`CHEVY CHASE
                          PREFERRED CAPITAL CORPORATION
                                    FORM 10-K
                                December 31, 2001







________________________________________________________________________________

                       SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 2001

                       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 Identification No.)
Incorporation or organization)


                             7501 Wisconsin Avenue

                            Bethesda, Maryland 20814

               (Address of principal executive office) (Zip Code)

                                 (301) 986-7000

              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of Act:

Title of each class                   Name of each exchange on which registered
-------------------------------       -----------------------------------------
10 3/8% Noncumulative Exchangeable       New York Stock Exchange, Inc.
Preferred Stock, Series A

Securities registered pursuant to Section 12(g) of the Act:
        N/A
--------------------------------------------------------------------------------
                                (Title of class)

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best  of  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. X

The number of shares outstanding of the  registrant's  sole class of common
stock was 100 shares,  $1.00 par value per share,  as of March 15, 2002.  All of
such shares were owned by Chevy Chase Bank, F.S.B.;  therefore,  no common stock
was held by non-affiliates.

____________________________________________________________________________________

                   CHEVY CHASE PREFERRED CAPITAL CORPORATION

                               TABLE OF CONTENTS

                                   PART I                                   Page
                                                                            ----
Item 1.BUSINESS.................................................................1
       General.................................................................1
       Mortgage Assets.........................................................1
        Loan Portfolio Composition.............................................1
        Investment Policy......................................................4
        Credit Risk Management Policies........................................5
        Delinquencies..........................................................5
        Geographic Distribution................................................5
       Servicing...............................................................6
       Dividend Policy..........................................................6
       The Bank................................................................7
       The Advisor.............................................................8
       Capital and Leverage Policies...........................................8
       Employees...............................................................9
       Competition.............................................................9
       Environmental Matters...................................................9
       Tax Status of the Company..............................................10
Item 2.PROPERTIES..............................................................10
Item 3.LEGAL PROCEEDINGS......................................................11
Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................11

                                    PART II

Item 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
       STOCKHOLDER MATTERS....................................................12
       Description of Common Stock............................................12
        General...............................................................12
        Dividends.............................................................12
        Voting Rights.........................................................13
        Rights Upon Liquidation...............................................13
       Description of Series A Preferred Shares...............................13
        Market Information and Dividends......................................13
        General...............................................................14
        Automatic Exchange....................................................14
        Voting Rights.........................................................15
        Redemption............................................................15
        Rights Upon Liquidation...............................................15
        Independent Director Approval.........................................16
Item 6.SELECTED FINANCIAL DATA................................................17
Item 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
       CONDITION AND RESULTS OF OPERATIONS....................................18
       Financial Condition....................................................18



        Critical Accounting Policies..........................................18
        Allowance for Loan Losses.............................................18
        Residential Mortgage Loans............................................18
        Interest Rate Risk....................................................19
        Significant Concentration of Credit Risk..............................20
        Liquidity and Capital Resources.......................................21
       Results of Operations..................................................21
        Fiscal Year 2001 Compared to Fiscal Year 2000.........................21
        Fiscal Year 2000 Compared to Fiscal Year 1999.........................22
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES
        ABOUT MARKET RISKS....................................................23
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................F-1
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
        ON ACCOUNTING AND FINANCIAL DISCLOSURE................................24

                                    PART III

Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................25
        Directors and Executive Officers......................................25
        Audit Committee.......................................................27
        Section 16(a) Beneficial Ownership Reporting Compliance...............27
Item 11.EXECUTIVE COMPENSATION................................................27
Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
        OWNERS AND MANAGEMENT.................................................27
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................28

                                    PART IV

Item 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
        REPORTS ON FORM 8-K...................................................29


                                     PART I

ITEM 1.  BUSINESS

GENERAL

Chevy  Chase  Preferred  Capital  Corporation  (the  "Company")  is  a  Maryland
corporation  which  acquires,  holds and  manages  real estate  mortgage  assets
("Mortgage  Assets").  The  Company  has  elected to be treated as a real estate
investment  trust (a "REIT") under the Internal Revenue Code of 1986, as amended
(the  "Code"),  and generally  will not be subject to federal  income tax to the
extent that it distributes  its earnings to its  stockholders  and maintains its
qualification  as a REIT. All of the shares of the Company's  common stock,  par
value  $1.00 per share (the  "Common  Stock"),  are owned by Chevy  Chase  Bank,
F.S.B.,  a federally  chartered  and  federally  insured stock savings bank (the
"Bank"). The Bank is in compliance with its regulatory capital requirements. The
Bank services the Company's  Residential  Mortgage  Loans (as defined below) and
administers  the  day-to-day  operations  of the  Company.  The Company also has
outstanding  3,000,000 shares of 10 3/8%  Noncumulative  Exchangeable  Preferred
Stock,  Series A, par value $5.00 per share (the  "Series A Preferred  Shares").
The Series A Preferred  Shares are listed on the New York Stock Exchange (symbol
CCP-PrA).

MORTGAGE ASSETS

Loan Portfolio Composition

The  Company's  current  portfolio  of Mortgage  Assets  consists of whole loans
("Mortgage Loans") secured by first mortgages or deeds of trust on single-family
residential real estate properties ("Residential Mortgage Loans"). The following
table sets forth  information  concerning  the  Company's  Residential  Mortgage
Loans,  all of which were  acquired  from the Bank,  as of December 31, 2001 and
December 31, 2000. A  description  of the types of  Residential  Mortgage  Loans
included in the Company's portfolio follows the table.


                       Residential Mortgage Loan Portfolio

                                             December 31,
                    ------------------------------------------------------------
                             2001
                    ----------------------------   -----------------------------
                      Aggregate      Percent        Aggregate         Percent
                      Principal         to          Principal            to
    Type               Balance        Total         Balance            Total
    ----            --------------   -------       -------------      ----------

Monthly ARMs         $ 79,541,872     27.7%        $ 15,010,666         5.0%
One-Year ARMs          21,583,666      7.5%          17,405,151         5.9%
Three-Year ARMs        19,462,468      6.8%          31,244,189        10.5%
5/1 ARMs               49,804,806     17.3%          82,907,320        27.8%
7/1 ARMs                8,378,308      2.9%          12,043,834         4.0%
10/1 ARMs              99,255,916     34.5%         134,689,699        45.2%
30 Year Fixed-Rate      9,537,078      3.3%           4,884,503         1.6%
                    --------------   -------       --------------     ----------
                      287,564,114    100.0%         298,185,362       100.0%
                    ==============   =======       ==============     ==========
Less:
 Allowance for loan
  losses                   40,333                        40,333
                    --------------                 --------------

  Total             $ 287,523,781                 $ 298,145,029
                    ==============                 ==============

Purchases  from the Bank of  Residential  Mortgage  Loans  during the year ended
December 31, 2001 were $97,217,311, which were offset by principal repayments on
the Company's loans of $107,838,559.  See "Management's  Discussion and Analysis
of  Financial  Condition  and  Results of  Operations  -  Financial  Condition -
Residential Mortgage Loans."

A majority of the Residential Mortgage Loans included in the Company's portfolio
at December 31, 2001 bear interest at adjustable  rates. The interest rate on an
"adjustable  rate  mortgage" or an "ARM" resets  periodically  based on an index
(such as the London  Interbank  Offered Rate  ("LIBOR") or the interest  rate on
United States Treasury Bills).  ARMs are typically  subject to lifetime interest
rate caps and periodic  interest rate adjustment  caps. As of December 31, 2001,
the interest rates on the  Residential  Mortgage Loans included in the Company's
portfolio  ranged  from 3.88% per annum to 9.75% per  annum.  For the year ended
December 31, 2001 the weighted average interest rate was approximately 7.16%.

The  interest  rate  on each  type  of ARM  product  included  in the  Company's
portfolio  adjusts  at the times  (each,  a "Rate  Adjustment  Date") and in the
manner  described  below,  subject to lifetime  interest  rate caps,  to minimum
interest  rates  and,  in the case of some  ARMs in the  portfolio,  to  maximum
periodic  adjustment  increases or decreases,  each as specified in the mortgage
note relating to the ARM.  Information set forth below  regarding  interest rate
caps  and  minimum  interest  rates  applies  to  the  current  portfolio  only.
Residential  Mortgage Loans purchased by the Company after December 31, 2001 may
be subject to different interest rates.

ARMs,  except Monthly ARMs, bear interest at its initial interest rate until the
first Rate  Adjustment  Date.  Effective  with each Rate  Adjustment  Date,  the
monthly  principal and interest  payment on an ARM will be adjusted to an amount
that will fully  amortize the  then-outstanding  principal  balance of such loan
over its  remaining  term to stated  maturity and that will be sufficient to pay
interest at the adjusted  interest  rate.  Certain of the types of loan products
that are ARMs contain an option,  which may be exercised  by the  mortgagor,  to
convert the ARM into a fixed-rate  loan for the remainder of the mortgage  term.
If a loan that is an ARM is converted into a fixed-rate  loan, the interest rate
on the fixed-rate loan will be determined at the time of conversion as specified
in the mortgage note relating to the loan and will remain fixed at such rate for
the remaining term of the loan. The Company's  current policy is to retain these
fixed-rate  loans in its portfolio.  All Fixed-Rate  Residential  Mortgage Loans
included in the portfolio allow the mortgagor to repay, at any time, some or all
of the outstanding principal balance of the loan without a fee or penalty.



Monthly  ARM.  The  interest  rate  with  respect  to a monthly  adjustable  ARM
("Monthly  ARM")  adjusts  on the first day of each  month as  specified  in the
related  mortgage note to a rate equal to the  then-current  applicable LIBOR or
treasury  index  plus the  margin set forth in such  mortgage  note,  subject to
periodic and lifetime caps, if any, as specified in related mortgage notes.

One-Year ARM. The interest rate with respect to a one-year ARM ("One-Year  ARM")
is fixed at an initial  rate for the first  twelve  monthly  payments.  The loan
adjusts  annually  thereafter on the date specified in the related mortgage note
to a rate equal to the  then-current  applicable  treasury index plus the margin
set forth in such  mortgage  note,  subject to a maximum  annual  interest  rate
increase or decrease of 2.00%, a lifetime  interest rate cap as specified in the
related mortgage note and a minimum interest rate no less than the gross margin.

Three-Year   ARM.  The  interest  rate  with  respect  to  each  three-year  ARM
("Three-Year  ARM") is  fixed  at an  initial  rate  for the  first  36  monthly
payments.  The loan adjusts  every three years  thereafter in the same manner as
described  for the One-Year  ARM,  except that the treasury  index is the weekly
average yield on the United States  Treasury  securities  adjusted to a constant
maturity of three years.

Five-Year  Fixed-Rate  Loan with  Automatic  Conversion  to  One-Year  ARM.  The
interest  rate with respect to each  five-year  fixed-rate  loan with  automatic
conversion  to a One-Year  ARM (a "5/1 ARM") is fixed at an initial rate for the
first 60 monthly payments and adjusts annually thereafter, as if the Residential
Mortgage Loan were a One-Year ARM, with a lifetime  interest cap as specified in
the related mortgage note. There is no ability to continue at a fixed rate after
the first  Rate  Adjustment  Date  under  the terms of this type of  Residential
Mortgage Loan.

Seven-Year  Fixed-Rate  Loan with  Automatic  Conversion  to One-Year  ARM.  The
interest rate with respect to each  seven-year  fixed-rate  loan with  automatic
conversion  to a One-Year  ARM (a "7/1 ARM") is fixed at an initial rate for the
first 84 monthly payments and adjusts annually thereafter, as if the Residential
Mortgage Loan were a One-Year ARM, with a lifetime  interest cap as specified in
the related mortgage note. There is no ability to continue at a fixed rate after
the first  Rate  Adjustment  Date  under  the terms of this type of  Residential
Mortgage Loan.

Ten-Year Fixed-Rate Loan With Automatic Conversion to One-Year ARM. The interest
rate with respect to each ten-year fixed-rate loan with automatic  conversion to
a  One-Year  ARM (a "10/1  ARM") is fixed at an  initial  rate for the first 120
monthly payments and adjusts annually thereafter, as if the Residential Mortgage
Loan were a One-Year  ARM,  with a lifetime  interest  cap as  specified  in the
related mortgage note. There is no ability to continue at a fixed rate after the
first Rate Adjustment Date under the terms of this type of Residential  Mortgage
Loan.



Investment Policy

General. The Company currently intends to maintain at least 95% of its portfolio
in Mortgage Assets consisting of either Residential Mortgage Loans or investment
grade  mortgage  securities  representing  interests in pools of Mortgage  Loans
("Mortgage-Backed  Securities")  and may  invest  up to 5% of its  portfolio  in
Mortgage  Loans secured by  commercial  real estate  properties or  multi-family
properties  ("Commercial Mortgage Loans") or in other assets eligible to be held
by a REIT.  The  Company's  current  policy  prohibits  the  acquisition  of any
Mortgage  Loan or any  interest  in a  Mortgage  Loan  (other  than an  interest
resulting from the  acquisition of  Mortgage-Backed  Securities) if the Mortgage
Loan (i) is delinquent in the payment of principal and interest;  (ii) is or was
at any time during the  preceding 12 months (a)  classified,  (b) in  nonaccrual
status or (c) renegotiated  due to the financial  deterioration of the borrower;
or (iii) has been,  more than once during the preceding 12 months,  more than 30
days  past due in the  payment  of  principal  or  interest.  Loans  that are in
"non-accrual  status" are  generally  loans that are past due 90 days or more in
principal or interest, and "classified" loans are generally troubled loans which
are deemed substandard or doubtful with respect to collectibility.

The Company may from time to time  acquire  both  conforming  and  nonconforming
Residential Mortgage Loans.  Conventional  conforming Residential Mortgage Loans
comply with the requirements for inclusion in a loan guarantee program sponsored
by either the Federal Home Loan  Mortgage  Corporation  ("FHLMC") or the Federal
National Mortgage Association ("FNMA").  The nonconforming  Residential Mortgage
Loans that the Company  purchases will be nonconforming  generally  because they
have  original  principal  balances  which  exceed  the limits for FHLMC or FNMA
programs in effect at the time the loan was originated.


Mortgage-Backed Securities.  While no Mortgage-Backed Securities are included in
the current Mortgage Asset  portfolio,  the Company may from time to time in the
future acquire fixed-rate or variable-rate Mortgage-Backed Securities. A portion
of any  Mortgage-Backed  Securities  that the Company may purchase may have been
originated  by  the  Bank  by  exchanging   pools  of  Mortgage  Loans  for  the
Mortgage-Backed  Securities.  The Mortgage Loans underlying the  Mortgage-Backed
Securities  will be  secured by  single-family  residential  properties  located
throughout the United States.

The Company intends to acquire only investment grade Mortgage-Backed  Securities
issued by agencies of the Federal government or government  sponsored  agencies,
such as FHLMC, FNMA and the Government National Mortgage  Association  ("GNMA").
The  Company  does not intend to acquire  any  interest-only  or  principal-only
Mortgage-Backed Securities.

Commercial  Mortgage Loans.  While no Commercial  Mortgage Loans are included in
the current  portfolio,  the Company may from time to time in the future acquire
Commercial  Mortgage  Loans  secured by  industrial  and  warehouse  properties,
recreational  facilities,  office  buildings,  retail space and shopping  malls,
hotels and motels,  hospitals,  nursing homes or senior living  centers.  Unlike
Residential   Mortgage   Loans,   Commercial   Mortgage  Loans   generally  lack
standardized terms. In addition, Commercial Mortgage Loans tend to be fixed-rate
loans having shorter  maturities than  Residential  Mortgage  Loans.  Commercial
Mortgage  Loans may also not be fully  amortizing,  meaning that they may have a
significant  principal balance or "balloon"  payment due on maturity.  Moreover,
commercial  properties,  particularly  industrial and warehouse properties,  are
generally subject to relatively greater  environmental risks than non-commercial
properties,  generally  giving  rise  to  increased  costs  of  compliance  with
environmental laws and regulations.




Other Real Estate Assets.  The Company may invest up to 5% of the total value of
its   portfolio  in  assets   (other  than   Residential   Mortgage   Loans  and
Mortgage-Backed  Securities)  eligible to be held by REITs.  Such  assets  could
include  Commercial  Mortgage  Loans,  Mortgage  Loans  secured by  multi-family
properties, cash and cash equivalents.

Credit Risk Management Policies

The  Company  intends  that each  Mortgage  Loan it  acquires in the future will
represent a first lien position and will be originated in the ordinary course of
the  originator's  real  estate  lending  activities  based on the  underwriting
standards  generally  applied (at the time of origination)  for the originator's
own  account.  The Company  also  intends  that all  Mortgage  Loans held by the
Company will be serviced pursuant to the servicing agreement between the Company
and  the  Bank  dated  December  1,  1996  (the  "Servicing   Agreement").   See
"Servicing."

Delinquencies

When a borrower fails to make a required payment on a Mortgage Loan, the loan is
considered  delinquent  and, after  expiration of the applicable cure period the
borrower is charged a late fee,  which is retained by the  Servicer  (as defined
below).  The Bank and the  Company  follow  practices  customary  in the banking
industry in  attempting  to cure  delinquencies  and in pursuing  remedies  upon
default.

Geographic Distribution

A  majority  (or  60.3%)  of the  Residential  Mortgage  Loans  are  secured  by
residential real estate  properties  located in the Washington,  DC metropolitan
area. Consequently, these loans may be subject to a greater risk of default than
other comparable loans in the event of adverse economic,  political, or business
developments  in  Washington,  DC,  Maryland,  and Virginia  that may affect the
ability of residential property owners in any of these areas to make payments of
the  principal  and  interest on the  underlying  mortgages.  See  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Significant Concentration of Credit Risk."



SERVICING

The  Residential  Mortgage  Loans owned by the Company are  serviced by the Bank
(the "Servicer") pursuant to the terms of the Servicing Agreement.  The Servicer
receives  a fee  equal to  0.375%  per annum on the  principal  balances  of the
Mortgage Loans serviced. See "Certain Relationships and Related Transactions."

The Servicing  Agreement requires the Servicer to service the Company's Mortgage
Loans in a manner generally consistent with accepted secondary market practices,
with any  servicing  guidelines  promulgated  by the Company and, in the case of
Residential  Mortgage Loans, with FNMA and FHLMC guidelines and procedures.  The
Servicing  Agreement  requires the Servicer to service these loans solely with a
view toward the interests of the Company and without  regard to the interests of
the Bank or any of the  Bank's  affiliates.  The  Servicer  collects  and remits
principal and interest payments,  administers mortgage escrow accounts,  submits
and  pursues   insurance   claims  and  initiates  and  supervises   foreclosure
proceedings on the loans it services.  The Servicer also provides accounting and
reporting  services  required  by the  Company  for such  loans.  The  Servicing
Agreement  requires the  Servicer to follow such  collection  procedures  as are
customary  in  the  industry,  including  contacting  delinquent  borrowers  and
supervising  foreclosures  and property  disposition  in the event of unremedied
defaults in accordance with servicing guidelines promulgated by the Company. The
Servicer may, in its discretion,  arrange with a defaulting  borrower a schedule
for the liquidation of delinquencies,  provided that, in the case of Residential
Mortgage Loans, no primary  mortgage  guaranty  insurance  coverage is adversely
affected.

The  Servicer is  entitled  to retain any  ancillary  fees,  including,  but not
limited to, late payment charges, prepayment fees, penalties and assumption fees
collected in connection with the Mortgage Loans serviced by it. In addition, the
Servicer is entitled to receive any  benefit  derived  from  interest  earned on
collected principal and interest payments between the date of collection and the
date of remittance to the Company and from interest  earned on tax and insurance
impound  funds  with  respect  to  Mortgage  Loans  serviced  by  the  Servicer.


The Servicer is required to pay all expenses  related to the  performance of its
duties under the Servicing Agreement.  The Servicer is required to make advances
of taxes and required  insurance  premiums that are not collected from borrowers
with respect to any Mortgage Loan serviced by it, unless it determines that such
advances are  nonrecoverable  from the  mortgagor,  insurance  proceeds or other
sources with respect to such Mortgage Loan.

The Company can terminate the  Servicing  Agreement  without cause with at least
sixty days notice to the Servicer and payment of a termination fee.

DIVIDEND POLICY

The  Company  expects to pay an  aggregate  amount of  dividends  each year with
respect to its outstanding  shares of stock equal to  approximately  100% of the
Company's  "REIT taxable income" for such year  (excluding  capital gains).  The
Company  anticipates that none of the dividends on the Series A Preferred Shares
and no material  portion of the  dividends on the Common  Stock will  constitute
non-taxable  returns of capital.  See  "Management's  Discussion and Analysis of
Financial Condition and Results of Operations - Results of Operations."




Dividends  are  declared  at the  discretion  of the Board of  Directors  of the
Company  after  considering  the  Company's   distributable   funds,   financial
requirements,  tax considerations and other factors. The Company's distributable
funds consist  primarily of interest  payments  received on the Mortgage  Assets
held by it,  and the  Company  anticipates  that most of such  assets  will bear
interest at  adjustable  rates.  See  "Management's  Discussion  and Analysis of
Financial  Condition and Results of Operations - Financial  Condition - Interest
Rate Risk."

Under Office of Thrift Supervision (the "OTS") regulations, the Bank is required
to apply to the OTS for approval to make any capital distribution  regardless of
size if the Bank does not qualify for expedited  treatment under the amended OTS
regulations.  Dividends  on the Series A  Preferred  Shares  are not  treated as
capital  distributions for the purposes of these regulations,  provided the Bank
remains "well capitalized" after the payment. At December 31, 2001, the Bank was
in  compliance  with  all of  its  regulatory  capital  requirements  under  the
Financial  Institutions  Reform,  Recovery and Enforcement  Act, and its capital
ratios exceeded the ratios established for "well capitalized" institutions under
prompt corrective action regulations.

THE BANK

The Bank is a federally chartered and federally insured stock savings bank which
at December 31, 2001 was  conducting  business  from 185  full-service  offices,
including 51 grocery store banking centers, and 849 automated teller machines in
Maryland,  Virginia,  Delaware  and the  District of  Columbia.  The Bank's home
office is located in McLean,  Virginia and its executive  offices are located in
Bethesda, Maryland, both suburban communities of Washington, DC. The Bank either
directly or through a wholly-owned  subsidiary  also maintains a commercial loan
production office in Baltimore, Maryland, eight mortgage loan production offices
in the  mid-Atlantic  region,  seven of which  are  operated  by a  wholly-owned
mortgage  banking  subsidiary,  and four consumer loan  production  offices.  At
December 31, 2001, the Bank had total assets of $11.3 billion, total deposits of
$7.5 billion and total  stockholders'  equity of $536.4 million.  Based on total
consolidated  assets  at  December  31,  2001,  the  Bank  is the  largest  bank
headquartered in the Washington, DC metropolitan area.

The  Company  is a  subsidiary  of the Bank and  therefore,  federal  regulatory
authorities have the right to examine the Company and its activities. Payment of
dividends  on the Series A  Preferred  Shares  could be  subject  to  regulatory
limitations  if  after  the  payment  the Bank was not  "well  capitalized"  for
purposes of the OTS prompt corrective action regulations.  "Well capitalized" is
currently defined as having a total risk-based  capital ratio of at least 10.0%,
a tier 1  risk-based  capital  ratio of at least  6.0%  and a core  capital  (or
leverage)  ratio of at least  5.0%.  At  December  31,  2001,  the Bank's  total
risk-based  capital  ratio was 10.70%,  its tier 1 risk-based  capital ratio was
7.00% and its core capital (or leverage) ratio was 5.55%.



If the Exchange  Event (as defined below under "Market for  Registrant's  Common
Equity and  Related  Stockholder  Matters")  occurs,  the Bank  would  likely be
prohibited from paying  dividends on the Bank Preferred Shares (as defined below
under "Market for Registrant's Common Equity and Related Stockholder  Matters").
In all  circumstances  following the Exchange  Event,  the Bank's ability to pay
dividends  would be subject to various  restrictions  under OTS  regulations and
certain contractual provisions.

THE ADVISOR

On  December 3, 1996,  the  Company  entered  into an  advisory  agreement  (the
"Advisory Agreement") with the Bank (the "Advisor") to administer the day-to-day
operations  of the  Company.  The Advisor  principally  is  responsible  for (i)
monitoring the credit quality of the Mortgage  Assets held by the Company,  (ii)
advising the Company with respect to the  acquisition,  management and financing
of the  Company's  Mortgage  Assets,  and (iii)  maintaining  the custody of the
documents related to the Company's  Mortgage Loans. The Advisor may from time to
time  subcontract  all  or a  portion  of its  obligations  under  the  Advisory
Agreement to one or more of its affiliates  involved in the business of managing
Mortgage Assets.

The Advisor and its  affiliates  have  substantial  experience  in the  mortgage
lending  industry,  both in the  origination  and in the  servicing  of mortgage
loans. At December 31, 2001, the Advisor and its affiliates owned  approximately
$5.0 billion of  residential  mortgage  loans,  including  all of the  Company's
Residential  Mortgage Loans. In their  residential  mortgage loan business,  the
Advisor and its affiliates  originate and purchase residential mortgage loans. A
portion of such loans are sold to investors,  primarily in the secondary market,
generally on a servicing  retained  basis.  The Advisor and its affiliates  also
purchase  servicing  rights on residential  mortgage loans. In addition to loans
serviced  for  its own  portfolio,  the  Advisor  and  its  affiliates  serviced
residential   mortgage   loans   having  an  aggregate   principal   balance  of
approximately $5.7 billion as of December 31, 2001.

The  Advisory  Agreement  had an  initial  term of three  years  and is  renewed
automatically  for  additional  one-year  periods unless notice of nonrenewal is
delivered  to  the  Advisor  by  the  Company.  The  Advisory  Agreement  may be
terminated by the Company at any time upon sixty days' prior written notice.  As
long as any Series A Preferred  Shares remain  outstanding,  any decision by the
Company either to not renew the Advisory  Agreement or to terminate the Advisory
Agreement  must be approved by a majority of the Board of Directors,  as well as
by a majority of the  Independent  Directors (as defined below under "Market for
Registrant's  Common Equity and Related  Stockholder  Matters").  The Advisor is
entitled to receive an annual  advisory  fee equal to $200,000  payable in equal
quarterly  installments  with respect to the advisory  and  management  services
provided to the Company. See "Certain Relationships and Related Transactions."

CAPITAL AND LEVERAGE POLICIES

To the extent that the Board of Directors  determines that additional funding is
required,  the Company may raise such funds through additional equity offerings,
debt financing or retention of cash flow (after  consideration  of provisions of
the Code requiring the distribution by a REIT of a certain percentage of taxable
income  and taking  into  account  taxes that would be imposed on  undistributed
taxable income,  including  capital  gains),  or a combination of these methods.



At December 31, 2001, the Company had no debt outstanding,  and the Company does
not currently  intend to incur any  indebtedness.  However,  the  organizational
documents  of the  Company  do not  contain  any  limitation  on the  amount  or
percentage  of debt,  funded or  otherwise,  that the Company  might incur.  The
Company  may  not,  without  the  approval  of a  majority  of  the  Independent
Directors, incur debt for borrowed money in excess of 25% of the Company's total
stockholders'  equity,  including  intercompany advances made by the Bank to the
Company.

The  Company may also issue  additional  series of  Preferred  Stock (as defined
below  under  "Market for  Registrant's  Common  Equity and Related  Stockholder
Matters").  However,  the  Company  does  not  currently  intend  to  issue  any
additional  series  of  Preferred  Stock  unless  it   simultaneously   receives
additional capital contributions from the Bank equal to the sum of the aggregate
offering price of such additional  Preferred Stock and the Company's expenses in
connection with the issuance of such additional shares of Preferred Stock. Prior
to its issuance of additional  shares of Preferred  Stock, the Company will take
into  consideration the Bank's regulatory  capital  requirements and the cost of
raising and maintaining that capital at the time.

EMPLOYEES

The  Company  has eight  officers.  The  executive  officers  of the Company are
described  further  below  under  "Directors  and  Executive   Officers  of  the
Registrant - Directors and Officers."  The Company does not  anticipate  that it
will  require any  additional  employees  because it has retained the Advisor to
administer  the  day-to-day  activities of the Company  pursuant to the Advisory
Agreement.  Each  officer of the  Company  currently  is also an officer  and/or
director  of the Bank  and/or  affiliates  of the Bank.  The  Company  maintains
corporate records and audited financial  statements that are separate from those
of the Bank or any of the Bank's affiliates.

COMPETITION

The  Company  does  not  anticipate  that  it will  engage  in the  business  of
originating Residential Mortgage Loans. It does anticipate that it will purchase
Mortgage  Assets in addition to those in the current loan portfolio and that all
these Mortgage Assets will be purchased from the Bank or affiliates of the Bank.
Accordingly,  the  Company  does not expect to  compete  with  mortgage  conduit
programs, investment banking firms, savings and loan associations, banks, thrift
and  loan  associations,   finance  companies,  mortgage  bankers  or  insurance
companies in acquiring its Mortgage Assets.

ENVIRONMENTAL MATTERS

In the event that the Company is forced to  foreclose  on a  defaulted  Mortgage
Loan to recover its investment in such Mortgage Loan, the Company may be subject
to  environmental  liabilities in connection  with the underlying  real property
which could exceed the value of the real property.  Although the Company intends
to exercise due diligence to discover potential environmental  liabilities prior
to the acquisition of any property through foreclosure,  hazardous substances or
waste,  contaminants,  pollutants  or sources  thereof  (as defined by state and
federal  laws and  regulations)  may be  discovered  on  properties  during  the
Company's  ownership or after a sale thereof to a third party. If such hazardous
substances are  discovered on a property which the Company has acquired  through
foreclosure or otherwise, the Company may be required to remove those substances
and clean up the  property.  There can be no  assurance  that in such a case the
Company  would not incur full  recourse  liability  for the entire  costs of any
removal  and  clean-up,  that the cost of such  removal and  clean-up  would not
exceed the value of the property or that the Company could recoup any such costs
from any third party.  The Company may also be liable to tenants and other users
of  neighboring  properties.  In addition,  the Company may find it difficult or
impossible  to sell the  property  prior  to or  following  any  such  clean-up.


TAX STATUS OF THE COMPANY

The Company has elected to be taxed as a REIT under  Sections 856 through 860 of
the Code. 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% of its REIT taxable  income to its  stockholders,  meets  certain
organizational,  stock ownership and operational  requirements and meets certain
income  and asset  tests.  To  remain  qualified  as a REIT,  the  Company  must
distribute  each year at least 90% of its "REIT taxable  income" (not  including
capital gains) for that year to stockholders. 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.

The Company  recognized a capital gain of $21,924 on the sale of one Real Estate
Owned ("REO") property during the year ended December 31, 2001. As a result, the
Company  incurred and paid an income tax liability  for the year ended  December
31, 2001 of $8,000.

During the year ended December 31, 2000, the Company recognized capital gains of
$20,209 on the sale of two REO properties.  As a result, the Company incurred an
income tax  liability for the year ended  December 31, 2000 of $7,073,  of which
$2,373 was paid subsequent to December 31, 2000.  During the year ended December
31, 1999, the Company incurred an income tax liability of $10,468 related to the
gain of $29,909  recognized  on the sale of five REO  properties  which was paid
during the year ended December 31, 2000.

ITEM 2. PROPERTIES

None.



ITEM 3.  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 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security  holders of the Company during the
fourth quarter of the year ended December 31, 2001.




                                    PART II

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

DESCRIPTION OF COMMON STOCK

General

In connection with the formation of the Company on November 5, 1996, the Company
issued 100 shares of Common Stock to the Bank for $1,000. These shares of Common
Stock were issued in reliance upon an exemption from registration  under Section
4(2) of the  Securities Act of 1933, as amended.  Thus,  there is no established
public trading market for the Common Stock. As of March 15, 2002, there were 100
issued and outstanding shares of Common Stock held by one stockholder, the Bank.


Dividends

The following  table reflects the  distributions  declared by the Company on the
Common Stock for each quarter  during the two most recent  fiscal  years.  For a
discussion  of the  Company's  distribution  policy  with  respect to the Common
Stock, see "Business - Dividend Policy."

                      Period           Distributions              Payment Date
-------------------------------------  --------------  -------------------------
January 1, 2000 to March 31, 2000      $   500,000                April 17, 2000
April 1, 2000 to June 30, 2000             250,000                 July 17, 2000
July 1, 2000 to September 30, 2000       1,000,000              October 16, 2000
October 1, 2000 to December 31, 2000     3,500,000              January 16, 2001
January 1, 2001 to March 31, 2001          275,000                April 16, 2001
April 1, 2001 to June 30, 2001             500,000                 July 16, 2001
July 1, 2001 to September 30, 2001       1,000,000              October 15, 2001
October 1, 2001 to December 31, 2001     2,700,000              January 15, 2002

Holders of Common  Stock are  entitled  to  receive  dividends  when,  as and if
declared  by the  Board of  Directors  out of funds  legally  available.  If the
Company fails to declare and pay full dividends on the Series A Preferred Shares
in any  dividend  period,  the  Company  may not  make  any  dividends  or other
distributions  with  respect to the Common Stock until such time as dividends on
all  outstanding  Series A Preferred  Shares have been (i) declared and paid for
three consecutive  dividend periods and (ii) declared and paid or declared and a
sum  sufficient  for the payment  thereof has been set apart for payment for the
fourth  consecutive  dividend period. To remain qualified as a REIT, the Company
must  distribute  annually at least 90% of its annual "REIT taxable income" (not
including  capital  gains) to  stockholders.  See  "Business - Tax Status of the
Company."




Voting Rights

Subject  to the  rights,  if any,  of the  holders  of any  class or  series  of
Preferred Stock (as defined  below),  all voting rights are vested in the Common
Stock.  The  holders  of  Common  Stock  are  entitled  to one vote  per  share.


Rights Upon Liquidation

In the event of the  liquidation,  dissolution  or  winding  up of the  Company,
whether  voluntary or  involuntary,  after there have been paid or set aside for
the holders of all series of Preferred  Stock the full  preferential  amounts to
which such holders are entitled, the holders of Common Stock will be entitled to
share equally and ratably in any assets remaining after the payment of all debts
and liabilities.

DESCRIPTION OF SERIES A PREFERRED SHARES

Market Information and Dividends

The Series A Preferred  Shares are listed on the New York Stock  Exchange  under
the trading  symbol  "CCP-PrA."  As of February 13, 2002,  there were  3,000,000
issued and  outstanding  Series A  Preferred  Shares held by  approximately  178
holders of record.  The following  table  reflects the  respective  high and low
sales prices for the Series A Preferred  Shares for each quarter  during the two
most recent fiscal years. The table also indicates the distributions declared by
the Company during these periods. For a discussion of the Company's distribution
policy with respect to the Series A Preferred  Shares,  see "Business - Dividend
Policy."

                                                           Price
Period                                               High         Low        Distributions         Payment Date
---------------------------------------------   -----------  -----------  -----------------   ----------------------
January 1, 2000 to March 31, 2000                  $ 48.94      $ 46.00        $ 3,890,625           April 17, 2000
April 1, 2000 to June 30, 2000                       52.88        46.19          3,890,625            July 17, 2000
July 1, 2000 to September 30, 2000                   53.75        49.50          3,890,625         October 16, 2000
October 1, 2000 to December 31, 2000                 54.00        50.50          3,890,625         January 16, 2001
January 1, 2001 to March 31, 2001                    54.70        52.19          3,890,625           April 16, 2001
April 1, 2001 to June 30, 2001                       56.00        53.55          3,890,625            July 16, 2001
July 1, 2001 to September 30, 2001                   57.50        53.30          3,890,625         October 15, 2001
October 1, 2001 to December 31, 2001                 57.95        55.25          3,890,625         January 15, 2002

Holders of Series A Preferred  Shares are  entitled to receive,  if, when and as
declared by the Board of  Directors  of the Company out of assets of the Company
legally  available,  cash  dividends  at the  rate of 10 3/8%  per  annum of the
liquidation preference (equivalent to $5.1875 per share per annum).

The right of  holders  of Series A  Preferred  Shares to  receive  dividends  is
noncumulative.  Accordingly,  if the  Board  of  Directors  fails to  declare  a
dividend on the Series A Preferred Shares for a quarterly dividend period,  then
holders  of the  Series A  Preferred  Shares  will  have no right to  receive  a
dividend  for that  period,  and the Company  will have no  obligation  to pay a
dividend for that period, whether or not dividends are declared and paid for any
future period with respect to either the Series A Preferred Shares or the Common
Stock.




General

The  Series A  Preferred  Shares  form a series  of the  preferred  stock of the
Company (the "Preferred  Stock"),  which Preferred Stock may be issued from time
to time in one or more series with such rights,  preferences  and limitations as
are determined by the Company's Board of Directors.

The holders of the Series A  Preferred  Shares  have no  preemptive  rights with
respect  to any  shares  of  the  capital  stock  of the  Company  or any  other
securities  of the Company  convertible  into or  carrying  rights or options to
purchase any such shares.  The Series A Preferred  Shares are not subject to any
sinking  fund or  other  obligation  of the  Company  for  their  repurchase  or
retirement.  The Series A Preferred Shares will be exchanged  automatically on a
one-for-one  basis  for  Bank  Preferred  Shares  (as  defined  below)  upon the
occurrence of the Exchange Event (as defined below).

Automatic Exchange

Each  Series A Preferred  Share will be  exchanged  automatically  for one newly
issued  Series B  preferred  share of the Bank ("Bank  Preferred  Share") if the
appropriate  federal  regulatory  agency of the Bank  directs  in  writing  (the
"Directive")  an exchange of the Series A  Preferred  Shares for Bank  Preferred
Shares because (i) the Bank becomes  "undercapitalized"  under prompt corrective
action  regulations  established  pursuant  to  the  Federal  Deposit  Insurance
Corporation  Improvement  Act of 1991, as amended,  (ii) the Bank is placed into
conservatorship  or  receivership or (iii) the  appropriate  federal  regulatory
agency,  in its sole discretion and even if the Bank is not  "undercapitalized,"
anticipates the Bank becoming "undercapitalized" in the near term (the "Exchange
Event").  Upon the Exchange Event, each holder of Series A Preferred Shares will
be   unconditionally   obligated  to  surrender  to  the  Bank  the  certificate
representing each Series A Preferred Share of such holder,  and the Bank will be
unconditionally  obligated  to issue to such  holder in  exchange  for each such
Series A Preferred  Share a certificate  representing  one Bank Preferred  Share
(the  "Automatic  Exchange").  Absent the occurrence of the Exchange  Event,  no
shares of Bank Preferred Shares will be issued.

Holders of Series A Preferred  Shares cannot  exchange  their Series A Preferred
Shares for Bank Preferred Shares voluntarily. In addition, absent the occurrence
of the  Automatic  Exchange,  holders of Series A Preferred  Shares will have no
dividend,  voting,  liquidation  preference  or other rights with respect to any
security  of the Bank;  such rights as are  conferred  by the Series A Preferred
Shares exist solely as to the Company.




Voting Rights

Except as expressly  required by applicable  law, or except as indicated  below,
the  holders of the Series A Preferred  Shares will not be entitled to vote.  In
the event the  holders  of Series A  Preferred  Shares are  entitled  to vote as
indicated  below,  each Series A Preferred Share will be entitled to one vote on
matters on which holders of the Series A Preferred  Shares are entitled to vote.


If at the time of any  annual  meeting  of the  Company's  stockholders  for the
election  of  directors,  the Company has failed to pay or declare and set aside
for  payment a quarterly  dividend  during any of the four  preceding  quarterly
dividend periods on any series of Preferred Stock of the Company,  including the
Series A Preferred  Shares,  the number of directors then constituting the Board
of Directors  of the Company will be increased by two (if not already  increased
by two due to a default in preference dividends),  and the holders of the Series
A Preferred  Shares,  voting  together  with the holders of all other  series of
Preferred Stock as a single class, will be entitled to elect such two additional
directors  to serve on the  Company's  Board of  Directors  at each such  annual
meeting.  Each director  elected by the holders of shares of the Preferred Stock
shall  continue to serve as such  director  until the later of (i) the full term
for  which  he or she  shall  have  been  elected  or (ii) the  payment  of four
quarterly  dividends on the  Preferred  Stock,  including the Series A Preferred
Shares.

Redemption

The Series A  Preferred  Shares are not  redeemable  prior to January  15,  2007
(except upon the  occurrence of certain tax events).  On or after such date, the
Series A Preferred  Shares will be redeemable  at the option of the Company,  in
whole or in part, at any time. Any such  redemption  must comply with the prompt
corrective  action and capital  distribution  regulations  of the OTS, which may
prohibit  a  redemption  and will  require  the  OTS'  prior  written  approval.


The Company will also have the right at any time, upon the occurrence of certain
tax events and with the prior written  approval of the OTS, to redeem the Series
A Preferred  Shares,  in whole (but not in part) at a redemption price of $50.00
per  share,  plus the  quarterly  accrued  and  unpaid  dividend  to the date of
redemption, if any, thereon.

Rights Upon Liquidation

In the event of any voluntary or involuntary liquidation, dissolution or winding
up of the  Company,  the  holders of the Series A  Preferred  Shares at the time
outstanding  will be entitled to receive out of assets of the Company  available
for distribution to  stockholders,  before any distribution of assets is made to
holders of Common Stock or any other class of stock ranking junior to the Series
A Preferred Shares upon liquidation,  liquidating distributions in the amount of
$50.00 per share,  plus the quarterly  accrued and unpaid dividend  thereon,  if
any, to the date of liquidation.




Independent Director Approval

As long as any Series A Preferred Shares are outstanding, certain actions by the
Company must be approved by a majority of the independent  directors who are not
officers  or  employees  of the  Company  and are not  directors,  officers,  or
employees of the Bank or any of its affiliates  (the  "Independent  Directors").
Any  members  of the Board of  Directors  of the  Company  elected by holders of
Preferred Stock,  including the Series A Preferred Shares,  will be deemed to be
Independent  Directors for purposes of approving  actions requiring the approval
of a majority of the Independent Directors.




ITEM 6.  SELECTED FINANCIAL DATA

The  selected  financial  data of the Company  herein has been  derived from the
financial  statements  of the  Company,  which  statements  have been audited by
Arthur  Andersen  LLP,  independent  public  accountants,  as indicated by their
report with  respect  thereto  included  elsewhere  in this Form 10-K.  The data
should be read in  conjunction  with  "Management's  Discussion  and Analysis of
Financial  Condition and Results of  Operations"  and the  financial  statements
included elsewhere herein.

                                                               As of or for the year ended
                                                                       December 31,
                                       -----------------------------------------------------------------------------
                                            2001           2000            1999           1998           1997
                                       -----------------------------------------------------------------------------
OPERATING DATA:

   Interest income                        $21,041,424     $22,189,625    $21,795,357    $22,860,956     $23,219,408
   Provision for loan losses                        -               -         26,554         10,862          65,195
                                       -----------------------------------------------------------------------------
      Total interest income after
         provision for loan losses         21,041,424      22,189,625     21,768,803     22,850,094      23,154,213
   Gain on sale of real estate
         acquired in settlement
         of loans, net                         21,924          20,209         29,909         32,937               -
   Operating expenses                       1,356,557       1,383,421      1,715,826      1,514,080       1,526,564
Provision for income taxes                     10,373          15,168              -              -               -
                                       -----------------------------------------------------------------------------
      Net income                          $19,696,418     $20,811,245    $20,082,886    $21,368,951     $21,627,649
                                       =============================================================================
  Earnings available to common            $ 4,133,918     $ 5,248,745                                   $ 6,065,149
      stockholders                                                       $ 4,520,386    $ 5,806,451
  Earnings per common share               $ 41,339.18     $ 52,487.45    $ 45,203.86    $ 58,064.51     $ 60,651.49

DIVIDENDS DECLARED:

  Dividends on common stock               $ 4,475,000     $ 5,250,000    $ 4,690,000    $ 5,810,000     $ 6,150,000
  Dividends on preferred stock            $15,562,500     $15,562,500    $15,562,500    $15,562,500     $15,562,500

BALANCE SHEET DATA:

  Residential mortgage loans, net        $287,523,781    $298,145,029   $295,195,830   $292,682,032    $290,382,131
  Total assets                           $306,318,593    $307,516,771   $307,146,976   $307,593,809    $306,823,316
  Total stockholders' equity             $299,658,918    $299,998,745   $299,830,386   $299,996,451    $299,915,149
  Number of preferred shares
       outstanding                          3,000,000       3,000,000      3,000,000      3,000,000       3,000,000
  Number of common shares
       outstanding                                100             100            100            100             100
  Average yield on residential
       mortgage loans                           7.16%           7.42%          7.35%          7.82%           7.85%



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

FINANCIAL CONDITION

Critical Accounting Policies

Financial  Reporting  Release  No.  60,  which  was  recently  released  by  the
Securities and Exchange  Commission (the "SEC"),  encourages public companies to
include a  discussion  of critical  accounting  policies or methods  used in the
preparation of financial statements. Critical accounting policies are defined as
those that are  reflective  of  significant  judgments  and  uncertainties,  and
potentially result in materially  different results under different  assumptions
and conditions.  The Company's significant  accounting policies are described in
Note 2 in the Notes to the Financial  Statements.  Not all of these  significant
accounting policies require management to make difficult,  subjective or complex
judgements or  estimates.  However,  the following  policy could be deemed to be
critical within the SEC definition:

     . estimation of allowance for loan losses

Allowance for Loan Losses

Management  reviews the loan  portfolio to establish an allowance  for estimated
losses if deemed  necessary.  An analysis to determine  whether an allowance for
loan losses is required is performed periodically,  and an allowance is 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 for the years ended  December 31, 2001,  2000 and
1999 is as follows:

                                                               Year Ended December 31,
                                         ---------------------------------------------------------------------
                                                 2001                    2000                    1999
                                         ---------------------    --------------------    --------------------

        Beginning balance                        $    40,333             $    40,333             $    40,333
        Provision for loan losses                          -                       -                  26,554
        Charge-offs                                        -                       -                 (26,554)
                                         ---------------------    --------------------    --------------------
          Ending Balance                         $    40,333             $    40,333             $    40,333
                                         =====================    ====================    ====================

Residential Mortgage Loans

At December  31,  2001,  the Company had  $287,523,781  invested in  Residential
Mortgage  Loans  compared to  $298,145,029  at December 31,  2000.  During 2001,
Residential  Mortgage Loan purchases were $97,217,311 and principal  collections
were $107,838,559. In addition, the Company received proceeds of $138,330 on the
sale of one property  classified as real estate  acquired in settlement of loans
during the year ended  December  31,  2001.  Management  intends to  continue to
reinvest  proceeds  received from  repayments of loans by purchasing  additional
Residential Mortgage Loans from either the Bank or its affiliates.




At December 31, 2001, the Company had six non-accrual loans (loans contractually
past due 90 days or more or with respect to which other  factors  indicate  that
full payment of principal and interest is unlikely) with an aggregate  principal
balance of $1,088,562 (or 0.38% of loans). At December 31, 2000, the Company had
three  non-accrual  loans with an  aggregate  principal  balance of $547,069 (or
0.18% of loans).

At December 31, 2001, the Company had eight delinquent  loans (loans  delinquent
30-89  days) with an  aggregate  principal  balance of  $1,320,986  (or 0.46% of
loans).  At December 31,  2000,  the Company had five  delinquent  loans with an
aggregate principal balance of $655,042 (or 0.22% of loans).

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 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.

Based on the outstanding balance of the Company's  Residential Mortgage Loans at
December 31,  2001,  and the interest  rates on such loans,  anticipated  annual
interest income on the Company's loan portfolio was approximately  125.3% 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 or the Common Stock. The Company,
to date,  has not used any  derivative  instruments  to manage its interest rate
risk.

The following  table  contains  estimated  principal  cash flows and fair market
values by type for the Company's  Residential  Mortgage Loans.  Prepayment rates
are  assumed  for  the  Company's  loans  based  on  recent  actual  and  market
experience. Fair value is estimated using discounted cash flow analyses based on
contractual repayment and anticipated  prepayment schedules.  The discount rates
used in these  analyses  are based on either  the  interest  rates  paid on U.S.
Treasury  securities  of  comparable  maturities  adjusted  for credit  risk and
non-interest  operating costs, or the interest rates currently offered for loans
with similar terms to borrowers of similar credit quality.




                                          Expected Maturity/Repricing Date
----------------------------------------------------------------------------------------------------------------------
                                               (Dollars in thousands)
                                                    December 31,
                           --------------------------------------------------------
                                                                                                              Fair
                             2002       2003        2004        2005       2006     Thereafter     Total      Value
                           ---------  ----------  ----------  ---------  ---------- ------------  ---------  ---------
Monthly ARMs                 79,542           -           -          -           -            -     79,542     79,542
 Average Interest Rate       4.896%           -           -          -           -            -     4.896%

One-Year ARMs                20,769         815           -          -           -            -     21,584     22,187
 Average Interest Rate       6.253%      6.824%           -          -           -            -     6.275%

Three-Year ARMs              15,207       3,974         281          -           -            -     19,462     20,698
 Average Interest Rate       7.820%      7.893%      7.376%          -           -            -     7.828%

5/1 ARMs                     31,871       9,142       6,551      2,156          85            -     49,805     51,907
 Average Interest Rate       7.212%      6.997%      6.967%     7.491%      7.817%            -     7.153%

7/1 ARMs                      1,562       1,292       1,053      1,153       3,318            -      8,378      8,718
 Average Interest Rate       6.757%      6.763%      6.763%     6.698%      6.793%            -     6.765%

10/1 ARMs                    19,350      14,757      12,111      9,932       8,137       34,969     99,256    102,985
 Average Interest Rate       7.013%      6.970%      6.970%     6.970%      6.970%       6.971%     6.979%

30-Year Fixed Rate            1,187         953         854        766         686        5,091      9,537      9,782
 Average Interest Rate       7.607%      7.606%      7.606%     7.606%      7.606%       7.604%     7.605%

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.  A majority of the
Company's  Residential  Mortgage  Loans are loans  secured by  residential  real
estate  properties  located in the  Washington,  DC metropolitan  area.  Service
industries and Federal, state and local governments employ a significant portion
of the Washington, DC area labor force. 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 REIT as  discussed  in  "Business  - 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
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 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 as it deems necessary.

RESULTS OF OPERATIONS

Fiscal Year 2001 Compared to Fiscal Year 2000

The Company  reported net income of $19,696,418  and  $20,811,245  for the years
ended  December 31, 2001 and 2000,  respectively.  The decrease in net income is
due  primarily  to a decrease  in the average  balance and yield on  Residential
Mortgage Loans.

Interest   income  on  Residential   Mortgage  Loans  totaled   $20,875,203  and
$22,011,411 for the years ended December 31, 2001 and 2000, respectively,  which
represents an average yield on such loans of 7.16% and 7.42%, respectively.  The
average loan balance of the Residential Mortgage Loan portfolio was $291,606,584
and $296,486,907  for the years ended December 31, 2001 and 2000,  respectively.
The Company would have  recorded an  additional  $37,120 and $35,879 in interest
income for the years ended  December  31, 2001 and 2000,  respectively,  had its
non-accrual  loans  been  current  in  accordance  with  their  original  terms.


Other  interest  income of $166,221 and $178,214 was recognized on the Company's
interest  bearing  deposits  during the years ended  December 31, 2001 and 2000,
respectively.

There were no  provisions  for loan losses  during the years ended  December 31,
2001 and 2000.

The Company  recognized a gain of $21,924 on the sale of one REO property during
the year  ended  December  31,  2001.  A gain of  $20,209 on the sale of two REO
properties was recognized during the year ended December 31, 2000.




Operating  expenses  totaling  $1,356,557  and  $1,383,421  for the years  ended
December 31, 2001 and 2000, 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 $1,052,549 and
$1,088,694  for the years ended December 31, 2001 and 2000,  respectively,  were
based on a servicing fee rate of 0.375% per annum of the  outstanding  principal
balances of Residential  Mortgage  Loans,  pursuant to the Servicing  Agreement.
Advisory  fees paid to parent for the years  ended  December  31,  2001 and 2000
totaled $200,000 for each period. Directors' fees totaled $29,000 for both years
ended  December  31,  2001  and  2000  and  represent  compensation  to the  two
independent  members  of the  Board of  Directors.  General  and  administrative
expenses  totaled  $75,008 and $65,727 for the years ended December 31, 2001 and
2000, respectively.

During the year ended  December  31,  2001,  the  Company's  Board of  Directors
declared cash dividends of  $15,562,500,  representing  $5.1875 per share on the
outstanding shares of Series A Preferred Shares, out of the retained earnings of
the Company.

Also during the year ended December 31, 2001,  the Company's  Board of Directors
declared  cash  dividends of $44,750 per share of Common  Stock,  $4,133,918  of
which was paid out of the retained earnings of the Company and $341,082 of which
was treated as a return of capital.

Fiscal Year 2000 Compared to Fiscal Year 1999

The Company  reported net income of $20,811,245  and  $20,082,886  for the years
ended  December 31, 2000 and 1999,  respectively.  The increase in net income is
due primarily to a increase in the average yield on  Residential  Mortgage Loans
and a decrease in operating expenses.

Interest   income  on  Residential   Mortgage  Loans  totaled   $22,011,411  and
$21,628,731 for the years ended December 31, 2000 and 1999, respectively,  which
represents an average yield on such loans of 7.42% and 7.35%, respectively.  The
average loan balance of the Residential Mortgage Loan portfolio was $296,486,907
and $294,142,360  for the years ended December 31, 2000 and 1999,  respectively.
The Company would have  recorded an  additional  $35,879 and $38,434 in interest
income for the years ended  December  31, 2000 and 1999,  respectively,  had its
non-accrual  loans  been  current  in  accordance  with  their  original  terms.


Other  interest  income of $178,214 and $166,626 was recognized on the Company's
interest  bearing  deposits  during the years ended  December 31, 2000 and 1999,
respectively.

There were no  provisions  for loan losses  during the year ended  December  31,
2000.  Provision for loan losses of $26,554 was recorded on the  Company's  loan
portfolio during the year ended December 31, 1999.

The  Company  recognized  a gain of  $20,209  on the sale of two REO  properties
during the year ended  December  31, 2000. A gain of $29,909 on the sale of five
REO properties was recognized during the year ended December 31, 1999. Operating
expenses  totaling  $1,383,421  and  $1,715,826 for the years ended December 31,
2000 and 1999,  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 $1,088,694 and
$1,116,911  for the years ended December 31, 2000 and 1999,  respectively,  were
based on a servicing fee rate of 0.375% per annum of the  outstanding  principal



balances of Residential  Mortgage  Loans,  pursuant to the Servicing  Agreement.
Advisory  fees paid to parent for the years  ended  December  31,  2000 and 1999
totaled  $200,000 for each period.  Directors'  fees totaled $29,000 and $26,000
for the years ended  December  31, 2000 and 1999,  respectively,  and  represent
compensation to the two independent  members of the Board of Directors.  General
and  administrative  expenses  totaled  $65,727 and $372,915 for the years ended
December  31,  2000  and  1999,  respectively.   The  decrease  in  general  and
administrative  expenses is due primarily to the prior year  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 year ended  December  31,  2000,  the  Company's  Board of  Directors
declared cash dividends of  $15,562,500,  representing  $5.1875 per share on the
outstanding shares of Series A Preferred Shares, out of the retained earnings of
the Company.

Also during the year ended December 31, 2000,  the Company's  Board of Directors
declared  cash  dividends of $52,500 per share of Common  Stock,  $5,248,745  of
which was paid out of the  retained  earnings of the Company and $1,255 of which
was treated as a return of capital.

 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Information  required  by  this  item  is  included  in  Item  7,  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Interest Rate Risk."





ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                    CONTENTS


                                                                           Page

(a) Report of Independent Public Accountants.................................F-2

(b) Statements of Financial Condition at December 31, 2001 and 2000..........F-3

(c) Statements of Operations for the Years Ended
    December 31, 2001, 2000 and 1999.........................................F-4

(d) Statements of Stockholders' Equity for the Years Ended
    December 31, 2001, 2000 and 1999.........................................F-5

(e) Statements of Cash Flows for the Years Ended
    December 31, 2001, 2000 and 1999.........................................F-6

(f) Notes to Financial Statements............................................F-7



                                      F-1







                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors of Chevy Chase Preferred Capital Corporation:

We have audited the  accompanying  statements  of  financial  condition of Chevy
Chase Preferred Capital  Corporation (the "Company," a Maryland  corporation) as
of  December  31,  2001 and 2000,  and the  related  statements  of  operations,
stockholders'  equity and cash  flows for each of the three  years in the period
ended December 31, 2001. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of the Company as of December 31,
2001 and 2000,  and the results of its operations and its cash flows for each of
the three  years in the  period  ended  December  31,  2001 in  conformity  with
accounting principles generally accepted in the United States.

Vienna, Virginia
March 13, 2002



                                      F-2












                    CHEVY CHASE PREFERRED CAPITAL CORPORATION
                        STATEMENTS OF FINANCIAL CONDITION


                                                       December 31,
                                              ----------------------------------
                                                      2001                2000
                                              ----------------  ----------------

                                     ASSETS

  Cash and interest-bearing deposits              $  5,764,867     $  5,122,692
  Residential mortgage loans (net of allowance
   for loan losses of $40,333 for both years)      287,523,781      298,145,029
  Real estate acquired in settlement of loans               -           116,406
  Accounts receivable from parent                   11,825,608        2,519,665
  Accrued interest receivable                        1,196,337        1,604,979
  Prepaid expenses                                       8,000            8,000
                                               ----------------  ---------------

                 Total assets                     $306,318,593     $307,516,771
                                               ================  ===============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

  Accounts payable to others and
   accrued expenses                                 $   69,050      $   127,401
  Dividends payable to parent                        2,700,000        3,500,000
  Dividends payable to others                        3,890,625        3,890,625
                                               ----------------  ---------------

                 Total liabilities                   6,659,675        7,518,026
                                               ----------------  ---------------

  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             284,658,818      284,998,645
                                                ---------------  ---------------
               Total stockholders' equity          299,658,918      299,998,745
                                                ---------------  ---------------

               Total liabilities and
                 stockholders' equity             $306,318,593     $307,516,771
                                                ===============  ===============


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

                                      F-3



                                     CHEVY CHASE PREFERRED CAPITAL CORPORATION
                                             STATEMENTS OF OPERATIONS

                                                                        Year Ended December 31,
                                                  ---------------------------------------------------------------------
                                                             2001                   2000                   1999
                                                      -------------------    -------------------    -------------------
Interest income:
Residential mortgage loans                                  $ 20,875,203           $ 22,011,411           $ 21,628,731
Other                                                            166,221                178,214                166,626
                                                      -------------------    -------------------    -------------------

         Total interest income                                21,041,424             22,189,625             21,795,357

Provision for loan losses                                              -                      -                 26,554
                                                      -------------------    -------------------    -------------------
         Total interest income after
               provision for loan losses                      21,041,424             22,189,625             21,768,803

Gain on sale of real estate acquired in
         settlement of loans, net                                 21,924                 20,209                 29,909
                                                      -------------------    -------------------    -------------------

         Total operating income                               21,063,348             22,209,834             21,798,712
                                                      -------------------    -------------------    -------------------

Operating expenses:
Loan servicing fees-parent                                     1,052,549              1,088,694              1,116,911
Advisory fees-parent                                             200,000                200,000                200,000
Directors' fees                                                   29,000                 29,000                 26,000
General and administrative                                        75,008                 65,727                372,915
                                                      -------------------    -------------------    -------------------
      Total operating expenses                                 1,356,557              1,383,421              1,715,826
                                                      -------------------    -------------------    -------------------

      Income before income taxes                              19,706,791             20,826,413             20,082,886
Provision for income taxes                                        10,373                 15,168                      -
                                                      -------------------    -------------------    -------------------

NET INCOME                                                  $ 19,696,418           $ 20,811,245           $ 20,082,886
                                                      ===================    ===================    ===================

PREFERRED STOCK
  DIVIDENDS                                                   15,562,500             15,562,500             15,562,500
                                                      -------------------    -------------------    -------------------

EARNINGS AVAILABLE TO
  COMMON STOCKHOLDER                                         $ 4,133,918            $ 5,248,745            $ 4,520,386
                                                      ===================    ===================    ===================

EARNINGS PER COMMON
  SHARE                                                      $ 41,339.18            $ 52,487.45            $ 45,203.86
                                                      ===================    ===================    ===================



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

                                      F-4


                                           CHEVY CHASE PREFERRED CAPITAL CORPORATION
                                              STATEMENTS OF STOCKHOLDERS' EQUITY


                                                                              Capital
                                                                            Contributed
                                          Preferred          Common          in Excess         Retained       Stockholders'
                                            Stock            Stock            of Par           Earnings           Equity
                                        ---------------  --------------- ------------------ ---------------  -----------------
  Balance, December 31, 1998             $ 15,000,000        $    100       $284,996,351         $     -      $   299,996,451

  Capital contribution from
     common stockholder                             -               -              3,549               -                3,549
  Net income                                        -               -                  -      20,082,886           20,082,886
  Dividends on 10 3/8%
     Noncumulative Exchangeable
     Preferred Stock, Series A                      -               -                  -     (15,562,500)         (15,562,500)
  Dividends on common stock                         -               -           (169,614)     (4,520,386)          (4,690,000)
                                        ---------------  --------------- ------------------ ---------------  -----------------
  Balance, December 31, 1999               15,000,000             100        284,830,286               -          299,830,386

  Capital contribution from
     common stockholder                             -               -            169,614               -              169,614
  Net income                                        -               -                  -      20,811,245           20,811,245
  Dividends on 10 3/8%
     Noncumulative Exchangeable
     Preferred Stock, Series A                      -               -                  -     (15,562,500)         (15,562,500)
  Dividends on common stock                         -               -             (1,255)     (5,248,745)          (5,250,000)
                                        ---------------  --------------- ------------------ ---------------  -----------------
  Balance, December 31, 2000               15,000,000             100        284,998,645               -          299,998,745

  Capital contribution from
     common stockholder                             -               -              1,255               -                1,255
  Net income                                        -               -                  -      19,696,418           19,696,418
  Dividends on 10 3/8%
     Noncumulative Exchangeable
     Preferred Stock, Series A                      -               -                  -    (15,562,500)          (15,562,500)
  Dividends on common stock                         -               -           (341,082)    (4,133,918)           (4,475,000)
                                        ---------------  --------------- ------------------ ---------------  -----------------
  Balance, December 31, 2001             $ 15,000,000        $    100       $284,658,818        $     -         $ 299,658,918
                                        ===============  =============== ================== ===============  =================









                    The accompanying Notes to Financial Statements are an integral part of these statements
                                      F-5





                                          CHEVY CHASE PREFERRED CAPITAL CORPORATION
                                                  STATEMENTS OF CASH FLOWS

                                                                                    Year Ended December 31,
                                                                   ----------------------------------------------------------
                                                                        2001                2000                1999
                                                                   ------------------  ------------------ -------------------
 Cash flows from operating activities:

 Net income                                                            $ 19,696,418        $20,811,245        $ 20,082,886

Adjustments to reconcile net income to
 net cash provided by (used in) operating
 activities:
    Provision for loan losses                                                 -                   -                 26,554
       Gain on sale of real estate acquired
        in settlement of loans, net                                         (21,924)           (20,209)            (29,909)
       (Increase) decrease in accounts receivable from parent            (9,305,943)         1,079,869           4,404,586
       (Increase) decrease in accrued interest receivable                   408,642           (333,617)            166,264
       Decrease in prepaid expenses                                               -                  -             327,850
       Increase (decrease) in accounts payable to parent                          -           (272,346)             37,423
       Increase (decrease) in accounts payable to others and
           accrued expenses                                                 (58,351)            73,782              41,809
                                                                   ------------------  ------------------ -------------------
   Net cash provided by operating activities                             10,718,842         21,338,724          25,057,463
                                                                   ------------------  ------------------ -------------------

 Cash flows from investing activities:

 Purchases of residential mortgage loans                                (97,217,311)      (45,942,919)         (73,323,320)
 Repayments of residential mortgage loans                               107,838,559        42,653,845           70,029,056
 Net proceeds from sale of real estate acquired in
     settlement of loans                                                    138,330           243,678            1,056,018
                                                                   ------------------  ------------------ -------------------
       Net cash provided by (used in) investing activities               10,759,578        (3,045,396)          (2,238,246)
                                                                   ------------------  ------------------ -------------------


 Cash flows from financing activities:

 Capital contribution from common stockholder                                1,255             169,614               3,549
 Dividends paid on preferred stock                                     (15,562,500)        (15,562,500)        (15,562,500)
 Dividends paid on common stock                                         (5,275,000)         (4,850,000)         (5,050,000)
                                                                   ------------------  ------------------ -------------------

      Net cash used in financing activities                            (20,836,245)        (20,242,886)        (20,608,951)
                                                                   ------------------  ------------------ -------------------

 Net increase (decrease) in cash and cash equivalents                      642,175          (1,949,558)          2,210,266

 Cash and cash equivalents at beginning of year                          5,122,692           7,072,250           4,861,984
                                                                   ------------------  ------------------ -------------------

 Cash and cash equivalents at end of year                              $ 5,764,867       $   5,122,692         $ 7,072,250
                                                                   ==================  ================== ===================

 Supplemental disclosures of cash flow information:
      Income taxes paid during the year                                $    10,373       $      15,168         $      -
                                                                   ==================  ================== ===================
 Supplemental disclosures of non-cash activities:
      Net transfer of loans receivable to real
        estate acquired in settlement of loans                         $      -          $     339,875           $  753,912
                                                                   ==================  ================== ===================





                  The accompanying Notes to Financial Statements are an integral part of these statements.
                                      F-6




                    CHEVY CHASE PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2001, 2000 and 1999

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:

Chevy  Chase  Preferred  Capital  Corporation  (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 (as defined  below).  The Bank is in compliance with
its regulatory capital requirements.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Use of Estimates:

The  financial  statements  have been  prepared in  conformity  with  accounting
principles  generally  accepted in the United States. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported  amounts of assets and  liabilities  and  disclosure  of contingent
liabilities as of the date of the  statements of financial  condition and income
and expenses for the reporting  periods.  Actual results could differ from those
estimates.

Cash and Cash Equivalents:

For purposes of reporting cash flows, cash and cash equivalents include cash and
interest-bearing deposits.

Residential Mortgage Loans:

Residential  mortgage loans are carried at amortized  cost.  Interest  income is
accrued and recognized  using the weighted  average coupon  interest rate of the
portfolio.

Loans are reviewed on a monthly basis and are placed on non-accrual status when,
in the opinion of management,  the full collection of principal and interest has
become unlikely.  Uncollectible accrued interest receivable on non-accrual loans
is charged against current period income.  The Company had non-accrual  loans at
December  31, 2001 and 2000  totaling  $1,088,562  and  $547,069,  respectively.


Allowance for Loan Losses:

Management periodically reviews the loan portfolio to establish an allowance for
estimated losses if deemed necessary. An allowance is provided after considering
such factors as the economy in lending  areas,  delinquency  statistics and past
loss  experience.  The  allowance  for loan  losses are based on  estimates  and
ultimate losses may vary from current estimates. As adjustments to the allowance
become  necessary,  provisions  for losses are  reported  in  operations  in the
periods they are determined to be necessary.


                                      F-7

                   CHEVY CHASE PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2001, 2000 and 1999

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Concentrations of Credit:

A majority  of the  Company's  loans are  secured by  properties  located in the
Washington,  DC metropolitan  area.  Service  industries and Federal,  state and
local governments employ a significant portion of the Washington,  DC area labor
force.  Adverse changes in economic conditions could have a direct impact on the
timing and amounts of payments by borrowers.

Accounts Receivable from Parent:

Accounts  receivable  from parent  represents  principal  and interest  payments
received from  borrowers by the Bank as servicer of the mortgage loans which are
being held by the  servicer in a custodial  account  pending  remittance  to the
Company.  The Company receives  remittances from the servicer on the 10th day of
each month. See Note 7.

Dividends:

Preferred  Stock.  Dividends  on the Series A Preferred  Shares are payable at a
rate of 10 3/8% per annum of the  liquidation  preference  (an  amount  equal to
$5.1875 per annum per share), if, when and as declared by the Board of Directors
of the Company.  Dividends  are not  cumulative  and, if  declared,  are payable
quarterly in arrears on the fifteenth day of January, April, July and October or
the next business day when the fifteenth falls on a weekend or holiday.

Common Stock.  The stockholder is entitled to receive  dividends if, when and as
declared by the Board of  Directors  out of funds  legally  available  after all
preferred dividends have been paid.

Earnings Per Common Share:

Dividends on preferred  stock are deducted from earnings in the  computation  of
earnings per common share when  declared by the  Company's  Board of  Directors.
Because  there are no dilutive  securities,  basic  earnings per common share is
equal to diluted earnings per common share.

Income Taxes:

The Company has elected,  for Federal  income tax  purposes,  to be treated as a
Real Estate  Investment Trust ("REIT") and intends to comply with the provisions
of the Internal Revenue Code of 1986, as amended (the "IRC").  Accordingly,  the
Company is generally  not subject to Federal  corporate  income taxes on its net
income  (excluding  capital gains) to the extent it distributes at least 100% of
its annual REIT taxable  income to  stockholders  and as long as certain  asset,
income and stock  ownership  tests are met in accordance with the IRC. To remain
qualified


                                      F-8

                  CHEVY CHASE PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2001, 2000 and 1999



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Income Taxes (Continued):

as a REIT,  the  Company  must  distribute  each  year at least 90% of its "REIT
taxable  income" (not including  capital  gains) for that year to  stockholders.
Because  management  of the Company  believes it qualifies as a REIT for Federal
income  tax  purposes,  no  provision  for  income  taxes  is  included  in  the
accompanying  financial  statements  other than income  taxes on capital  gains.


The Company  recognized a capital gain of $21,924 on the sale of one Real Estate
Owned ("REO") property during the year ended December 31, 2001. As a result, the
Company  incurred and paid an income tax liability  for the year ended  December
31, 2001 of $8,000.

During the year ended December 31, 2000, the Company recognized capital gains of
$20,209 on the sale of two REO properties.  As a result, the Company incurred an
income tax  liability for the year ended  December 31, 2000 of $7,073,  of which
$2,373 was paid subsequent to December 31, 2000.  During the year ended December
31, 1999, the Company incurred an income tax liability of $10,468 related to the
gain of $29,909  recognized  on the sale of five REO  properties  which was paid
during the year ended December 31, 2000.

NOTE 3 - RESIDENTIAL MORTGAGE LOANS:

Residential  mortgage  loans  consist  of  monthly   adjustable-rate   mortgages
("ARMs"),  one-year ARMs,  three-year ARMs,  five-year,  seven-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.  The following table shows
the  residential  mortgage  loan  portfolio  by  type  at the  dates  indicated:


                                                 December 31,
                               -------------------------------------------------
                                        2001                       2000
                               ----------------------     ----------------------

  Monthly ARMs                    $  79,541,872              $  15,010,666
  One-Year ARMs                      21,583,666                 17,405,151
  Three-Year ARMs                    19,462,468                 31,244,189
  5/1 ARMs                           49,804,806                 82,907,320
  7/1 ARMs                            8,378,308                 12,043,834
  10/1 ARMs                          99,255,916                134,689,699
  30 Year Fixed-Rate                  9,537,078                  4,884,503
                               ----------------------     ----------------------
     Total                          287,564,114                298,185,362
  Less:
     Allowance for loan losses           40,333                     40,333
                               ----------------------     ----------------------
     Total                        $ 287,523,781              $ 298,145,029
                               ======================     ======================

                                      F-9


                  CHEVY CHASE PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2001, 2000 and 1999


NOTE 3 - RESIDENTIAL MORTGAGE LOANS (continued):

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.

NOTE 4 - ALLOWANCE FOR LOAN LOSSES:

Activity in the allowance for loan losses is summarized as follows:

                                       Year Ended December 31,
                          -------------------------------------------------
                                2001            2000              1999
                          ---------------  ---------------  ---------------

Beginning balance            $ 40,333         $ 40,333         $ 40,333
 Provision for losses              -                -            26,554
 Charge-offs                       -                -           (26,554)
                          ---------------  ---------------  ---------------
Ending balance               $ 40,333         $ 40,333         $ 40,333
                          ===============  ===============  ===============

NOTE 5 - PREFERRED STOCK:

On December 3, 1996, the Company sold $150 million of Series A Preferred Shares,
$5.00 par value and received net cash proceeds of $144 million.  Cash  dividends
on the Series A  Preferred  Shares,  if,  when and as  declared  by the Board of
Directors,  are payable  quarterly in arrears at an annual rate of 10 3/8%.  The
liquidation  value of each  Series A  Preferred  Share is $50 plus  accrued  and
unpaid dividends. Except under certain 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.

The Series A Preferred Shares are redeemable at the option of the Company at any
time on or after  January 15, 2007,  in whole or in part,  at the  following per
share redemption prices plus accrued and unpaid dividends:

            If redeemed during the
               12-month period                        Redemption
             beginning January 15,                        Price
      -----------------------------------           ----------------
                     2007                                 $  52.594
                     2008                                    52.075
                     2009                                    51.556
                     2010                                    51.038
                     2011                                    50.519
             2012 and thereafter                             50.000


                                      F-10


                  CHEVY CHASE PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2001, 2000 and 1999


NOTE 6 - DIVIDENDS:

During the year ended  December  31,  2001,  the  Company's  Board of  Directors
declared  $15,562,500 of preferred stock  dividends out of retained  earnings of
the Company and  $4,475,000 of common stock  dividends,  $4,133,918 of which was
paid out of the  retained  earnings  of the  Company  and  $341,082 of which was
treated as a return of capital.  Of these amounts,  preferred stock dividends of
$3,890,625  and common stock  dividends of  $2,700,000  were paid  subsequent to
December 31, 2001.

NOTE 7 - RELATED PARTY TRANSACTIONS:

The Company has entered into an advisory  agreement (the  "Advisory  Agreement")
with the Bank  (the  "Advisor").  The  Advisor  provides  advice to the Board of
Directors  and manages the  operations of the Company as defined in the Advisory
Agreement.  The Advisory Agreement has an initial term of three years commencing
on December 3, 1996 and is automatically renewed for additional one-year periods
unless the Company delivers a notice of nonrenewal to the Advisor.  The Advisory
Agreement  may be  terminated  by the Company at any time upon sixty days' prior
written  notice.  The  advisory  fee is  $200,000  per  annum  payable  in equal
quarterly installments.

The  Company  also  entered  into a  servicing  agreement  with the Bank for the
servicing  of  its  residential  mortgage  loans  (the  "Servicing  Agreement").
Pursuant to the  Servicing  Agreement,  the Bank  performs the  servicing of the
loans owned by the Company,  in accordance  with normal industry  practice.  The
Servicing  Agreement can be  terminated  without cause with at least sixty days'
notice to the servicer and payment of a termination  fee. The servicing fee rate
is 0.375% of the outstanding principal balance of the loans.  Servicing fees for
the years ended December 31, 2001, 2000 and 1999 totaled $1,052,549,  $1,088,694
and $1,116,911 respectively.

The Company had cash  balances of $5,764,867  and  $5,122,692 as of December 31,
2001 and 2000,  respectively,  held in various  deposit  accounts with the Bank.
Interest  earned on these  accounts was $166,221,  $178,214 and $166,626 for the
years ended December 31, 2001, 2000 and 1999, respectively.

NOTE 8 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:

The majority of the Company's assets and liabilities are financial  instruments;
however,  certain  of these  financial  instruments  lack an  available  trading
market.  Significant estimates,  assumptions and present value calculations were
therefore  used for the  purposes of deriving  the fair values of the  Company's
financial  instruments,  resulting in a degree of  subjectivity  inherent in the
indicated fair value amounts.  Comparability among REITs may be difficult due to
the wide range of permitted valuation  techniques and the numerous estimates and
assumptions which must be made.

                                      F-11


                 CHEVY CHASE PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2001, 2000 and 1999


NOTE 8 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued):

The estimated fair values of the Company's financial instruments at December 31,
2001 and 2000 are as follows:



                                                 December 31, 2001
                                      ------------------------------------------
                                           Carrying                  Fair
                                            Amount                   Value
                                      -----------------       ------------------

 Financial assets:
  Cash and interest-bearing deposits     $ 5,764,867              $ 5,764,867
  Residential mortgage loans
    receivable, net                      287,523,781              295,779,000
  Other financial assets                  13,021,945               13,021,945

 Financial liabilities                     6,590,625                6,590,625

                                                 December 31, 2000
                                      ------------------------------------------
                                           Carrying                  Fair
                                            Amount                   Value
                                      -----------------       ------------------
 Financial assets:
  Cash and interest-bearing deposits     $ 5,122,692              $ 5,122,692
  Residential mortgage loans
   receivable, net                       298,145,029              301,929,000
  Other financial assets                   4,241,050                4,241,050

 Financial liabilities                     7,390,625                7,390,625

The  following  methods and  assumptions  were used to  estimate  the fair value
amounts at December 31, 2001 and 2000.

Cash and interest-bearing deposits:

Carrying amount approximates fair value.

Residential mortgage loans:

Fair value is estimated using discounted cash flow analyses based on contractual
repayment and anticipated prepayment schedules. The discount rates used in these
analyses are based on either the interest rates paid on U.S. Treasury securities
of comparable  maturities  adjusted for credit risk and  non-interest  operating
costs, or the interest rates  currently  offered for loans with similar terms to
borrowers of similar credit quality.

                                      F-12


                 CHEVY CHASE PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2001, 2000 and 1999


NOTE 8 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued):

Other financial assets:

The carrying  amounts of accounts  receivable  from parent and accrued  interest
receivable approximate fair value.

Financial liabilities:

The carrying amounts of accounts payable to parent,  accounts payable to others,
dividends  payable to parent and dividends  payable to others  approximate  fair
value.


                                      F-13



              CHEVY CHASE PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2001, 2000 and 1999

NOTE 9 - QUARTERLY FINANCIAL DATA (Unaudited)

The  quarterly  financial  data of the Company  herein has been derived from the
unaudited quarterly financial statements of the Company. The data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of  Operations"  and the  financial  statements  included  elsewhere
herein.

                                                                             2001
                                                                     For the quarter ended
                                           --------------------------------------------------------------------------
                                                March 31            June 30         September 30      December 31
                                           --------------------------------------------------------------------------
OPERATING DATA:

   Interest income                             $  5,586,068        $ 5,449,430       $5,218,240        $4,787,686
   Provision for loan losses                              -                  -                -                 -
                                           --------------------------------------------------------------------------
      Total interest income after
         provision for loan losses                5,586,068          5,449,430        5,218,240         4,787,686
   Gain on sale of real estate acquired
         in settlement of loans, net                 21,924                  -                -                 -
   Operating expenses                              (335,392)          (341,549)        (338,365)         (341,251)
Provision for income taxes                           (2,300)                 -           (8,073)                -
                                           --------------------------------------------------------------------------
      Net income                               $  5,270,300        $ 5,107,881       $4,871,802        $4,446,435
                                           ==========================================================================
  Earnings available to common stockholders    $  1,379,675        $ 1,217,256        $ 981,177         $ 555,810
  Earnings per common share                    $  13,796.75        $ 12,172.56       $ 9,811.77        $ 5,558.10


                                                                             2000
                                                                     For the quarter ended
                                           --------------------------------------------------------------------------
                                                March 31            June 30         September 30      December 31
                                           --------------------------------------------------------------------------
OPERATING DATA:

   Interest income                             $  5,544,202        $ 5,451,336       $5,560,967        $5,633,120
   Provision for loan losses                              -                  -                -                 -
                                           --------------------------------------------------------------------------
      Total interest income after
         provision for loan losses                5,544,202          5,451,336        5,560,967         5,633,120
   Gain on sale of real estate acquired
         in settlement of loans, net                      -                  -           13,475             6,734
   Operating expenses                              (343,319)          (354,490)        (345,205)         (340,407)
Provision for income taxes                          (10,468)                 -                -            (4,700)
                                           --------------------------------------------------------------------------
       Net income                              $  5,190,415        $ 5,096,846       $5,229,237        $5,294,747
                                           ==========================================================================
  Earnings available to common stockholders    $  1,299,790        $ 1,206,221       $1,338,612        $1,404,122
  Earnings per common share                    $  12,997.90        $ 12,062.21       $13,386.12        $14,041.22




                                      F-14




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

None.

                                      -24-


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

The Company's Board of Directors currently consists of five members, two of whom
are Independent Directors.  Each director was elected to serve for a term of one
year and until his  successor  shall have been duly elected and  qualified.  The
Board of  Directors  met four  times  during  the year ended 2001 and all of its
members attended at least 50% of the meetings.  The Company  currently has eight
officers.  The Company has no other  employees and does not  anticipate  that it
will require additional employees.

The  following  persons are the Company's  current  directors  and/or  executive
officers, each of whom has served since 1996.

Name                           Age          Position and Offices Held
------------------------------------------------------------------------------

B. Francis Saul II.............69   Chairman of the Board, President and Chief
                                     Executive Officer
Alexander R. M. Boyle..........64   Director
Stephen R. Halpin, Jr..........46   Executive Vice President, Chief Financial
                                     oficer, Treasurer and Director
N. Alexander MacColl, Jr.......67   Director
John J. O'Connor III...........71   Director

                                      -25-





The following is a summary of the  experience of the executive  officers  and/or
directors of the Company:

B. FRANCIS SAUL II serves as Chairman of the Board and Chief  Executive  Officer
of the Bank.  He also has been  President and Chief  Operating  Officer of B. F.
Saul Company since 1969.  Mr. Saul has served as the Chairman of B. F. Saul Real
Estate  Investment  Trust since 1969 and as a trustee  since 1964.  He is also a
director of Derwood  Investment  Corporation.  At December 31, 2001,  B. F. Saul
Real Estate Investment Trust and Derwood Investment  Corporation owned of record
80% and 16%,  respectively,  of the Bank's outstanding common stock. Mr. Saul is
also  Chairman of the Board of  Directors of Chevy Chase  Financial  Limited and
Chevy Chase  Property  Company  Limited.  He serves as Chairman of the Board and
Chief Executive  Officer of Saul Centers,  Inc., a public real estate investment
trust. Mr. Saul also serves as a Trustee of the National  Geographic  Society, a
member of the Trustees  Council of the  National  Gallery of Art and an Honorary
Trustee of the Brookings Institute.  In addition,  Mr. Saul is Director Emeritus
of  Colonial  Williamsburg  Hotel  Properties,  Inc.,  a  member  of the  Folger
Shakespeare  Library  and the Board of  Visitors  and  Governors  of  Washington
College.

ALEXANDER  R. M. BOYLE has been Vice  Chairman of the Board of  Directors of the
Bank since 1985. Prior to beginning service in this position,  Mr. Boyle was the
President and a member of the Board of Directors of Government  Services Savings
and Loan,  Inc.  from 1975 until its merger with the Bank in 1985.  He is also a
Trustee of the B. F. Saul Employees Profit Sharing  Retirement  Trust. Mr. Boyle
has served as a director  of the U. S.  League of  Savings  Institutions  and as
chairman of the Maryland League of Financial  Institutions.  He currently serves
as a director of the  Association of Financial  Services  Holding  Companies and
serves on the Chancellor's Advisory Council of the University of Maryland and is
a member of the Rotary Club of Bethesda-Chevy Chase.

STEPHEN R. HALPIN,  JR. serves as Executive Vice  President and Chief  Financial
Officer of the Bank. Mr. Halpin is also the Chief  Financial  Officer for the B.
F. Saul Company and B. F. Saul Real Estate  Investment Trust. He is a Trustee of
the B. F. Saul Employees Profit Sharing  Retirement  Trust. Mr. Halpin currently
serves on the American Bankers Association  Accounting  Committee.  In addition,
Mr.  Halpin is a Trustee for Hospice  Caring,  Inc.  Before  joining the Bank in
1983, Mr. Halpin was with a public accounting firm.

N. ALEXANDER MACCOLL, JR. was a Senior Vice President of the Union Trust Company
Loan  Production  Office  from 1982  until  1990 when he  retired.  He served as
Corporate Vice President of Colonial Bancorp. from 1977 until 1981. Prior to his
position  at  Colonial  Bancorp.,  he  served as Second  Vice  President  of the
National Bank of Detroit from 1962 until 1977.

JOHN J.  O'CONNOR III has been engaged in the practice of law since 1957. He was
a partner in Bryan Cave LLP. He is now of Counsel to Bryan Cave LLP.


                                      -26-



AUDIT COMMITTEE

The Company's audit committee reviews the engagement of independent  accountants
and reviews their independence. The audit committee also reviews the adequacy of
the Company's internal accounting controls.  The audit committee is comprised of
the  Company's  Independent  Directors,  John J.  O'Connor III and N.  Alexander
MacColl, Jr. The audit committee met twice during 2001.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities  Exchange Act of 1934, as amended (the "Exchange
Act"), requires the Company's officers,  directors and persons who own more than
ten percent of either the Common Stock or the Series A Preferred  Shares to file
reports of  ownership on Form 3 and changes in ownership on Form 4 or 5 with the
SEC and the New York Stock  Exchange.  Such officers,  directors and ten percent
shareholders  are also  required by SEC rules to furnish the Company with copies
of all Section 16(a) forms that they file.

Based solely on its review of copies of such reports received or representations
from certain reporting persons, the Company believes that, during the year ended
December 31, 2001, all of its officers,  directors and ten percent  shareholders
complied  with all Section  16(a) filing  requirements  applicable  to them with
respect to transactions during fiscal 2001

ITEM 11.  EXECUTIVE COMPENSATION

Since the  Company's  inception on November 5, 1996,  no  compensation  has been
awarded to, earned by or paid to any of the Company's  directors (other than its
Independent  Directors),  officers or employees.  The Company does not intend to
pay  any  compensation  to any of its  directors  (other  than  its  Independent
Directors),  officers or employees.  The Company pays the Independent  Directors
annual compensation of $10,000,  plus a fee of $750 for attendance (in person or
by  telephone) at each meeting of the Board of Directors and each meeting of the
Audit  Committee.  In 2001, each of the Independent  Directors earned $4,500 for
attending  four Board of Directors  meetings and two Audit  Committee  meetings.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following  table sets forth, as of March 15, 2002, the number and percentage
of outstanding shares of Common Stock and Series A Preferred Shares beneficially
owned by (i) all persons  known by the Company to own more than five  percent of
such shares; (ii) each director of the Company;  (iii) each executive officer of
the Company;  and (iv) all executive  officers and directors of the Company as a
group.  The  persons or  entities  named in the table have sole  voting and sole
investment power with respect to each of the shares  beneficially  owned by such
person or entity. The calculations were based on a total of 100 shares of Common
Stock and 3,000,000 Series A Preferred Shares  outstanding as of March 15, 2002.


                                      -27-




Names and Address of                Amount of Beneficial     Percent of Class of
Beneficial Owner (1)                     Ownership           Outstanding Shares
------------------------------     ----------------------   --------------------
Chevy Chase Bank, F.S.B.                    100                Common - 100%

B. Francis Saul II (2)(3)                     0                     0%

Alexander R. M. Boyle (2)                     0                     0%

Stephen R. Halpin, Jr. (2)(3)             1,000              Preferred - 0.033%

N. Alexander MacColl, Jr. (2)                 0                     0%

John J. O'Connor III (2)                      0                     0%

 All directors and executive officers
   as a group (5 persons)                 1,000               Preferred - 0.033%


(1) The address of each beneficial owner is 7501 Wisconsin Avenue, Bethesda,
    Maryland  20814.
(2) Indicates a director of the Company.
(3) Indicates an executive officer of the Company.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Set forth below are certain  transactions  between the Company and its directors
and affiliates.  Management  believes that the transactions with related parties
described herein have been conducted on substantially  the same terms as similar
transactions with unrelated parties.

The Bank administers the day-to-day operations of the Company and is entitled to
receive fees in connection  with the Advisory  Agreement.  Advisory fees paid to
the Bank for the year ended December 31, 2001 totaled $200,000.  See "Business -
The Advisor."

The Bank  services the  Residential  Mortgage  Loans  included in the  Company's
portfolio  and is  entitled to receive  fees in  connection  with the  Servicing
Agreement.  Loan servicing fees paid to the Bank for the year ended December 31,
2001 totaled $1,052,549. See "Business - Servicing."

The Company  had cash  balances of  $5,764,867  as of December  31, 2001 held in
various  deposit  accounts with the Bank.  Interest earned on these accounts was
$166,221 for the year ended December 31, 2001.

                                      -28-




                                                         PART IV

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

(a)(1) The following financial statements of the Company are included in
        Item 8 of this report:

          Report of Independent Public Accountants
          Statements of Financial Condition at December 31, 2001 and 2000
          Statements of Operations for the Years Ended December 31, 2001,
           2000 and 1999
          Statements of Stockholders' Equity for the Years Ended December
           31, 2001, 2000 and 1999
          Statements of Cash Flows for the Years Ended December 31, 2001,
           2000 and 1999

          Notes to Financial Statements


(a)(2)  All  other  schedules  for  which  provision  is made in the applicable
        accounting of the Securities and Exchange  Commission are not required
        under the related instruction or are inapplicable and therefore have
        been omitted.

(a)(3)  Exhibits:

3.1     Articles of Incorporation of the Company, as amended (incorporated
        herein by reference to Exhibit 3.1 of the Company's 1996 Annual Report
        on Form 10-K).

3.2     Bylaws of the Company  (incorporated  herein by  reference  to Exhibit
        3(b) of Form S-11 (file number 333-10495) filed by the Company).

4.1     Articles Supplementary of 10 3/8% Noncumulative Exchangeable Preferred
        Stock, Series A (incorporated  herein by reference to Exhibit 4.1 of the
        Company's 1996 Annual Report on Form 10-K).

10.1    Residential Mortgage Loan Purchase Agreement between the Company and the
        Bank (incorporated herein by reference to Exhibit 10.1 of the Company's
        1996 Annual Report on Form 10-K).

10.2    Mortgage Loan Servicing Agreement between the Company and the Bank
        (incorporated herein by reference to Exhibit 10.2 of the Company's 1996
        Annual Report on Form 10-K).

10.3    Advisory Agreement between the Company and the Bank (incorporated herein
        by reference to Exhibit 10.3 of the Company's 1996 Annual Report on Form
        10-K).

*12.1   Computation of ratio of earnings to fixed charges and Preferred Stock
        dividend requirements.

*99     Letter from the Company to the SEC regarding Arthur Andersen LLP.

(b)     No reports on Form 8-K were issued during the three months ended
        December 31, 2001.


*Filed herewith.


                                      -29-




EXHIBIT 12.1


                   CHEVY CHASE PREFERRED CAPITAL CORPORATION

               COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

                   AND PREFERRED STOCK DIVIDEND REQUIREMENTS

----------------------------------------------------------------------------------------------
                                                  (in thousands, except ratio data)
                                               As of or for the year ended December 31,
                                          ----------------------------------------------------
                                             2001      2000       1999       1998       1997
                                          --------   --------   --------   --------   --------
Net income                                $ 19,696   $ 20,811   $ 20,083   $ 21,369   $ 21,628
Fixed charges                                   -          -          -          -          -
                                          --------   --------   --------   --------   --------
Earnings before fixed charges             $ 19,696   $ 20,811   $ 20,083   $ 21,369   $ 21,628
                                          ========   ========   ========   ========   ========
Fixed charges, as above                   $     -    $     -    $     -    $     -    $     -
Preferred stock dividend requirements       15,563     15,563     15,563     15,563     15,563
                                          --------   --------   --------   --------   --------
Fixed charges including preferred stock
   dividends                              $15,563    $ 15,563   $ 15,563   $ 15,563   $ 15,563
                                          ========   ========   ========   ========   ========

Ratio of earnings to fixed charges and
   Preferred stock dividend requirements     1.27        1.34       1.29       1.37       1.39


                                                                      Exhibit 99

March 29, 2002


Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C.  20549

Dear Sir or Madam:

This letter is being filed by Chevy Chase  Preferred  Capital  Corporation  (the
"Company")  with its Form 10-K  pursuant  to  Temporary  Note 3T to Article 3 of
Regulation  S-X to set forth  certain  representations  made to the  Company  by
Arthur Andersen LLP in connection with their audit.

The Company received a  representation  letter dated March 21, 2002, from Arthur
Andersen indicating that they have audited the consolidated financial statements
of the  Company  as of  December  31,  2001 and for the year then ended and have
issued their report thereon dated March 13, 2002. In the letter, Arthur Andersen
represents  that the audit was subject to their quality  control  system for the
U.S.  accounting and auditing practice to provide reasonable  assurance that the
engagement  was conducted in  compliance  with  professional  standards and that
there was  appropriate  continuity of Arthur Andersen  personnel  working on the
audit,   availability  of  national  office  consultation  and  availability  of
personnel  at foreign  affiliates  of Arthur  Andersen to conduct  the  relevant
portions of the audit.

CHEVY CHASE PREFERRED CAPITAL CORPORATION

By:   /s/ Joel A. Friedman
      Joel A. Friedman
      Senior Vice President and Controller





                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) 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, in Chevy Chase, Maryland on
March 29, 2002.

                            CHEVY CHASE PREFERRED CAPITAL CORPORATION
                                          (Registrant)




                                By:  /s/ B. Francis Saul II
                                     B. Francis Saul II
                                     Chairman of the Board of Directors
                                     and President and Chief Executive Officer
                                     (Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  officers and directors of the Registrant
and in the capacities and on the dates indicated.

March 29, 2002                  By:  /s/ Alexander R. M. Boyle
                                     Alexander R. M. Boyle
                                     Director




March 29, 2002                  By:  /s/ Joel A. Friedman
                                     Joel A. Friedman
                                     Senior Vice President and
                                     Controller
                                     (Principal Accounting Officer)




March 29, 2002                  By:  /s/ Stephen R. Halpin, Jr.
                                     Stephen R. Halpin, Jr.
                                     Director,
                                     Executive Vice President, Treasurer and
                                     Chief Financial Officer
                                     (Principal Financial Officer)




March 29, 2002                  By:  /s/ N. Alexander MacColl, Jr.
                                     N. Alexander MacColl, Jr.
                                     Director



March 29, 2002                  By:  /s/ John J. O'Connor III
                                     John J. O'Connor III
                                     Director



March 29, 2002                  By:  /s/ B. Francis Saul II
                                     B. Francis Saul II
                                     Chairman of the Board,
                                     President and Chief Executive Officer
                                     (Principal Executive Officer)`