CHEVY CHASE
                          PREFERRED CAPITAL CORPORATION
                                    FORM 10-Q
                                  June 30, 1999












<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 June 30, 1999

                       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  July 31, 1999.
--------------------------------------------------------------------------------
<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 June 30, 1999
                  and December 31, 1998                                     2
        (b)     Statements of Operations for the Three Months and
                  Six Months Ended June 30, 1999 and 1998                   3
        (c)     Statement of Stockholders' Equity for the Six
                  Months Ended June 30, 1999                                4
        (d)     Statements of Cash Flows for the Six Months Ended
                  June 30, 1999 and 1998                                    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        12

                          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 Reports 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, 1998, included in the Company's Annual Report on
Form 10-K (File No. 333-10495) filed with the Securities and Exchange Commission
on March 31, 1999 (the "1998 10-K").



                                      -1-

<PAGE>


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

                                                       June 30,    December 31,
                                                         1999          1998
                                                     ------------  ------------
                                     ASSETS

Cash and interest-bearing deposits                   $  3,790,381  $  4,861,984
Residential mortgage loans (net of allowance for
   losses of $40,333 for both periods)                297,800,509   292,682,032
Real estate acquired in settlement of loans, net          241,540       272,197
Accounts receivable from parent                         2,780,197     8,004,120
Accrued interest receivable                             1,555,174     1,437,626
Prepaid expenses                                          122,932       335,850
                                                     ------------  ------------
         Total assets                                $306,290,733  $307,593,809
                                                     ============  ============


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable to parent                           $    244,725  $    234,923
Accrued expenses                                           81,247        11,810
Dividends payable to parent                             1,100,000     3,460,000
Dividends payable to others                             3,890,625     3,890,625
                                                     ------------  ------------
Total liabilities                                       5,316,597     7,597,358
                                                     ------------  ------------

10 3/8% Noncumulative Exchangeable Preferred
  Stock, $5 par value, 10,000,000 shares
  authorized, 3,000,000  shares issued and
  outstanding  (liquidation  value of
  $150,000,000 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   284,996,351
Retained earnings                                         974,136         -
                                                     ------------  ------------
Total stockholders' equity                            300,974,136   299,996,451
                                                     ------------  ------------
      Total liabilities and stockholders' equity     $306,290,733  $307,593,809
                                                     ============  ============





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


                                      -2-

<PAGE>

                   CHEVY CHASE PREFERRED CAPITAL CORPORATION
                            STATEMENTS OF OPERATIONS
                                  (Unaudited)


                                Three Months Ended         Six Months Ended
                                     June 30,                  June 30,
                              ------------------------  ------------------------
                                  1999        1998        1999          1998
                              -----------  -----------  -----------  -----------
Interest Income
 Residential mortgage loans   $5,424,076   $5,720,076   $10,908,728  $11,421,327
 Other                            41,184       64,873        82,088      110,210
                              -----------  -----------  -----------  -----------
 Total interest income         5,465,260    5,784,949    10,990,816   11,531,537

Provision for loan losses         13,034          -          26,554          -
                              -----------  -----------  -----------  -----------
 Total interest income after
   provision for loan losses   5,452,226    5,784,949    10,964,262   11,531,537

Gain on sale of real estate
 acquired in settlement of
 loans, net                          286        3,991         1,671        4,951
                              -----------  -----------  -----------  -----------
 Total income                  5,452,512    5,788,940    10,965,933   11,536,488
                              -----------  -----------  -----------  -----------
Operating Expenses
 Loan servicing fees paid
  to parent                      276,583      275,827       549,487      547,892
 Advisory fees paid to parent     50,000       50,000       100,000      100,000
 Directors fees                    6,500        6,500        13,000       13,500
 General and administrative      127,391       34,545       258,060       71,632
                              -----------  -----------  -----------  -----------
 Total operating expenses        460,474      366,872       920,547      733,024
                              ===========  ===========  ===========  ===========
NET INCOME                    $4,992,038   $5,422,068   $10,045,386  $10,803,464
                              ===========  ===========  ===========  ===========
PREFERRED STOCK DIVIDENDS      3,890,625    3,890,625     7,781,250    7,781,250
                              -----------  -----------  -----------  -----------
EARNINGS AVAILABLE TO
 COMMON STOCKHOLDER           $1,101,413   $1,531,443   $ 2,264,136  $ 3,022,214
                              ===========  ===========  ===========  ===========
EARNINGS PER COMMON SHARE     $11,014.13   $15,314.43   $ 22,641.36  $ 30,222.14
                              ===========  ===========  ===========  ===========






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

                                      -3-
<PAGE>

                   CHEVY CHASE PREFERRED CAPITAL CORPORATION
                       STATEMENT OF STOCKHOLDERS' EQUITY
                                  (Unaudited)


<TABLE>


                                                         Capital
                                                       Contributed                   Total
                              Preferred     Common      in Excess     Retained    Stockholders'
                                Stock       Stock        of Par       Earnings       Equity
                             -----------    -------  -------------  ------------  --------------
<S>                          <C>            <C>      <C>            <C>           <C>

Balance, December 31, 1998   $15,000,000     $100    $284,996,351   $    -        $299,996,451

Net income                         -           -            -        10,045,386     10,045,386

Capital contribution from
 common stockholder                -           -            3,549          -             3,549

Dividends on 10 3/8%
 Noncumulative Exchangeable
 Preferred Stock, Series A         -           -            -        (7,781,250)    (7,781,250)

Dividends on Common Stock          -           -            -        (1,290,000)    (1,290,000)
                             -----------    -------  -------------  ------------  --------------
Balance, June 30, 1999       $15,000,000     $100    $284,999,900   $   974,136   $300,974,136
                             ===========    =======  =============  ============  ==============

</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)

                                                         Six Months Ended
                                                             June 30,
                                                  ------------------------------
                                                        1999            1998
                                                  --------------  --------------
Cash flows from operating activities:

Net income                                        $ 10,045,386    $  10,803,464

Adjustments to reconcile net income to net cash
   provided by operating activities:
     Provision for loan losses                          26,554               -
     Gain on sale of real estate acquired in
      settlement of loans, net                          (1,671)          (4,951)
     Decrease in accounts receivable from parent     5,223,923        1,218,604
     Increase in accrued interest receivable          (117,548)        (151,441)
     Decrease in prepaid expenses                      212,918           48,667
     Increase in accrued expenses                       69,437            4,125
     Increase (decrease) in accounts payable
      to parent                                          9,802           (8,068)
     Decrease in accounts payable  to others                -            (3,749)
                                                  --------------  --------------
     Net cash provided by operating activities      15,468,801       11,906,651
                                                  --------------  --------------
Cash flows from investing activities:
     Purchases of residential mortgage loans       (47,676,236)     (81,762,466)
     Repayments of residential mortgage loans       41,997,591       80,593,458
     Net proceeds on sale of real estate
      acquired in settlement of loans                  565,942          354,494
                                                  --------------  --------------
     Net cash provided by (used in)
      investing activities                          (5,112,703)        (814,514)
                                                  --------------  --------------
Cash flows from financing activities:
     Capital contribution from common stockholder        3,549           84,851
     Dividends paid on preferred stock              (7,781,250)      (7,781,250)
     Dividends paid on common stock                 (3,650,000)      (3,200,000)
                                                  --------------  --------------
     Net cash used in financing activities         (11,427,701)     (10,896,399)
                                                  --------------  --------------
Net increase (decrease) in cash and
 cash equivalents                                   (1,071,603)         195,738

Cash and cash equivalents at beginning of period     4,861,984        3,894,269
                                                  --------------  --------------
Cash and cash equivalents at end of period        $  3,790,381    $   4,090,007
                                                  ==============  ==============
Supplemental disclosures of non-cash activities:
     Loans receivable transferred to real estate
      acquired in settlement of loans             $    533,614    $     562,694
                                                  ==============  ==============


  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,  seven-year  and ten-year  fixed-rate
loans with automatic conversion to one-year ARMs after the end of 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:

                                   June 30,               December 31,
                                        1999                 1998
                                   -------------         -------------
    One-year ARMs                  $ 13,423,490          $ 16,159,185
    Three-year ARMs                  27,059,220            35,684,740
    5/1 ARMs                         98,605,599           100,108,907
    7/1 ARMs                          6,844,196                  -
    10/1 ARMs                       146,566,784           135,436,966
    30 year fixed-rate                5,341,553             5,332,567
                                   -------------         -------------
         Total                      297,840,842           292,722,365

    Less:
       Allowance for loan losses         40,333                40,333
                                   -------------         -------------
         Total                     $297,800,509          $292,682,032
                                   =============         =============


NOTE 3 - PREFERRED STOCK

Cash  dividends on the Company's 10 3/8%  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  June 30,  1999,  the   Company's  Board  of
Directors declared $3,890,625 and $1,100,000 of preferred stock and common stock
dividends,  respectively,  out of the retained  earnings of the  Company.  These
dividends were paid in July, 1999.

During  the  six  months  ended  June 30, 1999, the Company's Board of Directors
declared   $7,781,250  and  $1,290,000  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 June 30,  1999,  the Company had  $297,800,509  invested in loans  secured by
first  mortgages  or deeds of trust on  single-family  residential  real  estate
properties  ("Residential  Mortgage  Loans").  The $5,118,477  increase from the
balance at December 31, 1998, resulted from Residential  Mortgage Loan purchases
of  $47,676,236,  which were offset by principal  collections of $41,997,591 and
provisions for loan losses of $26,554.  The Company transferred three loans with
an aggregate principal balance of $533,614 to real estate acquired in settlement
of loans  ("REO")  during the six months ended June 30, 1999.  In addition,  the
Company received proceeds of $565,942 on the sale of three REO properties during
the six months ended June 30, 1999.  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 June 30, 1999, the Company had two 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 $377,369.

At June 30, 1999,  the Company had four loans which were  delinquent  30-89 days
with an aggregate principal balance of $742,793 (or 0.24% 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:

                                       Six Months             Three Months
                                         Ended                    Ended
                                        June 30,                 June 30,
                                  --------------------     --------------------
                                     1999      1998           1999      1998
                                  ---------  ---------     ---------  ---------
Balance at beginning of period     $40,333    $39,999       $27,539    $40,333
Provision for loan losses           26,554        -          13,034        -
Charge-offs                        (26,554)      (364)         (240)       -
Recoveries                             -          698           -          -
                                  ---------  ---------     ---------  ---------
Balance at end of period           $40,333    $40,333       $40,333    $40,333
                                  =========  =========     =========  =========

                                      -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 then the Company will
experience a decrease in income available to be distributed to its stockholders.
Certain  Residential  Mortgage Loans which the Company holds allow  borrowers to
convert an ARM to a fixed-rate mortgage, thus "locking in" a fixed interest rate
at a time when interest  rates have declined.  In addition,  when interest rates
decline,  holders  of  fixed-rate  mortgages  are more  likely  to  prepay  such
mortgages.  In such an interest rate environment,  the Company may experience an
increase  in  prepayments  on its  Residential  Mortgage  Loans  and may find it
difficult to purchase  additional  loans bearing  interest  rates  sufficient to
support  payment of  dividends  on the Series A Preferred  Shares.

Based on the outstanding balance of the Company's  Residential Mortgage Loans at
June 30, 1999 and the interest rates on such loans,  anticipated annual interest
income, net of servicing fees, on the Company's loan portfolio was approximately
133% 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
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.

There have been no material  changes to the  Company's   market risk disclosures
for the year ended  December 31, 1998 included in the 1998 10-K.

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,  meets  certain  organizational,   stock
ownership and operational requirements and meets certain income and asset tests.
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 June 30, 1999 Compared to Three Months Ended June 30, 1998

During the three months ended June 30, 1999 and 1998,  the Company  reported net
income of $4,992,038 and $5,422,068, respectively.

Interest income on Residential  Mortgage Loans totaled $5,424,076 and $5,720,076
for the  three  months  ended  June  30,  1999  and  1998,  respectively,  which
represents an average yield on such loans of 7.40% and 7.93%, respectively.  The
average loan balance of the Residential Mortgage Loan portfolio was $293,340,723
and   $288,494,139   for  the  three  months  ended  June  30,  1999  and  1998,
respectively. The Company would have recorded an additional $8,502 and $5,987 in
interest income for the three months ended June 30, 1999 and 1998, respectively,
had its non-accrual loans been current in accordance with their original terms.

Other  interest  income of $41,184 and $64,873 was  recognized  on the Company's
interest  bearing deposits during the three months ended June 30, 1999 and 1998,
respectively.

A  provision  for loan  losses of $13,034 was  recorded  on the  Company's  loan
portfolio  during the three months ended June 30,  1999.  No provision  for loan
losses was recorded during the three months ended June 30, 1998.

The Company recognized a gain of $286 on the sale of one REO property during the
three months ended June 30, 1999. The Company recognized a gain of $3,991 on the
sale of two REO properties during the three months ended June 30, 1998.


Operating  expenses  totaling  $460,474  and $366,872 for the three months ended
June 30, 1999 and 1998, 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 $276,583  and
$275,827, for the three months ended June 30, 1999 and 1998, 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 June 30, 1999 and 1998 totaled  $50,000 for each period.  Directors
fees  totaled  $6,500 for both the three  months  ended June 30,  1999 and 1998,
respectively,  and represent  compensation to the two independent members of the
Board of Directors.  General and  administrative  expenses  totaled $127,391 and
$34,545 for the three  months  ended June 30, 1999 and 1998,  respectively,  and
consist primarily of the amortization of  organizational  costs. The increase in
general and administrative  expenses is due primarily to the acceleration of the
amortization of organizational  costs in accordance with the American  Institute
of Certified  Public  Accountants'  Statement of Position 98-5 "Reporting on the
Costs of Start-Up  Activities,"  which the Company adopted  effective January 1,
1999.
                                      -10-
<PAGE>
On June 29, 1999,  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 July 15,
1999.

The  Company  also  declared  on  June  29, 1999,  out of the retained  earnings
of the  Company,  a cash  dividend  of $11,000  per share of common  stock.  The
$1,100,000 dividend was paid on July 15, 1999.

Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998

During the six months  ended June 30, 1999 and 1998,  the Company  reported  net
income of $10,045,386 and $10,803,464, respectively.

Interest   income  on  Residential   Mortgage  Loans  totaled   $10,908,728  and
$11,421,327 for the six months ended June 30, 1999 and 1998, respectively, which
represents an average yield on such loans of 7.45% and 7.94%, respectively.  The
average loan balance of the Residential Mortgage Loan portfolio was $292,988,893
and $287,840,901 for the six months ended June 30, 1999 and 1998,  respectively.
The Company would have  recorded an  additional  $19,217 and $24,421 in interest
income for the six months  ended June 30, 1999 and 1998,  respectively,  had its
non-accrual loans been current in accordance with their original terms.

Other  interest  income of $82,088 and $110,210 was  recognized on the Company's
interest  bearing  deposits  during the six months ended June 30, 1999 and 1998,
respectively.

The  Company  recorded  provision  for loan losses of $26,554 for the six months
ended June 30,  1999.  No  provision  for loan losses was  recorded  for the six
months ended June 30, 1998.

The  Company  recognized  a gain  of  $1,671  on the  sale of  three  properties
classified as real estate  acquired in settlement of loans during the six months
ended June 30, 1999.

Operating  expenses totaling $920,547 and $733,024 for the six months ended June
30, 1999 and 1998,  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 $549,487  and
$547,892,  for the six months ended June 30, 1999 and 1998,  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 six
months ended June 30, 1999 and 1998 totaled $100,000 for each period.  Directors
fees  totaled  $13,000 and  $13,500  for the six months  ended June 30, 1999 and
1998, 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.  The  increase  in  general  and
administrative expenses is due primarily to the acceleration of the amortization
of organizational  costs in accordance with the American  Institute of Certified
Public  Accountants'  Statement  of  Position  98-5  "Reporting  on the Costs of
Start-Up Activities," which the Company adopted effective January 1, 1999.

During the six months  ended June 30,  1999,  the  Company's  Board of Directors
declared   $7,781,250  and  $1,290,000  of  preferred  stock  and  common  stock
dividends, respectively, out of the retained earnings of the Company.


                                      -11-

<PAGE>

YEAR 2000 ISSUES

As the year 2000 approaches,  companies are facing "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.

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 Bank 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.  The Bank has advised the Company
that as of June 30, 1999, all such deadlines have been met and all phases of the
Bank's Year 2000 program have been  completed  with respect to mission  critical
systems. 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 June 30, 1999,
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  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 Year 2000
Compliance expenses in the future.

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

Information  required  by  this  item  is  included  in  Item  2,  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Interest Rate Risk", which is hereby incorporated herein by reference.

                                      -12-
<PAGE>


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 June 30,
     1999.

                                      -13-

<PAGE>


                                   SIGNATURES

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


                   CHEVY CHASE PREFERRED CAPITAL CORPORATION
                                  (Registrant)




 August 16, 1999                  By:   /s/ Stephen R. Halpin, Jr.
                                        ---------------------------
                                        Stephen R. Halpin, Jr.
                                        Director,
                                        Executive Vice President, Treasurer and
                                         Chief Financial Officer
                                        (Principal Financial Officer)



August 16, 1999                   By:   /s/ Joel A. Friedman
                                        ----------------------------
                                        Joel A. Friedman
                                        Senior Vice President and Controller
                                        (Principal Accounting Officer)




<PAGE>

Exhibit Index


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

  27      Financial Data Schedule.