CHEVY CHASE
                          PREFERRED CAPITAL CORPORATION
                                    FORM 10-Q
                                  June 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 June 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 July 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 June 30, 1998 and
            December 31, 1997............................................ 2
        (b) Statements of Operations for the Three and Six Months Ended
            June 30, 1998 and 1997 ...................................... 3
        (c) Statement of Stockholders' Equity for the Six Months Ended
            June 30, 1998................................................ 4
        (d) Statements of Cash Flows for the Six Months Ended
            June 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 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, 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)

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

Cash and interest-bearing deposits                  $  4,090,007    $  3,894,269
Residential mortgage loans (net of allowance for
losses of $40,333 and $39,999, respectively)         290,988,445     290,382,131
Real estate acquired in settlement of loans, net         386,889         173,738
Accounts receivable from parent                        9,156,287      10,374,891
Accrued interest receivable                            1,713,919       1,562,478
Prepaid expenses                                         387,142         435,809
                                                    ------------    ------------

     Total assets                                   $306,722,689    $306,823,316
                                                    ============    ============


                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------

Accounts payable to parent                          $    155,725    $    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                                           4,125           -
                                                    ------------    ------------

     Total liabilities                              $  5,050,475    $  6,908,167
                                                    ------------    ------------

103/8%  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                                      1,672,214           -
                                                    ------------    ------------

     Total stockholders' equity                      301,672,214     299,915,149
                                                    ------------    ------------

     Total liabilities and stockholders' equity     $306,722,689    $306,823,316
                                                    ============    ============
 
             The Notes to Financial Statements are an integral part
                              of these statements.


                                        2

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

                               Three Months Ended          Six Months Ended
                                    June 30,                    June 30,
                            ------------------------   -------------------------

                                1998          1997           1998        1997
                            -----------  -----------   -----------   -----------
Interest income
Residential mortgage loans   $5,720,076   $5,813,882   $11,421,327   $11,465,351
Other                            64,873       32,184       110,210        42,226
                            -----------  -----------   -----------   -----------

Total interest income         5,784,949    5,846,066    11,531,537    11,507,577

Provision for loan losses         -           19,254         -            19,254
                            -----------  -----------   -----------   -----------

Total interest income after
Provision for loan losses     5,784,949    5,826,812    11,531,537    11,488,323

Gain on sale of real estate 
acquired in settlement of 
loans, net                        3,991        -             4,951         -
                            -----------  -----------   -----------   -----------

Total income                  5,788,940    5,826,812    11,536,488    11,488,323
                            -----------  -----------   -----------   -----------

Operating Expenses
Loan servicing fees paid 
to parent                       275,827      277,594       547,892       574,899
Advisory fees paid to parent     50,000       50,000       100,000       100,000
Directors fees                    6,500        6,500        13,500        11,500
General and administrative       34,545       33,735        71,632        58,982
                            -----------  -----------   -----------   -----------

Total operating expenses        366,872      367,829       733,024       745,381
                            -----------  -----------   -----------   -----------

NET INCOME                  $ 5,422,068  $ 5,458,983   $10,803,464   $10,742,942
                            ===========  ===========   ===========   ===========

PREFERRED STOCK DIVIDENDS     3,890,625    3,890,625     7,781,250     7,781,250
                            -----------  -----------   -----------   -----------

EARNINGS AVAILABLE TO
 COMMON STOCKHOLDER         $ 1,531,443  $ 1,568,358   $ 3,022,214   $ 2,961,692
                            ===========  ===========   ===========   ===========

EARNINGS PER COMMON SHARE   $ 15,314.43  $ 15,683.58   $ 30,222.14   $ 29,616.92
                            ===========  ===========   ===========   ===========


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

                                        3

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

Net income                          -              -                 -            10,803,464         10,803,464

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

Dividends on 103/8%
 Noncumulative Exchangeable
 Preferred Stock, Series A          -              -                 -            (7,781,250)        (7,781,250)

Dividends on Common stock           -              -                 -            (1,350,000)        (1,350,000)
                            ------------     ----------     -------------      -------------      -------------

Balance, June 30, 1998      $ 15,000,000     $      100     $ 284,999,900      $   1,672,214      $ 301,672,214
                            ============     ==========     =============      =============      =============

</TABLE>


                                                                          
        The Notes to Financial Statements are an integral
                            part of this statement.


                                        4

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                    CHEVY CHASE PREFERRED CAPITAL CORPORATION
                    -----------------------------------------
                            STATEMENTS OF CASH FLOWS
                            ------------------------
                                   (Unaudited)
                                                       Six Months Ended
                                                            June 30,
                                                      1998             1997
                                                -------------      -------------
Cash flows from operating activities:

Net income                                      $ 10,803,464       $ 10,742,942

Adjustments  to  reconcile   net  income  
to  net  cash  provided  by  operating
activities:
     Provision for loan losses                          -                19,254
     Gain on sale of real estate acquired in
       settlement of loans, net                       (4,951)               -
     Decrease in accounts receivable
       from parent                                 1,218,604          3,223,527
     Increase in accrued interest receivable        (151,441)          (109,619)
      Decrease (increase) in prepaid expenses         48,667           (486,186)
      Increase in accrued expenses                     4,125               -
     Decrease in accounts payable to parent           (8,068)          (331,740)
     Decrease in accounts payable - others            (3,749)            (3,334)
                                                -------------      -------------

   Net cash provided by operating activities      11,906,651         13,054,844
                                                -------------      -------------

Cash flows from investing activities:
Purchases of residential mortgage loans          (81,762,466)       (35,903,553)
Repayments of residential mortgage loans          80,593,458         32,208,292
Net proceeds on sale of real estate acquired
  in settlement of loans                             354,494             -
                                                -------------      -------------

     Net cash used in investing activities          (814,514)        (3,695,261)
                                                -------------      -------------

Cash flows from financing activities:
Capital contribution from common stockholder          84,851              6,515
Dividends paid on preferred stock                 (7,781,250)        (5,144,265)
Dividends paid on common stock                    (3,200,000)          (584,749)
                                                -------------      -------------

     Net cash used in financing activities       (10,896,399)        (5,722,499)
                                                -------------      -------------

Net increase in cash and cash equivalents            195,738          3,637,084

Cash and cash equivalents at beginning of period   3,894,269            365,175
                                                -------------      -------------

Cash and cash equivalents at end of period      $  4,090,007       $  4,002,259
                                                =============      =============

Supplemental disclosures of non-cash activities:
  Loans receivable transferred to real estate
   acquired in settlement of loans              $    562,694       $    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:

                                              June 30,             December 31,
                                                1998                    1997
                                         ---------------        ----------------
     One-year ARMs                       $   20,289,929         $   27,657,820
     Three-year ARMs                         50,301,435             78,228,562
     5/1 ARMs                               129,220,221            165,785,490
     10/1 ARMs                               85,912,558             16,196,915
     30 year fixed-rate                       5,304,635              2,553,343
                                         ---------------        ---------------
         Total                              291,028,778            290,422,130

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

         Total                           $  290,988,445         $  290,382,131
                                         ===============        ===============


NOTE 3 - PREFERRED STOCK

Cash  dividends on the Company's  103/8%  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, 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 July 1998.

During the six months  ended June 30,  1998,  the  Company's  Board of Directors
declared   $7,781,250  and  $1,350,000  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 June 30,  1998,  the Company had  $290,988,445  invested in loans  secured by
first  mortgages  or deeds of trust on  single-family  residential  real  estate
properties  ("Residential  Mortgage  Loans").  The  $606,314  increase  from the
balance at December 31, 1997, resulted from Residential  Mortgage Loan principal
collections of $80,593,458,  which were offset by purchases of $81,762,466.  The
Company  transferred three loans with an aggregate principal balance of $562,694
to real estate  acquired in settlement of loans during the six months ended June
30, 1998. In addition,  the Company received proceeds of $354,494 on the sale of
three  properties  classified  as real estate  acquired in  settlement  of loans
during the six months  ended June 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 June 30, 1998, the Company had one non-accrual loan  (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 a principal  balance of
$283,059.

At June 30, 1998,  the Company had nine loans which were  delinquent  30-89 days
with an aggregate principal balance of $1,433,484 (or 0.49% 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
                                          Ended                  Three Months
                                        June 30,                      Ended
                                   1998           1997           June 30, 1998
                                 ----------      ---------       ---------------

Balance at beginning of period   $  39,999      $    -                 $  40,333
Provision for loan losses             -            19,254                   -
Charge-offs                           (364)        (8,595)                  -
Recoveries                             698           -                      -
                                 ----------     ----------       ---------------

Balance at end of period         $  40,333      $  10,659        $        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 (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
June 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
138.5% 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."



                                        9

<PAGE>




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 held by the Company 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.

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

During the three months ended June 30, 1998 and 1997,  the Company  reported net
income of $5,422,068 and $5,458,983, respectively.

Interest income on Residential  Mortgage Loans totaled $5,720,076 and $5,813,882
for the  three  months  ended  June  30,  1998  and  1997,  respectively,  which
represents an average yield on such loans of 7.93% and 7.87%, respectively.  The
average loan balance of the Residential Mortgage Loan portfolio was $288,494,139
and  $295,  577,912  for  the  three  months  ended  June  30,  1998  and  1997,
respectively. The Company would have recorded an additional $5,987 and $2,081 in
interest income for the three months ended June 30, 1998 and 1997, respectively,
had its non-accrual loans been current in accordance with their original terms.

Other  interest  income of $64,873 and $32,184 was  recognized  on the Company's
interest  bearing deposits during the three months ended June 30, 1998 and 1997,
respectively.

No  provision  for loan losses was  recorded for the three months ended June 30,
1998.  The Company  recorded  provision for loan losses of $19,254 for the three
months ended June 30, 1997.

The Company recognized a gain of $3,991 on the sale of two properties classified
as real estate  acquired in  settlement  of loans  during the three months ended
June 30, 1998.

                                       10

<PAGE>




Operating  expenses  totaling  $366,872  and $367,829 for the three months ended
June 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 $275,827  and
$277,594, for the three months ended June 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 June 30, 1998 and 1997 totaled  $50,000 for each period.  Directors
fees  totaled  $6,500 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 June 17, 1998,  the Company  declared,  out of the  retained  earnings of the
Company,  a cash  dividend of $1.296875 per share on the  outstanding  shares of
Series A Preferred Stock. Dividends of $3,890,625 were subsequently paid on July
15, 1998.

The Company also declared on June 17, 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 July 15, 1998.


Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997

During the six months  ended June 30, 1998 and 1997,  the Company  reported  net
income of $10,803,464 and $10,742,942, respectively.

Interest   income  on  Residential   Mortgage  Loans  totaled   $11,421,327  and
$11,465,351 for the six months ended June 30, 1998 and 1997, respectively, which
represents an average yield on such loans of 7.94% and 7.76%, respectively.  The
average loan balance of the Residential Mortgage Loan portfolio was $287,840,901
and $295,310,825 for the six months ended June 30, 1998 and 1997,  respectively.
The Company  would have  recorded an  additional  $24,421 and $6,983 in interest
income for the six months  ended June 30, 1998 and 1997,  respectively,  had its
non-accrual loans been current in accordance with their original terms.

Other  interest  income of $110,210 and $42,226 was  recognized on the Company's
interest  bearing  deposits  during the six months ended June 30, 1998 and 1997,
respectively.

No  provision  for loan losses was  recorded  for the six months  ended June 30,
1998.  The  Company  recorded  provision  for loan losses of $19,254 for the six
months ended June 30, 1997.

The  Company  recognized  a gain  of  $4,951  on the  sale of  three  properties
classified as real estate  acquired in settlement of loans during the six months
ended June 30, 1998.

Operating  expenses totaling $733,024 and $745,381 for the six months ended June
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 $547,892  and
$574,899,  for the six months ended June 30, 1998 and 1997,  respectively,  were
based on a servicing fee

                                       11

<PAGE>




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, 1998 and
1997  totaled  $100,000  for each period.  Directors  fees  totaled  $13,500 and
$11,500  for the six months  ended  June 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 six months  ended June 30,  1998,  the  Company's  Board of Directors
declared   $7,781,250  and  $1,350,000  of  preferred  stock  and  common  stock
dividends, respectively, out of the retained earnings of the Company.

                                       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 issued  during the three  months  ended June 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  signed  on its  behalf by the
undersigned thereunto duly authorized.


                    CHEVY CHASE PREFERRED CAPITAL CORPORATION
                                  (Registrant)




August 14, 1998                    By:  /s/ Stephen R. Halpin, Jr.
       ----                             --------------------------
                                        Stephen R. Halpin, Jr.
                                        Director,
                                        Executive Vice President, Treasurer and
                                        Chief Financial Officer
                                        (Principal Financial Officer)


August 14, 1998                    By:  /s/ Joel A. Friedman
       ---                              --------------------
                                        Joel A. Friedman
                                        Senior Vice President and
                                        Controller
                                        (Principal Accounting Officer)


                                       14

<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.


<PAGE>