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







________________________________________________________________________________

                       SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                                    FORM 10-K

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

                       Commission File Number: 333-10495

                   CHEVY CHASE PREFERRED CAPITAL CORPORATION

             (Exact name of registrant as specified in its charter)

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


                             7501 Wisconsin Avenue

                            Bethesda, Maryland 20814

               (Address of principal executive office) (Zip Code)

                                 (301) 986-7000

              (Registrant's telephone number, including area code)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

Yes  X  No

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

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

____________________________________________________________________________________

                   CHEVY CHASE PREFERRED CAPITAL CORPORATION

                               TABLE OF CONTENTS

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

                                    PART II

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



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

                                    PART III

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

                                    PART IV

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


                                     PART I

ITEM 1.  BUSINESS

GENERAL

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

MORTGAGE ASSETS

Loan Portfolio Composition

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


                       Residential Mortgage Loan Portfolio

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

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

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

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

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

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

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



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

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

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

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

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

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



Investment Policy

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

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


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

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

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




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

Credit Risk Management Policies

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

Delinquencies

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

Geographic Distribution

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



SERVICING

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

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

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


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

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

DIVIDEND POLICY

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




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

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

THE BANK

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

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



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

THE ADVISOR

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

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

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

CAPITAL AND LEVERAGE POLICIES

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



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

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

EMPLOYEES

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

COMPETITION

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

ENVIRONMENTAL MATTERS

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


TAX STATUS OF THE COMPANY

The Company has elected to be taxed as a REIT under  Sections 856 through 860 of
the Code. As a REIT, the Company generally will not be subject to federal income
tax on its net income  (excluding  capital  gains)  provided that it distributes
annually  100% of its REIT taxable  income to its  stockholders,  meets  certain
organizational,  stock ownership and operational  requirements and meets certain
income  and asset  tests.  To  remain  qualified  as a REIT,  the  Company  must
distribute  each year at least 90% of its "REIT taxable  income" (not  including
capital gains) for that year to stockholders. If in any taxable year the Company
fails to qualify as a REIT,  the Company  would not be allowed a  deduction  for
distributions  to  stockholders  in  computing  its taxable  income and would be
subject to federal and state income tax (including  any  applicable  alternative
minimum tax) on its taxable income at regular corporate rates. In addition,  the
Company would also be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification was lost.

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

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

ITEM 2. PROPERTIES

None.



ITEM 3.  LEGAL PROCEEDINGS

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

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

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




                                    PART II

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

DESCRIPTION OF COMMON STOCK

General

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


Dividends

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

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

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




Voting Rights

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


Rights Upon Liquidation

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

DESCRIPTION OF SERIES A PREFERRED SHARES

Market Information and Dividends

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

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

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

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




General

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

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

Automatic Exchange

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

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




Voting Rights

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


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

Redemption

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


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

Rights Upon Liquidation

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




Independent Director Approval

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




ITEM 6.  SELECTED FINANCIAL DATA

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

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

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

DIVIDENDS DECLARED:

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

BALANCE SHEET DATA:

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



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

FINANCIAL CONDITION

Critical Accounting Policies

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

     . estimation of allowance for loan losses

Allowance for Loan Losses

Management  reviews the loan  portfolio to establish an allowance  for estimated
losses if deemed  necessary.  An analysis to determine  whether an allowance for
loan losses is required is performed periodically,  and an allowance is provided
after  considering  such  factors as the economy in lending  areas,  delinquency
statistics and past loss  experience.  The allowance for loan losses is based on
estimates,  and ultimate losses may vary from current estimates.  As adjustments
to the allowance  become  necessary,  provisions for loan losses are reported in
operations in the periods they are  determined to be necessary.  The activity in
the  allowance for loan losses for the years ended  December 31, 2001,  2000 and
1999 is as follows:

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

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

Residential Mortgage Loans

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




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

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

Interest Rate Risk

The Company's  income  consists  primarily of interest  payments on  Residential
Mortgage Loans.  If there is a decline in interest rates,  then the Company will
experience a decrease in income available to be distributed to its stockholders.
Certain  Residential  Mortgage Loans which the Company holds allow  borrowers to
convert an ARM to a fixed-rate mortgage, thus "locking in" a fixed interest rate
at a time when interest  rates have declined.  In addition,  when interest rates
decline,  holders  of  fixed-rate  mortgages  are more  likely  to  prepay  such
mortgages.  In recent  periods,  primarily  as a result of a decline in interest
rates, the Company has experienced an increase in prepayments on its Residential
Mortgage Loans.

Based on the outstanding balance of the Company's  Residential Mortgage Loans at
December 31,  2001,  and the interest  rates on such loans,  anticipated  annual
interest income on the Company's loan portfolio was approximately  125.3% of the
projected  annual  dividend  on the Series A Preferred  Shares.  There can be no
assurance  that an  interest  rate  environment  in which  there is a  continued
decline in interest  rates would not adversely  affect the Company's  ability to
pay dividends on the Series A Preferred Shares or the Common Stock. The Company,
to date,  has not used any  derivative  instruments  to manage its interest rate
risk.

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




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

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

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

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

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

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

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

Significant Concentration of Credit Risk

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

The Company's exposure to geographic  concentrations directly affects the credit
risk of the Residential  Mortgage Loans within the portfolio.  A majority of the
Company's  Residential  Mortgage  Loans are loans  secured by  residential  real
estate  properties  located in the  Washington,  DC metropolitan  area.  Service
industries and Federal, state and local governments employ a significant portion
of the Washington, DC area labor force. Consequently, these loans may be subject
to a greater risk of default than other comparable residential mortgage loans in
the event of adverse  economic,  political or business  developments and natural
hazards in the region that may affect the ability of residential property owners
in the region to make  payments of  principal  and  interest  on the  underlying
mortgages.




Liquidity and Capital Resources

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


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

RESULTS OF OPERATIONS

Fiscal Year 2001 Compared to Fiscal Year 2000

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

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


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

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

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




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

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

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

Fiscal Year 2000 Compared to Fiscal Year 1999

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

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


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

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

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



balances of Residential  Mortgage  Loans,  pursuant to the Servicing  Agreement.
Advisory  fees paid to parent for the years  ended  December  31,  2000 and 1999
totaled  $200,000 for each period.  Directors'  fees totaled $29,000 and $26,000
for the years ended  December  31, 2000 and 1999,  respectively,  and  represent
compensation to the two independent  members of the Board of Directors.  General
and  administrative  expenses  totaled  $65,727 and $372,915 for the years ended
December  31,  2000  and  1999,  respectively.   The  decrease  in  general  and
administrative  expenses is due primarily to the prior year  acceleration of the
amortization of organizational  costs in accordance with the American  Institute
of Certified  Public  Accountants'  Statement of Position 98-5 "Reporting on the
Costs of Start-Up  Activities,"  which the Company adopted  effective January 1,
1999.

During the year ended  December  31,  2000,  the  Company's  Board of  Directors
declared cash dividends of  $15,562,500,  representing  $5.1875 per share on the
outstanding shares of Series A Preferred Shares, out of the retained earnings of
the Company.

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

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

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





ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                    CONTENTS


                                                                           Page

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

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

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

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

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

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



                                      F-1







                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


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

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

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

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

Vienna, Virginia
March 13, 2002



                                      F-2












                    CHEVY CHASE PREFERRED CAPITAL CORPORATION
                        STATEMENTS OF FINANCIAL CONDITION


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

                                     ASSETS

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

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

                      LIABILITIES AND STOCKHOLDERS' EQUITY

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

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

  10 3/8% Noncumulative Exchangeable
    Preferred Stock, $5 par value
    10,000,000 shares authorized, 3,000,000
    shares issued and outstanding
    (liquidation value of $150,000,000
    plus accrued and unpaid dividends)              15,000,000       15,000,000
  Common Stock, $1 par value
    1,000 shares authorized, 100 shares
    issued and outstanding                                 100              100
  Capital contributed in excess of par             284,658,818      284,998,645
                                                ---------------  ---------------
               Total stockholders' equity          299,658,918      299,998,745
                                                ---------------  ---------------

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


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

                                      F-3



                                     CHEVY CHASE PREFERRED CAPITAL CORPORATION
                                             STATEMENTS OF OPERATIONS

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

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

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

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

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

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

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

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

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

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

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



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

                                      F-4


                                           CHEVY CHASE PREFERRED CAPITAL CORPORATION
                                              STATEMENTS OF STOCKHOLDERS' EQUITY


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

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

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

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









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





                                          CHEVY CHASE PREFERRED CAPITAL CORPORATION
                                                  STATEMENTS OF CASH FLOWS

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

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

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

 Cash flows from investing activities:

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


 Cash flows from financing activities:

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

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

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

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

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

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





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




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

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Use of Estimates:

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

Cash and Cash Equivalents:

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

Residential Mortgage Loans:

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

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


Allowance for Loan Losses:

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


                                      F-7

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

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

Concentrations of Credit:

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

Accounts Receivable from Parent:

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

Dividends:

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

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

Earnings Per Common Share:

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

Income Taxes:

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


                                      F-8

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



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

Income Taxes (Continued):

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


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

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

NOTE 3 - RESIDENTIAL MORTGAGE LOANS:

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


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

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

                                      F-9


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


NOTE 3 - RESIDENTIAL MORTGAGE LOANS (continued):

Each of the  mortgage  loans is  secured by a  mortgage,  deed of trust or other
security  instrument  which  created a first lien on the  residential  dwellings
located in their respective jurisdictions.

NOTE 4 - ALLOWANCE FOR LOAN LOSSES:

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

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

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

NOTE 5 - PREFERRED STOCK:

On December 3, 1996, the Company sold $150 million of Series A Preferred Shares,
$5.00 par value and received net cash proceeds of $144 million.  Cash  dividends
on the Series A  Preferred  Shares,  if,  when and as  declared  by the Board of
Directors,  are payable  quarterly in arrears at an annual rate of 10 3/8%.  The
liquidation  value of each  Series A  Preferred  Share is $50 plus  accrued  and
unpaid dividends. Except under certain circumstances,  the holders of the Series
A Preferred  Shares  have no voting  rights.  The Series A Preferred  Shares are
automatically  exchangeable for a new series of preferred stock of the Bank upon
the occurrence of certain events.

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

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


                                      F-10


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


NOTE 6 - DIVIDENDS:

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

NOTE 7 - RELATED PARTY TRANSACTIONS:

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

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

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

NOTE 8 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:

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

                                      F-11


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


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

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



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

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

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

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

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

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

Cash and interest-bearing deposits:

Carrying amount approximates fair value.

Residential mortgage loans:

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

                                      F-12


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


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

Other financial assets:

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

Financial liabilities:

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


                                      F-13



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

NOTE 9 - QUARTERLY FINANCIAL DATA (Unaudited)

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

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

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


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

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




                                      F-14




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

None.

                                      -24-


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

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

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

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

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

                                      -25-





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

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

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

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

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

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


                                      -26-



AUDIT COMMITTEE

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

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

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

ITEM 11.  EXECUTIVE COMPENSATION

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


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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


                                      -27-




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

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

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

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

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

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

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


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

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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

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

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

                                      -28-




                                                         PART IV

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

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

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

          Notes to Financial Statements


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

(a)(3)  Exhibits:

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

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

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

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

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

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

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

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

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


*Filed herewith.


                                      -29-




EXHIBIT 12.1


                   CHEVY CHASE PREFERRED CAPITAL CORPORATION

               COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

                   AND PREFERRED STOCK DIVIDEND REQUIREMENTS

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

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


                                                                      Exhibit 99

March 29, 2002


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

Dear Sir or Madam:

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

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

CHEVY CHASE PREFERRED CAPITAL CORPORATION

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





                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned thereunto duly authorized, in Chevy Chase, Maryland on
March 29, 2002.

                            CHEVY CHASE PREFERRED CAPITAL CORPORATION
                                          (Registrant)




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

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

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




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




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




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



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



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

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2004________________

OR

_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to_

Commission File Number: 001-12477

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

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

7501 Wisconsin Avenue
Bethesda, Maryland 20814
(Address of principal executive office) (Zip Code)

(301) 987-2265
(Registrant's telephone number, including area code)

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

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

Securities registered pursuant to Section 12(g) of the Act:

_N/A_
(Title of class)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ___ No _X_

The number of shares outstanding of the registrant's sole class of common stock was 100 shares, $1.00 par value per share, as of March 15, 2005. All of such shares were owned by Chevy Chase Bank, F.S.B.; therefore, no common stock was held by non-affiliates.

CHEVY CHASE PREFERRED CAPITAL CORPORATION

                                            PART I

                                                             Page
Item 1.       BUSINESS........................................................1
              General.........................................................1
              Dividend Coverage...............................................1
              Mortgage Assets.................................................1
                 Loan Portfolio Composition...................................1
                 Investment Policy............................................3
                 Loan Payable to Parent.......................................4
                 Credit Risk Management Policies..............................4
                 Delinquencies................................................5
                 Geographic Distribution......................................5
              Servicing.......................................................5
              Dividend Policy.................................................6
              The Bank........................................................6
              The Advisor.....................................................6
              Capital and Leverage Policies...................................7
              Employees.......................................................7
              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, RELATED
              STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES...9
              Description of Common Stock.....................................9
                 General......................................................9
                 Dividends...................................................10
                 Voting Rights...............................................10
                 Rights Upon Liquidation.....................................10
              Description of Series A Preferred Shares.......................10
                 Market Information and Dividends............................10
                 General.....................................................11
                 Automatic Exchange..........................................11
                 Voting Rights...............................................12
                 Redemption..................................................12
                 Rights Upon Liquidation.....................................12
                 Independent Director Approval...............................12
Item 6.       SELECTED FINANCIAL DATA........................................13
Item 7.       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS............................13
              Financial Condition............................................13
                 Critical Accounting Policies................................13
                 Allowance for Loan Losses...................................14
                 Residential Mortgage Loans..................................14
                 Interest Rate Risk..........................................14
                 Significant Concentration of Credit Risk....................15
                 Liquidity and Capital Resources.............................16
              Results of Operations..........................................16
                 Year 2004 Compared to Year 2003.............................16
                 Year 2003 Compared to Year 2002.............................17
Item 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES
              ABOUT MARKET RISK   ...........................................18
Item 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................F-1
Item 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
              ON ACCOUNTING AND FINANCIAL DISCLOSURE.........................19
Item 9A.      CONTROLS AND PROCEDURES........................................19
Item 9B.      OTHER INFORMATION..............................................19

                                        PART III

Item 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............19
              Directors and Executive Officers...............................19
              Code of Business Conduct.......................................20
              Audit Committee................................................21
              Section 16(a) Beneficial Ownership Reporting Compliance........21
Item 11.      EXECUTIVE COMPENSATION.........................................21
Item 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
              OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS..........22
Item 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................22
Item 14.      PRINCIPAL ACCOUNTANT FEES AND SERVICES.........................23

                                        PART IV

Item 15.      EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.....................24

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 has outstanding 3,000,000 shares of 10 3/8% Noncumulative Exchangeable Preferred Stock, Series A, par value $5.00 per share (the “Series A Preferred Shares”). The Series A Preferred Shares are listed on the New York Stock Exchange (symbol CCP-PrA).

DIVIDEND COVERAGE

Based on the outstanding balance of the Company’s Residential Mortgage Loans (as defined below) at December 31, 2004 and the interest rates on such loans, the Company anticipates that annual income, net of interest expense and operating expenses, on the Company’s loan portfolio will be approximately 112.1% of the projected annual dividend of $15,562,500 on the Series A Preferred Shares.

In response to reduced market interest rates, the Company has taken steps to increase the funds available to pay dividends on the Series A Preferred Shares. In addition to the July 2003 reduction in the Bank’s servicing fee, the Company borrowed $75,000,000 from the Bank on December 20, 2004, and used the proceeds to purchase adjustable-rate Residential Mortgage Loans from the Bank. The loan is secured by a portion of the Residential Mortgage Loan portfolio and the interest rate on the loan adjusts monthly based on changes in one-month LIBOR.

MORTGAGE ASSETS

Loan Portfolio Composition

The Company’s current portfolio of Mortgage Assets consists of loans secured by first mortgages or deeds of trust (“Mortgage Loans”) on single-family residential real estate properties (“Residential Mortgage Loans”). The following table sets forth information concerning the Company’s Residential Mortgage Loans as of December 31, 2004 and December 31, 2003. All of the Mortgage Loans were acquired from the Bank or its affiliates. A description of the types of Residential Mortgage Loans included in the Company’s portfolio follows the table.

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                              Residential Mortgage Loan Portfolio
                              -----------------------------------
                                                        December 31,
                          --------------------------------------------------------------------------
                                          2004                                   2003
                          -----------------------------------   ------------------------------------
                           Aggregate    Weighted     Percent      Aggregate    Weighted    Percent
                           Principal     Average        to         Principal   Average       to
     Type                   Balance       Yield       Total        Balance      Yield      Total
    ------                ------------  ---------  ----------   ------------  ---------  ----------
Monthly ARMs              $107,438,487     4.93%      28.7%     $ 47,833,336     3.36%      16.2%
One-Year ARMs               13,985,393     4.48%       3.7%       12,988,634     4.09%       4.4%
Three-Year ARMs             13,040,178     5.35%       3.5%       12,224,073     5.47%       4.1%
Five-Year ARMs             110,068,100     5.56%      29.4%       62,720,041     5.92%      21.2%
7/1 ARMs                     6,229,074     6.71%       1.7%       12,478,626     6.75%       4.2%
10/1 ARMs                   17,658,506     6.70%       4.7%       38,215,901     6.74%      12.9%
15 & 30 Year Fixed-Rate    106,079,238     6.48%      28.3%      109,642,464     6.67%      37.0%
                           -----------  --------   --------     ------------   -------    -------
                           374,498,976     5.67%     100.0%      296,103,075     5.83%     100.0%
                                        ========   ========                    =======    =======
Less:
Allowance for loan losses       40,333                               40,333
                          ------------                         ------------
Total                     $374,458,643                         $296,062,742
                          ============                         ============

Purchases from the Bank of Residential Mortgage Loans during the year ended December 31, 2004 were $214,098,734 and principal collections were $135,702,832. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Residential Mortgage Loans.”

A majority (or 71.7%) of the Residential Mortgage Loans included in the Company’s portfolio at December 31, 2004 bear interest at adjustable rates. The interest rate on an adjustable rate mortgage (“ARM”) resets periodically based on an index (such as the London Interbank Offered Rate (“LIBOR”) or the interest rate on United States Treasury Bills). ARMs are typically subject to lifetime interest rate caps and may be subject to periodic interest rate adjustment caps. As of December 31, 2004, the weighted average yield on the Residential Mortgage Loans included in the Company’s portfolio was 5.67%. For the year ended December 31, 2004, the weighted average interest rate was approximately 5.71%.

The interest rate on each type of ARM product included in the Company’s portfolio adjusts at the time (each “Rate Adjustment Date”) and in the manner described below. If specified in the related mortgage note, an ARM may be subject to lifetime interest rate adjustment caps, to minimum interest rates and to maximum periodic adjustment increases or decreases. Information set forth below regarding interest rate adjustment caps and minimum interest rates applies to the current portfolio only. Residential Mortgage Loans purchased by the Company after December 31, 2004 may be subject to different terms.

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

Monthly ARM. The interest rate on each monthly ARM (“Monthly ARM”) will adjust monthly on each Rate Adjustment Date as specified in the related mortgage note to a rate equal to the sum (rounded as specified in the note) of the index and the related margin, subject to certain limitations. The initial payment on each Monthly ARM is based on an initial interest rate, in effect only until the first Rate Adjustment Date, which is lower, and may be significantly lower, than the sum of the index and the margin. No Monthly ARM contains a periodic interest rate adjustment cap. The interest rate, however, may not exceed the maximum interest rate specified for such Monthly

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ARM in the related mortgage note. The amount of the minimum monthly payment due on each Monthly ARM adjusts, on the dates and in the manner specified in the related mortgage note, to an amount that would fully amortize the outstanding principal balance of the mortgage loan over its remaining term to maturity at the interest rate applicable.

The Company purchases residential ARMs with interest rates that adjust monthly, some of which provide a borrower with a below-market introductory interest rate and a variety of monthly payment options. Certain of these loans have a payment option that could result in the interest being added to the principal of the loan, or “negative amortization.” Each loan contains terms which limit the amount of negative amortization to a percentage of the original loan amount.

One-Year ARM. The interest rate with respect to each one-year ARM (“One-Year ARM”) is fixed at an initial rate for the first twelve monthly payments. The interest rate adjusts on the date specified in the related mortgage note, and annually thereafter, to a rate equal to the then-current applicable index plus the margin set forth in such mortgage note, subject to a maximum annual interest rate increase or decrease, a lifetime interest rate adjustment cap, and a minimum interest rate as specified in the related mortgage note.

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 interest rate adjusts on the date specified in the related mortgage note and periodically thereafter to a rate equal to the then-current applicable index plus the margin set forth in such mortgage note, subject to a maximum periodic interest rate increase or decrease, a lifetime interest rate adjustment cap, and a minimum interest rate as specified in the related mortgage note.

Five-Year ARM. The interest rate with respect to each five-year ARM (“Five-Year ARM”) is fixed at an initial rate for the first 60 monthly payments and adjusts on the date specified in the related mortgage note, and periodically thereafter, to a rate equal to the then-current applicable index plus the margin set forth in such mortgage note, subject to a maximum periodic interest rate increase or decrease, a lifetime interest rate adjustment cap, and a minimum interest rate as specified in the related mortgage note. Certain of these loans 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.

Seven-Year Fixed-Rate Loan with Automatic Conversion to One-Year ARM. The interest rate with respect to each seven-year fixed-rate loan with automatic conversion to a One-Year ARM (a “7/1 ARM”) is fixed at an initial rate for the first 84 monthly payments and adjusts on the date specified in the related mortgage note, and annually thereafter, to a rate equal to the then-current applicable index plus the margin set forth in such mortgage note, subject to a maximum annual interest rate increase or decrease, a lifetime interest rate adjustment cap, and a minimum interest rate 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 on the date specified in the related mortgage note, and annually thereafter, to a rate equal to the then-current applicable index plus the margin set forth in such mortgage note, subject to a maximum annual interest rate increase or decrease, a lifetime interest rate adjustment cap, and a minimum interest rate 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

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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, 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.

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

Commercial Mortgage Loans. While no Commercial Mortgage Loans are included in the current portfolio, the Company may, from time to time, 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, cash and cash equivalents.

Loan Payable to Parent

On December 20, 2004, the Company borrowed $75,000,000 from the Bank. The Company used the proceeds to purchase adjustable-rate Residential Mortgage Loans from the Bank. The loan payable is secured by a portion of the Residential Mortgage Loan portfolio. Interest on the loan payable varies monthly based on one-month LIBOR plus a specified margin and is payable monthly.

Credit Risk Management Policies

The Company intends that each Mortgage Loan it acquires 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, as amended on June 17, 2003 (the “Servicing Agreement”). See “Servicing.”

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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

Many (or 41.5%) of the Residential Mortgage Loans are secured by residential real estate properties located in the Washington, DC metropolitan area. In addition, 12.1% of the Residential Mortgage Loans are secured by residential real estate properties located in California. Consequently, these loans may be subject to a greater risk of default than other comparable loans in the event of adverse economic, political, or business developments in Washington, DC, Maryland, Virginia and California that may affect the ability of residential property owners in any of these areas to make payments of 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. Effective July 1, 2003, the servicing agreement between the Bank and the Company was modified to reduce the servicing fee paid to the Bank to 0.250% of the outstanding loan balance from 0.375%. See “Certain Relationships and Related Transactions.”

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

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

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

The Company can terminate the Servicing Agreement without cause provided it gives at least sixty days’ notice to the Servicer and pays a termination fee.

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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. The Company anticipates that none of the dividends on the Series A Preferred Shares and no material portion of the dividends on the Common Stock will constitute non-taxable returns of capital. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.”

Dividends are declared at the discretion of the Board of Directors of the Company after considering the Company’s distributable funds, financial requirements, tax considerations and other factors. The Company’s distributable funds consist primarily of interest payments received on its Mortgage Assets. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Interest Rate Risk.”

Under Office of Thrift Supervision (“OTS”) regulations, the Bank is required to apply to the OTS for approval to make any capital distribution, regardless of size, if the Bank does not qualify for expedited treatment under OTS regulations. Dividends on the Series A Preferred Shares are not treated as capital distributions for the purposes of these regulations, provided the Bank remains “well capitalized” after the payment. At December 31, 2004, the Bank was in compliance with all of its regulatory capital requirements under the Financial Institutions Reform, Recovery and Enforcement Act, and its capital ratios exceeded the ratios established for “well capitalized” institutions under prompt corrective action regulations.

THE BANK

The Bank is a federally chartered and federally insured stock savings bank which, at December 31, 2004, was conducting business from 235 full-service offices, including 54 grocery store banking centers, and 882 automated teller machines in Maryland, Virginia, Delaware and the District of Columbia. The Bank’s home office is located in McLean, Virginia and its executive offices are located in Bethesda, Maryland, both suburban communities of Washington, DC. The Bank either directly or through a wholly-owned subsidiary also maintains a commercial loan production office in Baltimore, Maryland and six mortgage loan production offices in the mid-Atlantic region. At December 31, 2004, the Bank had total assets of $13.4 billion, total deposits of $9.2 billion and total stockholders’ equity of $737.5 million. Based on total assets at December 31, 2004, the Bank is the largest full-service bank headquartered in the Washington, DC metropolitan area.

The Company is a subsidiary of the Bank and, therefore, federal regulatory authorities have the right to examine the Company and its activities. Payment of dividends on the Series A Preferred Shares could be subject to regulatory limitations if after the payment the Bank were not “well capitalized” for purposes of the OTS prompt corrective action regulations. “Well capitalized” is currently defined as having a core capital (leverage) ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0%, a total risk-based capital ratio of at least 10.0% and not being subject to an OTS agreement, order or directive to maintain a specific capital level. At December 31, 2004, the Bank’s core capital (or leverage) ratio was 6.15%, its tier 1 risk-based capital ratio was 8.83% and its total risk-based capital ratio was 11.14% and the Bank was not subject to any such agreement, order or directive.

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

THE ADVISOR

On December 3, 1996, the Company entered into an advisory agreement (the “Advisory Agreement”) with the Bank (the “Advisor”) to administer the day-to-day operations of the Company. The Advisor is principally 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

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subcontract all or a portion of its obligations under the Advisory Agreement to one or more of its affiliates involved in the business of managing Mortgage Assets.

The Advisor and its affiliates have substantial experience in the mortgage lending industry, both in the origination and in the servicing of mortgage loans. At December 31, 2004, the Advisor and its affiliates owned approximately $6.9 billion of residential mortgage loans, including all of the Company’s Residential Mortgage Loans. In their residential mortgage loan business, the Advisor and its affiliates originate and purchase residential mortgage loans. A portion of such loans are sold to investors, primarily in the secondary market, generally on a servicing retained basis. The Advisor and its affiliates may purchase servicing rights on residential mortgage loans. Including loans serviced for its own portfolio, the Advisor and its affiliates serviced residential mortgage loans having an aggregate principal balance of approximately $19.3 billion as of December 31, 2004.

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

CAPITAL AND LEVERAGE POLICIES

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

At December 31, 2004, the Company had principal debt outstanding totaling $75,000,000. The Company does not currently intend to incur additional indebtedness. However, the organizational documents of the Company do not contain any limitation on the amount or percentage of debt, funded or otherwise, that the Company might incur. The Company may not, without the approval of a majority of the Independent Directors, incur debt for borrowed money in excess of 25% of the Company’s total stockholders’ equity, including intercompany advances made by the Bank to the Company.

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

EMPLOYEES

The Company has seven 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.

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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 such 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 decontaminate 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 decontamination, that the cost of such removal and decontamination 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 decontamination.

TAX STATUS OF THE COMPANY

The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Code. As a REIT, the Company generally will not be subject to federal income tax on its net income (excluding capital gains) provided that it distributes annually 100% of its REIT taxable income to its stockholders, meets certain organizational, stock ownership and operational requirements and meets certain income and asset tests. To remain qualified as a REIT, the Company must (a) distribute each year at least 90% of its “REIT taxable income” (not including capital gains) for that year to stockholders, (b) meet certain income tests, (c) meet certain asset tests and (d) meet certain ownership 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 be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost.

The American Jobs Creation Act of 2004 introduced several changes to REIT qualification standards. The changes excuse certain REIT asset and organization test failures, but generally require payment of a penalty and demonstration of reasonable cause for the failure. Compliance with the relief provisions preserves a company’s REIT status. The changes are effective beginning with the Company’s 2005 tax year.

During the year ended December 31, 2004, the Company distributed over 100% of its REIT taxable income to its stockholders. On March 16, 2004, the Company’s Board of Directors declared a cash dividend of $426.14 per share of Common Stock, which was paid out of retained earnings of the Company and which was treated, for tax purposes, as a distribution made for 2003. Including this dividend, the Company distributed 100% of its REIT taxable income in 2003.

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There are two income tests that must be satisfied for each taxable year.

o At least 75% of the Company’s gross income (excluding income from certain prohibited transactions) must be from interest on obligations secured by mortgages on real property or on interests in real property, gains from the sale or other disposition of real property (including interests in mortgages on real property), and certain other sources;

o At least 95% of the Company’s gross income (excluding income from prohibited transactions) must be from income included under the 75% income test, other interest, dividends, and gains from the sale or other disposition of certain stocks and securities.

There are three relevant asset tests that must be satisfied at the close of each quarter of the Company’s taxable year.

o At least 75% of the value of the Company’s total assets must be represented by real estate assets, cash, cash items, and government securities;

o Not more than 25% of the Company’s total assets may be represented by securities other than those in the 75% asset class; and o The value of any one issuer’s securities included in the 25% asset class may not exceed 5% of the value of the Company’s totalassets and the Company may not own more than 10% of the total voting power or value of the outstanding securities of any one issuer.

The stock ownership test has two components. At least 100 persons must hold shares of capital stock for at least 335 days of the year and no more than 50% of the Company’s capital stock may be owned directly or indirectly by five or fewer individuals during the final six months of the calendar year.

During 2004, the Company met the requirements of each test.

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, 2004.

PART II

DESCRIPTION OF COMMON STOCK

General

In connection with the formation of the Company on November 5, 1996, the Company issued 100 shares of Common Stock to the Bank for $1,000. These shares of Common Stock were issued in reliance upon an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. Thus, there is no established public trading market for the Common Stock. As of March 15, 2005, there were 100 issued and outstanding shares of Common Stock held by one stockholder, the Bank.

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Dividends

The following table reflects the distributions declared by the Company on the Common Stock for the two most recent years. For a discussion of the Company’s distribution policy with respect to the Common Stock, see “Business – Dividend Policy.”

               Period                       Distributions           Payment Date
--------------------------------------   -------------------   ---------------------
January 1, 2003 to March 31, 2003          $              -                     N/A
April 1, 2003 to June 30, 2003                            -                     N/A
July 1, 2003 to September 30, 2003                        -                     N/A
October 1, 2003 to December 31, 2003                350,000        January 15, 2004
January 1, 2004 to March 31, 2004                    42,614          April 15, 2004
April 1, 2004 to June 30, 2004                            -                     N/A
July 1, 2004 to September 30, 2004                        -                     N/A
October 1, 2004 to December 31, 2004                700,000        January 18, 2005

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 dividend or other distributions with respect to the Common Stock until such time as dividends on all outstanding Series A Preferred Shares have been (i) declared and paid for three consecutive dividend periods and (ii) declared and paid or declared and a sum sufficient for the payment thereof has been set apart for payment for the fourth consecutive dividend period. To remain qualified as a REIT, the Company must distribute each year at least 90% of its annual “REIT taxable income” (not including capital gains) to stockholders. See “Business – Tax Status of the Company.”

Voting Rights

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

Rights Upon Liquidation

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

DESCRIPTION OF SERIES A PREFERRED SHARES

Market Information and Dividends

The Series A Preferred Shares are listed on the New York Stock Exchange under the trading symbol “CCP-PrA.” As of February 10, 2005, there were 3,000,000 issued and outstanding Series A Preferred Shares held by approximately 164 holders of record. The following table reflects the respective high and low sales prices for the Series A Preferred Shares for each quarter during the two most recent years. The table also indicates the distributions declared by the Company during these periods. For a discussion of the Company’s distribution policy with respect to the Series A Preferred Shares, see “Business – Dividend Policy.”

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                                              Price
                                        ------------------
             Period                       High      Low      Distributions      Payment Date
--------------------------------------  --------  --------  ---------------  ------------------
January 1, 2003 to March 31, 2003        $ 57.80   $ 55.60     $  3,890,625      April 15, 2003
April 1, 2003 to June 30, 2003             56.55     55.10        3,890,625       July 15, 2003
July 1, 2003 to September 30, 2003         57.50     55.25        3,890,625    October 15, 2003
October 1, 2003 to December 31, 2003       60.30     56.80        3,890,625    January 15, 2004
January 1, 2004 to March 31, 2004          61.75     58.15        3,890,625      April 15, 2004
April 1, 2004 to June 30, 2004             60.75     56.10        3,890,625       July 15, 2004
July 1, 2004 to September 30, 2004         60.00     57.00        3,890,625    October 15, 2004
October 1, 2004 to December 31, 2004       59.60     57.30        3,890,625    January 18, 2005

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

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

General

The Company may issue, from time to time, one or more series of preferred stock with rights, preferences and limitations determined by the Company’s Board of Directors. The holders of the Series A Preferred Shares have no preemptive rights with respect to any shares of the capital stock of the Company or any other securities of the Company convertible into or carrying rights or options to purchase any such shares. The Series A Preferred Shares are not subject to any sinking fund or other obligation of the Company for their repurchase or retirement. The Series A Preferred Shares will be exchanged automatically on a one-for-one basis for Bank Preferred Shares (as defined below) upon the occurrence of the Exchange Event (as defined below).

Automatic Exchange

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

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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 expiration of 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 at the following per share redemption prices plus accrued and unpaid dividends:

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

Any such redemption must comply with the prompt corrective action and capital distribution regulations of the OTS, which may prohibit a redemption and will require the OTS’ prior written approval.

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

Rights Upon Liquidation

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

Independent Director Approval

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

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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. The data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements included elsewhere herein.

                                                           As of or for the year ended
                                                                   December 31,
                                   --------------------------------------------------------------------------
                                        2004           2003            2002           2001           2000
                                   -------------- -------------- -------------- -------------- --------------
OPERATING DATA:

 Interest income                   $  17,394,530  $  17,035,160  $  17,729,403  $  21,041,424  $  22,189,625
 Interest expense                         81,500              -              -              -              -
                                     ------------ -------------- -------------- -------------- --------------
   Net interest income                17,313,030     17,035,160     17,729,403     21,041,424     22,189,625
 Gain on sale of real estate acquired
   in settlement of loans, net                 -              -              -         21,924         20,209
 Operating expenses                   (1,020,672)    (1,103,037)    (1,232,182)    (1,356,557)    (1,383,421)
 Provision for income taxes                    -              -              -        (10,373)       (15,168)
                                   -------------- -------------- -------------- -------------- --------------
    Net income                     $  16,292,358  $  15,932,123  $  16,497,221   $ 19,696,418  $  20,811,245
                                   ============== ============== ============== ============== ==============
 Earnings available to common      $     729,858  $     369,623  $     934,721  $   4,133,918  $   5,248,745
      Stockholders
 Earnings per common share         $    7,298.58  $    3,696.23  $    9,347.21  $   41,339.18  $   52,487.45

DIVIDENDS DECLARED:

 Dividends on common stock         $     742,614  $     350,000  $   1,100,000  $   4,475,000  $   5,250,000
 Dividends on preferred stock      $  15,562,500  $  15,562,500  $  15,562,500  $  15,562,500  $  15,562,500

BALANCE SHEET DATA:

 Residential mortgage loans, net   $ 374,458,643  $ 296,062,742  $ 285,395,464  $ 287,523,781  $ 298,145,029
 Total assets                      $ 379,720,055  $ 304,266,967  $ 304,825,346  $ 306,318,593  $ 307,516,771
 Loan payable to parent            $  75,000,000  $           -  $           -  $           -  $           -
 Total stockholders' equity        $ 300,006,867  $ 300,019,623  $ 299,834,721  $ 299,658,918  $ 299,998,745
 Number of preferred shares
       Outstanding                     3,000,000      3,000,000      3,000,000      3,000,000      3,000,000
  Number of common shares
       Outstanding                           100            100            100            100            100
  Average yield on residential
       mortgage loans                       5.71%          5.90%          6.14%          7.16%          7.42%

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

FINANCIAL CONDITION

Critical Accounting Policies

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different outcomes under different assumptions and conditions. The Company’s significant accounting policies are described in Note 2 in the Notes to the Financial Statements. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates;

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however, the Company’s policy on estimation of allowance for loan losses could be deemed to be critical within the Securities and Exchange Commission (the “SEC”) definition.

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 loss is required is performed periodically, and an allowance is provided after considering such factors as historical loss performance, delinquency status, current economic conditions and geographical concentrations. 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. There was no activity in the allowance for loan losses during the years ended December 31, 2004 and 2003, and the balance of the allowance was $40,333 at the end of each year.

Residential Mortgage Loans

At December 31, 2004, the Company had $374,458,643 invested in Residential Mortgage Loans compared to $296,062,742 at December 31, 2003. The increase in the portfolio resulted from the Company’s decision to borrow $75,000,000 from the Bank to acquire additional Residential Mortgage Loans in order to increase funds available to pay dividends on the Series A Preferred Stock. During 2004, Residential Mortgage Loan purchases totaled $214,098,734 and principal collections totaled $135,702,832. 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, 2004, the Company had two 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 $546,701 (or 0.15% of loans). At December 31, 2003, the Company had five non-accrual loans with an aggregate principal balance of $1,589,670 (or 0.54% of loans).

At December 31, 2004, the Company had two delinquent loans (loans delinquent 30-89 days) with an aggregate principal balance of $576,811 (or 0.15% of loans). At December 31, 2003, the Company had five delinquent loans with an aggregate principal balance of $807,205 (or 0.27% of loans).

Interest Rate Risk

The Company’s income consists primarily of interest payments on Residential Mortgage Loans. If there is a decline in interest rates, then the Company will experience a decrease in income available to be distributed to its stockholders. Certain Residential Mortgage Loans which the Company holds allow borrowers to convert an ARM to a fixed-rate mortgage, thus “locking in” a fixed interest rate at a time when interest rates have declined. In addition, when interest rates decline, holders of fixed-rate mortgages are more likely to prepay such mortgages. In recent periods, primarily as a result of a decline in interest rates, the Company has experienced an increase in prepayments on its Residential Mortgage Loans.

Based on the outstanding balance of the Company’s Residential Mortgage Loans at December 31, 2004, and the interest rates on such loans, anticipated annual interest income on the Company’s loan portfolio at December 31, 2004, net of interest expense and operating expenses, was approximately 112.1% of the projected annual dividend of $15,562,500 on the Series A Preferred Shares.

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There can be no assurance that an interest rate environment in which there is a decline in interest rates would not adversely affect the Company’s ability to pay dividends on the Series A Preferred Shares or the Common Stock. The Company, to date, has not used any derivative instruments to manage its interest rate risk.

The following table stratifies the Company’s loan portfolio by type and calendar year based on the earlier of the next interest rate adjustment or estimated principal payments, including both contractual and anticipated prepayment amounts. Prepayment rates are assumed for the Company’s loans based on recent actual and market experience. Fair value is estimated using discounted cash flow analyses based on contractual repayment and estimated prepayment schedules. The discount rates used in these analyses are based either on the interest rates paid on U.S. Treasury securities of comparable maturities adjusted for credit risk and non-interest earning operating costs, or the interest rates currently offered for loans with similar terms to borrowers of similar credit quality.

                                               Expected Maturity/Repricing Date
-------------------------------------------------------------------------------------------------------------------------

                                             (Dollars in thousands)
                                             Year Ending December 31,
                          ----------------------------------------------------------
                             2005        2006        2007       2008         2009     Thereafter    Total     Fair Value
                          ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------



Monthly ARMs              $ 107,439   $       -   $       -    $      -   $      -     $      -   $ 107,439   $ 110,931
Average Yield                  4.93%          -           -           -          -            -        4.93%

One-Year ARMs                13,985           -           -           -          -            -      13,985      14,615
Average Yield                  4.48%          -           -           -          -            -        4.48%

Three-Year ARMs              10,745       1,884         411           -          -            -      13,040      13,489
Average Yield                  5.24%       5.82%       5.85%          -          -            -        5.35%

Five-Year ARMs               46,552      16,497      20,785      19,459      6,775            -     110,068     114,791
Average Yield                  5.93%       5.72%       5.76%       5.64%      5.42%           -        5.56%

7/1 ARMs                      3,061       3,168           -           -          -            -       6,229       6,424
Average Yield                  6.67%       6.74%          -           -          -            -        6.71%

10/1 ARMs                     7,447       4,290       2,786       1,715      1,421            -      17,659      18,230
Average Yield                  6.66%       6.73%       6.78%       6.76%      6.62%           -        6.70%

15 & 30-Year Fixed Rate      10,330       9,713       8,892       8,139      7,430       61,575     106,079     112,353
Average Yield                  6.51%       6.51%       6.51%       6.51%      6.50%        6.47%       6.48%

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.

Many (or 41.5%) of the Company’s Residential Mortgage Loans are loans secured by residential real estate properties located in the Washington, DC metropolitan area. In addition, 12.1% of the Residential Mortgage Loans are secured by residential real estate properties located in California. 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 and natural hazards in Washington DC, Maryland, Virginia and California that may affect the ability of residential property owners to make payments of principal and interest on the underlying mortgages.

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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 needs are 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.

The following table summarizes our material contractual cash obligations associated with operating, investing and financing activities as of December 31, 2004:

                               Principal payments due by period
                            --------------------------------------
                                          Less than        1-3
                               Total        1 year        years
                            ------------  ----------  ------------
Long term debt obligations  $ 75,000,000  $        -  $ 75,000,000

RESULTS OF OPERATIONS

Year 2004 Compared to Year 2003

The Company reported net income of $16,292,358 and $15,932,123 for the years ended December 31, 2004 and 2003, respectively. The increase in net income is due primarily to an increase in interest income on Residential Mortgage Loans and a reduction in operating expenses partially offset by an increase in interest expense.

Total interest income was $17,394,530 and $17,035,160 for the years ended December 31, 2004 and 2003, respectively. Interest income on Residential Mortgage Loans totaled $17,383,039 and $17,012,620 for the years ended December 31, 2004 and 2003, respectively. The increase in interest income on Residential Mortgage Loans was due to an increase in the average balance of the Residential Mortgage Loan portfolio to $304,388,330 for 2004 from $288,265,768 for 2003. The increase was partially offset by a reduction in average yields on the Residential Mortgage Loan portfolio to 5.71% for 2004 from 5.90% for 2003. The Company would have recorded an additional $31,984 and $88,014 in interest income for the years ended December 31, 2004 and 2003, respectively, had its non-accrual loans been current in accordance with their original terms.

Other interest income of $11,491 and $22,540 was recognized on the Company’s interest bearing deposits during the years ended December 31, 2004 and 2003, respectively. The decrease was due to lower average balances of interest bearing deposits to $1,410,211 in the 2004 period from $3,464,460 in the 2003 period. Partially offsetting the decrease in interest income on interest bearing deposits was a higher average yield on interest bearing deposits, which increased by 16 basis points (to 0.81% from 0.65%) from the average yield in the 2003 period.

The Company’s $75,000,000 loan payable to the Bank on December 20, 2004 resulted in interest expense of $81,500 for 2004.

There were no provisions for loan losses during the years ended December 31, 2004 and 2003.

Operating expenses totaling $1,020,672 and $1,103,037 for the years ended December 31, 2004 and 2003, 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 were $650,912 and $747,976 for the years

-16-

ended December 31, 2004 and 2003, respectively. Effective July 1, 2003 the servicing agreement between the Bank and the Company was modified to reduce the servicing fee paid to the Bank to 0.250% of the outstanding loan balance from 0.375%. Advisory fees paid to parent for the years ended December 31, 2004 and 2003 totaled $200,000 for each period. Directors’ fees paid were $32,751 and $36,000 for the years ended December 31, 2004 and 2003, respectively, and represent compensation to the two independent members of the Board of Directors. General and administrative expenses totaled $137,009 and $119,061 for the years ended December 31, 2004 and 2003, respectively. The increase in general and administrative expenses is largely due to an increase in legal expenses.

During the year ended December 31, 2004, the Company’s Board of Directors declared cash dividends of $15,562,500, representing $5.1875 per share on the outstanding shares of Series A Preferred Shares, out of the retained earnings of the Company.

Also during the year ended December 31, 2004, the Company’s Board of Directors declared cash dividends of $742,614, representing $7,426.14 per share of Common Stock, which were paid out of the retained earnings of the Company.

Year 2003 Compared to Year 2002

The Company reported net income of $15,932,123 and $16,497,221 for the years ended December 31, 2003 and 2002, respectively. The decrease in net income is due primarily to a decrease in the average yield of Residential Mortgage Loans.

Total interest income was $17,035,160 and $17,729,403 for the years ended December 31, 2003 and 2002, respectively. Interest income on Residential Mortgage Loans totaled $17,012,620 and $17,643,920 for the years ended December 31, 2003 and 2002, respectively, which represents an average yield on such loans of 5.90% and 6.14%, respectively. The average loan balance of the Residential Mortgage Loan portfolio was $288,265,768 and $287,453,466 for the years ended December 31, 2003 and 2002, respectively. The Company would have recorded an additional $88,014 and $84,426 in interest income for the years ended December 31, 2003 and 2002, respectively, had its non-accrual loans been current in accordance with their original terms.

Other interest income of $22,540 and $85,483 was recognized on the Company’s interest bearing deposits during the years ended December 31, 2003 and 2002, respectively. The decrease was due to a lower average yield on interest bearing deposits, which decreased by 72 basis points (to 0.65% from 1.37%) from the average yield in the 2002 period, and a decrease in the average balance of interest bearing deposits to $3,464,460 in the 2003 period from $6,242,020 in the 2002 period.

There were no provisions for loan losses during the years ended December 31, 2003 and 2002.

Operating expenses totaling $1,103,037 and $1,232,182 for the years ended December 31, 2003 and 2002, 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 were $747,976 and $939,336 for the years ended December 31, 2003 and 2002, respectively. Effective July 1, 2003, the servicing agreement between the Bank and the Company was modified to reduce servicing fees paid to the Bank to 0.250% of the outstanding loan balance from 0.375%. Advisory fees paid to parent for the years ended December 31, 2003 and 2002 totaled $200,000 for each period. Directors’ fees paid were $36,000 and $30,500 for the years ended December 31, 2003 and 2002, respectively, and represent compensation to the two independent members of the Board of Directors. General and administrative expenses totaled $119,061 and $62,346 for the years ended December 31, 2003 and 2002, respectively. The increase in general and administrative expenses was due to increases in trustee fees, auditing expenses and New York Stock Exchange expenses.

During the year ended December 31, 2003, 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.

-17-

Also during the year ended December 31, 2003, the Company’s Board of Directors declared cash dividends of $350,000, representing $3,500.00 per share of Common Stock, which was paid out of the retained earnings of the Company.

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.”

-18-

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                                     CONTENTS


                                                                                                    Page
                                                                                                   ------
(a)      Report of Independent Auditors..............................................................F-2

(b)      Statements of Financial Condition at December 31, 2004 and 2003.............................F-3

(c)      Statements of Operations for the Years Ended
         December 31, 2004, 2003 and 2002   .........................................................F-4

(d)      Statements of Stockholders' Equity for the Years Ended
         December 31, 2004, 2003 and 2002............................................................F-5

(e)      Statements of Cash Flows for the Years Ended
         December 31, 2004, 2003 and 2002............................................................F-6

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

F-1

Report of Independent Registered Accounting Firm

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, 2004 and 2003, and the related statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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 at December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with U.S. generally accepted accounting principles.

McLean, Virginia February 18, 2005

F-2

CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION

                                                                      December 31,
                                                          ----------------------------------
                                                                2004             2003
                                                          ----------------  ----------------

                                                   ASSETS

Cash and interest-bearing deposits                        $     2,318,102   $     5,411,004
Residential mortgage loans (net of allowance
   for loan losses of $40,333 for both years)                 374,458,643       296,062,742
Accounts receivable from parent                                 1,591,546         1,755,369
Accrued interest receivable                                     1,346,764         1,031,352
Prepaid expenses                                                    5,000             6,500
                                                          ----------------  ----------------
               Total assets                               $   379,720,055   $   304,266,967
                                                          ================  ================


                               LIABILITIES AND STOCKHOLDERS' EQUITY

Loan payable to parent                                    $    75,000,000   $             -
Accounts payable to others and accrued expenses                    41,063             6,719
Accrued interest payable to parent                                 81,500                 -
Dividends payable to parent                                       700,000           350,000
Dividends payable to others                                     3,890,625         3,890,625
                                                          ----------------  ----------------

               Total liabilities                               79,713,188         4,247,344
                                                          ----------------  ----------------

Preferred Stock, 10,000,000 shares authorized:
  10 3/8% Noncumulative Exchangeable Preferred Stock,
     $5 par value, 3,000,000 shares issued and outstanding
     (liquidation value of $150,000,000 plus accrued and
     unpaid dividends)                                         15,000,000        15,000,000
Common Stock, $1 par value 1,000 shares authorized,
  100 shares issued and outstanding                                   100               100
Capital contributed in excess of par                          284,999,900       284,999,900
Retained Earnings                                                   6,867            19,623
                                                          ----------------  ----------------
             Total stockholders' equity                       300,006,867       300,019,623
                                                          ----------------  ----------------
             Total liabilities and stockholders' equity   $   379,720,055   $   304,266,967
                                                          ================  ================












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

F-3

CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF OPERATIONS

                                              Year Ended December 31,
                                   -------------------------------------------
                                       2004            2003           2002
                                   -------------  -------------  -------------
Interest income:
Residential mortgage loans         $  17,383,039  $  17,012,620  $  17,643,920
Other                                     11,491         22,540         85,483
                                   -------------  -------------  -------------
     Total interest income            17,394,530     17,035,160     17,729,403

Interest expense                          81,500              -              -
                                   -------------  -------------  -------------

     Total operating income           17,313,030     17,035,160     17,729,403
                                   -------------  -------------  -------------

Operating expenses:
Loan servicing fees-parent               650,912        747,976        939,336
Advisory fees-parent                     200,000        200,000        200,000
Directors' fees                           32,751         36,000         30,500
General and administrative               137,009        119,061         62,346
                                   -------------  -------------  -------------
     Total operating expenses          1,020,672      1,103,037      1,232,182
                                   -------------  -------------  -------------

     Income before income taxes       16,292,358     15,932,123     16,497,221
Provision for income taxes                     -              -              -
                                   -------------  -------------  -------------

NET INCOME                         $  16,292,358  $  15,932,123  $  16,497,221
                                   =============  =============  =============

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

EARNINGS AVAILABLE TO
  COMMON STOCKHOLDER               $     729,858  $     369,623  $     934,721
                                   =============  =============  =============

AVERAGE COMMON SHARES                        100            100            100
                                   =============  =============  =============

EARNINGS PER COMMON  SHARE         $    7,298.58  $    3,696.23  $    9,347.21
                                   =============  =============  =============


















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

F-4

CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY

                                                                Capital
                                                              Contributed
                                   Preferred       Common      in Excess         Retained       Stockholders'
                                     Stock         Stock         of Par          Earnings           Equity
                                 --------------  ----------  ---------------  --------------  -----------------

 Balance, December 31, 2001       $ 15,000,000    $    100    $ 284,658,818    $          -    $ 299,658,918

 Capital contribution from
    common stockholder                       -           -          341,082               -          341,082
 Net income                                  -           -                -      16,497,221       16,497,221
 Dividends on 10 3/8%
    Noncumulative Exchangeable
    Preferred Stock, Series A                -           -                -     (15,562,500)     (15,562,500)
 Dividends on common stock                   -           -         (165,279)       (934,721)      (1,100,000)
                                 --------------  ----------  ---------------  --------------  ---------------

 Balance, December 31, 2002         15,000,000         100      284,834,621               -      299,834,721

 Capital contribution from
    common stockholder                       -           -          165,279               -          165,279
 Net income                                  -           -                -      15,932,123       15,932,123
 Dividends on 10 3/8%
    Noncumulative Exchangeable
    Preferred Stock, Series A                -           -                -     (15,562,500)     (15,562,500)
 Dividends on common stock                   -           -                -        (350,000)        (350,000)
                                 --------------  ----------  ---------------  --------------  ---------------

 Balance, December 31, 2003         15,000,000         100      284,999,900          19,623      300,019,623

 Net income                                  -           -                -      16,292,358       16,292,358
 Dividends on 10 3/8%
    Noncumulative Exchangeable
    Preferred Stock, Series A                -           -                -     (15,562,500)     (15,562,500)
 Dividends on common stock                   -           -                -        (742,614)        (742,614)
                                 --------------  ----------  ---------------  --------------  ---------------

 Balance, December 31, 2004       $ 15,000,000    $    100    $ 284,999,900    $      6,867    $ 300,006,867
                                 ==============  ==========  ===============  ==============  ===============












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

F-5

CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS

                                                                        Year Ended December 31,
                                                       ----------------------------------------------------------
                                                               2004                2003                2002
                                                       ------------------  ------------------  ------------------
Cash flows from operating activities:

Net income                                                  $ 16,292,358        $ 15,932,123        $ 16,497,221

Adjustments to reconcile net income to net cash
 provided by (used in) operating activities:

   (Increase) decrease in accounts receivable from parent        163,823          13,541,771          (3,471,532)
   (Increase) decrease in accrued interest receivable           (315,412)            106,894              58,091
    Decrease in prepaid expenses                                   1,500               1,500                   -
    Increase (decrease) in accounts payable to others and
        accrued expenses                                          34,344               6,719             (69,050)
    Increase in accrued interest payable to parent                81,500                   -                   -
                                                        ------------------  ------------------  ------------------

    Net cash provided by operating activities                 16,258,113          29,589,007          13,014,730
                                                        ------------------  ------------------  ------------------

Cash flows from investingactivities:

Purchases of residential mortgage loans                     (214,098,734)       (279,698,324)       (173,247,015)
Repayments of residential mortgage loans                     135,702,833         269,031,046         175,375,332
                                                         ------------------  ------------------  ------------------

   Net cash provided by (used in) investing activities       (78,395,901)        (10,667,278)          2,128,317
                                                         ------------------  ------------------  ------------------

Cash flows from financing activities:

Proceeds from loan payable to parent                           75,000,000                   -                   -
Capital contribution from common stockholder                            -             165,279             341,082
Dividends paid on preferred stock                             (15,562,500)        (15,562,500)        (15,562,500)
Dividends paid on common stock                                   (392,614)         (1,100,000)         (2,700,000)
                                                         ------------------  ------------------  ------------------

     Net cash provided by (used in) financing activities       59,044,886         (16,497,221)        (17,921,418)
                                                          ------------------  ------------------  ------------------

Net increase (decrease) in cash and cash equivalents           (3,092,902)          2,424,508          (2,778,371)

Cash and cash equivalents at beginning of year                  5,411,004           2,986,496           5,764,867
                                                          ------------------  ------------------  ------------------

Cash and cash equivalents at end of year                     $  2,318,102        $  5,411,004        $  2,986,496
                                                          ==================  ==================  ==================


















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

F-6

CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:

Chevy Chase Preferred Capital Corporation (the “Company”) is a Maryland corporation which acquires, holds and manages real estate assets. Chevy Chase Bank, F.S.B. (the “Bank”), a federally insured stock savings bank, owns all of the Company’s Common Stock (as defined below). The Bank is in compliance with its regulatory capital requirements.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Use of Estimates:

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

Cash and Cash Equivalents:

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

Residential Mortgage Loans:

Residential mortgage loans are carried at amortized cost. Interest income is accrued and recognized based on the terms of each loan.

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, 2004 and 2003 totaling $546,701 and $1,589,670, respectively.

Allowance for Loan Losses:

Management periodically reviews the loan portfolio and adjusts the 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:

Many (41.5%) of the Company’s loans are secured by properties located in the Washington, DC metropolitan area. In addition, 12.1% of the Residential Mortgage Loans are secured by residential real estate properties located in California. Consequently, these loans may be subject to a greater risk of default than other comparable loans in the event of adverse economic, political, or business developments in Washington DC, Maryland, Virginia and California that may affect the ability of residential property owners in any of these areas to make payments of principal and interest on the underlying mortgages.

F-7

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

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 a weekly basis. See Note 8.

Loan Payable to Parent:

The Company has a loan payable to the Bank which requires no payment of principal until it matures on August 31, 2007, but can be prepaid at any time. The loan payable is secured by liens on mortgage loans held in the residential mortgage portfolio. Interest is payable monthly at a variable rate based on an index plus a specified margin.

Dividends:

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

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

Earnings Per Common Share:

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

Income Taxes:

The Company has elected, for Federal income tax purposes, to be treated as a Real Estate Investment Trust (“REIT”) and intends to comply with the provisions of the Internal Revenue Code of 1986, as amended (the “IRC”). Accordingly, the Company is generally not subject to Federal corporate income taxes on its net income (excluding capital gains) to the extent it distributes at least 100% of its annual REIT taxable income to stockholders and as long as certain asset, income and stock ownership tests are met in accordance with the IRC. To remain qualified as a REIT, the Company must (a) distribute each year at least 90% of its “REIT taxable income” (not including capital gains) for that year to stockholders (b) meet certain income tests (c) meet certain asset tests and (d) meet certain ownership tests. Because management of the Company believes it qualifies as a REIT for Federal income tax purposes and it generally intends to fully remit its earnings to the extent of REIT taxable income to its shareholders, no provision for income tax is included in the accompanying financial statements.

F-8

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

Income Taxes (Continued):

of Common Stock, which was paid out of retained earnings of the Company and which was treated, for tax purposes, as a distribution made in 2003. Including this dividend, the Company distributed 100% of its REIT taxable income for 2003.

There are two income tests that must be satisfied for each taxable year.

There are three relevant asset tests that must be satisfied at the close of each quarter of the Company’s taxable year.

o At least 75% of the value of the Company’s total assets must be represented by real estate assets, cash, cash items, and government securities;

During 2004, the Company met the requirements of each test.

NOTE 3 - RESIDENTIAL MORTGAGE LOANS:

Residential mortgage loans consist of adjustable-rate mortgages (“ARMs”) and 15 and 30 year fixed-rate mortgages. The ARMs have interest rates which are fixed for the indicated period (one month, one year, three years, five years, seven years or ten years) and which adjust thereafter based on the margin, index and frequency, subject to interest rate adjustment caps, all as specified in the related mortgage note. The following table shows the residential mortgage loan portfolio by type at the dates indicated:

F-9

NOTE 3 - RESIDENTIAL MORTGAGE LOANS (Continued):

                                                December 31,
                                       ----------------------------------
                                            2004               2003
                                       ----------------  ----------------
       Monthly ARMs                     $  107,438,487    $   47,833,336
       One-Year ARMs                        13,985,393        12,988,634
       Three-Year ARMs                      13,040,178        12,224,073
       Five-Year ARMs                      110,068,100        62,720,041
       7/1 ARMs                              6,229,074        12,478,626
       10/1 ARMs                            17,658,506        38,215,901
       15 & 30 Year Fixed-Rate             106,079,238       109,642,464
                                       ----------------  ----------------
            Total                          374,498,976       296,103,075
       Less:
            Allowance for loan losses           40,333            40,333
                                       ----------------  ----------------
            Total                       $  374,458,643    $  296,062,742
                                       ================  ================

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:

There was no activity in the allowance for loan losses during the years ended December 31, 2004, 2003 and 2002, and the balance of the allowance for loan losses was $40,333 at the end of each year.

NOTE 5 - LOAN PAYABLE TO PARENT:

The Company borrowed $75,000,000 from the Bank on December 20, 2004, and used the proceeds to purchase adjustable-rate Residential Mortgage Loans from the Bank. The loan payable is secured by a portion of the Residential Mortgage Loan portfolio, and the interest rate on the loan payable adjusts monthly based on changes in one-month LIBOR.

The loan payable requires no payment of principal until it matures on August 31, 2007, but can be prepaid at any time. Interest is payable monthly at a variable rate equal to the sum of one-month LIBOR plus 0.85%. At December 31, 2004, the interest rate was 3.26%.

NOTE 6 - PREFERRED STOCK:

On December 3, 1996, the Company sold $150,000,000 of Series A Preferred Shares, $5.00 par value and received net cash proceeds of $144 million. Cash dividends on the Series A Preferred Shares, if, when and as declared by the Board of Directors, are payable quarterly in arrears at an annual rate of 10 3/8%. The liquidation value of each Series A Preferred Share is $50 plus accrued and unpaid dividends. Except under certain circumstances, the holders of the Series A Preferred Shares have no voting rights. The Series A Preferred Shares are automatically exchangeable for a new series of preferred stock of the Bank upon the occurrence of certain events.

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

F-10

NOTE 6 - PREFERRED STOCK (Continued):

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

NOTE 7 - DIVIDENDS:

During the year ended December 31, 2004, the Company’s Board of Directors declared $15,562,500 of preferred stock dividends out of retained earnings of the Company. The Company’s Board of Directors also declared $742,614 of common stock dividends out of retained earnings of the Company.

Of these amounts, preferred stock dividends of $3,890,625 and common stock dividends of $700,000 were paid subsequent to December 31, 2004.

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

The Company also entered into a servicing agreement with the Bank for the servicing of its residential mortgage loans (the “Servicing Agreement”). Pursuant to the Servicing Agreement, the Bank performs the servicing of the loans owned by the Company, in accordance with normal industry practice. The Servicing Agreement can be terminated without cause upon sixty days’ notice to the servicer and payment of a termination fee. Effective July 1, 2003, the servicing agreement was modified to reduce the servicing fee paid to the Bank to 0.250% of the outstanding loan balance from 0.375%. Servicing fees for the years ended December 31, 2004, 2003 and 2002 totaled $650,912, $747,976 and $939,336, respectively.

The Company borrowed $75,000,000 from the Bank on December 20, 2004, and used the proceeds to purchase adjustable-rate Residential Mortgage Loans from the Bank. The loan payable is secured by a portion of the Residential Mortgage Loan portfolio and the interest rate on the loan payable adjusts monthly based on changes in one-month LIBOR.

The Company had cash balances of $2,318,102 and $5,411,004 as of December 31, 2004 and 2003, respectively, held in various deposit accounts with the Bank. Interest earned on these accounts was $11,491, $22,540 and $85,483 for the years ended December 31, 2004, 2003 and 2002, respectively.

NOTE 9 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:

The majority of the Company’s assets 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

F-11

NOTE 9 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued):

subjectivity inherent in the indicated fair value amounts. Comparability among REITs may be difficult due to the range of permitted valuation techniques and the numerous estimates and assumptions which must be made.

The estimated fair values of the Company’s financial instruments at December 31, 2004 and 2003 are as follows:

                                                    December 31, 2004
                                           ----------------------------------
                                              Carrying             Fair
                                               Amount              Value
                                           ---------------   ----------------
  Financial assets:
     Cash and interest-bearing deposits     $   2,318,102     $   2,318,102
     Residential mortgage loans, net          374,458,643       390,833,000


  Financial liabilities
     Loan payable to parent                 $  75,000,000     $  75,000,000


                                                    December 31, 2003
                                           ----------------------------------
                                               Carrying           Fair
                                                Amount            Value
                                           ---------------   ----------------
  Financial assets:
     Cash and interest-bearing deposits     $   5,411,004     $   5,411,004
     Residential mortgage loans, net          296,062,742       302,201,000

The following methods and assumptions were used to estimate the fair value amounts at December 31, 2004 and 2003.

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.

Loan payable to parent:

Carrying amount of loan payable to parent approximates fair value because the line reprices monthly at market rate.

F-12

NOTE 10 - QUARTERLY FINANCIAL DATA (Unaudited):

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

F-1

NOTE 10 – QUARTERLY FINANCIAL DATA (Unaudited) (Continued):

                                                          2004
                                                  For the quarter ended
                                   ------------------------------------------------------
                                     March 31      June 30     September 30  December 31
                                   ------------  ------------  ------------  ------------
OPERATING DATA:

   Interest income                 $ 4,355,196   $ 4,301,451   $ 4,259,094   $ 4,478,789
   Interest expense                          -             -             -       (81,500)
   Operating expenses                 (250,939)     (254,042)     (262,190)     (253,501)
                                   ------------  ------------  ------------  ------------
      Net income                   $ 4,104,257   $ 4,047,409   $ 3,996,904   $ 4,143,788
                                   ============  ============  ============  ============
  Preferred Stock dividends        $ 3,890,625   $ 3,890,625   $ 3,890,625   $ 3,890,625
                                   ------------  ------------  ------------  ------------
  Earnings available to common
       stockholders                $   213,632   $   156,784   $   106,279   $   253,163
                                   ============  ============  ============  ============
  Average common shares                    100           100           100           100
                                   ============  ============  ============  ============
  Earnings per common share        $  2,136.32   $  1,567.84   $  1,062.79   $  2,531.63
                                   ============  ============  ============  ============

                                                          2003
                                                  For the quarter ended
                                   ------------------------------------------------------
                                     March 31      June 30     September 30  December 31
                                   ------------  ------------  ------------  ------------
OPERATING DATA:

   Interest income                 $ 4,251,760   $ 4,205,110   $ 4,238,342   $ 4,339,948
   Operating expenses                 (314,218)     (317,611)     (225,497)     (245,711)
                                   ------------  ------------  ------------  ------------
       Net income                  $ 3,937,542   $ 3,887,499   $ 4,012,845   $ 4,094,237
                                   ============  ============  ============  ============
  Preferred Stock dividends        $ 3,890,625   $ 3,890,625   $ 3,890,625   $ 3,890,625
                                   ------------  ------------  ------------  ------------
  Earnings (loss) available to common
          stockholders             $    46,917   $    (3,126)  $   122,220   $   203,612
                                   ============  ============  ============  ============
  Average common shares                    100           100           100           100
                                   ============  ============  ============  ============
  Earnings (loss) per common share $    469.17   $    (31.26)  $  1,222.20   $  2,036.12
                                   ============  ============  ============  ============

F-13

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chairman and Chief Executive Officer and its Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2004. Based on the foregoing, the Company’s Chairman and Chief Executive Officer and its Executive Vice President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2004.

During the three months ended December 31, 2004, there were no changes in the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

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 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 is elected by the Bank, which is the sole holder of common stock of the Company. The holders of the Series A Preferred Shares may elect directors only under certain limited circumstances. See DESCRIPTION OF SERIES A PREFERRED SHARES – Voting Rights. The Board of Directors met four times during the year ended 2004 and all of its members attended at least 80% of the meetings. The Company currently has nine 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.

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

B. Francis Saul II...............72  Chairman of the Board, President and Chief
                                        Executive Officer
Alexander R. M. Boyle............67  Director
Stephen R. Halpin, Jr............49  Executive Vice President, Chief Financial
                                        Officer, Treasurer and Director
Thomas H. McCormick..............54  Executive Vice President, General Counsel
                                        and Director
N. Alexander MacColl, Jr.........70  Director

H. Gregory Platts................57  Director

-19-

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

B. FRANCIS SAUL II serves as Chairman of the Board and Chief Executive Officer of the Bank. He also has been President and Chief Operating Officer of B. F. Saul Company since 1969. Mr. Saul has served as the Chairman of B. F. Saul Real Estate Investment Trust since 1969 and as a trustee since 1964. He is also a director of Derwood Investment Corporation. At December 31, 2003, B. F. Saul Real Estate Investment Trust and Derwood Investment Corporation owned of record 80% and 16%, respectively, of the Bank's outstanding common stock. Mr. Saul is also Chairman of the Board of Directors of Chevy Chase Financial Limited and Chevy Chase Property Company Limited. He serves as Chairman of the Board and Chief Executive Officer of Saul Centers, Inc., a public real estate investment trust. Mr. Saul also serves as a Trustee of the National Geographic Society, a member of the Trustees Council of the National Gallery of Art and an Honorary Trustee of the Brookings Institute. In addition, Mr. Saul is Director Emeritus of Colonial Williamsburg Hotel Properties, Inc., a member of the Folger Shakespeare Library and the Board of Visitors and Governors of Washington College.

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

STEPHEN R. HALPIN, JR. serves as Executive Vice President and Chief Financial Officer of the Bank. Mr. Halpin is also the Chief Financial Officer for the B. F. Saul Company and B. F. Saul Real Estate Investment Trust. He is a Trustee of the B. F. Saul Employees Profit Sharing Retirement Trust. 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.

THOMAS H. MCCORMICK joined the Bank in February 2005. He serves as Executive Vice President and General Counsel of the Bank. Mr. McCormick, prior to joining the Bank, was a senior partner with Shaw Pittman, LLP. He also served as the former Chair of Shaw Pittman's Board of Directors and its Corporate and Securities group. Mr. McCormick is a member of the American Bar Association and the National Association of Real Estate Investment Trusts.

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.

H. GREGORY PLATTS currently serves as Senior Vice President and Treasurer of the National Geographic Society. Prior to joining the National Geographic Society in 1980, Mr. Platts served as a trust investment officer with the Union Trust Company and First American Bank in Washington, DC from 1972 until 1978. Mr. Platts currently serves on the boards of the National Geographic Society Education Foundation, St. Albans School, and Decatur House. He has served as a director and president of the Washington Society of Investment Analysts, chairman of the American Red Cross Blood Services mid-Atlantic region, and trustee of Westmoreland Congregational Church in Bethesda. He has also served on the boards of the National Presbyterian School, the Edes Home in Georgetown, the Friends of Fort Dupont, and the Bulldog Hockey Club.

CODE OF BUSINESS CONDUCT

The Company does not have employees and, accordingly, has not adopted a code of business conduct applicable exclusively to the Company. However, the officers of the Company, including the principal executive, financial and accounting officers of the Company, are employees of the Bank and, as such, are bound by the Bank’s Code of Business Conduct. The Bank’s Code of Business Conduct will be made available to any person who writes the Company requesting a copy.

-20-

AUDIT COMMITTEE

The Company’s audit committee reviews the engagement of independent accountants and reviews their independence. The audit committee also reviews the adequacy of the Company’s internal accounting controls. The audit committee is comprised of the Company’s Independent Directors, H. Gregory Platts and N. Alexander MacColl, Jr. The audit committee met four times during 2004.

The Company’s Board of Directors has not designated any member of the audit committee as an “audit committee financial expert.” The Board of Directors believes that the Company’s business of acquiring, holding and managing Mortgage Assets does not generate accounting issues of sufficient complexity to require the designation of a member of the audit committee as an “audit committee financial expert.”

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

Based solely on its review of copies of such reports received or representations from certain reporting persons, the Company believes that, during the year ended December 31, 2004, 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 2004.

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 2004, each of the Independent Directors earned $6,000 for attending four meetings of the Board of Directors and four meetings of the Audit Committee.

-21-

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The Company had no compensation plan under which its equity securities are authorized for issuance. The following table sets forth, as of March 15, 2005, 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, 2005.

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%

Thomas H. McCormick (2)(3)                             0                       0%

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

H. Gregory Platts (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 7501 Wisconsin Avenue, Bethesda, Maryland 20814.
(2) Indicates a director of the Company.
(3) Indicates an executive officer of the Company.

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, 2004 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, 2004 totaled $650,912. See “Business - Servicing.”

The Company borrowed $75,000,000 from the Bank on December 20, 2004, and used the proceeds to purchase adjustable-rate Residential Mortgage Loans from the Bank. The loan payable is secured by a portion of the Residential Mortgage Loan portfolio and the interest rate on the loan payable adjusts monthly based on changes in one-month LIBOR.

The Company had cash balances of $2,318,102 as of December 31, 2004 held in various deposit accounts with the Bank. Interest earned on these accounts was $11,491 for the year ended December 31, 2004.

-22-

During 2004 and through January 2005, Thomas H. McCormick was a partner of Shaw Pittman LLP, principal outside counsel to the Company and to the Bank.

ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES

The firm of Ernst & Young LLP has examined the financial statements of the Company for the period from January 1, 2002 to December 31, 2004. Ernst & Young LLP reports to, and is engaged at the direction of, the Audit Committee. The aggregate fees billed by Ernst & Young LLP during the years ended December 31, 2004 and 2003 are as follows:

                                                      December 31,
                                            ---------------------------------
         Types of Fees and Services              2004              2003
         -------------------------------    ---------------    --------------
         Audit                                   $  26,203         $  26,392

         Tax (1)                                     4,400             4,000
                                            ---------------    --------------
                Total                            $  30,603         $  30,392
                                            ===============    ==============

(1) Fees and services related to federal and state income tax returns, tax advice and tax planning.

The Audit Committee approves, in advance, the engagement of the independent accountants to provide services to the Company.

-23-

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

Report of Independent Auditors
Statements of Financial Condition at December 31, 2004 and 2003
Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002
Statements of Stockholders’ Equity for the Years Ended December 31, 2004, 2003 and 2002
Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002

Notes to Financial Statements

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

(a)3 Exhibits:

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

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

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

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

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

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

10.4 Amendment to Servicing Agreement as modified on June 17, 2003 effective July 1,
2003 (incorporated herein by reference to Exhibit 10.4 of the Company’s
report on Form 10-Q for the quarterly period ended June 30, 2003).

* 10.5 Loan Agreement by and between Chevy Chase Preferred Capital Corporation
and Chevy Chase Bank, F.S.B. dated December 20, 2004

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

* 31.1 Rule 13a-14(a) / 15d - 14(a) Certifications of Chief Executive Officer.

* 31.2 Rule 13a-14(a) / 15d - 14(a) Certifications of Chief Financial Officer.

* 32.1 Section 1350 Certifications of Chief Executive Officer.

* 32.2 Section 1350 Certifications of Chief Financial Officer.

*Filed herewith.

-24-

EXHIBIT 12.1

CHEVY CHASE PREFERRED CAPITAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS

------------------------------------------------------------------------------------------------------
                               (in thousands, except ratio data)

                                                    As of or for the year ended December 31,
                                          ------------------------------------------------------------
                                              2004        2003        2002        2001        2000
                                          ------------ ----------- ----------- ----------- -----------

Net income                                 $   16,292  $   15,932  $   16,497  $   19,696  $   20,811
Fixed charges                                       -           -           -           -           -
                                          ------------ ----------- ----------- ----------- -----------
Earnings before fixed charges              $   16,292  $   15,932  $   16,497  $   19,696  $   20,811
                                          ============ =========== =========== =========== ===========

Fixed charges, as above                    $        -  $        -  $        -  $        -  $        -
Preferred stock dividend requirements          15,563      15,563      15,563      15,563      15,563
                                          ------------ ----------- ----------- ----------- -----------
Fixed charges including preferred stock
   dividends                               $   15,563  $   15,563  $   15,563  $   15,563  $   15,563
                                          ============ =========== =========== =========== ===========
Ratio of earnings to fixed charges and
   Preferred stock dividend requirements        1.05x        1.02x       1.06x       1.27x       1.34x

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 Bethesda, Maryland on March 23, 2005.

CHEVY CHASE PREFERRED CAPITAL CORPORATION

                                        By:  /s/ B. Francis Saul II
                                             -----------------------------------------
                                             B. Francis Saul II
                                             Chairman of the Board of Directors,
                                             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.

NAME                                        TITLE                              DATE
------------------------------------------------------------------------------------------


/s/ Alexander R.M. Boyle                   Director                        March 23, 2005
-----------------------------
Alexander R.M. Boyle


/s/ Joel A. Friedman                   Senior Vice President               March 23, 2005
-----------------------------              and Controller
Joel A. Friedman                    (Principal Accounting Officer)

/s/ Stephen R. Halpin, Jr.        Director, Executive Vice President       March 23, 2005
-----------------------------         and Chief Financial Officer
Stephen R. Halpin, Jr.               (Principal Financial Officer)

/s/ Thomas H. McCormick           Director, Executive Vice President       March 23, 2005
-----------------------------            and General Counsel
Thomas H. McCormick

/s/ N. Alexander MacColl, Jr.              Director                        March 23, 2005
-----------------------------
N. Alexander MacColl, Jr.


/s/ H. Gregory Platts                      Director                        March 23, 2005
-----------------------------
H. Gregory Platts


/s/ B. Francis Saul II           Chairman of the Board of Directors,       March 23, 2005
-----------------------------   President and Chief Executive Officer
B. Francis Saul II                 (Principal Executive Officer)

Exhibit 31.1

CERTIFICATION

I, B. Francis Saul II, certify that:

         1.    I have reviewed this annual report on Form 10-K for the year ending December 31, 2004 of Chevy Chase Preferred Capital
               Corporation;

         2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
               fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
               misleading with respect to the period covered by this report;

         3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly
               present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
               and for, the periods presented in this report;

         4.    The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
               and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

                      a)            designed such disclosure controls and procedures, or caused such disclosure controls and
                             procedures to be designed under our supervision, to ensure that material information relating to the
                             registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
                             particularly during the period in which this report is being prepared;

                      b)            evaluated the effectiveness of the registrant's disclosure controls and procedures and presented
                             in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
                             the end of the period covered by this report based on such evaluation; and

                      c)            disclosed in this report any change in the registrant's internal control over financial reporting
                             that occurred during the registrant's fourth fiscal quarter that has materially affected, or is
                             reasonable likely to materially affect, the registrant's internal control over financial reporting; and

         5.    The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
               over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or
               persons performing the equivalent functions):

                      a)            all significant deficiencies and material weaknesses in the design or operation of internal
                             control over financial reporting which are reasonably likely to adversely affect the registrant's ability
                             to record, process, summarize and report financial information; and

                      b)            any fraud, whether or not material, that involves management or other employees who have a
                             significant role in the registrant's internal control over financial reporting.



                                                  /s/ B. FRANCIS SAUL II
                                                  --------------------------------------
                                                  B. Francis Saul II
                                                  Chairman and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Stephen R. Halpin, Jr., certify that:

         1.    I have reviewed this annual report on Form 10-K for the year ending December 31, 2004 of Chevy Chase Preferred Capital
               Corporation;

         2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
               fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
               misleading with respect to the period covered by this report;

         3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly
               present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
               and for, the periods presented in this report;

         4.    The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
               and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

                      a)            designed such disclosure controls and procedures, or caused such disclosure controls and
                             procedures to be designed under our supervision, to ensure that material information relating to the
                             registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
                             particularly during the period in which this report is being prepared;

                      b)            evaluated the effectiveness of the registrant's disclosure controls and procedures and presented
                             in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
                             the end of the period covered by this report based on such evaluation; and

                      c)            disclosed in this report any change in the registrant's internal control over financial reporting
                             that occurred during the registrant's fourth fiscal quarter that has materially affected, or is
                             reasonable likely to materially affect, the registrant's internal control over financial reporting; and

         5.    The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
               over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or
               persons performing the equivalent functions):

                      a)            all significant deficiencies and material weaknesses in the design or operation of internal
                             control over financial reporting which are reasonably likely to adversely affect the registrant's ability
                             to record, process, summarize and report financial information; and

                      b)            any fraud, whether or not material, that involves management or other employees who have a
                             significant role in the registrant's internal control over financial reporting.




                                                  /s/ STEPHEN R. HALPIN, JR.
                                                  ------------------------------
                                                  Stephen R. Halpin, Jr.
                                                  Director, Executive Vice President and
                                                  Chief Financial Officer

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, B. Francis Saul II, the Chairman and Chief Executive Officer of Chevy Chase Preferred Capital Corporation (the “Company”), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company’s Annual Report on Form 10-K for the year ending December 31, 2004 (the “Report”). The undersigned hereby certifies that:

         (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the
             Securities Exchange Act of 1934; and

         (2) the information contained in the Report fairly presents, in all material respects,
             the financial condition and results of operations of the Company.




                                      /s/  B. FRANCIS SAUL II
                                      -------------------------------------
                                      B. Francis Saul II
                                      Chairman and Chief Executive Officer

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, Stephen R. Halpin, Jr., the Executive Vice President and Chief Financial Officer of Chevy Chase Preferred Capital Corporation (the “Company”), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company’s Annual Report on Form 10-K for the year ending December 31, 2004 (the “Report”). The undersigned hereby certifies that:

         (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the
             Securities Exchange Act of 1934; and

         (2) the information contained in the Report fairly presents, in all material respects,
             the financial condition and results of operations of the Company.


                            /s/ STEPHEN R. HALPIN, JR.
                            -------------------------------------------
                            Stephen R. Halpin, Jr.
                            Director, Executive Vice President and
                            Chief Financial Officer

SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549

FORM 10-K

__X__ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2004________________

OR

_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________to___________________

Commission File Number: 001-12477

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

7501 Wisconsin Avenue Bethesda, Maryland 20814 (Address of principal executive office) (Zip Code)

(301) 987-2265(Registrant's telephone number, including area code)

_______________________________________________________N/A_______________________________________________________ (Title of class)

CHEVY CHASE PREFERRED CAPITAL CORPORATION

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

GENERAL

DIVIDEND COVERAGE

MORTGAGE ASSETS

Loan Portfolio Composition

-1-

-2-

Investment Policy

-3-

Loan Payable to Parent

Credit Risk Management Policies

-4-

Delinquencies

Geographic Distribution

SERVICING

-5-

DIVIDEND POLICY

THE BANK

THE ADVISOR

-6-

CAPITAL AND LEVERAGE POLICIES

EMPLOYEES

-7-

COMPETITION

ENVIRONMENTAL MATTERS

TAX STATUS OF THE COMPANY

-8-

ITEM 2. PROPERTIES

ITEM 3. LEGAL PROCEEDINGS

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

PART II

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

DESCRIPTION OF COMMON STOCK

General

-9-

Dividends

Voting Rights

Rights Upon Liquidation

DESCRIPTION OF SERIES A PREFERRED SHARES

Market Information and Dividends

-10-

General

Automatic Exchange

-11-

Voting Rights

Redemption

Rights Upon Liquidation

Independent Director Approval

-12-

ITEM 6. SELECTED FINANCIAL DATA

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

FINANCIAL CONDITION

Critical Accounting Policies

-13-

Allowance for Loan Losses

Residential Mortgage Loans

Interest Rate Risk

-14-

Significant Concentration of Credit Risk

-15-

Liquidity and Capital Resources

RESULTS OF OPERATIONS

Year 2004 Compared to Year 2003

-16-

Year 2003 Compared to Year 2002

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to_

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

7501 Wisconsin Avenue
Bethesda, Maryland 20814
(Address of principal executive office) (Zip Code)

(301) 987-2265
(Registrant's telephone number, including area code)

_N/A_
(Title of class)

CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION

CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF OPERATIONS

CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY

CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS

CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002

CHEVY CHASE PREFERRED CAPITAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS

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