<PAGE>
   As filed with the Securities and Exchange Commission on January 19, 1999.   

                                             Registration No. 333-
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                              ---------------------

                                    FORM S-1

                             REGISTRATION STATEMENT
                                      UNDER
                           THE SECURITIES ACT OF 1933
                              ---------------------

B.F. Saul Real Estate Investment Trust                 Maryland
--------------------------------------   ---------------------------------------
    (Exact name of registrant as              (State or other jurisdiction
      specified in its charter)             of incorporation or organization)

             6712                                       52-605334
--------------------------------------   ---------------------------------------
    (Primary standard industrial         (I.R.S. employer identification number)
     classification code number)

                            8401 Connecticut Avenue,
                    Chevy Chase, Maryland 20815 301/986-6000
       -------------------------------------------------------------
       (Address, including zip code, and telephone number, including
           area code, of registrant's principal executive offices)

                               Henry Ravenel, Jr.
                            8401 Connecticut Avenue,
                    Chevy Chase, Maryland 20815 301/986-6000
          -------------------------------------------------------------
            (Name, address, including zip code, and telephone number,
                   including area code, of agent for service)

                          Copies of correspondence to:
                            Thomas H. McCormick, Esq.
                         Shaw Pittman Potts & Trowbridge
                               2300 N Street, N.W.
                             Washington, D.C. 20037
                                 (202) 663-8000

Approximate date of commencement of proposed sale to the public: From time to
time following the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
   
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of earlier effective registration
statement for the same offering. / /

If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

                         CALCULATION OF REGISTRATION FEE
     ----------------------------------------------------------------------
       Title of Each        Amount    Proposed     Proposed    Amount of
          Class of          To Be      Maximum      Maximum    Registration
         Securities       Registered  Offering     Aggregate     Fee (1)
      To Be Registered                Price Per    Offering
                                        Unit         Price
     ----------------------------------------------------------------------
     Notes Due From     $60,000,000       100%      $60,000,000    $16,680
     One Year to Ten
     Years From Date
     of Issue
     ----------------------------------------------------------------------

(1) Calculated pursuant to Rule 457(o) of the rules and regulations under the
Securities Act of 1933, as amended.

The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.


<PAGE>
PROSPECTUS SUBJECT TO COMPLETION DATED JANUARY 19, 1999                        



                                  $60,000,000

                     B.F. SAUL REAL ESTATE INVESTMENT TRUST
                                      NOTES

     Due one year to ten years from date of issue Interest payable each six
                    months from date of issue and at maturity

                          Note Maturities   Interest Rate
                          From Issue Date     Per Annum
                          ---------------   -------------
                          One Year              5.0%
                          Two Years             7.0%
                          Three Years           9.0%
                          Four Years            9.5%
                          Five to Ten Years    10.0%
                          -------------------------------

                                      Per Note        Total  
                                      --------   ------------
          Public Offering Price         100%     $ 60,000,000
          Underwriting Discounts
           and Commissions              None          None
          Proceeds to Trust(1)          100%     $ 60,000,000

    (1) Before deduction of expenses payable by the B.F. Saul Real Estate
    Investment Trust estimated at $1,507,000, including $600,000 payable
    to B.F. Saul Advisory Company for administering the note program. B.F.
    Saul Advisory Company serves as the Trust's investment advisor and is
    an affiliate of the Trust.

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

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

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

There is no established trading market for the Notes, and the Trust does not
anticipate that an active trading market will be established. These notes are
unsecured obligations and are not guaranteed or insured by any governmental
agency. Furthermore, an investment in the notes involves significant risks.

See "Risk Factors" beginning on page ___ for a discussion of material risks that
you should consider before you invest in the notes being sold by this
Prospectus.

                The date of this Prospectus is January   , 1999.               

[The information in this prospectus is not complete and may be changed. We may
not sell these Notes until the registration statement filed with the Securities
and Exchange Commission has been declared effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.]

<PAGE>
                                  TABLE OF CONTENTS





PROSPECTUS SUMMARY

RISK FACTORS

USE OF PROCEEDS

PLAN OF DISTRIBUTION

HOW TO PURCHASE NOTES

PLAN OF DISTRIBUTION

DESCRIPTION OF NOTES

EXPERTS

LEGAL MATTERS

AVAILABLE INFORMATION

BUSINESS 

    General
         Real Estate
         Banking

PROPERTIES
    Real Estate
    Banking

LEGAL PROCEEDINGS

SELECTED FINANCIAL DATA
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    Financial Condition
         Real Estate
         Banking
    
    Liquidity and Capital Resources
         Real Estate
         Banking
              Liquidity
              Capital

    Results of Operations
         Fiscal 1998 Compared to Fiscal 1997
              Real Estate
              Banking

         Fiscal 1997 Compared to Fiscal 1996
              Real Estate
              Banking

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    Management's Statement on Responsibility

TRUSTEES AND EXECUTIVES OFFICERS OF THE TRUST

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

EXECUTIVE COMPENSATION

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
  OWNERS AND MANAGEMENT

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
              Real Estate
              Banking

NOTE ORDER FORM
<PAGE>
                               PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this Prospectus. It
is not complete and may not contain all of the information that you should
consider before investing in the Notes. To understand this offering fully, you
should read the entire Prospectus carefully, including the "Risk Factors"
section and the financial statements and the notes to those statements.

We have prepared our financial statements and other disclosures on a fully
consolidated basis, which means we included the financial results of Chevy Chase
Bank and its subsidiaries in our financial statements. When we use the term
"Trust" in the text and financial statements, we are referring to the combined
entity including B.F. Saul Real Estate Investment Trust and its subsidiaries,
and Chevy Chase Bank and its subsidiaries. The terms "Real Estate Trust," "we,"
"us," "our" and "ours" refers to B.F. Saul Real Estate Investment Trust and its
subsidiaries, excluding Chevy Chase Bank and its subsidiaries. The operations
conducted by the Real Estate Trust are designated as "Real Estate," while the
business conducted by Chevy Chase Bank and its subsidiaries is identified by the
term "Banking."

                     B.F. Saul Real Estate Investment Trust

Our Corporate Structure

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

Our principal business activity is the ownership and development of
income-producing properties. In addition, we own 80% of the outstanding common
stock of Chevy Chase Bank, F.S.B. ("Chevy Chase Bank" or the "Bank"), whose
assets accounted for 95% of our consolidated assets at September 30, 1998. By
virtue of our ownership of a majority interest in Chevy Chase Bank, we are
considered to be a savings and loan holding company subject to certain
governmental regulations.

We recorded net income of $66.1 million in the fiscal year ended September 30,
1998, compared to net income of $18.9 million in the fiscal year ended September
30, 1997 and a net loss of $78,000 in the fiscal year ended September 30, 1996.

Our Real Estate Business

     Our long-term business objectives are to increase cash flow from operations
and to maximize the capital appreciation of our real estate. Our properties are
located predominantly in the Mid-Atlantic and Southeastern regions of the United
States and consist principally of office and industrial projects, hotels and
undeveloped land parcels.
<PAGE>
In August 1993, we consummated a series of transactions in which we transferred
22 shopping center properties and one of our office properties and the debt
associated with such properties to a newly organized limited partnership, Saul
Holdings Limited Partnership ("Saul Holdings Partnership"), and one of two newly
organized subsidiary limited partnerships of Saul Holdings Partnership. In
exchange for the transferred properties, we received a 21.5% limited partnership
interest in Saul Holdings Partnership. Saul Centers, Inc. ("Saul Centers"), a
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. Saul Centers and a
wholly-owned subsidiary, which are the sole general partners of Saul Holdings
Partnership and the two subsidiary limited partnerships, generally have full,
exclusive and complete responsibility and discretion in the management and
control of each such partnership. B. Francis Saul II, the Chairman of the Board
of Trustees and Chief Executive Officer of the Trust, serves as Chairman of the
Board of Directors and Chief Executive Officer of Saul Centers.

The Business of Chevy Chase Bank

Chevy Chase Bank is a federally chartered and federally insured stock savings
bank which at September 30, 1998 was conducting business from 143 full service
offices, including 11 in-store banking centers, and 696 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 Chevy
Chase, Maryland, both suburban communities of Washington, D.C. The Bank also
maintains 14 mortgage loan production offices in the mid-Atlantic region, 13 of
which are operated by a wholly-owned mortgage banking subsidiary, and 31
consumer loan production offices, 24 of which are operated by a wholly-owned
finance subsidiary of the Bank. At September 30, 1998, the Bank had total assets
of $6.7 billion and total deposits of $4.9 billion. Based on total consolidated
assets at September 30, 1998, Chevy Chase Bank is the largest bank headquartered
in the Washington, D.C. metropolitan area.

Chevy Chase Bank 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 other types of
consumer loans. The Bank also has an 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. On November 12, 1997, the Bank acquired ASB Capital Management,
Inc. ("ASB"), one of the largest SEC-registered investment managers
headquartered in the Washington, D.C. metropolitan area, through which the Bank
provides a variety of investment products and fiduciary services to a primarily
institutional customer base.

In the past, Chevy Chase Bank has earned a significant portion of its revenues
from the issuance and servicing of credit cards and credit card receivables.
However, on September 30, 1998, the Bank sold its entire credit card portfolio
and related assets to an unaffiliated third party. As a result of this
transaction, the Bank will concentrate its resources on capitalizing on its
status as the largest locally headquartered bank in the Washington, D.C.
metropolitan area and furthering its community banking objectives.
<PAGE>
Chevy Chase Bank has historically relied on retail deposits originated in its
branch network as its primary funding source. The Bank has developed its branch
network in furtherance of its corporate strategy to solidify its relationships
with existing customers, achieve a broader retail base to support future growth
and improve its ability to compete with other depository institutions in the
Washington, D.C. metropolitan area. With 47 of its 143 branches located in
Montgomery County, which has one of the nation's highest per capita incomes, the
Bank has the leading market share of retail deposits in that community. The
Bank's branch network also includes locations in Northern Virginia (44
branches), other Maryland counties (40 branches) and the District of Columbia
(12 branches). In addition to locations at deposit branch sites, the Bank has an
extensive network of ATMs.

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

Address of the Trust

Our executive offices are located at 8401 Connecticut Avenue, Chevy Chase,
Maryland 20815 and our sales office is located at 7200 Wisconsin Avenue, Suite
903, Bethesda, Maryland 20814. Our telephone number is 301-986-6207.

Ratio of Earnings to Fixed Charges

During the past five fiscal years, our "fixed charges," that is the total of
interest and debt expense (including amounts payable on the Notes) and ground
rent expense, were greater than our earnings generated from operations available
to pay such fixed charges. "Available earnings" is the sum of (1) income (loss)
from continuing operations, (2) provisions for income taxes, (3) ground rent
expense, and (4) interest and debt expense reduced by capitalized interest. In
fiscal 1998, 1997, 1996, 1995 and 1994, fixed charges exceeded available
earnings by $18.5 million, $19.0 million, $24.2 million, $27.3 million and $34.3
million, respectively.

<PAGE>
                                  THE OFFERING

Securities Offered.....  We are offering $60,000,000 in principal
                         amount of Notes of the Real Estate Trust
                         with varying interest rates as fixed from
                         time to time by the Trust (the "Notes").
                         At [____________], $____ million in
                         principal amount of Notes were available
                         to be issued.

Maturity Date..........  The Notes will mature from one to ten
                         years from the date of issue, as selected
                         by you.

Interest Payment Dates.  Interest on the Notes will be payable
                         semi-annually (six months from the date of
                         issue and each six months thereafter) and
                         at maturity.

Ranking................  The Notes will be unsecured obligations
                         and will rank equally with all of our
                         other unsecured debt.  At September 30,
                         1998, our unsecured debt, consisting of
                         outstanding Notes, accounts payable and
                         accrued expenses, totaled $78.5 million.
                         At September 30, 1998, we had $401.3
                         million of secured debt, which effectively
                         will be prior in right of payment to the
                         Notes.   Of such indebtedness, $198.9
                         million consisted of mortgage notes
                         payable, $200 million consisted of notes
                         secured by the common stock of Chevy Chase
                         Bank owned by us and $2.4 million
                         consisted of other debt.

Sinking Fund...........  We have not set aside any money for the
                         purpose of paying principal and interest
                         on the Notes.

Rating.................  The Notes have not been rated by any
                         independent rating agency.

Redemption.............  At our sole option, we can repurchase from
                         you for the same price you paid us any
                         Note that has been outstanding for more
                         than one year.  We can redeem the Note on
                         the first anniversary of the date of issue
                         or on any interest payment date
                         afterwards.

Covenants..............  The Indenture does not impose any
                         restrictions on our ability to pay
                         dividends or other distributions to our
                         shareholders, to incur debt or to issue
                         additional securities.

Claims                   of Noteholders.. You will not have any claim on any of
                         the assets of Chevy Chase Bank and may look only to our
                         earnings and assets, subject to the priority of others,
                         for the payment of interest and principal on your
                         Notes.

Use of Proceeds........  We will use the net proceeds of the
                         offering of these Notes primarily to
                         retire maturing Notes (including the Notes
                         offered hereby).  Any proceeds not used to
                         repay maturing Notes will be used for
                         other general corporate purposes.
<PAGE>
                                  RISK FACTORS

An investment in these Notes involves significant risks and therefore is
suitable only for persons who understand those risks and their consequences and
who are able to lose their investment. You should consider the following risks
in addition to other information set forth elsewhere in this Prospectus before
making your investment decision.

We also caution you that this Prospectus contains forward looking statements.
Such statements can be identified by the use of forward-looking terminology such
as "may," "will," "expect," "anticipate," "estimate," "continue" or other
similar words. Although we believe that our expectations reflected in the
forward-looking statements are based on reasonable assumptions, these
expectations may not prove to be correct. Important factors that could cause our
actual results to differ materially from the expectations reflected in these
forward-looking statements include those set forth below, as well as general
economic, business and market conditions, changes in Federal and local laws and
regulations and increased competitive pressures.

Risks Relating to these Notes

The Notes are not secured by the Real Estate Trust and you will only be paid
principal and interest on your Notes after certain other debts have been paid.
As the source of payment of principal and interest on your Notes, you may look
only at the earnings and assets of the Real Estate Trust available after its
secured debt and other senior claims have been paid. At September 30, 1998, the
secured debt of the Real Estate Trust was $401.3 million. This secured debt
consisted of $189.9 million in mortgage notes payable, $200.0 million in notes
secured by the common stock of Chevy Chase Bank and $2.4 million of other debt.

We will pay principal and interest on the Notes at the same time we pay all
other unsecured debt of the Real Estate Trust. At September 30, 1998, the
unsecured debt of the Real Estate Trust, consisting of Notes previously issued,
accounts payable and accrued expenses, was $78.5 million.

If we are unable to pay principal and interest on your Notes, you may only look
to the assets of the Real Estate Trust for payment; you will not have any claim
on any of the assets of Chevy Chase Bank.

The proceeds from the sale of the Notes will primarily be used to repay maturing
Notes. We will use the proceeds from the sale of these Notes primarily to repay
maturing Notes. In the future, our ability to pay principal and interest on
these Notes will depend on our available cash and our ability to borrow
additional funds. We cannot guarantee that we will have sufficient funds in the
future to make payments of principal and interest on these Notes.

The terms of the Notes do not limit our ability to pay dividends, make
distributions, issue new securities or borrow money. The agreement pursuant to
which the Notes will be issued (the "Indenture") does not include certain
covenants intended to protect the rights of investors which are customary in
indentures for similar public debt securities. In particular, the Indenture does
not limit our ability to (1) pay dividends or make distributions, (2) issue
<PAGE>
additional securities, or (3) borrow money. However, our ability to pay
dividends, make distributions, issue additional securities and borrow money is
limited by various other agreements to which we are a party, including the
indenture for our outstanding 9 3/4% Senior Secured Notes due 2008.

We can redeem the Notes before they mature. At our option, we can repurchase
from you at the same price you paid us any Note that has been outstanding for
more than one year. If we choose to repurchase any of the Notes prior to
maturity, we will have less money available to pay principal and interest on the
remaining outstanding Notes. In addition, if market interest rates are lower at
the time we repurchase your Notes than they were when you bought the Notes, you
may not be able to reinvest your money at the same rate as your Note.

The Notes are not rated by an independent rating agency and are not being sold
through brokers or dealers. We have not used and do not intend to use an
underwriter or selling agent to sell these Notes. In addition, the Notes have
not been rated by an independent rating agency. As a result, you will not have
the benefit of an independent review of the Real Estate Trust, the terms of the
Notes and the accuracy and completeness of the information contained in the
Prospectus that a rating agency, underwriter or other selling agent might
provide if they were involved in selling the Notes. The officers of the Real
Estate Trust who will be selling these Notes to you are not registered with the
Securities and Exchange Commission as brokers or dealers, so they will not be in
a position to determine the suitability of these notes for your investment
profile and objectives. You must decide for yourself or seek investment advice
to determine whether these Notes represent a suitable investment for you.

We have not established a "sinking fund" for repayment of the Notes. We have not
put aside or reserved any money for the purpose of paying principal and interest
on the Notes.

Risks Relating to Our Business

Factors that may limit our ability to pay principal and interest on your Notes.
Although we had positive cash flow from operating activities of $14.7 million in
1998, $6.9 million in 1997 and $9.0 million in 1996, we primarily rely on
external sources of funds to repay principal on maturing debt, including on the
Notes, and to make capital improvements. In the past, these external sources of
funds have included (1) sales of debt securities (including sale of the Notes),
(2) refinancings of maturing mortgage debt, (3) asset sales, (4) dividends paid
by Chevy Chase Bank and (5) tax sharing payments from Chevy Chase Bank pursuant
to an agreement among the Real Estate Trust, Chevy Chase Bank and their
subsidiaries (the "Tax Sharing Agreement"). In 1999 and beyond, we will be
required to raise substantial additional amounts of cash from these external
sources. Our ability to raise that cash is subject to various contingencies
including:

     Our ability to sell these Notes. At present, we are selling these Notes
     principally to pay outstanding Notes as they mature. If we do not sell
     enough new Notes to repay maturing Notes, we will need to raise funds from
     other sources. In fiscal 1998, we sold $11.3 million in new Notes and
     repaid principal on $7.6 million in maturing Notes.
<PAGE>
     Our continued receipt of dividends and tax sharing payments from Chevy
     Chase Bank. To meet our cash needs, we rely substantially on dividends paid
     on the common stock of Chevy Chase Bank (of which we own 80%) and payments
     made by Chevy Chase Bank pursuant to the Tax Sharing Agreement. The
     availability and amount of tax sharing payments and/or dividends in the
     future depends on, among other things, Chevy Chase Bank's operating
     performance and income, restrictions imposed by Chevy Chase Bank's
     regulators and, in the case of tax sharing payments, the continued
     consolidation of Chevy Chase Bank and its subsidiaries with the Real Estate
     Trust for federal income tax purposes. If Chevy Chase Bank does not pay
     sufficient dividends or make sufficient payments under the Tax Sharing
     Agreement, we will need to raise funds from other sources. In fiscal 1998,
     Chevy Chase Bank paid us $5.2 million in dividends and $5.6 million in tax
     sharing payments. Moreover, following the sale of the Bank's credit card
     portfolio, the Bank paid us dividends of $16.8 million in December 1998 and
     $1.6 million in January 1999.

The Real Estate Trust, as a stand-alone business, has historically had negative
net income (before taking into account asset sales), which may affect our
ability to pay principal and interest on the Notes. In the last eleven years,
the Real Estate Trust has lost money before accounting for gains from the sale
of properties and before the consolidation of Chevy Chase Bank into our
financial statements. For the fiscal year ended September 30, 1998, this loss
was $(22.0 million). If we did not consolidate Chevy Chase Bank into our
financial statements, our overall operating results in fiscal 1998 and prior
years would have been worse. If we continue to operate at a loss, our ability to
pay principal and interest on these Notes will be significantly diminished.

Our "fixed charges" have been greater than our funds generated from operations
for the past five years which may impact our ability to pay principal and
interest on these Notes. During the past five fiscal years, our "fixed charges,"
that is the total of interest and debt expense (including amounts payable on the
Notes) and ground rent expense, were greater than our earnings generated from
operations available to pay such fixed charges. "Available earnings" is the sum
of (1) income (loss) from continuing operations, (2) provisions for income
taxes, (3) ground rent expense, and (4) interest and debt expense reduced by
capitalized interest. In fiscal 1998, 1997, 1996, 1995 and 1994, fixed charges
exceeded available earnings by $18.5 million, $19.0 million, $24.2 million,
$27.3 million and $34.3 million, respectively. If our fixed charges continue to
exceed earnings available to pay such charges, our ability to pay principal and
interest on these Notes may be diminished.

Our business of owning and developing real estate properties is subject to
certain inherent risks. Most of the operating expenses and almost all debt
service payments associated with the operation of our income-producing
properties are fixed, while the income generated from these properties can
significantly fluctuate, for example by reductions in occupancy and rental
rates. In addition, the operating expenses of income-producing properties can
increase due to inflation and other general economic factors outside our
control. As such, our ability to pay the fixed costs with cash flow produced by
our income-producing properties is highly dependent on our ability to maintain
or increase rental income and hotel sales revenue.
<PAGE>
Rental income, which is a major source of our revenues, is subject to numerous
risks, including adverse changes in national or local economic conditions and
other factors which might impair the ability of existing tenants to make rental
payments and reduce the demand of new tenants for vacant space. Hotel income,
another major source of our revenues, is also subject to rapid declines if
customer demand decreases since advance bookings only represent a small portion
of overall revenues and are subject to cancellation. In addition, the
profitability of our income-producing properties can be reduced by an increase
in real estate taxes or other governmental action.

Real estate investments, including ours, tend to be relatively illiquid, meaning
that they can not be sold quickly for cash (although given enough time and under
normal market conditions, such properties generally can be sold at a fair
price). This lack of liquidity limits our ability to promptly change the types
of properties we own in response to changes in economic, demographic, social,
financial and investment conditions

Risks Relating to the Business of Chevy Chase Bank

The following risk factors relate to the business of Chevy Chase Bank. This
information is important because it impacts Chevy Chase Bank's ability to pay
dividends and to make tax sharing payments to us.

Chevy Chase Bank's sale of the credit card portfolio may reduce the ability of
the Bank to pay dividends to the Real Estate Trust. On September 30, 1998, Chevy
Chase Bank sold its credit card portfolio to First USA Bank, N.A. The credit
card program has historically been a major source of earnings for the Bank. The
Bank believes it will be able to operate profitably by relying on its core
deposit franchise as a significant source of low-cost funds, and investing these
funds in assets that, although offering lower yields than credit cards, involve
less credit risk and overhead costs. However, achieving acceptable levels of
profitability may take some period of time as the Bank restructures its
operations, which could reduce the ability of the Bank to pay us dividends.

Chevy Chase Bank's operating results may be negatively affected by an increase
in interest rates, which may affect the ability of the Bank to pay dividends to
the Real Estate Trust. Chevy Chase Bank's operating results depend in large part
on the difference between the interest the Bank receives from its loans,
securities and other assets and the interest it pays on its deposits and
liabilities. In general, the Bank's liabilities have shorter terms and are more
interest rate sensitive than its assets. In addition, the sale of the Bank's
credit card portfolio and current market conditions are likely to continue to
result in a greater portion of the Bank's assets being comprised of assets with
longer durations and greater sensitivity to market interest rates. Accordingly,
an increase in market interest rates will negatively affect the operating
results of the Bank and may affect the Bank's ability to pay us dividends.

Chevy Chase Bank is increasing its automobile and home improvement loans which
are riskier than residential mortgage loans. Chevy Chase Bank continues to grow
its consumer lending business, focusing on automobile and home improvement
loans. These loans have shorter terms and higher interest rates than residential
mortgage loans, but are generally riskier than residential mortgage loans. The
<PAGE>
Bank, through one of its subsidiaries, also makes automobile loans to applicants
who have adverse credit events in their credit history. These loans typically
experience higher rates of delinquencies, repossessions and losses than loans
originated under the Bank's traditional lending program. The Bank's rate of
losses on this "subprime" portion of its consumer loan portfolio has increased
substantially in recent periods and, together with the growth in the portfolio,
led the Bank to increase its allowance for loan losses on automobile loans to
$29.0 million at September 30, 1998 from $3.1 million at September 30, 1997. If
these loans are unprofitable or further additions to the Bank's allowance for
loan losses become necessary, the ability of the Bank to pay dividends to us may
be adversely affected.

A reduction in the amount of non-interest income earned by Chevy Chase Bank may
affect the Bank's ability to pay dividends to the Real Estate Trust. In recent
years, non-interest income has become an increasingly large component of Chevy
Chase Bank's net income. The Bank has historically earned non-interest income
from servicing and securitization income, credit card fees, deposit servicing
fees and gains on sales of loans. The Bank had total non-interest income of
$641.9 million in fiscal 1998, $411.1 million in fiscal 1997 and $343.8 million
in fiscal 1996, representing 93.2%, 82.5% and 80.4% of total operating income in
each year, respectively. A substantial portion of the Bank's non-interest income
was earned from credit card related activities in those years. However, the Bank
will no longer earn non-interest income from credit card related activities
following the September 30, 1998 sale of its credit card portfolio. The
resulting reduction in non-interest income may affect the ability of the Bank to
pay us dividends.

Chevy Chase Bank's allowances for losses might not be sufficient to cover its
actual losses from its loan and real estate portfolios. If the losses are
greater than expected, Chevy Chase may not be able to pay dividends to the Real
Estate Trust. Chevy Chase Bank is required to record on its financial statements
an allowance for possible losses from its loan and real estate portfolios. At
September 30, 1998, the ratio of the Bank's allowances for losses to
non-performing assets was 92.4%. It is possible that Chevy Chase Bank will
suffer losses in excess of its allowances for losses, or that future evaluations
of the Bank's asset portfolios will require significant increases in the
allowances for losses as a result of changes in economic conditions, regulatory
examinations, or the Bank's own internal review process. As a result, the Bank
may be unable to pay us the same amount of, or any, dividends in the future.

Chevy Chase Bank's ability to pay dividends to the Trust is legally restricted.
Chevy Chase Bank's ability to pay dividends to us is subject to the following
legal restrictions:

          Federal regulations provide that Chevy Chase Bank may not
          pay us dividends unless the Bank is at least
          "adequately capitalized."  At September 30, 1998, the
          Bank's capital ratios met the ratios established for
          "well-capitalized" institutions and thus exceeded the
          ratios established for "adequately capitalized"
          institutions.  The Office of Thrift Supervision (OTS)
          has authority to lower the Bank's capital adequacy
          category, and the Bank's ability to maintain its
          capital levels depends on a number of factors,
          including general economic conditions particularly in
          the Bank's local markets.
<PAGE>
          Federal regulations limit the ability of Chevy Chase Bank
          to pay cash dividends based primarily upon the Bank's
          regulatory capital levels and earnings.  Generally,
          the regulations permit the Bank to pay dividends
          without OTS approval in amounts up to the greater of
          (1) 100% of its net income for the calendar year to
          date, plus up to one-half of its "excess" capital at
          the beginning of the calendar year or (2) 75% of the
          Bank's net income for the most recent four quarters.
          However, the OTS retains the discretion to limit
          dividends if it deems the Bank to be in need of more
          than normal supervision or believes the dividend would
          be an "unsafe or unsound" practice.

          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 stock (other than the Bank's
          13% Preferred Stock) in any quarterly period up to the
          lesser of (1) 50% of its after tax net income for the
          immediately preceding quarter or (2) 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 13%
          Preferred Stock during that quarterly period.

          The indentures pursuant to which the Bank's outstanding 9
          1/4% Subordinated Debentures due 2005 (the "1993
          Debentures") and 91/4% Subordinated Debentures due 2008
          (the "1996 Debentures") were issued both provide that
          the Bank may not pay cash dividends unless, after
          giving effect to the dividend, no event of 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 (1) $15 million, (2) 66 2/3% of the Bank's
          consolidated net income (as defined in the indentures)
          since October 1, 1993 and (3) the aggregate net cash
          proceeds received by the Bank after October 1, 1993
          from the sale of certain securities, minus the
          aggregate amount of any "restricted payments" made by
          the Bank.

Certain legislation being considered by Congress could prohibit the Trust from
owning the common stock of Chevy Chase Bank. Congress has been considering
legislation that could require Chevy Chase Bank to convert its thrift charter to
a national or state bank charter. If legislation requiring Chevy Chase Bank to
convert its charter were enacted and did not contain adequate "grandfather"
provisions, such legislation could have an adverse effect on us because, among
other things, we are engaged in activities that are not permissible for a
company that controls a national- or state-chartered bank.

The Office of Thrift Supervision may require the Real Estate Trust to make cash
payments to Chevy Chase Bank. Pursuant to an agreement with the predecessor
agency to the OTS, we have agreed to maintain the regulatory capital of Chevy
Chase Bank at certain minimum levels and to contribute additional capital to the
Bank if necessary to meet those requirements. If the Bank is unable to maintain
its capital at the prescribed levels, the OTS could require us to contribute
capital to the Bank. Such a payment would reduce the funds available to repay
the Notes.
<PAGE>
If Chevy Chase Bank becomes "undercapitalized," the Bank would be required to
file a capital restoration plan outlining the steps it will take to become
"adequately capitalized." OTS could choose not to accept the plan unless we
guaranteed in writing the Bank's compliance with the plan. The total liability
under the guarantee of all of the companies that control the Bank, including us,
would be the lesser of (i) 5% 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 date the Bank failed
to comply with its capital plan. If we refused to provide such a guarantee, the
Bank could be subject to more restrictive regulatory actions and would not be
able to pay us dividends.

We may be required to make payments to Chevy Chase Bank pursuant to the Tax
Sharing Agreement. If in any fiscal year Chevy Chase Bank has a net operating
loss, we would be required under the Tax Sharing Agreement to make payments to
Chevy Chase Bank if we or any of our affiliated companies use that loss to
offset our taxable income. If Chevy Chase Bank has a net operating loss that is
not used by us in that year to offset our taxable income, Chevy Chase Bank can
use those losses to obtain a refund from the IRS of taxes paid in previous years
or to obtain a refund from us of tax sharing payments paid by the Bank to the
Real Estate Trust, or both, depending on the amount of losses and the taxable
year in which they occurred.

At September 30, 1998, the maximum amount we could be required to pay Chevy
Chase Bank as a result of a carryback of the Bank's losses as described above
was $34.2 million. If we are required to make any such payments, our funds
available to pay principal and interest on these Notes will be reduced.

Other Risks

Possible conflicts of interests affecting the Real Estate Trust. B. Francis Saul
II, Chairman of the Real Estate Trust, and affiliates of Mr. Saul own 100% of
the Real Estate Trust's common shares of beneficial interest and thus control
the Trust. Mr. Saul also controls B.F. Saul Company which in turn controls B.F.
Saul Advisory Company and Franklin Property Company. The B.F. Saul Advisory
Company acts as the Real Estate Trust's investment advisor and carries on the
day-to-day general management, financial, accounting, legal and administrative
affairs of the Real Estate Trust. Franklin Property Company acts as the leasing
and management agent for most of the income-producing properties owned by the
Real Estate Trust and oversees the development of new properties and the
expansion and renovation of existing properties.

The Board of Trustees of the Real Estate Trust, including the independent
trustees, determines the compensation paid to B.F. Saul Advisory Company and to
Franklin Property Company for services rendered to the Real Estate Trust. The
Board of Trustees is required to establish that the Real Estate Trust is paying
compensation comparable to what an unaffiliated party would be paid for similar
services. Since only two of the Real Estate Trust's six trustees are considered
independent, the independent trustees represent a minority of the Board of
Trustees. There is no requirement in the Trust's Declaration of Trust or in the
Indenture for these Notes, or elsewhere, that the Real Estate Trust have a
certain number or percentage of independent trustees.
<PAGE>
B.F. Saul Company, its affiliated companies, their officers and directors, and
two trustees of the Real Estate Trust engage in various activities relating to
real estate development and finance. Also, B.F. Saul Company and related
companies have many clients other than the Real Estate Trust who invest in real
estate, and B.F. Saul Company invests in real estate on its on behalf or as
agent or advisor to others. Neither the Declaration of Trust nor the Advisory
Contract between the Real Estate Trust and B.F. Saul Advisory Company (the
"Advisory Contract") prohibit the Real Estate Trust, B.F. Saul Company, Franklin
Property Company, its affiliates, or their officers, directors, employees or the
trustees of the Real Estate Trust from providing investment advisory services to
third parties or from engaging in activities similar or competitive with the
investment operations of the Real Estate Trust. Furthermore, these parties are
not prohibited from making investments that might be suitable or desirable for
the Real Estate Trust.

Pursuant to the Advisory Contract, the Real Estate Trust has priority with
respect to any investment by the B.F. Saul Company, B.F. Saul Advisory Company
and their directors and officers, for their own account or the account of any
enterprise (other than a savings and loan institution) in which they have a
beneficial interest totaling 40% or more. Although there are no procedural
safeguards to ensure this priority, these companies normally do not compete for
the same types of investments as the Real Estate Trust, so conflicts generally
have not arisen.

Potential conflicts of interest also may arise from Mr. Saul's role as Chairman
of the Board and Chief Executive Officer of Saul Centers, Inc., the general
partner of Saul Holdings Partnership. The Real Estate Trust has entered into an
Exclusivity Agreement with and has granted a right of first refusal to Saul
Centers, Saul Holdings Partnership and its two subsidiary limited partnerships.
The purpose of these two agreements is to minimize the potential conflicts of
interest between these entities and the Real Estate Trust. These agreements
generally require the Real Estate Trust to conduct is shopping center business
exclusively through these entities and to grant them 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 these two agreements, the Real Estate Trust may continue to develop,
acquire, own and manage commercial properties and own land suitable for
development of shopping centers and other commercial properties.

The Real Estate Trust's Declaration of Trust does not contain investment or
borrowing limitations. With certain exceptions, the Real Estate Trust's
Declaration of Trust does not require us to invest our assets in any particular
manner. The Board of Trustees, in their discretion, may change the mix of our
investment portfolio at any time or make new types of investments, so as long as
the investments are not prohibited by the Declaration of Trust or by any
indentures, loan documents or other agreements applicable to us. In addition,
the Declaration of Trust does not limit the amount of money we can borrow or the
types of debt securities we can issue, including additional Notes or debt
securities which are senior to the Notes.

Our business, or the business of Chevy Chase Bank, may be impacted by the Year
2000 date change. Some of our internal business systems and systems operated by
third parties may not be compliant with the Year 2000 date change. We have
<PAGE>
implemented a program to upgrade or replace our internal systems to address the
Year 2000 problem and to seek certification from outside vendors of compliance
of their systems. Although we expect all of our necessary systems to be Year
2000 compliant by May 1999, the failure of any system as a result of the Year
2000 date change may adversely affect our business. In addition, Chevy Chase
Bank is exposed to the potential failure of internal or external business
systems due to the Year 2000 date change. Although the management of Chevy Chase
Bank has implemented a program to achieve compliance of its internal and
external business systems for the Year 2000 date change, it is possible that any
such system may fail and have a negative impact on the Bank's financial
condition and results of operations.
<PAGE>
                                 USE OF PROCEEDS

We will use the net proceeds from the sale of these Notes primarily to retire
maturing Notes (including the Notes offered hereby). At December 31, 1998, $10.8
million and $8.9 million principal amount of Notes were scheduled to mature in
fiscal 1999 and fiscal 2000, respectively. The interest rates on outstanding
Notes scheduled to mature during this period vary from 5% to 15% per annum. Any
proceeds not used to pay maturing Notes will be used for other general corporate
purposes. This offering is not contingent on the sale of any minimum amount of
Notes. At [___________], $____ million of principal amount of the Notes (of the
$60 million offered by this Prospectus) was available to be issued.

                              PLAN OF DISTRIBUTION

The Notes will not be distributed through underwriters, brokers or dealers and
will be sold only by us acting through one or more of our duly authorized
officers. Such officers are salaried employees of the Saul Company, the parent
of the Advisor, and do not receive any compensation in connection with their
participation in the offering and sale of the Notes in the form of commissions
or other remuneration based either directly or indirectly on sales of the Notes.
Although we do not pay the officers who participate in the offering and sale of
the Notes, we do pay the Advisor a fee of 1% of the principal amount of the
Notes as they are issued to offset its costs of administering the Note program.
Notes will be available for sale only at our office in Bethesda, Maryland. See
"How to Purchase Notes."

The offering of the Notes by this Prospectus will terminate when all of the
Notes have been sold. See "Description of Notes - General." We may also
terminate the offering of the Notes at any time without notice.

                              HOW TO PURCHASE NOTES

You may purchase Notes in person at our sales office located at 7200 Wisconsin
Avenue, Suite 903, Bethesda, Maryland 20814, or by mail by completing the
applicable Note Order Form, which may be found at the end of this Prospectus,
and mailing the form and a check payable to the Trust in the enclosed envelope.
In either case, the Note, in registered form, will be mailed directly to you by
U.S. Bank Trust National Association, the Indenture Trustee for the Notes. For
further information on how to purchase Notes, please telephone (301) 986-6207.

                              DESCRIPTION OF NOTES

The Notes will be issued under an Indenture dated as of September 1, 1992, as
supplemented by the First Supplemental Indenture dated as of January 16, 1997,
as further supplemented by the Second Supplemental Indenture dated January 13,
1999 (as supplemented, the "Indenture") between the Trust and U.S. Bank Trust
National Association (the "Indenture Trustee"). Included below is a summary of
the material terms of the Notes and the material provisions of the Indenture.
The summary does not purport to be complete and is subject in all respects to
<PAGE>
the provisions of, and is qualified in its entirety by express reference to, the
cited Sections and Articles of, and definitions contained in, the Indenture, a
copy of which has been filed with the Commission as an exhibit to the
Registration Statement of which this Prospectus forms a part, and which is
available as described under Available Information.

General

The Notes are limited to the aggregate principal amount of $60 million offered
hereby (Section 3.0 1). At [____________], $____ million in principal amount of
Notes was available to be issued under the Indenture. The Trust from time to
time may enter into one or more supplemental indentures providing for the
issuance of additional notes without the consent of the holders of outstanding
Notes (Section 9.01).

The Notes will be issued in denominations of $5,000 or any amount in excess
thereof which is an integral multiple of $1,000. They will be issued in
registered form only, without coupons, to mature one to ten years from the date
of issue, as selected by the investor. The Notes will be unsecured general
obligations of the Trust and will be identical except for interest rate, issue
date and maturity date (Section 3.02). Except as described below under
"Redemption of Certain Notes," the Notes will not contain any provisions for
conversion, redemption, amortization, sinking fund or retirement prior to
maturity.

The Notes are not guaranteed or insured and are not secured by any mortgage,
pledge or lien. The Notes will rank on a parity in right of payment with all
unsecured debt of the Real Estate Trust. At September 30, 1998, the Real Estate
Trust's unsecured debt (consisting of Notes and accounts payable and accrued
expenses) totaled $78.5 million.

Each Note will bear interest from the date of issue to the date of maturity at
the annual rate stated on the face thereof. Such interest will be payable
semiannually, six months from the date of issue and each six months thereafter,
and at maturity, to the persons in whose names the Notes are registered at the
close of business on the 20th day preceding such Interest Payment Dates.
Interest rates applicable to Notes will be subject to change by the Trust from
time to time, but no such change will affect any Notes issued prior to the
effective date of such change (Section 3.01). Based on the amount of a proposed
investment in Notes or the aggregate principal amount of the Trust's outstanding
unsecured notes held by a prospective investor, the Trust may offer to pay
interest on a Note of any maturity at an annual rate of up to 2% in excess of
the interest rate shown on the cover page of this Prospectus for a Note of such
maturity.

At maturity of any Note, principal will be payable upon surrender of such Note
without endorsement at U.S. Bank Trust National Association, 100 Wall Street
Suite 1600, New York, New York 10005. Interest payments will be made by the
Trust by check mailed to the person entitled thereto (Sections 3.01 and 10.02).
Notes must be presented at the above office of the Indenture Trustee for
registration of transfer or exchange and for payment at maturity. No service
charge will be imposed for any transfer or exchange of Notes, but the Trust may
require payment to cover taxes or other governmental charges that may be
assessed in connection with any such transfer or exchange (Section 3.05).
<PAGE>
The Indenture does not impose any restrictions on the Trust's ability to pay
dividends or other distributions to its shareholders, to incur debt or to issue
additional securities.

There is no established trading market for the Notes, and the Trust does not
anticipate that an active trading market will be established.

Redemption of Certain Notes

The Trust may, at its sole election, redeem any of the Notes having a Stated
Maturity of more than one year from date of issue on any Interest Payment Date
with respect to such Note on or after the first anniversary of the date of issue
of such Note at a Redemption Price (exclusive of the installment of interest due
on the Redemption Date, payment of which shall have been made or duly provided
for to the registered holder on the relevant Record Date) equal to the Principal
Amount of the Note so redeemed. (Section 11.01). Notes called for redemption
will not bear interest after the Redemption Date. (Section 11.07).

If fewer than all of the Notes having a Stated Maturity of more than one year
and the same Interest Payment Date as the Redemption Date are to be redeemed,
the particular Notes to be redeemed will be selected by such method as the Trust
shall deem appropriate and may include redemption of Notes with higher interest
rates first. (Section 11.04).

Events of Default and Notice Thereof

The Indenture provides that an "Event of Default" with respect to the Notes will
result upon the occurrence of any of the following:

     (a) default in the payment of any interest upon any Note when it becomes
     due and payable, and continuance of such default for a period of 30 days;

     (b) default in the payment of the principal of (and premium, if any, on)
     any Note at its Maturity;

     (c) default in the performance, or breach, of any covenant or warranty of
     the Trust in the Indenture (other than a covenant or warranty a default in
     whose performance or whose breach is elsewhere in the Indenture
     specifically dealt with), and continuance of such default or breach for a
     period of 60 days after there has been given, by registered or certified
     mail, to the Trust by the Indenture Trustee or to the Trust and the
     Indenture Trustee by the Holders of at least 10% in principal amount of the
     Notes Outstanding, a written notice specifying such default or breach and
     requiring it to be remedied and stating that such notice is a "Notice of
     Default" under the Indenture;

     (d) certain events of bankruptcy or insolvency affecting the Trust; or

     (e) B. F. Saul Advisory Company ceases to be the investment advisor to the
     Trust without being immediately replaced by another entity the majority
     voting interest of which is owned by the Saul Company or B. Francis Saul II
     (Section 5.01).
<PAGE>
Within 90 days after the occurrence of a default, the Indenture Trustee is
required to give the Noteholders notice of all defaults known to it; provided
that, except in the case of a default in the payment of principal of, and
premium if any, or interest on, any of the Notes, the Indenture Trustee will be
protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the interest of the Noteholders (Section 6.02).
If an Event of Default occurs and is continuing, the Indenture Trustee or the
Holders of not less than 25% in principal amount of the Notes Outstanding may
declare the principal of all the Notes to be due and payable immediately, by a
notice in writing to the Trust (and to the Indenture Trustee if given by
Noteholders), and upon any such declaration such principal will become
immediately due and payable (Section 5.02). At any time after such a declaration
of acceleration has been made and before a judgment or decree for payment of the
money due has been obtained by the Indenture Trustee, the Holders of a majority
in principal amount of the Notes Outstanding, by written notice to the Trust and
the Indenture Trustee, may rescind and annul such declaration and its
consequences if (i) the Trust has paid or deposited with the Indenture Trustee a
sum sufficient to pay:

     (A)  all overdue installments of interest on all Notes;

     (B) the principal of (and premium, if any, on) any Notes which have become
     due otherwise than by such declaration of acceleration and interest thereon
     at the rate borne by the Notes;

     (C) to the extent that payment of such interest is lawful, interest upon
     overdue installments of interest at the rate borne by the Notes; and

     (D) all sums paid or advanced by the Indenture Trustee under the Indenture
     and the reasonable compensation, expenses, disbursements and advances of
     the Indenture Trustee, its agents and counsel; and

(ii) all Events of Default, other than the nonpayment of the principal of Notes
which have become due solely by such acceleration, have been cured or have been
waived as provided in the Indenture (Section 5.02).

The Indenture provides that if (i) default is made in the payment of any
interest on any Note when such interest becomes due and payable and such default
continues for a period of 30 days, or (ii) default is made in the payment of the
principal of (or premium, if any, on) any Note at the Maturity thereof, the
Trust will, upon demand of the Indenture Trustee, pay to it, for the benefit of
the Holders of such Notes, the whole amount then due and payable on such Notes
for principal (and premium, if any) and interest, with interest upon the overdue
principal (and premium, if any) and, to the extent that payment of such interest
is legally enforceable, upon overdue installments of interest, at the rate borne
by the Notes. (Section 5.03).

In the case of an Event of Default which is not cured or waived, the Indenture
Trustee will be required to exercise such of its rights and powers under the
Indenture, and to use the degree of care and skill in their exercise, that a
prudent man would exercise or use under the circumstances in the conduct of his
own affairs, but it otherwise need only perform such duties as are specifically
<PAGE>
set forth in the Indenture (Section 6.01). Subject to such provisions, the
Indenture Trustee will be under no obligation to exercise any of its rights or
powers under the Indenture at the request of any of the Noteholders unless they
offer to the Indenture Trustee reasonable security or indemnity (Section 6.03).

Modification of Indenture

The Indenture, the rights and obligations of the Trust and the rights of the
Noteholders may be modified by the Trust and the Indenture Trustee without the
consent of the Noteholders (i) to evidence the succession of a corporation or
other entity to the Trust, and the assumption by any such successor of the
covenants of the Trust in the Indenture and the Notes, (ii) to add to the
covenants of the Trust, for the benefit of the Noteholders, or to surrender any
right or power conferred in the Indenture upon the Trust, (iii) to cure any
ambiguity, to correct or supplement any provision of the Indenture which may be
defective or inconsistent with any other provisions, or to make any other
provisions with respect to matters or questions arising under the Indenture
which are not inconsistent with the Indenture, provided such action does not
adversely affect the interests of the Noteholders, (iv) to create, from time to
time, notes in addition to the Notes initially issuable under the Indenture and
any supplemental indenture thereto, which subsequently created notes are
identical to the Notes initially issuable under the Indenture and any
supplemental indenture thereto, except for interest rate, issue date and
maturity date, or (v) to modify, amend or supplement the Indenture to effect the
qualification of the Indenture under the Trust Indenture Act of 1939 and to add
to the Indenture specified provisions permitted by such Act (Section 9.01).

With certain exceptions, the Indenture, the rights and obligations of the Trust
and the rights of the Noteholders may be modified in any manner by the Trust
with the consent of the holders of not less than 66-2/3% in aggregate principal
amount of the outstanding Notes; but no such modification may be made without
the consent of each Noteholder affected thereby which would (i) change the
maturity of the principal of, or any installment of interest on, any Note or
reduce the principal amount thereof or the interest thereon, or impair the right
of such Noteholder to institute suit for the enforcement of any such payment on
or after the maturity thereof, or (ii) reduce the percentage in principal amount
of the outstanding Notes, the consent of whose holders is required for any
modification of the Indenture, or the consent of whose holders is required for
any waiver of compliance with certain provisions of the Indenture or certain
defaults thereunder and the consequences thereof provided for in the Indenture
(Section 9.02).

Compliance Reports

The Trust and each other obligor on the Notes, if any, must deliver annually to
the Trustee, within 120 days after the end of each fiscal year, an officers'
certificate stating whether the Trust is in default in the performance and
observance of any of the conditions or covenants of the Indenture, and if the
Trust is in default, specifying all such defaults and the nature and status
thereof (Section 10.06).
<PAGE>
Reports to Noteholders

The Trust will furnish to the holders of Notes such summaries of all quarterly
and annual reports which it files with the Commission as may be required by the
rules and regulations of the Commission to be furnished to holders of any Notes
(Section 7.04).

                                     EXPERTS

The Trust's Consolidated Financial Statements and related schedules included in
this Prospectus and elsewhere in this registration statement as of September 30,
1998 and 1997 and for each of the three years in the period ended September 30,
1998, have been audited by Arthur Andersen LLP, independent public accountants,
as indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.

                                  LEGAL MATTERS

The legality of the securities offered by this Prospectus has been passed upon
for the Trust by the firm of Shaw Pittman Potts & Trowbridge, Washington, D.C.,
a partnership including professional corporations. George M. Rogers, Jr., a
member of that firm, is a trustee of the Trust and a director of B. F. Saul
Company and of Chevy Chase Bank.

                              AVAILABLE INFORMATION

The Trust has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") pursuant to the Securities Act of 1933, as amended (the "Securities
Act"), and the rules and regulations promulgated thereunder, covering the Notes
being offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission, and to which
reference is hereby made. Statements made in this Prospectus as to the contents
of any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference.

The Trust is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Commission. Information
as of particular dates concerning the Trust's Trustees, officers and principal
holders of securities and any material interest of such persons in transactions
with the Trust is set forth in annual reports on Form 10-K filed with the
Commission. Such reports and other information filed by the Trust is set forth
in annual reports on Form 10-K with the Commission. Such reports and other
information filed by the Trust with the Commission may be inspected and copied
at the public reference facilities of the Commission, located at 450 Fifth
Street, N.W., Washington, D.C. 20549; Seven World Trade Center, 13th Floor, New
York, New York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of this material may be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, certain of these materials are publicly available
through the Commission's web site located at http://www.sec.gov.
<PAGE>
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, 1998. The Trust is a thrift holding company by virtue of its
ownership of a majority interest in Chevy Chase. See "Real Estate - Holding
Company Regulation."

The Trust recorded net income of $66.1 million in the fiscal year ended
September 30, 1998, compared to a net income of $18.9 million in the fiscal year
ended September 30, 1997 and a net loss of $78,000 in the fiscal year ended
September 30, 1996.

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.
<PAGE>
Banking. Chevy Chase is a federally chartered and federally insured stock
savings bank which at September 30, 1998 was conducting business from 143
full-service branch offices, including 11 in-store banking centers, and 696
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 Chevy Chase, Maryland, both suburban communities of Washington, D.C.
The Bank also maintains 14 mortgage loan production offices in the mid-Atlantic
region, 13 of which are operated by a wholly-owned mortgage banking subsidiary,
and 31 consumer loan production offices, 24 of which are operated by a
wholly-owned finance subsidiary. At September 30, 1998, the Bank had total
assets of $6.7 billion and total deposits of $4.9 billion. Based on total assets
at September 30, 1998, 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 consumer loans. The Bank
also has an 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. On November
12, 1997, the Bank acquired ASB Capital Management, Inc. ("ASB"), one of the
largest SEC-registered investment managers headquartered in the Washington, D.C.
metropolitan area, through which the Bank provides a variety of investment
products and fiduciary services to a primarily institutional customer base.

On September 30, 1998, the Bank sold its credit card operations to First USA
Bank, N.A. ("FUSA"). The credit card portfolio purchased by FUSA included
approximately $4.8 billion of managed credit card loans and 3.1 million Visa and
Mastercard credit card accounts. The Bank recognized a net gain on this sale of
$288.3 million. See Note 8 to the Consolidated Financial Statements in this
Report. Management believes that the ongoing consolidation in the credit card
industry was making it increasingly difficult for relatively smaller
institutions like the Bank to make the investments in technology and other
resources necessary to compete effectively with increasingly larger and more
specialized issuers. In light of these competitive considerations, management
believes that selling the Bank's credit card business will relieve the Bank of
the substantial financial commitments necessary to maintain its credit card
operations, and enable the Bank to concentrate its resources on capitalizing on
the Bank's status as the largest locally-headquartered bank in the Washington,
D.C. metropolitan area and further its community banking objectives.
Accordingly, the Bank will continue to build its branch and alternative delivery
systems, maintain and expand its mortgage banking operations, and continue to
offer a broad range of non-credit card consumer products, including home equity
lines of credit, home improvement loans and automobile loans. In addition, the
Bank anticipates expanding its business banking program, with an emphasis on
businesses in the Washington, D.C. metropolitan area. The Bank will also seek to
develop further the fee based services it can provide to customers, including
securities brokerage, asset management and insurance products offered through
its subsidiaries.
<PAGE>
Chevy Chase recorded operating income of $184.4 million for the year ended
September 30, 1998, compared to operating income of $80.2 million for the year
ended September 30, 1997. At September 30, 1998, the Bank's tangible, core, tier
1 risk-based and total risk-based regulatory capital ratios were 7.93%, 7.93%,
12.93% and 20.70%, respectively. The Bank's regulatory capital ratios exceeded
the requirements under the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA") as well as the standards established for well
capitalized institutions under the prompt corrective action regulations
established pursuant to the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA").

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

Real Estate Investments

The following tables set forth, at and for the periods indicated, certain
information regarding the properties in the Real Estate Trust's investment
portfolio at September 30, 1998.

<TABLE>
       
         
                                                     HOTELS

                                                                Average Occupancy (2)         Average Room Rate
                                                               ------------------------    ------------------------
                                                               Year Ended September 30,    Year Ended September 30,
                                                    Available  ------------------------    ------------------------
  Location                 Name                      Rooms(1)  1998      1997      1996    1998    1997      1996
------------ -------------------------------------- ---------- ------------------------   -------------------------
<S>          <C>                                    <C>        <C>     <C>     <C>        <C>     <C>     <C>
  COLORADO                                            
   Pueblo           Holiday Inn - Pueblo                193    74%       74%       75%    $51.39   $53.09   $54.84
                                                                                                       
  MARYLAND                                                                                             
Gaithersburg      Holiday Inn - Gaithersburg            300    64%       65%       61%    $75.75   $70.10   $68.93
                                                                                                       
  MICHIGAN                                                                                             
Auburn Hills     Holiday Inn - Auburn Hills             190    74%       74%       75%    $99.78   $94.79   $86.52
                                                                                                       
  NEW YORK                                                                                             
 Rochester      Holiday Inn - Rochester Airport         280    71%       71%       68%    $72.25   $68.26   $66.51
                                                                                                       
    OHIO                                                                                               
 Cincinnati        Holiday Inn - Cincinnati             273    64%       58%       49%    $65.70   $63.21   $66.67
                                                                                                       
  VIRGINIA                                                                                             
 Arlington     Holiday Inn  - National Airport (3)      308    57%       --        --    $102.38     --       --  
 Arlington     Howard Johnsons  - National Airport      279    63%       66%       71%    $76.10   $67.99   $66.37
  Herndon            Holiday Inn Express (4)            115    75%       74%       --     $76.83   $64.70     --
   McLean         Holiday Inn - Tysons Corner           316    72%       74%       73%    $99.15   $87.52   $78.98
  Sterling        Hampton Inn - Dulles Airport          127    74%       77%       77%    $82.17   $71.70   $62.87
  Sterling        Holiday Inn - Dulles Airport          296    75%       75%       76%    $85.10   $72.18   $63.86
  Sterling   TownePlace Suites - Dulles Airport (5)      95    56%       --        --     $83.65     --       --  
                                                      -----    ---       ---       ---    ------   ------   ------
Totals                                                2,772    68%       70%       68%    $81.01   $72.21   $68.79
        

--------------------------------------------------------------------------------
(1)  Available rooms as of September 30, 1998.
(2)  Average occupancy is calculated by dividing the rooms occupied by the
     rooms available.
(3)  Acquired December 10, 1997.
(4)  Acquired October 30, 1996.
(5)  Opened August 13, 1998. 
</TABLE>
<PAGE>
<TABLE>
       
         
                                         OFFICE AND INDUSTRIAL

                                                                                       Expiring Leases (1)
                                                                                       -------------------
                                                               Leasing Percentages         Year Ending
                                              Gross         -------------------------  -------------------
                                                                   September 30,          September 30,
                                             Leasable       -------------------------  -------------------
   Location                  Name            Area (1)        1998      1997      1996    1999      2000   
---------------   -------------------------- --------       -------------------------  --------- ---------
<S>               <C>                        <C>            <C>       <C>      <C>     <C>       <C>
                                                                                                          
                                                                                                          
    FLORIDA                                                                                               
Fort Lauderdale   Commerce Center - Phase II    61,124      100%       97%       92%    29,100     8,219  
                                                                                                          
    GEORGIA                                                                                               
    Atlanta          900 Circle 75 Parkway     345,502      100%       98%       95%    49,165    55,575  
    Atlanta          100 Circle 75 Parkway      89,412      100%       98%      100%     9,771    38,056  
    Atlanta         1100 Circle 75 Parkway     269,049      100%       99%      100%   109,182    30,856  
                                                                                                          
   LOUISIANA                                                                                              
   Metairie             Metairie Tower          91,372      100%       95%       99%    12,879    22,615  
                                                                                                          
   VIRGINIA                                                                                               
    McLean           8201 Greensboro Drive     353,742      100%       99%       85%    48,948    53,737  
   Sterling            Dulles North             59,886      100%      100%       81%       --        --   
                                             ---------      ----      ----      ----   -------   -------  
                          Totals             1,270,087      100%       99%       93%   259,045   209,058  
                                                                                        20.4%     16.5%   
                                                                                                  

--------------------------------------------------------------------------------
(1)  Square feet
</TABLE>
<PAGE>
<TABLE>
       
         

                                         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 (2)               14        Office & Warehouse       
                                                                                                 
    GEORGIA                                                                                      
    Atlanta                  Circle 75                       133        Office & Industrial      
                                                                                                 
    KANSAS                                                                                       
 Overland Park               Overland Park                   162    Residential, Office & Retail 
                                                                                                 
   MARYLAND                                                                                      
 Gaithersburg            Avenel Business Park (3)              5            Commercial           
  Rockville                 Flagship Centre                    8            Commercial           
                                                                                                 
  MICHIGAN                                                                                       
Auburn Hills         Holiday Inn - Auburn Hills                4            Commercial

   NEW YORK                                                                                      
  Rochester         Holiday Inn - Rochester Airport            3            Commercial           
                                                                                                 
   VIRGINIA                                                                                      
Loudoun County                Church Road                     40        Office & Industrial      
Loudoun County           Sterling Boulevard (4)               45            Industrial           
                                                             ---
                                 Total                       434 

        

------------------------------------------------------------------------------
(1)  The Real Estate Trust is currently developing a 91-unit
     hotel and a 146-unit hotel on a portion of its 9 acre parcel.
     The balance of 11 acres is owned by a partnership in which a 
     Real Estate Trust subsidiary owns a 50% interest.
(2)  The Real Estate Trust is currently developing a 95-unit
     hotel on a portion of this parcel.
(3)  The Real Estate Trust is currently developing a 91-unit
     hotel on a portion of this parcel.
(4)  The Real Estate Trust is currently developing a 78,000
     office/research and development building on a portion of this parcel.
</TABLE>

<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
                                                                    -------
                                        Total                       424,000


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

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

(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. 

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.
<PAGE>
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. 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. 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. 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 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 a capital contribution and the second Subsidiary Partnership, Saul Subsidiary
II Limited Partnership, transferred one shopping center previously owned by it
to Saul Subsidiary I Limited Partnership as a 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 owned a
total of 17 shopping centers (the "Mortgaged Properties"). The Mortgaged
Properties, which continued to be managed by Saul Holdings Partnership, secured
the mortgage purchased with the proceeds of issuance of the Mortgage Notes.
<PAGE>
On October 1, 1997 Saul Centers closed a $147 million mortgage loan secured by
nine of the company's retail properties. The loan term is 15 years and requires
payments based on a fixed rate of 7.67% and 25 year principal amortization. At
the same time Saul Centers closed a new three-year $60 million unsecured
revolving credit line which replaced a secured credit line. Proceeds from the
new loans were used to repay the $128 million of collateralized floating rate
debt mentioned above and the outstanding balance of other floating rate debt.
Saul Centers currently has fixed interest rates on approximately 95% of its
total outstanding debt which has a weighted remaining term of approximately 14
years.

As a consequence of the Formation Transactions and the later transactions
described above undertaken in connection with financings, 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% interests in Saul
Subsidiary I Limited Partnership and Saul Subsidiary II Limited Partnership are
held by Saul Holdings Partnership as the sole limited partner.

In January 1998, in accordance with its obligation under the Exclusivity
Agreement described below, the Real Estate Trust offered Saul Centers the right
to purchase its newly constructed, 100% leased office/flex building (Avenel IV)
located in the Avenel Business Park adjacent to Saul Centers' Avenel I - III
buildings. The new building contained 46,227 square feet of leasable area. An
independent appraisal determined the purchase price of $5.6 million. Saul
Centers agreed to purchase the property as of April 1, 1998, by assuming the
mortgage of $3.7 million and issuing 105,992 new units in Saul Centers'
operating partnership to the Real Estate Trust.

At September 30, 1998, Saul Holdings Partnership owned, directly or indirectly
through the Subsidiary Partnerships, 29 community and neighborhood shopping
centers located in seven states and the District of Columbia, one office
property and one office/retail property located in the District of Columbia, one
research park located in a Maryland suburb of Washington, D.C. and one property
planned to be converted to an industrial/warehouse facility located in Oklahoma
(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 as a REIT, it generally will not be subject to federal income tax,
provided it makes certain distributions to its stockholders and meets certain
organizational and other requirements. Saul Centers has 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.
<PAGE>
Saul Centers shares with the Trust Affiliates certain ancillary functions at
cost, such as computer and payroll services, benefit administration and in-house
legal services, and shares insurance expense on a pro rata basis. The Trust
Affiliates sublease office space to Saul Centers at their cost. The terms of all
sharing arrangements, including payments related thereto, are reviewed
periodically by the independent directors of Saul Centers, who constitute five
of the nine members of the board of directors.

Exclusivity Agreement and Right of First Refusal. The Real Estate Trust has
entered into an Exclusivity Agreement (the "Exclusivity Agreement") with, and
has granted a right of first refusal (the "Right of First Refusal") to, Saul
Centers and the Partnerships (collectively, the "Company"). The purpose of these
agreements is to minimize potential conflicts of interest between the Real
Estate Trust and the Company. The Exclusivity Agreement and Right of First
Refusal generally require the Real Estate Trust to conduct its shopping center
business exclusively through the Company and to grant the Company a right of
first refusal to purchase commercial properties and development sites that
become available to the Real Estate Trust in the District of Columbia or
adjacent suburban Maryland. Subject to the Exclusivity Agreement and Right of
First Refusal, the Real Estate Trust will continue to develop, acquire, own and
manage commercial properties and 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.
<PAGE>
Tax Conflicts. The fair market value of each of the properties contributed to
the Partnerships by the Real Estate Trust and its subsidiaries at the date of
the Formation Transactions (the "FMV" of each such property) exceeded the tax
basis of such property (with respect to each property, such excess is referred
to as the "FMV-Tax Difference"). In the event Saul Centers or Saul QRS, Inc.,
acting as general partner of a Partnership, causes such Partnership to dispose
of, or there is an involuntary disposition of, one or more of such properties, a
disproportionately large share of the total gain for federal income tax purposes
would be allocated to the Real Estate Trust or its subsidiaries as a result of
the property disposition. In general, if the gain recognized by the Partnership
on such a property disposition is less than or equal to the FMV-Tax Difference
for such property (as previously reduced by the amounts of special tax
allocations of depreciation deductions to the partners), all such gain will be
allocated to the Real Estate Trust or its subsidiaries. To the extent the gain
recognized by the Partnerships on the property disposition exceeds the FMV-Tax
Difference (as adjusted), such excess generally will be allocated among all
partners in Saul Holdings based on their relative percentage interests. In
general, the amount of federal income tax liability in respect of gain allocated
to the Real Estate Trust or its subsidiaries in the event of such a property
disposition is likely to exceed, perhaps substantially, the amount of cash, if
any, distributable to the Real Estate Trust or its subsidiaries as a result of
the property disposition. In addition, future reductions in the level of the
Partnerships' debt, any release of the guarantees of such debt by the Real
Estate Trust or its subsidiaries (described above under "Reimbursement
Agreement") or any refinancings in which the Real Estate Trust or its
subsidiaries do not assume a comparable obligation to that contained in the
Reimbursement Agreement could cause the Real Estate Trust or its subsidiaries to
have taxable constructive distributions without the receipt of any corresponding
amounts of cash. See Note 2 to the Consolidated Financial Statements in this
report.

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

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

Environmental Matters

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

Relationships with the B. F. Saul Company

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

The Advisor acts as the Real Estate Trust's investment advisor and manages the
day-to-day financial, accounting, legal and administrative affairs of the Real
Estate Trust. Franklin acts as leasing and management agent for 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."
<PAGE>
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 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.
<PAGE>
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 and
its subsidiaries join in the filing of a consolidated federal income tax return
using the accrual method of accounting on the basis of a fiscal year ending
September 30.

Since June 28, 1990 the Bank and its subsidiaries have joined in the
consolidated federal income tax returns filed by the Trust on a fiscal year
basis. Each member of an affiliated group of corporations which files
consolidated income tax returns is liable for the group's federal income tax
liability. Prior to June 28, 1990, the Bank and its subsidiaries filed a
consolidated federal income tax return on a calendar-year basis.

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

The Internal Revenue Service ("IRS") has concluded the audits of the federal
income tax returns of the Trust for the taxable years ended September 30, 1992,
September 30, 1993 and September 30, 1994. The IRS audit adjustments did not
have a significant adverse effect on the Trust's reported earnings under
generally accepted accounting principles. The IRS has notified the Trust that
its consolidated federal tax return for the fiscal year ended September 30, 1995
has been selected for review, which could lead to an IRS audit.

Bad Debt Reserve. For taxable years beginning before December 31, 1995, savings
institutions that satisfied certain requirements were permitted to establish
reserves for bad debts and to deduct each year reasonable additions to those
reserves in lieu of taking a deduction for bad debts actually sustained during
the taxable year. To qualify for this treatment, at least 60% of a savings
institution's assets had to be "qualifying assets," including cash, certain U.S.
and state government securities, and loans secured by interests in residential
real property.

In establishing its reserves from calendar year 1988 through fiscal year 1996,
the Bank calculated its bad debt deduction for tax purposes using the experience
method. The experience method was based on the institution's actual loan loss
experience over a prescribed period. For the year ended September 30, 1996,
accumulated reserves were approximately $111.8 million.
<PAGE>
Provisions that repealed the thrift bad debt provisions of the Internal Revenue
Code were included in the Small Business Act of 1996 and took effect for tax
years beginning after December 31, 1995. As a result, for its fiscal year 1997
and fiscal year 1998, the Bank is no longer able to use the "reserve method" for
computing its bad debt deduction and can deduct only those bad debts actually
incurred during the respective taxable years. The bad debt provisions of 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). The Bank's accumulated
reserves since 1987 which are subject to recapture under this rule are $101.3
million. 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, 1998 and 1997.

Consolidated Tax Returns; Tax Sharing Payments. Generally, the operations of the
Trust have generated significant net operating losses ("NOL's"). The Bank's
taxable income in the current year was sufficient to fully utilize the current
year tax loss of the Trust. Under the terms of a tax sharing agreement dated
June 28, 1990, as amended (the "Tax Sharing Agreement"), the Bank is 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. Under the Tax Sharing Agreement, the
Bank and its subsidiaries are treated as a single member of the Trust's
affiliated group.

The Bank made tax sharing payments of $5.6 million in fiscal 1998. The tax
sharing payments were conditioned on a pledge by the Trust of certain Trust or
other assets to secure certain of its obligations under the Tax Sharing
Agreement. At September 30, 1998, the amount of tax sharing payments due to the
Trust from the Bank was $6.6 million, which was paid subsequent to the fiscal
year end. It is expected that the Bank will have taxable income in future years
and additional operating losses of the Trust will be utilized to reduce the
overall tax liability of the group which would otherwise arise from such taxable
income of the Bank (or from the taxable income of other members of the Trust's
affiliated group).
<PAGE>
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 "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.

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

State Taxation

Maryland law does not allow the filing of consolidated income tax returns, and
thus the Trust and its subsidiaries, which includes the Bank and its
subsidiaries, that are subject to Maryland income tax, are required to file
separately in Maryland. The Trust and its subsidiaries are also subject to
income taxes in other states, some of which allow or require combined or
consolidated filing. The Commonwealth of Virginia has concluded 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. The audit
adjustments did not have a significant adverse effect on the Trust's reported
earnings.

BANKING

Regulation

Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan
Bank (the "FHLB") of Atlanta. The 12 FHLBs are administered by the Federal
Housing Finance Board, an independent agency within the executive branch of the
federal government. The FHLBs serve as a central credit facility for their
members. Their primary credit mission is to enhance the availability of
residential mortgages. From time to time, the Bank obtains advances from the
FHLB. At September 30, 1998, the Bank had outstanding advances from the FHLB of
Atlanta of $352.0 million. See Note 21 to the Consolidated Financial Statements
in this report and "Deposits and Other Sources of Funds Borrowings."
<PAGE>
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 $49.0 million in FHLB stock at September 30, 1998. The Bank earned
dividends of $2.4 million and $2.0 million during the years ended September 30,
1998 and 1997, respectively.

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, certain mortgage-related securities, certain
mortgage loans and 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 quarter's average balances), plus borrowings
(or portions thereof) payable in one year or less. Effective November 24, 1997,
the OTS reduced the minimum liquidity requirement to 4.0% from 5.0% and changed
the reporting requirement to quarterly instead of monthly. If an institution's
liquid assets at any time do not at least equal (on an average daily basis for
the quarter) the amount required by the OTS, the institution could be subject to
various monetary penalties imposed by the OTS. At September 30, 1998, the Bank
was in compliance with the liquidity requirement, with a liquid assets ratio of
10.4%.

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

Although the FDIC insures commercial banks as well as thrifts, the insurance
funds for commercial banks and thrifts have been segregated into the Bank
Insurance Fund (the "BIF" ) and the SAIF, respectively. The FDIC is required to
maintain the reserve levels of both the BIF and the SAIF at 1.25% of insured
deposits. As a result of a one-time special assessment paid by thrift
institutions pursuant to legislation enacted in 1996 to recapitalize the SAIF, a
prior differential between BIF and SAIF assessment rates was eliminated and the
rates for SAIF members are identical to the rates for BIF members. Beginning in
1997, commercial banks have been required to share in the payment of interest
due on Financing Corporation ("FICO") bonds used to provide liquidity to the
savings and loan industry in the 1980s. Annualized FICO assessments which were
added to deposit insurance premiums equaled 6.25 basis points for SAIF members
and 1.25 basis points for BIF members for the first semi-annual period of 1998
and 5.96 basis points for SAIF members and 1.192 basis points for BIF members
for the second semi-annual period of 1998. 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.
<PAGE>
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, 1998, the Bank's tangible, core and total
risk-based regulatory capital ratios were 7.93%, 7.93% and 20.70%, 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." In October 1997, the OTS proposed amendments to its FIRREA capital
regulations that would establish a minimum leverage ratio of 4.0% for
institutions not in the highest supervisory category. Core capital generally
includes common shareholders' equity, noncumulative perpetual preferred stock
and minority interests in consolidated subsidiaries, less investments in certain
subsidiaries and certain intangible assets. Prior to October 1, 1998, under
interim guidance issued by the OTS, servicing assets (both mortgage and
non-mortgage) and purchased credit card relationships ("PCCRs") could be
included up to an aggregate amount of 50% of core capital and PCCRs and
non-mortgage servicing assets were also subject to a sublimit of 25% of core
capital. For these purposes, servicing assets and PCCRs are valued at the lesser
of 90% of fair market value or 100% of the current unamortized book value. At
September 30, 1998, the Bank had qualifying servicing assets of $27.0 million,
which constituted 5.1% of core capital at that date, and had no PCCRs.

Effective October 1, 1998, the OTS and the other federal bank regulatory
agencies amended their regulatory capital requirements relating to servicing
assets. The final rule increases the maximum amount of servicing assets (both
mortgage and non-mortgage) and PCCRs that can be included in Tier 1 capital from
50% to 100%. PCCRs and non-mortgage servicing assets are still subject to a
sublimit of 25% of core capital.

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.

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 servicing
assets valued at the amount includable in core capital.
<PAGE>
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 accounted for as having been sold. Pursuant to OTS's capital
requirements, the Bank maintains dollar-for-dollar capital against the
securitized assets in an amount equal to (i) the amounts on deposit in spread
accounts, (ii) the amount of any interest-only strips relating to the
securitized assets, and (iii) certain other items representing recourse for
regulatory capital purposes, up to the otherwise applicable capital requirement
on the underlying loans.

The OTS and the other federal bank regulatory agencies have proposed revisions
to their risk-based capital regulations to address the regulatory capital
treatment of recourse obligations and direct credit substitutes involving
exposure to credit risk. The proposal (i) would define recourse to include,
among other things, providing credit enhancement beyond any contractual
obligation to support assets sold and providing representations and warranties
other than those that relate to an existing state of facts that the seller can
either control or verify with reasonable due diligence at the time the assets
are sold; (ii) would treat direct credit substitutes and recourse obligations
consistently; and (iii) would use credit ratings and possibly certain other
alternative approaches to match the risk-based capital assessment more closely
to an institution's relative risk of loss in asset securitizations. The agencies
intend that any final rules adopted in connection with the proposal that result
in increased risk-based capital requirements for an institution will apply only
to transactions consummated after the effective date of any final rules.

There are currently four categories of risk-weightings: 0% for cash and similar
assets, 20% for qualifying mortgage-backed securities, 50% for qualifying
residential permanent real estate loans and 100% for other assets, including
consumer loans, commercial real estate loans 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,
1998, the Bank had $53.0 million in allowances for general loan and lease
losses, all of which was includable as supplementary capital.
<PAGE>
Subordinated debt may be included in supplementary capital with OTS approval
subject to a phase-out based on its remaining term to maturity. The phase-out
established for such maturing capital instruments by the OTS permits an
institution to include such instruments in supplementary capital under one of
two phase-out options: (i) at the beginning of each of the last five years prior
to the maturity date of the instrument, the institution may reduce the amount
eligible to be included by 20% of the original amount or (ii) the institution
may include only the aggregate amount of maturing capital instruments that
mature in any one year during the seven years immediately prior to an
instrument's maturity that does not exceed 20% of the institution's capital.
Once an institution selects either the first or second option, it must continue
to select the same option for all subsequent issuances of maturing capital
instruments as long as there is any outstanding balance of such instruments for
which an option has been selected. At September 30, 1998, the Bank had $250.0
million in maturing subordinated capital instruments, all of which was
includable as supplementary capital. Of that amount, $150.0 million matures in
2005 and $100.0 million matures in 2008. See "Deposits and Other Sources of
Funds - Borrowings."

The OTS has indefinitely delayed implementation of an interest-rate risk
component of its risk-based capital regulation. Under that component, 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. At September 30, 1998,
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, 1998, 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, 1998, the Bank's investments in, and extensions of credit to,
its non-includable subsidiaries totaled approximately $4.1 million, of which
$3.9 million constituted a deduction from tangible capital.
<PAGE>
OTS capital regulations also require the 100% deduction from total capital of
all equity investments that are not permissible for national banks and the
portion of land loans and non- residential construction loans in excess of an
80% loan-to-value ratio. The Bank's equity investments at September 30, 1998
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, 1998, the book value of these properties after subsequent
valuation allowances, was $11.7 million, of which $11.1 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,
1998. The Bank has $0.8 million of general valuation allowances maintained
against its non-includable subsidiaries and equity investments which, pursuant
to OTS guidelines, are 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 February 1998, the Bank
received from the OTS extensions through February 17, 1999 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 - Capital."

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 - Capital."

The OTS has the authority to require an institution to maintain capital at
levels above the minimum levels generally required, but has not taken any such
action with respect to the Bank.
<PAGE>
Prompt Corrective Action. Pursuant to FDICIA, the OTS and the other federal
agencies regulating financial institutions have adopted regulations which apply
to every FDIC- insured commercial bank and thrift institution a system of
mandatory and discretionary supervisory actions which generally become more
severe as the capital levels of an individual institution decline. The
regulations establish five capital categories to which institutions are assigned
for purposes of determining their treatment under these prompt corrective action
provisions. An institution is categorized as well capitalized under the
regulations if (i) it has a leverage ratio of at least 5.0%, a tier 1 risk-based
capital ratio of at least 6.0% and a total risk-based capital ratio of at least
10.0%, and (ii) is not subject to any written agreement, order, capital
directive or prompt corrective action directive issued by the OTS to meet and
maintain a specific capital level. An institution is considered adequately
capitalized if such capital ratios are at least 4.0% (3.0% if rated in the
highest supervisory category), 4.0% and 8.0%, respectively. An institution with
a leverage ratio below 4.0% (3.0% if rated in the highest supervisory category),
a tier 1 risk-based capital ratio below 4.0% or a total risk-based capital ratio
below 8.0% is considered undercapitalized and an institution with ratios under
3.0%, 3.0% or 6.0%, respectively, is considered significantly undercapitalized.
Finally, an institution is considered critically undercapitalized, and subject
to provisions mandating appointment of a conservator or receiver, if its ratio
of tangible equity (generally defined by the OTS as core capital plus cumulative
perpetual preferred stock) to total assets is 2.0% or less. An institution's
classification category could be downgraded if, after notice and an opportunity
for a hearing, the OTS determined that the institution is in an unsafe or
unsound condition or has received and has not corrected a less than satisfactory
examination rating for asset quality, management, earnings or liquidity.

At September 30, 1998, the Bank's leverage, tier 1 risk-based and total
risk-based regulatory capital ratios were 7.93%, 12.93% and 20.70%,
respectively, which exceeded the minimum ratios established for well capitalized
institutions.

Board Resolution. At the request of the OTS, the Board of Directors of the Bank
adopted a resolution in March 1996 which, among other things, 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 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 up to 20 percent of
total assets, and (iii) intangible assets, including goodwill. The QTL test must
be met on a monthly average basis in nine out of every 12 months.
<PAGE>
The Bank had 86.7% of its assets invested in qualified thrift investments at
September 30, 1998, and met the QTL test in each of the previous 12 months.

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, small business
loans, 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 consumer loans (other than
credit card and educational loans), 50% of residential housing loans originated
and sold within 90 days, investments in real estate-oriented service
corporations, 200% of mortgage loans for residences, churches, schools, nursing
homes and small businesses in 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 meet the QTL test, 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 meet the QTL test, 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 meet the QTL test, in the absence of a significant restructuring of the
Trust's operations, would, in effect, require the Trust to reduce its ownership
of 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.

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.
<PAGE>
Institutions are divided into two tiers for purposes of these regulations. Tier
1 institutions are those in compliance with their 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.

The definition of Tier 2 institutions is no longer applicable because all
deductions from capital requirements have been fully phased-in as of July 1,
1996. All institutions are classified 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, 1998, 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.

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.
<PAGE>
Although the Bank believes that dividends paid on the 10 3/8% Noncumulative
Exchangeable Preferred Stock, Series, A, (the "REIT Preferred Stock") issued by
Chevy Chase Preferred Capital Corporation (the "REIT Subsidiary") 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 - Capital." 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.

In January 1998, the OTS proposed to amend its capital distribution regulations.
The proposal would expand the definition of capital distribution to include
repurchases of subordinated debt and requested comment on whether to treat
dividends paid by an operating subsidiary such as the REIT Subsidiary as capital
distributions. Under the proposal, the Bank would be required to file an
application with the OTS to make any capital distribution regardless of its size
if the Bank did not qualify for expedited treatment under OTS regulations. If
the Bank qualified for expedited treatment, an application would be required
only if the total amount of all of the Bank's capital distributions for the year
exceeded the sum of the Bank's net income for the year and the retained net
income for the previous two years. However, as is the case under current OTS
regulations, a notice would be required for any capital distribution because the
Bank is a subsidiary of a savings and loan holding company. In considering an
application or notice, the proposal provides that the OTS will not permit a
capital distribution if (i) the Bank would be undercapitalized following the
distribution; (ii) the capital distribution raises safety and soundness
concerns; or (iii) the capital distribution violates any statute, regulation,
agreement with the OTS, or condition imposed by 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.
<PAGE>
The Bank is subject to other limitations on its ability to pay dividends. The
indenture pursuant to which $150 million principal amount of the Bank's 9 1/4%
Subordinated Debentures due 2005 was issued in 1993 (the "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 Bank's 10 3/8% Noncumulative Preferred Stock, Series B (the "Series B
Preferred Stock"), if issued in exchange for the outstanding REIT Preferred
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financial Condition - Capital and Security Ownership of
Certain Beneficial Owners and Management."

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 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 13% 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."

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 regulatory loans-to-one-borrower limit was approximately $125.6
million at September 30, 1998, and no group relationships exceeded this limit at
that date.
<PAGE>
Safety and Soundness Standards. The federal financial institution regulators
have developed standards to evaluate the operations of depository institutions,
as well as standards relating to asset quality, earnings and compensation. The
operational standards cover internal controls and audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth and
employee compensation. An institution that fails to meet a standard that is
imposed through regulation may be required to submit a plan for corrective
action within 30 days. If a savings association fails to submit or implement an
acceptable plan, the OTS must order it to correct the deficiency, and may
restrict its rate of asset growth, prohibit asset growth entirely, require the
institution to increase its ratio of tangible equity to assets, restrict the
interest rate paid on deposits to the prevailing rates of interest on deposits
of comparable amounts and maturities, or require the institution to take any
other action the OTS determines will better carry out the purpose of prompt
corrective action. Imposition of these sanctions is within the discretion of the
OTS in most cases, but is mandatory if the savings institution commenced
operations or experienced a change in control during the 24 months preceding the
institution's failure to meet these standards, or underwent extraordinary growth
during the preceding 18 months.

The asset quality standards require that 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.

Regulatory Assessments. The OTS imposes 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
$867,000 for the twelve-month period ending December 31, 1998) are the most
significant.

Effective January 1, 1999, the OTS will charge examination and supervisory
assessments based on a revised formula intended to more accurately reflect OTS's
estimates of the actual cost of examining and supervising an institution. Unlike
the current formula, the revised formula will impose a surcharge on institutions
with a CAMELS rating of 3 (in addition to institutions with a CAMELS rating of 4
or 5 that currently pay a surcharge) and on complex institutions, which OTS
defines as any institution with significant amounts (i.e., over $1 billion) of
certain off-balance sheet assets (specifically, loans serviced for others, trust
assets and recourse obligations or direct credit substitutes). The Bank
anticipates that its assessments will increase under the revised formula.

Other Regulations and Legislation. Chevy Chase must 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.
<PAGE>
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 meet
the QTL test and their regulatory capital requirements and have at least a
satisfactory rating under the Community Reinvestment Act ("CRA").

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

The OTS and the other federal bank regulatory agencies have requested comment on
possible changes to the existing regulatory classification policies for retail
credit. Among the changes being considered are adoption of: (i) a uniform
charge-off policy for open-end and closed-end credit; (ii) a charge-off policy
for loans affected by bankruptcy, fraudulent activity, and/or death of a
borrower; (iii) a policy for treatment of partial payments; (iv) a prudent
reaging policy for past due accounts; and (v) a classification policy for
delinquent residential mortgage and home equity loans. The Bank is unable to
predict at this time what, if any, changes will be made to the existing
policies.

Pending Legislation

Thrift Charter Legislation. Legislation passed in 1996 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. Because the 105th
Congress did not enact legislation eliminating the thrift charter, no such
merger will take place on January 1, 1999. Although earlier versions of
financial modernization legislation considered by the 105th Congress would have
required federal thrifts, like the Bank, to convert their charters to national
or state bank charters, the versions of the legislation passed by the House of
Representatives and by the Senate Banking Committee prior to adjournment would
not have required the Bank to convert its charter. If legislation requiring the
Bank to convert its charter were enacted and did not contain appropriate
grandfather provisions, such legislation could have an 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 at this time whether, or in what form, such
legislation may eventually be enacted, and there can be no assurances that any
such legislation that is enacted will contain adequate grandfather rights for
the Bank or the Trust.
<PAGE>
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 1, 1998, the first $4.7 million of a
depository institution's transaction accounts were subject to a 0% reserve
requirement. The next $43.1 million in net transaction accounts were subject to
a 3.0% reserve requirement and any net transaction accounts over $47.8 million
were subject to a 10.0% reserve requirement. Effective December 1, 1998, the FRB
increased the amount of transaction accounts subject to a 0% reserve requirement
from $4.7 million to $4.9 million and decreased the low reserve tranche from
$43.1 million to $41.6 million. The Bank met its reserve requirements for each
period during the year ended September 30, 1998. The balances maintained to meet
the reserve requirements imposed by the FRB also may be used to satisfy
liquidity requirements which are imposed by the OTS.

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 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. Based on the last OTS examination covering the period from January
1995 through June 1997, the Bank received an outstanding CRA rating, the highest
rating given by the OTS.

Institutions like the Bank, with more than $250 million in assets, are evaluated
primarily 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.
<PAGE>
In August 1994, Chevy Chase and its subsidiary, B. F. Saul Mortgage Company
(together, the "Companies"), entered into an agreement with the United States
Department of Justice (the "Department") which committed 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 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 obligated 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 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.

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.

Holding Company Regulation

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

The Holding Companies must obtain the prior approval of the OTS before acquiring
by merger, consolidation or purchase of assets any federally insured savings
institution or any savings and loan holding company. As unitary savings and loan
holding companies, the Holding
<PAGE>
Companies are virtually unrestricted in the types of business activities in
which they may engage, provided the Bank continues to meet the QTL test. See
"Qualified Thrift Lender ("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. See "Prompt Corrective Action."
<PAGE>
Recent Accounting Pronouncements

SFAS No. 130, Reporting Comprehensive Income ("SFAS 130") was issued in June
1997 and establishes accounting standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS 130 also requires an enterprise to classify
items of other comprehensive income by their nature in a financial statement and
to display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. Because SFAS 130 addresses only disclosure
related issues, its adoption will not have an impact on the Bank's financial
condition or its results of operations.

SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"), was also issued in June 1997. SFAS 131 establishes
accounting standards for the way business enterprises report information about
operating segments in annual and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 requires
that a business enterprise report financial and descriptive information,
including profit or loss, certain specific revenue and expense items, and
segment assets, about its reportable operating segments. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by management in deciding
how to allocate resources and in assessing performance. SFAS 131 is effective
for financial statements for fiscal years beginning after December 15, 1997.
Because SFAS 131 addresses only disclosure related issues, its adoption will not
have an impact on the Bank's financial condition or its results of operations.

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was
issued in June 1998 and establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. The impact of SFAS 133
on the Bank's financial statements has not yet been determined.

SFAS No. 134, Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise,
an amendment of FASB Statement No. 65 ("SFAS 134"), was issued in October
1Mortgage Banking Activities to require that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities or other retained interests
based on its ability and intent to sell or hold those investments. SFAS 134
conforms the subsequent accounting for securities retained after the
securitization of mortgage loans by a mortgage banking enterprise with the
subsequent accounting for securities retained after the securitization of other
types of assets by a nonmortgage banking enterprise. SFAS 134 is effective for
the first fiscal quarter beginning after December 15, 1998.
<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 3.3% in September
1998, compared to the national rate of 4.4%.

Chevy Chase historically has relied on retail deposits originated in its branch
network as its primary funding source. See "Deposits and Other Sources of
Funds." Chevy Chase's principal market for deposits consists of Montgomery and
Prince George's Counties in Maryland and Fairfax County in Virginia.
Approximately 13.3% of the Bank's deposits at September 30, 1998 were obtained
from depositors residing outside of Maryland and Northern Virginia. Chevy Chase
had the largest market share of deposits in Montgomery County, and ranked third
in market share of deposits in Prince George's County at June 30, 1997,
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 1998
(2.4% and 1.9%, respectively) was below the national rate (4.4%) and state rates
(4.3% for Maryland and 3.2% 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.

The Bank classifies its investment and mortgage-backed securities as either
held-to-maturity, available-for-sale or trading at the time such securities are
acquired. All investment securities and mortgage-backed securities are
classified as held-to-maturity at September 30, 1998 and 1997.

As part of its mortgage banking activities, the Bank exchanges loans held for
sale for mortgage-backed securities and then sells the mortgage-backed
securities, which are classified as trading securities, to third party investors
in the month of issuance. Gains and losses on sales of trading securities are
determined using the specific identification method. There were no
mortgage-backed securities classified as trading securities at September 30,
1998 and 1997.
<PAGE>
At September 30, 1998 and 1997, the Bank held automobile receivables-backed
securities which were classified as trading securities. These securities were
established in conjunction with two automobile loan securitization transactions
and represent subordinate classes of certificates retained by the Bank.

Lending Activities

Loan Portfolio Composition. At September 30, 1998, the Bank's loan portfolio
totaled $2.8 billion, which represented 41.2% 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 70.6% of the loan portfolio at that date.

The following table sets forth information concerning the Bank's loan portfolio
(net of unfunded commitments) for the periods indicated.
<PAGE>
<TABLE>
Loan Portfolio
(Dollars in thousands)

                                                                                    September 30,
                        ------------------------------------------------------------------------------------------------------------
                                1998                   1997                   1996                  1995                  1994
                        ---------------------- ---------------------  --------------------- --------------------- ------------------

                                     % 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>   
Single family 
  residential (1)      $ 1,821,982    65.7 %   $  849,955    33.2 %  $ 1,601,483    47.2 % $ 1,391,694    47.3 % $ 1,369,571   53.7%

Home equity (1)            135,122     4.9         94,088     3.7         32,052     0.9        29,024     1.0        34,708    1.4

Commercial real estate
  and multifamily           74,164     2.7         53,551     2.1         78,866     2.3        85,781     2.9        84,210    3.3

Real estate 
  construction and 
  ground                   108,379     3.9         54,998     2.2         63,907     1.9        32,652     1.1        52,350    2.1

Commercial                 174,076     6.3         98,346     3.9         57,023     1.7        13,986     0.5         3,950    0.2

Credit card (1)                --      --       1,077,149    42.3      1,118,271    33.0     1,012,548    34.4       650,199   25.5

Automobile (1)             357,826    12.9        229,868     9.0        301,066     9.0       239,217     8.1       289,346   11.4

Home improvement and
  related loans (1)         67,355     2.4         55,453     2.2         99,192     2.9       112,705     3.8        37,526    1.5

Overdraft lines of 
  credit and
  other consumer            33,484     1.2         36,029     1.4         37,954     1.1        26,206     0.9        25,375    0.9

                        -----------  --------- -----------  --------  -----------  -------- -----------  -------- ----------- ------
                         2,772,388   100.0 %    2,549,437   100.0 %    3,389,814   100.0 %   2,943,813   100.0 %   2,547,235  100.0%
                        -----------  ========= -----------  ========  -----------  ======== -----------  ======== ----------- ======
Less:

  Unearned premiums 
    and discounts               --                    449                    836                 1,103                 1,438

  Deferred loan 
    origination
    fees (costs)            (3,013)                (2,339)               (13,958)              (13,687)              (10,604)

  Allowance for loan 
    losses                  60,157                105,679                 95,523                60,496                50,205

                        -----------            -----------            -----------           -----------           -----------
                            57,144                103,789                 82,401                47,912                41,039
                        -----------            -----------            -----------           -----------           -----------

      Total loans 
        receivable     $ 2,715,244            $ 2,445,648            $ 3,307,413           $ 2,895,901           $ 2,506,196
                       ============           ============           ============          ============          ============






-----------------------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale and/or securitization, if any.
</TABLE>
<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. In addition, the composition of the Bank's loan portfolio as of
September 30, 1998 was significantly affected by the sale of the Bank's credit
card portfolio on that date. See "Regulation - Regulatory Capital," "Qualified
Thrift Lender ("QTL") Test" and "Federal Taxation - Bad Debt Reserve" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - 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,
1998. The entire balance of loans held for sale and/or securitization is shown
in the year ending September 30, 1999, because such loans are expected to be
sold in less than one year.
<PAGE>
<TABLE>
Contractual Principal Repayments
(In thousands)

                                       
                                                                           Approximate Principal Repayments
                              Principal                                   Due in Years Ending September 30,
                               Balance     
                             Outstanding at  ---------------------------------------------------------------------------------------
                             September 30,                                                                                 2014 and
                               1998 (1)        1999         2000        2001      2002-2003     2004-2008    2009-2013    Thereafter
                             ------------- ----------- ------------ ----------- ------------- ------------ ------------- -----------
<S>                          <C>           <C>         <C>          <C>         <C>           <C>          <C>           <C>        
Single family residential    $  1,772,784  $   23,377  $    24,982  $   26,482  $     49,758  $   170,039  $    379,357  $ 1,098,789
Home equity                       135,122         643        1,483         237           245        7,230        11,262      114,022
Commercial real estate and
  multifamily                      74,164         469       10,728      12,338        21,343       27,365         1,921           --
Real estate construction 
  and ground                      108,379      63,245        8,729      23,090        13,315           --            --           --
Commercial                        174,076      79,972        9,510      12,647        17,733       48,654         5,294          266
Automobile                        232,826      37,997       43,341      49,563       101,925           --            --           --
Home improvement and 
  related loans                    60,570       2,343        2,632       2,956         7,045       26,727        18,867           --
Overdraft lines of credit 
  and other consumer               33,484       3,187        3,744       4,411        11,377       10,765            --           --
Loans held for sale                55,983      55,983           --          --            --           --            --           --
Loans held for 
  securitization and sale         125,000     125,000           --          --            --           --            --           --
                             ------------- ----------- ------------ ----------- ------------- ------------ ------------- -----------
  Total loans receivable (2) $  2,772,388  $  392,216  $   105,149  $  131,724  $    222,741  $   290,780  $    416,701  $ 1,213,077
                             ============= =========== ============ =========== ============= ============ ============= ===========


Fixed-rate loans             $  1,592,388  $   69,360  $    68,423  $   81,645  $    166,858  $   175,992  $    316,345  $   713,765
Adjustable-rate loans             999,017     141,873       36,726      50,079        55,883      114,788       100,356      499,312
Loans held for sale                55,983      55,983           --          --            --           --            --           --
Loans held for 
  securitization and sale         125,000     125,000           --          --            --           --            --           --
                             ------------- ----------- ------------ ----------- ------------- ------------ ------------- -----------
  Total loans receivable (2) $  2,772,388  $  392,216  $   105,149  $  131,724  $    222,741  $   290,780  $    416,701  $ 1,213,077
                             ============= =========== ============ =========== ============= ============ ============= ===========

------------------------------------------------------------------------------------------------------------------------------------
(1) Of the total amount of loans outstanding at September 30, 1998 which were
due after one year, an aggregate principal balance of approximately $1.5 billion
had fixed interest rates and an aggregate principal balance of approximately
$857.1 million had adjustable interest rates. 

(2) Before deduction of allowance for loan losses, unearned premiums and
discounts and deferred loan origination fees (costs).
</TABLE>
<PAGE>
Actual payments may not reflect scheduled contractual principal repayments due
to the effect of loan refinancings, prepayments and enforcement of due-on-sale
clauses, which give the Bank the right to declare a conventional loan -- one
that is neither insured by the Federal Housing Administration ("FHA") nor
partially guaranteed by the Veterans' Administration ("VA") -- immediately due
and payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. Although the Bank's
single- family residential loans historically have had stated maturities of
generally 30 years, such loans normally have remained outstanding for
substantially shorter periods because of these factors. At September 30, 1998,
principal repayments of $211.0 million are contractually due within the next
year. Of this amount, $69.1 million is contractually due on fixed-rate loans and
$141.9 million is contractually due on adjustable-rate loans.

Origination, Purchase and Sale of Real Estate Loans. As a federally chartered
savings institution, the Bank has general authority to make loans secured by
real estate located throughout the United States. The following table shows
changes in the composition of the Bank's real estate loan portfolio and the net
change in mortgage-backed securities.
<PAGE>
<TABLE>
Origination, Purchase and Sale of Real Estate Loans
(In thousands)

                                                                      For the Year Ended September 30,
                                                        -------------------------------------------------------------
                                                             1998                   1997                   1996
                                                        ----------------       ----------------       ---------------
<S>                                                     <C>                    <C>                    <C>           
Real estate loan originations and purchases: (1)

Single family residential                               $     2,814,171        $     1,438,333        $    1,067,153
Home equity                                                     448,071                259,999               152,953
Commercial real estate and multifamily                           21,184                     29                   345
Real estate construction and ground                             126,295                 64,430                72,655
                                                        ----------------       ----------------       ---------------

Total originations and purchases                              3,409,721              1,762,791             1,293,106
                                                        ----------------       ----------------       ---------------

Principal repayments                                           (348,676)              (501,190)             (279,518)
Sales (2)                                                      (423,078)              (413,645)             (407,201)
Loans transferred to real estate acquired
  in settlement of loans                                         (4,938)                (4,706)               (5,973)

                                                        ----------------       ----------------       ---------------
                                                               (776,692)              (919,541)             (692,692)
                                                        ----------------       ----------------       ---------------

Transfers to mortgage-backed securities (3)                  (1,545,974)            (1,566,966)             (363,257)
                                                        ----------------       ----------------       ---------------


Increase (decrease) in real estate loans                $     1,087,055        $      (723,716)       $      237,157
                                                        ================       ================       ===============

(1) Excludes unfunded commitments.

(2) Includes securitization and sale of home equity receivables of $298.8
million, $170.6 million and $96.5 million for the years ended September 30,
1998, 1997 and 1996, respectively.

(3) Represents real estate loans which were pooled and exchanged for
mortgage-backed securities.
</TABLE>
<PAGE>
Single-Family Residential Real Estate Lending. The Bank originates a variety of
loans secured by single-family residential structures. At September 30, 1998,
$2.0 billion (or 70.6%) of the Bank's loan portfolio consisted of loans secured
by first or second mortgages on such properties, as compared to $944.0 million
(or 36.9%) at September 30, 1997. Of these amounts, $25.5 million and $13.4
million consisted of FHA-insured or VA-guaranteed loans at September 30, 1998
and 1997, respectively. Approximately 77.8% of the Bank's single-family
residential real estate loans at September 30, 1998, 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.
Chevy Chase currently offers fixed-rate loans with maturities of 10 to 30 years
and adjustable-rate residential mortgage loans ("ARMs"), principally with
maturities of 30 years.

The Bank maintains a wholesale network of correspondents, including loan brokers
and financial institutions, in order to supplement its direct origination of
single-family residential mortgage loans. The Bank determines the specific loan
products and rates under which the correspondents originate the loans, and
subjects the loans to the Bank's underwriting criteria and review. During the
year ended September 30, 1998, approximately $1.6 billion of loans settled under
the correspondent program.

Interest rates on the majority of the Bank's ARMs are adjusted based on changes
in yields on U.S. Treasury securities of varying maturities. The interest rate
adjustment provisions of the Bank's ARMs contain limitations on the frequency
and maximum amount of interest rate adjustments, although such limitations are
not required by law. These limitations are determined by a variety of factors,
including mortgage loan competition in the Bank's markets. The 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%. At September 30, 1998,
36.0% of the Bank's residential mortgage loans were comprised of ARMs.

During the current fiscal year, the Bank continued to fulfill its $1.0 billion
five-year loan commitment made in 1994 to meet the credit needs of low- and
moderate-income borrowers in the various communities which it serves. As part of
this commitment, the Bank's Community Development Fund 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.
<PAGE>
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
1998, sales of mortgage loans originated or purchased for sale by the Bank
totaled $124.3 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's conforming fixed-rate, single- family loans are originated
on terms which conform to Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal National Mortgage Association ("FNMA") and Government National Mortgage
Association ("GNMA") guidelines in order to facilitate the sale and/or
securitization of the mortgage loan. In order to manage its interest-rate
exposure, the Bank hedges its held for sale 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, 1998, the Bank had $56.3 million of single-family
residential loans held for sale to investors.

From time to time, as part of its capital and liquidity management plans, the
Bank may consider exchanging loans held in its portfolio for lower risk-weighted
mortgage-backed securities and retaining those securities in its portfolio
rather than selling them in the secondary mortgage market. During fiscal 1998,
the Bank exchanged $1.2 billion of single-family residential loans held in its
portfolio for mortgage-backed securities which the Bank retained for its own
portfolio.

When the Bank sells a residential whole loan or loan participation and retains
servicing, or purchases mortgage servicing assets from third parties, it
collects and remits loan payments, inspects the properties, makes certain
insurance and tax payments on behalf of borrowers and otherwise services the
loans. The servicing fee, generally ranging from 0.25% to 0.50% 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, 1998, the Bank was
servicing residential permanent loans totaling $4.0 billion for other investors.
See "Loan Servicing."

Sales of Mortgage-Backed Securities. The Bank originates and sells
mortgage-backed securities pursuant to its normal mortgage banking operations,
which are generally issued in the same month as they are sold. 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 an adjustable-rate loan to a fixed-rate loan. Mortgage-backed securities
held for sale in conjunction with mortgage banking activities are classified as
trading securities. 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, 1998.
<PAGE>
Home Equity Lending. The Bank's home equity credit line loan provides revolving
credit secured principally by a second mortgage on the borrower's home. Such
loans are originated directly by the Bank. Home equity credit line loans bear
interest at a variable rate that adjusts monthly based on changes in the
applicable interest rate index and generally are subject to a maximum annual
interest rate of between 18.0% and 24.0%. Generally, except for any amortization
of principal that may occur as a result of monthly payments, there are no
required payments of principal until maturity. 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.

During fiscal 1998, the Bank purchased $53.2 million of home equity credit line
loans at a premium. The Bank may make additional purchases of such loans in the
future as a way to supplement its direct origination of such loans.

Securitization and sale of home equity receivables has been an important element
of the Bank's strategies to enhance liquidity and to maintain compliance with
regulatory capital requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations Financial Condition." The Bank
transferred $298.8 million, $170.6 million and $96.5 million of home equity
receivables in fiscal 1998, fiscal 1997 and fiscal 1996, respectively, to trusts
for securitization and sale to investors. Gains of $19.7 million, $11.8 million
and $4.7 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. Commercial real estate, real
estate construction and ground loans are originated directly by the Bank.
Aggregate balances of residential and commercial construction, ground and
commercial real estate and multifamily loans increased 68.2% in fiscal 1998 to
$182.5 million at September 30, 1998, from $108.5 million at September 30, 1997.
The Bank provides financing, generally at market rates, to certain purchasers of
its real estate owned ("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. Commercial loans are originated, underwritten, and managed
by the Bank's Business Banking Group. The Bank makes loans to business entities
for a variety of purposes, including working capital, acquisitions of machinery
and equipment or other assets, and facilitating cash flows. The Bank also
provides acquisition, construction and permanent financing of real estate used
in the borrower's business. A wide variety of products are offered, including
revolving lines of credit for working capital or seasonal needs; term loans for
the financing of fixed assets; letters of credit; cash management services; and
other deposit and investment products. Business development efforts have been
concentrated in the major industry groups in the metropolitan Washington, D.C.
area, as well as a broad base of businesses and community service organizations.
Commercial loans increased $75.8 million during fiscal 1998 from $98.3 million
at September 30, 1997 to $174.1 million at September 30, 1998. Of the $174.1
million, 26.9% represents participations by the Bank in commercial loans
originated by other financial institutions. The Bank believes its balances of
commercial loans will increase as it continues to expand this aspect of its
business. In addition, management believes that the acquisition of ASB can
enhance the operations of the Business Banking Group by allowing the Bank to
offer a broader variety of investment products and fiduciary services to
institutional customers.

Federal laws and regulations limit the Bank's commercial loan portfolio to 20%
of assets, with at least 10% consisting of small business loans.
<PAGE>
Consumer Lending. Chevy Chase currently offers a variety of consumer 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 offers non-prime
automobile loans. 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 "Consumer Loan Underwriting." During fiscal 1998,
the Bank provided consumer credit through its credit card program, which offered
Visa(R) and MasterCard(R) credit cards. At June 30, 1998, credit card loans
outstanding totaled $938.7 million. Following the sale of the credit card
portfolio to FUSA on September 30, 1998, the Bank no longer offers its own
credit card loans, but has entered into an agreement with FUSA pursuant to which
the Bank will provide credit cards issued by FUSA to the Bank's local customers.
The Bank's portfolios of automobile loans, home improvement and related loans
and other consumer loans totaled $357.8 million, $67.4 million and $33.5
million, respectively, at September 30, 1998, which accounted for a combined
16.5% of total loans at that date. The largest areas of recent growth have been
in automobile loans and home improvement loans. During fiscal 1998, the Bank
purchased or originated $715.2 million and $108.5 million of automobile loans
and home improvement loans, respectively, which was partially offset by the
transfers of $534.7 million and $45.9 million, respectively, of receivables to
trusts for securitization and sale to investors.

Federal laws and regulations limit the Bank's secured and unsecured consumer
loans to 35% of its total assets. Certain consumer loans, which include home
improvement, secured deposit account and educational loans, are not included in
the 35% limit.

Real Estate Loan Underwriting. In the loan approval process, Chevy Chase
assesses both the borrower's ability to repay the loan and, in appropriate
cases, the adequacy of the proposed security. 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. Generally, all construction and commercial real estate loans
are reviewed and approved by the Executive Loan Committee. Any significant loan
not conforming to the Bank's approved policies must be approved by the Executive
Loan Committee or the Chief Executive Officer. Prior to October 1998, all loans
of $15 million or more were presented to the Board of Directors for final
approval. Effective October 1998, the Bank increased this threshold to $30
million.

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

In an effort to minimize the increased risk of loss associated with construction
and development loans, Chevy Chase considers the reputation of the borrower and
the contractor, reviews pre-construction sale and leasing information, and
requires an independent inspecting engineer or architect to review the progress
of multifamily and commercial real estate projects. In addition, the Bank
generally requires personal guarantees of developers for all development loans
and, if a general contractor is used by the developer, may require the posting
of a performance bond.
<PAGE>
The Bank generally lends up to 95% of the appraised value of single-family
residential dwellings to be owner-occupied. The Bank also lends up to 85% of the
appraised value of the completed project to finance the construction of such
dwellings, and, on a case-by-case basis, the Bank occasionally may lend up to
90% of such appraised value when such financing is limited to pre-sold units.
The loan-to-value ratio generally applied by the Bank to commercial real estate
loans and multifamily residential loans has been 80% of the appraised value of
the completed project. Currently, the Bank generally does not originate a
traditional second mortgage loan (excluding home equity credit line loans) if
the aggregate loan-to-value ratio of the second loan and the related first
mortgage loan exceeds 80% of the appraised value of the property. In some
circumstances, the Bank originates a first and second mortgage loan
simultaneously where the total loan value does not exceed 90% of the appraised
value of the property. Currently, the Bank offers home equity credit line loans
up to a 125% maximum loan-to-value ratio. 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 a loan's collateral could
expose the Bank to losses. The Bank's ability to make loans with a loan-to-value
ratio above 90 percent without mortgage insurance is limited to 100 percent of
the Bank's total risk-based capital.

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

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

Consumer Loan Underwriting. Consumer loans (which include automobile loans and
home improvement and related loans and overdraft lines of credit) are originated
or purchased by the Bank after a review by the Bank in accordance with its
established underwriting procedures.
<PAGE>
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. Servicing income earned on
single-family residential mortgage loans owned by third parties and the Bank's
securitization and servicing of credit card, home equity, 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.

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,
                                 -----------------------------------------
(In thousands)                       1998          1997           1996    
------------------------------   ------------  ------------  -------------
Residential...................    $ 4,003,946   $ 3,930,371    $ 3,045,650
Credit card...................           --       4,015,172      3,889,704
Home equity...................        421,432       459,130        416,365
Automobile....................      1,055,746     1,083,026        505,638
Home loans....................        200,033       244,140        141,106
                                 ------------  ------------  -------------
   Total amount of loans
   serviced for others (1)....    $ 5,681,157   $ 9,731,839    $ 7,998,463
                                 ============  ============  =============
Servicing and securitization
   income (2).................    $   233,271   $   305,192    $   284,964
                                 ============  ============  =============
---------------------
(1)...The Bank's basis in its servicing assets and interest-only strips at
September 30, 1998, 1997 and 1996 was $40.7 million, $128.8 million and $75.4
million, respectively.

(2)...In each of the years ended September 30, 1998, 1997 and 1996, servicing
and securitization income as a percentage of net interest income before
provision for loan losses was 118.2%, 143.6% and 142.9%, respectively.
<PAGE>
The Bank earns fees in connection with the servicing of home equity
loans, home loans, automobile loans and single-family residential mortgage loans
(and credit card loans prior to the sale of the credit card portfolio on
September 30, 1998). The Bank's level of servicing and securitization income
varies based in large part on the amount of the Bank's securitization activities
with respect to these loan types. As the Bank securitizes and sells assets,
acquires servicing assets either through purchase or origination, or sells
mortgage loans and retains the servicing rights on those loans, the level of
servicing and securitization income generally increases. During fiscal 1998, the
Bank securitized and sold $1.0 billion of credit card receivables, $298.8
million of home equity receivables, $534.7 million of automobile loan
receivables and $45.9 million of home loan receivables. The Bank's servicing and
securitization income decreased from the level achieved in fiscal 1997
principally because of increases in unrealized losses on interest-only strips in
addition to increases in the amortization of interest-only strips related to
prior gains on sales of loans. The Bank's level of servicing and securitization
income also declines upon repayment of assets previously securitized and sold
and repayment of mortgage loans serviced for others.

The Bank's investment in servicing assets (including servicing assets and
interest-only strips), and the amortization of such assets, are periodically
evaluated for impairment. Interest-only strips are evaluated quarterly based on
the discounted value of estimated future net cash flows to be generated by the
underlying loans. The difference between the book value of these assets and the
discounted value is recognized as an unrealized gain or loss in the period in
which the change occurs. Several estimates are used when determining the
discounted value, the most significant of which are the estimated rate of
repayment of the underlying loans and estimated credit losses. The Bank
evaluates its servicing assets for impairment based on fair value. To measure
fair value of its servicing assets, the Bank uses either quoted market prices or
discounted cash flow analyses using appropriate assumptions for servicing fee
income, servicing costs, prepayment rates and discount rates. If actual
prepayment or default rates significantly exceed the estimates used to calculate
the carrying values of the servicing assets, the actual amount of future cash
flow could be less than the expected amount and the value of the servicing
assets, as well as the Bank's earnings, could be negatively impacted. No
assurance can be given that the Bank's receivables will not experience
significant increases in prepayment or default rates or that the Bank may not
have to continue to write down the value of its servicing assets. Additionally,
the Bank stratifies its capitalized servicing assets for purposes of evaluating
impairment by taking into consideration relevant risk characteristics, including
loan type, note rate and date of acquisition. See Summary of Significant
Accounting Policies - The Bank 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.
<PAGE>
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.

See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Asset Quality - Delinquent Loans" for a
discussion of the Bank's delinquent loan portfolio at September 30, 1998.

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. The
Bank's specific methods for establishing the appropriate levels of allowances
vary depending upon the assets involved. Allowances for losses on loans and real
estate are based on current events or facts that may ultimately lead to future
losses. In addition to reviews of individual portfolio segments, the Bank
regularly reviews its overall loan portfolio consisting of performing
non-classified assets and, based on such review, may establish additional
allowances for 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 - Asset Quality -
Allowances for Losses."

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

The Bank's methods for determining the allowance 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 analyzes the allowance
by stratifying residential permanent loans on a state by state and ownership
(i.e., investor or homeowner) basis. After the residential permanent portfolio
has been stratified by state, historical loss ratios (as adjusted for
predictable or quantifiable trends, if known) for the specific states are
applied to delinquent loans. Based on this analysis, a reserve component is
assigned to residential permanent loans. In the Bank's experience, this approach
has resulted in timely recognition of necessary allowances, which has been
generally supported by the Bank's favorable results on the ultimate disposition
of the underlying collateral.
<PAGE>
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.

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.

From fiscal 1994 through fiscal 1998, the Bank provided additional general
valuation allowances, which were equal to, or exceeded, 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 - Asset Quality - Allowances for Losses."

REO is carried at the lower of cost or fair value, less selling costs. 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 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, 1998 comply with the guidelines.

The Bank's assets are subject to review and classification by the OTS upon
examination. Based on such examinations, the Bank could be required to establish
additional valuation allowances or incur additional charge-offs.
<PAGE>
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. At September 30, 1998, all outstanding jumbo
certificates of deposit had been sold directly by the Bank to depositors, either
through its branches or through its treasury management services division.

Chevy Chase attracts deposits through its branch network and advertisements, and
offers depositors access to their accounts through 696 ATMs, including 219 ATMs
located in grocery stores. The Bank also has the right to install ATMs in
certain additional grocery 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 HONOR (R) ATM network which offers over 50,000 locations
nationwide. The Bank is also a member of the PLUS (R) ATM network, which offers
over 457,000 locations worldwide. In addition, the Bank has a partnership
agreement with a regional grocery store to provide in-store banking centers at
up to 160 Baltimore and Washington area stores.

The Bank obtains deposits primarily from customers residing in Montgomery and
Prince George's Counties in Maryland and Northern Virginia. Approximately 31.2%
of the Bank's deposits at September 30, 1998 were obtained from depositors
residing outside of Maryland, with approximately 17.9% of the Bank's deposits
being obtained from depositors residing in Northern Virginia.

The following table shows the amounts of Chevy Chase's deposits by type of
account at the dates indicated.
<PAGE>
<TABLE>
Deposit Analysis
(Dollars in thousands)
                                                                         September 30,
                        ------------------------------------------------------------------------------------------------------------
                                1998                  1997                   1996                 1995                 1994
                        --------------------- --------------------- --------------------- -------------------- ---------------------
                                      % 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 $ 1,329,839    27.2 % $ 1,120,375    22.9 %  $ 1,007,902   24.2 % $   950,118   22.8 % $   918,227    22.9 %
Money market deposit 
  accounts                1,019,569    20.9       983,016    20.1      1,002,688   24.1       984,257   23.7     1,104,730    27.6
Statement savings 
  accounts                  913,467    18.7       907,141    18.5        881,285   21.2       872,366   21.0     1,201,141    30.0
Jumbo certificate 
  accounts                  358,913     7.3       358,737     7.3        125,847    3.0       219,304    5.3        85,110     2.1
Brokered certificate 
  accounts                       --      --       315,142     6.4             --     --            --     --            --      --
Other certificate 
  accounts                1,168,746    23.9     1,130,274    23.2      1,077,828   25.9     1,072,196   25.8       641,857    16.0
Other deposit 
  accounts                   97,696     2.0        79,071     1.6         68,487    1.6        61,011    1.4        57,696     1.4
                        ------------ -------- ------------ -------- ------------- ------- ------------ ------- ------------ --------

     Total deposits     $ 4,888,230   100.0 % $ 4,893,756   100.0 %  $ 4,164,037  100.0 % $ 4,159,252  100.0 % $ 4,008,761   100.0 %
                        ============ ======== ============ ======== ============= ======= ============ ======= ============ ========
</TABLE>
<TABLE>

                                                        Average Cost of Deposits

                                                        Year Ended September 30,
                                          ---------------------------------------------------------
                                           1998                     1997                     1996
---------------------------------------------------------------------------------------------------

<S>                                        <C>                      <C>                      <C>  
Demand and NOW accounts                    1.99%                    2.47%                    2.73%
Money market accounts                      3.90%                    3.90%                    3.87%
Statement savings and
   other deposit accounts                  3.02%                    3.39%                    3.38%
Certificate accounts                       5.41%                    5.29%                    5.48%


  Total deposit accounts                   3.84%                    3.95%                    4.02%
                                          =======                  =======                   ======
</TABLE>
<PAGE>
The range of deposit account products offered by the Bank through its extensive
branch and ATM network allows the Bank to be competitive in obtaining funds from
its local retail deposit market. At the same time, however, as customers have
become increasingly responsive to changes in interest rates, the Bank has
experienced some fluctuations in deposit flows. Chevy Chase's ability to attract
and maintain deposits and its cost of funds will continue to be significantly
affected by market conditions and its pricing strategy. The Bank had $0 and
$315.1 million of brokered deposits at September 30, 1998 and 1997,
respectively. Chevy Chase began accepting brokered deposits in fiscal 1997 as a
way to diversify the Bank's funding sources. The Bank does not currently place
significant reliance on brokered deposits as a key source of funding. Under FDIC
regulations, the Bank is permitted to accept brokered deposits as long as it
meets the capital standards established for well capitalized institutions (or
with FDIC approval, adequately-capitalized institutions) under the prompt
corrective action regulations.

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

                                                  Deposit Flows
                                             Year Ended September 30,      
                                    -----------------------------------------
(In thousands)                          1998           1997          1996    
------------------------------      ------------- ------------- -------------
Deposits......................      $ 24,799,407  $ 18,915,801  $ 15,312,125
Withdrawals from
  accounts....................       (24,984,251)  (18,354,989)  (15,469,909)
                                    ------------- ------------- -------------
Net cash to (from)
  accounts....................          (184,844)      560,812      (157,784)
Interest credited to
  accounts....................           179,318       168,907       162,569 
                                    ------------- ------------- -------------
Net increase (decrease) in deposit
  balances....................      $     (5,526) $    729,719   $     4,785 
                                    ============= ============= =============

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, 1998 which will mature during the
fiscal years indicated.
<PAGE>
<TABLE>
Weighted Average Interest Rates of Deposits
As of September 30, 1998
(Dollars in thousands)

                       Demand, NOW
                     and Money Market           Statement         Passbook and Other         Certificate
                     Deposit Accounts       Savings Accounts        Core Accounts             Accounts                   Total
                 ----------------------- ---------------------- --------------------- ------------------------ ---------------------

Maturing During               Weighted               Weighted              Weighted                 Weighted                Weighted
  Year Ending                 Average                Average               Average                  Average                  Average
 September 30,      Amount      Rate        Amount     Rate       Amount     Rate         Amount      Rate        Amount       Rate
---------------- ------------ ---------- ----------- ---------- ---------- ---------- ------------- ---------- ------------  -------
<S>              <C>          <C>        <C>         <C>        <C>        <C>        <C>           <C>        <C>           <C>   
     1999        $ 2,349,408      2.15 % $  913,467      2.41 % $  97,696      2.10 % $  1,236,272      5.20 % $ 4,596,843    3.02 %

     2000               -         -             -        -            -        -           190,466      5.94       190,466    5.94

     2001               -         -             -        -            -        -            40,076      5.46        40,076    5.46

     2002               -         -             -        -            -        -            29,257      5.79        29,257    5.79

     2003               -         -             -        -            -        -            31,588      5.77        31,588    5.77


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

     Total       $ 2,349,408      2.15 % $  913,467      2.41 % $  97,696      2.10 % $  1,527,659      5.32 % $ 4,888,230    3.19 %
                 ============            ===========            ==========            =============            ============
</TABLE>
<PAGE>
The following table summarizes maturities of certificate accounts in amounts of
$100,000 or greater as of September 30, 1998.

Year Ending September 30,            Amount           Weighted Average Rate
--------------------------    ---------------------   ---------------------
                             (Dollars in thousands)
1999  ..................            $ 343,610              5.29%
2000  ..................               17,737              6.47%
2001  ..................                2,597              5.56%
2002  ..................                2,994              5.67%
2003  ..................                3,118              5.80%
                                  -----------              -----
  Total.................            $ 370,056              5.69%
                                  ===========              =====

The following table represents the amounts of deposits by various interest rate
categories as of September 30, 1998 maturing during the fiscal years indicated.
<PAGE>
<TABLE>
Maturities of Deposits by Interest Rates
As of September 30, 1998
(In thousands)








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

    Interest Rate          1999              2000             2001              2002              2003              Total
------------------------------------   ---------------   --------------    --------------    --------------    --------------


<S>                   <C>              <C>               <C>               <C>               <C>               <C>          
Demand deposits (0%)  $     302,529    $        -        $       -         $       -         $       -         $     302,529

0.01% to 1.99%            1,024,485             -                -                 -                 -             1,024,485

2.00% to 2.99%            1,068,548             -                -                 -                 -             1,068,548

3.00% to 3.99%              640,744             -                -                 -                 -               640,744

4.00% to 4.99%              503,894            13,475            1,691               333             -               519,393

5.00% to 5.99%              993,703            90,431           38,308            15,250            26,232         1,163,924

6.00% to 7.99%               62,940            86,560               77            13,674             5,356           168,607

                      --------------   ---------------   --------------    --------------    --------------    --------------
     Total            $   4,596,843    $      190,466    $      40,076     $      29,257     $      31,588     $   4,888,230
                      ==============   ===============   ==============    ==============    ==============    ==============
</TABLE>
<PAGE>
Borrowings. The FHLB system functions as a central reserve bank providing credit
for member institutions. As a member of the FHLB of Atlanta, Chevy Chase is
required to own capital stock in the FHLB of Atlanta and is authorized to apply
for advances on the security of such stock and certain of its mortgages and
other assets (principally securities which are obligations of, or guaranteed by,
the United States or its agencies), provided certain standards related to
creditworthiness have been met.

Under the credit policies of the FHLB of Atlanta, credit may be extended to
creditworthy institutions based upon their financial condition, and the adequacy
of collateral pledged to secure the extension of credit. Such extensions of
credit or borrowings may be obtained pursuant to several different credit
programs, each of which has its own rate and range of maturities. Advances from
the FHLB of Atlanta must be secured by certain types of collateral with a value,
as determined by the FHLB of Atlanta, at least equal to 100% of the borrower's
outstanding advances. The Bank had outstanding FHLB advances of $352.0 million
at September 30, 1998.

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 Balance
Sheets in this report. These arrangements are, in effect, borrowings by the Bank
secured by the securities sold. The Bank had outstanding repurchase agreements
of $387.3 million at September 30, 1998.

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,
                                               ------------------------
(Dollars in thousands)                            1998          1997
---------------------------------------------  ----------   -----------
Securities sold under repurchase agreements:
Balance at year-end........................    $ 387,305    $    2,606
Average amount outstanding during
   the year................................      302,564       483,076
Maximum amount outstanding at any
  month-end................................      806,393       946,090
Weighted average interest rate during
  the year.................................        5.68%         5.48%
Weighted average interest rate
  on year-end balances.....................        5.63%         5.35%


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. As of
December 1, 1998, the 1993 Debentures are redeemable, in whole or in part,
at any time at the option of the Bank.
<PAGE>
On December 3, 1996, the Bank sold $100 million principal amount of its 9 1/4%
Subordinated Debentures due 2008 (the "1996 Debentures"). 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, 1998, 2.0% and 3.0% of the Bank's assets was equal to $135.0 million and
$202.5 million, respectively, and the Bank had $9.3 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. The Bank engages in a variety of other activities through
its subsidiaries, including those described below.

Real Estate Development Activities. Manor Investment Company ("Manor") was
engaged in certain real estate development 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Financial Condition - Asset Quality."

Securities Brokerage Services.  Chevy Chase Securities,  Inc., is a subsidiary
of  Chevy  Chase  Financial  Services  Corporation  ("CCFS"),  a  wholly-owned
subsidiary  of  Chevy  Chase.  Chevy  Chase  Securities,  Inc.  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) to the general public, including customers and
depositors of the Bank.
<PAGE>
Special Purpose Subsidiaries. At September 30, 1998, Chevy Chase Real Estate
Corporation ("CCRC"), a subsidiary of Chevy Chase, held 100% of the common stock
of 23 subsidiaries (14 of which are active) a majority of which were formed for
the sole purpose of acquiring title to various real estate projects pursuant to
foreclosure or deed-in-lieu of foreclosure. The Bank's investment in the
subsidiaries was $111.3 million at September 30, 1998. The Bank's investment in
CCRC is not subject to the 3.0% service corporation investment limit discussed
above.

Operating Subsidiaries. Chevy Chase engages in significant mortgage lending
activities through B. F. Saul Mortgage Company ("BFSMC"). See "Lending
Activities." Consumer Finance Corporation was formed as an operating subsidiary
in December 1994 to engage in automobile lending. Chevy Chase Preferred Capital
Corporation was formed as an operating subsidiary to issue the REIT Preferred
Stock.

On November 12, 1997, a newly formed operating subsidiary of the Bank acquired
ASB Capital Management, Inc. through which the Bank offers investment,
management and fiduciary services to primarily institutional customers.

CCB Holding Corporation ("CCBH") was a Delaware corporation created by the Bank
as an operating subsidiary in September 1994 in connection with its credit card
securitization activities. Subsequent to the sale of the Bank's credit card
portfolio and related operations, CCBH was merged into the Bank on September 30,
1998.

Employees

The Bank and its subsidiaries had 3,923 full-time and 595 part-time employees at
September 30, 1998. In connection with the sale of the credit card portfolio and
related operations to FUSA on September 30, 1998, the Bank entered into an
agreement with FUSA to lease the Bank's 1,173 credit card employees to FUSA for
the quarter ending December 31, 1998, after which FUSA agreed to offer
employment to all such employees.

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
loans to employees at prevailing market rates, but waives up to one point of any
loan origination fees on home mortgage loans, and provides a yearly rebate equal
to 0.5% of the outstanding loan balance of home mortgage loans at calendar
year-end. The Bank also offers employees a one percent discount on the interest
rate on overdraft lines of credit. None of the Bank's employees is represented
by a collective bargaining agent. The Bank believes that its employee relations
are good.

Competition

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

The Bank estimates that it competes principally with approximately thirteen
depository institutions in its deposit-taking activities in the Washington, DC
metropolitan area. The Bank also competes with such institutions in the
origination of single-family residential mortgage loans and home equity credit
line loans. According to the most recently published industry statistics, Chevy
Chase had the largest market share (approximately 23%) of deposits in Montgomery
County, Maryland, and ranked third in market share (approximately 10%) of
deposits in Prince George's County, Maryland at June 30, 1997. Based on publicly
available information, Chevy Chase estimates that, in the Washington, DC
metropolitan area, it maintains the leading market share of single-family
residential mortgage and home equity credit line loans.
<PAGE>
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, 1998, 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; its office facilities at 7700 Old
Georgetown Road, Bethesda, Maryland, 7735 Old Georgetown Road, Bethesda,
Maryland and 1101 Pennsylvania Avenue, NW, Washington, DC; and 143 full-service
offices located in Maryland, Virginia and the District of Columbia. On that
date, the Bank owned the building and land for 26 of its branch offices and
leased its remaining 117 branch offices. Chevy Chase leases the office
facilities at 8401 Connecticut Avenue, 6200 Chevy Chase Drive, 7735 Old
Georgetown Road, 1101 Pennsylvania Avenue, NW 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 1999 to 2019 and the
ground leases have terms expiring from 2029 to 2080. The Bank also owns the
building and land at 5202 President's Court, Frederick, Maryland. In connection
with the sale of the credit card portfolio and related operations on September
30, 1998, the Bank entered into a lease agreement with FUSA for this facility.
See Note 18 to the Consolidated Financial Statements in this report for lease
expense and commitments.

As of November, 1998, the Bank has received OTS approval to open fifteen
full-service branch offices. The branches, seven in Virginia, seven in Maryland
and the Bank's first branch in Delaware, are scheduled to open during fiscal
1999.

The following table sets forth the location of the Bank's 143 full-service
branch offices at September 30, 1998.

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

      8201 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 22031

      75 West Lee Highway                  8120 Sudley Road
      Warrenton, VA 22186                  Manassas, VA 22110
<PAGE>
      6367 Seven Corners Center            1100 S. Hayes Street
      Falls Church, VA 22044               Arlington, VA 22202

      11800 Sunrise Valley Drive           13344-A Franklin Farms Road
      Reston, VA 22091                     Herndon, VA 20165

      2952-H Chain Bridge Road             20970 Southbanks Street
      Oakton, VA 22124                     Sterling, VA 20165

      1201 Elden Street                    21800 Towncenter Plaza
      Herndon, VA 20170                    Sterling, VA 20164

      5613 Stone Road                      7030 Little River Turnpike
      Centreville, VA 22020                Annandale, VA 22003

      44151 Ashburn Village Way            3095 Nutley Street
      Ashburn, VA 22011                    Fairfax, VA 22031

      3690-A King Street                   4700 Lee Highway
      Alexandria, VA 22302                 Arlington, VA 22207

      6609 Springfield Mall                5851 Crossroads Center Way
      Springfield, VA 22150                Falls Church, VA 22041

      500 South Washington Street          13813 Foulger's Square
      Alexandria, VA 22314                 Woodbridge, VA 22192

      10100 Dumfries Road                  6800 Richmond Highway
      Manassas, VA 22192                   Alexandria, VA 22306

      5870 Kingstowne Boulevard            6335 Multiplex Drive
      Alexandria, VA 23210                 Centreville, VA 22022

      43761 Parkhurst Plaza                6025-A Burke Town Center Parkway
      Ashburn, VA 22011                    Burke, VA 22015

      3499 S. Jefferson Street             7935 L Tysons Corner Center
      Baileys Crossroads, VA 22041         McLean, VA 22102

      3046 Gatehouse Plaza                 11874 Spectrum Center
      Falls Church, VA 22042               Reston, VA 20190

      1621 B Crystal Square Arcade         5230-A Port Royal Road
      Arlington, VA 22202                  Springfield, VA 22151

      1100 Wilson Boulevard                8628 Richmond Highway
      Arlington, VA 22209                  Alexandria, VA 22309

      4299 Merchant Plaza                  46160 Potomac Run Plaza
      Woodbridge, VA 22192                 Sterling, VA 20190

      7500 Old Georgetown Road             11301 Rockville Pike
      Bethesda, MD 20814                   Kensington, MD 20895

      5370 Westbard Avenue                 26001 Ridge Road
      Bethesda, MD 20816                   Damascus, MD 20872

      7340 Westlake Terrace                17831 Georgia Avenue
      Bethesda, MD 20817                   Olney, MD  20832
<PAGE>
      1327 Lamberton Drive                 11261 New Hampshire Avenue
      Silver Spring, MD  20902             Silver Spring, MD 20904

      2215 Bel Pre Road                    1609-B Rockville Pike
      Wheaton, MD  20906                   Rockville, MD 20852

      8401 Connecticut Avenue              6107 Greenbelt Road
      Chevy Chase, MD  20815               Berwyn Heights, MD  20740

      5424 Western Avenue                  4 Bureau Drive
      Chevy Chase, MD  20815               Gaithersburg, MD  20878

      13641 Connecticut Avenue             19610 Club House Road
      Wheaton, MD  20906                   Gaithersburg, MD  20879

      8315 Georgia Avenue                  812 Muddy Branch Road
      Silver Spring, MD  20910             Gaithersburg, MD  20878

      4701 Sangamore Road                  10211 River Road
      Bethesda, MD  20816                  Potomac, MD  20854

      Landover Mall                        11413 Baltimore Avenue
      Landover, MD  20785                  Laurel, MD 20707

      6200 Annapolis Road                  7290-A Cradlerock Way
      Landover Hills, MD  20784            Columbia, MD  21045

      33 West Franklin Street              1151 Maryland Route 3 North
      Hagerstown, MD  21740                Gambrills, MD  21054

      6400 Belcrest Road                   12228 Viers Mill Road
      Hyattsville, MD  20782               Silver Spring, MD  20906

      8740 Arliss Street                   317 Kentlands Boulevard
      Silver Spring, MD  20901             Gaithersburg, MD  20878

      2409 Wootton Parkway                 215 N. Washington Street
      Rockville, MD  20850                 Rockville, MD  20850

      8889 Woodyard Road                   1336 Crain Highway South
      Clinton, MD  20735                    Mitchellville, MD  20716

      1181 University Boulevard            543 Ritchie Highway
      Langley Park, MD  20783              Severna Park, MD  21146

      12921 Wisteria Drive                 4745 Dorsey Hall Drive
      Germantown, MD  20874                Ellicott City, MD  21042

      1009 West Patrick Street             1130 Smallwood Drive
      Frederick, MD  21701                 Waldorf, MD  20603

      7937 Ritchie Highway                 10800 Baltimore Avenue
      Glen Burnie, MD  21061               Beltsville, MD  20705

      19781-83 Frederick Road              1040 Largo Center Drive
      Germantown, MD  20876                Landover, MD  20785

      16827 Crabbs Branch Way              6335 Marlboro Pike
      Rockville, MD  20855                 District Heights, MD  20747
<PAGE>
      2321-A Forest Drive                  7530 Annapolis Road
      Annapolis, MD 21401                  Lanham, MD  20784

      15460 Annapolis Road                 11241 Georgia Avenue
      Bowie, MD  20715                     Wheaton, MD  20902

      20000 Goshen Road                    13484 New Hampshire Avenue
      Gaithersburg, MD  20879              Silver Spring, MD  20904

      12097 Rockville Pike                 2401 Cleanleigh Drive
      Rockville, MD  20852                 Baltimore, MD  21234

      10159 New Hampshire Avenue           7101 Democracy Boulevard
      Hillandale, MD  20903                Bethesda, MD  20814

      6264 Central Avenue                  4825 Cordell Avenue
      Seat Pleasant, MD 20743              Bethesda, MD  20814

      7700 Old Georgetown Road             7515 Greenbelt Road
      Bethesda, MD  20814                  Greenbelt, MD  20770

      15777 Columbia Pike                  2722 N. Salisbury Boulevard
      Burtonsville, MD  20866              Salisbury, MD  21801

      18104 Town Center Drive              509 N. Frederick Avenue
      Olney, MD  20832                     Gaithersburg, MD  20877

      6197 Oxon Hill Road                  504 Ridgeville Boulevard
      Oxon Hill, MD  20745                 Mt. Airy, MD  21771

      10821 Connecticut Avenue             5823 Eastern Avenue
      Kensington, MD  20895                Chillum, MD  20782

      18006 Mateny Road                    3355 Corridor Market Place
      Germantown, MD  20874                Laurel, MD  20724

      7406 Baltimore Avenue                10400 Old Georgetown Road
      College Park, MD 20740               Bethesda, MD 20814

      980 E. Swan Creek Road               115 University Boulevard West
      Fort Washington, MD 20744            Silver Spring, MD 20901

      3828 International Drive             9707 Old Georgetown Road
      Silver Spring, MD 20906              Bethesda, MD 20814

      3400 Crain Highway                   7941 Tuckerman Lane
      Bowie, MD 20716                      Potomac, MD 20854

      2315 Randolph Road                   P.O. Box 170, Stamp Student Union
      Silver Spring, MD 20906              College, Park, MD 20742

      6020 Marshalee Drive                 5400 Corporate Drive
      Elkridge, MD 21227                   Frederick, MD 21703

      2950 Donnell Drive                   20944 Frederick Road
      Forestville, MD 20747                Germantown, MD 20876

      135 East Baltimore Street            3601 St. Barnabas Road
      Baltimore, MD 21202                  Silver Hill, MD 20746
<PAGE>
      2807 University Boulevard West       1850 K Street, NW
      Kensington, MD 20895                 Washington, DC 20006

      4860 Massachusetts Avenue, NW        4000 Wisconsin Avenue, NW
      Washington, DC 20016                 Washington, DC  20016

      210 Michigan Avenue, NE              1717 Pennsylvania Avenue, NW
      Washington, DC  20017                Washington, DC 20006

      4455 Connecticut Avenue, NW          925 15th Street, NW
      Washington, DC  20008                Washington, DC 20005

      2831 Alabama Avenue, SE              1299 Pennsylvania Avenue, N.W.
      Washington, DC  20020                Washington, DC 20006

      1800 M Street, NW                    5714 Connecticut Avenue, N.W.
      Washington, DC  20036                Washington, DC 20015

      1545 Wisconsin Avenue, NW
      Washington, DC  20007

At September 30, 1998, the net book value of the Bank's office facilities
(including leasehold improvements) was $149.4 million. See Note 17 to the
Consolidated Financial Statements in this report.

During fiscal 1998, the Bank entered into an agreement to lease approximately
3.5 acres of land located at 7501 Wisconsin Avenue, Bethesda, Maryland, on which
the Bank intends to develop and occupy an office building to use as its new
corporate headquarters. At September 30, 1998, the Bank had invested $5.5
million related to this facility.

The Bank owns additional assets, including furniture and data processing
equipment. At September 30, 1998, these other assets had a net book value of
$131.0 million. The Bank also has operating leases, primarily for certain data
processing equipment and software. Such leases have month-to-month or
year-to-year terms.

<PAGE>
LEGAL PROCEEDINGS

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

SELECTED FINANCIAL DATA

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

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

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

(In thousands, except per share amounts and other data)            1998         1997         1996         1995          1994
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>           <C>          <C>          <C>           <C>
STATEMENT OF OPERATIONS DATA:

Real Estate:
Revenues                                                           $ 98,592     $ 84,569     $ 76,839      $ 77,285     $ 66,044
Operating expenses                                                  118,636      108,601      104,321       109,971      102,087
Equity in earnings (losses) of partnership investments                1,918        4,150        3,374         3,681        1,738
Gain (loss) on sales of property                                       (331)         895          (68)        1,664           --
                                                               ------------------------------------------------------------------
Real estate operating loss                                          (18,457)     (18,987)     (24,176)      (27,341)     (34,305)
                                                               ------------------------------------------------------------------

Banking:
Interest income                                                     435,807      452,376      388,196       365,439      334,544
Interest expense                                                    238,410      239,815      188,836       189,114      165,544
                                                               ------------------------------------------------------------------
Net interest income                                                 197,397      212,561      199,360       176,325      169,000
Provision for loan losses                                          (150,829)    (125,115)    (115,740)      (54,979)     (29,222)
                                                               ------------------------------------------------------------------
Net interest income after provision for loan losses                  46,568       87,446       82,620       121,346      139,778
                                                               ------------------------------------------------------------------
Other income:
Servicing and securitization income                                 233,271      305,192      284,964       195,744       30,516
Credit card fees                                                     53,881       57,381       30,765         9,855       69,878
Deposit servicing fees                                               51,997       41,893       29,900        24,442       20,347
Gain (loss) on sales of trading securities, net                         982        1,203        1,158          (600)       1,695
Net unrealized holding losses on trading securities                  (1,258)        --           --            --           --
Gain (loss) on real estate held for investment or sale, net         (16,539)     (18,688)     (24,413)       (5,549)         835
Gain on sales of loans, net                                         290,434        1,527        1,732         1,289       20,980
Other                                                                27,831       22,573       19,713         7,320       15,718
                                                               ------------------------------------------------------------------
Total other income                                                  641,857      411,081      343,819       232,501      159,969
                                                               ------------------------------------------------------------------
Operating expenses                                                  504,018      418,346      381,328       298,164      246,560
                                                               ------------------------------------------------------------------
Banking operating income                                            184,407       80,181       46,111        55,683       53,187
                                                               ------------------------------------------------------------------

Total Company:
Operating income                                                    165,950       61,194       21,935        28,342       18,882
Provision for income taxes                                           42,869       12,810        8,301         2,021        7,025
                                                               ------------------------------------------------------------------
Income before extraordinary items, cumulative
    effect of change in accounting principle and
    minority interest                                               123,081       48,384       13,634        26,321       11,857
Extraordinary item:
    Loss on early extinguishment of debt, net of taxes               (9,601)          --           --            --      (11,315)
                                                               ------------------------------------------------------------------
Income before cumulative effect of change in
    accounting principle and minority interest                      113,480       48,384       13,634        26,321          542
Cumulative effect of change in accounting principle                      --           --           --            --       36,260
                                                               ------------------------------------------------------------------
Income before minority interest                                     113,480       48,384       13,634        26,321       36,802
Minority interest held by affiliates                                (22,043)      (6,848)      (3,962)       (5,721)      (3,963)
Minority interest -- other                                          (25,313)     (22,676)      (9,750)       (9,750)      (9,750)
                                                               ------------------------------------------------------------------
Total company net income (loss)                                    $ 66,124     $ 18,860        $ (78)     $ 10,850     $ 23,089
                                                               ==================================================================

Net income (loss) available to common shareholders                 $ 60,706     $ 13,442     $ (5,498)      $ 5,430     $ 17,669

Net income (loss) per common share:
Income before extraordinary items, cumulative
    effect of change in accounting principle and
    minority interest                                               $ 24.38       $ 8.90       $ 1.70        $ 4.33       $ 1.33
Extraordinary item:
    Loss on early extinguishment of debt, net of taxes                (1.99)          --           --            --        (2.34)
                                                               ------------------------------------------------------------------
Income (loss) before cumulative effect of change in
    accounting principle and minority interest                        22.39         8.90         1.70          4.33        (1.01)
Cumulative effect of change in accounting principle                      --           --           --            --         7.51
                                                               ------------------------------------------------------------------
Income before minority interest                                       22.39         8.90         1.70          4.33         6.50
Minority interest held by affiliates                                  (4.57)       (1.42)       (0.82)        (1.19)       (0.82)
Minority interest -- other                                            (5.24)       (4.70)       (2.02)        (2.02)       (2.02)
                                                               ------------------------------------------------------------------
Total company net income (loss)                                     $ 12.58       $ 2.78      $ (1.14)       $ 1.12       $ 3.66
                                                               ==================================================================

---------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
</TABLE>
<PAGE>
<TABLE>

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

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

(In thousands, except per share amounts and other data)            1998         1997         1996         1995          1994
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>           <C>          <C>          <C>           <C>

BALANCE SHEET DATA:

Assets:
Real estate assets                                                $ 323,432    $ 300,573    $ 294,503     $ 313,412    $ 327,739
    Income-producing properties, net                                183,879      156,535      156,115       163,787      159,529
    Land parcels                                                     40,110       42,160       41,580        38,458       38,455
Banking assets                                                    6,721,149    6,057,413    5,693,074     4,911,536    4,666,298
Total company assets                                              7,044,581    6,357,986    5,987,577     5,224,948    4,994,037

Liabilities:
Real estate liabilities                                             636,036      590,910      578,092       555,814      558,109
    Mortgage notes payable                                          198,874      180,204      173,345       184,502      185,730
    Notes payable - secured                                         200,000      175,000      177,500       175,500      175,000
    Notes payable - unsecured                                        50,335       46,633       42,367        41,057       40,288
Banking liabilities                                               6,141,636    5,582,167    5,388,444     4,619,451    4,413,832
Minority interest held by affiliates                                 72,242       51,388       46,065        43,556       35,632
Minority interest - other                                           218,306      218,306       74,307        74,307       74,307
Total company liabilities                                         7,068,220    6,442,771    6,086,908     5,293,128    5,081,880

Shareholders' deficit                                               (23,639)     (84,785)     (99,331)      (68,180)     (87,843)
---------------------------------------------------------------------------------------------------------------------------------

CASH FLOW DATA:

Net cash flows provided by (used in) operating activities:
    Real estate                                                    $ 14,738      $ 6,911      $ 9,782       $ 4,324    $ (10,859)
    Banking                                                       2,211,589    2,368,287    1,747,887     2,088,022    2,213,876
                                                               ------------------------------------------------------------------
Total Company                                                     2,226,327    2,375,198    1,757,669     2,092,346    2,203,017
                                                               ------------------------------------------------------------------

Net cash flows used in investing activities:
    Real estate                                                     (45,115)     (11,664)      (4,907)      (17,143)     (29,118)
    Banking                                                      (2,202,225)  (2,276,165)  (2,567,763)   (2,261,803)  (1,772,895)
                                                               ------------------------------------------------------------------
Total Company                                                    (2,247,340)  (2,287,829)  (2,572,670)   (2,278,946)  (1,802,013)
                                                               ------------------------------------------------------------------

Net cash flows provided by (used in) financing activities:
    Real estate                                                      26,079        7,485       (6,714)         (271)      75,723
    Banking                                                         555,201      293,344      727,019       160,966     (260,094)
                                                               ------------------------------------------------------------------
Total Company                                                       581,280      300,829      720,305       160,695     (184,371)
                                                               ------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                560,267      388,198      (94,696)      (25,905)     216,633
---------------------------------------------------------------------------------------------------------------------------------

OTHER DATA:

Hotels:
    Number of hotels                                                     12           10            9            10            9
    Number of guest rooms                                             2,772        2,370        2,261         2,608        2,415
    Average occupancy                                                   68%          70%          68%           67%          62%
    Average room rate                                                $81.01       $72.21       $68.79        $60.82       $57.57
Office properties:
    Number of properties                                                  7            8            8             9            9
    Leasable area (square feet)                                   1,270,087    1,308,000    1,308,000     1,368,000    1,363,000
    Leasing percentages                                                100%          99%          93%           84%          93%
Land parcels:
    Number of parcels                                                    10           10            9            10           10
    Total acreage                                                       434          439          446           433          433

---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
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, 1998 consisted
primarily of hotels, office and industrial projects, and land parcels. See
"Business - Real Estate - Real Estate Investments." In the first quarter of
fiscal 1998, the Real Estate Trust purchased a 308-room Holiday Inn in
Arlington, Virginia.

Office space in the Real Estate Trust's office property portfolio was 100%
leased at September 30, 1998, compared to a leasing rate of 99% at September 30,
1997. At September 30, 1998, the Real Estate Trust's office property portfolio
had a total gross leasable area of approximately 1.3 million square feet, of
which 259,000 square feet (20.4%) and 209,000 square feet (16.5%) are subject to
leases whose terms expire in fiscal 1999 and fiscal 2000, respectively.

Overall, the hotel portfolio experienced an average occupancy rate of 68% and
average room rate of $81.01 during the year ended September 30, 1998. For the
nine hotels owned by the Real Estate Trust throughout fiscal 1998 and fiscal
1997, the average occupancy rates were 69% and 70%, respectively, and the
average room rates were $79.31 and $72.58, respectively. Three of these hotels
registered improved occupancies and eight registered higher average room rates
in the current fiscal year.

Banking

General. The Bank recorded operating income of $184.4 million during fiscal
1998, compared to operating income of $80.2 million during fiscal 1997. The
increase in income for fiscal 1998 was primarily attributable to a $230.8
million increase in other (non-interest) income, largely attributable to the
sale of the Bank's credit card portfolio, which was partially offset by an $85.7
million increase in operating (non-interest) expenses and a $25.7 million
increase in the provision for loan losses. See "Results of Operations."

Gain on sales of loans of $290.4 million, representing an increase of $288.9
million over fiscal 1997, was a large component of the Bank's non-interest
income during the current year and resulted primarily from the sale of the
Bank's credit card portfolio and related operations on September 30, 1998. The
credit card portfolio included approximately $4.8 billion of managed credit card
loans and 3.1 million Visa and MasterCard credit card accounts. The Bank
recognized a net gain of $288.3 million on this sale. See Note 8 to the
Consolidated Financial Statements in this report.
<PAGE>
Servicing and securitization income decreased $71.9 million (or 23.6%) during
fiscal 1998 and resulted from increases in the amortization of and unrealized
losses on interest-only strips. The Bank recognized net unrealized losses on
interest-only strips of $42.9 million during fiscal 1998 compared to net
unrealized gains of $7.0 million during fiscal 1997. In addition, amortization
of $99.0 million on interest-only strips related to prior gains on sales of
loans was recorded in fiscal 1998 compared to $24.8 million in fiscal 1997.
Offsetting these amounts were gains on the securitization and sale of loan
receivables. During fiscal 1998, the Bank securitized and sold $1.9 billion of
receivables, of which $1.0 billion, $298.8 million, $534.7 million and $45.9
million, related to securitizations and sales of credit card, home equity,
automobile and home loan receivables, respectively, and recognized gains of
$81.6 million, $19.7 million, $23.1 million and $3.4 million, respectively, on
these transactions. In addition, the Bank securitized and sold $36.0 million of
amounts on deposit in certain spread accounts established in connection with
certain of the Bank's credit card securitizations. See Notes to the Consolidated
Financial Statements in this report. See "Liquidity."

Real estate owned, net of valuation allowances, declined 27.9% during fiscal
1998 to $65.4 million at September 30, 1998, from $90.7 million at September 30,
1997. This reduction was primarily due to sales in the Communities and other
properties and additional valuation allowances. See "REO."

At September 30, 1998, the Bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 7.93%, 7.93%, 12.93% and 20.70%,
respectively. The Bank's capital ratios exceeded the requirements under FIRREA
as well as the standards established for well-capitalized institutions under the
prompt corrective action regulations issued pursuant to FDICIA. See "Capital."

On November 12, 1997 the Bank purchased ASB Capital Management, Inc. ("ASB"), a
wholly-owned subsidiary of NationsBank Corporation and one of the largest
SEC-registered investment managers headquartered in the Washington, D.C.
metropolitan area, through which the Bank provides a variety of investment
products and fiduciary services to a primarily institutional customer base.

During fiscal 1998, the Bank declared and paid, out of the retained earnings of
the Bank, cash dividends on its Common Stock in the aggregate amount of $650 per
share. Subsequent to September 30, 1998, the Bank declared, out of the retained
earnings of the Bank, cash dividends on its Common Stock in the amount of $2,300
per share. Of this amount, $2,100 per share was paid in December 1998, and the
remaining $200 per share is payable in January 1999.

The Bank's assets are subject to review and classification by the OTS upon
examination. The Bank has been notified that the OTS will begin its annual
safety and soundness examination in December 1998.

The sale of the credit card portfolio has improved the Bank's regulatory capital
ratios and the overall credit quality of the Bank's loan portfolio. In addition,
the Bank anticipates additional long-term savings on overhead expenses as a
result of the sale. However, the credit card program has historically been a
major source of earnings for the Bank. Although the Bank believes it will be
able to operate profitably by relying on its core deposit franchise as a
significant source of low-cost funds, and investing those funds in assets that,
although offering lower yields than credit cards, involve less credit risk and
overhead costs, achieving acceptable levels of profitability may take some
period of time as the Bank restructures its operations.
<PAGE>
Asset Quality. Non-Performing Assets. The Bank's level of non-performing assets
continued to decline during fiscal 1998. The following table sets forth
information concerning the Bank's non-performing assets at the dates indicated.
The figures shown are after charge-offs and, in the case of real estate acquired
in settlement of loans, after all valuation allowances.
<PAGE>
<TABLE>
Non-Performing Assets
(Dollars in thousands)

                                                                                             September 30,
                                                                    ----------------------------------------------------------------
                                                                         1998        1997         1996         1995          1994
                                                                    ------------ ------------ ------------ ------------ ------------
<S>                                                                 <C>          <C>          <C>          <C>          <C>        
Non-performing assets:
  Non-accrual loans:
    Residential                                                     $     8,106  $     9,617  $     8,200  $     8,593  $     8,306
    Commercial real estate and multifamily                                   --           --           --          194           --
                                                                    ------------ ------------ ------------ ------------ ------------
      Total non-accrual real estate loans                                 8,106        9,617        8,200        8,787        8,306
    Credit card  (1) (2)                                                     --           --       25,350       18,569       16,229
    Consumer                                                              4,501        4,226        1,239          595          498
                                                                    ------------ ------------ ------------ ------------ ------------
      Total non-accrual loans (3)                                        12,607       13,843       34,789       27,951       25,033
                                                                    ------------ ------------ ------------ ------------ ------------

  Non-accrual real estate held for investment (3)                            --           --           --           --        8,915
                                                                    ------------ ------------ ------------ ------------ ------------

  Real estate acquired in settlement of loans                           218,972      231,407      246,380      354,277      387,024
  Allowance for losses on real estate acquired in settlement 
    of loans                                                           (153,564)    (140,738)    (126,519)    (135,043)    (109,074)
                                                                    ------------ ------------ ------------ ------------ ------------
    Real estate acquired in settlement of loans, net                     65,408       90,669      119,861      219,234      277,950
                                                                    ------------ ------------ ------------ ------------ ------------

      Total non-performing assets                                        78,015      104,512      154,650      247,185      311,898

  Accruing credit card loans past due 90 days (1) (4)                        --       25,700           --           --           --

                                                                    ------------ ------------ ------------ ------------ ------------
Total non-performing assets and accruing credit card loans 
  past due 90 days                                                  $    78,015  $   130,212  $   154,650  $   247,185  $   311,898
                                                                    ============ ============ ============ ============ ============

Allowance for losses on loans                                       $    60,157  $   105,679  $    95,523  $    60,496  $    50,205
Allowance for losses on real estate held for investment                     202          198          191          193        9,899
Allowance for losses on real estate acquired in settlement of loans     153,564      140,738      126,519      135,043      109,074
                                                                    ------------ ------------ ------------ ------------ ------------

  Total allowances for losses                                       $   213,923  $   246,615  $   222,233  $   195,732  $   169,178
                                                                    ============ ============ ============ ============ ============











------------------------------------------------------------------------------------------------------------------------------------
(1) The Bank sold its credit card portfolio and related operations on September
30, 1998. 

(2) Effective June 30, 1997, the Bank stopped placing credit card loans on
non-accrual status.

(3)  Before deduction of allowances for losses.

(4) Loans which are both past due 90 days or more and not deemed nonaccrual due
to an assessment of collectibility are specifically excluded from the definition
of non-performing.
</TABLE>
<PAGE>
<TABLE>
Non-Performing Assets (Continued)

                                                                                           September 30,
                                                                 -------------------------------------------------------------------
                                                                       1998         1997          1996          1995         1994
                                                                 -------------------------------------------------------------------
<S>                                                                <C>           <C>           <C>           <C>          <C>  
Ratios:

  Non-performing assets and accruing credit card loans past 
    due 90 days, net to total assets (1)                               0.26%         0.40%         1.03%         3.77%        5.35%

  Allowance for losses on real estate loans to non-accrual
    real estate loans (2)                                            204.18%        99.81%       134.44%       123.82%      169.58%

  Allowance for losses on consumer loans to
    non-accrual consumer and other loans (2)                         758.08%       148.37%       370.86%       542.18%      217.87%

  Allowance for losses on loans to non-accrual loans (2)             477.17%       763.41%       274.58%       216.44%      200.56%

  Allowance for losses on loans to total loans receivable (3)          2.17%         4.14%         2.81%         2.05%        1.97%

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

(2) Before deduction of allowances for losses.

(3) Includes loans receivable and loans held for sale and/or securitization,
before deduction of allowance for losses.
</TABLE>
<PAGE>
Non-performing assets include non-accrual loans (loans contractually past due 90
days or more or with respect to which other factors indicate that full payment
of principal and interest is unlikely), non-accrual real estate held for
investment ("non-accrual REI"), and REO, acquired either through foreclosure or
deed-in-lieu of foreclosure, or pursuant to in-substance foreclosure.

Prior to the sale of its credit card portfolio and related operations and
effective June 30, 1997, the Bank conformed its reporting practices for credit
card loans to those of most credit card issuers and excluded credit card loans
from non-accrual loans and non-performing assets. Credit card loans were not
placed on non-accrual status, but continued to accrue interest until the loan
was either paid-off or charged-off.

Non-performing assets totaled $78.0 million, after valuation allowances on REO
of $153.6 million, at September 30, 1998, compared to $104.5 million, after
valuation allowances on REO of $140.7 million, at September 30, 1997. In
addition to the valuation allowances on REO, the Bank maintained $4.6 million
and $1.4 million of valuation allowances on its non- accrual loans at September
30, 1998, and September 30, 1997, respectively. The $26.5 million decrease in
non-performing assets was comprised of a net decrease in REO of $25.3 million
and a decrease in non-accrual loans of $1.2 million.

Non-accrual Loans. The Bank's non-accrual loans totaled $12.6 million at
September 30, 1998, compared to $13.8 million at September 30, 1997. At
September 30, 1998, non- accrual loans consisted primarily of $8.1 million of
non-accrual real estate loans and $4.5 million of non-accrual consumer and other
loans.

REO. At September 30, 1998, the Bank's REO totaled $65.4 million, after
valuation allowances on such assets of $153.6 million as set forth in the
following table.

                                 Balance Before    All    Balance After
                          # of      Valuation   Valuation   Valuation    Percent
(Dollars in thousands) Properties  Allowances  Allowances  Allowances   of Total
---------------------- ---------- ----------- ----------- ------------- --------
Communities...........      5       $199,406    $144,642     $54,764      83.7%
Residential ground....      3          6,494       3,122       3,372       5.2%
Commercial ground.....      3         10,045       5,800       4,245       6.5%
Single-family 
    residential
    properties........     19          3,027        -          3,027       4.6%
                           --      --------- ------------ ------------- --------

  Total REO...........     30       $218,972    $153,564     $65,408     100.0%
                           ==      ========= ============ ============= ========
<PAGE>
During fiscal 1998, REO decreased $25.3 million, which was attributable to $12.5
million of sales in the Communities and other residential properties, partially
offset by additional capitalized costs, and $12.8 million of additional
valuation allowances.

During fiscal 1998, the Bank received revenues of $32.5 million from
dispositions of 422 residential lots or units in the Communities ($21.6
million), approximately 75 acres of commercial land in two of the Communities
and four commercial ground properties ($6.1 million) and various single-family
residential properties ($4.8 million).

At September 30, 1998, the Bank had an executed contract to sell one residential
ground property at its book value of $1.3 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. 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, 1998, two of the active
Communities had 1,883 remaining residential lots, of which 927 lots (49.2%) were
under contract and pending settlement. Four of the active Communities had
approximately 249 remaining acres of land designated for commercial use, of
which one acre (0.4%) was under contract and pending settlement. In addition, at
September 30, 1998, 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 2,000 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, 1998, this property had a book value of $4.7
million, after valuation allowances.

The Bank capitalizes costs relating to development and improvement of REO.
Interest costs are capitalized on real estate properties under development.
During fiscal 1998, the Bank capitalized interest in the amount of $2.0 million
relating to its four active Communities.

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

Potential Problem Assets. Although not considered non-performing assets,
primarily because the loans are not 90 or more days past due and the borrowers
have not abandoned control of the properties, potential problem assets are
experiencing problems sufficient to cause management to have serious doubts as
to the ability of the borrowers to comply with present repayment terms. At
September 30, 1998 and 1997, none of the Bank's assets were deemed by management
to be potential problem assets.
<PAGE>
Delinquent Loans. At September 30, 1998, delinquent loans totaled $20.7 million
(or 0.7% of loans) compared to $84.6 million (or 3.5% of loans) at September 30,
1997. The following table sets forth information regarding the Bank's delinquent
loans at September 30, 1998.

                                    Principal Balance
                          -----------------------------------    Total as a
                           Mortgage   Non-Mortgage               Percentage
(Dollars in thousands)       Loans        Loans       Total      of Loans (1)
------------------------- ----------- ------------  ---------   --------------
Loans delinquent for:
30-59 days...............  $ 3,486     $ 11,777      $ 15,263          0.5%
60-89 days...............    1,582        3,866         5,448          0.2%
                           -------     --------      --------          ----
 Total...................  $ 5,068     $ 15,643      $ 20,711          0.7%
                           =======     ========      ========          ====

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

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 $5.1 million at September
30, 1998, from $8.5 million at September 30, 1997.

Non-mortgage loans delinquent 30-89 days decreased to $15.6 million at September
30, 1998 from $50.4 million at September 30, 1997, and decreased as a percentage
of total non-mortgage loans outstanding to 2.5% at September 30, 1998 from 3.4%
at September 30, 1997. The decreased percentage of delinquent non-mortgage loans
to total non-mortgage loans outstanding resulted primarily from the sale of the
Bank's credit card portfolio on September 30, 1998.

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. In aggregate, troubled debt
restructurings totaled $11.8 million and $11.9 million at September 30, 1998 and
1997, respectively.

At September 30, 1998, loans accounted for as troubled debt restructurings
included one commercial permanent loan with a principal balance of $11.7 million
and one commercial collateralized loan with a principal balance of $0.1 million.
The $0.1 million decrease in loans accounted for as troubled debt restructurings
from September 30, 1997, was a result of net principal reductions. At September
30, 1998, 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, 1998 and 1997, 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.
<PAGE>
<TABLE>
Analysis of Allowance for and Charge-offs of Loans
(Dollars in thousands)

                                                                      Year Ended September 30,
                                                   ----------------------------------------------------------------
                                                        1998          1997         1996         1995        1994
                                                   ------------  ------------  -----------  -----------  ----------

<S>                                                <C>           <C>           <C>          <C>          <C>      
Balance at beginning of year                       $   105,679   $    95,523   $   60,496   $   50,205   $  68,040
                                                   ------------  ------------  -----------  -----------  ----------

Provision for loan losses                              150,829       125,115      115,740       54,979      29,222
                                                   ------------  ------------  -----------  -----------  ----------

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

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

Charge-offs:
  Single family residential and home equity             (1,629)       (1,014)        (867)      (1,174)     (1,641)
  Commercial real estate and multifamily                    --            --           --           --        (112)
  Real estate construction and ground                       --            --           --       (1,768)     (2,474)
  Credit card                                         (108,289)     (115,835)     (84,805)     (50,172)    (55,754)
  Consumer                                             (12,734)       (9,657)      (6,375)      (3,463)     (1,058)
                                                   ------------  ------------  -----------  -----------  ----------
      Total charge-offs                               (122,652)     (126,506)     (92,047)     (56,577)    (61,039)
                                                   ------------  ------------  -----------  -----------  ----------

Recoveries:
  Single family residential and home equity                 49            34           32           20          --
  Credit card                                           12,732        10,365       10,720       11,219      13,525
  Consumer                                               1,129         1,030          582          650         457
                                                   ------------  ------------  -----------  -----------  ----------
      Total recoveries                                  13,910        11,429       11,334       11,889      13,982
                                                   ------------  ------------  -----------  -----------  ----------

Charge-offs,  net of recoveries                       (108,742)     (115,077)     (80,713)     (44,688)    (47,057)
                                                   ------------  ------------  -----------  -----------  ----------

Balance at end of year                             $    60,157   $   105,679   $   95,523   $   60,496   $  50,205
                                                   ============  ============  ===========  ===========  ==========

Provision for loan losses to average loans  (1)          5.43%         3.50%        3.94%        1.85%       1.08%
Net loan charge-offs to average loans (1)                3.92%         3.22%        2.75%        1.51%       1.74%
Ending allowance for losses on loans to total 
  loans (1) (2)                                          2.17%         4.14%        2.81%        2.05%       1.97%

-------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale and/or securitization. 
(2) Before deduction of allowance for losses.
</TABLE>
<PAGE>
<TABLE>
Components of Allowance for Losses on Loans by Type
(Dollars in thousands)

                                                                    September 30,
                   -----------------------------------------------------------------------------------------------------------------
                         1998                    1997                   1996                    1995                   1994
                   --------------------   ---------------------   --------------------   --------------------   --------------------

                               Percent                 Percent                Percent                Percent                Percent 
                               of                      of                     of                     of                     of      
                               Loans to                Loans to               Loans to               Loans to               Loans to
                               Total                   Total                  Total                  Total                  Total   
                    Amount     Loans        Amount     Loans        Amount    Loans        Amount    Loans        Amount    Loans   
                   ----------  --------   -----------  --------   ----------  --------   ----------  --------   ----------  --------
<S>                <C>         <C>        <C>           <C>       <C>         <C>        <C>         <C>        <C>         <C>   

Balance at end 
  of year allocated
  to:

Single family 
  residential      $   1,822   65.7 %     $      661    33.2 %    $     925    47.2 %    $     929   47.3 %     $   1,384   53.7 %

Home equity              676    4.9              683     3.7            446     0.9            164    1.0             133    1.4

Commercial real 
  estate and 
  multifamily         10,828    2.7            7,705     2.1          8,398     2.3          8,523    2.9           8,506    3.3

Real estate 
  construction
  and ground           3,225    3.9              550     2.2          1,255     1.9          1,264    1.1           4,062    2.1

Commercial             3,623    6.3              364     3.9            223     1.7             65    0.5             505    0.2

Credit card               --     --           89,446    42.3         79,681    33.0         46,325   34.4          34,530   25.5

Automobile            29,044   12.9            3,080     9.0          3,965     9.0          3,226    8.1           1,085   11.4

Home improvement
  and related loans    3,403    2.4            2,415     2.2            229     2.9             --    3.8              --    1.5

Overdraft lines 
  of credit and
  other consumer       1,674    1.2              775     1.4            401     1.1             --    0.9              --    0.9

Unallocated            5,862     --               --      --             --      --             --     --              --     --
                   ----------             -----------             ----------             ----------             ----------

    Total          $  60,157              $  105,679              $  95,523              $  60,496              $  50,205
                   ==========             ===========             ==========             ==========             ==========
</TABLE>
<PAGE>
<TABLE>
Analysis of Allowance for and Charge-offs of
Real Estate Held for Investment or Sale
(In thousands)

                                                                Year Ended September 30,
                                          ----------------------------------------------------------------------
                                             1998           1997           1996          1995           1994
                                          -----------    -----------    -----------   -----------    -----------
<S>                                       <C>            <C>            <C>           <C>            <C>       

Balance at beginning of year:
  Real estate held for investment         $      198     $      191     $      193    $    9,899     $   10,182
  Real estate held for sale                  140,738        126,519        135,043       109,074        101,462
                                          -----------    -----------    -----------   -----------    -----------
    Total                                    140,936        126,710        135,236       118,973        111,644
                                          -----------    -----------    -----------   -----------    -----------

Provision for real estate losses:
  Real estate held for investment                  4              7             (2)       (6,974)          (283)
  Real estate held for sale                   18,856         19,616         26,343        33,295         14,335
                                          -----------    -----------    -----------   -----------    -----------
    Total                                     18,860         19,623         26,341        26,321         14,052
                                          -----------    -----------    -----------   -----------    -----------

Charge-offs:
  Real estate held for investment:
    Ground                                        --             --             --        (2,732)            --
                                          -----------    -----------    -----------   -----------    -----------

  Real estate held for sale:
    Commercial real estate and multifamily        --             --             --            --         (5,812)
    Real estate construction                      --             --             --        (4,396)          (911)
    Ground                                    (6,030)        (5,397)       (34,867)       (2,930)            --
                                          -----------    -----------    -----------   -----------    -----------
      Total                                   (6,030)        (5,397)       (34,867)       (7,326)        (6,723)
                                          -----------    -----------    -----------   -----------    -----------

    Total charge-offs on real estate
       held for investment or sale            (6,030)        (5,397)       (34,867)      (10,058)        (6,723)
                                          -----------    -----------    -----------   -----------    -----------

Balance at end of year:
  Real estate held for investment                202            198            191           193          9,899
  Real estate held for sale                  153,564        140,738        126,519       135,043        109,074
                                          -----------    -----------    -----------   -----------    -----------
    Total                                 $  153,766     $  140,936     $  126,710    $  135,236     $  118,973
                                          ===========    ===========    ===========   ===========    ===========
</TABLE>
<PAGE>
<TABLE>
Components of Allowance for Losses
on Real Estate Held for Investment or Sale
(In thousands)

                                                                      September 30,
                                          ----------------------------------------------------------------------
                                             1998           1997           1996          1995           1994
                                          -----------    -----------    -----------   -----------    -----------
<S>                                       <C>            <C>            <C>           <C>            <C>       

Allowance for losses on real estate held 
 for investment:
  Commercial real estate and multifamily  $       --     $       --     $       --    $       --     $    7,793
  Ground                                          --             --             --            --          1,975
  Other                                          202            198            191           193            131
                                          -----------    -----------    -----------   -----------    -----------
     Total                                       202            198            191           193          9,899
                                          -----------    -----------    -----------   -----------    -----------


Allowance for losses on real estate held 
 for sale:
 Single family residential and home equity        --             --            120           186             70
 Commercial real estate and multifamily           --             --             --            --            142
 Real estate construction                         --             --             --            --          3,158
 Ground                                      153,564        140,738        126,399       134,857        105,704
                                          -----------    -----------    -----------   -----------    -----------
     Total                                   153,564        140,738        126,519       135,043        109,074
                                          -----------    -----------    -----------   -----------    -----------

     Total allowance for losses on real
       estate held for investment or sale $  153,766     $  140,936     $  126,710    $  135,236     $  118,973
                                          ===========    ===========    ===========   ===========    ===========
</TABLE>
<PAGE>
The Bank maintains valuation allowances for estimated losses on loans and real
estate. The Bank's total valuation allowances for losses on loans and real
estate held for investment or sale decreased by $32.7 million from the level at
September 30, 1997, to $213.9 million at September 30, 1998. The $32.7 million
decrease was primarily attributable to an $87.6 million reduction in allowances
due to the sale of the Bank's credit card portfolio on September 30, 1998.
Offsetting this reduction were increased valuation allowances on consumer loans
and the Communities.

The allowance for losses on loans secured by real estate and real estate held
for investment or sale totaled $170.3 million at September 30, 1998, which
constituted 75.0% of total non-performing real estate assets, before valuation
allowances. This amount represented a $19.8 million increase from the September
30, 1997 level of $150.5 million, or 62.5% of total non-performing real estate
assets, before valuation allowances at that date.

During fiscal 1998, the Bank provided an additional $4.2 million of general
valuation allowances pursuant to its policy of providing additional general
valuation allowances which were equal to, or exceeded, the amount of the net
earnings generated by the development and sale of land in the Communities.

When real estate collateral securing an extension of credit is initially
recorded as REO, it is recorded at the lower of cost or fair value, less
estimated selling costs, on the basis of an appraisal. As circumstances change,
it may be necessary to provide additional valuation allowances based on new
information. The allowance for losses on real estate held for sale at September
30, 1998 is in addition to approximately $48.6 million of cumulative charge-offs
previously taken against assets remaining in the Bank's portfolio at September
30, 1998.

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 1998 were $95.6 million,
compared to $105.5 million for fiscal 1997. The decrease in net charge-offs
reflected management's implementation of more stringent underwriting and other
lending policies designed to reduce such losses. The allowance at any balance
sheet date related only to receivable balances that existed as of that date.
Because of the nature of a revolving credit card account, the cardholder may
have entered into transactions (such as retail purchases and cash advances)
subsequent to a balance sheet date which increased the outstanding balance of
the account. Accordingly, charge-offs in any fiscal period related 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 have exceeded the
levels of valuation allowances established at the beginning of the fiscal
period.
<PAGE>
The allowance for losses on consumer loans (automobile, home improvement,
overdraft lines of credit and other consumer loans) increased to $34.1 million
at September 30, 1998 from $6.3 million at September 30, 1997. Management
increased the allowance for losses on automobile loans from $3.1 million (or
1.3% of outstanding loans) to $29.0 million (8.1%) primarily because of adverse
trends in delinquencies and losses in the subprime segment of the automobile
loan portfolio and an increase in the size of this portfolio. Losses in this
portfolio increased from $3.2 million (or 3.7% of average loans) in fiscal 1997
to $7.0 million (or 5.0% of average loans) in fiscal 1998. However, the amount
of loans in the Bank's portfolio has increased from $116.6 million at September
30, 1997, to $236.5 million at September 30, 1998 and, on a six month lagged
basis, the annualized loss rate for the September quarter was 9.76%. Management
believes that this lagged loss rate is a better indication of losses inherent in
this portfolio because the portfolio contains a higher proportion of new loans
as a result of its recent growth and losses are generally not experienced on
automobile loans until the loans are five to seven months seasoned. Although
management has taken steps in recent months to mitigate losses in this
portfolio, including expansion of collection efforts and adjustment of
underwriting criteria, losses are not expected to show improvement until the
second half of fiscal 1999. Accordingly, based on recent experience, management
increased the allowance for losses at September 30, 1998.

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

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

The Bank pursues an asset-liability management strategy designed both to control
risk from changes in market interest rates and to maximize interest income in
its loan portfolio. To achieve this strategy, the Bank emphasized the
origination and retention of a mix of both adjustable-rate and fixed-rate loan
products. In addition to adjustable-rate mortgages and adjustable-rate home
equity credit line loans, fixed-rate mortgage loans were originated and retained
in the Bank's portfolio during fiscal 1998 to a significantly larger degree than
in prior years. At September 30, 1998, adjustable-rate loans accounted for 36.0%
of total loans compared to 79.5% in fiscal 1997.

Declining interest rates throughout 1998 contributed to an increased demand for
fixed-rate loan products. Due to this rising demand, the Bank increased its
volume of fixed-rate mortgage originations as adjustable-rate loan demand fell.
The Bank continuously monitors its sensitivity to changes in market interest
rates and attempts to minimize the impact of interest-rate changes to net
income. The Bank's policy is generally to sell, or have the ability to sell,
some portion of its long-term fixed-rate mortgage production in order to reduce
its exposure to market interest rate fluctuations typically associated with
long-term fixed-rate lending.
<PAGE>
A traditional measure of interest-rate risk within the banking industry is the
interest sensitivity gap, which is the sum of all interest-earning assets minus
all interest-bearing liabilities subject to repricing within the same period.
Gap analysis is a tool used by management to evaluate interest-rate risk which
results from the difference between repricing and maturity characteristics of
the Bank's assets and those of the liabilities that fund them. By analyzing
these differences, management can attempt to estimate how changes in interest
rates affect the Bank's future net interest income.

The Bank views control over interest rate sensitivity as a key element in its
financial planning process and monitors interest rate sensitivity through its
forecasting system. The Bank manages interest rate exposure and will narrow or
widen its gap, depending on its perception of interest rate movements and the
composition of its balance sheet. For the reasons discussed above, the Bank
might take action to narrow its gap if it believes that market interest rates
will experience a significant prolonged increase, and might widen its gap if it
believes that market interest rates will decline or remain relatively stable.

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

The following table presents the interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities at September 30, 1998,
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>
<TABLE>
Interest Rate Sensitivity Table (Gap)
(Dollars in thousands)

                                                   More than      More than        More than
                                                   Six Months      One Year       Three Years
                                     Six Months     through        through         through       More than
                                      or Less       One Year      Three Years     Five Years     Five Years      Total
                                  -------------  -------------  -------------  -------------   -----------   ------------
<S>                               <C>            <C>            <C>            <C>             <C>           <C>        
As of September 30, 1998 real 
 estate loans:
  Adjustable-rate                 $    401,081   $    326,382   $     21,576   $        231    $       --    $   749,270
  Fixed-rate                            48,532         46,130        174,593        141,643       762,744      1,173,642
  Home equity credit lines
    and second mortgages               148,049          1,952          6,868          5,617        22,224        184,710
Commercial                             124,165          6,404         21,793         15,109         6,241        173,712
Consumer and other                      66,588         50,812        122,747         59,070        13,563        312,780
Loans held for sale                     56,287             --             --             --            --         56,287
Loans held for securitization
  and sale                             125,000             --             --             --            --        125,000
Mortgage-backed securities             621,933        326,273        707,332        134,102       236,177      2,025,817
Trading securities                      11,319             --             --             --            --         11,319
Other investments                    1,055,904             --         43,999             --            --      1,099,903
                                  -------------  -------------  -------------  -------------   -----------   ------------

  Total interest-earning assets      2,658,858        757,953      1,098,908        355,772      1,040,949     5,912,440
Total non-interest earning assets           --             --             --             --       837,953        837,953
                                  -------------  -------------  -------------  -------------   -----------   ------------

  Total assets                    $  2,658,858   $    757,953   $  1,098,908   $    355,772    $ 1,878,902   $ 6,750,393
                                  =============  =============  =============  =============   ===========   ============

Deposits:
  Fixed maturity deposits         $    948,564   $    287,708   $    230,542   $     60,846    $       --    $ 1,527,660
  NOW, statement and passbook
    accounts                         1,537,898         43,800        145,882         99,291       211,600      2,038,471
  Money market deposit accounts      1,019,570             --             --             --            --      1,019,570
Borrowings:
  Capital notes - subordinated              --             --             --             --       250,000        250,000
  Other                                792,771          2,887          9,189         13,695        25,669        844,211
                                  -------------  -------------  -------------  -------------   -----------   ------------
  Total interest-bearing
    liabilities                      4,298,803        334,395        385,613        173,832       487,269      5,679,912
Total non-interest bearing
  liabilities                               --             --             --             --       605,724        605,724
Stockholders' equity                        --             --             --             --       464,757        464,757
                                  -------------  -------------  -------------  -------------   -----------   ------------
  Total liabilities & 
    stockholders' equity          $  4,298,803   $    334,395   $    385,613   $    173,832    $ 1,557,750   $ 6,750,393
                                  =============  =============  =============  =============   ===========   ============

Gap                               $ (1,639,945)  $    423,558   $    713,295   $    181,940    $  553,680
Cumulative gap                    $ (1,639,945)  $ (1,216,387)  $   (503,092)  $   (321,152)   $  232,528
Adjustment for interest rate
  caps (1)                        $    200,926   $    100,000   $         --   $         --    $       --
Adjusted cumulative gap           $ (1,439,019)  $ (1,116,387)  $   (503,092)  $   (321,152)   $  232,528
Adjusted cumulative gap as a
  percentage of total assets             (21.3)%        (16.5)%         (7.5)%         (4.8)%         3.4 %

(1) At September 30, 1998, the Bank had $205,556 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.
</TABLE>
<PAGE>
The one-year gap, adjusted for the effect of the Bank's interest rate caps, as a
percentage of total assets, was a negative 16.6% at September 30, 1998, compared
to 4.5% at September 30, 1997. The decline in the Bank's one-year gap was
primarily attributable to an increase in fixed-rate mortgage loans during fiscal
1998 which were funded primarily by short-term borrowings.

During fiscal 1995, the Bank purchased a series of interest rate caps designed
to limit 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 was a notional principal amount of $600
million, and such protection declined to $205.6 million at September 30, 1998,
and will decline to $200 million by March 31, 1999. 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.

During fiscal 1997, an additional interest rate cap agreement with a notional
amount of $5.6 million and $72.2 million at September 30, 1998 and 1997,
respectively, was transferred and assigned to the Bank at the termination of one
of the Bank's credit card securitization transactions. This interest rate cap
agreement terminated October 15, 1998.

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 ("TB 13"). Under this regulation,
institutions are required to establish limits on the sensitivity of their net
interest income and net portfolio value ("NPV") to parallel changes in interest
rates. Such changes in interest rates are defined as instantaneous and sustained
movements to rates in 100 basis point increments. The following table shows the
estimated impact of parallel shifts in interest rates at September 30, 1998,
calculated in a manner consistent with the requirements of TB 13.
<PAGE>
                                           Change In
                             ---------------------------------------
Change in Interest Rates        Net Interest         Net Portolio
     (Basis Points)               Income(1)             Value(2)  
------------------------     ------------------    -----------------
                                     (Dollars in thousands)
                             Percent   Amount      Percent   Amount
                             ------- ----------    ------- ---------
            + 200            (11.2)% $ (25,767)    (11.0)% $(102,239)
            + 100             (5.0)% $ (11,567)     (2.7)% $ (25,576)
            - 100             12.1 % $  27,859       7.3 % $  68,007
            - 200             20.3 % $  46,799      12.0 % $ 112,045
-------------------------------------------------------------------------------
(1) Represents the difference between net interest income for 12 months in a
stable interest rate environment and the various interest rate scenarios.

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

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

At September 30, 1998, 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 - Regulation
Regulatory Capital."

In December 1998, the Office of Thrift Supervision released Management of
Interest Rate Risk, Investment Securities, and Derivatives Analysis ("TB13a") to
replace prior thrift bulletins concerned with the measurement of interest rate
risk. The Bank currently measures interest-rate risk and the effect of changes
in interest rates on both net interest income and market value on a regular
basis. TB13a requires the Bank to modify its existing interest-rate risk
analyses to include a new measure, Net Portfolio Value Ratio, and to measure the
sensitivity of this ratio through interest rate shock scenarios. The Bank is
currently in the process of reviewing TB13a and incorporating this new
measurement into its regular analyses; however, based on a preliminary review of
TB13a and its impact to the Bank's measurement of interest rate sensitivity,
management believes its impact will be minimal.
<PAGE>
Nevertheless, the sale of the Bank's credit card portfolio and current market
conditions are likely to result in a higher proportion of the Bank's assets
being comprised of assets with longer durations and greater sensitivity to
market interest rates than credit card loans. Accordingly, management expects to
consider steps it can take during fiscal 1999 to reduce to some degree the
Bank's exposure to increases in market interest rates based on the change in
composition of the Bank's loan portfolio.

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, 1998, the Bank recorded a net deferred tax
asset of $81.6 million, which generally represents the cumulative excess of the
Bank's actual income tax liability over its income tax expense for financial
reporting purposes. See Note 26 to the Consolidated Financial Statements in this
report.

Tax Sharing Payments. During fiscal 1998, after receiving OTS approval, the Bank
made tax sharing payments totaling $5.6 million to the Trust. Subsequent to
September 30, 1998, the Bank made a tax sharing payment of $6.6 million to the
Trust. See Note 32 to the Consolidated Financial Statements in this report.

Capital. At September 30, 1998, the Bank was in compliance with all of its
regulatory capital requirements under FIRREA, and its capital ratios exceeded
the ratios established for well capitalized institutions under OTS prompt
corrective action regulations.

The following table shows the Bank's regulatory capital levels at September 30,
1998, 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.
<PAGE>
<TABLE>
Regulatory Capital
(Dollars in thousands)

                                                                                    Minimum                  Excess
                                                          Actual              Capital Requirement           Capital
                                                 ------------------------   ----------------------  -----------------------
                                                                 As a %                   As a %                   As a %
                                                    Amount      of Assets      Amount    of Assets     Amount     of Assets
                                                 -----------    ---------   -----------  ---------  -----------   ---------
<S>                                              <C>            <C>         <C>          <C>        <C>           <C>
Stockholders' equity per financial statements    $  464,757
  Minority interest in REIT Subsidiary (1)          144,000
  Net unrealized holding gains (2)                      (58)
                                                 -----------
                                                    608,699

Adjustments for tangible and core capital:
  Intangible assets                                 (63,144)
  Non-allowable minority interest in
    REIT Subsidiary (1)                             (11,433)
  Non-includable subsidiaries  (3)                   (3,852)

                                                 -----------
     Total tangible capital                         530,270        7.93%    $  100,253      1.50%   $  430,017       6.43%
                                                 -----------    =========   ===========  =========  ===========   =========

     Total core capital (4)                         530,270        7.93%    $  267,342      4.00%   $  262,928       3.93%
                                                 -----------    =========   ===========  =========  ===========   =========

     Tier 1 risk-based capital (4)                  530,270       12.93%    $  172,572      4.00%   $  357,698       8.93%
                                                 -----------    =========   ===========  =========  ===========   =========

Adjustments for total risk-based capital:
  Subordinated capital debentures                   250,000
  Allowance for general loan losses                  53,036
                                                 -----------
     Total supplementary capital                    303,036
                                                 -----------
     Total available capital                        833,306
  Equity investments (3)                            (11,133)
                                                 -----------
     Total risk-based capital (4)                $  822,173       20.70%    $  345,143      8.00%   $  477,030      12.70%
                                                 ===========    =========   ===========  =========  ===========   =========


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

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

(3) Reflects an aggregate offset of $0.8 million representing the allowance for
general loan losses maintained against the Bank's equity investments and
non-includable subsidiaries which, pursuant to OTS guidelines, is available as a
"credit" against the deductions from capital otherwise required for such
investments.

(4) Under the OTS "prompt corrective action" regulations, the standards for
classification as "well capitalized" are a leverage (or "core capital") ratio of
at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0% and a total
risk-based capital ratio of at least 10.0%.
</TABLE>
<PAGE>
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 February 1998, the
Bank received from the OTS an extension of the holding periods for certain of
its REO properties through February 17, 1999. The following table sets forth the
Bank's REO at September 30, 1998, after valuation allowances of $153.6 million,
by the fiscal year in which the property was acquired through foreclosure.

             Fiscal Year                       (In thousands)
      -------------------------------          --------------
      1990(1)(2).....................                $ 19,023
      1991(2)........................                  36,619
      1992(2)........................                     100
      1993...........................                    -
      1994...........................                     732
      1995...........................                   5,907
      1996...........................                    -
      1997...........................                    -
      1998.........................                     3,027
                                               --------------
        Total REO....................                $ 65,408
                                               ==============

(1) Includes REO with an aggregate net book value of $11.1 million, which the
Bank treats as equity investments for regulatory capital purposes.

(2) Includes REO, with an aggregate net book value of $44.6 million, for which
the Bank received an extension of the holding periods through February 17, 1999.

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, 1998, the Bank's
leverage, tier 1 risk-based and total risk-based capital ratios were 7.93%,
12.93% and 20.70%, respectively, which exceeded the ratios established for well
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, 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.

Failure to obtain the REO extensions discussed above could adversely affect the
Bank's regulatory capital ratios. The Bank's ability to maintain or increase its
capital levels in future periods also will be subject to general economic
conditions, particularly in the Bank's local markets. Adverse general economic
conditions or a 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.
<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 currently the case and is
expected to continue to be so 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 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 ability to meet its liquidity needs, including debt
service payments in fiscal 1999 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. See also the
discussion of potential limitations on the payment of dividends by the Bank
contained in "Business - Banking - Regulation Dividends and Other Capital
Distributions."

The Real Estate Trust believes that the financial condition and operating
results of the Bank in recent periods, as well as the Bank's board resolution
adopted in connection with the release of its written agreement with the OTS
(see "Banking - Regulation - Regulatory Capital") should enhance prospects for
the Real Estate Trust to receive tax sharing payments and dividends from the
Bank. During fiscal 1998, the Bank made tax sharing payments totalling $5.6
million and dividend payments totalling $5.2 million to the Real Estate Trust.

In recent years, the operations of the Trust have generated net operating losses
while the Bank has reported net income. 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 the refund which the Bank would otherwise have
been able to claim if it were not being included in the consolidated federal
income tax return of the group.
<PAGE>
Through September 30, 1998, the Real Estate Trust has purchased either in the
open market or through dividend reinvestment 2,091,176 shares of common stock of
Saul Centers (representing 16.4% of such company's outstanding common stock). As
of September 30, 1998, the market value of these unpledged shares was
approximately $35.5 million.

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
"1994 Notes"). See Note 4 to the Consolidated Financial Statements in this
report. In March 1998, the Real Estate Trust issued $200.0 million aggregate
principal amount of 9 3/4% Senior Secured Notes due 2008 (the "1998 Notes").
After providing for the retirement of the 1994 Notes, including a prepayment
premium of $10.0 million and debt issuance costs of approximately $5.9 million,
the Real Estate Trust realized approximately $9.1 million in new funds. In
addition, the Real Estate Trust received about $13.2 million in cash which had
been held as additional collateral by the indenture agent under the 1994 Notes.
The 1998 Notes are secured by a first priority perfected security interest in
8,000 shares (80%) of the issued and outstanding common stock of the Bank, which
constitute all of the Bank common stock held by the Real Estate Trust. The 1998
Notes are nonrecourse obligations of the Real Estate Trust.

The Real Estate Trust is currently selling Unsecured Notes, with a maturity
ranging from one to ten years, primarily to provide funds to repay maturing
Unsecured Notes. 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 was for an initial
two-year period subject to extension for one or more additional one-year terms.
In fiscal 1997, the facility was increased to $20.0 million and was renewed for
an additional two-year period. Interest is computed by reference to a floating
rate index. At September 30, 1998, there were no borrowings under the facility
and unrestricted availability was $8.4 million.

In fiscal 1996, the Real Estate Trust established an $8.0 million secured
revolving credit line with an unrelated bank. This facility was for a one-year
term, after which any outstanding loan amount would amortize over a two-year
period. During fiscal 1997, the line of credit was increased to $10.0 million
and was extended for a year. During fiscal 1998, the line of credit was
increased to $20.0 million and was extended for an additional year. Interest is
computed by reference to a floating rate index. At September 30, 1998, there
were no borrowings under the facility and unrestricted availability was $4.3
million.

During fiscal 1997, the Real Estate Trust refinanced two hotel and three office
properties with five- year floating rate debt. After payment of all financing
costs, the Real Estate Trust received net proceeds of approximately $11.0
million.
<PAGE>
The maturity schedule for the Real Estate Trust's outstanding debt at September
30, 1998 for fiscal years commencing October 1, 1998 is set forth in the
following table:

                      Debt Maturity Schedule
                          (In thousands)
--------------------------------------------------------------------
                             Notes          Notes
  Fiscal       Mortgage      Payable-       Payable-
   Year         Notes        Secured        Unsecured       Total
--------------------------------------------------------------------
   1999        $10,055         $   --        $16,149       $ 26,204
   2000         10,193             --          8,893         19,086
   2001         12,618             --          5,916         18,534
   2002         14,367             --          5,284         19,651
   2003         12,663             --          9,046         21,709
Thereafter     138,978        200,000          5,047        344,025
              ---------     ----------      ---------     ----------
  Total       $198,874       $200,000        $50,335       $449,209
              =========     ==========      =========     ==========
--------------------------------------------------------------------

Of the $198.9 million of mortgage debt outstanding at September 30, 1998, $169.8
million was nonrecourse to the Real Estate Trust.

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
shares in cash distributions from operations and from capital transactions
involving the sale of properties. The partnership agreement of Saul Holdings
Partnership provides for quarterly cash distributions to the partners out of net
cash flow. See "Business - Real Estate - Investment in Saul Holdings Limited
Partnership." In fiscal 1998, the Real Estate Trust received total cash
distributions of $5.6 million from Saul Holdings Partnership. Beginning in April
1998 the Real Estate Trust has reinvested its quarterly distributions and
obtained additional partnership units in Saul Holdings.

Development and Capital Expenditures

During the third quarter of fiscal 1997, the Real Estate Trust commenced
development of a 46,000 square foot single-story office research and development
building on 3 acres of its Avenel Business Park land parcel located in
Gaithersburg, Maryland ("Avenel Phase IV"). The Real Estate Trust financed the
project with a construction/permanent loan. The project was substantially
completed in January 1998 and was offered to Saul Holdings in accordance with
the Real Estate Trust's obligations under the Right of First Refusal Agreement.
An independent appraisal of the project indicated a market value of $5,600,000.
The fully funded balance of the loan was $3,657,000, resulting in an equity
position of $1,943,000 for the Real Estate Trust. The Board of Directors of Saul
Centers, Inc., general partner of Saul Holdings, agreed to purchase the Real
Estate Trust's equity position through the issuance of additional limited
partnership units in Saul Holdings. Accordingly, as of April 1, 1998, Saul
Holdings insured 105,922 new limited partnership units and a corresponding
limited partnership interest to the Real Estate Trust in exchange for the
ownership of Avenel Phase IV and the assumption of the loan.
<PAGE>
In September 1997, the Real Estate Trust commenced development of a 95-unit
extended stay hotel on a 3 acre parcel located adjacent to its Hampton Inn and
Holiday Inn near the Washington Dulles International Airport in Sterling,
Virginia. The new hotel was franchised as a TownePlace Suites by Marriott and
opened for business in August 1998. Development costs were $5.8 million and were
largely financed by a construction loan of $4.5 million. The loan is for two
years with two extension options for two year and one year periods,
respectively. The loan covered all costs except for the land, fees to related
parties, taxes and insurance.

On December 10, 1997, the Real Estate Trust purchased a 308-room Holiday Inn
located in Arlington, Virginia, near the Washington National Airport and the
Real Estate Trust's Howard Johnson Hotel. The purchase price was $25.8 million.
Also on December 10, 1997, the Real Estate Trust refinanced five other hotels in
its portfolio. Funds for the two transactions were provided by a lender in the
amount of $52.5 million. The new loans have a 15 year term, a fixed interest
rate of 7.57%, and amortization based on a 25 year schedule.

During the quarter ended June 30, 1998, the Real Estate Trust commenced
development of four new extended stay hotels:

     TownePlace Suites by Marriott containing 91 units to be located on a 2 acre
        site owned by the Trust in Avenel Business Park in Gaithersburg, 
        Maryland. Opening is scheduled for mid-April 1999.

     TownePlace Suites by Marriott containing 91 units to be located on part of
        a 9 acre site owned by the Real Estate Trust in the Arvida Park of
        Commerce in Boca Raton, Florida. Opening is scheduled for mid-July 1999.

     SpringHill Suites by Marriott containing 146-units to be located on part of
        a 9 acre site owned by the Real Estate Trust in the Arvida Park of
        Commerce in Boca Raton, Florida. Opening is scheduled for mid-July 1999.

     TownePlace Suites by Marriott containing 95-units to be located on a 3 acre
        site owned by the Real Estate Trust in Ft. Lauderdale Commerce Center,
        Ft. Lauderdale, Florida. Opening is scheduled for mid-August 1999.

The projected costs for the four hotels aggregate $32 million and will largely
be funded by the proceeds of a three year bank loan in the amount of $25.9
million. The loan has two one-year renewal options.

During the quarter ended June 30, 1998, the Real Estate Trust also began
development of a 78,000 square floor single-story office/research and
development building located on a 7 acre site owned by the Real Estate Trust in
Dulles North Corporate Park, Sterling, Virginia. This project is adjacent to the
Real Estate Trust's Dulles North office building and near three of the Real
Estate Trust's hotel properties. The development cost is $6.6 million with bank
financing of $6.5 million for a five-year term and a two-year extension option.
Completion is expected in early fiscal 1999. A lease for approximately 25% of
the space has been signed.
<PAGE>
During the quarter ended September 30, 1998, the Real Estate Trust began the
conversion of its two hotels located in Crystal City, Arlington, Virginia. The
present 308-room Crystal City Holiday Inn will be converted into a Holiday Inn
Crown Plaza, while the present 279-room Howard Johnsons will be converted into a
Holiday Inn. The new brands are expected to position the hotels to generate
higher room rates and revenues along with improved occupancy levels consistent
with the overall market. The renovations are largely an acceleration of normal
capital improvement work as well as some exterior and interior signage, new
marketing materials and a facade upgrade at the Howard Johnson hotel. A
restaurant, which had been operated by an unaffiliated company, will also be
renovated. The incremental costs for the two conversions will be funded by the
Real Estate Trust in part from its internal resources and in part from its lines
of credit.

The Real Estate Trust believes that the capital improvement costs for its
income-producing properties will be in range of $6.5 to $8.0 million per year
for the next several fiscal years.

Year 2000 Statement - Pursuant to The Year 2000  Information  And
Readiness Disclosure Act

The Real Estate Trust has reviewed all its financial and accounting systems for
the purpose of assessing the impact of Year 2000 on both internally developed
and externally provided systems. The Real Estate Trust currently uses an IBM
AS/400, which has been certified by the manufacturer to be Year 2000 compliant.
All software purchased over the past five years has been certified by the
various manufacturers to be Year 2000 compliant. All internally developed
software had already been modified or will be modified by December 1998 to make
it Year 2000 compliant. Property management systems for shopping centers, office
buildings, hotels, and construction and development have been certified as Year
2000 compliant by applicable vendors. At present, only one area of property
management, apartments, has software which requires replacement to meet Year
2000 compliance, and that replacement is scheduled to be completed by May 1999.
The Real Estate Trust had no information, which would suggest that its financial
systems would not continue to function effectively after the turn of the
century.

Using the Building Owners and Manager Association's guidelines to identify
building systems and critical services that might be vulnerable to the Year 2000
software problem, the Real Estate Trust has contacted the manufacturer,
supplier, or the vendor supporting the system and requested information
regarding Year 2000 compliance. The majority of the replies have indicated that
the systems or services are Year 2000 compliant. We are presently assessing
whether any of the internal systems should be tested or whether further
investigation is necessary. The Real Estate Trust has no information, which
would suggest that any system would not continue to function effectively the
after turn of the century. Except with regard to internally developed software,
all information regarding Year 2000 compliance is based on a republication (as
defined in The Year 2000 Information and Readiness Disclosure Act) of Year 2000
statements or disclosures made by others.
<PAGE>
The Real Estate Trust believes that there is risk that its operations may be
affected by vendors and tenants who are unable to perform as contracted due to
their own Year 2000 exposure. It is very difficult to identify the most
reasonably likely worst case scenario at this time. Although the Real Estate
Trust's potential exposure is widespread, there is no known major direct
exposure. The Real Estate Trust's commercial leases contain provisions
empowering it to take certain actions to enforce its right to the timely payment
of rent regardless of the tenants's Year 2000 exposure. While it is not possible
at this time to determine the likely impact of these potential problems, the
Real Estate Trust will continue to evaluate these areas and development
contingency plans as appropriate. The Real Estate Trust estimates that its
incremental costs to meet year 2000 compliance is less that $250,000.

Banking

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 under OTS regulations in effect at September 30, 1998 was 4.0%.
The Bank's liquidity ratio for the quarter ended September 30, 1998 was 10.4%,
compared to 11.1% for the month ended September 30, 1997. The Bank met the
liquidity level requirements for each quarter of fiscal 1998. Effective November
24, 1997, the OTS reduced the minimum liquidity requirement to 4% from 5% and
changed the reporting requirement to quarterly instead of monthly. See
"Business - Regulation - Liquidity Requirements."

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, 1998, the Bank's
portfolio included mortgage loans, U.S. Government securities and
mortgage-backed securities with outstanding principal balances of $103.7
million, $44.0 million and $2.0 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 $1.9 billion at September 30, 1998, 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,
home loan and automobile loan receivables, as well as single-family residential
loans, 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.
<PAGE>
Since 1988, the Bank has securitized approximately $13.0 billion of credit card,
home equity, 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, 1998, the Bank serviced $417.9 million, $1.1 billion
and $204.5 million of securitized home equity, automobile and home loan
receivables, respectively. Chevy Chase derives fee-based income from servicing
these securitized portfolios. However, such fee-based income has been adversely
affected in recent periods by increases in delinquencies and charge-offs related
to the receivables placed in these securitized pools.

The Bank's securitization transactions transfer the risk of repayment on
securitized assets to a trust which holds the receivables and issues the
asset-backed certificates and ultimately the risk of repayment is transferred to
the holders of those certificates. The Bank retains risk with respect to the
assets transferred to the trust only to the extent that it retains recourse
based on the performance of the assets or holds certificates issued by the trust
(such as a "seller certificate"). In its securitizations, the Bank typically
retains a limited amount of recourse through one or more means, most often,
through the establishment of "spread accounts." Occasionally other structures,
such as overcollateralization of receivables or subordinated asset-backed
securities, 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 overcollateralization of receivables or
subordinated interest), which, as noted above, constitute a dollar-for-dollar
capital requirement for the Bank. The Bank also retains risk through the Bank's
interest in any seller certificate. Seller certificates share collections on the
securitized assets on an unsubordinated basis with the investor certificates
(unless and to the extent recourse is retained through an express subordination)
and are on-balance sheet assets against which the Bank must maintain capital.
<PAGE>
In recent periods, the proceeds from the securitization and sale of credit card,
home equity, automobile and home loan receivables have been significant sources
of liquidity for the Bank. The Bank securitized and sold $1.0 billion of credit
card receivables, $534.7 million of automobile loan receivables, $298.8 million
of home equity receivables and $45.9 million of home loan receivables during
fiscal 1998. Additionally, during fiscal 1998, the Bank securitized and sold
$36.0 million of amounts on deposit in certain spread accounts established in
connection with certain of the Bank's credit card securitizations. At September
30, 1998, the Bank was considering the securitization and sale of approximately
$200.0 million of automobile loan receivables, including $125.0 million of
receivables outstanding at September 30, 1998 and $75.0 million of receivables
which the Bank expects to become available through additional fundings during
the six months ending March 31, 1999.

In connection with the sale of the Bank's credit card portfolio and related
operations, the Bank transferred all of its rights, interests, liabilities and
obligations (including recourse obligations) relating to its credit card
securitizations to FUSA.

As part of its operating strategy, the Bank will continue to explore
opportunities to sell assets and to securitize and sell home equity, automobile
and home loan receivables to meet liquidity and other balance sheet objectives.
However, management expects to rely less on securitizations as a source of
liquidity in fiscal 1999 because, among other things, changes in the composition
of the Bank's loan portfolio following the sale of its credit card business as
well as changes in market and other conditions have made other sources of
liquidity such as Federal Home Loan Bank advances relatively more attractive
sources of funding.

The Bank uses its liquidity primarily to meet its commitments to fund maturing
savings certificates and deposit withdrawals, fund existing and continuing loan
commitments, repay borrowings and meet operating expenses. During fiscal 1998,
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 $24.8 billion, repay borrowings of $19.9 billion, fund
existing and continuing loan commitments (including real estate held for
investment or sale) of $3.5 billion, purchase investments and loans of $1.7
billion and meet operating expenses, before depreciation and amortization, of
$464.2 million. These commitments were funded primarily through proceeds from
customer deposits and sales of certificates of deposit of $24.8 billion,
proceeds from borrowings of $20.4 billion, proceeds from sales of loans, trading
securities and real estate of $3.7 billion, and principal and interest collected
on investments, loans, and securities of $1.8 billion.

The Bank is obligated under various recourse provisions (primarily related to
credit losses) related to the securitization and sale of receivables. As a
result of these recourse provisions, the Bank maintained restricted cash
accounts and overcollateralization of receivables amounting to $110.2 million
and $12.5 million, respectively, at September 30, 1998, and $117.7 million and
$8.0 million, respectively, at September 30, 1997. In addition, the Bank owned
subordinated automobile receivables-backed securities with carrying values of
$11.3 million and $7.9 million at September 30, 1998 and 1997, respectively,
which were classified as trading securities in the Consolidated Balance Sheets.

The Bank is also obligated under various recourse provisions related to the swap
of single-family residential loans for mortgage-backed securities issued by the
Bank. At September 30, 1998, recourse to the Bank under these arrangements was
$6.5 million, consisting of restricted cash accounts amounting to $2.6 million
and overcollateralization of receivables of $3.9 million.
<PAGE>
The Bank's commitments to extend credit at September 30, 1998 are set forth in
the following table:

                                                      (In thousands)
                                                      --------------

      Commitments to originate loans.................. $   266,067
                                                       -------------

      Loans in process (collateralized loans):........
        Home equity...................................     582,280
        Real estate construction and ground...........     100,868
        Commercial real estate and multifamily........       1,713
        Commercial....................................      69,780
                                                       -------------
                                                           754,641
                                                       -------------
       Loans in process (unsecured loans):
        Overdraft lines...............................      88,665
        Commercial....................................      35,560
                                                       -------------
                                                           124,225
                                                       -------------
        Total commitments to extend credit............  $1,144,933
                                                       =============

The sale of the credit card portfolio substantially reduced the Bank's level of
commitments to extend credit at September 30, 1998. Based on historical
experience, the Bank expects to fund substantially less than the total amount of
its outstanding overdraft line and home equity credit line commitments, which
together accounted for 58.6% of commitments to extend credit at September 30,
1998.

At September 30, 1998, repayments of borrowed money scheduled to occur during
the next 12 months were $795.7 million. Certificates of deposit maturing during
the next 12 months amounted to $1.2 billion, of which a substantial portion is
expected to remain with the Bank.

There were no material commitments for capital expenditures at September 30,
1998. During fiscal 1998, the Bank leased 3.5 acres of land at 7501 Wisconsin
Avenue in Bethesda, Maryland, on which the Bank intends to develop and occupy an
office building to use as its new corporate headquarters. Construction on this
project is scheduled to begin in June 1999.

The Bank's liquidity requirements in years subsequent to fiscal 1998 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.
<PAGE>
YEAR 2000 ISSUES

The "Year 2000 problem" is caused by deficiencies in computer systems that are
designed to assume that the first two digits of a particular year are always
"19" and therefore these systems may have difficulty accurately processing
transactions using dates later than December 31, 1999. These deficiencies, if
not properly identified and remediated, could lead to internal and industry-wide
malfunctions and cause substantial business disruptions.

Under the direction of the Bank's management, the Bank has launched a
corporate-wide Year 2000 program (the "Program") to prepare its internal
computer systems, applications and infrastructure to correctly process dates up
through and after December 31, 1999, and to mitigate external risks to the Bank.
The Program is supported by a working group that organizes and conducts specific
Year 2000 projects, including projects dealing with the Bank's facilities,
counterparties and critical vendors and service providers.

The Program, which is based on the Federal Financial Institutions Examination
Council's guidelines, consists of five components relating to mission-critical
technology:

     1.   The awareness phase, which raised internal awareness of the Program;

     2.   The inventory/assessment phase, during which the Bank completed a
          corporate-wide inventory of information technology ("IT") and non-IT
          applications, identified key relationships with outside parties and
          developed plans and target dates for the Program;

     3.   The renovation/replacement phase, in which the Bank identified
          components in need of replacement or repair and made hardware and
          software upgrades, code enhancements, system replacements and other
          changes;

     4.   The validation phase, in which the Bank conducted tests of system-wide
          applications and evaluated user acceptance; and

     5.   The implementation phase, in which the Bank is converting its systems
          to year 2000-tested applications and products.

The awareness, assessment, renovation and validation phases have been completed
and the implementation phase is substantially complete.

The Bank is working to mitigate external risks through a variety of projects.
The Bank has assessed, and will continue to assess, the Year 2000 readiness of
key counterparties and of customers. In addition, the Bank has assessed the Year
2000 readiness of critical vendors and service providers, including
telecommunications, hardware and software, office equipment and financial
services providers.

The Bank is developing contingency plans to address problems which may be
created by external parties who may not be Year 2000 compliant. As part of this
effort, the Bank is assessing significant services provided by third parties to
determine the extent to which the Bank may be affected by inadequate Year 2000
preparedness. The Bank plans to identify significant Year 2000 risks, assess the
probability of their occurrence and take necessary actions to mitigate those
risks by developing contingency plans in response to those risks.
<PAGE>
The Bank does not expect to incur a material loss as a result of the Year 2000
problem. However, because the Bank ultimately has no control over the
remediation of systems of third parties with whom the Bank has relationships,
there can be no assurance that the Bank's Program, including its contingency
plans, will fully mitigate the effects of third-party failures.

The Bank expects to invest $14.6 million towards the Year 2000 program,
excluding the cost of its own staff, of which $2.3 million was charged to
expense in fiscal 1998 and $6.4 million and $1.0 million will be charged to
expense in fiscal 1999 and fiscal 2000, respectively. Remaining amounts, which
are related to equipment purchases, will be amortized to expense over the
estimated useful lives of the equipment. The Bank's cost estimates are based on
variables and assumptions that could cause actual results to differ from these
projections.

<PAGE>
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.

Fiscal  1998 Compared to Fiscal  1997

Real Estate

The Real Estate Trust recorded loss before depreciation and amortization of debt
expense of $6.9 million and an operating loss of $18.5 million for fiscal 1998,
compared to a loss before depreciation and amortization of debt expense of $7.8
million and an operating loss of $19.0 million for fiscal 1997. The improvement
was largely attributable to higher income after direct operating expenses for
hotels and office and industrial properties and higher other income, reduced by
increased corporate expenses, a reduction in equity in earnings of
unconsolidated entities, and a loss on the sale of a property in fiscal 1998 as
compared to a gain in fiscal 1997.
<PAGE>
Income after direct operating expenses from hotel properties increased
$4,967,000 (23.7%) in fiscal 1998 over the level achieved in fiscal 1997.
$2,208,000 (11.0%) of this increase reflected improved results from nine hotels
owned throughout both fiscal years, and $2,759,000 reflected results from
acquisition properties. The increase in total revenue of $11,960,000 (20.1%)
exceeded the increase of $6,993,000 (18.2%) in direct operating expenses. For
the nine hotels owned throughout both fiscal years, the increase in total
revenue was $4,677,000 (8.1%) and the increase in direct operating expenses was
$2,469,000 (6.6%). The revenue increase was attributable to improved market
conditions which permitted the Real Estate Trust to raise average room rates at
eight of the nine hotels. Average occupancy percentages declined slightly from
those of the previous year.

Income after direct operating expenses from office and industrial properties
increased $1,921,000 (14.4%) in fiscal 1998 compared to such income in fiscal
1997. Gross income increased $1,786,000 (8.5%) in fiscal 1998, while expenses
decreased $135,000 (1.7%) due to refunds of property taxes. The improvement in
gross income was due to higher rents obtained upon releasing space.

Other income, which includes interest income, income from other real estate
properties and miscellaneous receipts, increased $277,000 (6.9%) in fiscal 1998
due to higher interest income.

Land parcels and other expense decreased $76,000 (4.5%) in fiscal 1998 as the
result of lower real estate taxes and the disposition of a property in the
current year.

Interest expense increased $2,290,000 (5.7%) in fiscal 1998, primarily because
of the higher level of borrowings in the current period. The average balance of
outstanding borrowings increased to $433.2 million for fiscal 1998 from $400.3
million for the prior year. The increase in average borrowings occurred as a
result of a new issue of $200.0 million of Senior Secured Notes due 2008 and the
retirement of $175.0 million of Senior Secured Notes due 2002, new mortgage loan
financings and sales of new Unsecured Notes in excess of maturing Notes. The
average cost of borrowings was 10.05% in fiscal 1998 and 10.30% in fiscal 1997.

Amortization of debt expense decreased $292,000 (44.0%) in fiscal 1998,
primarily due to lower costs experienced in the new Senior Secured Note
financing and in the renewal of lines of credit.

Depreciation increased $627,000 (5.9%) in fiscal 1998 as a result of the
addition of two new income-producing properties as well as new tenant
improvements and capital replacements.

Advisory, management and leasing fees paid to related parties increased $747,000
(9.3%) in fiscal 1998. The advisory fee in fiscal 1998 was $317,000 per month
compared to $311,000 per month for fiscal 1997, which resulted in an aggregate
increase of $75,000 (2.0%). Management and leasing fees were higher by $672,000
(15.8%) in fiscal 1998 as a result of increased gross income on which fees are
based.

General and administrative expense decreased $119,000 (9.4%) in fiscal 1998 as a
result of lower legal and insurance costs.
<PAGE>
Equity in earnings of unconsolidated entities represents the Real Estate Trust's
share of earnings in its partnership investments. For fiscal 1998, the Real
Estate Trust recorded earnings of $1,918,000 from such investments compared to
earnings of $4,150,000 in the prior year. The reduction of earnings in fiscal
1998 was due to the sales of interest rate protection agreements and the
write-off of unamortized costs in excess of sales proceeds received and the
write-off of unamortized loan costs when a portion of the loan portfolio was
refinanced.

Loss on sale of property in fiscal 1998 reflected the termination of the Real
Estate Trust's lease on a property located in Oxon Hill, Maryland. Gain on sale
of property in fiscal 1997 represents the gain on the sale of a
purchase-leaseback investment located in Casper, Wyoming and the gain on the
condemnation of a portion of a land parcel located in Atlanta, Georgia.

Banking

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 and the rates of interest paid on its deposits and
borrowings. In the last three fiscal years, servicing and securitization income
from credit card, home equity, automobile and home loan receivables 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.

On September 30, 1998, the Bank sold its credit card portfolio and related
operations to First USA Bank, N.A. The credit card portfolio included
approximately $4.8 billion of managed credit card loans and 3.1 million Visa and
MasterCard credit card accounts. Although the credit card program has
historically been a significant source of earnings for the Bank, management
believes that the Bank will be able to maintain profitability by relying on its
core deposit franchise as a significant source of low-cost funds, and investing
those funds in assets that, although offering lower yields than credit cards,
involve less credit risk and overhead costs. Nevertheless, implementation of
this strategy will be a gradual process and the Bank's short term profitability
may be adversely affected to the extent the immediate loss of earnings from the
credit card program can not be offset by corresponding reductions in operating
expenses.

Overview. The Bank recorded operating income of $184.4 million for the year
ended September 30, 1998 ("fiscal 1998"), compared to operating income of $80.2
million for the year ended September 30, 1997 ("fiscal 1997"). The increase in
income for fiscal 1998 was primarily attributable to a $230.8 million increase
in other (non-interest) income resulting primarily from a $288.3 million gain on
sale of the Bank's credit card portfolio and related operations on September 30,
1998. Offsetting this amount was an $85.7 million (or 20.5%) increase in
operating (non-interest) expenses caused primarily by increased salaries and
employee benefits and loan expenses.

Net Interest Income. Net interest income, before the provision for loan losses,
decreased $15.2 million (or 7.1%) during fiscal 1998. The Bank would have
recorded interest income of $2.3 million in fiscal 1998 if non-accrual assets
and restructured loans had been current in accordance with their original terms.
Interest income of $0.4 million was actually recorded on non-accrual assets and
restructured loans during the fiscal year. The Bank's net interest income in
future periods will continue to be adversely affected by the Bank's
non-performing assets. See "Financial Condition - Asset Quality - Non-Performing
Assets."
<PAGE>
The following table sets forth, for the periods indicated, information regarding
the total amount of income from interest-earning assets and the resulting
yields, the interest expense associated with interest-bearing liabilities,
expressed in dollars and rates, and the net interest spread and net yield on
interest-earning assets.

<PAGE>
<TABLE>
Net Interest Margin Analysis
(Dollars in thousands)

                                                                             Year Ended September 30,
                                             ---------------------------------------------------------------------------------------
                               September 30,             1998                          1997                          1996
                                            ----------------------------- ----------------------------- ----------------------------
                                  1998        Average             Yield/    Average             Yield/    Average             Yield/
                               Yield/Rate     Balances  Interest  Rate      Balances  Interest  Rate      Balances  Interest  Rate
                               ------------ ----------------------------- ----------------------------- ----------------------------
<S>                            <C>          <C>         <C>       <C>     <C>         <C>       <C>     <C>         <C>       <C>
Assets:
 Interest-earning assets:
 Loans receivable, net (1)           8.88 % $ 2,775,884 $299,701  10.80 % $ 3,578,600 $360,780  10.08 % $ 2,940,158 $317,902  10.81%
 Mortgage-backed securities          5.92     1,990,123  113,441   5.70     1,204,839   72,209   5.99       834,198   50,955   6.11
 Federal funds sold and 
   securities purchased 
   under agreements to resell        5.67      140,004     7,892   5.64       128,268    7,066   5.51       185,794   10,195   5.49
 Trading securities                  8.74       25,159     2,005   7.97        15,436    1,530   9.91        13,477      953   7.07
 Investment securities               5.56       37,866     2,138   5.65         8,346      481   5.76         6,033      315   5.22
 Other interest-earning assets       5.67      196,646    10,765   5.47       196,444   10,248   5.22       164,783    7,931   4.81
                                              --------- ---------           --------- --------            --------- --------  
   Total                             7.27     5,165,682  435,942   8.44     5,131,933  452,314   8.81     4,144,443  388,251   9.37
                               -----------              --------- ------              --------  ------              --------  -----

 Non-interest earning assets:
 Cash                                           217,929                       191,626                       161,925
 Real estate held for 
   investment or sale                            86,348                       115,948                       161,092
 Property and equipment, net                    284,358                       245,879                       193,898
 Cost in excess of net 
   assets acquired, net                          55,496                        38,630                        42,648
 Other assets                                   608,957                       399,190                       248,676
                                            -----------                   -----------                   -----------
   Total assets                             $ 6,418,770                   $ 6,123,206                   $ 4,952,682
                                            ===========                   ===========                   ===========

Liabilities and stockholders'
   equity:
 Interest-bearing liabilities:
 Deposit accounts:
   Demand deposits                   1.32   $   998,256   19,877   1.99   $   890,204   21,977   2.47   $   846,796   23,137   2.73
   Savings deposits                  2.38     1,017,755   30,727   3.02       975,264   33,106   3.39       944,211   31,936   3.38
   Time deposits                     5.32     1,663,772   89,958   5.41     1,420,613   75,180   5.29     1,261,685   69,179   5.48
   Money market deposits             3.62       994,590   38,756   3.90       992,066   38,644   3.90       990,392   38,317   3.87
                                            ----------- ---------         ----------- --------          ----------- --------
   Total deposits                    3.40     4,674,373  179,318   3.84     4,278,147  168,907   3.95     4,043,084  162,569   4.02
 Borrowings                          6.43       888,473   59,092   6.65     1,134,754   70,908   6.25       369,831   26,267   7.10
                                            ----------- ---------         ----------- --------          ----------- --------
   Total liabilities                 3.98     5,562,846  238,410   4.29     5,412,901  239,815   4.43     4,412,915  188,836   4.28
                               -----------              --------- -------             --------  ------              --------  ------
 Non interest-bearing items:
 Non-interest bearing 
   deposits                                     266,711                       196,620                       149,158
 Other liabilities                               79,655                        53,037                        51,338
 Minority interest                              144,000                       119,376                          -- 
 Stockholders' equity                           365,558                       341,272                       339,271
                                            -----------                   -----------                    ----------
   Total liabilities and 
     stockholders' equity                   $ 6,418,770                    $6,123,206                    $4,952,682
                                            ===========                   ===========                    ==========

Net interest income                                     $197,532                      $212,499                      $199,415
                                                        =========                     ========                      ========
Net interest spread (2)                                            4.15 %                        4.38 %                        5.09%
                                                                  =======                       =======                       ======
Net yield on interest-
  earning assets (3)                                               3.82 %                        4.14 %                        4.81%
                                                                  =======                       =======                       ======
Interest-earning assets 
  to interest-bearing 
  liabilities                                                     92.86 %                       94.81 %                       93.92%
                                                                  =======                       =======                       ======

(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 ($3,078), ($8,329), and ($7,980) of amortized loan fees,
premiums and discounts in interest income for the years ended September 30,
1998, 1997 and 1996.

(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.
</TABLE>
<PAGE>
The following table presents certain information regarding changes in interest
income and interest expense of the Bank during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to changes in volume (change in
volume multiplied by old rate); changes in rate (change in rate multiplied by
old volume); and changes in rate and volume.
<PAGE>
<TABLE>
Volume and Rate Changes in Net Interest Income
(In thousands)

                                                        Year Ended September 30, 1998            Year Ended September 30, 1997
                                                                 Compared to                              Compared to
                                                        Year Ended September 30, 1997            Year Ended September 30, 1996
                                                             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)                                           $(85,412)  $   24,333   $ (61,079)       $  65,450    $(22,572)   $ 42,878
  Mortgage-backed securities                            44,886       (3,654)     41,232           22,272      (1,018)     21,254
  Federal funds sold and securities
    purchased under agreements  to resell                  657          169         826           (3,166)         37      (3,129)
  Trading securities                                       819         (344)        475              153         424         577
  Investment securities                                  1,666           (9)      1,657              131          35         166
  Other interest-earning assets                             11          506         517            1,605         712       2,317
                                                      ---------   ----------  ----------       ----------   ---------   ---------
      Total interest income                            (37,373 )     21,001     (16,372)          86,445     (22,382)     64,063
                                                      ---------   ----------  ----------       ----------   ---------   ---------


Interest expense:
  Deposit accounts                                      15,240       (4,829)     10,411            9,233      (2,895)      6,338
  Borrowings                                           (16,136)       4,320     (11,816)          48,142      (3,501)     44,641
                                                      ---------   ----------  ----------       ----------   ---------   ---------
      Total interest expense                              (896)        (509)     (1,405)          57,375      (6,396)     50,979
                                                      ---------   ----------  ----------       ----------   ---------   ---------



Increase (decrease) in net interest income            $(36,477)   $  21,510   $ (14,967)       $  29,070    $(15,986)   $ 13,084
                                                      =========   ==========  ==========       ==========   =========   =========

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

(2)  Includes loans held for sale and/or securitization.
</TABLE>
<PAGE>
Interest income in fiscal 1998 decreased $16.4 million (or 3.6%) from the level
in fiscal 1997 as a result of lower average balances of loans receivable, and,
to a lesser extent, lower average yields on mortgage-backed securities. Higher
average yields on loans receivable and higher average balances of
mortgage-backed securities partially offset the negative effect on interest
income of the lower average loan balances and lower average yields on
mortgage-backed securities.

The Bank's net yield on interest-earning assets decreased to 3.82% in fiscal
1998 from 4.14% in fiscal 1997. The decrease in the net yield primarily
reflected lower yields resulting from a shift in the composition of
interest-earning assets from loans receivable to lower yielding mortgage-backed
securities, as well as higher average balances of deposits. The increase in
average deposits was primarily due to brokered time deposits accepted in fiscal
1997 which matured during fiscal 1998. Average demand deposits also increased
during fiscal 1998 as a result of the continued expansion of the Bank's branch
network. The Bank does not currently anticipate significant reliance on brokered
deposits as a key source of funding in the future.

Interest income on loans, the largest category of interest-earning assets,
decreased by $61.3 million (or 17.0%) from fiscal 1997 primarily because of
lower average balances. Higher average yields earned on the loan portfolio
partially offset the negative effect of the lower average balances.

Lower average balances of the Bank's single-family residential loans, which
decreased $654.3 million (or 37.1%), resulted primarily from the $1.1 billion,
$560.2 million and $598.3 million exchange of single-family residential loans
held in its portfolio for mortgage-backed securities (which the Bank retained
for its own portfolio) in September 1997, March 1998, and June 1998,
respectively. The decrease was primarily responsible for a $34.5 million (or
29.4%) decrease in interest income from single-family residential loans. Average
balances of home improvement and related loans decreased $41.8 million, largely
because of securitization activity during fiscal 1998. Securitizations of credit
card loans and automobile loans were the primary reasons for the $122.3 million
and $35.6 million decline (or 10.5% and 14.4%), respectively, in average
balances of credit card loans and automobile loans.

The average yield on the loan portfolio in fiscal 1998 increased 71 basis points
(to 10.79% from 10.08%) from the average yield in fiscal 1997. Contributing to
the higher net yield was an increase in the average yield on automobile loans
which was largely responsible for a $6.4 million increase in interest income
from such loans. In addition, an increase in the average yield on single-family
residential loans (from 6.65% to 7.47%) resulted from the September 1997, March
1998, and June 1998 exchange of single-family residential loans for
mortgage-backed securities discussed above. Prior to the exchange, these loans
had a weighted average interest rate of 6.89%, 6.99%, and 6.84%, respectively.
Offsetting these amounts was a decrease in the average yield on credit card
loans, which, when coupled with the decreased average balance on such loans,
resulted in a $29.7 million decline in interest income from such loans for
fiscal 1998. During fiscal 1998, the Bank continued to reprice its credit card
portfolio as a result of ongoing competitive pressures in the credit card
industry.
<PAGE>
Interest income on mortgage-backed securities increased $41.2 million (or 57.1%)
primarily because of higher average balances. The increased mortgage-backed
securities balances in the 1998 period reflected the $1.1 billion, $560.2
million and $598.3 million exchange of single-family residential loans for
mortgage-backed securities in September 1997, March 1998 and June 1998,
respectively. The positive effect of the higher average balances was partially
offset by a decline in the average interest rates on these securities from 5.99%
to 5.70%.

Interest expense decreased $1.4 million (or 0.6%) for fiscal 1998 primarily
because of a $179.8 million decline in the average balances of repurchase
agreement transactions and a $111.0 million decline in the average balances of
Federal Home Loan Bank advances which resulted in an $11.8 million decrease in
interest expense on borrowings during fiscal 1998. Excess funds generated from
securitization activity during the year and additional deposits facilitated the
paydown of such borrowings.

The decrease in interest expense on borrowings was offset by an increase of
$10.4 million (or 6.2%) in interest expense on deposits, resulting from an
increase in average deposit balances of $396.2 million (or 9.3%), which was
partially offset by a decrease in the average rates on deposits (to 3.84% from
3.95%).

Provision for Loan Losses. The Bank's provision for loan losses increased to
$150.8 million in fiscal 1998 from $125.1 million in fiscal 1997. The $25.7
million increase was primarily due to a $32.2 million increase in the provision
for losses on consumer and other loans. The increase in the provision for loan
losses was primarily due to adverse trends in delinquencies and losses in the
subprime segment of the automobile portfolio. See "Financial Condition - Asset
Quality - Allowances for Losses."

Other Income. Other (non-interest) income increased to $641.9 million in fiscal
1998 period from $411.1 million in fiscal 1997. The $230.8 million increase in
such income was primarily attributable to an increase in gain on sales of loans
which included the $288.3 million gain on the sale of the Bank's credit card
portfolio and related operations on September 30, 1998. Also contributing to the
increase in other income was a $10.1 million increase in deposit servicing fees.
Partially offsetting these increases was a $71.9 million decrease in servicing
and securitization income.

Servicing and securitization income decreased $71.9 million to $233.3 million
from $305.2 million, primarily due to increases in the amortization of and
unrealized losses on interest-only strips. The Bank recognized net unrealized
losses on its automobile, home equity and home loan interest-only strips of
$42.9 million during fiscal 1998 compared to net unrealized gains on the
valuation of the Bank's credit card interest-only strips of $7.0 million during
1997. In addition, amortization of $99.0 million on interest-only strips related
to prior gains on sales of loans was recorded in fiscal 1998 compared to $24.8
million in fiscal 1997. Offsetting these amounts were gains of $81.6 million,
$23.1 million, $19.7 million and $3.4 million recognized on the securitization
and sale of credit card loans, automobile loans, home equity and home loan
receivables, respectively.

The $2.1 million (or 11.5%) decrease in loss on real estate held for investment
or sale was primarily attributable to an increase of $1.5 million in the gain
recorded on sales of the Bank's real estate held for sale coupled with a $0.8
million decrease in the provision for losses on such assets. See "Financial
Condition - Asset Quality - Allowances for Losses."
<PAGE>
Deposit servicing fees increased $10.1 million (or 24.1%) during fiscal 1998
primarily due to an increase in fees generated through the Bank's ATM network in
addition to increases in other deposit servicing fees resulting from the
expansion of the Bank's branch network.

Credit card fees, consisting of annual fees, late charges, cash advance charges,
interchange income, net of rebate expenses, and overlimit fees decreased to
$53.9 million in fiscal 1998 from $57.4 million in fiscal 1997. The $3.5 million
(or 6.1%) decrease was primarily attributable to an $8.8 million increase in
rebate expenses, the effects of which were due principally to the introduction
of additional programs and products designed to encourage greater usage of the
Bank's credit cards. Partially offsetting the increase in rebate expenses were
increases in certain fees resulting from changes to the fee structure for the
Bank's credit card programs which were implemented in fiscal 1997.

Operating Expenses. Operating expenses for fiscal 1998 increased $85.7 million
(or 20.5%) from the level in fiscal 1997. The primary component of the higher
operating expenses was a $38.6 million increase in salaries and employee
benefits resulting primarily from the addition of staff to the Bank's consumer
lending and branch operations. The $24.2 million increase in loan expenses was
primarily attributable to increased credit card collection and retention costs
and to increases in the valuation allowances on servicing assets. Also
contributing to the increase in operating expenses was an increase of $5.1
million in marketing expenses, primarily credit card marketing expenses.

Fiscal  1997 Compared to Fiscal  1996

Real Estate

The Real Estate Trust recorded a loss before depreciation and amortization of
debt expense of $7.8 million and an operating loss of $19.0 million for fiscal
1997, compared to a loss before depreciation and amortization of debt expense of
$13.5 million and an operating loss of $24.2 million for fiscal 1996. 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
gains on sales of properties.

Income after direct operating expenses from hotel properties increased
$2,771,000 (15.3%) in fiscal 1997 over the level achieved in fiscal 1996. In
fiscal 1997, room sales increased $4,542,000 (11.7%), while food and beverage
sales increased $565,000 (4.6%). The increase in total revenue of $5,219,000
(9.6%) exceeded the increase of $2,448,000 (6.8%) in direct operating expenses.
The revenue increases were due to improved market conditions, which permitted
management to raise average room rates while maintaining or increasing occupancy
at several of the hotels. The Real Estate Trust also acquired a new hotel in
fiscal 1997.

Income after direct operating expenses from commercial properties, which
consists of office and industrial properties, increased $2,992,000 (28.9%) in
fiscal 1997 compared to such income in fiscal 1996. Gross income increased
$3,507,000 (19.9%) in fiscal 1997, while expenses increased $515,000 (7.1%). The
improvement was the direct result of a higher leasing rate in fiscal 1997.
Expenses in fiscal 1997 were above the prior year's principally due to higher
property taxes and higher operating expenses.
<PAGE>
Other income, which includes interest income, income from other real estate
properties and miscellaneous receipts, declined by $996,000 (19.9%) in fiscal
1997 primarily due to lower cash balances on which interest was earned. Other
income in fiscal 1996 also included $695,000 received as refunds of transfer
taxes paid in a preceding year.

Land parcels and other expense increased $46,000 (2.8%) in fiscal 1997 as the
result of higher real estate taxes.

Interest expense increased $315,000 (0.8%) in fiscal 1997, primarily because of
the higher level of borrowings in the current period. The average balance of
outstanding borrowings increased to $400.3 million for fiscal 1997 from $395.6
million for the prior year. The change in average borrowings occurred as a
result of mortgage loan refinancings and unsecured note sales. The average cost
of borrowings was 10.30% in fiscal 1997 and 10.31% in fiscal 1996.

Depreciation increased $523,000 (5.2%) in fiscal 1997 as a result of new tenant
improvements, capital replacements, and the addition of a new income-producing
property.

Advisory, management and leasing fees paid to related parties increased $572,000
(7.7%) in fiscal 1997. The advisory fee in fiscal 1997 was $311,000 per month,
compared to $301,000 per month for the first six months of fiscal 1996 and
$306,000 per month for the second six months of fiscal 1996, which resulted in
an aggregate increase of $93,000 (2.6%). Management and leasing fees were higher
by $479,000 (12.7%) in fiscal 1997 as a result of increased gross income on
which fees are based. General and administrative expense decreased $129,000
(9.2%) in fiscal 1997, as a result of lower administrative costs.

Equity in earnings of unconsolidated entities represents the Real Estate Trust's
share of earnings in its partnership investments. For fiscal 1997, the Real
Estate Trust recorded earnings of $4,150,000 from such investments compared to
earnings of $3,374,000 in the prior year.

Gain on sale of property in fiscal 1997 represents the gain on the sale of a
purchase-leaseback investment located in Casper, Wyoming and the gain on the
condemnation of a portion of a land parcel located in Atlanta, Georgia.

Banking

Overview. The Bank recorded operating income of $80.2 million for the year ended
September 30, 1997 ("fiscal 1997"), compared to operating income of $46.1
million for the year ended September 30, 1996 ("fiscal 1996"). The increase in
income for fiscal 1997 was primarily attributable to a $67.3 million increase in
other (non-interest) income and a $13.2 million increase in net interest income
before provision for loan losses, the effect of which was partially offset by a
$9.4 million increase in the provision for loan losses and a $37.0 million
increase in operating (non-interest) expense reflecting in part additional
expenses associated with steps taken by management to improve credit quality and
expand the Bank's core businesses, including the consumer loan program and
deposit franchise.
<PAGE>
Net Interest Income. Net interest income, before the provision for loan losses,
increased $13.2 million (or 6.6%) in fiscal 1997. The Bank would have recorded
interest income of $6.9 million in fiscal 1997 if the Bank's nonaccrual assets
and restructured loans had been current in accordance with their original terms.
Interest income of $0.7 million was actually recorded on non-accrual assets and
restructured loans during the fiscal year. The Bank's net interest income in
future periods will continue to be adversely affected by the Bank's non-
performing assets. See "Financial Condition Asset Quality - Non-Performing
Assets."

Interest income in fiscal 1997 increased $64.2 million from the level in fiscal
1996, primarily as a result of higher average balances of loans receivable and,
to a lesser extent, mortgage-backed securities. The effect on interest income of
higher average balances was offset in part by lower average yields earned by the
Bank on its loan portfolio.

The Bank's net yield on interest-earning assets decreased to 4.14% in fiscal
1997 from 4.81% in fiscal 1996. The decrease in the net yield primarily
reflected lower yields earned on certain of the Bank's interest-earning assets
resulting from a decline in market rates as well as lower introductory and
promotional rates on certain products which the Bank has offered to new and
existing customers in an effort to stimulate usage.

Interest income on loans, the largest category of interest-earning assets,
increased by $43.0 million (or 13.5%) from fiscal 1996 primarily because of
higher average balances, which were partially offset by lower average yields on
the loan portfolio.

Higher average balances on credit card loans, which increased $159.5 million
(15.8%). The increase was primarily responsible for a $3.4 million (or 2.2%)
increase in interest income from credit card loans. Higher average balances of
automobile loans, which increased $64.2 million (or 35.1%), resulted primarily
from the higher origination volume of such loans, and was largely responsible
for a $16.2 million (or 75.3%) increase in interest income on automobile loans.
Interest income on the Bank's single-family residential loans increased by $15.8
million (or 15.6%) primarily because of increased originations, which resulted
in an increase of $355.8 million (or 25.2%) in the average balances of such
loans. Average balances of home equity credit line loans increased by $60.0
million (or 74.8%) primarily because of the $119.2 million purchase of such
loans in December 1996. Interest income on home equity credit line loans
increased by $5.7 million (or 124.4%) in the current year.

The average yield on the loan portfolio in fiscal 1997 decreased by 73 basis
points (to 10.08% from 10.81%) from the average yield in fiscal 1996. The lower
net yield was primarily due to a 182 basis point decrease in the average net
yield on credit card loans from 15.50% to 13.68%, the effect of which partially
offset the positive effect that the higher average balances had on income. The
decline in the net yield was primarily a result of marketing strategies to
introduce lower introductory rates to new customers, as well as a new program
offering reduced interest rates to previously risk-repriced accounts in an
attempt to encourage payments from delinquent customers. Also contributing to
the decreased average yield on the loan portfolio was a decrease in the average
yield on single-family residential loans from 7.21% to 6.65%. An increase in the
average yield on automobile loans from 11.75% to 15.24%, primarily due to higher
yields earned on loans originated by one of the Bank's operating subsidiaries,
partially offset the negative effect of the lower average yields discussed
above.
<PAGE>
Interest income on mortgage-backed securities increased $21.3 million (or 41.7%)
primarily because of higher average balances. The increased mortgage-backed
securities balances in fiscal 1997 reflected the purchase of $649.7 million of
mortgage-backed securities near the end of fiscal 1996 and the $1.1 billion
securitization of single-family residential loans in September 1997. The
positive effect of the higher average balances was partially offset by a
decrease in the average interest rates on these securities from 6.11% to 5.99%.

Interest expense increased $51.0 million (or 27.0%) for fiscal 1997 primarily
because of an increase of $764.9 million (or 206.8%) in the average balances of
the Bank's borrowings. The increase in the average balances of borrowings
resulted in an increase of $44.6 million in interest expense for fiscal 1997 for
such liabilities. The increase in interest expense on borrowings is primarily
due to a $22.8 million, a $13.7 million and a $6.9 million increase in interest
expense on securities sold under repurchase agreements, Federal Home Loan Bank
advances and subordinated debentures, respectively, resulting primarily from
higher average balances of such borrowings. The negative effect of the higher
average balances was partially offset by a decrease in the average borrowing
rate (to 6.25% from 7.10%), which reflected an increase in lower-yielding FHLB
advances and securities sold under repurchase agreements.

An increase of $6.3 million in interest expense on deposits, the largest
category of interest-bearing liabilities, also contributed to the increased
interest expense. Interest expense on deposits increased primarily because of a
$235.1 million increase in the average balances.

Provision for Loan Losses. The Bank's provision for loan losses increased to
$125.1 million in fiscal 1997 from $115.7 million in fiscal 1996. The $9.4
million increase over the prior year was primarily attributable to a $7.8
million increase in the provision for losses on credit card loans. See
"Financial Condition - Asset Quality - Allowances for Losses."

Other Income. The $67.3 million (or 19.6%) increase in other (non-interest)
income to $411.1 million in fiscal 1997 from $343.8 million in fiscal 1996 was
primarily attributable to increases in servicing and securitization income,
credit card fees, deposit servicing fees and a decrease in loss on real estate
held for investment or sale.

Servicing and securitization income increased $20.2 million to $305.2 million
from $285.0 million, primarily due to gains recognized on the securitization and
sale of credit card loans, automobile loans, home equity and home loan
receivables of $26.2 million, $26.9 million, $11.8 million and $7.4 million,
respectively. Management expects that the relative impact of gains recognized
under SFAS 125 on the Bank's earnings will diminish as the gains associated with
these and other transactions are amortized. In addition, in accordance with SFAS
125, the Bank recognized a $7.0 million net unrealized gain on the valuation of
its interest-only strips. This gain represents the September 30, 1997
market-value adjustment on the interest-only strips related to the credit card
securitized assets. Offsetting these amounts was a decrease of $36.3 million (or
13.8%) in loan servicing fees which was primarily due to a decrease of $49.0
million in excess spread income earned by the Bank for servicing its portfolios
of securitized credit card loans. The decrease in such excess spread income for
fiscal 1997 resulted primarily from an increase in charge-offs on securitized
credit card loans which is consistent with management's expectations and
generally reflects the trends that are affecting the credit card industry as a
whole. See "Financial Condition - Asset Quality - Allowances for Losses."
<PAGE>
Credit card fees, consisting of membership fees, late charges, over-the-limit
fees, interchange fees and cash advance charges, increased $26.6 million (or
86.5%) in fiscal 1997 from the level in fiscal 1996. The increase was primarily
attributable to the impact of changes in the fee structure for the Bank's credit
card programs which were implemented in fiscal 1996 and 1997.

The $12.0 million (or 40.1%) increase in deposit servicing fees resulted
primarily from the additional fees generated through the Bank's ATM network,
and, to a lesser extent, an increase in the number of deposit accounts
outstanding during fiscal 1997.

The $5.7 million (or 23.5%) decrease in loss on real estate held for investment
or sale was primarily attributable to a decrease of $6.7 million in the
provision for losses on such assets, which was partially offset by a decrease of
$1.1 million in the gain recorded on sales of the Bank's real estate held for
investment or sale.

Operating Expenses. Operating expenses for fiscal 1997 increased $37.0 million
(9.7%) from the level in fiscal 1996. The main components of the higher
operating expenses were increases in salaries and employee benefits, marketing
and data processing. The $33.6 million increase in salaries and employee
benefits resulted primarily from the addition of staff to the Bank's credit
card, consumer lending, branch and systems operations. The $20.8 million
increase in marketing expenses was primarily attributable to a $14.4 million
increase in marketing expenses associated with the credit card program as the
Bank continues to focus on increased originations of such loans, as well as a
$5.3 million increase in marketing expenses associated with the Bank's deposit
base. The $6.9 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 1997. The $32.3
million decrease in deposit insurance premiums, which partially offset the
expense increases discussed above, was primarily because of the one-time SAIF
assessment recorded by the Bank in fiscal 1996. See "Business - Regulation -
Deposit Insurance Premiums."

<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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


    (a)  Report of Independent Public Accountants.

    (b)  Consolidated Balance Sheets - As of September 30,
         1998 and 1997.

    (c)  Consolidated Statements of Operations - For the
         years ended September 30, 1998, 1997 and 1996.

    (d)  Consolidated Statements of Shareholders' Deficit - For the
         years ended September 30, 1998, 1997 and 1996.

    (e)  Consolidated Statements of Cash Flows - For the 
         years ended September 30, 1998, 1997 and 1996.

    (f)  Notes to Consolidated Financial Statements.

The selected quarterly financial data included in Note 34 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
"Business - General."
<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, 1998
and 1997, and the related consolidated statements of operations, shareholders'
deficit, and cash flows for each of the three years in the period ended
September 30, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1998, in conformity with generally accepted
accounting principles.




Arthur Andersen LLP



Washington, D.C.
December 2, 1998
<PAGE>
<TABLE>
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST
===============================================================================================================================
                                                                                                       September 30
                                                                                            -----------------------------------
(In thousands)                                                                                    1998              1997
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>               <C>
ASSETS
Real Estate
Income-producing properties
    Hotel                                                                                         $  165,805        $  128,557
    Office and industrial                                                                            110,257           109,628
    Other                                                                                              3,889             4,265
                                                                                            ----------------- -----------------
                                                                                                     279,951           242,450
    Accumulated depreciation                                                                         (96,072)          (85,915)
                                                                                            ----------------- -----------------
                                                                                                     183,879           156,535
Land parcels                                                                                          40,110            42,160
Construction in progress                                                                               8,694             2,480
Cash and cash equivalents                                                                             13,950            18,248
Other assets                                                                                          76,799            81,150
                                                                                            ----------------- -----------------
                    Total real estate assets                                                         323,432           300,573
-------------------------------------------------------------------------------------------------------------------------------
Banking
Cash and due from banks                                                                              336,858           238,169
Interest-bearing deposits                                                                            499,598            48,722
Federal funds sold and securities purchased under agreements to resell                               380,000           365,000
Loans held for sale                                                                                   56,287           102,749
Loans held for securitization and sale                                                               125,000           220,000
Investment securities (market value $44,528 and $5,012, respectively)                                 43,999             4,998
Trading securities                                                                                    11,319             7,899
Mortgage-backed securities (market value $2,014,819 and $1,984,667, respectively)                  2,025,817         1,985,707
Loans receivable (net of allowance for losses of $60,157 and $105,679, respectively)               2,533,957         2,122,899
Federal Home Loan Bank stock                                                                          49,036            33,170
Real estate held for investment or sale (net of allowance for losses of $153,766 and 
  $140,936, respectively)                                                                             69,025            94,290
Property and equipment, net                                                                          285,916           273,562
Goodwill and other intangible assets, net                                                             30,879             8,846
Interest only strips, net                                                                             13,508            87,011
Servicing assets, net                                                                                 27,156            41,721
Other assets                                                                                         232,794           422,670
                                                                                            ----------------- -----------------
                    Total banking assets                                                           6,721,149         6,057,413
-------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                                     $ 7,044,581       $ 6,357,986
-------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Real Estate
Mortgage notes payable                                                                            $  198,874        $  180,204
Notes payable - secured                                                                              200,000           175,000
Notes payable - unsecured                                                                             50,335            46,633
Deferred gains - real estate                                                                         112,883           112,883
Accrued dividends payable - preferred shares of beneficial interest                                   34,049            36,231
Other liabilities and accrued expenses                                                                39,895            39,959
                                                                                            ----------------- -----------------
                    Total real estate liabilities                                                    636,036           590,910
-------------------------------------------------------------------------------------------------------------------------------
Banking
Deposit accounts                                                                                   4,888,230         4,893,756
Securities sold under repurchase agreements and other short-term borrowings                          491,754            74,821
Notes payable                                                                                            430             7,019
Federal Home Loan Bank advances                                                                      352,027           188,511
Custodial accounts                                                                                     5,926             2,809
Amounts due to banks                                                                                  40,601            44,835
Other liabilities                                                                                    112,668           120,416
Capital notes -- subordinated                                                                        250,000           250,000
                                                                                            ----------------- -----------------
                    Total banking liabilities                                                      6,141,636         5,582,167
-------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interest held by affiliates                                                                  72,242            51,388
Minority interest -- other                                                                           218,306           218,306
-------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES                                                                                  7,068,220         6,442,771
-------------------------------------------------------------------------------------------------------------------------------
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                                                                                              (81,936)         (142,642)
Net unrealized holding loss                                                                               44              (396)
                                                                                            ----------------- -----------------
                                                                                                      18,209           (42,937)
Less cost of 1,814,688 common shares of beneficial interest in treasury                              (41,848)          (41,848)
                                                                                            ----------------- -----------------
TOTAL SHAREHOLDERS' DEFICIT                                                                          (23,639)          (84,785)
-------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                                                      $ 7,044,581       $ 6,357,986
-------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<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)                                           1998               1997              1996
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                <C>               <C>
REAL ESTATE
Income
Hotels                                                                             $   71,424         $   59,464        $   54,245
Office and industrial properties                                                       22,883             21,097            17,590
Other                                                                                   4,285              4,008             5,004
                                                                             -----------------  ----------------- -----------------
Total income                                                                           98,592             84,569            76,839
-----------------------------------------------------------------------------------------------------------------------------------
Expenses
Direct operating expenses:
    Hotels                                                                             45,516             38,523            36,075
    Office and industrial properties                                                    7,631              7,766             7,251
    Land parcels and other                                                              1,607              1,683             1,637
Interest expense                                                                       42,445             40,155            39,840
Amortization of debt expense                                                              372                664               674
Depreciation                                                                           11,170             10,543            10,020
Advisory, management and leasing fees - related parties                                 8,742              7,995             7,423
General and administrative                                                              1,153              1,272             1,401
                                                                             -----------------  ----------------- -----------------
Total expenses                                                                        118,636            108,601           104,321
-----------------------------------------------------------------------------------------------------------------------------------
Equity in earnings of unconsolidated entities                                           1,918              4,150             3,374
Gain (loss) on sale of property                                                          (331)               895               (68)
-----------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE OPERATING LOSS                                                         $  (18,457)        $  (18,987)       $  (24,176)
-----------------------------------------------------------------------------------------------------------------------------------
BANKING
Interest income
Loans                                                                              $  299,566         $  360,842        $  317,847
Mortgage-backed securities                                                            113,441             72,209            50,955
Trading securities                                                                      2,005              1,530               953
Investment securities                                                                   2,138                481               315
Other                                                                                  18,657             17,314            18,126
                                                                             -----------------  ----------------- -----------------
Total interest income                                                                 435,807            452,376           388,196
-----------------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposit accounts                                                                      179,318            168,907           162,569
Short-term borrowings                                                                  33,294             47,378            10,407
Long-term borrowings                                                                   25,798             23,530            15,860
                                                                             -----------------  ----------------- -----------------
Total interest expense                                                                238,410            239,815           188,836
                                                                             -----------------  ----------------- -----------------
Net interest income                                                                   197,397            212,561           199,360
Provision for loan losses                                                            (150,829)          (125,115)         (115,740)
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses                                    46,568             87,446            83,620
-----------------------------------------------------------------------------------------------------------------------------------
Other income
Servicing and securitization income                                                   233,271            305,192           284,964
Credit card fees                                                                       53,881             57,381            30,765
Deposit servicing fees                                                                 51,997             41,893            29,900
Gain on sales of trading securities, net                                                  982              1,203             1,158
Net unrealized holding loss on trading securities                                      (1,258)                --                --
Loss on real estate held for investment or sale, net                                  (16,539)           (18,688)          (24,413)
Gain on sales of loans, net                                                           290,434              1,527             1,732
Other                                                                                  29,089             22,573            19,713
                                                                             -----------------  ----------------- -----------------
Total other income                                                                    641,857            411,081           343,819
-----------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
</TABLE>
<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)                                           1998               1997              1996
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                <C>               <C>
BANKING (Continued)
Operating expenses
Salaries and employee benefits                                                     $  199,557         $  160,949        $  127,370
Loan                                                                                   54,147             29,943            28,284
Property and equipment                                                                 28,114             24,397            20,705
Marketing                                                                              79,642             74,504            53,705
Data processing                                                                        45,419             48,138            41,270
Depreciation and amortization                                                          33,989             28,708            24,635
Deposit insurance premiums                                                              4,859              5,033            37,362
Amortization of goodwill and other intangible assets                                    5,862              2,615             1,775
Other                                                                                  52,429             44,059            46,222
                                                                             -----------------  ----------------- -----------------
Total operating expenses                                                              504,018            418,346           381,328
-----------------------------------------------------------------------------------------------------------------------------------
BANKING OPERATING INCOME                                                           $  184,407         $   80,181        $   46,111
-----------------------------------------------------------------------------------------------------------------------------------

TOTAL COMPANY
Operating income                                                                   $  165,950         $   61,194        $   21,935
Income tax provision                                                                   42,869             12,810             8,301
                                                                             -----------------  ----------------- -----------------
Income before extraordinary item and minority interest                                123,081             48,384            13,634
Extraordinary item:
    Loss on early extinguishment of debt, net of taxes                                 (9,601)                --                --
                                                                             -----------------  ----------------- -----------------
Income before minority interest                                                       113,480             48,384            13,634
Minority interest held by affiliates                                                  (22,043)            (6,848)           (3,962)
Minority interest -- other                                                            (25,313)           (22,676)           (9,750)
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY NET INCOME (LOSS)                                                    $   66,124         $   18,860         $     (78)
-----------------------------------------------------------------------------------------------------------------------------------

NET INCOME (LOSS) AVAILABLE TO COMMON
    SHAREHOLDERS                                                                   $   60,706         $   13,442        $   (5,498)

NET INCOME (LOSS) PER COMMON SHARE
Income before extraordinary item and minority interest                             $    24.38          $    8.90         $    1.70
Extraordinary item:
    Loss on early extinguishment of debt, net of taxes                                  (1.99)               --                --
                                                                             -----------------  ----------------- -----------------
Income before minority interest                                                         22.39               8.90              1.70
Minority interest held by affiliates                                                    (4.57)             (1.42)            (0.82)
Minority interest -- other                                                              (5.24)             (4.70)            (2.02)
-----------------------------------------------------------------------------------------------------------------------------------

NET INCOME (LOSS) PER COMMON SHARE                                                 $    12.58          $    2.78        $    (1.14)
-----------------------------------------------------------------------------------------------------------------------------------

The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<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)                                      1998              1997             1996
------------------------------------------------------------------------------------------------------------------------------------
<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                                                                       (142,642)         (156,084)        (123,943)

Net income (loss)                                                                         66,124            18,860              (78)

Dividends:
    Real Estate Trust preferred shares of beneficial interest:
        Distributions ($0.97 per share in 1996)                                               --                --             (500)
        Distributions payable ($10.50, $10.50 and $61.17 per share in 1998, 1997 
          and 1996, respectively)                                                         (5,418)           (5,418)         (31,563)

                                                                                 ----------------  ---------------- ----------------
End of year                                                                              (81,936)         (142,642)        (156,084)
                                                                                 ----------------  ---------------- ----------------


Net unrealized holding gain (losses)                                                          44              (396)          (1,500)
                                                                                 ----------------  ---------------- ----------------


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

TOTAL SHAREHOLDERS' DEFICIT                                                           $  (23,639)       $  (84,785)      $  (99,331)
------------------------------------------------------------------------------------------------------------------------------------

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

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

                                                                                             For the Year Ended September 30
                                                                                  --------------------------------------------------
(In thousands)                                                                         1998             1997             1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net loss                                                                               $  (22,048)      $   (8,531)      $  (15,924)
Adjustments to reconcile net loss to net cash provided by
  operating activities:
    Depreciation                                                                           11,170           10,543           10,020
    (Gain) loss on sale of property                                                           328             (895)              68
    Early extinguishment of debt                                                            9,601               --               --
    (Increase) decrease in accounts receivable and accrued income                          (1,229)              17           (4,869)
    (Increase) decrease in deferred tax asset                                                 954           (3,252)           1,881
    Increase in accounts payable and accrued expenses                                       2,708            1,058              430
    (Increase) decrease in tax sharing receivable                                          (6,545)           2,492           14,533
    Amortization of debt expense                                                              372              664              674
    Equity in earnings of unconsolidated entities                                          (2,161)          (4,150)          (3,374)
    Other                                                                                  21,588            8,965            5,593
                                                                                  ---------------- ---------------- ----------------
                                                                                           14,738            6,911            9,032
                                                                                  ---------------- ---------------- ----------------
Banking
Net income                                                                                 88,172           27,391           15,846
Adjustments to reconcile net income to net cash provided by
    operating activities:
    Amortization (accretion) of premiums, discounts and net deferred loan fees              8,727            7,130             (163)
    Depreciation and amortization                                                          33,989           28,708           24,635
    Provision for loan losses                                                             150,829          125,115          115,740
    Capitalized interest on real estate under development                                  (1,954)          (2,212)          (3,462)
    Proceeds from sales of trading securities                                             320,942          430,938          363,364
    Net fundings of loans held for sale and/or securitization                            (366,915)        (697,593)        (690,589)
    Proceeds from sales of loans held for sale and/or securitization                    2,005,143        2,511,163        1,961,242
    Proceeds from sales of spread accounts                                                 36,000          144,200           42,140
    Gain on sale of credit card relationships                                            (288,332)              --               --
    Gain on sales of real estate held for sale                                             (2,609)          (1,156)          (2,278)
    Provision for losses on real estate held for investment or sale                        18,860           19,623           26,341
    Gain on sales of trading securities, net                                                 (982)          (1,203)          (1,158)
    (Increase) decrease in interest-only strips                                            73,503          (87,011)              --
    (Increase) decrease in excess spread assets                                                --           42,602           (8,580)
    (Increase) decrease in servicing assets                                                14,550           (8,948)          (4,238)
    Increase in goodwill and other intangible assets                                      (22,017)          (6,430)           1,795
    (Increase) decrease in other assets                                                   147,079         (207,883)        (103,211)
    Increase (decrease) in other liabilities                                              (11,982)          21,741           23,724
    Increase (decrease) in tax sharing payable                                              6,545           (2,492)         (14,533)
    Minority interest held by affiliates                                                   22,043            6,848            3,962
    Minority interest - other                                                               9,750            9,750            9,750
    Other                                                                                 (29,752)           8,006          (12,440)
                                                                                  ---------------- ---------------- ----------------
                                                                                        2,211,589        2,368,287        1,747,887
                                                                                  ---------------- ---------------- ----------------
Net cash provided by operating activities                                               2,226,327        2,375,198        1,756,919
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties                                                         (19,815)         (10,120)          (7,408)
Property acquisitions                                                                     (26,650)          (4,709)              --
Property sales                                                                                 --            1,399            1,812
Equity investment in unconsolidated entities                                                1,348            1,723              639
Other                                                                                           2               43               50
                                                                                  ---------------- ---------------- ----------------
                                                                                          (45,115)         (11,664)          (4,907)
                                                                                  ---------------- ---------------- ----------------
Banking
Net proceeds from maturities of investment securities                                       5,000            5,000            4,410
Net proceeds from redemption of Federal Home Loan Bank stock                                2,504            9,482               --
Net proceeds from sales of real estate                                                     25,305           23,624           58,874
Proceeds from the sale of credit card receivables                                       1,337,678               --               --
Net fundings of loans receivable                                                       (2,983,595)      (1,779,711)      (1,711,308)
Principal collected on mortgage-backed securities                                       1,180,995          771,095          221,698
Purchases of Federal Home Loan Bank stock                                                 (18,370)         (10,712)              --
Purchases of investment securities                                                        (44,001)              --           (9,725)
Purchases of mortgage-backed securities                                                        --         (311,554)        (649,688)
Purchases of loans receivable                                                          (1,645,458)        (892,367)        (391,878)
Purchases of property and equipment                                                       (58,106)         (77,859)         (69,749)
Disbursements for real estate held for investment or sale                                 (14,814)         (14,199)         (14,447)
Other                                                                                      10,637            1,036           (5,950)
                                                                                  ---------------- ---------------- ----------------
                                                                                       (2,202,225)      (2,276,165)      (2,567,763)
                                                                                  ---------------- ---------------- ----------------
Net cash used in investing activities                                                  (2,247,340)      (2,287,829)      (2,572,670)
------------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
</TABLE>
<PAGE>
<TABLE>

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

                                                                                             For the Year Ended September 30
                                                                                  --------------------------------------------------
(In thousands)                                                                         1998             1997             1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>              <C>              <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing                                                       $   60,929       $   27,072         $     --
Principal curtailments and repayments of mortgages                                        (38,602)         (19,977)          (8,573)
Proceeds from secured note financing                                                      224,075               --            2,500
Repayments of secured notes                                                              (199,075)          (2,500)            (500)
Proceeds from sales of unsecured notes                                                      5,802            5,822            3,708
Repayments of unsecured notes                                                              (2,100)          (1,556)          (2,398)
Costs of obtaining financings                                                              (7,295)            (626)            (201)
Loan prepayment fees                                                                      (10,055)              --               --
Dividends paid - preferred shares of beneficial interest                                   (7,600)            (750)            (500)
                                                                                  ---------------- ---------------- ----------------
                                                                                           26,079            7,485           (5,964)
                                                                                  ---------------- ---------------- ----------------
Banking
Proceeds from customer deposits and sales of certificates of deposit                   24,799,407       18,915,801       15,312,125
Customer withdrawals of deposits and payments for maturing certificates of deposit    (24,804,933)     (18,186,082)     (15,307,340)
Net increase (decrease) in securities sold under repurchase agreements                    384,699         (574,217)         574,400
Advances from the Federal Home Loan Bank                                                1,759,817          877,483          429,459
Repayments of advances from the Federal Home Loan Bank                                 (1,596,301)        (958,037)        (315,446)
Proceeds from other borrowings                                                         16,559,882        6,271,193        2,469,675
Repayments of other borrowings                                                        (16,534,237)      (6,259,554)      (2,417,606)
Cash dividends paid on preferred stock                                                     (9,750)          (9,750)          (9,750)
Cash dividends paid on common stock                                                        (6,500)          (9,000)          (8,500)
Repayment of capital notes - subordinated                                                      --          (10,000)              --
Net proceeds received from capital notes - subordinated                                        --           96,112               --
Net proceeds from issuance of preferred stock                                                  --          144,000               --
Other                                                                                       3,117           (4,605)               2
                                                                                  ---------------- ---------------- ----------------
                                                                                          555,201          293,344          727,019
                                                                                  ---------------- ---------------- ----------------
Net cash provided by financing activities                                                 581,280          300,829          721,055
------------------------------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                                      560,267          388,198          (94,696)
Cash and cash equivalents at beginning of year                                            670,139          281,941          376,637
                                                                                  ---------------- ---------------- ----------------
Cash and cash equivalents at end of year                                              $ 1,230,406       $  670,139       $  281,941
------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information: Cash paid during the year
    for:
        Interest (net of amount capitalized)                                           $  276,817       $  267,758       $  237,568
        Income taxes paid (refunded)                                                        7,454           (2,552)           4,356
        Shares of Saul Centers, Inc. common stock                                           4,806            6,111            4,864
    Cash received during the year from:
        Dividends on shares of Saul Centers, Inc. common stock                              3,014            2,539            1,952
        Distributions from Saul Holdings Limited Partnership                                5,567            5,453            5,453

Supplemental disclosures of noncash activities:
    Rollovers of notes payable - unsecured                                                  5,510            4,195            3,725
    Loans held for sale exchanged for trading securities                                  320,695          430,786          363,257
    Loans receivable transferred to loans held for sale and/or securitization           1,788,831        2,026,478        1,594,262
    Loans made in connection with the sale of real estate                                   7,274            7,769           46,537
    Loans receivable transferred to real estate acquired in settlement of loans             4,938            4,706            5,972
    Loans receivable exchanged for mortgage-backed securities held-to-maturity          1,225,279        1,136,180               --
    Loans held for sale transferred to loans receivable                                        --               --            3,146


------------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<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, 1998. 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.

ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS

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

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

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

NET INCOME (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 1998, 1997
and 1996, 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, 1997 and 1996 to conform with the
presentation used for the year ended September 30, 1998.

ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED

SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") was issued in June
1997 and establishes accounting standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS 130 also requires an enterprise to classify
items of other comprehensive income by their nature in a financial statement and
to display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS 130 will not have an
impact on the Trust's financial condition or its results of operations.

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), was also issued in June 1997. SFAS 131 establishes
accounting standards for the way business enterprises report information about
operating segments in annual and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 requires
that a business enterprise report financial and descriptive information,
including profit or loss, certain specific revenue and expense items, and
segment assets, about its reportable operating segments. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by management in deciding
how to allocate resources and in assessing performance. SFAS 131 is effective
for financial statements for periods beginning after December 15, 1997. Because
SFAS 131 addresses only disclosure related issues, its adoption will not have an
impact on the Trust's financial condition or its results of operations.
<PAGE>
AICPA Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"), was issued during fiscal 1998. SOP 98-5 generally
requires that start-up costs be expensed as incurred. However, certain start-up
costs, including the costs of acquiring or constructing long-lived assets and
getting them ready for their intended use, are not covered by SOP 98-5. SOP 98-5
is effective for financial statements for fiscal years beginning after December
15, 1998. The impact of the adoption of SOP 98-5 on the Trust's financial
condition and its results of operations has not been determined.

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 lesser of their
estimated useful lives or the lives of the related leases using the
straight-line method.

INCOME RECOGNITION

The Real Estate Trust derives room and other revenues from the operations of its
hotel properties. 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.


<PAGE>
Liabilities

The carrying amount of mortgage notes payable and notes payable - secured
approximates their fair value since most of the debt has been financed in recent
periods at prevailing market interest rates. The fair value of Notes payable -
unsecured is based on the rates currently offered by the Real Estate Trust for
similar notes. At September 30, 1998 and 1997 the fair value of Notes payable -
unsecured was $51.6 and $47.9 million, respectively.

C.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - THE BANK

Chevy Chase Bank, F.S.B. is a federally chartered and federally insured stock
savings bank and, as such, is subject to comprehensive regulation, examination
and supervision by the Office of Thrift Supervision ("OTS") and by the Federal
Deposit Insurance Corporation ("FDIC"). The Bank is principally engaged in the
business of attracting deposits from the public and using such deposits,
together with borrowings and other funds, to make loans secured by real estate,
primarily residential mortgage loans, and various types of consumer loans and
commercial 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.

Regulation D pursuant to the Federal Reserve Act requires the Bank to maintain
reserves in the form of cash and deposits at the Federal Reserve Bank. The total
average reserve balances maintained by the Bank, which consisted primarily of
cash, were $146.5, $114.6, and $105.2 million during the years ended September
30, 1998, 1997, and 1996, respectively.

LOANS HELD FOR SALE

The Bank engages in mortgage banking activities. At September 30, 1998 and 1997,
loans held for sale are composed of single-family residential loans and home
improvement and related loans originated or purchased for sale in the secondary
market and are carried at 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 loans expected to be sold
during any future reinvestment period.

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


<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. Investment and mortgage-backed securities classified as
"held-to-maturity" are reported at amortized cost. Investment and
mortgage-backed securities classified as "available-for-sale" are reported at
fair value, with unrealized gains and losses, net of the related tax effect,
reported as a separate component of stockholders' equity. Investment and
mortgage-backed securities classified as "trading" are reported at fair value,
with unrealized gains and losses included in earnings. All investment securities
and mortgage-backed securities are classified as held-to-maturity at September
30, 1998 and 1997. 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.

Net unrealized holding gains, net of the related income tax effect, amounted to
$58,000 as of September 30, 1998 and resulted from the transfer of investment
securities and mortgage-backed securities previously classified as
available-for-sale to held-to-maturity, are reported as a separate component of
stockholders' equity and are being accreted over the remaining lives of the
securities using the level-yield method.

TRADING SECURITIES

As part of its mortgage banking activities, the Bank exchanges loans held for
sale for mortgage-backed securities and then sells the mortgage-backed
securities, which are classified as trading securities, to third party investors
in the month of issuance. Proceeds from sales of trading securities were $320.9,
$430.9 and $363.4 million during the years ended September 30, 1998, 1997 and
1996, respectively. The Bank realized net gains of $1.0, $1.2 and $1.2 million
on the sales of trading securities for the years ended September 30, 1998, 1997
and 1996, respectively. Gains and losses on sales of trading securities are
determined using the specific identification method. There were no
mortgage-backed securities classified as trading securities at September 30,
1998 and 1997.

At September 30, 1998 and 1997, the Bank held automobile receivables-backed
securities with carrying amounts of $11.3 and $7.9 million, respectively, which
were classified as trading securities. These securities were established in
conjunction with two automobile loan securitization transactions and represent
subordinate classes of certificates retained by the Bank. The Bank recognized
net unrealized holding losses on trading securities of $1.3 million at September
30, 1998. There were no unrealized holding gains or losses on these securities
during the year ended September 30, 1997. See Note 16.

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.


<PAGE>
CREDIT CARD FEES AND COSTS

Prior to the sale of the credit card portfolio on September 30, 1998, credit
card membership fees were deferred and recognized as income on a straight-line
basis over the period the fee entitled the cardholder to use the card, which was
one year. Credit card origination costs were deferred and recognized as a
reduction of income on a straight-line basis over the privilege period which was
generally one year. See Note 8.

IMPAIRED LOANS

A loan is considered impaired when, based on all current information and events,
it is probable that the Bank will be unable to collect all amounts due according
to the contractual terms of the agreement, including all scheduled principal and
interest payments. Loans reviewed by the Bank for impairment include real estate
and commercial loans and loans modified in a troubled debt restructuring. Large
groups of smaller-balance homogeneous loans that have not been modified in a
troubled debt restructuring are collectively evaluated for impairment, which for
the Bank include residential mortgage loans and consumer loans. Impaired loans
are measured based on the present value of expected future cash flows,
discounted at the loan's effective interest rate or, as a practical expedient,
impairment may be measured based on the loan's observable market price, or, if
the loan is collateral-dependent, the fair value of the collateral. When the
measure of the impaired loan is less than the recorded investment in the loan,
the impairment is recorded through a valuation allowance. Loans for which
foreclosure is probable continue to be accounted for as loans. Prior to the sale
of the credit card portfolio on September 30, 1998, certain credit card loans
for which customers had agreed to modified payment terms were also classified as
impaired loans. See Note 8.

Each impaired real estate or commercial loan is evaluated individually to
determine the income recognition policy. Generally, payments received are
applied in accordance with the contractual terms of the note or as a reduction
of principal. Interest income on impaired credit card loans was recognized using
the interest rate of the loan and the accrual method. Interest income continued
to accrue on delinquent credit card loans until such loan was either paid or
charged off.

At September 30, 1998, the Bank had one impaired real estate loan with a book
value of $86,000. At September 30, 1997, the Bank had two impaired real estate
loans with an aggregate book value of $1.0 million before the related allowance
for losses of $545,000. At September 30, 1997, the Bank had impaired credit card
loans with a carrying value of $116.9 million, before the related allowance for
losses of $18.9 million. The average recorded investment in impaired credit card
and real estate loans for the years ended September 30, 1998, 1997 and 1996 was
$113.2, $99.0, and $49.8 million, respectively. The Bank recognized interest
income of $14.4, $13.1, and $7.3 million on its impaired loans for the years
ended September 30, 1998, 1997 and 1996, respectively.


<PAGE>
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 and past loss
experience.

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

ACCRUED INTEREST RECEIVABLE ON LOANS

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

REAL ESTATE HELD FOR INVESTMENT OR SALE

Real Estate Held for Investment

At September 30, 1998 and 1997, real estate held for investment consists of
developed land owned by one of the Bank's subsidiaries. Real estate held for
investment is carried at the lower of cost or net realizable value. See Note 14.

Real Estate Held for Sale

Real estate held for sale consists of real estate acquired in settlement of
loans ("REO") and is carried at the lower of cost or fair value (less estimated
selling costs). Costs relating to the development and improvement of property,
including interest, are capitalized, whereas costs relating to the holding of
property are expensed. Capitalized interest amounted to $2.0, $2.2 and $3.5
million for the years ended September 30, 1998, 1997 and 1996, 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.


<PAGE>
GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is stated net of accumulated amortization and is being amortized using
the straight-line method generally over a period of 25 years. At September 30,
1998 and 1997, goodwill totaled $24.4 and $1.1 million, respectively. On
November 12, 1997, the Bank purchased ASB Capital Management Inc. ("ASB"), one
of the largest SEC-registered investment managers headquartered in the
Washington, D.C. metropolitan area, for $27.2 million in cash. In connection
with the purchase, the Bank recorded $25.3 million of goodwill. The acquisition
was accounted for using the purchase method and the operating results of ASB
have been included in the Trust's Consolidated Statements of Operations since
the date of acquisition.

During fiscal 1998 and 1997, the Bank purchased approximately $53.2 and $137.9
million of home equity loans, respectively. The premium attributable to the
value of the home equity relationships, amounting to $6.5 and $7.7 million at
September 30, 1998 and 1997, respectively, is included in goodwill and other
intangible assets in the Consolidated Balance Sheets. This premium is being
amortized over the estimated term of the underlying relationships. Accumulated
amortization of goodwill and other intangible assets was $43.6 and $37.8 million
at September 30, 1998 and 1997, respectively.

SERVICING ASSETS

Effective January 1, 1997, the Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 125 ("SFAS 125"), "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," which superseded, but
generally retained, the requirements of SFAS No. 122, "Accounting for Mortgage
Servicing Rights" ("SFAS 122"). Both statements require that entities that
acquire servicing assets through either purchase or origination of loans and
sell or securitize those loans with servicing assets retained must allocate the
total cost of the loans to the servicing assets and the loans (without the
servicing assets) based on their relative fair values.

Servicing assets, which are stated net of accumulated amortization, are
amortized in proportion to the remaining net servicing revenues estimated to be
generated by the underlying loans. Amortization of these assets amounted to
$10.8, $9.0 and $7.8 million for the years ended September 30, 1998, 1997 and
1996, respectively. Accumulated amortization was $67.7 and $56.9 million at
September 30, 1998 and 1997, respectively. During fiscal 1998, 1997 and 1996,
the Bank recorded $8.6, $15.8 and $16.1 million respectively, of servicing
assets related to the sale and/or securitization of loans.

The Bank periodically evaluates its servicing assets for impairment based upon
fair value. For purposes of evaluating impairment, the Bank stratifies its
servicing assets taking into consideration relevant risk characteristics
including loan type, note rate and date of acquisition. To the extent the
carrying value of servicing assets exceeds the fair value of such assets, a
valuation allowance is recorded. The aggregate fair value of servicing assets at
September 30, 1998 and 1997 was $35.3 and $46.2 million, respectively.


<PAGE>
Activity in the valuation allowance for servicing assets is summarized as
follows.

                                            Year Ended September 30,           
                                 ----------------------------------------------
(In thousands)                        1998            1997            1996     
-------------------------------- --------------  --------------  --------------
Balance at beginning of year     $      1,129    $      3,142    $      --
Additions charged / (reductions)
  credited to loan expenses            12,369          (2,013)          3,142 
                                 --------------  --------------  --------------

Balance at end of year           $     13,498    $      1,129    $      3,142  
                                 ==============  ==============  ==============

During fiscal 1996, the Bank sold $947,000 of rights to service mortgage loans
with principal balances of $59.7 million, that were originated by the Bank in
connection with its mortgage banking activities. There were no sales of rights
to service mortgage loans during fiscal 1998 and 1997.

Servicing fees are included in servicing and securitization income in the
Consolidated Statements of Operations.

INTEREST-ONLY STRIPS

As a result of the adoption of SFAS 125 effective January 1, 1997, the Bank
recognized gains of $33.1 million during fiscal 1997 upon the securitization and
sale of credit card receivables based upon the estimated fair value of the
expected cash flows to be generated by the underlying receivables. Under SFAS
125, the Bank recorded a gain on the securitization and sale of credit card
receivables based on the estimated fair value of assets transferred, retained,
or obtained and liabilities incurred in the sale. The gain recognized at the
time of the sale principally represented the estimated fair value of the
interest-only strips, which represent the present value of finance charges and
other ancillary income received by the trust over the sum of the return paid to
certificateholders, contractual servicing fees, credit losses and other expenses
of the trust. During the revolving period of each transaction, gains were
recorded on the sale of new receivables to the trusts to replenish the
investors' interest in trust receivables. See Note 16.

Prior to January 1, 1997, no gain or loss was recorded on the securitization and
sale of credit card receivables; rather, loan servicing fees were recognized
over the life of the transaction when earned.

Upon the Bank's adoption of SFAS 125, effective January 1, 1997, previously
recognized excess spread assets were reclassified as interest-only strips.
Interest-only strips capitalized in the year ended September 30, 1998 and in the
nine months ended September 30, 1997 amounted to $124.0 and $68.2 million,
respectively, and were related to the securitization and sale of credit card,
home equity, automobile and home loan receivables. See Note 16.


<PAGE>
Prior to January 1, 1997, when loans (other than credit card) were sold with the
residual cash flow retained by the Bank, the net present value of such residual
cash flow was recorded as an adjustment to the sales price of the loans.
Estimated future losses were deducted in the computation of such residual cash
flows. Excess spread assets capitalized in the three months ended December 31,
1996 and in fiscal 1996 of $9.5 and $25.7 million, respectively, were the result
of the residual cash flow retained upon the securitization and sale of home
equity credit line, automobile and home loan receivables.

Interest-only strips (excess spread assets prior to January 1, 1997) are
amortized using the effective yield method over the estimated lives of the
underlying loans. Amortization amounted to $99.0, $24.8 and $17.1 million for
the years ended September 30, 1998, 1997 and 1996, respectively, and is included
in servicing and securitization income in the Consolidated Statements of
Operations. The Bank uses certain assumptions to calculate amortization of the
interest-only strips (excess spread assets prior to January 1, 1997), mainly
estimates of prepayment speeds and credit losses. To the extent actual results
differ from the assumptions, additional amortization is recorded.

Effective January 1, 1997, the Bank accounts for its interest-only strips as
trading securities and, accordingly, carries them at fair value. The Bank
estimates the fair value of the interest-only strips on a discounted cashflow
basis using appropriate discount and prepayment rates. Mark-to-market
adjustments, included in servicing and securitization income, amounted to a net
loss of $42.9 million in fiscal 1998 and a net gain of $7.0 million in fiscal
1997. Certain assumptions inherent in the determination of the amortization and
fair value of interest-only strips are influenced by factors outside the Bank's
control, and actual performance could materially differ from such assumptions.

DERIVATIVE FINANCIAL INSTRUMENTS

The Bank uses various strategies to minimize interest-rate risk, including
interest-rate cap agreements and forward sale or purchase commitments. 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, 1998
and 1997, unamortized premiums amounted to $0 and $3.1 million, respectively.
Gains and losses on forward sale or purchase commitments are deferred and
recorded as a component of the gain on sales of loans at the time the forward
sale or purchase commitment matures. See Note 28. The Bank does not hold any
derivative financial instruments for trading purposes.

ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED

SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998 and establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. The impact of SFAS 133
on the Bank's financial statements has not yet been determined.


<PAGE>
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise,
an amendment of FASB Statement No. 65" ("SFAS 134"), was issued in October 1998.
SFAS 134 amends SFAS 65 "Accounting for Certain Mortgage Banking Activities" to
require that after the securitization of mortgage loans held for sale, an entity
engaged in mortgage banking activities classify the resulting mortgage-backed
securities or other retained interests based on its ability and intent to sell
or hold those investments. SFAS 134 conforms the subsequent accounting for
securities retained after the securitization of mortgage loans by a mortgage
banking enterprise with the subsequent accounting for securities retained after
the securitization of other types of assets by a nonmortgage banking enterprise.
SFAS 134 is effective for the first fiscal quarter beginning after December 15,
1998.

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. This condition is currently the case and is
expected to continue to be so 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 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 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 and
dividend payments from the Bank.

The Real Estate Trust's ability to meet its liquidity needs, including debt
service payments in fiscal 1999 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 its written agreement with the OTS
should enhance prospects for the Real Estate Trust to receive tax sharing
payments and dividends from the Bank. During fiscal 1998, 1997 and 1996, the
Bank made tax sharing payments totaling $5.6, $9.8 and $25.0 million,
respectively, to the Real Estate Trust. During fiscal 1998, 1997 and 1996, the
Bank made dividend payments totaling $5.2, $7.2 and $6.8 million, respectively,
to the Real Estate Trust.
<PAGE>

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 the refund which the Bank would otherwise have
been able to claim if it were not being included in the consolidated federal
income tax return of the group.

Through September 30, 1998, the Real Estate Trust has purchased either in the
open market or through dividend reinvestment 2,091,176 shares of common stock of
Saul Centers, Inc. (representing 16.4% of such company's outstanding common
stock). As of September 30, 1998, the market value of these unpledged shares was
approximately $35.5 million.

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
"1994 Notes"). See Note 4. In March 1998, the Real Estate Trust issued $200.0
million aggregate principal amount of 9 3/4% Senior Secured Notes due 2008 (the
"1998 Notes"). After providing for the retirement of the 1994 Notes, including a
prepayment premium of $10.0 million and debt issuance costs of approximately
$5.9 million, the Real Estate Trust realized approximately $9.1 million in net
proceeds. In addition, the Real Estate Trust received about $13.2 million in
cash which had been held as additional collateral by the indenture agent under
the 1994 Notes. The 1998 Notes are secured by a first priority perfected
security interest in 8,000 shares (80%) of the issued and outstanding common
stock of the Bank, which constitute all of the Bank common stock held by the
Real Estate Trust. The 1998 Notes are nonrecourse obligations of the Real Estate
Trust.

The Real Estate Trust is currently selling Unsecured Notes, with a maturity
ranging from one to ten years, primarily to provide funds to repay maturing
Unsecured Notes. 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.

In fiscal 1995, the Real Estate Trust established a $15.0 million secured
revolving credit line with an unrelated bank. This facility was for an initial
two-year period subject to extension for one or more additional one-year terms.
In fiscal 1997, the facility was increased to $20.0 million and was renewed for
an additional two-year period. Interest is computed by reference to a floating
rate index. At September 30, 1998, there were no borrowings under the facility
and unrestricted availability was $8.4 million.

In fiscal 1996, the Real Estate Trust established an $8.0 million secured
revolving credit line with an unrelated bank. This facility was for a one-year
term, after which any outstanding loan amount would amortize over a two-year
period. During fiscal 1997, the line of credit was increased to $10.0 million
and was extended for a year. During fiscal 1998, the line of credit was
increased to $20.0 million and was extended for an additional year. Interest is
computed by reference to a floating rate index. At September 30, 1998, there
were no borrowings under the facility and unrestricted availability was $4.3
million.
<PAGE>
During fiscal 1997, the Real Estate Trust refinanced two hotel and three office
properties with five-year floating rate debt. After payment of all financing
costs, the Real Estate Trust received net proceeds of approximately $11.0
million.

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
shares in cash distributions from operations and from capital transactions
involving the sale of properties. The partnership agreement of Saul Holdings
Partnership provides for quarterly cash distributions to the partners out of net
cash flow. In fiscal 1998, the Real Estate Trust received total cash
distributions of $5.5 million from Saul Holdings Partnership. Beginning in April
1998 the Real Estate Trust has reinvested its quarterly distributions and
obtained additional partnership units in Saul Holdings.

During the third quarter of fiscal 1997, the Real Estate Trust commenced
development of a 46,000 square foot single-story office research and development
building on 3 acres of its Avenel Business Park land parcel located in
Gaithersburg, Maryland ("Avenel Phase IV"). The Real Estate Trust financed the
project with a construction/permanent loan. The project was substantially
completed in January 1998 and was offered to Saul Holdings in accordance with
the Real Estate Trust's obligations under the Right of First Refusal Agreement.
An independent appraisal of the project indicated a market value of $5,600,000.
The fully funded balance of the loan was $3,657,000, resulting in an equity
position of $1,943,000 for the Real Estate Trust. The Board of Directors of Saul
Centers, Inc., general partner of Saul Holdings, agreed to purchase the Real
Estate Trust's equity position through the issuance of additional limited
partnership units in Saul Holdings. Accordingly, as of April 1, 1998, Saul
Holdings issued 105,922 new limited partnership units and a corresponding
limited partnership interest to the Real Estate Trust in exchange for the
ownership of Avenel Phase IV and the assumption of the loan.

In September 1997, the Real Estate Trust commenced development of a 95-unit
extended stay hotel on a 3 acre parcel located adjacent to its Hampton Inn and
Holiday Inn near Washington Dulles International Airport in Sterling, Virginia.
The new hotel was franchised as a TownePlace Suites by Marriott and opened for
business in August 1998. Development costs were $5.8 million and were largely
financed by a construction loan of $4.5 million. The loan is for two years with
two extension options for two year and one year periods, respectively. The loan
covered all costs except for the land, fees to related parties, taxes and
insurance.

On December 10, 1997, the Real Estate Trust purchased a 308-room Holiday Inn
located in Arlington, Virginia, near Washington National Airport and the Real
Estate Trust's Howard Johnson Hotel. The purchase price was $25.8 million. Also
on December 10, 1997, the Real Estate Trust refinanced five other hotels in its
portfolio. Funds for the two transactions were provided by a lender in the
amount of $52.5 million. The new loans have a 15 year term, a fixed interest
rate of 7.57%, and amortization based on a 25 year schedule.

During the quarter ended June 30, 1998, the Real Estate Trust commenced
development of four new extended stay hotels:
<PAGE>
            TownePlace Suites by Marriott containing 91 units located on a 2
                  acre site owned by the Trust in Avenel Business Park in
                  Gaithersburg, Maryland. Opening is scheduled for mid-April
                  1999.

            TownePlace Suites by Marriott containing 91 units located on part of
                  a 9 acre site owned by the Real Estate Trust in the Arvida
                  Park of Commerce in Boca Raton, Florida. Opening is scheduled
                  for mid-July 1999.

            SpringHill Suites by Marriott containing 146 units located on part
                  of a 9 acre site owned by the Real Estate Trust in the Arvida
                  Park of Commerce in Boca Raton, Florida. Opening is scheduled
                  for mid-July 1999.

            TownePlace Suites by Marriott containing 95 units located on a 3 
                  acre site owned by the Real Estate Trust in Ft. Lauderdale
                  Commerce Center, Ft. Lauderdale, Florida. Opening is scheduled
                  for mid-August 1999.

The projected costs for the four hotels aggregate $32 million and will largely
be funded by the proceeds of a three year bank loan in the amount of $25.9
million. The loan has two one-year renewal options.

During the quarter ended June 30, 1998, the Real Estate Trust also began
development of a 78,000 square foot single-story office/research and
development building located on a 7 acre site owned by the Real Estate Trust in
Dulles North Corporate Park, Sterling, Virginia. This project is adjacent to the
Real Estate Trust's Dulles North office building and near three of the Real
Estate Trust's hotel properties. The development cost is $6.6 million with bank
financing of $6.5 million for a five-year term and a two-year extension option.
Completion is expected in early fiscal 1999. A lease for approximately 25% of
the space has been signed.

During the quarter ended September 30, 1998, the Real Estate Trust began the
conversion of its two hotels located in Crystal City, Arlington, Virginia. The
present 308-room Crystal City Holiday Inn will be converted into a Holiday Inn
Crown Plaza, while the present 279-room Howard Johnsons will be converted into a
Holiday Inn. The new brands are expected to position the hotels to generate
higher room rates and revenues along with improved occupancy levels consistent
with the overall market. The renovations are largely an acceleration of normal
capital improvement work as well as some exterior and interior signage, new
marketing materials and a facade upgrade at the Howard Johnson hotel. A
restaurant, which had been operated by an unaffiliated company, will also be
renovated. The incremental costs for the two conversions are expected to total
$6.3 million, which will be funded by the Real Estate Trust in part from its
internal resources and in part from its lines of credit.

The Real Estate Trust believes that the capital improvement costs for its
income-producing properties will be in the range of $6.5 to $8.0 million per
year for the next several fiscal years.


<PAGE>
2.  SAUL HOLDINGS LIMITED PARTNERSHIP - REAL ESTATE TRUST

In fiscal 1993, the Real Estate Trust entered into a series of transactions
undertaken in connection with an initial public offering of common stock of a
newly organized corporation, Saul Centers, Inc. ("Saul Centers"). The Real
Estate Trust transferred its 22 shopping centers and one of its office
properties together with the debt associated with such properties to a newly
formed partnership, Saul Holdings Limited Partnership ("Saul Holdings"), in
which the Real Estate Trust owns (directly or through one of its wholly owned
subsidiaries) a 21.7% interest, other entities affiliated with the Real Estate
Trust own a 5.3% 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. As of September 30, 1998, the Real Estate
Trust had pledged 3.6% 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, 1998, 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.
<PAGE>

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

Immediately subsequent to the business combination and initial public offering
of common stock by Saul Centers, Saul Centers had total owners' equity of
approximately $16.4 million of which approximately $3.5 million related to the
Real Estate Trust's original 21.5% ownership interest. Recognition by the Real
Estate Trust of the change in its investment in the properties of approximately
$107.8 million has been deferred due to the Real Estate Trust's guarantee of
$115.5 million under the Saul Centers reimbursement agreement. The deferred gain
of $107.8 million is included in "Deferred gains - real estate" in the financial
statements. The gain will be recognized in future periods to the extent the Real
Estate Trust's obligations are terminated under the reimbursement agreement.

The management of Saul Centers has adopted a strategy of maintaining a ratio of
total debt to total asset value, as estimated by management, of fifty percent or
less. The management of Saul Centers has concluded at September 30, 1998 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, 1998, the Real Estate
Trust's investment in the consolidated entities of Saul Centers, which is
accounted for under the equity method, consisted of the following.

     (In thousands)
     -------------------------------------------------------------------
     Saul Holdings:
       Acquisition of partnership units                         $ 2,892
       Distributions in excess of allocated net income          (10,190)

     Saul Centers:
       Acquisition of common shares                              33,836
       Distributions in excess of allocated net income           (6,295)
                                                           -------------

     Total                                                     $ 20,243
                                                           =============


The $20.2 million balance is included in "Other assets" in the financial
statements.

As of September 30, 1998, the Real Estate Trust, through its partnership
interest in Saul Holdings and its ownership of common shares of Saul Centers,
effectively owns 33.7% of the consolidated entities of Saul Centers. Some of
these shares and/or units have been deposited as collateral for the Trust's
revolving lines of credit. See Note 4.

The unaudited Condensed Consolidated Balance Sheet at September 30, 1998 and
1997, and the unaudited Condensed Consolidated Statements of Operations for the
twelve-month periods ended September 30, 1998, 1997 and 1996 of Saul Centers
follow.
<PAGE>
<TABLE>
Saul Centers, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
                                                                                                 September 30,
                                                                                -------------------------------------------------
(In thousands)                                                                           1998                     1997
                                                                                ------------------------ ------------------------
<S>                                                                             <C>                      <C>
Assets
    Real estate investments                                                                   $ 342,865                $ 346,253
    Accumulated depreciation                                                                   (100,320)                (102,186)
    Other assets                                                                                 26,133                   25,182
                                                                                ------------------------ ------------------------
Total assets                                                                                  $ 268,678                $ 269,249
                                                                                ======================== ========================

Liabilities and stockholders' equity (deficit)
    Notes payable                                                                             $ 288,812                $ 283,370
    Other liabilities                                                                            17,321                   16,184
                                                                                ------------------------ ------------------------
    Total liabilities                                                                           306,133                  299,554
    Total stockholders' equity (deficit)                                                        (37,455)                 (30,305)
                                                                                ------------------------ ------------------------
Total liabilities and stockholders' equity (deficit)                                          $ 268,678                $ 269,249
                                                                                ======================== ========================
</TABLE>

<TABLE>
Saul Centers, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)                                                           For the Twelve Months Ended September 30
                                                      ---------------------------------------------------------------------------
(In thousands)                                                 1998                      1997                     1996
                                                      ------------------------  ------------------------ ------------------------
<S>                                                   <C>                       <C>                      <C>
Revenue
    Base rent                                                         $54,724                   $51,157                  $49,646
    Other revenue                                                      15,145                    15,613                   13,727
                                                      ------------------------  ------------------------ ------------------------
Total revenue                                                          69,869                    66,770                   63,373
                                                      ------------------------  ------------------------ ------------------------

Expenses
    Operating expenses                                                 14,423                    14,624                   14,407
    Interest expense                                                   22,669                    19,404                   18,200
    Amortization of deferred debt expense                                 416                     2,286                    2,921
    Depreciation and amortization                                      11,299                    10,839                   10,978
    General and administrative                                          3,492                     3,250                    3,071
                                                      ------------------------  ------------------------ ------------------------
Total expenses                                                         52,299                    50,403                   49,577
                                                      ------------------------  ------------------------ ------------------------

Operating income                                                       17,570                    16,367                   13,796
Non-operating item
    Sales of interest rate protection
        agreements                                                    (4,392)                     (972)                      --
Net income before extraordinary item,
        cumulative effect of change in
        accounting method and minority
        interests                                                      13,178                    15,395                   13,796
Cumulative effect of change in
        accounting method                                                (771)                      --                       --
Extraordinary item - loss on early
        extinguishment of debt                                         (2,878)                     (956)                    (998)
                                                      ------------------------  ------------------------ ------------------------
Net income before minority interest                                     9,529                    14,439                   12,798
Minority interest                                                      (7,080)                   (6,854)                  (6,852)
                                                      ------------------------  ------------------------ ------------------------
Net income                                                            $ 2,449                   $ 7,585                  $ 5,946
                                                      ========================  ======================== ========================
</TABLE>
<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>
(Dollars in                                            Buildings and   Leasehold              Related
  thousands)                         No.      Land      Improvements   Interests   Total        Debt
----------------------------------- ------  --------- --------------- ---------- ----------  ----------
<S>                                 <C>     <C>       <C>             <C>        <C>         <C>
September 30, 1998
Income-producing properties:
 Hotels                                12    $15,291        $150,514      $  --   $165,805    $111,917
 Office & industrial                    7      4,555         105,702         --    110,257      77,103
 Other                                  5      3,075             814         --      3,889          --
                                    ------  --------- --------------- ---------- ----------  ----------
                                       24    $22,921        $257,030      $  --   $279,951    $189,020
                                    ======  ========= =============== ========== ==========  ==========

Land Parcels                           10    $40,110            $ --      $  --   $ 40,110    $ 10,513
                                    ======  ========= =============== ========== ==========  ==========

September 30, 1997
Income-producing properties:
 Hotels                                10    $10,843        $117,714      $  --   $128,557    $ 82,914
 Office & industrial                    7      4,469         105,159         --    109,628      79,597
 Other                                  6      3,075           1,041        149      4,265          --
                                    ------  --------- --------------- ---------- ----------  ----------
                                       23    $18,387        $223,914     $  149   $242,450    $162,511
                                    ======  ========= =============== ========== ==========  ==========

Land Parcels                           10    $42,160            $ --      $  --   $ 42,160    $ 19,201
                                    ======  ========= =============== ========== ==========  ==========
</TABLE>

4.  DEBT - REAL ESTATE TRUST

Mortgage notes payable are secured by various income-producing properties and
land parcels. Almost all mortgage notes are payable in monthly installments,
have maturity dates ranging to 2012 and accrue interest at annual rates from
7.6% to 10.0%. Certain mortgages contain a number of restrictions, including
cross default provisions.

Notes payable - unsecured includes notes which have been sold by the Real Estate
Trust directly to investors at varying interest rates with maturities of one to
ten years. These notes do not contain any provisions for conversion, sinking
fund or amortization, but are subject to a provision permitting the Real Estate
Trust to call them prior to maturity. The weighted average interest rates at
September 30, 1998 and 1997 were 10.3% and 10.4%, respectively. During fiscal
1998 and 1997, the Real Estate Trust sold notes amounting to approximately $11.3
and $10.0 million, respectively.


<PAGE>
In March 1994, the Real Estate Trust issued $175.0 million aggregate principal
amount of the 1994 Notes. The 1994 Notes were general obligations of the Real
Estate Trust ranking pari passu with all other unsubordinated obligations of the
Trust and were 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 1994
Notes to satisfy one of the initial collateral requirements with respect to such
securities. This collateral requirement, which remained in effect while the 1994
Notes were outstanding, was recalculated each calendar quarter based on the
estimated amount of one year's interest payments on then outstanding 1994 Notes
and Unsecured Notes and could have been satisfied through deposits of cash or
marketable securities. 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. As of September 30, 1997, the Real
Estate Trust was required to maintain deposits of $25.2 million and had
deposited 1,535,104 shares of common stock of Saul Centers (See Note 1) with the
Trustee for the 1994 Notes to satisfy in part the collateral requirements for
those deposits. The common stock of Saul Centers is reflected in other assets in
the accompanying balance sheets.

In March 1998, the Real Estate Trust issued $200.0 million aggregate principal
amount of the 1998 Notes. After providing for the retirement of the 1994 Notes,
including a prepayment premium of $10.0 million and debt issuance costs of
approximately $5.9 million, the Real Estate Trust realized approximately $9.1
million in net proceeds. In addition, the Real Estate Trust received about $13.2
million in cash which had been held as additional collateral by the indenture
agent under the 1994 Notes. The 1998 Notes are secured by a first priority
perfected security interest in 8,000 shares (80%) of the issued and outstanding
common stock of the Bank, which constitute all of the Bank common stock held by
the Real Estate Trust. The 1998 Notes are nonrecourse obligations of the Real
Estate Trust.

In fiscal 1995, the Real Estate Trust established a $15.0 million secured
revolving credit line with an unrelated bank. This facility was for an initial
two-year period subject to extension for one or more additional one-year terms.
In fiscal 1997, the facility was increased to $20.0 million and was renewed for
an additional two-year period. Interest is computed by reference to a floating
rate index. At September 30, 1998, there were no borrowings under the facility
and unrestricted availability was $8.4 million.

In fiscal 1996, the Real Estate Trust established an $8.0 million secured
revolving credit line with an unrelated bank. This facility was for a one-year
term, after which any outstanding loan amount would amortize over a two-year
period. During fiscal 1997, the line of credit was increased to $10.0 million
and was extended for a year. During fiscal 1998, the line of credit was
increased to $20.0 million and was extended for an additional year. Interest is
computed by reference to a floating rate index. At September 30, 1998, there
were no borrowings under the facility and unrestricted availability was $4.3
million.
<PAGE>
The maturity schedule for the Real Estate Trust's outstanding debt at September
30, 1998 for the fiscal years commencing October 1, 1998 is set forth in the
following table.

                             Debt Maturity Schedule
                                 (In thousands)
         --------------------------------------------------------------
                                    Notes       Notes
             Fiscal     Mortgage  Payable --  Payable --
              Year       Notes     Secured    Unsecured        Total
         ------------- --------- ----------- ----------- --------------
              1999      $10,055       $  --    $ 16,149     $  26,204
              2000       10,193          --       8,893        19,086
              2001       12,618          --       5,916        18,534
              2002       14,367          --       5,284        19,651
              2003       12,663          --       9,046        21,709
           Thereafter   138,978     200,000       5,047       344,025
                       --------- ----------- ----------- --------------
             Total     $198,874    $200,000    $ 50,335     $ 449,209
         --------------------------------------------------------------
Of the $198.9 million of mortgage debt outstanding at September 30, 1998, $169.8
million was nonrecourse to the Real Estate Trust.

5.  LONG-TERM LEASE OBLIGATIONS - REAL ESTATE TRUST

The Real Estate Trust has no minimum future rental commitments. The Real Estate
Trust had one long-term lease which terminated in 1998. The Real Estate Trust
paid minimum ground rent expense of $69,000, $101,000 and $101,000 in fiscal
1998, 1997 and 1996, respectively.

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 1998, 1997, and
1996 amounted to $21.5, $19.7 and $16.8 million, respectively. Future minimum
rentals as of September 30, 1998 under noncancelable leases are as follows:

            Fiscal Year                                   (In thousands)
            ------------------------------------------------------------
                 1999                                          $ 20,919
                 2000                                            17,767
                 2001                                            13,971
                 2002                                             9,258
                 2003                                             6,315
              Thereafter                                          7,930
                                                             -----------
                Total                                          $ 76,160
            ------------------------------------------------------------


<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 $301,000 during the period
October 1995 through March 1996, $306,000 during the period April 1996 through
September 1996, $311,000 during the period October 1996 through September 1997,
and, $317,000 during the period October 1997 through September 1998. The
advisory contract has been extended until September 30, 1999, 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 $5.2, $5.1 and $4.8 million in fiscal 1998,
1997 and 1996, respectively.

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

The Real Estate Trust pays the Advisor fees equal to 1% of the principal amount
of the unsecured notes as they are issued to offset its costs of administering
the program. These payments amounted to $113,000, $102,000 and $74,000 in fiscal
1998, 1997 and 1996, 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 $157,000,
$158,000 and $152,000 in fiscal 1998, 1997 and 1996, respectively.

In April 1994 the Real Estate Trust made an unsecured loan to the Saul Company
of $15.0 million bearing interest at 1/2 percent over prime and due on demand.
In fiscal 1995 the loan balance was reduced to $12.7 million. In fiscal 1996 the
Real Estate Trust made new loans aggregating $3.5 million to the Saul Company.
During fiscal 1997 a curtail of $750,000 was paid by the Saul Company. At
September 30, 1997 the total due the Real Estate Trust was $15.4 million. In
fiscal 1998 the loan balance was reduced to $15.3 million. Interest accrued on
these loans amounted to $1.3, $1.4 and $1.4 million during fiscal 1998, 1997 and
1996, respectively.

REMUNERATION OF TRUSTEES AND OFFICERS

For fiscal years 1998, 1997, and 1996, the Real Estate Trust paid the Trustees
$94,000, $89,000 and $79,000, respectively, for their services. No compensation
was paid to the officers of the Real Estate Trust for acting as such; however,
one Trustee was paid by the Bank for his services as Chairman and Chief
Executive Officer of the Bank, and four received payments for their services as
directors of the Bank. Four of the Trustees and all of the officers of the Real
Estate Trust receive compensation from Saul Co. as directors and/or officers.

LEGAL SERVICES

The law firm in which one of the Trustees is a partner received $0.8, $0.3 and
$0.1 million, during fiscal 1998, 1997, and 1996, respectively, for legal
services to the Real Estate Trust and its wholly-owned subsidiaries.

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 1998, 1997 and 1996 were $2.0,
$3.0 and $2.7 million, respectively. See Note 2.
<PAGE>
OTHER TRANSACTIONS

The Real Estate Trust leases space to the Bank and Franklin at two of its
income-producing properties. Minimum rents and recoveries paid by these
affiliates amounted to approximately $251,000, $239,000 and $143,000, in fiscal
1998, 1997 and 1996, respectively.

8.  DISPOSITION OF ASSETS - THE BANK

Pursuant to the terms of a purchase agreement, dated as of September 2, 1998 and
as amended on September 30, 1998, by and between the Bank and CCB Holding
Corporation (a wholly-owned subsidiary of the Bank) ("CCBH"), and First USA
Bank, NA, ("FUSA"), the Bank and CCBH sold their credit card portfolio and the
Bank sold its credit card operations to FUSA. This transaction was consummated
on September 30, 1998. The credit card portfolio purchased by FUSA included
approximately $4.8 billion of managed credit card loans and 3.1 million Visa and
MasterCard credit card accounts. The Bank recognized a net gain on this sale of
$288.3 million, which is included in gain on sale of loans, net in the
Consolidated Statements of Operations.

All significant assets and liabilities used in or related directly to the credit
card business, including those associated with credit card securitization
activities, were sold to or assumed by FUSA, with the exception of the Bank's
operations center which housed the majority of credit card operations (other
than origination activities). Concurrently with the transaction, the Bank and
FUSA entered into a lease agreement for that facility.

These financial statements include the results of operations of the credit card
business for the entire fiscal year, as well as the gain on sale, which occurred
on the last day of the Bank's fiscal year.

9.  LOANS HELD FOR SALE - THE BANK

Loans held for sale are composed of the following:

                                                           September 30,        
                                                   ----------------------------
(In thousands)                                        1998              1997    
------------------------------------------         ----------        ----------
     Single-family residential                     $  49,502         $ 102,749
     Home improvement and related loans                6,785               --  
                                                   ----------        ----------
     Total                                         $  56,287         $ 102,749 
                                                   ==========        ==========

10.  LOANS HELD FOR SECURITIZATION AND SALE - THE BANK

Loans held for securitization and sale are composed of the following:

                                                           September 30,        
                                                   ----------------------------
(In thousands)                                        1998              1997    
------------------------------------------         ----------       -----------
     Credit card                                   $     --         $   90,000
     Automobile                                      125,000            80,000
     Home equity                                         --             50,000  
                                                   ----------       -----------
     Total                                         $ 125,000        $  220,000 
                                                   ==========       ===========
<PAGE>
11.  INVESTMENT SECURITIES - THE BANK

At September 30, 1998 and 1997, all investment securities are classified as
held-to-maturity. Gross unrealized holding gains and losses on the Bank's
investment securities at September 30, 1998 and 1997 are as follows:

                                        Unrealized  Unrealized  Aggregate
                             Amortized   Holding     Holding       Fair
(In thousands)                  Cost      Gains       Losses      Value   
---------------------------- --------- ----------- ----------- ----------
September 30, 1998 
U.S. Government securities:
   Maturing after one year,
     but within five years   $  43,999 $       529 $     --    $   44,528
                             ========= =========== =========== ==========

September 30, 1997 
U.S. Government securities:
   Maturing within one year  $   4,998 $        14 $     --    $    5,012
                             ========= =========== =========== ==========

There were no sales of investment securities during the years ended September
30, 1998, 1997 and 1996.

12.  MORTGAGE-BACKED SECURITIES - THE BANK

At September 30, 1998 and 1997, 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, 1998 and 1997 are as follows:
                                          Gross       Gross
                                        Unrealized  Unrealized  Aggregate
                             Amortized   Holding     Holding       Fair
(In thousands)                  Cost      Gains       Losses      Value   
--------------------------- ---------- ----------- ----------- ----------
September 30, 1998 
   FNMA                     $  471,617 $     3,114 $   (1,927) $  472,804
   FHLMC                       408,274       1,558       (982)    408,850
   Private label, AAA-rated  1,117,017         --     (12,797)  1,104,220
   Private label, AA-rated      28,909          51        (15)     28,945
                            ---------- ----------- ----------- ----------
   Total                    $2,025,817 $     4,723 $  (15,721) $2,014,819
                            ========== =========== =========== ==========

                                          Gross       Gross
                                        Unrealized  Unrealized  Aggregate
                             Amortized   Holding     Holding       Fair
(In thousands)                  Cost      Gains       Losses      Value   
--------------------------- ---------- ----------- ----------- ----------
September 30, 1997
   FNMA                     $  333,563 $     1,425 $   (1,948) $  333,040
   FHLMC                       856,522       6,480     (2,835)    860,167
   Private label, AAA-rated    734,632         --      (4,828)    729,804
   Private label, AA-rated      60,990         666        --       61,656
                            ---------- ----------- ----------- ----------
   Total                    $1,985,707 $     8,571 $   (9,611) $1,984,667
                            ========== =========== =========== ==========
<PAGE>
There were no sales of mortgage-backed securities from the held-to-maturity
portfolio during the years ended September 30, 1998, 1997 and 1996. See Summary
of Significant Accounting Policies - The Bank - "Trading Securities."

Accrued interest receivable on mortgage-backed securities totaled $12.2 and
$11.9 million at September 30, 1998 and 1997, respectively, and is included in
other assets in the Consolidated Balance Sheets.

At September 30, 1998, certain mortgage-backed securities were pledged as
collateral for Federal Home Loan Bank of Atlanta advances, other short-term
borrowings and other recourse arrangements. See Notes 20, 21 and 28. Other
mortgage-backed securities with a book value of $20.9 million were pledged as
collateral primarily for credit and debit card settlement obligations.

13.  LOANS RECEIVABLE - THE BANK

Loans receivable is composed of the following:

                                                      September 30,           
                                             --------------------------------
(In thousands)                                    1998              1997     
-----------------------------------------    --------------    --------------
Single-family residential                    $   1,772,784     $     747,070
Home equity                                        135,122            44,088
Real estate construction and ground                209,247           106,813
Commercial real estate and multifamily              75,877            53,816
Commercial                                         279,416           152,483
Credit card                                            --            987,149
Automobile                                         232,826           149,868
Home improvement and related loans                  60,570            55,453
Overdraft lines of credit and
   other consumer                                   33,484            36,029  
                                             --------------    ---------------
                                                 2,799,326         2,332,769  

Less:
 Undisbursed portion of loans                      207,921           106,217
 Unearned discounts and net
    deferred loan origination costs                 (2,709)           (2,026)
 Allowance for losses on loans                      60,157           105,679  
                                             --------------    ---------------
                                                   265,369           209,870  
                                             --------------    ---------------
   Total                                     $   2,533,957     $   2,122,899  
                                             ==============    ===============

The Bank serviced loans owned by others amounting to $5,681.2 and $9,731.8
million at September 30, 1998 and 1997, respectively.

Accrued interest receivable on loans totaled $15.2 and $19.0 million at
September 30, 1998 and 1997, respectively, and is included in other assets in
the Consolidated Balance Sheets.
<PAGE>
14.  REAL ESTATE HELD FOR INVESTMENT OR SALE - THE BANK

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

                                                         September 30,          
                                               --------------------------------
(In thousands)                                      1998              1997      
---------------------------------------------- --------------    --------------

Real estate held for investment                $       3,819     $       3,819
Real estate held for sale                            218,972           231,407  
                                               --------------    --------------
     Sub-total                                       222,791           235,226  
                                               --------------    --------------
Less:
 Allowance for losses on real estate held
    for investment                                       202               198
 Allowance for losses on real estate held
    for sale                                         153,564           140,738  
                                               --------------    --------------
                                                     153,766           140,936  
                                               --------------    --------------
Total real estate held for investment or sale  $      69,025     $      94,290  
                                               ==============    ==============

Loss on real estate held for investment or sale is composed of the following:

                                                 September 30,                 
                                ----------------------------------------------
(In thousands)                       1998            1997            1996      
------------------------------  --------------  --------------  --------------
Provision for losses            $     (18,860)  $     (19,623)  $     (26,341)
Net loss from operating
    properties                           (288)           (221)           (350)
Net gain on sales                       2,609           1,156           2,278  
                                --------------  --------------  --------------
 Total                          $     (16,539)  $     (18,688)  $     (24,413)
                                ==============  ==============  ==============


<PAGE>
15.  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:
                                                                   Real Estate
                                                                    Held for
                                                   Loans           Investment
(In thousands)                                   Receivable          or Sale   
------------------------------------------------ ----------       -------------
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
  Provision for losses                             125,115            19,623
  Increase due to acquisition of loans                 118               --
  Charge-offs                                     (126,506)           (5,397)
  Recoveries                                        11,429               --   
                                                 ----------       ------------
Balance, September 30, 1997                        105,679           140,936
  Provision for losses                             150,829            18,860
  Reduction due to sale of credit card portfolio   (87,609)              --
  Charge-offs                                     (122,652)           (6,030)
  Recoveries                                        13,910               --   
                                                 ----------       ------------
Balance, September 30, 1998                      $  60,157        $  153,766  
                                                 ==========       ============

The allowances for losses at September 30, 1998 are based on management's
estimates of the amount of allowances required to reflect the losses incurred 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.

16.  ASSET-BACKED TRANSACTIONS - THE BANK

The Bank periodically sells various receivables through asset-backed
securitizations, in which receivables are transferred to trusts, and
certificates are sold to investors.

The Bank sold credit card receivables and received gross proceeds of $1,000.5,
$1,084.5 and $919.0 million during the years ended September 30, 1998, 1997 and
1996, respectively. The Bank recognized gains of $83.4 million on credit card
securitization transactions during fiscal 1998, including gains on sales of new
receivables into existing trusts. During fiscal 1997, the Bank recognized gains
of $33.1 million on credit card securitization transactions, including sales of
new receivables into existing trusts. No gains or losses were recorded on credit
card securitization transactions during fiscal 1996. See Summary of Significant
Accounting Policies - The Bank. At September 30, 1997, outstanding trust
certificate balances related to these and previous securitizations were $4,015.2
million and the related receivable balances contained in the trusts were
$4,659.7 million. On September 30, 1998, the Bank sold its credit card portfolio
and related operations, including its rights to the excess cash flows generated
from such credit card securitizations. See Note 8.
<PAGE>

The Bank sold amounts on deposit in certain spread accounts associated with
certain outstanding credit card securitizations and received gross proceeds of
$36.0, $144.2 and $42.1 million during fiscal 1998, 1997 and 1996, respectively.
Losses of $1.8 and $7.2 million were recognized for the years ended September
30, 1998 and 1997, respectively, and are included in servicing and
securitization income in the Consolidated Statements of Operations. No gains or
losses were recorded for the year ended September 30, 1996. Outstanding trust
certificate balances related to the securitizations were $225.9 million at
September 30, 1997. On September 30, 1998, the Bank sold its credit card
portfolio and related operations, including its obligations associated with such
spread account securitizations. See Note 8.

The Bank sold automobile loan receivables and received gross proceeds of $534.7,
$938.9 and $475.3 million during the years ended September 30, 1998, 1997 and
1996, respectively. Gains recognized on these transactions were $23.1, $26.9 and
$7.3 million, respectively, for the years ended September 30, 1998, 1997 and
1996. The outstanding trust certificate balances and the related receivable
balances contained in the trusts were $1,055.7 million at September 30, 1998,
$12.6 million of which represents subordinate classes of certificates retained
by the Bank. The outstanding trust certificate balances and the related
receivable balances contained in the trusts were $1,083.0 million at September
30, 1997, $7.9 million of which represents a subordinate class of certificates
retained by the Bank. These retained certificates were classified as trading
securities at September 30, 1998 and 1997 and had carrying values of $11.3 and
$7.9 million, respectively. See Summary of Significant Accounting Policies - The
Bank. The Bank continues to service the underlying loans and is contingently
liable under various credit enhancement facilities related to these
transactions. See Note 28.

The Bank sold home equity credit line receivables and received gross proceeds of
$181.4, $24.0 and $96.5 million during the years ended September 30, 1998, 1997
and 1996, respectively. The Bank recognized gains of $13.8, $3.4 and $4.7
million on home equity credit line transactions during the years ended September
30, 1998, 1997 and 1996, respectively, including gains on sale of new
receivables into existing trusts for fiscal 1998 and 1997. The outstanding trust
certificate balances and the related receivable balances contained in the trusts
were $305.7 million at September 30, 1998 and $325.8 million at September 30,
1997. The Bank continues to service the underlying loans and is contingently
liable under various credit enhancement facilities related to these
transactions. See Note 28.

During the years ended September 30, 1998 and 1997, the Bank sold home loan and
home equity receivables in asset-backed transactions to investors representing
interests in the trusts. The gross proceeds received on these sales were $163.3
and $216.2 million for the years ended September 30, 1998 and 1997,
respectively. The gains recognized on these transactions were $8.8 and $11.2
million for the years ended September 30, 1998 and 1997, respectively. At
September 30, 1998, the outstanding trust certificate balances and the related
receivable balances contained in the trust were $148.0 million and the Bank
serviced the underlying loans. At September 30, 1997, the outstanding trust
certificate balances and the related receivable balances contained in the trust
were $133.3 million. See Note 28.
<PAGE>

The Bank sold home loan receivables and received gross proceeds of $4.0, $154.4
and $153.5 million for the years ended September 30, 1998, 1997 and 1996,
respectively. Gains recognized on these transactions were $0.4, $7.2 and $9.5
million for the years ended September 30, 1998, 1997 and 1996, respectively. The
outstanding trust certificate balances and the related receivable balances
contained in the trusts were $168.7 million at September 30, 1998 and $246.8
million at September 30, 1997. The Bank continues to service the underlying
loans and is contingently liable under credit enhancement facilities related to
these transactions. See Note 28.

17.  PROPERTY AND EQUIPMENT - THE BANK

Property and equipment is composed of the following:

                             Estimated                   September 30,
                               Useful          -------------------------------- 
(In thousands)                  Lives               1998               1997     
-------------------------- ----------------    --------------   ---------------
Land                             --            $      51,044    $       49,925
Construction in progress         --                    8,830             1,950
Buildings and improvements   10-45 years             129,716           122,326
Leasehold improvements        5-20 years              90,967            83,526
Furniture and equipment       5-10 years             188,705           182,044
Automobiles                    3-5 years               2,336             2,303  
                                               --------------   ---------------
                                                     471,598           442,074
Less:
   Accumulated depreciation and amortization         185,682           168,512  
                                               --------------   ---------------
      Total                                    $     285,916    $      273,562  
                                               ==============   ===============

Depreciation and amortization expense amounted to $34.0, $28.7 and $24.6 million
for the years ended September 30, 1998, 1997 and 1996, respectively.



<PAGE>
18.  LEASES - THE BANK

The Bank has noncancelable, long-term leases for office premises and retail
space, which have a variety of terms expiring from fiscal 1999 to 2019 and
ground leases which have terms expiring from fiscal 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, 1998:

               Year Ending
              September 30,         (In thousands)  
              -------------          -------------
                   1999              $     14,631
                   2000                    13,832
                   2001                    12,411
                   2002                    10,621
                   2003                     9,099
                Thereafter                 71,049
                                     -------------
                  Total              $    131,643
                                     =============

Rent expense totaled $16.6, $16.1 and $13.5 million for the years ended
September 30, 1998, 1997 and 1996, respectively.

19.  DEPOSIT ACCOUNTS - THE BANK

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

                                                September 30,                   
                             --------------------------------------------------
                                       1998                      1997          
                             ------------------------  ------------------------

                                            Weighted                  Weighted
                                             Average                   Average
(Dollars in thousands)          Amount        Rate        Amount        Rate    
---------------------------  ------------  ----------  ------------  ----------
Demand accounts              $   302,529       --      $   215,678       --
NOW accounts                   1,027,310       1.32%       904,697       2.42%
Money market deposit
    accounts                   1,019,569       3.62%       983,016       3.97%
Statement savings accounts       913,467       2.41%       907,141       3.48%
Other deposit accounts            97,696       2.10%        79,071       2.99%
Certificate accounts, less
    than $100                  1,157,603       5.20%     1,156,724       5.50%
Certificate accounts, $100
    or more                      370,056       5.69%       647,429       5.69%
                             ------------              ------------
    Total                    $ 4,888,230       3.19%   $ 4,893,756       3.99%
                             ============              ============



<PAGE>
Interest expense on deposit accounts is composed of the following:

                                              Year Ended September 30,        
                                     ----------------------------------------
(In thousands)                           1998          1997          1996     
---------------------------------    ------------  ------------  ------------
NOW accounts                         $     19,796  $     21,882  $     23,044
Money market deposit accounts              38,756        38,644        38,317
Statement savings accounts                 28,419        30,927        30,034
Certificate accounts                       89,958        75,180        69,180
Other deposit accounts                      2,389         2,274         1,994
                                     ------------  ------------  ------------
    Total                            $    179,318  $    168,907  $    162,569
                                     ============  ============  ============


Outstanding certificate accounts at September 30, 1998 mature in the years
indicated as follows:

                Year Ending
                September 30,        (In thousands)
                -------------        --------------
                    1999             $ 1,236,272
                    2000                 190,466
                    2001                  40,076
                    2002                  29,257
                    2003                  31,588
                                     --------------
                    Total            $ 1,527,659
                                     ==============

At September 30, 1998, certificate accounts of $100,000 or more have contractual
maturities as indicated below:

                                    (In thousands)
                                     -----------
Three months or less                 $   229,540
Over three months through six months      59,546
Over six months through 12 months         54,525
Over 12 months                            26,445
                                     -----------
   Total                             $   370,056
                                     ===========


<PAGE>
20.  SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER
               SHORT-TERM BORROWINGS - THE BANK

Short-term borrowings are summarized as follows:

                                                         September 30,         
                                                 -----------------------------
(In thousands)                                     1998      1997      1996    
------------------------------------------------ --------- --------- ---------
Securities sold under repurchase agreements:
  Balance at year-end                            $ 387,305 $   2,606 $ 576,823
  Average amount outstanding during the year       302,564   483,076    59,687
  Maximum amount outstanding at any month-end      806,393   946,090   576,823
  Amount maturing within 30 days                   387,305     2,606   576,576
  Weighted average interest rate during the year     5.68%     5.48%     5.50%
  Weighted average interest rate on year-end
    balances                                         5.63%     5.35%     5.41%

Other short-term borrowings:
  Balance at year-end                            $ 104,449 $  72,215 $  60,318
  Average amount outstanding during the year        72,826    39,126    13,641
  Maximum amount outstanding at any month-end      107,845    72,241    60,318
  Amount maturing within 30 days                   104,449    72,215    60,318
  Weighted average interest rate during the year     5.08%     5.11%     5.04%
  Weighted average interest rate on year-end
    balances                                         5.19%     5.34%     5.63%

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

At September 30, 1998, the Bank had pledged mortgage-backed securities with a
book value of $162.3 million to secure certain other short-term borrowings.

21.  FEDERAL HOME LOAN BANK ADVANCES - THE BANK

At September 30, 1998, advances from the Federal Home Loan Bank of Atlanta
("FHLB") totaled $352.0 million. Of the total advances at September 30, 1998,
$275.0 million have a weighted average interest rate of 5.55%, adjust quarterly
based on the one-month London Interbank Offered Rate ("LIBOR") and mature over
varying periods between October 1998 and January 1999. The weighted average
interest rate on the remaining $77.0 million is 6.14%, which is fixed for the
term of the advances and which mature over varying periods between October 1998
and June 2013.

Under a Specific Collateral Agreement with the FHLB, advances are secured by all
of the Bank's FHLB stock and certain mortgage-backed securities with a book
value of $1,134.2 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, 1998
advances is available to secure additional advances from the FHLB, subject to
its collateralization guidelines.


<PAGE>
22.  CAPITAL NOTES - SUBORDINATED - THE BANK

Capital notes, which are subordinated to the interest of deposit account holders
and other senior debt are composed of the following:

                                                        September 30,
                                       Issue        ------------------- Interest
(Dollars in thousands)                  Date          1998      1997     Rate  
--------------------------------  ----------------- --------- --------- -------
Subordinated debentures due 2005  November 23, 1993 $ 150,000 $ 150,000  9 1/4%
Subordinated debentures due 2008  December 3, 1996    100,000   100,000  9 1/4%
                                                    --------- ---------
         Total                                      $ 250,000 $ 250,000
                                                    ========= =========

The 9 1/4% Subordinated Debentures due 2008 (the "1996 Debentures") are subject
to redemption at any time on or after December 1, 2001, at the option of the
Bank, in whole or in part, at the following redemption prices plus accrued and
unpaid interest:

   If redeemed during the 12-month period           Redemption
     beginning December 1,                             Price     
---------------------------------------------      --------------
                                                   (In thousands)
              2001                                   $ 104.625
              2002                                   $ 103.700
              2003                                   $ 102.775
              2004                                   $ 101.850
              2005                                   $ 100.925
              2006 and thereafter                    $ 100.000


The 9 1/4% Subordinated Debentures due 2005 (the "1993 Debentures") are subject
to redemption at any time on or after December 1, 1998, at the option of the
Bank, in whole or in part, at the following redemption prices plus accrued and
unpaid interest:

   If redeemed during the 12-month period           Redemption
     beginning December 1,                             Price     
---------------------------------------------      --------------
                                                   (In thousands)
              1998                                   $ 104.625
              1999                                   $ 103.700
              2000                                   $ 102.775
              2001                                   $ 101.850
              2002                                   $ 100.925
              2003 and thereafter                    $ 100.000



<PAGE>
The indenture pursuant to which the 1993 Debentures were sold (the "Indenture")
provides that the Bank may not pay dividends on its capital stock unless, after
giving effect to the dividend, no event of default shall have occurred and be
continuing and the Bank is in compliance with its regulatory capital
requirements. In addition, the amount of the proposed dividend may not exceed
the sum of (i) $15.0 million, (ii) 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 13% Preferred Stock (as defined below) or any
payment-in-kind preferred stock issued in lieu of cash dividends on the
Preferred Stock or the redemption of any such payment-in-kind preferred stock.
The indenture pursuant to which the 1996 Debentures were sold provides that the
proposed dividend may not exceed the sum of the restrictions discussed above for
the 1993 Indenture and the aggregate liquidation preference of the new series of
preferred stock of the Bank, if issued in exchange for the outstanding REIT
Preferred Stock (as defined below). See Note 23.

The Bank received OTS approval to include the principal amount of the 1996
Debentures and the 1993 Debentures in the Bank's supplementary capital for
regulatory capital purposes.

Deferred debt issuance costs, net of accumulated amortization, amounted to $8.6
and $9.4 million at September 30, 1998 and 1997, respectively, and are included
in other assets in the Consolidated Balance Sheets.

23. real estate investment trust subsidiary - THE BANK

On December 3, 1996, a new real estate investment trust subsidiary of the Bank
(the "REIT Subsidiary") sold $150.0 million of its Noncumulative Exchangeable
Preferred Stock, Series A, par value $5.00 per share (the "REIT Preferred
Stock"), and received net cash proceeds of $144.0 million. Cash dividends on the
REIT Preferred Stock are payable quarterly in arrears at an annual rate of 10
3/8%. The liquidation value of each share of REIT Preferred Stock is $50,000
plus accrued and unpaid dividends. Except under certain limited circumstances,
the holders of the REIT Preferred Stock have no voting rights. The REIT
Preferred Stock is automatically exchangeable for a new series of Preferred
Stock of the Bank upon the occurrence of certain events.

The REIT Preferred Stock is redeemable at the option of the REIT subsidiary at
any time on or after January 15, 2007, in whole or in part, at the following per
share redemption prices plus accrued and unpaid dividends:

If redeemed during the 12-month period         Redemption
   beginning January 15,                         Price     
---------------------------------------      --------------
                                             (In thousands)
              2007                             $ 52.594
              2008                             $ 52.075
              2009                             $ 51.556
              2010                             $ 51.038
              2011                             $ 50.519
              2012 and thereafter              $ 50.000


<PAGE>
The Bank received OTS approval to include the proceeds from the sale of the REIT
Preferred Stock in the core capital of the Bank for regulatory capital purposes
in an amount up to 25% of the Bank's core capital. The net cash proceeds from
the sale of the REIT Preferred Stock is reflected in minority interest - other
in the Trust's Consolidated Balance Sheets. Dividends on the REIT Preferred
Stock are presented as a reduction of net income in the Consolidated Statements
of Operations.

24.  PREFERRED STOCK - THE BANK

Cash Dividends on the Bank's Noncumulative Perpetual Preferred Stock, Series A
(the "Preferred Stock") are payable quarterly in arrears at an annual rate of
13%. If the Board of Directors does not declare the full amount of the
noncumulative cash dividend accrued in respect of any quarterly dividend period,
in lieu thereof the Board of Directors will be required to declare (subject to
regulatory and other restrictions) a stock dividend in the form of a new series
of payment-in-kind preferred stock of the Bank.

The OTS has approved the inclusion of the Preferred Stock as tier 1 or core
capital and has approved the payment of dividends on the Preferred Stock,
provided certain conditions are met. The holders of the Preferred Stock have no
voting rights, except in certain limited circumstances.

Holders of the Preferred Stock will be entitled to receive a liquidating
distribution in the amount of $25,000 per share, plus accrued and unpaid
dividends for the then-current dividend period in the event of any voluntary
liquidation of the Bank, after payment of the deposit accounts and other
liabilities of the Bank, and out of the assets available for distribution to
shareholders. The Preferred Stock ranks superior and prior to the issued and
outstanding common stock of the Bank with respect to dividend and liquidation
rights.

The Preferred Stock is redeemable by the Bank at its option at any time on and
after May 1, 2003, in whole or in part, at the following per share redemption
prices in cash, plus, in each case, an amount in cash equal to accrued and
unpaid dividends for the then-current dividend period:

If redeemed during the 12-month period          Redemption
   beginning May 1,                               Price     
---------------------------------------      --------------
                                              (In thousands)
              2003                              $ 27.250
              2004                              $ 27.025
              2005                              $ 26.800
              2006                              $ 26.575
              2007                              $ 26.350
              2008                              $ 26.125
              2009                              $ 25.900
              2010                              $ 25.675
              2011                              $ 25.450
              2012                              $ 25.225
              2013 and thereafter               $ 25.000


<PAGE>
25.  RETIREMENT PLAN - THE BANK

The Bank participates in a defined contribution profit sharing retirement plan
(the "Plan") which covers those full-time employees who meet the requirements as
specified in the Plan. The Plan, which can be modified or discontinued at any
time, requires participating employees to contribute 2.0% of their compensation.
Corporate contributions, at the discretionary amount of three times the employee
contribution, were $7.3, $5.6 and $4.7 million for the years ended September 30,
1998, 1997 and 1996, 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.



<PAGE>
26.  REGULATORY MATTERS - THE BANK

Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), the Bank's regulatory capital requirements at September 30, 1998
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, 1998, the Bank was in compliance with its tangible, core and total
risk-based regulatory capital requirements and exceeded the capital standards
established for "well capitalized" institutions under the "prompt corrective
action" regulations. The information below is based upon the Bank's
understanding of the applicable FIRREA and "prompt corrective action"
regulations and related interpretations.
<TABLE>
                                                          SEPTEMBER 30, 1998                        
                                 ------------------------------------------------------------------
                                                               MINIMUM                EXCESS
                                         ACTUAL          CAPITAL REQUIREMENT          CAPITAL       
                                 ---------------------- ---------------------- --------------------
                                              As a % of              As a % of            As a % of
(Dollars in thousands)             Amount     Assets(4)   Amount     Assets     Amount    Assets    
-------------------------------- ----------  ---------- ---------- ----------- --------- ----------
<S>                              <C>         <C>        <C>        <C>         <C>       <C>
Capital per financial statements $ 464,757
 Minority interest in REIT
  Subsidiary(1)                    144,000
 Net unrealized holding gains(2)       (58)
Adjusted capital                   608,699

Adjustments for tangible and
 core capital:
 Intangible assets                 (63,144)
 Non-allowable minority interest
  in REIT Subsidiary(1)            (11,433)
 Non-includable subsidiaries(3)     (3,852)
Total tangible capital             530,270        7.93% $ 100,253        1.50% $ 430,017      6.43%
                                 ----------  ========== ========== =========== ========= ==========
Total core capital(4)              530,270        7.93% $ 267,342        4.00% $ 262,928      3.93%
                                 ----------  ========== ========== =========== ========= ==========

Tier 1 risk-based capital(4)       530,270       12.93% $ 172,572        4.00% $ 357,698      8.93%
                                 ----------  ========== ========== =========== ========= ==========
Adjustments for total risk-based
 capital:
 Subordinated capital debentures   250,000
 Allowance for general loan
  losses                            53,036
   Total supplementary capital     303,036
   Total available capital         833,306
 Equity investments(3)             (11,133)
                                 ----------
Total risk-based capital(4)      $ 822,173      20.70 % $ 345,143        8.00% $ 477,030     12.70%
                                 ==========  ========== ========== =========== ========= ==========
</TABLE>
<PAGE>
(1) Eligible for inclusion in core capital in an amount up to 25% of the
    Bank's core capital pursuant to authorization from the OTS.
(2) Pursuant to OTS policy, net unrealized holding gains (losses) are excluded
    from regulatory capital.
(3) Reflects an aggregate offset of $788,000 representing the allowance for
    general loan losses maintained against the Bank's equity investments and
    non-includable subsidiaries which, pursuant to OTS guidelines, is available
    as a credit against the deductions from capital otherwise required for such
    investments.
(4) Under the OTS "prompt corrective action" regulations, the standards for
    classification as "well capitalized" are a leverage (or "core capital")
    ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0%
    and a total risk-based capital ratio of at least 10.0%.
<PAGE>
At September 30, 1997, the Bank was in compliance with its tangible, core and
total risk-based regulatory capital requirements and exceeded the capital
standards established for "well capitalized" institutions under the "prompt
corrective action" regulations. The information below is based upon the Bank's
understanding of the applicable FIRREA and "prompt corrective action"
regulations and related interpretations.
<TABLE>
                                                          SEPTEMBER 30, 1997                        
                                 ------------------------------------------------------------------
                                                               MINIMUM                EXCESS
                                         ACTUAL          CAPITAL REQUIREMENT          CAPITAL       
                                 ---------------------- ---------------------- --------------------
                                              As a % of              As a % of            As a % of
(Dollars in thousands)             Amount     Assets(4)   Amount     Assets     Amount    Assets    
-------------------------------- ----------  ---------- ---------- ----------- --------- ----------
<S>                              <C>         <C>        <C>        <C>         <C>       <C>
Capital per financial statements $ 363,246
 Minority interest in REIT
  Subsidiary(1)                    144,000
 Net unrealized holding gains(2)       493
Adjusted capital                   507,739

Adjustments for tangible and
 core capital:
 Intangible assets                 (44,251)
 Non-allowable minority interest
  in REIT Subsidiary(1)            (38,758)
 Non-includable subsidiaries(3)     (3,762)
Total tangible capital             420,968        6.96% $  90,715        1.50% $ 330,253      5.46%
                                 ----------  ========== ========== =========== ========= ==========
Total core capital(4)              420,968        6.96% $ 241,907        4.00% $ 179,061      2.96%
                                 ----------  ========== ========== =========== ========= ==========

Tier 1 risk-based capital(4)       420,968        7.24% $ 232,713        4.00% $ 188,255      3.24%
                                 ----------  ========== ========== =========== ========= ==========

Adjustments for total risk-based
 capital:
 Subordinated capital debentures   250,000
 Allowance for general loan
  losses                            92,962  
   Total supplementary capital     342,962
 Excess allowance for loan losses  (19,989)
 Adjusted supplementary capital    322,973  
   Total available capital         743,941
 Equity investments(3)             (14,556)
                                 ----------
Total risk-based capital(4)      $ 729,385      13.50 % $ 465,426        8.00% $ 263,959      5.50%
                                 ==========  ========== ========== =========== ========= ==========
</TABLE>
<PAGE>
(1) Eligible for inclusion in core capital in an amount up to 25% of the
    Bank's core capital pursuant to authorization from the OTS.
(2) Pursuant to OTS policy, net unrealized holding gains (losses) are excluded
    from regulatory capital.
(3) Reflects an aggregate offset of $964,000 representing the allowance for
    general loan losses maintained against the Bank's equity investments and
    non-includable subsidiaries which, pursuant to OTS guidelines, is available
    as a credit against the deductions from capital otherwise required for such
    investments.
(4) Under the OTS "prompt corrective action" regulations, the standards for
    classification as "well capitalized" are a leverage (or "core capital")
    ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0%
    and a total risk-based capital ratio of at least 10.0%.
<PAGE>
At September 30, 1998 and 1997, the Bank had $4.1 and $4.0 million,
respectively, in loans to and investments in subsidiaries engaged in activities
impermissible for national banks ("non-includable subsidiaries") which were
fully deducted from all three capital requirements. At September 30, 1998 and
1997, the Bank also had two equity investments with an aggregate balance, after
subsequent valuation allowances, of $11.7 and $15.3 million, respectively, which
were fully deducted from total risk-based capital.

OTS capital regulations provide a five-year holding period (or such longer
period as may be approved by the OTS) for REO to qualify for an exception from
treatment as an equity investment. If an REO property is considered an equity
investment, its then-current book value is deducted from total risk-based
capital. Accordingly, if the Bank is unable to dispose of any REO property
(through bulk sales or otherwise) prior to the end of its applicable five-year
holding period and is unable to obtain an extension of such five-year holding
period from the OTS, the Bank could be required to deduct the then-current book
value of such REO property from total risk-based capital. In February 1998, the
Bank received from the OTS an extension of the holding periods for certain of
its REO properties through February 17, 1999. The following table sets forth the
Bank's REO at September 30, 1998, after valuation allowances of $166.9 million,
by the fiscal year in which the property was acquired through foreclosure.

                 Fiscal Year         (In thousands)
                 -----------         --------------
                    1990              $ 19,023(1)(2)
                    1991                36,619(2)
                    1992                   100(2)
                    1993                   --
                    1994                   732
                    1995                 5,907
                    1996                    --
                    1997                    --
                    1998                 3,027  
                                      ---------
                 Total REO            $ 65,408 
                                      =========


(1) Includes REO with an aggregate net book value of $11.1 million, which the
    Bank treats as equity investments for regulatory capital purposes.
(2) Includes REO with an aggregate net book value of $44.6 million, for which
    the Bank received an extension of the holding periods through February 17,
    1999.

At the request of the OTS, the Board of Directors of the Bank adopted a
resolution in March 1996 which, among other things, 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
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.
<PAGE>
27.  TRANSACTIONS WITH RELATED PARTIES - THE BANK

Loans Receivable

From time to time, in the normal course of business, the Bank may make loans to
executive officers and directors, their immediate family members or companies
with which they are affiliated. These loans are on substantially the same terms
as similar loans with unrelated parties. An analysis of activity with respect to
these loans for the year ended September 30, 1998 is as follows:

                                    (In thousands)  
                                    ---------------
Balance, September 30, 1997         $        2,432
  Additions                                  3,276
  Reductions                                (2,313)
                                    ---------------
Balance, September 30, 1998         $        3,395  
                                    ================

Services

B. F. Saul Company, which is a shareholder of the Trust, and its subsidiaries
provide certain services to the Bank. These services include property
management, insurance brokerage and leasing. Fees for these services were
$24,000, $42,000 and $366,000 for the years ended September 30, 1998, 1997 and
1996, respectively.

The law firm in which one director of the Bank is a partner received $4.6, $4.9
and $3.2 million for legal services rendered to the Bank during the years ended
September 30, 1998, 1997 and 1996 respectively.

For the years ended September 30, 1998, 1997 and 1996, one of the directors of
the Bank was paid $75,000, $50,000 and $37,000, respectively, for consulting
services rendered to the Bank. Another director of the Bank was paid total fees
of $100,000 for each of the years ended September 30, 1998, 1997 and 1996,
respectively, for consulting services. A third director of the Bank was paid
$50,000 and $17,000 for consulting services rendered to the Bank for the years
ended September 30, 1998 and 1997, respectively.

Tax Sharing Agreement

The Bank and the other companies in the Trust's affiliated group are parties to
a tax sharing agreement dated June 28, 1990 (the "Tax Sharing Agreement"). The
Tax Sharing Agreement provides for payments to be made by members of the Trust's
affiliated group to the Trust based on their separate company tax liabilities.
The Tax Sharing Agreement also provides that, to the extent net operating losses
or tax credits of a particular member are used to reduce the overall tax
liability of the Trust's affiliated group, such member will be reimbursed by the
other members of the affiliated group that have taxable income in an amount
equal to such tax reduction. The Bank paid $5.6, $9.8 and $25.0 million to the
Trust during fiscal 1998, 1997 and 1996, respectively, under the Tax Sharing
Agreement. OTS approval of the tax sharing payments during fiscal 1998, 1997 and
1996 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 26. At September 30, 1998, the estimated tax sharing payment
payable to the Trust by the Bank was $6.6 million. There was no tax sharing
payment payable to the Trust by the Bank at September 30, 1997.
<PAGE>
Other

The Bank paid $5.0, $4.9 and $4.5 million for office space leased from or
managed by companies affiliated with the Bank or its directors during the years
ended September 30, 1998, 1997 and 1996, respectively.

The Trust, the B. F. Saul Company, Chevy Chase Lake Corporation ("Lake") and Van
Ness Square Corporation, affiliates of the Bank, from time to time maintain
interest-bearing deposit accounts with the Bank. Those accounts totaled $28.0
and $26.5 million at September 30, 1998 and 1997, respectively. The Bank paid
interest on the accounts amounting to $0.9, $0.6 and $1.1 million during fiscal
years ended 1998, 1997 and 1996, respectively.

28.  FINANCIAL INSTRUMENTS - THE BANK

The Bank, in the normal course of business, is a party to financial instruments
with off-balance-sheet risk and other derivative financial instruments to meet
the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include commitments
to extend credit at both fixed and variable rates, letters of credit,
interest-rate cap agreements and assets sold with limited recourse. All such
financial instruments are held or issued for purposes other than trading.

These instruments involve, to varying degrees, elements of credit and
interest-rate risk in excess of the amount recognized in the Consolidated
Balance Sheets.

The contract or notional amount of these instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments. For
interest-rate cap agreements, assets sold with limited recourse and forward
purchase and sale commitments, the contract or notional amounts do not represent
exposure to credit loss in the event of nonperformance by the other party. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. 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 approximately $1.1 billion of commitments to extend credit at
September 30, 1998. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Because many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. These commitments are subject to
the Bank's normal underwriting and credit evaluation policies and procedures.

Standby Letters of Credit

Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. At September 30, 1998,
the Bank had written standby letters of credit in the amount of $31.4 million,
which were issued to guarantee the performance of and irrevocably assure payment
by customers under construction projects.
<PAGE>

Of the total, $18.9 million will expire in fiscal 1999 and the remainder will
expire over time through fiscal 2001. The credit risk involved in issuing
standby letters of credit is essentially the same as that involved in extending
loan commitments to customers. Mortgage-backed securities with a book value of
$3.8 million were pledged as collateral for certain of these letters of credit
at September 30, 1998.

Recourse Arrangements

The Bank is obligated under various recourse provisions (primarily related to
credit losses) related to the securitization and sale of receivables. As a
result of these recourse provisions, the Bank maintained restricted cash
accounts and overcollateralization of receivables amounting to $110.2 and $12.5
million, respectively, at September 30, 1998, and $117.7 and $8.0 million,
respectively, at September 30, 1997, both of which are included in other assets
in the Consolidated Balance Sheets. In addition, the Bank owned subordinated
automobile receivables-backed securities with carrying values of $11.3 and $8.0
million at September 30, 1998 and 1997, respectively, which were classified as
trading securities in the Consolidated Balance Sheets.

The Bank is also obligated under various recourse provisions related to the swap
of single-family residential loans for mortgage-backed securities issued by the
Bank. At September 30, 1998, recourse to the Bank under these arrangements was
$6.5 million, consisting of restricted cash accounts amounting to $2.6 million
and overcollateralization of receivables of $3.9 million.

Derivative Financial Instruments

Interest-rate cap agreements are used to limit the Bank's exposure to rising
short-term interest rates related to the retained portion of certain of its
asset-backed securitizations. At September 30, 1998, the Bank was a party to two
interest-rate cap agreements with an aggregate notional amount of $205.6 million
with maturity dates ranging from October 15, 1998 through June 30, 1999. One of
the interest-rate cap agreements with a notional amount of $200.0 million
entitles 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
second interest-rate cap agreement with a notional amount of $5.6 million
entitles the Bank to receive compensatory payments from the cap provider, which
is a AA-rated (for long term debt as rated by Standard & Poor's) counterparty,
equal to the product of (a) the amount by which the one-month LIBOR exceeds
9.00% and (b) the then outstanding notional principal amount for the
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.

To manage the potentially adverse impact of interest rate movements on its held
for sale fixed-rate mortgage loan pipeline, the Bank hedges its pipeline by
entering into whole loan and mortgage-backed security forward sale commitments
and mortgage-backed security forward purchase commitments. Forward sale
commitments are used to sell specific financial instruments (whole loans or
mortgage-backed securities) at a future date for a specified price.


<PAGE>
At September 30, 1998, the Bank had mortgage-backed security forward sale
commitments of $39.1 million. At September 30, 1998, the Bank had no whole loan
forward sale commitments. In addition, at September 30, 1998, the Bank had $12.9
million in mortgage security forward purchase commitments related to its hedging
activities. Forward commitments generally settle within 90 days. Gains and
losses are deferred and recorded as a component of the gain on sales of loans at
the time the forward commitment matures.

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 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.


<PAGE>
29.  ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS - THE BANK

The majority of the Bank's assets and liabilities are financial instruments;
however, certain of these financial instruments lack an available trading
market. Significant estimates, assumptions and present value calculations were
therefore used for the purposes of the following disclosure, resulting in a
great degree of subjectivity inherent in the indicated fair value amounts.
Because 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, 1998 and 1997 are as
follows:
<TABLE>
                                                             September 30,                         
                                       -----------------------------------------------------------
                                                 1998                            1997            
                                       ------------------------    -------------------------------
                                        Carrying      Fair            Carrying          Fair
(In thousands)                           Amount       Value            Amount           Value     
-------------------------------------- ----------  ------------    --------------  ---------------
<S>                                    <C>         <C>             <C>             <C>
Financial assets:

Cash, due from banks,
 interest-bearing deposits, federal
 funds sold and securities purchased
 under agreements to resell           $1,216,456    $1,216,456       $   651,891     $   651,891
Loans held for sale                       56,287        56,991           102,749         103,819
Loans held for securitization and sale   125,000       125,000           220,000         220,000
Trading securities                        11,319        11,319             7,899           7,899
Investment securities                     43,999        44,528             4,998           5,012
Mortgage-backed securities             2,025,817     2,014,819         1,985,707       1,984,667
Loans receivable, net                  2,533,957     2,597,497         2,122,899       2,207,229
Other financial assets                   272,997       274,719           516,849         515,387


Financial liabilities:

Deposit accounts with
 no stated maturities                  3,360,571     3,360,571         3,089,603       3,089,603
Deposit accounts with
 stated maturities                     1,527,659     1,521,752         1,804,153       1,810,245
Securities sold under repurchase
 agreements and other short-term
 borrowings, notes payable and
 Federal Home Loan Bank advances         844,211       842,155           270,351         270,920
Capital notes-subordinated               241,417(1)    243,750           240,618(1)      256,875
Other financial liabilities               98,354        98,354           108,684         108,684
--------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of deferred debt issuance costs which are included in other assets in
    the Consolidated Balance Sheets.


<PAGE>
The following methods and assumptions were used to estimate the fair value
amounts at September 30, 1998 and 1997:

Cash, due from banks, interest-bearing deposits, federal funds sold and
securities purchased under agreements to resell: Carrying amount approximates
fair value.

Loans held for sale: Fair value is determined using quoted prices for loans, or
securities backed by loans with similar characteristics, or outstanding
commitment prices from investors.

Loans held for securitization and sale: The carrying value of loans held for
securitization and sale approximates fair value because such receivables are
sold at face value.

Trading securities: Fair value is equal to carrying value.

Investment securities: Fair value is based on quoted market prices.

Mortgage-backed securities: Fair value is based on quoted market prices, dealer
quotes or estimates using dealer quoted market prices for similar securities.

Loans 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 were generally sold at
face value through the Bank's securitization program, such face value was used
as the estimated fair value of these receivables at September 30, 1997. The fair
value of the Bank's loan portfolio as presented above does not include the value
of established credit line customer relationships, or the value relating to
estimated cash flows from future receivables and the associated fees generated
from existing customers.

Other financial assets: The carrying amount of Federal Home Loan Bank stock,
accrued interest receivable, interest-bearing deposits maintained pursuant to
various asset securitizations and other short-term receivables approximates fair
value. Interest-only strips are carried at fair value. The fair value of one of
the Bank's investments is based on quoted market prices. The fair value of the
Bank's interest-rate cap agreements is based on dealer quotes.

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.
<PAGE>

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 1993 Debentures and the 1996
Debentures is based on quoted market prices.

Other financial liabilities: The carrying amount of custodial accounts, amounts
due to banks, accrued interest payable 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.

30.  LITIGATION - THE BANK

During the normal course of business, the Bank is involved in certain
litigation, including litigation arising out of the collection of loans, the
enforcement or defense of the priority of its security interests, the continued
development and marketing of certain of its real estate properties and certain
employment claims. Although the amounts claimed in some of these suits in which
the Bank is a defendant are material, the Bank denies liability and, in the
opinion of management, litigation which is currently pending will not have a
material impact on the financial condition or future operations of the Bank.

31. COMMITMENTS AND CONTINGENCIES - THE TRUST

The Trust is involved in a number of lawsuits arising from the normal course of
its business. On the basis of consultations with counsel, management does not
believe that any material loss will result from the resolution of these matters.
<PAGE>
32. INCOME TAXES - THE TRUST

The Trust voluntarily terminated its qualification as a real estate investment
trust under the Internal Revenue Code during fiscal 1978.

The provisions for income taxes for the years ended September 30, 1998, 1997 and
1996, consist of the following:
<TABLE>
                                                                 Year Ended September 30,
                                                ------------------------------------------------------------
(In thousands)                                         1998                1997                 1996
----------------------------------------------  ------------------- -------------------  -------------------
<S>                                             <C>                 <C>                  <C>
Current provision (benefit):
  Federal                                                 $ 94,828             $(1,800)              $5,628
  State                                                      2,948               1,658                2,799
                                                ------------------- -------------------  -------------------
                                                            97,776                (142)               8,427
                                                ------------------- -------------------  -------------------

Deferred provision (benefit):
  Federal                                                  (35,291)             16,113                (513)
  State                                                    (19,616)             (3,159)                386
                                                ------------------- -------------------  -------------------
                                                           (54,907)             12,954                (127)
                                                ------------------- -------------------  -------------------

Subtotal                                                    42,869              12,812               8,300

Tax effect of other items:
  Tax effect of extraordinary item                          (5,169)                --                  --
  Tax effect of net unrealized holding gains
    (losses) reported in stockholders' equity                  361                 904                 809
                                                ------------------- -------------------  -------------------

Total                                                     $ 38,061            $ 13,716            $  9,109
                                                =================== ===================  ===================
</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)                                              1998                1997                 1996
---------------------------------------------------  ------------------- -------------------  -------------------
<S>                                                  <C>                 <C>                  <C>
Computed tax at statutory Federal income tax rate              $ 58,077            $ 21,418               $7,003
Increase (reduction) in taxes resulting from:
 Minority interest                                               (5,447)             (4,524)                 --
 Goodwill and other purchase accounting adjustments                 389                 699                1,626
 Change in valuation allowance for deferred
   tax asset allocated to income tax expense                     (7,074)              7,066                8,883
 State income taxes                                              (4,397)             (7,953)             (12,277)
 Other                                                            1,321              (3,894)               3,066
                                                     ------------------- -------------------  -------------------
                                                               $ 42,869            $ 12,812             $  8,301
                                                     =================== ===================  ===================
</TABLE>
<PAGE>
The components of the net deferred tax asset were as follows:
<TABLE>
                                                                September 30,
                                                 --------------------------------------------
(In thousands)                                           1998                   1997
------------------------------------------------ ---------------------  ---------------------
<S>                                              <C>                    <C>
Deferred tax assets:
  Provision for losses in excess of deductions               $25,103                $44,571
  Amortization of intangible                                   5,736                     --
  Unrealized losses on real estate owned                       4,836                  4,198
  Property                                                     7,211                  7,211
  State net operating losses                                  29,011                 21,351
  Amortization of servicing asset                              3,718                     --
  Partnership investments                                      1,811                  2,384
  Asset securitization                                        26,184                     --
  Forgiveness of debt                                          3,483                  3,928
  Deferred loan fees                                           3,416                     --
  Depreciation                                                 2,670                  2,307
  Compensation deferrals                                       4,371                     --
  Other                                                        5,298                  5,268
                                                 ---------------------  ---------------------
  Gross deferred tax assets                                  122,848                 91,218
                                                 ---------------------  ---------------------

Deferred tax liabilities:
  Net unrealized holding gains on securities                  (2,467)                (3,342)
      available-for-sale
  Deferred loan fees                                              --                   (541)
  Asset securitizations                                           --                (16,565)
  Saul Holdings                                               (4,509)                (4,509)
  Depreciation                                                  (712)                (4,096)
  FHLB stock dividends                                        (3,288)                (3,525)
  Other                                                       (2,950)                (3,879)
                                                 ---------------------  ---------------------
  Gross deferred tax liabilities                             (13,926)               (36,457)
                                                 ---------------------  ---------------------

Valuation allowance                                          (17,623)               (19,349)
                                                 ---------------------  ---------------------

Net deferred tax asset                                      $ 91,299               $ 35,412
                                                 =====================  =====================
</TABLE>
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,
1998, 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. The net operating loss carryforwards are not
expected to be realizable for state tax purposes. For federal tax purposes,
there are no net operating loss carryforwards.

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.
<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 $5.6, $9.8 and $25.0
million, respectively, to the Trust during fiscal 1998, 1997 and 1996.

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, 1998, 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, 1998, 1997, and 1996, the amount of dividends in arrears on the
preferred shares was $34.0 million ($65.98 per share), $36.2 million ($70.21 per
share) and $31.6 million ($61.17 per share), respectively. Based on the
dividends paid on the preferred shares during fiscal 1996, the Trust recorded a
liability at September 30, 1996, equal to the total dividends in arrears on that
date. The Trust paid preferred dividends of $7.6 million, $750,000 and $500,000
in fiscal 1998, 1997 and 1996, respectively.



<PAGE>



34. QUARTERLY FINANCIAL DATA (UNAUDITED) - THE TRUST

<TABLE>


                                                                         Year Ended September 30, 1998
                                         -------------------------------------------------------------------------------------------
(In thousands, except per share amounts)       December                 March                   June                September
---------------------------------------- ----------------------  ---------------------  ---------------------  ---------------------
<S>                                      <C>                     <C>                    <C>                    <C>
Real Estate Trust:
 Total income                                         $ 21,749               $ 22,167               $ 28,833               $ 25,843
 Operating loss                                         (7,430)                (5,542)                (1,975)                (3,510)
The Bank:
 Interest income                                       106,395                106,774                109,795                112,843
 Interest expense                                       58,292                 55,180                 61,606                 63,332
 Provision for loan losses                             (35,062)               (16,612)               (28,298)               (70,857)
 Other income                                          129,369                 95,820                 87,530                329,138
 Operating income (loss)                                29,433                 12,474                (17,624)               160,124
Total Company:
Operating income (loss)                                 22,003                  6,932                (19,599)               156,614
Income (loss) before minority interest                  16,156                 (3,086)                (9,528)               119,539
Net income (loss)                                        6,856                (10,153)               (13,299)                82,720
Net income (loss) per common share                        1.14                  (2.38)                 (3.04)                 16.86

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

                                                                        Year Ended September 30, 1997
                                         -------------------------------------------------------------------------------------------
(In thousands, except per share amounts)       December                 March                   June                September
---------------------------------------- ----------------------  ---------------------  ---------------------  ---------------------
<S>                                      <C>                     <C>                    <C>                    <C>
Real Estate Trust:
 Total income                                         $ 19,020               $ 18,653               $ 23,448               $ 23,448
 Operating loss                                         (7,092)                (6,762)                (2,167)                (2,966)
The Bank:
 Interest income                                       115,271                123,286                120,748                 91,175
 Interest expense                                       57,544                 61,911                 61,246                 59,114
 Provision for loan losses                             (26,840)               (26,922)               (36,129)               (35,224)
 Other income                                           87,611                 88,096                 90,158                147,112
 Operating income (loss)                                19,958                 20,126                 10,672                 29,425
Total Company:
Operating income                                        12,866                 13,364                  8,505                 26,459
Income (loss) before minority interest                   7,735                 10,333                  3,444                 26,872
Net income (loss)                                        2,303                  2,743                 (3,079)                16,893
Net income (loss) per common share                        0.20                   0.29                  (0.91)                  3.20

------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<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)                                                         1998                    1997                   1996
-------------------------------------------------------------  ----------------------  ---------------------- ----------------------
<S>                                                            <C>                     <C>                    <C>
INCOME
Hotels                                                                      $ 71,424                $ 59,464               $ 54,245
Office and industrial properties                                              22,883                  21,097                 17,590
Other                                                                          4,285                   4,008                  5,004
                                                               ----------------------  ---------------------- ----------------------
                                                                            $ 98,592                $ 84,569               $ 76,839
                                                               ======================  ====================== ======================


OPERATING PROFIT (LOSS)
Hotels                                                                      $ 19,175                $ 14,755               $ 12,635
Office and industrial properties                                              10,865                   9,020                  5,893
Other                                                                          4,546                   6,429                  6,702
                                                               ----------------------  ---------------------- ----------------------
                                                                              34,586                  30,204                 25,230
Gain (loss) on sales of property                                                (331)                    895                    (68)
Interest and debt expense                                                    (42,817)                (40,819)               (40,514)
Advisory fee, management and leasing fees - related parties                   (8,742)                 (7,995)                (7,423)
General and administrative                                                    (1,153)                 (1,272)                (1,401)
                                                               ======================  ====================== ======================
Operating loss                                                             $ (18,457)               $(18,987)              $(24,176)
                                                               ======================  ====================== ======================


IDENTIFIABLE ASSETS (AT YEAR END)
Hotels                                                                      $119,258                $ 86,815               $ 84,255
Office and industrial properties                                              75,332                  78,063                 78,388
Other                                                                        129,291                 135,695                131,860
                                                               ----------------------  ---------------------- ----------------------
                                                                            $323,881                $300,573               $294,503
                                                               ======================  ====================== ======================


DEPRECIATION
Hotels                                                                        $6,733                  $6,186                 $5,535
Office and industrial properties                                               4,387                   4,311                  4,446
Other                                                                             50                      46                     39
                                                               ----------------------  ---------------------- ----------------------
                                                                            $ 11,170                $ 10,543               $ 10,020
                                                               ======================  ====================== ======================

CAPITAL EXPENDITURES
Hotels                                                                      $ 39,539                  $8,462                 $4,769
Office and industrial properties                                               6,389                   5,288                  2,444
Other                                                                            537                   1,079                    195
                                                               ----------------------  ---------------------- ----------------------
                                                                            $ 46,465                $ 14,829                 $7,408
                                                               ======================  ====================== ======================
</TABLE>
<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)                                                                    1998                    1997
--------------------------------------------------------------------     ----------------------- -----------------------
<S>                                                                      <C>                     <C>
ASSETS
Income-producing properties                                                            $279,951                $242,450
Accumulated depreciation                                                                (96,072)                (85,915)
                                                                         ----------------------- -----------------------
                                                                                        183,879                 156,535
Land parcels                                                                             40,110                  42,160
Construction in progress                                                                  8,694                   2,480
Equity investment in bank                                                               288,965                 205,552
Cash and cash equivalents                                                                13,950                  18,248
Other assets                                                                             76,799                  81,150
                                                                         ----------------------- -----------------------
    TOTAL ASSETS                                                                       $612,397                $506,125
                                                                         ======================= =======================

LIABILITIES
Mortgage notes payable                                                                 $198,874                $180,204
Notes payable - secured                                                                 200,000                 175,000
Notes payable - unsecured                                                                50,335                  46,633
Deferred gains - real estate                                                            112,883                 112,883
Accrued dividends payable - preferred
  shares of beneficial interest                                                          34,049                  36,231
Other liabilities and accrued expenses                                                   39,895                  39,959
                                                                         ----------------------- -----------------------
    Total liabilities                                                                   636,036                 590,910
                                                                         ----------------------- -----------------------
TOTAL SHAREHOLDERS' DEFICIT*                                                            (23,639)                (84,785)
                                                                         ======================= =======================
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                                            $612,397                $506,125
                                                                         ======================= =======================

* See Consolidated Statements of Shareholders' Deficit
</TABLE>
<PAGE>
<TABLE>
CONDENSED STATEMENTS OF OPERATIONS

                                                                             For the Year Ended September 30
                                                           ---------------------------------------------------------------------
(In thousands)                                                     1998                    1997                   1996
---------------------------------------------------------- ---------------------- ----------------------- ----------------------
<S>                                                        <C>                    <C>                     <C>
Total income                                                            $ 98,592                $ 84,569               $ 76,839
Total expenses                                                          (118,636)               (108,601)              (104,321)
Equity in earnings of partnership investments                              1,918                   4,150                  3,374
Gain (loss) on sales of property                                            (331)                    895                    (68)
                                                           ---------------------- ----------------------- ----------------------
Real estate operating loss                                               (18,457)                (18,987)               (24,176)
Equity in earnings of bank                                                88,172                  27,391                 15,846
                                                           ---------------------- ----------------------- ----------------------
Total company operating income (loss)                                     69,715                   8,404                 (8,330)
Income tax benefit                                                        (6,010)                (10,456)                (8,252)
                                                           ---------------------- ----------------------- ----------------------
Income (loss) before extraordinary item                                   75,725                  18,860                    (78)
Extraordinary item: loss on early extinguishment of debt                  (9,601)                    --                     --
                                                           ---------------------- ----------------------- ----------------------

TOTAL COMPANY NET INCOME (LOSS)                                         $ 66,124                $ 18,860                  $ (78)
                                                           ====================== ======================= ======================
</TABLE>
<PAGE>
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS

                                                                                        For the Year Ended September 30
                                                                --------------------------------------------------------------------
(In thousands)                                                          1998                    1997                   1996
--------------------------------------------------------------- ---------------------- ----------------------- ---------------------
<S>                                                             <C>                    <C>                     <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)                                                            $ 66,124                $ 18,860                 $ (78)
Adjustments to reconcile net income (loss)
 to net cash provided by (used in)
 operating activities:
  Depreciation                                                                 11,170                  10,543                10,020
  Loss (gain) on sales of property                                                328                    (895)                   68
  Early extinguishment of debt, net of taxes                                    9,601                      --                    --
  Equity in earnings of bank                                                  (88,172)                (27,391)              (15,846)
  (Increase) decrease in deferred tax asset                                       954                  (3,252)                 (192)
  Decrease (increase) in accounts receivable and accrued income                (1,229)                     17                (4,869)
  Increase in accounts payable and accrued expenses                             2,708                   1,058                   430
  (Increase) decrease in tax sharing receivable                                (6,545)                  2,492                16,606
  Other                                                                        19,799                   5,479                 2,893
                                                                ---------------------- ----------------------- ---------------------
Net cash provided by operating activities                                      14,738                   6,911                 9,032
                                                                ---------------------- ----------------------- ---------------------

CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures - properties                                             (19,815)                (10,120)               (7,408)
Property acquisitions                                                         (26,650)                 (4,709)                   --
Property sales                                                                     --                   1,399                 1,812
Equity investment in unconsolidated entities                                    1,348                   1,723                   639
Other investing activities                                                          2                      43                    50
                                                                ---------------------- ----------------------- ---------------------
Net cash used in investing activities                                         (45,115)                (11,664)               (4,907)
                                                                ---------------------- ----------------------- ---------------------

CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from long-term debt                                                  296,316                  32,894                 6,208
Repayments of long-term debt                                                 (245,287)                (24,033)              (11,471)
Costs of obtaining financings                                                  (7,295)                   (626)                 (201)
Loan prepayment fees                                                          (10,055)                     --                    --
Dividends paid                                                                 (7,600)                   (750)                 (500)
                                                                ---------------------- ----------------------- ---------------------
Net cash provided by (used in) financing activities                            26,079                   7,485                (5,964)
                                                                ---------------------- ----------------------- ---------------------
Net increase (decrease) in cash and cash equivalents                           (4,298)                  2,732                (1,839)
Cash and cash equivalents at beginning of year                                 18,248                  15,516                17,355
                                                                ---------------------- ----------------------- ---------------------
Cash and cash equivalents at end of year                                     $ 13,950                $ 18,248              $ 15,516
                                                                ====================== ======================= =====================
</TABLE>

<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.
<PAGE>
TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST

The Declaration of Trust provides that there shall be no fewer than three nor
more than twelve Trustees, as determined from time to time by the Trustees in
office. The Board of Trustees has fixed its permanent membership at six Trustees
divided into three classes with overlapping three-year terms. The term of each
class expires at the Annual Meeting of Shareholders, which is usually held on
the last Friday of January.

The following list sets forth the name, age, position with the Trust, present
principal occupation or employment and material occupations, positions, offices
or employments during the past five years of each Trustee and executive officer
of the Trust. Unless otherwise indicated, each individual has held an office
with the Trust for at least the past five years.

Class Three Trustees --Terms End at 1999 Annual Meeting

Garland J. Bloom, Jr., age 67, 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 65, 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.

Class One Trustees --Terms End at 2000 Annual Meeting

Gilbert M. Grosvenor, age 67, 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 66, 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. Mr. Saul is the father of B. Francis Saul III.
<PAGE>
Class Two Trustees --Terms End at 2001 Annual Meeting

George M. Rogers, Jr., age 65, 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.

B. Francis Saul III, age 36, was elected a Trustee and Vice President of the
Trust in 1997. He also serves as a Director and/or Officer of the Bank, B. F.
Saul Company, B. F. Saul Advisory Company, Franklin Property Company, Chevy
Chase Property Company, Westminster Investing Corporation, and Saul Centers,
Inc. He is also a Director of the Greater Washington Boys and Girls Club and The
Heights School. Mr. Saul is the son of B. Francis Saul II.


Executive Officers of the Trust Who Are Not Directors

Philip D. Caraci, age 60, serves as Senior Vice President and Secretary of the
Trust, Executive Vice President of B.F. Saul Company, Senior Vice President of
B. F. Saul Advisory Company, President of Franklin Property Company and a
Director and President of Saul Centers, Inc.

Stephen R. Halpin, Jr., age 43, 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 59, 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 64, serves as Vice President of the Trust, B. F. Saul
Company, B. F. Saul Advisory Company and Saul Centers, Inc.

William K. Albright, age 67, 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 1998. 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 1998.
<PAGE>
The Executive Committee is composed of Messrs. Rogers, Saul II and Whitmore. It
is empowered to oversee day-to-day actions of the Advisor and Franklin Property
Company ("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 1998.

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 1998.

Trustees of the Trust are currently paid an annual retainer of $12,500 and a fee
of $600 for each Board or committee meeting attended. Trustees from outside the
Washington, D.C. area are also reimbursed for out-of-pocket expenses in
connection with their attendance at meetings. Mr. Saul II is not paid for
attending Executive Committee meetings. For the fiscal year ended September 30,
1998, the Real Estate Trust paid total fees of $94,000 to the Trustees,
including $15,000 to Mr. Saul II.

EXECUTIVE COMPENSATION

The Trust pays no compensation to its executive officers for their services in
such capacity. Mr. Saul II receives compensation from the Bank for his services
as the Bank's Chairman of the Board of Directors and Chief Executive Officer,
and Mr. Halpin receives compensation from 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, 1998,
1997 or 1996.

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, 1998,
1997 and 1996 for all capacities in which they served during such fiscal years.
<PAGE>
                           Summary Compensation Table
                               Annual Compensation
------------------------------------------------------------------------------
Name and Principal                                  Other Annual    All Other
  Position            Fiscal    Salary      Bonus   Compensation  Compensation
--------------------- ------ ------------ --------- ------------  ------------

B. Francis Saul II     1998   $1,353,528  $700,000     $   --     $725,873 (1)
  Chairman and Chief   1997    1,230,440   600,000         --      292,807 (2)
  Executive Officer    1996    1,015,054   500,000         --      214,426 (3)


Stephen R. Halpin, Jr. 1998     $400,010   $60,000     $   --     $159,073 (1)
  Vice President and   1997      375,402    54,000         --       69,167 (2)
  Chief Financial      1996      332,320    58,000         --       50,295 (3)
  Officer
---------------------
(1) The total amounts shown in the "All Other Compensation" column for fiscal
1998 consist of the following: (i) contributions made by the Bank's Supplemental
Executive Retirement Plan on behalf of Mr. Saul ($136,018) and Mr. Halpin
($20,170); (ii) the taxable benefit of premiums paid by the Bank for group term
insurance on behalf of Mr. Saul ($14,724) and Mr. Halpin ($2,621); (iii)
contributions to the Retirement Plan, a defined contribution plan, on behalf of
Mr. Halpin ($9,600); and (iv) accrued earnings on awards previously made under
the Bank's Deferred Compensation Plan on behalf of Mr. Saul ($575,131) and Mr.
Halpin ($126,682).

(2) The total amounts shown in the "All Other Compensation" column for fiscal
1997 consist of the following contributions made by the Bank to the Bank's
Supplemental Executive Retirement Plan on behalf of Mr. Saul ($109,616) and Mr.
Halpin ($16,164); (ii) the taxable benefit of premiums paid by the Bank for
group term insurance on behalf Mr. Halpin ($2,325); (iii) contributions to the
Retirement Plan, a defined contribution plan, on behalf of Mr. Halpin ($9,600);
and (iv) accrued earnings on awards previously made under the Bank's Deferred
Compensation Plan on behalf of Mr. Saul ($183,191) and Mr. Halpin ($41,078).

(3) The total amounts shown in the "All Other Compensation" column for fiscal
1996 consist of the 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
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).
<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 1998 under the Bank's
Deferred Compensation Plan (the "Plan").

            Long-Term Incentive Program - Awards in Last Fiscal Year

                          Number   Performance
                         of Shares   Or Other    Estimated Future Payouts Under
                           Units   Period Until   Non-Stock Price-Based Plans
Name and Principal       Or Other  Maturation   -------------------------------
  Position               Rights(1)  Or Payout   Threshold  Target(2)  Maximum
------------------------ --------- ------------ ---------  --------- ----------
B. Francis Saul II(3)(4)    N/A        2002     $550,000   $694,362  $1,140,480
  Chairman and Chief  
  Executive Officer   
                      
                      
Stephen R. Halpin, Jr.(4)   N/A        2008     $120,000   $214,902    $743,008
  Vice President and  
  Chief Financial     
  Officer             
------------------------

(1) The estimated future payouts shown in the table are based on assumed
performance rates for the Bank 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, 2008.

(2) The Plan does not establish any target performance levels. The payout
amounts shown in this column have 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,
1997.

(3) The payout amount shown for Mr. Saul is the estimated amount that would be
payable to Mr. Saul if he continued with the Bank for the entire ten-year
performance period of the Plan. 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 2008. 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 age 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,
1998, Mr. Saul was partially vested in the Account 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 $779,446.

(4) As of September 30, 1998 the following individuals have vested Accounts that
are payable within 120 days after September 30, 1998; Mr. Saul ($303,710); and
Mr. Halpin ($65,081).
<PAGE>
The Plan provides that, as of the end of each fiscal year in the ten-year period
ending September 30, 2008 (or the executive officer's earlier termination of
employment with the Bank), the Bank will add to or deduct from each executive
officer's Account a contribution or deduction, as the case may be, which
represents, the hypothetical interest (which may be positive or negative) earned
on the Principal Contribution, based on the Bank's rate of return on average
assets (as computed under the Plan) for the fiscal year then ended. (The
Principal Contribution, plus or minus any interest credited or deducted, is
referred to as the "Net Contribution").

Executive officers are entitled to receive the Net Contribution in their
respective Account only upon full or partial vesting. Plan participants become
fully vested in their Account under the Plan, provided that they remain
continuously employed by the Bank during the vesting period, upon the earliest
to occur of any of the following: (i) September 30, 2008; (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, 2003.

Payouts are made under the Plan within 120 days after September 30, 2008, or the
earlier termination of the executive officer's employment with the Bank,
provided that vesting or partial vesting has occurred under the Plan.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information, as of December 4, 1998,
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.

<PAGE>
                        Aggregate Number of          Percent
       Name of               Shares                     of
   Beneficial Owner     Beneficially Owned (1)        Class (1)
----------------------- ---------------------- ------------------
B. Francis Saul II           Preferred:
                             516,000 (2)               100.00%
                             Common:
                             4,807,510 (3)              99.60%

Philip D. Caraci             Common:
                             19,400 (4)                  0.40%

All Trustees and             Preferred:
executive officers           516,000 (2)               100.00%
as a group (10 persons)      Common:
                             4,826,910                 100.00%
-----------------------

(1) Beneficial owner and percent of class are calculated pursuant to rule 13d-3
under the Securities Exchange Act of 1934.

(2) Consists of Preferred Shares owned of record by B. F. Saul Company and other
companies of which Mr. Saul is an officer, director and/or more than 10%
shareholder (comprising 270,000 Preferred Shares owned by B. F. Saul Company,
90,000 Preferred Shares owned by Franklin Development Company, Inc., 90,000
Preferred Shares owned by The Klingle Corporation, and 66,000 Preferred Shares
owned by Westminster Investing Corporation). The address of each person listed
in this footnote is 8401 Connecticut Avenue, Chevy Chase, Maryland 20815.
Pursuant to Rule 13d-3, the Preferred Shares described above are considered to
be beneficially owned by Mr. Saul because he has or may be deemed to have sole
or shared voting and/or investment power in respect thereof.

(3) Consists of Common Shares owned of record by B. F. Saul Company and other
companies of which Mr. Saul is an officer and director and/or more than 10%
shareholder (comprising 1,125,739 Common Shares owned by Westminster Investing
Corporation, 43,673 Common Shares owned by Derwood Investment 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.
<PAGE>
The Preferred Shares were issued in June 1990 in connection with the transaction
in which the Trust increased its equity interest in the Bank from 60% to 80%.
The dividend rate on the Preferred Shares is $10.50 per share per annum.
Dividends are cumulative and are payable annually or at such other times as the
Trustees may determine, as and when declared by the Trustees out of any assets
legally available therefor. The Preferred Shares have a liquidation preference
of $100 per share. Subject to limits in certain of the Trust's loan agreements,
the Preferred Shares are subject to redemption at the option of the Trust at a
redemption price equal to their liquidation preference. Except as otherwise
required by applicable law, the holders of Preferred Shares are entitled to vote
only in certain limited situations, such as the merger of the Trust or a sale of
all or substantially all of the assets of the Trust.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Real Estate

Transactions with B. F. Saul Company and its Subsidiaries. The Real Estate Trust
is managed by the Advisor, a wholly owned subsidiary of the Saul Company. All of
the officers of the Trust and B. Francis Saul II, George M. Rogers, Jr., B.
Francis Saul III 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 $301,000 for the period October 1995
through March 1996, $306,000 for the period April 1996 through September 1996,
$311,000 for the period October 1996 through September 1997, and $317,000 for
the period October 1997 through September 1998. The advisory contract has been
extended until September 30, 1999, and will continue 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 $5.2 million in
fiscal 1998.

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 $113,000 in such fees
in fiscal 1998.

B. F. Saul Insurance Agency of Maryland, Inc., a subsidiary of the Saul Company,
is a general insurance agency that receives commissions and counter-signature
fees in connection with the Real Estate Trust's insurance program. Such
commissions and fees amounted to approximately $157,000 in fiscal 1998.
<PAGE>
In fiscal 1994 the Real Estate Trust made an unsecured loan to the Saul Company
of $15.0 million at a floating interest rate and due on demand. In fiscal 1995
the loan balance was reduced to $12.7 million. In fiscal 1996 the Real Estate
Trust made loans aggregating $3.5 million to the Saul Company. During fiscal
1997 and 1998, curtails of $750,000 and $141,000, respectively, were paid by the
Saul Company. At September 30, 1998 the total due the Real Estate Trust was
$15.3 million in principal and $1.7 million in deferred interest. Interest
accrued on these loans amounted to $1.3 million, $1.4 million and $1.4 million
during fiscal 1998, 1997 and 1996 respectively.

Remuneration of Trustees and Officers. For fiscal 1998, the Real Estate Trust
paid the Trustees $94,000 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 II 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, Saul II and Saul III receive compensation for their services
as directors of the Bank and Messrs. Rogers, Saul II, Saul III and Whitmore and
all of the officers of the Real Estate Trust receive compensation from 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 approximately $
800,000 in fiscal 1998, 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 approximately $251,000 in fiscal 1998.
<PAGE>
NOTE ORDER FORM


                     B.F. SAUL REAL ESTATE INVESTMENT TRUST
                        7200 Wisconsin Avenue, Suite 903
                            Bethesda, Maryland 20814

     PLEASE ISSUE A NOTE EXACTLY AS INDICATED BELOW AT THE INTEREST RATE SHOWN
ON YOUR CURRENT PROSPECTUS OR SUPPLEMENT THERETO. MY CHECK FOR 100% OF THE
PRINCIPAL AMOUNT IS ENCLOSED. I UNDERSTAND THAT MY NOTE WILL BE ISSUED AS OF THE
DATE THIS ORDER IS RECEIVED (IF RECEIVED BY NOON) AND THAT YOUR OFFER MAY BE
WITHDRAWN WITHOUT NOTICE.

Owner's Name:
              -----------------------------------------------------------------

Address:
              -----------------------------------------------------------------

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

Taxpayer Identification

(Social Security) Number:
                          -----------------------------------------------------


Principal Amount of Note   Maturity from date of issue

(Minimum $5,000):          (circle one):  1  2  3  4  5  6  7  8  9  10 year(s)
                 --------

If the maturity date falls on a Saturday, Sunday, or holiday, it will be changed
to the nearest business day. This change will not alter the interest rate.

Under penalties of perjury, I certify (1) that the number shown on this form is
my correct taxpayer identification number, and (2) that I am not subject to
backup withholding because (a) I have not been notified that I am subject to
backup withholding as a result of a failure to report all interest or dividends,
or (b) the Internal Revenue Service has notified me that I am no longer subject
to backup withholding; or all of the account owners are neither citizens nor
residents of the United States and therefore exempt from withholding.

Note: Strike out the language certifying that you are not subject to backup
withholding due to notified payee underreporting if the Internal Revenue Service
has notified you that you are subject to backup withholding and you have not
received notice from the Internal Revenue Service advising that backup
withholding has terminated.



--------------                -------------------------------------------------
Date                          Signature


For office use only:
--------------------          -------------------------------------------------
Date rec'd                    Print Name
           ---------

                              -------------------------------------------------
Issue date                    Address (if different from above)
           ---------

                              -------------------------------------------------
Interest rate                 City, State & Zip Code
              ------

                              -------------------------------------------------
                              (Area Code) Telephone Number
<PAGE>
                     B.F. SAUL REAL ESTATE INVESTMENT TRUST
                        7200 Wisconsin Avenue, Suite 903
                            Bethesda, Maryland 20814



Gentlemen:

I (We) hold a Note,

                        number
                                   ------------------------------

   For the principal amount of     $
                                   ------------------------------

              which matures on
                                   ------------------------------

     CHECK ONE OF THE FOLLOWING BOXES:

1.   I (We) wish to receive a check for the principal amount -
     if so, please send note to U.S. Bank Trust National
     Association

2.   I (We) wish to reinvest the principal amount in a new Note as follows:


Principal Amount of Note   Maturity from date of issue

(Minimum $5,000):          (circle one):  1  2  3  4  5  6  7  8  9  10 year(s)
                 --------


The principal amount of the new note may be either increased or decreased in
increments of $1,000. In no can case the new principal be less than $5,000. If
increased, please send a check payable to B.F. Saul Real Estate Investment Trust
for the amount of the increase.

                PLEASE ENCLOSE THE MATURING NOTE AND RETURN TO US

           IF THE NEW NOTE TO BE ISSUED IS TO BE REGISTERED IN A NAME
            OTHER THAN THAT OF THE PRESENT HOLDER(S), OR IF ANY OTHER
                         ALTERATIONS IN THE FORM OF THE
           REGISTRATION ARE REQUIRED, PLEASE PRINT OR TYPE IN THE NEW
                               INFORMATION BELOW.


Name of Owner(s)
                                   --------------------------------------------
                                   Print Name


                                   --------------------------------------------
                                   Print Name

Address:
                                   --------------------------------------------
                                   No.       Street    Apt.


                                   --------------------------------------------
                                   City      State     Zip Code

Telephone Number
                                   --------------------------------------------
                                   Area Code

Federal Identification or
Social Security
                                   --------------------------------------------



-----------------------------------                             ---------------
Signature                                                       Date
<PAGE>
                                 ACKNOWLEDGEMENT

                     B.F. SAUL REAL ESTATE INVESTMENT TRUST
                        7200 Wisconsin Avenue, Suite 903
                               Bethesda, MD 20814

     Gentlemen:

     I understand and acknowledge that (1) the Note I am purchasing is not a
savings account or a deposit and (2) the Note is not insured or guaranteed any
federal government agency, including the Federal Deposit Insurance Corporation,
or by any state governmental agency.




--------------------                     --------------------------------------
Date                                     Signature

                                         --------------------------------------
                                         Print Name

<PAGE>
                                     PART II


                     INFORMATION NOT REQUIRED IN PROSPECTUS


Item 14.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.


It is estimated that the expenses in connection with the issuance and
distribution of the securities are as follows:

Registration fee..................................     $   16,680
Cost of printing and engraving....................         18,500
Indenture Trustee & Registrar's Fees..............         80,000
Legal fees of counsel for registrant..............        400,000
Accountants' fees.................................         25,000
Payment to B. F. Saul Advisory Company for
     Administering Note Program...................        600,000
Miscellaneous and Advertising.....................        367,000
                                                       -----------

     Total........................................     $1,507,180
                                                       ===========

Item 15.  INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Declaration of Trust (Article III) provides that no Trustee or officer of
the Trust shall be liable for any action or failure to act except for his own
bad faith, willful misfeasance, gross negligence or reckless disregard of his
duties, and, except as stated, Trustees and officers are entitled to be
reimbursed and indemnified for all loss, expenthey are Trustees or officers of
the Trust.use

Item 16.

(a)  EXHIBITS.

  EXHIBITS                         DESCRIPTION
  ----------  ------------------------------------------------------------------
  3.    (a)   Amended and Restated Declaration of Trust filed with the
              Maryland State Department of Assessments and Taxation on June 22,
              1990 as filed as Exhibit 3(a) to Registration Statement No.
              33-34930 is hereby
              incorporated by reference.
<PAGE>
  EXHIBITS                         DESCRIPTION
  ----------  ------------------------------------------------------------------
        (b)   Amendment to Amended and Restated Declaration of Trust reflected
              in Secretary Certificate filed with the Maryland State Department
              of Assessments and Taxation on June 26, 1990 as filed as Exhibit
              3(b) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.

        (c)   Amended and Restated By-Laws of the Trust dated as of February 28,
              1991 as filed as Exhibit T3B to the Trust's Form T-3 Application
              for Qualification of Indentures under the Trust Indenture Act of
              1939 (File No. 22-20838) is hereby incorporated by
              reference.

  4.    (a)   Indenture dated as of September 1, 1992 with respect to the
              Trust's Notes due from One to Ten Years from Date of Issue filed
              as Exhibit 4(a) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.

        (b)   First Supplemental Indenture dated as of January 16, 1997 with
              respect to the Trust's Notes due from One to Ten Years from Date
              of Issue filed as Exhibit 4(b) to Registration Statement No.
              33-34930 is hereby incorporated by reference.

        (c)   Indenture with respect to the Trust's Senior Notes Due from One
              Year to Ten Years from Date of Issue as filed as Exhibit 4 (a) to
              Registration Statement No. 33-19909 is hereby incorporated by
              reference.

        (d)   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.

        (e)   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.

        (f)   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.

        (g)   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.

        (h)   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.

        (i)   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.
<PAGE>
  EXHIBITS                         DESCRIPTION
  ----------  ------------------------------------------------------------------
        (j)   Indenture with respect to the Trust's Senior Notes due from One
              Year to Five Years from Date of Issue as filed as Exhibit T-3C to
              the Trust's Form T-3 Application for Qualification of Indentures
              under the Trust Indenture Act of 1939 (File No. 22-10206) is
              hereby incorporated by reference.

        (k)   Indenture dated as of March 25, 1998 between the Trust and Norwest
              Bank Minnesota, National Association, as Trustee, with respect to
              the Trust's 9 3/4% Series B Senior Secured Notes due 2008, as
              filed as Exhibit 4(a) to Registration Statement No. 333-49937 is
              hereby incorporated by reference.

       *(l)   Second Supplemental Indenture dated as of January 13, 1999 with
              respect to the Trust's Notes due from One to Ten Years from Date
              of Issuance.

  *5.         Opinion of Shaw Pittman Potts & Trowbridge with respect to 
              legality of the Notes.

  10.  (a)    Advisory Contract with B.F. Saul Advisory Company effective 
              October 1, 1982 filed as Exhibit 10(a) to Registration Statement 
              No. 2-80831 is hereby incorporated by reference.

        (b)   Commercial Property Leasing and Management Agreement effective
              October 1, 1982 between the Trust and Franklin Property Company as
              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 subsidiaries 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 as 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)   Amendment 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) subsidiaries filed as
              Exhibit 10(o) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.
<PAGE>
  EXHIBITS                         DESCRIPTION
  ----------  ------------------------------------------------------------------
        (g)   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.

        (h)   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.

        (i)   Registration Rights and Lock-Up Agreement dated August 26, 1993 by
              and among Saul Centers, Inc. and the Trust, Westminster Investing
              Corporation, Van Ness Square Corporation, Dearborn 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.

        (j)   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.

        (k)   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 as 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.

        (1)   Registration Rights Agreement dated as of March 25, 1998 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. 333-49937 is hereby
              incorporated by reference.

        (m)   Bank Stock Registration Rights Agreement dated as of March 25,
              1998 between the Trust and Norwest Bank Minnesota, National
              Association, as Trustee, filed as Exhibit 4(d) to Registration
              Statement No. 333-49937 is hereby incorporated by reference.
              
        (n)   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.
<PAGE>
  EXHIBITS                         DESCRIPTION
  ----------  ------------------------------------------------------------------
        (o)   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.

   *12.       Statement re: Computation of Ratio of Earnings to Fixed Charges.

   *21.       List of Subsidiaries of the Trust.

   *23. (a)   Consent of Arthur Andersen LLP.

   *    (b)   Consent of Shaw Pittman Potts & Trowbridge (included in
              Exhibit 5).

   *24.       Power of Attorney (included on signature page).

   *25.       Statement of Eligibility on Form T-1 of U.S. Bank
              Trust National Association.
-------------------
*Filed herewith.

(b)  FINANCIAL STATEMENT SCHEDULES.

     The following Financial Statement Schedules are submitted under Item 16(b):

     Schedule I     Condensed Financial Information
     Schedule III   Consolidated Schedule of Investment Properties - Real
                         Estate Trust


ITEM 17.  UNDERTAKINGS.


     The undersigned registrant hereby undertakes:

     (1)  To file, during any period in which offers or sales are being made, a
          post-effective amendment to this registration statement:

          (i)   To include any prospectus required by Section 10(a)(3) of
                the Securities Act of 1933;

          (ii)  To reflect in the prospectus any facts or events arising after
                the effective date of the registration statement (or the most
                recent post-effective amendment thereof) which, individually or
                in the aggregate, represent a fundamental change in the
                information set forth in the registration statement;

          (iii) To include any material information with respect to the plan of
                distribution not previously disclosed in the registration
                statement or any material change to such information in the
                registration statement.

     (2) That, for the purpose of determining any liability under the Securities
         Act of 1933, each such post-effective amendment shall be deemed to be a
         new registration statement relating to the securities offered therein,
         and the offering of such securities at that time shall be deemed to be
         the initial bona fide offering thereof.

     (3) To remove from registration by means of a post-effective amendment any
         of the securities being registered which remain unsold at the
         termination of the offering.
<PAGE>
Insofar as Indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provision, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

<PAGE>




                                   SIGNATURES


Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Chevy Chase,
Maryland on this the 19th day of January 1999.                                 




                         B.F. SAUL REAL ESTATE INVESTMENT TRUST

                         By:  B. FRANCIS SAUL II
                         ----------------------------
                               B. Francis Saul II
                              Chairman of the Board
                         (Principal Executive Officer)




                                POWER OF ATTORNEY


KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints B. Francis Saul II and Ross E. Heasley, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments and registration statements for the same offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933,
as amended) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities indicated
below on this 19th day of January 1999.                                        

<PAGE>


          Signature                         Capacity
---------------------------    --------------------------------------


B. Francis Saul II
---------------------------    Trustee, Chairman of the Board
B. Francis Saul II             and Principal Executive Officer


Stephen R. Halpin, Jr.
---------------------------    Vice President and Chief
Stephen R. Halpin, Jr.         Financial Officer (Principal
                               Financial Officer)


Ross E. Heasley
---------------------------    Vice President
Ross E. Heasley                (Principal Accounting Officer)


Garland J. Bloom, Jr.
---------------------------    Trustee
Garland J. Bloom, Jr.


Gilbert M. Grosvenor
---------------------------    Trustee
Gilbert M. Grosvenor


Gilbert M. Grosvenor
---------------------------    Trustee
Gilbert M. Grosvenor


B. Francis Saul III
---------------------------    Trustee
B. Francis Saul III


John R. Whitmore
---------------------------    Trustee
John R. Whitmore
<PAGE>



                       REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                           ON FINANCIAL STATEMENT SCHEDULES


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




We have audited the consolidated financial statements of B.F. Saul Real Estate
Investment Trust (the "Trust") as of September 30, 1998 and 1997 and for the
years then ended in accordance with generally accepted auditing standards, and
have issued our report thereon dated December 2, 1998. 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 as to the financial data required to be set forth therein
in relation to the basic financial statements taken as a whole.


Arthur Andersen LLP


Washington, D.C.
December 2, 1998

<PAGE>

B.F. SAUL REAL ESTATE INVESTMENT TRUST
CONDENSED FINANCIAL INFORMATION                              SCHEDULE I


(a)  Required condensed financial information on the Trust is disclosed in 
     the audited consolidated financial statements included herewith.

(b)  Amounts of cash dividends paid to the Trust by consolidated subsidiaries 
     were as follows:



                                     Year Ended September 30
                           ---------------------------------------
                              1998           1997           1996  

                           $5,200,000    $7,200,000     $6,800,000 



<PAGE>
<TABLE>
Consolidated Schedule of Investment Properties - Real Estate Trust                                               Schedule III
September 30, 1998
(Dollars in Thousands)

                                                                       
                                                                       Costs               Basis at Close of Period
                                                                    Capitalized   --------------------------------------------
                                                       Initial      Subsequent                    Buildings
                                                       Basis to         to                           and
Hotels                                                  Trust       Acquisition      Land        Improvements       Total
---------------------------------------------------- ------------- -------------- ------------ ----------------- -------------
<S>                                                  <C>           <C>            <C>          <C>               <C>
Hampton Inn -- Dulles Airport, Sterling VA                   $ --        $ 6,512        $ 290           $ 6,222       $ 6,512
Holiday Inn Select, Auburn Hills MI                        10,450          1,017        1,031            10,436        11,467
Holiday Inn, Cincinnati OH                                  6,859          2,719          245             9,333         9,578
Holiday Inn -- National Airport, Arlington VA              26,979             --        4,229            22,750        26,979
Holiday Inn -- Dulles Airport, Sterling VA                  6,950         20,239          862            26,327        27,189
Holiday Inn, Gaithersburg MD                                3,849         15,270        1,781            17,338        19,119
Holiday Inn Express, Herndon VA                             5,259            108        1,178             4,189         5,367
Holiday Inn, Pueblo CO                                      3,458          2,463          561             5,360         5,921
Holiday Inn -- Rochester Airport, Rochester NY              3,340          9,588          605            12,323        12,928
Holiday Inn -- Tysons Corner, McLean VA                     6,976         14,553        3,107            18,422        21,529
Howard Johnsons -- National Airport, Arlington VA          10,187          3,180        1,183            12,184        13,367
TownePlace Suites -- Dulles Airport, Sterling VA            5,849             --          219             5,630         5,849
                                                     ------------- -------------- ------------ ----------------- -------------
Subtotal - Hotels                                        $ 90,156       $ 75,649     $ 15,291         $ 150,514     $ 165,805
                                                     ------------- -------------- ------------ ----------------- -------------

Commercial
----------------------------------------------------
900 Circle 75 Pkway, Atlanta GA                          $ 33,434        $ 1,707        $ 563          $ 34,578      $ 35,141
1000 Circle 75 Pkway, Atlanta GA                            2,820          1,049          248             3,621         3,869
1100 Circle 75 Pkway, Atlanta GA                           22,746          1,932          419            24,259        24,678
8201 Greensboro, Tysons Corner VA                          28,890          3,526        1,633            30,783        32,416
Commerce Ctr-Ph II, Ft Lauderdale FL                        4,266            727          782             4,211         4,993
Dulles North, Loudoun County VA                                --          5,782          507             5,275         5,782
Metairie Tower, Metairie LA                                 2,729            649          403             2,975         3,378
                                                     ------------- -------------- ------------ ----------------- -------------
Subtotal - Commercial                                    $ 94,885       $ 15,372      $ 4,555         $ 105,702     $ 110,257
                                                     ------------- -------------- ------------ ----------------- -------------
</TABLE>

<PAGE>
<TABLE>
Consolidated Schedule of Investment Properties - Real Estate Trust (Continued)                          Schedule III-Continued
September 30, 1998
(Dollars in Thousands)
                                                                            
                                                                       Costs               Basis at Close of Period
                                                                    Capitalized   --------------------------------------------
                                                       Initial      Subsequent                    Buildings
                                                       Basis to         to                           and
Purchase-Leasebacks                                     Trust       Acquisition      Land        Improvements       Total
---------------------------------------------------- ------------- -------------- ------------ ----------------- -------------
<S>                                                  <C>           <C>            <C>          <C>               <C>
Chateau di Jon, Metairie, LA                              $ 1,125           $ --      $ 1,125              $ --       $ 1,125
Country Club, Knoxville, TN                                   500             --          500                --           500
Houston Mall, Warner Robbins, GA                              650             --          650                --           650
Old National, Atlanta, GA                                     550             --          550                --           550
                                                     ------------- -------------- ------------ ----------------- -------------
Subtotal - Purchase-Leasebacks                            $ 2,825           $ --      $ 2,825              $ --       $ 2,825
                                                     ------------- -------------- ------------ ----------------- -------------

Miscellaneous investments                                   $ 250          $ 814        $ 250             $ 814       $ 1,064
                                                     ------------- -------------- ------------ ----------------- -------------

Total Income-Producing Properties                       $ 188,116       $ 91,835     $ 22,921         $ 257,030     $ 279,951
                                                     ------------- -------------- ------------ ----------------- -------------

Land Parcels
----------------------------------------------------
Arvida Park of Commerce,
    Boca Raton, FL                                        $ 7,378         (1,817)     $ 5,561              $ --       $ 5,561
Avenel, Gaithersburg, MD                                      361           (144)         217                --           217
Church Road, Loudoun Co., VA                                2,586          2,380        4,966                --         4,966
Circle 75, Atlanta, GA                                     12,927          4,300       17,227                --        17,227
Flagship Centre, Rockville, MD                              1,729             39        1,768                --         1,768
Holiday Inn - Auburn Hills, Auburn Hills MI                   656            219          875                --           875
Holiday Inn - Rochester, Roch., NY                             68             --           68                --            68
Overland Park, Overland Park, KA                            3,771            398        4,169                --         4,169
Commerce Center, Ft. Laud., FL                              2,203             20        2,223                --         2,223
Sterling Blvd., Loudoun Co., VA                               505          2,531        3,036                --         3,036
                                                     ------------- -------------- ------------ ----------------- -------------
Subtotal                                                 $ 32,184        $ 7,926     $ 40,110              $ --      $ 40,110
                                                     ------------- -------------- ------------ ----------------- -------------

Total Investment Properties                             $ 220,300       $ 99,761     $ 63,031         $ 257,030     $ 320,061
                                                     ============= ============== ============ ================= =============
</TABLE>

<PAGE>
<TABLE>
Consolidated Schedule of Investment Properties - Real Estate Trust (Continued)                          Schedule III-Continued
September 30, 1998
(Dollars in Thousands)

                                                                                                                  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 Airport, Sterling VA                $ 2,613        $ 6,864     1987            4/87            31.5
Holiday Inn Select, Auburn Hills MI                         1,557         12,606     1989           11/94            31.5
Holiday Inn, Cincinnati OH                                  5,172          6,291     1975            2/76             40
Holiday Inn -- National Airport, Arlington VA                 503         17,752     1959           12/97             39
Holiday Inn -- Dulles Airport, Sterling VA                 12,509         11,644     1971           11/84             28
Holiday Inn, Gaithersburg MD                                7,767          6,520     1972            6/75             45
Holiday Inn Express, Herndon VA                               305          5,097     1987           10/96             40
Holiday Inn, Pueblo CO                                      2,953          4,859     1973            3/76             40
Holiday Inn -- Rochester Airport, Rochester NY              6,322         12,651     1975            3/76             40
Holiday Inn -- Tysons Corner, McLean VA                     7,989         14,913     1971            6/75             47
Howard Johnsons -- National Airport, Arlington VA           5,935          8,598     1973           11/83             30
TownePlace Suites -- Dulles Airport, Sterling VA               29          4,122     1998            8/98             40
                                                     ------------- --------------
Subtotal - Hotels                                        $ 53,654      $ 111,917
                                                     ------------- --------------

Commercial
----------------------------------------------------
900 Circle 75 Pkway, Atlanta GA                          $ 13,373       $ 20,279     1985           12/85             35
1000 Circle 75 Pkway, Atlanta GA                            2,107          3,274     1974            4/76             40
1100 Circle 75 Pkway, Atlanta GA                           11,670         14,071     1982            9/82             40
8201 Greensboro, Tysons Corner VA                          10,569         33,613     1985            4/86             35
Commerce Ctr-Ph II, Ft Lauderdale FL                        1,614          2,865     1986            1/87             35
Dulles North, Loudoun County VA                             1,286          3,001     1990           10/90            31.5
Metairie Tower, Metairie LA                                 1,652             --     1974           11/76             40
                                                     ------------- --------------
Subtotal - Commercial                                    $ 42,271       $ 77,103
                                                     ------------- --------------
</TABLE>

<PAGE>
<TABLE>
Consolidated Schedule of Investment Properties - Real Estate Trust (Continued)                          Schedule III-Continued
September 30, 1998
(Dollars in Thousands)
                                                                                                                  Buildings
                                                                                                                     and
                                                                                                                 Improvements
                                                     Accumulated      Related       Date of          Date        Depreciable
Purchase-Leasebacks                                  Depreciation      Debt       Construction     Acquired      Lives (Years)
---------------------------------------------------- ------------- -------------- ------------ ----------------- -------------
<S>                                                  <C>           <C>            <C>          <C>               <C>
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                                   $ 147           $ --
                                                     ------------- --------------

Total Income-Producing Properties                        $ 96,072      $ 189,020
                                                     ------------- --------------

Land Parcels
----------------------------------------------------
Arvida Park of Commerce,
    Boca Raton, FL                                           $ --           $ --                 12/84 & 5/85
Avenel, Gaithersburg, MD                                       --             --                    12/76
Church Road, Loudoun Co., VA                                   --          9,791                 9/84 & 4/85
Circle 75, Atlanta, GA                                         --            312                 2/77 & 1/84
Flagship Centre, Rockville, MD                                 --             --                     8/85
Holiday Inn - Auburn Hills, Auburn Hills MI                    --            410                     7/97
Holiday Inn - Rochester, Roch., NY                             --             --                     9/86
Overland Park, Overland Park, KA                               --             --                 1/77 & 2/85
Commerce Center, Ft. Laud., FL                                 --             --                10/83 & 8/84
Sterling Blvd., Loudoun Co., VA                                --             --                     4/84
                                                     ------------- --------------
Subtotal                                                     $ --       $ 10,513
                                                     ------------- --------------

Total Investment Properties                              $ 96,072      $ 199,533
                                                     ============= ==============
</TABLE>

<PAGE>
<TABLE>
                                                                                                         Schedule III (Continued)

CONSOLIDATED SCHEDULE OF INVESTMENT PROPERTIES - REAL ESTATE TRUST

NOTES:

(1) See Summary of Significant Accounting Policies for basis of recording
    investment properties and computing depreciation. Investment
    properties are discussed in Note 3 to Consolidated Financial
    Statements.

(2) A reconciliation of the basis of investment properties and accumulated
    depreciation follows.


BASIS OF INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION
(In thousands)
                                                                              For The Year Ended September 30
                                                                ------------------------------------------------------------
                                                                       1998                1997                 1996
                                                                ------------------- -------------------- -------------------
<S>                                                             <C>                 <C>                  <C>

Basis of investment properties
---------------------------------------------------------------

Balance at beginning of period                                           $ 284,610            $ 274,208           $ 277,385
Additions (reductions) during the period:
    Capital expenditures                                                    34,079               12,069               7,408
    Sales - nonaffiliates                                                     (415)                (525)             (5,382)
    Transferred from construction in progress                                2,681                   --                  --
    Other                                                                     (894)              (1,142)             (5,203)
                                                                ------------------- -------------------- -------------------
Balance at end of period                                                 $ 320,061            $ 284,610           $ 274,208
                                                                =================== ==================== ===================


Accumulated depreciation
---------------------------------------------------------------

Balance at beginning of period                                            $ 85,915             $ 76,513            $ 75,140
Additions (reductions) during the period:
    Depreciation expense                                                    11,170               10,543              10,020
    Sales - nonaffiliates                                                     (216)                  --              (3,441)
    Other                                                                     (797)              (1,141)             (5,206)
                                                                ------------------- -------------------- -------------------
Balance at end of period                                                  $ 96,072             $ 85,915            $ 76,513
                                                                =================== ==================== ===================
</TABLE>
<PAGE>
                                  EXHIBIT INDEX


  EXHIBITS                         DESCRIPTION
  ----------  ------------------------------------------------------------------

  3.    (a)   Amended and Restated Declaration of Trust filed with the
              Maryland State Department of Assessments and Taxation on June 22,
              1990 as filed as Exhibit 3(a) to Registration Statement No.
              33-34930 is hereby
              incorporated by reference.

        (b)   Amendment to Amended and Restated Declaration of Trust reflected
              in Secretary Certificate filed with the Maryland State Department
              of Assessments and Taxation on June 26, 1990 as filed as Exhibit
              3(b) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.

        (c)   Amended and Restated By-Laws of the Trust dated as of February 28,
              1991 as filed as Exhibit T3B to the Trust's Form T-3 Application
              for Qualification of Indentures under the Trust Indenture Act of
              1939 (File No. 22-20838) is hereby incorporated by
              reference.

  4.    (a)   Indenture dated as of September 1, 1992 with respect to the
              Trust's Notes due from One to Ten Years from Date of Issue filed
              as Exhibit 4(a) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.

        (b)   First Supplemental Indenture dated as of January 16, 1997 with
              respect to the Trust's Notes due from One to Ten Years from Date
              of Issue filed as Exhibit 4(b) to Registration Statement No.
              33-34930 is hereby incorporated by reference.

        (c)   Indenture with respect to the Trust's Senior Notes Due from One
              Year to Ten Years from Date of Issue as filed as Exhibit 4 (a) to
              Registration Statement No. 33-19909 is hereby incorporated by
              reference.

        (d)   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.

        (e)   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.

        (f)   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.

        (g)   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.
<PAGE>
  EXHIBITS                         DESCRIPTION
  ----------  ------------------------------------------------------------------
        (h)   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.

        (i)   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.

        (j)   Indenture with respect to the Trust's Senior Notes due from One
              Year to Five Years from Date of Issue as filed as Exhibit T-3C to
              the Trust's Form T-3 Application for Qualification of Indentures
              under the Trust Indenture Act of 1939 (File No. 22-10206) is
              hereby incorporated by reference.

        (k)   Indenture dated as of March 25, 1998 between the Trust and Norwest
              Bank Minnesota, National Association, as Trustee, with respect to
              the Trust's 9 3/4% Series B Senior Secured Notes due 2008, as
              filed as Exhibit 4(a) to Registration Statement No. 333-49937 is
              hereby incorporated by reference.

       *(l)   Second Supplemental Indenture dated as of January 13, 1999 with
              respect to the Trust's Notes due from One to Ten Years from Date
              of Issuance.

  *5.         Opinion of Shaw Pittman Potts & Trowbridge with respect to
              legality of the Notes.

  10.  (a)    Advisory Contract with B.F. Saul Advisory Company effective
              October 1, 1982 filed as Exhibit 10(a) to Registration Statement
              No. 2-80831 is hereby incorporated by reference.

        (b)   Commercial Property Leasing and Management Agreement effective
              October 1, 1982 between the Trust and Franklin Property Company as
              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 subsidiaries filed as Exhibit
              10(d) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.
<PAGE>

  EXHIBITS                         DESCRIPTION
  ----------  ------------------------------------------------------------------
        (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 as 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)   Amendment 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) subsidiaries filed as
              Exhibit 10(o) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.

        (g)   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.

        (h)   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.

        (i)   Registration Rights and Lock-Up Agreement dated August 26, 1993 by
              and among Saul Centers, Inc. and the Trust, Westminster Investing
              Corporation, Van Ness Square Corporation, Dearborn 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.

        (j)   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.

        (k)   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 as 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.
<PAGE>
  EXHIBITS                         DESCRIPTION
  ----------  ------------------------------------------------------------------
        (1)   Registration Rights Agreement dated as of March 25, 1998 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. 333-49937 is hereby
              incorporated by reference.

        (m)   Bank Stock Registration Rights Agreement dated as of March 25,
              1998 between the Trust and Norwest Bank Minnesota, National
              Association, as Trustee, filed as Exhibit 4(d) to Registration
              Statement No. 333-49937 is hereby incorporated by reference.

        (n)   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.

        (o)   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.

   *12.       Statement re: Computation of Ratio of Earnings to Fixed Charges.

   *21.       List of Subsidiaries of the Trust.

   *23. (a)   Consent of Arthur Andersen LLP.

   *    (b)   Consent of Shaw Pittman Potts & Trowbridge (included in
              Exhibit 5).

   *24.       Power of Attorney (included on signature page).

   *25.       Statement of Eligibility on Form T-1 of U.S. Bank
              Trust National Association.
-------------------
*Filed herewith.
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{"company-data": {"conformed-name": "SAUL B F REAL ESTATE INVESTMENT TRUST", "cik": "0000086902", "assigned-sic": "6035", "irs-number": "526053341", "state-of-incorporation": "MD", "fiscal-year-end": "0930"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-70753", "film-number": "99507879"}, "business-address": {"street1": "8401 CONNECTICUT AVE", "city": "CHEVY CHASE", "state": "MD", "zip": "20815", "phone": "3019866000"}}
As filed with the Securities and Exchange Commission on January 19, 1999.   

                                             Registration No. 333-
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                              ---------------------

                                    FORM S-1

                             REGISTRATION STATEMENT
                                      UNDER
                           THE SECURITIES ACT OF 1933
                              ---------------------

B.F. Saul Real Estate Investment Trust                 Maryland
--------------------------------------   ---------------------------------------
    (Exact name of registrant as              (State or other jurisdiction
      specified in its charter)             of incorporation or organization)

             6712                                       52-605334
--------------------------------------   ---------------------------------------
    (Primary standard industrial         (I.R.S. employer identification number)
     classification code number)

                            8401 Connecticut Avenue,
                    Chevy Chase, Maryland 20815 301/986-6000
       -------------------------------------------------------------
       (Address, including zip code, and telephone number, including
           area code, of registrant's principal executive offices)

                               Henry Ravenel, Jr.
                            8401 Connecticut Avenue,
                    Chevy Chase, Maryland 20815 301/986-6000
          -------------------------------------------------------------
            (Name, address, including zip code, and telephone number,
                   including area code, of agent for service)

                          Copies of correspondence to:
                            Thomas H. McCormick, Esq.
                         Shaw Pittman Potts & Trowbridge
                               2300 N Street, N.W.
                             Washington, D.C. 20037
                                 (202) 663-8000

Approximate date of commencement of proposed sale to the public: From time to
time following the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
   
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of earlier effective registration
statement for the same offering. / /

If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

                         CALCULATION OF REGISTRATION FEE
     ----------------------------------------------------------------------
       Title of Each        Amount    Proposed     Proposed    Amount of
          Class of          To Be      Maximum      Maximum    Registration
         Securities       Registered  Offering     Aggregate     Fee (1)
      To Be Registered                Price Per    Offering
                                        Unit         Price
     ----------------------------------------------------------------------
     Notes Due From     $60,000,000       100%      $60,000,000    $16,680
     One Year to Ten
     Years From Date
     of Issue
     ----------------------------------------------------------------------

(1) Calculated pursuant to Rule 457(o) of the rules and regulations under the
Securities Act of 1933, as amended.

The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
PROSPECTUS SUBJECT TO COMPLETION DATED JANUARY 19, 1999                        

                                  $60,000,000

                     B.F. SAUL REAL ESTATE INVESTMENT TRUST
                                      NOTES

     Due one year to ten years from date of issue Interest payable each six
                    months from date of issue and at maturity

                          Note Maturities   Interest Rate
                          From Issue Date     Per Annum
                          ---------------   -------------
                          One Year              5.0%
                          Two Years             7.0%
                          Three Years           9.0%
                          Four Years            9.5%
                          Five to Ten Years    10.0%
                          -------------------------------

                                      Per Note        Total  
                                      --------   ------------
          Public Offering Price         100%     $ 60,000,000
          Underwriting Discounts
           and Commissions              None          None
          Proceeds to Trust(1)          100%     $ 60,000,000

    (1) Before deduction of expenses payable by the B.F. Saul Real Estate
    Investment Trust estimated at $1,507,000, including $600,000 payable
    to B.F. Saul Advisory Company for administering the note program. B.F.
    Saul Advisory Company serves as the Trust's investment advisor and is
    an affiliate of the Trust.

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

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

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

There is no established trading market for the Notes, and the Trust does not
anticipate that an active trading market will be established. These notes are
unsecured obligations and are not guaranteed or insured by any governmental
agency. Furthermore, an investment in the notes involves significant risks.

See "Risk Factors" beginning on page ___ for a discussion of material risks that
you should consider before you invest in the notes being sold by this
Prospectus.

                The date of this Prospectus is January   , 1999.               

[The information in this prospectus is not complete and may be changed. We may
not sell these Notes until the registration statement filed with the Securities
and Exchange Commission has been declared effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.]
TABLE OF CONTENTS

PROSPECTUS SUMMARY

RISK FACTORS

USE OF PROCEEDS

PLAN OF DISTRIBUTION

HOW TO PURCHASE NOTES

PLAN OF DISTRIBUTION

DESCRIPTION OF NOTES

EXPERTS

LEGAL MATTERS

AVAILABLE INFORMATION

BUSINESS 

    General
         Real Estate
         Banking

PROPERTIES
    Real Estate
    Banking

LEGAL PROCEEDINGS

SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    Financial Condition
         Real Estate
         Banking
    
    Liquidity and Capital Resources
         Real Estate
         Banking
              Liquidity
              Capital

    Results of Operations
         Fiscal 1998 Compared to Fiscal 1997
              Real Estate
              Banking

         Fiscal 1997 Compared to Fiscal 1996
              Real Estate
              Banking

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    Management's Statement on Responsibility

TRUSTEES AND EXECUTIVES OFFICERS OF THE TRUST

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

EXECUTIVE COMPENSATION

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
  OWNERS AND MANAGEMENT

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
              Real Estate
              Banking

NOTE ORDER FORM
PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this Prospectus. It
is not complete and may not contain all of the information that you should
consider before investing in the Notes. To understand this offering fully, you
should read the entire Prospectus carefully, including the "Risk Factors"
section and the financial statements and the notes to those statements.

We have prepared our financial statements and other disclosures on a fully
consolidated basis, which means we included the financial results of Chevy Chase
Bank and its subsidiaries in our financial statements. When we use the term
"Trust" in the text and financial statements, we are referring to the combined
entity including B.F. Saul Real Estate Investment Trust and its subsidiaries,
and Chevy Chase Bank and its subsidiaries. The terms "Real Estate Trust," "we,"
"us," "our" and "ours" refers to B.F. Saul Real Estate Investment Trust and its
subsidiaries, excluding Chevy Chase Bank and its subsidiaries. The operations
conducted by the Real Estate Trust are designated as "Real Estate," while the
business conducted by Chevy Chase Bank and its subsidiaries is identified by the
term "Banking."

                     B.F. Saul Real Estate Investment Trust

Our Corporate Structure

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

Our principal business activity is the ownership and development of
income-producing properties. In addition, we own 80% of the outstanding common
stock of Chevy Chase Bank, F.S.B. ("Chevy Chase Bank" or the "Bank"), whose
assets accounted for 95% of our consolidated assets at September 30, 1998. By
virtue of our ownership of a majority interest in Chevy Chase Bank, we are
considered to be a savings and loan holding company subject to certain
governmental regulations.

We recorded net income of $66.1 million in the fiscal year ended September 30,
1998, compared to net income of $18.9 million in the fiscal year ended September
30, 1997 and a net loss of $78,000 in the fiscal year ended September 30, 1996.

Our Real Estate Business

     Our long-term business objectives are to increase cash flow from operations
and to maximize the capital appreciation of our real estate. Our properties are
located predominantly in the Mid-Atlantic and Southeastern regions of the United
States and consist principally of office and industrial projects, hotels and
undeveloped land parcels.
In August 1993, we consummated a series of transactions in which we transferred
22 shopping center properties and one of our office properties and the debt
associated with such properties to a newly organized limited partnership, Saul
Holdings Limited Partnership ("Saul Holdings Partnership"), and one of two newly
organized subsidiary limited partnerships of Saul Holdings Partnership. In
exchange for the transferred properties, we received a 21.5% limited partnership
interest in Saul Holdings Partnership. Saul Centers, Inc. ("Saul Centers"), a
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. Saul Centers and a
wholly-owned subsidiary, which are the sole general partners of Saul Holdings
Partnership and the two subsidiary limited partnerships, generally have full,
exclusive and complete responsibility and discretion in the management and
control of each such partnership. B. Francis Saul II, the Chairman of the Board
of Trustees and Chief Executive Officer of the Trust, serves as Chairman of the
Board of Directors and Chief Executive Officer of Saul Centers.

The Business of Chevy Chase Bank

Chevy Chase Bank is a federally chartered and federally insured stock savings
bank which at September 30, 1998 was conducting business from 143 full service
offices, including 11 in-store banking centers, and 696 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 Chevy
Chase, Maryland, both suburban communities of Washington, D.C. The Bank also
maintains 14 mortgage loan production offices in the mid-Atlantic region, 13 of
which are operated by a wholly-owned mortgage banking subsidiary, and 31
consumer loan production offices, 24 of which are operated by a wholly-owned
finance subsidiary of the Bank. At September 30, 1998, the Bank had total assets
of $6.7 billion and total deposits of $4.9 billion. Based on total consolidated
assets at September 30, 1998, Chevy Chase Bank is the largest bank headquartered
in the Washington, D.C. metropolitan area.

Chevy Chase Bank 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 other types of
consumer loans. The Bank also has an 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. On November 12, 1997, the Bank acquired ASB Capital Management,
Inc. ("ASB"), one of the largest SEC-registered investment managers
headquartered in the Washington, D.C. metropolitan area, through which the Bank
provides a variety of investment products and fiduciary services to a primarily
institutional customer base.

In the past, Chevy Chase Bank has earned a significant portion of its revenues
from the issuance and servicing of credit cards and credit card receivables.
However, on September 30, 1998, the Bank sold its entire credit card portfolio
and related assets to an unaffiliated third party. As a result of this
transaction, the Bank will concentrate its resources on capitalizing on its
status as the largest locally headquartered bank in the Washington, D.C.
metropolitan area and furthering its community banking objectives.
Chevy Chase Bank has historically relied on retail deposits originated in its
branch network as its primary funding source. The Bank has developed its branch
network in furtherance of its corporate strategy to solidify its relationships
with existing customers, achieve a broader retail base to support future growth
and improve its ability to compete with other depository institutions in the
Washington, D.C. metropolitan area. With 47 of its 143 branches located in
Montgomery County, which has one of the nation's highest per capita incomes, the
Bank has the leading market share of retail deposits in that community. The
Bank's branch network also includes locations in Northern Virginia (44
branches), other Maryland counties (40 branches) and the District of Columbia
(12 branches). In addition to locations at deposit branch sites, the Bank has an
extensive network of ATMs.

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

Address of the Trust

Our executive offices are located at 8401 Connecticut Avenue, Chevy Chase,
Maryland 20815 and our sales office is located at 7200 Wisconsin Avenue, Suite
903, Bethesda, Maryland 20814. Our telephone number is 301-986-6207.

Ratio of Earnings to Fixed Charges

During the past five fiscal years, our "fixed charges," that is the total of
interest and debt expense (including amounts payable on the Notes) and ground
rent expense, were greater than our earnings generated from operations available
to pay such fixed charges. "Available earnings" is the sum of (1) income (loss)
from continuing operations, (2) provisions for income taxes, (3) ground rent
expense, and (4) interest and debt expense reduced by capitalized interest. In
fiscal 1998, 1997, 1996, 1995 and 1994, fixed charges exceeded available
earnings by $18.5 million, $19.0 million, $24.2 million, $27.3 million and $34.3
million, respectively.
THE OFFERING

Securities Offered.....  We are offering $60,000,000 in principal
                         amount of Notes of the Real Estate Trust
                         with varying interest rates as fixed from
                         time to time by the Trust (the "Notes").
                         At [____________], $____ million in
                         principal amount of Notes were available
                         to be issued.

Maturity Date..........  The Notes will mature from one to ten
                         years from the date of issue, as selected
                         by you.

Interest Payment Dates.  Interest on the Notes will be payable
                         semi-annually (six months from the date of
                         issue and each six months thereafter) and
                         at maturity.

Ranking................  The Notes will be unsecured obligations
                         and will rank equally with all of our
                         other unsecured debt.  At September 30,
                         1998, our unsecured debt, consisting of
                         outstanding Notes, accounts payable and
                         accrued expenses, totaled $78.5 million.
                         At September 30, 1998, we had $401.3
                         million of secured debt, which effectively
                         will be prior in right of payment to the
                         Notes.   Of such indebtedness, $198.9
                         million consisted of mortgage notes
                         payable, $200 million consisted of notes
                         secured by the common stock of Chevy Chase
                         Bank owned by us and $2.4 million
                         consisted of other debt.

Sinking Fund...........  We have not set aside any money for the
                         purpose of paying principal and interest
                         on the Notes.

Rating.................  The Notes have not been rated by any
                         independent rating agency.

Redemption.............  At our sole option, we can repurchase from
                         you for the same price you paid us any
                         Note that has been outstanding for more
                         than one year.  We can redeem the Note on
                         the first anniversary of the date of issue
                         or on any interest payment date
                         afterwards.

Covenants..............  The Indenture does not impose any
                         restrictions on our ability to pay
                         dividends or other distributions to our
                         shareholders, to incur debt or to issue
                         additional securities.

Claims                   of Noteholders.. You will not have any claim on any of
                         the assets of Chevy Chase Bank and may look only to our
                         earnings and assets, subject to the priority of others,
                         for the payment of interest and principal on your
                         Notes.

Use of Proceeds........  We will use the net proceeds of the
                         offering of these Notes primarily to
                         retire maturing Notes (including the Notes
                         offered hereby).  Any proceeds not used to
                         repay maturing Notes will be used for
                         other general corporate purposes.
RISK FACTORS

An investment in these Notes involves significant risks and therefore is
suitable only for persons who understand those risks and their consequences and
who are able to lose their investment. You should consider the following risks
in addition to other information set forth elsewhere in this Prospectus before
making your investment decision.

We also caution you that this Prospectus contains forward looking statements.
Such statements can be identified by the use of forward-looking terminology such
as "may," "will," "expect," "anticipate," "estimate," "continue" or other
similar words. Although we believe that our expectations reflected in the
forward-looking statements are based on reasonable assumptions, these
expectations may not prove to be correct. Important factors that could cause our
actual results to differ materially from the expectations reflected in these
forward-looking statements include those set forth below, as well as general
economic, business and market conditions, changes in Federal and local laws and
regulations and increased competitive pressures.

Risks Relating to these Notes

The Notes are not secured by the Real Estate Trust and you will only be paid
principal and interest on your Notes after certain other debts have been paid.
As the source of payment of principal and interest on your Notes, you may look
only at the earnings and assets of the Real Estate Trust available after its
secured debt and other senior claims have been paid. At September 30, 1998, the
secured debt of the Real Estate Trust was $401.3 million. This secured debt
consisted of $189.9 million in mortgage notes payable, $200.0 million in notes
secured by the common stock of Chevy Chase Bank and $2.4 million of other debt.

We will pay principal and interest on the Notes at the same time we pay all
other unsecured debt of the Real Estate Trust. At September 30, 1998, the
unsecured debt of the Real Estate Trust, consisting of Notes previously issued,
accounts payable and accrued expenses, was $78.5 million.

If we are unable to pay principal and interest on your Notes, you may only look
to the assets of the Real Estate Trust for payment; you will not have any claim
on any of the assets of Chevy Chase Bank.

The proceeds from the sale of the Notes will primarily be used to repay maturing
Notes. We will use the proceeds from the sale of these Notes primarily to repay
maturing Notes. In the future, our ability to pay principal and interest on
these Notes will depend on our available cash and our ability to borrow
additional funds. We cannot guarantee that we will have sufficient funds in the
future to make payments of principal and interest on these Notes.

The terms of the Notes do not limit our ability to pay dividends, make
distributions, issue new securities or borrow money. The agreement pursuant to
which the Notes will be issued (the "Indenture") does not include certain
covenants intended to protect the rights of investors which are customary in
indentures for similar public debt securities. In particular, the Indenture does
not limit our ability to (1) pay dividends or make distributions, (2) issue
additional securities, or (3) borrow money. However, our ability to pay
dividends, make distributions, issue additional securities and borrow money is
limited by various other agreements to which we are a party, including the
indenture for our outstanding 9 3/4% Senior Secured Notes due 2008.

We can redeem the Notes before they mature. At our option, we can repurchase
from you at the same price you paid us any Note that has been outstanding for
more than one year. If we choose to repurchase any of the Notes prior to
maturity, we will have less money available to pay principal and interest on the
remaining outstanding Notes. In addition, if market interest rates are lower at
the time we repurchase your Notes than they were when you bought the Notes, you
may not be able to reinvest your money at the same rate as your Note.

The Notes are not rated by an independent rating agency and are not being sold
through brokers or dealers. We have not used and do not intend to use an
underwriter or selling agent to sell these Notes. In addition, the Notes have
not been rated by an independent rating agency. As a result, you will not have
the benefit of an independent review of the Real Estate Trust, the terms of the
Notes and the accuracy and completeness of the information contained in the
Prospectus that a rating agency, underwriter or other selling agent might
provide if they were involved in selling the Notes. The officers of the Real
Estate Trust who will be selling these Notes to you are not registered with the
Securities and Exchange Commission as brokers or dealers, so they will not be in
a position to determine the suitability of these notes for your investment
profile and objectives. You must decide for yourself or seek investment advice
to determine whether these Notes represent a suitable investment for you.

We have not established a "sinking fund" for repayment of the Notes. We have not
put aside or reserved any money for the purpose of paying principal and interest
on the Notes.

Risks Relating to Our Business

Factors that may limit our ability to pay principal and interest on your Notes.
Although we had positive cash flow from operating activities of $14.7 million in
1998, $6.9 million in 1997 and $9.0 million in 1996, we primarily rely on
external sources of funds to repay principal on maturing debt, including on the
Notes, and to make capital improvements. In the past, these external sources of
funds have included (1) sales of debt securities (including sale of the Notes),
(2) refinancings of maturing mortgage debt, (3) asset sales, (4) dividends paid
by Chevy Chase Bank and (5) tax sharing payments from Chevy Chase Bank pursuant
to an agreement among the Real Estate Trust, Chevy Chase Bank and their
subsidiaries (the "Tax Sharing Agreement"). In 1999 and beyond, we will be
required to raise substantial additional amounts of cash from these external
sources. Our ability to raise that cash is subject to various contingencies
including:

     Our ability to sell these Notes. At present, we are selling these Notes
     principally to pay outstanding Notes as they mature. If we do not sell
     enough new Notes to repay maturing Notes, we will need to raise funds from
     other sources. In fiscal 1998, we sold $11.3 million in new Notes and
     repaid principal on $7.6 million in maturing Notes.
Our continued receipt of dividends and tax sharing payments from Chevy
     Chase Bank. To meet our cash needs, we rely substantially on dividends paid
     on the common stock of Chevy Chase Bank (of which we own 80%) and payments
     made by Chevy Chase Bank pursuant to the Tax Sharing Agreement. The
     availability and amount of tax sharing payments and/or dividends in the
     future depends on, among other things, Chevy Chase Bank's operating
     performance and income, restrictions imposed by Chevy Chase Bank's
     regulators and, in the case of tax sharing payments, the continued
     consolidation of Chevy Chase Bank and its subsidiaries with the Real Estate
     Trust for federal income tax purposes. If Chevy Chase Bank does not pay
     sufficient dividends or make sufficient payments under the Tax Sharing
     Agreement, we will need to raise funds from other sources. In fiscal 1998,
     Chevy Chase Bank paid us $5.2 million in dividends and $5.6 million in tax
     sharing payments. Moreover, following the sale of the Bank's credit card
     portfolio, the Bank paid us dividends of $16.8 million in December 1998 and
     $1.6 million in January 1999.

The Real Estate Trust, as a stand-alone business, has historically had negative
net income (before taking into account asset sales), which may affect our
ability to pay principal and interest on the Notes. In the last eleven years,
the Real Estate Trust has lost money before accounting for gains from the sale
of properties and before the consolidation of Chevy Chase Bank into our
financial statements. For the fiscal year ended September 30, 1998, this loss
was $(22.0 million). If we did not consolidate Chevy Chase Bank into our
financial statements, our overall operating results in fiscal 1998 and prior
years would have been worse. If we continue to operate at a loss, our ability to
pay principal and interest on these Notes will be significantly diminished.

Our "fixed charges" have been greater than our funds generated from operations
for the past five years which may impact our ability to pay principal and
interest on these Notes. During the past five fiscal years, our "fixed charges,"
that is the total of interest and debt expense (including amounts payable on the
Notes) and ground rent expense, were greater than our earnings generated from
operations available to pay such fixed charges. "Available earnings" is the sum
of (1) income (loss) from continuing operations, (2) provisions for income
taxes, (3) ground rent expense, and (4) interest and debt expense reduced by
capitalized interest. In fiscal 1998, 1997, 1996, 1995 and 1994, fixed charges
exceeded available earnings by $18.5 million, $19.0 million, $24.2 million,
$27.3 million and $34.3 million, respectively. If our fixed charges continue to
exceed earnings available to pay such charges, our ability to pay principal and
interest on these Notes may be diminished.

Our business of owning and developing real estate properties is subject to
certain inherent risks. Most of the operating expenses and almost all debt
service payments associated with the operation of our income-producing
properties are fixed, while the income generated from these properties can
significantly fluctuate, for example by reductions in occupancy and rental
rates. In addition, the operating expenses of income-producing properties can
increase due to inflation and other general economic factors outside our
control. As such, our ability to pay the fixed costs with cash flow produced by
our income-producing properties is highly dependent on our ability to maintain
or increase rental income and hotel sales revenue.
Rental income, which is a major source of our revenues, is subject to numerous
risks, including adverse changes in national or local economic conditions and
other factors which might impair the ability of existing tenants to make rental
payments and reduce the demand of new tenants for vacant space. Hotel income,
another major source of our revenues, is also subject to rapid declines if
customer demand decreases since advance bookings only represent a small portion
of overall revenues and are subject to cancellation. In addition, the
profitability of our income-producing properties can be reduced by an increase
in real estate taxes or other governmental action.

Real estate investments, including ours, tend to be relatively illiquid, meaning
that they can not be sold quickly for cash (although given enough time and under
normal market conditions, such properties generally can be sold at a fair
price). This lack of liquidity limits our ability to promptly change the types
of properties we own in response to changes in economic, demographic, social,
financial and investment conditions

Risks Relating to the Business of Chevy Chase Bank

The following risk factors relate to the business of Chevy Chase Bank. This
information is important because it impacts Chevy Chase Bank's ability to pay
dividends and to make tax sharing payments to us.

Chevy Chase Bank's sale of the credit card portfolio may reduce the ability of
the Bank to pay dividends to the Real Estate Trust. On September 30, 1998, Chevy
Chase Bank sold its credit card portfolio to First USA Bank, N.A. The credit
card program has historically been a major source of earnings for the Bank. The
Bank believes it will be able to operate profitably by relying on its core
deposit franchise as a significant source of low-cost funds, and investing these
funds in assets that, although offering lower yields than credit cards, involve
less credit risk and overhead costs. However, achieving acceptable levels of
profitability may take some period of time as the Bank restructures its
operations, which could reduce the ability of the Bank to pay us dividends.

Chevy Chase Bank's operating results may be negatively affected by an increase
in interest rates, which may affect the ability of the Bank to pay dividends to
the Real Estate Trust. Chevy Chase Bank's operating results depend in large part
on the difference between the interest the Bank receives from its loans,
securities and other assets and the interest it pays on its deposits and
liabilities. In general, the Bank's liabilities have shorter terms and are more
interest rate sensitive than its assets. In addition, the sale of the Bank's
credit card portfolio and current market conditions are likely to continue to
result in a greater portion of the Bank's assets being comprised of assets with
longer durations and greater sensitivity to market interest rates. Accordingly,
an increase in market interest rates will negatively affect the operating
results of the Bank and may affect the Bank's ability to pay us dividends.

Chevy Chase Bank is increasing its automobile and home improvement loans which
are riskier than residential mortgage loans. Chevy Chase Bank continues to grow
its consumer lending business, focusing on automobile and home improvement
loans. These loans have shorter terms and higher interest rates than residential
mortgage loans, but are generally riskier than residential mortgage loans. The
Bank, through one of its subsidiaries, also makes automobile loans to applicants
who have adverse credit events in their credit history. These loans typically
experience higher rates of delinquencies, repossessions and losses than loans
originated under the Bank's traditional lending program. The Bank's rate of
losses on this "subprime" portion of its consumer loan portfolio has increased
substantially in recent periods and, together with the growth in the portfolio,
led the Bank to increase its allowance for loan losses on automobile loans to
$29.0 million at September 30, 1998 from $3.1 million at September 30, 1997. If
these loans are unprofitable or further additions to the Bank's allowance for
loan losses become necessary, the ability of the Bank to pay dividends to us may
be adversely affected.

A reduction in the amount of non-interest income earned by Chevy Chase Bank may
affect the Bank's ability to pay dividends to the Real Estate Trust. In recent
years, non-interest income has become an increasingly large component of Chevy
Chase Bank's net income. The Bank has historically earned non-interest income
from servicing and securitization income, credit card fees, deposit servicing
fees and gains on sales of loans. The Bank had total non-interest income of
$641.9 million in fiscal 1998, $411.1 million in fiscal 1997 and $343.8 million
in fiscal 1996, representing 93.2%, 82.5% and 80.4% of total operating income in
each year, respectively. A substantial portion of the Bank's non-interest income
was earned from credit card related activities in those years. However, the Bank
will no longer earn non-interest income from credit card related activities
following the September 30, 1998 sale of its credit card portfolio. The
resulting reduction in non-interest income may affect the ability of the Bank to
pay us dividends.

Chevy Chase Bank's allowances for losses might not be sufficient to cover its
actual losses from its loan and real estate portfolios. If the losses are
greater than expected, Chevy Chase may not be able to pay dividends to the Real
Estate Trust. Chevy Chase Bank is required to record on its financial statements
an allowance for possible losses from its loan and real estate portfolios. At
September 30, 1998, the ratio of the Bank's allowances for losses to
non-performing assets was 92.4%. It is possible that Chevy Chase Bank will
suffer losses in excess of its allowances for losses, or that future evaluations
of the Bank's asset portfolios will require significant increases in the
allowances for losses as a result of changes in economic conditions, regulatory
examinations, or the Bank's own internal review process. As a result, the Bank
may be unable to pay us the same amount of, or any, dividends in the future.

Chevy Chase Bank's ability to pay dividends to the Trust is legally restricted.
Chevy Chase Bank's ability to pay dividends to us is subject to the following
legal restrictions:

          Federal regulations provide that Chevy Chase Bank may not
          pay us dividends unless the Bank is at least
          "adequately capitalized."  At September 30, 1998, the
          Bank's capital ratios met the ratios established for
          "well-capitalized" institutions and thus exceeded the
          ratios established for "adequately capitalized"
          institutions.  The Office of Thrift Supervision (OTS)
          has authority to lower the Bank's capital adequacy
          category, and the Bank's ability to maintain its
          capital levels depends on a number of factors,
          including general economic conditions particularly in
          the Bank's local markets.
Federal regulations limit the ability of Chevy Chase Bank
          to pay cash dividends based primarily upon the Bank's
          regulatory capital levels and earnings.  Generally,
          the regulations permit the Bank to pay dividends
          without OTS approval in amounts up to the greater of
          (1) 100% of its net income for the calendar year to
          date, plus up to one-half of its "excess" capital at
          the beginning of the calendar year or (2) 75% of the
          Bank's net income for the most recent four quarters.
          However, the OTS retains the discretion to limit
          dividends if it deems the Bank to be in need of more
          than normal supervision or believes the dividend would
          be an "unsafe or unsound" practice.

          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 stock (other than the Bank's
          13% Preferred Stock) in any quarterly period up to the
          lesser of (1) 50% of its after tax net income for the
          immediately preceding quarter or (2) 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 13%
          Preferred Stock during that quarterly period.

          The indentures pursuant to which the Bank's outstanding 9
          1/4% Subordinated Debentures due 2005 (the "1993
          Debentures") and 91/4% Subordinated Debentures due 2008
          (the "1996 Debentures") were issued both provide that
          the Bank may not pay cash dividends unless, after
          giving effect to the dividend, no event of 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 (1) $15 million, (2) 66 2/3% of the Bank's
          consolidated net income (as defined in the indentures)
          since October 1, 1993 and (3) the aggregate net cash
          proceeds received by the Bank after October 1, 1993
          from the sale of certain securities, minus the
          aggregate amount of any "restricted payments" made by
          the Bank.

Certain legislation being considered by Congress could prohibit the Trust from
owning the common stock of Chevy Chase Bank. Congress has been considering
legislation that could require Chevy Chase Bank to convert its thrift charter to
a national or state bank charter. If legislation requiring Chevy Chase Bank to
convert its charter were enacted and did not contain adequate "grandfather"
provisions, such legislation could have an adverse effect on us because, among
other things, we are engaged in activities that are not permissible for a
company that controls a national- or state-chartered bank.

The Office of Thrift Supervision may require the Real Estate Trust to make cash
payments to Chevy Chase Bank. Pursuant to an agreement with the predecessor
agency to the OTS, we have agreed to maintain the regulatory capital of Chevy
Chase Bank at certain minimum levels and to contribute additional capital to the
Bank if necessary to meet those requirements. If the Bank is unable to maintain
its capital at the prescribed levels, the OTS could require us to contribute
capital to the Bank. Such a payment would reduce the funds available to repay
the Notes.
If Chevy Chase Bank becomes "undercapitalized," the Bank would be required to
file a capital restoration plan outlining the steps it will take to become
"adequately capitalized." OTS could choose not to accept the plan unless we
guaranteed in writing the Bank's compliance with the plan. The total liability
under the guarantee of all of the companies that control the Bank, including us,
would be the lesser of (i) 5% 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 date the Bank failed
to comply with its capital plan. If we refused to provide such a guarantee, the
Bank could be subject to more restrictive regulatory actions and would not be
able to pay us dividends.

We may be required to make payments to Chevy Chase Bank pursuant to the Tax
Sharing Agreement. If in any fiscal year Chevy Chase Bank has a net operating
loss, we would be required under the Tax Sharing Agreement to make payments to
Chevy Chase Bank if we or any of our affiliated companies use that loss to
offset our taxable income. If Chevy Chase Bank has a net operating loss that is
not used by us in that year to offset our taxable income, Chevy Chase Bank can
use those losses to obtain a refund from the IRS of taxes paid in previous years
or to obtain a refund from us of tax sharing payments paid by the Bank to the
Real Estate Trust, or both, depending on the amount of losses and the taxable
year in which they occurred.

At September 30, 1998, the maximum amount we could be required to pay Chevy
Chase Bank as a result of a carryback of the Bank's losses as described above
was $34.2 million. If we are required to make any such payments, our funds
available to pay principal and interest on these Notes will be reduced.

Other Risks

Possible conflicts of interests affecting the Real Estate Trust. B. Francis Saul
II, Chairman of the Real Estate Trust, and affiliates of Mr. Saul own 100% of
the Real Estate Trust's common shares of beneficial interest and thus control
the Trust. Mr. Saul also controls B.F. Saul Company which in turn controls B.F.
Saul Advisory Company and Franklin Property Company. The B.F. Saul Advisory
Company acts as the Real Estate Trust's investment advisor and carries on the
day-to-day general management, financial, accounting, legal and administrative
affairs of the Real Estate Trust. Franklin Property Company acts as the leasing
and management agent for most of the income-producing properties owned by the
Real Estate Trust and oversees the development of new properties and the
expansion and renovation of existing properties.

The Board of Trustees of the Real Estate Trust, including the independent
trustees, determines the compensation paid to B.F. Saul Advisory Company and to
Franklin Property Company for services rendered to the Real Estate Trust. The
Board of Trustees is required to establish that the Real Estate Trust is paying
compensation comparable to what an unaffiliated party would be paid for similar
services. Since only two of the Real Estate Trust's six trustees are considered
independent, the independent trustees represent a minority of the Board of
Trustees. There is no requirement in the Trust's Declaration of Trust or in the
Indenture for these Notes, or elsewhere, that the Real Estate Trust have a
certain number or percentage of independent trustees.
B.F. Saul Company, its affiliated companies, their officers and directors, and
two trustees of the Real Estate Trust engage in various activities relating to
real estate development and finance. Also, B.F. Saul Company and related
companies have many clients other than the Real Estate Trust who invest in real
estate, and B.F. Saul Company invests in real estate on its on behalf or as
agent or advisor to others. Neither the Declaration of Trust nor the Advisory
Contract between the Real Estate Trust and B.F. Saul Advisory Company (the
"Advisory Contract") prohibit the Real Estate Trust, B.F. Saul Company, Franklin
Property Company, its affiliates, or their officers, directors, employees or the
trustees of the Real Estate Trust from providing investment advisory services to
third parties or from engaging in activities similar or competitive with the
investment operations of the Real Estate Trust. Furthermore, these parties are
not prohibited from making investments that might be suitable or desirable for
the Real Estate Trust.

Pursuant to the Advisory Contract, the Real Estate Trust has priority with
respect to any investment by the B.F. Saul Company, B.F. Saul Advisory Company
and their directors and officers, for their own account or the account of any
enterprise (other than a savings and loan institution) in which they have a
beneficial interest totaling 40% or more. Although there are no procedural
safeguards to ensure this priority, these companies normally do not compete for
the same types of investments as the Real Estate Trust, so conflicts generally
have not arisen.

Potential conflicts of interest also may arise from Mr. Saul's role as Chairman
of the Board and Chief Executive Officer of Saul Centers, Inc., the general
partner of Saul Holdings Partnership. The Real Estate Trust has entered into an
Exclusivity Agreement with and has granted a right of first refusal to Saul
Centers, Saul Holdings Partnership and its two subsidiary limited partnerships.
The purpose of these two agreements is to minimize the potential conflicts of
interest between these entities and the Real Estate Trust. These agreements
generally require the Real Estate Trust to conduct is shopping center business
exclusively through these entities and to grant them 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 these two agreements, the Real Estate Trust may continue to develop,
acquire, own and manage commercial properties and own land suitable for
development of shopping centers and other commercial properties.

The Real Estate Trust's Declaration of Trust does not contain investment or
borrowing limitations. With certain exceptions, the Real Estate Trust's
Declaration of Trust does not require us to invest our assets in any particular
manner. The Board of Trustees, in their discretion, may change the mix of our
investment portfolio at any time or make new types of investments, so as long as
the investments are not prohibited by the Declaration of Trust or by any
indentures, loan documents or other agreements applicable to us. In addition,
the Declaration of Trust does not limit the amount of money we can borrow or the
types of debt securities we can issue, including additional Notes or debt
securities which are senior to the Notes.

Our business, or the business of Chevy Chase Bank, may be impacted by the Year
2000 date change. Some of our internal business systems and systems operated by
third parties may not be compliant with the Year 2000 date change. We have
implemented a program to upgrade or replace our internal systems to address the
Year 2000 problem and to seek certification from outside vendors of compliance
of their systems. Although we expect all of our necessary systems to be Year
2000 compliant by May 1999, the failure of any system as a result of the Year
2000 date change may adversely affect our business. In addition, Chevy Chase
Bank is exposed to the potential failure of internal or external business
systems due to the Year 2000 date change. Although the management of Chevy Chase
Bank has implemented a program to achieve compliance of its internal and
external business systems for the Year 2000 date change, it is possible that any
such system may fail and have a negative impact on the Bank's financial
condition and results of operations.
USE OF PROCEEDS

We will use the net proceeds from the sale of these Notes primarily to retire
maturing Notes (including the Notes offered hereby). At December 31, 1998, $10.8
million and $8.9 million principal amount of Notes were scheduled to mature in
fiscal 1999 and fiscal 2000, respectively. The interest rates on outstanding
Notes scheduled to mature during this period vary from 5% to 15% per annum. Any
proceeds not used to pay maturing Notes will be used for other general corporate
purposes. This offering is not contingent on the sale of any minimum amount of
Notes. At [___________], $____ million of principal amount of the Notes (of the
$60 million offered by this Prospectus) was available to be issued.

                              PLAN OF DISTRIBUTION

The Notes will not be distributed through underwriters, brokers or dealers and
will be sold only by us acting through one or more of our duly authorized
officers. Such officers are salaried employees of the Saul Company, the parent
of the Advisor, and do not receive any compensation in connection with their
participation in the offering and sale of the Notes in the form of commissions
or other remuneration based either directly or indirectly on sales of the Notes.
Although we do not pay the officers who participate in the offering and sale of
the Notes, we do pay the Advisor a fee of 1% of the principal amount of the
Notes as they are issued to offset its costs of administering the Note program.
Notes will be available for sale only at our office in Bethesda, Maryland. See
"How to Purchase Notes."

The offering of the Notes by this Prospectus will terminate when all of the
Notes have been sold. See "Description of Notes - General." We may also
terminate the offering of the Notes at any time without notice.

                              HOW TO PURCHASE NOTES

You may purchase Notes in person at our sales office located at 7200 Wisconsin
Avenue, Suite 903, Bethesda, Maryland 20814, or by mail by completing the
applicable Note Order Form, which may be found at the end of this Prospectus,
and mailing the form and a check payable to the Trust in the enclosed envelope.
In either case, the Note, in registered form, will be mailed directly to you by
U.S. Bank Trust National Association, the Indenture Trustee for the Notes. For
further information on how to purchase Notes, please telephone (301) 986-6207.

                              DESCRIPTION OF NOTES

The Notes will be issued under an Indenture dated as of September 1, 1992, as
supplemented by the First Supplemental Indenture dated as of January 16, 1997,
as further supplemented by the Second Supplemental Indenture dated January 13,
1999 (as supplemented, the "Indenture") between the Trust and U.S. Bank Trust
National Association (the "Indenture Trustee"). Included below is a summary of
the material terms of the Notes and the material provisions of the Indenture.
The summary does not purport to be complete and is subject in all respects to
the provisions of, and is qualified in its entirety by express reference to, the
cited Sections and Articles of, and definitions contained in, the Indenture, a
copy of which has been filed with the Commission as an exhibit to the
Registration Statement of which this Prospectus forms a part, and which is
available as described under Available Information.

General

The Notes are limited to the aggregate principal amount of $60 million offered
hereby (Section 3.0 1). At [____________], $____ million in principal amount of
Notes was available to be issued under the Indenture. The Trust from time to
time may enter into one or more supplemental indentures providing for the
issuance of additional notes without the consent of the holders of outstanding
Notes (Section 9.01).

The Notes will be issued in denominations of $5,000 or any amount in excess
thereof which is an integral multiple of $1,000. They will be issued in
registered form only, without coupons, to mature one to ten years from the date
of issue, as selected by the investor. The Notes will be unsecured general
obligations of the Trust and will be identical except for interest rate, issue
date and maturity date (Section 3.02). Except as described below under
"Redemption of Certain Notes," the Notes will not contain any provisions for
conversion, redemption, amortization, sinking fund or retirement prior to
maturity.

The Notes are not guaranteed or insured and are not secured by any mortgage,
pledge or lien. The Notes will rank on a parity in right of payment with all
unsecured debt of the Real Estate Trust. At September 30, 1998, the Real Estate
Trust's unsecured debt (consisting of Notes and accounts payable and accrued
expenses) totaled $78.5 million.

Each Note will bear interest from the date of issue to the date of maturity at
the annual rate stated on the face thereof. Such interest will be payable
semiannually, six months from the date of issue and each six months thereafter,
and at maturity, to the persons in whose names the Notes are registered at the
close of business on the 20th day preceding such Interest Payment Dates.
Interest rates applicable to Notes will be subject to change by the Trust from
time to time, but no such change will affect any Notes issued prior to the
effective date of such change (Section 3.01). Based on the amount of a proposed
investment in Notes or the aggregate principal amount of the Trust's outstanding
unsecured notes held by a prospective investor, the Trust may offer to pay
interest on a Note of any maturity at an annual rate of up to 2% in excess of
the interest rate shown on the cover page of this Prospectus for a Note of such
maturity.

At maturity of any Note, principal will be payable upon surrender of such Note
without endorsement at U.S. Bank Trust National Association, 100 Wall Street
Suite 1600, New York, New York 10005. Interest payments will be made by the
Trust by check mailed to the person entitled thereto (Sections 3.01 and 10.02).
Notes must be presented at the above office of the Indenture Trustee for
registration of transfer or exchange and for payment at maturity. No service
charge will be imposed for any transfer or exchange of Notes, but the Trust may
require payment to cover taxes or other governmental charges that may be
assessed in connection with any such transfer or exchange (Section 3.05).
The Indenture does not impose any restrictions on the Trust's ability to pay
dividends or other distributions to its shareholders, to incur debt or to issue
additional securities.

There is no established trading market for the Notes, and the Trust does not
anticipate that an active trading market will be established.

Redemption of Certain Notes

The Trust may, at its sole election, redeem any of the Notes having a Stated
Maturity of more than one year from date of issue on any Interest Payment Date
with respect to such Note on or after the first anniversary of the date of issue
of such Note at a Redemption Price (exclusive of the installment of interest due
on the Redemption Date, payment of which shall have been made or duly provided
for to the registered holder on the relevant Record Date) equal to the Principal
Amount of the Note so redeemed. (Section 11.01). Notes called for redemption
will not bear interest after the Redemption Date. (Section 11.07).

If fewer than all of the Notes having a Stated Maturity of more than one year
and the same Interest Payment Date as the Redemption Date are to be redeemed,
the particular Notes to be redeemed will be selected by such method as the Trust
shall deem appropriate and may include redemption of Notes with higher interest
rates first. (Section 11.04).

Events of Default and Notice Thereof

The Indenture provides that an "Event of Default" with respect to the Notes will
result upon the occurrence of any of the following:

     (a) default in the payment of any interest upon any Note when it becomes
     due and payable, and continuance of such default for a period of 30 days;

     (b) default in the payment of the principal of (and premium, if any, on)
     any Note at its Maturity;

     (c) default in the performance, or breach, of any covenant or warranty of
     the Trust in the Indenture (other than a covenant or warranty a default in
     whose performance or whose breach is elsewhere in the Indenture
     specifically dealt with), and continuance of such default or breach for a
     period of 60 days after there has been given, by registered or certified
     mail, to the Trust by the Indenture Trustee or to the Trust and the
     Indenture Trustee by the Holders of at least 10% in principal amount of the
     Notes Outstanding, a written notice specifying such default or breach and
     requiring it to be remedied and stating that such notice is a "Notice of
     Default" under the Indenture;

     (d) certain events of bankruptcy or insolvency affecting the Trust; or

     (e) B. F. Saul Advisory Company ceases to be the investment advisor to the
     Trust without being immediately replaced by another entity the majority
     voting interest of which is owned by the Saul Company or B. Francis Saul II
     (Section 5.01).
Within 90 days after the occurrence of a default, the Indenture Trustee is
required to give the Noteholders notice of all defaults known to it; provided
that, except in the case of a default in the payment of principal of, and
premium if any, or interest on, any of the Notes, the Indenture Trustee will be
protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the interest of the Noteholders (Section 6.02).
If an Event of Default occurs and is continuing, the Indenture Trustee or the
Holders of not less than 25% in principal amount of the Notes Outstanding may
declare the principal of all the Notes to be due and payable immediately, by a
notice in writing to the Trust (and to the Indenture Trustee if given by
Noteholders), and upon any such declaration such principal will become
immediately due and payable (Section 5.02). At any time after such a declaration
of acceleration has been made and before a judgment or decree for payment of the
money due has been obtained by the Indenture Trustee, the Holders of a majority
in principal amount of the Notes Outstanding, by written notice to the Trust and
the Indenture Trustee, may rescind and annul such declaration and its
consequences if (i) the Trust has paid or deposited with the Indenture Trustee a
sum sufficient to pay:

     (A)  all overdue installments of interest on all Notes;

     (B) the principal of (and premium, if any, on) any Notes which have become
     due otherwise than by such declaration of acceleration and interest thereon
     at the rate borne by the Notes;

     (C) to the extent that payment of such interest is lawful, interest upon
     overdue installments of interest at the rate borne by the Notes; and

     (D) all sums paid or advanced by the Indenture Trustee under the Indenture
     and the reasonable compensation, expenses, disbursements and advances of
     the Indenture Trustee, its agents and counsel; and

(ii) all Events of Default, other than the nonpayment of the principal of Notes
which have become due solely by such acceleration, have been cured or have been
waived as provided in the Indenture (Section 5.02).

The Indenture provides that if (i) default is made in the payment of any
interest on any Note when such interest becomes due and payable and such default
continues for a period of 30 days, or (ii) default is made in the payment of the
principal of (or premium, if any, on) any Note at the Maturity thereof, the
Trust will, upon demand of the Indenture Trustee, pay to it, for the benefit of
the Holders of such Notes, the whole amount then due and payable on such Notes
for principal (and premium, if any) and interest, with interest upon the overdue
principal (and premium, if any) and, to the extent that payment of such interest
is legally enforceable, upon overdue installments of interest, at the rate borne
by the Notes. (Section 5.03).

In the case of an Event of Default which is not cured or waived, the Indenture
Trustee will be required to exercise such of its rights and powers under the
Indenture, and to use the degree of care and skill in their exercise, that a
prudent man would exercise or use under the circumstances in the conduct of his
own affairs, but it otherwise need only perform such duties as are specifically
set forth in the Indenture (Section 6.01). Subject to such provisions, the
Indenture Trustee will be under no obligation to exercise any of its rights or
powers under the Indenture at the request of any of the Noteholders unless they
offer to the Indenture Trustee reasonable security or indemnity (Section 6.03).

Modification of Indenture

The Indenture, the rights and obligations of the Trust and the rights of the
Noteholders may be modified by the Trust and the Indenture Trustee without the
consent of the Noteholders (i) to evidence the succession of a corporation or
other entity to the Trust, and the assumption by any such successor of the
covenants of the Trust in the Indenture and the Notes, (ii) to add to the
covenants of the Trust, for the benefit of the Noteholders, or to surrender any
right or power conferred in the Indenture upon the Trust, (iii) to cure any
ambiguity, to correct or supplement any provision of the Indenture which may be
defective or inconsistent with any other provisions, or to make any other
provisions with respect to matters or questions arising under the Indenture
which are not inconsistent with the Indenture, provided such action does not
adversely affect the interests of the Noteholders, (iv) to create, from time to
time, notes in addition to the Notes initially issuable under the Indenture and
any supplemental indenture thereto, which subsequently created notes are
identical to the Notes initially issuable under the Indenture and any
supplemental indenture thereto, except for interest rate, issue date and
maturity date, or (v) to modify, amend or supplement the Indenture to effect the
qualification of the Indenture under the Trust Indenture Act of 1939 and to add
to the Indenture specified provisions permitted by such Act (Section 9.01).

With certain exceptions, the Indenture, the rights and obligations of the Trust
and the rights of the Noteholders may be modified in any manner by the Trust
with the consent of the holders of not less than 66-2/3% in aggregate principal
amount of the outstanding Notes; but no such modification may be made without
the consent of each Noteholder affected thereby which would (i) change the
maturity of the principal of, or any installment of interest on, any Note or
reduce the principal amount thereof or the interest thereon, or impair the right
of such Noteholder to institute suit for the enforcement of any such payment on
or after the maturity thereof, or (ii) reduce the percentage in principal amount
of the outstanding Notes, the consent of whose holders is required for any
modification of the Indenture, or the consent of whose holders is required for
any waiver of compliance with certain provisions of the Indenture or certain
defaults thereunder and the consequences thereof provided for in the Indenture
(Section 9.02).

Compliance Reports

The Trust and each other obligor on the Notes, if any, must deliver annually to
the Trustee, within 120 days after the end of each fiscal year, an officers'
certificate stating whether the Trust is in default in the performance and
observance of any of the conditions or covenants of the Indenture, and if the
Trust is in default, specifying all such defaults and the nature and status
thereof (Section 10.06).
Reports to Noteholders

The Trust will furnish to the holders of Notes such summaries of all quarterly
and annual reports which it files with the Commission as may be required by the
rules and regulations of the Commission to be furnished to holders of any Notes
(Section 7.04).

                                     EXPERTS

The Trust's Consolidated Financial Statements and related schedules included in
this Prospectus and elsewhere in this registration statement as of September 30,
1998 and 1997 and for each of the three years in the period ended September 30,
1998, have been audited by Arthur Andersen LLP, independent public accountants,
as indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.

                                  LEGAL MATTERS

The legality of the securities offered by this Prospectus has been passed upon
for the Trust by the firm of Shaw Pittman Potts & Trowbridge, Washington, D.C.,
a partnership including professional corporations. George M. Rogers, Jr., a
member of that firm, is a trustee of the Trust and a director of B. F. Saul
Company and of Chevy Chase Bank.

                              AVAILABLE INFORMATION

The Trust has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") pursuant to the Securities Act of 1933, as amended (the "Securities
Act"), and the rules and regulations promulgated thereunder, covering the Notes
being offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission, and to which
reference is hereby made. Statements made in this Prospectus as to the contents
of any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference.

The Trust is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Commission. Information
as of particular dates concerning the Trust's Trustees, officers and principal
holders of securities and any material interest of such persons in transactions
with the Trust is set forth in annual reports on Form 10-K filed with the
Commission. Such reports and other information filed by the Trust is set forth
in annual reports on Form 10-K with the Commission. Such reports and other
information filed by the Trust with the Commission may be inspected and copied
at the public reference facilities of the Commission, located at 450 Fifth
Street, N.W., Washington, D.C. 20549; Seven World Trade Center, 13th Floor, New
York, New York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of this material may be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, certain of these materials are publicly available
through the Commission's web site located at http://www.sec.gov.
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, 1998. The Trust is a thrift holding company by virtue of its
ownership of a majority interest in Chevy Chase. See "Real Estate - Holding
Company Regulation."

The Trust recorded net income of $66.1 million in the fiscal year ended
September 30, 1998, compared to a net income of $18.9 million in the fiscal year
ended September 30, 1997 and a net loss of $78,000 in the fiscal year ended
September 30, 1996.

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 is a federally chartered and federally insured stock
savings bank which at September 30, 1998 was conducting business from 143
full-service branch offices, including 11 in-store banking centers, and 696
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 Chevy Chase, Maryland, both suburban communities of Washington, D.C.
The Bank also maintains 14 mortgage loan production offices in the mid-Atlantic
region, 13 of which are operated by a wholly-owned mortgage banking subsidiary,
and 31 consumer loan production offices, 24 of which are operated by a
wholly-owned finance subsidiary. At September 30, 1998, the Bank had total
assets of $6.7 billion and total deposits of $4.9 billion. Based on total assets
at September 30, 1998, 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 consumer loans. The Bank
also has an 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. On November
12, 1997, the Bank acquired ASB Capital Management, Inc. ("ASB"), one of the
largest SEC-registered investment managers headquartered in the Washington, D.C.
metropolitan area, through which the Bank provides a variety of investment
products and fiduciary services to a primarily institutional customer base.

On September 30, 1998, the Bank sold its credit card operations to First USA
Bank, N.A. ("FUSA"). The credit card portfolio purchased by FUSA included
approximately $4.8 billion of managed credit card loans and 3.1 million Visa and
Mastercard credit card accounts. The Bank recognized a net gain on this sale of
$288.3 million. See Note 8 to the Consolidated Financial Statements in this
Report. Management believes that the ongoing consolidation in the credit card
industry was making it increasingly difficult for relatively smaller
institutions like the Bank to make the investments in technology and other
resources necessary to compete effectively with increasingly larger and more
specialized issuers. In light of these competitive considerations, management
believes that selling the Bank's credit card business will relieve the Bank of
the substantial financial commitments necessary to maintain its credit card
operations, and enable the Bank to concentrate its resources on capitalizing on
the Bank's status as the largest locally-headquartered bank in the Washington,
D.C. metropolitan area and further its community banking objectives.
Accordingly, the Bank will continue to build its branch and alternative delivery
systems, maintain and expand its mortgage banking operations, and continue to
offer a broad range of non-credit card consumer products, including home equity
lines of credit, home improvement loans and automobile loans. In addition, the
Bank anticipates expanding its business banking program, with an emphasis on
businesses in the Washington, D.C. metropolitan area. The Bank will also seek to
develop further the fee based services it can provide to customers, including
securities brokerage, asset management and insurance products offered through
its subsidiaries.
Chevy Chase recorded operating income of $184.4 million for the year ended
September 30, 1998, compared to operating income of $80.2 million for the year
ended September 30, 1997. At September 30, 1998, the Bank's tangible, core, tier
1 risk-based and total risk-based regulatory capital ratios were 7.93%, 7.93%,
12.93% and 20.70%, respectively. The Bank's regulatory capital ratios exceeded
the requirements under the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA") as well as the standards established for well
capitalized institutions under the prompt corrective action regulations
established pursuant to the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA").

Chevy Chase is subject to comprehensive regulation, examination and supervision
by the Office of Thrift Supervision (the "OTS") and, to a lesser extent, by the
Federal Deposit Insurance Corporation (the "FDIC"). The Bank's deposit accounts
are fully insured up to $100,000 per insured depositor by the SAIF, which is
administered by the FDIC.
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, 1998.

       
         
                                                     HOTELS

                                                                Average Occupancy (2)         Average Room Rate
                                                               ------------------------    ------------------------
                                                               Year Ended September 30,    Year Ended September 30,
                                                    Available  ------------------------    ------------------------
  Location                 Name                      Rooms(1)  1998      1997      1996    1998    1997      1996
------------ -------------------------------------- ---------- ------------------------   -------------------------
COLORADO                                            
   Pueblo           Holiday Inn - Pueblo                193    74%       74%       75%    $51.39   $53.09   $54.84
                                                                                                       
  MARYLAND                                                                                             
Gaithersburg      Holiday Inn - Gaithersburg            300    64%       65%       61%    $75.75   $70.10   $68.93
                                                                                                       
  MICHIGAN                                                                                             
Auburn Hills     Holiday Inn - Auburn Hills             190    74%       74%       75%    $99.78   $94.79   $86.52
                                                                                                       
  NEW YORK                                                                                             
 Rochester      Holiday Inn - Rochester Airport         280    71%       71%       68%    $72.25   $68.26   $66.51
                                                                                                       
    OHIO                                                                                               
 Cincinnati        Holiday Inn - Cincinnati             273    64%       58%       49%    $65.70   $63.21   $66.67
                                                                                                       
  VIRGINIA                                                                                             
 Arlington     Holiday Inn  - National Airport (3)      308    57%       --        --    $102.38     --       --  
 Arlington     Howard Johnsons  - National Airport      279    63%       66%       71%    $76.10   $67.99   $66.37
  Herndon            Holiday Inn Express (4)            115    75%       74%       --     $76.83   $64.70     --
   McLean         Holiday Inn - Tysons Corner           316    72%       74%       73%    $99.15   $87.52   $78.98
  Sterling        Hampton Inn - Dulles Airport          127    74%       77%       77%    $82.17   $71.70   $62.87
  Sterling        Holiday Inn - Dulles Airport          296    75%       75%       76%    $85.10   $72.18   $63.86
  Sterling   TownePlace Suites - Dulles Airport (5)      95    56%       --        --     $83.65     --       --  
                                                      -----    ---       ---       ---    ------   ------   ------
Totals                                                2,772    68%       70%       68%    $81.01   $72.21   $68.79
        

--------------------------------------------------------------------------------
(1)  Available rooms as of September 30, 1998.
(2)  Average occupancy is calculated by dividing the rooms occupied by the
     rooms available.
(3)  Acquired December 10, 1997.
(4)  Acquired October 30, 1996.
(5)  Opened August 13, 1998.
OFFICE AND INDUSTRIAL

                                                                                       Expiring Leases (1)
                                                                                       -------------------
                                                               Leasing Percentages         Year Ending
                                              Gross         -------------------------  -------------------
                                                                   September 30,          September 30,
                                             Leasable       -------------------------  -------------------
   Location                  Name            Area (1)        1998      1997      1996    1999      2000   
---------------   -------------------------- --------       -------------------------  --------- ---------
FLORIDA                                                                                               
Fort Lauderdale   Commerce Center - Phase II    61,124      100%       97%       92%    29,100     8,219  
                                                                                                          
    GEORGIA                                                                                               
    Atlanta          900 Circle 75 Parkway     345,502      100%       98%       95%    49,165    55,575  
    Atlanta          100 Circle 75 Parkway      89,412      100%       98%      100%     9,771    38,056  
    Atlanta         1100 Circle 75 Parkway     269,049      100%       99%      100%   109,182    30,856  
                                                                                                          
   LOUISIANA                                                                                              
   Metairie             Metairie Tower          91,372      100%       95%       99%    12,879    22,615  
                                                                                                          
   VIRGINIA                                                                                               
    McLean           8201 Greensboro Drive     353,742      100%       99%       85%    48,948    53,737  
   Sterling            Dulles North             59,886      100%      100%       81%       --        --   
                                             ---------      ----      ----      ----   -------   -------  
                          Totals             1,270,087      100%       99%       93%   259,045   209,058  
                                                                                        20.4%     16.5%   
                                                                                                  

--------------------------------------------------------------------------------
(1)  Square feet
LAND PARCELS

    Location                     Name                    Acres                Zoning             
----------------    --------------------------------    --------    -----------------------------
FLORIDA                                                         
  Boca Raton          Arvida Park of Commerce (1)             20            Mixed Use            
Fort Lauderdale             Commerce Center (2)               14        Office & Warehouse       
                                                                                                 
    GEORGIA                                                                                      
    Atlanta                  Circle 75                       133        Office & Industrial      
                                                                                                 
    KANSAS                                                                                       
 Overland Park               Overland Park                   162    Residential, Office & Retail 
                                                                                                 
   MARYLAND                                                                                      
 Gaithersburg            Avenel Business Park (3)              5            Commercial           
  Rockville                 Flagship Centre                    8            Commercial           
                                                                                                 
  MICHIGAN                                                                                       
Auburn Hills         Holiday Inn - Auburn Hills                4            Commercial

   NEW YORK                                                                                      
  Rochester         Holiday Inn - Rochester Airport            3            Commercial           
                                                                                                 
   VIRGINIA                                                                                      
Loudoun County                Church Road                     40        Office & Industrial      
Loudoun County           Sterling Boulevard (4)               45            Industrial           
                                                             ---
                                 Total                       434 

        

------------------------------------------------------------------------------
(1)  The Real Estate Trust is currently developing a 91-unit
     hotel and a 146-unit hotel on a portion of its 9 acre parcel.
     The balance of 11 acres is owned by a partnership in which a 
     Real Estate Trust subsidiary owns a 50% interest.
(2)  The Real Estate Trust is currently developing a 95-unit
     hotel on a portion of this parcel.
(3)  The Real Estate Trust is currently developing a 91-unit
     hotel on a portion of this parcel.
(4)  The Real Estate Trust is currently developing a 78,000
     office/research and development building on a portion of this parcel.
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
                                                                    -------
                                        Total                       424,000

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

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

(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. 

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. 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. 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. 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 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 a capital contribution and the second Subsidiary Partnership, Saul Subsidiary
II Limited Partnership, transferred one shopping center previously owned by it
to Saul Subsidiary I Limited Partnership as a 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 owned a
total of 17 shopping centers (the "Mortgaged Properties"). The Mortgaged
Properties, which continued to be managed by Saul Holdings Partnership, secured
the mortgage purchased with the proceeds of issuance of the Mortgage Notes.
On October 1, 1997 Saul Centers closed a $147 million mortgage loan secured by
nine of the company's retail properties. The loan term is 15 years and requires
payments based on a fixed rate of 7.67% and 25 year principal amortization. At
the same time Saul Centers closed a new three-year $60 million unsecured
revolving credit line which replaced a secured credit line. Proceeds from the
new loans were used to repay the $128 million of collateralized floating rate
debt mentioned above and the outstanding balance of other floating rate debt.
Saul Centers currently has fixed interest rates on approximately 95% of its
total outstanding debt which has a weighted remaining term of approximately 14
years.

As a consequence of the Formation Transactions and the later transactions
described above undertaken in connection with financings, 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% interests in Saul
Subsidiary I Limited Partnership and Saul Subsidiary II Limited Partnership are
held by Saul Holdings Partnership as the sole limited partner.

In January 1998, in accordance with its obligation under the Exclusivity
Agreement described below, the Real Estate Trust offered Saul Centers the right
to purchase its newly constructed, 100% leased office/flex building (Avenel IV)
located in the Avenel Business Park adjacent to Saul Centers' Avenel I - III
buildings. The new building contained 46,227 square feet of leasable area. An
independent appraisal determined the purchase price of $5.6 million. Saul
Centers agreed to purchase the property as of April 1, 1998, by assuming the
mortgage of $3.7 million and issuing 105,992 new units in Saul Centers'
operating partnership to the Real Estate Trust.

At September 30, 1998, Saul Holdings Partnership owned, directly or indirectly
through the Subsidiary Partnerships, 29 community and neighborhood shopping
centers located in seven states and the District of Columbia, one office
property and one office/retail property located in the District of Columbia, one
research park located in a Maryland suburb of Washington, D.C. and one property
planned to be converted to an industrial/warehouse facility located in Oklahoma
(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 as a REIT, it generally will not be subject to federal income tax,
provided it makes certain distributions to its stockholders and meets certain
organizational and other requirements. Saul Centers has announced that it
intends to make regular quarterly dividend distributions to its stockholders.

Management of the Properties. The Partnerships manage the Portfolio Properties
and any subsequently acquired properties through the Management Functions, which
include personnel and such functions as property management, leasing, design,
renovation, development and accounting. The Management Functions provide the
Partnerships with a fully integrated property management capability through
approximately 150 professionals and staff personnel and with an extensive and
mature network of relationships with tenants and potential tenants as well as
with members of the brokerage and property owners' communities.
Saul Centers shares with the Trust Affiliates certain ancillary functions at
cost, such as computer and payroll services, benefit administration and in-house
legal services, and shares insurance expense on a pro rata basis. The Trust
Affiliates sublease office space to Saul Centers at their cost. The terms of all
sharing arrangements, including payments related thereto, are reviewed
periodically by the independent directors of Saul Centers, who constitute five
of the nine members of the board of directors.

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

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

Reimbursement Agreement. Pursuant to a reimbursement agreement among the
partners of the Partnerships, the Real Estate Trust and two of its subsidiaries
that are partners in the Partnerships have agreed to reimburse Saul Centers and
the other partners in the event the Partnerships fail to make payments with
respect to certain portions of the Partnerships' debt obligations and Saul
Centers or any such other partners personally make payments with respect to such
debt obligations. The maximum potential obligations of the Real Estate Trust and
its subsidiaries under this agreement total $115.5 million. See Note 2 to the
Consolidated Financial Statements in this report. The Real Estate Trust believes
that the Partnerships will be able to make all payments due with respect to
their debt obligations.
Tax Conflicts. The fair market value of each of the properties contributed to
the Partnerships by the Real Estate Trust and its subsidiaries at the date of
the Formation Transactions (the "FMV" of each such property) exceeded the tax
basis of such property (with respect to each property, such excess is referred
to as the "FMV-Tax Difference"). In the event Saul Centers or Saul QRS, Inc.,
acting as general partner of a Partnership, causes such Partnership to dispose
of, or there is an involuntary disposition of, one or more of such properties, a
disproportionately large share of the total gain for federal income tax purposes
would be allocated to the Real Estate Trust or its subsidiaries as a result of
the property disposition. In general, if the gain recognized by the Partnership
on such a property disposition is less than or equal to the FMV-Tax Difference
for such property (as previously reduced by the amounts of special tax
allocations of depreciation deductions to the partners), all such gain will be
allocated to the Real Estate Trust or its subsidiaries. To the extent the gain
recognized by the Partnerships on the property disposition exceeds the FMV-Tax
Difference (as adjusted), such excess generally will be allocated among all
partners in Saul Holdings based on their relative percentage interests. In
general, the amount of federal income tax liability in respect of gain allocated
to the Real Estate Trust or its subsidiaries in the event of such a property
disposition is likely to exceed, perhaps substantially, the amount of cash, if
any, distributable to the Real Estate Trust or its subsidiaries as a result of
the property disposition. In addition, future reductions in the level of the
Partnerships' debt, any release of the guarantees of such debt by the Real
Estate Trust or its subsidiaries (described above under "Reimbursement
Agreement") or any refinancings in which the Real Estate Trust or its
subsidiaries do not assume a comparable obligation to that contained in the
Reimbursement Agreement could cause the Real Estate Trust or its subsidiaries to
have taxable constructive distributions without the receipt of any corresponding
amounts of cash. See Note 2 to the Consolidated Financial Statements in this
report.

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

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

Environmental Matters

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

Relationships with the B. F. Saul Company

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

The Advisor acts as the Real Estate Trust's investment advisor and manages the
day-to-day financial, accounting, legal and administrative affairs of the Real
Estate Trust. Franklin acts as leasing and management agent for 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 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 and
its subsidiaries join in the filing of a consolidated federal income tax return
using the accrual method of accounting on the basis of a fiscal year ending
September 30.

Since June 28, 1990 the Bank and its subsidiaries have joined in the
consolidated federal income tax returns filed by the Trust on a fiscal year
basis. Each member of an affiliated group of corporations which files
consolidated income tax returns is liable for the group's federal income tax
liability. Prior to June 28, 1990, the Bank and its subsidiaries filed a
consolidated federal income tax return on a calendar-year basis.

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

The Internal Revenue Service ("IRS") has concluded the audits of the federal
income tax returns of the Trust for the taxable years ended September 30, 1992,
September 30, 1993 and September 30, 1994. The IRS audit adjustments did not
have a significant adverse effect on the Trust's reported earnings under
generally accepted accounting principles. The IRS has notified the Trust that
its consolidated federal tax return for the fiscal year ended September 30, 1995
has been selected for review, which could lead to an IRS audit.

Bad Debt Reserve. For taxable years beginning before December 31, 1995, savings
institutions that satisfied certain requirements were permitted to establish
reserves for bad debts and to deduct each year reasonable additions to those
reserves in lieu of taking a deduction for bad debts actually sustained during
the taxable year. To qualify for this treatment, at least 60% of a savings
institution's assets had to be "qualifying assets," including cash, certain U.S.
and state government securities, and loans secured by interests in residential
real property.

In establishing its reserves from calendar year 1988 through fiscal year 1996,
the Bank calculated its bad debt deduction for tax purposes using the experience
method. The experience method was based on the institution's actual loan loss
experience over a prescribed period. For the year ended September 30, 1996,
accumulated reserves were approximately $111.8 million.
Provisions that repealed the thrift bad debt provisions of the Internal Revenue
Code were included in the Small Business Act of 1996 and took effect for tax
years beginning after December 31, 1995. As a result, for its fiscal year 1997
and fiscal year 1998, the Bank is no longer able to use the "reserve method" for
computing its bad debt deduction and can deduct only those bad debts actually
incurred during the respective taxable years. The bad debt provisions of 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). The Bank's accumulated
reserves since 1987 which are subject to recapture under this rule are $101.3
million. 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, 1998 and 1997.

Consolidated Tax Returns; Tax Sharing Payments. Generally, the operations of the
Trust have generated significant net operating losses ("NOL's"). The Bank's
taxable income in the current year was sufficient to fully utilize the current
year tax loss of the Trust. Under the terms of a tax sharing agreement dated
June 28, 1990, as amended (the "Tax Sharing Agreement"), the Bank is 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. Under the Tax Sharing Agreement, the
Bank and its subsidiaries are treated as a single member of the Trust's
affiliated group.

The Bank made tax sharing payments of $5.6 million in fiscal 1998. The tax
sharing payments were conditioned on a pledge by the Trust of certain Trust or
other assets to secure certain of its obligations under the Tax Sharing
Agreement. At September 30, 1998, the amount of tax sharing payments due to the
Trust from the Bank was $6.6 million, which was paid subsequent to the fiscal
year end. It is expected that the Bank will have taxable income in future years
and additional operating losses of the Trust will be utilized to reduce the
overall tax liability of the group which would otherwise arise from such taxable
income of the Bank (or from the taxable income of other members of the Trust's
affiliated group).
In general, if the Bank has net operating losses or unused tax credits in any
taxable year, under the Tax Sharing Agreement the Trust is obligated to
reimburse the Bank in an amount generally equal to (i) the tax benefit to the
group of using such tax losses or unused tax credits in the group's consolidated
federal income tax return for such year, plus (ii) to the extent such losses or
credits are not used by the group in such year, the amount of the tax refunds
which the Bank would otherwise have been able to claim if it were not being
included in the consolidated federal income tax return of the group (but not in
excess of the net amount paid by the Bank to the Trust pursuant to the Tax
Sharing Agreement). There is no assurance that the Trust would be able to
fulfill this obligation. If the Trust did not make the reimbursement, the OTS
could attempt to characterize such nonpayment as an unsecured extension of
credit by the Bank to the Trust which, as described above under "Holding Company
Regulation," is prohibited under current law. The Tax Sharing Agreement itself
does not provide for any remedies upon a breach by any party of its obligations
under the Agreement.

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

State Taxation

Maryland law does not allow the filing of consolidated income tax returns, and
thus the Trust and its subsidiaries, which includes the Bank and its
subsidiaries, that are subject to Maryland income tax, are required to file
separately in Maryland. The Trust and its subsidiaries are also subject to
income taxes in other states, some of which allow or require combined or
consolidated filing. The Commonwealth of Virginia has concluded 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. The audit
adjustments did not have a significant adverse effect on the Trust's reported
earnings.

BANKING

Regulation

Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan
Bank (the "FHLB") of Atlanta. The 12 FHLBs are administered by the Federal
Housing Finance Board, an independent agency within the executive branch of the
federal government. The FHLBs serve as a central credit facility for their
members. Their primary credit mission is to enhance the availability of
residential mortgages. From time to time, the Bank obtains advances from the
FHLB. At September 30, 1998, the Bank had outstanding advances from the FHLB of
Atlanta of $352.0 million. See Note 21 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 $49.0 million in FHLB stock at September 30, 1998. The Bank earned
dividends of $2.4 million and $2.0 million during the years ended September 30,
1998 and 1997, respectively.

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, certain mortgage-related securities, certain
mortgage loans and 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 quarter's average balances), plus borrowings
(or portions thereof) payable in one year or less. Effective November 24, 1997,
the OTS reduced the minimum liquidity requirement to 4.0% from 5.0% and changed
the reporting requirement to quarterly instead of monthly. If an institution's
liquid assets at any time do not at least equal (on an average daily basis for
the quarter) the amount required by the OTS, the institution could be subject to
various monetary penalties imposed by the OTS. At September 30, 1998, the Bank
was in compliance with the liquidity requirement, with a liquid assets ratio of
10.4%.

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

Although the FDIC insures commercial banks as well as thrifts, the insurance
funds for commercial banks and thrifts have been segregated into the Bank
Insurance Fund (the "BIF" ) and the SAIF, respectively. The FDIC is required to
maintain the reserve levels of both the BIF and the SAIF at 1.25% of insured
deposits. As a result of a one-time special assessment paid by thrift
institutions pursuant to legislation enacted in 1996 to recapitalize the SAIF, a
prior differential between BIF and SAIF assessment rates was eliminated and the
rates for SAIF members are identical to the rates for BIF members. Beginning in
1997, commercial banks have been required to share in the payment of interest
due on Financing Corporation ("FICO") bonds used to provide liquidity to the
savings and loan industry in the 1980s. Annualized FICO assessments which were
added to deposit insurance premiums equaled 6.25 basis points for SAIF members
and 1.25 basis points for BIF members for the first semi-annual period of 1998
and 5.96 basis points for SAIF members and 1.192 basis points for BIF members
for the second semi-annual period of 1998. 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.
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, 1998, the Bank's tangible, core and total
risk-based regulatory capital ratios were 7.93%, 7.93% and 20.70%, 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." In October 1997, the OTS proposed amendments to its FIRREA capital
regulations that would establish a minimum leverage ratio of 4.0% for
institutions not in the highest supervisory category. Core capital generally
includes common shareholders' equity, noncumulative perpetual preferred stock
and minority interests in consolidated subsidiaries, less investments in certain
subsidiaries and certain intangible assets. Prior to October 1, 1998, under
interim guidance issued by the OTS, servicing assets (both mortgage and
non-mortgage) and purchased credit card relationships ("PCCRs") could be
included up to an aggregate amount of 50% of core capital and PCCRs and
non-mortgage servicing assets were also subject to a sublimit of 25% of core
capital. For these purposes, servicing assets and PCCRs are valued at the lesser
of 90% of fair market value or 100% of the current unamortized book value. At
September 30, 1998, the Bank had qualifying servicing assets of $27.0 million,
which constituted 5.1% of core capital at that date, and had no PCCRs.

Effective October 1, 1998, the OTS and the other federal bank regulatory
agencies amended their regulatory capital requirements relating to servicing
assets. The final rule increases the maximum amount of servicing assets (both
mortgage and non-mortgage) and PCCRs that can be included in Tier 1 capital from
50% to 100%. PCCRs and non-mortgage servicing assets are still subject to a
sublimit of 25% of core capital.

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.

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 servicing
assets 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 accounted for as having been sold. Pursuant to OTS's capital
requirements, the Bank maintains dollar-for-dollar capital against the
securitized assets in an amount equal to (i) the amounts on deposit in spread
accounts, (ii) the amount of any interest-only strips relating to the
securitized assets, and (iii) certain other items representing recourse for
regulatory capital purposes, up to the otherwise applicable capital requirement
on the underlying loans.

The OTS and the other federal bank regulatory agencies have proposed revisions
to their risk-based capital regulations to address the regulatory capital
treatment of recourse obligations and direct credit substitutes involving
exposure to credit risk. The proposal (i) would define recourse to include,
among other things, providing credit enhancement beyond any contractual
obligation to support assets sold and providing representations and warranties
other than those that relate to an existing state of facts that the seller can
either control or verify with reasonable due diligence at the time the assets
are sold; (ii) would treat direct credit substitutes and recourse obligations
consistently; and (iii) would use credit ratings and possibly certain other
alternative approaches to match the risk-based capital assessment more closely
to an institution's relative risk of loss in asset securitizations. The agencies
intend that any final rules adopted in connection with the proposal that result
in increased risk-based capital requirements for an institution will apply only
to transactions consummated after the effective date of any final rules.

There are currently four categories of risk-weightings: 0% for cash and similar
assets, 20% for qualifying mortgage-backed securities, 50% for qualifying
residential permanent real estate loans and 100% for other assets, including
consumer loans, commercial real estate loans 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,
1998, the Bank had $53.0 million in allowances for general loan and lease
losses, all of which was includable as supplementary capital.
Subordinated debt may be included in supplementary capital with OTS approval
subject to a phase-out based on its remaining term to maturity. The phase-out
established for such maturing capital instruments by the OTS permits an
institution to include such instruments in supplementary capital under one of
two phase-out options: (i) at the beginning of each of the last five years prior
to the maturity date of the instrument, the institution may reduce the amount
eligible to be included by 20% of the original amount or (ii) the institution
may include only the aggregate amount of maturing capital instruments that
mature in any one year during the seven years immediately prior to an
instrument's maturity that does not exceed 20% of the institution's capital.
Once an institution selects either the first or second option, it must continue
to select the same option for all subsequent issuances of maturing capital
instruments as long as there is any outstanding balance of such instruments for
which an option has been selected. At September 30, 1998, the Bank had $250.0
million in maturing subordinated capital instruments, all of which was
includable as supplementary capital. Of that amount, $150.0 million matures in
2005 and $100.0 million matures in 2008. See "Deposits and Other Sources of
Funds - Borrowings."

The OTS has indefinitely delayed implementation of an interest-rate risk
component of its risk-based capital regulation. Under that component, 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. At September 30, 1998,
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, 1998, 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, 1998, the Bank's investments in, and extensions of credit to,
its non-includable subsidiaries totaled approximately $4.1 million, of which
$3.9 million constituted a deduction from tangible capital.
OTS capital regulations also require the 100% deduction from total capital of
all equity investments that are not permissible for national banks and the
portion of land loans and non- residential construction loans in excess of an
80% loan-to-value ratio. The Bank's equity investments at September 30, 1998
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, 1998, the book value of these properties after subsequent
valuation allowances, was $11.7 million, of which $11.1 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,
1998. The Bank has $0.8 million of general valuation allowances maintained
against its non-includable subsidiaries and equity investments which, pursuant
to OTS guidelines, are 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 February 1998, the Bank
received from the OTS extensions through February 17, 1999 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 - Capital."

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 - Capital."

The OTS has the authority to require an institution to maintain capital at
levels above the minimum levels generally required, but has not taken any such
action with respect to the Bank.
Prompt Corrective Action. Pursuant to FDICIA, the OTS and the other federal
agencies regulating financial institutions have adopted regulations which apply
to every FDIC- insured commercial bank and thrift institution a system of
mandatory and discretionary supervisory actions which generally become more
severe as the capital levels of an individual institution decline. The
regulations establish five capital categories to which institutions are assigned
for purposes of determining their treatment under these prompt corrective action
provisions. An institution is categorized as well capitalized under the
regulations if (i) it has a leverage ratio of at least 5.0%, a tier 1 risk-based
capital ratio of at least 6.0% and a total risk-based capital ratio of at least
10.0%, and (ii) is not subject to any written agreement, order, capital
directive or prompt corrective action directive issued by the OTS to meet and
maintain a specific capital level. An institution is considered adequately
capitalized if such capital ratios are at least 4.0% (3.0% if rated in the
highest supervisory category), 4.0% and 8.0%, respectively. An institution with
a leverage ratio below 4.0% (3.0% if rated in the highest supervisory category),
a tier 1 risk-based capital ratio below 4.0% or a total risk-based capital ratio
below 8.0% is considered undercapitalized and an institution with ratios under
3.0%, 3.0% or 6.0%, respectively, is considered significantly undercapitalized.
Finally, an institution is considered critically undercapitalized, and subject
to provisions mandating appointment of a conservator or receiver, if its ratio
of tangible equity (generally defined by the OTS as core capital plus cumulative
perpetual preferred stock) to total assets is 2.0% or less. An institution's
classification category could be downgraded if, after notice and an opportunity
for a hearing, the OTS determined that the institution is in an unsafe or
unsound condition or has received and has not corrected a less than satisfactory
examination rating for asset quality, management, earnings or liquidity.

At September 30, 1998, the Bank's leverage, tier 1 risk-based and total
risk-based regulatory capital ratios were 7.93%, 12.93% and 20.70%,
respectively, which exceeded the minimum ratios established for well capitalized
institutions.

Board Resolution. At the request of the OTS, the Board of Directors of the Bank
adopted a resolution in March 1996 which, among other things, 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 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 up to 20 percent of
total assets, and (iii) intangible assets, including goodwill. The QTL test must
be met on a monthly average basis in nine out of every 12 months.
The Bank had 86.7% of its assets invested in qualified thrift investments at
September 30, 1998, and met the QTL test in each of the previous 12 months.

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, small business
loans, 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 consumer loans (other than
credit card and educational loans), 50% of residential housing loans originated
and sold within 90 days, investments in real estate-oriented service
corporations, 200% of mortgage loans for residences, churches, schools, nursing
homes and small businesses in 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 meet the QTL test, 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 meet the QTL test, 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 meet the QTL test, in the absence of a significant restructuring of the
Trust's operations, would, in effect, require the Trust to reduce its ownership
of 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.

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 two tiers for purposes of these regulations. Tier
1 institutions are those in compliance with their 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.

The definition of Tier 2 institutions is no longer applicable because all
deductions from capital requirements have been fully phased-in as of July 1,
1996. All institutions are classified 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, 1998, 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.

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 10 3/8% Noncumulative
Exchangeable Preferred Stock, Series, A, (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 - Capital." 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.

In January 1998, the OTS proposed to amend its capital distribution regulations.
The proposal would expand the definition of capital distribution to include
repurchases of subordinated debt and requested comment on whether to treat
dividends paid by an operating subsidiary such as the REIT Subsidiary as capital
distributions. Under the proposal, the Bank would be required to file an
application with the OTS to make any capital distribution regardless of its size
if the Bank did not qualify for expedited treatment under OTS regulations. If
the Bank qualified for expedited treatment, an application would be required
only if the total amount of all of the Bank's capital distributions for the year
exceeded the sum of the Bank's net income for the year and the retained net
income for the previous two years. However, as is the case under current OTS
regulations, a notice would be required for any capital distribution because the
Bank is a subsidiary of a savings and loan holding company. In considering an
application or notice, the proposal provides that the OTS will not permit a
capital distribution if (i) the Bank would be undercapitalized following the
distribution; (ii) the capital distribution raises safety and soundness
concerns; or (iii) the capital distribution violates any statute, regulation,
agreement with the OTS, or condition imposed by 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 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 Bank's 10 3/8% Noncumulative Preferred Stock, Series B (the "Series B
Preferred Stock"), if issued in exchange for the outstanding REIT Preferred
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financial Condition - Capital and Security Ownership of
Certain Beneficial Owners and Management."

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 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 13% 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."

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 regulatory loans-to-one-borrower limit was approximately $125.6
million at September 30, 1998, and no group relationships exceeded this limit at
that date.
Safety and Soundness Standards. The federal financial institution regulators
have developed standards to evaluate the operations of depository institutions,
as well as standards relating to asset quality, earnings and compensation. The
operational standards cover internal controls and audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth and
employee compensation. An institution that fails to meet a standard that is
imposed through regulation may be required to submit a plan for corrective
action within 30 days. If a savings association fails to submit or implement an
acceptable plan, the OTS must order it to correct the deficiency, and may
restrict its rate of asset growth, prohibit asset growth entirely, require the
institution to increase its ratio of tangible equity to assets, restrict the
interest rate paid on deposits to the prevailing rates of interest on deposits
of comparable amounts and maturities, or require the institution to take any
other action the OTS determines will better carry out the purpose of prompt
corrective action. Imposition of these sanctions is within the discretion of the
OTS in most cases, but is mandatory if the savings institution commenced
operations or experienced a change in control during the 24 months preceding the
institution's failure to meet these standards, or underwent extraordinary growth
during the preceding 18 months.

The asset quality standards require that 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.

Regulatory Assessments. The OTS imposes 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
$867,000 for the twelve-month period ending December 31, 1998) are the most
significant.

Effective January 1, 1999, the OTS will charge examination and supervisory
assessments based on a revised formula intended to more accurately reflect OTS's
estimates of the actual cost of examining and supervising an institution. Unlike
the current formula, the revised formula will impose a surcharge on institutions
with a CAMELS rating of 3 (in addition to institutions with a CAMELS rating of 4
or 5 that currently pay a surcharge) and on complex institutions, which OTS
defines as any institution with significant amounts (i.e., over $1 billion) of
certain off-balance sheet assets (specifically, loans serviced for others, trust
assets and recourse obligations or direct credit substitutes). The Bank
anticipates that its assessments will increase under the revised formula.

Other Regulations and Legislation. Chevy Chase must 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 meet
the QTL test and their regulatory capital requirements and have at least a
satisfactory rating under the Community Reinvestment Act ("CRA").

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

The OTS and the other federal bank regulatory agencies have requested comment on
possible changes to the existing regulatory classification policies for retail
credit. Among the changes being considered are adoption of: (i) a uniform
charge-off policy for open-end and closed-end credit; (ii) a charge-off policy
for loans affected by bankruptcy, fraudulent activity, and/or death of a
borrower; (iii) a policy for treatment of partial payments; (iv) a prudent
reaging policy for past due accounts; and (v) a classification policy for
delinquent residential mortgage and home equity loans. The Bank is unable to
predict at this time what, if any, changes will be made to the existing
policies.

Pending Legislation

Thrift Charter Legislation. Legislation passed in 1996 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. Because the 105th
Congress did not enact legislation eliminating the thrift charter, no such
merger will take place on January 1, 1999. Although earlier versions of
financial modernization legislation considered by the 105th Congress would have
required federal thrifts, like the Bank, to convert their charters to national
or state bank charters, the versions of the legislation passed by the House of
Representatives and by the Senate Banking Committee prior to adjournment would
not have required the Bank to convert its charter. If legislation requiring the
Bank to convert its charter were enacted and did not contain appropriate
grandfather provisions, such legislation could have an 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 at this time whether, or in what form, such
legislation may eventually be enacted, and there can be no assurances that any
such legislation that is enacted will contain adequate grandfather rights for
the Bank or 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 1, 1998, the first $4.7 million of a
depository institution's transaction accounts were subject to a 0% reserve
requirement. The next $43.1 million in net transaction accounts were subject to
a 3.0% reserve requirement and any net transaction accounts over $47.8 million
were subject to a 10.0% reserve requirement. Effective December 1, 1998, the FRB
increased the amount of transaction accounts subject to a 0% reserve requirement
from $4.7 million to $4.9 million and decreased the low reserve tranche from
$43.1 million to $41.6 million. The Bank met its reserve requirements for each
period during the year ended September 30, 1998. The balances maintained to meet
the reserve requirements imposed by the FRB also may be used to satisfy
liquidity requirements which are imposed by the OTS.

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 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. Based on the last OTS examination covering the period from January
1995 through June 1997, the Bank received an outstanding CRA rating, the highest
rating given by the OTS.

Institutions like the Bank, with more than $250 million in assets, are evaluated
primarily 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.
In August 1994, Chevy Chase and its subsidiary, B. F. Saul Mortgage Company
(together, the "Companies"), entered into an agreement with the United States
Department of Justice (the "Department") which committed 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 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 obligated 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 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.

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.

Holding Company Regulation

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

The Holding Companies must obtain the prior approval of the OTS before acquiring
by merger, consolidation or purchase of assets any federally insured savings
institution or any savings and loan holding company. As unitary savings and loan
holding companies, the Holding
Companies are virtually unrestricted in the types of business activities in
which they may engage, provided the Bank continues to meet the QTL test. See
"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. See "Prompt Corrective Action."
Recent Accounting Pronouncements

SFAS No. 130, Reporting Comprehensive Income ("SFAS 130") was issued in June
1997 and establishes accounting standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS 130 also requires an enterprise to classify
items of other comprehensive income by their nature in a financial statement and
to display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. Because SFAS 130 addresses only disclosure
related issues, its adoption will not have an impact on the Bank's financial
condition or its results of operations.

SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"), was also issued in June 1997. SFAS 131 establishes
accounting standards for the way business enterprises report information about
operating segments in annual and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 requires
that a business enterprise report financial and descriptive information,
including profit or loss, certain specific revenue and expense items, and
segment assets, about its reportable operating segments. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by management in deciding
how to allocate resources and in assessing performance. SFAS 131 is effective
for financial statements for fiscal years beginning after December 15, 1997.
Because SFAS 131 addresses only disclosure related issues, its adoption will not
have an impact on the Bank's financial condition or its results of operations.

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was
issued in June 1998 and establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. The impact of SFAS 133
on the Bank's financial statements has not yet been determined.

SFAS No. 134, Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise,
an amendment of FASB Statement No. 65 ("SFAS 134"), was issued in October
1Mortgage Banking Activities to require that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities or other retained interests
based on its ability and intent to sell or hold those investments. SFAS 134
conforms the subsequent accounting for securities retained after the
securitization of mortgage loans by a mortgage banking enterprise with the
subsequent accounting for securities retained after the securitization of other
types of assets by a nonmortgage banking enterprise. SFAS 134 is effective for
the first fiscal quarter beginning after December 15, 1998.
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 3.3% in September
1998, compared to the national rate of 4.4%.

Chevy Chase historically has relied on retail deposits originated in its branch
network as its primary funding source. See "Deposits and Other Sources of
Funds." Chevy Chase's principal market for deposits consists of Montgomery and
Prince George's Counties in Maryland and Fairfax County in Virginia.
Approximately 13.3% of the Bank's deposits at September 30, 1998 were obtained
from depositors residing outside of Maryland and Northern Virginia. Chevy Chase
had the largest market share of deposits in Montgomery County, and ranked third
in market share of deposits in Prince George's County at June 30, 1997,
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 1998
(2.4% and 1.9%, respectively) was below the national rate (4.4%) and state rates
(4.3% for Maryland and 3.2% 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.

The Bank classifies its investment and mortgage-backed securities as either
held-to-maturity, available-for-sale or trading at the time such securities are
acquired. All investment securities and mortgage-backed securities are
classified as held-to-maturity at September 30, 1998 and 1997.

As part of its mortgage banking activities, the Bank exchanges loans held for
sale for mortgage-backed securities and then sells the mortgage-backed
securities, which are classified as trading securities, to third party investors
in the month of issuance. Gains and losses on sales of trading securities are
determined using the specific identification method. There were no
mortgage-backed securities classified as trading securities at September 30,
1998 and 1997.
At September 30, 1998 and 1997, the Bank held automobile receivables-backed
securities which were classified as trading securities. These securities were
established in conjunction with two automobile loan securitization transactions
and represent subordinate classes of certificates retained by the Bank.

Lending Activities

Loan Portfolio Composition. At September 30, 1998, the Bank's loan portfolio
totaled $2.8 billion, which represented 41.2% 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 70.6% 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)

                                                                                    September 30,
                        ------------------------------------------------------------------------------------------------------------
                                1998                   1997                   1996                  1995                  1994
                        ---------------------- ---------------------  --------------------- --------------------- ------------------

                                     % of                   % of                   % of                  % of                 % of
                          Balance    Total       Balance    Total       Balance    Total      Balance    Total      Balance   Total
                        -----------  --------- -----------  --------  -----------  -------- -----------  -------- ----------- ------
Single family 
  residential (1)      $ 1,821,982    65.7 %   $  849,955    33.2 %  $ 1,601,483    47.2 % $ 1,391,694    47.3 % $ 1,369,571   53.7%

Home equity (1)            135,122     4.9         94,088     3.7         32,052     0.9        29,024     1.0        34,708    1.4

Commercial real estate
  and multifamily           74,164     2.7         53,551     2.1         78,866     2.3        85,781     2.9        84,210    3.3

Real estate 
  construction and 
  ground                   108,379     3.9         54,998     2.2         63,907     1.9        32,652     1.1        52,350    2.1

Commercial                 174,076     6.3         98,346     3.9         57,023     1.7        13,986     0.5         3,950    0.2

Credit card (1)                --      --       1,077,149    42.3      1,118,271    33.0     1,012,548    34.4       650,199   25.5

Automobile (1)             357,826    12.9        229,868     9.0        301,066     9.0       239,217     8.1       289,346   11.4

Home improvement and
  related loans (1)         67,355     2.4         55,453     2.2         99,192     2.9       112,705     3.8        37,526    1.5

Overdraft lines of 
  credit and
  other consumer            33,484     1.2         36,029     1.4         37,954     1.1        26,206     0.9        25,375    0.9

                        -----------  --------- -----------  --------  -----------  -------- -----------  -------- ----------- ------
                         2,772,388   100.0 %    2,549,437   100.0 %    3,389,814   100.0 %   2,943,813   100.0 %   2,547,235  100.0%
                        -----------  ========= -----------  ========  -----------  ======== -----------  ======== ----------- ======
Less:

  Unearned premiums 
    and discounts               --                    449                    836                 1,103                 1,438

  Deferred loan 
    origination
    fees (costs)            (3,013)                (2,339)               (13,958)              (13,687)              (10,604)

  Allowance for loan 
    losses                  60,157                105,679                 95,523                60,496                50,205

                        -----------            -----------            -----------           -----------           -----------
                            57,144                103,789                 82,401                47,912                41,039
                        -----------            -----------            -----------           -----------           -----------

      Total loans 
        receivable     $ 2,715,244            $ 2,445,648            $ 3,307,413           $ 2,895,901           $ 2,506,196
                       ============           ============           ============          ============          ============

-----------------------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale and/or securitization, if any.
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. In addition, the composition of the Bank's loan portfolio as of
September 30, 1998 was significantly affected by the sale of the Bank's credit
card portfolio on that date. See "Regulation - Regulatory Capital," "Qualified
Thrift Lender ("QTL") Test" and "Federal Taxation - Bad Debt Reserve" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - 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,
1998. The entire balance of loans held for sale and/or securitization is shown
in the year ending September 30, 1999, because such loans are expected to be
sold in less than one year.
Contractual Principal Repayments
(In thousands)

                                       
                                                                           Approximate Principal Repayments
                              Principal                                   Due in Years Ending September 30,
                               Balance     
                             Outstanding at  ---------------------------------------------------------------------------------------
                             September 30,                                                                                 2014 and
                               1998 (1)        1999         2000        2001      2002-2003     2004-2008    2009-2013    Thereafter
                             ------------- ----------- ------------ ----------- ------------- ------------ ------------- -----------
Single family residential    $  1,772,784  $   23,377  $    24,982  $   26,482  $     49,758  $   170,039  $    379,357  $ 1,098,789
Home equity                       135,122         643        1,483         237           245        7,230        11,262      114,022
Commercial real estate and
  multifamily                      74,164         469       10,728      12,338        21,343       27,365         1,921           --
Real estate construction 
  and ground                      108,379      63,245        8,729      23,090        13,315           --            --           --
Commercial                        174,076      79,972        9,510      12,647        17,733       48,654         5,294          266
Automobile                        232,826      37,997       43,341      49,563       101,925           --            --           --
Home improvement and 
  related loans                    60,570       2,343        2,632       2,956         7,045       26,727        18,867           --
Overdraft lines of credit 
  and other consumer               33,484       3,187        3,744       4,411        11,377       10,765            --           --
Loans held for sale                55,983      55,983           --          --            --           --            --           --
Loans held for 
  securitization and sale         125,000     125,000           --          --            --           --            --           --
                             ------------- ----------- ------------ ----------- ------------- ------------ ------------- -----------
  Total loans receivable (2) $  2,772,388  $  392,216  $   105,149  $  131,724  $    222,741  $   290,780  $    416,701  $ 1,213,077
                             ============= =========== ============ =========== ============= ============ ============= ===========

Fixed-rate loans             $  1,592,388  $   69,360  $    68,423  $   81,645  $    166,858  $   175,992  $    316,345  $   713,765
Adjustable-rate loans             999,017     141,873       36,726      50,079        55,883      114,788       100,356      499,312
Loans held for sale                55,983      55,983           --          --            --           --            --           --
Loans held for 
  securitization and sale         125,000     125,000           --          --            --           --            --           --
                             ------------- ----------- ------------ ----------- ------------- ------------ ------------- -----------
  Total loans receivable (2) $  2,772,388  $  392,216  $   105,149  $  131,724  $    222,741  $   290,780  $    416,701  $ 1,213,077
                             ============= =========== ============ =========== ============= ============ ============= ===========

------------------------------------------------------------------------------------------------------------------------------------
(1) Of the total amount of loans outstanding at September 30, 1998 which were
due after one year, an aggregate principal balance of approximately $1.5 billion
had fixed interest rates and an aggregate principal balance of approximately
$857.1 million had adjustable interest rates. 

(2) Before deduction of allowance for loan losses, unearned premiums and
discounts and deferred loan origination fees (costs).
Actual payments may not reflect scheduled contractual principal repayments due
to the effect of loan refinancings, prepayments and enforcement of due-on-sale
clauses, 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, 1998,
principal repayments of $211.0 million are contractually due within the next
year. Of this amount, $69.1 million is contractually due on fixed-rate loans and
$141.9 million is contractually due on adjustable-rate loans.

Origination, Purchase and Sale of Real Estate Loans. As a federally chartered
savings institution, the Bank has general authority to make loans secured by
real estate located throughout the United States. The following table shows
changes in the composition of the Bank's real estate loan portfolio and the net
change in mortgage-backed securities.
Origination, Purchase and Sale of Real Estate Loans
(In thousands)

                                                                      For the Year Ended September 30,
                                                        -------------------------------------------------------------
                                                             1998                   1997                   1996
                                                        ----------------       ----------------       ---------------
Real estate loan originations and purchases: (1)

Single family residential                               $     2,814,171        $     1,438,333        $    1,067,153
Home equity                                                     448,071                259,999               152,953
Commercial real estate and multifamily                           21,184                     29                   345
Real estate construction and ground                             126,295                 64,430                72,655
                                                        ----------------       ----------------       ---------------

Total originations and purchases                              3,409,721              1,762,791             1,293,106
                                                        ----------------       ----------------       ---------------

Principal repayments                                           (348,676)              (501,190)             (279,518)
Sales (2)                                                      (423,078)              (413,645)             (407,201)
Loans transferred to real estate acquired
  in settlement of loans                                         (4,938)                (4,706)               (5,973)

                                                        ----------------       ----------------       ---------------
                                                               (776,692)              (919,541)             (692,692)
                                                        ----------------       ----------------       ---------------

Transfers to mortgage-backed securities (3)                  (1,545,974)            (1,566,966)             (363,257)
                                                        ----------------       ----------------       ---------------

Increase (decrease) in real estate loans                $     1,087,055        $      (723,716)       $      237,157
                                                        ================       ================       ===============

(1) Excludes unfunded commitments.

(2) Includes securitization and sale of home equity receivables of $298.8
million, $170.6 million and $96.5 million for the years ended September 30,
1998, 1997 and 1996, respectively.

(3) Represents real estate loans which were pooled and exchanged for
mortgage-backed securities.
Single-Family Residential Real Estate Lending. The Bank originates a variety of
loans secured by single-family residential structures. At September 30, 1998,
$2.0 billion (or 70.6%) of the Bank's loan portfolio consisted of loans secured
by first or second mortgages on such properties, as compared to $944.0 million
(or 36.9%) at September 30, 1997. Of these amounts, $25.5 million and $13.4
million consisted of FHA-insured or VA-guaranteed loans at September 30, 1998
and 1997, respectively. Approximately 77.8% of the Bank's single-family
residential real estate loans at September 30, 1998, 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.
Chevy Chase currently offers fixed-rate loans with maturities of 10 to 30 years
and adjustable-rate residential mortgage loans ("ARMs"), principally with
maturities of 30 years.

The Bank maintains a wholesale network of correspondents, including loan brokers
and financial institutions, in order to supplement its direct origination of
single-family residential mortgage loans. The Bank determines the specific loan
products and rates under which the correspondents originate the loans, and
subjects the loans to the Bank's underwriting criteria and review. During the
year ended September 30, 1998, approximately $1.6 billion of loans settled under
the correspondent program.

Interest rates on the majority of the Bank's ARMs are adjusted based on changes
in yields on U.S. Treasury securities of varying maturities. The interest rate
adjustment provisions of the Bank's ARMs contain limitations on the frequency
and maximum amount of interest rate adjustments, although such limitations are
not required by law. These limitations are determined by a variety of factors,
including mortgage loan competition in the Bank's markets. The 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%. At September 30, 1998,
36.0% of the Bank's residential mortgage loans were comprised of ARMs.

During the current fiscal year, the Bank continued to fulfill its $1.0 billion
five-year loan commitment made in 1994 to meet the credit needs of low- and
moderate-income borrowers in the various communities which it serves. As part of
this commitment, the Bank's Community Development Fund 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.
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
1998, sales of mortgage loans originated or purchased for sale by the Bank
totaled $124.3 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's conforming fixed-rate, single- family loans are originated
on terms which conform to Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal National Mortgage Association ("FNMA") and Government National Mortgage
Association ("GNMA") guidelines in order to facilitate the sale and/or
securitization of the mortgage loan. In order to manage its interest-rate
exposure, the Bank hedges its held for sale 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, 1998, the Bank had $56.3 million of single-family
residential loans held for sale to investors.

From time to time, as part of its capital and liquidity management plans, the
Bank may consider exchanging loans held in its portfolio for lower risk-weighted
mortgage-backed securities and retaining those securities in its portfolio
rather than selling them in the secondary mortgage market. During fiscal 1998,
the Bank exchanged $1.2 billion of single-family residential loans held in its
portfolio for mortgage-backed securities which the Bank retained for its own
portfolio.

When the Bank sells a residential whole loan or loan participation and retains
servicing, or purchases mortgage servicing assets from third parties, it
collects and remits loan payments, inspects the properties, makes certain
insurance and tax payments on behalf of borrowers and otherwise services the
loans. The servicing fee, generally ranging from 0.25% to 0.50% 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, 1998, the Bank was
servicing residential permanent loans totaling $4.0 billion for other investors.
See "Loan Servicing."

Sales of Mortgage-Backed Securities. The Bank originates and sells
mortgage-backed securities pursuant to its normal mortgage banking operations,
which are generally issued in the same month as they are sold. 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 an adjustable-rate loan to a fixed-rate loan. Mortgage-backed securities
held for sale in conjunction with mortgage banking activities are classified as
trading securities. 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, 1998.
Home Equity Lending. The Bank's home equity credit line loan provides revolving
credit secured principally by a second mortgage on the borrower's home. Such
loans are originated directly by the Bank. Home equity credit line loans bear
interest at a variable rate that adjusts monthly based on changes in the
applicable interest rate index and generally are subject to a maximum annual
interest rate of between 18.0% and 24.0%. Generally, except for any amortization
of principal that may occur as a result of monthly payments, there are no
required payments of principal until maturity. 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.

During fiscal 1998, the Bank purchased $53.2 million of home equity credit line
loans at a premium. The Bank may make additional purchases of such loans in the
future as a way to supplement its direct origination of such loans.

Securitization and sale of home equity receivables has been an important element
of the Bank's strategies to enhance liquidity and to maintain compliance with
regulatory capital requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations Financial Condition." The Bank
transferred $298.8 million, $170.6 million and $96.5 million of home equity
receivables in fiscal 1998, fiscal 1997 and fiscal 1996, respectively, to trusts
for securitization and sale to investors. Gains of $19.7 million, $11.8 million
and $4.7 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. Commercial real estate, real
estate construction and ground loans are originated directly by the Bank.
Aggregate balances of residential and commercial construction, ground and
commercial real estate and multifamily loans increased 68.2% in fiscal 1998 to
$182.5 million at September 30, 1998, from $108.5 million at September 30, 1997.
The Bank provides financing, generally at market rates, to certain purchasers of
its real estate owned ("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. Commercial loans are originated, underwritten, and managed
by the Bank's Business Banking Group. The Bank makes loans to business entities
for a variety of purposes, including working capital, acquisitions of machinery
and equipment or other assets, and facilitating cash flows. The Bank also
provides acquisition, construction and permanent financing of real estate used
in the borrower's business. A wide variety of products are offered, including
revolving lines of credit for working capital or seasonal needs; term loans for
the financing of fixed assets; letters of credit; cash management services; and
other deposit and investment products. Business development efforts have been
concentrated in the major industry groups in the metropolitan Washington, D.C.
area, as well as a broad base of businesses and community service organizations.
Commercial loans increased $75.8 million during fiscal 1998 from $98.3 million
at September 30, 1997 to $174.1 million at September 30, 1998. Of the $174.1
million, 26.9% represents participations by the Bank in commercial loans
originated by other financial institutions. The Bank believes its balances of
commercial loans will increase as it continues to expand this aspect of its
business. In addition, management believes that the acquisition of ASB can
enhance the operations of the Business Banking Group by allowing the Bank to
offer a broader variety of investment products and fiduciary services to
institutional customers.

Federal laws and regulations limit the Bank's commercial loan portfolio to 20%
of assets, with at least 10% consisting of small business loans.
Consumer Lending. Chevy Chase currently offers a variety of consumer 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 offers non-prime
automobile loans. 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 "Consumer Loan Underwriting." During fiscal 1998,
the Bank provided consumer credit through its credit card program, which offered
Visa(R) and MasterCard(R) credit cards. At June 30, 1998, credit card loans
outstanding totaled $938.7 million. Following the sale of the credit card
portfolio to FUSA on September 30, 1998, the Bank no longer offers its own
credit card loans, but has entered into an agreement with FUSA pursuant to which
the Bank will provide credit cards issued by FUSA to the Bank's local customers.
The Bank's portfolios of automobile loans, home improvement and related loans
and other consumer loans totaled $357.8 million, $67.4 million and $33.5
million, respectively, at September 30, 1998, which accounted for a combined
16.5% of total loans at that date. The largest areas of recent growth have been
in automobile loans and home improvement loans. During fiscal 1998, the Bank
purchased or originated $715.2 million and $108.5 million of automobile loans
and home improvement loans, respectively, which was partially offset by the
transfers of $534.7 million and $45.9 million, respectively, of receivables to
trusts for securitization and sale to investors.

Federal laws and regulations limit the Bank's secured and unsecured consumer
loans to 35% of its total assets. Certain consumer loans, which include home
improvement, secured deposit account and educational loans, are not included in
the 35% limit.

Real Estate Loan Underwriting. In the loan approval process, Chevy Chase
assesses both the borrower's ability to repay the loan and, in appropriate
cases, the adequacy of the proposed security. 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. Generally, all construction and commercial real estate loans
are reviewed and approved by the Executive Loan Committee. Any significant loan
not conforming to the Bank's approved policies must be approved by the Executive
Loan Committee or the Chief Executive Officer. Prior to October 1998, all loans
of $15 million or more were presented to the Board of Directors for final
approval. Effective October 1998, the Bank increased this threshold to $30
million.

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

In an effort to minimize the increased risk of loss associated with construction
and development loans, Chevy Chase considers the reputation of the borrower and
the contractor, reviews pre-construction sale and leasing information, and
requires an independent inspecting engineer or architect to review the progress
of multifamily and commercial real estate projects. In addition, the Bank
generally requires personal guarantees of developers for all development loans
and, if a general contractor is used by the developer, may require the posting
of a performance bond.
The Bank generally lends up to 95% of the appraised value of single-family
residential dwellings to be owner-occupied. The Bank also lends up to 85% of the
appraised value of the completed project to finance the construction of such
dwellings, and, on a case-by-case basis, the Bank occasionally may lend up to
90% of such appraised value when such financing is limited to pre-sold units.
The loan-to-value ratio generally applied by the Bank to commercial real estate
loans and multifamily residential loans has been 80% of the appraised value of
the completed project. Currently, the Bank generally does not originate a
traditional second mortgage loan (excluding home equity credit line loans) if
the aggregate loan-to-value ratio of the second loan and the related first
mortgage loan exceeds 80% of the appraised value of the property. In some
circumstances, the Bank originates a first and second mortgage loan
simultaneously where the total loan value does not exceed 90% of the appraised
value of the property. Currently, the Bank offers home equity credit line loans
up to a 125% maximum loan-to-value ratio. 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 a loan's collateral could
expose the Bank to losses. The Bank's ability to make loans with a loan-to-value
ratio above 90 percent without mortgage insurance is limited to 100 percent of
the Bank's total risk-based capital.

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

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

Consumer Loan Underwriting. Consumer loans (which include automobile loans and
home improvement and related loans and overdraft lines of credit) 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. Servicing income earned on
single-family residential mortgage loans owned by third parties and the Bank's
securitization and servicing of credit card, home equity, 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.

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,
                                 -----------------------------------------
(In thousands)                       1998          1997           1996    
------------------------------   ------------  ------------  -------------
Residential...................    $ 4,003,946   $ 3,930,371    $ 3,045,650
Credit card...................           --       4,015,172      3,889,704
Home equity...................        421,432       459,130        416,365
Automobile....................      1,055,746     1,083,026        505,638
Home loans....................        200,033       244,140        141,106
                                 ------------  ------------  -------------
   Total amount of loans
   serviced for others (1)....    $ 5,681,157   $ 9,731,839    $ 7,998,463
                                 ============  ============  =============
Servicing and securitization
   income (2).................    $   233,271   $   305,192    $   284,964
                                 ============  ============  =============
---------------------
(1)...The Bank's basis in its servicing assets and interest-only strips at
September 30, 1998, 1997 and 1996 was $40.7 million, $128.8 million and $75.4
million, respectively.

(2)...In each of the years ended September 30, 1998, 1997 and 1996, servicing
and securitization income as a percentage of net interest income before
provision for loan losses was 118.2%, 143.6% and 142.9%, respectively.
The Bank earns fees in connection with the servicing of home equity
loans, home loans, automobile loans and single-family residential mortgage loans
(and credit card loans prior to the sale of the credit card portfolio on
September 30, 1998). The Bank's level of servicing and securitization income
varies based in large part on the amount of the Bank's securitization activities
with respect to these loan types. As the Bank securitizes and sells assets,
acquires servicing assets either through purchase or origination, or sells
mortgage loans and retains the servicing rights on those loans, the level of
servicing and securitization income generally increases. During fiscal 1998, the
Bank securitized and sold $1.0 billion of credit card receivables, $298.8
million of home equity receivables, $534.7 million of automobile loan
receivables and $45.9 million of home loan receivables. The Bank's servicing and
securitization income decreased from the level achieved in fiscal 1997
principally because of increases in unrealized losses on interest-only strips in
addition to increases in the amortization of interest-only strips related to
prior gains on sales of loans. The Bank's level of servicing and securitization
income also declines upon repayment of assets previously securitized and sold
and repayment of mortgage loans serviced for others.

The Bank's investment in servicing assets (including servicing assets and
interest-only strips), and the amortization of such assets, are periodically
evaluated for impairment. Interest-only strips are evaluated quarterly based on
the discounted value of estimated future net cash flows to be generated by the
underlying loans. The difference between the book value of these assets and the
discounted value is recognized as an unrealized gain or loss in the period in
which the change occurs. Several estimates are used when determining the
discounted value, the most significant of which are the estimated rate of
repayment of the underlying loans and estimated credit losses. The Bank
evaluates its servicing assets for impairment based on fair value. To measure
fair value of its servicing assets, the Bank uses either quoted market prices or
discounted cash flow analyses using appropriate assumptions for servicing fee
income, servicing costs, prepayment rates and discount rates. If actual
prepayment or default rates significantly exceed the estimates used to calculate
the carrying values of the servicing assets, the actual amount of future cash
flow could be less than the expected amount and the value of the servicing
assets, as well as the Bank's earnings, could be negatively impacted. No
assurance can be given that the Bank's receivables will not experience
significant increases in prepayment or default rates or that the Bank may not
have to continue to write down the value of its servicing assets. Additionally,
the Bank stratifies its capitalized servicing assets for purposes of evaluating
impairment by taking into consideration relevant risk characteristics, including
loan type, note rate and date of acquisition. See Summary of Significant
Accounting Policies - The Bank 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.

See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Asset Quality - Delinquent Loans" for a
discussion of the Bank's delinquent loan portfolio at September 30, 1998.

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. The
Bank's specific methods for establishing the appropriate levels of allowances
vary depending upon the assets involved. Allowances for losses on loans and real
estate are based on current events or facts that may ultimately lead to future
losses. In addition to reviews of individual portfolio segments, the Bank
regularly reviews its overall loan portfolio consisting of performing
non-classified assets and, based on such review, may establish additional
allowances for 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 - Asset Quality -
Allowances for Losses."

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

The Bank's methods for determining the allowance 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 analyzes the allowance
by stratifying residential permanent loans on a state by state and ownership
(i.e., investor or homeowner) basis. After the residential permanent portfolio
has been stratified by state, historical loss ratios (as adjusted for
predictable or quantifiable trends, if known) for the specific states are
applied to delinquent loans. Based on this analysis, a reserve component is
assigned to residential permanent loans. In the Bank's experience, this approach
has resulted in timely recognition of necessary allowances, which has been
generally supported by the Bank's favorable results on the ultimate disposition
of the underlying collateral.
The Bank assesses the adequacy of its 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.

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.

From fiscal 1994 through fiscal 1998, the Bank provided additional general
valuation allowances, which were equal to, or exceeded, 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 - Asset Quality - Allowances for Losses."

REO is carried at the lower of cost or fair value, less selling costs. 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 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, 1998 comply with the guidelines.

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

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

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. At September 30, 1998, all outstanding jumbo
certificates of deposit had been sold directly by the Bank to depositors, either
through its branches or through its treasury management services division.

Chevy Chase attracts deposits through its branch network and advertisements, and
offers depositors access to their accounts through 696 ATMs, including 219 ATMs
located in grocery stores. The Bank also has the right to install ATMs in
certain additional grocery 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 HONOR (R) ATM network which offers over 50,000 locations
nationwide. The Bank is also a member of the PLUS (R) ATM network, which offers
over 457,000 locations worldwide. In addition, the Bank has a partnership
agreement with a regional grocery store to provide in-store banking centers at
up to 160 Baltimore and Washington area stores.

The Bank obtains deposits primarily from customers residing in Montgomery and
Prince George's Counties in Maryland and Northern Virginia. Approximately 31.2%
of the Bank's deposits at September 30, 1998 were obtained from depositors
residing outside of Maryland, with approximately 17.9% 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)
                                                                         September 30,
                        ------------------------------------------------------------------------------------------------------------
                                1998                  1997                   1996                 1995                 1994
                        --------------------- --------------------- --------------------- -------------------- ---------------------
                                      % of                  % of                  % of                 % of                  % of
                           Balance   Total       Balance   Total        Balance   Total      Balance   Total      Balance   Total
----------------------- ------------ -------- ------------ -------- ------------ -------- ----------- -------- ------------ --------
Demand and NOW accounts $ 1,329,839    27.2 % $ 1,120,375    22.9 %  $ 1,007,902   24.2 % $   950,118   22.8 % $   918,227    22.9 %
Money market deposit 
  accounts                1,019,569    20.9       983,016    20.1      1,002,688   24.1       984,257   23.7     1,104,730    27.6
Statement savings 
  accounts                  913,467    18.7       907,141    18.5        881,285   21.2       872,366   21.0     1,201,141    30.0
Jumbo certificate 
  accounts                  358,913     7.3       358,737     7.3        125,847    3.0       219,304    5.3        85,110     2.1
Brokered certificate 
  accounts                       --      --       315,142     6.4             --     --            --     --            --      --
Other certificate 
  accounts                1,168,746    23.9     1,130,274    23.2      1,077,828   25.9     1,072,196   25.8       641,857    16.0
Other deposit 
  accounts                   97,696     2.0        79,071     1.6         68,487    1.6        61,011    1.4        57,696     1.4
                        ------------ -------- ------------ -------- ------------- ------- ------------ ------- ------------ --------

     Total deposits     $ 4,888,230   100.0 % $ 4,893,756   100.0 %  $ 4,164,037  100.0 % $ 4,159,252  100.0 % $ 4,008,761   100.0 %
                        ============ ======== ============ ======== ============= ======= ============ ======= ============ ========
Average Cost of Deposits

                                                        Year Ended September 30,
                                          ---------------------------------------------------------
                                           1998                     1997                     1996
---------------------------------------------------------------------------------------------------
Demand and NOW accounts                    1.99%                    2.47%                    2.73%
Money market accounts                      3.90%                    3.90%                    3.87%
Statement savings and
   other deposit accounts                  3.02%                    3.39%                    3.38%
Certificate accounts                       5.41%                    5.29%                    5.48%

  Total deposit accounts                   3.84%                    3.95%                    4.02%
                                          =======                  =======                   ======
The range of deposit account products offered by the Bank through its extensive
branch and ATM network allows the Bank to be competitive in obtaining funds from
its local retail deposit market. At the same time, however, as customers have
become increasingly responsive to changes in interest rates, the Bank has
experienced some fluctuations in deposit flows. Chevy Chase's ability to attract
and maintain deposits and its cost of funds will continue to be significantly
affected by market conditions and its pricing strategy. The Bank had $0 and
$315.1 million of brokered deposits at September 30, 1998 and 1997,
respectively. Chevy Chase began accepting brokered deposits in fiscal 1997 as a
way to diversify the Bank's funding sources. The Bank does not currently place
significant reliance on brokered deposits as a key source of funding. Under FDIC
regulations, the Bank is permitted to accept brokered deposits as long as it
meets the capital standards established for well capitalized institutions (or
with FDIC approval, adequately-capitalized institutions) under the prompt
corrective action regulations.

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

                                                  Deposit Flows
                                             Year Ended September 30,      
                                    -----------------------------------------
(In thousands)                          1998           1997          1996    
------------------------------      ------------- ------------- -------------
Deposits......................      $ 24,799,407  $ 18,915,801  $ 15,312,125
Withdrawals from
  accounts....................       (24,984,251)  (18,354,989)  (15,469,909)
                                    ------------- ------------- -------------
Net cash to (from)
  accounts....................          (184,844)      560,812      (157,784)
Interest credited to
  accounts....................           179,318       168,907       162,569 
                                    ------------- ------------- -------------
Net increase (decrease) in deposit
  balances....................      $     (5,526) $    729,719   $     4,785 
                                    ============= ============= =============

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, 1998 which will mature during the
fiscal years indicated.
Weighted Average Interest Rates of Deposits
As of September 30, 1998
(Dollars in thousands)

                       Demand, NOW
                     and Money Market           Statement         Passbook and Other         Certificate
                     Deposit Accounts       Savings Accounts        Core Accounts             Accounts                   Total
                 ----------------------- ---------------------- --------------------- ------------------------ ---------------------

Maturing During               Weighted               Weighted              Weighted                 Weighted                Weighted
  Year Ending                 Average                Average               Average                  Average                  Average
 September 30,      Amount      Rate        Amount     Rate       Amount     Rate         Amount      Rate        Amount       Rate
---------------- ------------ ---------- ----------- ---------- ---------- ---------- ------------- ---------- ------------  -------
1999        $ 2,349,408      2.15 % $  913,467      2.41 % $  97,696      2.10 % $  1,236,272      5.20 % $ 4,596,843    3.02 %

     2000               -         -             -        -            -        -           190,466      5.94       190,466    5.94

     2001               -         -             -        -            -        -            40,076      5.46        40,076    5.46

     2002               -         -             -        -            -        -            29,257      5.79        29,257    5.79

     2003               -         -             -        -            -        -            31,588      5.77        31,588    5.77

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

     Total       $ 2,349,408      2.15 % $  913,467      2.41 % $  97,696      2.10 % $  1,527,659      5.32 % $ 4,888,230    3.19 %
                 ============            ===========            ==========            =============            ============
The following table summarizes maturities of certificate accounts in amounts of
$100,000 or greater as of September 30, 1998.

Year Ending September 30,            Amount           Weighted Average Rate
--------------------------    ---------------------   ---------------------
                             (Dollars in thousands)
1999  ..................            $ 343,610              5.29%
2000  ..................               17,737              6.47%
2001  ..................                2,597              5.56%
2002  ..................                2,994              5.67%
2003  ..................                3,118              5.80%
                                  -----------              -----
  Total.................            $ 370,056              5.69%
                                  ===========              =====

The following table represents the amounts of deposits by various interest rate
categories as of September 30, 1998 maturing during the fiscal years indicated.
Maturities of Deposits by Interest Rates
As of September 30, 1998
(In thousands)

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

    Interest Rate          1999              2000             2001              2002              2003              Total
------------------------------------   ---------------   --------------    --------------    --------------    --------------
Demand deposits (0%)  $     302,529    $        -        $       -         $       -         $       -         $     302,529

0.01% to 1.99%            1,024,485             -                -                 -                 -             1,024,485

2.00% to 2.99%            1,068,548             -                -                 -                 -             1,068,548

3.00% to 3.99%              640,744             -                -                 -                 -               640,744

4.00% to 4.99%              503,894            13,475            1,691               333             -               519,393

5.00% to 5.99%              993,703            90,431           38,308            15,250            26,232         1,163,924

6.00% to 7.99%               62,940            86,560               77            13,674             5,356           168,607

                      --------------   ---------------   --------------    --------------    --------------    --------------
     Total            $   4,596,843    $      190,466    $      40,076     $      29,257     $      31,588     $   4,888,230
                      ==============   ===============   ==============    ==============    ==============    ==============
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 their financial condition, and the adequacy
of collateral pledged to secure the extension of credit. Such extensions of
credit or borrowings may be obtained pursuant to several different credit
programs, each of which has its own rate and range of maturities. Advances from
the FHLB of Atlanta must be secured by certain types of collateral with a value,
as determined by the FHLB of Atlanta, at least equal to 100% of the borrower's
outstanding advances. The Bank had outstanding FHLB advances of $352.0 million
at September 30, 1998.

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 Balance
Sheets in this report. These arrangements are, in effect, borrowings by the Bank
secured by the securities sold. The Bank had outstanding repurchase agreements
of $387.3 million at September 30, 1998.

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,
                                               ------------------------
(Dollars in thousands)                            1998          1997
---------------------------------------------  ----------   -----------
Securities sold under repurchase agreements:
Balance at year-end........................    $ 387,305    $    2,606
Average amount outstanding during
   the year................................      302,564       483,076
Maximum amount outstanding at any
  month-end................................      806,393       946,090
Weighted average interest rate during
  the year.................................        5.68%         5.48%
Weighted average interest rate
  on year-end balances.....................        5.63%         5.35%

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. As of
December 1, 1998, the 1993 Debentures are redeemable, in whole or in part,
at any time at the option of the Bank.
On December 3, 1996, the Bank sold $100 million principal amount of its 9 1/4%
Subordinated Debentures due 2008 (the "1996 Debentures"). 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, 1998, 2.0% and 3.0% of the Bank's assets was equal to $135.0 million and
$202.5 million, respectively, and the Bank had $9.3 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. The Bank engages in a variety of other activities through
its subsidiaries, including those described below.

Real Estate Development Activities. Manor Investment Company ("Manor") was
engaged in certain real estate development 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Financial Condition - Asset Quality."

Securities Brokerage Services.  Chevy Chase Securities,  Inc., is a subsidiary
of  Chevy  Chase  Financial  Services  Corporation  ("CCFS"),  a  wholly-owned
subsidiary  of  Chevy  Chase.  Chevy  Chase  Securities,  Inc.  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) to the general public, including customers and
depositors of the Bank.
Special Purpose Subsidiaries. At September 30, 1998, Chevy Chase Real Estate
Corporation ("CCRC"), a subsidiary of Chevy Chase, held 100% of the common stock
of 23 subsidiaries (14 of which are active) a majority of which were formed for
the sole purpose of acquiring title to various real estate projects pursuant to
foreclosure or deed-in-lieu of foreclosure. The Bank's investment in the
subsidiaries was $111.3 million at September 30, 1998. The Bank's investment in
CCRC is not subject to the 3.0% service corporation investment limit discussed
above.

Operating Subsidiaries. Chevy Chase engages in significant mortgage lending
activities through B. F. Saul Mortgage Company ("BFSMC"). See "Lending
Activities." Consumer Finance Corporation was formed as an operating subsidiary
in December 1994 to engage in automobile lending. Chevy Chase Preferred Capital
Corporation was formed as an operating subsidiary to issue the REIT Preferred
Stock.

On November 12, 1997, a newly formed operating subsidiary of the Bank acquired
ASB Capital Management, Inc. through which the Bank offers investment,
management and fiduciary services to primarily institutional customers.

CCB Holding Corporation ("CCBH") was a Delaware corporation created by the Bank
as an operating subsidiary in September 1994 in connection with its credit card
securitization activities. Subsequent to the sale of the Bank's credit card
portfolio and related operations, CCBH was merged into the Bank on September 30,
1998.

Employees

The Bank and its subsidiaries had 3,923 full-time and 595 part-time employees at
September 30, 1998. In connection with the sale of the credit card portfolio and
related operations to FUSA on September 30, 1998, the Bank entered into an
agreement with FUSA to lease the Bank's 1,173 credit card employees to FUSA for
the quarter ending December 31, 1998, after which FUSA agreed to offer
employment to all such employees.

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
loans to employees at prevailing market rates, but waives up to one point of any
loan origination fees on home mortgage loans, and provides a yearly rebate equal
to 0.5% of the outstanding loan balance of home mortgage loans at calendar
year-end. The Bank also offers employees a one percent discount on the interest
rate on overdraft lines of credit. None of the Bank's employees is represented
by a collective bargaining agent. The Bank believes that its employee relations
are good.

Competition

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

The Bank estimates that it competes principally with approximately thirteen
depository institutions in its deposit-taking activities in the Washington, DC
metropolitan area. The Bank also competes with such institutions in the
origination of single-family residential mortgage loans and home equity credit
line loans. According to the most recently published industry statistics, Chevy
Chase had the largest market share (approximately 23%) of deposits in Montgomery
County, Maryland, and ranked third in market share (approximately 10%) of
deposits in Prince George's County, Maryland at June 30, 1997. Based on publicly
available information, Chevy Chase estimates that, in the Washington, DC
metropolitan area, it maintains the leading market share of single-family
residential mortgage and home equity credit line loans.
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, 1998, 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; its office facilities at 7700 Old
Georgetown Road, Bethesda, Maryland, 7735 Old Georgetown Road, Bethesda,
Maryland and 1101 Pennsylvania Avenue, NW, Washington, DC; and 143 full-service
offices located in Maryland, Virginia and the District of Columbia. On that
date, the Bank owned the building and land for 26 of its branch offices and
leased its remaining 117 branch offices. Chevy Chase leases the office
facilities at 8401 Connecticut Avenue, 6200 Chevy Chase Drive, 7735 Old
Georgetown Road, 1101 Pennsylvania Avenue, NW 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 1999 to 2019 and the
ground leases have terms expiring from 2029 to 2080. The Bank also owns the
building and land at 5202 President's Court, Frederick, Maryland. In connection
with the sale of the credit card portfolio and related operations on September
30, 1998, the Bank entered into a lease agreement with FUSA for this facility.
See Note 18 to the Consolidated Financial Statements in this report for lease
expense and commitments.

As of November, 1998, the Bank has received OTS approval to open fifteen
full-service branch offices. The branches, seven in Virginia, seven in Maryland
and the Bank's first branch in Delaware, are scheduled to open during fiscal
1999.

The following table sets forth the location of the Bank's 143 full-service
branch offices at September 30, 1998.

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

      8201 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 22031

      75 West Lee Highway                  8120 Sudley Road
      Warrenton, VA 22186                  Manassas, VA 22110
6367 Seven Corners Center            1100 S. Hayes Street
      Falls Church, VA 22044               Arlington, VA 22202

      11800 Sunrise Valley Drive           13344-A Franklin Farms Road
      Reston, VA 22091                     Herndon, VA 20165

      2952-H Chain Bridge Road             20970 Southbanks Street
      Oakton, VA 22124                     Sterling, VA 20165

      1201 Elden Street                    21800 Towncenter Plaza
      Herndon, VA 20170                    Sterling, VA 20164

      5613 Stone Road                      7030 Little River Turnpike
      Centreville, VA 22020                Annandale, VA 22003

      44151 Ashburn Village Way            3095 Nutley Street
      Ashburn, VA 22011                    Fairfax, VA 22031

      3690-A King Street                   4700 Lee Highway
      Alexandria, VA 22302                 Arlington, VA 22207

      6609 Springfield Mall                5851 Crossroads Center Way
      Springfield, VA 22150                Falls Church, VA 22041

      500 South Washington Street          13813 Foulger's Square
      Alexandria, VA 22314                 Woodbridge, VA 22192

      10100 Dumfries Road                  6800 Richmond Highway
      Manassas, VA 22192                   Alexandria, VA 22306

      5870 Kingstowne Boulevard            6335 Multiplex Drive
      Alexandria, VA 23210                 Centreville, VA 22022

      43761 Parkhurst Plaza                6025-A Burke Town Center Parkway
      Ashburn, VA 22011                    Burke, VA 22015

      3499 S. Jefferson Street             7935 L Tysons Corner Center
      Baileys Crossroads, VA 22041         McLean, VA 22102

      3046 Gatehouse Plaza                 11874 Spectrum Center
      Falls Church, VA 22042               Reston, VA 20190

      1621 B Crystal Square Arcade         5230-A Port Royal Road
      Arlington, VA 22202                  Springfield, VA 22151

      1100 Wilson Boulevard                8628 Richmond Highway
      Arlington, VA 22209                  Alexandria, VA 22309

      4299 Merchant Plaza                  46160 Potomac Run Plaza
      Woodbridge, VA 22192                 Sterling, VA 20190

      7500 Old Georgetown Road             11301 Rockville Pike
      Bethesda, MD 20814                   Kensington, MD 20895

      5370 Westbard Avenue                 26001 Ridge Road
      Bethesda, MD 20816                   Damascus, MD 20872

      7340 Westlake Terrace                17831 Georgia Avenue
      Bethesda, MD 20817                   Olney, MD  20832
1327 Lamberton Drive                 11261 New Hampshire Avenue
      Silver Spring, MD  20902             Silver Spring, MD 20904

      2215 Bel Pre Road                    1609-B Rockville Pike
      Wheaton, MD  20906                   Rockville, MD 20852

      8401 Connecticut Avenue              6107 Greenbelt Road
      Chevy Chase, MD  20815               Berwyn Heights, MD  20740

      5424 Western Avenue                  4 Bureau Drive
      Chevy Chase, MD  20815               Gaithersburg, MD  20878

      13641 Connecticut Avenue             19610 Club House Road
      Wheaton, MD  20906                   Gaithersburg, MD  20879

      8315 Georgia Avenue                  812 Muddy Branch Road
      Silver Spring, MD  20910             Gaithersburg, MD  20878

      4701 Sangamore Road                  10211 River Road
      Bethesda, MD  20816                  Potomac, MD  20854

      Landover Mall                        11413 Baltimore Avenue
      Landover, MD  20785                  Laurel, MD 20707

      6200 Annapolis Road                  7290-A Cradlerock Way
      Landover Hills, MD  20784            Columbia, MD  21045

      33 West Franklin Street              1151 Maryland Route 3 North
      Hagerstown, MD  21740                Gambrills, MD  21054

      6400 Belcrest Road                   12228 Viers Mill Road
      Hyattsville, MD  20782               Silver Spring, MD  20906

      8740 Arliss Street                   317 Kentlands Boulevard
      Silver Spring, MD  20901             Gaithersburg, MD  20878

      2409 Wootton Parkway                 215 N. Washington Street
      Rockville, MD  20850                 Rockville, MD  20850

      8889 Woodyard Road                   1336 Crain Highway South
      Clinton, MD  20735                    Mitchellville, MD  20716

      1181 University Boulevard            543 Ritchie Highway
      Langley Park, MD  20783              Severna Park, MD  21146

      12921 Wisteria Drive                 4745 Dorsey Hall Drive
      Germantown, MD  20874                Ellicott City, MD  21042

      1009 West Patrick Street             1130 Smallwood Drive
      Frederick, MD  21701                 Waldorf, MD  20603

      7937 Ritchie Highway                 10800 Baltimore Avenue
      Glen Burnie, MD  21061               Beltsville, MD  20705

      19781-83 Frederick Road              1040 Largo Center Drive
      Germantown, MD  20876                Landover, MD  20785

      16827 Crabbs Branch Way              6335 Marlboro Pike
      Rockville, MD  20855                 District Heights, MD  20747
2321-A Forest Drive                  7530 Annapolis Road
      Annapolis, MD 21401                  Lanham, MD  20784

      15460 Annapolis Road                 11241 Georgia Avenue
      Bowie, MD  20715                     Wheaton, MD  20902

      20000 Goshen Road                    13484 New Hampshire Avenue
      Gaithersburg, MD  20879              Silver Spring, MD  20904

      12097 Rockville Pike                 2401 Cleanleigh Drive
      Rockville, MD  20852                 Baltimore, MD  21234

      10159 New Hampshire Avenue           7101 Democracy Boulevard
      Hillandale, MD  20903                Bethesda, MD  20814

      6264 Central Avenue                  4825 Cordell Avenue
      Seat Pleasant, MD 20743              Bethesda, MD  20814

      7700 Old Georgetown Road             7515 Greenbelt Road
      Bethesda, MD  20814                  Greenbelt, MD  20770

      15777 Columbia Pike                  2722 N. Salisbury Boulevard
      Burtonsville, MD  20866              Salisbury, MD  21801

      18104 Town Center Drive              509 N. Frederick Avenue
      Olney, MD  20832                     Gaithersburg, MD  20877

      6197 Oxon Hill Road                  504 Ridgeville Boulevard
      Oxon Hill, MD  20745                 Mt. Airy, MD  21771

      10821 Connecticut Avenue             5823 Eastern Avenue
      Kensington, MD  20895                Chillum, MD  20782

      18006 Mateny Road                    3355 Corridor Market Place
      Germantown, MD  20874                Laurel, MD  20724

      7406 Baltimore Avenue                10400 Old Georgetown Road
      College Park, MD 20740               Bethesda, MD 20814

      980 E. Swan Creek Road               115 University Boulevard West
      Fort Washington, MD 20744            Silver Spring, MD 20901

      3828 International Drive             9707 Old Georgetown Road
      Silver Spring, MD 20906              Bethesda, MD 20814

      3400 Crain Highway                   7941 Tuckerman Lane
      Bowie, MD 20716                      Potomac, MD 20854

      2315 Randolph Road                   P.O. Box 170, Stamp Student Union
      Silver Spring, MD 20906              College, Park, MD 20742

      6020 Marshalee Drive                 5400 Corporate Drive
      Elkridge, MD 21227                   Frederick, MD 21703

      2950 Donnell Drive                   20944 Frederick Road
      Forestville, MD 20747                Germantown, MD 20876

      135 East Baltimore Street            3601 St. Barnabas Road
      Baltimore, MD 21202                  Silver Hill, MD 20746
2807 University Boulevard West       1850 K Street, NW
      Kensington, MD 20895                 Washington, DC 20006

      4860 Massachusetts Avenue, NW        4000 Wisconsin Avenue, NW
      Washington, DC 20016                 Washington, DC  20016

      210 Michigan Avenue, NE              1717 Pennsylvania Avenue, NW
      Washington, DC  20017                Washington, DC 20006

      4455 Connecticut Avenue, NW          925 15th Street, NW
      Washington, DC  20008                Washington, DC 20005

      2831 Alabama Avenue, SE              1299 Pennsylvania Avenue, N.W.
      Washington, DC  20020                Washington, DC 20006

      1800 M Street, NW                    5714 Connecticut Avenue, N.W.
      Washington, DC  20036                Washington, DC 20015

      1545 Wisconsin Avenue, NW
      Washington, DC  20007

At September 30, 1998, the net book value of the Bank's office facilities
(including leasehold improvements) was $149.4 million. See Note 17 to the
Consolidated Financial Statements in this report.

During fiscal 1998, the Bank entered into an agreement to lease approximately
3.5 acres of land located at 7501 Wisconsin Avenue, Bethesda, Maryland, on which
the Bank intends to develop and occupy an office building to use as its new
corporate headquarters. At September 30, 1998, the Bank had invested $5.5
million related to this facility.

The Bank owns additional assets, including furniture and data processing
equipment. At September 30, 1998, these other assets had a net book value of
$131.0 million. The Bank also has operating leases, primarily for certain data
processing equipment and software. Such leases have month-to-month or
year-to-year terms.
LEGAL PROCEEDINGS

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

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.
SELECTED FINANCIAL DATA

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

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

(In thousands, except per share amounts and other data)            1998         1997         1996         1995          1994
---------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:

Real Estate:
Revenues                                                           $ 98,592     $ 84,569     $ 76,839      $ 77,285     $ 66,044
Operating expenses                                                  118,636      108,601      104,321       109,971      102,087
Equity in earnings (losses) of partnership investments                1,918        4,150        3,374         3,681        1,738
Gain (loss) on sales of property                                       (331)         895          (68)        1,664           --
                                                               ------------------------------------------------------------------
Real estate operating loss                                          (18,457)     (18,987)     (24,176)      (27,341)     (34,305)
                                                               ------------------------------------------------------------------

Banking:
Interest income                                                     435,807      452,376      388,196       365,439      334,544
Interest expense                                                    238,410      239,815      188,836       189,114      165,544
                                                               ------------------------------------------------------------------
Net interest income                                                 197,397      212,561      199,360       176,325      169,000
Provision for loan losses                                          (150,829)    (125,115)    (115,740)      (54,979)     (29,222)
                                                               ------------------------------------------------------------------
Net interest income after provision for loan losses                  46,568       87,446       82,620       121,346      139,778
                                                               ------------------------------------------------------------------
Other income:
Servicing and securitization income                                 233,271      305,192      284,964       195,744       30,516
Credit card fees                                                     53,881       57,381       30,765         9,855       69,878
Deposit servicing fees                                               51,997       41,893       29,900        24,442       20,347
Gain (loss) on sales of trading securities, net                         982        1,203        1,158          (600)       1,695
Net unrealized holding losses on trading securities                  (1,258)        --           --            --           --
Gain (loss) on real estate held for investment or sale, net         (16,539)     (18,688)     (24,413)       (5,549)         835
Gain on sales of loans, net                                         290,434        1,527        1,732         1,289       20,980
Other                                                                27,831       22,573       19,713         7,320       15,718
                                                               ------------------------------------------------------------------
Total other income                                                  641,857      411,081      343,819       232,501      159,969
                                                               ------------------------------------------------------------------
Operating expenses                                                  504,018      418,346      381,328       298,164      246,560
                                                               ------------------------------------------------------------------
Banking operating income                                            184,407       80,181       46,111        55,683       53,187
                                                               ------------------------------------------------------------------

Total Company:
Operating income                                                    165,950       61,194       21,935        28,342       18,882
Provision for income taxes                                           42,869       12,810        8,301         2,021        7,025
                                                               ------------------------------------------------------------------
Income before extraordinary items, cumulative
    effect of change in accounting principle and
    minority interest                                               123,081       48,384       13,634        26,321       11,857
Extraordinary item:
    Loss on early extinguishment of debt, net of taxes               (9,601)          --           --            --      (11,315)
                                                               ------------------------------------------------------------------
Income before cumulative effect of change in
    accounting principle and minority interest                      113,480       48,384       13,634        26,321          542
Cumulative effect of change in accounting principle                      --           --           --            --       36,260
                                                               ------------------------------------------------------------------
Income before minority interest                                     113,480       48,384       13,634        26,321       36,802
Minority interest held by affiliates                                (22,043)      (6,848)      (3,962)       (5,721)      (3,963)
Minority interest -- other                                          (25,313)     (22,676)      (9,750)       (9,750)      (9,750)
                                                               ------------------------------------------------------------------
Total company net income (loss)                                    $ 66,124     $ 18,860        $ (78)     $ 10,850     $ 23,089
                                                               ==================================================================

Net income (loss) available to common shareholders                 $ 60,706     $ 13,442     $ (5,498)      $ 5,430     $ 17,669

Net income (loss) per common share:
Income before extraordinary items, cumulative
    effect of change in accounting principle and
    minority interest                                               $ 24.38       $ 8.90       $ 1.70        $ 4.33       $ 1.33
Extraordinary item:
    Loss on early extinguishment of debt, net of taxes                (1.99)          --           --            --        (2.34)
                                                               ------------------------------------------------------------------
Income (loss) before cumulative effect of change in
    accounting principle and minority interest                        22.39         8.90         1.70          4.33        (1.01)
Cumulative effect of change in accounting principle                      --           --           --            --         7.51
                                                               ------------------------------------------------------------------
Income before minority interest                                       22.39         8.90         1.70          4.33         6.50
Minority interest held by affiliates                                  (4.57)       (1.42)       (0.82)        (1.19)       (0.82)
Minority interest -- other                                            (5.24)       (4.70)       (2.02)        (2.02)       (2.02)
                                                               ------------------------------------------------------------------
Total company net income (loss)                                     $ 12.58       $ 2.78      $ (1.14)       $ 1.12       $ 3.66
                                                               ==================================================================

---------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
SELECTED FINANCIAL DATA
(Continued)
=================================================================================================================================

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

(In thousands, except per share amounts and other data)            1998         1997         1996         1995          1994
---------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:

Assets:
Real estate assets                                                $ 323,432    $ 300,573    $ 294,503     $ 313,412    $ 327,739
    Income-producing properties, net                                183,879      156,535      156,115       163,787      159,529
    Land parcels                                                     40,110       42,160       41,580        38,458       38,455
Banking assets                                                    6,721,149    6,057,413    5,693,074     4,911,536    4,666,298
Total company assets                                              7,044,581    6,357,986    5,987,577     5,224,948    4,994,037

Liabilities:
Real estate liabilities                                             636,036      590,910      578,092       555,814      558,109
    Mortgage notes payable                                          198,874      180,204      173,345       184,502      185,730
    Notes payable - secured                                         200,000      175,000      177,500       175,500      175,000
    Notes payable - unsecured                                        50,335       46,633       42,367        41,057       40,288
Banking liabilities                                               6,141,636    5,582,167    5,388,444     4,619,451    4,413,832
Minority interest held by affiliates                                 72,242       51,388       46,065        43,556       35,632
Minority interest - other                                           218,306      218,306       74,307        74,307       74,307
Total company liabilities                                         7,068,220    6,442,771    6,086,908     5,293,128    5,081,880

Shareholders' deficit                                               (23,639)     (84,785)     (99,331)      (68,180)     (87,843)
---------------------------------------------------------------------------------------------------------------------------------

CASH FLOW DATA:

Net cash flows provided by (used in) operating activities:
    Real estate                                                    $ 14,738      $ 6,911      $ 9,782       $ 4,324    $ (10,859)
    Banking                                                       2,211,589    2,368,287    1,747,887     2,088,022    2,213,876
                                                               ------------------------------------------------------------------
Total Company                                                     2,226,327    2,375,198    1,757,669     2,092,346    2,203,017
                                                               ------------------------------------------------------------------

Net cash flows used in investing activities:
    Real estate                                                     (45,115)     (11,664)      (4,907)      (17,143)     (29,118)
    Banking                                                      (2,202,225)  (2,276,165)  (2,567,763)   (2,261,803)  (1,772,895)
                                                               ------------------------------------------------------------------
Total Company                                                    (2,247,340)  (2,287,829)  (2,572,670)   (2,278,946)  (1,802,013)
                                                               ------------------------------------------------------------------

Net cash flows provided by (used in) financing activities:
    Real estate                                                      26,079        7,485       (6,714)         (271)      75,723
    Banking                                                         555,201      293,344      727,019       160,966     (260,094)
                                                               ------------------------------------------------------------------
Total Company                                                       581,280      300,829      720,305       160,695     (184,371)
                                                               ------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                560,267      388,198      (94,696)      (25,905)     216,633
---------------------------------------------------------------------------------------------------------------------------------

OTHER DATA:

Hotels:
    Number of hotels                                                     12           10            9            10            9
    Number of guest rooms                                             2,772        2,370        2,261         2,608        2,415
    Average occupancy                                                   68%          70%          68%           67%          62%
    Average room rate                                                $81.01       $72.21       $68.79        $60.82       $57.57
Office properties:
    Number of properties                                                  7            8            8             9            9
    Leasable area (square feet)                                   1,270,087    1,308,000    1,308,000     1,368,000    1,363,000
    Leasing percentages                                                100%          99%          93%           84%          93%
Land parcels:
    Number of parcels                                                    10           10            9            10           10
    Total acreage                                                       434          439          446           433          433

---------------------------------------------------------------------------------------------------------------------------------
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, 1998 consisted
primarily of hotels, office and industrial projects, and land parcels. See
"Business - Real Estate - Real Estate Investments." In the first quarter of
fiscal 1998, the Real Estate Trust purchased a 308-room Holiday Inn in
Arlington, Virginia.

Office space in the Real Estate Trust's office property portfolio was 100%
leased at September 30, 1998, compared to a leasing rate of 99% at September 30,
1997. At September 30, 1998, the Real Estate Trust's office property portfolio
had a total gross leasable area of approximately 1.3 million square feet, of
which 259,000 square feet (20.4%) and 209,000 square feet (16.5%) are subject to
leases whose terms expire in fiscal 1999 and fiscal 2000, respectively.

Overall, the hotel portfolio experienced an average occupancy rate of 68% and
average room rate of $81.01 during the year ended September 30, 1998. For the
nine hotels owned by the Real Estate Trust throughout fiscal 1998 and fiscal
1997, the average occupancy rates were 69% and 70%, respectively, and the
average room rates were $79.31 and $72.58, respectively. Three of these hotels
registered improved occupancies and eight registered higher average room rates
in the current fiscal year.

Banking

General. The Bank recorded operating income of $184.4 million during fiscal
1998, compared to operating income of $80.2 million during fiscal 1997. The
increase in income for fiscal 1998 was primarily attributable to a $230.8
million increase in other (non-interest) income, largely attributable to the
sale of the Bank's credit card portfolio, which was partially offset by an $85.7
million increase in operating (non-interest) expenses and a $25.7 million
increase in the provision for loan losses. See "Results of Operations."

Gain on sales of loans of $290.4 million, representing an increase of $288.9
million over fiscal 1997, was a large component of the Bank's non-interest
income during the current year and resulted primarily from the sale of the
Bank's credit card portfolio and related operations on September 30, 1998. The
credit card portfolio included approximately $4.8 billion of managed credit card
loans and 3.1 million Visa and MasterCard credit card accounts. The Bank
recognized a net gain of $288.3 million on this sale. See Note 8 to the
Consolidated Financial Statements in this report.
Servicing and securitization income decreased $71.9 million (or 23.6%) during
fiscal 1998 and resulted from increases in the amortization of and unrealized
losses on interest-only strips. The Bank recognized net unrealized losses on
interest-only strips of $42.9 million during fiscal 1998 compared to net
unrealized gains of $7.0 million during fiscal 1997. In addition, amortization
of $99.0 million on interest-only strips related to prior gains on sales of
loans was recorded in fiscal 1998 compared to $24.8 million in fiscal 1997.
Offsetting these amounts were gains on the securitization and sale of loan
receivables. During fiscal 1998, the Bank securitized and sold $1.9 billion of
receivables, of which $1.0 billion, $298.8 million, $534.7 million and $45.9
million, related to securitizations and sales of credit card, home equity,
automobile and home loan receivables, respectively, and recognized gains of
$81.6 million, $19.7 million, $23.1 million and $3.4 million, respectively, on
these transactions. In addition, the Bank securitized and sold $36.0 million of
amounts on deposit in certain spread accounts established in connection with
certain of the Bank's credit card securitizations. See Notes to the Consolidated
Financial Statements in this report. See "Liquidity."

Real estate owned, net of valuation allowances, declined 27.9% during fiscal
1998 to $65.4 million at September 30, 1998, from $90.7 million at September 30,
1997. This reduction was primarily due to sales in the Communities and other
properties and additional valuation allowances. See "REO."

At September 30, 1998, the Bank's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were 7.93%, 7.93%, 12.93% and 20.70%,
respectively. The Bank's capital ratios exceeded the requirements under FIRREA
as well as the standards established for well-capitalized institutions under the
prompt corrective action regulations issued pursuant to FDICIA. See "Capital."

On November 12, 1997 the Bank purchased ASB Capital Management, Inc. ("ASB"), a
wholly-owned subsidiary of NationsBank Corporation and one of the largest
SEC-registered investment managers headquartered in the Washington, D.C.
metropolitan area, through which the Bank provides a variety of investment
products and fiduciary services to a primarily institutional customer base.

During fiscal 1998, the Bank declared and paid, out of the retained earnings of
the Bank, cash dividends on its Common Stock in the aggregate amount of $650 per
share. Subsequent to September 30, 1998, the Bank declared, out of the retained
earnings of the Bank, cash dividends on its Common Stock in the amount of $2,300
per share. Of this amount, $2,100 per share was paid in December 1998, and the
remaining $200 per share is payable in January 1999.

The Bank's assets are subject to review and classification by the OTS upon
examination. The Bank has been notified that the OTS will begin its annual
safety and soundness examination in December 1998.

The sale of the credit card portfolio has improved the Bank's regulatory capital
ratios and the overall credit quality of the Bank's loan portfolio. In addition,
the Bank anticipates additional long-term savings on overhead expenses as a
result of the sale. However, the credit card program has historically been a
major source of earnings for the Bank. Although the Bank believes it will be
able to operate profitably by relying on its core deposit franchise as a
significant source of low-cost funds, and investing those funds in assets that,
although offering lower yields than credit cards, involve less credit risk and
overhead costs, achieving acceptable levels of profitability may take some
period of time as the Bank restructures its operations.
Asset Quality. Non-Performing Assets. The Bank's level of non-performing assets
continued to decline during fiscal 1998. The following table sets forth
information concerning the Bank's non-performing assets at the dates indicated.
The figures shown are after charge-offs and, in the case of real estate acquired
in settlement of loans, after all valuation allowances.
Non-Performing Assets
(Dollars in thousands)

                                                                                             September 30,
                                                                    ----------------------------------------------------------------
                                                                         1998        1997         1996         1995          1994
                                                                    ------------ ------------ ------------ ------------ ------------
Non-performing assets:
  Non-accrual loans:
    Residential                                                     $     8,106  $     9,617  $     8,200  $     8,593  $     8,306
    Commercial real estate and multifamily                                   --           --           --          194           --
                                                                    ------------ ------------ ------------ ------------ ------------
      Total non-accrual real estate loans                                 8,106        9,617        8,200        8,787        8,306
    Credit card  (1) (2)                                                     --           --       25,350       18,569       16,229
    Consumer                                                              4,501        4,226        1,239          595          498
                                                                    ------------ ------------ ------------ ------------ ------------
      Total non-accrual loans (3)                                        12,607       13,843       34,789       27,951       25,033
                                                                    ------------ ------------ ------------ ------------ ------------

  Non-accrual real estate held for investment (3)                            --           --           --           --        8,915
                                                                    ------------ ------------ ------------ ------------ ------------

  Real estate acquired in settlement of loans                           218,972      231,407      246,380      354,277      387,024
  Allowance for losses on real estate acquired in settlement 
    of loans                                                           (153,564)    (140,738)    (126,519)    (135,043)    (109,074)
                                                                    ------------ ------------ ------------ ------------ ------------
    Real estate acquired in settlement of loans, net                     65,408       90,669      119,861      219,234      277,950
                                                                    ------------ ------------ ------------ ------------ ------------

      Total non-performing assets                                        78,015      104,512      154,650      247,185      311,898

  Accruing credit card loans past due 90 days (1) (4)                        --       25,700           --           --           --

                                                                    ------------ ------------ ------------ ------------ ------------
Total non-performing assets and accruing credit card loans 
  past due 90 days                                                  $    78,015  $   130,212  $   154,650  $   247,185  $   311,898
                                                                    ============ ============ ============ ============ ============

Allowance for losses on loans                                       $    60,157  $   105,679  $    95,523  $    60,496  $    50,205
Allowance for losses on real estate held for investment                     202          198          191          193        9,899
Allowance for losses on real estate acquired in settlement of loans     153,564      140,738      126,519      135,043      109,074
                                                                    ------------ ------------ ------------ ------------ ------------

  Total allowances for losses                                       $   213,923  $   246,615  $   222,233  $   195,732  $   169,178
                                                                    ============ ============ ============ ============ ============

------------------------------------------------------------------------------------------------------------------------------------
(1) The Bank sold its credit card portfolio and related operations on September
30, 1998. 

(2) Effective June 30, 1997, the Bank stopped placing credit card loans on
non-accrual status.

(3)  Before deduction of allowances for losses.

(4) Loans which are both past due 90 days or more and not deemed nonaccrual due
to an assessment of collectibility are specifically excluded from the definition
of non-performing.
Non-Performing Assets (Continued)

                                                                                           September 30,
                                                                 -------------------------------------------------------------------
                                                                       1998         1997          1996          1995         1994
                                                                 -------------------------------------------------------------------
Ratios:

  Non-performing assets and accruing credit card loans past 
    due 90 days, net to total assets (1)                               0.26%         0.40%         1.03%         3.77%        5.35%

  Allowance for losses on real estate loans to non-accrual
    real estate loans (2)                                            204.18%        99.81%       134.44%       123.82%      169.58%

  Allowance for losses on consumer loans to
    non-accrual consumer and other loans (2)                         758.08%       148.37%       370.86%       542.18%      217.87%

  Allowance for losses on loans to non-accrual loans (2)             477.17%       763.41%       274.58%       216.44%      200.56%

  Allowance for losses on loans to total loans receivable (3)          2.17%         4.14%         2.81%         2.05%        1.97%

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

(2) Before deduction of allowances for losses.

(3) Includes loans receivable and loans held for sale and/or securitization,
before deduction of allowance 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 sale of its credit card portfolio and related operations and
effective June 30, 1997, the Bank conformed its reporting practices for credit
card loans to those of most credit card issuers and excluded credit card loans
from non-accrual loans and non-performing assets. Credit card loans were not
placed on non-accrual status, but continued to accrue interest until the loan
was either paid-off or charged-off.

Non-performing assets totaled $78.0 million, after valuation allowances on REO
of $153.6 million, at September 30, 1998, compared to $104.5 million, after
valuation allowances on REO of $140.7 million, at September 30, 1997. In
addition to the valuation allowances on REO, the Bank maintained $4.6 million
and $1.4 million of valuation allowances on its non- accrual loans at September
30, 1998, and September 30, 1997, respectively. The $26.5 million decrease in
non-performing assets was comprised of a net decrease in REO of $25.3 million
and a decrease in non-accrual loans of $1.2 million.

Non-accrual Loans. The Bank's non-accrual loans totaled $12.6 million at
September 30, 1998, compared to $13.8 million at September 30, 1997. At
September 30, 1998, non- accrual loans consisted primarily of $8.1 million of
non-accrual real estate loans and $4.5 million of non-accrual consumer and other
loans.

REO. At September 30, 1998, the Bank's REO totaled $65.4 million, after
valuation allowances on such assets of $153.6 million as set forth in the
following table.

                                 Balance Before    All    Balance After
                          # of      Valuation   Valuation   Valuation    Percent
(Dollars in thousands) Properties  Allowances  Allowances  Allowances   of Total
---------------------- ---------- ----------- ----------- ------------- --------
Communities...........      5       $199,406    $144,642     $54,764      83.7%
Residential ground....      3          6,494       3,122       3,372       5.2%
Commercial ground.....      3         10,045       5,800       4,245       6.5%
Single-family 
    residential
    properties........     19          3,027        -          3,027       4.6%
                           --      --------- ------------ ------------- --------

  Total REO...........     30       $218,972    $153,564     $65,408     100.0%
                           ==      ========= ============ ============= ========
During fiscal 1998, REO decreased $25.3 million, which was attributable to $12.5
million of sales in the Communities and other residential properties, partially
offset by additional capitalized costs, and $12.8 million of additional
valuation allowances.

During fiscal 1998, the Bank received revenues of $32.5 million from
dispositions of 422 residential lots or units in the Communities ($21.6
million), approximately 75 acres of commercial land in two of the Communities
and four commercial ground properties ($6.1 million) and various single-family
residential properties ($4.8 million).

At September 30, 1998, the Bank had an executed contract to sell one residential
ground property at its book value of $1.3 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. 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, 1998, two of the active
Communities had 1,883 remaining residential lots, of which 927 lots (49.2%) were
under contract and pending settlement. Four of the active Communities had
approximately 249 remaining acres of land designated for commercial use, of
which one acre (0.4%) was under contract and pending settlement. In addition, at
September 30, 1998, 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 2,000 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, 1998, this property had a book value of $4.7
million, after valuation allowances.

The Bank capitalizes costs relating to development and improvement of REO.
Interest costs are capitalized on real estate properties under development.
During fiscal 1998, the Bank capitalized interest in the amount of $2.0 million
relating to its four active Communities.

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

Potential Problem Assets. Although not considered non-performing assets,
primarily because the loans are not 90 or more days past due and the borrowers
have not abandoned control of the properties, potential problem assets are
experiencing problems sufficient to cause management to have serious doubts as
to the ability of the borrowers to comply with present repayment terms. At
September 30, 1998 and 1997, none of the Bank's assets were deemed by management
to be potential problem assets.
Delinquent Loans. At September 30, 1998, delinquent loans totaled $20.7 million
(or 0.7% of loans) compared to $84.6 million (or 3.5% of loans) at September 30,
1997. The following table sets forth information regarding the Bank's delinquent
loans at September 30, 1998.

                                    Principal Balance
                          -----------------------------------    Total as a
                           Mortgage   Non-Mortgage               Percentage
(Dollars in thousands)       Loans        Loans       Total      of Loans (1)
------------------------- ----------- ------------  ---------   --------------
Loans delinquent for:
30-59 days...............  $ 3,486     $ 11,777      $ 15,263          0.5%
60-89 days...............    1,582        3,866         5,448          0.2%
                           -------     --------      --------          ----
 Total...................  $ 5,068     $ 15,643      $ 20,711          0.7%
                           =======     ========      ========          ====

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

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 $5.1 million at September
30, 1998, from $8.5 million at September 30, 1997.

Non-mortgage loans delinquent 30-89 days decreased to $15.6 million at September
30, 1998 from $50.4 million at September 30, 1997, and decreased as a percentage
of total non-mortgage loans outstanding to 2.5% at September 30, 1998 from 3.4%
at September 30, 1997. The decreased percentage of delinquent non-mortgage loans
to total non-mortgage loans outstanding resulted primarily from the sale of the
Bank's credit card portfolio on September 30, 1998.

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. In aggregate, troubled debt
restructurings totaled $11.8 million and $11.9 million at September 30, 1998 and
1997, respectively.

At September 30, 1998, loans accounted for as troubled debt restructurings
included one commercial permanent loan with a principal balance of $11.7 million
and one commercial collateralized loan with a principal balance of $0.1 million.
The $0.1 million decrease in loans accounted for as troubled debt restructurings
from September 30, 1997, was a result of net principal reductions. At September
30, 1998, 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, 1998 and 1997, 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)

                                                                      Year Ended September 30,
                                                   ----------------------------------------------------------------
                                                        1998          1997         1996         1995        1994
                                                   ------------  ------------  -----------  -----------  ----------
Balance at beginning of year                       $   105,679   $    95,523   $   60,496   $   50,205   $  68,040
                                                   ------------  ------------  -----------  -----------  ----------

Provision for loan losses                              150,829       125,115      115,740       54,979      29,222
                                                   ------------  ------------  -----------  -----------  ----------

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

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

Charge-offs:
  Single family residential and home equity             (1,629)       (1,014)        (867)      (1,174)     (1,641)
  Commercial real estate and multifamily                    --            --           --           --        (112)
  Real estate construction and ground                       --            --           --       (1,768)     (2,474)
  Credit card                                         (108,289)     (115,835)     (84,805)     (50,172)    (55,754)
  Consumer                                             (12,734)       (9,657)      (6,375)      (3,463)     (1,058)
                                                   ------------  ------------  -----------  -----------  ----------
      Total charge-offs                               (122,652)     (126,506)     (92,047)     (56,577)    (61,039)
                                                   ------------  ------------  -----------  -----------  ----------

Recoveries:
  Single family residential and home equity                 49            34           32           20          --
  Credit card                                           12,732        10,365       10,720       11,219      13,525
  Consumer                                               1,129         1,030          582          650         457
                                                   ------------  ------------  -----------  -----------  ----------
      Total recoveries                                  13,910        11,429       11,334       11,889      13,982
                                                   ------------  ------------  -----------  -----------  ----------

Charge-offs,  net of recoveries                       (108,742)     (115,077)     (80,713)     (44,688)    (47,057)
                                                   ------------  ------------  -----------  -----------  ----------

Balance at end of year                             $    60,157   $   105,679   $   95,523   $   60,496   $  50,205
                                                   ============  ============  ===========  ===========  ==========

Provision for loan losses to average loans  (1)          5.43%         3.50%        3.94%        1.85%       1.08%
Net loan charge-offs to average loans (1)                3.92%         3.22%        2.75%        1.51%       1.74%
Ending allowance for losses on loans to total 
  loans (1) (2)                                          2.17%         4.14%        2.81%        2.05%       1.97%

-------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale and/or securitization. 
(2) Before deduction of allowance for losses.
Components of Allowance for Losses on Loans by Type
(Dollars in thousands)

                                                                    September 30,
                   -----------------------------------------------------------------------------------------------------------------
                         1998                    1997                   1996                    1995                   1994
                   --------------------   ---------------------   --------------------   --------------------   --------------------

                               Percent                 Percent                Percent                Percent                Percent 
                               of                      of                     of                     of                     of      
                               Loans to                Loans to               Loans to               Loans to               Loans to
                               Total                   Total                  Total                  Total                  Total   
                    Amount     Loans        Amount     Loans        Amount    Loans        Amount    Loans        Amount    Loans   
                   ----------  --------   -----------  --------   ----------  --------   ----------  --------   ----------  --------
Balance at end 
  of year allocated
  to:

Single family 
  residential      $   1,822   65.7 %     $      661    33.2 %    $     925    47.2 %    $     929   47.3 %     $   1,384   53.7 %

Home equity              676    4.9              683     3.7            446     0.9            164    1.0             133    1.4

Commercial real 
  estate and 
  multifamily         10,828    2.7            7,705     2.1          8,398     2.3          8,523    2.9           8,506    3.3

Real estate 
  construction
  and ground           3,225    3.9              550     2.2          1,255     1.9          1,264    1.1           4,062    2.1

Commercial             3,623    6.3              364     3.9            223     1.7             65    0.5             505    0.2

Credit card               --     --           89,446    42.3         79,681    33.0         46,325   34.4          34,530   25.5

Automobile            29,044   12.9            3,080     9.0          3,965     9.0          3,226    8.1           1,085   11.4

Home improvement
  and related loans    3,403    2.4            2,415     2.2            229     2.9             --    3.8              --    1.5

Overdraft lines 
  of credit and
  other consumer       1,674    1.2              775     1.4            401     1.1             --    0.9              --    0.9

Unallocated            5,862     --               --      --             --      --             --     --              --     --
                   ----------             -----------             ----------             ----------             ----------

    Total          $  60,157              $  105,679              $  95,523              $  60,496              $  50,205
                   ==========             ===========             ==========             ==========             ==========
Analysis of Allowance for and Charge-offs of
Real Estate Held for Investment or Sale
(In thousands)

                                                                Year Ended September 30,
                                          ----------------------------------------------------------------------
                                             1998           1997           1996          1995           1994
                                          -----------    -----------    -----------   -----------    -----------
Balance at beginning of year:
  Real estate held for investment         $      198     $      191     $      193    $    9,899     $   10,182
  Real estate held for sale                  140,738        126,519        135,043       109,074        101,462
                                          -----------    -----------    -----------   -----------    -----------
    Total                                    140,936        126,710        135,236       118,973        111,644
                                          -----------    -----------    -----------   -----------    -----------

Provision for real estate losses:
  Real estate held for investment                  4              7             (2)       (6,974)          (283)
  Real estate held for sale                   18,856         19,616         26,343        33,295         14,335
                                          -----------    -----------    -----------   -----------    -----------
    Total                                     18,860         19,623         26,341        26,321         14,052
                                          -----------    -----------    -----------   -----------    -----------

Charge-offs:
  Real estate held for investment:
    Ground                                        --             --             --        (2,732)            --
                                          -----------    -----------    -----------   -----------    -----------

  Real estate held for sale:
    Commercial real estate and multifamily        --             --             --            --         (5,812)
    Real estate construction                      --             --             --        (4,396)          (911)
    Ground                                    (6,030)        (5,397)       (34,867)       (2,930)            --
                                          -----------    -----------    -----------   -----------    -----------
      Total                                   (6,030)        (5,397)       (34,867)       (7,326)        (6,723)
                                          -----------    -----------    -----------   -----------    -----------

    Total charge-offs on real estate
       held for investment or sale            (6,030)        (5,397)       (34,867)      (10,058)        (6,723)
                                          -----------    -----------    -----------   -----------    -----------

Balance at end of year:
  Real estate held for investment                202            198            191           193          9,899
  Real estate held for sale                  153,564        140,738        126,519       135,043        109,074
                                          -----------    -----------    -----------   -----------    -----------
    Total                                 $  153,766     $  140,936     $  126,710    $  135,236     $  118,973
                                          ===========    ===========    ===========   ===========    ===========
Components of Allowance for Losses
on Real Estate Held for Investment or Sale
(In thousands)

                                                                      September 30,
                                          ----------------------------------------------------------------------
                                             1998           1997           1996          1995           1994
                                          -----------    -----------    -----------   -----------    -----------
Allowance for losses on real estate held 
 for investment:
  Commercial real estate and multifamily  $       --     $       --     $       --    $       --     $    7,793
  Ground                                          --             --             --            --          1,975
  Other                                          202            198            191           193            131
                                          -----------    -----------    -----------   -----------    -----------
     Total                                       202            198            191           193          9,899
                                          -----------    -----------    -----------   -----------    -----------

Allowance for losses on real estate held 
 for sale:
 Single family residential and home equity        --             --            120           186             70
 Commercial real estate and multifamily           --             --             --            --            142
 Real estate construction                         --             --             --            --          3,158
 Ground                                      153,564        140,738        126,399       134,857        105,704
                                          -----------    -----------    -----------   -----------    -----------
     Total                                   153,564        140,738        126,519       135,043        109,074
                                          -----------    -----------    -----------   -----------    -----------

     Total allowance for losses on real
       estate held for investment or sale $  153,766     $  140,936     $  126,710    $  135,236     $  118,973
                                          ===========    ===========    ===========   ===========    ===========
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 decreased by $32.7 million from the level at
September 30, 1997, to $213.9 million at September 30, 1998. The $32.7 million
decrease was primarily attributable to an $87.6 million reduction in allowances
due to the sale of the Bank's credit card portfolio on September 30, 1998.
Offsetting this reduction were increased valuation allowances on consumer loans
and the Communities.

The allowance for losses on loans secured by real estate and real estate held
for investment or sale totaled $170.3 million at September 30, 1998, which
constituted 75.0% of total non-performing real estate assets, before valuation
allowances. This amount represented a $19.8 million increase from the September
30, 1997 level of $150.5 million, or 62.5% of total non-performing real estate
assets, before valuation allowances at that date.

During fiscal 1998, the Bank provided an additional $4.2 million of general
valuation allowances pursuant to its policy of providing additional general
valuation allowances which were equal to, or exceeded, the amount of the net
earnings generated by the development and sale of land in the Communities.

When real estate collateral securing an extension of credit is initially
recorded as REO, it is recorded at the lower of cost or fair value, less
estimated selling costs, on the basis of an appraisal. As circumstances change,
it may be necessary to provide additional valuation allowances based on new
information. The allowance for losses on real estate held for sale at September
30, 1998 is in addition to approximately $48.6 million of cumulative charge-offs
previously taken against assets remaining in the Bank's portfolio at September
30, 1998.

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 1998 were $95.6 million,
compared to $105.5 million for fiscal 1997. The decrease in net charge-offs
reflected management's implementation of more stringent underwriting and other
lending policies designed to reduce such losses. The allowance at any balance
sheet date related only to receivable balances that existed as of that date.
Because of the nature of a revolving credit card account, the cardholder may
have entered into transactions (such as retail purchases and cash advances)
subsequent to a balance sheet date which increased the outstanding balance of
the account. Accordingly, charge-offs in any fiscal period related 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 have exceeded the
levels of valuation allowances established at the beginning of the fiscal
period.
The allowance for losses on consumer loans (automobile, home improvement,
overdraft lines of credit and other consumer loans) increased to $34.1 million
at September 30, 1998 from $6.3 million at September 30, 1997. Management
increased the allowance for losses on automobile loans from $3.1 million (or
1.3% of outstanding loans) to $29.0 million (8.1%) primarily because of adverse
trends in delinquencies and losses in the subprime segment of the automobile
loan portfolio and an increase in the size of this portfolio. Losses in this
portfolio increased from $3.2 million (or 3.7% of average loans) in fiscal 1997
to $7.0 million (or 5.0% of average loans) in fiscal 1998. However, the amount
of loans in the Bank's portfolio has increased from $116.6 million at September
30, 1997, to $236.5 million at September 30, 1998 and, on a six month lagged
basis, the annualized loss rate for the September quarter was 9.76%. Management
believes that this lagged loss rate is a better indication of losses inherent in
this portfolio because the portfolio contains a higher proportion of new loans
as a result of its recent growth and losses are generally not experienced on
automobile loans until the loans are five to seven months seasoned. Although
management has taken steps in recent months to mitigate losses in this
portfolio, including expansion of collection efforts and adjustment of
underwriting criteria, losses are not expected to show improvement until the
second half of fiscal 1999. Accordingly, based on recent experience, management
increased the allowance for losses at September 30, 1998.

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

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

The Bank pursues an asset-liability management strategy designed both to control
risk from changes in market interest rates and to maximize interest income in
its loan portfolio. To achieve this strategy, the Bank emphasized the
origination and retention of a mix of both adjustable-rate and fixed-rate loan
products. In addition to adjustable-rate mortgages and adjustable-rate home
equity credit line loans, fixed-rate mortgage loans were originated and retained
in the Bank's portfolio during fiscal 1998 to a significantly larger degree than
in prior years. At September 30, 1998, adjustable-rate loans accounted for 36.0%
of total loans compared to 79.5% in fiscal 1997.

Declining interest rates throughout 1998 contributed to an increased demand for
fixed-rate loan products. Due to this rising demand, the Bank increased its
volume of fixed-rate mortgage originations as adjustable-rate loan demand fell.
The Bank continuously monitors its sensitivity to changes in market interest
rates and attempts to minimize the impact of interest-rate changes to net
income. The Bank's policy is generally to sell, or have the ability to sell,
some portion of its long-term fixed-rate mortgage production in order to reduce
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.
Gap analysis is a tool used by management to evaluate interest-rate risk which
results from the difference between repricing and maturity characteristics of
the Bank's assets and those of the liabilities that fund them. By analyzing
these differences, management can attempt to estimate how changes in interest
rates affect the Bank's future net interest income.

The Bank views control over interest rate sensitivity as a key element in its
financial planning process and monitors interest rate sensitivity through its
forecasting system. The Bank manages interest rate exposure and will narrow or
widen its gap, depending on its perception of interest rate movements and the
composition of its balance sheet. For the reasons discussed above, the Bank
might take action to narrow its gap if it believes that market interest rates
will experience a significant prolonged increase, and might widen its gap if it
believes that market interest rates will decline or remain relatively stable.

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

The following table presents the interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities at September 30, 1998,
which reflects management's estimate of mortgage loan prepayments and
amortization and provisions for adjustable interest rates. Adjustable and
floating rate loans are included in the period in which their interest rates are
next scheduled to adjust, and prepayment rates are assumed for the Bank's loans
based on recent actual experience. Statement savings and passbook accounts with
balances under $20,000 are classified based upon management's assumed attrition
rate of 17.5%, and those with balances of $20,000 or more, as well as all NOW
accounts, are assumed to be subject to repricing within six months or less.
Interest Rate Sensitivity Table (Gap)
(Dollars in thousands)

                                                   More than      More than        More than
                                                   Six Months      One Year       Three Years
                                     Six Months     through        through         through       More than
                                      or Less       One Year      Three Years     Five Years     Five Years      Total
                                  -------------  -------------  -------------  -------------   -----------   ------------
As of September 30, 1998 real 
 estate loans:
  Adjustable-rate                 $    401,081   $    326,382   $     21,576   $        231    $       --    $   749,270
  Fixed-rate                            48,532         46,130        174,593        141,643       762,744      1,173,642
  Home equity credit lines
    and second mortgages               148,049          1,952          6,868          5,617        22,224        184,710
Commercial                             124,165          6,404         21,793         15,109         6,241        173,712
Consumer and other                      66,588         50,812        122,747         59,070        13,563        312,780
Loans held for sale                     56,287             --             --             --            --         56,287
Loans held for securitization
  and sale                             125,000             --             --             --            --        125,000
Mortgage-backed securities             621,933        326,273        707,332        134,102       236,177      2,025,817
Trading securities                      11,319             --             --             --            --         11,319
Other investments                    1,055,904             --         43,999             --            --      1,099,903
                                  -------------  -------------  -------------  -------------   -----------   ------------

  Total interest-earning assets      2,658,858        757,953      1,098,908        355,772      1,040,949     5,912,440
Total non-interest earning assets           --             --             --             --       837,953        837,953
                                  -------------  -------------  -------------  -------------   -----------   ------------

  Total assets                    $  2,658,858   $    757,953   $  1,098,908   $    355,772    $ 1,878,902   $ 6,750,393
                                  =============  =============  =============  =============   ===========   ============

Deposits:
  Fixed maturity deposits         $    948,564   $    287,708   $    230,542   $     60,846    $       --    $ 1,527,660
  NOW, statement and passbook
    accounts                         1,537,898         43,800        145,882         99,291       211,600      2,038,471
  Money market deposit accounts      1,019,570             --             --             --            --      1,019,570
Borrowings:
  Capital notes - subordinated              --             --             --             --       250,000        250,000
  Other                                792,771          2,887          9,189         13,695        25,669        844,211
                                  -------------  -------------  -------------  -------------   -----------   ------------
  Total interest-bearing
    liabilities                      4,298,803        334,395        385,613        173,832       487,269      5,679,912
Total non-interest bearing
  liabilities                               --             --             --             --       605,724        605,724
Stockholders' equity                        --             --             --             --       464,757        464,757
                                  -------------  -------------  -------------  -------------   -----------   ------------
  Total liabilities & 
    stockholders' equity          $  4,298,803   $    334,395   $    385,613   $    173,832    $ 1,557,750   $ 6,750,393
                                  =============  =============  =============  =============   ===========   ============

Gap                               $ (1,639,945)  $    423,558   $    713,295   $    181,940    $  553,680
Cumulative gap                    $ (1,639,945)  $ (1,216,387)  $   (503,092)  $   (321,152)   $  232,528
Adjustment for interest rate
  caps (1)                        $    200,926   $    100,000   $         --   $         --    $       --
Adjusted cumulative gap           $ (1,439,019)  $ (1,116,387)  $   (503,092)  $   (321,152)   $  232,528
Adjusted cumulative gap as a
  percentage of total assets             (21.3)%        (16.5)%         (7.5)%         (4.8)%         3.4 %

(1) At September 30, 1998, the Bank had $205,556 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 16.6% at September 30, 1998, compared
to 4.5% at September 30, 1997. The decline in the Bank's one-year gap was
primarily attributable to an increase in fixed-rate mortgage loans during fiscal
1998 which were funded primarily by short-term borrowings.

During fiscal 1995, the Bank purchased a series of interest rate caps designed
to limit 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 was a notional principal amount of $600
million, and such protection declined to $205.6 million at September 30, 1998,
and will decline to $200 million by March 31, 1999. 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.

During fiscal 1997, an additional interest rate cap agreement with a notional
amount of $5.6 million and $72.2 million at September 30, 1998 and 1997,
respectively, was transferred and assigned to the Bank at the termination of one
of the Bank's credit card securitization transactions. This interest rate cap
agreement terminated October 15, 1998.

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 ("TB 13"). Under this regulation,
institutions are required to establish limits on the sensitivity of their net
interest income and net portfolio value ("NPV") to parallel changes in interest
rates. Such changes in interest rates are defined as instantaneous and sustained
movements to rates in 100 basis point increments. The following table shows the
estimated impact of parallel shifts in interest rates at September 30, 1998,
calculated in a manner consistent with the requirements of TB 13.
Change In
                             ---------------------------------------
Change in Interest Rates        Net Interest         Net Portolio
     (Basis Points)               Income(1)             Value(2)  
------------------------     ------------------    -----------------
                                     (Dollars in thousands)
                             Percent   Amount      Percent   Amount
                             ------- ----------    ------- ---------
            + 200            (11.2)% $ (25,767)    (11.0)% $(102,239)
            + 100             (5.0)% $ (11,567)     (2.7)% $ (25,576)
            - 100             12.1 % $  27,859       7.3 % $  68,007
            - 200             20.3 % $  46,799      12.0 % $ 112,045
-------------------------------------------------------------------------------
(1) Represents the difference between net interest income for 12 months in a
stable interest rate environment and the various interest rate scenarios.

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

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

At September 30, 1998, 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 - Regulation
Regulatory Capital."

In December 1998, the Office of Thrift Supervision released Management of
Interest Rate Risk, Investment Securities, and Derivatives Analysis ("TB13a") to
replace prior thrift bulletins concerned with the measurement of interest rate
risk. The Bank currently measures interest-rate risk and the effect of changes
in interest rates on both net interest income and market value on a regular
basis. TB13a requires the Bank to modify its existing interest-rate risk
analyses to include a new measure, Net Portfolio Value Ratio, and to measure the
sensitivity of this ratio through interest rate shock scenarios. The Bank is
currently in the process of reviewing TB13a and incorporating this new
measurement into its regular analyses; however, based on a preliminary review of
TB13a and its impact to the Bank's measurement of interest rate sensitivity,
management believes its impact will be minimal.
Nevertheless, the sale of the Bank's credit card portfolio and current market
conditions are likely to result in a higher proportion of the Bank's assets
being comprised of assets with longer durations and greater sensitivity to
market interest rates than credit card loans. Accordingly, management expects to
consider steps it can take during fiscal 1999 to reduce to some degree the
Bank's exposure to increases in market interest rates based on the change in
composition of the Bank's loan portfolio.

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, 1998, the Bank recorded a net deferred tax
asset of $81.6 million, which generally represents the cumulative excess of the
Bank's actual income tax liability over its income tax expense for financial
reporting purposes. See Note 26 to the Consolidated Financial Statements in this
report.

Tax Sharing Payments. During fiscal 1998, after receiving OTS approval, the Bank
made tax sharing payments totaling $5.6 million to the Trust. Subsequent to
September 30, 1998, the Bank made a tax sharing payment of $6.6 million to the
Trust. See Note 32 to the Consolidated Financial Statements in this report.

Capital. At September 30, 1998, the Bank was in compliance with all of its
regulatory capital requirements under FIRREA, and its capital ratios exceeded
the ratios established for well capitalized institutions under OTS prompt
corrective action regulations.

The following table shows the Bank's regulatory capital levels at September 30,
1998, in relation to the regulatory requirements in effect at that date. The
information below is based upon the Bank's understanding of the regulations and
interpretations currently in effect and may be subject to change.
Regulatory Capital
(Dollars in thousands)

                                                                                    Minimum                  Excess
                                                          Actual              Capital Requirement           Capital
                                                 ------------------------   ----------------------  -----------------------
                                                                 As a %                   As a %                   As a %
                                                    Amount      of Assets      Amount    of Assets     Amount     of Assets
                                                 -----------    ---------   -----------  ---------  -----------   ---------
Stockholders' equity per financial statements    $  464,757
  Minority interest in REIT Subsidiary (1)          144,000
  Net unrealized holding gains (2)                      (58)
                                                 -----------
                                                    608,699

Adjustments for tangible and core capital:
  Intangible assets                                 (63,144)
  Non-allowable minority interest in
    REIT Subsidiary (1)                             (11,433)
  Non-includable subsidiaries  (3)                   (3,852)

                                                 -----------
     Total tangible capital                         530,270        7.93%    $  100,253      1.50%   $  430,017       6.43%
                                                 -----------    =========   ===========  =========  ===========   =========

     Total core capital (4)                         530,270        7.93%    $  267,342      4.00%   $  262,928       3.93%
                                                 -----------    =========   ===========  =========  ===========   =========

     Tier 1 risk-based capital (4)                  530,270       12.93%    $  172,572      4.00%   $  357,698       8.93%
                                                 -----------    =========   ===========  =========  ===========   =========

Adjustments for total risk-based capital:
  Subordinated capital debentures                   250,000
  Allowance for general loan losses                  53,036
                                                 -----------
     Total supplementary capital                    303,036
                                                 -----------
     Total available capital                        833,306
  Equity investments (3)                            (11,133)
                                                 -----------
     Total risk-based capital (4)                $  822,173       20.70%    $  345,143      8.00%   $  477,030      12.70%
                                                 ===========    =========   ===========  =========  ===========   =========

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

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

(3) Reflects an aggregate offset of $0.8 million representing the allowance for
general loan losses maintained against the Bank's equity investments and
non-includable subsidiaries which, pursuant to OTS guidelines, is available as a
"credit" against the deductions from capital otherwise required for such
investments.

(4) Under the OTS "prompt corrective action" regulations, the standards for
classification as "well capitalized" are a leverage (or "core capital") ratio of
at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0% and a total
risk-based capital ratio of at least 10.0%.
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 February 1998, the
Bank received from the OTS an extension of the holding periods for certain of
its REO properties through February 17, 1999. The following table sets forth the
Bank's REO at September 30, 1998, after valuation allowances of $153.6 million,
by the fiscal year in which the property was acquired through foreclosure.

             Fiscal Year                       (In thousands)
      -------------------------------          --------------
      1990(1)(2).....................                $ 19,023
      1991(2)........................                  36,619
      1992(2)........................                     100
      1993...........................                    -
      1994...........................                     732
      1995...........................                   5,907
      1996...........................                    -
      1997...........................                    -
      1998.........................                     3,027
                                               --------------
        Total REO....................                $ 65,408
                                               ==============

(1) Includes REO with an aggregate net book value of $11.1 million, which the
Bank treats as equity investments for regulatory capital purposes.

(2) Includes REO, with an aggregate net book value of $44.6 million, for which
the Bank received an extension of the holding periods through February 17, 1999.

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, 1998, the Bank's
leverage, tier 1 risk-based and total risk-based capital ratios were 7.93%,
12.93% and 20.70%, respectively, which exceeded the ratios established for well
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, 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.

Failure to obtain the REO extensions discussed above could adversely affect the
Bank's regulatory capital ratios. The Bank's ability to maintain or increase its
capital levels in future periods also will be subject to general economic
conditions, particularly in the Bank's local markets. Adverse general economic
conditions or a 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.
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 currently the case and is
expected to continue to be so 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 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 ability to meet its liquidity needs, including debt
service payments in fiscal 1999 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. See also the
discussion of potential limitations on the payment of dividends by the Bank
contained in "Business - Banking - Regulation Dividends and Other Capital
Distributions."

The Real Estate Trust believes that the financial condition and operating
results of the Bank in recent periods, as well as the Bank's board resolution
adopted in connection with the release of its written agreement with the OTS
(see "Banking - Regulation - Regulatory Capital") should enhance prospects for
the Real Estate Trust to receive tax sharing payments and dividends from the
Bank. During fiscal 1998, the Bank made tax sharing payments totalling $5.6
million and dividend payments totalling $5.2 million to the Real Estate Trust.

In recent years, the operations of the Trust have generated net operating losses
while the Bank has reported net income. 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 the refund which the Bank would otherwise have
been able to claim if it were not being included in the consolidated federal
income tax return of the group.
Through September 30, 1998, the Real Estate Trust has purchased either in the
open market or through dividend reinvestment 2,091,176 shares of common stock of
Saul Centers (representing 16.4% of such company's outstanding common stock). As
of September 30, 1998, the market value of these unpledged shares was
approximately $35.5 million.

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
"1994 Notes"). See Note 4 to the Consolidated Financial Statements in this
report. In March 1998, the Real Estate Trust issued $200.0 million aggregate
principal amount of 9 3/4% Senior Secured Notes due 2008 (the "1998 Notes").
After providing for the retirement of the 1994 Notes, including a prepayment
premium of $10.0 million and debt issuance costs of approximately $5.9 million,
the Real Estate Trust realized approximately $9.1 million in new funds. In
addition, the Real Estate Trust received about $13.2 million in cash which had
been held as additional collateral by the indenture agent under the 1994 Notes.
The 1998 Notes are secured by a first priority perfected security interest in
8,000 shares (80%) of the issued and outstanding common stock of the Bank, which
constitute all of the Bank common stock held by the Real Estate Trust. The 1998
Notes are nonrecourse obligations of the Real Estate Trust.

The Real Estate Trust is currently selling Unsecured Notes, with a maturity
ranging from one to ten years, primarily to provide funds to repay maturing
Unsecured Notes. 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 was for an initial
two-year period subject to extension for one or more additional one-year terms.
In fiscal 1997, the facility was increased to $20.0 million and was renewed for
an additional two-year period. Interest is computed by reference to a floating
rate index. At September 30, 1998, there were no borrowings under the facility
and unrestricted availability was $8.4 million.

In fiscal 1996, the Real Estate Trust established an $8.0 million secured
revolving credit line with an unrelated bank. This facility was for a one-year
term, after which any outstanding loan amount would amortize over a two-year
period. During fiscal 1997, the line of credit was increased to $10.0 million
and was extended for a year. During fiscal 1998, the line of credit was
increased to $20.0 million and was extended for an additional year. Interest is
computed by reference to a floating rate index. At September 30, 1998, there
were no borrowings under the facility and unrestricted availability was $4.3
million.

During fiscal 1997, the Real Estate Trust refinanced two hotel and three office
properties with five- year floating rate debt. After payment of all financing
costs, the Real Estate Trust received net proceeds of approximately $11.0
million.
The maturity schedule for the Real Estate Trust's outstanding debt at September
30, 1998 for fiscal years commencing October 1, 1998 is set forth in the
following table:

                      Debt Maturity Schedule
                          (In thousands)
--------------------------------------------------------------------
                             Notes          Notes
  Fiscal       Mortgage      Payable-       Payable-
   Year         Notes        Secured        Unsecured       Total
--------------------------------------------------------------------
   1999        $10,055         $   --        $16,149       $ 26,204
   2000         10,193             --          8,893         19,086
   2001         12,618             --          5,916         18,534
   2002         14,367             --          5,284         19,651
   2003         12,663             --          9,046         21,709
Thereafter     138,978        200,000          5,047        344,025
              ---------     ----------      ---------     ----------
  Total       $198,874       $200,000        $50,335       $449,209
              =========     ==========      =========     ==========
--------------------------------------------------------------------

Of the $198.9 million of mortgage debt outstanding at September 30, 1998, $169.8
million was nonrecourse to the Real Estate Trust.

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
shares in cash distributions from operations and from capital transactions
involving the sale of properties. The partnership agreement of Saul Holdings
Partnership provides for quarterly cash distributions to the partners out of net
cash flow. See "Business - Real Estate - Investment in Saul Holdings Limited
Partnership." In fiscal 1998, the Real Estate Trust received total cash
distributions of $5.6 million from Saul Holdings Partnership. Beginning in April
1998 the Real Estate Trust has reinvested its quarterly distributions and
obtained additional partnership units in Saul Holdings.

Development and Capital Expenditures

During the third quarter of fiscal 1997, the Real Estate Trust commenced
development of a 46,000 square foot single-story office research and development
building on 3 acres of its Avenel Business Park land parcel located in
Gaithersburg, Maryland ("Avenel Phase IV"). The Real Estate Trust financed the
project with a construction/permanent loan. The project was substantially
completed in January 1998 and was offered to Saul Holdings in accordance with
the Real Estate Trust's obligations under the Right of First Refusal Agreement.
An independent appraisal of the project indicated a market value of $5,600,000.
The fully funded balance of the loan was $3,657,000, resulting in an equity
position of $1,943,000 for the Real Estate Trust. The Board of Directors of Saul
Centers, Inc., general partner of Saul Holdings, agreed to purchase the Real
Estate Trust's equity position through the issuance of additional limited
partnership units in Saul Holdings. Accordingly, as of April 1, 1998, Saul
Holdings insured 105,922 new limited partnership units and a corresponding
limited partnership interest to the Real Estate Trust in exchange for the
ownership of Avenel Phase IV and the assumption of the loan.
In September 1997, the Real Estate Trust commenced development of a 95-unit
extended stay hotel on a 3 acre parcel located adjacent to its Hampton Inn and
Holiday Inn near the Washington Dulles International Airport in Sterling,
Virginia. The new hotel was franchised as a TownePlace Suites by Marriott and
opened for business in August 1998. Development costs were $5.8 million and were
largely financed by a construction loan of $4.5 million. The loan is for two
years with two extension options for two year and one year periods,
respectively. The loan covered all costs except for the land, fees to related
parties, taxes and insurance.

On December 10, 1997, the Real Estate Trust purchased a 308-room Holiday Inn
located in Arlington, Virginia, near the Washington National Airport and the
Real Estate Trust's Howard Johnson Hotel. The purchase price was $25.8 million.
Also on December 10, 1997, the Real Estate Trust refinanced five other hotels in
its portfolio. Funds for the two transactions were provided by a lender in the
amount of $52.5 million. The new loans have a 15 year term, a fixed interest
rate of 7.57%, and amortization based on a 25 year schedule.

During the quarter ended June 30, 1998, the Real Estate Trust commenced
development of four new extended stay hotels:

     TownePlace Suites by Marriott containing 91 units to be located on a 2 acre
        site owned by the Trust in Avenel Business Park in Gaithersburg, 
        Maryland. Opening is scheduled for mid-April 1999.

     TownePlace Suites by Marriott containing 91 units to be located on part of
        a 9 acre site owned by the Real Estate Trust in the Arvida Park of
        Commerce in Boca Raton, Florida. Opening is scheduled for mid-July 1999.

     SpringHill Suites by Marriott containing 146-units to be located on part of
        a 9 acre site owned by the Real Estate Trust in the Arvida Park of
        Commerce in Boca Raton, Florida. Opening is scheduled for mid-July 1999.

     TownePlace Suites by Marriott containing 95-units to be located on a 3 acre
        site owned by the Real Estate Trust in Ft. Lauderdale Commerce Center,
        Ft. Lauderdale, Florida. Opening is scheduled for mid-August 1999.

The projected costs for the four hotels aggregate $32 million and will largely
be funded by the proceeds of a three year bank loan in the amount of $25.9
million. The loan has two one-year renewal options.

During the quarter ended June 30, 1998, the Real Estate Trust also began
development of a 78,000 square floor single-story office/research and
development building located on a 7 acre site owned by the Real Estate Trust in
Dulles North Corporate Park, Sterling, Virginia. This project is adjacent to the
Real Estate Trust's Dulles North office building and near three of the Real
Estate Trust's hotel properties. The development cost is $6.6 million with bank
financing of $6.5 million for a five-year term and a two-year extension option.
Completion is expected in early fiscal 1999. A lease for approximately 25% of
the space has been signed.
During the quarter ended September 30, 1998, the Real Estate Trust began the
conversion of its two hotels located in Crystal City, Arlington, Virginia. The
present 308-room Crystal City Holiday Inn will be converted into a Holiday Inn
Crown Plaza, while the present 279-room Howard Johnsons will be converted into a
Holiday Inn. The new brands are expected to position the hotels to generate
higher room rates and revenues along with improved occupancy levels consistent
with the overall market. The renovations are largely an acceleration of normal
capital improvement work as well as some exterior and interior signage, new
marketing materials and a facade upgrade at the Howard Johnson hotel. A
restaurant, which had been operated by an unaffiliated company, will also be
renovated. The incremental costs for the two conversions will be funded by the
Real Estate Trust in part from its internal resources and in part from its lines
of credit.

The Real Estate Trust believes that the capital improvement costs for its
income-producing properties will be in range of $6.5 to $8.0 million per year
for the next several fiscal years.

Year 2000 Statement - Pursuant to The Year 2000  Information  And
Readiness Disclosure Act

The Real Estate Trust has reviewed all its financial and accounting systems for
the purpose of assessing the impact of Year 2000 on both internally developed
and externally provided systems. The Real Estate Trust currently uses an IBM
AS/400, which has been certified by the manufacturer to be Year 2000 compliant.
All software purchased over the past five years has been certified by the
various manufacturers to be Year 2000 compliant. All internally developed
software had already been modified or will be modified by December 1998 to make
it Year 2000 compliant. Property management systems for shopping centers, office
buildings, hotels, and construction and development have been certified as Year
2000 compliant by applicable vendors. At present, only one area of property
management, apartments, has software which requires replacement to meet Year
2000 compliance, and that replacement is scheduled to be completed by May 1999.
The Real Estate Trust had no information, which would suggest that its financial
systems would not continue to function effectively after the turn of the
century.

Using the Building Owners and Manager Association's guidelines to identify
building systems and critical services that might be vulnerable to the Year 2000
software problem, the Real Estate Trust has contacted the manufacturer,
supplier, or the vendor supporting the system and requested information
regarding Year 2000 compliance. The majority of the replies have indicated that
the systems or services are Year 2000 compliant. We are presently assessing
whether any of the internal systems should be tested or whether further
investigation is necessary. The Real Estate Trust has no information, which
would suggest that any system would not continue to function effectively the
after turn of the century. Except with regard to internally developed software,
all information regarding Year 2000 compliance is based on a republication (as
defined in The Year 2000 Information and Readiness Disclosure Act) of Year 2000
statements or disclosures made by others.
The Real Estate Trust believes that there is risk that its operations may be
affected by vendors and tenants who are unable to perform as contracted due to
their own Year 2000 exposure. It is very difficult to identify the most
reasonably likely worst case scenario at this time. Although the Real Estate
Trust's potential exposure is widespread, there is no known major direct
exposure. The Real Estate Trust's commercial leases contain provisions
empowering it to take certain actions to enforce its right to the timely payment
of rent regardless of the tenants's Year 2000 exposure. While it is not possible
at this time to determine the likely impact of these potential problems, the
Real Estate Trust will continue to evaluate these areas and development
contingency plans as appropriate. The Real Estate Trust estimates that its
incremental costs to meet year 2000 compliance is less that $250,000.

Banking

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 under OTS regulations in effect at September 30, 1998 was 4.0%.
The Bank's liquidity ratio for the quarter ended September 30, 1998 was 10.4%,
compared to 11.1% for the month ended September 30, 1997. The Bank met the
liquidity level requirements for each quarter of fiscal 1998. Effective November
24, 1997, the OTS reduced the minimum liquidity requirement to 4% from 5% and
changed the reporting requirement to quarterly instead of monthly. See
"Business - Regulation - Liquidity Requirements."

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, 1998, the Bank's
portfolio included mortgage loans, U.S. Government securities and
mortgage-backed securities with outstanding principal balances of $103.7
million, $44.0 million and $2.0 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 $1.9 billion at September 30, 1998, 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,
home loan and automobile loan receivables, as well as single-family residential
loans, 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 $13.0 billion of credit card,
home equity, 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, 1998, the Bank serviced $417.9 million, $1.1 billion
and $204.5 million of securitized home equity, automobile and home loan
receivables, respectively. Chevy Chase derives fee-based income from servicing
these securitized portfolios. However, such fee-based income has been adversely
affected in recent periods by increases in delinquencies and charge-offs related
to the receivables placed in these securitized pools.

The Bank's securitization transactions transfer the risk of repayment on
securitized assets to a trust which holds the receivables and issues the
asset-backed certificates and ultimately the risk of repayment is transferred to
the holders of those certificates. The Bank retains risk with respect to the
assets transferred to the trust only to the extent that it retains recourse
based on the performance of the assets or holds certificates issued by the trust
(such as a "seller certificate"). In its securitizations, the Bank typically
retains a limited amount of recourse through one or more means, most often,
through the establishment of "spread accounts." Occasionally other structures,
such as overcollateralization of receivables or subordinated asset-backed
securities, 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 overcollateralization of receivables or
subordinated interest), which, as noted above, constitute a dollar-for-dollar
capital requirement for the Bank. The Bank also retains risk through the Bank's
interest in any seller certificate. Seller certificates share collections on the
securitized assets on an unsubordinated basis with the investor certificates
(unless and to the extent recourse is retained through an express subordination)
and are on-balance sheet assets against which the Bank must maintain capital.
In recent periods, the proceeds from the securitization and sale of credit card,
home equity, automobile and home loan receivables have been significant sources
of liquidity for the Bank. The Bank securitized and sold $1.0 billion of credit
card receivables, $534.7 million of automobile loan receivables, $298.8 million
of home equity receivables and $45.9 million of home loan receivables during
fiscal 1998. Additionally, during fiscal 1998, the Bank securitized and sold
$36.0 million of amounts on deposit in certain spread accounts established in
connection with certain of the Bank's credit card securitizations. At September
30, 1998, the Bank was considering the securitization and sale of approximately
$200.0 million of automobile loan receivables, including $125.0 million of
receivables outstanding at September 30, 1998 and $75.0 million of receivables
which the Bank expects to become available through additional fundings during
the six months ending March 31, 1999.

In connection with the sale of the Bank's credit card portfolio and related
operations, the Bank transferred all of its rights, interests, liabilities and
obligations (including recourse obligations) relating to its credit card
securitizations to FUSA.

As part of its operating strategy, the Bank will continue to explore
opportunities to sell assets and to securitize and sell home equity, automobile
and home loan receivables to meet liquidity and other balance sheet objectives.
However, management expects to rely less on securitizations as a source of
liquidity in fiscal 1999 because, among other things, changes in the composition
of the Bank's loan portfolio following the sale of its credit card business as
well as changes in market and other conditions have made other sources of
liquidity such as Federal Home Loan Bank advances relatively more attractive
sources of funding.

The Bank uses its liquidity primarily to meet its commitments to fund maturing
savings certificates and deposit withdrawals, fund existing and continuing loan
commitments, repay borrowings and meet operating expenses. During fiscal 1998,
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 $24.8 billion, repay borrowings of $19.9 billion, fund
existing and continuing loan commitments (including real estate held for
investment or sale) of $3.5 billion, purchase investments and loans of $1.7
billion and meet operating expenses, before depreciation and amortization, of
$464.2 million. These commitments were funded primarily through proceeds from
customer deposits and sales of certificates of deposit of $24.8 billion,
proceeds from borrowings of $20.4 billion, proceeds from sales of loans, trading
securities and real estate of $3.7 billion, and principal and interest collected
on investments, loans, and securities of $1.8 billion.

The Bank is obligated under various recourse provisions (primarily related to
credit losses) related to the securitization and sale of receivables. As a
result of these recourse provisions, the Bank maintained restricted cash
accounts and overcollateralization of receivables amounting to $110.2 million
and $12.5 million, respectively, at September 30, 1998, and $117.7 million and
$8.0 million, respectively, at September 30, 1997. In addition, the Bank owned
subordinated automobile receivables-backed securities with carrying values of
$11.3 million and $7.9 million at September 30, 1998 and 1997, respectively,
which were classified as trading securities in the Consolidated Balance Sheets.

The Bank is also obligated under various recourse provisions related to the swap
of single-family residential loans for mortgage-backed securities issued by the
Bank. At September 30, 1998, recourse to the Bank under these arrangements was
$6.5 million, consisting of restricted cash accounts amounting to $2.6 million
and overcollateralization of receivables of $3.9 million.
The Bank's commitments to extend credit at September 30, 1998 are set forth in
the following table:

                                                      (In thousands)
                                                      --------------

      Commitments to originate loans.................. $   266,067
                                                       -------------

      Loans in process (collateralized loans):........
        Home equity...................................     582,280
        Real estate construction and ground...........     100,868
        Commercial real estate and multifamily........       1,713
        Commercial....................................      69,780
                                                       -------------
                                                           754,641
                                                       -------------
       Loans in process (unsecured loans):
        Overdraft lines...............................      88,665
        Commercial....................................      35,560
                                                       -------------
                                                           124,225
                                                       -------------
        Total commitments to extend credit............  $1,144,933
                                                       =============

The sale of the credit card portfolio substantially reduced the Bank's level of
commitments to extend credit at September 30, 1998. Based on historical
experience, the Bank expects to fund substantially less than the total amount of
its outstanding overdraft line and home equity credit line commitments, which
together accounted for 58.6% of commitments to extend credit at September 30,
1998.

At September 30, 1998, repayments of borrowed money scheduled to occur during
the next 12 months were $795.7 million. Certificates of deposit maturing during
the next 12 months amounted to $1.2 billion, of which a substantial portion is
expected to remain with the Bank.

There were no material commitments for capital expenditures at September 30,
1998. During fiscal 1998, the Bank leased 3.5 acres of land at 7501 Wisconsin
Avenue in Bethesda, Maryland, on which the Bank intends to develop and occupy an
office building to use as its new corporate headquarters. Construction on this
project is scheduled to begin in June 1999.

The Bank's liquidity requirements in years subsequent to fiscal 1998 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.
YEAR 2000 ISSUES

The "Year 2000 problem" is caused by deficiencies in computer systems that are
designed to assume that the first two digits of a particular year are always
"19" and therefore these systems may have difficulty accurately processing
transactions using dates later than December 31, 1999. These deficiencies, if
not properly identified and remediated, could lead to internal and industry-wide
malfunctions and cause substantial business disruptions.

Under the direction of the Bank's management, the Bank has launched a
corporate-wide Year 2000 program (the "Program") to prepare its internal
computer systems, applications and infrastructure to correctly process dates up
through and after December 31, 1999, and to mitigate external risks to the Bank.
The Program is supported by a working group that organizes and conducts specific
Year 2000 projects, including projects dealing with the Bank's facilities,
counterparties and critical vendors and service providers.

The Program, which is based on the Federal Financial Institutions Examination
Council's guidelines, consists of five components relating to mission-critical
technology:

     1.   The awareness phase, which raised internal awareness of the Program;

     2.   The inventory/assessment phase, during which the Bank completed a
          corporate-wide inventory of information technology ("IT") and non-IT
          applications, identified key relationships with outside parties and
          developed plans and target dates for the Program;

     3.   The renovation/replacement phase, in which the Bank identified
          components in need of replacement or repair and made hardware and
          software upgrades, code enhancements, system replacements and other
          changes;

     4.   The validation phase, in which the Bank conducted tests of system-wide
          applications and evaluated user acceptance; and

     5.   The implementation phase, in which the Bank is converting its systems
          to year 2000-tested applications and products.

The awareness, assessment, renovation and validation phases have been completed
and the implementation phase is substantially complete.

The Bank is working to mitigate external risks through a variety of projects.
The Bank has assessed, and will continue to assess, the Year 2000 readiness of
key counterparties and of customers. In addition, the Bank has assessed the Year
2000 readiness of critical vendors and service providers, including
telecommunications, hardware and software, office equipment and financial
services providers.

The Bank is developing contingency plans to address problems which may be
created by external parties who may not be Year 2000 compliant. As part of this
effort, the Bank is assessing significant services provided by third parties to
determine the extent to which the Bank may be affected by inadequate Year 2000
preparedness. The Bank plans to identify significant Year 2000 risks, assess the
probability of their occurrence and take necessary actions to mitigate those
risks by developing contingency plans in response to those risks.
The Bank does not expect to incur a material loss as a result of the Year 2000
problem. However, because the Bank ultimately has no control over the
remediation of systems of third parties with whom the Bank has relationships,
there can be no assurance that the Bank's Program, including its contingency
plans, will fully mitigate the effects of third-party failures.

The Bank expects to invest $14.6 million towards the Year 2000 program,
excluding the cost of its own staff, of which $2.3 million was charged to
expense in fiscal 1998 and $6.4 million and $1.0 million will be charged to
expense in fiscal 1999 and fiscal 2000, respectively. Remaining amounts, which
are related to equipment purchases, will be amortized to expense over the
estimated useful lives of the equipment. The Bank's cost estimates are based on
variables and assumptions that could cause actual results to differ from these
projections.
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.

Fiscal  1998 Compared to Fiscal  1997

Real Estate

The Real Estate Trust recorded loss before depreciation and amortization of debt
expense of $6.9 million and an operating loss of $18.5 million for fiscal 1998,
compared to a loss before depreciation and amortization of debt expense of $7.8
million and an operating loss of $19.0 million for fiscal 1997. The improvement
was largely attributable to higher income after direct operating expenses for
hotels and office and industrial properties and higher other income, reduced by
increased corporate expenses, a reduction in equity in earnings of
unconsolidated entities, and a loss on the sale of a property in fiscal 1998 as
compared to a gain in fiscal 1997.
Income after direct operating expenses from hotel properties increased
$4,967,000 (23.7%) in fiscal 1998 over the level achieved in fiscal 1997.
$2,208,000 (11.0%) of this increase reflected improved results from nine hotels
owned throughout both fiscal years, and $2,759,000 reflected results from
acquisition properties. The increase in total revenue of $11,960,000 (20.1%)
exceeded the increase of $6,993,000 (18.2%) in direct operating expenses. For
the nine hotels owned throughout both fiscal years, the increase in total
revenue was $4,677,000 (8.1%) and the increase in direct operating expenses was
$2,469,000 (6.6%). The revenue increase was attributable to improved market
conditions which permitted the Real Estate Trust to raise average room rates at
eight of the nine hotels. Average occupancy percentages declined slightly from
those of the previous year.

Income after direct operating expenses from office and industrial properties
increased $1,921,000 (14.4%) in fiscal 1998 compared to such income in fiscal
1997. Gross income increased $1,786,000 (8.5%) in fiscal 1998, while expenses
decreased $135,000 (1.7%) due to refunds of property taxes. The improvement in
gross income was due to higher rents obtained upon releasing space.

Other income, which includes interest income, income from other real estate
properties and miscellaneous receipts, increased $277,000 (6.9%) in fiscal 1998
due to higher interest income.

Land parcels and other expense decreased $76,000 (4.5%) in fiscal 1998 as the
result of lower real estate taxes and the disposition of a property in the
current year.

Interest expense increased $2,290,000 (5.7%) in fiscal 1998, primarily because
of the higher level of borrowings in the current period. The average balance of
outstanding borrowings increased to $433.2 million for fiscal 1998 from $400.3
million for the prior year. The increase in average borrowings occurred as a
result of a new issue of $200.0 million of Senior Secured Notes due 2008 and the
retirement of $175.0 million of Senior Secured Notes due 2002, new mortgage loan
financings and sales of new Unsecured Notes in excess of maturing Notes. The
average cost of borrowings was 10.05% in fiscal 1998 and 10.30% in fiscal 1997.

Amortization of debt expense decreased $292,000 (44.0%) in fiscal 1998,
primarily due to lower costs experienced in the new Senior Secured Note
financing and in the renewal of lines of credit.

Depreciation increased $627,000 (5.9%) in fiscal 1998 as a result of the
addition of two new income-producing properties as well as new tenant
improvements and capital replacements.

Advisory, management and leasing fees paid to related parties increased $747,000
(9.3%) in fiscal 1998. The advisory fee in fiscal 1998 was $317,000 per month
compared to $311,000 per month for fiscal 1997, which resulted in an aggregate
increase of $75,000 (2.0%). Management and leasing fees were higher by $672,000
(15.8%) in fiscal 1998 as a result of increased gross income on which fees are
based.

General and administrative expense decreased $119,000 (9.4%) in fiscal 1998 as a
result of lower legal and insurance costs.
Equity in earnings of unconsolidated entities represents the Real Estate Trust's
share of earnings in its partnership investments. For fiscal 1998, the Real
Estate Trust recorded earnings of $1,918,000 from such investments compared to
earnings of $4,150,000 in the prior year. The reduction of earnings in fiscal
1998 was due to the sales of interest rate protection agreements and the
write-off of unamortized costs in excess of sales proceeds received and the
write-off of unamortized loan costs when a portion of the loan portfolio was
refinanced.

Loss on sale of property in fiscal 1998 reflected the termination of the Real
Estate Trust's lease on a property located in Oxon Hill, Maryland. Gain on sale
of property in fiscal 1997 represents the gain on the sale of a
purchase-leaseback investment located in Casper, Wyoming and the gain on the
condemnation of a portion of a land parcel located in Atlanta, Georgia.

Banking

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 and the rates of interest paid on its deposits and
borrowings. In the last three fiscal years, servicing and securitization income
from credit card, home equity, automobile and home loan receivables 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.

On September 30, 1998, the Bank sold its credit card portfolio and related
operations to First USA Bank, N.A. The credit card portfolio included
approximately $4.8 billion of managed credit card loans and 3.1 million Visa and
MasterCard credit card accounts. Although the credit card program has
historically been a significant source of earnings for the Bank, management
believes that the Bank will be able to maintain profitability by relying on its
core deposit franchise as a significant source of low-cost funds, and investing
those funds in assets that, although offering lower yields than credit cards,
involve less credit risk and overhead costs. Nevertheless, implementation of
this strategy will be a gradual process and the Bank's short term profitability
may be adversely affected to the extent the immediate loss of earnings from the
credit card program can not be offset by corresponding reductions in operating
expenses.

Overview. The Bank recorded operating income of $184.4 million for the year
ended September 30, 1998 ("fiscal 1998"), compared to operating income of $80.2
million for the year ended September 30, 1997 ("fiscal 1997"). The increase in
income for fiscal 1998 was primarily attributable to a $230.8 million increase
in other (non-interest) income resulting primarily from a $288.3 million gain on
sale of the Bank's credit card portfolio and related operations on September 30,
1998. Offsetting this amount was an $85.7 million (or 20.5%) increase in
operating (non-interest) expenses caused primarily by increased salaries and
employee benefits and loan expenses.

Net Interest Income. Net interest income, before the provision for loan losses,
decreased $15.2 million (or 7.1%) during fiscal 1998. The Bank would have
recorded interest income of $2.3 million in fiscal 1998 if non-accrual assets
and restructured loans had been current in accordance with their original terms.
Interest income of $0.4 million was actually recorded on non-accrual assets and
restructured loans during the fiscal year. The Bank's net interest income in
future periods will continue to be adversely affected by the Bank's
non-performing assets. See "Financial Condition - Asset Quality - Non-Performing
Assets."
The following table sets forth, for the periods indicated, information regarding
the total amount of income from interest-earning assets and the resulting
yields, the interest expense associated with interest-bearing liabilities,
expressed in dollars and rates, and the net interest spread and net yield on
interest-earning assets.
Net Interest Margin Analysis
(Dollars in thousands)

                                                                             Year Ended September 30,
                                             ---------------------------------------------------------------------------------------
                               September 30,             1998                          1997                          1996
                                            ----------------------------- ----------------------------- ----------------------------
                                  1998        Average             Yield/    Average             Yield/    Average             Yield/
                               Yield/Rate     Balances  Interest  Rate      Balances  Interest  Rate      Balances  Interest  Rate
                               ------------ ----------------------------- ----------------------------- ----------------------------
Assets:
 Interest-earning assets:
 Loans receivable, net (1)           8.88 % $ 2,775,884 $299,701  10.80 % $ 3,578,600 $360,780  10.08 % $ 2,940,158 $317,902  10.81%
 Mortgage-backed securities          5.92     1,990,123  113,441   5.70     1,204,839   72,209   5.99       834,198   50,955   6.11
 Federal funds sold and 
   securities purchased 
   under agreements to resell        5.67      140,004     7,892   5.64       128,268    7,066   5.51       185,794   10,195   5.49
 Trading securities                  8.74       25,159     2,005   7.97        15,436    1,530   9.91        13,477      953   7.07
 Investment securities               5.56       37,866     2,138   5.65         8,346      481   5.76         6,033      315   5.22
 Other interest-earning assets       5.67      196,646    10,765   5.47       196,444   10,248   5.22       164,783    7,931   4.81
                                              --------- ---------           --------- --------            --------- --------  
   Total                             7.27     5,165,682  435,942   8.44     5,131,933  452,314   8.81     4,144,443  388,251   9.37
                               -----------              --------- ------              --------  ------              --------  -----

 Non-interest earning assets:
 Cash                                           217,929                       191,626                       161,925
 Real estate held for 
   investment or sale                            86,348                       115,948                       161,092
 Property and equipment, net                    284,358                       245,879                       193,898
 Cost in excess of net 
   assets acquired, net                          55,496                        38,630                        42,648
 Other assets                                   608,957                       399,190                       248,676
                                            -----------                   -----------                   -----------
   Total assets                             $ 6,418,770                   $ 6,123,206                   $ 4,952,682
                                            ===========                   ===========                   ===========

Liabilities and stockholders'
   equity:
 Interest-bearing liabilities:
 Deposit accounts:
   Demand deposits                   1.32   $   998,256   19,877   1.99   $   890,204   21,977   2.47   $   846,796   23,137   2.73
   Savings deposits                  2.38     1,017,755   30,727   3.02       975,264   33,106   3.39       944,211   31,936   3.38
   Time deposits                     5.32     1,663,772   89,958   5.41     1,420,613   75,180   5.29     1,261,685   69,179   5.48
   Money market deposits             3.62       994,590   38,756   3.90       992,066   38,644   3.90       990,392   38,317   3.87
                                            ----------- ---------         ----------- --------          ----------- --------
   Total deposits                    3.40     4,674,373  179,318   3.84     4,278,147  168,907   3.95     4,043,084  162,569   4.02
 Borrowings                          6.43       888,473   59,092   6.65     1,134,754   70,908   6.25       369,831   26,267   7.10
                                            ----------- ---------         ----------- --------          ----------- --------
   Total liabilities                 3.98     5,562,846  238,410   4.29     5,412,901  239,815   4.43     4,412,915  188,836   4.28
                               -----------              --------- -------             --------  ------              --------  ------
 Non interest-bearing items:
 Non-interest bearing 
   deposits                                     266,711                       196,620                       149,158
 Other liabilities                               79,655                        53,037                        51,338
 Minority interest                              144,000                       119,376                          -- 
 Stockholders' equity                           365,558                       341,272                       339,271
                                            -----------                   -----------                    ----------
   Total liabilities and 
     stockholders' equity                   $ 6,418,770                    $6,123,206                    $4,952,682
                                            ===========                   ===========                    ==========

Net interest income                                     $197,532                      $212,499                      $199,415
                                                        =========                     ========                      ========
Net interest spread (2)                                            4.15 %                        4.38 %                        5.09%
                                                                  =======                       =======                       ======
Net yield on interest-
  earning assets (3)                                               3.82 %                        4.14 %                        4.81%
                                                                  =======                       =======                       ======
Interest-earning assets 
  to interest-bearing 
  liabilities                                                     92.86 %                       94.81 %                       93.92%
                                                                  =======                       =======                       ======

(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 ($3,078), ($8,329), and ($7,980) of amortized loan fees,
premiums and discounts in interest income for the years ended September 30,
1998, 1997 and 1996.

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

(3) Equals net interest income divided by the average balances of total
interest-earning assets.
The following table presents certain information regarding changes in interest
income and interest expense of the Bank during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to changes in volume (change in
volume multiplied by old rate); changes in rate (change in rate multiplied by
old volume); and changes in rate and volume.
Volume and Rate Changes in Net Interest Income
(In thousands)

                                                        Year Ended September 30, 1998            Year Ended September 30, 1997
                                                                 Compared to                              Compared to
                                                        Year Ended September 30, 1997            Year Ended September 30, 1996
                                                             Increase (Decrease)                      Increase (Decrease)
                                                            Due to Change in (1)                     Due to Change in (1)
                                                      ----------------------------------       ----------------------------------
                                                                                 Total                                    Total
                                                        Volume       Rate       Change           Volume       Rate       Change
                                                      ---------   ----------  ----------       ----------   ---------   ---------
Interest income:
  Loans (2)                                           $(85,412)  $   24,333   $ (61,079)       $  65,450    $(22,572)   $ 42,878
  Mortgage-backed securities                            44,886       (3,654)     41,232           22,272      (1,018)     21,254
  Federal funds sold and securities
    purchased under agreements  to resell                  657          169         826           (3,166)         37      (3,129)
  Trading securities                                       819         (344)        475              153         424         577
  Investment securities                                  1,666           (9)      1,657              131          35         166
  Other interest-earning assets                             11          506         517            1,605         712       2,317
                                                      ---------   ----------  ----------       ----------   ---------   ---------
      Total interest income                            (37,373 )     21,001     (16,372)          86,445     (22,382)     64,063
                                                      ---------   ----------  ----------       ----------   ---------   ---------

Interest expense:
  Deposit accounts                                      15,240       (4,829)     10,411            9,233      (2,895)      6,338
  Borrowings                                           (16,136)       4,320     (11,816)          48,142      (3,501)     44,641
                                                      ---------   ----------  ----------       ----------   ---------   ---------
      Total interest expense                              (896)        (509)     (1,405)          57,375      (6,396)     50,979
                                                      ---------   ----------  ----------       ----------   ---------   ---------

Increase (decrease) in net interest income            $(36,477)   $  21,510   $ (14,967)       $  29,070    $(15,986)   $ 13,084
                                                      =========   ==========  ==========       ==========   =========   =========

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

(2)  Includes loans held for sale and/or securitization.
Interest income in fiscal 1998 decreased $16.4 million (or 3.6%) from the level
in fiscal 1997 as a result of lower average balances of loans receivable, and,
to a lesser extent, lower average yields on mortgage-backed securities. Higher
average yields on loans receivable and higher average balances of
mortgage-backed securities partially offset the negative effect on interest
income of the lower average loan balances and lower average yields on
mortgage-backed securities.

The Bank's net yield on interest-earning assets decreased to 3.82% in fiscal
1998 from 4.14% in fiscal 1997. The decrease in the net yield primarily
reflected lower yields resulting from a shift in the composition of
interest-earning assets from loans receivable to lower yielding mortgage-backed
securities, as well as higher average balances of deposits. The increase in
average deposits was primarily due to brokered time deposits accepted in fiscal
1997 which matured during fiscal 1998. Average demand deposits also increased
during fiscal 1998 as a result of the continued expansion of the Bank's branch
network. The Bank does not currently anticipate significant reliance on brokered
deposits as a key source of funding in the future.

Interest income on loans, the largest category of interest-earning assets,
decreased by $61.3 million (or 17.0%) from fiscal 1997 primarily because of
lower average balances. Higher average yields earned on the loan portfolio
partially offset the negative effect of the lower average balances.

Lower average balances of the Bank's single-family residential loans, which
decreased $654.3 million (or 37.1%), resulted primarily from the $1.1 billion,
$560.2 million and $598.3 million exchange of single-family residential loans
held in its portfolio for mortgage-backed securities (which the Bank retained
for its own portfolio) in September 1997, March 1998, and June 1998,
respectively. The decrease was primarily responsible for a $34.5 million (or
29.4%) decrease in interest income from single-family residential loans. Average
balances of home improvement and related loans decreased $41.8 million, largely
because of securitization activity during fiscal 1998. Securitizations of credit
card loans and automobile loans were the primary reasons for the $122.3 million
and $35.6 million decline (or 10.5% and 14.4%), respectively, in average
balances of credit card loans and automobile loans.

The average yield on the loan portfolio in fiscal 1998 increased 71 basis points
(to 10.79% from 10.08%) from the average yield in fiscal 1997. Contributing to
the higher net yield was an increase in the average yield on automobile loans
which was largely responsible for a $6.4 million increase in interest income
from such loans. In addition, an increase in the average yield on single-family
residential loans (from 6.65% to 7.47%) resulted from the September 1997, March
1998, and June 1998 exchange of single-family residential loans for
mortgage-backed securities discussed above. Prior to the exchange, these loans
had a weighted average interest rate of 6.89%, 6.99%, and 6.84%, respectively.
Offsetting these amounts was a decrease in the average yield on credit card
loans, which, when coupled with the decreased average balance on such loans,
resulted in a $29.7 million decline in interest income from such loans for
fiscal 1998. During fiscal 1998, the Bank continued to reprice its credit card
portfolio as a result of ongoing competitive pressures in the credit card
industry.
Interest income on mortgage-backed securities increased $41.2 million (or 57.1%)
primarily because of higher average balances. The increased mortgage-backed
securities balances in the 1998 period reflected the $1.1 billion, $560.2
million and $598.3 million exchange of single-family residential loans for
mortgage-backed securities in September 1997, March 1998 and June 1998,
respectively. The positive effect of the higher average balances was partially
offset by a decline in the average interest rates on these securities from 5.99%
to 5.70%.

Interest expense decreased $1.4 million (or 0.6%) for fiscal 1998 primarily
because of a $179.8 million decline in the average balances of repurchase
agreement transactions and a $111.0 million decline in the average balances of
Federal Home Loan Bank advances which resulted in an $11.8 million decrease in
interest expense on borrowings during fiscal 1998. Excess funds generated from
securitization activity during the year and additional deposits facilitated the
paydown of such borrowings.

The decrease in interest expense on borrowings was offset by an increase of
$10.4 million (or 6.2%) in interest expense on deposits, resulting from an
increase in average deposit balances of $396.2 million (or 9.3%), which was
partially offset by a decrease in the average rates on deposits (to 3.84% from
3.95%).

Provision for Loan Losses. The Bank's provision for loan losses increased to
$150.8 million in fiscal 1998 from $125.1 million in fiscal 1997. The $25.7
million increase was primarily due to a $32.2 million increase in the provision
for losses on consumer and other loans. The increase in the provision for loan
losses was primarily due to adverse trends in delinquencies and losses in the
subprime segment of the automobile portfolio. See "Financial Condition - Asset
Quality - Allowances for Losses."

Other Income. Other (non-interest) income increased to $641.9 million in fiscal
1998 period from $411.1 million in fiscal 1997. The $230.8 million increase in
such income was primarily attributable to an increase in gain on sales of loans
which included the $288.3 million gain on the sale of the Bank's credit card
portfolio and related operations on September 30, 1998. Also contributing to the
increase in other income was a $10.1 million increase in deposit servicing fees.
Partially offsetting these increases was a $71.9 million decrease in servicing
and securitization income.

Servicing and securitization income decreased $71.9 million to $233.3 million
from $305.2 million, primarily due to increases in the amortization of and
unrealized losses on interest-only strips. The Bank recognized net unrealized
losses on its automobile, home equity and home loan interest-only strips of
$42.9 million during fiscal 1998 compared to net unrealized gains on the
valuation of the Bank's credit card interest-only strips of $7.0 million during
1997. In addition, amortization of $99.0 million on interest-only strips related
to prior gains on sales of loans was recorded in fiscal 1998 compared to $24.8
million in fiscal 1997. Offsetting these amounts were gains of $81.6 million,
$23.1 million, $19.7 million and $3.4 million recognized on the securitization
and sale of credit card loans, automobile loans, home equity and home loan
receivables, respectively.

The $2.1 million (or 11.5%) decrease in loss on real estate held for investment
or sale was primarily attributable to an increase of $1.5 million in the gain
recorded on sales of the Bank's real estate held for sale coupled with a $0.8
million decrease in the provision for losses on such assets. See "Financial
Condition - Asset Quality - Allowances for Losses."
Deposit servicing fees increased $10.1 million (or 24.1%) during fiscal 1998
primarily due to an increase in fees generated through the Bank's ATM network in
addition to increases in other deposit servicing fees resulting from the
expansion of the Bank's branch network.

Credit card fees, consisting of annual fees, late charges, cash advance charges,
interchange income, net of rebate expenses, and overlimit fees decreased to
$53.9 million in fiscal 1998 from $57.4 million in fiscal 1997. The $3.5 million
(or 6.1%) decrease was primarily attributable to an $8.8 million increase in
rebate expenses, the effects of which were due principally to the introduction
of additional programs and products designed to encourage greater usage of the
Bank's credit cards. Partially offsetting the increase in rebate expenses were
increases in certain fees resulting from changes to the fee structure for the
Bank's credit card programs which were implemented in fiscal 1997.

Operating Expenses. Operating expenses for fiscal 1998 increased $85.7 million
(or 20.5%) from the level in fiscal 1997. The primary component of the higher
operating expenses was a $38.6 million increase in salaries and employee
benefits resulting primarily from the addition of staff to the Bank's consumer
lending and branch operations. The $24.2 million increase in loan expenses was
primarily attributable to increased credit card collection and retention costs
and to increases in the valuation allowances on servicing assets. Also
contributing to the increase in operating expenses was an increase of $5.1
million in marketing expenses, primarily credit card marketing expenses.

Fiscal  1997 Compared to Fiscal  1996

Real Estate

The Real Estate Trust recorded a loss before depreciation and amortization of
debt expense of $7.8 million and an operating loss of $19.0 million for fiscal
1997, compared to a loss before depreciation and amortization of debt expense of
$13.5 million and an operating loss of $24.2 million for fiscal 1996. 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
gains on sales of properties.

Income after direct operating expenses from hotel properties increased
$2,771,000 (15.3%) in fiscal 1997 over the level achieved in fiscal 1996. In
fiscal 1997, room sales increased $4,542,000 (11.7%), while food and beverage
sales increased $565,000 (4.6%). The increase in total revenue of $5,219,000
(9.6%) exceeded the increase of $2,448,000 (6.8%) in direct operating expenses.
The revenue increases were due to improved market conditions, which permitted
management to raise average room rates while maintaining or increasing occupancy
at several of the hotels. The Real Estate Trust also acquired a new hotel in
fiscal 1997.

Income after direct operating expenses from commercial properties, which
consists of office and industrial properties, increased $2,992,000 (28.9%) in
fiscal 1997 compared to such income in fiscal 1996. Gross income increased
$3,507,000 (19.9%) in fiscal 1997, while expenses increased $515,000 (7.1%). The
improvement was the direct result of a higher leasing rate in fiscal 1997.
Expenses in fiscal 1997 were above the prior year's principally due to higher
property taxes and higher operating expenses.
Other income, which includes interest income, income from other real estate
properties and miscellaneous receipts, declined by $996,000 (19.9%) in fiscal
1997 primarily due to lower cash balances on which interest was earned. Other
income in fiscal 1996 also included $695,000 received as refunds of transfer
taxes paid in a preceding year.

Land parcels and other expense increased $46,000 (2.8%) in fiscal 1997 as the
result of higher real estate taxes.

Interest expense increased $315,000 (0.8%) in fiscal 1997, primarily because of
the higher level of borrowings in the current period. The average balance of
outstanding borrowings increased to $400.3 million for fiscal 1997 from $395.6
million for the prior year. The change in average borrowings occurred as a
result of mortgage loan refinancings and unsecured note sales. The average cost
of borrowings was 10.30% in fiscal 1997 and 10.31% in fiscal 1996.

Depreciation increased $523,000 (5.2%) in fiscal 1997 as a result of new tenant
improvements, capital replacements, and the addition of a new income-producing
property.

Advisory, management and leasing fees paid to related parties increased $572,000
(7.7%) in fiscal 1997. The advisory fee in fiscal 1997 was $311,000 per month,
compared to $301,000 per month for the first six months of fiscal 1996 and
$306,000 per month for the second six months of fiscal 1996, which resulted in
an aggregate increase of $93,000 (2.6%). Management and leasing fees were higher
by $479,000 (12.7%) in fiscal 1997 as a result of increased gross income on
which fees are based. General and administrative expense decreased $129,000
(9.2%) in fiscal 1997, as a result of lower administrative costs.

Equity in earnings of unconsolidated entities represents the Real Estate Trust's
share of earnings in its partnership investments. For fiscal 1997, the Real
Estate Trust recorded earnings of $4,150,000 from such investments compared to
earnings of $3,374,000 in the prior year.

Gain on sale of property in fiscal 1997 represents the gain on the sale of a
purchase-leaseback investment located in Casper, Wyoming and the gain on the
condemnation of a portion of a land parcel located in Atlanta, Georgia.

Banking

Overview. The Bank recorded operating income of $80.2 million for the year ended
September 30, 1997 ("fiscal 1997"), compared to operating income of $46.1
million for the year ended September 30, 1996 ("fiscal 1996"). The increase in
income for fiscal 1997 was primarily attributable to a $67.3 million increase in
other (non-interest) income and a $13.2 million increase in net interest income
before provision for loan losses, the effect of which was partially offset by a
$9.4 million increase in the provision for loan losses and a $37.0 million
increase in operating (non-interest) expense reflecting in part additional
expenses associated with steps taken by management to improve credit quality and
expand the Bank's core businesses, including the consumer loan program and
deposit franchise.
Net Interest Income. Net interest income, before the provision for loan losses,
increased $13.2 million (or 6.6%) in fiscal 1997. The Bank would have recorded
interest income of $6.9 million in fiscal 1997 if the Bank's nonaccrual assets
and restructured loans had been current in accordance with their original terms.
Interest income of $0.7 million was actually recorded on non-accrual assets and
restructured loans during the fiscal year. The Bank's net interest income in
future periods will continue to be adversely affected by the Bank's non-
performing assets. See "Financial Condition Asset Quality - Non-Performing
Assets."

Interest income in fiscal 1997 increased $64.2 million from the level in fiscal
1996, primarily as a result of higher average balances of loans receivable and,
to a lesser extent, mortgage-backed securities. The effect on interest income of
higher average balances was offset in part by lower average yields earned by the
Bank on its loan portfolio.

The Bank's net yield on interest-earning assets decreased to 4.14% in fiscal
1997 from 4.81% in fiscal 1996. The decrease in the net yield primarily
reflected lower yields earned on certain of the Bank's interest-earning assets
resulting from a decline in market rates as well as lower introductory and
promotional rates on certain products which the Bank has offered to new and
existing customers in an effort to stimulate usage.

Interest income on loans, the largest category of interest-earning assets,
increased by $43.0 million (or 13.5%) from fiscal 1996 primarily because of
higher average balances, which were partially offset by lower average yields on
the loan portfolio.

Higher average balances on credit card loans, which increased $159.5 million
(15.8%). The increase was primarily responsible for a $3.4 million (or 2.2%)
increase in interest income from credit card loans. Higher average balances of
automobile loans, which increased $64.2 million (or 35.1%), resulted primarily
from the higher origination volume of such loans, and was largely responsible
for a $16.2 million (or 75.3%) increase in interest income on automobile loans.
Interest income on the Bank's single-family residential loans increased by $15.8
million (or 15.6%) primarily because of increased originations, which resulted
in an increase of $355.8 million (or 25.2%) in the average balances of such
loans. Average balances of home equity credit line loans increased by $60.0
million (or 74.8%) primarily because of the $119.2 million purchase of such
loans in December 1996. Interest income on home equity credit line loans
increased by $5.7 million (or 124.4%) in the current year.

The average yield on the loan portfolio in fiscal 1997 decreased by 73 basis
points (to 10.08% from 10.81%) from the average yield in fiscal 1996. The lower
net yield was primarily due to a 182 basis point decrease in the average net
yield on credit card loans from 15.50% to 13.68%, the effect of which partially
offset the positive effect that the higher average balances had on income. The
decline in the net yield was primarily a result of marketing strategies to
introduce lower introductory rates to new customers, as well as a new program
offering reduced interest rates to previously risk-repriced accounts in an
attempt to encourage payments from delinquent customers. Also contributing to
the decreased average yield on the loan portfolio was a decrease in the average
yield on single-family residential loans from 7.21% to 6.65%. An increase in the
average yield on automobile loans from 11.75% to 15.24%, primarily due to higher
yields earned on loans originated by one of the Bank's operating subsidiaries,
partially offset the negative effect of the lower average yields discussed
above.
Interest income on mortgage-backed securities increased $21.3 million (or 41.7%)
primarily because of higher average balances. The increased mortgage-backed
securities balances in fiscal 1997 reflected the purchase of $649.7 million of
mortgage-backed securities near the end of fiscal 1996 and the $1.1 billion
securitization of single-family residential loans in September 1997. The
positive effect of the higher average balances was partially offset by a
decrease in the average interest rates on these securities from 6.11% to 5.99%.

Interest expense increased $51.0 million (or 27.0%) for fiscal 1997 primarily
because of an increase of $764.9 million (or 206.8%) in the average balances of
the Bank's borrowings. The increase in the average balances of borrowings
resulted in an increase of $44.6 million in interest expense for fiscal 1997 for
such liabilities. The increase in interest expense on borrowings is primarily
due to a $22.8 million, a $13.7 million and a $6.9 million increase in interest
expense on securities sold under repurchase agreements, Federal Home Loan Bank
advances and subordinated debentures, respectively, resulting primarily from
higher average balances of such borrowings. The negative effect of the higher
average balances was partially offset by a decrease in the average borrowing
rate (to 6.25% from 7.10%), which reflected an increase in lower-yielding FHLB
advances and securities sold under repurchase agreements.

An increase of $6.3 million in interest expense on deposits, the largest
category of interest-bearing liabilities, also contributed to the increased
interest expense. Interest expense on deposits increased primarily because of a
$235.1 million increase in the average balances.

Provision for Loan Losses. The Bank's provision for loan losses increased to
$125.1 million in fiscal 1997 from $115.7 million in fiscal 1996. The $9.4
million increase over the prior year was primarily attributable to a $7.8
million increase in the provision for losses on credit card loans. See
"Financial Condition - Asset Quality - Allowances for Losses."

Other Income. The $67.3 million (or 19.6%) increase in other (non-interest)
income to $411.1 million in fiscal 1997 from $343.8 million in fiscal 1996 was
primarily attributable to increases in servicing and securitization income,
credit card fees, deposit servicing fees and a decrease in loss on real estate
held for investment or sale.

Servicing and securitization income increased $20.2 million to $305.2 million
from $285.0 million, primarily due to gains recognized on the securitization and
sale of credit card loans, automobile loans, home equity and home loan
receivables of $26.2 million, $26.9 million, $11.8 million and $7.4 million,
respectively. Management expects that the relative impact of gains recognized
under SFAS 125 on the Bank's earnings will diminish as the gains associated with
these and other transactions are amortized. In addition, in accordance with SFAS
125, the Bank recognized a $7.0 million net unrealized gain on the valuation of
its interest-only strips. This gain represents the September 30, 1997
market-value adjustment on the interest-only strips related to the credit card
securitized assets. Offsetting these amounts was a decrease of $36.3 million (or
13.8%) in loan servicing fees which was primarily due to a decrease of $49.0
million in excess spread income earned by the Bank for servicing its portfolios
of securitized credit card loans. The decrease in such excess spread income for
fiscal 1997 resulted primarily from an increase in charge-offs on securitized
credit card loans which is consistent with management's expectations and
generally reflects the trends that are affecting the credit card industry as a
whole. See "Financial Condition - Asset Quality - Allowances for Losses."
Credit card fees, consisting of membership fees, late charges, over-the-limit
fees, interchange fees and cash advance charges, increased $26.6 million (or
86.5%) in fiscal 1997 from the level in fiscal 1996. The increase was primarily
attributable to the impact of changes in the fee structure for the Bank's credit
card programs which were implemented in fiscal 1996 and 1997.

The $12.0 million (or 40.1%) increase in deposit servicing fees resulted
primarily from the additional fees generated through the Bank's ATM network,
and, to a lesser extent, an increase in the number of deposit accounts
outstanding during fiscal 1997.

The $5.7 million (or 23.5%) decrease in loss on real estate held for investment
or sale was primarily attributable to a decrease of $6.7 million in the
provision for losses on such assets, which was partially offset by a decrease of
$1.1 million in the gain recorded on sales of the Bank's real estate held for
investment or sale.

Operating Expenses. Operating expenses for fiscal 1997 increased $37.0 million
(9.7%) from the level in fiscal 1996. The main components of the higher
operating expenses were increases in salaries and employee benefits, marketing
and data processing. The $33.6 million increase in salaries and employee
benefits resulted primarily from the addition of staff to the Bank's credit
card, consumer lending, branch and systems operations. The $20.8 million
increase in marketing expenses was primarily attributable to a $14.4 million
increase in marketing expenses associated with the credit card program as the
Bank continues to focus on increased originations of such loans, as well as a
$5.3 million increase in marketing expenses associated with the Bank's deposit
base. The $6.9 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 1997. The $32.3
million decrease in deposit insurance premiums, which partially offset the
expense increases discussed above, was primarily because of the one-time SAIF
assessment recorded by the Bank in fiscal 1996. See "Business - Regulation -
Deposit Insurance Premiums."
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

    (a)  Report of Independent Public Accountants.

    (b)  Consolidated Balance Sheets - As of September 30,
         1998 and 1997.

    (c)  Consolidated Statements of Operations - For the
         years ended September 30, 1998, 1997 and 1996.

    (d)  Consolidated Statements of Shareholders' Deficit - For the
         years ended September 30, 1998, 1997 and 1996.

    (e)  Consolidated Statements of Cash Flows - For the 
         years ended September 30, 1998, 1997 and 1996.

    (f)  Notes to Consolidated Financial Statements.

The selected quarterly financial data included in Note 34 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
"Business - General."
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, 1998
and 1997, and the related consolidated statements of operations, shareholders'
deficit, and cash flows for each of the three years in the period ended
September 30, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1998, in conformity with generally accepted
accounting principles.

Arthur Andersen LLP

Washington, D.C.
December 2, 1998
Consolidated Balance Sheets
B. F. SAUL REAL ESTATE INVESTMENT TRUST
===============================================================================================================================
                                                                                                       September 30
                                                                                            -----------------------------------
(In thousands)                                                                                    1998              1997
-------------------------------------------------------------------------------------------------------------------------------
ASSETS
Real Estate
Income-producing properties
    Hotel                                                                                         $  165,805        $  128,557
    Office and industrial                                                                            110,257           109,628
    Other                                                                                              3,889             4,265
                                                                                            ----------------- -----------------
                                                                                                     279,951           242,450
    Accumulated depreciation                                                                         (96,072)          (85,915)
                                                                                            ----------------- -----------------
                                                                                                     183,879           156,535
Land parcels                                                                                          40,110            42,160
Construction in progress                                                                               8,694             2,480
Cash and cash equivalents                                                                             13,950            18,248
Other assets                                                                                          76,799            81,150
                                                                                            ----------------- -----------------
                    Total real estate assets                                                         323,432           300,573
-------------------------------------------------------------------------------------------------------------------------------
Banking
Cash and due from banks                                                                              336,858           238,169
Interest-bearing deposits                                                                            499,598            48,722
Federal funds sold and securities purchased under agreements to resell                               380,000           365,000
Loans held for sale                                                                                   56,287           102,749
Loans held for securitization and sale                                                               125,000           220,000
Investment securities (market value $44,528 and $5,012, respectively)                                 43,999             4,998
Trading securities                                                                                    11,319             7,899
Mortgage-backed securities (market value $2,014,819 and $1,984,667, respectively)                  2,025,817         1,985,707
Loans receivable (net of allowance for losses of $60,157 and $105,679, respectively)               2,533,957         2,122,899
Federal Home Loan Bank stock                                                                          49,036            33,170
Real estate held for investment or sale (net of allowance for losses of $153,766 and 
  $140,936, respectively)                                                                             69,025            94,290
Property and equipment, net                                                                          285,916           273,562
Goodwill and other intangible assets, net                                                             30,879             8,846
Interest only strips, net                                                                             13,508            87,011
Servicing assets, net                                                                                 27,156            41,721
Other assets                                                                                         232,794           422,670
                                                                                            ----------------- -----------------
                    Total banking assets                                                           6,721,149         6,057,413
-------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                                     $ 7,044,581       $ 6,357,986
-------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Real Estate
Mortgage notes payable                                                                            $  198,874        $  180,204
Notes payable - secured                                                                              200,000           175,000
Notes payable - unsecured                                                                             50,335            46,633
Deferred gains - real estate                                                                         112,883           112,883
Accrued dividends payable - preferred shares of beneficial interest                                   34,049            36,231
Other liabilities and accrued expenses                                                                39,895            39,959
                                                                                            ----------------- -----------------
                    Total real estate liabilities                                                    636,036           590,910
-------------------------------------------------------------------------------------------------------------------------------
Banking
Deposit accounts                                                                                   4,888,230         4,893,756
Securities sold under repurchase agreements and other short-term borrowings                          491,754            74,821
Notes payable                                                                                            430             7,019
Federal Home Loan Bank advances                                                                      352,027           188,511
Custodial accounts                                                                                     5,926             2,809
Amounts due to banks                                                                                  40,601            44,835
Other liabilities                                                                                    112,668           120,416
Capital notes -- subordinated                                                                        250,000           250,000
                                                                                            ----------------- -----------------
                    Total banking liabilities                                                      6,141,636         5,582,167
-------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interest held by affiliates                                                                  72,242            51,388
Minority interest -- other                                                                           218,306           218,306
-------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES                                                                                  7,068,220         6,442,771
-------------------------------------------------------------------------------------------------------------------------------
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                                                                                              (81,936)         (142,642)
Net unrealized holding loss                                                                               44              (396)
                                                                                            ----------------- -----------------
                                                                                                      18,209           (42,937)
Less cost of 1,814,688 common shares of beneficial interest in treasury                              (41,848)          (41,848)
                                                                                            ----------------- -----------------
TOTAL SHAREHOLDERS' DEFICIT                                                                          (23,639)          (84,785)
-------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                                                      $ 7,044,581       $ 6,357,986
-------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
Consolidated Statements of Operations
B. F. SAUL REAL ESTATE INVESTMENT TRUST
===================================================================================================================================

                                                                                        For the Year Ended September 30
                                                                             ------------------------------------------------------
(In thousands, except per share amounts)                                           1998               1997              1996
-----------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE
Income
Hotels                                                                             $   71,424         $   59,464        $   54,245
Office and industrial properties                                                       22,883             21,097            17,590
Other                                                                                   4,285              4,008             5,004
                                                                             -----------------  ----------------- -----------------
Total income                                                                           98,592             84,569            76,839
-----------------------------------------------------------------------------------------------------------------------------------
Expenses
Direct operating expenses:
    Hotels                                                                             45,516             38,523            36,075
    Office and industrial properties                                                    7,631              7,766             7,251
    Land parcels and other                                                              1,607              1,683             1,637
Interest expense                                                                       42,445             40,155            39,840
Amortization of debt expense                                                              372                664               674
Depreciation                                                                           11,170             10,543            10,020
Advisory, management and leasing fees - related parties                                 8,742              7,995             7,423
General and administrative                                                              1,153              1,272             1,401
                                                                             -----------------  ----------------- -----------------
Total expenses                                                                        118,636            108,601           104,321
-----------------------------------------------------------------------------------------------------------------------------------
Equity in earnings of unconsolidated entities                                           1,918              4,150             3,374
Gain (loss) on sale of property                                                          (331)               895               (68)
-----------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE OPERATING LOSS                                                         $  (18,457)        $  (18,987)       $  (24,176)
-----------------------------------------------------------------------------------------------------------------------------------
BANKING
Interest income
Loans                                                                              $  299,566         $  360,842        $  317,847
Mortgage-backed securities                                                            113,441             72,209            50,955
Trading securities                                                                      2,005              1,530               953
Investment securities                                                                   2,138                481               315
Other                                                                                  18,657             17,314            18,126
                                                                             -----------------  ----------------- -----------------
Total interest income                                                                 435,807            452,376           388,196
-----------------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposit accounts                                                                      179,318            168,907           162,569
Short-term borrowings                                                                  33,294             47,378            10,407
Long-term borrowings                                                                   25,798             23,530            15,860
                                                                             -----------------  ----------------- -----------------
Total interest expense                                                                238,410            239,815           188,836
                                                                             -----------------  ----------------- -----------------
Net interest income                                                                   197,397            212,561           199,360
Provision for loan losses                                                            (150,829)          (125,115)         (115,740)
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses                                    46,568             87,446            83,620
-----------------------------------------------------------------------------------------------------------------------------------
Other income
Servicing and securitization income                                                   233,271            305,192           284,964
Credit card fees                                                                       53,881             57,381            30,765
Deposit servicing fees                                                                 51,997             41,893            29,900
Gain on sales of trading securities, net                                                  982              1,203             1,158
Net unrealized holding loss on trading securities                                      (1,258)                --                --
Loss on real estate held for investment or sale, net                                  (16,539)           (18,688)          (24,413)
Gain on sales of loans, net                                                           290,434              1,527             1,732
Other                                                                                  29,089             22,573            19,713
                                                                             -----------------  ----------------- -----------------
Total other income                                                                    641,857            411,081           343,819
-----------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
Consolidated Statements of Operations (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST
===================================================================================================================================

                                                                                        For the Year Ended September 30
                                                                             ------------------------------------------------------
(In thousands, except per share amounts)                                           1998               1997              1996
-----------------------------------------------------------------------------------------------------------------------------------
BANKING (Continued)
Operating expenses
Salaries and employee benefits                                                     $  199,557         $  160,949        $  127,370
Loan                                                                                   54,147             29,943            28,284
Property and equipment                                                                 28,114             24,397            20,705
Marketing                                                                              79,642             74,504            53,705
Data processing                                                                        45,419             48,138            41,270
Depreciation and amortization                                                          33,989             28,708            24,635
Deposit insurance premiums                                                              4,859              5,033            37,362
Amortization of goodwill and other intangible assets                                    5,862              2,615             1,775
Other                                                                                  52,429             44,059            46,222
                                                                             -----------------  ----------------- -----------------
Total operating expenses                                                              504,018            418,346           381,328
-----------------------------------------------------------------------------------------------------------------------------------
BANKING OPERATING INCOME                                                           $  184,407         $   80,181        $   46,111
-----------------------------------------------------------------------------------------------------------------------------------

TOTAL COMPANY
Operating income                                                                   $  165,950         $   61,194        $   21,935
Income tax provision                                                                   42,869             12,810             8,301
                                                                             -----------------  ----------------- -----------------
Income before extraordinary item and minority interest                                123,081             48,384            13,634
Extraordinary item:
    Loss on early extinguishment of debt, net of taxes                                 (9,601)                --                --
                                                                             -----------------  ----------------- -----------------
Income before minority interest                                                       113,480             48,384            13,634
Minority interest held by affiliates                                                  (22,043)            (6,848)           (3,962)
Minority interest -- other                                                            (25,313)           (22,676)           (9,750)
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY NET INCOME (LOSS)                                                    $   66,124         $   18,860         $     (78)
-----------------------------------------------------------------------------------------------------------------------------------

NET INCOME (LOSS) AVAILABLE TO COMMON
    SHAREHOLDERS                                                                   $   60,706         $   13,442        $   (5,498)

NET INCOME (LOSS) PER COMMON SHARE
Income before extraordinary item and minority interest                             $    24.38          $    8.90         $    1.70
Extraordinary item:
    Loss on early extinguishment of debt, net of taxes                                  (1.99)               --                --
                                                                             -----------------  ----------------- -----------------
Income before minority interest                                                         22.39               8.90              1.70
Minority interest held by affiliates                                                    (4.57)             (1.42)            (0.82)
Minority interest -- other                                                              (5.24)             (4.70)            (2.02)
-----------------------------------------------------------------------------------------------------------------------------------

NET INCOME (LOSS) PER COMMON SHARE                                                 $    12.58          $    2.78        $    (1.14)
-----------------------------------------------------------------------------------------------------------------------------------

The Notes to Consolidated Financial Statements are an integral part of these
statements.
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)                                      1998              1997             1996
------------------------------------------------------------------------------------------------------------------------------------
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                                                                       (142,642)         (156,084)        (123,943)

Net income (loss)                                                                         66,124            18,860              (78)

Dividends:
    Real Estate Trust preferred shares of beneficial interest:
        Distributions ($0.97 per share in 1996)                                               --                --             (500)
        Distributions payable ($10.50, $10.50 and $61.17 per share in 1998, 1997 
          and 1996, respectively)                                                         (5,418)           (5,418)         (31,563)

                                                                                 ----------------  ---------------- ----------------
End of year                                                                              (81,936)         (142,642)        (156,084)
                                                                                 ----------------  ---------------- ----------------

Net unrealized holding gain (losses)                                                          44              (396)          (1,500)
                                                                                 ----------------  ---------------- ----------------

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

TOTAL SHAREHOLDERS' DEFICIT                                                           $  (23,639)       $  (84,785)      $  (99,331)
------------------------------------------------------------------------------------------------------------------------------------

The Notes to Consolidated Financial Statements are an integral part of these
statements.
Consolidated Statements of Cash Flows
B. F. SAUL REAL ESTATE INVESTMENT TRUST
====================================================================================================================================

                                                                                             For the Year Ended September 30
                                                                                  --------------------------------------------------
(In thousands)                                                                         1998             1997             1996
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate
Net loss                                                                               $  (22,048)      $   (8,531)      $  (15,924)
Adjustments to reconcile net loss to net cash provided by
  operating activities:
    Depreciation                                                                           11,170           10,543           10,020
    (Gain) loss on sale of property                                                           328             (895)              68
    Early extinguishment of debt                                                            9,601               --               --
    (Increase) decrease in accounts receivable and accrued income                          (1,229)              17           (4,869)
    (Increase) decrease in deferred tax asset                                                 954           (3,252)           1,881
    Increase in accounts payable and accrued expenses                                       2,708            1,058              430
    (Increase) decrease in tax sharing receivable                                          (6,545)           2,492           14,533
    Amortization of debt expense                                                              372              664              674
    Equity in earnings of unconsolidated entities                                          (2,161)          (4,150)          (3,374)
    Other                                                                                  21,588            8,965            5,593
                                                                                  ---------------- ---------------- ----------------
                                                                                           14,738            6,911            9,032
                                                                                  ---------------- ---------------- ----------------
Banking
Net income                                                                                 88,172           27,391           15,846
Adjustments to reconcile net income to net cash provided by
    operating activities:
    Amortization (accretion) of premiums, discounts and net deferred loan fees              8,727            7,130             (163)
    Depreciation and amortization                                                          33,989           28,708           24,635
    Provision for loan losses                                                             150,829          125,115          115,740
    Capitalized interest on real estate under development                                  (1,954)          (2,212)          (3,462)
    Proceeds from sales of trading securities                                             320,942          430,938          363,364
    Net fundings of loans held for sale and/or securitization                            (366,915)        (697,593)        (690,589)
    Proceeds from sales of loans held for sale and/or securitization                    2,005,143        2,511,163        1,961,242
    Proceeds from sales of spread accounts                                                 36,000          144,200           42,140
    Gain on sale of credit card relationships                                            (288,332)              --               --
    Gain on sales of real estate held for sale                                             (2,609)          (1,156)          (2,278)
    Provision for losses on real estate held for investment or sale                        18,860           19,623           26,341
    Gain on sales of trading securities, net                                                 (982)          (1,203)          (1,158)
    (Increase) decrease in interest-only strips                                            73,503          (87,011)              --
    (Increase) decrease in excess spread assets                                                --           42,602           (8,580)
    (Increase) decrease in servicing assets                                                14,550           (8,948)          (4,238)
    Increase in goodwill and other intangible assets                                      (22,017)          (6,430)           1,795
    (Increase) decrease in other assets                                                   147,079         (207,883)        (103,211)
    Increase (decrease) in other liabilities                                              (11,982)          21,741           23,724
    Increase (decrease) in tax sharing payable                                              6,545           (2,492)         (14,533)
    Minority interest held by affiliates                                                   22,043            6,848            3,962
    Minority interest - other                                                               9,750            9,750            9,750
    Other                                                                                 (29,752)           8,006          (12,440)
                                                                                  ---------------- ---------------- ----------------
                                                                                        2,211,589        2,368,287        1,747,887
                                                                                  ---------------- ---------------- ----------------
Net cash provided by operating activities                                               2,226,327        2,375,198        1,756,919
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate
Capital expenditures - properties                                                         (19,815)         (10,120)          (7,408)
Property acquisitions                                                                     (26,650)          (4,709)              --
Property sales                                                                                 --            1,399            1,812
Equity investment in unconsolidated entities                                                1,348            1,723              639
Other                                                                                           2               43               50
                                                                                  ---------------- ---------------- ----------------
                                                                                          (45,115)         (11,664)          (4,907)
                                                                                  ---------------- ---------------- ----------------
Banking
Net proceeds from maturities of investment securities                                       5,000            5,000            4,410
Net proceeds from redemption of Federal Home Loan Bank stock                                2,504            9,482               --
Net proceeds from sales of real estate                                                     25,305           23,624           58,874
Proceeds from the sale of credit card receivables                                       1,337,678               --               --
Net fundings of loans receivable                                                       (2,983,595)      (1,779,711)      (1,711,308)
Principal collected on mortgage-backed securities                                       1,180,995          771,095          221,698
Purchases of Federal Home Loan Bank stock                                                 (18,370)         (10,712)              --
Purchases of investment securities                                                        (44,001)              --           (9,725)
Purchases of mortgage-backed securities                                                        --         (311,554)        (649,688)
Purchases of loans receivable                                                          (1,645,458)        (892,367)        (391,878)
Purchases of property and equipment                                                       (58,106)         (77,859)         (69,749)
Disbursements for real estate held for investment or sale                                 (14,814)         (14,199)         (14,447)
Other                                                                                      10,637            1,036           (5,950)
                                                                                  ---------------- ---------------- ----------------
                                                                                       (2,202,225)      (2,276,165)      (2,567,763)
                                                                                  ---------------- ---------------- ----------------
Net cash used in investing activities                                                  (2,247,340)      (2,287,829)      (2,572,670)
------------------------------------------------------------------------------------------------------------------------------------
Continued on following page.
Consolidated Statements of Cash Flows (Continued)
B. F. SAUL REAL ESTATE INVESTMENT TRUST
===================================================================================================================================

                                                                                             For the Year Ended September 30
                                                                                  --------------------------------------------------
(In thousands)                                                                         1998             1997             1996
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Real Estate
Proceeds from mortgage financing                                                       $   60,929       $   27,072         $     --
Principal curtailments and repayments of mortgages                                        (38,602)         (19,977)          (8,573)
Proceeds from secured note financing                                                      224,075               --            2,500
Repayments of secured notes                                                              (199,075)          (2,500)            (500)
Proceeds from sales of unsecured notes                                                      5,802            5,822            3,708
Repayments of unsecured notes                                                              (2,100)          (1,556)          (2,398)
Costs of obtaining financings                                                              (7,295)            (626)            (201)
Loan prepayment fees                                                                      (10,055)              --               --
Dividends paid - preferred shares of beneficial interest                                   (7,600)            (750)            (500)
                                                                                  ---------------- ---------------- ----------------
                                                                                           26,079            7,485           (5,964)
                                                                                  ---------------- ---------------- ----------------
Banking
Proceeds from customer deposits and sales of certificates of deposit                   24,799,407       18,915,801       15,312,125
Customer withdrawals of deposits and payments for maturing certificates of deposit    (24,804,933)     (18,186,082)     (15,307,340)
Net increase (decrease) in securities sold under repurchase agreements                    384,699         (574,217)         574,400
Advances from the Federal Home Loan Bank                                                1,759,817          877,483          429,459
Repayments of advances from the Federal Home Loan Bank                                 (1,596,301)        (958,037)        (315,446)
Proceeds from other borrowings                                                         16,559,882        6,271,193        2,469,675
Repayments of other borrowings                                                        (16,534,237)      (6,259,554)      (2,417,606)
Cash dividends paid on preferred stock                                                     (9,750)          (9,750)          (9,750)
Cash dividends paid on common stock                                                        (6,500)          (9,000)          (8,500)
Repayment of capital notes - subordinated                                                      --          (10,000)              --
Net proceeds received from capital notes - subordinated                                        --           96,112               --
Net proceeds from issuance of preferred stock                                                  --          144,000               --
Other                                                                                       3,117           (4,605)               2
                                                                                  ---------------- ---------------- ----------------
                                                                                          555,201          293,344          727,019
                                                                                  ---------------- ---------------- ----------------
Net cash provided by financing activities                                                 581,280          300,829          721,055
------------------------------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                                      560,267          388,198          (94,696)
Cash and cash equivalents at beginning of year                                            670,139          281,941          376,637
                                                                                  ---------------- ---------------- ----------------
Cash and cash equivalents at end of year                                              $ 1,230,406       $  670,139       $  281,941
------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information: Cash paid during the year
    for:
        Interest (net of amount capitalized)                                           $  276,817       $  267,758       $  237,568
        Income taxes paid (refunded)                                                        7,454           (2,552)           4,356
        Shares of Saul Centers, Inc. common stock                                           4,806            6,111            4,864
    Cash received during the year from:
        Dividends on shares of Saul Centers, Inc. common stock                              3,014            2,539            1,952
        Distributions from Saul Holdings Limited Partnership                                5,567            5,453            5,453

Supplemental disclosures of noncash activities:
    Rollovers of notes payable - unsecured                                                  5,510            4,195            3,725
    Loans held for sale exchanged for trading securities                                  320,695          430,786          363,257
    Loans receivable transferred to loans held for sale and/or securitization           1,788,831        2,026,478        1,594,262
    Loans made in connection with the sale of real estate                                   7,274            7,769           46,537
    Loans receivable transferred to real estate acquired in settlement of loans             4,938            4,706            5,972
    Loans receivable exchanged for mortgage-backed securities held-to-maturity          1,225,279        1,136,180               --
    Loans held for sale transferred to loans receivable                                        --               --            3,146

------------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

B.F. Saul Real Estate Investment Trust 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, 1998. 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.

ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS

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

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

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

NET INCOME (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 1998, 1997
and 1996, 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, 1997 and 1996 to conform with the
presentation used for the year ended September 30, 1998.

ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED

SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") was issued in June
1997 and establishes accounting standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS 130 also requires an enterprise to classify
items of other comprehensive income by their nature in a financial statement and
to display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS 130 will not have an
impact on the Trust's financial condition or its results of operations.

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), was also issued in June 1997. SFAS 131 establishes
accounting standards for the way business enterprises report information about
operating segments in annual and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 requires
that a business enterprise report financial and descriptive information,
including profit or loss, certain specific revenue and expense items, and
segment assets, about its reportable operating segments. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by management in deciding
how to allocate resources and in assessing performance. SFAS 131 is effective
for financial statements for periods beginning after December 15, 1997. Because
SFAS 131 addresses only disclosure related issues, its adoption will not have an
impact on the Trust's financial condition or its results of operations.
AICPA Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"), was issued during fiscal 1998. SOP 98-5 generally
requires that start-up costs be expensed as incurred. However, certain start-up
costs, including the costs of acquiring or constructing long-lived assets and
getting them ready for their intended use, are not covered by SOP 98-5. SOP 98-5
is effective for financial statements for fiscal years beginning after December
15, 1998. The impact of the adoption of SOP 98-5 on the Trust's financial
condition and its results of operations has not been determined.

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 lesser of their
estimated useful lives or the lives of the related leases using the
straight-line method.

INCOME RECOGNITION

The Real Estate Trust derives room and other revenues from the operations of its
hotel properties. 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, 1998 and 1997 the fair value of Notes payable -
unsecured was $51.6 and $47.9 million, respectively.

C.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - THE BANK

Chevy Chase Bank, F.S.B. is a federally chartered and federally insured stock
savings bank and, as such, is subject to comprehensive regulation, examination
and supervision by the Office of Thrift Supervision ("OTS") and by the Federal
Deposit Insurance Corporation ("FDIC"). The Bank is principally engaged in the
business of attracting deposits from the public and using such deposits,
together with borrowings and other funds, to make loans secured by real estate,
primarily residential mortgage loans, and various types of consumer loans and
commercial 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.

Regulation D pursuant to the Federal Reserve Act requires the Bank to maintain
reserves in the form of cash and deposits at the Federal Reserve Bank. The total
average reserve balances maintained by the Bank, which consisted primarily of
cash, were $146.5, $114.6, and $105.2 million during the years ended September
30, 1998, 1997, and 1996, respectively.

LOANS HELD FOR SALE

The Bank engages in mortgage banking activities. At September 30, 1998 and 1997,
loans held for sale are composed of single-family residential loans and home
improvement and related loans originated or purchased for sale in the secondary
market and are carried at 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 loans expected to be sold
during any future reinvestment period.

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

The Bank classifies its investment and mortgage-backed securities as either
"held-to-maturity," "available-for-sale" or "trading" at the time such
securities are acquired. Investment and mortgage-backed securities classified as
"held-to-maturity" are reported at amortized cost. Investment and
mortgage-backed securities classified as "available-for-sale" are reported at
fair value, with unrealized gains and losses, net of the related tax effect,
reported as a separate component of stockholders' equity. Investment and
mortgage-backed securities classified as "trading" are reported at fair value,
with unrealized gains and losses included in earnings. All investment securities
and mortgage-backed securities are classified as held-to-maturity at September
30, 1998 and 1997. 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.

Net unrealized holding gains, net of the related income tax effect, amounted to
$58,000 as of September 30, 1998 and resulted from the transfer of investment
securities and mortgage-backed securities previously classified as
available-for-sale to held-to-maturity, are reported as a separate component of
stockholders' equity and are being accreted over the remaining lives of the
securities using the level-yield method.

TRADING SECURITIES

As part of its mortgage banking activities, the Bank exchanges loans held for
sale for mortgage-backed securities and then sells the mortgage-backed
securities, which are classified as trading securities, to third party investors
in the month of issuance. Proceeds from sales of trading securities were $320.9,
$430.9 and $363.4 million during the years ended September 30, 1998, 1997 and
1996, respectively. The Bank realized net gains of $1.0, $1.2 and $1.2 million
on the sales of trading securities for the years ended September 30, 1998, 1997
and 1996, respectively. Gains and losses on sales of trading securities are
determined using the specific identification method. There were no
mortgage-backed securities classified as trading securities at September 30,
1998 and 1997.

At September 30, 1998 and 1997, the Bank held automobile receivables-backed
securities with carrying amounts of $11.3 and $7.9 million, respectively, which
were classified as trading securities. These securities were established in
conjunction with two automobile loan securitization transactions and represent
subordinate classes of certificates retained by the Bank. The Bank recognized
net unrealized holding losses on trading securities of $1.3 million at September
30, 1998. There were no unrealized holding gains or losses on these securities
during the year ended September 30, 1997. See Note 16.

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

Prior to the sale of the credit card portfolio on September 30, 1998, credit
card membership fees were deferred and recognized as income on a straight-line
basis over the period the fee entitled the cardholder to use the card, which was
one year. Credit card origination costs were deferred and recognized as a
reduction of income on a straight-line basis over the privilege period which was
generally one year. See Note 8.

IMPAIRED LOANS

A loan is considered impaired when, based on all current information and events,
it is probable that the Bank will be unable to collect all amounts due according
to the contractual terms of the agreement, including all scheduled principal and
interest payments. Loans reviewed by the Bank for impairment include real estate
and commercial loans and loans modified in a troubled debt restructuring. Large
groups of smaller-balance homogeneous loans that have not been modified in a
troubled debt restructuring are collectively evaluated for impairment, which for
the Bank include residential mortgage loans and consumer loans. Impaired loans
are measured based on the present value of expected future cash flows,
discounted at the loan's effective interest rate or, as a practical expedient,
impairment may be measured based on the loan's observable market price, or, if
the loan is collateral-dependent, the fair value of the collateral. When the
measure of the impaired loan is less than the recorded investment in the loan,
the impairment is recorded through a valuation allowance. Loans for which
foreclosure is probable continue to be accounted for as loans. Prior to the sale
of the credit card portfolio on September 30, 1998, certain credit card loans
for which customers had agreed to modified payment terms were also classified as
impaired loans. See Note 8.

Each impaired real estate or commercial loan is evaluated individually to
determine the income recognition policy. Generally, payments received are
applied in accordance with the contractual terms of the note or as a reduction
of principal. Interest income on impaired credit card loans was recognized using
the interest rate of the loan and the accrual method. Interest income continued
to accrue on delinquent credit card loans until such loan was either paid or
charged off.

At September 30, 1998, the Bank had one impaired real estate loan with a book
value of $86,000. At September 30, 1997, the Bank had two impaired real estate
loans with an aggregate book value of $1.0 million before the related allowance
for losses of $545,000. At September 30, 1997, the Bank had impaired credit card
loans with a carrying value of $116.9 million, before the related allowance for
losses of $18.9 million. The average recorded investment in impaired credit card
and real estate loans for the years ended September 30, 1998, 1997 and 1996 was
$113.2, $99.0, and $49.8 million, respectively. The Bank recognized interest
income of $14.4, $13.1, and $7.3 million on its impaired loans for the years
ended September 30, 1998, 1997 and 1996, 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 and past loss
experience.

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

ACCRUED INTEREST RECEIVABLE ON LOANS

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

REAL ESTATE HELD FOR INVESTMENT OR SALE

Real Estate Held for Investment

At September 30, 1998 and 1997, real estate held for investment consists of
developed land owned by one of the Bank's subsidiaries. Real estate held for
investment is carried at the lower of cost or net realizable value. See Note 14.

Real Estate Held for Sale

Real estate held for sale consists of real estate acquired in settlement of
loans ("REO") and is carried at the lower of cost or fair value (less estimated
selling costs). Costs relating to the development and improvement of property,
including interest, are capitalized, whereas costs relating to the holding of
property are expensed. Capitalized interest amounted to $2.0, $2.2 and $3.5
million for the years ended September 30, 1998, 1997 and 1996, 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.
GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is stated net of accumulated amortization and is being amortized using
the straight-line method generally over a period of 25 years. At September 30,
1998 and 1997, goodwill totaled $24.4 and $1.1 million, respectively. On
November 12, 1997, the Bank purchased ASB Capital Management Inc. ("ASB"), one
of the largest SEC-registered investment managers headquartered in the
Washington, D.C. metropolitan area, for $27.2 million in cash. In connection
with the purchase, the Bank recorded $25.3 million of goodwill. The acquisition
was accounted for using the purchase method and the operating results of ASB
have been included in the Trust's Consolidated Statements of Operations since
the date of acquisition.

During fiscal 1998 and 1997, the Bank purchased approximately $53.2 and $137.9
million of home equity loans, respectively. The premium attributable to the
value of the home equity relationships, amounting to $6.5 and $7.7 million at
September 30, 1998 and 1997, respectively, is included in goodwill and other
intangible assets in the Consolidated Balance Sheets. This premium is being
amortized over the estimated term of the underlying relationships. Accumulated
amortization of goodwill and other intangible assets was $43.6 and $37.8 million
at September 30, 1998 and 1997, respectively.

SERVICING ASSETS

Effective January 1, 1997, the Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 125 ("SFAS 125"), "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," which superseded, but
generally retained, the requirements of SFAS No. 122, "Accounting for Mortgage
Servicing Rights" ("SFAS 122"). Both statements require that entities that
acquire servicing assets through either purchase or origination of loans and
sell or securitize those loans with servicing assets retained must allocate the
total cost of the loans to the servicing assets and the loans (without the
servicing assets) based on their relative fair values.

Servicing assets, which are stated net of accumulated amortization, are
amortized in proportion to the remaining net servicing revenues estimated to be
generated by the underlying loans. Amortization of these assets amounted to
$10.8, $9.0 and $7.8 million for the years ended September 30, 1998, 1997 and
1996, respectively. Accumulated amortization was $67.7 and $56.9 million at
September 30, 1998 and 1997, respectively. During fiscal 1998, 1997 and 1996,
the Bank recorded $8.6, $15.8 and $16.1 million respectively, of servicing
assets related to the sale and/or securitization of loans.

The Bank periodically evaluates its servicing assets for impairment based upon
fair value. For purposes of evaluating impairment, the Bank stratifies its
servicing assets taking into consideration relevant risk characteristics
including loan type, note rate and date of acquisition. To the extent the
carrying value of servicing assets exceeds the fair value of such assets, a
valuation allowance is recorded. The aggregate fair value of servicing assets at
September 30, 1998 and 1997 was $35.3 and $46.2 million, respectively.
Activity in the valuation allowance for servicing assets is summarized as
follows.

                                            Year Ended September 30,           
                                 ----------------------------------------------
(In thousands)                        1998            1997            1996     
-------------------------------- --------------  --------------  --------------
Balance at beginning of year     $      1,129    $      3,142    $      --
Additions charged / (reductions)
  credited to loan expenses            12,369          (2,013)          3,142 
                                 --------------  --------------  --------------

Balance at end of year           $     13,498    $      1,129    $      3,142  
                                 ==============  ==============  ==============

During fiscal 1996, the Bank sold $947,000 of rights to service mortgage loans
with principal balances of $59.7 million, that were originated by the Bank in
connection with its mortgage banking activities. There were no sales of rights
to service mortgage loans during fiscal 1998 and 1997.

Servicing fees are included in servicing and securitization income in the
Consolidated Statements of Operations.

INTEREST-ONLY STRIPS

As a result of the adoption of SFAS 125 effective January 1, 1997, the Bank
recognized gains of $33.1 million during fiscal 1997 upon the securitization and
sale of credit card receivables based upon the estimated fair value of the
expected cash flows to be generated by the underlying receivables. Under SFAS
125, the Bank recorded a gain on the securitization and sale of credit card
receivables based on the estimated fair value of assets transferred, retained,
or obtained and liabilities incurred in the sale. The gain recognized at the
time of the sale principally represented the estimated fair value of the
interest-only strips, which represent the present value of finance charges and
other ancillary income received by the trust over the sum of the return paid to
certificateholders, contractual servicing fees, credit losses and other expenses
of the trust. During the revolving period of each transaction, gains were
recorded on the sale of new receivables to the trusts to replenish the
investors' interest in trust receivables. See Note 16.

Prior to January 1, 1997, no gain or loss was recorded on the securitization and
sale of credit card receivables; rather, loan servicing fees were recognized
over the life of the transaction when earned.

Upon the Bank's adoption of SFAS 125, effective January 1, 1997, previously
recognized excess spread assets were reclassified as interest-only strips.
Interest-only strips capitalized in the year ended September 30, 1998 and in the
nine months ended September 30, 1997 amounted to $124.0 and $68.2 million,
respectively, and were related to the securitization and sale of credit card,
home equity, automobile and home loan receivables. See Note 16.
Prior to January 1, 1997, when loans (other than credit card) were sold with the
residual cash flow retained by the Bank, the net present value of such residual
cash flow was recorded as an adjustment to the sales price of the loans.
Estimated future losses were deducted in the computation of such residual cash
flows. Excess spread assets capitalized in the three months ended December 31,
1996 and in fiscal 1996 of $9.5 and $25.7 million, respectively, were the result
of the residual cash flow retained upon the securitization and sale of home
equity credit line, automobile and home loan receivables.

Interest-only strips (excess spread assets prior to January 1, 1997) are
amortized using the effective yield method over the estimated lives of the
underlying loans. Amortization amounted to $99.0, $24.8 and $17.1 million for
the years ended September 30, 1998, 1997 and 1996, respectively, and is included
in servicing and securitization income in the Consolidated Statements of
Operations. The Bank uses certain assumptions to calculate amortization of the
interest-only strips (excess spread assets prior to January 1, 1997), mainly
estimates of prepayment speeds and credit losses. To the extent actual results
differ from the assumptions, additional amortization is recorded.

Effective January 1, 1997, the Bank accounts for its interest-only strips as
trading securities and, accordingly, carries them at fair value. The Bank
estimates the fair value of the interest-only strips on a discounted cashflow
basis using appropriate discount and prepayment rates. Mark-to-market
adjustments, included in servicing and securitization income, amounted to a net
loss of $42.9 million in fiscal 1998 and a net gain of $7.0 million in fiscal
1997. Certain assumptions inherent in the determination of the amortization and
fair value of interest-only strips are influenced by factors outside the Bank's
control, and actual performance could materially differ from such assumptions.

DERIVATIVE FINANCIAL INSTRUMENTS

The Bank uses various strategies to minimize interest-rate risk, including
interest-rate cap agreements and forward sale or purchase commitments. 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, 1998
and 1997, unamortized premiums amounted to $0 and $3.1 million, respectively.
Gains and losses on forward sale or purchase commitments are deferred and
recorded as a component of the gain on sales of loans at the time the forward
sale or purchase commitment matures. See Note 28. The Bank does not hold any
derivative financial instruments for trading purposes.

ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED

SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998 and establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. The impact of SFAS 133
on the Bank's financial statements has not yet been determined.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise,
an amendment of FASB Statement No. 65" ("SFAS 134"), was issued in October 1998.
SFAS 134 amends SFAS 65 "Accounting for Certain Mortgage Banking Activities" to
require that after the securitization of mortgage loans held for sale, an entity
engaged in mortgage banking activities classify the resulting mortgage-backed
securities or other retained interests based on its ability and intent to sell
or hold those investments. SFAS 134 conforms the subsequent accounting for
securities retained after the securitization of mortgage loans by a mortgage
banking enterprise with the subsequent accounting for securities retained after
the securitization of other types of assets by a nonmortgage banking enterprise.
SFAS 134 is effective for the first fiscal quarter beginning after December 15,
1998.

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. This condition is currently the case and is
expected to continue to be so 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 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 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 and
dividend payments from the Bank.

The Real Estate Trust's ability to meet its liquidity needs, including debt
service payments in fiscal 1999 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 its written agreement with the OTS
should enhance prospects for the Real Estate Trust to receive tax sharing
payments and dividends from the Bank. During fiscal 1998, 1997 and 1996, the
Bank made tax sharing payments totaling $5.6, $9.8 and $25.0 million,
respectively, to the Real Estate Trust. During fiscal 1998, 1997 and 1996, the
Bank made dividend payments totaling $5.2, $7.2 and $6.8 million, respectively,
to the Real Estate Trust.
In recent years, the operations of the Trust have generated net operating losses
while the Bank has reported net income. 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 the refund which the Bank would otherwise have
been able to claim if it were not being included in the consolidated federal
income tax return of the group.

Through September 30, 1998, the Real Estate Trust has purchased either in the
open market or through dividend reinvestment 2,091,176 shares of common stock of
Saul Centers, Inc. (representing 16.4% of such company's outstanding common
stock). As of September 30, 1998, the market value of these unpledged shares was
approximately $35.5 million.

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
"1994 Notes"). See Note 4. In March 1998, the Real Estate Trust issued $200.0
million aggregate principal amount of 9 3/4% Senior Secured Notes due 2008 (the
"1998 Notes"). After providing for the retirement of the 1994 Notes, including a
prepayment premium of $10.0 million and debt issuance costs of approximately
$5.9 million, the Real Estate Trust realized approximately $9.1 million in net
proceeds. In addition, the Real Estate Trust received about $13.2 million in
cash which had been held as additional collateral by the indenture agent under
the 1994 Notes. The 1998 Notes are secured by a first priority perfected
security interest in 8,000 shares (80%) of the issued and outstanding common
stock of the Bank, which constitute all of the Bank common stock held by the
Real Estate Trust. The 1998 Notes are nonrecourse obligations of the Real Estate
Trust.

The Real Estate Trust is currently selling Unsecured Notes, with a maturity
ranging from one to ten years, primarily to provide funds to repay maturing
Unsecured Notes. 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.

In fiscal 1995, the Real Estate Trust established a $15.0 million secured
revolving credit line with an unrelated bank. This facility was for an initial
two-year period subject to extension for one or more additional one-year terms.
In fiscal 1997, the facility was increased to $20.0 million and was renewed for
an additional two-year period. Interest is computed by reference to a floating
rate index. At September 30, 1998, there were no borrowings under the facility
and unrestricted availability was $8.4 million.

In fiscal 1996, the Real Estate Trust established an $8.0 million secured
revolving credit line with an unrelated bank. This facility was for a one-year
term, after which any outstanding loan amount would amortize over a two-year
period. During fiscal 1997, the line of credit was increased to $10.0 million
and was extended for a year. During fiscal 1998, the line of credit was
increased to $20.0 million and was extended for an additional year. Interest is
computed by reference to a floating rate index. At September 30, 1998, there
were no borrowings under the facility and unrestricted availability was $4.3
million.
During fiscal 1997, the Real Estate Trust refinanced two hotel and three office
properties with five-year floating rate debt. After payment of all financing
costs, the Real Estate Trust received net proceeds of approximately $11.0
million.

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
shares in cash distributions from operations and from capital transactions
involving the sale of properties. The partnership agreement of Saul Holdings
Partnership provides for quarterly cash distributions to the partners out of net
cash flow. In fiscal 1998, the Real Estate Trust received total cash
distributions of $5.5 million from Saul Holdings Partnership. Beginning in April
1998 the Real Estate Trust has reinvested its quarterly distributions and
obtained additional partnership units in Saul Holdings.

During the third quarter of fiscal 1997, the Real Estate Trust commenced
development of a 46,000 square foot single-story office research and development
building on 3 acres of its Avenel Business Park land parcel located in
Gaithersburg, Maryland ("Avenel Phase IV"). The Real Estate Trust financed the
project with a construction/permanent loan. The project was substantially
completed in January 1998 and was offered to Saul Holdings in accordance with
the Real Estate Trust's obligations under the Right of First Refusal Agreement.
An independent appraisal of the project indicated a market value of $5,600,000.
The fully funded balance of the loan was $3,657,000, resulting in an equity
position of $1,943,000 for the Real Estate Trust. The Board of Directors of Saul
Centers, Inc., general partner of Saul Holdings, agreed to purchase the Real
Estate Trust's equity position through the issuance of additional limited
partnership units in Saul Holdings. Accordingly, as of April 1, 1998, Saul
Holdings issued 105,922 new limited partnership units and a corresponding
limited partnership interest to the Real Estate Trust in exchange for the
ownership of Avenel Phase IV and the assumption of the loan.

In September 1997, the Real Estate Trust commenced development of a 95-unit
extended stay hotel on a 3 acre parcel located adjacent to its Hampton Inn and
Holiday Inn near Washington Dulles International Airport in Sterling, Virginia.
The new hotel was franchised as a TownePlace Suites by Marriott and opened for
business in August 1998. Development costs were $5.8 million and were largely
financed by a construction loan of $4.5 million. The loan is for two years with
two extension options for two year and one year periods, respectively. The loan
covered all costs except for the land, fees to related parties, taxes and
insurance.

On December 10, 1997, the Real Estate Trust purchased a 308-room Holiday Inn
located in Arlington, Virginia, near Washington National Airport and the Real
Estate Trust's Howard Johnson Hotel. The purchase price was $25.8 million. Also
on December 10, 1997, the Real Estate Trust refinanced five other hotels in its
portfolio. Funds for the two transactions were provided by a lender in the
amount of $52.5 million. The new loans have a 15 year term, a fixed interest
rate of 7.57%, and amortization based on a 25 year schedule.

During the quarter ended June 30, 1998, the Real Estate Trust commenced
development of four new extended stay hotels:
TownePlace Suites by Marriott containing 91 units located on a 2
                  acre site owned by the Trust in Avenel Business Park in
                  Gaithersburg, Maryland. Opening is scheduled for mid-April
                  1999.

            TownePlace Suites by Marriott containing 91 units located on part of
                  a 9 acre site owned by the Real Estate Trust in the Arvida
                  Park of Commerce in Boca Raton, Florida. Opening is scheduled
                  for mid-July 1999.

            SpringHill Suites by Marriott containing 146 units located on part
                  of a 9 acre site owned by the Real Estate Trust in the Arvida
                  Park of Commerce in Boca Raton, Florida. Opening is scheduled
                  for mid-July 1999.

            TownePlace Suites by Marriott containing 95 units located on a 3 
                  acre site owned by the Real Estate Trust in Ft. Lauderdale
                  Commerce Center, Ft. Lauderdale, Florida. Opening is scheduled
                  for mid-August 1999.

The projected costs for the four hotels aggregate $32 million and will largely
be funded by the proceeds of a three year bank loan in the amount of $25.9
million. The loan has two one-year renewal options.

During the quarter ended June 30, 1998, the Real Estate Trust also began
development of a 78,000 square foot single-story office/research and
development building located on a 7 acre site owned by the Real Estate Trust in
Dulles North Corporate Park, Sterling, Virginia. This project is adjacent to the
Real Estate Trust's Dulles North office building and near three of the Real
Estate Trust's hotel properties. The development cost is $6.6 million with bank
financing of $6.5 million for a five-year term and a two-year extension option.
Completion is expected in early fiscal 1999. A lease for approximately 25% of
the space has been signed.

During the quarter ended September 30, 1998, the Real Estate Trust began the
conversion of its two hotels located in Crystal City, Arlington, Virginia. The
present 308-room Crystal City Holiday Inn will be converted into a Holiday Inn
Crown Plaza, while the present 279-room Howard Johnsons will be converted into a
Holiday Inn. The new brands are expected to position the hotels to generate
higher room rates and revenues along with improved occupancy levels consistent
with the overall market. The renovations are largely an acceleration of normal
capital improvement work as well as some exterior and interior signage, new
marketing materials and a facade upgrade at the Howard Johnson hotel. A
restaurant, which had been operated by an unaffiliated company, will also be
renovated. The incremental costs for the two conversions are expected to total
$6.3 million, which will be funded by the Real Estate Trust in part from its
internal resources and in part from its lines of credit.

The Real Estate Trust believes that the capital improvement costs for its
income-producing properties will be in the range of $6.5 to $8.0 million per
year for the next several fiscal years.
2.  SAUL HOLDINGS LIMITED PARTNERSHIP - REAL ESTATE TRUST

In fiscal 1993, the Real Estate Trust entered into a series of transactions
undertaken in connection with an initial public offering of common stock of a
newly organized corporation, Saul Centers, Inc. ("Saul Centers"). The Real
Estate Trust transferred its 22 shopping centers and one of its office
properties together with the debt associated with such properties to a newly
formed partnership, Saul Holdings Limited Partnership ("Saul Holdings"), in
which the Real Estate Trust owns (directly or through one of its wholly owned
subsidiaries) a 21.7% interest, other entities affiliated with the Real Estate
Trust own a 5.3% 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. As of September 30, 1998, the Real Estate
Trust had pledged 3.6% 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, 1998, the maximum potential obligations of the Real Estate
Trust and its subsidiaries under this agreement totaled approximately $115.5
million.

The fair market value of each of the properties contributed to the Partnerships
by the Real Estate Trust at the date of transfer (the FMV of each such property)
exceeded the tax basis of such property (with respect to each property, such
excess is referred to as the FMV-Tax Difference). In the event Saul Centers, as
general partner of the Partnerships, causes the Partnerships to dispose of one
or more of such properties, a disproportionately large share of the total gain
for federal income tax purposes would be allocated to the Real Estate Trust or
its subsidiaries. In general, if the gain recognized by the Partnerships on a
property disposition is less than or equal to the FMV-Tax Difference for such
property (as previously reduced by the amounts of special tax allocations of
depreciation deductions to the partners), a gain equal to the FMV-Tax Difference
(as adjusted) will be allocated to the Real Estate Trust. To the extent the gain
recognized by the Partnerships on the property disposition exceeds the FMV-Tax
Difference (as adjusted), such excess generally will be allocated among all the
partners in Saul Holdings based on their relative percentage interests. In
general, the amount of gain allocated to the Real Estate Trust in the event of
such a property disposition is likely to exceed, perhaps substantially, the
amount of cash, if any, distributable to the Real Estate Trust as a result of
the property disposition. In addition, future reductions in the level of the
Partnerships' debt, or any release of the guarantees of such debt by the Real
Estate Trust, could cause the Real Estate Trust to have taxable constructive
distributions without the receipt of any corresponding amounts of cash.
Currently, management does not intend to seek a release of or a reduction in the
guarantees or to convert its limited partner units in Saul Holdings into shares
of Saul Centers common stock.
At the date of transfer of the Real Estate Trust properties to Saul Holdings,
liabilities exceeded assets transferred by approximately $104.3 million on an
historical cost basis. The assets and liabilities were recorded by Saul Holdings
and Saul Centers at their historical cost rather than market value because of
affiliated ownership and common management and because the assets and
liabilities were the subject of the business combination between Saul Centers
and Saul Holdings, newly formed entities with no prior operations.

Immediately subsequent to the business combination and initial public offering
of common stock by Saul Centers, Saul Centers had total owners' equity of
approximately $16.4 million of which approximately $3.5 million related to the
Real Estate Trust's original 21.5% ownership interest. Recognition by the Real
Estate Trust of the change in its investment in the properties of approximately
$107.8 million has been deferred due to the Real Estate Trust's guarantee of
$115.5 million under the Saul Centers reimbursement agreement. The deferred gain
of $107.8 million is included in "Deferred gains - real estate" in the financial
statements. The gain will be recognized in future periods to the extent the Real
Estate Trust's obligations are terminated under the reimbursement agreement.

The management of Saul Centers has adopted a strategy of maintaining a ratio of
total debt to total asset value, as estimated by management, of fifty percent or
less. The management of Saul Centers has concluded at September 30, 1998 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, 1998, the Real Estate
Trust's investment in the consolidated entities of Saul Centers, which is
accounted for under the equity method, consisted of the following.

     (In thousands)
     -------------------------------------------------------------------
     Saul Holdings:
       Acquisition of partnership units                         $ 2,892
       Distributions in excess of allocated net income          (10,190)

     Saul Centers:
       Acquisition of common shares                              33,836
       Distributions in excess of allocated net income           (6,295)
                                                           -------------

     Total                                                     $ 20,243
                                                           =============

The $20.2 million balance is included in "Other assets" in the financial
statements.

As of September 30, 1998, the Real Estate Trust, through its partnership
interest in Saul Holdings and its ownership of common shares of Saul Centers,
effectively owns 33.7% of the consolidated entities of Saul Centers. Some of
these shares and/or units have been deposited as collateral for the Trust's
revolving lines of credit. See Note 4.

The unaudited Condensed Consolidated Balance Sheet at September 30, 1998 and
1997, and the unaudited Condensed Consolidated Statements of Operations for the
twelve-month periods ended September 30, 1998, 1997 and 1996 of Saul Centers
follow.
Saul Centers, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
                                                                                                 September 30,
                                                                                -------------------------------------------------
(In thousands)                                                                           1998                     1997
                                                                                ------------------------ ------------------------
Assets
    Real estate investments                                                                   $ 342,865                $ 346,253
    Accumulated depreciation                                                                   (100,320)                (102,186)
    Other assets                                                                                 26,133                   25,182
                                                                                ------------------------ ------------------------
Total assets                                                                                  $ 268,678                $ 269,249
                                                                                ======================== ========================

Liabilities and stockholders' equity (deficit)
    Notes payable                                                                             $ 288,812                $ 283,370
    Other liabilities                                                                            17,321                   16,184
                                                                                ------------------------ ------------------------
    Total liabilities                                                                           306,133                  299,554
    Total stockholders' equity (deficit)                                                        (37,455)                 (30,305)
                                                                                ------------------------ ------------------------
Total liabilities and stockholders' equity (deficit)                                          $ 268,678                $ 269,249
                                                                                ======================== ========================
Saul Centers, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)                                                           For the Twelve Months Ended September 30
                                                      ---------------------------------------------------------------------------
(In thousands)                                                 1998                      1997                     1996
                                                      ------------------------  ------------------------ ------------------------
Revenue
    Base rent                                                         $54,724                   $51,157                  $49,646
    Other revenue                                                      15,145                    15,613                   13,727
                                                      ------------------------  ------------------------ ------------------------
Total revenue                                                          69,869                    66,770                   63,373
                                                      ------------------------  ------------------------ ------------------------

Expenses
    Operating expenses                                                 14,423                    14,624                   14,407
    Interest expense                                                   22,669                    19,404                   18,200
    Amortization of deferred debt expense                                 416                     2,286                    2,921
    Depreciation and amortization                                      11,299                    10,839                   10,978
    General and administrative                                          3,492                     3,250                    3,071
                                                      ------------------------  ------------------------ ------------------------
Total expenses                                                         52,299                    50,403                   49,577
                                                      ------------------------  ------------------------ ------------------------

Operating income                                                       17,570                    16,367                   13,796
Non-operating item
    Sales of interest rate protection
        agreements                                                    (4,392)                     (972)                      --
Net income before extraordinary item,
        cumulative effect of change in
        accounting method and minority
        interests                                                      13,178                    15,395                   13,796
Cumulative effect of change in
        accounting method                                                (771)                      --                       --
Extraordinary item - loss on early
        extinguishment of debt                                         (2,878)                     (956)                    (998)
                                                      ------------------------  ------------------------ ------------------------
Net income before minority interest                                     9,529                    14,439                   12,798
Minority interest                                                      (7,080)                   (6,854)                  (6,852)
                                                      ------------------------  ------------------------ ------------------------
Net income                                                            $ 2,449                   $ 7,585                  $ 5,946
                                                      ========================  ======================== ========================
3.  INVESTMENT PROPERTIES - REAL ESTATE TRUST

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

(Dollars in                                            Buildings and   Leasehold              Related
  thousands)                         No.      Land      Improvements   Interests   Total        Debt
----------------------------------- ------  --------- --------------- ---------- ----------  ----------
September 30, 1998
Income-producing properties:
 Hotels                                12    $15,291        $150,514      $  --   $165,805    $111,917
 Office & industrial                    7      4,555         105,702         --    110,257      77,103
 Other                                  5      3,075             814         --      3,889          --
                                    ------  --------- --------------- ---------- ----------  ----------
                                       24    $22,921        $257,030      $  --   $279,951    $189,020
                                    ======  ========= =============== ========== ==========  ==========

Land Parcels                           10    $40,110            $ --      $  --   $ 40,110    $ 10,513
                                    ======  ========= =============== ========== ==========  ==========

September 30, 1997
Income-producing properties:
 Hotels                                10    $10,843        $117,714      $  --   $128,557    $ 82,914
 Office & industrial                    7      4,469         105,159         --    109,628      79,597
 Other                                  6      3,075           1,041        149      4,265          --
                                    ------  --------- --------------- ---------- ----------  ----------
                                       23    $18,387        $223,914     $  149   $242,450    $162,511
                                    ======  ========= =============== ========== ==========  ==========

Land Parcels                           10    $42,160            $ --      $  --   $ 42,160    $ 19,201
                                    ======  ========= =============== ========== ==========  ==========
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 2012 and accrue interest at annual rates from
7.6% to 10.0%. Certain mortgages contain a number of restrictions, including
cross default provisions.

Notes payable - unsecured includes notes which have been sold by the Real Estate
Trust directly to investors at varying interest rates with maturities of one to
ten years. These notes do not contain any provisions for conversion, sinking
fund or amortization, but are subject to a provision permitting the Real Estate
Trust to call them prior to maturity. The weighted average interest rates at
September 30, 1998 and 1997 were 10.3% and 10.4%, respectively. During fiscal
1998 and 1997, the Real Estate Trust sold notes amounting to approximately $11.3
and $10.0 million, respectively.
In March 1994, the Real Estate Trust issued $175.0 million aggregate principal
amount of the 1994 Notes. The 1994 Notes were general obligations of the Real
Estate Trust ranking pari passu with all other unsubordinated obligations of the
Trust and were 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 1994
Notes to satisfy one of the initial collateral requirements with respect to such
securities. This collateral requirement, which remained in effect while the 1994
Notes were outstanding, was recalculated each calendar quarter based on the
estimated amount of one year's interest payments on then outstanding 1994 Notes
and Unsecured Notes and could have been satisfied through deposits of cash or
marketable securities. 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. As of September 30, 1997, the Real
Estate Trust was required to maintain deposits of $25.2 million and had
deposited 1,535,104 shares of common stock of Saul Centers (See Note 1) with the
Trustee for the 1994 Notes to satisfy in part the collateral requirements for
those deposits. The common stock of Saul Centers is reflected in other assets in
the accompanying balance sheets.

In March 1998, the Real Estate Trust issued $200.0 million aggregate principal
amount of the 1998 Notes. After providing for the retirement of the 1994 Notes,
including a prepayment premium of $10.0 million and debt issuance costs of
approximately $5.9 million, the Real Estate Trust realized approximately $9.1
million in net proceeds. In addition, the Real Estate Trust received about $13.2
million in cash which had been held as additional collateral by the indenture
agent under the 1994 Notes. The 1998 Notes are secured by a first priority
perfected security interest in 8,000 shares (80%) of the issued and outstanding
common stock of the Bank, which constitute all of the Bank common stock held by
the Real Estate Trust. The 1998 Notes are nonrecourse obligations of the Real
Estate Trust.

In fiscal 1995, the Real Estate Trust established a $15.0 million secured
revolving credit line with an unrelated bank. This facility was for an initial
two-year period subject to extension for one or more additional one-year terms.
In fiscal 1997, the facility was increased to $20.0 million and was renewed for
an additional two-year period. Interest is computed by reference to a floating
rate index. At September 30, 1998, there were no borrowings under the facility
and unrestricted availability was $8.4 million.

In fiscal 1996, the Real Estate Trust established an $8.0 million secured
revolving credit line with an unrelated bank. This facility was for a one-year
term, after which any outstanding loan amount would amortize over a two-year
period. During fiscal 1997, the line of credit was increased to $10.0 million
and was extended for a year. During fiscal 1998, the line of credit was
increased to $20.0 million and was extended for an additional year. Interest is
computed by reference to a floating rate index. At September 30, 1998, there
were no borrowings under the facility and unrestricted availability was $4.3
million.
The maturity schedule for the Real Estate Trust's outstanding debt at September
30, 1998 for the fiscal years commencing October 1, 1998 is set forth in the
following table.

                             Debt Maturity Schedule
                                 (In thousands)
         --------------------------------------------------------------
                                    Notes       Notes
             Fiscal     Mortgage  Payable --  Payable --
              Year       Notes     Secured    Unsecured        Total
         ------------- --------- ----------- ----------- --------------
              1999      $10,055       $  --    $ 16,149     $  26,204
              2000       10,193          --       8,893        19,086
              2001       12,618          --       5,916        18,534
              2002       14,367          --       5,284        19,651
              2003       12,663          --       9,046        21,709
           Thereafter   138,978     200,000       5,047       344,025
                       --------- ----------- ----------- --------------
             Total     $198,874    $200,000    $ 50,335     $ 449,209
         --------------------------------------------------------------
Of the $198.9 million of mortgage debt outstanding at September 30, 1998, $169.8
million was nonrecourse to the Real Estate Trust.

5.  LONG-TERM LEASE OBLIGATIONS - REAL ESTATE TRUST

The Real Estate Trust has no minimum future rental commitments. The Real Estate
Trust had one long-term lease which terminated in 1998. The Real Estate Trust
paid minimum ground rent expense of $69,000, $101,000 and $101,000 in fiscal
1998, 1997 and 1996, respectively.

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 1998, 1997, and
1996 amounted to $21.5, $19.7 and $16.8 million, respectively. Future minimum
rentals as of September 30, 1998 under noncancelable leases are as follows:

            Fiscal Year                                   (In thousands)
            ------------------------------------------------------------
                 1999                                          $ 20,919
                 2000                                            17,767
                 2001                                            13,971
                 2002                                             9,258
                 2003                                             6,315
              Thereafter                                          7,930
                                                             -----------
                Total                                          $ 76,160
            ------------------------------------------------------------
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 $301,000 during the period
October 1995 through March 1996, $306,000 during the period April 1996 through
September 1996, $311,000 during the period October 1996 through September 1997,
and, $317,000 during the period October 1997 through September 1998. The
advisory contract has been extended until September 30, 1999, 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 $5.2, $5.1 and $4.8 million in fiscal 1998,
1997 and 1996, respectively.

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

The Real Estate Trust pays the Advisor fees equal to 1% of the principal amount
of the unsecured notes as they are issued to offset its costs of administering
the program. These payments amounted to $113,000, $102,000 and $74,000 in fiscal
1998, 1997 and 1996, 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 $157,000,
$158,000 and $152,000 in fiscal 1998, 1997 and 1996, respectively.

In April 1994 the Real Estate Trust made an unsecured loan to the Saul Company
of $15.0 million bearing interest at 1/2 percent over prime and due on demand.
In fiscal 1995 the loan balance was reduced to $12.7 million. In fiscal 1996 the
Real Estate Trust made new loans aggregating $3.5 million to the Saul Company.
During fiscal 1997 a curtail of $750,000 was paid by the Saul Company. At
September 30, 1997 the total due the Real Estate Trust was $15.4 million. In
fiscal 1998 the loan balance was reduced to $15.3 million. Interest accrued on
these loans amounted to $1.3, $1.4 and $1.4 million during fiscal 1998, 1997 and
1996, respectively.

REMUNERATION OF TRUSTEES AND OFFICERS

For fiscal years 1998, 1997, and 1996, the Real Estate Trust paid the Trustees
$94,000, $89,000 and $79,000, respectively, for their services. No compensation
was paid to the officers of the Real Estate Trust for acting as such; however,
one Trustee was paid by the Bank for his services as Chairman and Chief
Executive Officer of the Bank, and four received payments for their services as
directors of the Bank. Four of the Trustees and all of the officers of the Real
Estate Trust receive compensation from Saul Co. as directors and/or officers.

LEGAL SERVICES

The law firm in which one of the Trustees is a partner received $0.8, $0.3 and
$0.1 million, during fiscal 1998, 1997, and 1996, respectively, for legal
services to the Real Estate Trust and its wholly-owned subsidiaries.

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 1998, 1997 and 1996 were $2.0,
$3.0 and $2.7 million, respectively. See Note 2.
OTHER TRANSACTIONS

The Real Estate Trust leases space to the Bank and Franklin at two of its
income-producing properties. Minimum rents and recoveries paid by these
affiliates amounted to approximately $251,000, $239,000 and $143,000, in fiscal
1998, 1997 and 1996, respectively.

8.  DISPOSITION OF ASSETS - THE BANK

Pursuant to the terms of a purchase agreement, dated as of September 2, 1998 and
as amended on September 30, 1998, by and between the Bank and CCB Holding
Corporation (a wholly-owned subsidiary of the Bank) ("CCBH"), and First USA
Bank, NA, ("FUSA"), the Bank and CCBH sold their credit card portfolio and the
Bank sold its credit card operations to FUSA. This transaction was consummated
on September 30, 1998. The credit card portfolio purchased by FUSA included
approximately $4.8 billion of managed credit card loans and 3.1 million Visa and
MasterCard credit card accounts. The Bank recognized a net gain on this sale of
$288.3 million, which is included in gain on sale of loans, net in the
Consolidated Statements of Operations.

All significant assets and liabilities used in or related directly to the credit
card business, including those associated with credit card securitization
activities, were sold to or assumed by FUSA, with the exception of the Bank's
operations center which housed the majority of credit card operations (other
than origination activities). Concurrently with the transaction, the Bank and
FUSA entered into a lease agreement for that facility.

These financial statements include the results of operations of the credit card
business for the entire fiscal year, as well as the gain on sale, which occurred
on the last day of the Bank's fiscal year.

9.  LOANS HELD FOR SALE - THE BANK

Loans held for sale are composed of the following:

                                                           September 30,        
                                                   ----------------------------
(In thousands)                                        1998              1997    
------------------------------------------         ----------        ----------
     Single-family residential                     $  49,502         $ 102,749
     Home improvement and related loans                6,785               --  
                                                   ----------        ----------
     Total                                         $  56,287         $ 102,749 
                                                   ==========        ==========

10.  LOANS HELD FOR SECURITIZATION AND SALE - THE BANK

Loans held for securitization and sale are composed of the following:

                                                           September 30,        
                                                   ----------------------------
(In thousands)                                        1998              1997    
------------------------------------------         ----------       -----------
     Credit card                                   $     --         $   90,000
     Automobile                                      125,000            80,000
     Home equity                                         --             50,000  
                                                   ----------       -----------
     Total                                         $ 125,000        $  220,000 
                                                   ==========       ===========
11.  INVESTMENT SECURITIES - THE BANK

At September 30, 1998 and 1997, all investment securities are classified as
held-to-maturity. Gross unrealized holding gains and losses on the Bank's
investment securities at September 30, 1998 and 1997 are as follows:

                                        Unrealized  Unrealized  Aggregate
                             Amortized   Holding     Holding       Fair
(In thousands)                  Cost      Gains       Losses      Value   
---------------------------- --------- ----------- ----------- ----------
September 30, 1998 
U.S. Government securities:
   Maturing after one year,
     but within five years   $  43,999 $       529 $     --    $   44,528
                             ========= =========== =========== ==========

September 30, 1997 
U.S. Government securities:
   Maturing within one year  $   4,998 $        14 $     --    $    5,012
                             ========= =========== =========== ==========

There were no sales of investment securities during the years ended September
30, 1998, 1997 and 1996.

12.  MORTGAGE-BACKED SECURITIES - THE BANK

At September 30, 1998 and 1997, 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, 1998 and 1997 are as follows:
                                          Gross       Gross
                                        Unrealized  Unrealized  Aggregate
                             Amortized   Holding     Holding       Fair
(In thousands)                  Cost      Gains       Losses      Value   
--------------------------- ---------- ----------- ----------- ----------
September 30, 1998 
   FNMA                     $  471,617 $     3,114 $   (1,927) $  472,804
   FHLMC                       408,274       1,558       (982)    408,850
   Private label, AAA-rated  1,117,017         --     (12,797)  1,104,220
   Private label, AA-rated      28,909          51        (15)     28,945
                            ---------- ----------- ----------- ----------
   Total                    $2,025,817 $     4,723 $  (15,721) $2,014,819
                            ========== =========== =========== ==========

                                          Gross       Gross
                                        Unrealized  Unrealized  Aggregate
                             Amortized   Holding     Holding       Fair
(In thousands)                  Cost      Gains       Losses      Value   
--------------------------- ---------- ----------- ----------- ----------
September 30, 1997
   FNMA                     $  333,563 $     1,425 $   (1,948) $  333,040
   FHLMC                       856,522       6,480     (2,835)    860,167
   Private label, AAA-rated    734,632         --      (4,828)    729,804
   Private label, AA-rated      60,990         666        --       61,656
                            ---------- ----------- ----------- ----------
   Total                    $1,985,707 $     8,571 $   (9,611) $1,984,667
                            ========== =========== =========== ==========
There were no sales of mortgage-backed securities from the held-to-maturity
portfolio during the years ended September 30, 1998, 1997 and 1996. See Summary
of Significant Accounting Policies - The Bank - "Trading Securities."

Accrued interest receivable on mortgage-backed securities totaled $12.2 and
$11.9 million at September 30, 1998 and 1997, respectively, and is included in
other assets in the Consolidated Balance Sheets.

At September 30, 1998, certain mortgage-backed securities were pledged as
collateral for Federal Home Loan Bank of Atlanta advances, other short-term
borrowings and other recourse arrangements. See Notes 20, 21 and 28. Other
mortgage-backed securities with a book value of $20.9 million were pledged as
collateral primarily for credit and debit card settlement obligations.

13.  LOANS RECEIVABLE - THE BANK

Loans receivable is composed of the following:

                                                      September 30,           
                                             --------------------------------
(In thousands)                                    1998              1997     
-----------------------------------------    --------------    --------------
Single-family residential                    $   1,772,784     $     747,070
Home equity                                        135,122            44,088
Real estate construction and ground                209,247           106,813
Commercial real estate and multifamily              75,877            53,816
Commercial                                         279,416           152,483
Credit card                                            --            987,149
Automobile                                         232,826           149,868
Home improvement and related loans                  60,570            55,453
Overdraft lines of credit and
   other consumer                                   33,484            36,029  
                                             --------------    ---------------
                                                 2,799,326         2,332,769  

Less:
 Undisbursed portion of loans                      207,921           106,217
 Unearned discounts and net
    deferred loan origination costs                 (2,709)           (2,026)
 Allowance for losses on loans                      60,157           105,679  
                                             --------------    ---------------
                                                   265,369           209,870  
                                             --------------    ---------------
   Total                                     $   2,533,957     $   2,122,899  
                                             ==============    ===============

The Bank serviced loans owned by others amounting to $5,681.2 and $9,731.8
million at September 30, 1998 and 1997, respectively.

Accrued interest receivable on loans totaled $15.2 and $19.0 million at
September 30, 1998 and 1997, respectively, and is included in other assets in
the Consolidated Balance Sheets.
14.  REAL ESTATE HELD FOR INVESTMENT OR SALE - THE BANK

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

                                                         September 30,          
                                               --------------------------------
(In thousands)                                      1998              1997      
---------------------------------------------- --------------    --------------

Real estate held for investment                $       3,819     $       3,819
Real estate held for sale                            218,972           231,407  
                                               --------------    --------------
     Sub-total                                       222,791           235,226  
                                               --------------    --------------
Less:
 Allowance for losses on real estate held
    for investment                                       202               198
 Allowance for losses on real estate held
    for sale                                         153,564           140,738  
                                               --------------    --------------
                                                     153,766           140,936  
                                               --------------    --------------
Total real estate held for investment or sale  $      69,025     $      94,290  
                                               ==============    ==============

Loss on real estate held for investment or sale is composed of the following:

                                                 September 30,                 
                                ----------------------------------------------
(In thousands)                       1998            1997            1996      
------------------------------  --------------  --------------  --------------
Provision for losses            $     (18,860)  $     (19,623)  $     (26,341)
Net loss from operating
    properties                           (288)           (221)           (350)
Net gain on sales                       2,609           1,156           2,278  
                                --------------  --------------  --------------
 Total                          $     (16,539)  $     (18,688)  $     (24,413)
                                ==============  ==============  ==============
15.  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:
                                                                   Real Estate
                                                                    Held for
                                                   Loans           Investment
(In thousands)                                   Receivable          or Sale   
------------------------------------------------ ----------       -------------
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
  Provision for losses                             125,115            19,623
  Increase due to acquisition of loans                 118               --
  Charge-offs                                     (126,506)           (5,397)
  Recoveries                                        11,429               --   
                                                 ----------       ------------
Balance, September 30, 1997                        105,679           140,936
  Provision for losses                             150,829            18,860
  Reduction due to sale of credit card portfolio   (87,609)              --
  Charge-offs                                     (122,652)           (6,030)
  Recoveries                                        13,910               --   
                                                 ----------       ------------
Balance, September 30, 1998                      $  60,157        $  153,766  
                                                 ==========       ============

The allowances for losses at September 30, 1998 are based on management's
estimates of the amount of allowances required to reflect the losses incurred 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.

16.  ASSET-BACKED TRANSACTIONS - THE BANK

The Bank periodically sells various receivables through asset-backed
securitizations, in which receivables are transferred to trusts, and
certificates are sold to investors.

The Bank sold credit card receivables and received gross proceeds of $1,000.5,
$1,084.5 and $919.0 million during the years ended September 30, 1998, 1997 and
1996, respectively. The Bank recognized gains of $83.4 million on credit card
securitization transactions during fiscal 1998, including gains on sales of new
receivables into existing trusts. During fiscal 1997, the Bank recognized gains
of $33.1 million on credit card securitization transactions, including sales of
new receivables into existing trusts. No gains or losses were recorded on credit
card securitization transactions during fiscal 1996. See Summary of Significant
Accounting Policies - The Bank. At September 30, 1997, outstanding trust
certificate balances related to these and previous securitizations were $4,015.2
million and the related receivable balances contained in the trusts were
$4,659.7 million. On September 30, 1998, the Bank sold its credit card portfolio
and related operations, including its rights to the excess cash flows generated
from such credit card securitizations. See Note 8.
The Bank sold amounts on deposit in certain spread accounts associated with
certain outstanding credit card securitizations and received gross proceeds of
$36.0, $144.2 and $42.1 million during fiscal 1998, 1997 and 1996, respectively.
Losses of $1.8 and $7.2 million were recognized for the years ended September
30, 1998 and 1997, respectively, and are included in servicing and
securitization income in the Consolidated Statements of Operations. No gains or
losses were recorded for the year ended September 30, 1996. Outstanding trust
certificate balances related to the securitizations were $225.9 million at
September 30, 1997. On September 30, 1998, the Bank sold its credit card
portfolio and related operations, including its obligations associated with such
spread account securitizations. See Note 8.

The Bank sold automobile loan receivables and received gross proceeds of $534.7,
$938.9 and $475.3 million during the years ended September 30, 1998, 1997 and
1996, respectively. Gains recognized on these transactions were $23.1, $26.9 and
$7.3 million, respectively, for the years ended September 30, 1998, 1997 and
1996. The outstanding trust certificate balances and the related receivable
balances contained in the trusts were $1,055.7 million at September 30, 1998,
$12.6 million of which represents subordinate classes of certificates retained
by the Bank. The outstanding trust certificate balances and the related
receivable balances contained in the trusts were $1,083.0 million at September
30, 1997, $7.9 million of which represents a subordinate class of certificates
retained by the Bank. These retained certificates were classified as trading
securities at September 30, 1998 and 1997 and had carrying values of $11.3 and
$7.9 million, respectively. See Summary of Significant Accounting Policies - The
Bank. The Bank continues to service the underlying loans and is contingently
liable under various credit enhancement facilities related to these
transactions. See Note 28.

The Bank sold home equity credit line receivables and received gross proceeds of
$181.4, $24.0 and $96.5 million during the years ended September 30, 1998, 1997
and 1996, respectively. The Bank recognized gains of $13.8, $3.4 and $4.7
million on home equity credit line transactions during the years ended September
30, 1998, 1997 and 1996, respectively, including gains on sale of new
receivables into existing trusts for fiscal 1998 and 1997. The outstanding trust
certificate balances and the related receivable balances contained in the trusts
were $305.7 million at September 30, 1998 and $325.8 million at September 30,
1997. The Bank continues to service the underlying loans and is contingently
liable under various credit enhancement facilities related to these
transactions. See Note 28.

During the years ended September 30, 1998 and 1997, the Bank sold home loan and
home equity receivables in asset-backed transactions to investors representing
interests in the trusts. The gross proceeds received on these sales were $163.3
and $216.2 million for the years ended September 30, 1998 and 1997,
respectively. The gains recognized on these transactions were $8.8 and $11.2
million for the years ended September 30, 1998 and 1997, respectively. At
September 30, 1998, the outstanding trust certificate balances and the related
receivable balances contained in the trust were $148.0 million and the Bank
serviced the underlying loans. At September 30, 1997, the outstanding trust
certificate balances and the related receivable balances contained in the trust
were $133.3 million. See Note 28.
The Bank sold home loan receivables and received gross proceeds of $4.0, $154.4
and $153.5 million for the years ended September 30, 1998, 1997 and 1996,
respectively. Gains recognized on these transactions were $0.4, $7.2 and $9.5
million for the years ended September 30, 1998, 1997 and 1996, respectively. The
outstanding trust certificate balances and the related receivable balances
contained in the trusts were $168.7 million at September 30, 1998 and $246.8
million at September 30, 1997. The Bank continues to service the underlying
loans and is contingently liable under credit enhancement facilities related to
these transactions. See Note 28.

17.  PROPERTY AND EQUIPMENT - THE BANK

Property and equipment is composed of the following:

                             Estimated                   September 30,
                               Useful          -------------------------------- 
(In thousands)                  Lives               1998               1997     
-------------------------- ----------------    --------------   ---------------
Land                             --            $      51,044    $       49,925
Construction in progress         --                    8,830             1,950
Buildings and improvements   10-45 years             129,716           122,326
Leasehold improvements        5-20 years              90,967            83,526
Furniture and equipment       5-10 years             188,705           182,044
Automobiles                    3-5 years               2,336             2,303  
                                               --------------   ---------------
                                                     471,598           442,074
Less:
   Accumulated depreciation and amortization         185,682           168,512  
                                               --------------   ---------------
      Total                                    $     285,916    $      273,562  
                                               ==============   ===============

Depreciation and amortization expense amounted to $34.0, $28.7 and $24.6 million
for the years ended September 30, 1998, 1997 and 1996, respectively.
18.  LEASES - THE BANK

The Bank has noncancelable, long-term leases for office premises and retail
space, which have a variety of terms expiring from fiscal 1999 to 2019 and
ground leases which have terms expiring from fiscal 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, 1998:

               Year Ending
              September 30,         (In thousands)  
              -------------          -------------
                   1999              $     14,631
                   2000                    13,832
                   2001                    12,411
                   2002                    10,621
                   2003                     9,099
                Thereafter                 71,049
                                     -------------
                  Total              $    131,643
                                     =============

Rent expense totaled $16.6, $16.1 and $13.5 million for the years ended
September 30, 1998, 1997 and 1996, respectively.

19.  DEPOSIT ACCOUNTS - THE BANK

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

                                                September 30,                   
                             --------------------------------------------------
                                       1998                      1997          
                             ------------------------  ------------------------

                                            Weighted                  Weighted
                                             Average                   Average
(Dollars in thousands)          Amount        Rate        Amount        Rate    
---------------------------  ------------  ----------  ------------  ----------
Demand accounts              $   302,529       --      $   215,678       --
NOW accounts                   1,027,310       1.32%       904,697       2.42%
Money market deposit
    accounts                   1,019,569       3.62%       983,016       3.97%
Statement savings accounts       913,467       2.41%       907,141       3.48%
Other deposit accounts            97,696       2.10%        79,071       2.99%
Certificate accounts, less
    than $100                  1,157,603       5.20%     1,156,724       5.50%
Certificate accounts, $100
    or more                      370,056       5.69%       647,429       5.69%
                             ------------              ------------
    Total                    $ 4,888,230       3.19%   $ 4,893,756       3.99%
                             ============              ============
Interest expense on deposit accounts is composed of the following:

                                              Year Ended September 30,        
                                     ----------------------------------------
(In thousands)                           1998          1997          1996     
---------------------------------    ------------  ------------  ------------
NOW accounts                         $     19,796  $     21,882  $     23,044
Money market deposit accounts              38,756        38,644        38,317
Statement savings accounts                 28,419        30,927        30,034
Certificate accounts                       89,958        75,180        69,180
Other deposit accounts                      2,389         2,274         1,994
                                     ------------  ------------  ------------
    Total                            $    179,318  $    168,907  $    162,569
                                     ============  ============  ============

Outstanding certificate accounts at September 30, 1998 mature in the years
indicated as follows:

                Year Ending
                September 30,        (In thousands)
                -------------        --------------
                    1999             $ 1,236,272
                    2000                 190,466
                    2001                  40,076
                    2002                  29,257
                    2003                  31,588
                                     --------------
                    Total            $ 1,527,659
                                     ==============

At September 30, 1998, certificate accounts of $100,000 or more have contractual
maturities as indicated below:

                                    (In thousands)
                                     -----------
Three months or less                 $   229,540
Over three months through six months      59,546
Over six months through 12 months         54,525
Over 12 months                            26,445
                                     -----------
   Total                             $   370,056
                                     ===========
20.  SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER
               SHORT-TERM BORROWINGS - THE BANK

Short-term borrowings are summarized as follows:

                                                         September 30,         
                                                 -----------------------------
(In thousands)                                     1998      1997      1996    
------------------------------------------------ --------- --------- ---------
Securities sold under repurchase agreements:
  Balance at year-end                            $ 387,305 $   2,606 $ 576,823
  Average amount outstanding during the year       302,564   483,076    59,687
  Maximum amount outstanding at any month-end      806,393   946,090   576,823
  Amount maturing within 30 days                   387,305     2,606   576,576
  Weighted average interest rate during the year     5.68%     5.48%     5.50%
  Weighted average interest rate on year-end
    balances                                         5.63%     5.35%     5.41%

Other short-term borrowings:
  Balance at year-end                            $ 104,449 $  72,215 $  60,318
  Average amount outstanding during the year        72,826    39,126    13,641
  Maximum amount outstanding at any month-end      107,845    72,241    60,318
  Amount maturing within 30 days                   104,449    72,215    60,318
  Weighted average interest rate during the year     5.08%     5.11%     5.04%
  Weighted average interest rate on year-end
    balances                                         5.19%     5.34%     5.63%

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

At September 30, 1998, the Bank had pledged mortgage-backed securities with a
book value of $162.3 million to secure certain other short-term borrowings.

21.  FEDERAL HOME LOAN BANK ADVANCES - THE BANK

At September 30, 1998, advances from the Federal Home Loan Bank of Atlanta
("FHLB") totaled $352.0 million. Of the total advances at September 30, 1998,
$275.0 million have a weighted average interest rate of 5.55%, adjust quarterly
based on the one-month London Interbank Offered Rate ("LIBOR") and mature over
varying periods between October 1998 and January 1999. The weighted average
interest rate on the remaining $77.0 million is 6.14%, which is fixed for the
term of the advances and which mature over varying periods between October 1998
and June 2013.

Under a Specific Collateral Agreement with the FHLB, advances are secured by all
of the Bank's FHLB stock and certain mortgage-backed securities with a book
value of $1,134.2 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, 1998
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
and other senior debt are composed of the following:

                                                        September 30,
                                       Issue        ------------------- Interest
(Dollars in thousands)                  Date          1998      1997     Rate  
--------------------------------  ----------------- --------- --------- -------
Subordinated debentures due 2005  November 23, 1993 $ 150,000 $ 150,000  9 1/4%
Subordinated debentures due 2008  December 3, 1996    100,000   100,000  9 1/4%
                                                    --------- ---------
         Total                                      $ 250,000 $ 250,000
                                                    ========= =========

The 9 1/4% Subordinated Debentures due 2008 (the "1996 Debentures") are subject
to redemption at any time on or after December 1, 2001, at the option of the
Bank, in whole or in part, at the following redemption prices plus accrued and
unpaid interest:

   If redeemed during the 12-month period           Redemption
     beginning December 1,                             Price     
---------------------------------------------      --------------
                                                   (In thousands)
              2001                                   $ 104.625
              2002                                   $ 103.700
              2003                                   $ 102.775
              2004                                   $ 101.850
              2005                                   $ 100.925
              2006 and thereafter                    $ 100.000

The 9 1/4% Subordinated Debentures due 2005 (the "1993 Debentures") are subject
to redemption at any time on or after December 1, 1998, at the option of the
Bank, in whole or in part, at the following redemption prices plus accrued and
unpaid interest:

   If redeemed during the 12-month period           Redemption
     beginning December 1,                             Price     
---------------------------------------------      --------------
                                                   (In thousands)
              1998                                   $ 104.625
              1999                                   $ 103.700
              2000                                   $ 102.775
              2001                                   $ 101.850
              2002                                   $ 100.925
              2003 and thereafter                    $ 100.000
The indenture pursuant to which the 1993 Debentures were sold (the "Indenture")
provides that the Bank may not pay dividends on its capital stock unless, after
giving effect to the dividend, no event of default shall have occurred and be
continuing and the Bank is in compliance with its regulatory capital
requirements. In addition, the amount of the proposed dividend may not exceed
the sum of (i) $15.0 million, (ii) 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 13% Preferred Stock (as defined below) or any
payment-in-kind preferred stock issued in lieu of cash dividends on the
Preferred Stock or the redemption of any such payment-in-kind preferred stock.
The indenture pursuant to which the 1996 Debentures were sold provides that the
proposed dividend may not exceed the sum of the restrictions discussed above for
the 1993 Indenture and the aggregate liquidation preference of the new series of
preferred stock of the Bank, if issued in exchange for the outstanding REIT
Preferred Stock (as defined below). See Note 23.

The Bank received OTS approval to include the principal amount of the 1996
Debentures and the 1993 Debentures in the Bank's supplementary capital for
regulatory capital purposes.

Deferred debt issuance costs, net of accumulated amortization, amounted to $8.6
and $9.4 million at September 30, 1998 and 1997, respectively, and are included
in other assets in the Consolidated Balance Sheets.

23. real estate investment trust subsidiary - THE BANK

On December 3, 1996, a new real estate investment trust subsidiary of the Bank
(the "REIT Subsidiary") sold $150.0 million of its Noncumulative Exchangeable
Preferred Stock, Series A, par value $5.00 per share (the "REIT Preferred
Stock"), and received net cash proceeds of $144.0 million. Cash dividends on the
REIT Preferred Stock are payable quarterly in arrears at an annual rate of 10
3/8%. The liquidation value of each share of REIT Preferred Stock is $50,000
plus accrued and unpaid dividends. Except under certain limited circumstances,
the holders of the REIT Preferred Stock have no voting rights. The REIT
Preferred Stock is automatically exchangeable for a new series of Preferred
Stock of the Bank upon the occurrence of certain events.

The REIT Preferred Stock is redeemable at the option of the REIT subsidiary at
any time on or after January 15, 2007, in whole or in part, at the following per
share redemption prices plus accrued and unpaid dividends:

If redeemed during the 12-month period         Redemption
   beginning January 15,                         Price     
---------------------------------------      --------------
                                             (In thousands)
              2007                             $ 52.594
              2008                             $ 52.075
              2009                             $ 51.556
              2010                             $ 51.038
              2011                             $ 50.519
              2012 and thereafter              $ 50.000
The Bank received OTS approval to include the proceeds from the sale of the REIT
Preferred Stock in the core capital of the Bank for regulatory capital purposes
in an amount up to 25% of the Bank's core capital. The net cash proceeds from
the sale of the REIT Preferred Stock is reflected in minority interest - other
in the Trust's Consolidated Balance Sheets. Dividends on the REIT Preferred
Stock are presented as a reduction of net income in the Consolidated Statements
of Operations.

24.  PREFERRED STOCK - THE BANK

Cash Dividends on the Bank's Noncumulative Perpetual Preferred Stock, Series A
(the "Preferred Stock") are payable quarterly in arrears at an annual rate of
13%. If the Board of Directors does not declare the full amount of the
noncumulative cash dividend accrued in respect of any quarterly dividend period,
in lieu thereof the Board of Directors will be required to declare (subject to
regulatory and other restrictions) a stock dividend in the form of a new series
of payment-in-kind preferred stock of the Bank.

The OTS has approved the inclusion of the Preferred Stock as tier 1 or core
capital and has approved the payment of dividends on the Preferred Stock,
provided certain conditions are met. The holders of the Preferred Stock have no
voting rights, except in certain limited circumstances.

Holders of the Preferred Stock will be entitled to receive a liquidating
distribution in the amount of $25,000 per share, plus accrued and unpaid
dividends for the then-current dividend period in the event of any voluntary
liquidation of the Bank, after payment of the deposit accounts and other
liabilities of the Bank, and out of the assets available for distribution to
shareholders. The Preferred Stock ranks superior and prior to the issued and
outstanding common stock of the Bank with respect to dividend and liquidation
rights.

The Preferred Stock is redeemable by the Bank at its option at any time on and
after May 1, 2003, in whole or in part, at the following per share redemption
prices in cash, plus, in each case, an amount in cash equal to accrued and
unpaid dividends for the then-current dividend period:

If redeemed during the 12-month period          Redemption
   beginning May 1,                               Price     
---------------------------------------      --------------
                                              (In thousands)
              2003                              $ 27.250
              2004                              $ 27.025
              2005                              $ 26.800
              2006                              $ 26.575
              2007                              $ 26.350
              2008                              $ 26.125
              2009                              $ 25.900
              2010                              $ 25.675
              2011                              $ 25.450
              2012                              $ 25.225
              2013 and thereafter               $ 25.000
25.  RETIREMENT PLAN - THE BANK

The Bank participates in a defined contribution profit sharing retirement plan
(the "Plan") which covers those full-time employees who meet the requirements as
specified in the Plan. The Plan, which can be modified or discontinued at any
time, requires participating employees to contribute 2.0% of their compensation.
Corporate contributions, at the discretionary amount of three times the employee
contribution, were $7.3, $5.6 and $4.7 million for the years ended September 30,
1998, 1997 and 1996, respectively. There are no past service costs associated
with the Plan and the Bank has no liability under the Plan other than its
current contributions. The Plan owns 4.0% of the Bank's common stock.
26.  REGULATORY MATTERS - THE BANK

Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), the Bank's regulatory capital requirements at September 30, 1998
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, 1998, the Bank was in compliance with its tangible, core and total
risk-based regulatory capital requirements and exceeded the capital standards
established for "well capitalized" institutions under the "prompt corrective
action" regulations. The information below is based upon the Bank's
understanding of the applicable FIRREA and "prompt corrective action"
regulations and related interpretations.

                                                          SEPTEMBER 30, 1998                        
                                 ------------------------------------------------------------------
                                                               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    
-------------------------------- ----------  ---------- ---------- ----------- --------- ----------
Capital per financial statements $ 464,757
 Minority interest in REIT
  Subsidiary(1)                    144,000
 Net unrealized holding gains(2)       (58)
Adjusted capital                   608,699

Adjustments for tangible and
 core capital:
 Intangible assets                 (63,144)
 Non-allowable minority interest
  in REIT Subsidiary(1)            (11,433)
 Non-includable subsidiaries(3)     (3,852)
Total tangible capital             530,270        7.93% $ 100,253        1.50% $ 430,017      6.43%
                                 ----------  ========== ========== =========== ========= ==========
Total core capital(4)              530,270        7.93% $ 267,342        4.00% $ 262,928      3.93%
                                 ----------  ========== ========== =========== ========= ==========

Tier 1 risk-based capital(4)       530,270       12.93% $ 172,572        4.00% $ 357,698      8.93%
                                 ----------  ========== ========== =========== ========= ==========
Adjustments for total risk-based
 capital:
 Subordinated capital debentures   250,000
 Allowance for general loan
  losses                            53,036
   Total supplementary capital     303,036
   Total available capital         833,306
 Equity investments(3)             (11,133)
                                 ----------
Total risk-based capital(4)      $ 822,173      20.70 % $ 345,143        8.00% $ 477,030     12.70%
                                 ==========  ========== ========== =========== ========= ==========
(1) Eligible for inclusion in core capital in an amount up to 25% of the
    Bank's core capital pursuant to authorization from the OTS.
(2) Pursuant to OTS policy, net unrealized holding gains (losses) are excluded
    from regulatory capital.
(3) Reflects an aggregate offset of $788,000 representing the allowance for
    general loan losses maintained against the Bank's equity investments and
    non-includable subsidiaries which, pursuant to OTS guidelines, is available
    as a credit against the deductions from capital otherwise required for such
    investments.
(4) Under the OTS "prompt corrective action" regulations, the standards for
    classification as "well capitalized" are a leverage (or "core capital")
    ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0%
    and a total risk-based capital ratio of at least 10.0%.
At September 30, 1997, the Bank was in compliance with its tangible, core and
total risk-based regulatory capital requirements and exceeded the capital
standards established for "well capitalized" institutions under the "prompt
corrective action" regulations. The information below is based upon the Bank's
understanding of the applicable FIRREA and "prompt corrective action"
regulations and related interpretations.

                                                          SEPTEMBER 30, 1997                        
                                 ------------------------------------------------------------------
                                                               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    
-------------------------------- ----------  ---------- ---------- ----------- --------- ----------
Capital per financial statements $ 363,246
 Minority interest in REIT
  Subsidiary(1)                    144,000
 Net unrealized holding gains(2)       493
Adjusted capital                   507,739

Adjustments for tangible and
 core capital:
 Intangible assets                 (44,251)
 Non-allowable minority interest
  in REIT Subsidiary(1)            (38,758)
 Non-includable subsidiaries(3)     (3,762)
Total tangible capital             420,968        6.96% $  90,715        1.50% $ 330,253      5.46%
                                 ----------  ========== ========== =========== ========= ==========
Total core capital(4)              420,968        6.96% $ 241,907        4.00% $ 179,061      2.96%
                                 ----------  ========== ========== =========== ========= ==========

Tier 1 risk-based capital(4)       420,968        7.24% $ 232,713        4.00% $ 188,255      3.24%
                                 ----------  ========== ========== =========== ========= ==========

Adjustments for total risk-based
 capital:
 Subordinated capital debentures   250,000
 Allowance for general loan
  losses                            92,962  
   Total supplementary capital     342,962
 Excess allowance for loan losses  (19,989)
 Adjusted supplementary capital    322,973  
   Total available capital         743,941
 Equity investments(3)             (14,556)
                                 ----------
Total risk-based capital(4)      $ 729,385      13.50 % $ 465,426        8.00% $ 263,959      5.50%
                                 ==========  ========== ========== =========== ========= ==========
(1) Eligible for inclusion in core capital in an amount up to 25% of the
    Bank's core capital pursuant to authorization from the OTS.
(2) Pursuant to OTS policy, net unrealized holding gains (losses) are excluded
    from regulatory capital.
(3) Reflects an aggregate offset of $964,000 representing the allowance for
    general loan losses maintained against the Bank's equity investments and
    non-includable subsidiaries which, pursuant to OTS guidelines, is available
    as a credit against the deductions from capital otherwise required for such
    investments.
(4) Under the OTS "prompt corrective action" regulations, the standards for
    classification as "well capitalized" are a leverage (or "core capital")
    ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0%
    and a total risk-based capital ratio of at least 10.0%.
At September 30, 1998 and 1997, the Bank had $4.1 and $4.0 million,
respectively, in loans to and investments in subsidiaries engaged in activities
impermissible for national banks ("non-includable subsidiaries") which were
fully deducted from all three capital requirements. At September 30, 1998 and
1997, the Bank also had two equity investments with an aggregate balance, after
subsequent valuation allowances, of $11.7 and $15.3 million, respectively, which
were fully deducted from total risk-based capital.

OTS capital regulations provide a five-year holding period (or such longer
period as may be approved by the OTS) for REO to qualify for an exception from
treatment as an equity investment. If an REO property is considered an equity
investment, its then-current book value is deducted from total risk-based
capital. Accordingly, if the Bank is unable to dispose of any REO property
(through bulk sales or otherwise) prior to the end of its applicable five-year
holding period and is unable to obtain an extension of such five-year holding
period from the OTS, the Bank could be required to deduct the then-current book
value of such REO property from total risk-based capital. In February 1998, the
Bank received from the OTS an extension of the holding periods for certain of
its REO properties through February 17, 1999. The following table sets forth the
Bank's REO at September 30, 1998, after valuation allowances of $166.9 million,
by the fiscal year in which the property was acquired through foreclosure.

                 Fiscal Year         (In thousands)
                 -----------         --------------
                    1990              $ 19,023(1)(2)
                    1991                36,619(2)
                    1992                   100(2)
                    1993                   --
                    1994                   732
                    1995                 5,907
                    1996                    --
                    1997                    --
                    1998                 3,027  
                                      ---------
                 Total REO            $ 65,408 
                                      =========

(1) Includes REO with an aggregate net book value of $11.1 million, which the
    Bank treats as equity investments for regulatory capital purposes.
(2) Includes REO with an aggregate net book value of $44.6 million, for which
    the Bank received an extension of the holding periods through February 17,
    1999.

At the request of the OTS, the Board of Directors of the Bank adopted a
resolution in March 1996 which, among other things, 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
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.
27.  TRANSACTIONS WITH RELATED PARTIES - THE BANK

Loans Receivable

From time to time, in the normal course of business, the Bank may make loans to
executive officers and directors, their immediate family members or companies
with which they are affiliated. These loans are on substantially the same terms
as similar loans with unrelated parties. An analysis of activity with respect to
these loans for the year ended September 30, 1998 is as follows:

                                    (In thousands)  
                                    ---------------
Balance, September 30, 1997         $        2,432
  Additions                                  3,276
  Reductions                                (2,313)
                                    ---------------
Balance, September 30, 1998         $        3,395  
                                    ================

Services

B. F. Saul Company, which is a shareholder of the Trust, and its subsidiaries
provide certain services to the Bank. These services include property
management, insurance brokerage and leasing. Fees for these services were
$24,000, $42,000 and $366,000 for the years ended September 30, 1998, 1997 and
1996, respectively.

The law firm in which one director of the Bank is a partner received $4.6, $4.9
and $3.2 million for legal services rendered to the Bank during the years ended
September 30, 1998, 1997 and 1996 respectively.

For the years ended September 30, 1998, 1997 and 1996, one of the directors of
the Bank was paid $75,000, $50,000 and $37,000, respectively, for consulting
services rendered to the Bank. Another director of the Bank was paid total fees
of $100,000 for each of the years ended September 30, 1998, 1997 and 1996,
respectively, for consulting services. A third director of the Bank was paid
$50,000 and $17,000 for consulting services rendered to the Bank for the years
ended September 30, 1998 and 1997, respectively.

Tax Sharing Agreement

The Bank and the other companies in the Trust's affiliated group are parties to
a tax sharing agreement dated June 28, 1990 (the "Tax Sharing Agreement"). The
Tax Sharing Agreement provides for payments to be made by members of the Trust's
affiliated group to the Trust based on their separate company tax liabilities.
The Tax Sharing Agreement also provides that, to the extent net operating losses
or tax credits of a particular member are used to reduce the overall tax
liability of the Trust's affiliated group, such member will be reimbursed by the
other members of the affiliated group that have taxable income in an amount
equal to such tax reduction. The Bank paid $5.6, $9.8 and $25.0 million to the
Trust during fiscal 1998, 1997 and 1996, respectively, under the Tax Sharing
Agreement. OTS approval of the tax sharing payments during fiscal 1998, 1997 and
1996 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 26. At September 30, 1998, the estimated tax sharing payment
payable to the Trust by the Bank was $6.6 million. There was no tax sharing
payment payable to the Trust by the Bank at September 30, 1997.
Other

The Bank paid $5.0, $4.9 and $4.5 million for office space leased from or
managed by companies affiliated with the Bank or its directors during the years
ended September 30, 1998, 1997 and 1996, respectively.

The Trust, the B. F. Saul Company, Chevy Chase Lake Corporation ("Lake") and Van
Ness Square Corporation, affiliates of the Bank, from time to time maintain
interest-bearing deposit accounts with the Bank. Those accounts totaled $28.0
and $26.5 million at September 30, 1998 and 1997, respectively. The Bank paid
interest on the accounts amounting to $0.9, $0.6 and $1.1 million during fiscal
years ended 1998, 1997 and 1996, respectively.

28.  FINANCIAL INSTRUMENTS - THE BANK

The Bank, in the normal course of business, is a party to financial instruments
with off-balance-sheet risk and other derivative financial instruments to meet
the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include commitments
to extend credit at both fixed and variable rates, letters of credit,
interest-rate cap agreements and assets sold with limited recourse. All such
financial instruments are held or issued for purposes other than trading.

These instruments involve, to varying degrees, elements of credit and
interest-rate risk in excess of the amount recognized in the Consolidated
Balance Sheets.

The contract or notional amount of these instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments. For
interest-rate cap agreements, assets sold with limited recourse and forward
purchase and sale commitments, the contract or notional amounts do not represent
exposure to credit loss in the event of nonperformance by the other party. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. 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 approximately $1.1 billion of commitments to extend credit at
September 30, 1998. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Because many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. These commitments are subject to
the Bank's normal underwriting and credit evaluation policies and procedures.

Standby Letters of Credit

Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. At September 30, 1998,
the Bank had written standby letters of credit in the amount of $31.4 million,
which were issued to guarantee the performance of and irrevocably assure payment
by customers under construction projects.
Of the total, $18.9 million will expire in fiscal 1999 and the remainder will
expire over time through fiscal 2001. The credit risk involved in issuing
standby letters of credit is essentially the same as that involved in extending
loan commitments to customers. Mortgage-backed securities with a book value of
$3.8 million were pledged as collateral for certain of these letters of credit
at September 30, 1998.

Recourse Arrangements

The Bank is obligated under various recourse provisions (primarily related to
credit losses) related to the securitization and sale of receivables. As a
result of these recourse provisions, the Bank maintained restricted cash
accounts and overcollateralization of receivables amounting to $110.2 and $12.5
million, respectively, at September 30, 1998, and $117.7 and $8.0 million,
respectively, at September 30, 1997, both of which are included in other assets
in the Consolidated Balance Sheets. In addition, the Bank owned subordinated
automobile receivables-backed securities with carrying values of $11.3 and $8.0
million at September 30, 1998 and 1997, respectively, which were classified as
trading securities in the Consolidated Balance Sheets.

The Bank is also obligated under various recourse provisions related to the swap
of single-family residential loans for mortgage-backed securities issued by the
Bank. At September 30, 1998, recourse to the Bank under these arrangements was
$6.5 million, consisting of restricted cash accounts amounting to $2.6 million
and overcollateralization of receivables of $3.9 million.

Derivative Financial Instruments

Interest-rate cap agreements are used to limit the Bank's exposure to rising
short-term interest rates related to the retained portion of certain of its
asset-backed securitizations. At September 30, 1998, the Bank was a party to two
interest-rate cap agreements with an aggregate notional amount of $205.6 million
with maturity dates ranging from October 15, 1998 through June 30, 1999. One of
the interest-rate cap agreements with a notional amount of $200.0 million
entitles 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
second interest-rate cap agreement with a notional amount of $5.6 million
entitles the Bank to receive compensatory payments from the cap provider, which
is a AA-rated (for long term debt as rated by Standard & Poor's) counterparty,
equal to the product of (a) the amount by which the one-month LIBOR exceeds
9.00% and (b) the then outstanding notional principal amount for the
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.

To manage the potentially adverse impact of interest rate movements on its held
for sale fixed-rate mortgage loan pipeline, the Bank hedges its pipeline by
entering into whole loan and mortgage-backed security forward sale commitments
and mortgage-backed security forward purchase commitments. Forward sale
commitments are used to sell specific financial instruments (whole loans or
mortgage-backed securities) at a future date for a specified price.
At September 30, 1998, the Bank had mortgage-backed security forward sale
commitments of $39.1 million. At September 30, 1998, the Bank had no whole loan
forward sale commitments. In addition, at September 30, 1998, the Bank had $12.9
million in mortgage security forward purchase commitments related to its hedging
activities. Forward commitments generally settle within 90 days. Gains and
losses are deferred and recorded as a component of the gain on sales of loans at
the time the forward commitment matures.

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 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.
29.  ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS - THE BANK

The majority of the Bank's assets and liabilities are financial instruments;
however, certain of these financial instruments lack an available trading
market. Significant estimates, assumptions and present value calculations were
therefore used for the purposes of the following disclosure, resulting in a
great degree of subjectivity inherent in the indicated fair value amounts.
Because 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, 1998 and 1997 are as
follows:

                                                             September 30,                         
                                       -----------------------------------------------------------
                                                 1998                            1997            
                                       ------------------------    -------------------------------
                                        Carrying      Fair            Carrying          Fair
(In thousands)                           Amount       Value            Amount           Value     
-------------------------------------- ----------  ------------    --------------  ---------------
Financial assets:

Cash, due from banks,
 interest-bearing deposits, federal
 funds sold and securities purchased
 under agreements to resell           $1,216,456    $1,216,456       $   651,891     $   651,891
Loans held for sale                       56,287        56,991           102,749         103,819
Loans held for securitization and sale   125,000       125,000           220,000         220,000
Trading securities                        11,319        11,319             7,899           7,899
Investment securities                     43,999        44,528             4,998           5,012
Mortgage-backed securities             2,025,817     2,014,819         1,985,707       1,984,667
Loans receivable, net                  2,533,957     2,597,497         2,122,899       2,207,229
Other financial assets                   272,997       274,719           516,849         515,387

Financial liabilities:

Deposit accounts with
 no stated maturities                  3,360,571     3,360,571         3,089,603       3,089,603
Deposit accounts with
 stated maturities                     1,527,659     1,521,752         1,804,153       1,810,245
Securities sold under repurchase
 agreements and other short-term
 borrowings, notes payable and
 Federal Home Loan Bank advances         844,211       842,155           270,351         270,920
Capital notes-subordinated               241,417(1)    243,750           240,618(1)      256,875
Other financial liabilities               98,354        98,354           108,684         108,684
--------------------------------------------------------------------------------------------------
(1) Net of deferred debt issuance costs which are included in other assets in
    the Consolidated Balance Sheets.
The following methods and assumptions were used to estimate the fair value
amounts at September 30, 1998 and 1997:

Cash, due from banks, interest-bearing deposits, federal funds sold and
securities purchased under agreements to resell: Carrying amount approximates
fair value.

Loans held for sale: Fair value is determined using quoted prices for loans, or
securities backed by loans with similar characteristics, or outstanding
commitment prices from investors.

Loans held for securitization and sale: The carrying value of loans held for
securitization and sale approximates fair value because such receivables are
sold at face value.

Trading securities: Fair value is equal to carrying value.

Investment securities: Fair value is based on quoted market prices.

Mortgage-backed securities: Fair value is based on quoted market prices, dealer
quotes or estimates using dealer quoted market prices for similar securities.

Loans 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 were generally sold at
face value through the Bank's securitization program, such face value was used
as the estimated fair value of these receivables at September 30, 1997. The fair
value of the Bank's loan portfolio as presented above does not include the value
of established credit line customer relationships, or the value relating to
estimated cash flows from future receivables and the associated fees generated
from existing customers.

Other financial assets: The carrying amount of Federal Home Loan Bank stock,
accrued interest receivable, interest-bearing deposits maintained pursuant to
various asset securitizations and other short-term receivables approximates fair
value. Interest-only strips are carried at fair value. The fair value of one of
the Bank's investments is based on quoted market prices. The fair value of the
Bank's interest-rate cap agreements is based on dealer quotes.

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 1993 Debentures and the 1996
Debentures is based on quoted market prices.

Other financial liabilities: The carrying amount of custodial accounts, amounts
due to banks, accrued interest payable 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.

30.  LITIGATION - THE BANK

During the normal course of business, the Bank is involved in certain
litigation, including litigation arising out of the collection of loans, the
enforcement or defense of the priority of its security interests, the continued
development and marketing of certain of its real estate properties and certain
employment claims. Although the amounts claimed in some of these suits in which
the Bank is a defendant are material, the Bank denies liability and, in the
opinion of management, litigation which is currently pending will not have a
material impact on the financial condition or future operations of the Bank.

31. COMMITMENTS AND CONTINGENCIES - THE TRUST

The Trust is involved in a number of lawsuits arising from the normal course of
its business. On the basis of consultations with counsel, management does not
believe that any material loss will result from the resolution of these matters.
32. INCOME TAXES - THE TRUST

The Trust voluntarily terminated its qualification as a real estate investment
trust under the Internal Revenue Code during fiscal 1978.

The provisions for income taxes for the years ended September 30, 1998, 1997 and
1996, consist of the following:

                                                                 Year Ended September 30,
                                                ------------------------------------------------------------
(In thousands)                                         1998                1997                 1996
----------------------------------------------  ------------------- -------------------  -------------------
Current provision (benefit):
  Federal                                                 $ 94,828             $(1,800)              $5,628
  State                                                      2,948               1,658                2,799
                                                ------------------- -------------------  -------------------
                                                            97,776                (142)               8,427
                                                ------------------- -------------------  -------------------

Deferred provision (benefit):
  Federal                                                  (35,291)             16,113                (513)
  State                                                    (19,616)             (3,159)                386
                                                ------------------- -------------------  -------------------
                                                           (54,907)             12,954                (127)
                                                ------------------- -------------------  -------------------

Subtotal                                                    42,869              12,812               8,300

Tax effect of other items:
  Tax effect of extraordinary item                          (5,169)                --                  --
  Tax effect of net unrealized holding gains
    (losses) reported in stockholders' equity                  361                 904                 809
                                                ------------------- -------------------  -------------------

Total                                                     $ 38,061            $ 13,716            $  9,109
                                                =================== ===================  ===================
The Trust's effective income tax rate varies from the statutory Federal income
tax rate as a result of the following factors:

                                                                      Year Ended September 30,
                                                     ------------------------------------------------------------
(In thousands)                                              1998                1997                 1996
---------------------------------------------------  ------------------- -------------------  -------------------
Computed tax at statutory Federal income tax rate              $ 58,077            $ 21,418               $7,003
Increase (reduction) in taxes resulting from:
 Minority interest                                               (5,447)             (4,524)                 --
 Goodwill and other purchase accounting adjustments                 389                 699                1,626
 Change in valuation allowance for deferred
   tax asset allocated to income tax expense                     (7,074)              7,066                8,883
 State income taxes                                              (4,397)             (7,953)             (12,277)
 Other                                                            1,321              (3,894)               3,066
                                                     ------------------- -------------------  -------------------
                                                               $ 42,869            $ 12,812             $  8,301
                                                     =================== ===================  ===================
The components of the net deferred tax asset were as follows:

                                                                September 30,
                                                 --------------------------------------------
(In thousands)                                           1998                   1997
------------------------------------------------ ---------------------  ---------------------
Deferred tax assets:
  Provision for losses in excess of deductions               $25,103                $44,571
  Amortization of intangible                                   5,736                     --
  Unrealized losses on real estate owned                       4,836                  4,198
  Property                                                     7,211                  7,211
  State net operating losses                                  29,011                 21,351
  Amortization of servicing asset                              3,718                     --
  Partnership investments                                      1,811                  2,384
  Asset securitization                                        26,184                     --
  Forgiveness of debt                                          3,483                  3,928
  Deferred loan fees                                           3,416                     --
  Depreciation                                                 2,670                  2,307
  Compensation deferrals                                       4,371                     --
  Other                                                        5,298                  5,268
                                                 ---------------------  ---------------------
  Gross deferred tax assets                                  122,848                 91,218
                                                 ---------------------  ---------------------

Deferred tax liabilities:
  Net unrealized holding gains on securities                  (2,467)                (3,342)
      available-for-sale
  Deferred loan fees                                              --                   (541)
  Asset securitizations                                           --                (16,565)
  Saul Holdings                                               (4,509)                (4,509)
  Depreciation                                                  (712)                (4,096)
  FHLB stock dividends                                        (3,288)                (3,525)
  Other                                                       (2,950)                (3,879)
                                                 ---------------------  ---------------------
  Gross deferred tax liabilities                             (13,926)               (36,457)
                                                 ---------------------  ---------------------

Valuation allowance                                          (17,623)               (19,349)
                                                 ---------------------  ---------------------

Net deferred tax asset                                      $ 91,299               $ 35,412
                                                 =====================  =====================
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,
1998, 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. The net operating loss carryforwards are not
expected to be realizable for state tax purposes. For federal tax purposes,
there are no net operating loss carryforwards.

Management believes the existing net deductible temporary differences will
reverse during periods in which the Bank generates taxable income in excess of
Real Estate Trust taxable losses. Management believes that the positive
consolidated earnings will continue as a result of the Bank's earnings.
TAX SHARING AGREEMENT

The Trust's affiliated group, including the Bank, entered into a tax sharing
agreement dated June 28, 1990. 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 $5.6, $9.8 and $25.0
million, respectively, to the Trust during fiscal 1998, 1997 and 1996.

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, 1998, 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, 1998, 1997, and 1996, the amount of dividends in arrears on the
preferred shares was $34.0 million ($65.98 per share), $36.2 million ($70.21 per
share) and $31.6 million ($61.17 per share), respectively. Based on the
dividends paid on the preferred shares during fiscal 1996, the Trust recorded a
liability at September 30, 1996, equal to the total dividends in arrears on that
date. The Trust paid preferred dividends of $7.6 million, $750,000 and $500,000
in fiscal 1998, 1997 and 1996, respectively.
34. QUARTERLY FINANCIAL DATA (UNAUDITED) - THE TRUST

                                                                         Year Ended September 30, 1998
                                         -------------------------------------------------------------------------------------------
(In thousands, except per share amounts)       December                 March                   June                September
---------------------------------------- ----------------------  ---------------------  ---------------------  ---------------------
Real Estate Trust:
 Total income                                         $ 21,749               $ 22,167               $ 28,833               $ 25,843
 Operating loss                                         (7,430)                (5,542)                (1,975)                (3,510)
The Bank:
 Interest income                                       106,395                106,774                109,795                112,843
 Interest expense                                       58,292                 55,180                 61,606                 63,332
 Provision for loan losses                             (35,062)               (16,612)               (28,298)               (70,857)
 Other income                                          129,369                 95,820                 87,530                329,138
 Operating income (loss)                                29,433                 12,474                (17,624)               160,124
Total Company:
Operating income (loss)                                 22,003                  6,932                (19,599)               156,614
Income (loss) before minority interest                  16,156                 (3,086)                (9,528)               119,539
Net income (loss)                                        6,856                (10,153)               (13,299)                82,720
Net income (loss) per common share                        1.14                  (2.38)                 (3.04)                 16.86

------------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 1997
                                         -------------------------------------------------------------------------------------------
(In thousands, except per share amounts)       December                 March                   June                September
---------------------------------------- ----------------------  ---------------------  ---------------------  ---------------------
Real Estate Trust:
 Total income                                         $ 19,020               $ 18,653               $ 23,448               $ 23,448
 Operating loss                                         (7,092)                (6,762)                (2,167)                (2,966)
The Bank:
 Interest income                                       115,271                123,286                120,748                 91,175
 Interest expense                                       57,544                 61,911                 61,246                 59,114
 Provision for loan losses                             (26,840)               (26,922)               (36,129)               (35,224)
 Other income                                           87,611                 88,096                 90,158                147,112
 Operating income (loss)                                19,958                 20,126                 10,672                 29,425
Total Company:
Operating income                                        12,866                 13,364                  8,505                 26,459
Income (loss) before minority interest                   7,735                 10,333                  3,444                 26,872
Net income (loss)                                        2,303                  2,743                 (3,079)                16,893
Net income (loss) per common share                        0.20                   0.29                  (0.91)                  3.20

------------------------------------------------------------------------------------------------------------------------------------
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.

                                                                                      Year Ended September 30
                                                               ---------------------------------------------------------------------
(In thousands)                                                         1998                    1997                   1996
-------------------------------------------------------------  ----------------------  ---------------------- ----------------------
INCOME
Hotels                                                                      $ 71,424                $ 59,464               $ 54,245
Office and industrial properties                                              22,883                  21,097                 17,590
Other                                                                          4,285                   4,008                  5,004
                                                               ----------------------  ---------------------- ----------------------
                                                                            $ 98,592                $ 84,569               $ 76,839
                                                               ======================  ====================== ======================

OPERATING PROFIT (LOSS)
Hotels                                                                      $ 19,175                $ 14,755               $ 12,635
Office and industrial properties                                              10,865                   9,020                  5,893
Other                                                                          4,546                   6,429                  6,702
                                                               ----------------------  ---------------------- ----------------------
                                                                              34,586                  30,204                 25,230
Gain (loss) on sales of property                                                (331)                    895                    (68)
Interest and debt expense                                                    (42,817)                (40,819)               (40,514)
Advisory fee, management and leasing fees - related parties                   (8,742)                 (7,995)                (7,423)
General and administrative                                                    (1,153)                 (1,272)                (1,401)
                                                               ======================  ====================== ======================
Operating loss                                                             $ (18,457)               $(18,987)              $(24,176)
                                                               ======================  ====================== ======================

IDENTIFIABLE ASSETS (AT YEAR END)
Hotels                                                                      $119,258                $ 86,815               $ 84,255
Office and industrial properties                                              75,332                  78,063                 78,388
Other                                                                        129,291                 135,695                131,860
                                                               ----------------------  ---------------------- ----------------------
                                                                            $323,881                $300,573               $294,503
                                                               ======================  ====================== ======================

DEPRECIATION
Hotels                                                                        $6,733                  $6,186                 $5,535
Office and industrial properties                                               4,387                   4,311                  4,446
Other                                                                             50                      46                     39
                                                               ----------------------  ---------------------- ----------------------
                                                                            $ 11,170                $ 10,543               $ 10,020
                                                               ======================  ====================== ======================

CAPITAL EXPENDITURES
Hotels                                                                      $ 39,539                  $8,462                 $4,769
Office and industrial properties                                               6,389                   5,288                  2,444
Other                                                                            537                   1,079                    195
                                                               ----------------------  ---------------------- ----------------------
                                                                            $ 46,465                $ 14,829                 $7,408
                                                               ======================  ====================== ======================
36. CONDENSED FINANCIAL STATEMENTS - THE TRUST

These condensed financial statements reflect the Real Estate Trust and all its
consolidated subsidiaries except for the Bank which has been reflected on the
equity method.

CONDENSED BALANCE SHEETS

                                                                                         September 30,
                                                                         ----------------------------------------------
(In thousands)                                                                    1998                    1997
--------------------------------------------------------------------     ----------------------- -----------------------
ASSETS
Income-producing properties                                                            $279,951                $242,450
Accumulated depreciation                                                                (96,072)                (85,915)
                                                                         ----------------------- -----------------------
                                                                                        183,879                 156,535
Land parcels                                                                             40,110                  42,160
Construction in progress                                                                  8,694                   2,480
Equity investment in bank                                                               288,965                 205,552
Cash and cash equivalents                                                                13,950                  18,248
Other assets                                                                             76,799                  81,150
                                                                         ----------------------- -----------------------
    TOTAL ASSETS                                                                       $612,397                $506,125
                                                                         ======================= =======================

LIABILITIES
Mortgage notes payable                                                                 $198,874                $180,204
Notes payable - secured                                                                 200,000                 175,000
Notes payable - unsecured                                                                50,335                  46,633
Deferred gains - real estate                                                            112,883                 112,883
Accrued dividends payable - preferred
  shares of beneficial interest                                                          34,049                  36,231
Other liabilities and accrued expenses                                                   39,895                  39,959
                                                                         ----------------------- -----------------------
    Total liabilities                                                                   636,036                 590,910
                                                                         ----------------------- -----------------------
TOTAL SHAREHOLDERS' DEFICIT*                                                            (23,639)                (84,785)
                                                                         ======================= =======================
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                                            $612,397                $506,125
                                                                         ======================= =======================

* See Consolidated Statements of Shareholders' Deficit
CONDENSED STATEMENTS OF OPERATIONS

                                                                             For the Year Ended September 30
                                                           ---------------------------------------------------------------------
(In thousands)                                                     1998                    1997                   1996
---------------------------------------------------------- ---------------------- ----------------------- ----------------------
Total income                                                            $ 98,592                $ 84,569               $ 76,839
Total expenses                                                          (118,636)               (108,601)              (104,321)
Equity in earnings of partnership investments                              1,918                   4,150                  3,374
Gain (loss) on sales of property                                            (331)                    895                    (68)
                                                           ---------------------- ----------------------- ----------------------
Real estate operating loss                                               (18,457)                (18,987)               (24,176)
Equity in earnings of bank                                                88,172                  27,391                 15,846
                                                           ---------------------- ----------------------- ----------------------
Total company operating income (loss)                                     69,715                   8,404                 (8,330)
Income tax benefit                                                        (6,010)                (10,456)                (8,252)
                                                           ---------------------- ----------------------- ----------------------
Income (loss) before extraordinary item                                   75,725                  18,860                    (78)
Extraordinary item: loss on early extinguishment of debt                  (9,601)                    --                     --
                                                           ---------------------- ----------------------- ----------------------

TOTAL COMPANY NET INCOME (LOSS)                                         $ 66,124                $ 18,860                  $ (78)
                                                           ====================== ======================= ======================
CONDENSED STATEMENTS OF CASH FLOWS

                                                                                        For the Year Ended September 30
                                                                --------------------------------------------------------------------
(In thousands)                                                          1998                    1997                   1996
--------------------------------------------------------------- ---------------------- ----------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)                                                            $ 66,124                $ 18,860                 $ (78)
Adjustments to reconcile net income (loss)
 to net cash provided by (used in)
 operating activities:
  Depreciation                                                                 11,170                  10,543                10,020
  Loss (gain) on sales of property                                                328                    (895)                   68
  Early extinguishment of debt, net of taxes                                    9,601                      --                    --
  Equity in earnings of bank                                                  (88,172)                (27,391)              (15,846)
  (Increase) decrease in deferred tax asset                                       954                  (3,252)                 (192)
  Decrease (increase) in accounts receivable and accrued income                (1,229)                     17                (4,869)
  Increase in accounts payable and accrued expenses                             2,708                   1,058                   430
  (Increase) decrease in tax sharing receivable                                (6,545)                  2,492                16,606
  Other                                                                        19,799                   5,479                 2,893
                                                                ---------------------- ----------------------- ---------------------
Net cash provided by operating activities                                      14,738                   6,911                 9,032
                                                                ---------------------- ----------------------- ---------------------

CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures - properties                                             (19,815)                (10,120)               (7,408)
Property acquisitions                                                         (26,650)                 (4,709)                   --
Property sales                                                                     --                   1,399                 1,812
Equity investment in unconsolidated entities                                    1,348                   1,723                   639
Other investing activities                                                          2                      43                    50
                                                                ---------------------- ----------------------- ---------------------
Net cash used in investing activities                                         (45,115)                (11,664)               (4,907)
                                                                ---------------------- ----------------------- ---------------------

CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from long-term debt                                                  296,316                  32,894                 6,208
Repayments of long-term debt                                                 (245,287)                (24,033)              (11,471)
Costs of obtaining financings                                                  (7,295)                   (626)                 (201)
Loan prepayment fees                                                          (10,055)                     --                    --
Dividends paid                                                                 (7,600)                   (750)                 (500)
                                                                ---------------------- ----------------------- ---------------------
Net cash provided by (used in) financing activities                            26,079                   7,485                (5,964)
                                                                ---------------------- ----------------------- ---------------------
Net increase (decrease) in cash and cash equivalents                           (4,298)                  2,732                (1,839)
Cash and cash equivalents at beginning of year                                 18,248                  15,516                17,355
                                                                ---------------------- ----------------------- ---------------------
Cash and cash equivalents at end of year                                     $ 13,950                $ 18,248              $ 15,516
                                                                ====================== ======================= =====================
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.
TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST

The Declaration of Trust provides that there shall be no fewer than three nor
more than twelve Trustees, as determined from time to time by the Trustees in
office. The Board of Trustees has fixed its permanent membership at six Trustees
divided into three classes with overlapping three-year terms. The term of each
class expires at the Annual Meeting of Shareholders, which is usually held on
the last Friday of January.

The following list sets forth the name, age, position with the Trust, present
principal occupation or employment and material occupations, positions, offices
or employments during the past five years of each Trustee and executive officer
of the Trust. Unless otherwise indicated, each individual has held an office
with the Trust for at least the past five years.

Class Three Trustees --Terms End at 1999 Annual Meeting

Garland J. Bloom, Jr., age 67, 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 65, 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.

Class One Trustees --Terms End at 2000 Annual Meeting

Gilbert M. Grosvenor, age 67, 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 66, 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. Mr. Saul is the father of B. Francis Saul III.
Class Two Trustees --Terms End at 2001 Annual Meeting

George M. Rogers, Jr., age 65, 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.

B. Francis Saul III, age 36, was elected a Trustee and Vice President of the
Trust in 1997. He also serves as a Director and/or Officer of the Bank, B. F.
Saul Company, B. F. Saul Advisory Company, Franklin Property Company, Chevy
Chase Property Company, Westminster Investing Corporation, and Saul Centers,
Inc. He is also a Director of the Greater Washington Boys and Girls Club and The
Heights School. Mr. Saul is the son of B. Francis Saul II.

Executive Officers of the Trust Who Are Not Directors

Philip D. Caraci, age 60, serves as Senior Vice President and Secretary of the
Trust, Executive Vice President of B.F. Saul Company, Senior Vice President of
B. F. Saul Advisory Company, President of Franklin Property Company and a
Director and President of Saul Centers, Inc.

Stephen R. Halpin, Jr., age 43, 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 59, 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 64, serves as Vice President of the Trust, B. F. Saul
Company, B. F. Saul Advisory Company and Saul Centers, Inc.

William K. Albright, age 67, 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 1998. 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 1998.
The Executive Committee is composed of Messrs. Rogers, Saul II and Whitmore. It
is empowered to oversee day-to-day actions of the Advisor and Franklin Property
Company ("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 1998.

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 1998.

Trustees of the Trust are currently paid an annual retainer of $12,500 and a fee
of $600 for each Board or committee meeting attended. Trustees from outside the
Washington, D.C. area are also reimbursed for out-of-pocket expenses in
connection with their attendance at meetings. Mr. Saul II is not paid for
attending Executive Committee meetings. For the fiscal year ended September 30,
1998, the Real Estate Trust paid total fees of $94,000 to the Trustees,
including $15,000 to Mr. Saul II.

EXECUTIVE COMPENSATION

The Trust pays no compensation to its executive officers for their services in
such capacity. Mr. Saul II receives compensation from the Bank for his services
as the Bank's Chairman of the Board of Directors and Chief Executive Officer,
and Mr. Halpin receives compensation from 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, 1998,
1997 or 1996.

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, 1998,
1997 and 1996 for all capacities in which they served during such fiscal years.
Summary Compensation Table
                               Annual Compensation
------------------------------------------------------------------------------
Name and Principal                                  Other Annual    All Other
  Position            Fiscal    Salary      Bonus   Compensation  Compensation
--------------------- ------ ------------ --------- ------------  ------------

B. Francis Saul II     1998   $1,353,528  $700,000     $   --     $725,873 (1)
  Chairman and Chief   1997    1,230,440   600,000         --      292,807 (2)
  Executive Officer    1996    1,015,054   500,000         --      214,426 (3)

Stephen R. Halpin, Jr. 1998     $400,010   $60,000     $   --     $159,073 (1)
  Vice President and   1997      375,402    54,000         --       69,167 (2)
  Chief Financial      1996      332,320    58,000         --       50,295 (3)
  Officer
---------------------
(1) The total amounts shown in the "All Other Compensation" column for fiscal
1998 consist of the following: (i) contributions made by the Bank's Supplemental
Executive Retirement Plan on behalf of Mr. Saul ($136,018) and Mr. Halpin
($20,170); (ii) the taxable benefit of premiums paid by the Bank for group term
insurance on behalf of Mr. Saul ($14,724) and Mr. Halpin ($2,621); (iii)
contributions to the Retirement Plan, a defined contribution plan, on behalf of
Mr. Halpin ($9,600); and (iv) accrued earnings on awards previously made under
the Bank's Deferred Compensation Plan on behalf of Mr. Saul ($575,131) and Mr.
Halpin ($126,682).

(2) The total amounts shown in the "All Other Compensation" column for fiscal
1997 consist of the following contributions made by the Bank to the Bank's
Supplemental Executive Retirement Plan on behalf of Mr. Saul ($109,616) and Mr.
Halpin ($16,164); (ii) the taxable benefit of premiums paid by the Bank for
group term insurance on behalf Mr. Halpin ($2,325); (iii) contributions to the
Retirement Plan, a defined contribution plan, on behalf of Mr. Halpin ($9,600);
and (iv) accrued earnings on awards previously made under the Bank's Deferred
Compensation Plan on behalf of Mr. Saul ($183,191) and Mr. Halpin ($41,078).

(3) The total amounts shown in the "All Other Compensation" column for fiscal
1996 consist of the 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
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).
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 1998 under the Bank's
Deferred Compensation Plan (the "Plan").

            Long-Term Incentive Program - Awards in Last Fiscal Year

                          Number   Performance
                         of Shares   Or Other    Estimated Future Payouts Under
                           Units   Period Until   Non-Stock Price-Based Plans
Name and Principal       Or Other  Maturation   -------------------------------
  Position               Rights(1)  Or Payout   Threshold  Target(2)  Maximum
------------------------ --------- ------------ ---------  --------- ----------
B. Francis Saul II(3)(4)    N/A        2002     $550,000   $694,362  $1,140,480
  Chairman and Chief  
  Executive Officer   
                      
                      
Stephen R. Halpin, Jr.(4)   N/A        2008     $120,000   $214,902    $743,008
  Vice President and  
  Chief Financial     
  Officer             
------------------------

(1) The estimated future payouts shown in the table are based on assumed
performance rates for the Bank 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, 2008.

(2) The Plan does not establish any target performance levels. The payout
amounts shown in this column have 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,
1997.

(3) The payout amount shown for Mr. Saul is the estimated amount that would be
payable to Mr. Saul if he continued with the Bank for the entire ten-year
performance period of the Plan. 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 2008. 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 age 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,
1998, Mr. Saul was partially vested in the Account 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 $779,446.

(4) As of September 30, 1998 the following individuals have vested Accounts that
are payable within 120 days after September 30, 1998; Mr. Saul ($303,710); and
Mr. Halpin ($65,081).
The Plan provides that, as of the end of each fiscal year in the ten-year period
ending September 30, 2008 (or the executive officer's earlier termination of
employment with the Bank), the Bank will add to or deduct from each executive
officer's Account a contribution or deduction, as the case may be, which
represents, the hypothetical interest (which may be positive or negative) earned
on the Principal Contribution, based on the Bank's rate of return on average
assets (as computed under the Plan) for the fiscal year then ended. (The
Principal Contribution, plus or minus any interest credited or deducted, is
referred to as the "Net Contribution").

Executive officers are entitled to receive the Net Contribution in their
respective Account only upon full or partial vesting. Plan participants become
fully vested in their Account under the Plan, provided that they remain
continuously employed by the Bank during the vesting period, upon the earliest
to occur of any of the following: (i) September 30, 2008; (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, 2003.

Payouts are made under the Plan within 120 days after September 30, 2008, or the
earlier termination of the executive officer's employment with the Bank,
provided that vesting or partial vesting has occurred under the Plan.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information, as of December 4, 1998,
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.
Aggregate Number of          Percent
       Name of               Shares                     of
   Beneficial Owner     Beneficially Owned (1)        Class (1)
----------------------- ---------------------- ------------------
B. Francis Saul II           Preferred:
                             516,000 (2)               100.00%
                             Common:
                             4,807,510 (3)              99.60%

Philip D. Caraci             Common:
                             19,400 (4)                  0.40%

All Trustees and             Preferred:
executive officers           516,000 (2)               100.00%
as a group (10 persons)      Common:
                             4,826,910                 100.00%
-----------------------

(1) Beneficial owner and percent of class are calculated pursuant to rule 13d-3
under the Securities Exchange Act of 1934.

(2) Consists of Preferred Shares owned of record by B. F. Saul Company and other
companies of which Mr. Saul is an officer, director and/or more than 10%
shareholder (comprising 270,000 Preferred Shares owned by B. F. Saul Company,
90,000 Preferred Shares owned by Franklin Development Company, Inc., 90,000
Preferred Shares owned by The Klingle Corporation, and 66,000 Preferred Shares
owned by Westminster Investing Corporation). The address of each person listed
in this footnote is 8401 Connecticut Avenue, Chevy Chase, Maryland 20815.
Pursuant to Rule 13d-3, the Preferred Shares described above are considered to
be beneficially owned by Mr. Saul because he has or may be deemed to have sole
or shared voting and/or investment power in respect thereof.

(3) Consists of Common Shares owned of record by B. F. Saul Company and other
companies of which Mr. Saul is an officer and director and/or more than 10%
shareholder (comprising 1,125,739 Common Shares owned by Westminster Investing
Corporation, 43,673 Common Shares owned by Derwood Investment 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 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.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Real Estate

Transactions with B. F. Saul Company and its Subsidiaries. The Real Estate Trust
is managed by the Advisor, a wholly owned subsidiary of the Saul Company. All of
the officers of the Trust and B. Francis Saul II, George M. Rogers, Jr., B.
Francis Saul III 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 $301,000 for the period October 1995
through March 1996, $306,000 for the period April 1996 through September 1996,
$311,000 for the period October 1996 through September 1997, and $317,000 for
the period October 1997 through September 1998. The advisory contract has been
extended until September 30, 1999, and will continue 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 $5.2 million in
fiscal 1998.

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 $113,000 in such fees
in fiscal 1998.

B. F. Saul Insurance Agency of Maryland, Inc., a subsidiary of the Saul Company,
is a general insurance agency that receives commissions and counter-signature
fees in connection with the Real Estate Trust's insurance program. Such
commissions and fees amounted to approximately $157,000 in fiscal 1998.
In fiscal 1994 the Real Estate Trust made an unsecured loan to the Saul Company
of $15.0 million at a floating interest rate and due on demand. In fiscal 1995
the loan balance was reduced to $12.7 million. In fiscal 1996 the Real Estate
Trust made loans aggregating $3.5 million to the Saul Company. During fiscal
1997 and 1998, curtails of $750,000 and $141,000, respectively, were paid by the
Saul Company. At September 30, 1998 the total due the Real Estate Trust was
$15.3 million in principal and $1.7 million in deferred interest. Interest
accrued on these loans amounted to $1.3 million, $1.4 million and $1.4 million
during fiscal 1998, 1997 and 1996 respectively.

Remuneration of Trustees and Officers. For fiscal 1998, the Real Estate Trust
paid the Trustees $94,000 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 II 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, Saul II and Saul III receive compensation for their services
as directors of the Bank and Messrs. Rogers, Saul II, Saul III and Whitmore and
all of the officers of the Real Estate Trust receive compensation from 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 approximately $
800,000 in fiscal 1998, 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 approximately $251,000 in fiscal 1998.
NOTE ORDER FORM

                     B.F. SAUL REAL ESTATE INVESTMENT TRUST
                        7200 Wisconsin Avenue, Suite 903
                            Bethesda, Maryland 20814

     PLEASE ISSUE A NOTE EXACTLY AS INDICATED BELOW AT THE INTEREST RATE SHOWN
ON YOUR CURRENT PROSPECTUS OR SUPPLEMENT THERETO. MY CHECK FOR 100% OF THE
PRINCIPAL AMOUNT IS ENCLOSED. I UNDERSTAND THAT MY NOTE WILL BE ISSUED AS OF THE
DATE THIS ORDER IS RECEIVED (IF RECEIVED BY NOON) AND THAT YOUR OFFER MAY BE
WITHDRAWN WITHOUT NOTICE.

Owner's Name:
              -----------------------------------------------------------------

Address:
              -----------------------------------------------------------------

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

Taxpayer Identification

(Social Security) Number:
                          -----------------------------------------------------

Principal Amount of Note   Maturity from date of issue

(Minimum $5,000):          (circle one):  1  2  3  4  5  6  7  8  9  10 year(s)
                 --------

If the maturity date falls on a Saturday, Sunday, or holiday, it will be changed
to the nearest business day. This change will not alter the interest rate.

Under penalties of perjury, I certify (1) that the number shown on this form is
my correct taxpayer identification number, and (2) that I am not subject to
backup withholding because (a) I have not been notified that I am subject to
backup withholding as a result of a failure to report all interest or dividends,
or (b) the Internal Revenue Service has notified me that I am no longer subject
to backup withholding; or all of the account owners are neither citizens nor
residents of the United States and therefore exempt from withholding.

Note: Strike out the language certifying that you are not subject to backup
withholding due to notified payee underreporting if the Internal Revenue Service
has notified you that you are subject to backup withholding and you have not
received notice from the Internal Revenue Service advising that backup
withholding has terminated.

--------------                -------------------------------------------------
Date                          Signature

For office use only:
--------------------          -------------------------------------------------
Date rec'd                    Print Name
           ---------

                              -------------------------------------------------
Issue date                    Address (if different from above)
           ---------

                              -------------------------------------------------
Interest rate                 City, State & Zip Code
              ------

                              -------------------------------------------------
                              (Area Code) Telephone Number
B.F. SAUL REAL ESTATE INVESTMENT TRUST
                        7200 Wisconsin Avenue, Suite 903
                            Bethesda, Maryland 20814

Gentlemen:

I (We) hold a Note,

                        number
                                   ------------------------------

   For the principal amount of     $
                                   ------------------------------

              which matures on
                                   ------------------------------

     CHECK ONE OF THE FOLLOWING BOXES:

1.   I (We) wish to receive a check for the principal amount -
     if so, please send note to U.S. Bank Trust National
     Association

2.   I (We) wish to reinvest the principal amount in a new Note as follows:

Principal Amount of Note   Maturity from date of issue

(Minimum $5,000):          (circle one):  1  2  3  4  5  6  7  8  9  10 year(s)
                 --------

The principal amount of the new note may be either increased or decreased in
increments of $1,000. In no can case the new principal be less than $5,000. If
increased, please send a check payable to B.F. Saul Real Estate Investment Trust
for the amount of the increase.

                PLEASE ENCLOSE THE MATURING NOTE AND RETURN TO US

           IF THE NEW NOTE TO BE ISSUED IS TO BE REGISTERED IN A NAME
            OTHER THAN THAT OF THE PRESENT HOLDER(S), OR IF ANY OTHER
                         ALTERATIONS IN THE FORM OF THE
           REGISTRATION ARE REQUIRED, PLEASE PRINT OR TYPE IN THE NEW
                               INFORMATION BELOW.

Name of Owner(s)
                                   --------------------------------------------
                                   Print Name

                                   --------------------------------------------
                                   Print Name

Address:
                                   --------------------------------------------
                                   No.       Street    Apt.

                                   --------------------------------------------
                                   City      State     Zip Code

Telephone Number
                                   --------------------------------------------
                                   Area Code

Federal Identification or
Social Security
                                   --------------------------------------------

-----------------------------------                             ---------------
Signature                                                       Date
ACKNOWLEDGEMENT

                     B.F. SAUL REAL ESTATE INVESTMENT TRUST
                        7200 Wisconsin Avenue, Suite 903
                               Bethesda, MD 20814

     Gentlemen:

     I understand and acknowledge that (1) the Note I am purchasing is not a
savings account or a deposit and (2) the Note is not insured or guaranteed any
federal government agency, including the Federal Deposit Insurance Corporation,
or by any state governmental agency.

--------------------                     --------------------------------------
Date                                     Signature

                                         --------------------------------------
                                         Print Name
PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 14.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

It is estimated that the expenses in connection with the issuance and
distribution of the securities are as follows:

Registration fee..................................     $   16,680
Cost of printing and engraving....................         18,500
Indenture Trustee & Registrar's Fees..............         80,000
Legal fees of counsel for registrant..............        400,000
Accountants' fees.................................         25,000
Payment to B. F. Saul Advisory Company for
     Administering Note Program...................        600,000
Miscellaneous and Advertising.....................        367,000
                                                       -----------

     Total........................................     $1,507,180
                                                       ===========

Item 15.  INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Declaration of Trust (Article III) provides that no Trustee or officer of
the Trust shall be liable for any action or failure to act except for his own
bad faith, willful misfeasance, gross negligence or reckless disregard of his
duties, and, except as stated, Trustees and officers are entitled to be
reimbursed and indemnified for all loss, expenthey are Trustees or officers of
the Trust.use

Item 16.

(a)  EXHIBITS.

  EXHIBITS                         DESCRIPTION
  ----------  ------------------------------------------------------------------
  3.    (a)   Amended and Restated Declaration of Trust filed with the
              Maryland State Department of Assessments and Taxation on June 22,
              1990 as filed as Exhibit 3(a) to Registration Statement No.
              33-34930 is hereby
              incorporated by reference.
EXHIBITS                         DESCRIPTION
  ----------  ------------------------------------------------------------------
        (b)   Amendment to Amended and Restated Declaration of Trust reflected
              in Secretary Certificate filed with the Maryland State Department
              of Assessments and Taxation on June 26, 1990 as filed as Exhibit
              3(b) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.

        (c)   Amended and Restated By-Laws of the Trust dated as of February 28,
              1991 as filed as Exhibit T3B to the Trust's Form T-3 Application
              for Qualification of Indentures under the Trust Indenture Act of
              1939 (File No. 22-20838) is hereby incorporated by
              reference.

  4.    (a)   Indenture dated as of September 1, 1992 with respect to the
              Trust's Notes due from One to Ten Years from Date of Issue filed
              as Exhibit 4(a) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.

        (b)   First Supplemental Indenture dated as of January 16, 1997 with
              respect to the Trust's Notes due from One to Ten Years from Date
              of Issue filed as Exhibit 4(b) to Registration Statement No.
              33-34930 is hereby incorporated by reference.

        (c)   Indenture with respect to the Trust's Senior Notes Due from One
              Year to Ten Years from Date of Issue as filed as Exhibit 4 (a) to
              Registration Statement No. 33-19909 is hereby incorporated by
              reference.

        (d)   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.

        (e)   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.

        (f)   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.

        (g)   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.

        (h)   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.

        (i)   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.
EXHIBITS                         DESCRIPTION
  ----------  ------------------------------------------------------------------
        (j)   Indenture with respect to the Trust's Senior Notes due from One
              Year to Five Years from Date of Issue as filed as Exhibit T-3C to
              the Trust's Form T-3 Application for Qualification of Indentures
              under the Trust Indenture Act of 1939 (File No. 22-10206) is
              hereby incorporated by reference.

        (k)   Indenture dated as of March 25, 1998 between the Trust and Norwest
              Bank Minnesota, National Association, as Trustee, with respect to
              the Trust's 9 3/4% Series B Senior Secured Notes due 2008, as
              filed as Exhibit 4(a) to Registration Statement No. 333-49937 is
              hereby incorporated by reference.

       *(l)   Second Supplemental Indenture dated as of January 13, 1999 with
              respect to the Trust's Notes due from One to Ten Years from Date
              of Issuance.

  *5.         Opinion of Shaw Pittman Potts & Trowbridge with respect to 
              legality of the Notes.

  10.  (a)    Advisory Contract with B.F. Saul Advisory Company effective 
              October 1, 1982 filed as Exhibit 10(a) to Registration Statement 
              No. 2-80831 is hereby incorporated by reference.

        (b)   Commercial Property Leasing and Management Agreement effective
              October 1, 1982 between the Trust and Franklin Property Company as
              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 subsidiaries 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 as 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)   Amendment 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) subsidiaries filed as
              Exhibit 10(o) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.
EXHIBITS                         DESCRIPTION
  ----------  ------------------------------------------------------------------
        (g)   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.

        (h)   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.

        (i)   Registration Rights and Lock-Up Agreement dated August 26, 1993 by
              and among Saul Centers, Inc. and the Trust, Westminster Investing
              Corporation, Van Ness Square Corporation, Dearborn 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.

        (j)   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.

        (k)   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 as 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.

        (1)   Registration Rights Agreement dated as of March 25, 1998 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. 333-49937 is hereby
              incorporated by reference.

        (m)   Bank Stock Registration Rights Agreement dated as of March 25,
              1998 between the Trust and Norwest Bank Minnesota, National
              Association, as Trustee, filed as Exhibit 4(d) to Registration
              Statement No. 333-49937 is hereby incorporated by reference.
              
        (n)   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.
EXHIBITS                         DESCRIPTION
  ----------  ------------------------------------------------------------------
        (o)   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.

   *12.       Statement re: Computation of Ratio of Earnings to Fixed Charges.

   *21.       List of Subsidiaries of the Trust.

   *23. (a)   Consent of Arthur Andersen LLP.

   *    (b)   Consent of Shaw Pittman Potts & Trowbridge (included in
              Exhibit 5).

   *24.       Power of Attorney (included on signature page).

   *25.       Statement of Eligibility on Form T-1 of U.S. Bank
              Trust National Association.
-------------------
*Filed herewith.

(b)  FINANCIAL STATEMENT SCHEDULES.

     The following Financial Statement Schedules are submitted under Item 16(b):

     Schedule I     Condensed Financial Information
     Schedule III   Consolidated Schedule of Investment Properties - Real
                         Estate Trust

ITEM 17.  UNDERTAKINGS.

     The undersigned registrant hereby undertakes:

     (1)  To file, during any period in which offers or sales are being made, a
          post-effective amendment to this registration statement:

          (i)   To include any prospectus required by Section 10(a)(3) of
                the Securities Act of 1933;

          (ii)  To reflect in the prospectus any facts or events arising after
                the effective date of the registration statement (or the most
                recent post-effective amendment thereof) which, individually or
                in the aggregate, represent a fundamental change in the
                information set forth in the registration statement;

          (iii) To include any material information with respect to the plan of
                distribution not previously disclosed in the registration
                statement or any material change to such information in the
                registration statement.

     (2) That, for the purpose of determining any liability under the Securities
         Act of 1933, each such post-effective amendment shall be deemed to be a
         new registration statement relating to the securities offered therein,
         and the offering of such securities at that time shall be deemed to be
         the initial bona fide offering thereof.

     (3) To remove from registration by means of a post-effective amendment any
         of the securities being registered which remain unsold at the
         termination of the offering.
Insofar as Indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provision, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Chevy Chase,
Maryland on this the 19th day of January 1999.                                 

                         B.F. SAUL REAL ESTATE INVESTMENT TRUST

                         By:  B. FRANCIS SAUL II
                         ----------------------------
                               B. Francis Saul II
                              Chairman of the Board
                         (Principal Executive Officer)

                                POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints B. Francis Saul II and Ross E. Heasley, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments and registration statements for the same offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933,
as amended) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities indicated
below on this 19th day of January 1999.
Signature                         Capacity
---------------------------    --------------------------------------

B. Francis Saul II
---------------------------    Trustee, Chairman of the Board
B. Francis Saul II             and Principal Executive Officer

Stephen R. Halpin, Jr.
---------------------------    Vice President and Chief
Stephen R. Halpin, Jr.         Financial Officer (Principal
                               Financial Officer)

Ross E. Heasley
---------------------------    Vice President
Ross E. Heasley                (Principal Accounting Officer)

Garland J. Bloom, Jr.
---------------------------    Trustee
Garland J. Bloom, Jr.

Gilbert M. Grosvenor
---------------------------    Trustee
Gilbert M. Grosvenor

Gilbert M. Grosvenor
---------------------------    Trustee
Gilbert M. Grosvenor

B. Francis Saul III
---------------------------    Trustee
B. Francis Saul III

John R. Whitmore
---------------------------    Trustee
John R. Whitmore
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                           ON FINANCIAL STATEMENT SCHEDULES

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

We have audited the consolidated financial statements of B.F. Saul Real Estate
Investment Trust (the "Trust") as of September 30, 1998 and 1997 and for the
years then ended in accordance with generally accepted auditing standards, and
have issued our report thereon dated December 2, 1998. 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 as to the financial data required to be set forth therein
in relation to the basic financial statements taken as a whole.

Arthur Andersen LLP

Washington, D.C.
December 2, 1998
B.F. SAUL REAL ESTATE INVESTMENT TRUST
CONDENSED FINANCIAL INFORMATION                              SCHEDULE I

(a)  Required condensed financial information on the Trust is disclosed in 
     the audited consolidated financial statements included herewith.

(b)  Amounts of cash dividends paid to the Trust by consolidated subsidiaries 
     were as follows:

                                     Year Ended September 30
                           ---------------------------------------
                              1998           1997           1996  

                           $5,200,000    $7,200,000     $6,800,000
Consolidated Schedule of Investment Properties - Real Estate Trust                                               Schedule III
September 30, 1998
(Dollars in Thousands)

                                                                       
                                                                       Costs               Basis at Close of Period
                                                                    Capitalized   --------------------------------------------
                                                       Initial      Subsequent                    Buildings
                                                       Basis to         to                           and
Hotels                                                  Trust       Acquisition      Land        Improvements       Total
---------------------------------------------------- ------------- -------------- ------------ ----------------- -------------
Hampton Inn -- Dulles Airport, Sterling VA                   $ --        $ 6,512        $ 290           $ 6,222       $ 6,512
Holiday Inn Select, Auburn Hills MI                        10,450          1,017        1,031            10,436        11,467
Holiday Inn, Cincinnati OH                                  6,859          2,719          245             9,333         9,578
Holiday Inn -- National Airport, Arlington VA              26,979             --        4,229            22,750        26,979
Holiday Inn -- Dulles Airport, Sterling VA                  6,950         20,239          862            26,327        27,189
Holiday Inn, Gaithersburg MD                                3,849         15,270        1,781            17,338        19,119
Holiday Inn Express, Herndon VA                             5,259            108        1,178             4,189         5,367
Holiday Inn, Pueblo CO                                      3,458          2,463          561             5,360         5,921
Holiday Inn -- Rochester Airport, Rochester NY              3,340          9,588          605            12,323        12,928
Holiday Inn -- Tysons Corner, McLean VA                     6,976         14,553        3,107            18,422        21,529
Howard Johnsons -- National Airport, Arlington VA          10,187          3,180        1,183            12,184        13,367
TownePlace Suites -- Dulles Airport, Sterling VA            5,849             --          219             5,630         5,849
                                                     ------------- -------------- ------------ ----------------- -------------
Subtotal - Hotels                                        $ 90,156       $ 75,649     $ 15,291         $ 150,514     $ 165,805
                                                     ------------- -------------- ------------ ----------------- -------------

Commercial
----------------------------------------------------
900 Circle 75 Pkway, Atlanta GA                          $ 33,434        $ 1,707        $ 563          $ 34,578      $ 35,141
1000 Circle 75 Pkway, Atlanta GA                            2,820          1,049          248             3,621         3,869
1100 Circle 75 Pkway, Atlanta GA                           22,746          1,932          419            24,259        24,678
8201 Greensboro, Tysons Corner VA                          28,890          3,526        1,633            30,783        32,416
Commerce Ctr-Ph II, Ft Lauderdale FL                        4,266            727          782             4,211         4,993
Dulles North, Loudoun County VA                                --          5,782          507             5,275         5,782
Metairie Tower, Metairie LA                                 2,729            649          403             2,975         3,378
                                                     ------------- -------------- ------------ ----------------- -------------
Subtotal - Commercial                                    $ 94,885       $ 15,372      $ 4,555         $ 105,702     $ 110,257
                                                     ------------- -------------- ------------ ----------------- -------------
Consolidated Schedule of Investment Properties - Real Estate Trust (Continued)                          Schedule III-Continued
September 30, 1998
(Dollars in Thousands)
                                                                            
                                                                       Costs               Basis at Close of Period
                                                                    Capitalized   --------------------------------------------
                                                       Initial      Subsequent                    Buildings
                                                       Basis to         to                           and
Purchase-Leasebacks                                     Trust       Acquisition      Land        Improvements       Total
---------------------------------------------------- ------------- -------------- ------------ ----------------- -------------
Chateau di Jon, Metairie, LA                              $ 1,125           $ --      $ 1,125              $ --       $ 1,125
Country Club, Knoxville, TN                                   500             --          500                --           500
Houston Mall, Warner Robbins, GA                              650             --          650                --           650
Old National, Atlanta, GA                                     550             --          550                --           550
                                                     ------------- -------------- ------------ ----------------- -------------
Subtotal - Purchase-Leasebacks                            $ 2,825           $ --      $ 2,825              $ --       $ 2,825
                                                     ------------- -------------- ------------ ----------------- -------------

Miscellaneous investments                                   $ 250          $ 814        $ 250             $ 814       $ 1,064
                                                     ------------- -------------- ------------ ----------------- -------------

Total Income-Producing Properties                       $ 188,116       $ 91,835     $ 22,921         $ 257,030     $ 279,951
                                                     ------------- -------------- ------------ ----------------- -------------

Land Parcels
----------------------------------------------------
Arvida Park of Commerce,
    Boca Raton, FL                                        $ 7,378         (1,817)     $ 5,561              $ --       $ 5,561
Avenel, Gaithersburg, MD                                      361           (144)         217                --           217
Church Road, Loudoun Co., VA                                2,586          2,380        4,966                --         4,966
Circle 75, Atlanta, GA                                     12,927          4,300       17,227                --        17,227
Flagship Centre, Rockville, MD                              1,729             39        1,768                --         1,768
Holiday Inn - Auburn Hills, Auburn Hills MI                   656            219          875                --           875
Holiday Inn - Rochester, Roch., NY                             68             --           68                --            68
Overland Park, Overland Park, KA                            3,771            398        4,169                --         4,169
Commerce Center, Ft. Laud., FL                              2,203             20        2,223                --         2,223
Sterling Blvd., Loudoun Co., VA                               505          2,531        3,036                --         3,036
                                                     ------------- -------------- ------------ ----------------- -------------
Subtotal                                                 $ 32,184        $ 7,926     $ 40,110              $ --      $ 40,110
                                                     ------------- -------------- ------------ ----------------- -------------

Total Investment Properties                             $ 220,300       $ 99,761     $ 63,031         $ 257,030     $ 320,061
                                                     ============= ============== ============ ================= =============
Consolidated Schedule of Investment Properties - Real Estate Trust (Continued)                          Schedule III-Continued
September 30, 1998
(Dollars in Thousands)

                                                                                                                  Buildings
                                                                                                                     and
                                                                                                                 Improvements
                                                     Accumulated      Related       Date of          Date        Depreciable
Hotels                                               Depreciation      Debt       Construction     Acquired      Lives (Years)
---------------------------------------------------- ------------- -------------- ------------ ----------------- -------------
Hampton Inn -- Dulles Airport, Sterling VA                $ 2,613        $ 6,864     1987            4/87            31.5
Holiday Inn Select, Auburn Hills MI                         1,557         12,606     1989           11/94            31.5
Holiday Inn, Cincinnati OH                                  5,172          6,291     1975            2/76             40
Holiday Inn -- National Airport, Arlington VA                 503         17,752     1959           12/97             39
Holiday Inn -- Dulles Airport, Sterling VA                 12,509         11,644     1971           11/84             28
Holiday Inn, Gaithersburg MD                                7,767          6,520     1972            6/75             45
Holiday Inn Express, Herndon VA                               305          5,097     1987           10/96             40
Holiday Inn, Pueblo CO                                      2,953          4,859     1973            3/76             40
Holiday Inn -- Rochester Airport, Rochester NY              6,322         12,651     1975            3/76             40
Holiday Inn -- Tysons Corner, McLean VA                     7,989         14,913     1971            6/75             47
Howard Johnsons -- National Airport, Arlington VA           5,935          8,598     1973           11/83             30
TownePlace Suites -- Dulles Airport, Sterling VA               29          4,122     1998            8/98             40
                                                     ------------- --------------
Subtotal - Hotels                                        $ 53,654      $ 111,917
                                                     ------------- --------------

Commercial
----------------------------------------------------
900 Circle 75 Pkway, Atlanta GA                          $ 13,373       $ 20,279     1985           12/85             35
1000 Circle 75 Pkway, Atlanta GA                            2,107          3,274     1974            4/76             40
1100 Circle 75 Pkway, Atlanta GA                           11,670         14,071     1982            9/82             40
8201 Greensboro, Tysons Corner VA                          10,569         33,613     1985            4/86             35
Commerce Ctr-Ph II, Ft Lauderdale FL                        1,614          2,865     1986            1/87             35
Dulles North, Loudoun County VA                             1,286          3,001     1990           10/90            31.5
Metairie Tower, Metairie LA                                 1,652             --     1974           11/76             40
                                                     ------------- --------------
Subtotal - Commercial                                    $ 42,271       $ 77,103
                                                     ------------- --------------
Consolidated Schedule of Investment Properties - Real Estate Trust (Continued)                          Schedule III-Continued
September 30, 1998
(Dollars in Thousands)
                                                                                                                  Buildings
                                                                                                                     and
                                                                                                                 Improvements
                                                     Accumulated      Related       Date of          Date        Depreciable
Purchase-Leasebacks                                  Depreciation      Debt       Construction     Acquired      Lives (Years)
---------------------------------------------------- ------------- -------------- ------------ ----------------- -------------
Chateau di Jon, Metairie, LA                                 $ --           $ --                    11/73
Country Club, Knoxville, TN                                    --             --                     5/76
Houston Mall, Warner Robbins, GA                               --             --                     2/72
Old National, Atlanta, GA                                      --             --                     8/71
                                                     ------------- --------------
Subtotal - Purchase-Leasebacks                               $ --           $ --
                                                     ------------- --------------

Miscellaneous investments                                   $ 147           $ --
                                                     ------------- --------------

Total Income-Producing Properties                        $ 96,072      $ 189,020
                                                     ------------- --------------

Land Parcels
----------------------------------------------------
Arvida Park of Commerce,
    Boca Raton, FL                                           $ --           $ --                 12/84 & 5/85
Avenel, Gaithersburg, MD                                       --             --                    12/76
Church Road, Loudoun Co., VA                                   --          9,791                 9/84 & 4/85
Circle 75, Atlanta, GA                                         --            312                 2/77 & 1/84
Flagship Centre, Rockville, MD                                 --             --                     8/85
Holiday Inn - Auburn Hills, Auburn Hills MI                    --            410                     7/97
Holiday Inn - Rochester, Roch., NY                             --             --                     9/86
Overland Park, Overland Park, KA                               --             --                 1/77 & 2/85
Commerce Center, Ft. Laud., FL                                 --             --                10/83 & 8/84
Sterling Blvd., Loudoun Co., VA                                --             --                     4/84
                                                     ------------- --------------
Subtotal                                                     $ --       $ 10,513
                                                     ------------- --------------

Total Investment Properties                              $ 96,072      $ 199,533
                                                     ============= ==============
Schedule III (Continued)

CONSOLIDATED SCHEDULE OF INVESTMENT PROPERTIES - REAL ESTATE TRUST

NOTES:

(1) See Summary of Significant Accounting Policies for basis of recording
    investment properties and computing depreciation. Investment
    properties are discussed in Note 3 to Consolidated Financial
    Statements.

(2) A reconciliation of the basis of investment properties and accumulated
    depreciation follows.

BASIS OF INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION
(In thousands)
                                                                              For The Year Ended September 30
                                                                ------------------------------------------------------------
                                                                       1998                1997                 1996
                                                                ------------------- -------------------- -------------------
Basis of investment properties
---------------------------------------------------------------

Balance at beginning of period                                           $ 284,610            $ 274,208           $ 277,385
Additions (reductions) during the period:
    Capital expenditures                                                    34,079               12,069               7,408
    Sales - nonaffiliates                                                     (415)                (525)             (5,382)
    Transferred from construction in progress                                2,681                   --                  --
    Other                                                                     (894)              (1,142)             (5,203)
                                                                ------------------- -------------------- -------------------
Balance at end of period                                                 $ 320,061            $ 284,610           $ 274,208
                                                                =================== ==================== ===================

Accumulated depreciation
---------------------------------------------------------------

Balance at beginning of period                                            $ 85,915             $ 76,513            $ 75,140
Additions (reductions) during the period:
    Depreciation expense                                                    11,170               10,543              10,020
    Sales - nonaffiliates                                                     (216)                  --              (3,441)
    Other                                                                     (797)              (1,141)             (5,206)
                                                                ------------------- -------------------- -------------------
Balance at end of period                                                  $ 96,072             $ 85,915            $ 76,513
                                                                =================== ==================== ===================
EXHIBIT INDEX

  EXHIBITS                         DESCRIPTION
  ----------  ------------------------------------------------------------------

  3.    (a)   Amended and Restated Declaration of Trust filed with the
              Maryland State Department of Assessments and Taxation on June 22,
              1990 as filed as Exhibit 3(a) to Registration Statement No.
              33-34930 is hereby
              incorporated by reference.

        (b)   Amendment to Amended and Restated Declaration of Trust reflected
              in Secretary Certificate filed with the Maryland State Department
              of Assessments and Taxation on June 26, 1990 as filed as Exhibit
              3(b) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.

        (c)   Amended and Restated By-Laws of the Trust dated as of February 28,
              1991 as filed as Exhibit T3B to the Trust's Form T-3 Application
              for Qualification of Indentures under the Trust Indenture Act of
              1939 (File No. 22-20838) is hereby incorporated by
              reference.

  4.    (a)   Indenture dated as of September 1, 1992 with respect to the
              Trust's Notes due from One to Ten Years from Date of Issue filed
              as Exhibit 4(a) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.

        (b)   First Supplemental Indenture dated as of January 16, 1997 with
              respect to the Trust's Notes due from One to Ten Years from Date
              of Issue filed as Exhibit 4(b) to Registration Statement No.
              33-34930 is hereby incorporated by reference.

        (c)   Indenture with respect to the Trust's Senior Notes Due from One
              Year to Ten Years from Date of Issue as filed as Exhibit 4 (a) to
              Registration Statement No. 33-19909 is hereby incorporated by
              reference.

        (d)   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.

        (e)   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.

        (f)   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.

        (g)   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.
EXHIBITS                         DESCRIPTION
  ----------  ------------------------------------------------------------------
        (h)   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.

        (i)   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.

        (j)   Indenture with respect to the Trust's Senior Notes due from One
              Year to Five Years from Date of Issue as filed as Exhibit T-3C to
              the Trust's Form T-3 Application for Qualification of Indentures
              under the Trust Indenture Act of 1939 (File No. 22-10206) is
              hereby incorporated by reference.

        (k)   Indenture dated as of March 25, 1998 between the Trust and Norwest
              Bank Minnesota, National Association, as Trustee, with respect to
              the Trust's 9 3/4% Series B Senior Secured Notes due 2008, as
              filed as Exhibit 4(a) to Registration Statement No. 333-49937 is
              hereby incorporated by reference.

       *(l)   Second Supplemental Indenture dated as of January 13, 1999 with
              respect to the Trust's Notes due from One to Ten Years from Date
              of Issuance.

  *5.         Opinion of Shaw Pittman Potts & Trowbridge with respect to
              legality of the Notes.

  10.  (a)    Advisory Contract with B.F. Saul Advisory Company effective
              October 1, 1982 filed as Exhibit 10(a) to Registration Statement
              No. 2-80831 is hereby incorporated by reference.

        (b)   Commercial Property Leasing and Management Agreement effective
              October 1, 1982 between the Trust and Franklin Property Company as
              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 subsidiaries filed as Exhibit
              10(d) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.
EXHIBITS                         DESCRIPTION
  ----------  ------------------------------------------------------------------
        (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 as 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)   Amendment 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) subsidiaries filed as
              Exhibit 10(o) to Registration Statement No. 33-34930 is hereby
              incorporated by reference.

        (g)   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.

        (h)   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.

        (i)   Registration Rights and Lock-Up Agreement dated August 26, 1993 by
              and among Saul Centers, Inc. and the Trust, Westminster Investing
              Corporation, Van Ness Square Corporation, Dearborn 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.

        (j)   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.

        (k)   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 as 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.
EXHIBITS                         DESCRIPTION
  ----------  ------------------------------------------------------------------
        (1)   Registration Rights Agreement dated as of March 25, 1998 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. 333-49937 is hereby
              incorporated by reference.

        (m)   Bank Stock Registration Rights Agreement dated as of March 25,
              1998 between the Trust and Norwest Bank Minnesota, National
              Association, as Trustee, filed as Exhibit 4(d) to Registration
              Statement No. 333-49937 is hereby incorporated by reference.

        (n)   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.

        (o)   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.

   *12.       Statement re: Computation of Ratio of Earnings to Fixed Charges.

   *21.       List of Subsidiaries of the Trust.

   *23. (a)   Consent of Arthur Andersen LLP.

   *    (b)   Consent of Shaw Pittman Potts & Trowbridge (included in
              Exhibit 5).

   *24.       Power of Attorney (included on signature page).

   *25.       Statement of Eligibility on Form T-1 of U.S. Bank
              Trust National Association.
-------------------
*Filed herewith.