CHEVY CHASE
                         PREFERRED CAPITAL CORPORATION
                                   FORM 10-Q
                               September 30, 1998





<PAGE>









                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-Q

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
               For the quarterly period ended September 30, 1998

                       Commission File Number: 333-10495

                   CHEVY CHASE PREFERRED CAPITAL CORPORATION
             (Exact name of registrant as specified in its charter)

              Maryland                                      52-1998335
   (State or other jurisdiction of                       (I.R.S. Employer
    incorporation or organization)                      Identification No.)

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

                                 (301) 986-7000
              (Registrant's telephone number, including area code)


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

The number of shares  outstanding of the registrant's sole class of common stock
was 100 shares, $1 par value, as of October 31, 1998.

<PAGE>


                    CHEVY CHASE PREFERRED CAPITAL CORPORATION
                    -----------------------------------------


                               TABLE OF CONTENTS
                               -----------------


                         PART I - FINANCIAL INFORMATION
                                                                           Page
Item 1.  Financial Statements: ..........................................    1
        (a)   Statements of Financial Condition at September 30, 1998 and
               December 31, 1997 ........................................    2
        (b)   Statements of Operations for the Three and Nine Months Ended
               September 30, 1998 and 1997...............................    3
        (c)   Statement of Stockholders' Equity for the Nine Months Ended
               September 30, 1998........................................    4
        (d)   Statements of Cash Flows for the  Nine Months Ended
               September 30, 1998 and 1997...............................    5
        (e)   Notes to Financial Statements .............................    6

Item 2.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations..........................    8

Item 3.  Quantitative and Qualitative Disclosures about Market Risk......   13


                          PART II - OTHER INFORMATION

Item 1.  Legal Proceedings ..............................................   13

Item 2.  Changes in Securities...........................................   13

Item 3.  Defaults Upon Senior Securities ................................   13

Item 4.  Submission of Matters to a Vote of Security Holders ............   13

Item 5.  Other  Information..............................................   13

Item 6.  Exhibits and Repor1ts on Form  8-K .............................   13







                                       i

<PAGE>

                                     PART I

ITEM 1.  FINANCIAL STATEMENTS

The following unaudited financial  statements and notes of Chevy Chase Preferred
Capital  Corporation  (the  "Company")  have been  prepared in  accordance  with
generally accepted accounting principles for interim financial  information.  In
the opinion of management,  all adjustments necessary for a fair presentation of
the  financial  position and the results of  operations  for the interim  period
presented have been  included.  Such  unaudited  financial  statements and notes
should be read in conjunction with the Company's financial  statements and notes
for the year ended December 31, 1997, included in the Company's Annual Report on
Form 10-K (File No. 333-10495) filed with the Securities and Exchange Commission
on March 30, 1998.



































                                        1
             
<PAGE>





                   CHEVY CHASE PREFERRED CAPITAL CORPORATION
                   -----------------------------------------
                       STATEMENTS OF FINANCIAL CONDITION
                       ---------------------------------
                                  (Unaudited)

                                                    September 30,   December 31,
                                                        1998           1997
                                                    ------------   ------------
                                     ASSETS

Cash and interest-bearing deposits                   $ 4,438,425    $ 3,894,269
Residential mortgage loans (net of allowance for
   losses of $40,333 and $39,999, respectively)      294,154,909     90,382,131
Real estate acquired in settlement of loans, net         417,617        173,738
Accounts receivable from parent                        6,235,974     10,374,891
Accrued interest receivable                            1,616,544      1,562,478
Prepaid expenses                                         361,246        435,809
                                                    ------------   ------------
         Total assets                               $307,224,715   $306,823,316
                                                    ============   ============



                       IABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable to parent                             $ 223,769      $ 163,793
Accounts payable - others                                   -             3,749
Dividends payable to parent                            1,000,000      2,850,000
Dividends payable - others                             3,890,625      3,890,625
Accrued expenses                                           7,783           -
                                                    ------------   ------------
         Total liabilities                             5,122,177      6,908,167
                                                    ------------   ------------

10 3/8%  Noncumulative Exchangeable Preferred 
 Stock, Series A, $5 par value, 10,000,000 shares
 authorized, 3,000,000 shares issued and outstanding
 (liquidation value of $50 per share plus accrued 
 and unpaid dividends)                                15,000,000     15,000,000
Common stock, $1 par value,
 1,000 shares authorized, 100 shares issued and 
 outstanding                                                 100            100
Capital contributed in excess of par                 284,999,900    284,915,049
Retained earnings                                      2,102,538           -
                                                    ------------   ------------
                                                           
Total stockholders' equity                           302,102,538    299,915,149
                                                    ------------   ------------

         Total liabilities and stockholders' 
          equity                                    $307,224,715   $306,823,316
                                                    ============   ============





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

                                       2
<PAGE>

                   CHEVY CHASE PREFERRED CAPITAL CORPORATION
                   -----------------------------------------
                            STATEMENT OF OPERATIONS
                            -----------------------
                                  (Unaudited)


                               Three Months Ended         Nine Months Ended 
                                  September 30,             September 30,
                              ----------------------   ------------------------
                                1998         1997          1998         1997
                              ----------  ----------   -----------  -----------
Interest Income
  Residential mortgage 
   loans                      $5,639,820  $5,809,030   $17,061,147  $17,274,381
  Other                           62,268      40,576       172,478       82,802
                              ----------  ----------   -----------  -----------

  Total interest income        5,702,088   5,849,606    17,233,625   17,357,183

Provision for loan losses         10,862      16,033        10,862       35,287
                              ----------  ----------   -----------  -----------

  Total interest income after
   provision for loan losses   5,691,226   5,833,573    17,222,763   17,321,896

Gain on sale of real estate 
 acquired in settlement of 
 loans, net                       27,544        -           32,495         -
                              ----------  ----------   -----------  -----------

     Total income              5,718,770   5,833,573    17,255,258   17,321,896

Operating Expenses
  Loan servicing fees paid
   to parent                     282,667     278,019       830,559      852,918
  Advisory fees paid to parent    50,000      50,000       150,000      150,000
  Directors fees                   8,000       7,500        21,500       19,000
  General and administrative      57,154      63,108       128,786      122,090
                              ----------  ----------   -----------  -----------

     Total operating expenses    397,821     398,627     1,130,845    1,144,008
                              ----------  ----------   -----------  -----------

NET INCOME                    $5,320,949  $5,434,946   $16,124,413  $16,177,888
                              ==========  ==========   ===========  ===========

PREFERRED STOCK DIVIDENDS      3,890,625   3,890,625    11,671,875   11,671,875
                              ----------  ----------   -----------  -----------

EARNINGS AVAILABLE TO
   COMMON STOCKHOLDER         $1,430,324  $1,544,321    $4,452,538   $4,506,013
                              ==========  ==========   ===========  ===========

EARNINGS PER COMMON SHARE     $14,303.24  $15,443.21    $44,525.38   $45,060.13
                              ==========  ==========   ===========  ===========







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

                                       3
<PAGE>


<TABLE>


                   CHEVY CHASE PREFERRED CAPITAL CORPORATION
                       STATEMENT OF STOCKHOLDERS' EQUITY
                                  (Unaudited)
                     
                                                                Capital                          
                                                              Contributed                       Total                               
                                 Preferred       Common        in Excess      Retained       Stockholders'   
                                   Stock          Stock         of  Par       Earnings          Equity
                                -----------     --------      ------------   ----------       ------------
<S>                            <C>             <C>           <C>            <C>              <C>

Balance, December 31, 1997      $15,000,000       $100        $284,915,049       -            $299,915,149

Net income                           -              -               -        16,124,413         16,124,413

Capital contribution from 
 common stockholder                  -              -               84,851       -                  84,851

Dividends on 10d%   
 Noncumulative Exchangeable   
 Preferred Stock, Series A           -              -               -        (11,671,875)       (11,671,875)

Dividends on Common Stock            -              -               -        (2,350,000)        (2,350,000)
                                -----------     --------      ------------   ----------       ------------ 

Balance, September 30, 1998     $15,000,000       $100        $284,999,900   $2,102,538       $302,102,538
                                ===========     ========      ============   ==========       ============
</TABLE>






















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

                                       4
<PAGE>

                   CHEVY CHASE PREFERRED CAPITAL CORPORATION
                   -----------------------------------------
                            STATEMENTS OF CASH FLOWS
                            ------------------------
                                  (Unaudited)

                                                       Nine Months Ended
                                                         September  30,
                                                  -----------------------------
                                                     1998               1997
                                                  ----------         ----------
Cash flows from operating activities:

Net income                                       $16,124,413        $16,177,888

Adjustments to reconcile net income to net cash   
 provided by operating activities:
     Provision for loan losses                        10,862             35,287
     Gain on sale of real estate acquired in        
      settlement of loans, net                       (32,495)              -
     Decrease (increase) in accounts receivable 
      from parent                                  4,138,917         (3,553,030)
     Increase in accrued interest receivable         (54,066)           (78,573)
     Decrease (increase) in prepaid expenses          74,563           (463,747)
     Increase in accrued expenses                      7,783               -
     Increase (decrease) in accounts payable 
      to parent                                       59,976           (326,424)
     Decrease in accounts payable - others            (3,749)            (3,334)
                                                  ----------         ---------- 

     Net cash provided by operating activities    20,326,204         11,788,067
                                                  ----------         ----------

Cash flows from investing activities:
     Purchases of residential mortgage loans    (112,112,436)       (54,740,287)
     Repayments of residential mortgage loans    107,348,484         57,662,596
     Net proceeds on sale of real estate 
      acquired in settlement of loans                768,928            214,722
                                                  ----------         ----------

     Net cash provided by (used in) 
      investing activities                        (3,995,024)         3,137,031
                                                  ----------         ----------

Cash flows from financing activities:
     Capital contribution from common stockholder     84,851              6,515
     Dividends paid on preferred stock           (11,671,875)        (9,034,890)
     Dividends paid on common stock               (4,200,000)        (2,384,749)
                                                  ----------         ---------- 

     Net cash used in financing activities       (15,787,024)       (11,413,124)
                                                  ----------         ---------- 
Net increase in cash and cash equivalents            544,156          3,511,974
Cash and cash equivalents at beginning of period   3,894,269            365,175
                                                  ----------         ----------
Cash and cash equivalents at end of period        $4,438,425         $3,877,149
                                                  ==========         ==========
Supplemental disclosures of non-cash activities:
     Loans receivable transferred to real estate  
      acquired in settlement of loans               $980,312           $220,941
                                                  ==========         ==========


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

                                       5
<PAGE>

                   CHEVY CHASE PREFERRED CAPITAL CORPORATION
                   -----------------------------------------
                         NOTES TO FINANCIAL STATEMENTS
                         -----------------------------
                                  (Unaudited)

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:

The Company is a Maryland  corporation  which  acquires,  holds and manages real
estate assets.  Chevy Chase Bank, F.S.B. (the "Bank"), a federally insured stock
savings bank, owns all of the Company's  common stock. The Bank is in compliance
with its regulatory capital requirements.


NOTE 2 - RESIDENTIAL MORTGAGE LOANS:

Residential  mortgage  loans  consist  of  one-year  adjustable  rate  mortgages
("ARMs"),  three-year  ARMs and  five-year  and ten-year  fixed-rate  loans with
automatic  adjustment to one-year ARMs after the  respective  fixed rate period,
and 30 year  fixed-rate  mortgages.  Each of the mortgage  loans is secured by a
mortgage,  deed of trust or other security instrument which created a first lien
on the residential  dwellings  located in their  respective  jurisdictions.  The
following  table shows the  residential  mortgage loan  portfolio by type at the
dates indicated:

                                         September 30,          December 31,
                                             1998                  1997
                                         ------------          ------------
        One-year ARMs                     $18,577,501           $27,657,820
        Three-year ARMs                    41,941,620            78,228,562
        5/1 ARMs                          117,191,090           165,785,490
        10/1 ARMs                         111,288,980            16,196,915
        30 year fixed-rate                  5,196,051             2,553,343
             Total                        294,195,242           290,422,130

        Less:
             Allowance for loan losses         40,333                39,999
                                         ------------          ------------

             Total                       $294,154,909          $290,382,131
                                         ============          ============



NOTE 3 - PREFERRED STOCK

Cash dividends on the Company's 10d% Noncumulative Exchangeable Preferred Stock,
Series A ("the Series A Preferred Shares") are payable quarterly in arrears. The
liquidation  value of each  Series A  Preferred  Share is $50 plus  accrued  and
unpaid dividends. The Series A Preferred Shares are not redeemable until January
15, 2007 (except upon the occurrence of certain tax events),  and are redeemable
thereafter  at  the  option  of  the  Company.   Except  under  certain  limited
circumstances,  the  holders of the  Series A  Preferred  Shares  have no voting
rights.  The Series A Preferred Shares are automatically  exchangeable for a new
series of  preferred  stock of the Bank upon the  occurrence  of certain  events
relating to the Bank.

                                       6
<PAGE>


                   CHEVY CHASE PREFERRED CAPITAL CORPORATION
                   -----------------------------------------
                         NOTES TO FINANCIAL STATEMENTS
                         -----------------------------
                                  (Unaudited)

NOTE 4 - DIVIDENDS:

During the three  months  ended  September  30,  1998,  the  Company's  Board of
Directors declared $3,890,625 and $1,000,000 of preferred stock and common stock
dividends,  respectively,  out of the retained  earnings of the  Company.  These
dividends were paid in October 1998.

During  the nine  months  ended  September  30,  1998,  the  Company's  Board of
Directors  declared  $11,671,875  and  $2,350,000 of preferred  stock and common
stock dividends, respectively, out of the retained earnings of the Company.

                                       7
<PAGE>

ITEM 2.         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS OF OPERATIONS

FINANCIAL CONDITION

Residential Mortgage Loans

At September 30, 1998, the Company had $294,154,909 invested in loans secured by
first  mortgages  or deeds of trust on  single-family  residential  real  estate
properties  ("Residential  Mortgage  Loans").  The $3,772,778  increase from the
balance at December 31, 1997, resulted from Residential  Mortgage Loan purchases
of $112,112,436,  which were offset by principal collections of $107,348,184 and
provisions for loan losses of $10,862.  The Company  transferred five loans with
an aggregate principal balance of $980,312 to real estate acquired in settlement
of loans ("REO")  during the nine months ended  September 30, 1998. In addition,
the Company  received  proceeds  of $768,928 on the sale of five REO  properties
during the nine months ended September 30, 1998.  Management intends to continue
to reinvest proceeds received from repayments of loans in additional Residential
Mortgage Loans to be purchased from either the Bank or its affiliates.

At September 30, 1998,  the Company had four  non-accrual  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) with an aggregate  principal
balance of $517,970.

At September 30, 1998, the Company had three loans which were  delinquent  30-89
days with an aggregate principal balance of $466,985 (or 0.16% of loans).

Allowance for Loan Losses

An analysis is performed periodically to determine whether an allowance for loan
losses is required.  An allowance may be provided after considering such factors
as  the  economy  in  lending  areas,   delinquency  statistics  and  past  loss
experience.  The allowance  for loan losses is based on estimates,  and ultimate
losses may vary from current  estimates.  As adjustments to the allowance become
necessary,  provisions for loan losses are reported in operations in the periods
they are  determined  to be  necessary.  The activity in the  allowance for loan
losses is as follows:

                                         Three Months            Nine Months
                                            Ended                   Ended
                                         September 30,           September 30,
                                      -----------------       -----------------
                                        1998       1997         1998       1997
                                      -------    -------      -------   -------
Balance at beginning of period        $40,333    $10,659      $39,999    $   -
Provision for loan losses              10,862     16,033       10,862     5,287
Charge-offs                           (10,862)      -         (11,226)   (8,595)
Recoveries                               -         2,376          698     2,376
                                      -------    -------      -------   -------

Balance at end of period              $40,333    $29,068      $40,333   $29,068
                                      =======    =======      =======   =======


                                       8
<PAGE>


Interest Rate Risk

The Company's  income  consists  primarily of interest  payments on  Residential
Mortgage  Loans.  If there is a decline in  interest  rates (as  measured by the
indices upon which the interest  rates of the ARMs are based),  then the Company
will  experience  a  decrease  in  income  available  to be  distributed  to its
stockholders.  In addition,  certain ARM products  which the Company holds allow
borrowers to convert an adjustable rate mortgage to a fixed rate mortgage,  thus
"locking in" a fixed  interest rate at a time when interest rates have declined.
In recent  periods,  primarily as a result of a decline in interest  rates,  the
Company has experienced an increase in prepayments on its  Residential  Mortgage
Loans. In response,  the Company has begun to alter the mix of the loans that it
purchases. Specifically, the Company has purchased more 10/1 ARMs from the Bank,
which typically have higher yields than other adjustable rate loan types.

Based on the outstanding balance of the Company's  Residential Mortgage Loans at
September  30,  1998 and the  interest  rate on such loans,  anticipated  annual
interest  income,  net of servicing  fees, on the Company's  loan  portfolio was
approximately  138.4% of the projected annual dividend on the Series A Preferred
Shares.  There can be no assurance  that an interest rate  environment  in which
there is a continued  decline in interest  rates would not adversely  affect the
Company's  ability  to pay  dividends  on the  Series A  Preferred  Shares.  The
Company, to date, has not used any derivative instruments to manage its interest
rate risk.

Significant Concentration of Credit Risk

Concentration of credit risk arises when a number of customers engage in similar
business  activities,  or activities in the same  geographical  region,  or have
similar  economic  features that would cause their  ability to meet  contractual
obligations  to  be  similarly  affected  by  changes  in  economic  conditions.
Concentration of credit risk indicates the relative sensitivity of the Company's
performance  to both positive and negative  developments  affecting a particular
industry.

The Company's exposure to geographic  concentrations directly affects the credit
risk of the Residential  Mortgage Loans within the portfolio.  Substantially all
of the Company's  Residential  Mortgage  Loans are secured by  residential  real
estate  properties   located  in  the  Washington,   D.C.   metropolitan   area.
Consequently, these loans may be subject to a greater risk of default than other
comparable  residential  mortgage  loans  in  the  event  of  adverse  economic,
political or business  developments  and natural  hazards in the region that may
affect the ability of residential property owners in the region to make payments
of principal and interest on the underlying mortgages.

Liquidity and Capital Resources

The  objective  of  liquidity  management  is  to  ensure  the  availability  of
sufficient  cash flows to meet all of the Company's  financial  commitments.  In
managing  liquidity,  the Company takes into account  various legal  limitations
placed on a real estate investment trust (a "REIT"),  as discussed below in "Tax
Status of the Company."

The  Company's  principal  liquidity  need  will be to fund the  acquisition  of
additional mortgage assets as mortgage assets held by the Company are repaid and
to pay  dividends  on the Series A Preferred  Shares.  The  acquisition  of such
additional  mortgage  assets  will be  funded  with the  proceeds  of  principal
repayments  on its current  portfolio of mortgage  assets.  The Company does not
anticipate  that it will  have any  other  material  capital  expenditures.  The
Company  believes that cash generated from the payment of principal and interest
on its  mortgage  asset  portfolio  will  provide  sufficient  funds to meet its
operating  requirements and to pay dividends in accordance with the requirements
to be treated as a REIT for income tax purposes for the foreseeable  future. The
Company may borrow funds as it deems necessary.

                                       9
<PAGE>

Tax Status of the Company

The Company has elected to be taxed as a REIT under  Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended.  As a REIT, the Company generally
will not be subject to Federal income tax on its net income  (excluding  capital
gains)  provided  that it  distributes  annually  100 percent of its annual REIT
taxable  income to its  stockholders,  and meets certain  organizational,  stock
ownership and operational requirements. If in any taxable year the Company fails
to  qualify  as a REIT,  the  Company  would  not be  allowed  a  deduction  for
distributions  to  stockholders  in  computing  its taxable  income and would be
subject to Federal and state income tax (including  any  applicable  alternative
minimum tax) on its taxable income at regular corporate rates. In addition,  the
Company would also be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification was lost.

RESULTS OF OPERATIONS

Three Months Ended  September 30, 1998 Compared to Three Months Ended  September
30, 1997

During the three months ended September 30, 1998 and 1997, the Company  reported
net income of $5,320,949 and $5,434,946, respectively.

Interest income on Residential  Mortgage Loans totaled $5,639,820 and $5,809,030
for the three  months ended  September  30, 1998 and 1997,  respectively,  which
represents an average yield on such loans of 7.76% and 7.90%, respectively.  The
average loan balance of the Residential Mortgage Loan portfolio was $290,889,994
and  $293,948,202  for the  three  months  ended  September  30,  1998 and 1997,
respectively.  The Company would have recorded an additional $16,290 and $11,341
in  interest  income for the three  months  ended  September  30, 1998 and 1997,
respectively,  had its  non-accrual  loans been current in accordance with their
original terms.

Other  interest  income of $62,268 and $40,576 was  recognized  on the Company's
interest  bearing  deposits during the three months ended September 30, 1998 and
1997, respectively.

Provisions for loan losses of $10,862 and $16,033 were recorded on the Company's
loan  portfolio  during the three  months  ended  September  30,  1998 and 1997,
respectively.

The  Company  recognized  a gain of  $27,544  on the sale of two REO  properties
during the three months ended September 30, 1998.

Operating  expenses  totaling  $397,821  and $398,627 for the three months ended
September 30, 1998 and 1997, respectively, were comprised of loan servicing fees
paid to parent,  advisory  fees paid to parent,  directors  fees and general and
administrative  expenses.  Loan  servicing  fees paid to parent of $282,667  and
$278,019, for the three months ended September 30, 1998 and 1997,  respectively,
were  based on a  servicing  fee rate of  0.375%  per  annum of the  outstanding
principal  balances  of  Residential  Mortgage  Loans,  pursuant  to a servicing
agreement between the Company and the Bank. Advisory fees paid to parent for the
three months ended  September 30, 1998 and 1997 totaled $50,000 for each period.
Directors  fees  totaled  $8,000  and  $7,500  for  each  period  and  represent
compensation to the two independent  members of the Board of Directors.  General
and   administrative   expenses   consist   primarily  of  the  amortization  of
organizational costs.

On September 15, 1998, the Company declared, out of the retained earnings of the
Company,  a cash  dividend of $1.296875  per share on the  outstanding  Series A
Preferred Shares.  Dividends of $3,890,625 were subsequently paid on October 15,
1998. 

                                       10
<PAGE>

The Company also  declared on  September  15, 1998,  out of the retained
earnings of the Company,  a cash  dividend of $10,000 per share of common stock.
The $1,000,000 dividend was paid on October 15, 1998.


Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997

During the nine months ended  September 30, 1998 and 1997, the Company  reported
net income of $16,124,413 and $16,177,888, respectively.

Interest   income  on  Residential   Mortgage  Loans  totaled   $17,061,147  and
$17,274,381 for the nine months ended September 30, 1998 and 1997, respectively,
which   represents   an  average  yield  on  such  loans  of  7.88%  and  7.81%,
respectively.  The  average  loan  balance  of  the  Residential  Mortgage  Loan
portfolio was  $288,857,265 and $294,856,617 for the nine months ended September
30, 1998 and 1997,  respectively.  The Company would have recorded an additional
$40,711 and $20,440 in interest  income for the nine months ended  September 30,
1998  and  1997,  respectively,  had  its  non-accrual  loans  been  current  in
accordance with their original terms.

Other  interest  income of $172,478 and $82,802 was  recognized on the Company's
interest  bearing  deposits  during the nine months ended September 30, 1998 and
1997, respectively.

Provisions for loan losses of $10,862 and $35,287 were recorded on the Company's
loan  portfolio  during  the nine  months  ended  September  30,  1998 and 1997,
respectively.

The  Company  recognized  a gain of $32,495  on the sale of five REO  properties
during the nine months ended September 30, 1998.

Operating expenses totaling  $1,130,845 and $1,144,008 for the nine months ended
September 30, 1998 and 1997, respectively, were comprised of loan servicing fees
paid to parent,  advisory  fees paid to parent,  directors  fees and general and
administrative  expenses.  Loan  servicing  fees paid to parent of $830,559  and
$852,918,  for the nine months ended September 30, 1998 and 1997,  respectively,
were  based on a  servicing  fee rate of  0.375%  per  annum of the  outstanding
principal  balances  of  Residential  Mortgage  Loans,  pursuant  to a servicing
agreement between the Company and the Bank. Advisory fees paid to parent for the
nine months ended September 30, 1998 and 1997 totaled  $150,000 for each period.
Directors fees totaled  $21,500 and $19,000 for the nine months ended  September
30,  1998  and  1997,  respectively,  and  represent  compensation  to  the  two
independent  members  of the  Board of  Directors.  General  and  administrative
expenses consist primarily of the amortization of organizational costs.

During  the nine  months  ended  September  30,  1998,  the  Company's  Board of
Directors  declared  $11,671,875  and  $2,350,000 of preferred  stock and common
stock dividends, respectively, out of the retained earnings of the Company.

YEAR 2000 ISSUES

As the  year  2000  approaches,  companies  are  beginning  to face  "Year  2000
Compliance"  issues  in  at  least  three  critical  areas:   internal  systems,
dependencies  with  suppliers  and  service  providers,  and  dependencies  with
customers (or, in the Company's  case,  payors on the mortgage loans held by the
Company). Year 2000 Compliance means the ability of hardware, software and other
processing  capabilities to interpret and manipulate  correctly all date data up
to and through the year 2000, including the computation of leap years. Year 2000
Compliance issues arise because many commonly used software and hardware systems
were  programmed to use two-digit  year  representations  with the century of 19
implied.  Thus, in the year 2000, those systems will treat 00 as 1900 instead of
2000 and may fail to produce proper results.

                                       11
<PAGE>

Because the Company's  operations are performed in their entirety under contract
with the Bank,  the Company has no equipment  or systems of its own.  Therefore,
the Company  does not believe that it faces any  internal  Year 2000  Compliance
risk.

For the  same  reason,  the  Company  is  heavily  dependent  on the  Year  2000
Compliance of its sole service provider, the Bank. The Year 2000 Compliance risk
profile of the  Company is tied to the Year 2000  Compliance  risks of the Bank.
However, the Bank has advised the Company that it is subject to strict deadlines
for Year 2000  Compliance  and other  detailed Year 2000  Compliance  guidelines
established  by the  Office  of Thrift  Supervision  and the  Federal  Financial
Institutions  Examination  Council  and  that  the Bank  believes  it has  taken
appropriate steps to meet all such deadlines.  Accordingly, the Company does not
expect to suffer any material  adverse impact from the year 2000 on the services
provided by the Bank.

With  respect  to the payors of the  mortgage  loans  held by the  Company,  the
Company also does not expect any material  impact from the year 2000.  Potential
Year 2000  Compliance  risk in this area could arise from the  inability of such
payors to timely make their payments because of problems with their own internal
payment systems. This would result in decreased revenues for the Company,  which
could have an adverse  effect on the payment of dividends by the Company and the
market price of the  Company's  stock.  However,  the  investment  policy of the
Company is to have 95% of its portfolio in mortgage assets  consisting of either
Residential  Mortgage Loans or mortgage-backed  securities.  As of September 30,
1998, all of the assets of the Company consisted of Residential  Mortgage Loans.
The  Company  believes  that  Residential  Mortgage  Loans are not  likely to be
materially  affected  by  the  year  2000  because  the  payments  are  made  by
individuals  rather  than  organizations  that are  more  heavily  dependent  on
technology.

To date, the Company has made no material  expenditures  in connection with Year
2000  Compliance  because  of its  ability  to  rely  on the  Bank's  Year  2000
Compliance program. For the same reason, the Company does not expect to face any
material Year 2000 Compliance expenses in the future.

                                       12
<PAGE>

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

PART II - OTHER INFORMATION

ITEM 1.  Legal Proceedings

The Company is not the subject of any material litigation.  None of the Company,
the Bank or any  affiliate  of the Bank is  currently  involved  in nor,  to the
Company's  knowledge,  is currently threatened with any material litigation with
respect to the Residential Mortgage Loans included in the portfolio,  other than
routine litigation arising in the ordinary course of business,  most of which is
covered by liability insurance.


ITEM 2.  Changes in Securities

None.


ITEM 3.  Defaults Upon Senior Securities

None.


ITEM 4.  Submission of Matters to a Vote of Security Holders

None.


ITEM 5.  Other Information

None.


ITEM 6.  Exhibits and Reports on Form 8-K

(a) Exhibits required by Item 601 of Regulation S-K are set forth below.

Exhibit
  No.                   Exhibit
  ---                   -------
   11              Computation of Earnings Per Common Share included in Part I,
                    Item 1 of this report
   27              Financial Data Schedule

(b) No reports on Form 8-K were filed during the three  months  ended  September
30, 1998.

                                       13
<PAGE>



SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report to be  signed1  on its  behalf by the
undersigned thereunto duly authorized.


CHEVY CHASE PREFERRED CAPITAL CORPORATION
(Registrant)




 November 13, 1998        By: /s/ Stephen R. Halpin, Jr.
                          ------------------------------
                              Stephen R. Halpin, Jr.
                              Director,
                              Executive Vice President, Treasurer and
                              Chief Financial Officer
                              (Principal Financial Officer)



November 13, 1998         By: /s/ Joel A. Friedman
                          ------------------------
                              Joel A. Friedman
                              Senior Vice President and
                              Controller
                              (Principal Accounting Officer)




                                       
<PAGE>