CHEVY CHASE
                         PREFERRED CAPITAL CORPORATION
                                   FORM 10-K
                               December 31, 1998










<PAGE>

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

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 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, 1998

                       Commission File Number: 333-10495

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

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

                            8401 Connecticut Avenue
                          Chevy Chase, Maryland 20815
               (Address of principal executive 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
-------------------                   -----------------------------------------
103/8% 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. ___

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,  1999.  All of such
shares were owned by Chevy Chase Bank,  F.S.B.;  therefore,  no common stock was
held by non-affiliates.

--------------------------------------------------------------------------------
<PAGE>

                   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..................................................3
          Credit Risk Management Policies....................................4
          Delinquencies......................................................4
          Geographic Distribution............................................4
        Servicing............................................................4
        Dividend Policy......................................................5
        The Bank.............................................................6
        The Advisor..........................................................6
        Capital and Leverage Policies........................................7
        Employees............................................................8
        Competition..........................................................8
        Environmental Matters................................................8
        Tax Status of the Company............................................8
Item 2. PROPERTIES...........................................................9
Item 3. LEGAL PROCEEDINGS....................................................9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................9

                                    PART II

Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
        STOCKHOLDER MATTERS..................................................10
        Description of Common Stock..........................................10
          General............................................................10
          Dividends..........................................................10
          Voting Rights......................................................10
          Rights Upon Liquidation............................................10
        Description of Series A. Preferred Shares............................11
          Market Information and Dividends...................................11
          General............................................................11
          Automatic Exchange.................................................12
          Voting Rights......................................................12
          Redemption.........................................................12
          Rights Upon Liquidation............................................13
          Independent Director Approval......................................13
<PAGE>

Item 6. SELECTED FINANCIAL DATA..............................................13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS............................................14
        Financial Condition..................................................14
         Residential Mortgage Loans..........................................14
         Allowance for Loan Losses...........................................14
         Interest Rate Risk..................................................15
         Significant Concentration of Credit Risk............................16
         Liquidity and Capital Resources.....................................16
         Year 2000 Issues....................................................16
        Results of Operations................................................17
          Fiscal Year 1998 Compared to Fiscal Year 1997......................17
          Fiscal Year 1997 Compared to Period from Inception
          (November 15, 1996) to December 31, 1996...........................18
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
        RISKS................................................................19
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................F-1
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
        ACCOUNTING AND FINANCIAL DISCLOSURE..................................20

                                    PART III

Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................20
        Directors and Executive Officers.....................................20
        Audit Committee......................................................22
        Section 16(a) Beneficial Ownership Reporting Compliance..............22
Item 11.EXECUTIVE COMPENSATION...............................................22
Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......22
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................23

                                    PART IV

Item 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
        ON FORM 8-K..........................................................24

<PAGE>
                                     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 10d %  Noncumulative  Exchangeable  Preferred
Stock, Series A, par value $5.00 per share (the "Series A Preferred Shares").
The Series A Preferred Shares are publicly held.

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, 1998 and December  31,  1997. A  description  of the types of
Residential  Mortgage  Loans  included in the  Company's  portfolio  follows the
table.

                      Residential Mortgage Loan Portfolio
                      -----------------------------------

                                                 December 31,
                             ---------------------------------------------------
                                        1998                       1997
                             ------------------------   ------------------------
                              Aggregate      Percent     Aggregate      Percent
                              Principal        to        Principal         to
   Type                        Balance        Total       Balance        Total
   ----                      -----------     -------    -----------      -------

One-Year ARMSs             $  16,159,185       5.5%   $  27,657,820       9.5%
Three-Year ARMs               35,684,740      12.2%      78,228,562      26.9%
5/1 ARMs                     100,108,907      34.2%     165,785,490      57.1%
10/1 ARMs                    135,436,966      46.3%      16,196,915       5.6%
30-Year Fixed-Rate             5,332,567       1.8%       2,553,343       0.9%
                             -----------     -------    -----------     ------- 
                             292,722,365     100.0%     290,422,130     100.0%
Less:
 Allowance for loan losses        40,333                     39,999
                             -----------                -----------

Total                      $ 292,682,032              $ 290,382,131
                           =============              =============

                                       1
<PAGE>



Purchases  from the Bank of  Residential  Mortgage  Loans  during the year ended
December 31, 1998 were $145,009,967,  which were offset by principal  repayments
on the  Company's  loans  of  $141,718,892.  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, 1998 bore interest at adjustable  rates. The interest rate on an
"adjustable  rate mortgage" or an "ARM" adjusts  periodically  based on an index
(such as 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, 1998,  the interest rates on the  Residential  Mortgage
Loans included in the Company's  portfolio  ranged from 5.63% per annum to 9.63%
per annum and the weighted  average  interest rate was  approximately  7.54% per
annum.

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 most  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, 1998 may
be subject to different interest rates.

Each ARM bears  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 adjustable  rate  Residential  Mortgage Loan 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 such loan and will
remain fixed at such rate for the  remaining  term of such loan.  The  Company's
current policy is to retain these fixed-rate loans in its portfolio. At December
31, 1998, all of the Company's $5.3 million of fixed-rated loans were the result
of converted ARMs. All the 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.

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 gross
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.


                                       2
<PAGE>


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.

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.

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.


                                       3
<PAGE>


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
that 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 substantial  majority of the  Residential  Mortgage
Loans  included in the current loan  portfolio are located in  Washington  D.C.,
Maryland,  and Virginia.  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 D.C., 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."



                                       4
<PAGE>



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 in respect of 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."


                                       5
<PAGE>



Under recent amendments to the Office of Thrift  Supervision (the "OTS") capital
distribution regulations, which will take effect April 1, 1999, the Bank will be
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 will not
be  treated as  capital  distributions  for the  purposes  of these  regulations
provided the Bank remains "well capitalized" after the payment.  At December 31,
1998, the Bank was in compliance with all of its regulatory capital requirements
under  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, 1998 was conducting  business from 151 full-service  offices and
718 automated teller machines ("ATMs") primarily in Maryland,  Virginia, and the
District of Columbia. The Bank's home office is located in McLean,  Virginia and
its  executive  office  is  located  in Chevy  Chase,  Maryland,  which are both
suburban  communities  of  Washington,  D.C. The Bank also maintains 13 mortgage
loan production offices in the mid-Atlantic  region, 12 of which are operated by
a  wholly-owned  mortgage  banking  subsidiary  and 31 consumer loan  production
offices,  24 of which are  operated by a  wholly-owned  finance  subsidiary.  At
December 31, 1998, the Bank had total assets of $7.3 billion,  total deposits of
$5.2 billion and total  stockholders'  equity of $440.7 million.  Based on total
consolidated  assets  at  December  31,  1998,  the  Bank  is the  largest  bank
headquartered in the Washington, D.C. metropolitan area.

Because the Company is a subsidiary of the Bank, 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
under the recently amended capital distribution regulations 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, 1998,  the Bank's total  risk-based  capital ratio was 16.23%,  its
tier 1 risk-based  capital  ratio was 9.95% and its core  capital (or  leverage)
ratio was 6.91%.

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,  a
resolution of the Bank's board of directors 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.


                                       6
<PAGE>

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, 1998, the Advisor and its affiliates owned  approximately
$2.9 billion of  residential  mortgage  loans,  including  $292.7 million 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 $3.7 billion as of December 31, 1998.

The Advisory  Agreement has an initial term of three years,  and will be 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 60 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, 1998, 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.


                                       7
<PAGE>


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  percent of its REIT  taxable  income to its  stockholders,  meets
certain  organizational,  stock  ownership,  operational  requirements and meets
certain  income and asset  tests.  If in any taxable  year the Company  fails to
qualify  as  a  REIT,   the  Company  would  not  be  allowed  a  deduction  for
distributions  to  stockholders  in  computing  its taxable  income and would be
subject to Federal and state income tax (including  any  applicable  alternative
minimum tax) on its taxable income at regular corporate rates. In addition,  the
Company would also be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification was lost.


                                       8
<PAGE>

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, 1998.



                                       9
<PAGE>
                                    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 the  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, 1999,  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  since the  Company's  formation on
November 5, 1996.  For a discussion  of the Company's  distribution  policy with
respect to the Common Stock, see "Business - Dividend Policy."

                 Period                    Distributions          Payment Date
 -------------------------------------     -------------        ----------------
 November 5, 1996 to December 31, 1996       $  584,749         January 15, 1997
 January 1, 1997 to March 31, 1997               -                      N/A
 April 1, 1997 to June 30, 1997                  -                      N/A
 July 1, 1997 to September 30, 1997           3,300,000         October 15, 1997
 October 1, 1997 to December 31, 1997         2,850,000         January 15, 1998
 January 1, 1998 to March 31, 1998              350,000           April 15, 1998
 April 1, 1998 to June 30, 1998               1,000,000            July 15, 1998
 July 1, 1998 to September 30, 1998           1,000,000         October 15, 1998
 October 1, 1998 to December 31, 1998         3,460,000         January 15, 1999


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. In order to remain qualified as a REIT, the
Company  must  distribute  annually  at least 95% 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.



                                       10
<PAGE>

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 March 5,
1998, there were 3,000,000 issued and outstanding Series A Preferred Shares held
by  approximately  202  holders of record.  The  following  table  reflects  the
respective high and low sales prices for the Series A Preferred  Shares for each
quarter  since the  Company's  formation  on  November  5, 1996.  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."

<TABLE>

                                            Price
                                       --------------
           Period                       High    Low    Distributions    Payment Date
-------------------------------------  ------  ------  -------------  ----------------
<S>                                    <C>     <C>     <C>            <C>   
November 5, 1996 to December 31, 1996  $52.50  $50.00  $  1,253,640   January 15, 1997
January 1, 1997 to March 31, 1997       54.88   48.00     3,890,625   April 15, 1997
April 1, 1997 to June 30, 1997          54.25   46.75     3,890,625   July 15, 1997
July 1, 1997 to September 30, 1997      54.06   51.63     3,890,625   October 15,1997
October 1, 1997 to December 31, 1997    53.50   50.25     3,890,625   January 15, 1998
January 1, 1998 to March 31, 1998       55.00   50.38     3,890,625   April 15, 1998
April 1, 1998 to June 30, 1998          56.38   53.13     3,890,625   July 15, 1998
July 1, 1998 to September 30, 1998      55.75   51.50     3,890,625   October 15, 1998
October 1, 1998 to December 31, 1998    53.25   49.88     3,890,625   January 15, 1999

</TABLE>

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  103/8%  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.  If the  Company  fails to pay or  declare  and set aside  for  payment a
quarterly  dividend on the Series A Preferred  Shares,  holders of the Preferred
Stock of the Company,  including the Series A Preferred Shares, will be entitled
to elect two directors.

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).


                                       11
<PAGE>

Automatic   Exchange.   Each  Series  A  Preferred   Share  will  be   exchanged
automatically  for one newly  issued  Series B  preferred  share of the Bank ( a
"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 or from  time to  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.


                                       12
<PAGE>

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 (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
                              As of or for the years ended       period ended   
                                      December 31,                 December 31,
                              ----------------------------      
                                   1998           1997                 1996
                              -------------   ------------      ----------------
OPERATING DATA:

Interest income                $ 22,860,956   $ 23,219,408          $ 1,943,288
Provision for loan losses            10,862         65,195                -
                               ------------   ------------        ------------
 Total interest income after 
  provision for loan losses      22,850,094     23,154,213            1,943,288
Gain on sale of real estate 
  acquired in settlement of 
  loans, net                         32,937          -                    -
Operating expenses               (1,514,080)    (1,526,564)            (111,414)
                               ------------   ------------         ------------ 
  Net income                   $ 21,368,951   $ 21,627,649          $ 1,831,874
                               ============   ============          ============
Earnings available to
  common stockholder           $  5,806,451   $  6,065,149          $   578,234
Earnings per common share      $  58,064.51   $  60,651.49          $  5,782.34

DIVIDENDS DECLARED:

Dividends on common stock      $ 5 ,810,000   $  6,150,000          $   584,749
Dividends on preferred stock   $ 15,562,500   $ 15,562,500          $ 1,253,640

BALANCE SHEET DATA:

Residential mortgage 
   loans, net                 $ 292,682,032  $ 290,382,131        $ 294,504,138
Total assets                  $ 307,593,809  $ 306,823,316        $ 302,318,288
Total stockholders' equity    $ 299,996,451  $ 299,915,149        $ 299,993,485
Number of preferred 
   shares outstanding             3,000,000      3,000,000            3,000,000
Number of common 
   shares outstanding                   100            100                  100
Average yield on residential 
   mortgage loans                     7.82%          7.85%                7.79%




                                       13
<PAGE>

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

FINANCIAL CONDITION

Residential Mortgage Loans

At December  31,  1998,  the Company had  $292,682,032  invested in  Residential
Mortgage  Loans  compared to  $290,382,131  at December 31,  1997.  During 1998,
Residential Mortgage Loan purchases were $145,009,967 and principal  collections
were $141,718,892. In addition, the Company received proceeds of $914,790 on the
sale of six properties classified as real estate acquired in settlement of loans
during the year ended  December  31,  1998.  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,  1998,  the  Company  had  three   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 $477,624.  At December 31, 1997, the Company had
four non-accrual loans with an aggregate principal balance of $807,028.

At December 31, 1998, the Company had four  delinquent  loans (loans  delinquent
30-89 days) with an aggregate principal balance of $845,911 (or 0.29% of loans).
At December 31, 1997, the Company had seven  delinquent  loans with an aggregate
principal balance of $1,616,662 (or 0.56% of loans).

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,  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, 1998 and 1997 is
as follows:

                                         Years Ended December 31,
                                         ------------------------
                                             1998        1997
                                         -----------  -----------

          Beginning balance              $   39,999   $     -
          Provision for loan losses          10,862       65,195
          Charge-offs                       (11,226)     (27,572)
          Recoveries                            698        2,376
                                         -----------  -----------

          Ending Balance                 $   40,333   $   39,999
                                         ===========  ===========



                                       14
<PAGE>

Interest Rate Risk

The Company's  income  consists  primarily of interest  payments on  Residential
Mortgage Loans.  If there is a decline in interest rates,  then the Company will
experience a decrease in income available to be distributed to its stockholders.
Certain  Residential  Mortgage Loans which the Company holds allow  borrowers to
convert an ARM to a fixed-rate mortgage, thus "locking in" a fixed interest rate
at a time when interest  rates have declined.  In addition,  when interest rates
decline,  holders  of  fixed-rate  mortgages  are more  likely  to  prepay  such
mortgages.  During  fiscal  year  1998,  primarily  as a result of a decline  in
interest  rates,  the Company has  experienced an increase in prepayments on its
Residential Mortgage Loans. In response,  the Company has altered the mix of the
Residential Mortgage Loans that it purchases.  Specifically,  during fiscal year
1998,  the Company has purchased  more 10/1 ARMs,  which  typically  have higher
yield than other types of ARMs, from the Bank.

Based on the outstanding balance of the Company's  Residential Mortgage Loans at
December  31,  1998 and the  interest  rates on such loans,  anticipated  annual
interest income on the Company's loan portfolio was approximately  134.8% 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  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.

<TABLE>

                                              December 31,
---------------------------------------------------------------------------------------------------------
                                       Expected Maturity Date
                          ------------------------------------------------
                                     (dollars in thousands)

                                                                                                   Fair
                            1999       2000     2001     2002      2003    Thereafter    Total    Value
                          --------  --------  --------  --------  -------- ----------  --------  --------
<S>                       <C>       <C>       <C>       <C>       <C>       <C>        <C>       <C>     
One-Year ARMs             $  6,069  $  3,162  $  2,162  $  1,479  $  1,011  $  2,276   $ 16,159  $ 16,336
   Average Interest Rate     7.72%     7.39%     7.39%     7.39%     7.39%     7.39%      7.51%

Three-Year ARMs             10,951     8,748     5,624     3,615     2,322     4,425     35,685    36,191
   Average Interest Rate     7.94%     7.61%     7.35%     7.32%     7.32%     7.32%      7.59%

5/1 ARMs                    24,360    18,427    13,940    10,545     7,976    24,861    100,109   102,981
   Average Interest Rate     7.73%     7.44%     7.38%     7.28%     7.28%     7.28%      7.41%

10/1 ARMs                   10,810    12,796    11,481    10,304     9,246    80,800    135,437   138,436
   Average Interest Rate     7.14%     7.14%     7.14%     7.14%     7.13%     7.13%      7.14%

30-Year Fixed-Rate             566       510       460       415       374     3,007      5,332     5,441
   Average Interest Rate     7.59%     7.59%     7.59%     7.59%     7.59%     7.59%      7.59%

</TABLE>



                                       15
<PAGE>


Significant Concentration of Credit Risk

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

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

Liquidity and Capital Resources

The  objective  of  liquidity  management  is  to  ensure  the  availability  of
sufficient  cash flows to meet all of the Company's  financial  commitments.  In
managing  liquidity,  the Company takes into account  various legal  limitations
placed on a 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.

YEAR 2000 ISSUES

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

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

For the  same  reason,  the  Company  is  heavily  dependent  on the  Year  2000
Compliance of its sole service provider, the Bank. However, the Bank has advised
the Company that it is subject to strict  deadlines for Year 2000 Compliance and
other detailed Year 2000  Compliance  guidelines  established by the OTS and the



                                       16
<PAGE>

Federal Financial Institutions Examination Council and that the Bank believes it
has taken appropriate steps to meet all such deadlines. Accordingly, the Company
does not expect to suffer any material  adverse impact from the year 2000 on the
services provided by the Bank.

With  respect  to the payors of the  Mortgage  Loans  held by the  Company,  the
Company also does not expect any material  impact from the year 2000.  Potential
Year 2000  Compliance  risk in this area could arise from the  inability of such
payors to timely make their payments because of problems with their own internal
payment systems. This would result in decreased revenues for the Company,  which
could have an adverse  effect on the payment of dividends by the Company and the
market price of the  Company's  stock.  However,  the  investment  policy of the
Company is to have 95% of its portfolio in Mortgage Assets  consisting of either
Residential  Mortgage Loans or  Mortgage-Backed  Securities.  As of December 31,
1998, all of the assets of the Company consisted of Residential  Mortgage Loans.
The  Company  believes  that  Residential  Mortgage  Loans are not  likely to be
materially  affected  by  the  year  2000  because  the  payments  are  made  by
individuals  rather  than  organizations  that are  more  heavily  dependent  on
technology.

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

RESULTS OF OPERATIONS

Fiscal Year 1998 Compared to Fiscal Year 1997

The Company  reported net income of $21,368,951  and  $21,627,649  for the years
ended December 31, 1998 and 1997, respectively.

Interest   income  on  Residential   Mortgage  Loans  totaled   $22,632,939  and
$23,079,170 for the years ended December 31, 1998 and 1997, respectively,  which
represents an average yield on such loans of 7.82% and 7.85%, respectively.  The
average loan balance of the Residential Mortgage Loan portfolio was $289,332,464
and $294,094,062  for the years ended December 31, 1998 and 1997,  respectively.
The Company would have  recorded an  additional  $49,641 and $45,402 in interest
income for the years ended  December  31, 1998 and 1997,  respectively,  had its
non-accrual loans been current in accordance with their original terms.

Other  interest  income of $228,017 and $140,238 was recognized on the Company's
interest  bearing  deposits  during the years ended  December 31, 1998 and 1997,
respectively.

Provision  for loan losses of $10,862 and $65,195 were recorded on the Company's
loan portfolio during the years ended December 31, 1998 and 1997, respectively.

The Company  recognized  a gain of $32,937 on the sale of six Real Estate  Owned
("REO") properties during the year ended December 31, 1998.

Operating  expenses  totaling  $1,514,080  and  $1,526,564  for the years  ended
December 31, 1998 and 1997, respectively,  were comprised of loan servicing fees
paid to parent,  advisory  fees paid to parent,  directors  fees and general and
administrative  expenses.  Loan  servicing fees paid to parent of $1,116,729 and
$1,137,487,  for the years ended December 31, 1998 and 1997, respectively,  were
based on a servicing fee rate of 0.375% per annum of the  outstanding  principal
balances of Residential  Mortgage  Loans,  pursuant to the Servicing  Agreement.
Advisory  fees paid to parent for the years  ended  December  31,  1998 and 1997



                                       17
<PAGE>

totaled $200,000 for each period. Directors fees totaled $28,000 and $25,500 for
the  years  ended  December  31,  1998 and  1997,  respectively,  and  represent
compensation to the two independent  members of the Board of Directors.  General
and   administrative   expenses   consist   primarily  of  the  amortization  of
organizational costs.

During the year ended  December  31,  1998,  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  December 31, 1998,  the Company's  Board of Directors also declared
cash  dividends of $58,100 per share of Common  Stock,  $5,806,451  of which was
paid out of the retained earnings of the Company and $3,549 of which was treated
as a return of capital.

Fiscal  Year 1997  Compared  to period  from  inception  (November  5,  1996) to
December 31, 1996

The Company reported net income of $21,627,649 and $1,831,874 for the year ended
December  31,  1997 (the  "year  ended  1997")  and the  period  from  inception
(November 5, 1996) to December 31, 1996 (the "period ended 1996"), respectively.

Interest income on Residential Mortgage Loans totaled $23,079,170 and $1,940,387
for the  year  ended  1997  and  the  period  ended  1996,  respectively,  which
represents an average yield on such loans of 7.85% and 7.79%, respectively.  The
average loan balance of the  Residential  Mortgage  Loan  portfolio for the year
ended 1997 was $294,094,062 and for the period ended 1996 was $299,032,490.  The
Company  would have recorded an  additional  $45,402 in interest  income for the
year ended 1997 had its non-accrual loans made payments in accordance with their
original terms.

Other  interest  income of $140,238 and $2,901 was  recognized  on the Company's
interest  bearing deposits during the year ended 1997 and the period ended 1996,
respectively.

A  provision  for loan  losses of $65,195 was  recorded  on the  Company's  loan
portfolio  during the year ended 1997.  There was no  provision  for loan losses
during the period ended 1996.

Operating  expenses  totaling  $1,526,564  and $111,414  were  comprised of loan
servicing fees paid to its parent,  advisory fees paid to its parent,  directors
fees and general and administrative  expenses during the year ended 1997 and the
period  ended  1996,  respectively.  Loan  servicing  fees paid to its parent of
$1,137,487  and  $91,413  for the year  ended 1997 and the  period  ended  1996,
respectively,  were based on a servicing  fee rate of 0.375% of the  outstanding
principal  balances of  Residential  Mortgage  Loans,  pursuant to the Servicing
Agreement.  Advisory  fees paid to its  parent  for the year  ended 1997 and the
period ended 1996 totaled  $200,000 and $16,667,  respectively.  Directors  fees
totaled $25,500 and $3,167 during the year ended 1997 and the period ended 1996,
respectively,  and represent  compensation to the two independent members of the
Board of Directors.  General and  administrative  expenses consist  primarily of
amortization of organizational costs and independent auditor services.

During the year ended 1997,  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.



                                       18
<PAGE>

Also during the year ended 1997, the Company's Board of Directors  declared cash
dividends of $61,500.00 per share of Common Stock,  $6,065,149 of which was paid
out of the retained  earnings of the Company and $84,851 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".



                                       19
<PAGE>


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, 1998 and 1997......  F-3

(c)  Statements of Operations for the Years Ended December 31, 1998
     and 1997 and the Period Ended December 31, 1996......................  F-4

(d)  Statements of Stockholders' Equity for the Years Ended
     December 31, 1998 and 1997 and the Period Ended December 31, 1996....  F-5

(e)  Statements of Cash Flows for the Years Ended December 31, 1998
     and 1997 and the Period Ended December 31, 1996......................  F-6

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








                                F-1

<PAGE>







                    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,  1998 and 1997,  and the  related  statements  of  operations,
stockholders'  equity and cash flows for the years then ended and for the period
November 5, 1996 (date of inception)  through December 31, 1996. 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  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of the Company as of December 31,
1998 and 1997,  and the  results  of its  operations  and its cash flows for the
years then ended and for the period November 5, 1996 (date of inception) through
December 31, 1996 in conformity with generally accepted accounting principles.



                                                             Arthur Andersen LLP

Vienna, Virginia
March 19, 1999





                                     F-2

<PAGE>

                    CHEVY CHASE PREFERRED CAPITAL CORPORATION
                    -----------------------------------------
                       STATEMENTS OF FINANCIAL CONDITION
                       ---------------------------------


                                                         December 31,
                                              ----------------------------------
                                                   1998                1997
                                              -------------       --------------

                                     ASSETS
                                     ------

Cash and interest-bearing
  deposits                                    $   4,861,984       $   3,894,269
Residential mortgage loans
  (net of allowancefor loan losses
   of $40,333 and $39,999, respectively)        292,682,032         290,382,131
Real estate acquired in settlement of loans         272,197             173,738
Accounts receivable from parent                   8,004,120          10,374,891
Accrued interest receivable                       1,437,626           1,562,478
Prepaid expenses                                    335,850             435,809
                                              -------------       --------------

 Total assets                                 $ 307,593,809       $ 306,823,316
                                              =============       ==============

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

Accounts payable to parent                    $     234,923       $     163,793
Accounts payable to others
   and accrued expenses                              11,810               3,749
Dividends payable to parent                       3,460,000           2,850,000
Dividends payable to others                       3,890,625           3,890,625
                                              -------------       --------------

 Total liabilities                                7,597,358           6,908,167
                                              -------------       --------------

103/8% 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            284,996,351         284,915,049
Retained earnings                                    -                   -
                                              -------------       --------------
 Total stockholders's equity                    299,996,451         299,915,149
                                              -------------       --------------

 Total liabilities and stockholders' equity   $ 307,593,809       $ 306,823,316
                                              =============       ==============




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

                                      F-3
<PAGE>

                    CHEVY CHASE PREFERRED CAPITAL CORPORATION
                    -----------------------------------------
                            STATEMENTS OF OPERATIONS
                            ------------------------



                                 Year Ended December 31,           Period Ended
                              -----------------------------         December 31,
                                   1998            1997                1996(1)
                              ------------     ------------        -------------
Interest income:
Residential mortgage loans    $ 22,632,939     $ 23,079,170        $  1,940,387
Other                              228,017          140,238               2,901
                              ------------     ------------        -------------

 Total interest income          22,860,956       23,219,408           1,943,288

Provision for loan losses           10,862           65,195                -
                              ------------     ------------        -------------
 Total interest income
    after provision for loan
    losses                      22,850,094       23,154,213           1,943,288

Gain on sale of real estate
  acquired in settlement of
  loans, net                        32,937             -                   -
                              ------------     ------------        -------------

    Total operating income      22,883,031       23,154,213           1,943,288
                              ------------     ------------        -------------

Operating expenses:
Loan servicing fees-parent       1,116,729        1,137,487              91,413
Advisory fees-parent               200,000          200,000              16,667
Directors fees                      28,000           25,500               3,167
General and administrative         169,351          163,577                 167
                              ------------     ------------        -------------
    Total operating expenses     1,514,080        1,526,564             111,414
                              ------------     ------------        -------------

NET INCOME                      21,368,951       21,627,649           1,831,874

PREFERRED STOCK DIVIDENDS       15,562,500       15,562,500           1,253,640
                              ------------     ------------        -------------

EARNINGS AVAILABLE TO
  COMMON STOCKHOLDER          $  5,806,451     $  6,065,149        $    578,234
                              ============     ============        =============

EARNINGS PER COMMON SHARE     $  58,064.51     $  60,651.49        $   5,782.34
                              ============     ============        =============



(1) For the period from inception (November 5, 1996) through December 31, 1996.





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

                                      F-4
<PAGE>

                    CHEVY CHASE PREFERRED CAPITAL CORPORATION
                    -----------------------------------------
                       STATEMENTS OF STOCKHOLDERS' EQUITY
                       ----------------------------------

<TABLE>


                                                                 Capital
                                                               Contributed
                                        Preferred     Common    in Excess      Retained     Stockholders'
                                          Stock       Stock      of Par        Earnings        Equity
                                      -------------  -------  ------------- -------------  --------------
<S>                                   <C>            <C>      <C>           <C>            <C>            
Issuance of common stock
   on November 5, 1996                $       -      $  100   $        900  $       -      $       1,000

Initial public offering of 103/8%
Noncumulative Exchangeable
Preferred Stock, Series A
   on December 3, 1996

                                        15,000,000     -       129,000,000          -        144,000,000
Capital contribution from
   common stockholder on
   December 3, 1996
                                              -         -      155,999,000          -        155,999,000
Net income                                    -         -             -        1,831,874       1,831,874
Dividends on 103/8%
Noncumulative Exchangeable
   Preferred Stock, Series A
                                              -         -             -       (1,253,640)     (1,253,640)
Dividends on common stock                     -         -           (6,515)     (578,234)       (584,749)
                                      -------------  -------   ------------  ------------  --------------

Balance, December 31, 1996              15,000,000      100    284,993,385          -        299,993,485

Capital contribution from
   common stockholder                         -         -            6,515          -              6,515
Net income                                    -         -             -       21,627,649      21,627,649
Dividends on 103/8%
       Noncumulative Exchangeable
   Preferred Stock, Series A                  -         -             -      (15,562,500)    (15,562,500)
Dividends on common stock                     -         -          (84,851)   (6,065,149)     (6,150,000)
                                      -------------  -------   ------------  ------------  --------------

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

Capital contribution from
common stockholder
                                              -         -           84,851          -             84,851
Net income                                    -         -             -       21,368,951      21,368,951
Dividends on 103/8%
   Noncumulative Exchangeable
   Preferred Stock, Series A                  -         -             -      (15,562,500)    (15,562,500)
Dividends on common stock                     -         -           (3,549)   (5,806,451)     (5,810,000)
                                       ------------  -------  -------------  ------------  --------------

Balance, December 31, 1998            $ 15,000,000   $  100   $284,996,351   $      -      $ 299,996,451
                                      =============  =======  =============  ============  ==============
</TABLE>






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

                                      F-5

<PAGE>
                    CHEVY CHASE PREFERRED CAPITAL CORPORATION
                    -----------------------------------------
                            STATEMENTS OF CASH FLOWS
                            ------------------------
                                                                    Period Ended
                                         Year Ended December 31,    December 31,
                                        -------------------------- -------------
                                          1998          1997          1996(1)
                                        ------------  ------------ -------------
Cash flows from operating activities:

Net income                              $ 21,368,951  $ 21,627,649 $  1,831,874

Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
  Provision for loan losses                 10,862        65,195           -
  Gain on sale of real estate
   acquired in settlement of loans, net    (32,937)         -              -
 (Increase) decrease in accounts
   receivable from parent                2,370,771    (4,530,742)    (5,844,149)
 (Increase) decrease in accrued
   interest receivable                     124,852        42,348     (1,604,826)
 (Increase) decrease in prepaid
   expenses                                 99,959      (435,809)          -
  Increase (decrease) in accounts
   payable to parent                        71,130      (319,287)       483,080
  Increase in accounts payable to
   others and accrued expenses               8,061           415          3,334
                                        ------------  ------------ -------------
Net cash provided by (used in)
    operating activities                  24,021,649    16,449,769   (5,130,687)
                                        ------------  ------------ -------------

Cash flows from investing activities:

Purchases of residential mortgage loans (145,009,967) (82,980,950) (301,637,523)
Repayments of residential mortgage
  loans                                  141,718,892    86,649,302    7,133,385
Net proceeds from sale of real
  estate acquired in settlement
  of loan                                   914,790       214,722        -
                                        ------------  ------------ -------------
Net cash provided by (used in)
   investing activities                  (2,376,285)    3,883,074  (294,504,138)
                                        ------------  ------------ -------------

Cash flows from financing activities:

Proceeds from issuance of  
  common stock                                -              -            1,000
Net proceeds from issuance of 
  preferred stock                             -              -      144,000,000
Capital contribution from 
  common stockholder                          84,851         6,515  155,999,000
Dividends paid on preferred stock        (15,562,500)  (12,925,515)        -
Dividends paid on common stock            (5,200,000)   (3,884,749)        -
                                        ------------  ------------- ------------
Net cash provided by (used in) 
    financing activities                 (20,677,649)  (16,803,749) 300,000,000
                                        ------------   ------------ ------------

Net increase in cash and    
   cash equivalents                          967,715    3,529,094       365,175

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

Cash and cash equivalents at 
   end of year                          $  4,861,984  $ 3,894,269   $   365,175
                                        ============  ============  ============

Supplemental disclosures of non-cash activities:

 Net transfer of loans receivable 
  to real estate acquired in 
  settlement of loans                   $    980,312  $   388,460   $     -
                                        ============  ============  ============

(1) From inception (November 5, 1996) through December 31, 1996

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

                                      F-6

<PAGE>

                   CHEVY CHASE PREFERRED CAPITAL CORPORATION
                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 and 1996

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.

On November 5, 1996, the Company was initially  capitalized with the issuance to
the Bank of 100 shares of the Company's common stock (the "Common Stock"), $1.00
par value.  On  December 3, 1996,  the Company  commenced  its  operations  upon
consummation of an initial public offering of 3,000,000  shares of the Company's
103/8%  Noncumulative  Exchangeable  Preferred  Stock,  Series A (the  "Series A
Preferred Shares"),  $5.00 par value. These offerings,  together with a separate
capital contribution made by the Bank on December 3, 1996, raised net capital of
$300 million.

The Company used the  proceeds  raised from the initial  public  offering of the
Series  A  Preferred  Shares,  the  sale of  Common  Stock  to the  Bank and the
additional  capital  contribution to the Company by the Bank to pay the expenses
related to the  offering and the  formation of the Company and to purchase  from
the Bank the Company's initial portfolio of residential  mortgage loans at their
estimated fair value of approximately $300 million.  Such loans were recorded in
the accompanying  statements of financial condition at their aggregate principal
balance, which approximated their estimated fair values.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Use of Estimates:

The  financial  statements  have been  prepared  in  conformity  with  generally
accepted  accounting   principles.   In  preparing  the  financial   statements,
management  is  required  to make  estimates  and  assumptions  that  affect the
reported  amounts  of  assets  and  liabilities  and  disclosure  of  contingent
liabilities as of the date of the  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.

                                       F-7

<PAGE>




                    CHEVY CHASE PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 and 1996

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

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, 1998 and 1997 totaling $477,624 and $807,029, 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 is 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.

Concentrations of Credit:

Substantially  all of the Company's  loans are secured by properties  located in
the Washington,  D.C.  metropolitan area. Service industries and Federal,  state
and local governments employ a significant portion of the Washington,  D.C. area
labor force.  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.

Accounts Payable to Parent:

Accounts  payable to parent  represents  fees owed to the Bank for  managing the
operations of the Company,  for  servicing the Company's  loans and for expenses
paid by the Bank on behalf of the Company. See Note 7.

                                      F-8
<PAGE>




                    CHEVY CHASE PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 and 1996

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

Dividends:

Preferred  Stock.  Dividends  on the Series A Preferred  Shares are payable at a
rate of 103/8%  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.

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.
Earnings per common share assuming dilution equals the basic 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 not  subject  to  Federal  corporate  income  taxes 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. 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.



                                       F-9
<PAGE>

                    CHEVY CHASE PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 and 1996

NOTE 3 - RESIDENTIAL MORTGAGE LOANS:

Residential  mortgage  loans  consist  of  one-year  adjustable  rate  mortgages
("ARMs"),   three-year  ARMs,  five-year  and  ten-year  fixed-rate  loans  with
automatic adjustment to one-year ARMs after the respective fixed rate period and
conventional  30-year  fixed-rate  mortgages.  The  following  table  shows  the
residential mortgage loan portfolio by type at the dates indicated:


                                               December 31,
                                  --------------------------------------
                                        1998                  1997
                                  -----------------    -----------------
One-Year ARMs                     $     16,159,185     $     27,657,820
Three-Year ARMs                         35,684,740           78,228,562
5/1 ARMs                               100,108,907          165,785,490
10/1 ARMs                              135,436,966           16,196,915
30 Year Fixed-Rate                       5,332,567            2,553,343
                                  -----------------    -----------------
     Total                             292,722,365          290,422,130

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

     Total                        $    292,682,032     $    290,382,131
                                  =================    =================


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,
                                   --------------------------
                                      1998            1997
                                   -----------    -----------

Beginning balance                  $   39,999     $     -
  Provision for losses                 10,862         65,195
  Charge-offs                         (11,226)       (27,572)
  Recoveries                              698          2,376
                                   -----------    -----------
Ending balance                     $   40,333     $   39,999
                                   ===========    ===========




                                      F-10
<PAGE>

                    CHEVY CHASE PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 and 1996

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 103/8%.  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                         $51.519
                           2012 and thereafter          $50.000

NOTE 6 - DIVIDENDS:

During the year ended  December  31,  1998,  the  Company's  Board of  Directors
declared  $15,562,500 of preferred stock  dividends out of retained  earnings of
the Company and  $5,810,000 of common stock  dividends,  $5,806,451 of which was
paid out of the retained earnings of the Company and $3,549 of which was treated
as a  return  of  capital.  Of  these  amounts,  preferred  stock  dividends  of
$3,890,625  and common stock  dividends of  $3,460,000  were paid  subsequent to
December 31, 1998.

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  automatically  renews 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.

                                      F-11
<PAGE>

                    CHEVY CHASE PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 and 1996

NOTE 7 - RELATED PARTY TRANSACTIONS (Continued):

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, 1998 and 1997 and the period  ended  December 31,
1996 totaled $1,116,729, $1,137,487 and $91,413, respectively.

The Company had cash  balances of $4,861,984  and  $3,894,269 as of December 31,
1998 and 1997,  respectively,  held in various  deposit  accounts with the Bank.
Interest  earned on these  accounts  was  $228,017,  $140,238 and $2,901 for the
years ended  December  31, 1998 and 1997 and for the period  ended  December 31,
1996, 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.  Because the fair value is  estimated  as of the
balance  sheet  date,  the amount  which will  actually be realized or paid upon
settlement or maturity could be  significantly  different.  Comparability  among
REITs may be difficult due to the wide range of permitted  valuation  techniques
and the numerous estimates and assumptions which must be made.













                                      F-12
<PAGE>




                    CHEVY CHASE PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 and 1997

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

The estimated fair values of the Company's financial instruments at December 31,
1998 and 1997 are as follows:


                                                   December 31, 1998
                                            ------------------------------
                                               Carrying          Fair
                                                Amount           Value
                                            -------------    -------------
Financial assets:
     Cash and interest-bearing deposits     $   4,861,984    $   4,861,984
     Residential mortgage loans
       receivable, net                        292,682,032      299,823,000
     Other financial assets                     9,441,746        9,441,746

Financial liabilities                           7,585,548        7,585,548


                                                   December 31, 1997
                                            ------------------------------
                                               Carrying          Fair
                                                Amount           Value
                                            -------------    -------------

Financial assets:
     Cash and interest-bearing deposits     $   3,894,269    $   3,894,269
     Residential mortgage loans
       receivable, net                        290,382,131      291,310,000
     Other financial assets                    11,937,369       11,937,369

Financial liabilities                           6,908,167        6,908,167


The  following  methods and  assumptions  were used to  estimate  the fair value
amounts at December 31, 1998 and 1997.

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-13
<PAGE>

                    CHEVY CHASE PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 and 1997

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-14
<PAGE>

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

None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

The Company's Board of Directors currently consists of six members,  two of whom
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").
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 1998 and all of its members  attended at least
75% 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              66     Chairman of the Board, President  
                                        and Chief Executive Officer
Alexander R. M. Boyle           60     Director
Stephen R. Halpin, Jr.          43     Executive Vice President, Chief Financial
                                        Officer, Treasurer and Director
N. Alexander MacColl, Jr.       64     Director
Leslie A. Nicholson             58     Executive Vice President, General
                                        Counsel and Director
John J. O'Connor III            68     Director




                                       20
<PAGE>

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 the B. F.
Saul Company  since 1969.  Mr. Saul has served as the Chairman of the 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, 1998, 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 is the father of B.F. Francis Saul III, a director of the Bank.
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 the B. F. Saul Real Estate Investment Trust. He is a Trustee
of the B. F. Saul Employees Profit Sharing  Retirement  Trust. 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.

LESLIE A.  NICHOLSON  joined the Bank as Executive  Vice  President  and General
Counsel in June of 1996.  Prior to joining the Bank,  Mr.  Nicholson  had been a
partner for twenty four years in the law firm of Shaw Pittman Potts & Trowbridge
in  Washington,  D.C.,  where he was a member of its  Management  Committee  and
Chairman of its Litigation Department. Mr. Nicholson is a member of the American
College of Real Estate Lawyers and the American College of Construction Lawyers,
where he served as a  National  Governor  for three  years,  and a member of the
Board of Directors of the Frederick M. Abramson Foundation.

JOHN J.  O'CONNOR III has been engaged in the practice of law since 1957. He has
been a partner in Bryan Cave LLP since 1988.



                                       21
<PAGE>

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
John J. O'Connor III and N. Alexander  MacColl,  Jr. The audit committee met two
times during 1998.

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
Securities and Exchange  Commission (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, 1998, 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 1998.

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 1998, each of the Independent Directors earned the $750 fee
for attending four Board of Directors and two Audit Committee meetings.

ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following  table sets forth, as of March 15, 1999, 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, 1999.



                                       22
<PAGE>

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%

Leslie A. Nicholson (2)(3)               0                               0%

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

All directors and executive officers 
as a group (6 persons)               1,000                 Preferred - 0.033%



(1) The address of each beneficial owner is 8401 Connecticut Avenue, 
      Chevy Chase, Maryland  20815.
(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, 1998 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,
1998 totaled $1,116,729. See "Business - Servicing."

The Company  had cash  balances of  $4,861,984  as of December  31, 1998 held in
various  deposit  accounts with the Bank.  Interest earned on these accounts was
$228,017 for the year ended December 31, 1998.





                                       23
<PAGE>

                                    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, 1998 and 
                   1997 
                  Statements of Operations for the Years Ended December 31, 1998
                   and 1997 and the Period Ended December 31, 1996 
                  Statements of Stockholders' Equity for the Years Ended
                   December 31, 1998 and 1997 and the Period Ended December 31,
                   1996 
                  Statements of Cash Flows for the Years Ended December 31, 1998
                   and 1997 and the Period Ended December 31, 1996  

                  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 103/8% 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.

*         27      Financial Data Schedule.

          (b)     No reports on Form 8-K were issued during the three months  
                  ended December 31, 1998.


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

* Filed herewith.




                                       24
<PAGE>

                                   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 31, 1999.


                   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 31, 1999                By:     /s/ Alexander R. M. Boyle
                                      --------------------------
                                      Alexander R. M. Boyle
                                      Director




March 31, 1999                By:     /s/ Joel A. Friedman
                                      --------------------
                                      Joel A. Friedman
                                      Senior Vice President and
                                      Controller
                                      (Principal Accounting Officer)




March 31, 1999                By:     /s/ Stephen R. Halpin, Jr.
                                      --------------------------
                                      Stephen R. Halpin, Jr.
                                      Director,
                                      Executive Vice President, Treasurer and
                                      Chief Financial Officer
                                      (Principal Financial Officer)

<PAGE>

March 31, 1999               By:     /s/ N. Alexander MacColl, Jr.
                                      -----------------------------
                                      N. Alexander MacColl, Jr.
                                      Director


March 31, 1999                By:     /s/ Leslie A. Nicholson
                                      -----------------------
                                      Leslie A. Nicholson
                                      Director,
                                      Executive Vice President and
                                      General Counsel




March 31, 1999                By:     /s/ John J. O'Connor III
                                      ------------------------
                                      John J. O'Connor III
                                      Director



March 31, 1999                By:     /s/ B. Francis Saul II
                                      ----------------------
                                      B. Francis Saul II
                                      Chairman of the Board,
                                      President and Chief Executive Officer
                                      (Principal Executive Officer)

<PAGE>

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)

                                                               
                                      Year Ended December 31,    Period Ended
                                      -----------------------    December 31,
                                          1998        1997           1996
                                      ----------    ---------    ------------
                                  
Net income                              $21,369      $21,628         $ 1,832

Fixed Charges                              -            -               -     
                                      ----------    ---------    ------------
Earnings before fixed charges           $21,369      $21,628         $ 1,832
                                      ==========    =========    ============


Fixed charges, as above                 $  -         $  -            $  -     

Preferred stock dividend requirments     15,563       15,563           1,254


Fixed charges including preferred     ----------    ---------    ------------
  stock dividend                        $15,563      $15,563         $ 1,254
                                      ==========    =========    ============

Ratio of earnings to fixed charges and
  preferred stock dividend requirements    1.37       1.39            1.46

<PAGE>