~~SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549~~____________________________________________________________________________________________

~~FORM~~SECURITIES ~~10-K~~AND EXCHANGE COMMISSION

~~FOR~~Washington, ~~ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~DC 20549

~~__X__~~FORM ~~ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~10-K

~~For~~FOR ~~the~~ANNUAL ~~fiscal~~AND ~~year~~TRANSITION ~~ended:~~REPORTS ~~December 31, 2004________________~~

PURSUANT TO SECTION 13 OR 15(d) OF THE

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

~~For~~[ ~~the~~X ~~transition~~] ~~period~~ANNUAL ~~from~~REPORT ~~__________________to___________________~~PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~Commission~~For ~~File~~the ~~Number~~fiscal year ended: December ~~001-12477~~31, 2005 .

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

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

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

~~7501~~For ~~Wisconsin~~the ~~Avenue~~transition ~~Bethesda,~~period ~~Maryland~~from ~~20814 (Address of principal executive office) (Zip Code)~~_______________________________to___________________________________

~~(301)~~Commission ~~987-2265(Registrant's~~File ~~telephone~~Number: ~~number, including area code)~~001-12477

~~Securities~~CHEVY ~~registered~~CHASE ~~pursuant~~PREFERRED toCAPITAL ~~Section 12(b) of Act:~~ CORPORATION

~~Title~~(Exact ofname ~~each class Name~~ of ~~each~~registrant ~~exchange~~as onspecified ~~which~~in ~~registered~~its ~~10 3/8% Noncumulative Exchangeable New York Stock Exchange, Inc. Preferred Stock, Series A~~ charter)

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

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

~~_______________________________________________________N/A_______________________________________________________~~Incorporation ~~(Title~~or ~~of class~~organization)

~~Indicate~~7501 byWisconsin 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 ___Avenue

~~Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein~~Bethesda, ~~and~~Maryland 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 20814

~~Indicate by check mark whether the registrant is an accelerated filer~~ (asAddress ~~defined~~of inprincipal ~~Exchange~~executive ~~Act Rule 12b-2~~office). ~~Yes~~(Zip ~~___ No _X_~~ Code)

~~The~~(301) 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 non987-~~affiliates.~~ 2265

~~CHEVY~~(Registrant’s ~~CHASE~~telephone ~~PREFERRED~~number, ~~CAPITAL~~including ~~CORPORATION~~area code)

~~TABLE~~Securities OFregistered ~~CONTENTS~~pursuant to Section 12(b) of Act:

                                            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

Title of each class	Name of each exchange on which registered
10d% Noncumulative Exchangeable		New York Stock Exchange, Inc.

~~PART~~Preferred IStock, Series A

~~ITEM~~Securities 1.registered ~~BUSINESS~~pursuant to Section 12(g) of the Act:

~~GENERAL~~N/A

~~Chevy Chase Preferred Capital Corporation~~ (~~the~~Title “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”~~class), 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~~Indicate ~~COVERAGE~~by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

~~Based~~Yes[ on] ~~the~~No ~~outstanding balance~~[ ofX 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. ]

InIndicate ~~response~~by tocheck ~~reduced market~~mark ~~interest~~if ~~rates,~~ the ~~Company~~registrant ~~has~~is ~~taken~~not ~~steps~~required to ~~increase~~file ~~the~~reports ~~funds available~~pursuant to ~~pay~~Section ~~dividends~~13 onor ~~the~~Section ~~Series~~15(d) 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~~Act.

~~MORTGAGE~~Yes[ ~~ASSETS~~] No [ X ]

~~Loan~~Indicate ~~Portfolio~~by ~~Composition~~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.

~~The~~Yes[ ~~Company’s~~X ~~current~~] ~~portfolio of~~No ~~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. ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-1K 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 ]

~~Residential~~Indicate ~~Mortgage~~by ~~Loan~~check ~~Portfolio ----------------------------------- December~~mark 31, -------------------------------------------------------------------------- 2004 2003 ----------------------------------- ------------------------------------ Aggregate Weighted Percent Aggregate Weighted Percent Principal Average to Principal Average to Type Balance Yield Total Balance Yield Total ------ ------------ --------- ---------- ------------ --------- ---------- Monthlywhether ~~ARMs $107,438,487 4.93% 28.7% $~~the ~~47,833,336 3.36% 16.2% One-Year~~registrant ~~ARMs 13,985,393 4.48% 3.7% 12,988,634 4.09% 4.4% Three-Year~~is ~~ARMs 13,040,178 5.35% 3.5% 12,224,073 5.47% 4.1% Five-Year~~a ~~ARMs 110,068,100 5.56% 29.4% 62,720,041 5.92% 21.2% 7/1~~large ~~ARMs 6,229,074 6.71% 1.7% 12,478,626 6.75% 4.2% 10/1~~accelerated ~~ARMs 17~~filer,~~658,506 6.70% 4.7% 38,215,901 6.74% 12.9% 15~~ &an 30accelerated ~~Year~~filer, ~~Fixed~~or a non-~~Rate 106,079,238 6~~accelerated filer.~~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: AllowanceSee ~~for~~definition ~~loan~~of ~~losses 40,333 40,333~~ “accelerated filer and large accelerated filer” in Rule 12b-~~----------- ------------ Total $374,458,643 $296,062,742 ============ ============~~ 2 of the Exchange Act. (Check one):

~~Purchases~~Large ~~from~~accelerated ~~the~~filer[ ~~Bank~~] ~~of Residential~~Accelerated ~~Mortgage~~filer[ ~~Loans~~] ~~during~~Non-accelerated ~~the~~filer ~~year~~[ ~~ended~~X 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.” ]

AIndicate ~~majority~~by ~~(or~~check ~~71.7%)~~mark ~~of the~~whether ~~Residential Mortgage Loans included in~~ the ~~Company’s~~registrant ~~portfolio~~is ~~at December~~a ~~31,~~shell ~~2004~~company ~~bear interest at adjustable rates. The interest rate on an adjustable rate mortgage~~ (~~“ARM”) resets periodically based on an index (such~~ as ~~the~~defined ~~London~~in ~~Interbank~~Exchange ~~Offered~~Act ~~Rate~~Rule ~~(“LIBOR”~~12b-2) ~~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~~Yes[ ~~interest~~] ~~rate~~No on[ ~~each type~~X 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~~The ~~ARM~~number ~~bears~~of ~~interest~~shares 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~~registrant’s ~~interest~~sole ~~rate.~~class ~~Certain~~ of ~~the~~common ~~types~~stock ofwas ~~loan~~100 ~~products that are ARMs contain an option~~shares, ~~which~~$1.00 ~~may~~par ~~be exercised~~value byper ~~the mortgagor~~share, toas ~~convert the ARM into a fixed-rate loan for the remainder~~ of ~~the~~March ~~mortgage~~15, ~~term~~2006. All ~~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~~shares ~~for~~were ~~the~~owned ~~remaining~~by ~~term~~Chevy ofChase ~~the~~Bank, ~~loan~~F. ~~The Company’s current policy is to retain these fixed-rate loans in its portfolio~~S.B.; ~~All fixed-rate Residential Mortgage Loans included in the portfolio allow the mortgagor to repay~~therefore, atno ~~any~~common ~~time,~~stock ~~some~~was orheld ~~all~~by ~~of the outstanding principal balance of the loan without a fee or penalty~~non-affiliates.

~~Monthly~~CHEVY ~~ARM.~~CHASE ~~The interest~~PREFERRED ~~rate~~CAPITAL 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 MonthlyCORPORATION

~~-2-~~TABLE OF CONTENTS

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.

	PART I		Page

Item 1.	BUSINESS.......................................................................................................			1
	General............................................................................................................			1
	Dividend Coverage...............................................................................................			1
	Mortgage Assets..................................................................................................			1
		Loan Portfolio Composition..................................................................................		1
		Investment Policy.............................................................................................		4
		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.......................................................................................................			7
	Environmental Matters..........................................................................................			8
	Tax Status of the Company.....................................................................................			8
Item 1A.	RISK FACTORS................................................................................................			9
Item 1B.	UNRESOLVED STAFF COMMENTS....................................................................			13
Item 2.	PROPERTIES....................................................................................................			13
Item 3.	LEGAL PROCEEDINGS.....................................................................................			13
Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................			13

	PART II

Item 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES....			14
	Description of Common Stock.................................................................................			14
		General..........................................................................................................		14
		Dividends.......................................................................................................		14
		Voting Rights...................................................................................................		14
		Rights Upon Liquidation.....................................................................................		14
	Description of Series A Preferred Shares.....................................................................			15
		Market Information and Dividends.........................................................................		15
		General.........................................................................................................		15
		Automatic Exchange..........................................................................................		15
		Voting Rights....................................................................................................		16
		Redemption.....................................................................................................		16
		Rights Upon Liquidation.....................................................................................		16
		Independent Director Approval..............................................................................		17
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..............................................................................................	18
		Significant Concentration of Credit Risk..................................................................	19
		Liquidity and Capital Resources............................................................................	19
	Results of Operations............................................................................................		20
		Year 2005 Compared to Year 2004........................................................................	20
		Year 2004 Compared to Year 2003........................................................................	21
Item 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........		21
Item 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................		F-1
Item 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..............................................		22
Item 9A.	CONTROLS AND PROCEDURES........................................................................		22
Item 9B.	OTHER INFORMATION....................................................................................		22

	PART III

Item 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........................		22
	Directors and Executive Officers..............................................................................		22
	Code of Business Conduct......................................................................................		24
	Audit Committee.................................................................................................		24
	Section 16(a) Beneficial Ownership Reporting Compliance...............................................		24
Item 11.	EXECUTIVE COMPENSATION..........................................................................		24
Item 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.........................		25
Item 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................		25
Item 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES................................................		26

	PART IV

Item 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES..............................................		27

~~The~~PART 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. I

~~One-Year~~ITEM ~~ARM~~1. 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. BUSINESS

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. GENERAL

~~Five-Year~~Chevy ~~ARM.~~Chase ~~The interest~~Preferred ~~rate~~Capital ~~with~~Corporation ~~respect~~(the to“Company”) ~~each~~is ~~five-year~~a ~~ARM~~Maryland corporation which acquires, holds and manages real estate mortgage assets (“~~Five-Year~~Mortgage ~~ARM~~Assets”). The ~~is fixed~~Company athas anelected ~~initial~~to ~~rate~~be ~~for~~treated ~~the~~as ~~first~~a 60real ~~monthly~~estate ~~payments~~investment ~~and~~trust ~~adjusts~~(a on“REIT”) under the ~~date~~ ~~specified~~Internal inRevenue ~~the~~Code ~~related~~of ~~mortgage~~1986, ~~note~~as amended (the “Code”), and ~~periodically~~generally ~~thereafter,~~will not be subject to ~~a rate~~federal ~~equal~~income tax to the ~~then-current~~extent ~~applicable~~that ~~index~~it ~~plus~~distributes ~~the~~its ~~margin~~earnings ~~set~~to ~~forth~~its ~~in such~~stockholders ~~mortgage~~and ~~note,~~maintains ~~subject~~its toqualification as a ~~maximum~~REIT. ~~periodic~~All ~~interest~~of ~~rate~~the ~~increase~~shares ~~or decrease~~of the Company’s common stock, apar ~~lifetime~~value ~~interest~~$1.00 ~~rate~~per ~~adjustment~~share ~~cap~~(the “Common Stock”), ~~and~~are owned by Chevy Chase Bank, F.S.B., a ~~minimum~~federally ~~interest~~chartered ~~rate as~~and ~~specified~~federally ininsured ~~the~~stock ~~related~~savings ~~mortgage~~bank ~~note~~(the “Bank”). The ~~Certain~~Bank ofis ~~these~~in ~~loans~~compliance ~~contain~~with ~~an option,~~its ~~which~~regulatory ~~may~~capital berequirements. The ~~exercised~~Bank byservices the ~~mortgagor,~~Company’s toResidential ~~convert~~Mortgage ~~the~~Loans ~~ARM~~(as ~~into~~defined abelow) and ~~fixed~~administers the day-~~rate~~to-day ~~loan~~operations ~~for~~of the ~~remainder~~Company. The Company has outstanding 3,000,000 shares of 10d% Noncumulative Exchangeable Preferred Stock, Series A, par value $5.00 per share (the ~~mortgage~~“Series ~~term~~A Preferred Shares”). The Series A Preferred Shares are listed on the New York Stock Exchange (symbol CCP-PrA).

~~Seven-Year~~DIVIDEND 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. COVERAGE

~~Ten-Year~~Based ~~Fixed-Rate~~on ~~Loan With~~the ~~Automatic~~outstanding ~~Conversion~~balance toof ~~One-Year~~the ~~ARM.~~Company’s ~~The~~Residential ~~interest~~Mortgage ~~rate~~Loans ~~with respect to each ten-year fixed-rate loan with automatic conversion to a One-Year ARM~~ (~~a “10/1~~as ~~ARM”~~defined below) ~~is fixed~~ at anDecember ~~initial~~31, ~~rate~~2005 ~~for~~and the ~~first~~interest ~~120~~rates ~~monthly payments and adjusts~~ on ~~the~~such ~~date specified in the related mortgage note~~loans, ~~and annually thereafter, to a rate equal to~~ the ~~then-current~~Company ~~applicable~~anticipates ~~index~~that ~~plus the margin set forth in such mortgage note, subject to a maximum~~ annual ~~interest rate increase or decrease~~income, anet ~~lifetime~~of interest ~~rate~~expense ~~adjustment cap,~~ and ~~a minimum~~operating ~~interest~~expenses, ~~rate~~on ~~as specified in~~ the ~~related~~Company’s ~~mortgage~~loan ~~note.~~portfolio ~~There~~will isbe ~~no ability~~approximately to117.5% ~~continue~~of ~~at a fixed rate after~~ the ~~first~~projected ~~Rate~~annual ~~Adjustment~~dividend ~~Date under the terms~~ of ~~this~~$15,562,500 ~~type~~on ofthe ~~Residential~~Series ~~Mortgage~~A ~~Loan.~~Preferred Shares.

~~Investment~~In ~~Policy~~response to reduced market interest rates in prior years, the Company took steps to increase the funds available to pay dividends on the Series A Preferred Shares. In addition to the 2003 reduction in the Bank’s servicing fee, the Company borrowed $75,000,000 from the Bank in December 2004, and used the proceeds to purchase 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.

~~General. The~~MORTGAGE 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 anyASSETS

~~-3-~~Loan Portfolio Composition

~~time~~The ~~during~~Company’s ~~the~~current ~~preceding~~portfolio 12of ~~months~~Mortgage ~~(a)~~Assets ~~classified, (b)~~consists inof ~~nonaccrual status~~loans orsecured ~~(c)~~by ~~renegotiated due~~first tomortgages ~~the~~or ~~financial deterioration~~ deeds of ~~the borrower; or~~trust (~~iii~~“Mortgage Loans”) ~~has~~on ~~been, more~~single-family ~~than~~residential ~~once during~~real ~~the~~estate properties ~~preceding 12~~(“Residential ~~months,~~Mortgage Loans”). ~~more~~The ~~than~~following 30table ~~days~~sets ~~past~~forth ~~due~~information inconcerning the ~~payment~~ ~~of principal~~Company’s orResidential ~~interest.~~ Mortgage Loans ~~that~~as ~~are~~of ~~in "non-accrual status"~~December ~~are~~31, ~~generally loans~~2005 ~~that~~and ~~are~~December ~~past~~31, ~~due~~2004. 90All ~~days~~of orthe ~~more~~Mortgage inLoans ~~principal~~were acquired from the Bank or ~~interest,~~ ~~and~~its ~~"classified"~~affiliates. A ~~loans~~description ~~are~~of ~~generally~~the ~~troubled~~types ~~loans~~of ~~which~~Residential ~~are~~Mortgage ~~deemed~~Loans ~~substandard~~included orin ~~doubtful~~the ~~with~~Company’s ~~respect~~portfolio tofollows ~~collectibility~~the table.

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. -1-

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.

Residential Mortgage Loan Portfolio
	December 31,
	2005			2004
Type	Aggregate Principal Balance	Weighted Average Yield	Percent to Total		Aggregate Principal Balance	Weighted Average Yield	Percent to Total
Payment Option ARMs	$ 72,466,980	6.96%	19.2%		$107,438,487	4.93%	28.7%
One-Year ARMs	8,545,766	6.13%	2.3%		13,985,393	4.48%	3.7%
Three-Year ARMs	25,589,269	6.06%	6.8%		13,040,178	5.35%	3.5%
Five-Year ARMs	180,269,621	5.84%	47.9%		110,068,100	5.56%	29.4%
7/1 ARMs	3,559,239	6.72%	0.9%		6,229,074	6.71%	1.7%
10/1 ARMs	11,376,174	6.68%	3.0%		17,658,506	6.70%	4.7%
15 & 30 Year Fixed-Rate	75,047,780	6.42%	19.9%		106,079,238	6.48%	28.3%
	376,854,829	6.23%	100.0%		374,498,976	5.67%	100.0%
Less:
Allowance for loan losses	40,333				40,333
Total	$376,814,496				$374,458,643

~~The~~Purchases ~~Company~~from ~~intends~~the ~~to acquire~~Bank ~~only~~of ~~investment~~Residential ~~grade~~ Mortgage~~-Backed~~ ~~Securities~~Loans ~~issued~~during ~~by agencies of~~ the ~~Federal~~year ~~government~~ended orDecember ~~government sponsored agencies~~31, ~~such~~2005 astotaled ~~FHLMC~~$151,039,626 ~~FNMA~~ and ~~the~~ ~~Government~~principal ~~National~~collections ~~Mortgage~~totaled ~~Association~~$148,683,773. See (“~~GNMA”).~~Management’s ~~The~~Discussion ~~Company does~~and ~~not~~Analysis ~~intend~~of toFinancial ~~acquire~~Condition ~~any~~and ~~interest-only~~Results orof ~~principal-only~~Operations – Financial Condition – Residential Mortgage~~-Backed Securities.~~ Loans.”

~~Commercial~~A ~~Mortgage Loans~~majority (or 80.1%) ~~While~~of nothe ~~Commercial~~Residential Mortgage Loans ~~are~~ included in the ~~current portfolio, the~~ Company’s ~~may,~~portfolio ~~from~~at ~~time~~December ~~to time~~31, ~~acquire~~2005 ~~Commercial~~bear ~~Mortgage~~interest ~~Loans secured~~at byadjustable ~~industrial~~rates. The ~~and~~interest ~~warehouse~~rate ~~properties,~~on ~~recreational~~an ~~facilities,~~adjustable ~~office buildings,~~rate ~~retail~~mortgage ~~space~~(“ARM”) ~~and~~resets ~~shopping~~periodically ~~malls,~~based ~~hotels~~on ~~and~~an ~~motels,~~index ~~hospitals, nursing~~(such ~~homes~~as orthe ~~senior~~London ~~living~~Interbank ~~centers.~~Offered ~~Unlike~~Rate ~~Residential~~(“LIBOR”) ~~Mortgage~~or ~~Loans, Commercial~~the ~~Mortgage~~interest ~~Loans~~rate ~~generally~~on ~~lack~~United ~~standardized~~States ~~terms~~Treasury Bills). ARMs Inare ~~addition, Commercial~~typically ~~Mortgage~~subject ~~Loans tend~~ to belifetime ~~fixed-~~interest rate ~~loans~~caps ~~having~~and ~~shorter~~may ~~maturities than~~be ~~Residential~~subject ~~Mortgage~~to ~~Loans.~~periodic ~~Commercial~~interest ~~Mortgage~~rate ~~Loans~~adjustment ~~may~~caps. As ~~also~~of ~~not~~December be31, ~~fully amortizing~~2005, ~~meaning~~the ~~that~~weighted ~~they~~average ~~may~~yield ~~have~~on athe ~~significant~~Residential ~~principal~~Mortgage ~~balance~~Loans ~~or “balloon”~~included ~~payment~~in ~~due~~the onCompany’s ~~maturity.~~portfolio ~~Moreover,~~was ~~commercial~~6.23%. For ~~properties, particularly~~the ~~industrial~~year ~~and~~ended ~~warehouse~~December ~~properties~~31, ~~are generally subject to relatively greater environmental risks than non-commercial properties~~2005, ~~generally giving~~the ~~rise~~weighted toaverage ~~increased~~interest ~~costs~~rate ofwas ~~compliance~~approximately ~~with environmental laws and regulations~~6. 01%.

~~Other~~The ~~Real~~interest ~~Estate Assets.~~rate ~~The~~on each type of ARM product included in the Company’s ~~may~~portfolio ~~invest~~adjusts upat tothe 5%time of(each “Rate Adjustment Date”) and in the ~~total~~manner ~~value~~described ofbelow. If ~~its~~specified ~~portfolio~~ in ~~assets~~the ~~(other~~related ~~than~~mortgage ~~Residential~~note, ~~Mortgage~~an ~~Loans~~ARM ~~and~~may ~~Mortgage-Backed~~be ~~Securities) eligible~~subject to belifetime ~~held~~interest byrate ~~REITs~~adjustment caps, to minimum interest rates and to maximum periodic adjustment increases or decreases. Information ~~Such~~set ~~assets~~forth ~~could~~below ~~include~~regarding ~~Commercial~~interest rate adjustment caps and minimum interest rates applies to the current portfolio only. Residential Mortgage Loans purchased by the Company after December 31, ~~cash~~2005 ~~and~~may ~~cash~~be ~~equivalents.~~subject to different terms.

~~Loan~~Each ~~Payable~~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 based on the ARM type. For all ARMs other than those that provide the borrower with a variety of payment options (“Payment Option ARMs”), on each Rate Adjustment Date the payment is re-calculated to ~~Parent~~an amount that will fully amortize the then-outstanding principal balance of such loan over its remaining term to stated maturity. Most Payment Option ARMs require the borrower to make a minimum payment which is re-calculated when the loan reaches the maximum negative amortization threshold or on the dates specified in the note. The minimum payment on some Payment Option ARMs is equal to the amount of interest due (interest-only payment) and changes each month. Certain ARM loan products 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 an ARM loan 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 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.

~~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~~2-~~month LIBOR plus a specified margin and is payable monthly.~~

~~Credit~~Payment ~~Risk~~Option ~~Management~~ARM. Payment ~~Policies~~Option ARMs have interest rates that 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 Payment Option ARM is based on an initial interest rate, which is lower, and may be significantly lower, than the sum of the index and the margin. No Payment Option ARM contains a periodic interest rate adjustment cap; however, the interest rate may not exceed the maximum interest rate specified for such Payment Option ARM in the related mortgage note. The amount of the minimum monthly payment due on most Payment Option ARMs 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 minimum payment on some Payment Option ARMs is equal to the amount of interest due (interest-only payment) and changes each month. The option to make an interest-only payment terminates with the 181st monthly payment, at which time the minimum payment adjusts to an amount that would fully amortize the outstanding principal balance of the mortgage loan over its remaining term to maturity at the then-current interest rate.

~~The~~Most ~~Company~~of ~~intends~~the ~~that each~~Payment ~~Mortgage~~Option ~~Loan~~ARMs itprovide ~~acquires~~the ~~will~~borrower ~~represent~~with a ~~first~~below-market ~~lien~~introductory ~~position~~interest rate and ~~will~~a ~~be originated~~variety inof ~~the~~monthly ~~ordinary~~payment ~~course~~options. At December 31, 2005, approximately $71.1 million of the ~~originator~~Company’s ~~real~~Payment ~~estate~~Option ~~lending activities~~ARMs ~~based~~have ona ~~the~~payment ~~underwriting~~option ~~standards~~that ~~generally~~could ~~applied~~result ~~(at~~in the ~~time~~interest ~~of origination)~~being ~~for~~added to the ~~originator’s~~principal ~~own~~of ~~account.~~the ~~The~~loan, ~~Company~~or ~~also~~“negative ~~intends~~ amortization.” At that ~~all~~date, ~~Mortgage~~approximately ~~Loans~~$0.5 ~~held~~million byof outstanding principal in excess of the ~~Company~~original ~~will~~principal bebalance ~~serviced~~was ~~pursuant~~due toon ~~the servicing~~these ~~agreement~~loans. Each ~~between~~loan ~~the~~contains ~~Company~~terms ~~and~~which limit the ~~Bank~~amount ~~dated~~of ~~December~~negative 1,amortization ~~1996,~~to ~~as amended~~a onpercentage ~~June~~of 17the original loan amount, ~~2003~~generally (10%. The remaining Payment Option ARMs have a payment option that allows the ~~“Servicing~~borrower ~~Agreement”).~~to ~~See “Servicing.”~~make an interest only payment.

One-4Year ARM. Each one-year ARM bears interest at a rate that is fixed 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.

~~Delinquencies~~Three-Year ARM. Each three-year ARM bears interest at a rate that is fixed 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.

~~When~~Five-Year aARM. Each ~~borrower~~five-year ~~fails~~ARM ~~to make~~bears an interest at a ~~required~~rate ~~payment~~that is fixed for the first 60 monthly payments and adjusts on athe ~~Mortgage~~date ~~Loan,~~specified in the ~~loan~~related ismortgage ~~considered~~note, ~~delinquent~~ and periodically thereafter, ~~after~~to ~~expiration~~a ofrate equal to the then-current applicable ~~cure~~index ~~period,~~plus the ~~borrower~~margin isset ~~charged~~forth ~~a late~~in ~~fee~~such mortgage note, ~~which~~subject isto ~~retained~~a bymaximum ~~the~~periodic ~~Servicer~~interest ~~(as~~rate ~~defined~~increase ~~below).~~or ~~The~~decrease, ~~Bank~~a lifetime interest rate adjustment cap, and ~~the Company~~a ~~follow~~minimum ~~practices~~interest ~~customary~~rate as specified in the ~~banking~~related ~~industry~~mortgage innote. Certain ~~attempting~~of these loans contain an option, which may be exercised by the mortgagor, to ~~cure delinquencies~~convert ~~and~~the inARM ~~pursuing~~into ~~remedies~~a ~~upon~~fixed-rate ~~default.~~loan for the remainder of the mortgage term.

~~Geographic~~Seven-Year ~~Distribution~~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 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.

~~Many~~Ten-Year ~~(or~~Fixed-Rate ~~41.5%)~~Loan ofWith ~~the~~Automatic ~~Residential Mortgage~~Conversion ~~Loans~~to ~~are~~One-Year ~~secured~~ARM. The byinterest ~~residential~~rate ~~real~~with ~~estate~~respect ~~properties~~to ~~located~~each inten-year ~~the Washington,~~fixed-rate DCloan ~~metropolitan~~with ~~area.~~automatic Inconversion ~~addition,~~to ~~12.1%~~a ofOne-Year ~~the~~ARM ~~Residential~~(a ~~Mortgage Loans~~“10/1 ~~are~~ARM”) ~~secured~~is byfixed ~~residential~~for ~~real~~the ~~estate~~first ~~properties~~120 ~~located~~monthly inpayments ~~California. Consequently,~~and ~~these~~adjusts ~~loans~~on ~~may~~the bedate ~~subject~~specified ~~to a greater risk of default than other comparable loans~~ in the ~~event~~related ofmortgage ~~adverse economic~~note, ~~political,~~and orannually ~~business developments in Washington~~thereafter, ~~DC,~~to ~~Maryland,~~a ~~Virginia~~rate ~~and~~equal ~~California~~to ~~that~~the ~~may affect~~then-current ~~the~~applicable ~~ability~~index ofplus ~~residential~~the ~~property~~margin ~~owners~~set forth in ~~any~~such ofmortgage ~~these~~note, ~~areas~~subject to ~~make payments~~a ofmaximum ~~principal~~annual ~~and~~ interest onrate ~~the~~increase ~~underlying~~or ~~mortgages.~~decrease, ~~See “Management’s~~a ~~Discussion~~lifetime ~~and~~interest ~~Analysis~~rate ofadjustment ~~Financial~~cap, ~~Condition~~ and ~~Results~~ ofa ~~Operations~~minimum –interest ~~Significant~~rate ~~Concentration~~as ~~of Credit Risk.”~~

~~SERVICING~~-3-

~~The~~specified ~~Residential~~in ~~Mortgage Loans owned by~~ the ~~Company~~related ~~are~~mortgage ~~serviced~~note. There byis ~~the~~no ~~Bank~~ability ~~(the “Servicer”) pursuant~~ to ~~the~~continue ~~terms~~at ofa ~~the~~fixed ~~Servicing~~rate ~~Agreement.~~after ~~Effective July 1, 2003,~~ the ~~servicing~~ ~~agreement~~first ~~between~~Rate ~~the~~Adjustment ~~Bank~~Date ~~and~~under the ~~Company~~terms ~~was~~of ~~modified~~this totype ~~reduce the servicing fee paid to the Bank to 0.250%~~ of ~~the~~Residential ~~outstanding~~Mortgage ~~loan balance from 0~~Loan.~~375%.~~ ~~See “Certain Relationships and Related Transactions.”~~

~~The~~Investment ~~Servicing~~Policy 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.

General. The ~~Servicer~~Company iscurrently ~~entitled~~intends to ~~retain~~ ~~any~~maintain ~~ancillary~~at ~~fees,~~least ~~including,~~95% ~~but~~of ~~not~~its ~~limited~~portfolio ~~to,~~in ~~late~~Mortgage ~~payment~~Assets ~~charges, prepayment~~consisting ~~fees,~~of ~~penalties~~either Residential Mortgage Loans or investment grade mortgage securities representing interests in pools of Mortgage Loans (“Mortgage-Backed Securities”) and ~~assumption~~may ~~fees~~invest ~~collected~~up to 5% of its portfolio in ~~connection~~Mortgage ~~with~~Loans ~~the~~ secured by commercial real estate properties or multi-family properties (“Commercial Mortgage Loans”) ~~serviced~~or in other assets eligible to be held by ita REIT. The InCompany’s ~~addition,~~current policy prohibits the ~~Servicer~~acquisition isof ~~entitled~~any toMortgage ~~receive~~ Loan or any ~~benefit~~interest ~~derived~~in ~~from~~a Mortgage Loan (other than an interest ~~earned~~resulting onfrom ~~collected~~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) ~~payments~~renegotiated ~~between~~due to the ~~date~~financial deterioration of ~~collection~~the ~~and~~borrower; or (iii) has been, more than once during the ~~date~~preceding of12 ~~remittance~~months, tomore than 30 days past due in the ~~Company~~ ~~and~~payment ~~from~~of principal or interest. Loans ~~earned~~that onare ~~tax~~in “non-accrual status” are generally loans that are past due 90 days or more in principal or interest, and ~~insurance~~“classified” ~~impound~~loans ~~funds~~are ~~with~~generally ~~respect to~~troubled ~~Mortgage~~loans ~~Loans~~which ~~serviced~~are bydeemed ~~the~~substandard ~~Servicer.~~or doubtful with respect to collectibility.

The ~~Servicer~~Company ismay, ~~required~~from time to ~~pay~~ ~~all~~time, ~~expenses~~acquire ~~related~~both toconforming ~~the~~and ~~performance~~nonconforming ofResidential ~~its~~Mortgage ~~duties~~Loans. Conventional ~~under~~conforming Residential Mortgage Loans comply with the ~~Servicing Agreement.~~requirements ~~The~~for ~~Servicer~~inclusion isin ~~required~~a toloan ~~make~~guarantee ~~advances~~program ofsponsored ~~taxes~~by ~~and~~either ~~required insurance~~the ~~premiums~~Federal ~~that~~Home ~~are~~Loan ~~not~~Mortgage ~~collected~~Corporation ~~from~~(“FHLMC”) ~~borrowers~~or ~~with~~the ~~respect~~Federal toNational ~~any~~ Mortgage ~~Loan~~Association ~~serviced~~(“FNMA”). The bynonconforming ~~it,~~Residential ~~unless~~Mortgage itLoans ~~determines~~ that ~~such~~the ~~advances~~Company ~~are~~purchases ~~not recoverable~~will ~~from~~be ~~the~~nonconforming ~~mortgagor,~~generally ~~insurance~~because ~~proceeds~~they orhave ~~other~~original ~~sources~~principal ~~with~~balances ~~respect to~~which ~~such~~exceed ~~Mortgage~~the ~~Loan.~~limits for FHLMC or FNMA programs.

~~The~~Mortgage-Backed ~~Company~~Securities. While ~~can~~no ~~terminate the~~Mortgage-Backed ~~Servicing~~Securities ~~Agreement~~are ~~without~~included ~~cause~~in ~~provided~~the itcurrent ~~gives~~Mortgage atAsset ~~least~~portfolio, ~~sixty days’~~the ~~notice~~Company may, from time to time, acquire fixed-rate or variable-rate Mortgage-Backed Securities. A portion of any Mortgage-Backed Securities that the ~~Servicer~~Company ~~and~~may ~~pays~~purchase amay ~~termination~~have ~~fee~~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-5Backed 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.

~~DIVIDEND~~Commercial ~~POLICY~~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.

~~The~~Other ~~Company~~Real ~~expects~~Estate toAssets. The ~~pay an~~Company ~~aggregate~~may ~~amount~~invest ofup ~~dividends each year with respect~~ to ~~its outstanding shares of stock equal to approximately 100~~5% of the ~~Company’s~~total ~~“REIT taxable~~value ~~income”~~of ~~for~~its ~~such~~portfolio ~~year.~~in ~~The~~assets ~~Company~~(other ~~anticipates~~than ~~that~~Residential ~~none~~Mortgage ofLoans ~~the dividends on the Series A Preferred Shares~~ and noMortgage-Backed ~~material~~Securities) ~~portion~~eligible ofto ~~the dividends~~be onheld ~~the~~by ~~Common Stock will constitute non-taxable returns of capital~~REITs. ~~See~~ Such ~~“Management’s~~assets ~~Discussion~~could ~~and~~include ~~Analysis~~Commercial ofMortgage ~~Financial~~Loans, ~~Condition~~cash and ~~Results~~ ofcash ~~Operations – Results of Operations~~equivalents.”

~~Dividends~~Loan ~~are~~Payable ~~declared~~to 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.” Parent

~~Under~~On ~~Office~~December of20, ~~Thrift Supervision (“OTS”) regulations~~2004, the ~~Bank~~Company isborrowed ~~required to apply to the OTS for approval to make any capital distribution~~$75, ~~regardless of size~~000,000 iffrom the Bank. The ~~does~~Company ~~not~~used ~~qualify~~the ~~for~~proceeds ~~expedited~~to ~~treatment~~purchase ~~under~~Residential ~~OTS~~Mortgage ~~regulations.~~Loans ~~Dividends on~~from the ~~Series~~Bank. The Aloan ~~Preferred~~payable ~~Shares~~is ~~are~~secured ~~not~~by ~~treated~~a asportion ~~capital distributions for the purposes~~ of ~~these regulations, provided~~ the ~~Bank~~Residential ~~remains~~Mortgage ~~“well capitalized”~~Loan ~~after the payment~~portfolio. Interest Aton ~~December 31, 2004,~~ the ~~Bank~~loan ~~was~~payable ~~in compliance~~varies ~~with~~monthly ~~all~~based ofon ~~its~~one-month ~~regulatory~~LIBOR ~~capital~~plus ~~requirements~~a ~~under~~specified ~~the~~margin ~~Financial Institutions Reform, Recovery~~ and ~~Enforcement~~is ~~Act,~~payable ~~and its capital ratios exceeded the ratios established for “well capitalized” institutions under prompt corrective action regulations~~monthly.

~~THE BANK~~-4-

~~The~~Credit ~~Bank~~Risk isManagement 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. Policies

The Company isintends athat ~~subsidiary of~~each ~~the~~Mortgage ~~Bank~~Loan ~~and,~~it ~~therefore,~~acquires ~~federal~~will ~~regulatory~~represent ~~authorities~~a ~~have~~first ~~the~~lien ~~right~~position ~~to examine the Company~~ and ~~its~~will ~~activities. Payment of dividends on the Series A Preferred Shares could~~ be ~~subject~~originated toin ~~regulatory limitations if after~~ the ~~payment the~~ordinary ~~Bank~~course ~~were not “well capitalized” for purposes~~ of the ~~OTS~~originator’s ~~prompt corrective~~real ~~action~~estate ~~regulations.~~lending ~~“Well~~activities ~~capitalized”~~based ison ~~currently~~the ~~defined as~~underwriting ~~having~~standards agenerally ~~core~~applied ~~capital~~ (~~leverage) ratio of~~ at ~~least~~the ~~5.0%,~~time aof ~~tier~~origination) 1for ~~risk-based capital~~the ~~ratio~~originator’s ofown ~~at least 6~~account.~~0%,~~ The aCompany ~~total~~also ~~risk-based~~intends ~~capital~~that ~~ratio~~all ofMortgage atLoans ~~least 10.0%~~held ~~and~~by ~~not~~the ~~being~~Company ~~subject~~will tobe anserviced ~~OTS~~pursuant ~~agreement, order or directive~~ to ~~maintain a~~the ~~specific~~servicing ~~capital~~agreement ~~level.~~between Atthe ~~December~~Company ~~31,~~and ~~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~~“Servicing ~~was not subject to any such agreement, order or directive~~Agreement”). See “Servicing.”

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. Delinquencies

~~THE~~When ~~ADVISOR~~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.

OnGeographic 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 timeDistribution

-Residential Mortgage Loans secured by residential real estate properties located in the Washington, DC metropolitan area comprised 43.6-% of total loans at December 31, 2005. In addition, 12.7% of the Residential Mortgage Loans are secured by residential real estate properties located in California. Consequently, adverse economic, political, or business developments in Washington, DC, Maryland, Virginia and California may affect the Company’s loan portfolio to a greater degree than a more diversified portfolio. See “Risk Factors.”

~~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.~~ SERVICING

The ~~Advisor~~Residential ~~and~~Mortgage ~~its affiliates~~Loans ~~have~~owned ~~substantial~~by ~~experience~~the inCompany ~~the~~are ~~mortgage~~serviced ~~lending~~by ~~industry,~~the ~~both~~Bank in (the ~~origination~~“Servicer”) ~~and~~pursuant into the ~~servicing~~terms of ~~mortgage loans. At December 31, 2004,~~ the ~~Advisor~~Servicing ~~and its affiliates owned approximately $6~~Agreement.9 During ~~billion~~July ~~of residential mortgage loans~~2003, ~~including all of~~ the ~~Company’s~~servicing ~~Residential~~agreement ~~Mortgage~~between ~~Loans. In their residential mortgage loan business,~~ the ~~Advisor~~Bank and ~~its~~the ~~affiliates originate~~Company ~~and~~was ~~purchase~~modified ~~residential mortgage loans. A portion of such loans are sold~~ to ~~investors,~~reduce ~~primarily in~~ the ~~secondary market, generally on a~~ servicing ~~retained~~ ~~basis.~~fee ~~The~~paid ~~Advisor~~to ~~and~~the ~~its~~Bank ~~affiliates~~to ~~may purchase servicing rights on residential mortgage loans~~0.250% ~~Including~~of ~~loans serviced for its own portfolio,~~ the ~~Advisor~~ ~~and~~outstanding ~~its~~loan ~~affiliates serviced residential mortgage loans having an aggregate principal~~ balance offrom ~~approximately $19~~0.3375%. See ~~billion~~“Certain asRelationships ofand ~~December~~Related ~~31, 2004~~Transactions. ”

The ~~Advisory~~Servicing Agreement ~~had an~~requires ~~initial~~the ~~term~~Servicer ofto ~~three~~service ~~years~~the ~~and~~Company’s isMortgage ~~renewed~~Loans ~~automatically~~in ~~for~~a ~~additional one-year~~manner ~~periods~~generally ~~unless~~consistent ~~notice~~with ofaccepted ~~nonrenewal~~secondary ismarket ~~delivered~~practices, towith ~~the~~any ~~Advisor~~servicing guidelines promulgated by the Company. ~~The~~and, ~~Advisory~~in ~~Agreement~~the ~~may~~case beof ~~terminated~~Residential byMortgage ~~the~~Loans, ~~Company~~with atFNMA ~~any~~and ~~time upon~~FHLMC ~~sixty~~guidelines ~~days’~~and ~~prior~~procedures. The ~~written~~Servicing ~~notice.~~Agreement Asrequires ~~long~~the asServicer ~~any~~to ~~Series~~service Athese ~~Preferred Shares~~loans ~~remain~~solely ~~outstanding,~~with ~~any~~a ~~decision~~view bytoward the interests of the Company ~~either~~and without regard to ~~not~~the ~~renew~~interests of the ~~Advisory~~ ~~Agreement~~Bank or toany ~~terminate~~of the ~~Advisory~~Bank’s ~~Agreement~~affiliates. The ~~must~~Servicer becollects ~~approved~~and byremits ~~a majority~~principal ofand ~~the~~interest ~~Board~~payments, ofadministers ~~Directors~~mortgage escrow accounts, assubmits ~~well~~and aspursues byinsurance aclaims ~~majority~~and ofinitiates ~~the~~and ~~Independent Directors~~supervises ~~(as~~foreclosure ~~defined~~proceedings ~~below~~on ~~under~~the ~~“Market~~loans ~~for~~it ~~Registrant’s~~services. The ~~Common Equity~~Servicer also provides accounting and ~~Related~~reporting ~~Stockholder~~services ~~Matters”).~~required by the Company for such loans. The ~~Advisor~~Servicing isAgreement ~~entitled~~requires the Servicer to follow such ~~receive~~collection anprocedures ~~annual~~as ~~advisory~~are ~~fee~~customary ~~equal~~in tothe ~~$200~~industry,~~000~~ ~~payable~~including contacting delinquent borrowers and supervising foreclosures and property disposition in ~~equal~~the ~~quarterly installments~~event of unremedied defaults in accordance with ~~respect~~servicing toguidelines promulgated by the ~~advisory~~Company. The ~~and~~Servicer ~~management~~may, ~~services~~in its discretion, arrange with a defaulting borrower a schedule for the liquidation of delinquencies, provided to that, in the ~~Company.~~case ~~See~~of ~~“Certain~~Residential ~~Relationships~~Mortgage ~~and~~Loans, ~~Related~~no ~~Transactions.”~~primary mortgage guaranty insurance coverage is adversely affected.

~~CAPITAL~~The ~~AND~~Servicer ~~LEVERAGE~~is ~~POLICIES~~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.

ToThe ~~the~~Servicer ~~extent~~is ~~that~~required ~~the Board~~to ofpay ~~Directors~~all ~~determines~~expenses ~~that~~related ~~additional~~to ~~funding~~the isperformance ~~required,~~of ~~the~~its ~~Company may~~duties ~~raise~~under ~~such~~the ~~funds~~Servicing ~~through~~Agreement. The ~~additional~~Servicer ~~equity~~is ~~offerings,~~required ~~debt~~to ~~financing~~make ~~or retention~~advances of ~~cash~~taxes ~~flow~~and ~~(after~~required ~~consideration~~insurance ofpremiums ~~provisions~~that ofare ~~the~~not ~~Code~~collected ~~requiring the~~from ~~distribution~~borrowers bywith arespect ~~REIT~~to ofany aMortgage ~~certain~~Loan ~~percentage~~serviced ofby ~~taxable~~it, ~~income~~unless ~~and~~it ~~taking into~~determines ~~account taxes~~ that ~~would~~such beadvances ~~imposed~~are onnot ~~undistributed~~recoverable ~~taxable~~from ~~income~~the mortgagor, ~~including~~ ~~capital~~insurance ~~gains),~~proceeds or aother ~~combination~~sources ofwith ~~these~~respect ~~methods.~~to such Mortgage Loan.

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. -5-

The Company ~~may~~can ~~also~~terminate ~~issue additional series of Preferred Stock (as defined below under “Market for Registrant’s Common Equity and Related Stockholder Matters”). However,~~ the ~~Company~~Servicing ~~does~~Agreement ~~not~~without ~~currently~~cause ~~intend~~provided ~~to issue any additional series of Preferred Stock unless~~ it ~~simultaneously~~gives ~~receives~~at ~~additional~~least ~~capital contributions~~sixty ~~from the Bank equal to the sum of the aggregate offering price of such additional Preferred Stock and the Company~~days’s ~~expenses~~notice ~~in connection with the issuance of such additional shares of Preferred Stock. Prior~~ to ~~its issuance of additional shares of Preferred Stock,~~ the ~~Company~~Servicer ~~will take into consideration the Bank’s regulatory capital requirements~~ and ~~the~~pays ~~cost~~a ~~of raising~~termination ~~and maintaining that capital at the time~~fee.

~~EMPLOYEES~~DIVIDEND POLICY

The Company ~~has~~expects ~~seven officers.~~to ~~The~~pay ~~executive~~an ~~officers~~aggregate amount of ~~the~~dividends ~~Company~~each ~~are~~year ~~described~~with ~~further~~respect ~~below under~~to ~~“Directors~~its ~~and~~outstanding ~~Executive~~shares ~~Officers~~ of ~~the~~stock ~~Registrant~~equal –to ~~Directors and~~approximately ~~Officers.”~~100% ~~The~~of the Company’s ~~does~~“REIT ~~not~~taxable ~~anticipate~~income” ~~that~~for itsuch ~~will~~year. The ~~require~~Company ~~any additional~~anticipates ~~employees~~that ~~because~~none itof ~~has retained~~ the ~~Advisor~~dividends toon ~~administer~~ the ~~day-to-day~~ ~~activities~~Series ofA ~~the~~Preferred ~~Company~~Shares ~~pursuant~~and tono ~~the~~material ~~Advisory~~portion ~~Agreement. Each officer~~ of the ~~Company~~dividends ~~currently~~on isthe ~~also~~Common anStock ~~officer~~will ~~and/or~~constitute ~~director~~non-taxable ofreturns ~~the Bank and/or affiliates~~ of ~~the Bank~~capital. See ~~The~~“Management’s ~~Company~~Discussion ~~maintains corporate records~~ and ~~audited~~ ~~financial~~Analysis ~~statements~~of ~~that~~Financial ~~are~~Condition ~~separate~~and ~~from~~Results ~~those~~ of ~~the~~Operations ~~Bank~~– orResults ~~any~~ of ~~the~~ ~~Bank’s affiliates~~Operations. ”

~~-7-~~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.”

~~COMPETITION~~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, 2005, 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~~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. BANK

~~ENVIRONMENTAL~~The ~~MATTERS~~Bank is a federally chartered and federally insured stock savings bank which, at December 31, 2005, was conducting business from 251 full-service offices, including 54 grocery store banking centers, and 972 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 two commercial loan production offices located in Baltimore, Maryland and Northern Virginia and six mortgage loan production offices in the mid-Atlantic region. At December 31, 2005, the Bank had total assets of $14.5 billion, total deposits of $10.3 billion and total stockholders’ equity of $781 million. Based on total assets at December 31, 2005, the Bank is the largest full-service bank headquartered in the Washington, DC metropolitan area.

InThe ~~the event that the~~ Company is ~~forced to foreclose on~~ a ~~defaulted~~subsidiary ~~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~~Bank ~~property. Although the Company intends to exercise due diligence to discover potential environmental liabilities prior to the acquisition of any property through foreclosure~~and, ~~hazardous substances or waste~~therefore, ~~contaminants,~~ ~~pollutants or sources thereof (as defined by state and~~ federal ~~laws~~ ~~and~~regulatory ~~regulations)~~authorities ~~may~~have bethe ~~discovered~~right onto ~~properties~~examine ~~during~~ the Company~~’s ownership~~ orand ~~after~~its ~~a sale thereof to a third party~~activities. Payment Ifof ~~such~~dividends ~~hazardous substances are discovered~~ on ~~a property which~~ the ~~Company~~Series ~~has~~A ~~acquired~~Preferred ~~through~~Shares ~~foreclosure or~~could ~~otherwise, the Company may~~ be ~~required~~subject to ~~remove~~regulatory ~~those~~limitations ~~substances~~if ~~and decontaminate~~after the ~~property.~~payment ~~There can be no assurance that in such a case~~ the ~~Company~~ ~~would~~Bank were not ~~incur~~“well ~~full~~capitalized” ~~recourse liability~~ for ~~the~~purposes ~~entire costs~~ of ~~any removal and decontamination, that~~ the ~~cost~~OTS ofprompt ~~such~~corrective ~~removal~~action ~~and decontamination would not exceed the value of the property or that the Company could recoup any such costs from any third party~~regulations. See ~~The~~“Risk ~~Company may also be liable to tenants and other users of neighboring properties~~Factors. ~~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~~ADVISOR

~~The~~In ~~Company~~1996, ~~has~~the ~~elected~~Company ~~to be~~entered ~~taxed~~into asan aadvisory ~~REIT~~agreement ~~under~~(the ~~Sections~~“Advisory ~~856~~Agreement”) ~~through~~with ~~860~~the ofBank (the ~~Code.~~“Advisor”) Asto aadminister ~~REIT,~~ the ~~Company~~ ~~generally~~day-to-day ~~will~~operations ~~not~~of bethe ~~subject~~Company. The toAdvisor ~~federal~~is ~~income~~principally ~~tax~~responsible onfor: ~~its net income~~ (~~excluding capital gains~~i) ~~provided~~monitoring ~~that~~the itcredit ~~distributes~~quality ~~annually 100%~~ of ~~its~~the ~~REIT taxable~~Mortgage ~~income~~Assets toheld ~~its~~by ~~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~~ (aii) ~~distribute~~advising ~~each~~the ~~year~~Company ~~at least~~with ~~90%~~respect ofto ~~its~~the ~~“REIT~~acquisition, ~~taxable~~management ~~income”~~and ~~(not~~financing ~~including~~of ~~capital~~the ~~gains) for~~Company’s ~~that~~Mortgage ~~year to stockholders~~Assets, ~~(b) meet certain income tests, (c) meet certain asset tests~~ and (diii) ~~meet~~maintaining ~~certain~~the ~~ownership~~custody ~~tests.~~of ~~If in any taxable year~~ the ~~Company~~ ~~fails~~documents related to ~~qualify as a REIT,~~ the Company’s ~~would~~Mortgage ~~not~~Loans. The beAdvisor ~~allowed~~may afrom ~~deduction for~~time ~~distributions~~ to ~~stockholders~~time insubcontract ~~computing~~all ~~its~~or ~~taxable~~a ~~income~~portion ~~and~~of ~~would be subject to federal and state income tax (including any applicable alternative minimum tax) on~~ its ~~taxable~~obligations ~~income~~under ~~at regular corporate rates. In addition,~~ the ~~Company~~ ~~would~~Advisory beAgreement ~~disqualified~~to ~~from~~one ~~treatment~~or asmore aof ~~REIT~~its ~~for~~affiliates ~~the~~involved ~~four~~in ~~taxable years following~~ the ~~year~~business ~~during~~of ~~which~~managing ~~qualification~~Mortgage ~~was lost~~Assets.

The ~~American~~Advisor ~~Jobs~~and ~~Creation Act~~its ofaffiliates ~~2004~~have ~~introduced~~substantial ~~several~~experience ~~changes~~in tothe ~~REIT~~mortgage ~~qualification~~lending ~~standards.~~industry, ~~The changes~~both ~~excuse~~in ~~certain~~the ~~REIT~~origination ~~asset~~ and ~~organization~~in ~~test~~the ~~failures,~~servicing ~~but~~of ~~generally require~~mortgage ~~payment~~loans. At ofDecember a31, ~~penalty~~2005, ~~and~~the ~~demonstration~~Advisor ofand ~~reasonable~~its ~~cause~~affiliates ~~for~~owned ~~the failure~~approximately $7.7 ~~Compliance~~billion ~~with~~of ~~the~~residential ~~relief~~mortgage ~~provisions~~loans, ~~preserves~~including aall ~~company~~of the Company’s ~~REIT status.~~Residential ~~The~~Mortgage ~~changes~~Loans. In ~~are~~their ~~effective~~residential ~~beginning~~mortgage ~~with~~loan business, the ~~Company’s~~Advisor ~~2005~~and ~~tax year.~~its affiliates originate and purchase residential mortgage loans.

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. -6-

-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 and loans serviced for the Company, the Advisor and its affiliates serviced residential mortgage loans having an aggregate principal balance of approximately $20.8- billion as of December 31, 2005.

~~There~~The ~~are~~Advisory ~~two~~Agreement ~~income~~had ~~tests that~~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 ~~satisfied~~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 ~~each~~Registrant’s ~~taxable~~Common ~~year~~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.”

~~o At~~CAPITAL ~~least~~AND ~~75%~~LEVERAGE 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; POLICIES

~~o At~~To ~~least~~the ~~95%~~extent that the Board of Directors determines that additional funding is required, the Company’s ~~gross~~may ~~income~~raise ~~(excluding~~such ~~income~~funds ~~from prohibited~~through ~~transactions)~~additional ~~must~~equity beofferings, ~~from~~debt ~~income~~financing ~~included~~or ~~under~~retention ~~the~~of ~~75%~~cash ~~income~~flow ~~test, other~~(after ~~interest,~~consideration ~~dividends,~~of ~~and~~provisions ~~gains~~of ~~from~~the Code requiring the ~~sale~~distribution orby ~~other~~a ~~disposition~~REIT of a certain ~~stocks~~percentage of taxable income and ~~securities.~~taking into account taxes that would be imposed on undistributed taxable income, including capital gains), or a combination of these methods.

~~There~~At ~~are~~December ~~three~~31, ~~relevant asset~~2005, ~~tests~~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 ~~must~~the beCompany ~~satisfied~~might atincur. The Company may not, without the ~~close~~approval of ~~each~~a ~~quarter~~majority of the Independent Directors, incur debt for borrowed money in excess of 25% of the Company’s ~~taxable~~total ~~year~~stockholders’ equity, including intercompany advances made by the Bank to the Company.

~~o At~~The ~~least~~Company ~~75%~~may also issue additional series of Preferred Stock (as defined below under “Market for Registrant’s Common Equity and Related Stockholder Matters”). However, the ~~value~~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 ~~total~~ ~~assets~~expenses ~~must~~in beconnection ~~represented~~with bythe ~~real~~issuance ~~estate~~of ~~assets,~~such ~~cash,~~additional ~~cash~~shares ~~items~~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 ~~government~~ ~~securities;~~the cost of raising and maintaining that capital at the time.

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.EMPLOYEES

The ~~stock~~Company ~~ownership test~~ has ~~two~~seven ~~components~~officers. The Atexecutive ~~least~~officers ~~100~~of ~~persons~~the ~~must~~Company ~~hold~~are ~~shares~~described offurther ~~capital~~below ~~stock~~under ~~for at~~“Directors ~~least~~and ~~335~~Executive ~~days~~Officers of the ~~year~~Registrant – Directors and noOfficers.” The ~~more~~Company ~~than~~does ~~50%~~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’s ~~capital stock~~pursuant ~~may~~to bethe ~~owned~~Advisory ~~directly~~Agreement. Each officer of the Company currently is also an officer and/or ~~indirectly~~director byof ~~five~~the Bank and/or ~~fewer~~affiliates ~~individuals~~of ~~during~~ the ~~final~~Bank. The ~~six~~Company ~~months~~maintains corporate records and audited financial statements that are separate from those of the ~~calendar~~Bank ~~year.~~or any of the Bank’s affiliates.

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

~~ITEM~~The 2Company does not anticipate that it will engage in the business of originating Residential Mortgage Loans. It ~~PROPERTIES~~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.

~~ITEM 3. LEGAL PROCEEDINGS~~-7-

~~The~~ENVIRONMENTAL 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. MATTERS

~~ITEM~~In 4.the ~~SUBMISSION~~event OFthat ~~MATTERS~~the TOCompany Ais ~~VOTE~~forced OFto ~~SECURITY~~foreclose ~~HOLDERS~~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. See “Risk Factors.”

NoTAX ~~matter~~STATUS ~~was~~OF ~~submitted~~THE ~~to a vote of security holders of the Company during the fourth quarter of the year ended December 31, 2004.~~ COMPANY

~~PART~~The IICompany 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.

~~ITEM~~The 5American Jobs Creation Act of 2004 introduced several changes to REIT qualification standards. The ~~MARKET~~changes ~~FOR~~excuse ~~REGISTRANT’S~~certain ~~COMMON~~REIT ~~EQUITY~~asset ~~AND~~and ~~RELATED~~organization ~~STOCKHOLDER~~test ~~MATTERS~~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 took effect beginning with the Company's 2005 tax year.

~~DESCRIPTION~~On OFMarch ~~COMMON~~14, ~~STOCK~~2006, the Company’s Board of Directors declared a cash dividend of $2,301.04 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 2005. Including this dividend, the Company will have distributed 100% of its REIT taxable income to its stockholders in 2005. During the year ended December 31, 2004, the company distributed over 100% of its REIT taxable income to its stockholders.

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

In• ~~connection~~At ~~with~~least ~~the formation~~75% of the Company’s ongross ~~November~~income 5,(excluding ~~1996,~~income ~~the~~from ~~Company~~certain ~~issued~~prohibited ~~100~~transactions) ~~shares~~must ~~of Common~~be ~~Stock~~from tointerest ~~the~~on ~~Bank~~obligations ~~for~~secured ~~$1,000.~~by ~~These~~mortgages ~~shares~~on ofreal ~~Common~~property ~~Stock~~or ~~were~~on ~~issued~~interests in ~~reliance~~ ~~upon~~real anproperty, ~~exemption~~gains from ~~registration~~the ~~under~~sale ~~Section~~or ~~4(2)~~other ofdisposition ~~the Securities Act~~ of ~~1933,~~real asproperty ~~amended.~~(including ~~Thus,~~interests ~~there~~in ismortgages noon ~~established~~real ~~public trading market for the Common Stock. As of March 15~~property), ~~2005, there were 100 issued~~ and ~~outstanding~~ ~~shares~~certain ofother ~~Common Stock held by one stockholder, the Bank.~~ sources;

~~-9-~~• 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.

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

~~The~~• ~~following~~At ~~table reflects~~least ~~the~~75% ~~distributions~~of ~~declared by~~ the ~~Company~~value ~~on the Common Stock for the two most recent years. For a discussion~~ of the Company’s ~~distribution policy~~total ~~with~~assets ~~respect~~must tobe ~~the~~represented ~~Common~~by ~~Stock~~real estate assets, ~~see~~cash, ~~“Business~~cash –items, ~~Dividend Policy.”~~and government securities;

~~Period Distributions Payment~~• ~~Date -------------------------------------- ------------------- --------------------- January~~Not 1,more ~~2003~~than to25% ~~March~~of ~~31,~~the ~~2003 $ - N/A April~~Company’s 1,total ~~2003~~assets tomay ~~June~~be ~~30,~~represented ~~2003 - N/A July~~by 1,securities ~~2003~~other tothan ~~September~~those ~~30,~~in ~~2003 - N/A October~~the 1,75% ~~2003~~asset toclass; 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 and

~~Holders~~• ofThe ~~Common~~value ~~Stock~~of ~~are entitled~~any toone ~~receive~~issuer’s ~~dividends~~securities ~~when,~~included asin ~~and~~the if25% ~~declared~~asset byclass ~~the~~may ~~Board~~not ofexceed ~~Directors out~~5% of ~~funds~~the ~~legally~~value ~~available.~~of If the Company’s ~~fails~~total toassets ~~declare~~ and ~~pay full dividends on~~ the ~~Series A Preferred Shares in any dividend period, the~~ Company may not ~~make~~own ~~any~~more ~~dividend~~than or10% ~~other~~of ~~distributions with respect to~~ the ~~Common Stock~~total ~~until~~voting ~~such~~power ~~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~~value ~~and~~of ~~a sum sufficient for~~ the ~~payment~~outstanding ~~thereof~~securities ~~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~~any ~~“REIT~~one ~~taxable income” (not including capital gains) to stockholders~~issuer. ~~See “Business – Tax Status of the Company.”~~

~~Voting~~The ~~Rights~~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.

~~Subject~~During ~~to the rights~~2005, ~~if any, of~~ the ~~holders~~Company ofmet ~~any class or series of Preferred Stock (as defined below), all voting rights are vested in~~ the ~~Common~~requirements ~~Stock. The holders~~ of ~~Common Stock~~each ~~are entitled to one vote per share~~test.

~~Rights Upon Liquidation~~-8-

InITEM 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 liabilities1A. RISK FACTORS

~~DESCRIPTION~~Our OFability ~~SERIES~~to Apay ~~PREFERRED~~dividends ~~SHARES~~could be affected by regulatory restrictions on our operations.

~~Market~~Because ~~Information~~we are a subsidiary of the Bank, federal regulators have the right to examine us and ~~Dividends~~our activities. Under certain circumstances, including any determination that the Bank’s relationship to us results in an unsafe and unsound banking practice, those regulators have the authority to restrict our ability to transfer assets, to make distributions to our stockholders (including dividends to the holders of Series A Preferred Shares, as described below), or to redeem the Series A Preferred Shares, or even to require the Bank to sever its relationship with or divest its ownership of us. Those actions also could potentially result in our failure to qualify as a REIT.

~~The~~Payment of dividends on the Series A Preferred Shares ~~are~~could ~~listed~~also onbe ~~the~~subject ~~New~~to ~~York~~regulatory ~~Stock~~limitations ~~Exchange~~if ~~under~~after the ~~trading~~payment ~~symbol~~ the Bank were not “~~CCP-PrA.~~well capitalized” Asfor purposes of ~~February~~the ~~10,~~OTS ~~2005,~~prompt ~~there~~corrective ~~were~~action 3regulations,~~000,000~~ ~~issued~~which ~~and outstanding~~is ~~Series~~currently Adefined ~~Preferred~~as ~~Shares~~having ~~held~~a bytotal ~~approximately~~risk-based ~~164~~capital ~~holders~~ratio of ~~record~~ less than 10.0%, ~~The~~a ~~following~~Tier ~~table~~1 ~~reflects~~risk-based ~~the~~capital ~~respective~~ratio ~~high~~of less than 6.0% and ~~low~~a ~~sales~~core ~~prices for~~capital ~~the~~(or ~~Series~~leverage) Aratio ~~Preferred~~of ~~Shares~~less ~~for~~than ~~each~~5.0%, ~~quarter~~and ~~during~~not ~~the~~being ~~two~~subject ~~most~~to ~~recent years.~~a ~~The~~regulatory ~~table~~action ~~also~~requiring ~~indicates~~maintenance ~~the~~of ~~distributions~~a ~~declared~~specific bycapital level. At December 31, 2005, the ~~Company~~Bank’s ~~during these~~total ~~periods~~risk-based capital ratio was 11.10%, ~~For~~its aTier ~~discussion~~1 ofrisk-based capital ratio was 9.0% and its core capital (or leverage) ratio was 6.0%, and the ~~Company~~Bank was not subject to any such regulatory action. The Bank’s ~~distribution~~ability ~~policy~~to ~~with respect~~maintain towell-capitalized ~~the~~status ~~Series~~depends Aon ~~Preferred~~a ~~Shares~~number of factors, ~~see~~many ~~“Business~~of –which, ~~Dividend~~such as general economic conditions, are ~~Policy.”~~beyond its control.

~~-10-~~If the Automatic Exchange (as defined in Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”) occurs, the Bank would likely be prohibited from paying dividends on the Bank Preferred Shares. In all circumstances following the Automatic Exchange, the Bank’s ability to pay dividends would be subject to various restrictions under OTS regulations and certain contractual provisions.

~~Price ------------------ Period High Low Distributions Payment~~Furthermore, ~~Date -------------------------------------- -------- -------- --------------- ------------------ January~~in 1,the ~~2003~~event tothe ~~March~~Bank ~~31,~~is ~~2003 $~~placed ~~57.80 $~~into ~~55.60 $ 3,890,625 April~~conservatorship ~~15,~~or ~~2003 April~~receivership 1,(whether ~~2003~~before toor ~~June~~after ~~30,~~the ~~2003 56.55 55.10 3,890,625 July~~Automatic 15Exchange), ~~2003 July~~the 1,Bank ~~2003~~would be unable to ~~September~~pay ~~30,~~dividends ~~2003 57~~on the Bank Preferred Shares.~~50 55.25 3,890,625 October~~ 15In addition, ~~2003 October~~in 1,the ~~2003~~event toof ~~December~~a ~~31,~~liquidation ~~2003 60.30 56.80 3,890,625 January~~of 15the Bank, ~~2004 January~~the 1,claims ~~2004~~of tothe ~~March~~Bank’s ~~31,~~depositors ~~2004 61.75 58.15 3~~and of its secured,~~890,625 April~~ 15senior, ~~2004 April~~general 1,and ~~2004~~subordinated creditors would be entitled to ~~June~~a ~~30,~~priority ~~2004 60.75 56.10 3,890,625 July~~of ~~15,~~payment ~~2004 July~~over 1,the ~~2004~~dividend toand ~~September~~other ~~30,~~claims ~~2004 60.00 57.00 3,890,625 October~~of ~~15,~~holders ~~2004 October~~of 1,equity ~~2004~~interests tosuch ~~December~~as ~~31,~~the ~~2004 59.60 57.30 3,890,625 January~~Bank ~~18,~~Preferred ~~2005~~ Shares issued pursuant to the Automatic Exchange.

~~Holders~~Because ofour ~~Series~~dividends ~~A Preferred Shares~~ are ~~entitled~~not ~~to receive~~cumulative, ~~if,~~we ~~when~~cannot ~~and~~assure asyou ~~declared~~that byyou ~~the~~will ~~Board of~~receive ~~Directors~~dividends ofeach ~~the~~quarter ~~Company~~or ~~out of assets of the Company legally available, cash dividends~~ at ~~the~~historical ~~rate of 10 3/8% per annum of the liquidation preference (equivalent to $5~~rates.~~1875 per share per annum).~~

~~The~~Dividends ~~right~~on ofthe ~~holders of~~ Series A Preferred Shares toare ~~receive~~not ~~dividends is noncumulative~~cumulative. ~~Accordingly~~ Consequently, if ~~the~~ our Board of Directors ~~fails~~does tonot declare a dividend on the Series A Preferred Shares for aany quarterly ~~dividend~~ period, ~~then~~the holders of the Series A Preferred Shares ~~will~~would ~~have~~not nobe ~~right~~entitled to ~~receive~~recover athat dividend ~~for~~whether ~~that~~or ~~period~~not funds are or subsequently become available. The Board of Directors may determine, ~~and~~in ~~the~~its ~~Company will~~business ~~have~~judgment, nothat ~~obligation~~it would be in our best interests to pay aless ~~dividend~~than ~~for~~the ~~that~~full ~~period,~~amount ~~whether~~of orthe ~~not~~ stated dividends ~~are~~on ~~declared~~the ~~and~~Series ~~paid~~A Preferred Shares or no dividends for any ~~future~~quarter ~~period~~notwithstanding ~~with~~that ~~respect~~funds toare ~~either~~available. Factors that would be considered by the ~~Series~~ ABoard ~~Preferred~~of ~~Shares~~Directors in making this determination are our financial condition and capital needs, the impact of legislation and regulations as then in effect or as may be proposed, economic conditions, and such other factors as the ~~Common~~Board ~~Stock~~may deem relevant. Notwithstanding the foregoing, to remain qualified as a REIT, we must distribute annually at least 90% of our “REIT taxable income” (not including capital gains) to stockholders.

~~General~~The concentration of our mortgage loans in certain geographic areas makes our income more susceptible to the effects of weaker economic conditions in those areas.

~~The~~Certain ~~Company~~geographic ~~may~~regions ~~issue, from time to time, one or more series~~ of ~~preferred~~the ~~stock~~United ~~with~~States ~~rights,~~may ~~preferences~~from ~~and limitations~~time ~~determined~~to bytime ~~the~~experience ~~Company’s~~natural ~~Board~~disasters ofor ~~Directors.~~weaker ~~The~~regional ~~holders~~economic ~~of the~~conditions ~~Series~~and Ahousing ~~Preferred~~markets, ~~Shares~~and, ~~have~~consequently, nomay ~~preemptive~~experience ~~rights~~higher ~~with~~rates ~~respect to any shares~~ of ~~the~~loss ~~capital~~and ~~stock~~delinquency ofon ~~the~~Mortgage ~~Company~~Loans orgenerally. Any ~~any~~concentration ~~other securities~~ of the ~~Company~~ ~~convertible~~Mortgage ~~into~~Loans orin ~~carrying rights or options to purchase any~~ such ~~shares.~~ ~~The~~a ~~Series~~region Amay ~~Preferred~~present ~~Shares~~risks ~~are~~in ~~not~~addition ~~subject~~ to ~~any~~those ~~sinking~~present ~~fund or other obligation of the Company~~ for ~~their~~Mortgage ~~repurchase~~Loans ~~or retirement~~generally. Residential ~~The~~Mortgage ~~Series~~Loans ~~A Preferred~~secured ~~Shares~~by ~~will~~properties belocated ~~exchanged~~in ~~automatically~~the onWashington, aDC ~~one-for-one~~metropolitan ~~basis~~area ~~for~~equaled ~~Bank Preferred~~43.6% ~~Shares (as defined below) upon the occurrence~~ of ~~the~~total ~~Exchange~~loans ~~Event (as~~at ~~defined~~December ~~below)~~31, 2005. In addition,

~~Automatic Exchange~~-9-

~~Each~~12.7% ~~Series A Preferred Share will be exchanged automatically for one newly issued Series B preferred share~~ of the ~~Bank~~Residential ~~(“Bank~~Mortgage ~~Preferred~~Loans ~~Share”)~~are ifsecured ~~the~~by ~~appropriate~~properties ~~federal regulatory~~located ~~agency of the Bank directs~~ in ~~writing~~California. Consequently, ~~(the~~these ~~“Directive”)~~Mortgage ~~an exchange~~Assets ofmay ~~the~~be ~~Series~~subject Ato ~~Preferred~~a ~~Shares~~greater ~~for~~risk ~~Bank~~of ~~Preferred~~default ~~Shares~~than ~~because~~other ~~(i) the~~comparable ~~Bank~~Mortgage ~~becomes~~Assets ~~“undercapitalized”~~in ~~under prompt corrective action regulations established pursuant to~~ the ~~Federal~~event ~~Deposit Insurance Corporation Improvement Act~~ of ~~1991,~~adverse ~~as amended~~economic, ~~(ii)~~political ~~the~~or ~~Bank~~business isdevelopments ~~placed into conservatorship~~ or ~~receivership~~natural orhazards ~~(iii)~~that ~~the~~may ~~appropriate~~affect ~~federal~~those ~~regulatory agency,~~regions ~~in its sole discretion~~ and ~~even if~~ the ~~Bank~~ability isof ~~not “undercapitalized,”~~property ~~anticipates~~owners ~~the Bank becoming “undercapitalized”~~ in ~~the~~those ~~near~~regions ~~term~~to ~~(the~~make ~~“Exchange~~payments ~~Event”). Upon the Exchange Event, each holder~~ of ~~Series~~principal ~~A Preferred Shares will be unconditionally obligated to surrender to the Bank any~~ and ~~all~~interest ~~certificates representing~~on ~~any and all Series A Preferred Shares owned by such holder, and~~ the ~~Bank~~ ~~will~~underlying 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”)mortgages. ~~Absent the occurrence of the Exchange Event, no Bank Preferred Shares will be issued.~~

~~Holders~~Because ofour ~~Series~~income ~~A Preferred~~consists ~~Shares~~primarily ~~cannot exchange their Series A Preferred Shares for Bank Preferred Shares voluntarily. In addition, absent the occurrence~~ of ~~the Automatic~~interest ~~Exchange,~~payments ~~holders~~on ofour ~~Series~~Mortgage ~~A Preferred Shares will have no dividend~~Assets, ~~voting,~~ ~~liquidation~~a ~~preference~~decline orin ~~other~~interest ~~rights~~rates ~~with~~could ~~respect~~reduce toour ~~any~~income ~~security~~and ~~of the~~affect ~~Bank;~~our ~~such~~ability ~~rights as are conferred by the Series A Preferred Shares exist solely as~~ to ~~the~~pay ~~Company~~dividends.

~~-11-~~Our income consists primarily of interest payments on the Mortgage Assets we hold. A majority (or 80.1%) of our Mortgage Assets bear interest at adjustable rates. If there is a decline in interest rates (as measured by the indices upon which the interest rates of the Mortgage Assets are based), then we may experience a decrease in income available to be distributed to our stockholders. In such an interest rate environment, we may experience an increase in prepayments on our Mortgage Assets and may find it difficult to purchase additional Mortgage Assets bearing rates sufficient to support payment of dividends on our Series A Preferred Shares. In addition, certain Mortgage Asset products which we may purchase may permit the borrower to convert an adjustable rate mortgage to a fixed rate mortgage. Borrowers may be more likely to exercise this right in a low interest rate environment in order to “lock in” a low fixed interest rate. Because the rate at which dividends, if, when and as declared, are payable on the Series A Preferred Shares is fixed, there can be no assurance that a significant decline in interest rates would not adversely affect our ability to pay dividends on the Series A Preferred Shares.

~~Voting~~We ~~Rights~~have not obtained credit enhancements or special hazard insurance for our Mortgage Loans, and thus are subject to risks that are not covered by standard hazard insurance.

~~Except~~The asServicer ~~expressly~~ is required byto ~~applicable~~ensure ~~law~~that standard and, orwhere ~~except~~required, flood insurance is maintained on the Mortgage Loans. We have not obtained credit enhancements such as ~~indicated~~mortgagor ~~below~~bankruptcy insurance or special hazard insurance for our Mortgage Loans. Accordingly, during the ~~holders~~time ofwe ~~the Series~~hold AMortgage ~~Preferred~~Loans ~~Shares~~for ~~will~~which these credit enhancements are not obtained, we will be ~~entitled~~subject to ~~vote.~~risks of borrower defaults and bankruptcies and special hazard losses that are not covered by standard hazard insurance (such as those occurring from earthquakes). In addition, in the event ~~the~~of ~~holders~~ a default on any of ~~Series~~our AMortgage ~~Preferred~~Loans ~~Shares~~resulting ~~are~~from ~~entitled~~declining toproperty ~~vote~~values asor ~~indicated~~worsening ~~below~~economic conditions, ~~each Series~~among Aother ~~Preferred~~factors, ~~Share~~we ~~will~~would bebear ~~entitled~~the risk of loss of principal to ~~one~~the ~~vote~~extent onof ~~matters~~any ondeficiency ~~which holders~~between (i) the value of the ~~Series~~related Amortgaged ~~Preferred~~property, ~~Shares~~plus ~~are~~any ~~entitled~~payments tofrom ~~vote.~~an insurer (or guarantor in the case of Commercial Mortgage Loans) and (ii) the amount owing on the Mortgage Loan.

IfOur atoperations ~~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~~financial ~~aside~~condition ~~for~~could 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~~adversely byaffected ~~two (if not already increased~~ by ~~two due to~~ a ~~default~~ innumber ~~preference dividends), and the holders~~ of ~~the~~factors ~~Series~~affecting ~~A Preferred Shares, voting together with~~ the ~~holders~~value of ~~all~~real ~~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~~estate. 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 results of the our operations are affected by various factors, many of which are beyond our control, such as:

~~The~~• ~~Series~~local Aand ~~Preferred Shares~~other ~~are~~economic ~~not~~conditions ~~redeemable~~affecting ~~prior~~real toestate ~~January 15~~values, 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~~the ~~during~~ability ~~the 12-month~~of ~~period Redemption beginning~~borrowers ~~January~~to 15, Price -------------------------- ---------------- 2007 $ 52.594 2008 52.075 2009 51.556 2010 51.038 2011 50.519 2012make ~~and~~mortgage ~~thereafter 50.000~~ payments; and

~~Any~~• ~~such~~interest ~~redemption~~rate ~~must comply~~levels ~~with~~and the ~~prompt~~availability ~~corrective action and capital distribution regulations~~ of ~~the~~ ~~OTS,~~credit ~~which~~to ~~may~~refinance ~~prohibit~~such aloans ~~redemption~~at ~~and~~or ~~will require the OTS’~~ prior ~~written~~ ~~approval.~~to maturity.

The ~~Company~~results ~~will~~of ~~also~~our ~~have the~~operations ~~right~~depend aton, ~~any~~among ~~time~~other things, ~~upon~~ the ~~occurrence~~level of ~~certain~~interest ~~tax~~income ~~events~~generated ~~and~~by ~~with~~our Mortgage Assets, the ~~prior~~ ~~written~~market ~~approval~~value of ~~the~~such ~~OTS,~~Mortgage toAssets ~~redeem~~and the ~~Series~~supply Aof ~~Preferred~~and ~~Shares~~demand for such Mortgage Assets. Further, ~~in whole~~there ~~(but~~can ~~not~~be no assurance that the values of the Mortgage Assets included in ~~part)~~our atportfolio, aor ~~redemption~~the ~~price~~values of ~~$50.00~~properties ~~per~~securing ~~share~~such Mortgage Assets, ~~plus~~have ~~the quarterly~~remained ~~accrued~~or ~~and~~will ~~unpaid~~remain ~~dividend~~at tothe levels existing on the ~~date~~dates of ~~redemption,~~origination ifof ~~any, thereon.~~such Mortgage Assets.

~~Rights~~We ~~Upon~~may ~~Liquidation~~experience delays in liquidating defaulted Mortgage Loans which may affect our financial condition.

InEven assuming that the ~~event~~mortgaged ofproperties ~~any voluntary~~underlying orour ~~involuntary~~Mortgage ~~liquidation,~~Loans ~~dissolution~~provide oradequate ~~winding~~security upfor ofthose ~~the~~Mortgage ~~Company~~Loans, ~~the~~ ~~holders~~substantial ofdelays ~~the~~could ~~Series~~be Aencountered ~~Preferred~~in ~~Shares~~connection atwith the ~~time~~liquidation ~~outstanding will be entitled to receive out~~ of ~~assets~~defaulted ofMortgage ~~the Company available for distribution to stockholders~~Loans, ~~before~~with ~~any~~corresponding ~~distribution~~delays ofin ~~assets~~the isreceipt ~~made to holders~~ of ~~Common Stock~~related orproceeds ~~any~~by ~~other~~us. An ~~class~~action ~~of stock ranking junior~~ to ~~the~~foreclose ~~Series~~on Aa ~~Preferred Shares~~mortgaged ~~upon~~property ~~liquidation,~~securing ~~liquidating~~a ~~distributions~~Mortgage inLoan ~~the~~is ~~amount~~regulated ofby ~~$50.00~~state ~~per share,~~statutes ~~plus~~and ~~the~~rules ~~quarterly accrued~~ and ~~unpaid~~is ~~dividend~~subject ~~thereon,~~to ifmany ~~any,~~of to the ~~date~~ ofdelays ~~liquidation.~~and

~~Independent Director Approval~~-10-

Asexpenses ~~long~~of asother ~~any~~lawsuits ~~Series~~if Adefenses ~~Preferred Shares~~or counterclaims are ~~outstanding~~asserted, ~~certain~~sometimes ~~actions~~requiring byseveral ~~the~~years ~~Company~~to ~~must~~complete. Furthermore, bein ~~approved~~some bystates ~~a majority~~(not ofincluding ~~the~~Washington, ~~independent~~DC, ~~directors~~Maryland ~~who~~or ~~are~~Virginia) an action to obtain a deficiency judgment is not ~~officers~~permitted orfollowing ~~employees~~a nonjudicial sale of a mortgaged property. In the ~~Company~~ ~~and~~event ~~are~~of ~~not~~a ~~directors~~default by a mortgagor, ~~officers~~these restrictions, oramong ~~employees~~other ofthings, may impede our ability to foreclose on or sell the ~~Bank~~mortgaged property or ~~any~~to ofobtain ~~its affiliates~~proceeds (sufficient to repay all amounts due on the ~~“Independent~~related ~~Directors”)~~Mortgage Loan. In ~~Any~~addition, ~~members~~the Servicers of ~~the~~our ~~Board~~Mortgage ~~of Directors~~Loans ofwill ~~the~~be ~~Company~~entitled ~~elected~~to bydeduct ~~holders~~from ofcollections ~~Preferred~~received ~~Stock~~all expenses reasonably incurred in attempting to recover amounts due and not yet repaid on liquidated Mortgage Loans, including ~~the Series~~legal Afees ~~Preferred~~and ~~Shares~~costs of legal action, ~~will~~real beestate taxes and maintenance and preservation expenses, thereby reducing amounts available to us.

~~-12-~~Our business is highly regulated and we are subject to complex legal restrictions, the violation of which may adversely affect our financial condition and results of operations.

~~deemed~~Applicable state laws generally regulate interest rates and other charges and require certain disclosures to beborrowers. In ~~Independent~~addition, ~~Directors~~most ~~for purposes~~states have other laws, public policy and general principles of ~~approving~~equity ~~actions~~relating ~~requiring~~to the ~~approval~~protection of aconsumers, ~~majority~~unfair and deceptive practices and practices which may apply to the servicing and collection of the ~~Independent~~ ~~Directors~~Mortgage Loans. Depending on the provisions of the applicable law and the specific facts and circumstances involved, violations of these laws, policies and principles may limit our ability to collect all or part of the principal of or interest on the Mortgage Loans, may entitle the borrower to a refund of amounts previously paid and, in addition, could subject us to damages and administrative sanctions.

~~ITEM~~Environmental 6.liabilities ~~SELECTED~~could ~~FINANCIAL~~reduce ~~DATA~~the value of the properties securing a defaulted Mortgage Loan, which could require us to make significant expenditures or make it difficult or impossible to sell the properties.

~~The~~In ~~selected~~the ~~financial~~event ~~data of~~that ~~the~~we ~~Company~~are ~~herein~~forced ~~has~~to ~~been~~foreclose ~~derived~~on ~~from~~a defaulted Mortgage Loan to recover our investment in such Mortgage Loan, we may be subject to environmental liabilities in connection with the ~~financial~~underlying ~~statements~~real property which could exceed the value of the ~~Company~~ real property. Although ~~The~~we ~~data~~intend ~~should~~to exercise due diligence to discover potential environmental liabilities prior to the acquisition of any property through foreclosure, hazardous substances or wastes, contaminants, pollutants or sources thereof (as defined by state and federal laws and regulations) may be ~~read~~discovered on properties during our ownership or after a sale thereof to a third party. If such hazardous substances are discovered on a property which we have acquired through foreclosure or otherwise, we may be required to remove those substances and clean up the property. There can be no assurance that in ~~conjunction~~such ~~with~~a ~~“Management’s~~case we would not incur full recourse ~~Discussion~~liability ~~and~~for ~~Analysis~~the entire costs of ~~Financial~~any ~~Condition~~removal and ~~Results~~clean-up, that the cost of ~~Operations”~~ such removal and clean-up would not exceed the ~~financial~~value ~~statements~~of ~~included~~the ~~elsewhere~~property ~~herein~~or that we could recoup any of such costs from any third party. We may also be liable to tenants and other users of neighboring properties. In addition, we may find it difficult or impossible to sell the property prior to or following any such clean-up.

AsFailure 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~~ qualify ~~Earnings~~as ~~per~~a ~~common~~REIT ~~share $ 7,298.58 $ 3,696.23 $ 9,347.21 $ 41,339.18 $ 52,487.45 DIVIDENDS~~would ~~DECLARED:~~ cause ~~Dividends~~us 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 $ - $ - $ - $ -~~ be ~~Total~~taxed ~~stockholders'~~as ~~equity $~~a ~~300~~corporation,~~006,867 $~~ ~~300,019,623 $~~which ~~299,834,721 $~~would ~~299,658,918 $~~substantially ~~299,998,745~~ reduce ~~Number~~funds ofavailable ~~preferred~~for ~~shares Outstanding 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 Number~~payment of ~~common shares Outstanding 100 100 100 100 100 Average yield on residential mortgage loans 5~~distributions.~~71% 5.90% 6.14% 7.16% 7.42%~~

~~ITEM~~We 7operate so as to qualify as a REIT under the Code. Although ~~MANAGEMENT’S~~we ~~DISCUSSION~~believe ~~AND~~that ~~ANALYSIS~~we OFare ~~FINANCIAL~~owned ~~CONDITION~~and ~~AND~~organized ~~RESULTS~~and OFoperate ~~OPERATIONS~~in such a manner, no assurance can be given that we will be able to continue to operate in such a manner so as to remain qualified as a REIT. Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations. The determination of various factual matters and circumstances, not entirely within our control, may affect our ability to remain qualified as a REIT. Although we are not aware of any proposal in Congress to amend the tax laws in a manner that would materially and adversely affect our ability to operate as a REIT, no assurance can be given that new legislation or new regulations, administrative interpretations or court decisions will not significantly change the tax laws in the future with respect to qualification as a REIT or the federal income tax consequences of such qualification.

~~FINANCIAL~~If ~~CONDITION~~in any taxable year we fail to qualify as a REIT, we would not be allowed a deduction for distributions to stockholders in computing our taxable income and would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. As a result, the amount available for distribution to our stockholders, including the holders of the Series A Preferred Shares, would be reduced for the

~~Critical Accounting Policies~~-11-

~~Critical~~year ~~accounting policies~~or ~~are~~years ~~defined~~involved. In ~~as those that are reflective of significant judgments and uncertainties~~addition, ~~and~~unless ~~potentially~~entitled ~~result~~to inrelief ~~materially different outcomes~~ under ~~different~~ ~~assumptions~~certain ~~and~~statutory ~~conditions.~~provisions, ~~The~~we ~~Company’s~~would ~~significant~~also ~~accounting policies~~be ~~are~~disqualified ~~described~~from intreatment ~~Note~~as 2a inREIT ~~the~~for ~~Notes to~~ the ~~Financial~~four ~~Statements.~~taxable ~~Not all~~years offollowing ~~these~~the ~~significant~~year ~~accounting~~during ~~policies~~which ~~require~~qualification ~~management~~was tolost. ~~make difficult, subjective or complex judgments or estimates;~~

~~-13-~~We are dependent on the Bank as Advisor and Servicer.

~~however,~~We depend on the ~~Company’s~~ ~~policy~~diligence and skill of officers and employees of the Advisor to select, structure and monitor our Mortgage Assets. In addition, we depend on ~~estimation~~the expertise of ~~allowance~~the Servicer for ~~loan~~the ~~losses~~servicing ~~could~~of bethe ~~deemed to~~Mortgage beLoans. The ~~critical~~Advisor ~~within~~may subcontract all or a portion of its obligations under the ~~Securities~~Advisory Agreement, and ~~Exchange~~the ~~Commission~~Servicer (of the ~~“SEC”)~~ ~~definition~~Mortgage Loans may subcontract all or a portion of its obligations under the Servicing Agreement, to one or more affiliates, and under certain conditions to non-affiliates, involved in the business of managing Mortgage Assets. In the event the Advisor or the Servicer subcontracts its obligations in such a manner, we will be dependent upon the subcontractor to provide services. Any failure by the Bank or any subcontractor to perform its services in a satisfactory manner could have an adverse affect on our operating performance.

~~Allowance~~We ~~for~~have ~~Loan~~substantial ~~Losses~~relationships with the Bank and its affiliates and their interests may not always be aligned with our interests.

~~Management~~The ~~reviews~~Bank ~~the~~and ~~loan portfolio~~its toaffiliates ~~establish~~are aninvolved ~~allowance~~in ~~for~~virtually ~~estimated~~every ~~losses~~aspect ifof ~~deemed~~our ~~necessary~~existence. The ~~An analysis~~Bank tois ~~determine~~the ~~whether~~sole anholder ~~allowance~~of ~~for~~our ~~loan~~Common ~~loss~~Stock ~~is required is performed periodically,~~ and anadministers ~~allowance~~our isday-to-day ~~provided~~activities ~~after~~in ~~considering~~its ~~such factors~~role as ~~historical~~Advisor ~~loss~~under ~~performance,~~the ~~delinquency~~Advisory ~~status,~~Agreement. The ~~current~~Bank ~~economic conditions~~acts ~~and~~as ~~geographical~~Servicer ~~concentrations.~~of ~~The~~our ~~allowance~~Mortgage ~~for~~Loans ~~loan~~under ~~losses~~the ~~is based~~Servicing onAgreement. In ~~estimates~~addition, ~~and~~other ~~ultimate~~than ~~losses~~the ~~may~~Independent ~~vary~~Directors, ~~from~~all ~~current~~of ~~estimates.~~our ~~As adjustments~~officers toand ~~the~~directors ~~allowance~~are ~~become~~also ~~necessary,~~officers ~~provisions~~and/or ~~for~~directors ~~loan~~of ~~losses~~the ~~are reported~~Bank inand/or ~~operations.~~affiliates ~~There~~of ~~was~~the noBank. As ~~activity in~~ the ~~allowance~~holder ~~for~~of ~~loan~~all ~~losses during~~of ~~the~~our ~~years~~outstanding ~~ended~~voting ~~December 31~~stock, ~~2004~~the ~~and~~Bank ~~2003,~~will ~~and~~have the ~~balance~~right ofto ~~the allowance~~elect ~~was~~all ~~$40~~of our directors,~~333~~ atincluding the ~~end~~Independent ~~of each year~~Directors.

~~Residential~~The Bank and its affiliates may have interests which are not identical to ours. Consequently, conflicts of interest may arise with respect to transactions, including without limitation, future acquisitions of Mortgage Assets from the Bank and/or affiliates of the Bank; servicing of Mortgage Loans; future dispositions of Mortgage Loans to the Bank or affiliates of the Bank; and the modification of the Advisory Agreement or the Servicing Agreement. It is our intention and the intention of the Bank that any agreements and transactions between us, on the one hand, and the Bank and/or its affiliates, on the other hand, are fair to all parties and consistent with market terms, including the prices paid and received for Mortgage Assets, including those in our current portfolio, on their acquisition or disposition by us or in connection with the servicing of Mortgage Loans. The requirement in the Articles Supplementary establishing the Series A Preferred Shares that certain of our actions be approved by a majority of the Independent Directors is also intended to ensure fair dealings between us and the Bank and its affiliates. However, there can be no assurance that such agreements or transactions will be on terms as favorable to us as those that could have been obtained from unaffiliated third parties.

AtWe ~~December~~may ~~31,~~change ~~2004,~~our ~~the Company~~policies ~~had~~and ~~$374,458,643~~strategies ~~invested in Residential Mortgage Loans compared to $296,062,742~~ at ~~December~~any ~~31,~~time ~~2003.~~without ~~The~~shareholder 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 Stockapproval. 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.

AtThe ~~December~~Board ~~31,~~of ~~2004,~~Directors ~~the Company~~has ~~had~~established ~~two~~our ~~non-accrual~~investment ~~loans~~policies ~~(loans~~and ~~contractually~~operating ~~past~~policies ~~due~~and 90strategies. These ~~days~~policies ormay ~~more~~ be amended or ~~with~~revised ~~respect~~from time to ~~which~~time ~~other~~at ~~factors~~the ~~indicate~~discretion ~~that~~of ~~full~~the ~~payment~~Board of ~~principal and~~Directors ~~interest~~(in iscertain ~~unlikely)~~circumstances ~~with~~subject anto ~~aggregate~~the ~~principal~~approval ~~balance~~ of ~~$546,701~~a ~~(or 0.15%~~majority of ~~loans~~the Independent Directors). Atwithout ~~December~~a ~~31,~~vote ~~2003~~of our stockholders, ~~the~~including ~~Company~~holders ~~had~~of ~~five~~the ~~non-accrual~~Series ~~loans with~~A anPreferred ~~aggregate~~Shares. The ~~principal~~ultimate ~~balance~~effect of ~~$1,589,670~~any ~~(or~~change ~~0.54%~~in our policies and strategies on a holder of ~~loans)~~Series A Preferred Shares may be positive or negative.

AtWe ~~December~~have ~~31,~~not ~~2004,~~obtained ~~the Company~~third ~~had~~party ~~two~~valuations ~~delinquent~~of ~~loans~~Mortgage ~~(loans~~Assets ~~delinquent~~we ~~30-89~~have ~~days)~~purchased ~~with~~and anwe ~~aggregate principal~~have ~~balance~~not ofengaged ~~$576,811~~in ~~(or~~arms’-length ~~0.15%~~negotiations ofwith ~~loans).~~the AtBank ~~December~~or ~~31,~~its ~~2003~~affiliates, thus we cannot assure that the ~~Company~~ ~~had~~purchase ~~five~~prices ~~delinquent~~paid ~~loans~~do ~~with~~not andiffer ~~aggregate~~from ~~principal~~the ~~balance~~fair value of ~~$807,205~~ ~~(or~~the ~~0.27%~~Mortgage ofAssets ~~loans)~~purchased.

~~Interest~~We, ~~Rate~~along ~~Risk~~with the Bank, intend that the fair value of our portfolio is approximately equal to the amount that we paid for such portfolio. However, no third party valuations of the Mortgage Assets constituting the portfolio were obtained, and there can be no assurance that the fair value of the portfolio does not differ from the purchase price we paid. In addition, we do not anticipate obtaining third party valuations in connection with future acquisitions and dispositions of Mortgage Assets even in circumstances where one of our affiliates is selling the Mortgage

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~~12-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~~Assets onto, or purchasing the ~~outstanding balance~~Mortgage ofAssets from, us. Accordingly, although we and the ~~Company’s~~Bank ~~Residential~~intend ~~Mortgage~~that ~~Loans~~future atacquisitions ~~December~~or ~~31,~~dispositions ~~2004, and~~of ~~the~~Mortgage ~~interest~~Assets ~~rates~~be on ~~such~~a ~~loans~~fair value basis, ~~anticipated~~there ~~annual~~can ~~interest~~be ~~income~~no onassurance that the ~~Company’s~~ ~~loan~~consideration ~~portfolio~~to atbe ~~December~~paid ~~31,~~(or ~~2004,~~received) ~~net~~by ofus ~~interest~~to ~~expense~~(or ~~and operating~~from) ~~expenses,~~the ~~was~~Bank ~~approximately~~or ~~112.1%~~any of ~~the~~its ~~projected~~affiliates ~~annual~~in ~~dividend~~connection with future acquisitions or dispositions of ~~$15,562,500~~ onMortgage Assets will not differ from the ~~Series~~fair Avalue ~~Preferred~~of ~~Shares.~~such Mortgage Assets.

InUpon ~~response to reduced market interest rates,~~ the ~~Company~~occurrence ~~has~~of ~~taken steps to increase~~ the ~~funds available~~Exchange toEvent, ~~pay~~your ~~dividends~~investment onin ~~the~~us ~~Series~~will Abe ~~Preferred~~converted ~~Shares. In addition~~ to ~~the July~~an ~~2003~~investment ~~reduction~~ in the Bank’s ~~servicing~~and ~~fee~~thus, ~~the~~you ~~Company~~will ~~borrowed $75,000,000~~subject ~~from~~to ~~the~~risks ~~Bank~~related ~~on December 20, 2004, and used the proceeds~~ to ~~purchase~~ ~~adjustable-rate~~owning ~~Residential~~interests ~~Mortgage~~in ~~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.~~

Our Series A Preferred Shares will be exchanged automatically on a one-14for-one basis for Bank Preferred Shares upon the occurrence of the Exchange Event. Consequently, an investment in Series A Preferred Shares could be replaced by an investment in Bank Preferred Shares at a time when the Bank’s financial condition is deteriorating or when the Bank has been placed into conservatorship or receivership. In addition, although the Series A Preferred Shares are listed on the NYSE, the Bank has not applied and does not intend to apply for listing of the Bank Preferred Shares, for which the Series A Preferred Shares will be exchanged automatically on a one-for-one basis upon the occurrence of the Exchange Event, on any national securities exchange or for quotation of the Bank Preferred Shares through the National Association of Securities Dealers Automated Quotation System. Consequently, there can be no assurance as to the liquidity of the trading markets for the Bank Preferred Shares, if issued, or that an active public market for the Bank Preferred Shares would develop or be maintained. Potential investors in the Series A Preferred Shares, therefore, should carefully consider the risks related to an investment in the Bank summarized below and more fully described in the Bank’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005 filed with the Office of Thrift Supervision:

~~There~~• ~~can~~risks berelated noto ~~assurance that~~legislative anand ~~interest~~regulatory ~~rate~~actions ~~environment~~and inrestrictions, ~~which~~including ~~there~~restrictions ison athe ~~decline~~payment inof ~~interest~~dividends ~~rates would~~and ~~not adversely affect~~ the ~~Company~~Bank’s ability to ~~pay~~satisfy ~~dividends~~regulatory oncapital ~~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.~~ requirements;

~~The~~• ~~following~~risks ~~table stratifies~~related ~~the~~to ~~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~~Bank’s ~~loans~~reliance ~~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~~income, orincluding ~~the~~gains ~~interest~~from ~~rates~~securitization ~~currently offered~~transactions, for ~~loans~~a ~~with~~significant ~~similar~~portion ~~terms to borrowers~~ of ~~similar~~its ~~credit quality.~~ revenue;

~~Expected~~• ~~Maturity/Repricing~~risks ~~Date ------------------------------------------------------------------------------------------------------------------------- (Dollars~~related into ~~thousands) Year~~changes ~~Ending~~in ~~December~~interest 31, ---------------------------------------------------------- 2005 2006 2007 2008 2009 Thereafter Total Fairrates ~~Value ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Monthly~~and ~~ARMs $~~other ~~107,439 $ - $ - $ - $ - $ - $~~market 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% conditions;

~~Significant~~• ~~Concentration~~risks ofrelated ~~Credit~~to ~~Risk~~the Bank’s investments in “payment option” adjustable rate mortgage loans, commercial loans, and automobile loans and leases that can be riskier than amortizing residential mortgage loans;

~~Concentration~~• ofrisks ~~credit~~relating ~~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~~valuation ~~sensitivity~~ of the ~~Company~~Bank’s ~~performance~~interest-only tostrips ~~both positive~~ and ~~negative~~mortgage ~~developments~~servicing ~~affecting~~rights, awhich ~~particular~~are ~~industry.~~based ~~The Company’s~~on ~~exposure~~various toassumptions ~~geographic~~concerning ~~concentrations~~prepayment ~~directly~~and ~~affects~~default ~~the credit risk of the Residential Mortgage Loans within the portfolio.~~ rates;

~~Many~~• ~~(or~~risks ~~41.5%)~~related ofto the ~~Company~~ Bank’s ~~Residential~~dependence ~~Mortgage~~on ~~Loans~~asset ~~are~~securitizations ~~loans~~for ~~secured~~additional 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. liquidity;

~~-15-~~• risks related to the sufficiency of the Bank’s allowance for losses;

~~Liquidity~~• ~~and~~risks ~~Capital~~related ~~Resources~~to the Bank’s tax sharing arrangement with B. F. Saul Real Estate Investment Trust;

~~The~~• ~~objective~~risks ofrelated ~~liquidity management is~~ to ~~ensure~~ the ~~availability of sufficient cash flows to meet all of the Company~~Bank’s ~~financial~~concentration ~~commitments.~~of Inbusiness ~~managing~~in ~~liquidity,~~ the ~~Company takes~~metropolitan ~~into~~Washington, ~~account~~DC ~~various~~area; ~~legal limitations placed on a REIT as discussed in “Business - Tax Status of the Company.”~~ and

~~The~~• ~~Company’s principal~~risks ~~liquidity~~related ~~needs are~~ to ~~fund~~increased ~~the~~competition ~~acquisition~~in ~~of additional Mortgage Assets as Mortgage Assets held by~~ the ~~Company~~financial ~~are~~services ~~repaid~~industry 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~~Bank’s tolocal ~~be treated as a REIT for income tax purposes for the foreseeable future~~markets. ~~The Company may borrow as it deems necessary.~~

~~The~~ITEM ~~following~~1B. ~~table summarizes~~UNRESOLVED ~~our~~STAFF ~~material contractual cash obligations associated with operating, investing and financing activities as of December 31, 2004:~~ COMMENTS

Principal payments due by period -------------------------------------- Less than 1-3 Total 1 year years ------------ ---------- ------------ Long term debt obligations $ 75,000,000 $ - $ 75,000,000 None.

~~RESULTS~~ITEM OF2. ~~OPERATIONS~~PROPERTIES

~~Year 2004 Compared to Year 2003~~None.

~~The~~ITEM ~~Company reported net income of $16,292,358 and $15,932,123 for the years ended December 31, 2004 and 2003, respectively~~3. ~~The~~LEGAL ~~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.~~ PROCEEDINGS

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~~is ~~have~~not ~~recorded an~~involved ~~additional $31,984 and $88,014~~ in ~~interest~~any ~~income~~material ~~for the years ended December 31, 2004 and 2003, respectively, had its non-accrual loans been current in accordance with their original terms~~litigation.

~~Other~~ITEM ~~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~~4. ~~The decrease~~SUBMISSION ~~was~~OF ~~due~~MATTERS toTO ~~lower~~A ~~average~~VOTE ~~balances~~OF ofSECURITY 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. HOLDERS

~~The~~No ~~Company’s $75,000,000~~matter ~~loan~~was ~~payable~~submitted to ~~the~~a ~~Bank~~vote onof ~~December~~security ~~20,~~holders ~~2004~~of ~~resulted~~the inCompany ~~interest expense~~during the fourth quarter of ~~$81,500~~the ~~for~~year ~~2004.~~ended December 31, 2005.

~~There were no provisions for loan losses during the years ended December 31, 2004 and 2003.~~ -13-

~~Operating expenses totaling~~ ~~$1,020,672~~PART 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 yearsII

~~-16-~~ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

~~ended~~DESCRIPTION ~~December~~OF ~~31,~~COMMON 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. STOCK

~~During~~General 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~~In ~~during~~connection with the ~~year~~formation ~~ended December~~of ~~31,~~the ~~2004~~Company in 1996, the Company’s ~~Board~~issued 100 shares of ~~Directors~~Common ~~declared~~Stock ~~cash~~to ~~dividends of~~the ~~$742,614,~~Bank ~~representing~~for $71,~~426~~000.14 These ~~per~~shares ~~share~~ of Common Stock, ~~which~~ were ~~paid out~~issued in reliance upon an exemption from registration under Section 4(2) of the ~~retained~~Securities ~~earnings~~Act of 1933, as amended. Thus, there is no established public trading market for the ~~Company~~Common Stock. As of March 15, 2006, there were 100 issued and outstanding shares of Common Stock held by one stockholder, the Bank.

~~Year 2003 Compared to Year 2002~~Dividends

The ~~Company~~following ~~reported~~table ~~net income~~reflects ofthe ~~$15,932,123~~distributions ~~and~~declared ~~$16,497,221~~by ~~for~~the Company on the ~~years~~Common ~~ended~~Stock ~~December~~for ~~31,~~the ~~2003~~two ~~and 2002,~~most ~~respectively~~recent years. For ~~The~~a ~~decrease~~discussion inof ~~net~~the ~~income~~Company’s isdistribution ~~due~~policy ~~primarily~~with respect to ~~a decrease in~~ the ~~average~~Common ~~yield~~Stock, ofsee ~~Residential~~“Business ~~Mortgage~~– ~~Loans.~~Dividend Policy.”

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.

Period	Distributions	Payment Date
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
January 1, 2005 to March 31, 2005	-	N/A
April 1, 2005 to June 30, 2005	-	N/A
July 1, 2005 to September 30, 2005	-	N/A
October 1, 2005 to December 31, 2005	2,300,000	January 17, 2006

~~Other~~Holders ~~interest~~of ~~income~~Common ~~of $22~~Stock are entitled to receive dividends when,~~540~~ as and ~~$85,483~~if ~~was~~declared ~~recognized~~by onthe Board of Directors out of funds legally available. If the Company’s ~~interest~~fails ~~bearing deposits~~to ~~during~~declare and pay full dividends on the ~~years~~Series ~~ended~~A ~~December~~Preferred ~~31,~~Shares ~~2003~~in ~~and~~any ~~2002~~dividend period, ~~respectively.~~the ~~The decrease~~Company ~~was~~may ~~due~~not make any dividend or other distributions with respect to athe ~~lower~~Common ~~average~~Stock ~~yield~~until such time as dividends on ~~interest~~all ~~bearing~~outstanding ~~deposits,~~Series ~~which decreased~~A byPreferred 72Shares ~~basis~~have ~~points~~been (toi) ~~0.65%~~declared ~~from~~and ~~1.37%)~~paid ~~from~~for ~~the~~three ~~average~~consecutive ~~yield~~dividend inperiods ~~the 2002~~and ~~period,~~(ii) declared and paid or declared and a ~~decrease~~sum insufficient for the ~~average~~payment ~~balance~~thereof ofhas ~~interest~~been ~~bearing~~set ~~deposits to~~apart ~~$3,464,460~~for inpayment for the ~~2003~~fourth consecutive dividend period. To ~~from~~remain ~~$6,242,020~~qualified inas a REIT, the ~~2002~~Company ~~period~~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.”

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

~~Operating~~Subject ~~expenses~~to ~~totaling $1,103,037 and $1,232,182 for~~ the ~~years ended December 31~~rights, ~~2003~~if ~~and 2002~~any, ~~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~~holders ~~December~~of ~~31,~~any ~~2003~~class ~~and~~or ~~2002,~~series ~~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~~Preferred ~~outstanding~~Stock ~~loan~~(as ~~balance~~defined ~~from 0.375%. Advisory fees paid to parent for the years ended December 31~~below), ~~2003~~all ~~and 2002~~voting ~~totaled~~rights ~~$200,000~~are ~~for~~vested ~~each~~in ~~period. Directors’ fees paid were $36,000 and $30,500 for~~ the ~~years~~Common ~~ended December 31, 2003 and 2002, respectively, and represent compensation to the two independent members of the Board of Directors~~Stock. ~~General and administrative expenses totaled $119,061 and $62,346 for the years ended December 31, 2003 and 2002, respectively.~~ The ~~increase~~holders inof ~~general~~Common ~~and administrative~~Stock ~~expenses~~are ~~was~~entitled ~~due~~ to ~~increases~~one invote ~~trustee~~per ~~fees, auditing expenses and New York Stock Exchange expenses~~share.

~~During~~Rights ~~the~~Upon 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. Liquidation

~~-17-~~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.

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. -14-

~~ITEM~~ DESCRIPTION ~~7A.~~OF ~~QUANTITATIVE~~SERIES ~~AND~~A ~~QUALITATIVE~~PREFERRED ~~DISCLOSURES ABOUT MARKET RISK~~SHARES

Market 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.”~~ Dividends

The Series A Preferred Shares are listed on the New York Stock Exchange under the trading symbol “CCP-~~18-~~PrA.” As of February 9, 2006, there were 3,000,000 issued and outstanding Series A Preferred Shares held by approximately 149 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.”

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

	Price
Period	High	Low	Distributions	Payment Date
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
January 1, 2005 to March 31, 2005	59.99	57.76	3,890,625	April 15, 2005
April 1, 2005 to June 30, 2005	59.52	57.00	3,890,625	July 15, 2005
July 1, 2005 to September 30, 2005	58.91	56.20	3,890,625	October 17, 2005
October 1, 2005 to December 31, 2005	56.95	53.35	3,890,625	January 17, 2006

CONTENTS Page ------ (a) ReportHolders of ~~Independent~~Series ~~Auditors..............................................................F-2 (b) Statements~~A ofPreferred ~~Financial~~Shares ~~Condition~~are atentitled ~~December~~to 31receive, ~~2004~~if, when and ~~2003.............................F-3 (c) Statements~~as ofdeclared ~~Operations~~by ~~for~~ the ~~Years~~Board ~~Ended December~~of ~~31,~~Directors ~~2004,~~of ~~2003~~the ~~and~~Company ~~2002 .........................................................F-4 (d) Statements~~out of ~~Stockholders'~~assets ~~Equity~~of ~~for~~ the ~~Years~~Company ~~Ended December~~legally 31available, ~~2004,~~cash ~~2003~~dividends ~~and~~at ~~2002............................................................F-5 (e) Statements~~the rate of ~~Cash~~10d% ~~Flows~~per ~~for~~annum of the ~~Years~~liquidation ~~Ended December~~preference ~~31,~~(equivalent ~~2004,~~to ~~2003 and 2002~~$5.~~...........................................................F-6 (f) Notes~~1875 toper ~~Financial~~share ~~Statements~~per annum).~~..............................................................F-7~~

~~F-1~~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.

~~Report of Independent Registered Accounting Firm~~General

WeThe ~~have~~Company ~~audited~~may ~~the accompanying~~issue, ~~statements~~from oftime ~~financial~~to ~~condition~~time, one or more series of ~~Chevy~~preferred ~~Chase~~stock ~~Preferred~~with ~~Capital Corporation~~rights, (preferences and limitations determined by the “Company,”’s aBoard ~~Maryland~~of ~~corporation)~~Directors. The asholders of ~~December~~the ~~31, 2004~~Series ~~and~~A ~~2003,~~Preferred ~~and~~Shares ~~the~~have ~~related~~no ~~statements~~preemptive ofrights ~~operations,~~with ~~stockholders’ equity~~respect ~~and~~to ~~cash~~any ~~flows~~shares ~~for~~of ~~each~~the capital stock of the ~~three~~Company ~~years~~or inany other securities of the ~~period~~Company ~~ended~~convertible ~~December 31,~~into ~~2004~~or carrying rights or options to purchase any such shares. The ~~These~~Series ~~financial~~A ~~statements~~Preferred Shares are ~~the~~not ~~responsibility~~subject to any sinking fund or other obligation of the Company’s ~~management~~for their repurchase or retirement. The ~~Our~~Series ~~responsibility~~A isPreferred toShares ~~express~~will anbe ~~opinion~~exchanged automatically on ~~these financial~~a ~~statements~~one-for-one ~~based~~basis onfor ~~our~~Bank ~~audits.~~Preferred Shares (as defined below) upon the occurrence of the Exchange Event (as defined below).

WeAutomatic 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. Exchange

InEach ~~our~~Series ~~opinion,~~A Preferred Share will be exchanged automatically (an “Automatic Exchange”) for one newly issued Series B preferred share of the ~~financial~~ ~~statements~~Bank ~~referred~~(“Bank toPreferred ~~above~~Share”) ~~present~~if ~~fairly~~the inappropriate ~~all~~federal ~~material~~regulatory ~~respects,~~ agency of the ~~financial~~Bank ~~position~~directs in writing (the “Directive”) an exchange of the ~~Company~~Series atA ~~December~~Preferred ~~31,~~Shares ~~2004~~for ~~and~~Bank ~~2003,~~Preferred ~~and~~Shares because (i) the ~~results~~ ofBank ~~its~~becomes ~~operations~~“undercapitalized” ~~and~~under ~~its~~prompt ~~cash~~corrective ~~flows~~action ~~for~~regulations ~~each~~established pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991, as amended, (ii) the ~~three~~Bank ~~years~~is placed into conservatorship or receivership or (iii) the appropriate federal regulatory agency, in its sole discretion and even if the ~~period~~ ~~ended~~Bank ~~December~~is 31not “undercapitalized,” ~~2004~~anticipates the Bank becoming “undercapitalized” in ~~conformity~~the ~~with~~near Uterm (the “Exchange Event”).S. Upon ~~generally~~the ~~accepted~~Exchange Event, each holder of ~~accounting~~Series ~~principles.~~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

F-215-

~~CHEVY~~such ~~CHASE~~Series ~~PREFERRED~~A ~~CAPITAL~~Preferred ~~CORPORATION~~Share ~~STATEMENTS~~a OFcertificate ~~FINANCIAL~~representing ~~CONDITION~~an equal number of Bank Preferred Shares. Absent the occurrence of the Exchange Event, no Bank Preferred Shares will be issued.

~~December~~Holders 31, ---------------------------------- 2004 2003 ---------------- ---------------- ASSETS Cashof ~~and~~Series ~~interest-bearing~~A ~~deposits $ 2,318,102 $ 5,411,004 Residential~~Preferred ~~mortgage~~Shares ~~loans~~cannot ~~(net~~exchange oftheir ~~allowance for~~Series ~~loan~~A ~~losses~~Preferred ofShares ~~$40,333~~ for ~~both~~Bank ~~years) 374,458,643 296,062,742 Accounts~~Preferred ~~receivable~~Shares from parent 1,591,546 1,755,369 Accrued interest receivable 1,346,764 1,031,352 Prepaid expenses 5,000 6,500 ----------------voluntarily. ~~---------------- Total~~In ~~assets $ 379~~addition,~~720,055 $ 304,266,967 ================ ================ LIABILITIES~~ ~~AND~~absent ~~STOCKHOLDERS'~~the ~~EQUITY Loan~~occurrence ~~payable~~of tothe ~~parent $ 75,000,000 $ - Accounts~~Automatic ~~payable to others and accrued expenses 41~~Exchange,~~063 6,719 Accrued~~ ~~interest~~holders ~~payable~~of toSeries ~~parent 81,500 - Dividends~~A 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,~~Shares ~~10,000,000~~will ~~shares~~have ~~authorized: 10~~no ~~3/8% Noncumulative Exchangeable Preferred Stock~~dividend, $5 ~~par value~~voting, ~~3,000,000 shares issued and outstanding (~~liquidation ~~value~~preference ofor ~~$150,000,000~~other ~~plus~~rights ~~accrued~~with ~~and unpaid~~respect ~~dividends) 15,000,000 15,000,000 Common~~to ~~Stock,~~any $1security ~~par~~of ~~value~~the ~~1,000~~Bank; ~~shares~~such ~~authorized, 100~~rights ~~shares~~as ~~issued~~are ~~and~~conferred ~~outstanding 100 100 Capital~~by ~~contributed~~the inSeries ~~excess~~A ofPreferred ~~par 284,999,900 284,999,900 Retained~~Shares ~~Earnings 6,867 19,623 ---------------- ---------------- Total~~exist ~~stockholders'~~solely ~~equity 300,006,867 300,019,623 ---------------- ---------------- Total~~as liabilities and stockholders' equity $ 379,720,055 $ 304,266,967 ================ ================ The accompanying Notes to ~~Financial~~the ~~Statements are an integral part of these statements~~Company.

~~F-3~~Voting Rights

~~CHEVY~~Except ~~CHASE~~as ~~PREFERRED~~expressly ~~CAPITAL~~required ~~CORPORATION~~by ~~STATEMENTS~~applicable OFlaw, ~~OPERATIONS~~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.

~~Year~~If ~~Ended~~at ~~December~~the 31, ------------------------------------------- 2004 2003 2002 ------------- ------------- ------------- Interesttime ~~income: Residential~~of ~~mortgage~~any loans $ 17,383,039 $ 17,012,620 $ 17,643,920 Other 11,491 22,540 85,483 ------------- ------------- ------------- Totalannual ~~interest~~meeting ~~income 17,394,530 17,035,160 17,729,403 Interest~~of ~~expense 81,500 - - ------------- ------------- ------------- Total~~the ~~operating~~Company’s ~~income 17~~stockholders for the election of directors,~~313,030 17,035,160 17,729,403 ------------- ------------- ------------- Operating~~ ~~expenses: Loan~~the ~~servicing~~Company ~~fees-parent 650~~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,~~912 747,976 939,336 Advisory~~ ~~fees-parent 200~~including the Series A Preferred Shares,~~000 200,000 200,000~~ the number of directors then constituting the Board of Directors' ~~fees 32~~of the Company will be increased by two (if not already increased by two due to a default in preference dividends),~~751 36,000 30,500 General~~ and ~~administrative 137,009 119,061 62,346 ------------- ------------- ------------- Total~~the ~~operating~~holders ~~expenses 1,020,672 1,103,037 1,232,182 ------------- ------------- ------------- Income~~of ~~before~~the ~~income~~Series ~~taxes 16~~A Preferred Shares,~~292,358 15,932,123 16,497,221 Provision~~ ~~for~~voting ~~income~~together ~~taxes - - - ------------- ------------- ------------- NET~~with ~~INCOME $ 16,292,358 $ 15,932,123 $ 16,497,221 ============= ============= ============= PREFERRED~~the ~~STOCK DIVIDENDS 15,562,500 15,562,500 15,562,500 ------------- ------------- ------------- EARNINGS~~holders ~~AVAILABLE~~of ~~TO COMMON~~all ~~STOCKHOLDER $ 729,858 $ 369,623 $ 934,721 ============= ============= ============= AVERAGE~~other ~~COMMON~~series ~~SHARES 100 100 100 ============= ============= ============= EARNINGS~~of ~~PER~~Preferred ~~COMMON SHARE $ 7~~Stock as a single class,~~298~~ will be entitled to elect such two additional directors to serve on the Company’s Board of Directors at each such annual meeting.58 ~~$ 3,696.23 $ 9,347.21 ============= ============= ============= The~~Each ~~accompanying~~director ~~Notes~~elected by the holders of shares of the Preferred Stock shall continue to ~~Financial~~serve ~~Statements~~as ~~are~~such andirector ~~integral~~until ~~part~~the later of ~~these~~(i) ~~statements~~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.

~~F-4~~Redemption

~~CHEVY~~The ~~CHASE~~Series ~~PREFERRED~~A ~~CAPITAL~~Preferred ~~CORPORATION~~Shares ~~STATEMENTS~~are OFnot ~~STOCKHOLDERS'~~redeemable ~~EQUITY~~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:

                                                                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.

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

~~F-5~~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.

~~CHEVY~~The ~~CHASE~~Company ~~PREFERRED~~will ~~CAPITAL~~also ~~CORPORATION~~have ~~STATEMENTS~~the OFright ~~CASH~~at ~~FLOWS~~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.

~~Year~~Rights ~~Ended~~Upon 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. Liquidation

~~F-6~~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

~~CHEVY CHASE PREFERRED CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002~~-16-

~~NOTE~~in 1the -amount ~~ORGANIZATION~~of ~~AND~~$50.00 ~~BASIS~~per OFshare, ~~PRESENTATION:~~plus the quarterly accrued and unpaid dividend thereon, if any, to the date of liquidation.

~~Chevy~~Independent ~~Chase~~Director 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. Approval

~~NOTE~~As 2long -as ~~SUMMARY~~any OFSeries ~~SIGNIFICANT~~A ~~ACCOUNTING~~Preferred ~~POLICIES:~~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.

~~The~~ITEM ~~financial statements have been prepared in conformity with accounting principles generally accepted in the United States~~6. InSELECTED ~~preparing~~FINANCIAL 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. DATA

~~For~~The ~~purposes~~selected financial data of ~~reporting cash~~the ~~flows,~~Company ~~cash~~herein has been derived from the financial statements of the Company. The data should be read in conjunction with “Management’s Discussion and ~~cash~~Analysis ~~equivalents~~of ~~include~~Financial ~~cash~~Condition and ~~interest-bearing deposits.~~Results of Operations” and the financial statements included elsewhere herein.

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

	As of or for the year ended December 31,
	2005	2004	2003	2002	2001
OPERATING DATA:

Interest income	$ 22,469,755	$ 17,394,530	$ 17,035,160	$ 17,729,403	$ 21,041,424
Interest expense	3,153,396	81,500	-	-	-
Net interest income	19,316,359	17,313,030	17,035,160	17,729,403	21,041,424
Gain on sale of real estate acquired in settlement of loans, net	-	-	-	-	21,924
Operating expenses	(1,245,429)	(1,020,672)	(1,103,037)	(1,232,182)	(1,356,557)
Provision for income taxes	-	-	-	-	(10,373)
Net income	$ 18,070,930	$ 16,292,358	$ 15,932,123	$ 16,497,221	$ 19,696,418
Earnings available to common Stockholders	$ 2,508,430	$ 729,858	$ 369,623	$ 934,721	$ 4,133,918
Earnings per common share	$ 25,084.30	$ 7,298.58	$ 3,696.23	$ 9,347.21	$ 41,339.18

DIVIDENDS DECLARED:

Dividends on common stock	$ 2,300,000	$ 742,614	$ 350,000	$ 1,100,000	$ 4,475,000
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	$ 376,814,496	$ 374,458,643	$ 296,062,742	$ 285,395,464	$ 287,523,781
Total assets	$ 381,735,069	$ 379,720,055	$ 304,266,967	$ 304,825,346	$ 306,318,593
Loan payable to parent	$ 75,000,000	$ 75,000,000	$ -	$ -	$ -
Total stockholders’ equity	$ 300,215,297	$ 300,006,867	$ 300,019,623	$ 299,834,721	$ 299,658,918
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	6.01%	5.71%	5.90%	6.14%	7.16%

~~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~~17-~~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.~~

~~Management~~ITEM ~~periodically reviews the loan portfolio and adjusts the allowance for estimated losses if deemed necessary~~7. AnMANAGEMENT’S ~~allowance~~DISCUSSION isAND ~~provided~~ANALYSIS ~~after~~OF ~~considering~~FINANCIAL ~~such~~CONDITION ~~factors~~AND asRESULTS ~~the economy~~OF 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. OPERATIONS

~~Many~~FINANCIAL (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. CONDITION

~~F-7~~Critical Accounting Policies

~~NOTE~~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 ~~SUMMARY~~the OFNotes ~~SIGNIFICANT~~to ~~ACCOUNTING~~the ~~POLICIES~~Financial Statements. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates; however, the Company’s policy on estimation of allowance for loan losses could be deemed to be critical within the Securities and Exchange Commission (~~Continued~~the “SEC”): definition.

~~Accounts~~Allowance ~~receivable~~for ~~from parent~~Loan 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. Losses

~~The~~Management ~~Company~~reviews ~~has~~the a loan ~~payable~~ portfolio to ~~the~~establish ~~Bank~~an ~~which~~allowance ~~requires~~for noestimated ~~payment~~losses ofif ~~principal~~deemed ~~until~~necessary. An itanalysis ~~matures~~to ~~on August~~determine 31whether an allowance for loan loss is required is performed periodically, ~~2007~~and an allowance is provided after considering such factors as historical loss performance, ~~but~~delinquency ~~can~~status, becurrent ~~prepaid~~economic atconditions ~~any~~and ~~time.~~geographical concentrations. The allowance for loan ~~payable~~losses is ~~secured~~based ~~by liens~~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. Based on ~~mortgage~~a review of delinquent and nonaccrual loans, ~~held~~management indetermined that the ~~residential~~allowance ~~mortgage~~for ~~portfolio.~~loan ~~Interest~~losses ~~is payable~~was ~~monthly~~appropriate at aDecember ~~variable~~31, ~~rate~~2005 ~~based~~and on2004. There anwas ~~index~~no ~~plus~~activity ain ~~specified~~the ~~margin.~~allowance for loan losses during the years ended December 31, 2005 and 2004, and the balance of the allowance was $40,333 at the end of each year.

~~Preferred~~Residential ~~Stock.~~Mortgage 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. Loans

~~Common~~At ~~Stock.~~December ~~The stockholder~~31, is2005, ~~entitled~~the Company had $376,814,496 invested in Residential Mortgage Loans compared to ~~receive~~$374,458,643 ~~dividends~~at ifDecember 31, ~~when~~2004. During 2005, Residential Mortgage Loan purchases totaled $151,039,626 and asprincipal ~~declared~~collections bytotaled ~~the Board~~$148,683,773. ofManagement ~~Directors~~intends ~~out~~to continue to reinvest proceeds received from repayments of ~~funds~~loans ~~legally~~by ~~available~~purchasing ~~after~~additional ~~all~~Residential ~~preferred~~Mortgage ~~dividends have~~Loans ~~been~~from ~~paid.~~either the Bank or its affiliates.

~~Dividends~~At onDecember ~~preferred stock~~31, ~~are~~2005, ~~deducted~~the ~~from~~Company ~~earnings~~had inthree ~~the~~non-accrual ~~computation~~loans (loans contractually past due 90 days or more or with respect to which other factors indicate that full payment of ~~earnings~~principal ~~per~~and ~~common~~interest ~~share when~~is ~~declared~~unlikely) bywith ~~the~~an ~~Company’s~~aggregate ~~Board~~principal balance of ~~Directors~~$689,796 (or 0.18% ~~Because~~of ~~there~~loans). At ~~are~~December ~~no dilutive~~31, ~~securities~~2004, ~~basic~~the ~~earnings~~Company ~~per~~had ~~common~~two ~~share~~non-accrual isloans ~~equal~~with toan ~~diluted earnings~~aggregate ~~per~~principal ~~common~~balance ~~share~~of $546,701 (or 0.15% of loans).

~~The~~At ~~Company~~December ~~has elected~~31, ~~for~~ ~~Federal income tax purposes~~2005, tothe beCompany ~~treated~~had assix adelinquent ~~Real~~loans ~~Estate Investment Trust~~ (~~“REIT”)~~loans ~~and~~delinquent ~~intends~~30-89 todays) ~~comply~~ with ~~the~~an ~~provisions~~aggregate ofprincipal ~~the~~balance ~~Internal Revenue Code~~ of ~~1986~~$1, ~~as amended (the “IRC”). Accordingly~~406,900 ~~the Company is generally not subject to Federal corporate income taxes on its net income~~ (~~excluding~~or ~~capital gains) to the extent it distributes at least 100~~0.37% of ~~its annual~~loans). At ~~REIT~~December ~~taxable~~31, ~~income to stockholders and as long as certain asset~~2004, ~~income and~~the ~~stock~~Company ~~ownership~~had ~~tests~~two ~~are~~delinquent ~~met~~loans ~~in accordance~~ with ~~the~~an ~~IRC.~~aggregate Toprincipal ~~remain qualified~~balance asof ~~a REIT~~$576,811 ~~the Company must~~ (a)or ~~distribute each year at least 90~~0.15% of ~~its~~ ~~“REIT taxable income” (not including capital gains~~loans) ~~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.

~~The~~Interest ~~American~~Rate 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. Risk

~~During~~The ~~the~~Company’s ~~year~~income ~~ended December~~consists ~~31,~~primarily ~~2004,~~of ~~the~~interest ~~Company~~payments ~~distributed~~on ~~over~~Residential ~~100%~~Mortgage ofLoans. If ~~its~~there ~~REIT~~is ~~taxable~~a ~~income to~~decline ~~its~~in ~~stockholders.~~interest ~~On March 16~~rates, ~~2004,~~then the Company’s ~~Board~~will ofexperience ~~Directors declared~~ a ~~cash~~decrease ~~dividend~~in ofincome ~~$426.14~~available ~~per~~to ~~share~~be distributed to its stockholders. See “Risk Factors.”

~~F-8~~Based on the outstanding balance of the Company’s Residential Mortgage Loans at December 31, 2005, and the interest rates on such loans, anticipated annual interest income on the Company’s loan portfolio at December 31, 2005, net of interest expense and operating expenses, was approximately 117.5% of the projected annual dividend of $15,562,500 on the Series A Preferred Shares.

~~NOTE~~The 2Company -took ~~SUMMARY~~steps OFin ~~SIGNIFICANT~~prior ~~ACCOUNTING~~years ~~POLICIES~~to ~~(Continued):~~increase the funds available to pay dividends on the Series A Preferred Shares. In addition to the 2003 reduction in the Bank’s servicing fee, the Company borrowed $75,000,000 from

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. -18-

~~There~~the ~~are~~Bank ~~two~~in ~~income~~December ~~tests that~~2004, ~~must~~and beused ~~satisfied~~the ~~for~~proceeds ~~each~~to ~~taxable~~purchase ~~year~~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.

~~o At~~There ~~least~~can ~~75%~~be ofno ~~the~~assurance ~~Company’s~~that ~~gross~~an ~~income~~interest ~~(excluding~~rate ~~income~~environment ~~from~~in ~~certain prohibited~~which ~~transactions)~~there ~~must~~is bea ~~from~~decline in interest onrates ~~obligations~~would ~~secured~~not ~~by mortgages~~adversely onaffect ~~real~~the ~~property~~Company’s orability to pay dividends on ~~interests~~the inSeries ~~real~~A ~~property,~~Preferred ~~gains~~Shares ~~from~~or the ~~sale or~~Common ~~other~~Stock. The ~~disposition~~Company, ofto ~~real~~date, ~~property~~has ~~(including~~not ~~interests~~used inany ~~mortgages~~derivative oninstruments ~~real property),~~to ~~and~~manage ~~certain~~its ~~other~~interest ~~sources;~~rate risk.

~~o At~~The ~~least~~following ~~95%~~table ofstratifies the Company’s ~~gross~~loan ~~income~~portfolio ~~(excluding~~by ~~income~~type ~~from prohibited~~and ~~transactions)~~calendar ~~must~~year bebased ~~from~~on ~~income~~the ~~included~~earlier ~~under~~of the ~~75%~~next ~~income~~interest ~~test, other~~rate ~~interest,~~adjustment ~~dividends~~or estimated principal payments, including both contractual and ~~gains~~anticipated ~~from~~prepayment amounts. Prepayment rates are assumed for the ~~sale~~Company’s orloans ~~other~~based ~~disposition~~on ~~of certain~~recent ~~stocks~~actual and ~~securities~~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.

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

Expected Maturity/Repricing Date

(Dollars in thousands)
Year Ending December 31,
	2006	2007	2008	2009	2010	Thereafter	Total	Fair Value

Payment Option ARMs	72,467	-	-	-	-	-	72,467	74,641
Average Yield	6.96%	-	-	-	-	-	6.96%

One-Year ARMs	8,546	-	-	-	-	-	8,546	9,418
Average Yield	6.13%	-	-	-	-	-	6.13%

Three-Year ARMs	19,548	2,723	3,318	-	-	-	25,589	26,527
Average Yield	6.15%	5.86%	5.75%	-	-	-	6.06%

Five-Year ARMs	61,713	34,547	30,619	16,658	36,733	-	180,270	186,866
Average Yield	6.01%	5.78%	5.67%	5.72%	5.79%	-	5.84%

7/1 ARMs	3,559	-	-	-	-	-	3,559	3,677
Average Yield	6.72%	-	-	-	-	-	6.72%

10/1 ARMs	4,823	3,189	1,586	1,778	-	-	11,376	11,611
Average Yield	6.67%	6.73%	6.65%	6.63%	-	-	6.68%

15 & 30-Year Fixed Rate	7,573	7,081	6,476	5,905	5,360	42,653	75,048	76,582
Average Yield	6.45%	6.45%	6.44%	6.44%	6.44%	6.40%	6.42%

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

~~o Not~~Concentration ~~more~~of ~~than~~credit ~~25%~~risk ofarises ~~the~~when ~~Company’s~~a ~~total~~number ~~assets~~of ~~may~~customers beengage ~~represented~~in bysimilar ~~securities~~business ~~other~~activities, ~~than~~or ~~those~~activities in the ~~75%~~same ~~asset~~geographical ~~class;~~region, ~~and~~or ohave ~~The~~similar ~~value~~economic offeatures ~~any~~that ~~one~~would ~~issuer’s~~cause ~~securities included~~their inability ~~the~~to ~~25%~~meet ~~asset~~contractual ~~class~~obligations ~~may~~to ~~not~~be ~~exceed~~similarly 5%affected by changes in economic conditions. Concentration of credit risk indicates the ~~value~~relative sensitivity of the Company’s ~~totalassets~~performance to both positive and ~~the~~negative ~~Company~~developments ~~may~~affecting ~~not~~a ~~own~~particular ~~more~~industry. The ~~than~~Company’s ~~10%~~exposure ofto ~~the~~geographic ~~total~~concentrations ~~voting~~directly ~~power~~affects ~~or value~~the credit risk of the ~~outstanding~~Residential ~~securities~~Mortgage ofLoans ~~any~~within ~~one~~the ~~issuer~~portfolio. See “Risk Factors.”

~~The~~Liquidity ~~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 noCapital ~~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.~~ Resources

~~During~~The ~~2004,~~objective of liquidity management is to ensure the availability of sufficient cash flows to meet all of the Company ~~met~~’s financial commitments. In managing liquidity, the ~~requirements~~Company takes into account various legal limitations placed on a REIT as discussed in “Business - Tax Status of ~~each~~the ~~test~~Company. ”

~~NOTE 3~~ - ~~RESIDENTIAL MORTGAGE LOANS:~~19-

~~Residential~~ The ~~mortgage~~Company’s ~~loans consist~~principal liquidity needs are to fund the acquisition of ~~adjustable-rate~~additional ~~mortgages~~Mortgage ~~(“ARMs”)~~Assets ~~and~~as 15Mortgage Assets held by the Company are repaid and 30to ~~year fixed-rate~~pay ~~mortgages.~~dividends on the Series A Preferred Shares. The ~~ARMs~~acquisition ~~have~~of ~~interest~~such ~~rates~~Mortgage ~~which~~Assets ~~are~~held ~~fixed~~by ~~for~~the Company will be funded with the ~~indicated~~ ~~period~~proceeds ~~(one~~of ~~month,~~principal ~~one~~repayments ~~year,~~on ~~three~~its ~~years,~~current ~~five~~portfolio ~~years,~~of ~~seven~~Mortgage ~~years~~Assets. The ~~or ten~~Company ~~years)~~does ~~and~~not ~~which~~anticipate ~~adjust~~that ~~thereafter~~it ~~based~~will onhave any material capital expenditures. The Company believes that cash generated from the ~~margin,~~payment ~~index~~of principal and ~~frequency, subject~~interest on its Mortgage Asset portfolio will provide sufficient funds to ~~interest~~meet ~~rate~~its ~~adjustment~~operating ~~caps,~~requirements ~~all~~and asto ~~specified~~pay dividends in ~~the~~accordance ~~related mortgage~~with ~~note.~~the ~~The~~requirements ~~following~~to ~~table~~be ~~shows~~treated ~~the~~as ~~residential~~a ~~mortgage~~REIT ~~loan~~for ~~portfolio by~~income ~~type~~tax atpurposes for the ~~dates~~foreseeable ~~indicated:~~future. The Company may borrow as it deems necessary.

~~F-9~~The following table summarizes the Company’s material contractual cash obligations associated with operating, investing and financing activities as of December 31, 2005:

NOTE 3 - RESIDENTIAL MORTGAGE LOANS (Continued):

	Principal payments due by period
	Total	Less than 1 year	1-3 years

Long term debt obligations	$ 75,000,000	$ -	$ 75,000,000

~~December~~RESULTS 31, ---------------------------------- 2004 2003 ---------------- ---------------- MonthlyOF 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 ================ ================ OPERATIONS

~~Each~~Year of2005 ~~the~~Compared ~~mortgage~~to ~~loans is~~Year ~~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.~~ 2004

~~NOTE~~The 4Company -reported ~~ALLOWANCE~~net ~~FOR~~income ~~LOAN~~of ~~LOSSES:~~$18,070,930 and $16,292,358 for the years ended December 31, 2005 and 2004, respectively. The increase in net income is due primarily to an increase in interest income on Residential Mortgage Loans partially offset by an increase in interest expense.

~~There~~Total interest income was no$22,469,755 ~~activity~~and in $17,394,530 for the ~~allowance~~years ~~for~~ended ~~loan~~December ~~losses~~31, ~~during~~2005 and 2004, respectively. Interest income on Residential Mortgage Loans totaled $22,444,739 and $17,383,039 for the years ended December 31, 2005 and 2004, ~~2003~~respectively. The ~~and 2002,~~increase ~~and~~in interest income on Residential Mortgage Loans was due to an increase in the average balance of the ~~allowance~~Residential ~~for~~Mortgage ~~loan~~Loan ~~losses~~portfolio ~~was~~to $40373,~~333~~707,850 atfor 2005 from $304,388,330 for 2004 as well as an increase in the ~~end~~average ~~of each~~yield ~~year~~on these loans to 6.01% for 2005 from 5.71% for 2004. The Company would have recorded an additional $11,033 and $31,984 in interest income for the years ended December 31, 2005 and 2004, respectively, had its non-accrual loans been current in accordance with their original terms.

~~NOTE~~Other 5interest -income ~~LOAN~~of ~~PAYABLE~~$25,016 TOand ~~PARENT:~~$11,491 was recognized on the Company’s interest bearing deposits during the years ended December 31, 2005 and 2004, respectively. The increase was due to higher average balances and a higher average yield on interest bearing deposits from the 2004 period.

The Company’s ~~borrowed~~ $75,000,000 ~~from~~loan ~~the~~payable ~~Bank on December 20, 2004, and used the proceeds~~ to ~~purchase~~ ~~adjustable-rate Residential Mortgage Loans from~~ the Bank. ~~The~~resulted ~~loan payable~~in isinterest ~~secured~~expense ~~by a portion~~ of ~~the~~$3,153,396 ~~Residential~~for ~~Mortgage~~2005 ~~Loan~~and ~~portfolio~~$81,500 ~~and the~~for ~~interest rate on the loan payable adjusts monthly based on changes in one-month LIBOR~~2004.

~~The~~There ~~loan~~were ~~payable requires~~ no ~~payment~~provisions offor ~~principal~~loan ~~until~~losses itduring ~~matures on August 31, 2007, but can be prepaid at any time. Interest is payable monthly at a variable rate equal to~~ the ~~sum~~years ~~of one-month~~ended ~~LIBOR plus 0.85%. At~~ December 31, ~~2004,~~2005 ~~the~~and ~~interest rate was 3~~2004.~~26%.~~

~~NOTE~~Operating 6expenses -totaling ~~PREFERRED~~$1,245,429 ~~STOCK:~~and $1,020,672 for the years ended December 31, 2005 and 2004, 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 $911,577 and $650,912 for the years ended December 31, 2005 and 2004, respectively, and were based on a servicing fee rate of 0.250% per annum of the outstanding principal balances of residential mortgage loans, pursuant to the Servicing Agreement. The increase in servicing fees paid in 2005 resulted from an increase in the average balance of the Residential Mortgage loan portfolio. Advisory fees paid to parent for the years ended December 31, 2005 and 2004 totaled $200,000 for each period. Directors’ fees paid were $32,000 and $32,751 for the years ended December 31, 2005 and 2004, respectively, and represent compensation to the two independent members of the Board of Directors. General and administrative expenses totaled $101,852 and $137,009 for the years ended December 31, 2005 and 2004, respectively. The decrease in general and administrative expenses is largely due to a decrease in rating agency fees.

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. -20-

~~The Series A Preferred~~ ~~Shares~~During ~~are~~the ~~redeemable~~year atended ~~the~~December ~~option~~31, of2005, the Company’s atBoard ~~any~~of ~~time~~Directors ondeclared orcash ~~after January~~dividends of $15, ~~2007~~562,500, inrepresenting ~~whole~~$5.1875 orper inshare ~~part,~~on at the ~~following~~outstanding ~~per~~shares ~~share~~of ~~redemption prices~~Series ~~plus~~A ~~accrued~~Preferred ~~and~~Shares, ~~unpaid~~out ~~dividends:~~of the retained earnings of the Company.

~~F-10~~Also during the year ended December 31, 2005, the Company’s Board of Directors declared cash dividends of $2,300,000, representing $23,000.00 per share of Common Stock, which were paid out of the retained earnings of the Company.

~~NOTE~~Year 62004 -Compared ~~PREFERRED~~to ~~STOCK~~Year ~~(Continued):~~2003

IfThe ~~redeemed~~Company ~~during~~reported ~~the 12-month~~net ~~period Redemption beginning~~income ~~January~~of 15$16, ~~Price -------------------------- ------------- 2007~~ 292,358 and $ 5215,932,123 for the years ended December 31, 2004 and 2003, respectively.594 2008 52.075 2009 51.556 2010 51.038 2011 50.519 2012 The increase in net income is due primarily to an increase in interest income on Residential Mortgage Loans and ~~thereafter 50~~a reduction in operating expenses partially offset by an increase in interest expense.~~000~~

~~NOTE~~Total 7interest 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 ~~DIVIDENDS:~~loans been current in accordance with their original terms.

~~During~~Other interest income of $11,491 and $22,540 was recognized on the ~~year~~Company’s interest bearing deposits during the years ended December 31, 2004 and 2003, ~~the~~respectively. The ~~Company’s~~decrease ~~Board~~was due to lower average balances of ~~Directors~~interest ~~declared~~bearing deposits to $151,~~562~~410,~~500~~211 ~~of preferred~~in ~~stock~~the ~~dividends~~2004 ~~out~~period offrom ~~retained~~$3,464,460 ~~earnings~~in of the ~~Company~~2003 period. Partially ~~The Company’s~~offsetting ~~Board~~the ofdecrease ~~Directors~~in ~~also~~interest ~~declared~~income ~~$742~~on interest bearing deposits was a higher average yield on interest bearing deposits,~~614~~ ofwhich ~~common~~increased ~~stock dividends~~by ~~out~~16 ofbasis ~~retained~~points ~~earnings~~(to of0.81% ~~the~~from ~~Company~~0.65%) from the average yield in the 2003 period.

OfThere ~~these~~were ~~amounts,~~no ~~preferred stock~~provisions ~~dividends~~for ofloan ~~$3,890,625~~losses ~~and~~during ~~common~~the ~~stock~~years ~~dividends~~ended ~~of $700,000 were paid subsequent to~~ December 31, 2004. and 2003.

~~NOTE~~Operating 8expenses -totaling ~~RELATED~~$1,020,672 ~~PARTY~~and ~~TRANSACTIONS:~~$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 ended December 31, 2004 and 2003, 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, 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 was due to increases in legal expenses.

~~The~~During ~~Company has entered into an advisory agreement (~~the ~~“Advisory~~year ~~Agreement”)~~ended ~~with~~December ~~the~~31, ~~Bank (the~~2004, ~~“Advisor”). The Advisor provides advice to~~ the Company’s Board of Directors ~~and~~ ~~manages~~declared ~~the~~cash ~~operations~~dividends of ~~the~~$15,562,500, ~~Company~~representing ~~as defined in the Advisory Agreement~~$5. ~~The~~1875 ~~Advisory~~per ~~Agreement~~share ~~has~~on anthe ~~initial~~outstanding ~~term~~shares of ~~three~~Series ~~years~~A ~~commencing~~Preferred ~~on December 3~~Shares, ~~1996~~out ~~and~~of ~~is automatically renewed for additional one-year periods unless~~ the ~~Company~~ ~~delivers~~retained aearnings ~~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~~Also ~~Company~~during ~~also entered into a servicing agreement with~~ the ~~Bank~~year ~~for~~ended ~~the~~December ~~servicing~~31, ~~of its residential mortgage loans (the “Servicing Agreement”). Pursuant to the Servicing Agreement~~2004, the ~~Bank~~Company’s ~~performs~~Board ~~the servicing~~ of ~~the~~Directors ~~loans~~declared ~~owned~~cash bydividends ~~the~~of ~~Company~~$742,614, ~~in accordance~~representing ~~with normal industry practice~~$7,426.14 ~~The~~per ~~Servicing~~share ~~Agreement can be terminated without cause upon sixty days’ notice to the servicer and payment~~ of aCommon ~~termination fee. Effective July 1~~Stock, ~~2003,~~which ~~the servicing agreement~~ was ~~modified to reduce the servicing fee~~ paid toout ~~the Bank to 0.250%~~ of the ~~outstanding~~ ~~loan~~retained ~~balance~~earnings ~~from~~of ~~0.375%. Servicing fees for~~ the ~~years ended December 31, 2004, 2003 and 2002 totaled $650,912, $747,976 and $939,336, respectively~~Company.

~~The~~ITEM ~~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~~7A. ~~The~~QUANTITATIVE ~~loan payable~~AND isQUALITATIVE ~~secured~~DISCLOSURES byABOUT aMARKET ~~portion of the Residential Mortgage Loan portfolio and the interest rate on the loan payable adjusts monthly based on changes in one-month LIBOR.~~ RISK

~~The~~Information ~~Company~~required ~~had~~by ~~cash balances~~this ofitem ~~$2,318,102~~is ~~and~~included ~~$5,411,004~~in asItem ~~of December 31~~7, ~~2004~~“Management’s Discussion and ~~2003, respectively,~~Analysis ~~held~~of inFinancial ~~various~~Condition ~~deposit~~and ~~accounts~~Results ~~with~~of ~~the~~Operations ~~Bank.~~- Interest ~~earned~~Rate ~~on these accounts was $11,491, $22,540 and $85,483 for the years ended December 31, 2004, 2003 and 2002, respectively~~Risk. ”

~~NOTE 9~~ - ~~ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:~~21-

~~The~~ITEM ~~majority of the Company’s assets are financial instruments; however, certain of these financial instruments lack an available trading market~~8. ~~Significant~~FINANCIAL ~~estimates, assumptions~~STATEMENTS ~~and~~AND ~~present~~SUPPLEMENTARY ~~value calculations were therefore used for the purposes of deriving the fair values of the Company’s financial instruments, resulting in a degree of~~ DATA

~~F-11~~CONTENTS

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

		Page

(a)	Report of Independent Registered Public Accounting Firm....................................................		F-2

(b)	Statements of Financial Condition at December 31, 2005 and 2004..........................................		F-3

(c)	Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003.......................		F-4

(d)	Statements of Stockholders’ Equity for the Years Ended December 31, 2005, 2004 and 2003..........		F-5

(e)	Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003.....................		F-6

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

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. F-1

~~The~~Report ~~estimated fair values~~ of ~~the~~Independent ~~Company’s~~Registered ~~financial~~Public ~~instruments~~Accounting ~~at December 31, 2004 and 2003 are as follows:~~ Firm

~~December~~The ~~31,~~Board 2004 ---------------------------------- Carrying Fair Amount Value --------------- ---------------- Financialof ~~assets: Cash~~Directors ~~and~~of ~~interest-bearing~~Chevy ~~deposits $ 2,318,102 $ 2,318,102 Residential~~Chase ~~mortgage~~Preferred ~~loans,~~Capital 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 assetsCorporation: ~~Cash and interest-bearing deposits $ 5,411,004 $ 5,411,004 Residential mortgage loans, net 296,062,742 302,201,000~~

~~The~~We ~~following~~have ~~methods~~audited ~~and assumptions~~the ~~were~~accompanying ~~used~~statements toof ~~estimate~~financial ~~the~~condition ~~fair~~of ~~value~~Chevy ~~amounts~~Chase atPreferred Capital Corporation (the “Company,”) as of December 31, 2005 and 2004 , and ~~2003~~the related statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. 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.

~~Carrying~~We ~~amount~~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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included 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 such 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 ~~approximates~~estimates ~~fair~~made ~~value~~by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

~~Fair~~In ~~value~~our isopinion, ~~estimated using~~the ~~discounted~~financial ~~cash~~statements ~~flow~~referred ~~analyses~~to ~~based~~above onpresent ~~contractual~~fairly, ~~repayment~~in ~~and anticipated~~all ~~prepayment~~material ~~schedules.~~respects, ~~The~~the ~~discount~~financial ~~rates~~position ~~used~~of inthe ~~these~~Company ~~analyses~~at ~~are based~~December on31, ~~either~~2005 ~~the~~and ~~interest~~2004, ~~rates~~and ~~paid~~the onresults ~~U.S.~~of ~~Treasury~~its ~~securities~~operations ~~of comparable~~and ~~maturities~~its ~~adjusted~~cash flows for ~~credit~~each ~~risk~~of ~~and~~the ~~non-interest~~three ~~operating~~years ~~costs, or~~in the ~~interest~~period ~~rates~~ended ~~currently~~December ~~offered~~31, ~~for~~2005, ~~loans~~in conformity with ~~similar~~U.S. ~~terms~~generally ~~to borrowers~~accepted ofaccounting ~~similar credit quality~~principles.

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

~~F-12~~February 17, 2006

~~NOTE 10~~ F- ~~QUARTERLY FINANCIAL DATA (Unaudited):~~2

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.

CHEVY CHASE PREFERRED CAPITAL CORPORATION STATEMENTS OF FINANCIAL CONDITION


	December 31,
	2005	2004

ASSETS

Cash and interest-bearing deposits	$ 1,913,298	$ 2,318,102
Residential mortgage loans (net of allowance for loan losses of $40,333 for both years)	376,814,496	374,458,643
Accounts receivable from parent	1,458,559	1,591,546
Accrued interest receivable	1,543,716	1,346,764
Prepaid expenses	5,000	5,000

Total assets	$ 381,735,069	$ 379,720,055

LIABILITIES AND STOCKHOLDERS’ EQUITY

Loan payable to parent	$ 75,000,000	$ 75,000,000
Accounts payable to others and accrued expenses	9,624	41,063
Accrued interest payable to parent	319,523	81,500
Dividends payable to parent	2,300,000	700,000
Dividends payable to others	3,890,625	3,890,625

Total liabilities	81,519,772	79,713,188

Preferred Stock, 10,000,000 shares authorized: 10d% 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	215,297	6,867
Total stockholders’ equity	300,215,297	300,006,867

Total liabilities and stockholders’ equity	$ 381,735,069	$ 379,720,055











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

F-13

~~NOTE~~CHEVY 10CHASE –PREFERRED ~~QUARTERLY~~CAPITAL ~~FINANCIAL DATA (Unaudited) (Continued):~~CORPORATION

~~2004 For~~STATEMENTS ~~the~~OF 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 ============ ============ ============ ============ OPERATIONS

F-13

	Year Ended December 31,
	2005	2004	2003
Interest income:
Residential mortgage loans	$ 22,444,739	$ 17,383,039	$ 17,012,620
Other	25,016	11,491	22,540
Total interest income	22,469,755	17,394,530	17,035,160

Interest expense	3,153,396	81,500	-

Total operating income	19,316,359	17,313,030	17,035,160

Operating expenses:
Loan servicing fees-parent	911,577	650,912	747,976
Advisory fees-parent	200,000	200,000	200,000
Directors’ fees	32,000	32,751	36,000
General and administrative	101,852	137,009	119,061
Total operating expenses	1,245,429	1,020,672	1,103,037

NET INCOME	$ 18,070,930	$ 16,292,358	$ 15,932,123

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

EARNINGS AVAILABLE TO
COMMON STOCKHOLDER	$ 2,508,430	$ 729,858	$ 369,623

AVERAGE COMMON SHARES	100	100	100

EARNINGS PER COMMON SHARE	$ 25,084.30	$ 7,298.58	$ 3,696.23


















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

~~ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE~~F-4

ITEM 9A. CONTROLS AND PROCEDURES

CHEVY CHASE PREFERRED CAPITAL CORPORATION STATEMENTS OF STOCKHOLDERS’ EQUITY

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

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 10d%
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 10d%
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

Net income	-	-	-	18,070,930	18,070,930
Dividends on 10d%
Noncumulative Exchangeable
Preferred Stock, Series A	-	-	-	(15,562,500)	(15,562,500)
Dividends on common stock	-	-	-	(2,300,000)	(2,300,000)

Balance, December 31, 2005	$ 15,000,000	$ 100	$ 284,999,900	$ 215,297	$ 300,215,297













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

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. F-5

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.

CHEVY CHASE PREFERRED CAPITAL CORPORATION STATEMENTS OF CASH FLOWS
	Year Ended December 31,
	2005	2004	2003
Cash flows from operating activities:

Net income	$ 18,070,930	$ 16,292,358	$ 15,932,123

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Decrease in accounts receivable from parent	132,987	163,823	13,541,771
(Increase) decrease in accrued interest receivable	(196,952)	(315,412)	106,894
Decrease in prepaid expenses	-	1,500	1,500
Increase (decrease) in accounts payable to others and accrued expenses	(31,439)	34,344	6,719
Increase in accrued interest payable to parent	238,023	81,500	-

Net cash provided by operating activities	18,213,549	16,258,113	29,589,007

Cash flows from investing activities:

Purchases of residential mortgage loans	(151,039,626)	(214,098,734)	(279,698,324)
Repayments of residential mortgage loans	148,683,773	135,702,833	269,031,046

Net cash used in investing activities	(2,355,853)	(78,395,901)	(10,667,278)

Cash flows from financing activities:

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

Net cash provided by (used in) financing activities	(16,262,500)	59,044,886	(16,497,221)

Net increase (decrease) in cash and cash equivalents	(404,804)	(3,092,902)	2,424,508

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

Cash and cash equivalents at end of year	$ 1,913,298	$ 2,318,102	$ 5,411,004
















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

~~ITEM 9B. OTHER INFORMATION~~F-6

~~PART~~CHEVY ~~III~~CHASE PREFERRED CAPITAL CORPORATION

~~ITEM~~NOTES ~~10.~~TO ~~DIRECTORS~~FINANCIAL ~~AND EXECUTIVE OFFICERS OF THE REGISTRANT~~STATEMENTS

~~DIRECTORS~~DECEMBER ~~AND~~31, ~~EXECUTIVE~~2005, ~~OFFICERS~~2004 and 2003

~~The~~NOTE ~~Company’s~~1 ~~Board~~– ~~of Directors~~ORGANIZATION ~~currently~~AND ~~consists~~BASIS 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. PRESENTATION:

~~The~~Chevy ~~following~~Chase ~~persons~~Preferred ~~are~~ 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 ~~current~~Common ~~directors~~Stock ~~and/or~~(as ~~executive~~defined ~~officers~~below). The Bank is in compliance with its regulatory capital requirements.

~~Name Age Position~~NOTE ~~and~~2 ~~Offices~~– ~~Held ------------------------------~~SUMMARY ~~-----~~OF ~~------------------------------------------- B.~~SIGNIFICANT ~~Francis~~ACCOUNTING 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 POLICIES:

~~-19-~~Use of Estimates:

The ~~following~~financial statements have been prepared in conformity with accounting principles generally accepted in the United States. In preparing the financial statements, management is arequired ~~summary~~ to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the ~~experience~~date of the ~~executive~~statements ~~officers~~of financial condition and~~/or~~ ~~directors~~income ofand expenses for the ~~Company:~~reporting periods. Actual results could differ from those estimates.

~~B. FRANCIS SAUL~~Cash ~~II serves as Chairman of the Board~~ and ~~Chief Executive Officer~~Cash 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.Equivalents:

~~ALEXANDER~~For R.purposes ~~M. BOYLE has been Vice Chairman~~ of ~~the~~reporting ~~Board~~cash ~~of Directors of the Bank since 1985. Prior to beginning service in this position~~flows, ~~Mr.~~cash ~~Boyle was the President~~ and acash ~~member~~equivalents ~~of the~~include ~~Board~~cash ~~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 Bethesdainterest-~~Chevy~~bearing ~~Chase~~deposits.

~~STEPHEN~~Residential R.Mortgage 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. Loans:

~~THOMAS~~Residential ~~H. MCCORMICK joined~~mortgage ~~the~~loans ~~Bank~~are incarried ~~February 2005.~~at Heamortized ~~serves as Executive Vice President and General Counsel of the Bank~~cost. ~~Mr. McCormick, prior~~Interest toincome ~~joining the~~is ~~Bank, was~~accrued ~~a senior partner with Shaw Pittman, LLP. He also served as the former Chair of Shaw Pittman's Board of Directors~~ and ~~its~~recognized ~~Corporate~~based ~~and~~on ~~Securities group. Mr. McCormick is a member of~~ the ~~American~~terms ~~Bar Association and the National Association~~ of ~~Real~~each ~~Estate Investment Trusts~~loan.

N.Loans ~~ALEXANDER MACCOLL, JR.~~are ~~was~~reviewed on a ~~Senior~~monthly ~~Vice~~basis ~~President~~and ofare ~~the~~placed ~~Union~~on ~~Trust~~non-accrual ~~Company~~status ~~Loan~~when, ~~Production Office~~in ~~from~~the ~~1982~~opinion ~~until~~of ~~1990~~management, ~~when~~the ~~he retired. He~~full ~~served~~collection ~~as Corporate Vice President~~ of ~~Colonial Bancorp~~ principal and interest has become unlikely. ~~from~~Uncollectible ~~1977~~accrued ~~until 1981~~interest receivable on non-accrual loans is charged against current period income. ~~Prior~~The toCompany ~~his position~~ had non-accrual loans at ~~Colonial Bancorp.~~December 31, he2005 ~~served~~and as2004 ~~Second~~totaling ~~Vice~~$689,796 ~~President~~and of$546,701, respectively. The Company would have recorded an additional $11,033 and $31,984 in interest income for the ~~National~~years ~~Bank~~ended ofDecember ~~Detroit~~31, ~~from~~2005 ~~1962~~and ~~until~~2004, ~~1977.~~respectively, had its non-accrual loans been current in accordance with their original terms.

H.Allowance ~~GREGORY~~for ~~PLATTS currently serves~~Loan 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. Losses:

~~CODE~~Management OFperiodically ~~BUSINESS~~reviews ~~CONDUCT~~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.

~~The~~Concentrations ~~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. Credit:

~~-20-~~Residential Mortgage Loans secured by residential real estate properties located in the Washington, DC metropolitan area equaled 43.6% of total residential loans at December 31, 2005. In addition, 12.7% of the Residential Mortgage Loans are secured by residential real estate properties located in California. Consequently, adverse economic, political, or business developments in Washington DC, Maryland, Virginia and California may affect the Company’s loan portfolio to a greater degree than a more diversified portfolio.

~~AUDIT COMMITTEE~~F-7

~~The~~CHEVY ~~Company’s~~CHASE ~~audit committee~~PREFERRED ~~reviews~~CAPITAL 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. CORPORATION

~~The~~NOTES ~~Company’s~~TO ~~Board~~FINANCIAL 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.” STATEMENTS

~~SECTION~~DECEMBER ~~16(a)~~31, ~~BENEFICIAL~~2005, ~~OWNERSHIP~~2004 ~~REPORTING~~and ~~COMPLIANCE~~2003

~~Section 16(a) of the~~ ~~Securities~~NOTE ~~Exchange~~2 ~~Act~~– ofSUMMARY ~~1934,~~OF asSIGNIFICANT ~~amended~~ACCOUNTING ~~(the~~POLICIES “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(aContinued) ~~forms that they file.~~ :

~~Based~~Accounts ~~solely~~Receivable ~~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. Parent:

~~ITEM~~Accounts 11receivable from parent represents principal and interest payments received from borrowers by the Bank as servicer of the mortgage loans. These ~~EXECUTIVE~~payments ~~COMPENSATION~~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.

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. Dividends:

~~-21-~~Preferred Stock. Dividends on the Series A Preferred Shares are payable at a rate of 10d% 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.

~~ITEM~~Common 12Stock. The ~~SECURITY~~stockholder ~~OWNERSHIP~~is OFentitled ~~CERTAIN~~to ~~BENEFICIAL~~receive ~~OWNERS~~dividends ~~AND~~if, ~~MANAGEMENT~~when ~~AND~~and ~~RELATED~~as ~~STOCKHOLDER~~declared ~~MATTERS~~by the Board of Directors out of funds legally available after all preferred dividends have been paid.

~~The~~Earnings ~~Company~~Per ~~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. Share:

~~Names~~Dividends ~~and~~on ~~Address~~preferred ~~of Amount~~stock ofare ~~Beneficial Percent~~deducted offrom ~~Class~~earnings ~~of Beneficial~~in ~~Owner(1) Ownership Outstanding~~the ~~Shares ---------------------------------------- -------------------- ------------------- Chevy~~computation ~~Chase~~of ~~Bank,~~earnings ~~F.S.B. 100 Common~~per -common ~~100% B.~~share ~~Francis~~when ~~Saul~~declared IIby ~~(2)(3) 0 0% Alexander~~the R.Company’s M.Board ~~Boyle~~of ~~(2) 0 0% Stephen R~~Directors. Because ~~Halpin,~~there ~~Jr.~~are ~~(2)(3) 1,000 Preferred~~no -dilutive ~~0.033% Thomas H. McCormick (2)(3) 0 0% N. Alexander MacColl~~securities, ~~Jr.~~basic ~~(2) 0 0% H.~~earnings ~~Gregory~~per ~~Platts~~common ~~(2) 0 0% All~~share ~~directors and executive officers as a group (6 persons) 1,000 Preferred - 0.033% __________ (1) The address of each beneficial owner~~ is ~~7501~~equal ~~Wisconsin~~to ~~Avenue,~~diluted ~~Bethesda,~~earnings ~~Maryland~~per ~~20814. (2)~~common ~~Indicates a director of the Company~~share. ~~(3) Indicates an executive officer of the Company.~~

~~ITEM~~Income ~~13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS~~Taxes:

~~Set~~The ~~forth~~Company ~~below~~has ~~are~~elected, ~~certain transactions~~for ~~between~~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 ~~and~~is generally not subject to Federal corporate income taxes on its ~~directors~~net income (excluding capital gains) to the extent it distributes at least 100% of its annual REIT taxable income to stockholders and ~~affiliates~~as long as certain asset, income and stock ownership tests are met in accordance with the IRC. To ~~Management believes~~remain ~~that~~qualified as a REIT, the ~~transactions~~Company ~~with~~must ~~related~~(a) ~~parties~~distribute ~~described~~each ~~herein~~year ~~have~~at ~~been conducted~~least on90% ~~substantially~~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 ~~same~~Company ~~terms~~believes it qualifies as ~~similar~~a ~~transactions~~REIT ~~with~~for ~~unrelated~~Federal ~~parties.~~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.

The ~~Bank~~American ~~administers~~Jobs ~~the day-to-day~~Creation ~~operations~~Act of ~~the~~2004 ~~Company~~introduced several changes to REIT qualification standards. The changes excuse certain REIT asset and isorganization ~~entitled~~test tofailures, ~~receive~~but ~~fees~~generally ~~in connection~~require ~~with~~payment ~~the~~of ~~Advisory~~a ~~Agreement.~~penalty ~~Advisory~~and ~~fees~~demonstration ~~paid~~of toreasonable cause for the ~~Bank~~failure. Compliance ~~for~~with the ~~year~~ ~~ended~~relief ~~December~~provisions ~~31,~~preserves ~~2004~~a ~~totaled~~company's ~~$200,000~~REIT status. The ~~See~~changes ~~“Business~~are -effective ~~The Advisor.”~~beginning with the Company's 2005 tax year.

~~The~~On ~~Bank~~March ~~services~~14, ~~the Residential~~2006, ~~Mortgage Loans included in~~ the Company’s ~~portfolio~~Board ~~and~~of ~~is entitled~~Directors todeclared ~~receive~~a ~~fees~~cash individend ~~connection~~of ~~with~~$2,301.04 ~~the~~per ~~Servicing~~share ~~Agreement.~~of ~~Loan servicing~~Common ~~fees~~Stock, which was paid toout ~~the~~of ~~Bank~~retained ~~for~~earnings of the ~~year~~Company ~~ended~~and ~~December~~which 31will be treated, ~~2004~~for ~~totaled $650~~tax purposes,~~912.~~ ~~See~~as ~~“Business~~a -distribution ~~Servicing~~made in 2005.” Including this dividend, the Company will have distributed 100% of its REIT taxable income.

~~The Company borrowed $75,000,000 from the Bank on December 20, 2004, and used the proceeds to purchase adjustable~~F-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. 8

~~The~~CHEVY ~~Company~~CHASE ~~had~~PREFERRED ~~cash balances~~CAPITAL ~~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.~~ CORPORATION

~~-22-~~NOTES TO FINANCIAL STATEMENTS

~~During~~DECEMBER ~~2004~~31, ~~and through January~~ 2005, ~~Thomas~~2004 ~~H. McCormick was a partner of Shaw Pittman LLP, principal outside counsel to the Company~~ and ~~to the Bank.~~ 2003

~~ITEM~~ NOTE ~~14.~~2 ~~PRINCIPAL~~– ~~ACCOUNTANTS~~SUMMARY ~~FEES~~OF ~~AND~~SIGNIFICANT ~~SERVICES~~ACCOUNTING POLICIES (Continued):

~~The~~Income ~~firm~~Taxes 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(Continued):

~~December~~There ~~31, --------------------------------- Types~~are oftwo ~~Fees~~income ~~and~~tests Services 2004 2003 ------------------------------- --------------- -------------- Audit $ 26,203 $ 26,392 Taxthat (1) 4,400 4,000 --------------- -------------- Total $ 30,603 $ 30,392 =============== ============== (1)must ~~Fees~~be ~~and~~satisfied ~~services~~for ~~related~~each totaxable ~~federal and state income tax returns, tax advice and tax planning~~year.

~~The~~• ~~Audit~~At ~~Committee approves,~~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 ~~advance~~real property, gains from the ~~engagement~~sale or other disposition of ~~the~~real ~~independent~~property ~~accountants~~(including tointerests ~~provide services~~in tomortgages ~~the~~on ~~Company.~~real property), and certain other sources;

~~-23-~~• 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.

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

~~ITEM~~• ~~15.~~At ~~EXHIBITS~~least ~~AND~~75% ~~FINANCIAL~~of ~~STATEMENT~~the ~~SCHEDULES~~value of the Company’s total assets must be represented by real estate assets, cash, cash items, and government securities;

~~(a)1 The~~• ~~following~~Not ~~financial~~more ~~statements~~than of25% ~~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~~total ~~Annual~~assets ~~Report~~may onbe ~~Form~~represented ~~10-K). 3.2 Bylaws of the Company (incorporated herein~~ by ~~reference~~securities toother ~~Exhibit~~than ~~3(b)~~those ofin ~~Form S-11 (file number 333-10495) filed by~~ the ~~Company). 4.1 Articles Supplementary of 10 3/8~~75% ~~Noncumulative~~asset ~~Exchangeable~~class; 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-~~• 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 total assets and the Company may not own more than 10% of the total voting power or value of the outstanding securities of any one issuer.

~~EXHIBIT~~The 12stock ownership test has two components.1 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.

~~CHEVY~~During ~~CHASE~~2005, ~~PREFERRED~~the ~~CAPITAL~~Company ~~CORPORATIONCOMPUTATION~~met OFthe ~~RATIO~~requirements OFof ~~EARNINGS~~each ~~TO FIXED CHARGESAND PREFERRED STOCK DIVIDEND REQUIREMENTS~~test.

~~------------------------------------------------------------------------------------------------------ (in~~NOTE ~~thousands,~~3 ~~except~~– ~~ratio~~RESIDENTIAL ~~data) As~~MORTGAGE 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 LOANS:

~~SIGNATURES~~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:

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.F-9

CHEVY CHASE PREFERRED CAPITAL CORPORATION

~~By: /s/~~NOTES B.TO ~~Francis~~FINANCIAL Saul II ----------------------------------------- B. Francis Saul II Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) STATEMENTS

~~Pursuant~~DECEMBER to31, ~~the requirements of the Securities Exchange Act of 1934~~2005, ~~this~~2004 ~~report has been signed below by the following officers~~ and ~~directors of the Registrant and in the capacities and on the dates indicated.~~ 2003

~~NAME TITLE DATE~~ ~~------------------------------------------------------------------------------------------ /s/~~NOTE ~~Alexander~~3 ~~R.M.~~– ~~Boyle Director March~~RESIDENTIAL ~~23,~~MORTGAGE ~~2005 ----------------------------- Alexander~~LOANS ~~R.M. Boyle /s/ Joel A. Friedman Senior Vice President March 23, 2005 ----------------------------- and Controller Joel A. Friedman~~ (~~Principal Accounting Officer~~Continued) /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

	December 31,
	2005	2004
Payment Option ARMs	$ 72,466,980	$ 107,438,487
One-Year ARMs	8,545,766	13,985,393
Three-Year ARMs	25,589,269	13,040,178
Five-Year ARMs	180,269,621	110,068,100
7/1 ARMs	3,559,239	6,229,074
10/1 ARMs	11,376,174	17,658,506
15 & 30 Year Fixed-Rate	75,047,780	106,079,238
Subtotal	376,854,829	374,498,976
Less:
Allowance for loan losses	40,333	40,333
Total	$ 376,814,496	$ 374,458,643

~~CERTIFICATION~~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.

I,NOTE 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~~ALLOWANCE ~~15d-15(e))~~FOR ~~for~~LOAN ~~the registrant and have~~LOSSES: 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~~There was no activity in the allowance for loan losses during the years ended December 31, 2005, 2004 and 2003, and the balance of the allowance for loan losses was $40,333 at the end of each year.2

~~CERTIFICATION~~NOTE 5 – LOAN PAYABLE TO PARENT:

I,The ~~Stephen~~Company R.borrowed ~~Halpin~~$75, ~~Jr.~~000,000 ~~certify~~from ~~that: 1. I~~the ~~have~~Bank ~~reviewed this annual report~~ on ~~Form 10-K for the year ending~~ December 3120, 2004 ~~of Chevy Chase Preferred Capital Corporation; 2. Based on my knowledge~~, ~~this~~and ~~report~~used ~~does not contain any untrue statement of a material fact or omit to state a material fact necessary to make~~ the ~~statements~~proceeds ~~made, in light of the circumstances under which such statements were made, not misleading with respect~~ to ~~the~~purchase ~~period~~Residential ~~covered~~Mortgage byLoans ~~this~~from ~~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; 4Bank. The ~~registrant's~~loan 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~~secured ~~known to us~~ by ~~others~~a ~~within~~portion ~~those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness~~ of the ~~registrant's~~Residential ~~disclosure~~Mortgage ~~controls~~Loan ~~and~~portfolio, ~~procedures~~ and ~~presented in this report our conclusions about~~ the ~~effectiveness~~interest ofrate ~~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~~loan ~~internal~~adjusts ~~control~~monthly 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~~changes 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. one-~~----------------------------- Stephen~~month RLIBOR. ~~Halpin, Jr. Director, Executive Vice President and Chief Financial Officer~~

~~Exhibit~~The 32loan requires no payment of principal until it matures on August 31, 2007, but can be prepaid at any time.1 Interest is payable monthly at a variable rate equal to the sum of one-month LIBOR plus 0.85%. At December 31, 2005, the interest rate was 5.14%.

~~CERTIFICATION~~NOTE OF6 ~~CHIEF~~- ~~EXECUTIVE~~PREFERRED ~~OFFICER~~STOCK:

~~PURSUANT~~On TODecember 183, U1996, the Company sold $150,000,000 of Series A Preferred Shares, $5.S00 par value and received net cash proceeds of $144 million.C 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 10d%. The ~~SECTION~~liquidation ~~1350~~value ASof ~~ADOPTED~~each ~~PURSUANT~~Series ~~TOSECTION~~A ~~906~~Preferred OFShare ~~THE~~is ~~SARBANES-OXLEY~~$50 ~~ACT~~plus OFaccrued ~~2002~~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 ~~undersigned,~~Series B.A ~~Francis Saul~~Preferred ~~II,~~Shares ~~the~~are ~~Chairman~~redeemable ~~and~~at ~~Chief~~the ~~Executive~~option ~~Officer~~ of ~~Chevy Chase Preferred Capital Corporation (~~the “Company~~”),~~ ~~has~~at ~~executed~~any ~~this~~time ~~certification in~~on ~~connection~~or ~~with~~after ~~the~~January ~~filing~~15, ~~with~~2007, ~~the~~in ~~Securities~~whole ~~and~~or ~~Exchange~~in ~~Commission~~part, ofat the ~~Company’s~~ ~~Annual~~following ~~Report~~per onshare ~~Form~~redemption ~~10-K~~prices ~~for~~plus ~~the~~accrued ~~year~~and ~~ending~~unpaid ~~December 31, 2004 (the “Report”). The undersigned hereby certifies that~~dividends:

(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 F-~~------------------------------------ B. Francis Saul II Chairman and Chief Executive Officer~~ 10

~~Exhibit~~CHEVY ~~32.2~~CHASE PREFERRED CAPITAL CORPORATION

~~CERTIFICATION~~NOTES OFTO ~~CHIEF~~ FINANCIAL ~~OFFICER~~STATEMENTS

~~PURSUANT~~DECEMBER TO31, 182005, ~~U.S.C.~~2004 ~~SECTION~~and ~~1350 AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002~~2003

~~The undersigned, Stephen R.~~ ~~Halpin,~~NOTE ~~Jr.,~~6 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~~PREFERRED ~~the~~STOCK ~~year ending December 31, 2004~~ (~~the “Report”~~Continued)~~. 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

If redeemed during the 12-month period beginning January 15,		Redemption 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, 2005, 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 $2,300,000 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 $2,300,000 were paid subsequent to December 31, 2005.

NOTE 8 - 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 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, 2005, 2004 and 2003 totaled $911,577, $650,912 and $747,976, respectively.

The Company borrowed $75,000,000 from the Bank on December 20, 2004, and used the proceeds to purchase 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.

The Company had cash balances of $1,913,298 and $2,318,102 as of December 31, 2005 and 2004, respectively, held in various deposit accounts with the Bank. Interest earned on these accounts was $25,016, $11,491 and $22,540 for the years ended December 31, 2005, 2004 and 2003, 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

CHEVY CHASE PREFERRED CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 and 2003

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

The estimated fair values of the Company’s financial instruments at December 31, 2005 and 2004 are as follows:

	December 31, 2005
	Carrying Amount	Fair Value
Financial assets:
Cash and interest-bearing deposits	$ 1,913,298	$ 1,913,298
Residential mortgage loans, net	376,814,496	389,322,000

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

	December 31, 2004
	Carrying Amount	Fair 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

The following methods and assumptions were used to estimate the fair value amounts at December 31, 2005 and 2004.

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.

NOTE 10 – QUARTERLY FINANCIAL DATA (Unaudited):

F-12

CHEVY CHASE PREFERRED CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 and 2003

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

	2005 For the quarter ended
	March 31	June 30	September 30	December 31
OPERATING DATA:

Interest income	$ 5,387,772	$ 5,544,819	$ 5,605,619	$ 5,931,545
Interest expense	(638,542)	(735,018)	(844,163)	(935,673)
Operating expenses	(304,658)	(342,808)	(301,089)	(296,874)
Net income	$ 4,444,572	$ 4,466,993	$ 4,460,367	$ 4,698,998
Preferred Stock dividends	$ 3,890,625	$ 3,890,625	$ 3,890,625	$ 3,890,625
Earnings available to common stockholders	$ 53,947	$ 576,368	$ 569,742	$ 808,373
Average common shares	100	100	100	100
Earnings per common share	$ 5,539.47	$ 5,763.68	$ 5,697.42	$ 8,083.73
	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

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, 2005. 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, 2005.

During the three months ended December 31, 2005, 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 2005 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	73	Chairman of the Board, President and Chief Executive Officer

Alexander R. M. Boyle	68	Director

Stephen R. Halpin, Jr.	50	Executive Vice President, Chief Financial Officer, Treasurer and Director

Thomas H. McCormick	55	Executive Vice President, General Counsel and Director

N. Alexander MacColl, Jr.	71	Director

H. Gregory Platts	58	Director

-22-

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

B. FRANCIS SAUL II has served as Chairman of the Board and Chief Executive Officer of the Company since its formation in 1996. He also 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, 2005, 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 B. F. Saul Advisory Company and Chevy Chase Property Company Limited. He serves as Chairman of the Board and Chief Executive Officer of Saul Centers, Inc., a public real estate investment trust. Mr. Saul is the father of B. Francis Saul III, a director of the Bank. Mr. Saul serves as a Trustee of the National Geographic Society and the Johns Hopkins Medicine Board. He also serves as a member of the Trustees Council of the National Gallery of Art and is 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 a Director of the Company since its formation in 1996. He also 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 American Bankers Association and has been appointed to a two-year term on the Thrift Institutions Advisory Council of the Federal Reserve Board. He is also a member of the Rotary Club of Bethesda-Chevy Chase.

STEPHEN R. HALPIN, JR. has served as Director, Executive Vice President and Chief Financial Officer of the Company since its formation in 1996. Mr. Halpin has also served as Executive Vice President and Chief Financial Officer of the Bank since 1995. 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 has served as Director, Executive Vice President and General Counsel of the Company since 2005. He joined the Bank in February 2005 as Executive Vice President and General Counsel. Mr. McCormick is also Senior Vice President and General Counsel and a Director of B. F. Saul Company and Senior Vice President and General Counsel of Saul Centers, Inc. In addition, he is a Trustee of the B. F. Saul Employees Profit Sharing Retirement Trust. Prior to joining the Bank, Mr. McCormick was a senior partner with the law firm Shaw Pittman, LLP, now known as Pillsbury Winthrop Shaw Pittman LLP. He also served as the Chair of Shaw Pittman’s managing board and its Corporate and Securities group.

N. ALEXANDER MACCOLL, JR. has been a Director of the Company since its formation in 1996. Mr. MacColl 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 has been a Director since 2003. Mr. 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.

-23-

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.

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 2005.

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, 2005, 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 2005.

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 2005, each of the Independent Directors earned $6,000 for attending four meetings of the Board of Directors and four meetings of the Audit Committee.

-24-

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, 2006, 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, 2006.

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

B. Francis Saul II ^(2)(3)(4)	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.

(4) Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, Mr. B. Francis Saul II may be deemed to possess beneficial ownership of some or all of the Common Stock of the Company owned by Chevy Chase Bank because he has, or may be deemed to have, sole or shared voting and/or investment power of those shares of Common Stock.

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, 2005 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, 2005 totaled $911,577. See “Business - Servicing.”

-25-

The Company had cash balances of $1,913,298 as of December 31, 2005 held in various deposit accounts with the Bank. Interest earned on these accounts was $25,016 for the year ended December 31, 2005.

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 ACCOUNTING 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, 2005. 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, 2005 and 2004 are as follows:

	December 31,
Types of Fees and Services	2005	2004
Audit	$ 33,562	$ 26,203

Tax ⁽¹⁾	-	4,400

Total	$ 33,562	$ 30,603

(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.

-26-

PART IV

ITEM 15.	EXHIBITS, 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, 2005 and 2004 Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003 Statements of Stockholders’ Equity for the Years Ended December 31, 2005, 2004 and 2003 Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003 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 10d% 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.

-27-

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,
	As of or for the year ended December 31,
	2005	2004	2003	2002	2001

Net income	$ 18,071	$ 16,292	$ 15,932	$ 16,497	$ 19,696
Fixed charges	-	-	-	-	-
Earnings before fixed charges	$ 18,071	$ 16,292	$ 15,932	$ 16,497	$ 19,696

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	1.16x	1.05x	1.02x	1.06x	1.27x

SIGNATURES

CHEVY CHASE PREFERRED CAPITAL CORPORATION

March 16, 2006

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 16, 2006<

Filing Compare · CHEVY CHASE PREFERRED CAPITAL CORP