway, Atlanta GA                            4,828      1974          4/76             40
1100 Circle 75 Pkway, Atlanta GA                           13,150      1982          9/82             40
8201 Greensboro, Tysons Corner VA                          38,192      1985          4/86             35
Commerce Ctr-Ph II, Ft Lauderdale FL                        3,668      1986          1/87             35
Dulles North, Loudoun County VA                             4,858      1990          10/90           31.5
Dulles North Two, Loudoun County VA                         8,378      1999          10/99            40
Dulles North Five, Loudoun County VA                        6,588      2000          3/00             40
Dulles North Six, Loudoun County VA                         4,965      2000          10/00            40
Sweitzer Lane, Laurel MD                                   10,780      1995          11/00            40
Tysons Park Place, Tysons Corner VA                        30,809      1976          12/99            30
                                                     -------------
Subtotal - Commercial                                   $ 149,257
                                                     -------------

Consolidated Schedule of Investment Properties - Real Estate Trust (Continued)                         Schedule III-Continued
September 30, 2001
(Dollars in Thousands)
                                                                                                  Buildings
                                                                                                     and
                                                                                     Date        Improvements
                                                       Related        Date of      Acquired/     Depreciable
Purchase-Leasebacks                                      Debt      Construction   Transferred   Lives (Years)
---------------------------------------------------- ------------- -------------- ------------ -----------------
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                               $ --
                                                     -------------

Total Income-Producing Properties                       $ 318,979
                                                     -------------

Land Parcels
----------------------------------------------------
Arvida Park of Commerce,
    Boca Raton, FL                                           $ --                 12/84 and 5/85
Cedar Green, Loudoun Co., VA                                   --                    10/00
Church Road, Loudoun Co., VA                                   --                 9/84 and 4/85
Circle 75, Atlanta, GA                                         --                 2/77 and 1/84
Flagship Centre, Rockville, MD                                 --                    8/85
Holiday Inn - Auburn Hills, Auburn Hills MI                    --                    7/97
Holiday Inn - Rochester, Roch., NY                             --                    9/86
Overland Park, Overland Park, KA                               --                 1/77 and 2/85
Prospect Indust. Pk, Ft. Laud., FL                             --                 10/83 and 8/84
Sterling Blvd., Loudoun Co., VA                                --               4/84, 2/00 and 3/00
                                                     -------------
Subtotal                                                     $ --
                                                     -------------

Total Investment Properties                             $ 318,979
                                                     =============

                                                                                                         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
                                                                ------------------------------------------------------------
                                                                       2001                2000                 1999
                                                                ------------------- -------------------- -------------------

Basis of investment properties
---------------------------------------------------------------

Balance at beginning of period                                           $ 402,149            $ 351,629           $ 320,061
Additions (reductions) during the period:
    Capital expenditures and property acquisitions from
     nonaffiliates                                                          25,536               17,404              15,476
    Transfer from banking segment                                               --               21,787                  --
    Sales to nonaffiliates                                                  (7,678)                (904)                 --
    Transferred from construction in progress, net                          44,246               13,909              19,872
    Other                                                                   (8,775)              (1,676)             (3,780)
                                                                ------------------- -------------------- -------------------
Balance at end of period                                                 $ 455,478            $ 402,149           $ 351,629
                                                                =================== ==================== ===================

Accumulated depreciation
---------------------------------------------------------------

Balance at beginning of period                                           $ 124,184            $ 104,774            $ 96,072
Additions (reductions) during the period:
    Depreciation expense                                                    18,600               14,309              12,508
    Transfer from banking segment                                               --                6,833                  --
    Sales to nonaffiliates                                                  (2,309)                  --                  --
    Other                                                                   (8,816)              (1,732)             (3,806)
                                                                ------------------- -------------------- -------------------
Balance at end of period                                                 $ 131,659            $ 124,184           $ 104,774
                                                                =================== ==================== ===================

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Trust has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.

                                 B.F. Saul Real Estate Investment Trust

December 28, 2001                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.

         Signature                      Title                        Date
         ---------                      -----                        ----

   B. Francis Saul II
--------------------------  Trustee, Chairman of the Board
   B. Francis Saul II       (Principal Executive Officer)     December 28, 2001

   Stephen R. Halpin, Jr.                                     December 28, 2001
--------------------------   Vice President and Chief
   Stephen R. Halpin, Jr.    Financial Officer (Principal
                             Financial Officer)

   Bill D. Tzamaras                                           December 28, 2001
--------------------------   Vice President and Treasurer
   Bill D. Tzamaras          (Principal Accounting Officer)

   Garland J. Bloom, Jr.                                      December 28, 2001
--------------------------   Trustee
   Garland J. Bloom, Jr.

   Gilbert M. Grosvenor                                       December 28, 2001
--------------------------   Trustee
   Gilbert M. Grosvenor

   George M. Rogers, Jr.                                      December 28, 2001
--------------------------   Trustee
   George M. Rogers, Jr.

   B. Francis Saul III                                        December 28, 2001
--------------------------   Trustee
   B. Francis Saul III

   John R. Whitmore                                           December 28, 2001
--------------------------   Trustee
   John R. Whitmore
```