<PAGE>
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
DRAFT122396

                        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, 1996

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

    For the transition period from ____________________ to _____________________
                          Commission File number 1-7184 

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


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

    8401 Connecticut Avenue
    Chevy Chase, Maryland                                      20815
--------------------------------------------------------------------------------
(Address of principal executive offices)                    (Zip Code)

Registrant's telephone number, including area code:  (301) 986-6000         
                                                   -----------------------------
Securities registered pursuant to Section 12(b) of Act:

     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 
amendements to this Form 10-K. /x/

    There were no Common Shares of Beneficial Interest held by non-affiliates
of the registrant as of December 27, 1996.

    The number of Common Shares of Beneficial Interest, $1 Par Value,
outstanding as of December 27, 1996 was 4,826,910.

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

<PAGE>


                                  TABLE OF CONTENTS


                                        PART I
                                                                           Page
                                           
ITEM 1.  BUSINESS 
    
    General ...........................................................       1

         Real Estate ..................................................       1
         Banking   
    

ITEM 2.  PROPERTIES ...................................................      52

    Real Estate .......................................................      52
    Banking ...........................................................      52

ITEM 3.  LEGAL PROCEEDINGS ............................................      56

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..........      56

                                       PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND
          RELATED STOCKHOLDER MATTERS .................................      57

ITEM 6.  SELECTED FINANCIAL DATA ......................................      57

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...............      59

    Financial Condition ...............................................      59
         Real Estate ..................................................      59
         Banking ......................................................      60
    
    Liquidity and Capital Resources ...................................      73
         Real Estate ..................................................      73
         Banking ......................................................      75
              Liquidity ...............................................      75
              Capital .................................................      78


                                         -i-

<PAGE>

    Results of Operations .............................................      82
         Fiscal 1996 Compared to Fiscal 1995 ..........................      84
              Real Estate .............................................      84
              Banking .................................................      85

         Fiscal 1995 Compared to Fiscal 1994 ..........................      92
              Real Estate .............................................      92
              Banking .................................................      93

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

    Management's Statement on Responsibility ..........................      97

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURE .........................      97

                                       PART III

ITEM 10. TRUSTEES AND EXECUTIVES OFFICERS OF THE TRUST ................      97

     Executive Officers of the Trust Who Are Not Directors ............      98
     Committees of the Board of Trustees ..............................      99

ITEM 11. EXECUTIVE COMPENSATION .......................................     100

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
          OWNERS AND MANAGEMENT .......................................     102

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ...............     103

                                       PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
          AND REPORTS ON FORM 8-K .....................................     105


                                         -ii-

<PAGE>

                                        PART I

ITEM 1.  BUSINESS

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

    The principal business activity of the Trust and its real estate
subsidiaries is the ownership and development of income-producing properties. 
The Trust owns 80% of the outstanding common stock of Chevy Chase  Bank, F.S.B.
("Chevy Chase" or the "Bank"), whose assets accounted for 95% of the Trust's
consolidated assets at September 30, 1996.  The Trust is a thrift holding
company by virtue of its ownership of a majority interest in Chevy Chase.  See
"Real Estate - Holding Company Regulation."

    The Trust recorded a net loss of $78,000 in the fiscal year ended September
30, 1996, compared to net income of $10.9 million in the fiscal year ended
September 30, 1995 and net income of  $23.1 million in the fiscal year ended
September 30, 1994.

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

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

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

    BANKING.  Chevy Chase Bank is a federally chartered and federally insured
stock savings bank which at September 30, 1996 was conducting business from 107
full service offices and  529 automated teller machines ("ATMs") in Maryland, 
Virginia and the District of Columbia.  The Bank has its home office in McLean,
Virginia and its executive offices in Montgomery County, Maryland, both suburban
communities of Washington, D.C.  The Bank also maintains 22 mortgage loan
production offices in the mid-Atlantic region, 21 of which are operated by a
wholly-owned mortgage 

<PAGE>
banking subsidiary.   The Bank also maintains 18 consumer loan production 
offices, 11 of which are owned by a wholly-owned finance subsidiary of the 
Bank.  At September 30, 1996, the Bank had total assets of $ 5.7 billion and 
total deposits of $4.2  billion.  Based on total consolidated assets at 
September 30, 1996, Chevy Chase is the largest bank headquartered in the 
Washington, D.C. 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 credit card and
other types of consumer loans. The Bank is also developing on active commercial
lending program.  The Bank's principal deposit and lending markets are located
in the Washington, D.C. 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.

    Chevy Chase recorded operating income of $46.1 million for the year ended 
September 30, 1996, compared to operating income of $55.7 million for the 
year ended September 30, 1995.  At September 30, 1996, the Bank's tangible, 
core, tier 1 risk-based and total risk-based regulatory capital ratios were 
5.21%, 5.21%, 5.80% and 10.14%, respectively.  The Bank's capital ratios 
exceeded the requirements under the Financial Institutions Reform, Recovery, 
and Enforcement Act of 1989 ("FIRREA") as well as the standards established 
for "adequately capitalized" institutions under the prompt corrective action 
regulations established pursuant to the Federal Deposit Insurance Corporation 
Improvement Act of 1991 ("FDICIA").   See "Management's Discussion and 
Analysis of Financial Condition and Results of Operations - Financial 
Condition - Banking - Capital."  Chevy Chase's fiscal 1996 earnings reflect a 
$26.5 million charge for the special assessment imposed by Congress to 
recapitalize the Savings Association Insurance Fund (the "SAIF").  See 
"Banking Regulation - Deposit Insurance Premiums."  Excluding the one-time 
SAIF assessment, Chevy Chase would have reported operating income of $72.6 
million for the year ended September 30, 1996, and its regulatory capital 
ratios would have exceeded those established for well-capitalized 
institutions under the prompt corrective action standards.

    On December 3, 1996, the Bank sold $100.0 million of  9 1/4% Subordinated 
Debentures due 2008 (the "1996 Debentures"), the principal amount of which is 
includable in the Bank's supplementary capital.  In addition, on December 3, 
1996, a new real estate investment trust subsidiary of the Bank sold $150.0 
million of its Noncumulative Exchangeable Preferred Stock, Series A (the 
"REIT Preferred Stock), which is eligible for inclusion as core capital of 
the Bank in an amount up to 25% of the Bank's total core capital.  If these 
transactions had occurred at September 30, 1996, the Bank's tangible, core, 
tier 1 risk-based and total risk-based regulatory capital ratios would have 
been 6.67%, 6.67%, 7.65% and 15.15%, respectively, which would have exceeded 
the ratios established for "well-capitalized" institutions.

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

                                       2


<PAGE>
                                  REAL ESTATE

REAL ESTATE INVESTMENTS

    The following tables set forth, at and for the periods indicated, certain
information regarding the properties in the Real Estate Trust's investment
portfolio at September 30, 1996.

<TABLE>
<CAPTION>

                                                     HOTELS

                                                            Average Occupancy (2)         Average Room Rate
                                                           ------------------------    ------------------------
                                                           Year Ended September 30,    Year Ended September 30,
                                                Available  ------------------------    ------------------------
  Location                 Name                  Rooms(1)  1996      1995      1994    1996      1995      1994
------------   -------------------------------- ---------- ------------------------    ------------------------
<S>            <C>                                <C>    <C>       <C>       <C>    <C>       <C>       <C>
  COLORADO                                            
   Pueblo           Holiday Inn - Pueblo            193    75%       81%       79%    $54.84    $50.97    $48.75
                                                                                                         
  MARYLAND                                                                                               
Gaithersburg      Holiday Inn - Gaithersburg        303    61%       65%       57%    $68.93    $61.76    $60.12
                                                                                                         
  MICHIGAN                                                                                               
Auburn Hills    Holiday Inn - Auburn Hills (3)      190    75%       77%        --    $86.52    $75.17    $   --
                                                                                                         
  NEW YORK                                                                                               
 Rochester      Holiday Inn - Rochester Airport     280    68%       73%       64%    $66.51    $65.38    $64.24
                                                                                                         
    OHIO                                                                                                 
 Cincinnati        Holiday Inn - Cincinnati         277    49%       52%       52%    $66.67    $62.37    $58.77
                                                                                                         
  VIRGINIA                                                                                               
 Arlington    Howard Johnsons  - National Airport   279    71%       66%       70%    $66.37    $66.08    $65.27
   McLean         Holiday Inn - Tysons Corner       316    73%       72%       74%    $78.98    $72.23    $64.41
  Sterling     Hampton Inn - Dulles Airport (4)     127    77%       75%       73%    $62.87    $58.06    $54.10
  Sterling        Holiday Inn - Dulles Airport      296    76%       71%       65%    $63.86    $59.53    $56.84
                                                  -----    ---       ---       ---    ------    ------    ------
Totals                                            2,261    68%       69%       66%    $68.79    $63.79    $59.85
</TABLE>

--------------------------------------------------------------------------------
(1)  Available rooms as of September 30, 1996.  On October 30, 1996 the Real
     Estate Trust acquired a 115 - room Holiday Inn Express in Herndon, 
     Virginia.
(2)  Average occupancy is calculated by dividing the rooms occupied by the
     rooms available.
(3)  Acquired November 30, 1994.
(4)  A Real Estate Trust subsidiary owns a 99% interest in this hotel. 



                                       3


<PAGE>

<TABLE>
<CAPTION>

                                         OFFICE AND INDUSTRIAL

                                                                                       Expiring Leases (1)
                                                                                       -------------------
                                                               Leasing Percentages         Year Ending
                                                Gross       -------------------------  -------------------
                                                                   September 30,          September 30,
                                               Leasable     -------------------------  -------------------
   Location                  Name              Area (1)      1996      1995      1994    1997      1998
---------------   --------------------------   --------     -------------------------  -------------------

<S>            <C>                            <C>          <C>       <C>       <C>    <C>       <C>

    FLORIDA                                             
Fort Lauderdale   Commerce Center - Phase II    60,959       92%       83%       72%    13,720    17,115
                                                    
    GEORGIA                                             
    Atlanta          900 Circle 75 Parkway     345,502       95%       94%      100%    34,283    92,602
    Atlanta          100 Circle 75 Parkway      89,412      100%      100%       96%    25,785    21,976
    Atlanta         1100 Circle 75 Parkway     268,779      100%      100%       98%    44,644    48,898
                                                
   LOUISIANA                                       
   Metairie             Metairie Tower          91,372       99%       98%       92%    33,356    29,790
                                                
   VIRGINIA                                        
   Chantilly           Dulles South (2)         38,502      100%       74%       63%    16,378     4,293
    McLean           8201 Greensboro Drive     353,742       85%       59%       98%    14,048    39,646
   Sterling            Dulles North (3)         59,886       81%      100%       87%    31,306    16,943
                                             ---------      ----      ----      ----   -------   -------
                          Totals             1,308,154       93%       85%       95%   213,520   271,263

</TABLE>

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

                                       4

<PAGE>

<TABLE>
<CAPTION>

                                         LAND PARCELS

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

<S>                 <C>                                 <C>         <C>
    FLORIDA                                                         
  Boca Raton          Arvida Park of Commerce (1)             20            Mixed Use            
Fort Lauderdale             Commerce Center                   14        Office & Warehouse       
                                                                                                 
    GEORGIA                                                                                      
    Atlanta                  Circle 75 (2)                   133        Office & Industrial      
                                                                                                 
    KANSAS                                                                                       
 Overland Park               Overland Park                   162    Residential, Office & Retail 
                                                                                                 
   MARYLAND                                                                                      
 Gaithersburg            Avenel Business Park                  8            Commercial           
  Rockville                 Flagship Centre                    8            Commercial           
                                                                                                 
   NEW YORK                                                                                      
  Rochester         Holiday Inn - Rochester Airport            3            Commercial           
                                                                                                 
   VIRGINIA                                                                                      
Loudoun County                Church Road                     40        Office & Industrial      
Loudoun County           Sterling Boulevard (3)               48            Industrial           
                                                             ---
                                 Total                       436 

</TABLE>

------------------------------------------------------------------------------
(1)  A Real Estate Trust subsidiary owns a 50% interest in 11 acres of this
     parcel.
(2)  Includes land parcel formerly identified as Perimeter Way.
(3)  A Real Estate Trust subsidiary owns a 99% interest in this parcel. 

                                       5


<PAGE>

                            OTHER REAL ESTATE INVESTMENTS

                      Location                         Name
                   ---------------         ------------------------------
                             PURCHASE - LEASEBACK PROPERTIES (1)

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


     TENNESSEE
     Knoxville                       Country Club                 232
                                                                  ---
                                        Total                     568


                                   SHOPPING CENTERS


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

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

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

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

                            MISCELLANEOUS PROPERTY (RETAIL)

                                                                      Gross    
                                                                     Leasable   
                                                                     Area (2) 
                                                                     --------
     MARYLAND
     Oxon Hill                       Wheeler Road                     24,000

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

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

                                       6

<PAGE>

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

INVESTMENT IN SAUL HOLDINGS LIMITED PARTNERSHIP

    On August 26, 1993 the Real Estate Trust consummated a series of
transactions (together with related transactions, the "Formation Transactions")
in which it transferred its 22 shopping center properties and one of its office
properties (the "Transferred Properties"), together with the debt associated
with such properties, to a newly organized limited partnership, Saul Holdings
Limited Partnership ("Saul Holdings Partnership"), and one of two newly
organized subsidiary limited partnerships of Saul Holdings Partnership (the
"Subsidiary Partnerships" and, collectively with Saul Holdings Partnership, the
"Partnerships").  In exchange for the Transferred Properties, the Real Estate
Trust received securities representing a 21.5% limited partnership interest in
Saul Holdings Partnership, which it holds directly and through two wholly owned
subsidiaries.  Saul Centers, Inc. ("Saul Centers"), a newly organized, publicly
held real estate investment trust, received a 73.0% general partnership interest
in Saul Holdings Partnership in exchange for the contribution of approximately
$220.7 million to Saul Holdings Partnership.  Entities under common control with
the Trust (the "Trust Affiliates") received limited partnership interests
collectively representing a 5.5% partnership interest in Saul Holdings
Partnership in exchange for the transfer of property management functions (the
"Management Functions") and certain other properties to the Partnerships.  In
addition, the Trust Affiliates received certain cash distributions from Saul
Holdings Partnership and purchased 4.0% of the common stock of Saul Centers in a
private offering consummated concurrently with the initial public offering of
such common stock.   B. Francis Saul II, the Chairman of the Board of Trustees
and Chief Executive Officer of the Trust, also serves as Chairman of the Board
of Directors and Chief Executive Officer of Saul Centers.

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

     In July 1994,  Saul Centers established Saul QRS, Inc. and SC Finance
Corporation, as wholly owned subsidiaries of Saul Centers.  Saul QRS, Inc. was
established to succeed to the interest of Saul Centers as the sole general
partner of one of the Subsidiary Partnerships, Saul Subsidiary I Limited
Partnership, and SC Finance Corporation was established for the purpose of
issuing $128 million of collateralized floating rate mortgage notes (the
"Mortgage Notes").  In connection with these transactions, Saul Holdings
Partnership transferred ten shopping centers previously owned by it to Saul
Subsidiary I Limited Partnership as an additional capital contribution and the
second 

                                       7


<PAGE>

Subsidiary Partnership, Saul Subsidiary II Limited Partnership,
transferred one shopping center previously owned by it to Saul Subsidiary I
Limited Partnership as an initial capital contribution in return for a limited
partnership interest in Saul Subsidiary I Limited Partnership.  As a consequence
of these transfers, Saul Subsidiary I Limited Partnership currently owns a total
of 17 shopping centers (the "Mortgaged Properties").  The Mortgaged Properties,
which continue to be managed by Saul Holdings Partnership, secure the mortgage
purchased with the proceeds of issuance of the Mortgage Notes.

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

    At September 30, 1996, Saul Holdings Partnership owned, directly or
indirectly through the Subsidiary Partnerships, 30 community and neighborhood
shopping centers (including the 22 shopping centers transferred by the Real
Estate Trust) located in seven states and the District of Columbia, one office
property and one office/retail property located in the District of Columbia and
one research park located in a Maryland suburb of Washington, D.C.(collectively,
the "Portfolio Properties).

    SAUL CENTERS.  Saul Centers  made an election to be treated as a real
estate investment trust ("REIT") for federal income tax purposes under Sections
856 through 860 of the Internal Revenue Code commencing with the year ended
December 31, 1993.  Under the Internal Revenue Code, REITs are subject to
numerous organizational and operational requirements. If Saul Centers continues
to qualify, it generally will not be subject to federal income tax, provided it
makes certain distributions to its stockholders and meets certain organizational
and other requirements. Saul Centers has announced that it intends to make
regular quarterly dividend distributions to its stockholders.

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

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

                                       8


<PAGE>

periodically by the independent directors of Saul Centers, who constitute 
five of the nine members of the board of directors.  

    EXCLUSIVITY AGREEMENT AND RIGHT OF FIRST REFUSAL.  The Real Estate Trust
has entered into an Exclusivity Agreement (the "Exclusivity Agreement") with,
and has granted a right of first refusal (the "Right of First Refusal") to, Saul
Centers and the Partnerships (collectively, the "Company").  The purpose of
these agreements is to minimize potential conflicts of interest between the Real
Estate Trust and the Company.  The Exclusivity Agreement and Right of First
Refusal generally require the Real Estate Trust to conduct its shopping center
business exclusively through the Company and to grant the Company a right of
first refusal to purchase commercial properties and development sites that
become available to the Real Estate Trust in the District of Columbia or
adjacent suburban Maryland.  Subject to the Exclusivity Agreement and Right of
First Refusal, the Real Estate Trust will continue to develop, acquire, own and
manage commercial properties and own land suitable for development as, among
other things, shopping centers and other commercial properties.

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

    REIMBURSEMENT AGREEMENT.  Pursuant to a reimbursement agreement among the
partners of the Partnerships, the Real Estate Trust and two of its subsidiaries
that are partners in the Partnerships have agreed to reimburse Saul Centers and
the other partners in the event the Partnerships fail to make payments with
respect to certain portions of the Partnerships' debt obligations and Saul
Centers or any such other partners personally make payments with respect to such
debt obligations. The maximum potential obligations of the Real Estate Trust and
its subsidiaries under this agreement total $115.5 million.  See Note 2 to the
Consolidated Financial Statements in this report.  The Real Estate Trust
believes that the Partnerships will be able to make all payments due with
respect to their debt obligations.

    TAX CONFLICTS.  The fair market value of each of the properties contributed
to the Partnerships by the Real Estate Trust and its subsidiaries at the date of
the Formation Transactions (the "FMV" of each such property) exceeded the tax
basis of such property (with respect to each property, such excess is referred
to as the "FMV-Tax Difference").  In the event Saul Centers or Saul QRS, Inc.,
acting as general partner of a Partnership, causes such Partnership to dispose
of, or there is an involuntary disposition of, one or more of such properties, a
disproportionately large share of the total gain for federal income tax purposes
would be allocated to the Real Estate Trust or its subsidiaries as a result of
the property disposition.  In general, if the gain recognized by the Partnership
on such a property disposition is less than or equal to the FMV-Tax Difference
for such property (as previously reduced by the amounts of special tax
allocations of depreciation deductions to the partners), all such gain will be
allocated to the Real Estate Trust or its subsidiaries.  To the extent the gain
recognized by the Partnerships on the property disposition exceeds the FMV-Tax

                                       9


<PAGE>

Difference (as adjusted), such excess generally will be allocated among all
partners in Saul Holdings based on their relative percentage interests.  In
general, the amount of federal income tax liability in respect of gain allocated
to the Real Estate Trust or its subsidiaries in the event of such a property
disposition is likely to exceed, perhaps substantially, the amount of cash, if
any, distributable to the Real Estate Trust or its subsidiaries as a result of
the property disposition.  In addition, future reductions in the level of the
Partnerships' debt, any release of the guarantees of such debt by the Real
Estate Trust or its subsidiaries (described above under "Reimbursement
Agreement") or any refinancings in which the Real Estate Trust or its
subsidiaries do not assume a comparable obligation to that contained in the
Reimbursement Agreement could cause the Real Estate Trust or its subsidiaries to
have taxable constructive distributions without the receipt of any corresponding
amounts of cash.  See Note 2 to the Consolidated Financial Statements in this
report.

    REGISTRATION RIGHTS.  Saul Centers has granted the Real Estate Trust and
the Trust Affiliates certain "demand" and "piggyback" registration rights
(collectively, the "Registration Rights") with respect to the shares of Saul
Centers common stock acquired in connection with the Formation Transactions or
as a consequence of exercise of the Rights (the "Registration Shares").  Subject
to certain limitations, the Registration Rights grant the holders of
Registration Shares the opportunity to cause Saul Centers to register all or any
portion of their respective Registration Shares once in each calendar year and
to have such Shares registered incidentally to any registration, by Saul
Centers, of shares of common stock or other securities substantially similar to
common stock.  Except with respect to the Registration Rights incident to a
pledge of Registration Shares or Saul Holdings Partnership interests, the demand
Registration Rights may be exercised only prior to such time, if any, as the
holder is permitted to sell the Registration Shares pursuant to Rule 144 (k)
under the Securities Act of 1933.  Saul Centers will bear expenses incident to
its registration obligations upon exercise of the Registration Rights, except
that it will not bear any underwriting discounts or commissions, Securities and
Exchange Commission or state Blue Sky registration fees, or transfer taxes
relating to registration of Registration Shares.

COMPETITION

    As an owner of, or investor in, commercial real estate properties, the Real
Estate Trust is subject to competition from a variety of other owners of similar
properties in connection with their sale, lease or other disposition and use. 
Management believes that success in such competition is dependent upon the
geographic location of the property, the performance of property managers, the
amount of new construction in the area and the maintenance and appearance of the
property.  Additional competitive factors with respect to commercial and
industrial properties are the ease of access to the property, the adequacy of
related facilities such as parking, and the ability to provide rent concessions
and additional tenant improvements without increasing rent.  Management believes
that general economic circumstances and trends and new properties in the
vicinity of each of the Real Estate Trust's properties also will be competitive
factors.

ENVIRONMENTAL MATTERS

    The Real Estate Trust's properties are subject to various laws and
regulations relating to environmental and pollution controls. The Real Estate
Trust requires an environmental study to be 


                                       10

<PAGE>

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

RELATIONSHIPS WITH THE B. F. SAUL COMPANY

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

    The Advisor acts as the Real Estate Trust's investment advisor and manages
the day-to-day financial, accounting, legal and administrative affairs of the
Real Estate Trust.  Franklin acts as leasing and management agent for most of
the income-producing properties owned by the Real Estate Trust, and plans and
oversees the development of new properties and the expansion and renovation of
existing properties.

    The Trustees, including the two independent Trustees, review the fees and
compensation arrangements between the Real Estate Trust and the Saul Company and
its related entities and affiliates and believe that such fees and compensation
arrangements are as favorable to the Real Estate Trust as would be obtainable
from unaffiliated sources.  See "Certain Relationships and Related
Transactions."

HOLDING COMPANY REGULATION

    The  Trust and the Saul Company, by virtue of their direct and indirect
control of the Bank, and Chevy Chase Property Company ("CCPC") and CCPC's
wholly-owned subsidiary, Westminster Investing Corporation ("Westminster"), by
virture of Westminster's direct and indirect ownership of 24.9% of the common
stock of the Trust (collectively the "Holding Companies"), are "savings and loan
holding companies" subject to regulation, examination and supervision by the
OTS.  The Bank is prohibited from making or guaranteeing loans or advances to or
for the benefit of the Holding Companies or other affiliates engaged in
activities beyond those permissible for bank holding companies and from
investing  in the securities of the Holding Companies or other affiliates. 
Further, transactions between the Bank and the Holding Companies must be on
terms substantially the same, or at least as favorable to the Bank , as those
that would be available to non-affiliates.

    The Holding Companies must obtain the prior approval of the OTS before
acquiring by merger, consolidation or purchase of assets any federally insured
savings institution or any savings and loan holding company.  As unitary savings
and loan holding companies, the Holding Companies 

                                       11


<PAGE>

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

    The Trust and the Saul Company entered into an agreement with OTS's
predecessor, the Federal Savings and Loan Insurance Corporation, to maintain the
Bank's regulatory capital at the required levels, and, if necessary, to infuse
additional capital to enable the Bank to meet those requirements.  Since the
execution of this agreement, the OTS has changed its policy and now accepts more
limited agreements from those acquiring thrift institutions.  In addition, the
regulatory capital requirements applicable to the Bank have  changed
significantly as a result of FIRREA.  The OTS has stated that capital
maintenance agreements entered into prior to such modification of OTS policy and
the enactment of FIRREA were not affected by such changes.  The Trust and the
Saul Company have not sought to modify the existing agreement.  To the extent
the Bank is unable to meet regulatory capital requirements in the future, the
OTS could seek to enforce the obligations of the Trust and the Saul Company
under the agreement.  The Bank's business plan does not contemplate any future
capital contributions from the Trust or the Saul Company.

    If the Bank were to become "undercapitalized" under the prompt corrective
action regulations, it would be required to file a capital restoration plan with
the OTS setting forth, among other things, the steps the Bank would take to
become "adequately capitalized."  The OTS could not accept the plan unless the
Holding Companies guaranteed in writing the Bank's compliance with that plan. 
The aggregate liability of the Holding Companies under such a commitment would
be limited to the lesser of (i) an amount equal to 5.0% of the Bank's total
assets at the time the Bank became "undercapitalized" and (ii) the amount
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.

FEDERAL TAXATION

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

                                       12


<PAGE>

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

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

    The Internal Revenue Service ("IRS") is currently conducting audits of the
federal income tax returns of the Trust for the taxable years ended September
30, 1992 and September 30, 1993.  

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

    The Bank has calculated the bad debt deduction for tax purposes under the
experience method since calendar year 1988. The experience method is based on
the institution's actual loan loss experience over a prescribed period.  If the
Bank were not treated as a qualifying institution for any taxable year, it would
be required to recapture its bad debt reserve (for 1996, approximately $114.8
million) into taxable income.  In addition, the Bank would be allowed to deduct
only those bad debts that actually were sustained during the taxable year.  If
the Bank were no longer permitted to use the reserve method, the change would
not have a significant adverse effect on the Bank's reported earnings under
generally accepted accounting principles.

    Provisions that repealed the thrift bad debt provisions of the Internal
Revenue Code were included in the Small Business Act of 1996 and are effective
for tax years beginning after December 31, 1995.  As a result, the Bank will no
longer be able to used the "reserve method" for computing its bad debt deduction
and will be allowed to deduct only those bad debts actually incurred during the
taxable year.  The bad debt provisions of this legislation also require thrifts
to recapture and pay 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).  Bad debt reserves accumulated prior to 1988 do not have to be
recaptured under this legislation.  The tax liability related to the recapture
of the bad debt reserves accumulated since 1987 has been reflected in the Bank's
financial statements as of September 30, 1996.
    
    CONSOLIDATED TAX RETURNS; TAX SHARING PAYMENTS.  In recent years, the
operations of the Trust have generated significant NOL's. The Bank's taxable
income in the current year was sufficient to fully utilize all NOL carryforwards
and the current year tax loss of the Trust.  Under the terms of a tax sharing
agreement dated June 28, 1990 (the "Tax Sharing Agreement"), Chevy Chase is

                                       13


<PAGE>

obligated to make payments to the Trust based on its taxable income, as
explained more fully below.  Under the terms of the Bank's board resolution, the
Bank is permitted to make tax sharing payments to the Trust of up to $15.0
million relating to any fiscal year without OTS approval. 

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

    The Bank made a tax sharing payment of $20.6 million in fiscal 1990, tax 
sharing payments totaling $29.6 million in fiscal 1991 and a tax sharing 
payment of $5.0 million in fiscal 1993.  OTS approval of the $5.0 million 
payment made in 1993 was conditioned on a pledge by the  Trust of certain  
Trust assets to secure certain of its obligations under the Tax Sharing 
Agreement.  Following execution of such a pledge, the OTS approved, and the 
Bank made during fiscal 1994, 1995 and 1996, additional tax sharing payments 
of $9.6, $20.5 and $25.0 million, respectively, to the Trust.  It is expected 
that the Bank will have taxable income in future years and additional 
operating losses will be utilized to reduce the overall tax liability of the 
group which would otherwise arise from such taxable income of the Bank (or 
from the taxable income of other members of the Trust's affiliated group). 
    
    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 (i) the tax benefit to the
group of using such tax losses or unused tax credits in the group's consolidated
federal income tax return for such year, plus (ii) to the extent such losses or
credits are not used by the group in such year, the amount of the tax refunds
which the Bank would otherwise have been able to claim if it were not being
included in the consolidated federal income tax return of the group (but not in
excess of the net amount paid by the Bank to the Trust pursuant to the Tax
Sharing Agreement).  There is no assurance that the  Trust would be able to
fulfill this obligation.  If the Trust did not make the reimbursement, the OTS
could attempt to characterize such nonpayment as an unsecured extension of
credit by the Bank to the Trust which, as described above under "Regulation -
Holding Company Regulation," is prohibited under current law.  The Tax Sharing
Agreement itself does not provide for any remedies upon a breach by any party of
its obligations under the Agreement.

                                       14

<PAGE>

STATE TAXATION

    Maryland law does not allow the filing of consolidated income tax returns,
and thus the Trust and its subsidiaries, which includes the Bank, subject to
Maryland income tax are required to file separately in Maryland.  The Trust and
its subsidiaries are also subject to income taxes in other states, some of which
allow or require combined or consolidated filing.    The Commonwealth of
Virginia is currently conducting audits of the consolidated state income tax
returns of the Trust for the taxable years ended September 30, 1991, September
30, 1992 and September 30, 1993.


                                       15


<PAGE>

                                     BANKING

REGULATION

    FEDERAL HOME LOAN BANK SYSTEM.  The Bank is a member of the Federal Home 
Loan Bank ("FHLB") of Atlanta.  The 12 FHLBs are administered by the Federal 
Housing Finance Board, an independent agency within the executive branch of 
the federal government.  The FHLBs serve as a central credit facility for 
their members. Their primary credit mission is to enhance the availability 
of residential mortgages.  From time to time, the Bank obtains advances from 
the FHLB.  At September 30, 1996, the Bank had outstanding $269.1 million of 
advances from the FHLB of Atlanta.  See Note 18 to the Consolidated Financial 
Statements in this report and "Deposits and Other Sources of Funds - 
Borrowings."

    As a member of the FHLB of Atlanta, the Bank is required to acquire and 
hold shares of capital stock in that bank in an amount equal to the greater 
of:  (i) 1.0% of mortgage-related assets (i.e., home mortgage loans, 
home-purchase contracts and similar obligations); (ii) 0.3% of total assets; 
(iii) $500; or (iv) 5.0% of outstanding advances. Pursuant to this 
requirement, the Bank had an investment of $31.9 million in FHLB stock at 
September 30, 1996.  The Bank earned dividends of $2.3 million during each of 
the years ended September 30, 1996 and 1995.

    LIQUIDITY REQUIREMENTS.  The Bank is required to maintain a daily average 
balance of liquid assets (including cash, federal funds, certain time 
deposits, certain bankers' acceptances, certain corporate debt securities and 
commercial paper, securities of certain mutual funds and specified U.S. 
Government, state government and federal agency obligations) equal to a 
specified percentage of its average daily balance of deposits (based upon the 
preceding month's average balances), plus borrowings (or portions thereof) 
payable in one year or less. This liquidity requirement is currently 5.0%.  
Federal regulations also require that each institution maintain an average 
daily balance of short-term liquid assets equal to at least 1.0% of its 
average daily balance of deposits, plus borrowings payable in one year or 
less.  If an institution's liquid assets or short-term liquid assets at any 
time do not at least equal (on an average daily basis for the month) the 
amount required by the OTS, the institution could be subject to various 
monetary penalties imposed by the OTS.  At September 30, 1996, the Bank was 
in compliance with both requirements, with a liquid assets ratio of 13.1% and 
a short-term liquid assets ratio of 8.8%.

     DEPOSIT INSURANCE PREMIUMS.  Under FDIC insurance regulations, the Bank 
is required to pay premiums to SAIF for insurance of its accounts. The FDIC 
utilizes a risk-based premium system in which an institution pays premiums 
for deposit insurance on its SAIF-insured deposits that range based on 
supervisory evaluations and on the institution's capital category under the 
OTS's prompt corrective action regulations.  See "Prompt Corrective Action."

                                        16

<PAGE>

    Although the FDIC insures commercial banks as well as thrifts, the 
insurance reserve funds for commercial banks and thrifts have been segregated 
into the Bank Insurance Fund ("BIF") and the SAIF, respectively.  The FDIC is 
required to maintain the reserve levels of both the BIF and the SAIF at 1.25% 
of insured deposits.   The BIF reserve reached the mandated 1.25% of insured 
deposits during fiscal 1995.  Legislation was enacted on September 30, 1996 
that, among other things, imposed on thrift institutions a one-time 
assessment of 65.7 cents for every $100 of SAIF-insured deposits to 
recapitalize the SAIF to the 1.25% level.  Pursuant to this legislation, 
effective January 1, 1997, the FDIC has lowered the risk-based schedule for 
SAIF assessment rates so that the rates for SAIF members are identical to the 
rates for BIF members. In addition, commercial banks will be required to 
share in the payment of interest due on Financing Corporation ("FICO") bonds 
used to rescue the savings and loan industry in the 1980s. For the first 
semi-annual period of 1997, annualized FICO assessments to be added to 
deposit insurance premiums will equal 6.48 basis points for SAIF members and 
1.3 basis points for BIF members. This differential is expected to remain in 
effect through December 31, 1999, after which BIF and SAIF members will pay 
identical FICO assessments, which are expected to be approximately 2.4 basis 
points. Thus, the Bank and other institutions with SAIF-assessable deposits 
will continue to pay somewhat higher deposit insurance premiums than 
institutions with BIF-assessable deposits, which could lead to a competitive 
disadvantage in the pricing of loans and deposits and additional operating 
expenses.  In addition, regulators have recently begun approving applications 
by several thrift organizations to establish or acquire BIF-insured 
affiliates and prolonged continuation of the disparity in deposit insurance 
premiums could lead to more widespread efforts to shift insured deposits from 
SAIF to BIF, thus further destabilizing the SAIF.  However, the new 
legislation contains provisions designed to prohibit deposit transfers from 
SAIF to BIF under certain circumstances.

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

    REGULATORY CAPITAL.  Under OTS regulations implementing the capital 
requirements imposed by FIRREA, savings institutions, such as the Bank, are 
subject to a minimum tangible capital requirement, a minimum core (or 
leverage) capital requirement, and a minimum total risk-based capital 
requirement.  Each of these requirements generally must be no less stringent 
than the capital standards for national banks.  At September 30, 1996, the 
Bank's tangible, core and total risk-based regulatory capital ratios were 
5.21%, 5.21% and 10.14%, respectively, compared to the minimum requirements 
under FIRREA of 1.50%, 3.00% and 8.00%, respectively, in effect at that date.

    Under FIRREA's minimum leverage ratio, Chevy Chase must maintain a ratio of
"core capital" to tangible assets of not less than 3.0%.  However, under the OTS
"prompt corrective action" regulations, an institution that is not in the
highest supervisory category must maintain a minimum leverage ratio of 4.0% to
be considered an "adequately capitalized" institution.  See "Prompt Corrective
Action." "Core capital" generally includes common shareholders' equity,
noncumulative perpetual preferred stock and minority interests in consolidated
subsidiaries, less 

                                       17


<PAGE>

investments in certain subsidiaries and certain intangible assets, except 
that purchased mortgage servicing rights and originated mortgage servicing 
rights (collectively "MSRs") and purchased credit card relationships 
("PCCRs") may be included up to an aggregate amount of 50% of core capital. 
PCCRs are also subject to a sublimit of 25% of core capital.  For these 
purposes, MSRs and PCCRs are valued at the lesser of 90% of fair market value 
or 100% of the current unamortized book value.  At September 30, 1996, the 
Bank had qualifying MSRs of $32.1 million, which constituted 10.8% of core 
capital at that date, and had no PCCRs.

    Deductions from capital apply for investments in, and loans to, subsidiaries
engaged in activities not permissible for national banks, for equity investments
that are not permissible for national banks and for the portion of land loans
and non-residential construction loans in excess of an 80% loan-to-value ratio. 
All such deductions were fully phased-in as of July 1, 1996.

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

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

    There are currently four categories of risk-weightings:  0% for cash and 
similar assets, 20% for qualifying mortgage-backed securities, 50% for 
qualifying residential permanent real estate loans and 100% for other assets, 
including credit card loans, commercial real estate loans and loans more than 
90 days past due and for real estate acquired in settlement of loans.  
Savings institutions generally are required to maintain risk-based capital 
equal to 8.0% of risk-weighted assets, with at least half of that amount in 
the form of core capital.

    A savings institution's supplementary capital may be used to satisfy the
risk-based capital requirement only to the extent of the institution's core
capital.  Supplementary capital includes cumulative perpetual preferred stock,
qualifying non-perpetual preferred stock, qualifying subordinated debt,
nonwithdrawable accounts and pledged deposits, and allowances for loan and lease
losses (up to a maximum of 1.25% of risk-weighted assets).  At September 30,
1996, the Bank had $88.0 million in allowances for loan and lease losses, of
which $64.2 million was includable as supplementary capital.

    Subordinated debt may be included in supplementary capital with OTS approval
subject to a phase-out based on its term to maturity.  The phase-out established
for such maturing capital instruments by the OTS permits an institution to
include such instruments in supplementary capital under one of two phase-out
options:  (i) at the beginning of each of the last five years prior to 

                                       18


<PAGE>

the maturity date of the instrument, the institution may reduce the amount 
eligible to be included by 20% of the original amount or (ii) the institution 
may include only the aggregate amount of maturing capital instruments that 
mature in any one year during the seven years immediately prior to an 
instrument's maturity that does not exceed 20% of the institution's capital.  
Once an institution selects either the first or second option, it must 
continue to select the same option for all subsequent issuances of maturing 
capital instruments as long as there is any outstanding balance of such 
instruments for which an option has been selected.  At September 30, 1996, 
the Bank had a $10.0 million capital note outstanding which was treated in 
accordance with the rules in effect at November 7, 1989, the date of issuance 
of the new regulation, none of which was included in supplementary capital 
and an additional $150.0 million in maturing subordinated capital 
instruments, all of which was includable as supplementary capital.  See 
"Deposits and Other Sources of Funds - Borrowings."

    FDICIA required OTS and the other regulators to revise their risk-based 
capital standards to take into account interest-rate risk, concentration of 
credit risk and the risks of non-traditional activities.  The OTS amended its 
risk-based capital rules to incorporate interest-rate risk measures to 
complement measures already established for credit risk.  An institution that 
would experience a change in "portfolio equity" in an amount in excess of 
2.0% of the institution's assets as a result of a 200 basis point increase or 
decrease in the general level of interest rates would be required to maintain 
additional amounts of risk-based capital based on the lowest interest rate 
exposure at the end of the three previous quarters.  In August 1995, the OTS 
indefinitely delayed implementation of its interest-rate risk regulation 
pending the testing of an OTS appeals process.  At September 30, 1996, the 
Bank would not have been required to maintain additional amounts of 
risk-based capital had the interest-rate risk component of the capital 
regulations been in effect.

    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 an individual minimum
capital requirement.

    OTS regulations contain special rules affecting savings institutions with
certain kinds of subsidiaries.  For purposes of determining compliance with each
of the capital standards, a savings institution's investments in, and extensions
of credit to, subsidiaries engaged in activities not permissible for a national
bank ("non-includable subsidiaries") are, with certain exceptions, deducted from
the savings institution's capital.  At September 30, 1996, investments in
non-includable subsidiaries were fully deducted from all three FIRREA capital
requirements.  All or a portion of the assets of each of a savings institution's
subsidiaries are generally consolidated with the assets of the savings
institution for regulatory capital purposes unless all of the savings
institution's investments in, and extensions of credit to, such subsidiary are
deducted from capital.  Chevy Chase's real estate development subsidiaries are
its only subsidiaries engaged in activities not permissible for a national bank.
At September 30, 1996, the Bank's investments in, and extensions of credit to,
its non-includable subsidiaries totaled approximately $3.8 million, of which
$3.6 million constituted a deduction from tangible capital.

    OTS capital regulations also require the 100% deduction from total 
capital of all equity investments that are not permissible for national banks 
and the portion of land loans and non-

                                       19


<PAGE>

residential construction loans in excess of an 80% loan-to-value ratio.  The 
Bank's only equity investments at September 30, 1996 were certain properties 
classified as real estate held for sale which the Bank has agreed to treat as 
equity investments for regulatory capital purposes.  At September 30, 1996, 
the book value of these properties after subsequent valuation allowances, was 
$20.7 million, of which $19.7 million was required to be deducted from total 
capital.  The Bank had no land loans or non-residential construction loans 
with loan-to-value ratios greater than 80% at September 30, 1996.  The Bank 
has $1.2 million of general valuation allowances maintained against its 
non-includable subsidiaries and equity investments which, pursuant to OTS 
guidelines, is available as a "credit" against the deductions from capital 
otherwise required.

    OTS capital regulations provide a five-year holding period (or such longer
period as may be approved by the OTS) for real estate acquired in settlement of
loans ("REO" or "real estate held for sale") to qualify for an exception from
treatment as an equity investment.  If an REO property is considered an equity
investment, its then-current book value is deducted from total risk-based
capital.  Accordingly, if the Bank is unable to dispose of any REO property
(through bulk sales or otherwise) prior to the end of its applicable five-year
holding period and is unable to obtain an extension of such five-year holding
period from the OTS, the Bank could be required to deduct the then-current book
value of such REO property from risk-based capital.  In November 1996, the Bank
received from the OTS extensions through November 12, 1997 of the holding
periods for certain of its REO properties acquired through foreclosure in fiscal
1990, 1991 and 1992.  See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition - Banking - Capital - 
Regulatory Action and Requirements."

    The Bank's ability to maintain capital compliance is dependent on a 
number of factors, including, for example, general economic conditions and 
the condition of local real estate markets.  See "Management's Discussion and 
Analysis of Financial Condition and Results of Operations - Financial 
Condition - Banking - Capital - Regulatory Action and Requirements."

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

    PROMPT CORRECTIVE ACTION.  Pursuant to FDICIA, the OTS and the other federal
agencies regulating financial institutions have adopted regulations which apply
to every FDIC-insured commercial bank and thrift institution a system of
mandatory and discretionary supervisory actions which generally become more
severe as the capital levels of an individual institution decline.  The
regulations establish five capital categories to which institutions are assigned
for purposes of determining their treatment under these prompt corrective action
provisions.  An institution is categorized as "well capitalized" under the
regulations if (i) it has a leverage ratio of at least 5.0%, a tier 1 risk-based
capital ratio of at least 6.0% and a total risk-based capital ratio of at least
10.0%, and (ii) is not subject to any written agreement, order, capital
directive or prompt corrective action directive issued by the OTS to meet and
maintain a specific capital level.  An institution is considered "adequately
capitalized" if such capital ratios are at least 4.0% (3.0% if rated in the
highest supervisory category), 4.0% and 8.0%, respectively.  An institution with
a leverage ratio below 4.0% (3.0% if rated in the highest supervisory category),
a tier 1 risk-

                                       20


<PAGE>

based capital ratio below 4.0% or a total risk-based capital ratio below 8.0% 
is considered "undercapitalized" and an institution with ratios under 3.0%, 
3.0% or 6.0%, respectively, is considered "significantly undercapitalized."  
Finally, an institution is considered "critically undercapitalized," and 
subject to provisions mandating appointment of a conservator or receiver, if 
its ratio of "tangible equity" (generally defined by the OTS as core capital 
plus cumulative perpetual preferred stock) to total assets is 2.0% or less.  
An institution's classification category could be downgraded if, after notice 
and an opportunity for a hearing, the OTS determined that the institution is 
in an unsafe or unsound condition or has received and has not corrected a 
less than satisfactory examination rating for asset quality, management, 
earnings or liquidity.

    At September 30, 1996, the Bank's leverage, tier 1 risk-based and total
risk-based regulatory capital ratios were 5.21%, 5.80% and 10.14%, respectively,
which exceeded the minimum ratios established for "adequately-capitalized"
institutions.  If the sales of the 1996 Debentures and the REIT Preferred Stock
had occurred at September 30, 1996, the Bank's tangible, core, tier 1 risk-based
and total risk-based regulatory capital ratios would have been 6.67%, 6.67%,
7.65% and 15.15%, respectively, which would have exceeded the ratios established
for "well capitalized" institutions.

    REGULATORY AGREEMENT.  On March 29, 1996, the OTS released the Bank from its
September 30, 1991 written agreement with the OTS, as amended in October 1993,
and from regulatory restrictions on asset growth.  In connection with the
termination of the written agreement and at the request of the OTS, the Board of
Directors of the Bank adopted a resolution which addressed certain issues
previously addressed by the written agreement.  Among other things, the
resolution permits the Bank:  (i) to make tax sharing payments without OTS
approval to the B.F. Saul Real Estate Investment Trust (the "Trust"), which owns
80% of the Bank's Common Stock, of up to $15.0 million relating to any single
fiscal year; and (ii) to declare dividends on its common stock in any quarterly
period up to the lesser of (A) 50% of its after tax net income for the
immediately preceding quarter or (B) 50% of the average quarterly after tax net
income for the immediately preceding four quarter period, minus (in either case)
dividends declared on the Bank's preferred stock during that quarterly period. 
The resolution also provides that the Bank will present a plan annually to the
OTS detailing anticipated consumer loan securitization activity.  

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

    At September 30, 1996, the Bank had 83.4% of its portfolio assets 
invested in qualified thrift investments.  Additionally, the Bank met the QTL 
test in each of the previous 12 months.

                                       21


<PAGE>

    Legislation was enacted on September 30, 1996 that, among other things, 
significantly liberalizes the current QTL test by, among other things, 
permitting inclusion of credit card and educational loans as qualified thrift 
investments without limits (previously, such loans could be included only up 
to 10% of the institution's assets).  As a result of this provision, the 
Bank's entire credit card portfolio is now eligible for inclusion as a 
qualified thrift investment, thus substantially reducing the QTL test's 
impact as a constraint on the Bank's business strategies.

    A thrift's "qualified thrift investments" consist of residential housing 
loans (including home equity loans and manufactured housing loans), 
mortgage-backed securities FHLB and Federal National Mortgage Association 
stock and, beginning September 30, 1996, credit card 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 50% of residential housing loans originated and sold within 
90 days, investments in real estate-oriented service corporations, 200% of 
mortgage loans for residences, churches, schools, nursing homes and small 
businesses in areas with unmet credit needs (low or moderate income areas 
where credit demand exceeds supply).  Intangible assets, including goodwill, 
are specifically excluded from qualified thrift investments.

    An institution that fails to meet the QTL test is subject to significant
penalties.  Immediately after an institution ceases to be a QTL, it (i) may not
make any new investment or engage directly or indirectly in any other new
activity unless the investment or activity would be permissible for a national
bank, (ii) may not establish any new branch office at any location at which a
national bank could not establish a branch office, (iii) may not obtain new
advances from the applicable FHLB and (iv) may not pay dividends beyond the
amounts permissible if it were a national bank.  One year following an
institution's failure to meet the test, the institution's holding company parent
must register and be subject to supervision as a bank holding company.  Three
years after failure to remain a QTL, an institution may not retain any
investments or engage in any activities that would be impermissible for a
national bank, and must repay any outstanding FHLB advances as promptly as
possible consistent with the safe and sound operation of the institution. 
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 Chevy Chase is engaged in activities that are not currently 
permissible for national banks, such as investing in subsidiaries that engage 
in real estate development activities, failure to satisfy the QTL test would 
require Chevy Chase to terminate these activities and divest itself of any 
prohibited assets held at such time.  Based on a review of the Bank's current 
activities, management of the Bank believes that compliance with these 
restrictions would not have a significant adverse effect on the Bank.  In 
addition, because the Trust is engaged in real estate ownership and 
development, which are activities that are currently prohibited for bank 
holding companies, failure by Chevy Chase to remain a QTL, in the absence of 
a significant restructuring of the Trust's operations, would, in effect, 
require the Trust to reduce its ownership of Chevy Chase to a level at which 
it no longer would be deemed to control the Bank.

    The Bank has 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.

                                       22

<PAGE>

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

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

    Tier 2 institutions are defined as institutions that are in compliance with
their current, but not their fully phased-in capital requirements, and depending
on their specific capital levels, are authorized to make capital distributions
without regulatory approval in amounts not to exceed 75% of net income for the
most recent four quarters.  However, all deductions from capital requirements
have been fully phased-in as of July 1, 1996, resulting in all institutions 
being classified on the basis of their capital levels as either Tier 1 or 
Tier 3 institutions since that date.

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

    At September 30, 1996, the Bank had sufficient levels of capital to be a 
Tier 1 institution for purposes of the capital distribution regulation.  
However, the OTS retains discretion under its capital distribution regulation 
to treat an institution that is in need of more than normal supervision 
(after written notice) as a Tier 2 or Tier 3 institution.

    In December 1994, the OTS proposed to amend its capital distribution 
regulation to simplify it and to conform it to the system of "prompt 
corrective action" established by FDICIA.  The proposal would replace the 
current "tiered" approach with one that, in accordance with the OTS's "prompt 
corrective action" rule, would allow associations to make only those capital 
distributions that would not cause capital to drop below the level required 
to remain adequately capitalized. Those associations that are held by a 
savings and loan holding company, such as the Bank, or that receive a 
composite supervisory rating lower than "2" would continue to be required to 
notify the OTS prior to making any capital distributions.  Those associations 
that are undercapitalized or that would be undercapitalized following a 
capital distribution, or that are not undercapitalized but are in "troubled 
condition" (defined generally to include institutions subject to a formal 
written agreement relating to safety and soundness), could make a capital 
distribution only upon application to and approval by the OTS.  The proposal 
would delete from the OTS regulations the current numerical restrictions on 
the amount of permissible capital distributions, but the OTS has indicated 
that it would continue to use them as general guidelines.


                                       23

<PAGE>

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

     Although the Bank believes that dividends paid on the REIT Preferred 
Stock issued by Chevy Chase Preferred Capital Corporation (the "REIT 
Subsidiary") should not be considered "capital distributions" for this 
purpose, there can be no assurances that the OTS would agree with this 
position.  Without addressing the issue of whether dividends on the REIT 
Preferred Stock are "capital distributions" subject to the regulations, the 
OTS has indicated that it would not object to the REIT Subsidiary's payment 
of quarterly dividends on the REIT Preferred Stock in an amount up to the 
amount of the REIT Subsidiary's net income for that quarter.  See 
"Management's Discussion and Analysis of Financial Condition and Results of 
Operations - Financial Condition - Banking - Capital - Regulatory Action and 
Requirements."  The REIT Subsidiary currently expects that its net income 
will be in excess of amounts needed to pay dividends on the REIT Preferred 
Stock. However, dividends paid on the REIT Preferred Stock in excess of the 
REIT Subsidiary's net income could be treated as "capital distributions" by 
the OTS, in which case the REIT Subsidiary's payment of such dividends would 
be subject to restrictions under the OTS capital distribution regulations.  
Moreover, if dividends on the REIT Preferred Stock were treated as "capital 
distributions," they would be included, together with dividends paid on the 
13% Preferred Stock and the common stock of the Bank, in calculating the 
amount of "capital distributions" that could be paid by the Bank without 
obtaining OTS approval. The Bank currently intends to seek clarification of 
these issues from the OTS.

    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 its federal regulator to pay "dividends" in 
any fiscal year in excess of 50% of the Bank's net income for that fiscal 
year, provided that any dividends permitted under such limitation could be 
deferred and paid in a subsequent year.  However, under both the current and 
the proposed OTS capital distribution rule, with the approval of the OTS, the 
Bank could substitute the requirements of the OTS capital distribution rule 
for any more stringent requirements imposed on it by a previous written 
agreement.

    The Bank is subject to other limitations on its ability to pay dividends. 
The indenture pursuant to which $150 million principal amount of the Bank's 
9 1/4% Subordinated Debentures 

                                       24

<PAGE>

due 2005 was issued in 1993 (the "1993 Indenture") provides that the Bank may 
not pay dividends on its capital stock unless, after giving effect to the 
dividend, no event of a continuing default shall have occurred and the Bank 
is in compliance with its regulatory capital requirements. In addition, the 
amount of the proposed dividend may not exceed the sum of (i) $15 million, 
(ii) 66 2/3% of the Bank's consolidated net income (as defined) accrued on a 
cumulative basis commencing on October 1, 1993, and (iii) the aggregate net 
cash proceeds received by the Bank after October 1, 1993 from the sale of 
qualified capital stock or certain debt securities, minus the aggregate 
amount of any restricted payments made by the Bank.  Notwithstanding these 
restrictions on dividends, provided no event of default has occurred or is 
continuing under the 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 Chevy Chase Bank, F.S.B.  10 3/8% Noncumulative 
Preferred Stock, Series B (the "Series B Preferred Stock"), if issued in 
exchange for the outstanding REIT Preferred Stock.  See "Management's 
Discussion and Analysis of Financial Condition and Results of Operations - 
Financial Condition - Banking - Capital - Regulatory Action and Requirements".

    In connection with the termination of the written agreement and at the 
request of the OTS, the Board of Directors of the Bank adopted a resolution 
which permits the Bank to declare dividends on its common stock in any 
quarterly period up to the lesser of (i) 50% of its after tax net income for 
the immediately preceding quarter or (ii) 50% of the average quarterly after 
tax net income for the immediately preceding four quarter period, minus (in 
either case) dividends declared on the Bank's preferred stock during that 
quarterly period.

    The payment of any dividends on the Bank's common stock and preferred 
stock will be determined by the Board of Directors based on the Bank's 
liquidity, asset quality profile, capital adequacy and recent earnings 
history, as well as economic conditions and other factors deemed relevant by 
the Board of Directors, including applicable government regulations and 
policies.  See "- Deposits and Other Sources of Funds - Borrowings." After 
consideration of these factors, on December 18, 1996, the Board of Directors 
declared a $300 per share dividend on the Bank's common stock. The dividend 
meets the requirements of the OTS' capital distribution rules; however, the 
Board's prior resolution would effectively preclude payment of any dividends 
for the quarter based on the Bank's financial results for the September 1996 
quarter. The Bank has asked the OTS for confirmation that it would not object 
to the payment of the dividend.

   LENDING LIMITS.  With certain exceptions, the Bank is prohibited from 
lending to one borrower (including certain related entities of the borrower) 
amounts in excess of 15% of the institution's unimpaired capital and 
unimpaired surplus, plus an additional 10% for loans fully secured by readily 
marketable collateral. The Bank's loans-to-one-borrower limit was 
approximately $80.7 million at September 30, 1996, and no group relationships 
exceeded this limit at that date.

    SAFETY AND SOUNDNESS STANDARDS.  FDICIA requires the federal financial
institution regulators to devise standards to evaluate the operations of
depository institutions, as well as standards relating to asset quality,
earnings and compensation.  The operational standards cover 

                                       25
<PAGE>


internal controls and audit systems, loan documentation, credit underwriting, 
interest rate exposure, asset growth and employee compensation.  An 
institution that fails to meet a standard that is imposed through regulation 
may be required to submit a plan for corrective action within 30 days.  If a 
savings association fails to submit or implement an acceptable plan, the OTS 
must order it to correct the deficiency, and may restrict its rate of asset 
growth, prohibit asset growth entirely, require the institution to increase 
its ratio of tangible equity to assets, restrict the interest rate paid on 
deposits to the prevailing rates of interest on deposits of comparable 
amounts and maturities, or require the institution to take any other action 
the OTS determines will better carry out the purpose of prompt corrective 
action.  Imposition of these sanctions is within the discretion of the OTS in 
most cases, but is mandatory if the savings institution commenced operations 
or experienced a change in control during the 24 months preceding the 
institution's failure to meet these standards, or underwent extraordinary 
growth during the preceding 18 months.

    In August 1996, the OTS and the federal bank regulators jointly issued final
safety and soundness standards for asset quality and earnings effective October
1, 1996.  The asset quality standards require that an insured depository
institution establish and maintain a system to identify problem assets and
prevent deterioration in those assets.  The earnings standards require that an
insured depository institution establish and maintain a system to evaluate and
monitor earnings and ensure that earnings are sufficient to maintain adequate
capital and reserves.  Based on its review, management does not believe that
these new requirements, will have a material adverse effect on the Bank's
operations.

    REGULATORY ASSESSMENTS.  Pursuant to authority under FIRREA, the OTS has 
adopted the following fees to fund its operations:  (i) asset-based 
assessments for all savings institutions, (ii) examination fees for certain 
affiliates of savings associations, (iii) application fees, (iv) securities 
filing fees, and (v) publication fees.  Of these fees, the semi-annual 
asset-based assessments (which for the Bank totaled $361,000 for the 
six-month period ending December 31, 1996) are the most significant.

    OTHER REGULATIONS AND LEGISLATION.  As a thrift institution, Chevy Chase
continues to be subject to a requirement that it obtain prior approval of the
OTS before merging with another institution or before increasing its insured
accounts through merger, consolidation, purchase of assets or assumption of
liabilities.  Also, as a SAIF-insured institution, the Bank is subject to
limitations on its ability to buy or sell deposits from or to, or to combine
with, a BIF-insured institution.  Despite these restrictions, SAIF-insured
thrifts may be acquired by banks or by bank holding companies under certain
circumstances.

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

    Federally chartered thrifts like Chevy Chase generally are permitted to
establish new branches anywhere in the United States, provided that they (i)
meet their regulatory capital requirements; (ii) either have a satisfactory
record under the OTS's regulations implementing the Community Reinvestment Act
("CRA") or have committed to improve their investment-related 

                                       26
<PAGE>

practices and performance to the satisfaction of the OTS; (iii) meet the 
domestic building and loan test of section 7701(a)(19) of the Internal 
Revenue Code, or the asset composition test of subparagraph (C) of that 
section or, effective September 30, 1996, the QTL test; and (iv) meet the 
domestic building and loan test, the asset composition test or, effective 
September 30, 1996, the QTL test, with respect to each state outside of its 
home state where the association has established branches.

    Under legislation adopted in 1993, amounts realized by the FDIC from the
liquidation or other resolution of any insured depository institution must be
distributed to pay claims (other than secured claims to the extent of any such
security) in the following order of priority: (i) administrative expenses of the
receiver, (ii) any deposit liability of the institution, (iii) any other general
or senior liability of the institution (which is not an obligation described in
clause (iv) or (v)), (iv) any obligation subordinated to depositors or general
creditors (which is not an obligation described in clause (v)), and (v) any
obligation to stockholders arising as a result of their status as stockholders.

PENDING LEGISLATION

    THRIFT CHARTER LEGISLATION.  During the past year, Congress has been 
considering legislation in various forms that would require federal thrifts, 
like the Bank, to convert their charters to national or state bank charters.  
Recent legislation requires the merger of the BIF and the SAIF into a single 
Deposit Insurance Fund on January 1, 1999, but only if the thrift charter is 
eliminated by that date.  The Treasury Department is required to submit a 
comprehensive study on thrift charter issues by March 31, 1997.  In the 
absence of appropriate "grandfather" provisions, such legislation could have 
a material adverse effect on the Bank and the Trust because, among other 
things, the Trust engages in activities that are not permissible for bank 
holding companies and the regulatory capital and accounting treatment for 
banks and thrifts differs in certain significant respects.  The Bank cannot 
determine whether, or in what form, such legislation will eventually be 
enacted and there can be no assurances that any such legislation that is 
enacted will contain adequate grandfather rights for the Bank and the Trust.

FEDERAL RESERVE SYSTEM

    The Federal Reserve Board (the "FRB") requires depository institutions, 
including federal savings banks, to maintain reserves against their 
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 
earning asset base.  FRB regulations generally require that reserves be 
maintained against net transaction accounts. Prior to December 17, 1996, the 
first $4.3 million of a depository institution's transaction accounts were 
subject to a 0% reserve requirement.  The next $47.7 million in net 
transaction accounts were subject to a 3.0% reserve requirement and any net 
transaction accounts over $52.0 million were subject to a 10.0% reserve 
requirement.  Effective December 17, 1996, the FRB increased the amount of 
transaction accounts subject to a 0% reserve requirement from $4.3 million to 
$4.4 million and decreased the "low reserve tranche" from $47.7 million to 
$44.9 million.  The Bank met its reserve requirements for each period during 
the year ended September 30, 1996.  The 

                                       27

<PAGE>

balances maintained to meet the reserve requirements imposed by the FRB also 
may be used to satisfy liquidity requirements which are imposed by the OTS.

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

COMMUNITY REINVESTMENT ACT

    Under the CRA and the OTS's implementing regulations, a savings 
association has a continuing and affirmative obligation to help meet the 
credit needs of its local communities, including low- and moderate-income 
neighborhoods, consistent with the safe and sound operation of the 
institution.  In connection with its examination of a savings association, 
the OTS is required to assess the institution's record in satisfying the 
intent of the CRA.  In addition, the OTS is required to take into account the 
institution's record of meeting the credit needs of its community in 
determining whether to grant approval for certain types of applications.

    The Bank is committed to fulfilling its CRA obligation by providing 
access to a full range of credit-related products and services to all 
segments of its community.

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

OTHER ASPECTS OF FEDERAL LAW

    The Bank is also subject to federal statutory provisions covering other 
items, including security procedures, currency transactions reporting, 
insider and affiliated party transactions, management interlocks, 
truth-in-lending, electronic funds transfers, funds availability and equal 
credit opportunity. The Economic Development Regulatory Paperwork Reduction 
Act of 1996, which was signed into law on September 30, 1996, contains 
several provisions designed to reduce regulatory burdens associated with 
compliance with various consumer and other laws applicable to the Bank, 
including for example, provisions designed to coordinate the disclosure and 
other requirements under the Truth-in-Lending and Real Estate Settlement 
Procedures Acts, modify certain insider lending restrictions, permit OTS to 
allow exemptions to anti-tying prohibitions and exempt certain transactions 
and simplify certain disclosures under the Truth-in-


                                       28

<PAGE>

Lending Act.

RECENT ACCOUNTING PRONOUNCEMENTS

    Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting 
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be 
Disposed Of" ("SFAS 121"), was issued in March 1995.  SFAS 121 establishes 
accounting standards for the impairment of long-lived assets, certain 
identifiable intangibles, and goodwill related to those assets, to be held 
and used and for long-lived assets and certain identifiable intangibles to be 
disposed of.  It addresses how impairment losses should be measured and when 
such losses should be recognized.  Under SFAS 121, long-lived assets and 
certain identifiable intangibles to be held and used shall be reviewed for 
impairment whenever events or changes in circumstances indicate that the 
carrying amount of an asset may not be recoverable.  If the sum of the 
expected cash flows (undiscounted and without interest charges) is less than 
the carrying amount of the asset, the entity shall recognize an impairment 
loss.  Measurement of an impairment loss for long-lived assets and 
identifiable intangibles that an entity expects to hold and use should be 
based on the fair value of the asset.  Long-lived assets and certain 
identifiable intangibles to be disposed of should generally be reported at 
the lower of carrying amount or fair value less the cost to sell. SFAS 121 is 
effective for financial statements for fiscal years beginning after December 
15, 1995.  The adoption of SFAS 121 is not anticipated to have a material 
impact on the Bank's financial condition or the results of operations. See 
Note 1 to the Consolidated Financial Statements in this report.

    SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets 
and Extinguishments of Liabilities" ("SFAS 125"), was issued in June 1996.  
SFAS 125 provides accounting and reporting standards for transfers and 
servicing of financial assets and extinguishments of liabilities.  Those 
standards are based on consistent application of a "financial-components 
approach" that focuses on control.  Under that approach, upon the 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 125 supersedes SFAS No. 76, "Extinguishment of Debt," and 
SFAS No. 77, "Reporting by Transferors for Transfers of Receivables with 
Recourse."  It amends SFAS No. 115, "Accounting for Certain Investments in 
Debt and Equity Securities," to clarify that a debt security may not be 
classified as held-to-maturity if it can be prepaid or otherwise settled in 
such a way that the holder of the security would not recover substantially 
all of its recorded investment.  SFAS 125 amends and extends to all servicing 
assets and liabilities the accounting standards for mortgage servicing rights 
now in SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," and 
supersedes SFAS No. 122, "Accounting for Mortgage Servicing Rights." SFAS 125 
is effective for transfers and servicing of financial assets and 
extinguishments of liabilities occurring after December 31, 1996.  The impact 
of the adoption of SFAS 125 on the Bank's financial statements has not yet 
been determined.


                                       29

<PAGE>
MARKET AREA

    The Bank's principal deposit and lending markets are located in the 
Washington, D.C. metropolitan area.  Service industries and federal, state 
and local governments employ a significant portion of the Washington, D.C. 
area labor force, while a substantial number of the nation's 500 largest 
corporations have some presence in the area.  The Washington, D.C. area's 
seasonally unadjusted unemployment rate is generally below the national rate 
and was 3.8% in September 1996, compared to the national rate of 5.0%.

    Chevy Chase historically has relied on retail deposits originated in its 
branch network as its primary funding source.  See "Deposits and Other 
Sources of Funds."  Chevy Chase's principal market for deposits consists of 
Montgomery and Prince George's Counties in Maryland and, to a lesser extent, 
Fairfax County in Virginia.  Approximately 26.1% of the Bank's deposits at 
September 30, 1996 were obtained from depositors residing outside of 
Maryland, primarily in Northern Virginia.  Chevy Chase had the largest market 
share of deposits in Montgomery County at June 30, 1995, according to 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, D.C. area's largest suburban employment centers, with a 
substantial portion of their labor force consisting of federal, state and 
local government employees.  Private employment is concentrated in services 
and retail trade centers. Unemployment in Montgomery and Fairfax Counties in 
September 1996 (2.7% and 2.8%, respectively) was below the national rate 
(5.0%) and state rates (4.9% for Maryland and 4.2% for Virginia) for the same 
month. 

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

INVESTMENT AND OTHER SECURITIES

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

    During fiscal 1995, the Bank transferred at fair value all of its 
investment securities and mortgage-backed securities previously classified as 
available-for-sale to held-to-maturity and, as a result, all such securities 
are classified as held-to-maturity at September 30, 1996.  Net unrealized 
holding losses, net of the related income tax effect, continue to be reported 
as a separate component of stockholders' equity and are being amortized to 
income over the remaining lives of the securities.

    The OTS guidelines require that investments in securities be accounted 
for in accordance with generally accepted accounting principles ("GAAP"), 
summarize the applicable accounting principles and provide guidance regarding 
the application of GAAP in determining whether 


                                       30

<PAGE>

securities are properly classified as held-to-maturity, available-for-
sale or trading.

LENDING ACTIVITIES

    LOAN PORTFOLIO COMPOSITION.  At September 30, 1996, the Bank's loan 
portfolio totaled $3.4 billion, which represented 59.4% of its total assets.  
(All references in this report to the Bank's loan portfolio refer to loans, 
whether they are held for sale and/or securitization or for investment, and 
exclude mortgage-backed securities.)  Loans collateralized by single-family 
residences constituted 48.3% of the loan portfolio at that date.

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

                             LOAN PORTFOLIO
                         (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                          SEPTEMBER 30, 
                        ----------------------------------------------------------------------------------------------------------
                                 1996                   1995                 1994                  1993                1992  
                        ---------------------    ------------------    ------------------    ------------------    ---------------
                                       % OF                  % OF                   % OF                   % OF              % OF 
                          BALANCE      TOTAL     BALANCE     TOTAL     BALANCE      TOTAL     BALANCE     TOTAL    BALANCE   TOTAL
                        ----------    -------   ----------  -------   ----------    -----    ---------     ------  --------   -----
<S>                     <C>           <C>       <C>         <C>       <C>           <C>      <C>           <C>     <C>        <C>
Residential (1)         $1,601,483      47.4%    $1,391,694   47.3%    $1,369,571    53.8%   $1,287,333    53.6%   $933,867   41.6%

Home equity (1)             32,052       0.9         29,024    1.0         34,708     1.4        60,549     2.5     223,148    9.9

Commercial real estate
  and multifamily           78,866       2.3         85,781    2.9         84,210     3.3        94,079     3.9      61,522     2.7

Real estate
  construction and 
  ground                    63,907       1.9         32,652    1.1         52,350     2.0        62,637     2.6      92,215     4.1

Credit card (1)          1,118,271      33.1      1,012,548   34.4        650,199    25.5       754,520    31.4     872,672    38.9

Automobile (1)             297,560       8.8        239,217    8.1        289,346    11.4       106,725     4.4      19,910     0.9

Home improvement and 
  and other consumer (1)    94,316       2.8        112,705    3.9         37,526     1.4         8,255     0.3       8,735     0.4

Commercial                  56,567       1.7         13,223    0.4          1,219     0.1          --        --         --      --

Other                       38,410       1.1         26,969    0.9         28,106     1.1        29,793     1.3      33,284     1.5
                         ---------     -------     ---------  -----       --------   -----      --------    ----     -------    ---
                         3,381,432     100.0%     2,943,813  100.0%     2,547,235   100.0%    2,403,891   100.0%  2,245,353   100.0%
                         ---------     -------    ----------  -----       --------   -----    ----------  ------  ----------  -----
                                       -------                -----                  -----                ------              -----
Less:

  Unearned premiums 
   and discounts              836                    1,103                  1,438                 1,543               2,589

  Deferred loan 
    origination
    fees (costs)          (13,958)                 (13,687)               (10,604)               (3,472)              1,889

  Reserve for loan 
    losses                 95,523                   60,496                 50,205                68,040              78,818
                         ---------                 --------               -------                -------             -------
                           82,401                   47,912                 41,039                66,111              83,296
                         ---------                 --------               -------                -------             -------

    Total loans 
     receivable          $3,299,031                $2,895,901           $2,506,196            $2,337,780          $2,162,057
                         ----------                ----------           -----------           -----------         -----------
                         ----------                ----------           -----------           -----------         -----------

</TABLE>

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

                                      31

<PAGE>

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

    CONTRACTUAL PRINCIPAL REPAYMENTS OF LOANS.  The following table shows the 
scheduled contractual principal repayments of the Bank's loans at September 
30, 1996.  The entire balance of loans held for sale and/or securitization is 
shown in the year ending September 30, 1997, because such loans are expected 
to be sold in less than one year.

                                               CONTRACTUAL PRINCIPAL REPAYMENTS
                                                          (IN THOUSANDS)

<TABLE>
<CAPTION>


                                           PRINCIPAL                     APPROXIMATE PRINCIPAL REPAYMENTS  
                                            BALANCE                       DUE IN YEARS ENDING SEPTEMBER 30,   
                                         OUTSTANDING AT   --------------------------------------------------------------------------
                                          SEPTEMBER 30,                                                                  2012 AND  
                                           1996 (1)          1997      1998     1999    2000-2001 2002-2006  2007-2011  THEREAFTER 
                                          -------------  ----------  -------  -------- --------- ---------  ---------  -----------
<S>                                       <C>            <C>         <C>      <C>      <C>       <C>        <C>        <C>
Residential                               $  1,525,322   $   28,520  $ 26,363 $ 28,946 $ 137,636 $ 153,828  $ 236,418  $  913,611
Home equity                                     32,052        5,774    --        --         --         --       7,021      19,257
Commercial real estate and multifamily          78,866        8,594     5,309    5,123    10,281    30,429     19,130        --
Real estate construction and ground             63,907       26,906    11,829    5,907    12,362     6,903      --           --
Credit card (2)                                893,271       41,690    39,744   37,889    73,352   149,517    117,735    433,344
Automobile                                      72,560       14,303    16,097   18,116    24,044    --          --          --
Home improvement and other consumer             94,316       13,728    12,501   11,394    19,891    16,637     20,165       --
Commercial                                      56,567       29,148     5,943    6,435    10,428     4,613      --          --
Other                                           38,410        8,691     8,340    8,452     3,084     9,843      --          --
Loans held for sale                             76,161       76,161    --        --         --         --       --          --
Loans held for securitization and sale         450,000      450,000    --        --         --         --       --          --
                                          ------------   ----------  -------- --------  --------  --------   --------  ----------
    Total loans receivable (3)            $  3,381,432   $  703,515  $126,126 $122,262  $291,078  $371,770   $400,469  $1,366,212
                                          ------------   ----------  -------- --------  --------  --------   --------  ----------
                                          ------------   ----------  -------- --------  --------  --------   --------  ----------



Fixed-rate loans                          $    402,993   $   70,394  $ 54,334 $ 56,506  $158,885  $ 40,523   $ 22,064  $      287
Adjustable-rate loans                        2,452,278      106,960    71,792   65,756   132,193   331,247    378,405   1,365,925
Loans held for sale                             76,161       76,161    --         --        --          --         --         --
Loans held for securitization and sale         450,000      450,000    --         --        --          --         --         --
                                          ------------   ----------  -------- --------  --------  --------   --------  ----------
   Total loans receivable (3)             $  3,381,432   $  703,515  $126,126 $122,262   $291,078 $371,770   $400,469  $1,366,212
                                          ------------   ----------  -------- --------   -------- --------   --------  ----------
                                          ------------   ----------  -------- --------   -------- --------   --------  ----------

</TABLE>


---------------------------------------------------
(1) Of the total amount of loans outstanding at September 30, 1996 which were 
    due after one year, an aggregate principal balance of approximately 
    $332.6 million had fixed interest rates and an aggregate principal balance 
    of approximately $2.3 billion had adjustable interest rates.

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

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

     Actual payments may not reflect scheduled contractual principal 
repayments due to the effect of loan refinancings, prepayments and 
enforcement of due-on-sale clauses, which give the Bank the right to declare 
a "conventional loan" -- one that is neither insured by the Federal Housing 
Administration ("FHA") nor partially guaranteed by the Veterans' 
Administration ("VA") -- immediately due and payable in the event, among 
other things, that the borrower sells the real property subject to the 
mortgage and the loan is not repaid.  Although the Bank's single-family 
residential loans historically have had stated maturities of generally 30 
years, such loans normally have remained outstanding for substantially 
shorter periods because of these factors.  At September 30, 1996, principal 
repayments of $177.4 million are contractually due within the next year.  Of 
this amount, $70.4 million is contractually due on fixed-rate loans and 
$107.0 million is contractually due on adjustable-rate loans. 

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


                                       32

<PAGE>

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

<TABLE>
<CAPTION>


                                       FOR THE YEAR ENDED SEPTEMBER 30,
                                      -----------------------------------
                                       1996           1995           1994
                                      ------          -----          -----
<S>                                   <C>             <C>            <C>
Real estate loan originations and 
 purchases: (1)

 Residential and home equity          $1,321,951       $742,560      $1,570,155
 Commercial, real estate and 
 multifamily                                 345          4,023           9,582
 Real estate construction and ground      72,655         37,510          47,693
                                      ----------       --------      -----------
Total originations and purchases       1,394,951        784,093       1,627,430
                                      ----------       --------      -----------

Principal repayments                    (381,365)      (245,376)       (389,847)
Sales (2)                               (407,200)      (374,414)       (800,506)
Loans transferred to real estate 
 acquired in settlement of loans          (5,972)        (9,822)         (4,106)
Other                                       --              --              (541)
                                      ----------       --------      -----------
                                        (794,537)      (629,612)     (1,195,000)

Transfers to mortgage-backed 
 securities (3)                         (363,257)      (156,169)       (396,189)
                                      ----------       --------      -----------

Increase (decrease) in real estate 
 loans                                  $237,157       $ (1,688)      $  36,241
                                      ----------       --------      -----------
                                      ----------       --------      -----------
</TABLE>

 (1) Excludes unfunded commitments.
 (2) Includes securitization and sale of home equity credit line receivables 
     of $96.5 million, $150.5 millon and $181.9 million for the years ended 
     September 30, 1996, 1995 and 1994, respectively.
 (3) Represents real estate loans which were pooled and exchanged for FHLMC 
     and FNMA mortgage-backed securities.

    As a federally chartered savings institution, the Bank has general 
authority to make loans secured by real estate located throughout the United 
States. Approximately 92.4% of the Bank's single-family residential real 
estate loans at September 30, 1996 by principal balance were secured by 
properties located in Maryland, Virginia or the District of Columbia.

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

    The Bank maintains a wholesale network of correspondents, including loan 
brokers and financial institutions, in order to supplement its direct 
origination of single-family 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, 1996, approximately $394.4 
million of loans settled under the correspondent program.

    Loan sales provide the Bank with liquidity and additional funds for 
lending, enabling the Bank to increase the volume of loans originated and 
thereby increase loan interest and fee income, and in recent periods have 
produced additional non-interest income in the form of gains on sales of 
loans.  In fiscal 1996, sales of mortgage loans originated or purchased for 
sale by the Bank totaled $317.3 million. The marketability of loans, loan 
participations and mortgage-backed securities depends on purchasers' 
investment limitations, general market and competitive conditions, mortgage 
loan demand and other factors.  The Bank originates fixed-rate, single-family 
loans on terms which conform to Federal Home Loan Mortgage Corporation 
("FHLMC") and Federal National Mortgage Association ("FNMA") guidelines in 
order to ensure the salability of the loan in the public secondary mortgage 
market.  In order to manage its interest-rate exposure, the Bank hedges its 
fixed-rate mortgage loan pipeline by entering into whole loan and 
mortgage-backed security forward sale commitments. Sales of residential 
mortgage loans are generally made without recourse to the Bank.  At September 
30, 1996, the Bank had $76.1 million of single-family residential loans held 
for sale to investors. 

     When the Bank sells a whole loan or loan participation and retains 
servicing, or purchases mortgage servicing rights from third parties, it 
continues to collect and remit loan payments, inspect the properties, make 
certain insurance and tax payments on behalf of borrowers and otherwise 
service the loans.  The normal servicing fee, generally ranging from 0.25% to 
0.50% of the outstanding loan principal amount per annum, is recognized as 
income over the life of the loans. The Bank also typically derives income 
from temporary investment for its own account of loan collections pending 
remittance to the participation or whole loan purchaser.  At September 30, 
1996, the Bank was servicing residential permanent loans totaling $3.0 
billion for other investors.

                                       33

<PAGE>

     SALES OF MORTGAGE-BACKED SECURITIES.  A significant portion of the 
Bank's sales of mortgage-backed securities involve sales pursuant to the 
Bank's normal mortgage banking operations.  Generally, the Bank's policy is 
to sell its fixed-rate mortgage production which, in the case of most 
conforming fixed-rate loans, is accomplished by first pooling such loans into 
mortgage-backed securities.  The mortgage-backed securities sold as part of 
the Bank's mortgage banking operations are generally issued in the same month 
as the sale of such securities.  The securities are formed from conforming 
fixed-rate loans originated for sale or from conforming fixed-rate loans 
resulting from the borrower's election to convert from a variable-rate loan 
to a fixed-rate loan. Mortgage-backed securities held for sale in conjunction 
with mortgage banking activities are classified as trading securities.  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, 1996.  Fixed-rate loans 
are designated as held for sale in the Consolidated Statements of Financial 
Condition in this report.

    SINGLE-FAMILY RESIDENTIAL REAL ESTATE LENDING.  The Bank originates a 
variety of loans secured by single-family residential structures.  At 
September 30, 1996, $1.6 billion (or 48.3%) of the Bank's loan portfolio 
consisted of loans secured by first or second mortgages on such properties, 
including $40.0 million of FHA-insured or VA-guaranteed loans.

    Chevy Chase currently offers fixed-rate loans with maturities of 15 to 30 
years and adjustable-rate residential mortgage loans ("ARMs"), principally 
with maturities of 30 years.  At September 30, 1996, 40.1% of the Bank's 
residential mortgage loans consisted of ARMs scheduled to have interest rate 
adjustments within five years. See "Management's Discussion and Analysis of 
Financial Condition and Results of Operations - Financial Condition - Banking 
- Asset and Liability Management."  Interest rates on the majority of the 
Bank's ARMs are adjusted based on changes in yields on U.S. Treasury 
securities of varying maturities. The interest rate adjustment provisions of 
the Bank's ARMs contain limitations on the frequency and maximum amount of 
interest rate adjustments, although such limitations are not required by law. 
These limitations are determined by a variety of factors, including mortgage 
loan competition in the Bank's markets.  The ARMs currently offered by the 
Bank are generally subject to a limitation on the annual increase in the 
interest rate of 2.0% and a limitation on the increase in the interest rate 
over the term of the loan ranging from 6.0% to 9.0%.

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

    The Bank's home equity credit line loan provides revolving credit secured
principally by a second mortgage on the borrower's home.  Home equity credit
line loans bear interest at a variable rate that adjusts quarterly based on
changes in the applicable interest rate index and generally are subject to a
maximum annual interest rate of between 18.0% and 24.0%.  Except for any


                                       34

<PAGE>

amortization of principal that may occur as a result of monthly payments, there
are no required payments of principal until maturity.  In order to promote its
home equity credit line loan program, the Bank currently offers prospective
borrowers a below-market interest rate for an introductory period and settlement
without closing costs.

    Securitizations of home equity credit line receivables have been an 
integral element of the Bank's strategies to enhance liquidity and to 
maintain compliance with regulatory capital requirements.  See "Management's 
Discussion and Analysis of Financial Condition and Results of Operations - 
Financial Condition."  The Bank transferred $96.5 million, $150.5 million and 
$181.9 million of home equity credit line receivables in fiscal 1996, fiscal 
1995 and fiscal 1994, respectively, to trusts for securitization and sale to 
investors.  Gains of $4.7 million, $7.6 million and $9.5 million were 
recognized by the Bank as a result of these transactions.  The Bank continues 
to service the underlying accounts.

    COMMERCIAL REAL ESTATE AND CONSTRUCTION LENDING.  Aggregate balances of 
residential construction, commercial construction, ground and commercial real 
estate and multifamily loans increased 20.6% in fiscal 1996 to $142.8 million 
at September 30, 1996, from $118.4 million at September 30, 1995.  In the 
past four fiscal years, the Bank has provided financing, generally at market 
rates, to certain purchasers of its REO. Additionally, the Bank finances the 
construction of residential real estate, principally single-family detached 
homes and townhouses, but generally only when a home is under contract for 
sale by the builder to a consumer.

    COMMERCIAL LENDING.  Beginning in July 1994, the Bank began developing an 
active commercial lending program.  Commercial loans are defined as any loans 
made to a business entity for commercial purposes. Such purposes may include 
the financing of working capital, the acquisition of machinery and equipment 
or other assets, and the financing of cash flow needs. Loans for the 
acquisition, construction or permanent financing of real estate used in the 
borrower's business are considered commercial loans. All commercial loans are 
underwritten, orginated and managed by the Bank's Business Banking Group. A 
wide variety of products is offered, including revolving lines of credit for 
working capital or seasonal needs; term loans for the financing of fixed 
assets; letters of credit; corporate credit cards; cash management services; 
and other deposit and investment products.  Business development efforts have 
been concentrated in the major industry groups in the metropolitan 
Washington, D.C. area, as well as a broad base of small businesses and 
community service organizations. Commercial loans increased $43.3 million 
during fiscal 1996 to $56.6 million at September 30, 1996 and will continue 
to grow as the Bank continues to expand this aspect of its business. 

    Under legislation signed into law on September 30, 1996, the authority of 
federal thrifts, like Chevy Chase, to make commercial loans was increased 
from 10% to 20% of assets, provided that the additional 10% consists of small 
business loans.

    CREDIT CARD LENDING.  Chevy Chase provides consumer credit through its 
credit card program, which offers VISA (Registered Trademark) and MasterCard 
(Registered Trademark) credit cards and includes Gold and Classic cards.  
Chevy Chase issues the credit cards and receives interest income on credit 
extended, a fee based on a percentage of credit sales paid by merchants 
accepting card purchases, and generally, an annual membership fee for use of 
the cards.  Chevy Chase's credit card loan portfolio accounted for 33.1% of 
Chevy Chase's total loans at September 30, 1996.  According to statistics 
published in the American Banker, Chevy Chase is the largest issuer of credit 
cards among thrift institutions, based on managed credit card loans 
outstanding at March 31, 1996.  At September 30, 1996, credit card loans 
outstanding totaled $1.1 billion and managed credit card receivables, 

                                       35

<PAGE>

including receivables owned by the Bank and receivables securitized, sold and 
serviced by the Bank, totaled $5.0 billion.

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

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

    Changes in credit card use and payment patterns by cardholders, including 
increased defaults, may result from a variety of social, legal and economic 
factors.  Chevy Chase currently offers introductory and promotional periodic 
interest rates for varying initial and promotional periods which, at the 
conclusion of such periods, revert to the Bank's regular variable interest 
rate. If account holders choose to utilize competing sources of credit, the 
rate at which new receivables are generated may be reduced and certain 
purchase and payment patterns with respect to the receivables may be 
affected.  Economic factors affecting credit card use include the rate of 
inflation and relative interest rates offered for various types of loans.  
Adverse changes in economic conditions could have a direct impact on the 
timing and amount of payments by borrowers. During times of economic 
recession, default rates on credit card loans generally may be expected to 
exceed default rates on residential mortgage loans.  During 1995 and 1996, 
the number of individuals declaring bankruptcy has increased.  Although the 
Bank cannot predict with certainty the level of bankruptcies that may occur 
among cardholders, the Bank has adjusted its underwriting procedures in an 
attempt to mitigate losses incurred as a result of a cardholder declaring 
bankruptcy. The Bank can make no assurances as to the level of bankruptcies 
that may occur among cardholders in the future.  See "Management's Discussion 
and Analysis of Financial Condition and Results of Operations - Financial 
Condition - Banking - Asset Quality - Delinquent Loans" and "- Allowances for 
Losses."

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


                                       36

<PAGE>

Periodically, the Bank offers promotional discounts to certain customers to 
encourage increased usage of the Bank's credit cards.

    Certain jurisdictions and their residents may attempt to require 
out-of-state credit card issuers to comply with such jurisdictions' consumer 
protection laws that impose requirements on the making, enforcement and 
collection of consumer loans.  For example, in recent years, a number of 
lawsuits and administrative actions have been filed in several states against 
out-of-state credit card issuers (including both federally and state 
chartered insured institutions) challenging various fees and charges (such as 
late fees, over-the-limit fees, returned check fees and annual membership 
fees) assessed against residents of the states in which such lawsuits were 
filed, based on restrictions or prohibitions under the laws of such states.  
The Supreme Court recently ruled that national banks may export late fees on 
credit cards as interest regardless of states' usury laws, however the law 
is not settled with respect to all types of fees and charges.  If it were 
determined that out-of-state credit card issuers must comply with a 
jurisdiction's laws limiting the charges imposed by credit card issuers, such 
action could have an adverse impact on the Bank's credit card operations.

    Securitizations of credit card receivables and sales of credit card 
relationships have been integral elements of the Bank's strategies to enhance 
liquidity, to further asset and liability management objectives and to 
maintain compliance with regulatory capital requirements.  In fiscal 1994, 
1992 and 1991, the Bank sold approximately 150,000 credit card relationships 
at a premium over their receivables balances of $96.5 million, $14.9 million 
and $273.4 million, respectively.  No such sales occurred during fiscal 1996, 
1995 and 1993.  The Bank transferred $919.0 million, $1.6 billion, $1.4 
billion, $350.0 million and $280.0 million of credit card receivables in 
fiscal 1996, fiscal 1995, fiscal 1994, fiscal 1993 and fiscal 1992, 
respectively, to trusts for securitization and sale to investors.  No gain or 
loss was recognized by the Bank as a result of these transactions; however, 
the Bank continues to service the underlying accounts, and excess spread 
income is recognized over the related lives of the transactions.  This excess 
spread income represents the contractual interest and fees, including 
interchange fees, paid by the cardholders less certificate interest paid to 
the certificate holders, and administrative fees paid to providers of 
services to the trusts, and is net of charge-offs on credit card loans in the 
trusts.

    Chevy Chase plans to securitize an additional $825.0 million of credit 
card receivables during the first and second quarters of fiscal 1997.  
Certain of these receivables at September 30, 1996 were classified as loans 
held for securitization and sale in the Consolidated Statements of Financial 
Condition in this report.

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

    OTHER CONSUMER LENDING.  Chevy Chase currently offers a variety of consumer
loans other than credit card loans, including automobile loans, overdraft lines
of credit, home improvement loans and other unsecured loans for traditional
consumer purchases and needs.  In addition, through a wholly-owned subsidiary,
the Bank began offering "non-prime" automobile loans in 


                                       37

<PAGE>

fiscal 1995. "Non-prime" refers to a category of loans made to applicants who 
have experienced certain adverse credit events, but who meet certain other 
creditworthiness tests.  See "Other Consumer Loan Underwriting."  The Bank's 
portfolio of automobile loans, home improvement loans and other consumer 
loans and other loans totaled $297.6 million, $94.3 million and $38.4 
million, respectively, at September 30, 1996, which accounted for a combined 
12.7% of total loans at that date.  The largest areas of recent growth have 
been in automobile loans and home improvement loans.  During fiscal 1996, the 
Bank purchased or originated $591.2 and $153.4 million of automobile loans 
and home improvement loans, respectively, which was offset in part by the 
transfers of $475.3 million and $153.5 million, respectively, of receivables 
to trusts for securitization and sale to investors.

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

    REAL ESTATE LOAN UNDERWRITING.  In the loan approval process, Chevy Chase
assesses both the borrower's ability to repay the loan and, in appropriate
cases, the adequacy of the proposed security.  Credit approval is vested with
the Board of Directors and delegated to the Executive Loan Committee and certain
senior officers in accordance with the credit authorizations approved by the
Board of Directors.  All construction and commercial real estate loans are
reviewed and approved by the Executive Loan Committee.  Any significant loan not
conforming to the Bank's approved policies must be approved by the Executive
Loan Committee or the Chief Executive Officer.  All loans of $15 million or more
are presented to the Board of Directors for final approval.

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

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

    The Bank generally lends up to 95% of the appraised value of 
single-family residential dwellings to be owner-occupied.  The Bank also 
lends up to 85% of the appraised value of the completed project to finance 
the construction of such dwellings, and, on a case-by-case basis, the Bank 
occasionally may lend up to 90% of such appraised value when such financing 
is limited to pre-sold units. The loan-to-value ratio generally applied by 
the Bank to commercial real estate loans and multifamily residential loans 
has been 80% of the appraised value of the completed 


                                       38

<PAGE>

project.  Currently, the Bank generally does not originate a second mortgage 
loan (excluding home equity credit line loans) if the aggregate loan-to-value 
ratio of the second loan and the related first mortgage loan exceeds 80% of 
the appraised value of the property.  Currently, the Bank offers home equity 
credit line loans up to a 100% maximum loan-to-value ratio.  Private mortgage 
insurance is generally obtained for the amount over 80% of the value of the 
underlying property.  Loan-to-value ratios are determined at the time a loan 
is originated.  Consequently, subsequent declines in the value of the loans' 
collateral could expose the Bank to losses.

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

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

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

    COMMERCIAL LOAN UNDERWRITING.  All commercial loan requests 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. Generally, larger requests are subject 
to a full narrative credit analysis of the borrower's financial condition and 
performance. Credit analyses are generally performed by the Bank's credit 
analysis group. On intermediate size loans the credit analysis group produces 
an automated narrative analysis utilizing software incorporating expert 
systems and the underwriting is then performed by the loan officer. 
Microbusinesses (generally businesses with sales of $1.0 million or less) are 
underwritten by the loan officer utilizing automated analysis software 
designed to reduce underwriting costs and to improve customer responsiveness. 
All commercial loans greater than $100,000 are assigned a risk rating at 
inception, utilizing a risk-rating system as defined in the Bank's credit 
policies.

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

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

                                       39

<PAGE>

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

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

    OTHER CONSUMER LOAN UNDERWRITING.  Other consumer loans (which include
automobile loans and home improvement loans) are originated or purchased by the
Bank after a review by the Bank in accordance with its established underwriting
procedures.

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

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

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


                                       40

<PAGE>

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, 
                                   -----------------------------------------
                                     1996               1995           1994 
                                   --------          --------       --------
                                                  (In thousands) 

Residential...............    $    3,045,650      $   1,350,423  $   1,495,120
Credit Card...............         3,889,704          3,226,316      1,953,792
Home Equity...............           416,365            455,791        485,428
Automobile................           505,638            218,287          9,506
Home Loans................           141,106                __             __ 
                                ------------      -------------  -------------
  Total amount of
  loans serviced
  for others (1)..........    $    7,998,463      $   5,250,817  $   3,943,846
                               =============      =============  =============

Loan servicing fee            
  income (2)..............    $      264,096      $     184,275  $      69,878
                               =============      =============  =============

--------------------------------------
(1)    The Bank's basis in its servicing rights at September 30, 1996, 1995 and 
       1994 was $75.4 million, $54.2 million and $40.5 million, respectively. 


(2)    In each of the years ended September 30, 1996, 1995 and 1994, loan
       servicing fee income as a percentage of net interest income before 
       provision for loan losses was 132.9%, 104.6% and 41.4%, respectively.

     The Bank earns fees in connection with the servicing of home equity 
credit line loans, credit card loans, home loans, automobile loans and 
single-family residential mortgage loans.  The Bank's level of servicing fee 
income increases or decreases with increases or decreases in securitized 
balances of these loan types.  The increase in loan servicing fee income in 
fiscal 1996 from the level achieved in fiscal 1995 was principally 
attributable to an increase in securitized credit card receivables 
outstanding.  The Bank's level of servicing fee income declines upon 
repayment of assets previously securitized and sold and repayment of mortgage 
loans serviced for others.  As the Bank securitizes and sells assets, 
acquires mortgage servicing rights either through purchase or origination, or 
sells mortgage loans and retains the servicing rights on those loans, the 
level of servicing fee income increases.  During fiscal 1996, the Bank 
securitized and sold $919.0 million of credit card receivables, $96.5 million 
of home equity credit line receivables, $475.3 million of automobile loan 
receivables and $153.5 million of home loan receivables.  In fiscal 1996, the 
Bank also sold the rights to service mortgage loans with an aggregate 
principal balance of $59.7 million, which were originated by the Bank in 
connection with its mortgage banking activities.

    The Bank's investment in loan servicing rights (including MSR's and excess
spread assets), and the amortization of such rights, are periodically evaluated
for impairment.  Excess 

                                       41

<PAGE>

spread assets are evaluated quarterly based on the discounted value of 
estimated future net cash flows to be generated by the underlying loans.  The 
excess of the book value of these assets over the discounted value is 
recorded as a valuation adjustment in the period in which the change occurs.  
Several estimates are used when determining the discounted value, the most 
significant of which is the estimated rate of repayment of the underlying 
loans.  The Bank evaluates its MSRs for impairment based on fair value.  To 
measure fair value of its MSRs, 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. Additionally, 
the Bank stratifies its capitalized MSRs for purposes of evaluating 
impairment by taking into consideration relevant risk characteristics, 
including loan type, note rate and date of acquisition.  See Note 1 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, such acquired property is listed in the Bank's 
account for real estate acquired in settlement of loans until the property is 
sold. Deficiency judgments generally may be enforced against borrowers in 
Maryland, Virginia and the District of Columbia, but may not be available or 
may be subject to limitations in other jurisdictions in which loans are 
originated by the Bank.

    The total outstanding balance of a credit card loan (the largest category 
of the Bank's consumer loans) is considered contractually delinquent if the 
minimum payment indicated on the cardholder's statement is not received by 
the due date indicated on such statement.  Efforts to collect contractually 
delinquent credit card receivables currently are made by the Bank's service 
center personnel or the Bank's designees.  Collection activities include 
statement messages, formal collection letters and telephone calls.  The Bank 
may, at its option, enter into arrangements with 

                                       42

<PAGE>

cardholders to extend or otherwise change payment schedules. 
Delinquency levels are monitored by collection managers, and information is 
reported regularly to senior management. Accounts are charged off when they 
become 180 days contractually delinquent, although the Bank continues to 
attempt to collect balances due and, in some cases, may refer the accounts to 
outside collection agencies.

     See "Management's Discussion and Analysis of Financial Condition and 
Results of Operations - Financial Condition - Banking - Asset Quality - 
Delinquent Loans" for a discussion of the Bank's delinquent loan portfolio at 
September 30, 1996.

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

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

     The Bank's methods for determining the allowance on loans secured by 
real estate vary depending on whether the loans are secured by residential 
homes or by other real estate.  For residential mortgage loans, management 
computes the allowance by stratifying residential permanent loans on a state 
by state and ownership (i.e., investor or homeowner) basis.  After the 

                                       43

<PAGE>

residential permanent portfolio has been stratified by state, historical loss 
ratios (as adjusted for predictable or quantifiable trends, if known) for the 
specific states are applied to delinquent loans.  The sum of these 
calculations is the component assigned to residential permanent loans.  In 
the Bank's experience, this approach has resulted in timely recognition of 
necessary allowances, which has been generally supported by the Bank's 
favorable results on the ultimate disposition of the underlying collateral.

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

    The Bank regularly reviews its overall loan portfolio consisting of 
performing non-classified assets and, based on such review, establishes 
additional allowances for losses.

    In addition to the general valuation allowances described above, 
valuation allowances 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.

    Beginning October 1, 1994, the Bank has been providing additional general 
valuation allowances, which are equal to, or exceed, the net earnings 
generated by the development and sale of land in the Communities.  See 
"Managements' Discussion and Analyses of Financial Condition and Results of 
Operations - Financial Condition - Banking - Asset Quality - Allowances for 
Losses."

    REO is carried at the lower of cost or fair value.  To date, sales of 
REO, non-residential mortgage 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 individualized asset review takes place within its Asset Review
Committee and the Asset Classification Committee (the "Committee").  The Asset
Review Committee accumulates and analyzes data relating to classified and
potential problem assets of $5.0 million or more and makes appropriate
recommendations regarding asset classifications to the Committee.  The Committee
meets on a regular basis to discuss classifications of such assets and to review
the allowances for losses.  The Committee generally reviews the status of
various projects, including, for example, data on recent lot sales for
residential development projects.  Actual progress is compared to projections
made when the related loan was underwritten.  Local economic conditions and
known trends are also reviewed.  The Committee also considers steps being taken

                                       44

<PAGE>

by borrowers to address problems, and reviews financial information relating to
borrowers and guarantors as well as reports by loan officers who are responsible
for continually evaluating the projects.  The actions of the Committee are
reported to the Board of Directors.

    The Federal Financial Institution Examination Council, which is composed 
of the OTS and the other federal banking agencies, has issued  guidelines 
regarding the appropriate levels of general valuation allowances that should 
be maintained by insured institutions. The Bank believes that its levels of 
general valuation allowances at September 30, 1996 comply with the guidelines.

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

DEPOSITS AND OTHER SOURCES OF FUNDS

    GENERAL.  Deposits are the primary source of the Bank's funds for use in 
lending and for other general business purposes. In addition to deposits, 
Chevy Chase receives funds from loan repayments and loan sales.  Loan 
repayments are a relatively stable source of funds, while deposit inflows and 
outflows are influenced by general interest rates and money-market 
conditions. Borrowings may be used to compensate for reductions in normal 
sources of funds, such as deposit inflows at less than projected levels or 
deposit outflows, or to support the Bank's operating or investing activities.

    DEPOSITS.  Chevy Chase currently offers a variety of deposit accounts 
with a range of interest rates and maturities designed to attract both 
long-term and short-term deposits.  Deposit programs include Super Statement 
Savings, Super NOW, Insured Money Fund, Checking, Simple Statement Savings, 
Young Savers, Certificate, and special programs for Individual Retirement and 
Keogh self-employed retirement accounts.  All jumbo certificates of deposit 
are sold directly by the Bank to depositors, either through its branches or 
through its money desk operation.

    Chevy Chase attracts deposits through its branch network and 
advertisements, and offers depositors access to their accounts through 529 
ATMs, including 129 ATMs located in Safeway Inc. stores and 58 ATMs located 
in Superfresh Food Markets. The Bank also has the right to install ATMs in 
Safeway stores in the greater Washington, D.C./Baltimore/Richmond area which 
do not currently have ATM service. These ATMs and installation rights 
significantly enhance the Bank's position as a leading provider of convenient 
ATM service in its primary market area.  The Bank is a member of the regional 
"MOST"(Registered Trademark) ATM network which offers over 8,900 locations in 
the middle-Atlantic region.  The Bank is also a member of the 
"PLUS"(Registered Trademark) ATM network, which offers over 306,000 locations 
worldwide.

    The Bank obtains deposits primarily from customers residing in Montgomery 
and Prince George's Counties in Maryland and Northern Virginia.  
Approximately 26.1% of the Bank's deposits at September 30, 1996 were 
obtained from depositors residing outside of Maryland, with 

                                       45

<PAGE>

approximately 13.7% of the Bank's deposits being obtained from depositors 
residing in Northern Virginia.

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

                                                         DEPOSIT ANALYSIS
                                                      (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                               ---------------------------------------------------------------------------------------------------
                                                                          SEPTEMBER 30,                                           
                               ---------------------------------------------------------------------------------------------------
                                      1996                1995                1994                1993                1992        
                               ------------------- ------------------- ------------------- ------------------- -------------------
                                            % OF                % OF                % OF                % OF                % OF
                                BALANCE     TOTAL   BALANCE     TOTAL   BALANCE     TOTAL   BALANCE     TOTAL   BALANCE     TOTAL
                               ----------  ------  ---------  -------  ----------  -------  ----------  ------  ----------  ------
<S>                            <C>         <C>     <C>        <C>      <C>         <C>      <C>         <C>     <C>         <C>
Demand and NOW accounts        $1,007,902   24.2%  $ 950,118    22.8%  $  918,227   22.9%   $  835,084  21.6%   $  743,214  19.0%

Money market deposit accounts   1,002,688   24.1     984,257    23.7    1,104,730   27.6     1,196,690  30.9     1,292,779  33.0

Statement savings accounts        881,285   21.2     872,366    21.0    1,201,141   30.0       941,289  24.3       690,328  17.6

Jumbo certificate accounts        125,847    3.0     219,304     5.3       85,110    2.1        56,218   1.5        42,423   1.1

Other certificate accounts      1,077,828   25.9   1,072,196    25.8      641,857   16.0       790,465  20.4     1,099,833  28.1

Other deposit accounts             68,487    1.6      61,011     1.4       57,696    1.4        50,277   1.3        47,381   1.2
                               ----------  ------ ----------   ------  ----------  ------   ---------- ------   ---------- ------
    Total deposits             $4,164,037  100.0% $4,159,252   100.0%  $4,008,761  100.0%   $3,870,023 100.0%   $3,915,958 100.0%
                               ----------  ------ ----------   ------  ----------  ------   ---------- ------   ---------- ------
                               ----------  ------ ----------   ------  ----------  ------   ---------- ------   ---------- ------
</TABLE>

                              AVERAGE COST OF DEPOSITS

<TABLE>
<CAPTION>
                                                       YEAR ENDED SEPTEMBER 30,         
                                           ---------------------------------------------
                                           1996                1995                1994 
                                           -----               -----               -----
<S>                                        <C>                 <C>                 <C>
Demand and NOW accounts                    2.51%               2.71%               2.74%                                          
Money market accounts                      3.87%               3.96%               3.24%                                          
Statement savings and
 other deposit accounts                    3.38%               3.35%               3.37%                                          
Certificate accounts                       5.48%               5.17%               3.96%                                          

 Total deposit accounts                    3.95%               3.84%               3.31%                                          
                                           -----               -----               -----
                                           -----               -----               -----
</TABLE>

    The range of deposit account products offered by the Bank through its 
extensive branch and ATM network allows the Bank to be competitive in 
obtaining funds from its local retail deposit market.   At the same time, 
however, as customers have become increasingly responsive to changes in 
interest rates, the Bank has experienced some fluctuations in deposit flows.  
Chevy Chase's ability to attract and maintain deposits and its cost of funds 
will continue to be significantly affected by market conditions and its 
pricing strategy.  During fiscal 1996, the Bank did not actively solicit 
brokered deposits.  Under FDIC regulations, the Bank is permitted to accept 
brokered deposits as long as it meets the capital standards established for 
"well-capitalized" or with a waiver from the FDIC, "adequately-capitalized" 
institutions, under the prompt corrective action regulations.  As a result of 
the Bank's capital levels dropping below the levels established for 
"well-capitalized" institutions as of September 30, 1996, the Bank has filed 
a waiver request with the FDIC to permit retention of approximately $8.5 
million in brokered deposits held at September 30, 1996, which were acquired 
in prior years.

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

                                                    Deposit Flows
                                              Year Ended September 30,
                                            ----------------------------
                                                   (In thousands)
                                        1996            1995           1994   
                                     --------         --------       -------- 

Deposits.......................   $  15,312,125    $ 14,086,575   $ 12,308,342 
Withdrawals from 
  accounts.....................     (15,475,215)    (14,089,444)   (12,305,196) 
                                    ------------    -----------    ------------
Net cash from  
  accounts.....................        (163,090)         (2,869)        (3,146) 
Interest credited to 
  accounts.....................         167,875         153,360        135,592  
                                    ------------    ------------    ----------- 
Net increase (decrease) 
  in deposit balances             $       4,785    $    150,491   $   (138,738)
                                  =============     ============   ============

                                       46


<PAGE>

    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, 1996 which will mature 
during the fiscal years indicated. 

                  WEIGHTED AVERAGE INTEREST RATES OF DEPOSITS 

                           AS OF SEPTEMBER 30, 1996                    
                                                    
                            (DOLLARS IN THOUSANDS)                      
------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                              
                        DEMAND, NOW
                      AND MONEY MARKET            STATEMENT        PASSBOOK AND OTHER       CERTIFICATE
                      DEPOSIT ACCOUNTS        SAVINGS ACCOUNTS       CORE ACCOUNTS           ACCOUNTS                 TOTAL
                    ---------------------  --------------------  --------------------  --------------------  -------------------

MATURING DURING                  WEIGHTED              WEIGHTED              WEIGHTED              WEIGHTED               WEIGHTED
  YEAR ENDING                     AVERAGE               AVERAGE               AVERAGE               AVERAGE                AVERAGE
 SEPTEMBER 30,        AMOUNT       RATE      AMOUNT       RATE     AMOUNT       RATE     AMOUNT      RATE      AMOUNT        RATE
----------------    ----------   --------- ----------  --------- ----------  --------  ----------  --------  ----------   --------
<S>                 <C>          <C>       <C>         <C>        <C>        <C>       <C>         <C>       <C>          <C>

    1997            $2,010,590    2.96%     $881,285    3.47%     $68,487     2.98%    $  897,768   5.17%    $3,858,130   3.59% 
    1998                 -         -           -         -          -          -          147,836   5.38        147,836   5.38  
    1999                 -         -           -         -          -          -           51,381   5.26         51,381   5.26 
    2000                 -         -           -         -          -          -           89,516   6.68         89,516   6.68
    2001                 -         -           -         -          -          -           17,174   5.46         17,174   5.46
                    ----------              --------              --------             ----------            ----------
    Total           $2,010,590    2.96%     $881,285    3.47%     $68,487     2.98%    $1,203,675   5.32%    $4,164,037   3.75%
                    ----------              --------              --------             ----------            ----------
                    ----------              --------              --------             ----------            ----------
</TABLE>


    The following table summarizes maturities of certificate accounts in 
amounts of $100,000 or greater as of September 30, 1996.

Year Ending September 30,          Amount       Weighted Average Rate 
-------------------------          ------       ----------------------
                           (Dollars in thousands)

1997 ....................      $  150,193              5.32% 

1998 ....................           7,092              5.43% 

1999 ....................           4,281              5.27% 

2000 ....................           9,936              6.77% 

2001 ....................           1,772              5.44% 
                               ----------
 Total...................      $  173,274              5.41%  
                               ==========              =====
<PAGE>

    The following table represents the amounts of deposits by various 
interest rate categories as of September 30, 1996 maturing during the fiscal 
years indicated. 

                     MATURITIES OF DEPOSITS BY INTEREST RATES
                            AS OF SEPTEMBER 30, 1996
                                (IN THOUSANDS)

<TABLE>
<CAPTION>

                                 ACCOUNTS MATURING DURING YEAR ENDING SEPTEMBER 30,
                        ----------------------------------------------------------------------
   INTEREST RATE           1997        1998        1999        2000        2001       TOTAL
--------------------    ----------  ----------  ----------  ----------  ----------  ----------
<S>                     <C>         <C>         <C>         <C>         <C>         <C>

Demand deposits (0%)    $  156,517    $   --     $     --     $     --     $     --     $  156,517

0.01% to 1.99%                 558        --           --           --           --            558

2.00% to 2.99%             884,225        --           --           --           --        884,225

3.00% to 3.99%           1,232,603        --           --           --           --      1,232,603

4.00% to 4.99%           1,121,541      62,438      12,982         471           --      1,197,432

5.00% to 5.99%             300,545      46,562      34,379       2,920          17,174     401,580

6.00% to 7.99%             162,141      38,805       4,020      86,125           --        291,091

8.00% to 9.99%                --            31         --           --           --             31
                         -----------   --------    --------    --------    ------------  ----------
    Total                $3,858,130   $147,836   $   51,381    $ 89,516     $   17,174   $4,164,037
                         -----------   --------    --------    --------    ------------  ----------
                         -----------   --------    --------    --------    ------------  ----------
</TABLE>


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

    Under the credit policies of the FHLB of Atlanta, credit may be extended to
creditworthy institutions based upon the financial condition, and the adequacy
of collateral pledged to secure the extension of credit.  Such extensions of
credit or borrowings may be obtained pursuant to several different credit
programs, each of which has its own rate and range of maturities.  Advances from
the FHLB of Atlanta must be secured by certain types of collateral with a value,
as 

                                      47

<PAGE>

determined by the FHLB of Atlanta, at least equal to 100% of the borrower's 
outstanding advances.  The Bank had outstanding FHLB advances of $269.1 
million at September 30, 1996.

    From time to time, the Bank enters into repurchase agreements, which are 
treated as financings.  The Bank sells securities (usually mortgage-backed 
securities) to a dealer and agrees to buy back the same securities at a 
specified time (generally within seven to 90 days).  The Bank pays a stated 
interest rate for the use of the funds for the specified time period to the 
dealer.  The obligation to repurchase the securities sold is reflected as a 
liability and the securities underlying the agreements are included in assets 
in the Consolidated Statements of Financial Condition in this report.  These 
arrangements are, in effect, borrowings by the Bank secured by the securities 
sold.  The Bank had outstanding repurchase agreements of $576.6 million at 
September 30, 1996, which were used to fund the purchase of $629.6 million of 
mortgage-backed securities during fiscal 1996. 

    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,
                                                        -----------------------
                                                            1996        1995 
                                                        ----------    ---------
                                                        (Dollars in thousands) 

Securities sold under repurchase agreements: 

Balance at year-end ............................          $576,576  $     ---

Average amount outstanding at any month-end.....            57,644    159,044 

Maximum amount outstanding at any 
   month-end....................................           576,576    353,615 

Weighted average interest rate during year......             5.51%      6.02% 

Weighted average interest rate on year-end 
   balance......................................             5.41%        ---

    In December 1986, the Bank issued an unsecured ten-year subordinated 
capital note in the original principal amount of $10.0 million to BACOB Bank, 
s.c., a foreign private savings bank.  On November 15, 1996, the Bank 
redeemed this note at par.

    On November 23, 1993, the Bank sold $150 million principal amount of its 
9 1/4% Subordinated Debentures due 2005 (the "1993 Debentures").  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.  On or after December 1, 1998, the 1993 Debentures will be 
redeemable, in whole or in part, at any time at the option of the Bank.

                                       48

<PAGE>

    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 or after December 
1, 2001, the 1996 Debentures will be redeemable, in whole or in part, at any 
time at the option of the Bank.  

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

SUBSIDIARIES

     OTS regulations generally permit the Bank to make investments in service 
corporation subsidiaries in an amount not to exceed 3.0% of the Bank's 
assets, provided that any investment in excess of 2.0% of assets serves 
primarily community, inner city or community development purposes.  Such 
regulations also permit the Bank to make "conforming loans" to such 
subsidiaries and joint ventures in an amount not to exceed 50% of the Bank's 
regulatory capital.  At September 30, 1996, 2.0% and 3.0% of the Bank's 
assets was equal to $114.5 million and $171.8 million, respectively, and the 
Bank had $12.0 million invested in its service corporation subsidiaries, $5.0 
million of which was in the form of conforming loans.  The Bank is required 
to provide 30 days advance notice to the OTS and to the FDIC before 
establishing a new subsidiary or conducting a new activity in an existing 
subsidiary. With prior written approval from the OTS, the Bank may also 
establish operating subsidiaries to engage in any activities in which the 
Bank may engage directly.

     During fiscal 1996, Chevy Chase formed two new subsidiaries for the 
purpose of holding 100% of the stock in the Bank's special purpose 
subsidiaries and financial services subsidiaries.  Chevy Chase Real Estate 
Corporation ("CCRC") holds stock in all special purpose subsidiaries.  Chevy 
Chase Financial Services Corporation ("CCFS") holds stock in both Chevy Chase 
Securities, Inc. and Chevy Chase Insurance Agency, Inc.  The Bank engages in 
other activities through its subsidiaries, including those described below.

     REAL ESTATE DEVELOPMENT ACTIVITIES.  Manor Investment Company ("Manor") 
previously engaged in certain real estate development activities as the 
result of activities commenced prior to the enactment of FIRREA and continues 
to manage the two remaining properties 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.  

                                       49

<PAGE>

In fiscal 1995, Manor sold two of its largest projects.  See "Management's 
Discussion and Analysis of Financial Condition and Results of Operations - 
Financial Condition - Banking - Asset Quality." 

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

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

    SPECIAL PURPOSE SUBSIDIARIES.  At September 30, 1996, CCRC held 100% of the
common stock of 29 subsidiaries (16 of which are active) that were formed for
the sole purpose of acquiring title to various real estate projects pursuant to
foreclosure or deed-in-lieu of foreclosure.  The Bank's investment in the
subsidiaries was $158.4 million at September 30, 1996.  The Bank's investment in
CCRC is not subject to the 3.0% service corporation investment limit discussed
above.  See "Regulation - Regulatory Capital."

    OPERATING SUBSIDIARIES.  Chevy Chase engages in significant activities 
through B.F. Saul Mortgage Company ("BFSMC").  See "Lending Activities".  
During fiscal 1996, the Bank received OTS approval to treat BFSMC as an 
operating subsidiary. CCB Holding Corporation ("CCBH") is a Delaware 
corporation created by the Bank as an operating subsidiary in September 1994 
in connection with its asset securitization activities.  CCBH owns certain 
certificates issued by two credit card trusts formed by the Bank and certain 
other related assets.  Consumer Finance Corporation was formed as an 
operating subsidiary in December 1994 to engage in automobile lending.  Chevy 
Chase Preferred Capital Corporation was formed in November 1996 to issue the 
REIT Preferred Stock.

EMPLOYEES

    The Bank and its subsidiaries had 3,380 full-time and 779 part-time 
employees at September 30, 1996.  The Bank provides its employees with a 
comprehensive range of employee benefit programs, including group health 
benefits, life insurance, disability insurance, paid sick leave and an 
employee loan program.  The Bank offers home mortgage and credit card loans 
to employees at prevailing market rates, but waives up to one point of any 
loan origination fees on home mortgage loans and the annual fee on credit 
card loans, and provides a yearly rebate equal to 0.5% of the outstanding 
loan balance of home mortgage loans at calendar year-end.  The Bank also 
offers employees a one percent discount on the interest rate on overdraft 
lines of credit.  See "Executive Compensation and Other Information" 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.



                                       50

<PAGE>

COMPETITION

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

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

    The Bank estimates that it competes principally with approximately 11 
depository institutions in its deposit-taking activities, with approximately 
ten institutions in the origination of single-family residential mortgage 
loans (other than home equity credit line loans) and with approximately six 
depository institutions in the origination of home equity credit line loans.  
According to the most recently published industry statistics, Chevy Chase had 
the largest market share (approximately 19.6%) of deposits in Montgomery 
County, Maryland, and ranked third in market share of deposits in Prince 
George's County, Maryland at June 30, 1995.  Based on publicly available 
information, Chevy Chase estimates that, in the Washington, D.C. metropolitan 
area, it maintains a significant market share of single-family residential 
mortgage loans and the leading market share of home equity credit line loans.

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

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


                                       51


<PAGE>

ITEM 2.  PROPERTIES

REAL ESTATE

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

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

BANKING

    At September 30, 1996, the Bank conducted its business from its home 
office at 7926 Jones Branch Drive, McLean, Virginia and its executive offices 
at 8401 Connecticut Avenue, Chevy Chase, Maryland; its operations centers at 
6151 and 6200 Chevy Chase Drive, Laurel, Maryland, 7215 Corporate Court, 
Frederick, Maryland, 5300, 5310 and 5340 Spectrum Drive, Frederick, Maryland 
and 7430 New Technology Way, Frederick, Maryland; its office facilities at 
7700 Old Georgetown Road, Bethesda, Maryland; and 107 full-service offices 
located in Maryland, Virginia and the District of Columbia.  On that date, 
the Bank owned the building and land for 21 of its branch offices and leased 
its remaining 86 branch offices.  Chevy Chase leases the office facilities at 
8401 Connecticut Avenue, 6200 Chevy Chase Drive and 7215 Corporate Court and 
the land at 7700 Old Georgetown Road.  Chevy Chase owns the building at 7700 
Old Georgetown Road.  In addition, the Bank leases office space in which its 
subsidiaries are housed. The office facility leases have various terms 
expiring from 1997 to 2019 and the ground leases have terms expiring from 
2029 to 2080.  See Note 11 to the Consolidated Financial Statements in this 
report for lease expense and commitments. 

    As of November 1996, the Bank has received OTS approval to open six 
branches and is awaiting OTS approval to open another six branches.  The 
branches, six in Virginia, four in Maryland and two in the District of 
Columbia, are scheduled to open during fiscal 1997. 

    The following table sets forth the location of the Bank's 107 
full-service offices at September 30, 1996.

    1 Catoctin Circle                              14245-R Centreville Square
    Leesburg, VA  22075                            Centreville, VA  20121

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

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

    8436 Old Keene Mill Road                       1439 Chain Bridge Road 
    Springfield, VA  22152                         McLean, VA  22101 

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

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

                                       52


<PAGE>

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

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

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

    5613 Stone Road                                21800 Towncenter Plaza 
    Centreville, VA  22020                         Sterling, VA  20164 

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

    3690-A King Street                             3095 Nutley Street 
    Alexandria, VA  22302                          Fairfax, VA  22031  

    6609 Springfield Mall                          4700 Lee Highway 
    Springfield, VA  22150                         Arlington, VA  22207  

    500 South Washington Street                    5851 Crossroads Center Way 
    Alexandria, VA  22314                          Falls Church, VA  22041  

    3537 S. Jefferson Street                       7340 Westlake Terrace 
    Baileys Crossroads, VA  22041                  Bethesda, MD  20817 

    8401 Connecticut Avenue                        11261 New Hampshire Avenue 
    Chevy Chase, MD  20815                         Silver Spring, MD  20904 

    5424 Western Avenue                            1327 Lamberton Drive 
    Chevy Chase, MD  20815                         Silver Spring, MD  20902 

    13641 Connecticut Avenue                       1609-B Rockville Pike 
    Wheaton, MD  20906                             Rockville, MD  20852 

    8315 Georgia Avenue                            2215 Bel Pre Road 
    Silver Spring, MD  20910                       Wheaton, MD  20906 

    4701 Sangamore Road                            2807 University Blvd. West 
    Bethesda, MD  20816                            Kensington, MD  20895 

    Landover Mall                                  11301 Rockville Pike
    Landover, MD  20785                            Kensington, MD  20895 


                                       53

<PAGE>
    11325 Seven Locks Road                         7500 Old Georgetown Road 
    Potomac, MD  20854                             Bethesda, MD  20814 

    6200 Annapolis Road                            26001 Ridge Road 
    Landover Hills, MD  20784                      Damascus, MD  20872 

    33 West Franklin Street                        5370 Westbard Avenue 
    Hagerstown, MD  21740                          Bethesda, MD  20816 

    6400 Belcrest Road                             3601 St. Barnabas Road 
    Hyattsville, MD  20782                         Silver Hill, MD  20746 

    8740 Arliss Street                             17831 Georgia Avenue 
    Silver Spring, MD  20901                       Olney, MD  20832 

    2409 Wootton Parkway                           6107 Greenbelt Road 
    Rockville, MD  20850                           Berwyn Heights, MD  20740 

    8889 Woodyard Road                             4 Bureau Drive 
    Clinton, MD  20735                             Gaithersburg, MD  20878 

    1181 University Boulevard                      19610 Club House Road 
    Langley Park, MD  20783                        Gaithersburg, MD  20879 

    12921 Wisteria Drive                           812 Muddy Branch Road 
    Germantown, MD  20874                          Gaithersburg, MD  20878 

    1009 West Patrick Street                       10211 River Road 
    Frederick, MD  21701                           Potomac, MD  20854 

    7937 Ritchie Highway                           12331-C Georgia Avenue 
    Glen Burnie, MD  21061                         Wheaton, MD  20906 

    19781-83 Frederick Road                        14113 Baltimore Avenue 
    Germantown, MD  20876                          Laurel, MD  20707 

    16823 Crabbs Branch Way                        7290-A Cradlerock Way 
    Rockville, MD  20855                           Columbia, MD  21045 

    2331-A Forest Drive                            1151 Maryland Route 3 North 
    Annapolis, MD  21401                           Gambrills, MD  21054 

    3244 Superior Lane                             12228 Viers Mill Road 
    Bowie, MD  20715                               Silver Spring, MD  20906 

                                       54


<PAGE>

    20000 Goshen Road                              317 Kentlands Blvd. 
    Gaithersburg, MD  20879                        Gaithersburg, MD  20878 

    12097 Rockville Pike                           215 N. Washington Street 
    Rockville, MD  20852                           Rockville, MD  20850 

    10159 New Hampshire Avenue                     1336 Crain Highway South 
    Hillandale, MD  20903                          Mitchellville, MD  20716 

    6264 Central Avenue                            543 Ritchie Highway 
    Seat Pleasant, MD  20743                       Severna Park, MD  21146 

    7700 Old Georgetown Road                       4745 Dorsey Hall Drive 
    Bethesda, MD  20814                            Ellicott City, MD  21042 

    15777 Columbia Pike                            1130 Smallwood Drive 
    Burtonsville, MD  20866                        Waldorf, MD  20603 

    18104 Town Center Drive                        10800 Baltimore Avenue 
    Olney, MD  20832                               Beltsville, MD  20705

    6197 Oxon Hill Road                            1040 Largo Center Drive 
    Oxon Hill, MD  20745                           Landover, MD  20785 

    980 E. Swan Creek Road                         6335 Marlboro Pike 
    Fort Washington, MD  20744                     District Heights, MD  20747  

    115 University Blvd. West                      7530 Annapolis Road 
    Silver Spring, MD  20901                       Lanham, MD  20784  

    3828 International Drive                       10821 Connecticut Avenue 
    Silver Spring, MD  20906                       Kensington, MD  20895  

    9707 Old Georgetown Road                       18006 Mateny Road 
    Bethesda, MD  20814                            Germantown, MD  20874  

    3400 Crain Highway                             7406 Baltimore Avenue 
    Bowie, MD  20716                               College Park, MD  20740  

    11241 Georgia Avenue                           10400 Old Georgetown Road 
    Wheaton, MD  20902                             Bethesda, MD  20814  

    13484 New Hampshire Avenue                     210 Michigan Avenue, N.E. 
    Silver Spring, MD  20904                       Washington, D.C.  20017  

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

    4860 Massachusetts Avenue, N.W.                320 Riggs Road, N.E. 
    Washington, D.C.  20016                        Washington, D.C.  20011 

    4000 Wisconsin Avenue 
    Washington, D.C.  20016


                                       55

<PAGE>

    At September 30, 1996, the net book value of the Bank's office facilities 
(including leasehold improvements) was $144.3 million.  See Note 16 to the 
Consolidated Financial Statements in this report.

    The Bank currently is building a facility in Frederick, Maryland to 
consolidate the Bank's employees and operations in that area.  At September 
30, 1996, the Bank had invested $3.5 million in the land and $17.8 million 
for capital expenditures relating to this facility, of which $0.7 million 
represents capitalized interest.

    During fiscal 1995, the Bank transferred an office building, which was 
previously classified as real estate held for investment, to property and 
equipment and the Bank began to occupy a portion of the building during 
fiscal 1996 in order to satisfy its need for additional office space.  


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

    The Bank owns additional assets, including furniture and data processing 
equipment.  At September 30, 1996, these other assets had a net book value of 
$80.8 million.  The Bank also has operating leases, primarily for certain 
automobiles and data processing equipment and software.  The leases for 
automobiles are generally for periods of less than four years; the leases for 
the data processing equipment and software have month-to-month or 
year-to-year terms. 

                            *   *   *   *   * 

ITEM 3.  LEGAL PROCEEDINGS

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

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

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

    No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1996.
                                       56

<PAGE>
                                       PART II

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

    There currently is no established public trading market for the Trust's
Common Shares of Beneficial Interest (the "Common Shares"). At December 2, 1996,
there were nine corporate or individual holders of record of Common Shares.  All
holders of Common Shares at such date were affiliated with the Trust. See
"Security Ownership of Certain Beneficial Owners and Management."

ITEM 6.  SELECTED FINANCIAL DATA

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

                                      57

<PAGE>
<TABLE>
SELECTED FINANCIAL DATA

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

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

(In thousands, except  per share amounts and other data)       1996           1995          1994           1993          1992
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>            <C>           <C>            <C>            <C>        
STATEMENT OF OPERATIONS DATA:

Real Estate:
Revenues                                                    $     76,839   $     77,285  $     66,044   $     93,245   $   100,179
Operating expenses                                               104,321        109,971       102,087        137,256       127,936
Equity in earnings (losses) of partnership investments             3,374          3,681         1,738           (668)         (208)
Gain (loss) on sales of property                                     (68)         1,664            --            184          (546)
                                                           ------------------------------------------------------------------------
Real estate operating loss                                       (24,176)       (27,341)      (34,305)       (44,495)      (28,511)
                                                           ------------------------------------------------------------------------

Banking:
Interest income                                                  387,511        365,315       334,464        348,814       403,033
Interest expense                                                 188,836        189,114       165,544        167,518       214,761
                                                           ------------------------------------------------------------------------
Net interest income                                              198,675        176,201       168,920        181,296       188,272
Provision for loan losses                                       (115,740)       (54,979)      (29,222)       (60,372)      (89,062)
                                                           ------------------------------------------------------------------------
Net interest income after provision for loan losses               82,935        121,222       139,698        120,924        99,210
                                                           ------------------------------------------------------------------------
Other income:
    Credit card, loan servicing and deposit service fees         324,761        218,572       111,279         91,216        92,291
    Earnings (loss) on real estate held for investment
       or sale, net                                              (24,413)        (5,549)          835        (12,722)      (50,649)
    Gain on sales of assets                                       24,400         12,282        32,217         40,270        44,259
    Gain on sales of mortgage servicing rights                        --          1,397         5,833          4,828         3,750
    Other                                                         19,713          5,923         9,885          7,161        10,766
                                                           ------------------------------------------------------------------------
Total other income                                               344,461        232,625       160,049        130,753       100,417
                                                           ------------------------------------------------------------------------
Operating expenses                                               381,285        298,164       246,560        187,828       156,218
                                                           ------------------------------------------------------------------------
Banking operating income                                          46,111         55,683        53,187         63,849        43,409
                                                           ------------------------------------------------------------------------

Total Company:
Operating income before income taxes,                             21,935         28,342        18,882         19,354        14,898
    extraordinary items, cumulative effect of change in
    accounting principle, and minority interest
Provision for income taxes                                         8,301          2,021         7,025         11,703         7,385
                                                           ------------------------------------------------------------------------
Income before extraordinary items, cumulative
    effect of change in accounting principle and
    minority interest                                             13,634         26,321        11,857          7,651         7,513
Extraordinary items:
    Adjustment for tax benefit of operating loss
        carryovers                                                    --             --            --          7,738         3,817
    Loss on early extinguishment of debt, net of taxes                --             --       (11,315)            --          (132)
                                                           ------------------------------------------------------------------------
Income before cumulative effect of change in
    accounting principle and minority interest                    13,634         26,321           542         15,389        11,198
Cumulative effect of change in accounting principle                   --             --        36,260             --            --
                                                           ------------------------------------------------------------------------
Income before minority interest                                   13,634         26,321        36,802         15,389        11,198
Minority interest held by affiliates                              (3,962)        (5,721)       (3,963)        (6,582)       (5,261)
Minority interest -- other                                        (9,750)        (9,750)       (9,750)        (4,334)           --
                                                           ------------------------------------------------------------------------
Total company net income (loss)                             $        (78)  $     10,850  $     23,089  $       4,473  $      5,937
                                                           ========================================================================

Net income (loss) available to common shareholders          $     (5,498)  $      5,430  $     17,669  $        (947) $        517

Net income (loss) per common share:
Income before extraordinary items, cumulative
    effect of change in accounting principle and
    minority interest                                       $       1.70   $       4.33  $       1.33  $        0.46  $       0.43
Extraordinary items:
    Adjustment for tax benefit of operating loss
        carryovers                                                    --             --            --           1.60          0.79
    Loss on early extinguishment of debt, net of taxes                --             --         (2.34)            --         (0.03)
                                                           ------------------------------------------------------------------------
Income (loss) before cumulative effect of change in
    accounting principle and minority interest                      1.70           4.33         (1.01)          2.06          1.19
Cumulative effect of change in accounting principle                   --             --          7.51             --            --
                                                           ------------------------------------------------------------------------
Income before minority interest                                     1.70           4.33          6.50           2.06          1.19
Minority interest held by affiliates                               (0.82)         (1.19)        (0.82)         (1.36)        (1.08)
Minority interest -- other                                         (2.02)         (2.02)        (2.02)         (0.90)           --
                                                           ------------------------------------------------------------------------
Total company net income (loss)                             $      (1.14)  $       1.12  $       3.66  $       (0.20) $       0.11
                                                           ========================================================================

-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      58

<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
(Continued)
===================================================================================================================================

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

(In thousands, except per share amounts and other data)   1996            1995           1994            1993            1992
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>            <C>             <C>             <C>            <C>        
BALANCE SHEET DATA:

Assets:
Real estate assets                                       $   294,503    $   313,412     $   327,739     $   220,556    $   334,378
    Income-producing properties, net                         156,115        163,787         159,529         162,356        254,700
    Land parcels                                              41,580         38,458          38,455          38,411         50,981
Banking assets                                             5,693,074      4,911,536       4,666,298       4,872,771      4,998,756
Total company assets                                       5,987,577      5,224,948       4,994,037       5,093,327      5,333,134

Liabilities:
Real estate liabilities                                      578,092        555,814         558,109         450,153        522,760
    Mortgage notes payable                                   173,345        184,502         185,730         264,776        429,968
    Notes payable - secured                                  177,500        175,500         175,000              --             --
    Notes payable - unsecured                                 42,367         41,057          40,288          38,661         50,417
Banking liabilities                                        5,388,444      4,619,451       4,413,832       4,634,001      4,885,189
Minority interest held by affiliates                          46,065         43,556          35,632          34,495         27,912
Minority interest - other                                     74,307         74,307          74,307          74,307             --
Total company liabilities                                  6,086,908      5,293,128       5,081,880       5,192,956      5,435,861

Shareholders' deficit                                        (99,331)       (68,180)        (87,843)        (99,629)      (102,727)
-----------------------------------------------------------------------------------------------------------------------------------

CASH FLOW DATA:

Net cash flows provided by (used in)
  operating activities:
    Real estate                                        $       9,782  $       4,324     $   (10,859)   $     (3,149) $        (884)
    Banking                                                1,745,593      2,095,663       2,218,262       1,137,686      1,026,705
                                                       ----------------------------------------------------------------------------
Total Company                                              1,755,375      2,099,987       2,207,403       1,134,537      1,025,821
                                                       ----------------------------------------------------------------------------

Net cash flows provided by (used in)
  investing activities:
    Real estate                                               (4,907)       (17,143)        (29,118)         (2,999)        (1,333)
    Banking                                               (2,565,469)    (2,269,444)     (1,777,281)       (879,178)    (1,224,100)
                                                       ----------------------------------------------------------------------------
Total Company                                             (2,570,376)    (2,286,587)     (1,806,399)       (882,177)    (1,225,433)
                                                       ----------------------------------------------------------------------------

Net cash flows provided by (used in)
  financing activities:
    Real estate                                               (6,714)          (271)         75,723           3,230            169
    Banking                                                  727,019        160,966        (260,094)       (190,850)       157,183
                                                       ----------------------------------------------------------------------------
Total Company                                                720,305        160,695        (184,371)       (187,620)       157,352
                                                       ----------------------------------------------------------------------------

Net increase (decrease) in cash and
  cash equivalents                                           (94,696)       (25,905)        216,633          64,740        (42,260)
-----------------------------------------------------------------------------------------------------------------------------------

OTHER DATA:

Hotels:
    Number of hotels                                               9             10               9               9              9
    Number of guest rooms                                      2,261          2,608           2,415           2,356          2,400
    Average occupancy                                             68%            67%             62%             68%            63%
    Average room rate                                         $68.79         $60.82          $57.57          $54.02         $56.54
Shopping centers:
    Number of properties                                         N/A            N/A             N/A              23             23
    Leasable area (square feet)                                  N/A            N/A             N/A       4,408,000      4,416,000
    Average occupancy                                            N/A            N/A             N/A              95%            95%
Office properties:
    Number of properties (1)                                       8              9               9              10             10
    Leasable area (square feet) (1)                        1,308,000      1,368,000       1,363,000       1,537,000      1,537,000
    Leasing percentages (1)                                       93%            84%             93%             85%            92%
Land parcels:
    Number of parcels                                              9             10              10              12             12
    Total acreage                                                446            433             433           1,496          9,529

(1) Includes Dulles South Office Building which is owned by a subsidiary in which the Trust has a 50% interest.
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>




ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS
    
    The Trust has prepared its financial statements and other disclosures on a
fully consolidated basis.  The term "Trust" used in the text and the financial
statements included herein refers to the combined entity, which includes B. F.
Saul Real Estate Investment Trust and its subsidiaries, including Chevy Chase
and Chevy Chase's subsidiaries. "Real Estate Trust" refers to B. F. Saul Real
Investment Trust and its subsidiaries, excluding Chevy Chase and Chevy Chase's
subsidiaries.  The operations conducted by the Real Estate Trust are designated
as "Real Estate," while the business conducted by the Bank and its subsidiaries
is identified by the term "Banking." 

FINANCIAL CONDITION

REAL ESTATE

    The Real Estate Trust's investment portfolio at September 30, 1996
consisted primarily of  hotels, office and industrial projects,  and land
parcels.  See "Business - Real Estate - Real Estate Investments."  In August
1993, the Real Estate Trust transferred its 22 shopping center properties and
one of its office properties, together with the debt associated with such
properties, to Saul Holdings Partnership and a subsidiary limited partnership of
Saul Holding Partnership in exchange for securities representing a 21.5% limited
partnership interest in Saul Holdings Partnership.  See "Business - Real Estate
- Investment in Saul Holdings Limited Partnership."

    Office space in the Real Estate Trust's office property portfolio was 93%
leased at September 30, 1996, compared to a leasing rate of 85% at September 30,
1995.  At September 30, 1996, the Real Estate Trust's office property portfolio
had a total gross leasable area of approximately 1.3 million  square  feet, of 
which 214,000 square feet (16%) and 271,000 square feet (21%) are  subject 
to leases whose terms expire in fiscal 1997 and fiscal 1998, respectively.

                                       59


<PAGE>

    The eight hotel properties owned by the Real Estate Trust throughout fiscal
1996 and fiscal 1995 experienced average occupancy rates of 68% and 69%, and
average room rates of $66.98 and $62.80, respectively.  Four of the hotels
registered improved occupancy rates and all eight of the hotels registered
higher average room rates in the most recent fiscal year.  Overall, the hotel
portfolio experienced an average room rate of  $68.70 and an average occupancy
rate of 68% during the most recent fiscal year.   At September 30, 1996, the
Real  Estate Trust owned nine hotels containing 2,261 rooms.  On October 31,
1996, the Real Estate Trust purchased a 115-room Holiday Inn Express hotel in
Herndon, Virginia, approximately three miles from the Washington Dulles
International Airport.

BANKING

    GENERAL. The Bank recorded operating income of $46.1 million during 
fiscal 1996, compared to operating income of $55.7 million in fiscal 1995.  
The decrease in income for fiscal 1996 was primarily attributable to a $60.8 
million increase in the provision for loan losses and an $83.1 million 
increase in non-interest expense (which included the $26.5 million SAIF 
assessment discussed below), the effect of which was primarily offset by a 
$111.8 million increase in non-interest income and a $22.5 million increase 
in net interest income. See "Results of Operations - Fiscal 1996 Compared to 
Fiscal 1995 - Banking." 

    Legislation was enacted on September 30, 1996 that, among other things, 
imposed on thrift institutions a one-time assessment of 65.7 basis points on 
their SAIF-insured deposits to recapitalize the SAIF.  At September 30, 1996, 
the Bank accrued an expense amounting to approximately $26.5 million for the 
SAIF assessment.

    Because of the continued improvement in the financial condition of the 
Bank, on March 29, 1996, the OTS released the Bank from its written agreement 
with the OTS, and the Board of Directors of the Bank adopted a resolution 
addressing certain issues previously addressed by the written agreement.  See 
"Capital."

    Real estate owned, net of valuation allowances, declined 45.3% during fiscal
1996 to $119.9 million at September 30, 1996, from $219.2 million at September
30, 1995.  This reduction was primarily due to sales of residential lots or
units in the Communities and other smaller residential properties.  See "REO."

    The Bank securitized and sold $1.6 billion of receivables pursuant to its
funding strategy during fiscal 1996, of which $919.0 million, $96.5 million,
$475.3 million and $153.5 million, related to securitizations and sales of
credit card, home equity, automobile and home loan receivables, respectively. 
In addition, the Bank securitized and sold $42.1 million of amounts on deposit
in certain spread accounts established in connection with certain of the Bank's
outstanding credit card securitizations.  See "Capital."

    At September 30, 1996, the Bank's tangible, core, tier 1 risk-based and 
total risk-based regulatory capital ratios were 5.21%, 5.21%, 5.80% and 
10.14%, respectively.  The Bank's capital ratios exceeded the requirements 
under FIRREA as well as the standards established for 
"adequately-capitalized" institutions under the prompt corrective action 
regulations issued pursuant to FDICIA.  In the September 30, 1996 quarter, 
the Bank's capital ratios fell below the ratios established for 
"well-capitalized" institutions for the first time since June 1993.  If the 
SAIF assessment discussed above had not been accrued in the quarter ended 
September 30, 1996, the Bank's capital ratios would have continued to be 
sufficient to meet the standards established for "well-capitalized 
institutions."  See "Capital."

                                       60

<PAGE>

    On December 3, 1996, the Bank sold $100 million principal amount of its 
9 1/4% Subordinated Debentures due 2008, the principal amount of which is 
includable in the Bank's supplementary capital.  In addition, on December 3, 
1996, the REIT Subsidiary sold $150 million of REIT Preferred Stock, which is 
eligible for inclusion as core capital of the Bank in an amount up to 25% of 
the Bank's total core capital.  If these transactions had occurred at 
September 30, 1996, the Bank's tangible, core, tier 1 risk-based and total 
risk-based regulatory capital ratios would have been 6.67%, 6.67%, 7.65%, and 
15.15%, respectively, which would have exceeded the ratios established for 
"well-capitalized" institutions.

    The Bank's assets are subject to review and classification by the OTS upon
examination.  The OTS concluded its most recent annual examination of the Bank
in December 1995.

    ASSET QUALITY.  Non-Performing Assets.  The Bank's level of non-performing
                    ---------------------
assets continued to decline during fiscal 1996.  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)

<TABLE>
<CAPTION>
                                                                                            SEPTEMBER 30,
                                                                     ----------------------------------------------------------
                                                                        1996        1995        1994        1993         1992
                                                                     ----------  ----------  ----------  ----------  ----------
<S>                                                                  <C>         <C>         <C>         <C>         <C>
Non-performing assets:
  Non-accrual loans:
          Residential                                                $   8,200   $   8,593   $   8,306   $   9,108   $  12,865
          Commercial and multifamily                                     --            194       --          --          3,694
          Residential construction and ground                            --          --          --          --         11,196
          Commercial construction and ground                             --          --          --          --          3,413
                                                                     ---------   ---------   ---------   ---------   ---------
                  Total non-accrual real estate loans                    8,200       8,787       8,306       9,108      31,168
          Credit card                                                   25,350      18,569      16,229      20,557      26,780
          Consumer and other                                             1,239         595         498         314       3,572
                                                                     ---------   ---------   ---------   ---------   ---------
                  Total non-accrual loans (1)                           34,789      27,951      25,033      29,979      61,520
                                                                     ---------   ---------   ---------   ---------   ---------
  Non-accrual real estate held for investment (1)                        --          --          8,915       8,898       8,892
                                                                     ---------   ---------   ---------   ---------   ---------
  Real estate acquired in settlement of loans                          246,380     354,277     387,024     434,616     541,352
  Reserve for losses on real estate acquired in settlement of loans   (126,519)   (135,043)   (109,074)   (101,462)    (94,125)
                                                                     ---------   ---------   ---------   ---------   ---------
          Real estate acquired in settlement of loans, net             119,861     219,234     277,950     333,154     447,227
                                                                     ---------   ---------   ---------   ---------   ---------
                  Total non-performing assets                        $ 154,650    $247,185   $ 311,898   $ 372,031   $ 517,639
                                                                     ---------   ---------   ---------   ---------   ---------
                                                                     ---------   ---------   ---------   ---------   ---------
Reserve for losses on loans                                          $  95,523     $60,496   $  50,205   $  68,040   $  78,818
Reserve for losses on real estate held for investment                      191         193       9,899      10,182      14,919
Reserve for losses on real estate acquired in settlement of loans      126,519     135,043     109,074     101,462      94,125
                                                                     ---------   ---------   ---------   ---------   ---------
    Total reserves for losses                                        $ 222,233    $195,732   $ 169,178   $ 179,684    $187,862
                                                                     ---------   ---------   ---------   ---------   ---------
                                                                     ---------   ---------   ---------   ---------   ---------
</TABLE>
-------------------
(1)  Before deduction of reserves for losses.

                                      61

<PAGE>

                                              NON-PERFORMING ASSETS (CONTINUED)

<TABLE>
<CAPTION>
                                                                                      SEPTEMBER 30,
                                                                    -----------------------------------------------------
                                                                        1996        1995      1994      1993      1992
                                                                      -------      ------    ------    ------    ------
<S>                                                                 <C>            <C>       <C>       <C>       <C>
Ratios:
        Non-performing assets, net to total assets (1)                  1.04%        3.80%     5.40%     6.03%     8.48%

        Reserve for losses on real estate loans to non-accrual   
          real estate loans (2)                                       134.44%      123.82%   169.58%   219.29%    53.16%

        Reserve for losses on credit card loans to non-accrual
          credit card loans (2)                                       314.32%      249.47%   212.77%   228.08%   214.96%

        Reserve for losses on consumer and other loans to             
          non-accrual consumer and other loans (2)                    388.86%      553.11%   319.28%   376.11%   131.10%

        Reserve for losses on loans to non-accrual loans (2)          274.58%      216.44%   200.56%   226.96%   128.12%

        Reserve for losses on loans to total loans receivable (3)       2.81%        2.05%     1.97%     2.83%     3.52%
</TABLE>
----------------
(1)  Non-performing assets is presented after all reserves for losses on 
     loans and real estate held for investment or sale.

(2)  Before deduction of reserves for losses.

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

    Non-performing assets include non-accrual loans (loans contractually past 
due 90 days or more or with respect to which other factors indicate that full 
payment of principal and interest is unlikely), non-accrual real estate held 
for investment ("non-accrual REI"), and REO, acquired either through 
foreclosure or deed-in-lieu of foreclosure, or pursuant to in-substance 
foreclosure (prior to the adoption of SFAS No. 114, "Accounting by Creditors 
for Impairment of a Loan," in fiscal 1994).

    Non-performing assets totaled $154.6 million, after valuation allowances 
on REO of $126.5 million, at September 30, 1996, compared to $247.2 million, 
after valuation allowances on REO of $135.0 million, at September 30, 1995.  
In addition to the valuation allowances on REO, the Bank maintained $26.1 
million and $2.3 million of valuation allowances on its non-accrual loans at 
September 30, 1996, and September 30, 1995, respectively.  The decrease in 
non-performing assets was primarily attributable to a net decrease in REO of 
$99.4 million.  

    Non-accrual Loans.  The Bank's non-accrual loans totaled $34.8 million at
    -----------------
September 30, 1996, compared to $28.0 million at September 30, 1995.  At
September 30, 1996, non-accrual loans consisted primarily of $8.2 million of
non-accrual real estate loans and $25.4 million of non-accrual credit card
loans.  The $6.8 million increase in non-accrual loans was primarily due to an
increase in non-accrual credit card loans, reflecting an industry-wide decline
in the performance of such loans.

    At September 30, 1996, the $25.4 million of non-accrual credit card loans 
were classified for regulatory purposes as substandard and disclosed as 
non-performing assets because they were 90 days or more past due.  At that 
date, the Bank also had $16.4 million of credit card loans classified for 
regulatory purposes as substandard which were not either non-performing 
assets (i.e., credit card loans which are 90 days or more past due) or 
potential problem assets.  The amount classified as substandard but not 
non-performing assets ($16.4 million) primarily related to accounts for which 
the customers have agreed to modified payment terms, but which were 30-89

                                       62

<PAGE>

days past due.  Of the $16.4 million, $2.3 million was current, $7.8 million 
was 30-59 days past due and $6.3 million was 60-89 days past due at September 
30, 1996.  All delinquent amounts are included in the table of delinquent 
loans under "Delinquent Loans."

    REO.  At September 30, 1996, the Bank's REO totaled $119.9 million, after
    ----
valuation allowances on such assets of $126.5 million as set forth in the
following table.

<TABLE>
<CAPTION>
                                             Balance
                                              Before                           Balance After
                            # of            Valuation        All Valuation       Valuation         Percent
                         Properties         Allowances        Allowances         Allowances        of Total 
                         ----------         ----------        ----------         ----------        --------
                                                                 (Dollars in thousands)

<S>                         <C>             <C>               <C>                 <C>              <C>
Communities ............     5               $209,573          $114,561            $95,012          79.3% 

Residential ground .....     3                 11,207             5,944              5,263           4.4% 

Commercial ground  .....     8                 23,203             5,894             17,309          14.4% 

Single-family 
  residential properties    17                  2,397               120              2,277           1.9%  
                            --              ---------         ---------          ---------         ------
  Total REO ............    33               $246,380          $126,519           $119,861         100.0% 
                            --              ---------         ---------          ---------         ------
                            --              ---------         ---------          ---------         ------
</TABLE>

    During fiscal 1996, REO decreased $99.4 million, which was primarily 
comprised of $96.3 million in proceeds from REO sales.

    The $96.3 million in REO sales proceeds consisted of five residential 
ground properties ($21.9 million), 2,295 residential lots in the Communities 
($62.2 million), approximately 30.2 acres of commercial land in four of the 
Communities ($6.6 million), three partial sales of commercial ground ($1.3 
million) and various single-family residential properties ($4.3 million).

    Included in the activity discussed above is one transaction in which the 
Bank sold the remaining residential lots (approximately 2,000) in two of its 
Communities and two other residential properties at an amount that 
approximated the net carrying value, after utilization of applicable 
valuation allowances.  The impact of this transaction was to reduce REO, net 
of all valuation allowances, by $49.2 million.  The Bank provided financing 
of $33.4 million, net of participations, in connection with this sale.

    At September 30, 1996, the Bank had executed contracts to sell one of the
residential ground properties at its book value of $1.8 million at that date.

    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.  In accordance with this objective, management of the Bank
continues to pursue several strategies.  First, the Bank has focused its efforts
on marketing residential building lots directly to homebuilders, and is
proceeding with lot development to meet the requirements of existing and new
contracts with builders.  Second, the Bank continues to seek and negotiate with
potential purchasers of 

                                      63

<PAGE>

remaining retail and commercial ground.  Third, the Bank continues to seek 
potential investors concerning the possibility of larger scale or bulk 
purchases of remaining ground at the Communities.  The Bank's ability to 
achieve this objective will depend on a number of factors, some of which are 
beyond its control, such as the general economic conditions in the 
Washington, D.C. metropolitan area.  

    The principal component of REO consists of the five Communities, four of 
which are under active development.  At September 30, 1996, two of the active 
Communities had 2,554 remaining residential lots, of which 367 lots (14.4%) 
were under contract and pending settlement.  Four of the active Communities 
had approximately 294 remaining acres of land designated for commercial use, 
of which 17.9 acres (6.1%) were under contract and pending settlement.  In 
addition, at September 30, 1996, the Bank was engaged in discussions with 
potential purchasers regarding the sale of additional residential units and 
retail land.

    In addition to the four active Communities, REO includes a fifth Community,
consisting of approximately 2,400 acres, in Loudoun County, Virginia, which is
in the pre-development stage and was to be developed into approximately 6,200
residential units at September 30, 1996.  At September 30, 1996, this property
had a book value of $18.9 million, after valuation allowances.

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

                                                   Year Ended September 30,
                                           -------------------------------------
                                             1996           1995          1994
                                           --------      ---------     ---------
                                                      (In thousands)

Residential construction loans ........... $49,623        $12,615        $13,367

Single-family permanent loans(1) .........  43,297         50,096         54,642
                                           -------        -------        -------

  Total .................................. $92,920        $62,711        $68,009
                                           =======        =======        =======

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

(1)  Includes $1.2 million, $2.3 million and $4.4 million of loans classified as
    held for sale at September 30, 1996, September 30, 1995 and September 30, 
    1994, respectively.

    The Bank anticipates that it will provide construction financing for a 
portion of the remaining unsold lot inventory in the Communities.  The Bank 
also expects that it will provide permanent financing for a portion of the 
homes to be sold in the Communities.  The Bank's current policy is to sell 
all such single-family loans for which it provides permanent financing.  At 

                                      64

<PAGE>

September 30, 1996, $1.2 million of such loans are classified as held for 
sale and generally are expected to be sold in the first quarter of fiscal 
1997.

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

                                           Year Ended September 30,
                                   ---------------------------------------
                                      1996           1995           1994 
                                   --------      ----------      ---------
                                               (In thousands)

Sales proceeds                     $ 71,023       $ 65,211       $ 78,057 
Development costs                    17,931         32,626         44,264 
                                   --------        -------       --------
  Net cash flow                      53,092         32,585         33,793 
Increase (decrease) in reserves 
  and other non-cash items           13,870         16,884         (4,337) 
                                   --------        -------       --------
Net decrease in balances of the 
  Communities                      $ 66,962       $ 49,469       $ 29,456
                                   --------        -------       --------
                                   --------        -------       --------

    The Bank currently anticipates that sales proceeds will continue to exceed
development costs in future periods.  In the event development costs exceed
sales proceeds in future periods, the Bank believes that adequate funds will be
available from its primary liquidity sources to fund such costs.  See
"Liquidity."

    The Bank capitalizes costs relating to development and improvement of 
REO. Interest costs are capitalized on real estate properties under 
development.  During fiscal 1996, the Bank capitalized interest in the amount 
of $2.8 million relating to its four active Communities.  

    In accordance with the OTS extensions of the holding periods for certain 
of its REO, the Bank is required to submit a quarterly status report on its 
large REO properties.  See "Capital - Regulatory Action and Requirements."

    The Bank will continue to monitor closely its major non-performing and 
potential problem assets in light of current and anticipated market 
conditions.  The Bank's asset workout group focuses its efforts in resolving 
these problem assets as expeditiously as possible.  The Bank does not 
anticipate any significant increases in non-performing and potential problem 
assets.

    Potential Problem Assets.  Although not considered non-performing assets,
    ------------------------
primarily because the loans are not 90 or more days past due and the borrowers
have not abandoned control of the properties, potential problem assets are
experiencing problems sufficient to cause management to have serious doubts as
to the ability of the borrowers to comply with present repayment 

                                      65

<PAGE>

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

    At September 30, 1996, potential problem assets totaled $5.9 million, 
before valuation allowances of $1.1 million, as compared to $8.2 million, 
before valuation allowances of $1.5 million, at September 30, 1995.  The $2.3 
million decrease in potential problem assets was primarily attributable to 
net principal reductions on such assets.

    Delinquent Loans.   At September 30, 1996, delinquent loans totaled $51.6 
    ----------------
million (or 1.6% of loans) compared to $39.7 million (or 1.3% of loans) at 
September 30, 1995.  The following table sets forth information regarding the 
Bank's delinquent loans at September 30, 1996.

<TABLE>
<CAPTION>
                                          Principal Balance

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


Loans delinquent for:

<S>                          <C>              <C>             <C>               <C>
30-59 days ...............   $ 5,013        $ 28,717          $ 33,730          1.0% 

60-89 days ...............       839          17,004            17,843          0.6% 
                               -----        --------          --------          ----

  Total                      $ 5,852        $ 45,721          $ 51,573          1.6% 
                             -------        --------          --------          ----
                             -------        --------          --------          ----

</TABLE>

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

    Mortgage loans classified as delinquent 30-89 days consists entirely of
single-family permanent residential mortgage loans and home equity credit line
loans.  Total delinquent mortgage loans decreased to $5.9 million at September
30, 1996, from $6.0 million at September 30, 1995.

    Non-mortgage loans (principally credit card loans) delinquent 30-89 days
increased to $45.7 million at September 30, 1996 from $33.7 million at September
30, 1995, and increased as a percentage of total non-mortgage loans outstanding
to 2.9% at September 30, 1996 from 2.4% at September 30, 1995.  The increased
percentage of delinquent non-mortgage loans to total non-mortgage loans
outstanding resulted primarily from the increase in delinquent credit card
loans, which reflects the industry-wide decline in the performance of such
loans.

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

                                      66

<PAGE>

                                              September 30,
                                      --------------------------
                                          1996           1995
                                      -----------    -----------
                                            (In thousands)
    Troubled debt restructurings.....     $13,618        $17,344
                                      -----------    -----------
                                      -----------    -----------

    At September 30, 1996, loans accounted for as troubled debt restructurings
included two commercial permanent loans with principal balances totaling $13.2
million and one commercial collateralized loan with a principal balance of $0.4
million.  The $3.7 million decrease in loans accounted for as troubled debt
restructurings from September 30, 1995, resulted from the principal repayment of
one residential ground loan with a principal balance of $3.4 million, which was
accounted for as a troubled-debt restructuring at September 30, 1995, and other
net principal reductions.  At September 30, 1996, the Bank had commitments to
lend $0.1 million of additional funds on loans that have been restructured.

    Real Estate Held for Investment.  At September 30, 1996 and 1995, real 
    -------------------------------
estate held for investment consisted of two properties with an aggregate book 
value of $3.6 million, net of valuation allowances of $0.2 million.

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


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


<TABLE>
<CAPTION>

                                                                              YEAR ENDED SEPTEMBER 30,
                                                              -------------------------------------------------------
                                                                1996         1995       1994        1993        1992 
                                                              --------      -------    ------      ------      ------

<S>                                                           <C>           <C>        <C>         <C>         <C>
Balance at beginning of year                                  $ 60,496      $50,205    $68,040     $78,818     $89,745
                                                              --------      -------    -------     -------     -------

Provision for loan losses                                      115,740       54,979     29,222      60,372      86,453
                                                              --------      -------    -------     -------     -------

Charge-offs:
   Residential                                                     867        1,174      1,641          45         581
   Commercial and multifamily                                      -            -          112         766       1,855
   Ground                                                          -          1,768      2,027       4,274       1,650
   Residential construction                                        -            -          -           -         1,971
   Commercial construction                                         -            -          447         -         1,431
   Credit card                                                  84,805       50,172     55,754      76,141     100,391
   Consumer and other                                            6,375        3,463      1,058       3,664       1,898
                                                              --------      -------    -------     -------     -------

     Total charge-offs                                          92,047       56,577     61,039      84,890     109,777
                                                              --------      -------    -------     -------     -------

Recoveries: 
   Residential                                                      32           20        -          -           -
   Credit card                                                  10,720       11,219     13,525      13,438      12,038
   Other                                                           582          650        457         302         359
                                                              --------      -------    -------     -------     -------

     Total recoveries                                           11,334       11,889     13,982      13,740      12,397
                                                              --------      -------    -------     -------     -------

Charge-offs, net of recoveries                                 80,713       44,688     47,057      71,150      97,380
                                                              --------      -------    -------     -------     -------

Balance at end of year                                        $ 95,523      $60,496    $50,205     $68,040     $78,818
                                                              --------      -------    -------     -------     -------
                                                              --------      -------    -------     -------     -------

Provision for loan losses to average loans (1)                    3.94%        1.85%       1.08%       2.83%      3.59%
Net loan charge-offs to average loans (1)                         2.75%        1.51%       1.74%       3.33%      4.04%
Ending reserve for losses on loans to total loans (1) (2)         2.81%        2.05%       1.97%       2.83%      3.52%

</TABLE>


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

(2) Before deduction of reserves.


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

<TABLE>
<CAPTION>
                                                                    SEPTEMBER 30,
                                        ---------------------------------------------------------------------
                                                 1996                     1995                   1994        
                                        -----------------------   ---------------------  --------------------
                                                   PERCENT OF              PERCENT OF             PERCENT OF 
                                                    LOANS TO                LOANS TO               LOANS TO  
                                        AMOUNT     TOTAL LOANS   AMOUNT    TOTAL LOANS  AMOUNT   TOTAL LOANS 
                                        -------    -----------   ------    -----------  ------   ----------- 
<S>                                     <C>        <C>           <C>       <C>          <C>      <C>         

Balance at end of year allocated to:
Residential permanent                   $   925       47.4%      $  929        47.3%    $ 1,384      53.8%   
Home equity                                 446        0.9          164         1.0         133       1.4    
Commercial and multifamily                8,398        2.3        8,523         2.9       8,506       3.3    
Residential construction                    823        0.6        1,159         0.8       1,455       1.2    
Commercial construction                      15        0.1           56         0.2         245       0.2    
Ground                                      417        1.2           49         0.1       2,362       0.6    
Credit card                              79,681       33.1       46,325        34.4      34,530      25.5    
Consumer and other                        4,818       14.4        3,291        13.3       1,590      14.0    
                                        -------                 -------                 -------              
  Total                                 $95,523                 $60,496                 $50,205              
                                        -------                 -------                 -------              
                                        -------                 -------                 -------              

<CAPTION>
                                                        SEPTEMBER 30,
                                         -------------------------------------------
                                                 1993                  1992         
                                         ---------------------  --------------------
                                                  PERCENT OF            PERCENT OF  
                                                   LOANS TO              LOANS TO   
                                         AMOUNT   TOTAL LOANS  AMOUNT   TOTAL LOANS 
                                         ------   -----------  ------   ----------- 
<S>                                      <C>      <C>          <C>      <C>         
                                                                                    
Balance at end of year allocated to:                                                
Residential permanent                    $ 4,235      53.6%    $ 2,335      41.6%   
Home equity                                  250       2.5         504       9.9    
Commercial and multifamily                 9,606       3.9       5,907       2.7    
Residential construction                   4,125       1.5       4,470       2.6    
Commercial construction                      345       0.4         729       0.5    
Ground                                     1,412       0.7       2,624       1.0    
Credit card                               46,886      31.4      57,566      38.9    
Consumer and other                         1,181       6.0       4,683       2.8    
                                         -------               -------              
  Total                                  $68,040               $78,818              
                                         -------               -------              
                                         -------               -------              

</TABLE>


<PAGE>

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

<TABLE>
<CAPTION>

                                                 YEAR ENDED SEPTEMBER 30,
                                    ----------------------------------------------------
                                      1996       1995       1994       1993       1992
                                    --------   --------   --------   --------   --------
<S>                                 <C>        <C>        <C>        <C>        <C>
Balance at beginning of year:
  Real estate held for investment   $    193   $  9,899   $ 10,182   $ 14,919   $  4,161
  Real estate held for sale          135,043    109,074    101,462     94,125     53,337
                                    --------   --------   --------   --------   --------
    Total                            135,236    118,973    111,644    109,044     57,498
                                    --------   --------   --------   --------   --------

Provision for real estate losses:
  Real estate held for investment         (2)    (6,974)      (283)     1,470     12,673
  Real estate held for sale           26,343     33,295     14,335     28,945     47,923
                                    --------   --------   --------   --------   --------
      Total                           26,341     26,321     14,052     30,415     60,596
                                    --------   --------   --------   --------   --------

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

  Real estate held for sale:
    Residential                           --         --         --         --      3,002
    Residential construction              --      1,924        911         79         --
    Residential ground                34,867        103         --        259        348
    Commercial ground                     --      2,827         --      1,353      3,785
    Commercial permanent                  --         --      5,812        761         --
    Commercial construction               --      2,472         --     19,156         --
                                    --------   --------   --------   --------   --------
      Total                           34,867      7,326      6,723     21,608      7,135
                                    --------   --------   --------   --------   --------

    Total charge-offs on real estate
      held for investment or sale     34,867     10,058      6,723     27,815      9,050
                                    --------   --------   --------   --------   --------

Balance at end of year
  Real estate held for investment        191        193      9,899     10,182     14,919
  Real estate held for sale          126,519    135,043    109,074    101,462     94,125
                                    --------   --------   --------   --------   --------
      Total                         $126,710   $135,236   $118,973   $111,644   $109,044
                                    --------   --------   --------   --------   --------
                                    --------   --------   --------   --------   --------
</TABLE>
<PAGE>
                                      COMPONENTS OF ALLOWANCE FOR LOSSES
                                   ON REAL ESTATE HELD FOR INVESTMENT OR SALE
                                               (IN THOUSANDS)

<TABLE>
<CAPTION>


                                                                               SEPTEMBER 30,
                                                    ---------------------------------------------------------------------------
                                                       1996            1995            1994            1993            1992
                                                    ----------      ----------      ----------      ----------      ----------
<S>                                                 <C>             <C>            <C>              <C>             <C>
Allowance for losses on real estate
 held for investment:
   Commercial and multifamily                       $      --       $       --      $    7,793      $    7,945      $    8,037
   Commercial construction                                 --               --              --              --           4,995
   Ground                                                  --               --           1,975           1,972           1,682
   Other                                                  191              193             131             265             205
                                                    ---------       ----------      ----------      ----------      ----------
    Total                                                 191              193           9,899          10,182          14,919
                                                    ---------       ----------      ----------      ----------      ----------
Allowance for losses on real estate
 held for sale:
   Residential                                            112              184              66             102             447
   Home equity                                              8                2               4              53              21
   Commercial and multifamily                              --               --             142           4,678           1,705
   Commercial construction                                 --               --           1,216           1,387          15,439
   Residential construction                                --               --           1,942           2,924           2,294
   Ground                                             126,399          134,857         105,704          92,318          74,219
                                                    ---------       ----------      ----------      ----------      ----------
    Total                                             126,519          135,043         109,074         101,462          94,125
                                                    ---------       ----------      ----------      ----------      ----------
    Total allowance for losses on real
     estate held for investment or sale             $ 126,710       $  135,236      $  118,973      $  111,644      $  109,044
                                                    ---------       ----------      ----------      ----------      ----------
                                                    ---------       ----------      ----------      ----------      ----------

</TABLE>

    The Bank maintains valuation allowances for estimated losses on loans and 
real estate.  The Bank's total valuation allowances for losses on loans and 
real estate held for investment or sale increased by $26.5 million from the 
level at September 30, 1995, to $222.2 million at September 30, 1996.  The 
$26.5 million increase was primarily attributable to increased valuation 
allowances on credit card loans.

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

                                      67

<PAGE>

<TABLE>
<CAPTION>
                                                      September 30, 1996
                                     ----------------------------------------------------
                                      Performing 
                                                         Non-performing           Total
                                     ------------       ----------------      -----------
                                                        (In thousands)

Allowances for losses on:

<S>                                   <C>                 <C>                 <C>
Loans:
  Real estate ...................      $ 10,293            $     731           $ 11,024 

  Credit card ...................        54,331               25,350             79,681 

  Consumer and other ............         4,802                   16              4,818 
                                       --------             --------             ------

  Total allowance for losses and 
   loans ........................        69,426               26,097             95,523
                                       --------             --------             ------

  Real estate held for investment           191                   -                 191 


  Real estate held for sale .....            -               126,519            126,519
                                       --------             --------            -------

  Total allowance for losses on real 
   estate held for investment or 
   sale .........................           191              126,519            126,710
                                       --------             --------            -------

Total allowance for losses ......     $  69,617            $ 152,616          $ 222,233
                                       --------             --------          ---------
                                       --------             --------          ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                       September 30, 1995
                                       -----------------------------------------------------
                                       Performing         Non-performing           Total 
                                       ------------     ------------------  ----------------
                                                          (In thousands)

Allowances for losses on:

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

                                      68

<PAGE>

<TABLE>

<S>                                      <C>                <C>                  <C>
Real estate held for investment ..           193                   -                 193

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

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

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


    The allowance for losses on loans secured by real estate and real estate 
held for investment or sale totaled $137.7 million at September 30, 1996, 
which constituted 54.1% of total non-performing real estate assets, before 
valuation allowances.  This amount represented an $8.4 million decrease from 
the September 30, 1995 level of $146.1 million, or 40.2% of total 
non-performing real estate assets, before valuation allowances at that date. 

    Beginning October 1, 1994, the Bank has provided additional general 
valuation allowances which are equal to, or exceed, the amount of the net 
earnings generated by the development and sale of land in the Communities.  
During fiscal 1996, the Bank provided an additional $6.4 million of general 
valuation allowances against its Communities pursuant to this policy.

    When real estate collateral securing an extension of credit is initially 
recorded as REO, it is recorded at the lower of cost or written down to fair 
value, less estimated selling costs, on the basis of an appraisal.  Such 
initial write-downs represent management's best estimate of exposure to the 
Bank at the time that the collateral becomes REO and in effect substitutes 
for valuation allowances that would otherwise be recorded if the collateral 
had not become REO.  As circumstances change, it may be necessary to provide 
additional valuation allowances based on new information.  Depending on the 
nature of the information, these new valuation allowances may be valuation 
allowances, which reflect additional impairment with respect to a specific 
asset, or may be unallocated valuation allowances, which provide protection 
against changes in asset valuation factors.  The allowance for losses on real 
estate held for sale at September 30, 1996 is in addition to approximately 
$50.8 million of cumulative charge-offs previously taken against assets 
remaining in the Bank's portfolio at September 30, 1996.

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

    Net charge-offs of credit card loans for fiscal 1996 were $74.1 million, 
compared to $39.0 million for fiscal 1995.  The increase in net charge-offs 
resulted primarily from continued maturation of the Bank's portfolio and 
reflects the industry-wide decline in the performance of credit card loans.  
The allowance at any balance sheet date relates only to receivable balances 
that exist as of that date.  Because of the nature of a revolving credit card 
account, the cardholder may enter into transactions (such as retail purchases 
and cash advances) subsequent to a balance sheet 

                                      69

<PAGE>

date which increase the outstanding balance of the account.  Accordingly, 
charge-offs in any fiscal period relate both to balances and conditions or 
events that existed at the beginning of the period and to balances created 
during the period, and may therefore exceed the levels of valuation 
allowances established at the beginning of the fiscal period.

    The allowance for losses on credit card loans increased to $79.7 million 
at September 30, 1996 from $46.3 million at September 30, 1995, primarily 
because of a $56.7 million increase in the provision for losses on such 
loans.  The increase in the provision for losses on credit card loans 
reflected an industry-wide decline in the performance of credit card loans.  
The ratios of the allowance for such losses to non-performing credit card 
loans and to outstanding credit card loans increased to 314.3% and 7.1%, 
respectively, at September 30, 1996, from 249.5% and 4.6%, respectively, 
at September 30, 1995.

    The allowance for losses on consumer and other loans increased to $4.8 
million at September 30, 1996 from $3.3 million at September 30, 1995, 
primarily because of the increased volume of consumer and other loans.  The 
ratios of the allowances for losses on consumer and other loans to 
non-performing consumer and other loans and to outstanding consumer and other 
loans were 388.9% and 1.0%, respectively, at September 30, 1996 compared to 
553.1% and 0.8%, respectively, at September 30, 1995.

    ASSET AND LIABILITY MANAGEMENT.  A key element of banking is the 
monitoring and management of liquidity risk and interest-rate risk.  The 
process of planning and controlling asset and liability mixes, volumes and 
maturities to stabilize the net interest spread is referred to as asset and 
liability management.  The objective of asset and liability management is to 
maximize the net interest yield within the constraints imposed by prudent 
lending and investing practices, liquidity needs and capital planning.

    The Bank is pursuing an asset-liability management strategy to control 
its risk from changes in market interest rates principally by originating 
interest-sensitive loans for its portfolio.  In furtherance of this strategy, 
the Bank emphasizes the origination and retention of ARMs, adjustable-rate 
home equity credit line loans and adjustable-rate credit card loans.  At 
September 30, 1996, adjustable-rate loans accounted for 78.6% of total loans, 
of which 63.7% will adjust in one year or less.

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

    A traditional measure of interest-rate risk within the banking industry 
is the interest sensitivity "gap," which is the sum of all interest-earning 
assets minus all interest-bearing liabilities subject to repricing within the 
same period.  A negative gap like that shown below for the Bank implies that, 
if market interest rates rise, the Bank's average cost of funds will increase 
more rapidly than the concurrent increase in the average yield on 
interest-earning assets.  In a period of rising market interest rates, a 
negative gap implies that the differential effect on the average yield on 
interest-earning assets and the average cost of interest-bearing liabilities 
will decrease the 

                                      70

<PAGE>

Bank's net interest spread and thereby adversely affect the Bank's operating 
results.  Conversely, in a period of declining interest rates, a negative gap 
may result in an increase in the Bank's net interest spread.  This analysis 
assumes a parallel shift in interest rates for instruments of different 
maturities and does not reflect the possibility that retail deposit pricing 
changes may lag behind those of wholesale market funds which, in a period of 
rising interest rates, might serve to mitigate the decline in net interest 
spread.

    The Bank views control over interest rate sensitivity as a key element in 
its financial planning process and monitors its interest rate sensitivity 
through its forecasting system.  The Bank manages its interest rate exposure 
and will narrow or widen its gap, depending on its perception of interest 
rate movements and the composition of its balance sheet.  For the reasons 
discussed above, the Bank might take action to narrow its gap if it believes 
that market interest rates will experience a significant prolonged increase, 
and might widen its gap if it believes that market interest rates will 
decline or remain relatively stable.  A number of asset and liability 
management strategies are available to the Bank in structuring its balance 
sheet.  These include selling or retaining certain portions of the Bank's 
current residential mortgage loan production; altering the Bank's pricing on 
certain deposit products to emphasize or de-emphasize particular maturity 
categories; altering the type and maturity of securities acquired for the 
Bank's investment portfolio when replacing securities following normal 
portfolio maturation and turnover; lengthening or shortening the maturity or 
repricing terms for any current period asset securitizations; and altering 
the maturity or interest rate reset profile of borrowed funds, if any, 
including funds borrowed from the FHLB of Atlanta. 

    The following table presents the interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities at September 30, 1996,
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.

<PAGE>

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


<TABLE>
<CAPTION>


                                                               MORE THAN      MORE THAN     MORE THAN
                                                               SIX MONTHS     ONE YEAR     THREE YEARS
                                                 SIX MONTHS     THROUGH        THROUGH       THROUGH     MORE THAN
                                                  OR LESS      ONE YEAR      THREE YEARS    FIVE YEARS   FIVE YEARS      TOTAL
                                                 ----------    ----------    ----------    ----------    ----------    ---------
<S>                                              <C>           <C>           <C>           <C>           <C>           <C>

As of September 30, 1996
Mortgage loans:
 Adjustable-rate                                  $ 305,001    $  369,435    $  706,341     $114,247      $  7,645     $1,502,669
 Fixed-rate                                          11,719         7,381        32,808       86,417        29,406        167,731
 Loans held for sale                                 76,064         --           --             --            --           76,064
 Home equity credit lines and second mortgages       39,223           238           788          578         1,495         42,322
Credit card and other                               962,605        23,637        58,166       42,723        68,748      1,155,879
Loans held for securitization and sale              450,000         --           --             --            --          450,000
Mortgage-backed securities                          313,926       764,195       206,981        4,792        16,523      1,306,417
Other investments                                   218,958         --            4,996         --            --          223,954
                                                 ----------    ----------    ----------     --------      --------     ----------
   Total interest-earning assets                  2,377,496     1,164,886     1,010,080      248,757       123,817      4,925,036
Total non-interest earning assets                     --            --            --            --         768,038        768,038
                                                 ----------    ----------    ----------     --------      --------     ----------
   Total assets                                  $2,377,496    $1,164,886    $1,010,080     $248,757      $891,855     $5,693,074
                                                 ----------    ----------    ----------     --------      --------     ----------
                                                 ----------    ----------    ----------     --------      --------     ----------

Deposits:
 Fixed maturity deposits                        $   661,743    $  236,079    $  203,411     $102,439      $   --       $1,203,672
 NOW, statement and passbook accounts             1,344,738        39,811       132,596       90,248       192,329      1,799,722
 Money market deposit accounts                    1,002,688         --            --            --            --        1,002,688
Borrowings:
 Capital notes -- subordinated                       10,000         --            --            --         150,000        160,000
 Other                                              892,039         1,964         8,881        5,434         5,165        913,483
                                                 ----------    ----------    ----------     --------      --------     ----------
 Total interest-bearing liabilities               3,911,208       277,854       344,888      198,121       347,494      5,079,565
Total non-interest bearing liabilities                --            --            --            --         308,879        308,879
Stockholders' equity                                  --            --            --            --         304,630        304,630
                                                 ----------    ----------    ----------     --------      --------     ----------
   Total liabilities & stockholders' equity      $3,911,208    $  277,854    $  344,888     $198,121      $961,003     $5,693,074
                                                 ----------    ----------    ----------     --------      --------     ----------
                                                 ----------    ----------    ----------     --------      --------     ----------

Gap                                             $(1,533,712)   $  887,032    $  665,192     $ 50,636     $(223,677)
Cumulative gap                                  $(1,533,712)   $ (646,680)   $   18,512     $ 69,148     $(154,529)
Adjustment for interest rate caps  (1)          $   475,000    $  375,000    $  193,750     $   --       $    --
Adjusted cumulative gap                         $(1,058,712)   $ (271,680)   $  212,262     $ 69,148     $(154,529)
Adjusted cumulative gap as a percentage
 of total assets                                      (18.6)%        (4.8)%         3.7%         1.2%         (2.7)%
</TABLE>

---------------------
(1) At September 30, 1996, the Bank had $500,000 notional amount of interest 
    rate caps.  The adjustments reflect the average notional amount outstanding 
    for each period until the last cap expires June 30, 1999.



    The one-year gap, adjusted for the effect of the Bank's interest rate 
caps, as a percentage of total assets, was a negative 4.8% at September 30, 
1996, compared to a negative 5.3% at September 30, 1995.  As noted above, the 
Bank's negative one-year gap might adversely affect the Bank's net interest 
spread and earnings if interest rates rise and the Bank is unable to take 
steps to reduce its gap.  The improvement in the Bank's one-year gap was 
primarily attributable to an increase in short-term assets at September 30, 
1996 resulting from the scheduled maturity of mortgage-backed balloon 
securities as well as an increase in one year ARM mortgage-backed securities.

    During fiscal 1995, the Bank purchased a series of interest rate caps which
management believes will limit significantly its exposure to rising short-term
interest rates during a four-year period which began July 1, 1995 and will end
June 30, 1999.  The Bank's Interest Rate Sensitivity Table reflects the 
reduction in risk provided by these caps.  The initial level of the protection 

                                      71

<PAGE>

was a notional principal amount of $600 million, and such protection declined 
to $500 million at September 30, 1996, and will decline to $200 million by 
March 31, 1998.  The remaining $200 million of protection will expire on June 
30, 1999.  In the event that the one-month London Inter-Bank Offered Rate 
("LIBOR") exceeds 7.00% on certain predetermined dates, the Bank is entitled 
to receive compensatory payments from the cap provider, which is a 
counterparty receiving the highest investment rating from Standard & Poor's 
Corporation.  Such payments would be equal to the product of (a) the amount 
by which one-month LIBOR exceeds 7.00% and (b) the then outstanding notional 
principal amount for a predetermined period of time.  The Bank has no 
obligation to make payments to the provider of the cap or any other party.

    In addition to gap measurements, the Bank measures and manages 
interest-rate risk with the extensive use of computer simulation.  This 
simulation includes calculations of Market Value of Portfolio Equity and Net 
Interest Margin as promulgated by the OTS's Thrift Bulletin 13.  

    At September 30, 1996, the Bank would not have been required to maintain
additional amounts of risk-based capital had the interest-rate risk component of
the OTS capital regulations been in effect.  See "Business - Banking - 
Regulation - Regulatory Capital."

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

    DEFERRED TAX ASSET.  At September 30, 1996, the Bank recorded a net 
deferred tax asset of $42.6 million, which generally represents the 
cumulative excess of the Bank's actual income tax liability over its income 
tax expense for financial reporting purposes.

    TAX SHARING PAYMENTS.  During fiscal 1996, after receiving OTS approval, 
the Bank made tax sharing payments totaling $25.0 million to the Trust.  See 
Note 32 to the Consolidated Financial Statements in this report. 

                                      72

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

REAL ESTATE

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

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

    The Real Estate Trust's current program of public Unsecured Note sales was
initiated in the 1970's as a vehicle for supplementing other external funding
sources.  In fiscal 1996, the Real Estate Trust sold $7.4 million of Unsecured
Notes. The table under "Recent Liquidity Trends" below provides information at
September 30, 1996 with respect to the maturities of  Unsecured Notes
outstanding at such date.

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

                                     73
<PAGE>

    Through December 1, 1996, the Trust has purchased either in the open market
or through dividend reinvestment 1,487,430 shares of common stock of Saul
Centers (representing 12.3% of such company's outstanding common stock). These
shares have been deposited with the Trustee for the Senior Secured Notes to
satisfy in part the collateral requirements for those securities, thereby
permitting release to the Trust of a portion of the cash on deposit with the
Trustee.

    The Real Estate Trust is currently selling Unsecured Notes, with a maturity
ranging from one to ten years, principally to provide funds to pay outstanding
Unsecured Notes as they mature.  In paying maturing Unsecured Notes with
proceeds of Unsecured Note sales, the Real Estate Trust effectively is
refinancing its outstanding Unsecured Notes with similar new unsecured debt at
the lower interest rates prevailing in today's market.  To the 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 secured
revolving credit line with an unrelated  bank.  This facility is for a two-year
period and may be extended for one or more additional one-year terms.  Interest
is computed by reference to a floating rate index.  At September 30, 1996,
borrowings under the facility were $2.5 million and unrestricted availability
was $4.6 million.

    In the first quarter of fiscal 1996, the Real Estate Trust established an
$8.0 million secured revolving credit line with an unrelated bank.  This
facility is for a one -year term, after which the loan amount amortizes over a
two-year period.  Interest in computed by reference to the floating rate index. 
At September 30, 1996, availability under this facility was entirely restricted
pending the delivery of collateral by the Real Estate Trust.  In November 1996,
the Real Estate Trust deposited collateral with the bank, enabling it to have
unrestricted availability of $5.9 million.

    The maturity schedule for the Real Estate Trust's outstanding debt at
September 30, 1996 for fiscal years commencing October 1, 1996 is set forth in
the following table:

<TABLE>
<CAPTION>

                                Debt Maturity Schedule
                                    (In thousands)
-----------------------------------------------------------------------------------------
                       Mortgage       Notes Payable-      Notes Payable-
Fiscal Year              Notes           Secured            Unsecured            Total
-----------           ----------     ----------------    ----------------      ----------
<S>                    <C>            <C>                <C>                 <C>
   1997               $   17,994        $   2,500        $     5,751          $   26,245
   1998                    7,413               --              7,413              14,826
   1999                   17,076               --             15,986              33,062
   2000                   18,856               --              6,080              24,936
   2001                    5,075               --              3,822               8,897
Thereafter               106,931          175,000              3,315             285,246
                         -------        ---------        -----------           ---------
  Total               $  173,345        $ 177,500        $    42,367          $  393,212
                     -----------        ---------        -----------         -----------
                     -----------        ---------        -----------         -----------
-----------------------------------------------------------------------------------------
</TABLE>

                                       74


<PAGE>

    Of the $173.3 million of mortgage debt outstanding at September 30, 
1996, $133.7 million was nonrecourse to the Real Estate Trust. 

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

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

    The Real Estate Trust believes that the 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 the written agreement with the OTS 
(see "Banking - Regulation - Regulatory Capital") should enhance prospects 
for the Real Estate Trust of receiving tax sharing payments and dividends 
from the Bank. The Bank made tax sharing payments of $25.0 million to the 
Real Estate Trust during fiscal 1996; however, the Real Estate Trust does not 
expect to receive tax sharing payments of such magnitude in the future. 

    During fiscal 1996, the Real Estate Trust received $6.8 million in 
dividends from the Bank.  OTS regulations tie Chevy Chase's ability to pay 
dividends to specific levels of regulatory capital and earnings. See 
"Business - Banking - Regulation - Dividends and Other Capital Distributions."

        As the owner, directly and through two wholly-owned subsidiaries, of 
a 21.5% limited partnership interest in Saul Holdings Partnership, the Real 
Estate Trust will share in cash distributions from operations and from 
capital transactions involving the sale or refinancing of the properties of 
Saul Holdings Partnership. The partnership agreement of Saul Holdings  
Partnership  provides for quarterly cash distributions to the partners out of 
net cash flow.  See "Business - Real Estate - Investment in Saul Holdings 
Limited Partnership."  In fiscal 1996, the Real Estate Trust received  total  
cash distributions  $5.5 million  from Saul Holdings Partnership.

BANKING

    LIQUIDITY.  The standard measure of liquidity in the savings industry is the
ratio of cash and short-term U.S. Government and other specified securities to
net withdrawable accounts and borrowings payable in one year or less.

    The OTS has established a minimum liquidity requirement, which may vary 
from time to time depending upon economic conditions and deposit flows.  The 
required liquidity level is currently 5.0%. The Bank's average liquidity 
ratio for the month ended September 30, 1996 was 13.1%, compared to 17.5% for 
the month ended September 30, 1995.  The Bank met the liquidity level 
requirements for each month of fiscal 1996. 

    The Bank's primary sources of funds historically have consisted of (i) 
principal and interest payments on loans and mortgage-backed securities, (ii) 
savings deposits, (iii) sales of loans and trading securities, (iv) 
securitizations and sales of loans and (v) borrowed funds (including funds 
borrowed from the FHLB of Atlanta).  The Bank's holdings of readily marketable 
securities constitute another important source of liquidity.  At September 
30, 1996, the Bank's portfolio included mortgage loans, U.S. Government 
securities and mortgage-backed securities with outstanding principal balances 
of $1.0 billion, $10.0 million and $1.3 billion, respectively.  The estimated 
borrowing capacity against mortgage loans, U.S. Government securities and 
mortgage-backed securities that are available to be pledged to the FHLB of 
Atlanta and various security dealers totaled $1.0 billion at September 30, 
1996, after market-value and other adjustments.

    Chevy Chase has accessed 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 credit 
card, home equity credit line, home loan and automobile loan receivables, 
because such 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 $8.6 billion of credit 
card, home equity credit line, automobile and home 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, 1996, the Bank serviced 
$3.9 billion, $416.4 million, $505.6 million and $141.1 million of 
securitized credit card, home equity credit line, automobile and home loan 
receivables, respectively.  Chevy Chase derives fee-based income from 
servicing these securitized portfolios.  However, such fee-based income may 
be adversely affected by increases in delinquencies and charge-offs related 
to the receivables placed in these securitized pools.

                                      75

<PAGE>

    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,
limited recourse is retained through the establishment of "spread accounts." 
Occasionally other structures, such as overcollateralization, are 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' interest 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.

    Pursuant to OTS's "low level recourse rule" (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 
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.

    In recent periods, the proceeds from the securitization and sale of 
credit card, home equity credit line, automobile and home loan receivables 
have been significant sources of liquidity for the Bank.  The Bank 
securitized and sold $919.0 million of credit card receivables, $475.3 
million of automobile loan receivables, $96.5 million of home equity credit 
line receivables and $153.5 million of home loan receivables during fiscal 
1996.  Additionally, during fiscal 1996, the Bank securitized and sold $42.1 
million of amounts on deposit in certain spread accounts established in 
connection with certain of the Bank's outstanding credit card 
securitizations.  At September 30, 1996, the Bank was considering the 
securitization and sale of (i) approximately $950.0 million of credit card 
receivables, including $225.0 million of receivables outstanding at September 
30, 1996 and $725.0 million of receivables which the Bank expects to become 
available, either through additional fundings or amortization of existing 
trusts, during the six months ending March 31, 1997; and (ii) approximately 
$325.0 million of automobile loan receivables, including $225.0 million of 
receivables outstanding at September 30, 1996 and $100.0 million of 
receivables which the Bank expects to become available through additional 
fundings during the six months ending March 31, 1997.  

    Another significant source of liquidity for the Bank during fiscal 1996 
was proceeds from the sales of trading securities in the amount of $363.4 
million. As part of its operating strategy, the Bank will continue to 

                                      76

<PAGE>

explore opportunities to sell assets and to securitize and sell credit card, 
home equity credit line, automobile and home loan receivables to meet 
liquidity and other balance sheet objectives. 

    The Bank uses its liquidity primarily to meet its commitments to fund 
maturing savings certificates and deposit withdrawals, fund existing and 
continuing loan commitments, repay borrowings and meet operating expenses.  
For fiscal 1996, the Bank used the cash provided by operating, investing and 
financing activities primarily to meet its commitments to fund maturing 
savings certificates and deposit withdrawals of $15.3 billion, repay 
borrowings of $3.2 billion, fund existing and continuing loan commitments 
(including real estate held for investment or sale) of $2.6 billion, purchase 
investments and loans of $1.1 billion and meet operating expenses, before 
depreciation and amortization, of $347.1 million.  These commitments were 
funded primarily through proceeds from customer deposits and sales of 
certificates of deposit of $15.3 billion, proceeds from borrowings of $3.9 
billion, proceeds from sales of loans, trading securities and real estate of 
$2.4 billion, and principal and interest collected on investments, loans, and 
securities of $831.0 million.  

    The Bank is obligated under various recourse provisions related to the 
securitization and sale of credit card, home equity credit line, automobile 
and home loan receivables and amounts on deposit in certain spread accounts 
through the asset-backed securitizations.  Of the $5.1 billion of outstanding 
trust certificate balances at September 30, 1996, the primary recourse to the 
Bank was approximately $128.0 million.

    The Bank also is obligated under various recourse provisions related to 
the swap of single-family residential loans for participation certificates 
issued to the Bank by FHLMC.  At September 30, 1996, recourse to the Bank 
under these arrangements was approximately $4.3 million.

    The Bank's commitments at September 30, 1996 are set forth in the following 
table:

                                                    (In thousands) 
    Commitments to originate loans                    $   78,781 
                                                      ----------

    Loans in process (collateralized loans):      

      Home equity .........................              522,168

      Real estate construction ............               22,377

      Commercial and multifamily ..........               27,589
                                                      ----------
                                                         572,134
                                                      ----------
    Loans in process (unsecured loans):

      Credit cards ........................           14,749,181

      Overdraft lines .....................               69,821

      Commercial ..........................                  845
                                                         -------
                                                      14,819,847
                                                      ----------

                                      77

<PAGE>

       Total commitments to extend credit..           15,470,762

    Letters of credit .....................               24,694

    Recourse arrangements on asset-backed 
     securitizations ......................              128,029

    Recourse arrangements on mortgage-backed securities    4,268
                                                         -------

    Total commitments .....................          $15,627,753
                                                     -----------
                                                     -----------


    Based on historical experience, the Bank expects to fund substantially 
less than the total amount of its outstanding credit card and home equity 
credit line commitments, which together accounted for 97.7% of commitments at 
September 30, 1996.

    At September 30, 1996, repayments of borrowed money scheduled to occur 
during the next 12 months were $793.4 million.  Certificates of deposit 
maturing during the next 12 months amounted to $897.8 million, of which a 
substantial portion is expected to remain with the Bank.

    There were no material commitments for capital expenditures at September 
30, 1996.

    The Bank's liquidity requirements in years subsequent to fiscal 1996 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 long-term
liquidity needs.  The mix of funding sources utilized from time to time will be
determined by a number of factors, including capital planning objectives,
lending and investment strategies and market conditions.

    CAPITAL.  At September 30, 1996, the Bank was in compliance with all of its
regulatory capital requirements under FIRREA, and its capital ratios exceeded
the ratios established for "adequately capitalized" institutions under OTS
prompt corrective action regulations.  In the September 30, 1996 quarter, the
Bank's capital ratios fell below the ratios established for "well-capitalized"
institutions for the first time since June 1993.  If the SAIF assessment
discussed below had not been made in the quarter ended September 30, 1996, the
Bank's capital ratios would have continued to be sufficient to meet the
standards established for well-capitalized institutions.

    The following table shows the Bank's regulatory capital levels at 
September 30, 1996, 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.

                                      78

<PAGE>

                             REGULATORY CAPITAL
                           (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                MINIMUM                    EXCESS
                                                      ACTUAL               CAPITAL REQUIREMENT             CAPITAL
                                           -------------------------    -------------------------    -------------------
                                                         AS A %                    AS A %                        AS A %
                                             AMOUNT    OF ASSETS (4)    AMOUNT    OF ASSETS          AMOUNT    OF ASSETS
                                           ---------  --------------   --------- -----------        --------  ----------
<S>                                       <C>          <C>              <C>       <C>                <C>       <C>
Capital per financial statements          $  339,160
 Net unrealized holding losses (1)             1,875
                                          ----------
Adjusted capital                             341,035

Adjustments for tangible and core capital:
 Intangible assets                           (41,051)
 Non-includable subsidiaries  (2) (4)         (3,622)
 Non-qualifying purchased/originated
   loan servicing                                 --
                                          ------------
     Total tangible capital                   296,362     5.21%         $  85,255     1.50%         $ 211,107      3.71%
                                          ------------    ------         ---------     -----         ---------      -----
                                          ------------    ------         ---------     -----         ---------      -----

     Total core capital (3) (4)               296,362     5.21%         $ 227,346    4.00%         $  69,016      1.21%
                                          ------------    ------         ---------     -----         ---------      -----
                                                          ------         ---------     -----         ---------      -----

     Tier 1 risk-based capital (3)            296,362     5.80%         $  204,519   4.00%          $  91,843      1.80%
                                          ------------    ------         ---------     -----         ---------      -----
                                                          ------         ---------     -----         ---------      -----

Adjustments for risk-based capital:  
 Subordinated capital debentures              150,000
 Allowance for general loan losses             87,953
                                           -----------
  Total supplementary capital                 237,953 
 Excess allowance for loan losses             (23,744)
                                           -----------
 Adjusted supplementary capital               214,209 
                                           -----------
  Total available capital                     510,571 
 Equity investments (2)                       (19,657)
                                           -----------
  Total risk-based capital (4)             $  490,914      10.14%       $  409,038     8.00%         $  81,876      2.14%
                                           ------------     ------        ---------     -----         ---------      -----
                                           ------------     ------        ---------     -----         ---------      -----
</TABLE>
---------------------------------
(1)   Pursuant to OTS policy, net unrealized holding gains (losses) are 
      excluded from regulatory capital.

(2)   Reflects an aggregate offset of $1.2 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.

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

(4)   Effective July 1, 1996, the percentage of non-includable subsidiaries 
      phased-out from core capital increased from 60% to 100%.

                                      79

<PAGE>

    Regulatory Action and Requirements.  In connection with the termination 
    ----------------------------------
of the Bank's written agreement, the Board of Directors of the Bank adopted a 
resolution which, among other things, authorizes the Bank: (i) to make tax 
sharing payments to the Trust of up to $15 million relating to any single 
fiscal year without OTS approval; and (ii) to declare dividends on its common 
stock in any quarterly period up to the lesser of (A) 50% of its after tax 
net income for the immediately preceding quarter or (B) 50% of the average 
quarterly after tax net income for the immediately preceding four quarter 
period, minus (in either case) dividends declared on the Bank's preferred 
stock during that quarterly period.  The resolution also provides that the 
Bank will present a plan annually to the OTS detailing anticipated consumer 
loan securitization activity.

    The Bank has been able to maintain capital compliance in recent periods 
despite the gradual phase-out of various assets from regulatory capital.  As 
of September 30, 1996, the Bank had $40.2 million in supervisory goodwill, 
all of which was excluded from core capital, $20.7 million in equity 
investments, after subsequent valuation allowances, all of which were fully 
deducted from total risk-based capital, and $3.8 million, after subsequent 
valuation allowances, of extensions of credit to, and investments in, 
non-includable subsidiaries, all of which were fully deducted from all three 
FIRREA capital requirements.  Pursuant to OTS guidelines, $1.2 million of 
general valuation allowances maintained against the Bank's non-includable 
subsidiaries and equity investments is available as a "credit" against the 
deduction from capital otherwise required for such investments.

    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 November 1996, the
Bank received from the OTS a one-year extension of the holding periods for
certain of its REO properties.  The following table sets forth the Bank's REO at
September 30, 1996, after valuation allowances of $126.5 million, by the fiscal
year in which the property was acquired through foreclosure.

                      Fiscal Year         (In thousands) 
                      -----------          ------------

               1990(1)(2) .................  $  30,236 

               1991(2) ....................     68,910 

               1992(2) ....................      3,339 

               1993 .......................      4,903 

               1994 .......................      1,811 

               1995 .......................      7,503 

               1996 .......................      3,159 
                                              --------

             Total REO ....................  $ 119,861 
                                             ---------
                                             ---------

                                      80

<PAGE>

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

(1) Includes REO with an aggregate net book value of $19.7 million, which the
    Bank treats as equity investments for regulatory capital purposes.

(2) Includes REO, with an aggregate net book value of $82.8 million, for which 
    the Bank received an extension of the holding periods through November 12, 
    1997.

    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, 
1996, the Bank's leverage, tier 1 risk-based and total risk-based capital 
ratios were 5.21%, 5.80% and 10.14%, respectively, which exceeded the ratios 
established for "adequately capitalized" institutions.  The OTS has the 
discretion to reclassify an institution from one category to the next lower 
category, for example from "well capitalized" to "adequately capitalized," or 
from "adequately capitalized" to "undercapitalized" 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.

    On December 3, 1996, the Bank sold $100 million principal amount of its 
9 1/4% Subordinated Debentures due 2008.  The Bank received net proceeds of 
$96.3 million from the sale of the 1996 Debentures which will be used for 
general corporate purposes.  The Bank has received OTS approval to include 
the principal amount of the 1996 Debentures in the Bank's supplementary 
capital for regulatory capital purposes.

    In addition, on December 3, 1996, the REIT Subsidiary sold $150.0 million 
of its 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 REIT Preferred Stock is automatically 
exchangeable for a new series of preferred stock of the Bank upon the 
occurrence of certain events (specifically, if the appropriate federal 
regulatory agency directs in writing an exchange of the REIT Preferred Stock 
for Series B Preferred Stock because (i) the Bank becomes "undercapitalized" 
under prompt corrective action regulations established pursuant to FDICIA, 
(ii) the Bank is placed into conservatorship or receivership, or (iii) the 
appropriate federal regulatory agency, in its sole discretion and even if the 
Bank is not "undercapitalized", anticipates the Bank becoming 
"undercapitalized" in the near term).  The Bank has received OTS approval to 
include the proceeds received 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 REIT Preferred Stock is not redeemable 
until January 15, 2007, and is redeemable thereafter at the option of the 
Reit Subsidiary.  If these transactions had occurred at September 30, 1996, 
the Bank's tangible, core, tier 1 risk-based and total risk-based capital 
ratios would have been 6.67%, 6.67%, 7.65% and 15.15%, respectively.

                                      81

<PAGE>

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

RESULTS OF OPERATIONS

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

    The Bank's operating results historically have depended primarily on its 
"net interest spread," which is the difference between the rates of interest 
earned on its loans and securities investments and the rates of interest paid 
on its deposits and borrowings. In the last three fiscal years, non-interest 
income from securitizations of credit card and home equity credit line 
receivables and income from gains on sales of credit card accounts (or 
"relationships"), loans and mortgage-backed securities have had a significant 
effect on net income. In addition to interest paid on its interest-bearing 
liabilities, the Bank's principal expenses are operating expenses.

REAL ESTATE

    The following table sets forth, for the fiscal years ended September 30, 
1996, 1995 and 1994, direct operating results for the Real Estate Trust's (i) 
hotel properties and (ii) commercial properties (consisting of office and 
industrial properties).

                                      82
<PAGE>

<TABLE>
<CAPTION>
                                                         Year Ended September 30,
                                                      -------------------------------
                                                       1996        1995        1994
                                                      -------------------------------
                                                             (In thousands)
HOTELS (1)
<S>                                                 <C>         <C>       <C>
Revenue            
    Room sales..................................     $ 38,932   $  37,984  $  31,676 
    Food sales .................................        9,804      10,235      8,696
    Beverage sales..............................        2,570       2,739      2,648
    Other ......................................        2,939       3,146      3,026
                                                      -------     -------    -------
         Total revenues ........................       54,245      51,104     46,046
                                                      -------     -------    -------

Direct operationg expenses
    Payroll ....................................       15,140      16,687     14,989
    Cost of sales  .............................        4,439       4,645      4,269
    Utilities ..................................        2,734       3,216      3,181
    Repairs and maintenance ....................        2,624       2,836      2,468
    Advertising and promotion ..................        2,848       2,510      2,276
    Property taxes .............................        1,410       1,354        943
    Insurance ..................................          590         624        583
    Other ......................................        6,290       6,166      5,165
                                                      -------     -------    -------
         Total direct operating expenses .......       36,075      38,038     33,874
                                                      -------     -------    -------
Income after direct operating expenses .........     $ 18,170   $  16,066  $  12,172
                                                     ========   =========  =========
<CAPTION>
COMMERCIAL PROPERTIES (2)
(Office and Industrial Properties )
Revenue            
<S>                                                  <C>        <C>        <C>
    Base rent ..................................     $ 16,374   $  17,490  $  15,345
    Expense recoveries .........................          874         930        967
    Other ......................................          342         392        503
                                                      -------     -------    -------
         Total revenues ........................       17,590      18,812     16,815
                                                      -------     -------    -------

Direct operating expenses
    Utilities ..................................        2,133       2,364      2,324
    Repairs and maintenance ....................        2,037       2,028      1,792
    Real estate taxes ..........................        1,425       1,337      1,383
    Payroll ....................................          599         579        566
    Insurance ..................................          236         263        256
    Other ......................................          821         838        651
                                                      -------     -------    -------
         Total direct operating expenses .......        7,251       7,409      6,972
                                                      -------     -------    -------
Income after direct operating expenses .........     $ 10,339   $  11,403 $    9,843
                                                      =======     =======    =======
</TABLE>

--------------------------------------------- 
(1)  Includes the results of the Real Estate Trust's acquisition
     of a 192-room hotel on November 30, 1994 and results of a 
     344-room hotel until it was sold on October 6, 1995.
(2)  Includes the results of an office project until it was reclassified 
     as a land parcel on December 31, 1995.   

                                      83

<PAGE>

FISCAL 1996 COMPARED TO FISCAL 1995

REAL ESTATE

    The Real Estate Trust recorded a loss before depreciation and 
amortization of debt expense of $13.5 million and an operating loss of $24.2 
million for fiscal 1996, compared to a loss before depreciation and 
amortization of debt expense of $17.2 million and an operating loss of $27.3 
million for fiscal 1995. Of the $3.1 million positive variance in the 
operating loss, approximately $2.1 million was due to improved results from 
operations in fiscal 1996, and $1.0 million reflected the net change from 
fiscal 1995 results which included a $2.7 million writedown of real estate to 
net realizable value and a $1.7 gain on sale of property.

    Income after direct operating expenses from hotel properties increased
$2,104,000 (13.1%) from such income in fiscal 1995.  Room sales increased by
$948,000 (2.5%) as a result of higher room rates.  Food, beverage, and
miscellaneous sales were down by a total of $807,000 and payroll expense was
lower by $1,547,000, largely due to the sale of the Norfolk hotel early in
October 1995.  Other operating expenses reflected decreases of $416,000, also
due to the sale.

    Income after direct operating expenses from commercial properties decreased
$1,064,000 (9.9%) in fiscal 1996.  Gross income declined $1,222,000 (6.8%)
largely due to vacancies at 8201 Greensboro Drive.  Partially offsetting this
reduction in income was a decline in operating expenses of $158,000 (2.2%).  The
leasing percentage of 8201 Greensboro Drive at September 30, 1996, was 85%.

    Interest expense decreased $724,000 (1.8%) in fiscal 1996 as a result of
lower average borrowings, which were $395.6 million in fiscal 1996 as compared
to the prior year's average borrowings of $403.7 million.  The average cost of
borrowings increased slightly to 10.31% in fiscal 1996 from 10.25% during the
prior year.

    Amortization of debt expense increased $198,000 (41.6%) due to the expense
of a new $8.0 million line of credit which was obtained in fiscal 1996 and the
first full year of expense for the $15.0 million line of credit which  had  been
obtained  during  fiscal 1995.

    Depreciation increased $306,000 (3.2%) in fiscal 1996 as a result of new
tenant improvements and property renovations in excess of the reduction in
depreciation caused by the sale of a hotel.

    Advisory, management and leasing fees paid to related parties increased
$47,000 (0.6%) in fiscal 1996.  The monthly advisory fee in fiscal 1996 was
$301,000 for the period October 1995 through March 1996 and $306,000 for the
period April 1996 through September 1996 as compared to $292,000 throughout
fiscal 1995, which represented an aggregate increase of $141,000 (4.0%). 
Management and leasing fees were lower in the current year by $94,000 (2.4%) as
a result of lower gross income on which fees are based.

    General and administrative expense decreased $918,000 (39.6%) in fiscal
1996, principally as a result of high legal costs incurred in fiscal 1995 in
litigation with a tenant.

    The fiscal 1995 write-down of real estate to net realizable value reflected
as $1.2 million reduction in the carrying value of a hotel property and a $1.5
million write-off of restaurant assets.  The Real Estate Trust sold the hotel
property on October 6, 1995.  There were no comparable write-downs or write-offs
during fiscal 1996.

                                      84

<PAGE>

    Equity in earnings of unconsolidated entities represents the Real Estate
Trust's share of earnings in its partnership investments.  For fiscal 1996, the
Real Estate Trust recorded earnings of $3.4 million from such investments
compared to earnings of $3.7 million in the prior year. 

BANKING

    OVERVIEW.  The Bank recorded operating income of $46.1 million for the 
year ended September 30, 1996 ("fiscal 1996"), compared to operating income 
of $55.7 million for the year ended September 30, 1995 ("fiscal 1995").  The 
decrease in pre-tax income for fiscal 1996 was primarily attributable to a 
$60.8 million increase in the provision for loan losses and an $83.1 million 
increase in non-interest expenses (which included the $26.5 million SAIF 
assessment discussed previously - see "Business - Banking - Regulation - 
Deposit Insurance Premiums"), the effect of which was partially offset by a 
$111.8 million increase in non-interest income and a $22.5 million increase 
in net interest income.

    NET INTEREST INCOME.  Net interest income, before the provision for loan 
losses, increased $22.5 million (or 12.8%) in fiscal 1996.  The Bank would 
have recorded additional interest income of $9.1 million in fiscal 1996 if 
the Bank's non-accrual assets and restructured loans had been current in 
accordance with their original terms. Interest income of $1.3 million was 
actually recorded on non-accrual assets and restructured loans during the 
fiscal year.  The Bank's net interest income in future periods will continue 
to be adversely affected by the Bank's non-performing assets.  See "Financial 
Condition - Banking - Asset Quality -Non-Performing Assets."

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

                                      85

<PAGE>
                                                   NET INTEREST MARGIN ANALYSIS
                                                      (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                         YEAR ENDED SEPTEMBER 30,                 
                                                       -----------------------------------------------------------
                                                                    1996                          1995            
                                                       ----------------------------   ----------------------------
                                        SEPTEMBER 30
                                             1996      AVERAGE               YIELD/   AVERAGE               YIELD/
                                         YIELD/RATE    BALANCES   INTEREST    RATE    BALANCES   INTEREST    RATE 
                                        ------------   --------   --------   ------   --------   --------   ------
<S>                                     <C>            <C>        <C>        <C>      <C>        <C>        <C>   
Assets:
 Interest-earning assets:
   Loans receivable, net (1)               11.41%     $2,940,242  $317,847   10.81%   $2,968,376  $294,554   9.92%
Mortgage-backed securities                  6.05         834,198    50,955    6.11       981,253    60,623   6.18 
   Federal funds sold and 
   securities purchased under
   agreements to resell                       --         185,794    10,195    5.49        65,865     3,756   5.70
   Trading securities                         --          13,477       953    7.07         4,843       373   7.70 
   Investment securities                    5.68           6,033       315    5.22         4,405       194   4.40 
   Other interest-earning                                                                                         
    assets                                  5.34         164,783     7,246    4.40       126,792     5,815   4.59 
                                                       ---------   -------             ---------   -------        
    Total                                   9.70       4,144,527   387,511    9.35     4,151,534   365,315   8.80 
                                          ------                   -------   -----                 -------  ----- 

Non-interest earning assets:
   Cash                                                  161,925                         131,345                  
   Real estate held for
    investment or sale                                   161,092                         287,564                  
   Property and equipment, net                           197,351                         161,109                  
   Cost in excess of net assets
    acquired, net                                          3,289                           5,470                  
   Other assets                                          248,870                         156,172                  
                                                      ----------                      ----------                  
    Total assets                                      $4,917,054                      $4,893,194                  
                                                      ----------                      ----------                  
                                                      ----------                      ----------                  
Liabilities and stockholders' equity:
 Interest-bearing liabilities:
   Deposit accounts:
     Demand deposits                        2.42        $921,704    23,137    2.51    $  875,551    23,721   2.71 
     Savings deposits                       3.43         944,211    31,936    3.38     1,048,783    35,125   3.35 
     Time deposits                          5.32       1,261,685    69,179    5.48     1,025,111    53,033   5.17 
     Money market deposits                  3.88         990,392    38,317    3.87     1,070,531    42,420   3.96 
                                                       ---------    ------             ---------    ------        
     Total deposits                         3.90       4,117,992   162,569    3.95     4,019,976   154,299   3.84 
   Borrowings                               6.04         369,831    26,267    7.10       496,938    34,815   7.01 
                                                       ---------    ------             ---------   -------        
     Total liabilities                      4.35       4,487,823   188,836    4.21     4,516,914   189,114   4.19 
                                            ----                   -------   -----                 -------  ----- 
Non interest-bearing items:                       
 Non-interest bearing deposits                            74,250                          69,734                  
 Other liabilities                                        51,338                          48,702                  
 Stockholders' equity                                    303,643                         257,844                  
                                                      ----------                      ----------                  
   Total liabilities and
    stockholders' equity                              $4,917,054                      $4,893,194                  
                                                      ----------                      ----------                  
                                                      ----------                      ----------                  

Net interest income                                               $198,675                        $176,201        
                                                                  --------                        --------        
                                                                  --------                        --------        
Net interest spread (2)                                                       5.14                           4.61 
                                                                             -----                          ----- 
                                                                             -----                          ----- 
                                                                                              
Net yield on interest-earning                                                                 
 assets (3)                                                                   4.79                           4.24%
                                                                             -----                          ----- 
                                                                             -----                          ----- 
Interest-earning assets to                                                                    
  interest-bearing liabilities                                               92.35                          91.91%
                                                                             -----                          ----- 
                                                                             -----                          ----- 

<CAPTION>
                                            YEAR ENDED SEPTEMBER 30,      
                                        -------------------------------   
                                                       1994               
                                           ----------------------------   
                                                                          
                                           AVERAGE              YIELD/    
                                           BALANCES   INTEREST   RATE     
                                           --------   --------  ------    
<S>                                       <C>         <C>       <C>       
Assets:                                                                   
 Interest-earning assets:                                                 
   Loans receivable, net (1)              $2,706,132  $255,328   9.44%    
Mortgage-backed securities                 1,229,898    70,937   5.77     
   Federal funds sold and                                                 
   securities purchased under                                             
   agreements to resell                       63,050     2,277   3.61     
   Trading securities                         15,655     1,019   6.51     
   Investment securities                       4,594       197   4.29     
   Other interest-earning                                                 
    assets                                   138,163     4,706   3.41     
                                           ---------   -------            
    Total                                  4,157,492   334,464   8.04     
                                                       -------  -----     
                                                                          
Non-interest earning assets:                                              
   Cash                                      116,388                      
   Real estate held for                                                   
    investment or sale                       356,993                      
   Property and equipment, net               138,489                      
   Cost in excess of net assets                                           
    acquired, net                              8,110                      
   Other assets                              163,766                      
                                          ----------                      
    Total assets                          $4,941,238                      
                                          ----------                      
                                          ----------                      
Liabilities and stockholders' equity:                                     
 Interest-bearing liabilities:                                            
   Deposit accounts:                                                      
     Demand deposits                        $847,158    23,176   2.74     
     Savings deposits                      1,208,041    40,720   3.37     
     Time deposits                           751,299    29,723   3.96     
     Money market deposits                 1,149,671    37,305   3.24     
                                           ---------    ------            
     Total deposits                        3,956,169   130,924   3.31     
   Borrowings                                622,010    34,620   5.57     
                                           ---------   -------            
     Total liabilities                     4,578,179   165,544   3.62     
                                                       -------  -----     
Non interest-bearing items:                                               
 Non-interest bearing deposits                61,895                      
 Other liabilities                            37,059                      
 Stockholders' equity                        264,105                      
                                          ----------                      
   Total liabilities and                                                  
    stockholders' equity                  $4,941,238                      
                                          ----------                      
                                          ----------                      
                                                                          
Net interest income                                   $168,920            
                                                      --------            
                                                      --------            
Net interest spread (2)                                          4.42%    
                                                                -----     
                                                                -----     
                                                                          
Net yield on interest-earning                                             
 assets (3)                                                      4.06%    
                                                                -----     
                                                                -----     
Interest-earning assets to                                                
  interest-bearing liabilities                                  90.81%    
                                                                -----     
                                                                -----     

</TABLE>
------------------

 (1)     Includes loans held for sale and/or securitization.  
         Interest on non-accruing loans has been included only to the extent 
         reflected in the consolidated statements of operations; however, 
         the loan balance is included in the average amount outstanding 
         until transferred to real estate acquired in settlement of loans.  
         Includes ($7,980), ($10,062), and ($4,097) of amortized loan fees, 
         premiums and discounts in interest income for the years ended 
         September 30, 1996, 1995 and 1994.

 (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.

                                      86

<PAGE>

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

                                      87

<PAGE>


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

<TABLE>
<CAPTION>
                                YEAR ENDED SEPTEMBER 30, 1996      YEAR ENDED SEPTEMBER 30, 1995
                                          COMPARED TO                        COMPARED TO
                                YEAR ENDED SEPTEMBER 30, 1995      YEAR ENDED SEPTEMBER 30, 1994
                                     INCREASE (DECREASE)                INCREASE (DECREASE)
                                    DUE TO CHANGE IN (1)                DUE TO CHANGE IN (1)
                                -----------------------------       ----------------------------
                                                     TOTAL                                 TOTAL
                              VOLUME      RATE       CHANGE         VOLUME      RATE      CHANGE
                              ------      ----       ------         ------      ----      ------
<S>                           <C>         <C>        <C>            <C>         <C>       <C>

Interest income:
 Loans (2)                   $(2,823)     26,116     $23,293       $25,727     $13,499     $39,226

 Mortgage-backed securities   (8,989)       (679)     (9,668)      (15,094)      4,780     (10,314)

 Federal funds sold and 
  securities purchased under
  agreements to resell         6,582        (143)      6,439           106       1,373       1,479

 Trading securities              613         (33)        580          (405)       (241)       (646)

 Investment securities            80          41         121            (8)          5          (3)

 Other interest-earning 
  assets                       1,681        (250)      1,431          (413)      1,522       1,109
                             --------     -------    --------       -------     ------      -------
    Total interest income     (2,856)     25,052      22,196         9,913      20,938      30,851
                             --------     -------    --------       -------     ------      -------

Interest expense:

 Deposit accounts              3,803       4,467       8,270         2,139      21,236      23,375

 Borrowings                   (8,991)        443      (8,548)       (7,752)      7,947         195
                             --------     -------    --------       -------     ------      -------
    Total interest expense    (5,188)      4,910        (278)       (5,613)     29,183      23,570
                             --------     -------    --------       -------     ------      -------

Increase (decrease) in 
 net interest income          $2,332     $20,142     $22,474       $15,526     $(8,245)      $7,281
                             --------     -------    --------       -------     ------      -------
                             --------     -------    --------       -------     ------      -------
</TABLE>

------------------------------------
(1) The net change attributable to the combined impact of volume and rate has 
    been allocated in proportion to the absolute value of the change due to 
    volume and the change due to rates. 

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

                                      88

<PAGE>

    Interest income in fiscal 1996 increased $22.2 million from the level in 
fiscal 1995, primarily as a result of higher average yields earned by the 
Bank on its loan portfolio.  Higher average balances of federal funds sold 
and securities purchased under agreements to resell and other 
interest-earning assets also contributed to the increase in interest income.  
The effect on interest income of higher average yields on the loan portfolio 
and higher average balances was offset in part by lower average balances of 
mortgage-backed securities and loans receivable.

    The Bank's net yield on interest-earning assets increased to 4.79% in 
fiscal 1996 from 4.24% in fiscal 1995.  The increase primarily reflected the 
upward adjustment of interest rates on certain of the Bank's adjustable rate 
products and higher yields on other consumer loans.  The positive effect of 
the increase on the Bank's net yield was offset in part by increased interest 
rates on the Bank's interest-bearing liabilities.

    Interest income on loans, the largest category of interest-earning 
assets, increased by $23.3 million (or 7.9%) from fiscal 1995 primarily 
because of higher average yields on the loan portfolio, which were partially 
offset by lower average balances.  The average yield on the loan portfolio in 
fiscal 1996 increased by 89 basis points (to 10.81% from 9.92%) from the 
average yield in fiscal 1995.  The higher yields were primarily due to 
increases in the average net yield on credit card loans from 13.94% to 15.50% 
and on automobile loans from 8.84% to 11.75%.  The increase in the yield on 
credit card loans was primarily a result of risk management strategies that 
have repriced upward the yield on higher risk credit card accounts and the 
expiration of promotional introductory rates.  The increase was primarily 
responsible for a $17.0 million (or 12.2%) increase in interest income from 
credit card loans.  The increase in the net yield on automobile loans was 
primarily due to higher yields earned on loans originated by one of the 
Bank's operating subsidiaries.  Higher average balances of consumer loans 
other than automobile loans, which increased $61.3 million (or 50.9%), also 
contributed to the increase in interest income on loans.  The increased 
average balances of other consumer loans resulted primarily from the higher 
origination volume of home improvement and commercial loans during fiscal 
1996, and was largely responsible for an $11.2 million (or 102.5%) increase 
in interest income on other consumer loans.  The effect on interest income of 
higher average net yields and higher average balances of certain consumer 
loans was offset in part by an $84.3 million decrease in the average balances 
of automobile loan receivables due to the securitization and sale of $475.3 
million of such receivables during fiscal 1996.

    Interest income on mortgage-backed securities decreased $9.7 million (or 
15.9%) primarily because of lower average balances.  The reduced 
mortgage-backed securities balances in fiscal 1996 reflected the effects of 
scheduled principal paydowns and unscheduled principal prepayments.  The 
negative effect of the lower average balances was compounded by a decrease in 
the average interest rates on these securities from 6.18% to 6.11%.

    Other interest income increased $7.9 million (or 82.2%) in fiscal 1996 
primarily as a result of higher average balances on federal funds sold and 
securities purchased under agreements 

                                      89

<PAGE>

to resell which increased by $119.9 million (or 182.1%) and, to a lesser 
extent, higher average balances on other interest-earning assets. 

    Interest expense decreased $0.3 million in fiscal 1996 primarily because 
of a decrease of $127.1 million (or 25.6%) in the average balances of the 
Bank's borrowings, which resulted in an $8.5 million decrease in interest 
expense during fiscal 1996 for such liabilities.  The decrease in interest 
expense on borrowings is primarily due to a $6.2 million, a $1.3 million and 
a $0.7 million decrease in interest expense on securities sold under 
repurchase agreements, bonds payable and FHLB advances, respectively, 
resulting from lower average balances.  The decrease in interest expense on 
securities sold under repurchase agreements was primarily a result of a 
$101.9 million decrease in the average balances of such liabilities as the 
Bank's deposit base has increased in recent periods.  The decrease in 
interest expense on bonds payable was due to the assumption of bonds payable 
in April 1995 by the purchaser of two residential apartment buildings that 
were securing the bonds.  A $6.6 million decline in the average balances of 
FHLB advances contributed to the $0.7 million decrease in the interest 
expense on such liabilities.  The positive effect of such lower average 
balances was offset in part by an increase in the average borrowing rate (to 
7.10% from 7.01%).

    The decrease in interest on borrowings was partially offset by an $8.3 
million increase in interest expense on deposits, the largest category of 
interest-bearing liabilities.  Interest expense on deposits increased 
primarily as a result of an increase in average rates (to 3.95% from 3.84%), 
which reflected a shift in the composition of the Bank's deposits to higher 
yielding certificates of deposit and, to a lesser extent, an increase in 
average deposit balances of $98.0 million.

    PROVISION FOR LOAN LOSSES.  The Bank's provision for loan losses 
increased to $115.7 million in fiscal 1996 from $55.0 million in fiscal 1995. 
 The $60.8 million increase over the prior year was primarily attributable to 
a $56.7 million increase in the provision for losses on credit card loans 
primarily because of increased charge-offs of such loans, reflecting an 
industry-wide decline in the performance of credit card loans.  See 
"Financial Condition - Banking - Asset Quality - Allowances for Losses."

    OTHER INCOME.  The increase in other (non-interest) income to $344.5 
million in fiscal 1996 from $232.6 million in fiscal 1995 was primarily 
attributable to increases in loan servicing fees, credit card fees and gain 
on sales of loans.  The positive effect of these items on other income was 
partially offset by an increase in loss on real estate held for investment or 
sale.

    An increase of $49.0 million in excess spread income and $20.8 million of 
servicing fees earned by the Bank for servicing its portfolios of securitized 
credit card loans contributed to an increase of $79.8 million (or 43.3%) in 
loan servicing fees.  Such excess spread income and servicing fees have 
increased in recent periods as a result of greater securitization activity by 
the Bank. 

    Credit card fees, consisting of membership fees, late charges, 
over-the-limit fees, interchange fees and cash advance charges, increased 
$20.9 million (or 212.2%) in fiscal 1996 from 

                                      90

<PAGE>

the level in fiscal 1995.  The increase was primarily attributable to changes 
in the fee structure for the Bank's credit card programs during fiscal 1996.

    Gain on sales of loans increased by $10.4 million (or 80.4%) primarily 
because of additional gains recognized on the securitization and sales of 
automobile, home equity credit line and home loan receivables during fiscal 
1996.

    The $19.2 million increase in loss on real estate held for investment or 
sale was primarily attributable to a decrease of $4.5 million in the equity 
earnings in partnership income and a decrease of $12.5 million in the gain 
recorded on sales of the Bank's real estate held for investment or sale.

    OPERATING EXPENSES.  Operating expenses for fiscal 1996 increased $83.1 
million (27.9%) from the level in fiscal 1995.  The primary reason for the 
increase was the $26.5 million SAIF assessment included in deposit insurance 
premiums.  Other expense categories with increases include salaries and 
employee benefits, loan and data processing.  The $19.2 million increase in 
salaries and employee benefits resulted primarily from the addition of staff 
to the Bank's credit card, consumer lending and branch operations.  The $12.5 
million increase in loan expenses was primarily attributable to an increase 
in the amortization of capitalized mortgage servicing rights, which resulted 
from acquisitions of single-family residential mortgage servicing rights in 
recent periods, and a $3.1 million valuation allowance against mortgage 
servicing rights.  The $8.8 million increase in data processing expenses was 
principally attributable to an increase in the number of credit card accounts 
outstanding and the activity generated by such accounts during fiscal 1996.

                                      91

<PAGE>
FISCAL 1995 COMPARED TO FISCAL 1994

REAL ESTATE

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

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

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

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

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

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

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

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

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

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

                                       92

<PAGE>

BANKING

    OVERVIEW.  The Bank recorded operating income of $55.7 million for the 
year ended September 30, 1995 ("fiscal 1995"), compared to operating income 
of $53.2 million for the year ended September 30, 1994 ("fiscal 1994"). The 
increase in income for fiscal 1995 was primarily attributable to a $72.6 
million increase in other (non-interest) income resulting primarily from an 
increase in loan servicing fees and a $7.3 million increase in net interest 
income.  The positive effect of these items on income was partially offset by 
a $51.6 million increase in operating expenses and a $25.8 million increase 
in the provision for loan losses.

    NET INTEREST INCOME.  Net interest income, before the provision for loan 
losses, increased $7.3 million (or 4.3%) in fiscal 1995.  The Bank would have 
recorded additional interest income of $7.2 million in fiscal 1995 if the 
Bank's non-accrual assets and restructured loans had been current in 
accordance with their original terms. Interest income of $2.0 million was 
actually recorded on non-accrual assets and restructured loans during the 
fiscal year.  The Bank's net interest income in future periods will continue 
to be adversely affected by the Bank's non-performing assets.  See "Financial 
Condition - Banking - Asset Quality - Non-Performing Assets."

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

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

    Interest income on loans, the largest category of interest-earning 
assets, increased by $39.2 million (or 15.4%) from fiscal 1994.  The increase 
in interest income on loans was primarily attributable to higher average 
balances. Average balances of consumer loans (other than credit card loans), 
principally automobile loans, increased $150.7 million (or 63.6%) in fiscal 
1995.  The higher balances were largely responsible for the increase of $15.2 
million (or 78.5%) in interest income on consumer loans.  Average balances of 
credit card loans increased $84.7 million (or 9.2%) during fiscal 1995, 
largely as a result of new account originations.  The increase in balances of 
such loans contributed to a $14.2 million (or 11.4%) increase in interest 
income from these assets. Average balances of single-family residential 
permanent loans increased $70.2 million (or 5.3%) as a result of increased 
originations of such loans during the current year.  Interest income on these 
loans increased $9.8 million (or 10.8%) from fiscal 1994.  Average balances 
of home equity credit line loans declined in fiscal 1995, largely as a result 
of the Bank's securitization and sale activity. The securitization and sale 
of $181.9 million and $150.5 million of home equity credit line receivables 
in September 1994 and 1995, respectively, more than offset the originations 
of $128.9 million of such loans during fiscal 1995, and resulted in a decline 
of $25.4 million (or 18.0%) in average balances of home equity credit line 
receivables.

    Higher average net yields on the loan portfolio also contributed to the 
increase in interest income on loans.  The average yield on the loan 
portfolio in fiscal 1995 increased by 48 basis points (to 9.92% from 9.44%) 
from the average yield in fiscal 1994.  An increase in the average yield on 
credit card loans to 13.94% from 13.67% and on automobile loans to 8.84% from 
7.37% contributed to the increase in loan portfolio interest income.  
Increases in the average yields on single-family residential permanent loans 
(to 7.28% from 6.92%), home equity credit line loans (to 8.74% from 6.96%), 
commercial permanent loans (to 6.95% from 6.66%) and construction 

                                      93

<PAGE>

loans (to 11.53% from 8.27%) also contributed to the increased income on such 
assets.  The increase in the average yields on these loans reflected the 
upward adjustment of interest rates on such loans to reflect increases in 
market interest rates to which rates on such products are indexed.  

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

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

    Interest expense increased $23.6 million in fiscal 1995 primarily because 
of an increase of $23.4 million in interest expense on deposits, the largest 
category of interest-bearing liabilities. Interest expense on deposits 
increased as a result of an increase in average rates (to 3.84% from 3.31%), 
which reflected higher market interest rates in fiscal 1995 and a shift in 
the composition of the Bank's deposits to higher yielding certificates of 
deposit (average rates on certificates of deposits increased 30.6%, to 5.17% 
from 3.96%) as well as, to a lesser extent, an increase in average deposit 
balances of $63.8 million.  See "Financial Condition - Banking - Asset and 
Liability Management." 

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

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

    OTHER INCOME.  The increase in other (non-interest) income to $232.6 
million in fiscal 1995 from $160.0 million in fiscal 1994 was primarily 
attributable to an increase in loan servicing fees.  The positive effect of 
this item on other income was partially offset by decreases in most other 
categories of non-interest income.

                                      94

<PAGE>

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

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

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

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

    The $6.4 million decrease in earnings on real estate held for investment 
or sale was primarily attributable to an increase of $12.3 million in the 
provision for losses on such assets and a decrease of $1.6 million in the 
operating income generated by the REO properties.  See "Financial Condition - 
Asset Quality - Allowances for Losses."  Partially offsetting these items was 
a $4.1 million increase in partnership earnings recorded on real estate held 
for investment and a $3.4 million increase in the gain recorded on sales of 
the Bank's REO properties.

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

    OPERATING EXPENSES.  Operating expenses for fiscal 1995 increased $51.6 
million (20.9%) from the level in fiscal 1994.  The main components of the 
higher operating expenses were increases in salaries and employee benefits, 
data processing and other expenses.  The $21.0 million increase in salaries 
and employee benefits resulted primarily from the addition of staff to the 
Bank's credit card operations.  The $12.5 million increase in data processing 
expenses was principally attributable to an increase in the number of credit 
card accounts outstanding and the activity generated by such accounts during 
fiscal 1995.  The $15.6 million increase in other operating expenses was 
primarily a result of increased credit card fraud losses during fiscal 1995.

                                      95

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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


                                                                          Page
                                                                          ----
    (a)  Report of Independent Public Accountant.                         F-2

    (b)  Consolidated Balance Sheets - As of September 30,                F-3
         1996 and 1995.

    (c)  Consolidated Statements of Operations - For the                  F-4
         years ended September 30, 1996, 1995 and 1994.

    (d)  Consolidated Statements of Shareholders' Deficit - For the       F-6
         years ended September 30, 1996, 1995 and 1994.

    (e)  Consolidated Statements of Cash Flows - For the 
         years ended September 30, 1996, 1995 and 1994.                   F-7

    (f)  Notes to Consolidated Financial Statements.                      F-9

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

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

                                       F-1

<PAGE>


                 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


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


We have audited the accompanying consolidated balance sheets of B.F. Saul 
Real Estate Investment Trust (the "Trust") and subsidiaries as of September 
30, 1996 and 1995, and the related consolidated statements of operations, 
shareholders' deficit, and cash flows for the years then ended. These 
financial statements are the responsibility of the Trust's management. Our 
responsibility is to express an opinion on these financial statements based 
on our audits.

We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether the financial statements are free 
of material 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, 1996 and 1995, and the 
results of their operations and their cash flows for the years then ended in 
conformity with generally accepted accounting principles.

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



/s/ Arthur Andersen LLP



Washington, D.C.
December 3, 1996

                                      F-2


<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
B. F. SAUL REAL ESTATE INVESTMENT TRUST
===================================================================================================================================
                                                                                                             September 30
                                                                                                     ------------------------------
(In thousands)                                                                                           1996            1995
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                  <C>             <C>          
ASSETS
Real Estate
Income-producing properties
    Hotel                                                                                            $     121,417   $     122,649
    Commercial                                                                                             106,496         111,646
    Other                                                                                                    4,715           4,632
                                                                                                     --------------  --------------
                                                                                                           232,628         238,927
    Accumulated depreciation                                                                               (76,513)        (75,140)
                                                                                                     --------------  --------------
                                                                                                           156,115         163,787
Land parcels                                                                                                41,580          38,458
Cash and cash equivalents                                                                                   15,516          17,355
Other assets                                                                                                81,292          93,812
                                                                                                     --------------  --------------
                    Total real estate assets                                                               294,503         313,412
-----------------------------------------------------------------------------------------------------------------------------------
Banking
Cash and due from banks                                                                                    213,394         198,096
Interest-bearing deposits                                                                                   53,031          51,186
Securities purchased under agreements to resell                                                                 --         110,000
Loans held for sale                                                                                         76,064          68,679
Loans held for securitization and sale                                                                     450,000         500,000
Investment securities (market value $9,820 and $4,371, respectively)                                         9,818           4,370
Mortgage-backed securities (market value $1,307,838 and $879,720, respectively)                          1,306,417         880,208
Loans receivable (net of allowance for losses of $95,523 and $60,496, respectively)                      2,772,967       2,327,222
Federal Home Loan Bank stock                                                                                31,940          31,940
Real estate held for investment or sale (net of allowance for losses of $126,710
    and $135,236, respectively)                                                                            123,489         222,860
Property and equipment, net                                                                                225,135         180,438
Cost in excess of net assets acquired, net                                                                   2,399           4,173
Excess spread assets, net                                                                                   42,602          25,640
Mortgage servicing rights, net                                                                              32,790          28,573
Other assets                                                                                               353,028         278,151
                                                                                                     --------------  --------------
                    Total banking assets                                                                 5,693,074       4,911,536
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                                         $   5,987,577   $   5,224,948
-----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Real Estate
Mortgage notes payable                                                                               $     173,345   $     184,502
Notes payable - secured                                                                                    177,500         175,500
Notes payable - unsecured                                                                                   42,367          41,057
Deferred gains - real estate                                                                               112,883         112,883
Accrued dividends payable - preferred shares of beneficial interest                                         31,563              --
Other liabilities and accrued expenses                                                                      40,434          41,872
                                                                                                     --------------  --------------
                    Total real estate liabilities                                                          578,092         555,814
-----------------------------------------------------------------------------------------------------------------------------------
Banking
Deposit accounts                                                                                         4,164,037       4,159,252
Securities sold under repurchase agreements and other short-term borrowings                                637,141          10,435
Notes payable                                                                                                7,277           7,514
Federal Home Loan Bank advances                                                                            269,065         155,052
Custodial accounts                                                                                           7,415           7,413
Amounts due to banks                                                                                        44,423          32,240
Other liabilities                                                                                           99,086          87,545
Capital notes -- subordinated                                                                              160,000         160,000
                                                                                                     --------------  --------------
                    Total banking liabilities                                                            5,388,444       4,619,451
-----------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interest held by affiliates                                                                        46,065          43,556
Minority interest -- other                                                                                  74,307          74,307
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES                                                                                        6,086,908       5,293,128
-----------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' DEFICIT
Preferred shares of beneficial interest, $10.50 cumulative, $1 par value, 90 million shares
    authorized, 516,000 shares issued and outstanding, liquidation value $51.6 million                         516             516
Common shares of beneficial interest, $1 par value, 10 million shares authorized,
    6,641,598 shares issued                                                                                  6,642           6,642
Paid-in surplus                                                                                             92,943          92,943
Deficit                                                                                                   (156,084)       (123,943)
Net unrealized holding loss                                                                                 (1,500)         (2,490)
                                                                                                     --------------  --------------
                                                                                                           (57,483)        (26,332)
Less cost of 1,814,688 common shares of beneficial interest in treasury                                    (41,848)        (41,848)
                                                                                                     --------------  --------------
TOTAL SHAREHOLDERS' DEFICIT                                                                                (99,331)        (68,180)
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                                                          $   5,987,577   $   5,224,948
-----------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>

                                      F-3

<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
B. F. SAUL REAL ESTATE INVESTMENT TRUST
===================================================================================================================================
                                                                                            For the Year Ended September 30
                                                                                     ----------------------------------------------
(In thousands, except per share amounts)                                                 1996            1995            1994
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>             <C>             <C>          
REAL ESTATE
Income
Hotels                                                                               $      54,245   $      54,104   $      46,046
Commercial properties                                                                       17,590          18,812          16,815
Other                                                                                        5,004           4,369           3,183
                                                                                     --------------  --------------  --------------
Total income                                                                                76,839          77,285          66,044
-----------------------------------------------------------------------------------------------------------------------------------
Expenses
Direct operating expenses:
    Hotels                                                                                  36,075          38,038          33,874
    Commercial properties                                                                    7,251           7,409           6,972
    Land parcels and other                                                                   1,637           1,348           1,383
Interest expense                                                                            39,840          40,564          39,370
Amortization of debt expense                                                                   674             476           1,206
Depreciation                                                                                10,020           9,714           9,082
Advisory, management and leasing fees - related parties                                      7,423           7,376           6,793
General and administrative                                                                   1,401           2,319           2,027
Write-down of real estate to net realizable value                                               --           2,727           1,380
                                                                                     --------------  --------------  --------------
Total expenses                                                                             104,321         109,971         102,087
-----------------------------------------------------------------------------------------------------------------------------------
Equity in earnings of unconsolidated entities                                                3,374           3,681           1,738
Gain (loss) on sale of property                                                                (68)          1,664              --
-----------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE OPERATING LOSS                                                           $     (24,176)  $     (27,341)  $     (34,305)
-----------------------------------------------------------------------------------------------------------------------------------
BANKING
Interest income
Loans                                                                                $     317,847   $     294,554   $     255,328
Mortgage-backed securities                                                                  50,955          60,623          70,937
Trading securities                                                                             953             373           1,019
Investment securities                                                                          315             194             197
Other                                                                                       17,441           9,571           6,983
                                                                                     --------------  --------------  --------------
Total interest income                                                                      387,511         365,315         334,464
-----------------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposit accounts                                                                           162,569         154,299         130,924
Short-term borrowings                                                                       10,407          18,094          11,439
Long-term borrowings                                                                        15,860          16,721          23,181
                                                                                     --------------  --------------  --------------
Total interest expense                                                                     188,836         189,114         165,544
                                                                                     --------------  --------------  --------------
Net interest income                                                                        198,675         176,201         168,920
Provision for loan losses                                                                 (115,740)        (54,979)        (29,222)
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses                                         82,935         121,222         139,698
-----------------------------------------------------------------------------------------------------------------------------------
Other income
Credit card fees                                                                            30,765           9,855          21,054
Loan servicing fees                                                                        264,096         184,275          69,878
Deposit servicing fees                                                                      29,900          24,442          20,347
Gain (loss) on sales of trading securities, net                                              1,158            (600)          1,695
Earnings (loss) on real estate held for investment or sale, net                            (24,413)         (5,549)            835
Gain on sales of credit card relationships and loans, net                                   23,242          12,882          30,522
Gain on sales of mortgage servicing rights, net                                                 --           1,397           5,833
Other                                                                                       19,713           5,923           9,885
                                                                                     --------------  --------------  --------------
Total other income                                                                         344,461         232,625         160,049
-----------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
</TABLE>

                                      F-4

<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
B. F. SAUL REAL ESTATE INVESTMENT TRUST
===================================================================================================================================
                                                                                            For the Year Ended September 30
                                                                                     ----------------------------------------------
(In thousands, except per share amounts)                                                 1996            1995            1994
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>             <C>             <C>           
BANKING (Continued)
Operating expenses
Salaries and employee benefits                                                       $     127,597   $     108,432   $      87,390
Loan                                                                                        28,241          15,745          14,870
Property and equipment                                                                      34,362          28,799          25,729
Marketing                                                                                   53,705          46,117          46,441
Data processing                                                                             52,021          43,270          30,766
Deposit insurance premiums                                                                  37,362          10,749          11,527
Amortization of cost in excess of net assets acquired                                        1,775           2,411           2,801
Other                                                                                       46,222          42,641          27,036
                                                                                     --------------  --------------  --------------
Total operating expenses                                                                   381,285         298,164         246,560
-----------------------------------------------------------------------------------------------------------------------------------
BANKING OPERATING INCOME                                                             $      46,111   $      55,683   $      53,187
-----------------------------------------------------------------------------------------------------------------------------------

TOTAL COMPANY
Operating income before income taxes, extraordinary item, cumulative effect of
    change in accounting principle,
    and minority interest                                                            $      21,935   $      28,342   $      18,882
Income tax provision                                                                         8,301           2,021           7,025
                                                                                     --------------  --------------  --------------
Income before extraordinary item, cumulative effect
    of change in accounting principle and minority interest                                 13,634          26,321          11,857
Extraordinary item:
    Loss on early extinguishment of debt, net of taxes                                          --              --         (11,315)
                                                                                     --------------  --------------  --------------
Income before cumulative effect of change in accounting
    principle and minority interest                                                         13,634          26,321             542
Cumulative effect of change in accounting principle                                             --              --          36,260
                                                                                     --------------  --------------  --------------
Income before minority interest                                                             13,634          26,321          36,802
Minority interest held by affiliates                                                        (3,962)         (5,721)         (3,963)
Minority interest -- other                                                                  (9,750)         (9,750)         (9,750)
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY NET INCOME  (LOSS)                                                     $         (78)  $      10,850   $      23,089
-----------------------------------------------------------------------------------------------------------------------------------


NET INCOME (LOSS) AVAILABLE TO COMMON
    SHAREHOLDERS                                                                     $      (5,498)  $       5,430   $      17,669
NET INCOME (LOSS) PER COMMON SHARE 
  Income before extraordinary item, cumulative
   effect of change in accounting principle and minority interest                    $        1.70   $        4.33   $        1.33
Extraordinary item:
    Loss on early extinguishment of debt, net of taxes                                          --              --           (2.34)
                                                                                     --------------  --------------  --------------
Income (loss) before cumulative effect of change in accounting
    principle and minority interest                                                           1.70            4.33           (1.01)
Cumulative effect of change in accounting principle                                             --              --            7.51
                                                                                     --------------  --------------  --------------
Income before minority interest                                                               1.70            4.33            6.50
Minority interest held by affiliates                                                         (0.82)          (1.19)          (0.82)
Minority interest -- other                                                                   (2.02)          (2.02)          (2.02)
-----------------------------------------------------------------------------------------------------------------------------------

NET INCOME (LOSS) PER COMMON SHARE                                                   $       (1.14)  $        1.12   $        3.66
-----------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>

                                      F-5

<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
B. F. SAUL REAL ESTATE INVESTMENT TRUST
===================================================================================================================================


                                                                                               For the Year Ended September 30
                                                                                     ----------------------------------------------
(Dollars in thousands, except per share amounts)                                         1996            1995            1994
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>             <C>             <C>          


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


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


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


DEFICIT
Beginning of year                                                                         (123,943)       (134,793)       (157,882)

Net income (loss)                                                                              (78)         10,850          23,089

Dividends:
    Real Estate Trust preferred shares of beneficial interest:
        Distributions ($0.97 per share)                                                       (500)             --              --
        Distributions payable ($61.17 per share)                                           (31,563)             --              --

                                                                                     --------------  --------------  --------------
End of year                                                                               (156,084)       (123,943)       (134,793)
                                                                                     --------------  --------------  --------------


Net unrealized holding losses                                                               (1,500)         (2,490)        (11,303)
                                                                                     --------------  --------------  --------------


TREASURY SHARES
Beginning and end of year (1,814,688 shares)                                               (41,848)        (41,848)        (41,848)
-----------------------------------------------------------------------------------------------------------------------------------

TOTAL SHAREHOLDERS' DEFICIT                                                          $     (99,331)  $     (68,180)  $     (87,843)
-----------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>

                                      F-6

<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
B. F. SAUL REAL ESTATE INVESTMENT TRUST
===================================================================================================================================
                                                                                            For the Year Ended September 30
                                                                                     ----------------------------------------------
(In thousands)                                                                           1996            1995            1994
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>             <C>             <C>          
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net income (loss)                                                                    $     (15,924)  $     (12,032)  $       7,239
Adjustments to reconcile net income (loss) to net cash provided by (used in)
  operating activities:
    Depreciation                                                                            10,020           9,714           9,082
    (Gain) loss on sale of property                                                             68          (1,654)             --
    Write-down of real estate to net realizable value                                           --           2,727           1,380
    Increase in accounts receivable and accrued income                                      (4,869)           (224)           (516)
    (Increase) decrease in deferred tax asset                                                1,881          10,836         (19,028)
    (Increase) decrease in accounts payable and accrued expenses                               430             317          (5,473)
    (Increase) decrease in tax sharing receivable                                           14,533          (5,685)        (12,015)
    Amortization of debt expense                                                               674             476           1,206
    Equity in earnings of unconsolidated entities                                           (3,374)         (3,681)         (1,738)
    Loss on early extinguishment of debt                                                        --              --           4,982
    Other                                                                                    6,343           3,530           4,022
                                                                                     --------------  --------------  --------------
                                                                                             9,782           4,324         (10,859)
                                                                                     --------------  --------------  --------------
Banking
Net income                                                                                  15,846          28,603          15,850
Adjustments to reconcile net income to net cash provided by (used in)
    operating activities:
    Amortization (accretion) of premiums, discounts and net deferred loan fees                 112            (435)         (1,301)
    Depreciation and amortization                                                           24,635          21,690          18,292
    Amortization of cost in excess of net assets acquired and mortgage
        servicing rights                                                                     9,575           4,590           8,857
    Capitalized interest on real estate held for investment or sale                         (3,462)         (4,512)         (4,386)
    Originations of mortgage servicing rights                                               (6,205)         (1,514)             --
    Loss on extinguishment of debt                                                              --              --          10,476
    Provision for loan losses                                                              115,740          54,979          29,222
    Net fundings of loans held for sale  and/or securitization                            (690,589)       (390,634)       (874,917)
    Proceeds from sales of trading securities                                              363,364         239,147         688,811
    Proceeds from sales of loans held for sale and/or securitization                     1,984,484       2,188,531       2,276,391
    Proceeds from sales of spread accounts                                                  42,140          59,200              --
    Provision for losses on real estate held for investment or sale                         26,341          26,321          14,052
    Earnings on real estate                                                                 (2,278)        (18,882)        (11,366)
    (Gain) loss on sales of trading securities, net                                         (1,158)            600          (1,695)
    Gain on sales of credit card relationships and loans, net                              (23,242)        (12,882)        (30,522)
    Minority interest held by affiliates                                                     3,962              --           3,963
    Minority interest - other                                                                9,750           9,750           9,750
    (Increase) decrease in excess spread assets                                            (16,962)           (442)          2,375
    (Increase) decrease in other assets                                                   (103,211)       (145,918)         25,441
    Increase in other liabilities                                                           23,724          23,981          18,125
    Increase (decrease) in tax sharing payable                                             (14,533)          5,685          12,015
    Other operating activities, net                                                        (12,440)          1,779           4,443
                                                                                     --------------  --------------  --------------
                                                                                         1,745,593       2,089,637       2,213,876
                                                                                     --------------  --------------  --------------
Net cash provided by operating activities                                                1,755,375       2,093,961       2,203,017
-----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties                                                           (7,408)         (6,270)         (6,717)
Property acquisitions                                                                           --         (10,193)             --
Property sales                                                                               1,812              --              --
Equity investment in unconsolidated entities                                                   639            (733)         (9,769)
Notes receivable - affiliates                                                                   --              --         (12,675)
Other investing activities                                                                      50              53              43
                                                                                     --------------  --------------  --------------
                                                                                            (4,907)        (17,143)        (29,118)
                                                                                     --------------  --------------  --------------
Banking
Proceeds from maturities of investment securities                                            4,410             100             300
Net proceeds from sales of real estate held for investment or sale                          58,874         133,300          94,308
Net proceeds from sales of mortgage servicing rights                                           947           2,232           5,833
Net fundings of loans receivable                                                        (1,702,926)     (2,295,069)     (1,700,831)
Principal collected on mortgage-backed securities                                          221,698         183,166         447,666
Purchases of investment securities                                                         (10,000)             --              --
Purchases of mortgage-backed securities                                                   (649,688)       (107,127)       (291,335)
Purchases of loans receivable                                                             (391,878)        (88,518)       (256,608)
Purchases of property and equipment                                                        (69,749)        (55,924)        (22,503)
Purchases of mortgage servicing rights                                                      (9,902)         (3,847)           (888)
Disbursements for real estate held for investment or sale                                  (14,447)        (32,834)        (53,677)
Other investing activities, net                                                             (2,808)          1,103           4,840
                                                                                     --------------  --------------  --------------
                                                                                        (2,565,469)     (2,263,418)     (1,772,895)
                                                                                     --------------  --------------  --------------
Net cash used in investing activities                                                   (2,570,376)     (2,280,561)     (1,802,013)
-----------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
</TABLE>

                                      F-7

<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
B. F. SAUL REAL ESTATE INVESTMENT TRUST
===================================================================================================================================

                                                                                            For the Year Ended September 30
                                                                                     ----------------------------------------------
(In thousands)                                                                           1996            1995            1994
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>             <C>             <C>          
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing                                                     $          --   $      11,400   $         461
Principal curtailments and repayments of mortgages                                          (8,573)        (12,424)        (66,169)
Proceeds from advances on secured notes                                                      2,500             500         175,000
Repayments of secured notes                                                                   (500)             --              --
Proceeds from sales of unsecured notes                                                       3,708           4,428           9,619
Repayments of unsecured notes                                                               (2,398)         (3,659)         (7,992)
Financing proceeds placed in liquidity maintenance escrow                                       --              --         (25,792)
Costs of obtaining financings                                                                 (201)           (516)         (9,404)
Cash dividends paid on preferred shares of beneficial interest                              (1,250)             --              --
                                                                                     --------------  --------------  --------------
                                                                                            (6,714)           (271)         75,723
                                                                                     --------------  --------------  --------------
Banking
Proceeds from customer deposits and sales of certificates of deposit                    15,312,125      14,086,575      12,308,342
Customer withdrawals of deposits and payments for maturing certificates of deposit     (15,307,340)    (13,936,084)    (12,169,604)
Net increase (decrease) in securities sold under repurchase agreements                     574,400             777         (81,504)
Advances from the Federal Home Loan Bank                                                   429,459         992,073         824,300
Repayments of advances from the Federal Home Loan Bank                                    (315,446)       (937,021)     (1,136,300)
Proceeds from other borrowings                                                           2,469,675         793,261         461,385
Repayments of other borrowings                                                          (2,417,606)       (816,755)       (460,011)
Cash dividends paid on preferred stock                                                      (9,750)         (9,750)         (9,750)
Cash dividends paid on common stock                                                         (8,500)             --              --
Repayment of capital notes - subordinated                                                       --              --        (134,153)
Net proceeds received from capital notes - subordinated                                         --              --         143,603
Other financing activities, net                                                                  2         (12,110)         (6,402)
                                                                                     --------------  --------------  --------------
                                                                                           727,019         160,966        (260,094)
                                                                                     --------------  --------------  --------------
Net cash provided by (used in) financing activities                                        720,305         160,695        (184,371)
-----------------------------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                                       (94,696)        (25,905)        216,633
Cash and cash equivalents at beginning of year                                             376,637         402,542         185,909
                                                                                     --------------  --------------  --------------
Cash and cash equivalents at end of year                                             $     281,941   $     376,637   $     402,542
-----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information: Cash paid during the year
    for:
        Interest (net of amount capitalized)                                          $    237,568   $     217,186   $     213,888
        Income taxes                                                                         4,356          (1,327)            (93)

Supplemental schedule of noncash investing and financing activities:
    Rollovers of notes payable - unsecured                                                   3,725           3,588           6,062
    Loans held for sale exchanged for trading securities                                   363,257         133,014         396,189
    Mortgage-backed securities available-for-sale transferred to mortgage-backed
        securities held-to-maturity                                                             --         942,085              --
    Mortgage-backed securities transferred to mortgage-backed securities
        available-for-sale                                                                      --              --       1,501,192
    Investment securities transferred to investment securities available-for-sale               --              --           4,789
    Investment securities available-for-sale transferred to investment securities
        held-to-maturity                                                                        --           4,354              --
    Real estate held for investment transferred to real estate held for sale                    --           9,273              --
    Loans receivable transferred to loans held for sale and/or securitization            1,594,262       2,387,690       1,446,924
    Loans made in connection with the sale of real estate                                   46,537          10,826          16,401
    Loans receivable transferred to real estate acquired in settlement of loans              5,972           9,822           4,106
    Loans receivable exchanged for mortgage-backed securities held-to-maturity                  --          23,155              --
    Loans held for sale and/or securitization transferred to loans receivable                   --          50,000           3,507
    Loans classified as in-substance foreclosed transferred to loans receivable                 --              --          15,008
    Loans held for sale transferred to loans receivable                                      3,146              --              --

-----------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>

                                      F-8

<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

B.F. Saul Real Estate Investment Trust and its wholly owned subsidiaries
(collectively, the "Real Estate Trust") operate as a Maryland real estate
investment trust. The principal business activity of the Real Estate Trust is
the ownership and development of income-producing properties. The properties
owned by the Real Estate Trust are located predominantly in the Mid-Atlantic and
Southeastern regions of the United States and consist principally of hotels,
office projects, and various undeveloped land parcels.

B.F. Saul Real Estate Investment Trust also owns 80% of the outstanding common
stock of Chevy Chase Bank, F.S.B. and its subsidiaries (collectively the "Bank"
or the "Corporations"), whose assets accounted for approximately 95% of the
consolidated assets of the B.F. Saul Real Estate Investment Trust and its
consolidated subsidiaries (the "Trust") at September 30, 1996. The Bank is a
federally chartered and federally insured stock savings bank. The B. F. Saul
Real Estate Investment Trust is a thrift holding company by virtue of its
ownership of a majority interest in the Bank and is subject to regulation by the
Office of Thrift Supervision ("OTS"). The accounting and reporting practices of
the Trust conform to generally accepted accounting principles and, as
appropriate, predominant practices within the real estate and banking
industries.

PRINCIPLES OF CONSOLIDATION

The 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.

USE OF ESTIMATES

The financial statements have been prepared in conformity with generally
accepted accounting principles. 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.

INCOME TAXES

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

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

                                      F-9

<PAGE>
NET INCOME (LOSS) PER COMMON SHARE

Net income (loss) per common share is determined by dividing net income (loss),
after deducting preferred share dividend requirements, by the weighted average
number of common shares outstanding during the year. For fiscal years 1996, 1995
and 1994, the weighted average number of shares used in the calculation was
4,826,910.

RECLASSIFICATIONS

Certain reclassifications have been made to the consolidated financial
statements for the years ended September 30, 1995 and 1994 to conform with the
presentation used for the year ended September 30, 1996.

ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED

SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"), was issued in March 1995.
SFAS 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets,
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. It addresses how impairment losses should be
measured and when such losses should be recognized. Under SFAS 121, long-lived
assets and certain identifiable intangibles to be held and used shall be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the sum of the
expected cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, the entity shall recognize an impairment loss.
Measurement of an impairment loss for long-lived assets and identifiable
intangibles that an entity expects to hold and use should be based on the fair
value of the asset. Long-lived assets and certain identifiable intangibles to be
disposed of should generally be reported at the lower of carrying amount or fair
value less the cost to sell. SFAS 121 is effective for financial statements for
fiscal years beginning after December 15, 1995. The adoption of SFAS 121 is not
anticipated to have a material impact on the Trust's financial condition or the
results of operations.

                                      F-10

<PAGE>
B.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - REAL ESTATE TRUST

CASH EQUIVALENTS

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

PROPERTIES

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

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

INCOME RECOGNITION

The Real Estate Trust derives room and other revenues from the operations of its
hotel properties. The Real Estate Trust derives rental income under
noncancelable long-term leases from tenants at its commercial properties.

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 mortgage notes payable and notes payable - secured
approximates their fair value since most of the debt has been financed in recent
periods at prevailing market interest rates. The fair value of Notes payable -
unsecured is based on the rates currently offered by the Real Estate Trust for
similar notes. At September 30, 1996 and 1995 the fair value of Notes payable -
unsecured was $43.8 and $42.6 million, respectively.

                                      F-11

<PAGE>
C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - THE BANK

The Bank is a federally chartered and federally insured stock savings bank and,
as such, is subject to comprehensive regulation, examination and supervision by
the Office of Thrift Supervision ("OTS") and by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is principally engaged in the business of
attracting deposits from the public and using such deposits, together with
borrowings and other funds, to make loans secured by real estate, primarily
residential mortgage loans, and various types of consumer loans, primarily
credit card loans. The Bank's principal deposit market is the Washington, D.C.
metropolitan area.

CASH AND CASH EQUIVALENTS

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

The Bank is required to maintain reserves in accordance with Regulation D of the
Federal Reserve Act. The total average reserve balances maintained were $105.1,
$87.8 and $83.8 million during the years ended September 30, 1996, 1995 and
1994, respectively.

LOANS HELD FOR SALE

The Bank engages in mortgage banking activities. At September 30, 1996 and 1995,
loans held for sale are composed of single-family residential loans originated
or purchased for sale in the secondary market and are carried at aggregate cost
which is lower than aggregate market value. Single-family residential loans held
for sale will either be sold or will be exchanged for mortgage-backed securities
and then sold. Gains and losses on sales of whole loans held for sale are
determined using the specific identification method. See "Trading Securities."

LOANS HELD FOR SECURITIZATION AND SALE

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

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

                                      F-12

<PAGE>
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. Effective October 1, 1993, in connection with the
adoption of Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"),
the Bank classified all of its investment and mortgage-backed securities as
available-for-sale.

During fiscal 1995, the Bank transferred all of its investment securities and
mortgage-backed securities previously classified as available-for-sale to
held-to-maturity and, as a result, all investment securities and mortgage-backed
securities are classified as held-to-maturity at September 30, 1996 and 1995.
These securities were transferred at their fair value. Net unrealized holding
losses, net of the related income tax effect, amounting to $3.5 million as of
the date of the transfer, and $1.9 million as of September 30, 1996, continue to
be reported as a separate component of stockholders' equity and are being
amortized to income over the remaining lives of the securities using the
level-yield method.

Premiums and discounts on investment securities and mortgage-backed securities
are amortized or accreted using the level-yield method. Realized gains and
losses are determined using the specific identification method.

TRADING SECURITIES

As part of its mortgage banking activities, the Bank exchanges loans held for
sale for mortgage-backed securities and then sells the mortgage-backed
securities, which are classified as trading securities, to third party investors
in the month of issuance. Proceeds from sales of trading securities were $363.4,
$239.1 and $688.8 million during the years ended September 30, 1996, 1995 and
1994, respectively. The Bank realized a net gain of $1.2 million, a net loss of
$600,000 and a net gain of $1.7 million on the sales of trading securities for
the years ended September 30, 1996, 1995 and 1994, respectively. Gains and
losses on sales of trading securities are determined using the specific
identification method. There were no securities classified as trading securities
at September 30, 1996 and 1995.

LOAN ORIGINATION AND COMMITMENT FEES

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

CREDIT CARD FEES AND COSTS

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

                                      F-13

<PAGE>
IMPAIRED LOANS

A loan is considered impaired when, based on all current information and events,
it is probable that the Bank will be unable to collect all amounts due according
to the contractual terms of the agreement, including all scheduled principal and
interest payments. Such impaired loans are measured based on the present value
of expected future cash flows, discounted at the loan's effective interest rate
or, as a practical expedient, impairment may be measured based on the loan's
observable market price, or, if the loan is collateral-dependent, the fair value
of the collateral. When the measure of the impaired loan is less than the
recorded investment in the loan, the impairment is recorded through a valuation
allowance. Loans for which foreclosure is probable continue to be accounted for
as loans. Certain credit card loans for which customers have agreed to modified
payment terms are also classified as impaired loans.

Each impaired real estate loan is evaluated individually to determine the income
recognition policy. Generally, payments received are applied in accordance with
the contractual terms of the note or as a reduction of principal. Interest
income on impaired credit card loans is recognized using the current interest
rate of the loan and the accrual method. When loans become 90 days past due, all
accrued interest is reserved and the loan is placed on non-accrual status.
Interest income on non-accrual credit card loans is recognized when received.

At September 30, 1996, the Bank had two impaired real estate loans with an
aggregate book value of $1.3 million, before the related allowance for losses of
$364,000. At September 30, 1995, the Bank had one impaired real estate loan with
a book value of $698,000. At September 30, 1996, the Bank had impaired credit
card loans with a carrying value of $55.9 million, before the related allowance
for losses of $4.0 million. At September 30, 1995, the Bank had impaired credit
card loans with a carrying value of $36.7 million, before the related allowance
for losses of $3.7 million, respectively. The average recorded investment in
impaired credit card and real estate loans for the years ended September 30,
1996, 1995 and 1994 was $49.8, $33.5 and $39.0 million, respectively. The Bank
recognized interest income of $7.3, $5.3 and $2.4 million on its impaired loans
for the years ended September 30, 1996, 1995 and 1994, respectively.

ALLOWANCES FOR LOSSES

Management reviews the loan, real estate held for investment and real estate
held for sale portfolios to establish allowances for estimated losses. The
allowances for losses are reviewed periodically, and allowances are provided
after consideration of the borrower's financial condition and/or the estimated
value of collateral 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, past loss experience
and estimated future losses.

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

ACCRUED INTEREST RECEIVABLE ON LOANS

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

                                      F-14

<PAGE>
REAL ESTATE HELD FOR INVESTMENT OR SALE

REAL ESTATE HELD FOR INVESTMENT

At September 30, 1996 and 1995, 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 aggregate cost or net realizable value.
See Note 12.

REAL ESTATE HELD FOR SALE

Real estate held for sale consists of real estate acquired in settlement of
loans ("REO") and is carried at the lower of cost or fair value. Costs relating
to the development and improvement of property, including interest, are
capitalized, whereas costs relating to the holding of property are expensed.
Capitalized interest amounted to $3.5, $4.5 and $4.4 million for the years ended
September 30, 1996, 1995 and 1994, respectively.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost, net of accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method which allocates the cost of the applicable assets over their estimated
useful lives. Major improvements and alterations to office premises and
leaseholds are capitalized. Leasehold improvements are amortized over the
shorter of the terms of the respective leases (including renewal options that
are expected to be exercised) or 20 years. Maintenance and repairs are charged
to operating expenses as incurred.

COST IN EXCESS OF NET ASSETS ACQUIRED

Cost in excess of net assets acquired is stated net of accumulated amortization
and is being amortized using the straight-line method generally over a period of
15 years. Accumulated amortization was $35.2 and $33.3 million at September 30,
1996 and 1995, respectively.

MORTGAGE SERVICING RIGHTS

Effective July 1, 1995, the Bank adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights" ("SFAS 122"), an amendment of SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities." SFAS 122 requires that a mortgage banking
enterprise recognize, as separate assets, rights to service mortgage loans for
others, however those servicing rights are acquired. Under previous accounting
guidance, separate mortgage servicing assets were generally recognized only when
purchased. A mortgage banking enterprise that acquires mortgage servicing rights
through either purchase or origination of mortgage loans and sells or
securitizes those loans with servicing rights retained must allocate the total
cost of the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values.

Mortgage servicing rights, which are stated net of accumulated amortization, are
being amortized in proportion to the remaining net revenues estimated to be
generated by the underlying mortgage servicing rights. Amortization of these
assets amounted to $7.8, $2.2 and $6.1 million for the years ended September 30,
1996, 1995 and 1994, respectively. Accumulated amortization was $47.7 and $39.9
million at September 30, 1996 and 1995, respectively. During fiscal 1996, 1995
and 1994, the Bank capitalized $16.1, $16.3 and $0.9 million respectively,
related to the acquisition of mortgage servicing rights.

During fiscal 1996, the Bank sold $947,000 of rights to service mortgage loans
with principal balances of $59.7 million which were originated by the Bank in
connection with its mortgage banking activities. In fiscal 1995 and 1994, the
Bank sold the rights to service mortgage loans with principal balances of $148.1
and $383.9 million, respectively, which were originated by the Bank in
connection with its mortgage banking activities, and recognized gains of $1.4
and $5.8 million, respectively.

                                      F-15

<PAGE>
The Bank periodically evaluates its mortgage
servicing rights for impairment based upon fair value. To measure fair value of
its mortgage servicing rights, the Bank uses either quoted market prices or
discounted cash flow analyses using appropriate assumptions for servicing fee
income, servicing costs, prepayment rates and discount rates. Additionally, the
Bank stratifies its capitalized mortgage servicing rights for purposes of
evaluating impairment taking into consideration relevant risk characteristics
including loan type, note rate and date of acquisition. The aggregate fair value
of capitalized mortgage servicing rights at September 30, 1996 was $37.7
million. The Bank recorded valuation allowances on its mortgage servicing rights
of $3.1 million during fiscal 1996. No valuation allowances were recorded during
fiscal 1995.

EXCESS SPREAD ASSETS

When loans are sold with the servicing rights retained by the Bank, the net
present value of estimated future spread income in excess of normal servicing
income is recorded as an adjustment to the sales price of the loans. Estimated
future losses are deducted in the computation of such excess spread income. The
resulting assets are amortized using the level-yield ("interest") method over
the estimated lives of the underlying loans. Amortization of these assets
amounted to $17.8, $14.5 and $13.5 million for the years ended September 30,
1996, 1995 and 1994, respectively. Accumulated amortization was $98.3 and $80.5
million at September 30, 1996 and 1995, respectively. Excess spread assets
capitalized in fiscal 1996, 1995 and 1994 of $34.7, $15.0 and $11.1 million,
respectively, were the result of the excess spread retained upon the
securitization and sale of home equity credit line, automobile and home loan
receivables. See Note 15.

Management periodically evaluates the carrying value of excess spread assets
taking into consideration current portfolio factors such as prepayment rates.
The Bank's analyses are performed on a discounted cashflow basis. Any
adjustments to the carrying value of such assets as a result of this evaluation
are recorded as a valuation adjustment.

INTEREST RATE CAP AGREEMENTS

Premiums paid for interest rate cap agreements are included in other assets in
the Consolidated Balance Sheets and are amortized to expense over the terms of
the interest rate caps on a straight-line basis. Funds payable to the Bank are
recognized as income in the month such funds are earned. At September 30, 1996
and 1995, unamortized premiums amounted to $6.2 and $10.0 million, respectively.
See Note 27.

ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED

SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"), was issued in June 1996. SFAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. Those standards are based
on consistent application of a "financial-components approach" that focuses on
control. Under that approach, upon the 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 125 supersedes SFAS No. 76, "Extinguishment of Debt," and SFAS No. 77,
"Reporting by Transferors for Transfers of Receivables with Recourse." It amends
SFAS 115, to clarify that a debt security may not be classified as
held-to-maturity if it can be prepaid or otherwise settled in such a way that
the holder of the security would not recover substantially all of its recorded
investment. SFAS 125 amends and extends to all servicing assets and liabilities
the accounting standards for mortgage servicing rights now in SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities," and supersedes SFAS 122.

SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. The impact of
the adoption of SFAS 125 on the Trust's financial statements has not yet been
determined.

                                      F-16

<PAGE>
1.  LIQUIDITY AND CAPITAL RESOURCES - REAL ESTATE TRUST

Historically, the Real Estate Trust's total cash requirements have exceeded the
cash generated by its operations. As described below, this condition persisted
in 1996 and is expected to continue for the foreseeable future. The cash flow
generated by the Real Estate Trust's income-producing properties has been
sufficient to meet its cash needs other than the repayment of principal on
outstanding debt, the payment of interest on the Senior Secured Notes (as
defined below), 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 (including sale of Unsecured Notes),
refinancings of maturing mortgage debt, asset sales and tax sharing payments
from the Bank.

The Real Estate Trust's ability to meet its liquidity needs will depend in
significant part on its receipts of tax sharing payments and dividends from the
Bank. The availability and amount of dividends and tax sharing payments in
future periods, is dependent upon, among other things, the Bank's operating
performance, regulatory restrictions on such payments and (in the case of tax
sharing payments) the continued consolidation of the Bank and the Trust for
federal income tax purposes.

Management anticipates that the Trust will continue to file a consolidated
federal income tax return and that the Bank will operate in a profitable manner
enabling it to generate tax sharing payments. Management also anticipates that
such tax sharing payments will be approved by the OTS in amounts sufficient to
enable the Real Estate Trust to meet its liquidity needs. Nonetheless, should
tax sharing payments not be paid during the next twelve months, management
estimates that the Real Estate Trust has adequate liquidity to fund its cash
flow requirements.

On March 30, 1994 the Real Estate Trust issued $175.0 million principal amount
of 11 5/8% Senior Secured Notes due 2002 (the "Senior Secured Notes"). After
paying offering expenses of $8.9 million, third-party mortgage indebtedness of
$74.1 million, and affiliate indebtedness of $8.9 million, the Real Estate Trust
retained $83.1 million of the net proceeds of the offering for application to
general corporate purposes, including a loan to an affiliate of $15.0 million.
Approximately $25.8 million was deposited with the Trustee for the Senior
Secured Notes to satisfy one of the initial collateral requirements. See Note 4.
Concurrently with the application of the net proceeds of the offering to repay
third-party mortgage indebtedness, the terms of certain of the mortgage loans
repaid in part were modified to waive deferred interest, reduce interest rates
and extend maturities. After the application of such net proceeds and the
modification of such loans, the final maturity of loans with total balances of
$111.1 million was 12 years and the final maturity of a loan with a balance of
$15.1 million was 15 years.

During fiscal 1994, 1995 and 1996, the Trust purchased either in the open market
or through dividend reinvestment 1,445,132 shares of common stock of Saul
Centers, Inc. (representing 12.0% of such company's outstanding common stock).
All of these shares have been deposited with the Trustee for the Senior Secured
Notes to satisfy in part the collateral requirements for those securities,
thereby permitting release to the Trust of a portion of the cash on deposit with
the Trustee.

The Senior Secured Notes are secured, general obligations of the Trust ranking
pari passu with all other unsubordinated obligations of the Trust, including the
Unsecured Notes. The Senior Secured Notes are secured by a first-priority
perfected security interest in the Trust's 80% interest in the Bank. The Senior
Secured Note Indenture contains convenants that, among other things, restrict
the ability of the Trust and/or its subsidiaries (excluding, in most cases, the
Bank and the Bank's subsidiaries) to incur additional indebtedness, make loans
to affiliates, make investments, sell assets, pay dividends or make
distributions to holders of the Trust's capital stock.

The Real Estate Trust's current program of public Unsecured Note sales was
initiated in the 1970's as a vehicle for supplementing other external funding
sources. The Real Estate Trust is currently selling Unsecured Notes principally
to pay outstanding Unsecured Notes as they mature. In paying maturing Unsecured
Notes with proceeds of new Unsecured Note sales, the Real Estate Trust
effectively is refinancing its outstanding Unsecured Notes with similar new
unsecured debt. To the degree that the Real Estate Trust does not sell new
Unsecured Notes in an amount sufficient to finance completely the scheduled
repayment of outstanding Unsecured Notes as they mature, it will be required to
finance such repayments from other sources of funds.

                                      F-17

<PAGE>
The Bank has agreed not to make any additional tax sharing payments to the Real
Estate Trust without the prior approval of the OTS. In June 1993, after
receiving approval of the OTS, the Bank made a $5.0 million payment to the Real
Estate Trust pursuant to the tax sharing agreement between the Bank and the Real
Estate Trust. OTS approval of this payment was conditioned on a pledge by or on
behalf of the Real Estate Trust of certain assets to secure certain of its
obligations under the Tax Sharing Agreement. Following execution of the pledge,
the OTS approved, and the Bank made tax sharing payments to the Real Estate
Trust of $9.6, $20.5 and $25.0 million during fiscal 1994, 1995 and 1996,
respectively.

The Real Estate Trust received no cash dividends from the Bank during fiscal
1994 or fiscal 1995. In fiscal 1996 the Real Estate Trust received $6.8 million
in cash dividends from the Bank. Receipt of cash dividends in the future will
depend on the Bank's earnings and regulatory capital levels, among other
factors. The Bank's written agreement with the OTS was amended in October 1993
to eliminate the requirement that the Bank obtain the written approval of the
OTS before declaring or paying any dividends on its common stock. Nonetheless,
the OTS must be notified regarding dividends declared or paid.

As the owner, directly and through a wholly owned subsidiary, of a 21.5% limited
partnership interest in Saul Holdings Limited Partnership, the Real Estate Trust
shares in cash distributions from operations and from capital transactions
involving the sale of properties. See Note 2. The partnership agreement provides
for quarterly cash distributions to the partners out of net cash flow. During
fiscal 1994, 1995 and 1996, the Real Estate Trust received distributions in the
amount of $4.6, $5.5 and $5.5 million, respectively, from Saul Holdings Limited
Partnership.

In fiscal 1995, the Real Estate Trust established a $15.0 million secured
revolving credit line to provide it with additional liquidity. In fiscal 1996,
the Real Estate Trust established a second secured revolving credit line for
$8.0 million. See Note 4.

While the Real Estate Trust's ability to satisfy its liquidity requirements is
contingent on future events, which include the sale of new Unsecured Notes in
amounts sufficient to finance most of the scheduled maturities of outstanding
Unsecured Notes and the Bank's ability to pay tax sharing payments and
dividends, the Real Estate Trust believes it will be able to consummate the
transactions described above as well as explore other financing opportunities in
order to raise sufficient proceeds to fund its liquidity requirements.

                                      F-18

<PAGE>
2.  SAUL HOLDINGS LIMITED PARTNERSHIP - REAL ESTATE TRUST

In late August 1993, the Real Estate Trust entered into a series of transactions
undertaken in connection with an initial public offering of common stock of a
newly organized corporation, Saul Centers, Inc. ("Saul Centers"). The Real
Estate Trust transferred its 22 shopping centers and one of its office
properties together with the debt associated with such properties to a newly
formed partnership, Saul Holdings Limited Partnership ("Saul Holdings"), in
which the Real Estate Trust owns (directly or through one of its wholly owned
subsidiaries) a 21.5% interest, other entities affiliated with the Real Estate
Trust own a 5.5% interest, and Saul Centers owns a 73.0% interest. B. Francis
Saul II, Chairman of the Board of Trustees of the Trust, is also Chairman of the
Board of Directors and Chief Executive Officer of Saul Centers, which is the
sole general partner of Saul Holdings. The Real Estate Trust has pledged 54% of
its interest in Saul Holdings to the Bank related to payments under the Tax
Sharing Agreement.

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, 1996, 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 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.

                                      F-19

<PAGE>
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, 1996 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, 1996, 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:
  Distributions in excess of allocated net income       $     (4,221)

Saul Centers:
  Acquisition of common shares                                22,916
  Distributions in excess of allocated net income             (2,258)
                                                        -------------

Total                                                   $     16,437
                                                        =============

The $16.4 million balance is included in "Other assets" in the financial
statements.

As of September 30, 1996, the Real Estate Trust, through its partnership
interest in Saul Holdings and its ownership of 1,445,132 common shares of Saul
Centers, effectively owns 30.0% of the consolidated entities of Saul Centers.

The Condensed Consolidated Balance Sheet at September 30, 1996 and 1995, and the
Condensed Consolidated Statements of Operations for the twelve-month periods
ended September 30, 1996, 1995 and 1994 of Saul Centers follow.

                                      F-20

<PAGE>
<TABLE>
SAUL CENTERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

                                                                                                  September 30,
                                                                                     -----------------------------------------
(IN THOUSANDS)                                                                              1996                 1995
                                                                                     -------------------- --------------------
<S>                                                                                   <C>                  <C>               
ASSETS
    Real estate investments                                                           $          335,137   $          315,221
    Accumulated depreciation                                                                     (99,349)             (89,871)
    Other assets                                                                                  33,986               44,181
                                                                                     -------------------- --------------------
TOTAL ASSETS                                                                          $          269,774   $          269,531
                                                                                     ==================== ====================

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
    Notes payable                                                                     $          276,981   $          268,100
    Other liabilities                                                                             15,583               13,882
                                                                                     -------------------- --------------------
    Total liabilities                                                                            292,564              281,982
    Total stockholders' equity (deficit)                                                         (22,790)             (12,451)
                                                                                     -------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                  $          269,774   $          269,531
                                                                                     ==================== ====================
</TABLE>

<TABLE>
SAUL CENTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

                                                                          For the Twelve Months Ended September 30
                                                                --------------------------------------------------------------
(IN THOUSANDS)                                                         1996                 1995                 1994
                                                                -------------------- -------------------- --------------------
<S>                                                              <C>                  <C>                  <C>               
REVENUE
    Base rent                                                    $           49,646   $           46,606   $           42,757
    Other revenue                                                            13,727               14,173               13,192
                                                                -------------------- -------------------- --------------------
TOTAL REVENUE                                                                63,373               60,779               55,949
                                                                -------------------- -------------------- --------------------

EXPENSES
    Operating expenses                                                       14,407               13,703               14,496
    Interest expense                                                         18,200               17,271               12,213
    Amortization of deferred debt expense                                     2,921                2,254                2,599
    Depreciation and amortization                                            10,978                9,996                9,101
    General and administrative                                                3,071                2,967                2,789
                                                                -------------------- -------------------- --------------------
TOTAL EXPENSES                                                               49,577               46,191               41,198
                                                                -------------------- -------------------- --------------------

Operating income before extraordinary
    item and minority interest                                               13,796               14,588               14,751
Extraordinary item - loss on early
    extinguishment of debt                                                     (998)                  --               (3,341)
                                                                -------------------- -------------------- --------------------
Net income before minority interest                                          12,798               14,588               11,410
Minority interest                                                            (6,852)              (6,855)              (3,524)
                                                                -------------------- -------------------- --------------------
NET INCOME                                                       $            5,946   $            7,733   $            7,886
                                                                ==================== ==================== ====================
</TABLE>

                                      F-21

<PAGE>
3.  INVESTMENT PROPERTIES - REAL ESTATE TRUST

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

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

<S>                               <C>     <C>              <C>              <C>             <C>             <C>           
September 30, 1996:
Income-producing properties
Hotels                                 9   $        9,662  $      111,755   $           --  $     121,417   $       75,654
Commercial                             7            4,469         102,027               --        106,496           77,888
Other                                  7            3,575             991              149          4,715               --
                                  ------- ---------------- --------------- ---------------- --------------- ----------------
                                      23   $       17,706  $      214,773   $          149  $     232,628   $      153,542
                                  ======= ================ =============== ================ =============== ================

Land Parcels                           9   $       41,580  $           --   $           --  $      41,580   $       23,662
                                  ======= ================ =============== ================ =============== ================

September 30, 1995:
Income-producing properties
Hotels                                10   $        9,885  $      112,764   $           --  $      122,649  $       79,745
Commercial                             8            5,670         105,976               --         111,646          81,871
Other                                  7            3,575             908              149           4,632             308
                                  ------- ---------------- --------------- ---------------- --------------- ----------------
                                      25   $       19,130  $      219,648   $          149  $      238,927  $      161,924
                                  ======= ================ =============== ================ =============== ================

Land Parcels                          10   $       38,548  $           --   $           --  $       38,458   $      26,202
                                  ======= ================ =============== ================ =============== ================

</TABLE>

                                      F-22

<PAGE>
4.  DEBT - REAL ESTATE TRUST

Mortgage notes payable are secured by various income-producing properties and
land parcels. Almost all mortgage notes are payable in monthly installments,
have maturity dates ranging to 2009 and accrue interest at annual rates from
7.6% to 10.0%. Certain mortgages contain a number of restrictions, including
cross default provisions.

The Real Estate Trust obtained a $5.0 million secured loan from an affiliate in
August 1992. Interest accrued at prime plus 1.5%. The loan was repaid during
fiscal 1994.

In December 1992, the Trust completed the sale to an institutional investor, for
$25 million, of 100% of the preferred stock of a newly organized Trust
subsidiary to which the Trust contributed certain real estate and other assets.
The assets contributed included six shopping centers and one office building,
several parcels of unencumbered raw land, and a capital note in the amount of
$58 million secured by a junior lien on 30% of the Bank's stock. The net
proceeds of the transaction were lent by the subsidiary to the Trust in exchange
for notes of the Trust secured by specified real estate properties and other
assets of the Trust (the "Trust Notes"). Such proceeds were applied by the Trust
for its general corporate purposes, with approximately $2.3 million of such
proceeds being reserved for capital improvements to certain of the real estate
properties contributed to the new subsidiary. In late August 1993, the Real
Estate Trust was relieved of approximately $196 million in mortgage debt and
deferred interest in connection with the formation of Saul Holdings (See Note
2). As a part of this transaction, the preferred stock issued to the
institutional investor was redeemed in exchange for the Trust Notes and the
pledge of all of the stock of the Trust subsidiary, together with $60 million,
at their then-market value, of the Real Estate Trust's partnership interests in
Saul Holdings. During fiscal 1994, the Trust Notes were repaid and the
collateral was released.

On March 30, 1994, the Real Estate Trust issued $175.0 million aggregate
principal amount of its Senior Secured Notes. The Senior Secured Notes are
general obligations of the Real Estate Trust ranking pari passu with all other
unsubordinated obligations of the Trust and are secured by a first priority
perfected security interest in 80% (8,000 shares) of the issued and outstanding
common stock of the Bank and by certain other assets of the Trust as described
herein. After paying offering expenses of $8.9 million, third-party mortgage
indebtedness of $74.1 million, and affiliate indebtedness of $8.9 million, the
Real Estate Trust retained $83.1 million of the net proceeds of the offering for
application to general corporate purposes, including a loan to an affiliate of
$15.0 million. Of the remaining amount, approximately $25.8 million was
deposited with the Trustee for the Senior Secured Notes to satisfy one of the
initial collateral requirements with respect to such securities. This collateral
requirement, which will remain in effect as long as any Senior Secured Notes are
outstanding, will be recalculated each calendar quarter based on the estimated
amount of one year's interest payments on then outstanding Senior Secured Notes
and Unsecured Notes. Concurrently with the application of the net proceeds of
the offering to repay third-party mortgage indebtedness, the terms of certain of
the mortgage loans repaid in part were modified to waive deferred interest,
reduce interest rates and extend maturities. After the application of such net
proceeds and the modification of such loans, the final maturity of loans with
total balances of $111.1 million was 12 years and the final maturity of a loan
with a balance of $15.1 million was 15 years. The Real Estate Trust has
deposited all of its 1,445,132 shares of common stock of Saul Centers (See Note
1) with the Trustee for the Senior Secured Notes to satisfy in part the
collateral requirements for those securities. The Senior Secured Notes may be
redeemed in whole or in part at any time on or after April 1, 1998, subject to,
among other things, prepayment premiums.

In the fourth quarter of fiscal 1995, the Real Estate Trust established a $15.0
million secured revolving credit line with a bank. This facility is for a
two-year period and may be extended for one or more additional one-year terms.
Interest is computed by reference to a floating rate index. As collateral for
the facility, the Real Estate Trust has pledged 30.5% of its interest in Saul
Holdings. Borrowings under the facility at year end totaled $2.5 million and
unrestricted availability amounted to $4.6 million.

In the first quarter of fiscal 1996, the Real Estate Trust established an $8.0
million secured revolving credit line with a bank. This facility is for a
one-year period, after which the loan amount amortizes over a two-year period.
Interest is computed by reference to a floating index. At September 30, 1996,
availability under this facility was entirely restricted pending the delivery of
collateral by the Real Estate Trust.

                                      F-23

<PAGE>
Notes payable - unsecured includes notes which have been sold by the Real Estate
Trust directly to investors at varying interest rates with maturities of one to
ten years. These notes do not contain any provisions for conversion, sinking
fund or amortization. Notes sold after November 14, 1986, are subject to a
provision permitting the Real Estate Trust to call them prior to maturity. The
weighted average interest rates at September 30, 1996 and 1995 were 10.4% and
10.5%, respectively. During fiscal 1996 and 1995, the Real Estate Trust sold
notes amounting to approximately $7.4 and $8.0 million, respectively.

The maturity schedule for the Real Estate Trust's outstanding debt at September
30, 1996 for the fiscal years commencing October 1, 1996 is set forth in the
following table.

                             DEBT MATURITY SCHEDULE
                                 (In thousands)
 ------------------------------------------------------------------------------
                                   Notes            Notes
   Fiscal        Mortgage        Payable -        Payable -
    Year           Notes          Secured         Unsecured         Total
-------------- --------------   -------------   --------------  --------------
    1997        $     17,994     $     2,500     $      5,751    $     26,245
    1998               7,413              --            7,413          14,826
    1999              17,076              --           15,986          33,062
    2000              18,856              --            6,080          24,936
    2001               5,075              --            3,822           8,897
Thereafter           106,931         175,000            3,315         285,246
               --------------   -------------   --------------  --------------
    Total        $   173,345     $   177,500     $     42,367     $   393,212
------------------------------------------------------------------------------

5.  LONG-TERM LEASE OBLIGATIONS - REAL ESTATE TRUST

The Real Estate Trust has one noncancelable long-term lease which provides for
periodic adjustments of the basic annual rent. This lease will expire in 2061.
The minimum future rental commitments under this lease amount to $101,000 per
year for the next five fiscal years; thereafter, the total commitment is $5.9
million.

The Real Estate Trust paid minimum ground rent expense of $101,000, $101,000 and
$102,000 in fiscal 1996, 1995 and 1994, respectively. In addition to the minimum
ground rent payments, real estate taxes on the land are an obligation of the
Real Estate Trust.

6.  INCOME FROM COMMERCIAL PROPERTIES - REAL ESTATE TRUST

Income from commercial properties consists of minimum rent arising from
noncancelable commercial leases. Minimum rent for fiscal years 1996, 1995, and
1994 amounted to $16.8, $17.9 and $15.9 million, respectively. Future minimum
rentals as of September 30, 1996 under noncancelable leases are as follows:

             Fiscal
              Year                  (In thousands)
          ---------------------------------------
              1997                  $     16,945
              1998                        14,453
              1999                        11,272
              2000                         8,098
              2001                         6,002
          Thereafter                      11,417
          ---------------------------------------

                                      F-24

<PAGE>
7.  TRANSACTIONS WITH RELATED PARTIES - REAL ESTATE TRUST

TRANSACTIONS WITH B. F. SAUL COMPANY AND ITS SUBSIDIARIES

The Real Estate Trust is managed by B. F. Saul Advisory Company (the Advisor), a
wholly-owned subsidiary of B. F. Saul Company ("Saul Co."). All of the Real
Estate Trust officers and three Trustees of the Trust are also officers and/or
directors of Saul Co. The Advisor is paid a fixed monthly fee which is subject
to annual review by the Trustees. The monthly fee was $250,000 during the period
October 1993 through March 1994, $292,000 during the period April 1994 through
September 1995, $301,000 during the period October 1995 through March 1996, and
$306,000 during the period April 1996 through September 1996. The advisory
contract has been extended until September 30, 1997, 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 Franklin Property Company ("Franklin"), 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 Franklin amounted to $4.8, $4.8 and $4.5 million in fiscal 1996,
1995 and 1994, respectively.

The Real Estate Trust reimburses the Advisor and Franklin for costs and expenses
incurred in connection with the acquisition and development of real property on
behalf of the Real Estate Trust, in-house legal expenses, and for all travel
expenses incurred in connection with the affairs of the Real Estate Trust.

The Real Estate Trust pays the Advisor fees equal to 1% of the principal amount
of the unsecured notes as they are issued to offset its costs of administering
the program. These payments amounted to $74,000, $80,000 and $157,000 in fiscal
1996, 1995 and 1994, respectively.

A subsidiary of Saul Co. is a general insurance agency which receives
commissions and countersignature fees in connection with the Real Estate Trust's
insurance program. Such commissions and fees amounted to approximately $152,000,
$158,000 and $157,000 in fiscal 1996, 1995 and 1994, respectively.

The Real Estate Trust had a working capital loan from the Saul Co. of
approximately $3.3 million as of September 30, 1993, bearing interest of 1/2
percent over prime per annum. The funds were repaid in March 1994.
Interest paid on this loan in fiscal 1994 amounted to $139,000.

In April 1994 the Real Estate Trust made an unsecured loan to the Saul Company
of $15.0 million bearing interest at 1/2 percent over prime and due on demand.
In fiscal 1995 the loan balance was reduced to $12.7 million. In fiscal 1996,
the Real Estate Trust made new loans aggregating $3.5 million to the Saul
Company. Interest accrued on these loans in fiscal 1996, 1995 and 1994 amounted
to $1,369,000, $1,180,000 and $565,000, respectively. At September 30, 1996, the
total principal due the Real Estate Trust was $16.2 million.

TRANSACTIONS WITH OTHER AFFILIATES

The Real Estate Trust obtained a $5.0 million secured loan from The Klingle
Corporation in August 1992. It accrued interest at a rate of prime plus 1.5% and
was repaid during fiscal 1994. The Real Estate Trust incurred interest expense
of $193,000 during fiscal 1994.

                                      F-25

<PAGE>
REMUNERATION OF TRUSTEES AND OFFICERS

For fiscal years 1996, 1995, and 1994, the Real Estate Trust paid the Trustees
$79,000, $81,000 and $76,000, respectively, for their services. No compensation
was paid to the officers of the Real Estate Trust for acting as such; however,
one Trustee was paid by the Bank for his services as Chairman and Chief
Executive Officer of the Bank, and two received payments for their services as
directors of the Bank. Three of the Trustees and all of the officers of the Real
Estate Trust receive compensation from Saul Co. as directors and/or officers.

LEGAL SERVICES

The law firm in which one of the Trustees is a partner received $0.1, $0.8 and
$1.3 million, excluding expense reimbursements, during fiscal 1996, 1995, and
1994, respectively, for legal services to the Real Estate Trust and its
wholly-owned subsidiaries.


SALE OF AVENEL BUSINESS PARK-PHASE I

In 1984, the Real Estate Trust sold Avenel Business Park-Phase I to an
affiliate, Avenel Associates Limited Partnership (the "Partnership"), for $8.9
million based on an independent appraisal. The managing general partner of the
Partnership was a subsidiary of Saul Co., and a subsidiary of the Bank owned a
45% interest in the Partnership. The Real Estate Trust received the sales price
for the property in the form of cash, a purchase money note in the amount of
$1,735,000 and the assumption of a first trust loan. The net gain realized upon
the sale was $3,023,000, after deducting a $781,000 discount of the purchase
money note due to its below market interest rate. The Real Estate Trust has
continued to defer recognition of this gain pending a sale of the property to an
unaffiliated entity.

In late August 1993, the Partnership sold Avenel Business Park-Phase I to Saul
Holdings and redeemed the purchase money note held by the Real Estate Trust. The
gain has continued to be deferred in accordance with the accounting policy for
gain recognition described in Note 2.


SAUL HOLDINGS LIMITED PARTNERSHIP

The Real Estate Trust accounts for this investment under the equity method. The
Real Estate Trust's share of earnings for fiscal 1996, 1995 and 1994 were $2.7,
$3.1 and $2.4 million, respectively. See Note 2.

OTHER TRANSACTIONS

The Real Estate Trust leases space to the Bank and Franklin at one of its
income-producing properties. Minimum rents and recoveries paid by these
affiliates amounted to approximately $143,000, $55,000 and $51,000, in fiscal
1996, 1995 and 1994, respectively.

                                      F-26

<PAGE>
8. LOANS HELD FOR SECURITIZATION AND SALE - THE BANK

Loans held for securitization and sale are composed of the following:
<TABLE>

(In thousands)                                                                     September 30,
---------------------------------------------------------------------   ------------------------------------
                                                                              1996               1995
                                                                        -----------------  -----------------
<S>                                                                      <C>                <C>            
Credit card receivables                                                  $       225,000    $       300,000
Automobile loan receivables                                                      225,000            200,000
                                                                        -----------------  -----------------
Total                                                                    $       450,000    $       500,000
                                                                        =================  =================
</TABLE>

9. INVESTMENT SECURITIES - THE BANK

At September 30, 1996 and 1995, all investment securities are classified as
held-to-maturity. Gross unrealized holding gains and losses on the Bank's
investment securities at September 30, 1996 and 1995 are as follows:
<TABLE>
                                                                             Gross              Gross
                                                                           Unrealized         Unrealized          Aggregate
                                                        Amortized           Holding            Holding              Fair
(In thousands)                                            Cost               Gains               Losses             Value
--------------------------------------------------   ----------------   -----------------  -----------------   ----------------

<S>                                                  <C>                 <C>                <C>                 <C>           
September 30, 1996
U.S. Government securities
  Maturing within one year                           $         4,822     $             3    $            --     $        4,825
  Maturing after one year,
     but within five years                                     4,996                  --                 (1)             4,995
                                                     ----------------   -----------------  -----------------   ----------------
        Total U.S. Government securities             $         9,818     $             3    $            (1)    $        9,820
                                                     ================   =================  =================   ================
</TABLE>
<TABLE>

                                                                             Gross              Gross
                                                                           Unrealized         Unrealized          Aggregate
                                                        Amortized           Holding            Holding              Fair
(In thousands)                                            Cost               Gains               Losses             Value
--------------------------------------------------   ----------------   -----------------  -----------------   ----------------

<S>                                                  <C>                 <C>                <C>                 <C>           
September 30, 1995
U.S. Government securities
  Maturing within one year                           $         4,370     $             1    $            --     $        4,371
                                                     ================   =================  =================   ================
</TABLE>

There were no sales of investment securities during the years ended September
30, 1996, 1995 and 1994.

                                      F-27

<PAGE>
10. MORTGAGE-BACKED SECURITIES - THE BANK

At September 30, 1996 and 1995, all mortgage-backed securities are classified as
held-to-maturity. Gross unrealized holding gains and losses on the Bank's
mortgage-backed securities at September 30, 1996 and 1995 are as follows:

<TABLE>
                                                                             Gross              Gross
                                                                           Unrealized         Unrealized          Aggregate
                                                        Amortized           Holding            Holding              Fair
(In thousands)                                            Cost               Gains               Losses             Value
--------------------------------------------------   ----------------   -----------------  -----------------   ----------------
<S>                                                  <C>                 <C>                <C>                 <C>           
September 30, 1996
FNMA                                                 $       432,527     $         2,253    $          (162)    $      434,618
FHLMC                                                        792,752               1,266             (2,802)           791,216
Private label, AA-rated                                       81,138                 866                 --             82,004
                                                     ----------------   -----------------  -----------------   ----------------
  Total                                              $     1,306,417     $         4,385    $        (2,964)    $    1,307,838
                                                     ================   =================  =================   ================
</TABLE>

<TABLE>
                                                                             Gross              Gross
                                                                           Unrealized         Unrealized          Aggregate
                                                        Amortized           Holding            Holding              Fair
(In thousands)                                            Cost               Gains               Losses             Value
--------------------------------------------------   ----------------   -----------------  -----------------   ----------------
<S>                                                  <C>                 <C>                <C>                 <C>           
September 30, 1995
FNMA                                                 $        27,182     $            50    $           (13)    $       27,219
FHLMC                                                        718,640                 833             (1,689)           717,784
Private label, AA-rated                                      134,386                 364                (33)           134,717
                                                     ----------------   -----------------  -----------------   ----------------
  Total                                              $       880,208     $         1,247    $        (1,735)    $      879,720
                                                     ================   =================  =================   ================
</TABLE>

There were no sales of mortgage-backed securities from the available-for-sale or
the held-to-maturity portfolios during the years ended September 30, 1996, 1995
and 1994. See Summary of Significant Accounting Policies - The Bank - "Trading
Securities."

Accrued interest receivable on mortgage-backed securities totaled $8.1 and $5.7
million at September 30, 1996 and 1995, respectively, and is included in other
assets in the Consolidated Balance Sheets.

At September 30, 1996, certain mortgage-backed securities were pledged as
collateral for securities sold under repurchase agreements, other short-term
borrowings and other recourse arrangements. See Notes 19 and 27. Other
mortgage-backed securities with a book value of $22.9 million were pledged as
collateral primarily for credit card settlement obligations.

                                      F-28

<PAGE>
11. LOANS RECEIVABLE - THE BANK

Loans receivable is composed of the following:
<TABLE>
                                                                                                      September 30,
                                                                                           ------------------------------------
(In thousands)                                                                                   1996               1995
---------------------------------------------------------------------                      -----------------   ----------------

<S>                                                                                         <C>                 <C>           
Single-family residential                                                                   $     1,525,322     $    1,322,772
Home equity                                                                                          32,052             29,024
Commercial and multifamily                                                                           78,951             86,007
Real estate construction                                                                             41,561             46,848
Ground                                                                                               44,723              6,892
Credit card                                                                                         893,271            712,548
Automobile                                                                                           72,560             39,217
Overdraft lines of credit                                                                            21,296             15,049
Home improvement and other consumer                                                                94,316            112,705
Other                                                                                               102,030             31,975
                                                                                           -----------------   ----------------
                                                                                                  2,906,082          2,403,037
                                                                                           -----------------   ----------------
Less:
  Undisbursed portion of loans                                                                       50,811             28,147
  Unearned discounts                                                                                    836              1,101
  Net deferred loan origination costs                                                               (14,055)           (13,929)
  Reserve for losses on loans                                                                        95,523             60,496
                                                                                           -----------------   ----------------
                                                                                                    133,115             75,815
                                                                                           -----------------   ----------------
    Total                                                                                   $     2,772,967     $    2,327,222
                                                                                           =================   ================
</TABLE>

The Bank serviced loans owned by others amounting to $8,010.9 and $5,250.8
million at September 30, 1996 and 1995, respectively.

Accrued interest receivable on loans totaled $33.2 and $21.9 million at
September 30, 1996 and 1995, respectively, and is included in other assets in
the Consolidated Balance Sheets.

                                      F-29

<PAGE>
12. REAL ESTATE HELD FOR INVESTMENT OR SALE - THE BANK

Real estate held for investment or sale is composed of the following:
<TABLE>
                                                                                                      September 30,
                                                                                           ------------------------------------
(In thousands)                                                                                   1996               1995
---------------------------------------------------------------------                      -----------------   ----------------
<S>                                                                                         <C>                 <C>           
Real estate held for investment                                                             $         3,819     $        3,819
                                                                                           -----------------   ----------------

Real estate held for sale                                                                           246,380            354,277
                                                                                           -----------------   ----------------

Less:
  Reserve for losses on real estate held
     for investment                                                                                     191                193
  Reserve for losses on real estate held for sale                                                   126,519            135,043
                                                                                           -----------------   ----------------
                                                                                                    126,710            135,236
                                                                                           -----------------   ----------------

    Total real estate held for investment or sale                                           $       123,489     $      222,860
                                                                                           =================   ================
</TABLE>

Earnings (loss) on real estate held for investment or sale is composed of the
following:
<TABLE>

                                                                                            September 30,
                                                                        -------------------------------------------------------
(In thousands)                                                                1996               1995               1994
---------------------------------------------------------------------   -----------------  -----------------   ----------------

<S>                                                                      <C>                <C>                 <C>            
Provision for losses                                                     $       (26,341)   $       (26,321)    $      (14,052)
Net income (loss) from operating properties                                         (350)             1,890              3,521
Equity earnings from investments in
  limited partnerships                                                                --              4,470                391
Net gain on sales                                                                  2,278             14,412             10,975
                                                                        -----------------  -----------------   ----------------
  Total                                                                  $       (24,413)   $        (5,549)    $          835
                                                                        =================  =================   ================
</TABLE>

During fiscal 1995, the Bank sold two residential apartment buildings which were
previously classified as real estate held for investment and had an aggregate
net book value of $25.3 million and recognized a net gain of $5.3 million. Also
during fiscal 1995, an office building, previously classified as real estate
held for investment, which had a book value of $24.5 million at September 30,
1995, was transferred to property and equipment and the Bank began to occupy a
portion of the building during fiscal 1996 in order to satisfy its need for
additional office space. In addition, during fiscal 1995, the investment in real
estate venture was transferred to REO and the Bank sold its limited partnership
interest in an office building at an amount that exceeded its net carrying
value.

During fiscal 1994, the Bank sold its interests in three limited partnerships to
other partners at an aggregate amount that exceeded the net carrying values of
these assets.

                                      F-30

<PAGE>
13. ALLOWANCES FOR LOSSES - THE BANK

Activity in the allowances for losses on loans receivable and real estate held
for investment or sale is summarized as follows:
<TABLE>
                                                                                                                 Real Estate
                                                                                                                  Held for
                                                                                                Loans            Investment
(In thousands)                                                                                Receivable           or Sale
---------------------------------------------------------------------                      -----------------   ----------------
<S>                                                                                        <C>                 <C>             
Balance, September 30, 1993                                                                $         68,040    $       111,644
  Provision for losses                                                                               29,222             14,052
  Charge-offs                                                                                       (61,039)            (6,723)
  Recoveries                                                                                         13,982                 --
                                                                                           -----------------   ----------------
Balance, September 30, 1994                                                                          50,205            118,973
  Provision for losses                                                                               54,979             26,321
  Charge-offs                                                                                       (56,577)           (10,058)
  Recoveries                                                                                         11,889                 --
                                                                                           -----------------   ----------------
Balance, September 30, 1995                                                                          60,496            135,236
  Provision for losses                                                                              115,740             26,341
  Charge-offs                                                                                       (92,047)           (34,867)
  Recoveries                                                                                         11,334                 --
                                                                                           -----------------   ----------------
Balance, September 30, 1996                                                                $         95,523    $       126,710
                                                                                           =================   ================
</TABLE>

The allowances for losses at September 30, 1996 are based on management's
estimates of the amount of allowances required to reflect the risks in the loan
and real estate portfolios based on circumstances and conditions known at the
time. As adjustments to the allowances become necessary, provisions for losses
are reported in operations in the periods they are determined to be necessary.

14. NON-PERFORMING ASSETS - THE BANK

Non-performing assets are composed of the following at September 30, 1996:
<TABLE>

                                                                        Non-accrual              Real
(Dollars in thousands)                                                       Loans            Estate (1)            Total
---------------------------------------------------------------------   -----------------  -----------------   ----------------
<S>                                                                      <C>                <C>                 <C>           
Single-family residential                                                $         8,200    $         2,277     $       10,477
Residential land, development and construction                                        --            100,275            100,275
Commercial land                                                                       --             17,309             17,309
                                                                        -----------------  -----------------   ----------------
  Total real estate assets                                                         8,200            119,861            128,061
Credit card                                                                       25,350                 --             25,350
Other                                                                              1,239                 --              1,239
                                                                        -----------------  -----------------   ----------------
  Total non-performing assets                                            $        34,789    $       119,861     $      154,650
                                                                        =================  =================   ================

Reserves for Losses
  Real estate                                                            $        11,024    $       126,710     $      137,734
  Credit card                                                                     79,681                 --             79,681
  Other                                                                            4,818                 --              4,818
                                                                        -----------------  -----------------   ----------------
    Total                                                                $        95,523    $       126,710     $      222,233
                                                                        =================  =================   ================

Reserves for Losses as a Percentage of
Non-Performing Assets (2)
  Real estate                                                                     134.44%             51.43%             54.10%
  Credit card                                                                     314.32%                --             314.32%
  Other                                                                           388.86%                --             388.86%
                                                                        -----------------  -----------------   ----------------
    Total                                                                         274.58%             51.43%             79.04%
                                                                        =================  =================   ================

-------------------------------------------------------------------------------------------------------------------------------
(1) Real estate acquired in settlement of loans is shown net of valuation allowances.
(2) The ratio of reserves for losses to non-performing assets is calculated before the deduction of such
           reserves.
</TABLE>

                                      F-31

<PAGE>
Approximately 28.4% of the Bank's non-performing credit card loans are located
in the Washington, D.C. metropolitan area. In general, the Bank's remaining
non-performing assets are located in the Washington, D.C. metropolitan area,
including approximately 57.9% located in Loudoun County, Virginia.

The ultimate collection or realization of the Bank's non-performing assets will
be primarily dependent on the general economic conditions in the Washington,
D.C. metropolitan area. Based upon current economic conditions and other
factors, the Bank has provided loss allowances and initial write-downs for real
estate acquired in settlement of loans. See Note 13. As circumstances change, it
may be necessary to provide additional allowances based on new information.

At September 30, 1996 and 1995, the Bank had $13.6 and $17.3 million,
respectively, of loans accounted for as troubled debt restructurings, all of
which were performing loans. At September 30, 1996, the Bank had commitments to
lend $85,000 of additional funds on loans which have been restructured.

The amount of interest income that would have been recorded if non-accrual
assets and restructured loans had been current in accordance with their original
terms was $6.1, $7.2 and $9.1 million for the years ended September 30, 1996,
1995 and 1994, respectively. The amount of interest income that was recorded on
these loans was $0.7, $2.0 and $2.7 million for the years ended September 30,
1996, 1995 and 1994, respectively.

15. SIGNIFICANT SALES TRANSACTIONS - THE BANK

The Bank periodically sells credit card receivables through asset-backed
securitizations, in which credit card receivables are transferred to trusts, and
the Bank sells certificates to investors representing ownership interests in the
trusts. The Bank sold credit card receivables and received gross proceeds of
$919.0, $1,550.0 and $1,350.0 million during the years ended September 30, 1996,
1995 and 1994, respectively. No gains or losses were recorded on the
transactions; however, excess servicing fees are recognized over the related
lives of the transactions. Outstanding trust certificate balances related to
these and previous securitizations were $3,890.0 and $3,226.3 million at
September 30, 1996 and 1995, respectively. The related receivable balances
contained in the trusts were $4,587.1 and $3,776.9 million at September 30, 1996
and 1995, respectively. The Bank continues to service the underlying loans and
is contingently liable under various credit enhancement facilities related to
these transactions. See Note 27.

The Bank periodically sells amounts on deposit in certain spread accounts
associated with certain outstanding credit card securitizations through
asset-backed securitizations, in which such amounts are transferred to trusts,
and the Bank sells certificates to investors representing ownership interests in
the trusts. The Bank sold such amounts on deposit and received gross proceeds of
$42.1 and $59.2 million during fiscal 1996 and 1995, respectively. No such sales
occurred during the year ended September 30, 1994. No gains or losses were
recorded on the transactions. Outstanding trust certificate balances related to
these securitizations were $91.8 and $58.7 million at September 30, 1996 and
1995, respectively.

During fiscal 1994, the Bank sold credit card relationships with related
outstanding receivable balances of $96.5 million. Gains of $16.9 million were
recorded in connection with this sale for the year ended September 30, 1994, and
the Bank is no longer servicing these relationships. No such sales occurred
during the years ended September 30, 1996 and 1995.

                                      F-32

<PAGE>
The Bank periodically sells home equity credit line receivables through
asset-backed securitizations, in which home equity credit line receivables are
transferred to trusts, and the Bank sells certificates to investors representing
ownership interests in the trusts. The amount of home equity credit line
receivables sold and gross proceeds received was $96.5, $150.5 and $181.9
million, during the years ended September 30, 1996, 1995 and 1994, respectively.
Gains recognized on these transactions were $4.7, $7.6 and $9.5 million, during
the years ended September 30, 1996, 1995 and 1994, respectively, and the Bank
continues to service the underlying loans. The outstanding trust certificate
balances and the related receivable balances contained in the trusts were $416.4
and $440.4 million, respectively, at September 30, 1996. The outstanding trust
certificate balances and the related receivable balances contained in the trusts
were $455.8 and $464.7 million, respectively, at September 30, 1995. The Bank is
contingently liable under various credit enhancement facilities related to these
transactions. See Note 27.

The Bank periodically sells automobile loan receivables through asset-backed
securitizations, in which automobile loan receivables are transferred to trusts,
and the Bank sells certificates to investors representing ownership interests in
the trusts. The amount of automobile loan receivables sold and gross proceeds
received was $475.3 and $252.2 million during fiscal 1996 and 1995,
respectively. Gains recognized on these transactions were $7.3 and $4.0 million,
respectively, and the Bank continues to service the underlying loans. The
outstanding trust certificate balances and the related receivable balances
contained in the trusts were $505.6 and $218.2 million at September 30, 1996 and
1995, respectively. The Bank is contingently liable under various credit
enhancement facilities related to these transactions. See Note 27.

During the year ended September 30, 1996, the Bank sold home loan receivables
through an asset-backed securitization, in which the home improvement and other
consumer loan receivables were transferred to a trust, and the Bank sold
certificates to investors representing ownership interests in the trust. The
amount of home loan receivables sold and gross proceeds received was $153.5
million. The gain recognized on this transaction was $9.5 million, and the Bank
continues to service the underlying loans. The outstanding trust certificate
balances and the related receivable balances contained in the trust were $153.5
million at September 30, 1996. The Bank is contingently liable under a credit
enhancement facility related to this transaction. See Note 27.

16. PROPERTY AND EQUIPMENT - THE BANK

Property and equipment is composed of the following:
<TABLE>

                                                                             Estimated
                                                                              Useful                  September 30,
                                                                                           ------------------------------------
(Dollars in thousands)                                                         Lives             1996               1995
---------------------------------------------------------------------      --------------  -----------------   ----------------
<S>                                                                         <C>            <C>                 <C>             
Land                                                                             -         $         45,211    $        38,616
Construction in progress                                                         -                   18,596              6,446
Buildings and improvements                                                  10-45 years              88,362             72,099
Leasehold improvements                                                      5-20 years               65,467             57,133
Furniture and equipment                                                     5-10 years              149,470            131,001
Automobiles                                                                  3-5 years                1,964              1,801
                                                                                           -----------------   ----------------
                                                                                                    369,070            307,096
Less:
  Accumulated depreciation and amortization                                                         143,935            126,658
                                                                                           -----------------   ----------------
    Total                                                                                  $        225,135    $       180,438
                                                                                           =================   ================
</TABLE>

Depreciation expense amounted to $24.4, $19.1 and $18.5 million for the years
ended September 30, 1996, 1995 and 1994, respectively.

During fiscal 1995, an office building previously classified as real estate held
for investment was transferred to property and equipment and the Bank began to
occupy a portion of the building during fiscal 1996 in order to satisfy its need
for additional office space. This asset had a net book value of $16.1 million at
September 30, 1996.

                                      F-33

<PAGE>
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 1997 to 2019 and ground
leases which have terms expiring from 2029 to 2080. These leases are accounted
for as operating leases. Some of the leases are subject to rent adjustments in
the future based upon changes in the Consumer Price Index and some also contain
renewal options. The following is a schedule by years of future minimum lease
payments required at September 30, 1996:

                             Year Ending
                            September 30,                  (In thousands)
                     -----------------------------      -----------------
                                  1997                  $         13,426
                                  1998                            12,053
                                  1999                             9,885
                                  2000                             8,985
                                  2001                             7,785
                               Thereafter                         69,099
                                                        -----------------
                                  Total                 $        121,233
                                                        =================

Future minimum sublease rental income at September 30, 1996 totaled $394,000.
Rent expense totaled $13.5, $11.2 and $9.7 million for the years ended September
30, 1996, 1995 and 1994, 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:

<TABLE>
                                                                                      September 30,
                                                     --------------------------------------------------------------------------
                                                                    1996                                  1995
                                                     ------------------------------------  ------------------------------------
                                                                            Weighted                              Weighted
                                                                            Average                                Average
(Dollars in thousands)                                   Amount               Rate              Amount              Rate
--------------------------------------------------   ----------------   -----------------  -----------------   ----------------
<S>                                                  <C>                <C>                <C>                 <C>      
Demand accounts                                      $       156,517              -        $        123,141            -
NOW accounts                                                 851,385             2.42%              826,977           2.91%
Money market deposit accounts                              1,002,688             3.88%              984,257           4.02%
Statement savings accounts                                   881,285             3.47%              872,366           3.48%
Other deposit accounts                                        68,487             2.98%               61,011           2.98%
Certificate accounts, less than $100                       1,030,401             5.30%            1,112,817           5.80%
Certificate accounts, $100 or more                           173,274             5.41%              178,683           5.99%
                                                     ----------------                      -----------------
  Total                                              $     4,164,037             3.75%     $      4,159,252           4.11%
                                                     ================                      =================
</TABLE>

Interest expense on deposit accounts is composed of the following:
<TABLE>

                                                                    Year Ended September 30,
                                                     -------------------------------------------------------
(In thousands)                                              1996               1995              1994
--------------------------------------------------   -------------------------------------------------------
<S>                                                  <C>                <C>                <C>             
NOW accounts                                         $        23,044    $         23,692   $         23,147
Money market deposit accounts                                 38,317              42,420             37,305
Statement savings accounts                                    30,034              33,394             39,147
Other deposit accounts                                         1,901               1,731              1,573
Certificate accounts                                          69,180              53,033             29,723
                                                     ----------------   -----------------  -----------------
                                                             162,476             154,270            130,895
Custodial accounts                                                93                  29                 29
                                                     ----------------   -----------------  -----------------
   Total                                             $       162,569    $        154,299   $        130,924
                                                     ================   =================  =================
</TABLE>

                                      F-34

<PAGE>
Outstanding certificate accounts at September 30, 1996 mature in the years
indicated as follows:

      Year Ending
     September 30,                                             (In thousands)
---------------------------                                   -----------------
          1997                                                $        897,768
          1998                                                         147,836
          1999                                                          51,381
          2000                                                          89,516
          2001                                                          17,174
                                                              -----------------
         Total                                                $      1,203,675
                                                              =================

At September 30, 1996, certificate accounts of $100,000 or more have contractual
maturities as indicated below:

                                                           (In thousands)
                                                        -----------------
Three months or less                                    $         86,063
Over three months through six months                              28,890
Over six months through 12 months                                 35,240
Over 12 months                                                    23,081
                                                        -----------------
  Total                                                 $        173,274
                                                        =================

19. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER
                    SHORT-TERM BORROWINGS - THE BANK

Short-term borrowings are summarized as follows:
<TABLE>
                                                                                            September 30,
                                                                        -------------------------------------------------------
(Dollars in thousands)                                                         1996               1995              1994
---------------------------------------------------------------------   ------------------ ------------------- ----------------
<S>                                                                     <C>                <C>                 <C>            
Securities sold under repurchase agreements:
    Balance at year-end                                                 $        576,576   $            --     $            --
    Average amount outstanding during the year                                    57,644            159,044            103,299
    Maximum amount outstanding at any month-end                                  576,576            353,615            202,256
    Amount maturing within 30 days                                               576,576                --                  --
    Weighted average interest rate during the year                                 5.51%              6.02%              3.78%
    Weighted average interest rate on year-end
      balances                                                                     5.41%                --                  --

Other short-term borrowings:
    Balance at year-end                                                 $         60,565   $         10,435    $         8,907
    Average amount outstanding during the year                                    15,684             20,451             13,336
    Maximum amount outstanding at any month-end                                   60,565             53,242             51,992
    Amount maturing within 30 days                                                60,317             10,435              8,907
    Weighted average interest rate during the year                                 5.08%              5.59%              3.42%
    Weighted average interest rate on year-end
      balances                                                                     5.63%              5.70%              4.87%
</TABLE>


The investment and mortgage-backed securities underlying the repurchase
agreements had a book value of $599.1 million at September 30, 1996. The
securities underlying these agreements were delivered to the dealers who
arranged the transactions. The dealers may have loaned such securities to other
parties in the normal course of their operations and agreed to resell to the
Bank the identical securities at the maturities of the agreements.

At September 30, 1996, the Bank had pledged mortgage-backed securities with a
book value of $77.6 million to secure certain other short-term borrowings.

                                      F-35

<PAGE>
20. NOTES PAYABLE - THE BANK

Notes payable bear interest at rates ranging from 8.9% to 13.0% and are due in
varying installments through 2011.

Scheduled repayments of notes payable at September 30, 1996 are as follows:

                             Year Ending
                            September 30,               (In thousands)
                     -----------------------------     -----------------
                                 1997                  $            260
                                 1998                               286
                                 1999                               314
                                 2000                               346
                                 2001                               380
                              Thereafter                          5,691
                                                       -----------------
                                Total                  $          7,277
                                                       =================

21. FEDERAL HOME LOAN BANK ADVANCES - THE BANK

At September 30, 1996, the advances from the Federal Home Loan Bank of Atlanta
("FHLB") totaled $269.1 million. Of the total advances at September 30, 1996,
$250.0 million have a weighted average interest rate of 5.43%, adjust quarterly
based on the three-month London Interbank Offered Rate ("LIBOR") and mature over
varying periods between May 1997 and February 1998. The weighted average
interest rate on the remaining $19.1 million is 6.78% which is fixed for the
term of the advances and matures over varying periods between December 1996 and
September 2006.

Under a Specific Collateral Agreement with the FHLB, advances are secured by all
of the Bank's FHLB stock, qualifying first mortgage loans with a total principal
balance of $515.7 million and mortgage-backed securities with a book value of
$114.2 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, 1996 advances is
available to secure additional advances from the FHLB, subject to its
collateralization guidelines.

22. CAPITAL NOTES - SUBORDINATED - THE BANK

Capital notes, which are subordinated to the interest of deposit account
holders, are composed of the following:
                                                September 30,
                                         -------------------------   Interest
(Dollars in thousands)                     1996          1995          Rate
---------------------------------------- -----------   ----------- -------------
Private placement:
      BACOB Bank, s.c.,
           due December, 1996            $   10,000    $   10,000   LIBOR + 3.0%

Public placement:
      Subordinated debentures due 2005      150,000       150,000      9 1/4%
                                         -----------   -----------
        Total                            $  160,000    $  160,000
                                         ===========   ===========

On November 23, 1993, the Bank sold $150.0 million 9 1/4% Subordinated
Debentures due 2005 (the "Debentures"). The Bank received net proceeds of $143.6
million from the sale of the Debentures, of which approximately $134.2 million
was used to redeem $78.5 million of debentures due in 2002 and $50.0 million of
debentures due in 2003 on December 23, 1993 and December 24, 1993, respectively.
The remaining net proceeds were used for general corporate purposes. The Bank
incurred a loss of $6.3 million, after related income taxes, in connection with
the redemption of these debentures. The OTS approved the inclusion of the
principal amount of the Debentures in the Bank's supplementary capital for
regulatory capital purposes.

                                      F-36

<PAGE>
The indenture pursuant to which the Debentures were sold ("the Indenture") 
provides that the Bank may not pay dividends on its capital stock unless, 
after giving effect to the dividend, no event of default shall have occurred 
and be continuing and the Bank is in compliance with its regulatory capital 
requirements. In addition, the amount of the proposed dividend may not exceed 
the sum of (i) $15.0 million, (ii) 66 2/3% of the Bank's consolidated net 
income (as defined in the Indenture) accrued on a cumulative basis commencing 
on October 1, 1993 and (iii) the aggregate net cash proceeds received by the 
Bank after October 1, 1993 from the sale of qualified capital stock or 
certain debt securities, minus the aggregate amount of any restricted 
payments made by the Bank. Notwithstanding the above restrictions on 
dividends, provided no event of default has occurred or is continuing, the 
Indenture does not restrict the payment of dividends on the Preferred Stock 
or any payment-in-kind preferred stock issued in lieu of cash dividends on 
the Preferred Stock or the redemption of any such payment-in-kind preferred 
stock.

Deferred debt issuance costs, net of accumulated amortization, amounted to 
$5.6 and $5.9 million at September 30, 1996 and 1995, respectively, and are 
included in other assets in the Consolidated Balance Sheets.

On November 15, 1996, the Bank redeemed the $10.0 million private placement 
note.

23. PREFERRED STOCK - THE BANK

In April 1993, the Bank sold $75.0 million of its Noncumulative Perpetual
Preferred Stock, Series A ("Preferred Stock") in a private offering. Cash
dividends on the Preferred Stock are payable quarterly in arrears at an annual
rate of 13%. If the Board of Directors does not declare the full amount of the
noncumulative cash dividend accrued in respect of any quarterly dividend period,
in lieu thereof the Board of Directors will be required to declare (subject to
regulatory and other restrictions) a stock dividend in the form of a new series
of payment-in-kind preferred stock of the Bank.

The OTS has approved the inclusion of the Preferred Stock as tier 1 or core 
capital and has approved the payment of dividends on the Preferred Stock, 
provided certain conditions are met. The Preferred Stock is not redeemable 
until May 1, 2003 and is redeemable thereafter at the option of the Bank. The 
holders of the Preferred Stock have no voting rights, except in certain 
limited circumstances.

Holders of the Preferred Stock will be entitled to receive a liquidating
distribution in the amount of $25 per share, plus accrued and unpaid dividends
for the then-current dividend period in the event of any voluntary liquidation
of the Bank, after payment of the deposit accounts and other liabilities of the
Bank, and out of the assets available for distribution to shareholders. The
Preferred Stock ranks superior and prior to the issued and outstanding common
stock of the Bank with respect to dividend and liquidation rights.

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 $4.7, $3.9 and $3.5 million 
for the years ended September 30, 1996, 1995 and 1994, 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.

                                      F-37

<PAGE>
25. REGULATORY MATTERS - THE BANK

Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), the Bank's regulatory capital requirements at September 30, 1996
were a 1.5% tangible capital requirement, a 3.0% core capital requirement and an
8.0% total risk-based capital requirement. Under the OTS "prompt corrective
action" regulations, the Bank must maintain minimum leverage, tier 1 risk-based
and total risk-based capital ratios of 4.0%, 4.0% and 8.0%, respectively, to
meet the ratios established for "adequately capitalized" institutions. At
September 30, 1996, the Bank was in compliance with its tangible, core and total
risk-based regulatory capital requirements and exceeded the capital standards
established for "adequately capitalized" institutions under the "prompt
corrective action" regulations. The information below is based upon the Bank's
understanding of the applicable FIRREA and "prompt corrective action"
regulations and related interpretations.
<TABLE>

                                                                    MINIMUM                   EXCESS
                                             ACTUAL            CAPITAL REQUIREMENT            CAPITAL
                                     ----------------------   ----------------------   -----------------------

                                                 As a % of                As a % of                 As a % of
(Dollars in thousands)                 Amount    Assets (4)     Amount      Assets       Amount       Assets
-----------------------------------  ----------  ----------   ----------  ----------   ----------   ----------
<S>                                  <C>         <C>          <C>         <C>          <C>          <C>       
Capital per Bank's financial 
statements                           $ 339,160
  Net unrealized holding losses (1)      1,875
                                     ----------
Adjusted capital                       341,035

Adjustments for tangible and core
 capital:
  Intangible assets                    (41,051)
  Non-includable subsidiaries (2)(4)    (3,622)
                                     ----------
Total tangible capital                 296,362        5.21%   $  85,255        1.50%   $ 211,107         3.71%
                                     ----------  ==========   ==========  ==========   ==========   ==========
Total core capital (3)(4)              296,362        5.21%   $ 227,346        4.00%   $  69,016         1.21%
                                     ----------  ==========   ==========  ==========   ==========   ==========

Tier 1 risk-based capital (3)          296,362        5.80%   $ 204,519        4.00%   $  91,843         1.80%
                                     ----------  ==========   ==========  ==========   ==========   ==========

Adjustments for risk-based
   capital:
  Subordinated capital debentures      150,000
  Allowance for general loan losses     87,953
                                     ----------
   Total supplementary capital         237,953
  Excess allowance for loan losses     (23,744)
                                     ----------
  Adjusted supplementary capital       214,209
                                     ----------
  Total available capital              510,571
  Equity investments (2)               (19,657)
                                     ----------
Total risk-based capital (4)         $ 490,914       10.14%   $ 409,038        8.00%   $  81,876         2.14%
                                     ==========  ==========   ==========  ==========   ==========   ==========
--------------------------------------------------------------------------------------------------------------
(1) Pursuant to OTS policy, net unrealized holding gains (losses) are excluded
    from regulatory capital.
(2) Reflects an aggregate offset of $1.2 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.
(3) Under the OTS "prompt corrective action" regulations, the standards for
    classification as "well capitalized" are a leverage (or "core capital")
    ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0%
    and a total risk-based capital ratio of at least 10.0%.
(4) Effective July 1, 1996, the percentage of non-includable subsidiaries
    phased-out from core capital increased from 60% to 100%.
</TABLE>

                                      F-38

<PAGE>
At September 30, 1996, the Bank had $3.8 million 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, 1996, the Bank also had two equity investments
with an aggregate balance, after subsequent valuation allowances, of $20.7
million which were fully deducted from total risk-based capital.

As of September 30, 1996, the Bank had $40.2 million in supervisory goodwill,
all of which was excluded from core capital pursuant to statutory provisions.

OTS capital regulations provide a five-year holding period (or such longer
period as may be approved by the OTS) for REO to qualify for an exception from
treatment as an equity investment. If an REO property is considered an equity
investment, its then-current book value is deducted from total risk-based
capital. Accordingly, if the Bank is unable to dispose of any REO property
(through bulk sales or otherwise) prior to the end of its applicable five-year
holding period and is unable to obtain an extension of such five-year holding
period from the OTS, the Bank could be required to deduct the then-current book
value of such REO property from total risk-based capital. In November 1996, the
Bank received from the OTS an extension of the holding periods for certain of
its REO properties. The following table sets forth the Bank's REO at September
30, 1996, after valuation allowances of $126.5 million, by the fiscal year in
which the property was acquired through foreclosure.

                     Fiscal Year                     (In thousands)
                     ----------------                ---------------------

                         1990                        $       30,236       (1)(2)
                         1991                                68,910       (2)
                         1992                                 3,339       (2)
                         1993                                 4,903
                         1994                                 1,811
                         1995                                 7,503
                         1996                                 3,159
                                                       -------------
                      Total REO                      $      119,861
                                                     ===============

--------------------------------------------------------------------
(1)  Includes REO with an aggregate net book value of $19.7 million, 
     which the Bank treats as equity investments for regulatory 
     capital purposes.
(2)  Includes REO, with an aggregate net book value of $82.8 million,
     for which the Bank received an extension of the holding periods
     through November 12, 1997.

On March 29, 1996, the OTS released the Bank from its September 30, 1991 written
agreement with the OTS, as amended in October 1993, and from regulatory
restrictions on asset growth. In connection with the termination of the written
agreement and at the request of the OTS, the Board of Directors of the Bank has
adopted a resolution which addressed certain issues previously addressed by the
written agreement. Among other things, the resolution permits the Bank: (i) to
make tax sharing payments without OTS approval to the Trust of up to $15.0
million relating to any single fiscal year; and (ii) to declare dividends on its
common stock in any quarterly period up to the lesser of (A) 50% of its after
tax net income for the immediately preceding quarter or (B) 50% of the average
quarterly after tax net income for the immediately preceding four quarter
period, minus (in either case) dividends declared on the Bank's preferred stock
during that quarterly period. The resolution also provides that the Bank will
present a plan annually to the OTS detailing anticipated consumer loan
securitization activity.

                                      F-39

<PAGE>
Legislation was enacted on September 30, 1996 that, among other things, imposes
on thrift institutions a one-time assessment of 65.7 basis points on their
SAIF-insured deposits to capitalize the SAIF. Following such legislation, the
Bank and other SAIF-insured institutions will continue to pay higher deposit
insurance premiums than commercial banks, which could lead to a competitive
disadvantage in the pricing of loans and deposits and additional operating
expenses. At September 30, 1996, the Bank accrued approximately $26.5 million
for the SAIF assessment which is included in deposit insurance premiums on the
Consolidated Statements of Operations and other liabilities on the Consolidated
Balance Sheets.

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, 1996 is as follows:

                                                     (In thousands)
                                                   --------------------
Balance, September 30, 1995                        $             3,905
  Additions                                                         31
  Reductions                                                    (1,199)
                                                   --------------------
Balance, September 30, 1996                        $             2,737
                                                   ====================

SERVICES:

B. F. Saul Company, which is a shareholder of the Trust, and its subsidiaries
provide certain services to the Bank. These services include property
management, cafeteria management, insurance brokerage and leasing. Fees for
these services were $366,000, $460,000 and $548,000 for the years ended
September 30, 1996, 1995 and 1994, respectively.

The law firm in which one director of the Bank is a partner received $3.2, $2.8
and $2.4 million for legal services rendered to the Bank during the years ended
September 30, 1996, 1995 and 1994, respectively.

For the years ended September 30, 1996, 1995 and 1994, one of the directors of
the Bank was paid $37,000, $30,000 and $30,000, respectively, for consulting
services rendered to the Bank. Another director of the Bank was paid total fees
of $100,000, $75,000 and $50,000 for the years ended September 30, 1996, 1995
and 1994, respectively, for consulting services.

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 $25.0, $20.5 and $9.6 million to the
Trust during fiscal 1996, 1995 and 1994, respectively, under the Tax Sharing
Agreement. OTS approval of the tax sharing payments during fiscal 1996, 1995 and
1994 was conditioned on a pledge by the Trust of certain assets to secure
certain of its obligations under the Tax Sharing Agreement. Under the terms of
the Bank's board resolution, the Bank is permitted to make tax sharing payments
to the Trust of up to $15.0 million relating to any fiscal year without OTS
approval. See Note 25.
                                      F-40

<PAGE>
OTHER:

The Bank paid $4.5, $4.2 and $3.9 million for office space leased from or
managed by companies affiliated with the Bank or its directors during the years
ended September 30, 1996, 1995 and 1994, respectively.

The Trust, the B. F. Saul Company and Chevy Chase Lake Corporation ("Lake"), an
affiliate of the Bank, from time to time maintain interest-bearing deposit
accounts with the Bank. Those accounts totaled $24.0 million at September 30,
1996. The Bank paid interest on the accounts amounting to $1.1 million in fiscal
1996.

During fiscal 1995, the Bank purchased land and building plans from Lake for
$1.3 million. During fiscal 1996, construction was completed and the Bank began
occupying the building.

During fiscal 1994, the Bank sold 12.70 acres of retail land to Saul Holdings,
L.P., at an amount equal to its net carrying value. During fiscal 1996,
construction was completed and the Bank began to occupy the building.

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 contract or notional amounts of these instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments. The
Bank's exposure to credit loss in the event of nonperformance by the other party
is represented by the contractual notional amount of these instruments. The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments. The Bank is also a party to
derivative financial instruments that do not have off-balance-sheet risk (e.g.
interest-rate cap agreements).

COMMITMENTS TO EXTEND CREDIT:

The Bank had $15,627.8 million of commitments to extend credit at September 30,
1996. 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.

Loans approved but not closed are commitments for fixed or adjustable-rate
residential loans which are secured by real estate. The Bank currently requires
borrowers to obtain private mortgage insurance on all loans where the
loan-to-value ratio exceeds 80%.

                                      F-41

<PAGE>
FORWARD COMMITMENTS:

To manage the potentially adverse impact of interest rate movements on the
fixed-rate mortgage loan pipeline, the Bank hedges its pipeline by entering into
whole loan and mortgage-backed security forward sale commitments. Forward sale
commitments are used to sell specific financial instruments (whole loans or
mortgage-backed securities) at a future date for a specified price. Forward sale
commitments generally settle within 90 days. Gains and losses are deferred and
recorded as a component of the gain on sales of loans at the time the forward
sale commitment matures. At September 30, 1996, the Bank had whole loan and
mortgage-backed security forward sale commitments of $1.2 and $132.5 million,
respectively. In addition, at September 30, 1996, the Bank had $36.2 million in
mortgage-backed security forward purchase commitments related to its hedging
activities.

LETTERS OF CREDIT:

Letters of credit are conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party. At September 30, 1996, the Bank
had written letters of credit in the amount of $24.7 million, which were issued
to guarantee the performance of and irrevocably assure payment by customers
under construction projects.

Of the total, $16.7 million will expire in fiscal 1997 and the remainder will
expire over time through fiscal 2001. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
commitments to customers. Investment and mortgage-backed securities with a book
value of $2.3 million were pledged as collateral for certain of these letters of
credit at September 30, 1996.

RECOURSE ARRANGEMENTS:

The Bank is obligated under various recourse provisions (primarily related to
credit losses) related to the securitization and sale of credit card
receivables, home equity credit line receivables, automobile loan receivables,
home loan receivables and amounts on deposit in certain spread accounts through
the asset-backed securitizations described in Note 15. At September 30, 1996 and
1995, the primary recourse to the Bank was $128.0 and $93.1 million,
respectively. As a result of these recourse provisions, the Bank maintained
restricted cash accounts amounting to $128.2 and $98.1 million, at September 30,
1996 and 1995, respectively, which are included in other assets in the
Consolidated Balance Sheets.

The Bank is obligated under various recourse provisions related to the swap of
single-family residential loans for participation certificates and
mortgage-backed securities issued to the Bank by FHLMC and FNMA. At September
30, 1996, recourse to the Bank under these arrangements was $4,268. As security
for the payment of funds due under certain of the FHLMC recourse obligations,
the Bank is required to post collateral. At September 30, 1996, mortgage-backed
securities pledged as collateral under these obligations had a book value of
$3.5 million. In addition, the Bank maintained a restricted cash account
amounting to $325,000 at September 30, 1996 and 1995 which is included in other
assets in the Consolidated Balance Sheets.

                                      F-42

<PAGE>
INTEREST RATE CAP AGREEMENTS:

Interest rate cap agreements are used to limit the Bank's exposure to rising
short-term interest rates related to certain of its asset-backed
securitizations. At September 30, 1996, the Bank was a party to seven interest
rate cap agreements with an aggregate notional amount of $500.0 million with
maturity dates ranging from December 31, 1996 through June 30, 1999. The
interest rate cap agreements entitle the Bank to receive compensatory payments
from the cap provider, which is a AAA-rated (by Standard & Poor's) counterparty,
equal to the product of (a) the amount by which the one-month LIBOR exceeds
7.00% and (b) the then outstanding notional principal amount for a predetermined
period of time. The Bank has no obligation to make payments to the provider of
the cap or any other party. The Bank is exposed to credit losses in the event of
nonperformance by the counterparty, but does not expect the counterparty to fail
to meet its obligation given its credit rating.

CONCENTRATIONS OF CREDIT:

The Bank's principal real estate lending market is the metropolitan Washington,
D.C. area. In addition, a significant portion of the Bank's consumer loan
portfolio, including credit cards, was generated by customers residing in the
metropolitan Washington, D.C. area. Service industries and Federal, state and
local governments employ a significant portion of the Washington, D.C. area
labor force. Adverse changes in economic conditions could have a direct impact
on the timing and amount of payments by borrowers.

                                      F-43

<PAGE>
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
the fair value is estimated as of the balance sheet date, the amount which will
actually be realized or paid upon settlement or maturity could be significantly
different. Comparability among financial institutions may be difficult due to
the wide range of permitted valuation techniques and the numerous estimates and
assumptions which must be made. The estimated fair values of the Bank's
financial instruments at September 30, 1996 and 1995 are as follows:

<TABLE>
                                                                                         September 30,
                                                       ------------------------------------------------------------------------
                                                                     1996                                   1995
                                                       ----------------------------------     ---------------------------------
                                                         Carrying              Fair             Carrying              Fair
(In thousands)                                            Amount               Value             Amount              Value
--------------------------------------------------     --------------      --------------     --------------      -------------
<S>                                                  <C>                <C>                <C>                 <C>            
Financial assets:
    Cash, due from banks,
       interest-bearing deposits
       and securities purchased
       under agreements to resell                    $       266,425    $        266,425   $        359,282    $       359,282
    Loans held for sale                                       76,064              76,064             68,679             68,729
    Loans held for securitization and sale                   450,000             450,000            500,000            500,000
    Investment securities                                      9,818               9,820              4,370              4,371
    Mortgage-backed securities                             1,306,417           1,307,838            880,208            879,720
    Loans receivable, net                                  2,772,969           2,834,726          2,327,222          2,351,729
    Interest rate cap agreements                               6,179               1,832              9,986              3,255
    Other financial assets                                   392,265             393,748            298,077            299,561

Financial liabilities:
    Deposit accounts with
        no stated maturities                               2,960,362           2,960,362          2,867,752          2,867,752
    Deposit accounts with
        stated maturities                                  1,203,675           1,210,497          1,291,500          1,295,816
    Securities sold under repurchase agreements 
       and other short-term borrowings,
       notes payable and Federal Home Loan
       Bank advances                                         913,483             914,418            173,001            173,813
    Capital notes-subordinated                               154,383 (1)         161,875            154,102 (1)        159,250
    Other financial liabilities                               80,760              80,760             80,149             80,149

-------------------------------------------------------------------------------------------------------------------------------
(1)   Net of deferred debt issuance costs which are included in other assets in
      the Consolidated Balance Sheets.
</TABLE>

The following methods and assumptions were used to estimate the fair value
amounts at September 30, 1996 and 1995:

Cash, due from banks, interest-bearing deposits, securities purchased under
agreements to resell and federal funds sold: Carrying amount approximates fair
value.

Loans held for sale: Fair value is determined using quoted prices for loans, or
securities backed by loans with similar characteristics, or outstanding
commitment prices from investors.

Loans held for securitization and sale: The carrying value of loans held for
securitization and sale approximates fair value because such receivables are
sold at face value.

                                      F-44

<PAGE>
Investment securities: Fair value is based on quoted market prices.

Mortgage-backed securities: Fair value is based on quoted market prices,
dealer quotes or estimates using dealer quoted market prices for similar
securities.

Loans receivable, net: Fair value of certain homogeneous groups of loans (e.g.,
single-family residential, automobile loans, home improvement loans and
fixed-rate commercial and multifamily loans) is estimated using discounted cash
flow analyses based on contractual repayment schedules. The discount rates used
in these analyses are based on either the interest rates paid on U.S. Treasury
securities of comparable maturities adjusted for credit risk and non-interest
operating costs, or the interest rates currently offered by the Bank for loans
with similar terms to borrowers of similar credit quality. For loans which
reprice frequently at market rates (e.g., home equity, variable-rate commercial
and multifamily, real estate construction and ground loans), the carrying amount
approximates fair value. Because credit card receivables are generally sold at
face value through the Bank's securitization program, such face value is used as
the estimated fair value of these receivables. The fair value of the Bank's loan
portfolio as presented above does not include the value of established credit
card and home equity credit line customer relationships, or the value relating
to estimated cash flows from future receivables and the associated fees
generated from existing customers.

Interest rate cap agreements: Fair value is based on dealer quotes.

Other financial assets: The carrying amount of Federal Home Loan Bank stock,
accrued interest receivable, excess servicing assets, interest-bearing deposits
maintained pursuant to various asset securitizations and other short-term
receivables approximates fair value. The fair value of one of the Bank's
investments is based on quoted market prices.

Deposit accounts with no stated maturities: Deposit liabilities payable on
demand, consisting of NOW accounts, money market deposits, statement savings and
other deposit accounts, are assumed to have an estimated fair value equal to
carrying value. The indicated fair value does not consider the value of the
Bank's established deposit customer relationships.

Deposit accounts with stated maturities: Fair value of fixed-rate certificates
of deposit is estimated based on discounted cash flow analyses using the
remaining maturity of the underlying accounts and interest rates currently
offered on certificates of deposit with similar maturities.

Borrowings: These instruments consist of securities sold under repurchase
agreements and other short-term borrowings, notes payable and Federal Home Loan
Bank advances. For borrowings which either reprice frequently to market interest
rates or are short-term in duration, the carrying amount approximates fair
value. Fair value of the remaining amounts borrowed is estimated based on
discounted cash flow analyses using interest rates currently charged by the
lender for comparable borrowings with similar remaining maturities.

Capital notes-subordinated: Fair value of the Debentures is based on quoted
market prices. The carrying amount of the $10.0 million private placement
capital note approximates fair value.

Other financial liabilities: The carrying amount of custodial accounts, amounts
due to banks, accrued interest payable and other short-term payables
approximates fair value.

Off-balance sheet instruments: The difference between the original fees charged
by the Bank for commitments to extend credit and letters of credit and the
current fees charged to enter into similar agreements is immaterial. Fair value
of forward commitments is based on the estimated amount that the Bank would pay
to terminate the arrangements at the reporting date, taking into account the
remaining terms of the arrangements and the counterparties' credit standing,
where applicable, which is immaterial.

                                      F-45

<PAGE>
29. LITIGATION - THE BANK

During the normal course of business, the Bank is involved in certain
litigation, including litigation arising out of the collection of loans, the
enforcement or defense of the priority of its security interests, the continued
development and marketing of certain of its real estate properties and certain
employment claims. Although the amounts claimed in some of these suits in which
the Bank is a defendant are material, the Bank denies liability and, in the
opinion of management, litigation which is currently pending will not have a
material impact on the financial condition or future operations of the Bank.

30. SUBSEQUENT EVENTS - THE BANK

On December 3, 1996, the Bank sold $100.0 million of 9 1/4% Subordinated
Debentures due 2008 (the "1996 Debentures"). The Bank received net proceeds of
$96.3 million from the sale of the 1996 Debentures which will be used for
general corporate purposes. The Bank received OTS approval to include the
principal amount of the 1996 Debentures in the Bank's supplementary capital for
regulatory capital purposes.

In addition, on December 3, 1996, a new real estate
investment trust subsidiary of the Bank (the "Company") sold $150.0 million of
its Noncumulative Exchangeable Perpetual Preferred Stock, Series A (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 REIT Preferred Stock is automatically exchangeable
for a new series of preferred stock of the Bank upon the occurrence of certain
events. The Bank has received OTS approval to include the proceeds received 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 REIT Preferred Stock is not redeemable until January 15, 2007, and is
redeemable thereafter at the option of the Company.

                                      F-46

<PAGE>
31. 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.

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.

As discussed in Organization and Summary of Significant Accounting Policies, the
Trust adopted SFAS 109 effective October 1, 1993, which had the effect of
increasing the Trust's net deferred tax asset by approximately $36.3 million.
The provisions for income taxes for the years ended September 30, 1996, 1995 and
1994, consist of the following:

<TABLE>
                                                                                            Year Ended September 30,
                                                                                  ----------------------------------------------
(In thousands)                                                                        1996            1995            1994
-------------------------------------------------------------------------------   --------------  --------------  --------------
<S>                                                                                <C>             <C>             <C>         
Current provision (benefit):
  Federal                                                                          $      5,628    $        (37)   $     13,480
  State                                                                                   2,799          (4,186)          4,421
                                                                                  --------------  --------------  --------------
                                                                                          8,427          (4,223)         17,901
                                                                                  --------------  --------------  --------------

Deferred provision (benefit):
  Federal                                                                                  (513)          5,964         (10,390)
  State                                                                                     386             280            (486)
                                                                                  --------------  --------------  --------------
                                                                                           (127)          6,244         (10,876)
                                                                                  --------------  --------------  --------------

Subtotal                                                                                  8,300           2,021           7,025

Tax effect of other items:
  Cumulative effect of adoption of SFAS 109                                                  --              --         (36,260)
  Extraordinary item                                                                         --              --          (6,160)
  Tax effect of net unrealized holding gains (losses) reported in
    stockholders' equity                                                                    809           7,207          (9,243)
                                                                                  --------------  --------------  --------------

Total                                                                              $       9,109   $       9,228    $   (44,638)
                                                                                  ==============  ==============  ==============
</TABLE>


The Trust's effective income tax rate varies from the statutory Federal income
tax rate as a result of the following factors:

<TABLE>
                                                                                            Year Ended September 30,
                                                                                  ----------------------------------------------
(In thousands)                                                                        1996            1995            1994
-------------------------------------------------------------------------------   --------------  --------------  --------------
<S>                                                                                <C>             <C>             <C>         
Computed tax at statutory Federal income tax rate                                  $      7,003    $      9,920    $      6,609
Increase (reduction) in taxes resulting from:
 Goodwill and other purchase accounting adjustments                                       1,626           1,164           1,311
 Change in valuation allowance for deferred
   tax asset allocated to income tax expense                                              8,883              --              --
 State income taxes                                                                     (12,277)         (3,540)          2,570
 Other                                                                                    3,066          (5,523)         (3,465)
                                                                                  --------------  --------------  --------------
                                                                                   $      8,301    $      2,021    $      7,025
                                                                                  ==============  ==============  ==============
</TABLE>

                                      F-47

<PAGE>
Under SFAS 109, the components of the net deferred tax asset were as follows:

<TABLE>
                                                                                                          September 30,
                                                                                                  ------------------------------
(In thousands)                                                                                        1996            1995
------------------------------------------------------------------------------------------------  --------------  --------------
<S>                                                                                                <C>             <C>         
Deferred tax assets:
  Provision for losses in excess of deductions                                                     $     51,166    $     65,072
  Deferred BIF/SAIF assessment                                                                           11,151              --
  Unrealized losses on real estate owned                                                                  3,545           2,744
  Property                                                                                                7,211           8,079
  Real estate mortgage investment conduit                                                                    --             675
  State net operating losses                                                                             12,224           2,593
  Partnership investments                                                                                 2,288           1,328
  Alternative minimum tax                                                                                    --           1,979
  Forgiveness of debt                                                                                     4,375           4,822
  Depreciation                                                                                            1,973           2,015
  Other                                                                                                   3,856           2,842
                                                                                                  --------------  --------------
  Gross deferred tax assets                                                                              97,789          92,149
                                                                                                  --------------  --------------

Deferred tax liabilities:
  Net unrealized holding gains on securities available-for-sale                                          (5,806)         (8,833)
  Deferred loan fees                                                                                     (5,764)         (4,691)
  Asset securitizations                                                                                  (3,125)             --
  Saul Holdings                                                                                          (7,682)         (7,685)
  Real estate taxes                                                                                          --            (335)
  Depreciation                                                                                           (5,750)         (8,970)
  FHLB stock dividends                                                                                   (5,375)         (5,376)
  Other                                                                                                  (2,804)         (3,955)
                                                                                                  --------------  --------------
  Gross deferred tax liabilities                                                                        (36,306)        (39,845)
                                                                                                  --------------  --------------

Valuation allowance                                                                                     (12,283)         (3,400)
                                                                                                  --------------  --------------

Net deferred tax asset                                                                             $     49,200    $     48,904
                                                                                                  ==============  ==============
</TABLE>


Under SFAS 109, a valuation allowance is provided when it is more likely than
not that some portion of the deferred tax asset will not be realized. As of
September 30, 1996, management has maintained a valuation allowance in part to
reduce the net deferred tax asset for net operating loss carryforwards related
to state taxes. Historically, the Bank has generated taxable income while the
Real Estate Trust has generated taxable losses. Net operating loss carryforwards
are realizable through future taxable income of the Bank since the Trust files a
consolidated tax return for federal purposes. The net operating loss
carryforwards are not expected to be realizable for state tax purposes since a
consolidated return is not filed with state tax authorities.

Management believes the existing net deductible temporary differences will
reverse during periods in which the Bank generates taxable income in excess of
Real Estate Trust taxable losses. Management believes that the positive
consolidated earnings will continue as a result of the Bank's earnings. See
further discussion in Notes 2 and 3.

                                      F-48

<PAGE>
TAX SHARING AGREEMENT

The Trust's affiliated group, including the Bank, entered into a tax sharing
agreement dated June 28, 1990. This agreement provides that payments be made by
members of the affiliated group to the Trust based on their respective allocable
shares of the overall federal income tax liability of the affiliated group for
taxable years and partial taxable years beginning on or after that date.
Allocable shares of the overall tax liability are prorated among the members
with taxable income calculated on a separate return basis. The agreement also
provides that, to the extent net operating losses or tax credits of a particular
member are used to reduce overall tax liability of the Trust's affiliated group,
such member will be reimbursed on a dollar-for-dollar basis by the other members
of the affiliated group that have taxable income in an amount equal to such tax
reduction. Under the tax sharing agreement, the Bank paid $25.0, $20.5 and $9.6
million, respectively, to the Trust during fiscal 1996, 1995 and 1994.

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

As of September 30, 1996, 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 ("preferred shares"). The transaction has been accounted for at
historical cost in a manner similar to the pooling of interests method because
the entities are considered to be under common control. In addition, the Trust
acquired two real estate properties from an affiliate in exchange for 66,000
preferred shares.

At September 30, 1996, 1995, and 1994, the amount of dividends in arrears on the
preferred shares was $31,562,500 ($61.17 per share), $26,644,500 ($51.64 per
share) and $21,226,500 ($41.14 per share), respectively.  Based on the 
resumption of dividend payments on the preferred shares, the Trust recorded a 
liability at September 30, 1996, equal to the total dividends in arrears on that
date.

                                      F-49

<PAGE>
34. QUARTERLY FINANCIAL DATA (UNAUDITED) - THE TRUST

<TABLE>
                                                                                    Year Ended September 30, 1996
                                                                     ------------------------------------------------------------
(In thousands, except per share amounts)                               December         March           June         September
-------------------------------------------------------------------  -------------   -------------  --------------  -------------
<S>                                                                   <C>             <C>             <C>            <C>        
Real Estate Trust:
 Total income                                                         $    18,159     $    17,206     $    20,696    $    20,778
 Operating loss                                                            (7,032)         (7,430)         (4,564)        (5,150)
The Bank:
 Interest income                                                           93,589          91,230          99,254        103,438
 Interest expense                                                          48,269          46,800          45,401         48,366
 Provision for loan losses                                                (11,913)        (28,850)        (30,062)       (44,915)
 Other income                                                              66,212          89,324          96,935         91,990
 Operating income (loss)                                                   15,984          21,341          31,617        (22,831)
Total Company:
Operating income (loss) before income taxes and
 minority interest                                                          8,952          13,911          27,053        (27,981)
Income (loss) before minority interest                                      5,199           7,842          15,621        (15,028)
Net income (loss)                                                           1,294           3,225          10,054        (14,651)
Net income (loss) per common share                                          (0.01)           0.39            1.80          (3.32)

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

                                                                                    Year Ended September 30, 1995
                                                                     ------------------------------------------------------------
(In thousands, except per share amounts)                               December         March           June         September
-------------------------------------------------------------------  -------------   -------------  --------------  -------------
Real Estate Trust:
 Total income                                                         $    17,324     $    17,541     $    21,754    $    20,666
 Operating loss                                                            (7,217)         (6,574)         (4,581)        (8,969)
The Bank:
 Interest income                                                           81,783          91,310          97,147         95,075
 Interest expense                                                          42,641          46,819          51,277         48,377
 Provision for loan losses                                                 (8,607)        (13,618)        (13,604)       (19,150)
 Other income                                                              43,107          55,304          67,950         66,756
 Operating income                                                           6,034          12,371          23,592         13,686
Total Company:
Operating income (loss) before income taxes and
 minority interest                                                         (1,183)          5,797          19,011          4,717
Income (loss) before minority interest                                       (742)          4,923          12,415          9,725
Net income (loss)                                                          (3,480)          1,135           7,379          5,816
Net income (loss) per common share                                          (1.00)          (0.05)           1.25           0.92
</TABLE>

                                      F-50

<PAGE>
35. INDUSTRY SEGMENT INFORMATION - TRUST

Industry segment information with regard to the Real Estate Trust is presented
below. For information regarding the Bank, please refer to the "Banking"
sections of the accompanying financial statements.


<TABLE>
                                                                                   Year Ended September 30
                                                                        ----------------------------------------------
(In thousands)                                                              1996            1995             1994
----------------------------------------------------------------------  --------------  --------------   -------------
<S>                                                                      <C>             <C>              <C>        
INCOME
Hotels                                                                   $     54,245    $     54,104     $    46,046
Commercial properties                                                          17,590          18,812          16,815
Other                                                                           5,004           4,369           3,183
                                                                        --------------  --------------   -------------
                                                                         $     76,839    $     77,285     $    66,044
                                                                        ==============  ==============   =============


OPERATING PROFIT (LOSS)
Hotels                                                                   $     12,635    $     10,836     $     7,488
Commercial properties                                                           5,893           6,951           5,473
Other                                                                           6,702           6,670           3,510
                                                                        --------------  --------------   -------------
                                                                               25,230          24,457          16,471
Gain (loss) on sales of property                                                  (68)          1,664              --
Interest and debt expense                                                     (40,514)        (41,040)        (40,576)
Advisory fee, management and leasing fees - related parties                    (7,423)         (7,376)         (6,793)
General and administrative                                                     (1,401)         (2,319)         (2,027)
Write-down of assets to net realizable value                                       --          (2,727)         (1,380)
                                                                        --------------  --------------   -------------
Operating loss                                                           $    (24,176)   $    (27,341)    $   (34,305)
                                                                        ==============  ==============   =============


IDENTIFIABLE ASSETS (AT YEAR END)
Hotels                                                                   $     84,255    $     87,143     $    79,183
Commercial properties                                                          78,388          81,821          83,937
Other                                                                         129,923         144,448         164,619
                                                                        --------------  --------------   -------------
                                                                         $    292,566    $    313,412     $   327,739
                                                                        ==============  ==============   =============


DEPRECIATION
Hotels                                                                   $      5,535    $      5,230     $     4,684
Commercial properties                                                           4,446           4,452           4,370
Other                                                                              39              32              28
                                                                        --------------  --------------   -------------
                                                                         $     10,020    $      9,714     $     9,082
                                                                        ==============  ==============   =============

CAPITAL EXPENDITURES
Hotels                                                                   $      4,769    $     13,815     $     3,586
Commercial properties                                                           2,444           2,544           2,486
Other                                                                             195             103             645
                                                                        --------------  --------------   -------------
                                                                         $      7,408    $     16,462     $     6,717
                                                                        ==============  ==============   =============
</TABLE>

                                      F-51

<PAGE>
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.

<TABLE>
CONDENSED BALANCE SHEETS

                                                                                                      September 30,
                                                                                         -----------------------------------------
(In thousands)                                                                                  1996                 1995
-------------------------------------------------------------------                      -----------------------------------------
<S>                                                                                       <C>                  <C>               
ASSETS
Income-producing properties                                                               $          232,628   $          238,927
Accumulated depreciation                                                                             (76,513)             (75,140)
                                                                                         -----------------------------------------
                                                                                                     156,115              163,787
Land parcels                                                                                          41,580               38,458
Equity investment in bank                                                                            184,258              174,222
Cash and cash equivalents                                                                             15,516               17,355
Other assets                                                                                          81,292               93,812
                                                                                         -----------------------------------------
    TOTAL ASSETS                                                                          $          478,761   $          487,634
                                                                                         =========================================

LIABILITIES
Mortgage notes payable                                                                    $          173,345   $          184,502
Notes payable - secured                                                                              177,500              175,500
Notes payable - unsecured                                                                             42,367               41,057
Deferred gains - real estate                                                                         112,883              112,883
Other liabilities and accrued expenses                                                                41,184               41,872
                                                                                         -----------------------------------------
    Total liabilities                                                                                547,279              555,814
                                                                                         -----------------------------------------
TOTAL SHAREHOLDERS' DEFICIT*                                                                         (68,518)             (68,180)
                                                                                         -----------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                                               $          478,761   $          487,634
                                                                                         =========================================

* See Consolidated Statements of Shareholders' Deficit
</TABLE>


<TABLE>
CONDENSED STATEMENTS OF OPERATIONS

                                                                                   For the Year Ended September 30
                                                                    --------------------------------------------------------------
(In thousands)                                                             1996                 1995                 1994
------------------------------------------------------------------- --------------------------------------------------------------
<S>                                                                  <C>                  <C>                  <C>               
Total income                                                         $           76,839   $           77,285   $           66,044
Total expenses                                                                 (104,321)            (109,971)            (102,087)
Equity in earnings of partnership investments                                     3,374                3,681                1,738
Gain (loss) on sales of property                                                    (68)               1,664                   --
                                                                    --------------------------------------------------------------
Real estate operating loss                                                      (24,176)             (27,341)             (34,305)
Equity in earnings of bank                                                       15,846               22,882               15,850
                                                                    --------------------------------------------------------------
Total company operating loss                                                     (8,330)              (4,459)             (18,455)
Income tax benefit                                                               (8,252)             (15,309)             (15,369)
                                                                    --------------------------------------------------------------
Income (loss) before extraordinary item and
  cumulative effect of change in accounting principle                               (78)              10,850               (3,086)
Extraordinary item: loss on early extinguishment of debt                             --                   --               (4,982)
                                                                    --------------------------------------------------------------
Income (loss) before  cumulative effect of change in
  accounting principle                                                              (78)              10,850               (8,068)
Cumulative effect of change in accounting principle                                  --                   --               31,157
                                                                    --------------------------------------------------------------
TOTAL COMPANY NET INCOME (LOSS)                                      $              (78)  $           10,850   $           23,089
                                                                    ==============================================================
</TABLE>

                                      F-52

<PAGE>
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS

                                                                                   For the Year Ended September 30
                                                                    --------------------------------------------------------------
(In thousands)                                                             1996                 1995                 1994
------------------------------------------------------------------- --------------------------------------------------------------
<S>                                                                  <C>                  <C>                  <C>               
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)                                                    $              (78)  $           10,850   $           23,089
Adjustments to reconcile net income (loss) to net cash provided
  by (used in) operating activities:
      Depreciation                                                               10,020                9,714                9,082
      Write-down of real estate to net realizable value                              --                2,727                1,380
      Loss (gain) on sales of property                                               68               (1,654)                  --
      Equity in earnings of bank                                                (15,846)             (22,882)             (15,850)
      (Increase) decrease in deferred tax asset                                    (192)              10,836              (19,028)
      Loss on early extinguishment of debt                                           --                   --                4,982
      Decrease (increase) in accounts receivable and accrued income              (4,869)                (224)                (516)
      Increase (decrease) in accounts payable and accrued expenses                  430                  317               (5,473)
      Decrease (increase) in tax sharing receivable                              16,606               (5,685)             (12,015)
      Other                                                                       3,643                  325                3,490
                                                                    --------------------------------------------------------------
Net cash provided by (used in) operating activities                               9,782                4,324              (10,859)
                                                                    --------------------------------------------------------------

CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures - properties                                                (7,408)              (6,270)              (6,717)
Property acquisitions                                                                --              (10,193)                  --
Property sales                                                                    1,812                   --                   --
Equity investment in unconsolidated entities                                        639                 (733)             (17,780)
Notes receivable - affiliates                                                        --                   --              (12,675)
Other investing activities                                                           50                   53                   43
                                                                    --------------------------------------------------------------
Net cash used in investing activities                                            (4,907)             (17,143)             (37,129)
                                                                    --------------------------------------------------------------

CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from long-term debt                                                      6,208               16,328              185,080
Repayments of long-term debt                                                    (11,471)             (16,083)             (74,161)
Financing proceeds placed in liquidity maintenance escrow                            --                   --              (25,792)
Costs of obtaining financings                                                      (201)                (516)              (9,404)
Dividends paid                                                                   (1,250)                  --                   --
                                                                    --------------------------------------------------------------
Net cash provided by (used in) financing activities                              (6,714)                (271)              75,723
                                                                    --------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                             (1,839)             (13,090)              27,735
Cash and cash equivalents at beginning of year                                   17,355               30,445                2,710
                                                                    --------------------------------------------------------------
Cash and cash equivalents at end of year                             $           15,516   $           17,355  $            30,445
                                                                    ==============================================================
</TABLE>

                                      F-53

<PAGE>

MANAGEMENT'S STATEMENT ON RESPONSIBILITY

    The Consolidated Financial Statements and related financial information in
this report have been prepared by the Advisor (management) in accordance with
generally accepted accounting principles appropriate in the circumstances, based
on best estimates and judgments, with consideration given to materiality.

    The Trust maintains a system of internal accounting control supported by
documentation to provide reasonable assurance that the books and records reflect
authorized transactions of the Trust, and that the assets of the Trust are
safeguarded.

    The Board of Trustees exercises its responsibility for the Trust's
financial statements through its Audit Committee, which is composed of two
outside Trustees who meet periodically with the Trust's independent accountants
and management.  The Committee considers the audit scope, discusses financial
and reporting subjects, and reviews management actions on these matters.  The
independent accountants have full access to the Audit Committee.

    The independent accountants are recommended by the Audit Committee and
confirmed by the Board of Trustees. They provide an objective assessment of the
fairness and accuracy of the financial statements, consider the adequacy of the
system of internal accounting controls, and perform such tests and other
procedures as they deem necessary to express an opinion on the fairness of the
financial statements.  Management believes that the policies and procedures it
has established provide reasonable assurance that its operations are conducted
in conformity with law and a high standard of business conduct.


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


                                   Not applicable.


                                       PART III


ITEM 10.  TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST

    The Declaration of Trust provides that there shall be no fewer than three 
nor more than twelve Trustees, as determined from time to time by the 
Trustees in office.  The Board of Trustees has fixed its permanent membership 
at five Trustees divided into three classes with overlapping three-year 
terms. The  term of  each  class  expires  at  the  Annual  Meeting  of  
Shareholders, which is usually held on the last Friday of  January.

                                      97

<PAGE>

    The following list sets forth the name, age, position with the Trust,
present principal occupation or employment and material occupations, positions,
offices or employments during the past five years of each Trustee and executive
officer of the Trust.  Unless otherwise indicated, each individual has held an
office with the Trust for at least the past five years.

              Class One Trustees --Terms End at 1997 Annual Meeting
              -----------------------------------------------------

    GILBERT M. GROSVENOR, age 65, has served as a Trustee since 1971.  He also
serves as Chairman of the Board of Trustees of the National Geographic Society
and as a  Director of the Bank,  Saul Centers, Inc., Marriott International
Corp., and  Ethyl Corporation.  

    B. FRANCIS SAUL II, age 64, has served as Chairman and Chief Executive
Officer of the Trust since 1969 and as a Trustee since 1964.  He also serves as
President and Chairman of the Board of Directors of B. F. Saul Company, B. F.
Saul Advisory Company, Chevy Chase Property Company,  Westminster Investing
Corporation, and Chevy Chase Lake Corporation, as Chairman of the Board of the
Bank, as Chairman of the Board and Chief Executive Officer of Saul Centers,
Inc., and as a Trustee of the National Geographic Society and the Brookings
Institute.

                 Class Two Trustee --Term Ends at 1998 Annual Meeting
                 ----------------------------------------------------

    GEORGE M. ROGERS, JR., age 63, has served as a Trustee since 1969.  His 
professional corporation is a partner in the law firm of Shaw, Pittman, Potts 
& Trowbridge, Washington, D.C., which serves as counsel to the Trust and the 
Bank. Mr. Rogers serves as a Director of  the Bank, B. F. Saul Company, Chevy 
Chase Property Company, Westminster Investing Corporation,  and Chevy Chase 
Lake Corporation.  

               Class Three Trustees --Terms End at 1999 Annual Meeting
               -------------------------------------------------------

    GARLAND J. BLOOM, JR., age 65, has served as a Trustee since 1964.  He is
currently a real estate consultant.  He was formerly Executive Vice President
and Principal of GMB Associates, Inc. (a real state finance and management firm)
from 1988 to 1990 and Vice Chairman and Chief Operating Officer of
Smithy-Braedon Company (a real estate finance and management firm) from 1985 to
1987.

    JOHN R. WHITMORE, age 63, has served as a Trustee since 1984.  He also
serves as Director, President and Chief Executive Officer of The Bessemer Group,
Incorporated (a financial management and banking firm) and its Bessemer Trust
Company subsidiaries with which he has been an associated since 1975,  and as a
Director of Bessemer Securities Corporation, Chevy Chase Property Company, B. F.
Saul Company and Saul Centers, Inc. 

EXECUTIVE OFFICERS OF THE TRUST WHO ARE NOT DIRECTORS

    PHILIP D. CARACI, age 58, serves as Senior Vice President and Secretary of
the Trust, Executive Vice President of B.F. Saul Company, Senior Vice President
of B. F. Saul Advisory Company, President of Franklin Property Company and a
Director and President of Saul Centers, Inc.

                                      98

<PAGE>

    STEPHEN R. HALPIN, JR., age 41, serves as Vice President and Chief
Financial Officer of the Trust.  He also serves as Executive Vice President and
Chief Financial Officer of the  Bank.

    ROSS E. HEASLEY, age 57, serves as Vice President of the Trust, B. F. Saul
Company, B. F. Saul Advisory Company, Franklin Property Company and Saul
Centers, Inc.

    HENRY RAVENEL, JR., age 62, serves as Vice President of the Trust, B. F.
Saul Company, B. F. Saul Advisory Company and Saul Centers, Inc.

    WILLIAM K. ALBRIGHT, age 65, serves as Vice President and Treasurer of the
Trust, B. F. Saul Company, Franklin Property Company and B. F. Saul Advisory
Company, and as Vice President of Saul Centers, Inc.

COMMITTEES OF THE BOARD OF TRUSTEES

    The Board of Trustees met four times during fiscal 1996.  Each member of
the Board attended at least 75% of the aggregate number of meetings of the Board
and of the Committees of the Board on which he served.

    The Board of Trustees has three standing committees:  the Audit Committee,
the Executive Committee  and the Nominating Committee.

    The Audit Committee is composed of Messrs. Bloom and Grosvenor.  Its duties
include nominating the Trust's independent auditors, discussing with them the
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 1996.

    The Executive Committee is composed of Messrs. Rogers, Saul and Whitmore. 
It is empowered to oversee day-to-day actions of the Advisor and Franklin in
connection with the operations of the Trust, including the acquisition,
administration, sale or disposition of investments.  This Committee did not meet
during  fiscal 1996.

    The Nominating Committee is composed of Messrs. Rogers and Whitmore.  Its
function is to screen and make recommendations to the Board of Trustees
regarding potential candidates for membership on the Board and to perform such
other duties as may be assigned to it from time to time.  This Committee did not
meet during fiscal 1996.

    Trustees of the Trust are currently paid an annual retainer of $12,500 and
a fee of $600 for each Board or committee meeting attended.  Trustees from
outside the Washington, D.C. area are also reimbursed for out-of-pocket expenses
in connection with their attendance at meetings.  Mr. Saul is not paid for
attending Executive Committee meetings.  For the fiscal year ended September 30,
1996, the Real Estate Trust paid total fees  of $78,700 to the Trustees,
including $14,900  to Mr. Saul.

                                      99

<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

    The Trust pays no compensation to its executive officers for their services
in such capacity.  Mr. Saul receives compensation from the Bank for his services
as the Bank's Chairman of the Board of Directors and Chief Executive Officer,
and Mr. Halpin, who became an executive officer of the Trust in fiscal 1994,
receives compensation from the the Bank for his services as Executive Vice
President and Chief Financial Officer. No other executive officers of the Trust
received any compensation from the Trust or its subsidiaries with respect to any
of the fiscal years ended September 30, 1996, 1995 or 1994.

    The following table set forth the cash compensation paid by the Bank to Mr.
Saul and Mr. Halpin for or with respect to the fiscal years ended September 30,
1996, 1995 and 1994 for all capacities in which they served during such fiscal
years.

<TABLE>
<CAPTION>

                              SUMMARY COMPENSATION TABLE
                                 Annual Compensation
                          ----------------------------------

                                                                                  Other Annual          All Other
Name and Principal Position        Fiscal           Salary         Bonus          Compensation        Compensation
---------------------------        ------           ------         -----          ------------        ------------

<S>                                <C>         <C>               <C>             <C>                 <C>
B. Francis Saul II                    1996     $1,015,054         $500,000        $---                  $214,426 (1)
     Chairman and Chief               1995        830,441         $400,000        $---                  $228,138 (2)
     Executive Officer                1994       $682,966         $300,000        $---                  $109,860 (3)

Stephen R. Halpin, Jr.                1996     $  332,320         $ 58,000        $---                  $ 50,295 (1)
     Vice President and               1995     $  304,627         $ 44,250        $---                  $ 51,830 (2)
     Chief Financial Officer          1994     $  281,369         $ 41,400        $---                  $ 31,993 (3)
</TABLE>
_____________________ 

(1) The total amounts shown in the "All Other Compensation" column for fiscal
    1996 consist of the following: (i) contributions made by the Bank to the
    Bank's Supplemental Executive Retirement Plan    on behalf of Mr. Saul
    ($90,693) and Mr. Halpin ($14,373); (ii) the taxable benefit of premiums 
    paid by the Bank for group term insurance on behalf of Mr. Halpin ($2,102);
    (iii) contributions to the B.     F. Saul   Company Employees Profit Sharing
    Retirement Plan (the "Retirement Plan"), a defined contribution plan, on
    behalf of Mr. Halpin ($9,000); and (iv) accrued earnings on awards 
    previously made under the Bank's   Deferred Compensation Plan on behalf of 
    Mr. Saul ($123,733) and Mr. Halpin ($24,820).

(2) The total amounts shown in the "All Other Compensation" column for fiscal
    1995 consist of the following:  (i)  contributions made by the Bank to the
    Bank's Supplemental Executive Retirement Plan on behalf of Mr. Saul
    ($73,847) and Mr. Halpin ($5,193); (ii) the taxable benefit of premiums paid
    by the Bank for group term insurance on behalf of Mr. Halpin ($1,450); (iii)
    contributions to the B. F. Saul Company Employees Profit Sharing Retirement 
    Plan (the "Retirement Plan"), a defined contribution plan, on behalf of 
    Mr. Halpin ($15,763); and (iv) accrued earnings on awards previously made
    under the Bank's Deferred Compensation Plan on behalf of Mr. Saul ($154,291)
    and Mr. Halpin ($29,424).

(3) The total amounts shown in the "All Other Compensation" column for fiscal
    1994 consist of the following: (i) contributions made by the Bank to the 
    Bank's Supplemental Executive Retirement Plan on behalf of Mr. Saul 
    ($42,337) and Mr. Halpin ($4,177); (ii) the taxable benefit of premiums paid
    by the Bank for group term life insurance on behalf of Mr. Halpin ($500);  
    (iii)  contributions to the Retirement Plan on behalf Mr. Halpin ($15,189); 
    and (iv)  accrued earnings on awards previously made under the Bank's 
    Deferred Compensation Plan on behalf of Mr. Saul ($67,523) and Mr. Halpin 
    ($12,127). 

                                      100

<PAGE>

    Long-Term Incentive Plan Awards.  The following table sets forth certain
information concerning the principal contributions (the "Principal
Contributions") credited by the Bank to the accounts (the "Accounts") of the
executive officers of the Bank named above for fiscal 1996 under the Bank's
Deferred Compensation Plan (the "Plan").
<TABLE>
<CAPTION>
                               Long-Term Incentive Program - Awards in Last Fiscal Year

                               Performance or              Estimated Future Payouts (1)
                             Other Period Until          Under Non-Stock Price-Based Plans 
Name                        Maturation or Payout         Threshold     Target (2)   Maximum
----                        --------------------        -----------  ------------- ---------

<S>                              <C>                    <C>            <C>          <C>
B. Francis Saul II(3)               2002                $  450,000      $638,330     $2,786,281
Stephen R. Halpin, Jr.              2006                $1,000,000      $179,085     $  619,174
</TABLE>

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

(1) The estimated future payouts shown in the table are based on assumed 
    performance rates for the Bank during each year in the ten-year 
    performance period.  The actual payouts under the Plan may vary 
    substantially from the payouts shown in the table, depending upon the 
    Bank's actual rate of return on average assets for each fiscal year in 
    the ten-year performance period ending September 30, 2006.

(2) The Plan does not establish any target performance levels.  The payout 
    amounts shown in this column have been calculated assuming that the 
    Bank's rate of return on average assets during each of the years in the 
    performance period are the same as the Bank's rate of return during the 
    fiscal year ended September 30, 1996.

(3) The payout amounts shown for Mr. Saul are the estimated amounts that 
    would be payable to Mr. Saul if his employment continued with the Bank 
    for the entire ten-year performance period of the Plan.  Certain of the 
    awards credited by the Bank to the account maintained for the benefit of 
    Mr. Saul under the Plan, vested at the time Mr. Saul attained age 60 in 
    1992.  Mr. Saul will attain the age of 70 in 2002 at which time he will 
    become fully vested in the account maintained for his benefit under the 
    Plan. Under the Plan, if Mr. Saul were to retire after that date, he could
    elect to have the Bank pay out the Net Contribution (as defined) in his 
    account prior to the year 2007.

    Certain of the awards credited by the Bank to the Account maintained for 
    the benefit of Mr. Saul under the Plan vested at the time Mr. Saul attained
    age 60 in 1992. Certain other awards credited by the Bank to the Account
    maintained for the benefit of Mr. Saul will vest upon the earlier of (i)
    five years after the date of the award, (ii) his attainment of the age of
    70 in 2002, (iii) his death, (iv) his total or permanent disability, or a
    change in control of the Bank (as defined in the Plan).  Accordingly, as
    of September 30, 1996, Mr. Saul was partially vested in the Account
    balance maintained for his benefit under the Plan.  As of that date, the
    vested Account balance maintained for Mr. Saul's benefit under the Plan
    was $983,069.  As of September 30, 1996, Mr. Saul has vested Accounts
    that are payable within 90 days after September 30, 1996 in the amount of
    $180,780.

    The Plan provides that, as of the end of each fiscal year in the ten-year
period ending September 30, 2006 (or the executive officer's earlier termination
of employment with the Bank), the Bank will add to or deduct from each executive
officer's Account a contribution or deduction, as the case may be, which
represents, the hypothetical interest (which may be positive or negative) earned
on the Principal Contribution, based on the Bank's rate of return on average
assets (as computed under the Plan) for the fiscal year then ended.  (The
Principal Contribution, plus or minus any interest credited or deducted, is
referred to as the "Net Contribution").

                                      101

<PAGE>

    Executive officers are entitled to receive the Net Contribution in their
Account only upon full or partial vesting.  Plan participants become fully
vested in their Account under the Plan, provided that they remain continuously
employed by the Bank during the vesting period, upon the earliest to occur of
any of the following:  (i) September 30, 2006; (ii) attainment of age 60; (iii)
death; (iv) total and permanent disability; or (v) a change in control of the
Bank (as defined in the Plan).  Plan participants become partially vested to the
extent of 50% of the Net Contribution in the Account, upon the termination of
their employment by the Bank without cause (as defined in the Plan) after
September 30, 2001.

    Payouts are made under the Plan without 120 days after September 30, 2006,
or the earlier termination of the executive officer's employment with the Bank,
provided that vesting or partial vesting has occurred under the Plan.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The  following  table  sets  forth  certain information,  as of December 2,
1996, concerning beneficial ownership of Common Shares and Preferred Shares of
Beneficial Interest ("Preferred Shares") by (i) each person known by the Trust
to be the beneficial owner of more than 5% of the Common Shares and the
Preferred Shares, (ii) each member of the Board of Trustees, (iii) each
executive officer of the Trust named in the Summary Compensation Table under
"Executive Compensation" and (iv) all Trustees and executive officers of the
Trust as a group.


         Name of                 Aggregate Number of Shares         Percent of
    Beneficial Owner               Beneficially Owned (1)           Class (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 executive               Preferred:
officers as a group (10 persons)         516,000 (2)                   100.00%
                                           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 B. F. Saul Company and other
    companies of which Mr. Saul is an officer, director and/or more than 10%
    shareholder (comprising 270,000 Preferred Shares owned by B. F. Saul 
    Company, 90,000 Preferred Shares owned by Franklin Development Company, 
    Inc., 90,000 Preferred Shares owned by The Klingle Corporation, and 66,000 
    Preferred 

                                      102

<PAGE>

    Shares owned by Westminster Investing Corporation).  The address of each 
    person listed in this footnote is 8401 Connecticut Avenue, Chevy Chase, 
    Maryland 20815. Pursuant to Rule 13d-3, the Preferred Shares described above
    are considered to be beneficially owned by Mr. Saul because he has or may be
    deemed to have sole or shared  voting and/or investment power in respect 
    thereof.

(3) Consists of Common Shares owned of record by B. F. Saul Company and other
    companies of which Mr. Saul is an officer and director and/or more than 10%
    shareholder (comprising 1,125,739 Common Shares owned by Westminster
    Investing Corporation, 43,673 Common Shares owned by Derwood Investment 
    Corporation (a subsidiary of  Westminster  Investing Corporation), 34,400 
    Common Shares owned by Somerset Investment Company, Inc. (a subsidiary of 
    Westminster  Investing Corporation), 2,545,362 Common Shares owned by 
    B. F. Saul Company, 206,300 Common Shares owned by Columbia Credit Company 
    (a subsidiary of B.F. Saul Company), 283,400 Common Shares owned by Columbia
    Securities Company of Washington, D.C., 172,918 Common Shares owned by 
    Franklin Development Company, Inc., and 395,718 Common Shares owned by The
    Klingle Corporation).  The address of each person listed in this footnote is
    8401 Connecticut  Avenue, Chevy Chase, Maryland  20815. Pursuant to 
    Rule 13d-3, the Common Shares described above are considered to be 
    beneficially owned by Mr. Saul because he has or may be deemed to have sole 
    or shared voting and/or investment power in respect thereof.

(4) Mr. Caraci has entered into an agreement with the Trust under which he is
    required to sell all Common Shares he then owns to the Trust when his 
    employment by B. F. Saul Company and any of its affiliates ceases for any 
    reason, including retirement, termination, death or disability.  The price 
    Mr. Caraci will receive for his Common Shares will be the greater of $28.00 
    per Share or the price the Trust determines at the time is the fair market 
    value thereof.

    The Preferred Shares were issued in June 1990 in connection with the
transaction in which the Trust  increased its equity interest in the Bank from
60% to 80%.  The dividend rate on the Preferred Shares is $10.50 per share per
annum.  Dividends are cumulative and are payable annually or at such other times
as the Trustees may determine, as and when declared by the Trustees out of any
assets legally available therefor.  The Preferred Shares have a liquidation
preference of $100 per share.  Subject to limits in certain of the Trust's loan
agreements, the Preferred Shares are subject to redemption at the option of the
Trust at any time on or after the fifth anniversary of their issuance at a
redemption price equal to their liquidation preference.  Except as otherwise
required by applicable law, the holders of Preferred Shares are entitled to vote
only in certain limited situations, such as the merger of the Trust or a sale of
all or substantially all of the assets of the Trust.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS   

    TRANSACTIONS WITH B. F. SAUL COMPANY AND ITS SUBSIDIARIES.  The Real 
Estate Trust is managed by the  Advisor, a wholly owned  subsidiary of the 
Saul Company.  All of the officers of the Trust and B. Francis Saul II, 
George M. Rogers, Jr. and John R. Whitmore, each of whom is a Trustee of the 
Trust, are also officers and/or directors of the Saul Company and/or its 
subsidiary corporations.  The Advisor is paid a fixed monthly fee subject to 
annual review by the Trustees.  The monthly fee was $250,000 for the period 
October 1993 through March 1994, $292,000 for the period April 1994 through 
September 1995, $301,000 for the period October 1995 through March 1996, and 
$306,000 for the period April 1996 through September 1996. The advisory 
contract has been extended until September 30, 1997, and will continue

                                      103

<PAGE>

thereafter unless cancelled by either party at the end of any contract year. 
Certain loan agreements prohibit termination of this contract.

    The Saul Company and Franklin, a wholly owned subsidiary of the Saul
Company, provide services to the Real Estate Trust in the areas of commercial
property management and leasing, hotel  management, development and construction
management, and acquisitions, sales and financings of real property.  The fee
schedules of the Saul Company and Franklin are reviewed and approved by the
Trustees.  Fees to the Saul Company and Franklin amounted to $4.8 million in
fiscal 1996.

    The Real Estate Trust reimburses the Advisor and Franklin for costs and
expenses incurred in connection with the acquisition and development of real
property on behalf of the Real Estate Trust, in-house legal expenses, and 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 $74,000  in 
such fees in fiscal 1996.

    B. F. Saul Insurance Agency of Maryland, Inc., a subsidiary of the Saul
Company, is a general insurance agency that receives commissions and
counter-signature fees in connection with the Real Estate Trust's insurance
program.  Such commissions and fees amounted to $152,000  in fiscal 1996.

    In fiscal 1994, the Real Estate Trust made a $15.0 million demand loan to
the Saul Company.  This loan accrues interest at an annual rate of prime plus
1/2%.  During fiscal 1995, Saul Company made principal and interest payments on
such loan of $2.3 million and $1.2 million respectively.  During fiscal 1996 the
Real Estate Trust made new loans aggregating $3.5 million to the Saul Company. 
Interest accrued on all loans to the Saul Company amounted to $1.4 million
during fiscal 1996.  At September 30, 1996 the total principal due the Real
Estate Trust was $16.2 million.

    REMUNERATION OF TRUSTEES AND OFFICERS.  For fiscal 1996, the Real Estate
Trust paid the Trustees $79,000 in fees for their services.  See "Trustees and
Executive Officers of the Trust."  No compensation was paid to the officers of
the Real Estate Trust for acting as such; however, Mr. Saul was paid by the Bank
for his services as the Bank's Chairman and Chief Executive Officer and Mr.
Halpin was paid by the Bank for his services as Executive Vice President and
Chief Financial Officer of the Bank.  See "Executive Compensation." Messrs.
Grosvenor, Rogers, and Saul receive  compensation for their services as
directors of the Bank and Messrs. Rogers,  Saul and Whitmore and all of the
officers of the Real Estate Trust receive compensation from the Saul Company
and/or its affiliated corporations as directors or officers thereof.

    LEGAL SERVICES.  For legal services to the Real Estate Trust and its
subsidiaries, the law firm in which the professional corporation of George M.
Rogers, Jr., a Trustee of the Trust, is a partner received $119,000  in fiscal
1996, excluding expense reimbursements.

    OTHER TRANSACTIONS.  The Real Estate Trust leases space to the Bank and
Franklin at one of its income-producing properties.   Amounts paid  under these 
leases  amounted to $143,000  in fiscal 1996.

                                      104

<PAGE>

                                       PART IV

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

(a) The following documents are filed as part of this report:

    1.   Financial Statements
         --------------------

         (a)  Report of Independent Public Accountant.

         (b)  Consolidated Balance Sheets - As of  September 30, 1996 and 1995.

         (c)  Consolidated Statements of Operations - For the years ended 
              September 30, 1996, 1995 and 1994.

         (d)  Consolidated Statements of Shareholders' Deficit - For the years
              ended September 30, 1996, 1995 and 1994.

         (e)  Consolidated Statements of Cash Flows - For the years ended
              September 30, 1996, 1995 and 1994.

         (f)  Notes to Consolidated Financial Statements.

    2.   Financial Statement Schedules and Supplementary Data
         ----------------------------------------------------

      (a)  Selected Quarterly Financial Data for the Real Estate Trust are 
           incorporated  by reference in Part II, Item 8.

      (b)  Report of Independent Public Accountant.

      (c)  Schedules of the Real Estate Trust:

           Schedule I - Condensed Financial Information - For the years ended 
           September 30, 1996, 1995 and 1994.

           Schedule III - Consolidated Schedule of Investment Properties - As 
           of September 30, 1996.

                                      105

<PAGE>
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 30, 1994 between the Trust and
              Norwest Bank Minnesota, National Association, as Trustee, with
              respect to the Trust's 115/8% Series B Senior Secured Notes due
              2002, as filed as Exhibit 4(a) to Registration Statement
              33-52995 is hereby incorporated by reference.

      (b)     Indenture with respect to the Trust's Senior Notes Due from One
              Year to Ten Years from Date of Issue as filed as Exhibit 4(a) to
              Registration 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

                                      106

<PAGE>

EXHIBITS       DESCRIPTION
--------      -----------------------------------------------------------------

              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.

  10.         MATERIAL CONTRACTS

      (a)     Advisory Contract with B.F. Saul Advisory Company effective
              October 1, 1982 filed as Exhibit 10(a) to Registration Statement
              No. 2-80831 is hereby incorporated by reference.

      (b)     Commercial Property Leasing and Management Agreement effective
              October 1, 1982 between the Trust and Franklin Property Company
              filed as Exhibit 10(b) to Registration Statement No. 2-80831 is
              hereby incorporated by reference.

      (c)     Tax sharing Agreement dated June 28,1990 among the Trust, Chevy
              Chase Savings Bank F.S.B. and certain of their subsidiaries filed
              as Exhibit 10(c) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.

      (d)     Agreement dated June 28, 1990 among the Trust B.F. Saul Company,
              Franklin Development Co., Inc., The Klingle Corporation and
              Westminster Investing Corporation relating to the transfer of
              certain shares of Chevy Chase Savings Bank, F.S.B. and certain
              real property to the Trust in exchange for preferred shares of
              beneficial interest of the Trust filed as Exhibit 10(d) to
              Registration Statement No. 33-34930 is hereby incorporated by
              reference.

      (e)     Regulatory Capital Maintenance/Dividend Agreement dated May 17,
              1988 among B.F. Saul Company, the Trust and the Federal Savings
              and Loan Insurance Corporation filed as Exhibit 10(e) to the
              Trust's Annual Report on Form 10-K (File No. 1-7184) for the
              fiscal year ended September 30, 1991 is hereby incorporated by
              reference.

      (f)     Written Agreement dated September 30, 1991 between the Office of
              Thrift Supervision and Chevy Chase Savings Bank, F.S.B. filed as
              Exhibit 10(f) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.

      (g)     Amendments to Commercial Property Leasing and Management
              Agreement between the Trust and Franklin Property Company dated
              as of December 31, 1992 (Amendment No. 5), July 1, 1989
              (Amendment No. 4), October 1, 1986 (Amendment No. 3), January 1,
              1985 (Amendment No. 2) and July 1, 1984 (Amendment No. 1) filed
              as Exhibit 10(o) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.

      (h)     Advisory Contract between B.F. Saul Advisory Company and Dearborn
              Corporation dated as of December 31, 1992 filed as Exhibit 10(p)
              to Registration Statement No. 33-34930 is hereby incorporated by
              reference.

      (i)     Commercial Property Leasing and Management Agreement between
              Dearborn Corporation and Franklin Property Company dated as of
              December 31, 1992 filed as Exhibit 10(q) to Registration
              Statement No. 33-34930 is hereby incorporated by reference.

                                      107

<PAGE>

EXHIBITS      DESCRIPTION
--------      -----------------------------------------------------------------

      (j)     Registration Rights and Lock-Up Agreement dated August 26, 1993
              by and among Saul Centers, Inc. and the Trust, Westminster
              Investing Corporation, Van Ness Square Corporation, Dearborn
              Corporation, Franklin Property Company and Avenel Executive Park
              Phase II, Inc. as filed as Exhibit 10.6 to Registration Statement
              No. 33-64562 is hereby incorporated by reference.

      (k)     Exclusivity and Right of First Refusal Agreement dated August 26,
              1993 among Saul Centers, Inc., the Trust, B. F. Saul Company,
              Westminster Investing Corporation, Franklin Property Company, Van
              Ness Square Corporation, and Chevy Chase Savings Bank, F.S.B. as
              filed as Exhibit 10.7 to Registration Statement No. 33-64562 is
              hereby incorporated by reference.

      (l)     First Amended and Restated Reimbursement Agreement dated as of
              August 1, 1994 by and among Saul Centers, Inc., Saul Holdings
              Limited Partnership, Saul Subsidiary I limited Partnership, Saul
              Subsidiary II Limited Partnership, Avenel Executive Park Phase
              II, Inc., Franklin Property Company, Westminster Investing
              Corporation, Van Ness Square Corporation, Dearborn Corporation
              and the Trust filed as Exhibit 10(l) to the Trust's Annual Report
              on Form 10-K (File No. 1-7184) for the fiscal year ended
              September 30, 1995 is hereby incorporated by reference.

      (m)     Amendment to Written Agreement dated October 29, 1993 between the
              Office of Thrift Supervision and Chevy Chase Savings Bank, F.S.B.
              filed as Exhibit 10(u) to Registration Statement No. 33-34930 is
              hereby incorporated by reference.

      (n)     Registration Rights Agreement dated as of March 30, 1994 among
              the Trust, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
              Smith Incorporated and Friedman, Billings, Ramsey & Co., Inc. as
              filed as Exhibit 4(c) to Registration Statement No. 33-52995 is
              hereby incorporated by reference.

      (o)     Bank Stock Registration Rights Agreement dated as of March 30,
              1994 between the Trust and Norwest Bank Minnesota, National
              Association, as Trustee, as filed as Exhibit 4(d) to Registration
              Statement No. 33-52995 is hereby incorporated by reference.

*21.          List of Subsidiaries of the Trust.

*27.          Financial Data Schedule.



---------------------
*  Filed herewith.

<PAGE>


                       REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                           ON FINANCIAL STATEMENT SCHEDULES


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




We have audited the consolidated financial statements of B.F. Saul Real 
Estate Investment Trust (the "Trust") as of September 30, 1996 and 1995 and 
for the years then ended in accordance with generally accepted auditing 
standards, and have issued our report thereon dated December 3, 1996. 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. This information has been subjected 
to the auditing procedures applied in our audit of the basic financial 
statements and, in our opinion, is fairly stated in all material respects the 
financial data required to be set forth therein in relation to the basic 
financial statements taken as a whole.


/s/ Arthur Andersen LLP


Washington, D.C.
December 3, 1996

<PAGE>

B.F. SAUL REAL ESTATE INVESTMENT TRUST
CONDENSED FINANCIAL INFORMATION                              SCHEDULE I


(a)  Required consensed 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
                           ---------------------------------------
                              1996             1995           1994

                           $6,800,000          None           None 

<PAGE>
Consolidated Schedule of Investment Properties - Real Estate Trust Schedule III
September 30, 1996
(Dollars in Thousands)
<TABLE>

                                                           Costs
                                                         Capitalized                  Basis at Close of Period
                                                                      ----------------------------------------------------------
                                             Initial     Subsequent                   Buildings
                                            Basis to         to                          and          Leasehold
Hotels                                        Trust      Acquisition     Land       Improvements      Interests       Total
------------------------------------------ ------------ -------------------------- ---------------- ----------------------------
<S>                                         <C>           <C>           <C>         <C>              <C>             <C>       
Hampton Inn-Dulles, Sterling VA             $       --    $     5,886   $     290   $        5,596   $          --   $    5,886
Holiday Inn, Auburn Hills MI                    10,450            641       1,028           10,063              --       11,091
Holiday Inn, Cincinnati OH                       6,859          2,319         245            8,933              --        9,178
Holiday Inn, Dulles VA                           6,950         19,446         862           25,534              --       26,396
Holiday Inn, Gaithersburg MD                     3,849         14,658       1,781           16,726              --       18,507
Holiday Inn, Pueblo CO                           3,458          1,995         561            4,892              --        5,453
Holiday Inn, Rochester NY                        3,340          9,360         605           12,095              --       12,700
Holiday Inn, Tysons Corner VA                    6,976         12,415       3,107           16,284              --       19,391
Howard Johnsons, Arlington VA                   10,187          2,628       1,183           11,632              --       12,815
                                           ------------ -------------------------- ---------------- ----------------------------
Subtotal - Hotels                            $  52,069     $   69,348    $  9,662    $     111,755   $          --     $121,417
                                           ------------ -------------------------- ---------------- ----------------------------

Commercial
------------------------------------------
900 Circle 75 Pkway, Atlanta GA              $  33,434   $        398   $     563   $       33,269   $          --    $  33,832
1000 Circle 75 Pkway, Atlanta GA                 2,820            870         248            3,442              --        3,690
1100 Circle 75 Pkway, Atlanta GA                22,746          1,796         419           24,123              --       24,542
8201 Greensboro, Tysons Corner VA               28,890          1,925       1,633           29,182              --       30,815
Commerce Ctr-Ph II, Ft Lauderdale FL             4,266            587         782            4,071              --        4,853
Dulles North, Loudon County VA                      --          5,502         421            5,081              --        5,502
Metairie Tower, Metairie LA                      2,729            533         403            2,859              --        3,262
                                           ------------ -------------------------- ---------------- ----------------------------
Subtotal - Commercial                        $  94,885     $   11,611    $  4,469    $     102,027   $          --     $106,496
                                           ------------ -------------------------- ---------------- ----------------------------
</TABLE>
<TABLE>

                                                                                                                    Buildings
                                                                                                                       and
                                                                                                                  Improvements
                                              Accumulated           Related         Date of           Date         Depreciable
Hotels                                        Depreciation           Debt         Construction      Acquired      Lives (Years)
------------------------------------------ ------------------- --------------------------------- --------------- ----------------
<S>                                         <C>                 <C>               <C>            <C>             <C> 
Hampton Inn-Dulles, Sterling VA             $           2,035   $          1,896      1987            4/87            31.5
Holiday Inn, Auburn Hills MI                              640              7,482      1989           11/94            31.5
Holiday Inn, Cincinnati OH                              4,289              2,927      1975            2/76             40
Holiday Inn, Dulles VA                                 10,031             12,573      1971           11/84             28
Holiday Inn, Gaithersburg MD                            6,274              7,308      1972            6/75             45
Holiday Inn, Pueblo CO                                  2,341              3,994      1973            3/76             40
Holiday Inn, Rochester NY                               5,244             13,805      1975            3/76             40
Holiday Inn, Tysons Corner VA                           6,513             16,274      1971            6/75             47
Howard Johnsons, Arlington VA                           4,859              9,395      1973           11/83             30
                                           ------------------- ------------------
Subtotal - Hotels                           $          42,226   $        75,654
                                           ------------------- ------------------

Commercial
------------------------------------------
900 Circle 75 Pkway, Atlanta GA             $          10,898   $         21,520      1985           12/85             35
1000 Circle 75 Pkway, Atlanta GA                        1,771              2,230      1974            4/76             40
1100 Circle 75 Pkway, Atlanta GA                        9,476             15,810      1982            9/82             40
8201 Greensboro, Tysons Corner VA                       8,307             35,669      1985            4/86             35
Commerce Ctr-Ph II, Ft Lauderdale FL                    1,221              1,340      1986            1/87             35
Dulles North, Loudon County VA                            932              1,319      1990           10/90            31.5
Metairie Tower, Metairie LA                             1,416                 --      1974           11/76             40
                                           ------------------- ------------------
Subtotal - Commercial                       $          34,021   $         77,888
                                           ------------------- ------------------
</TABLE>


<PAGE>
Consolidated Schedule of Investment Properties - Real Estate Trust (Continued) 
Schedule III-Continued
September 30, 1996
(Dollars in Thousands)
<TABLE>
                                                           Costs
                                                         Capitalized                  Basis at Close of Period
                                                                      ----------------------------------------------------------
                                             Initial     Subsequent                   Buildings
                                            Basis to         to                          and          Leasehold
Purchase-Leasebacks                           Trust      Acquisition     Land       Improvements      Interests       Total
------------------------------------------ ------------ -------------------------- ---------------- ----------------------------
<S>                                         <C>          <C>            <C>         <C>              <C>             <C>       
Beverly Plaza, Casper, WY                   $      500   $         --   $     500   $            --  $          --   $      500
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              $    3,325   $         --    $  3,325   $            --  $          --   $    3,325
                                           ------------ -------------------------- ---------------- ----------------------------

Miscellaneous investments                   $      633   $        757   $     250   $          991   $         149   $    1,390
                                           ------------ -------------------------- ---------------- ----------------------------

Total Income-Producing Properties             $150,912     $   81,716     $17,706   $      214,773   $         149     $232,628
                                           ------------ -------------------------- ---------------- ----------------------------

Land Parcels
------------------------------------------
Arvida Park of Commerce,
    Boca Raton, FL                          $    7,378            143    $  7,521   $           --   $          --   $    7,521
Avenel, Gaithersburg, MD                           361              8         369               --              --          369
Church Road, Loudoun Co., VA                     2,586          2,272       4,858               --              --        4,858
Circle 75, Atlanta, GA                          12,927          4,264      17,191               --              --       17,191
Flagship Centre, Rockville, MD                   1,729             39       1,768               --              --        1,768
Holiday Inn - Rochester, Roch., NY                  68             --          68               --              --           68
Overland Park, Overland Park, KA                 3,771            397       4,168               --              --        4,168
Prospect Indust. Pk, Ft. Laud., FL               2,203              9       2,212               --              --        2,212
Sterling Blvd., Loudoun Co., VA                     --          3,425       3,425               --              --        3,425
                                           ------------ -------------------------- ---------------- ----------------------------
Subtotal                                     $  31,023     $   10,557     $41,580   $           --   $          --    $  41,580
                                           ------------ -------------------------- ---------------- ----------------------------

Total Investment Properties                   $181,935     $   92,273     $59,286    $     214,773   $         149     $274,208
                                           ============ ========================== ================ ============================
</TABLE>
<TABLE>

                                                                                                                    Buildings
                                                                                                                       and
                                                                                                                  Improvements
                                              Accumulated           Related         Date of           Date         Depreciable
Purchase-Leasebacks                           Depreciation           Debt         Construction      Acquired      Lives (Years)
------------------------------------------ ------------------- --------------------------------- --------------- ----------------
<S>                                         <C>                 <C>               <C>            <C>             <C>
Beverly Plaza, Casper, WY                   $              --   $             --                      4/74
Chateau di Jon, Metairie, LA                               --                 --                     11/73
Country Club, Knoxville, TN                                --                 --                      5/76
Houston Mall, Warner Robbins, GA                           --                 --                      2/72
Old National, Atlanta, GA                                  --                 --                      8/71
                                           ------------------- ------------------
Subtotal - Purchase-Leasebacks              $              --   $             --
                                           ------------------- ------------------

Miscellaneous investments                   $             266   $             --
                                           ------------------- ------------------

Total Income-Producing Properties           $          76,513   $        153,542
                                           ------------------- ------------------

Land Parcels
------------------------------------------
Arvida Park of Commerce,
    Boca Raton, FL                          $              --   $         19,000                  12/84 & 5/85
Avenel, Gaithersburg, MD                                   --                 --                     12/76
Church Road, Loudoun Co., VA                               --                 --                  9/84 & 4/85
Circle 75, Atlanta, GA                                     --              4,312                  2/77 & 1/84
Flagship Centre, Rockville, MD                             --                 --                      8/85
Holiday Inn - Rochester, Roch., NY                         --                 --                      9/86
Overland Park, Overland Park, KA                           --                 --                  1/77 & 2/85
Prospect Indust. Pk, Ft. Laud., FL                         --                350                  10/83 & 8/84
Sterling Blvd., Loudoun Co., VA                            --                 --                      4/84
                                           ------------------- ------------------
Subtotal                                    $              --   $         23,662
                                           ------------------- ------------------

Total Investment Properties                 $          76,513   $        177,204
                                           =================== ==================
</TABLE>


<PAGE>
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.

<TABLE>

BASIS OF INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION
(In thousands)
                                                                                   For The Year Ended September 30
                                                                    --------------------------------------------------------------
                                                                           1996                 1995                 1994
                                                                    -------------------- -------------------- --------------------


Basis of investment properties
-------------------------------------------------------------------

<S>                                                                  <C>                  <C>                  <C>               
Balance at beginning of period                                       $          277,385   $          266,095   $          263,393
Additions (reductions) during the period:
    Capital expenditures                                                          7,408               16,462                6,717
    Sales - nonaffiliates                                                        (5,382)                  --                   --
    Write-down of assets to net realizable value                                     --               (2,727)              (1,380)
    Other                                                                        (5,203)              (2,445)              (2,635)
                                                                    -------------------- -------------------- --------------------
Balance at end of period                                             $          274,208   $          277,385   $          266,095
                                                                    ==================== ==================== ====================


Accumulated depreciation
-------------------------------------------------------------------

Balance at beginning of period                                       $           75,140   $           68,111   $           62,626
Additions (reductions) during the period:
    Depreciation expense                                                         10,020                9,714                9,082
    Sales - nonaffiliates                                                        (3,441)                  --                   --
    Other                                                                        (5,206)              (2,685)              (3,597)
                                                                    -------------------- -------------------- --------------------
Balance at end of period                                             $           76,513   $           75,140   $           68,111
                                                                    ==================== ==================== ====================

</TABLE>


<PAGE>

                                      SIGNATURES


    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Trust has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

                                 B.F. Saul Real Estate Investment Trust

December 27, 1996                 /s/B. Francis Saul II
                                 ---------------------------------------------
                                 B. Francis Saul II
                                 Chairman of the Board


    Pursuant to the requirements of the Securities Exchanges Act of 1934. this
report had been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the dates shown.

         Signature                      Title                        Date
         ---------                      -----                        ----


/s/B. Francis Saul II
--------------------------  Trustee, Chairman of the Board
   B. Francis Saul II       (Principal Executive Officer)     December 27, 1996


/s/Stephen R. Halpin, Jr.                                     December 27, 1996
--------------------------   Vice President and Chief
   Stephen R. Halpin         Financial Officer (Principal
                             Financial Officer)


/s/Ross E. Heasley                                            December 27, 1996
--------------------------   Vice President (Principal
   Ross E. Heasley           Accounting Officer)


/s/Garland J. Bloom, Jr.                                      December 27, 1996
--------------------------   Trustee
   Garland J. Bloom, Jr.


/s/Gilbert M. Grosvenor                                       December 27, 1996
--------------------------   Trustee
   Gilbert M. Grosvenor


/s/George M. Rogers, Jr.                                      December 27, 1996
--------------------------   Trustee
   George M. Rogers, Jr.


/s/John R. Whitmore                                           December 27, 1996
--------------------------   Trustee
   John R. Whitmore