# CHEVY CHASE

# PREFERRED CAPITAL CORPORATION

# FORM 10-Q

# June 30, 2003

---



# SECURITIES AND EXCHANGE COMMISSION

# Washington, DC 20549

# FORM 10-Q

# QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

# OF THE SECURITIES EXCHANGE ACT OF 1934

# For the quarterly period ended June 30, 2003

# Commission File Number: 001-12477

# CHEVY CHASE
PREFERRED CAPITAL CORPORATION

# (Exact name of registrant as specified in its charter)

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

# 7501 Wisconsin Avenue

# Bethesda, Maryland 20814

##### (Address of principal executive offices) (Zip Code)

# (301) 986-7000

##### (Registrant's telephone number, including area code)

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

Yes X   No__

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

The number of shares  outstanding of the registrant's sole class of common stock
was 100 shares, $1 par value, as of July 31, 2003.

---



# CHEVY CHASE
PREFERRED CAPITAL CORPORATION

# TABLE OF CONTENTS

`PART I - FINANCIAL INFORMATION
                                                                            Page
                                                                            ----
Item 1.Financial Statements:...................................................1
 (a) Statements of Financial Condition as of June 30, 2003 and
       December 31, 2002.......................................................2
 (b) Statements of Operations for the Three and Six Months Ended
       June 30, 2003 and 2002 .................................................3
 (c) Statement of Stockholders' Equity for the Six Months
       Ended June 30, 2003.....................................................4
 (d) Statements of Cash Flows for the Six Months Ended
       June 30, 2003 and 2002 .................................................5
 (e) Notes to Financial Statements.............................................6

Item 2.Management's Discussion and Analysis of Financial
     Condition and Results of Operations.......................................8

Item 3.Quantitative and Qualitative Disclosures about Market Risk.............14

Item 4.Controls and Procedures................................................14

                          PART II - OTHER INFORMATION

Item 1.Legal Proceedings......................................................15

Item 2.Changes in Securities..................................................15

Item 3.Defaults Upon Senior Securities........................................15

Item 4.Submission of Matters to a Vote of Security Holders....................15

Item 5.Other Information......................................................15

Item 6.Exhibits and Reports on Form 8-K.......................................15`

---



# PART I

## ITEM 1. Financial Statements

The  following unaudited
financial statements and notes of Chevy Chase Preferred Capital Corporation (the
"Company") have been prepared in accordance with generally  accepted  accounting
principles for interim financial information.  In the opinion of management, all
adjustments  necessary for a fair presentation of the financial position and the
results of operations for the interim period presented have been included.  Such
unaudited financial  statements and notes should be read in conjunction with the
Company's  financial  statements  and notes for the year ended December 31, 2002
included in the Company's  Annual Report on Form 10-K filed with the  Securities
and Exchange Commission on March 27, 2003 (the "2002 10-K").

`-1-`

---



# CHEVY CHASE
PREFERRED CAPITAL CORPORATION

# STATEMENTS
OF FINANCIAL CONDITION

`June 30,        December 31,
                                                    2003              2002
                                              ----------------  ----------------
                                                (Unaudited)
                                     ASSETS

Cash and interest-bearing deposits            $        45,055   $     2,986,496
Residential mortgage loans (net of
 allowance for losses of $40,333
 for both periods)                                282,723,904       285,395,464
Accounts receivable from parent                    20,063,816        15,297,140
Accrued interest receivable                         1,162,261         1,138,246
Prepaid expenses                                       21,500             8,000
                                              ----------------  ----------------
  Total assets                                $   304,016,536   $   304,825,346
                                              ================  ================

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable to parent                    $        50,000   $         -
Accrued expenses                                       32,120             -
Dividends payable to parent                             -             1,100,000
Dividends payable to others                         3,890,625         3,890,625
                                              ----------------  ----------------
 Total liabilities                                  3,972,745         4,990,625
                                              ----------------  ----------------
Preferred Stock, 10,000,000 shares
 authorized: 10 3/8 % Noncumulative
 Exchangeable Preferred Stock, Series A,
 $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       284,834,621
Retained earnings                                      43,791             -
                                              ----------------  ----------------
 Total stockholders' equity                       300,043,791       299,834,721
                                              ----------------  ----------------
  Total liabilities and Stockholders' equity  $   304,016,536   $   304,825,346
                                              ================  ================




              See the accompanying Notes to Financial Statements.
                                      -2-`

---



# CHEVY CHASE
PREFERRED CAPITAL CORPORATION

# STATEMENTS
OF OPERATIONS

# (Unaudited)

`Three Months Ended           Six Months Ended
                                           June 30,                    June 30,
                                 --------------------------  --------------------------
                                     2003          2002          2003          2002
                                 ------------  ------------  ------------  ------------
Interest Income
 Residential mortgage loans      $ 4,199,260   $ 4,518,771   $ 8,441,032   $ 9,032,294
 Other                                 5,850        15,776        15,838        45,731
                                -------------  ------------  ------------  ------------
   Total income                    4,205,110     4,534,547     8,456,870     9,078,025
                                -------------  ------------  ------------  ------------
Operating Expenses
 Loan servicing fees paid to
  parent                             220,743       228,633       447,351       469,317
 Advisory fees paid to parent         50,000        50,000       100,000       100,000
 Directors fees                       10,250        12,000        18,250        20,000
 General and administrative           36,618        20,999        66,228        38,271
                                 ------------  ------------  ------------  ------------
   Total operating expenses          317,611       311,632       631,829       627,588
                                 ------------  ------------  ------------  ------------
NET INCOME                       $ 3,887,499   $ 4,222,915   $ 7,825,041   $ 8,450,437
                                 ============   ===========  ============  ============
PREFERRED STOCK DIVIDENDS          3,890,625     3,890,625     7,781,250     7,781,250
                                 ------------   -----------  ------------  ------------

EARNINGS (LOSS) AVAILABLE TO
   COMMON STOCKHOLDER            $    (3,126)   $  332,290    $   43,791   $   669,187
                                 ============   ===========   ===========  ============

NUMBER OF COMMON SHARES                  100           100           100           100
                                 ============   ===========   ===========  ============

EARNINGS (LOSS) PER COMMON
   SHARE                         $    (31.26)   $  3,322.90   $   437.91   $  6,691.87
                                 ============   ============  ===========  ============






               See the accompanying Notes to Financial Statements.
                                      -3-`

---



# CHEVY CHASE
PREFERRED CAPITAL CORPORATION

# STATEMENT OF
STOCKHOLDERS' EQUITY

# (Unaudited)

`Capital
                                                         Contributed                Total
                                   Preferred    Common    In Excess    Retained  Stockholders'
                                     Stock       Stock     of Par      Earnings    Equity
                                ------------- -------- ------------- ---------- ---------------

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

Net income                                -       -             -     7,825,041      7,825,041


Capital contribution from
  common stockholder                      -       -         165,279         -          165,279

Dividends on 10 3/8 %
  Noncumulative Exchangeable
  Preferred Stock, Series A               -       -             -    (7,781,250)    (7,781,250)
                                ------------- -------- ------------- ---------- ----------------
Balance, June 30, 2003            $15,000,000   $ 100  $284,999,900  $   43,791   $300,043,791
                                ============= ======== ============= ========== ================

               See the accompanying Notes to Financial Statements.
                                      -4-`

---



# CHEVY CHASE
PREFERRED CAPITAL CORPORATION

# STATEMENTS
OF CASH FLOWS

# (Unaudited)

`Six Months Ended
                                                              June 30,
                                                 ------------------------------------
                                                       2003                2002
                                                 ----------------   -----------------
Cash flows from operating activities:

Net income                                       $     7,825,041    $      8,450,437
Adjustments to reconcile net income to net
 cash provided by operating activities:
 (Increase) decrease in accounts receivable
   from parent                                        (4,766,676)          1,922,169
  Increase in accrued interest receivable                (24,015)           (111,482)
 (Increase) decrease in prepaid expenses                 (13,500)              1,935
  Increase (decrease) in accrued expenses                 32,120             (31,701)
  Increase in accounts payable to parent                  50,000                 -
                                                 ----------------   -----------------
   Net cash provided by operating activities           3,102,970          10,231,358
                                                 ----------------   -----------------
Cash flows from investing activities:

 Purchases of residential mortgage loans            (128,228,478)        (68,993,512)
 Repayments of residential mortgage loans            130,900,038          65,746,642
                                                 ----------------   -----------------
  Net cash provided by (used in) investing
   activities                                          2,671,560          (3,246,870)
                                                 ----------------   -----------------
Cash flows from financing activities:

 Capital contribution from common stockholder            165,279             341,082
 Dividends paid on preferred stock                    (7,781,250)         (7,781,250)
 Dividends paid on common stock                       (1,100,000)         (2,700,000)
                                                 ----------------   -----------------
  Net cash used in financing activities               (8,715,971)        (10,140,168)
                                                 ----------------   -----------------
Net decrease in cash and cash equivalents             (2,941,441)         (3,155,680)
Cash and cash equivalents at beginning of period       2,986,496           5,764,867
                                                 ----------------   -----------------
Cash and cash equivalents at end of period       $        45,055    $      2,609,187
                                                 ================   =================



               See the accompanying Notes to Financial Statements.
                                      -5-`

---



# CHEVY CHASE
PREFERRED CAPITAL CORPORATION

# NOTES TO
FINANCIAL STATEMENTS

# (Unaudited)

## NOTE 1 -
ORGANIZATION AND BASIS OF PRESENTATION:

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

## NOTE 2 -
RESIDENTIAL MORTGAGE LOANS:

Residential mortgage loans
consist of adjustable-rate mortgages ("ARMs") 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, specified in
the related mortgage note, subject to interest rate caps. Each of the mortgage
loans is secured by a mortgage, deed of trust or other security instrument which
created a first lien on the residential dwellings located in their respective
jurisdictions. The following table shows the residential mortgage loan portfolio
by type at the dates indicated:

`June 30,           December 31,
                                                 2003                 2002
                                           ----------------     ----------------
     Monthly ARMs                          $    58,359,910      $    67,406,366
     One-year ARMs                              14,769,474           16,966,406
     Three-year ARMs                            14,992,741           20,126,451
     Five-year ARMs                             45,232,822           58,544,908
     7/1 ARMs                                   11,747,503           16,056,192
     10/1 ARMs                                  47,049,557           62,040,642
     30 year fixed-rate                         90,612,230           44,294,832
                                           ----------------      ---------------
       Total                                   282,764,237          285,435,797
        Less:
         Allowance for loan losses                  40,333               40,333
                                           ----------------      ---------------
        Total                              $   282,723,904       $  285,395,464
                                           ================      ===============`

## NOTE 3 -
PREFERRED STOCK:

Cash dividends on the
Company's 10 3/8 % Noncumulative Exchangeable Preferred Stock, Series A (the
"Series A Preferred Shares") are payable quarterly in arrears. The
liquidation value of each Series A Preferred Share is $50 plus accrued and
unpaid dividends. The Series A Preferred Shares are not redeemable until January
15, 2007 (except upon the occurrence of certain tax events) and are redeemable
thereafter at the option of the Company. Except under certain limited

`-6-`

---



# CHEVY CHASE
PREFERRED CAPITAL CORPORATION

# NOTES TO
FINANCIAL STATEMENTS

# (Unaudited)

## NOTE 3 -
PREFERRED STOCK (continued):

circumstances, the holders
of the Series A Preferred Shares have no voting rights. The Series A Preferred
Shares are automatically exchangeable for a new series of preferred stock of the
Bank upon the occurrence of certain events relating to the Bank.

## NOTE 4 -
DIVIDENDS:

During the three and six
months ended June 30, 2003, the Company's Board of Directors declared a
cash dividend of $3,890,625 and $7,781,250 on the Company's preferred
stock, out of the retained earnings of the Company, respectively. The dividends
were paid on April 15, and July 15, 2003.

There were no common
dividends declared during the six months ended June 30, 2003.

`-7-`

---



## ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations

## FINANCIAL
CONDITION

## Dividend
Coverage

Based on the outstanding
balance of the Company's Residential Mortgage Loans at June 30, 2003 and
the interest rates on such loans, anticipated annual income, net of operating
expenses, on the Company's loan portfolio was approximately 98.2% of the
projected annual dividend on the Series A Preferred Shares.

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%. The pro forma effect of the reduction of the servicing fee would be to
increase the dividend coverage ratio to 100.4% of the projected annual dividend
on the Series A Preferred Shares.

If market interest rates
remain at or near their recent historical lows, the Company's ability to
pay dividends on the Series A Preferred Shares could be adversely affected. If
the Company did not have sufficient earnings available to pay those dividends,
it would explore various options for generating additional funds to pay the
dividends. Those options could include further reducing the servicing fee paid
to the Bank, reducing the advisory fee paid to the Bank, purchasing other types
of loans, borrowing funds as the Company deems necessary or appropriate or using
principal repayments on Residential Mortgage Loans. However, there can be no
assurances that any of those measures would be implemented or, if implemented,
would be sufficient to enable the Company to pay dividends on the Series A
Preferred Shares.

## Residential
Mortgage Loans

At June 30, 2003 and
December 31, 2002, the Company had $282,723,904 and $285,395,464, respectively,
invested in loans secured by first mortgages or deeds of trust on single-family
residential real estate properties ("Residential Mortgage Loans").
During the six months ended June 30, 2003, Residential Mortgage Loan purchases
were $128,228,478 and principal collections were $130,900,038. Management
intends to continue to reinvest proceeds received from repayments of loans in
additional Residential Mortgage Loans to be purchased from either the Bank or
its affiliates.

At June 30, 2003, the
Company had four non-accrual loans (contractually past due 90 days or more or
with respect to which other factors indicate that full payment of principal and
interest is unlikely) with an aggregate principal balance of $923,188 (or 0.33%
of loans). At December 31, 2002, the Company had seven non-accrual loans with an
aggregate principal balance of $1,436,859 (or 0.50% of loans).

`-8-`

---



At June 30, 2003, the
Company had six loans which were delinquent 30-89 days with an aggregate
principal balance of $1,261,295 (or 0.45% of loans). At December 31, 2002, the
Company had five loans which were delinquent 30-89 days with an aggregate
principal balance of $1,307,482 (or 0.46% of loans).

## Allowance for
Loan Losses

An analysis is performed
periodically to determine whether an allowance for loan loss is required. An
allowance may be provided after considering such factors as the economy in
lending areas, delinquency statistics and past loss experience. The allowance
for loan losses is based on estimates, and ultimate losses may vary from current
estimates. As adjustments to the allowance become necessary, provisions for loan
losses are reported in operations in the periods that are determined to be
necessary. There was no activity in the allowance for loan losses during the
three months ended June 30, 2003 and 2002. The balance of the allowance for loan
losses was $40,333 for each of the quarters ended June 30, 2003 and 2002.

## Interest Rate
Risk

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

If market interest rates
remain at or near their recent historical lows, the Company's ability to
pay dividends on the Series A Preferred Shares could be adversely affected. See
"Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations  Financial Condition  Dividend
Coverage." The Company, to date, has not used any derivative instruments to
manage its interest rate risk.

There have been no material
changes to the Company's market risk disclosures from the disclosures made
in the Form 10-K for 2002.

## Significant
Concentration of Credit Risk

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

`-9-`

---



The Company's exposure
to geographic concentrations directly affects the credit risk of the Residential
Mortgage Loans within the portfolio. A majority (or 55.7%) of the Company's
Residential Mortgage Loans are secured by residential real estate properties
located in the Washington, DC metropolitan area. Service industries and Federal,
state and local governments employ a significant portion of the Washington, DC
area labor force. Consequently, these loans may be subject to a greater risk of
default than other comparable residential mortgage loans in the event of adverse
economic, political or business developments and natural hazards in the region
that may affect the ability of residential property owners in the region to make
payments of principal and interest on the underlying mortgages.

## Liquidity and
Capital Resources

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

The Company's
principal liquidity needs will be to fund the acquisition of additional mortgage
assets as current mortgage assets held by the Company are repaid and to pay
dividends on the Series A Preferred Shares. The acquisition of such additional
mortgage assets will be funded with the proceeds from principal repayments on
its current portfolio of mortgage assets. The Company does not anticipate that
it will have any other material capital expenditures. The Company expects to pay
dividends on the Series A Preferred Shares out of cash generated from operating
activities. As discussed earlier under "Item 2 Management's Discussion
and Analysis of Financial Condition and Results of Operations - Financial
Condition - Dividend Coverage," our projected dividend coverage ratio
is 100.4% of the projected annual dividend on the Series A Preferred Shares. If
market interest rates remain at or near their recent historical lows, the
Company's ability to pay dividends on the Series A Preferred Shares could
be adversely affected. If the Company did not have sufficient earnings available
to pay those dividends, it would explore various options for generating
additional funds to pay the dividends. Those options could include further
reducing the servicing fee paid to the Bank, reducing the advisory fee paid to
the Bank, purchasing other types of loans, borrowing funds as the Company deems
necessary or appropriate, or using principal repayments on Residential Mortgage
Loans. However, there can be no assurances that any of those measures would be
implemented or, if implemented, would be sufficient to enable the Company to pay
dividends on the Series A Preferred Shares.

Notwithstanding the
foregoing, the Company believes that it will be able to continue to meet the
requirements to be treated as a REIT for income tax purposes for the foreseeable
future.

`-10-`

---



## Tax Status of
the Company

The Company has elected to
be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code
of 1986, as amended. As a REIT, the Company generally will not be subject to
federal income tax on its net income (excluding capital gains) provided that it
distributes annually 100% of its REIT taxable income to its stockholders, meets
certain organizational, stock ownership and operational requirements and meets
certain income and asset tests. To remain qualified as a REIT, the Company must
distribute each year at least 90% of its "REIT taxable income" (not
including capital gains) for that year to stockholders. If, in any taxable year,
the Company fails to qualify as a REIT, the Company would not be allowed a
deduction for distributions to stockholders in computing its taxable income and
would be subject to federal and state income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates. In
addition, the Company would also be disqualified from treatment as a REIT for
the four taxable years following the year during which qualification was lost.

No income tax was paid
during either of the three month or six month periods ended June 30, 2003 and
2002.

`-11-`

---



## RESULTS OF
OPERATIONS

## Three Months
Ended June 30, 2003 Compared to Three Months Ended June 30, 2002

During the three months
ended June 30, 2003 and 2002, the Company reported net income of $3,887,499 and
$4,222,915, respectively.

Interest income on
Residential Mortgage Loans totaled $4,199,260 for the three months ended June
30, 2003 (the "2003 quarter"), compared to $4,518,771 for the three
months ended June 30, 2002 (the "2002 quarter"). The decrease in
interest income resulted from a decrease in the average yield on such loans to
5.92% in the 2003 quarter from 6.18% in the 2002 quarter. The average balance of
the Residential Mortgage Loan portfolio was $283,746,820 in the 2003 quarter
compared to $292,338,160 in the 2002 quarter. The Company would have recorded an
additional $5,307 and $7,282 in interest income for the three months ended June
30, 2003 and 2002, respectively, had its non-accrual loans been current in
accordance with their original terms.

Other interest income of
$5,850 and $15,776 was recognized on the Company's interest bearing
deposits during the three months ended June 30, 2003 and 2002, respectively. The
decrease was primarily due to a lower average yield on interest bearing deposits
which decreased by 90 basis points (from 1.46% to 0.56%) from the average yield
in the 2002 quarter.

No provision for loan
losses was recorded for the three months ended June 30, 2003 and 2002.

Operating expenses totaling
$317,611 and $311,632 for the three months ended June 30, 2003 and 2002,
respectively, were comprised of loan servicing fees paid to parent, advisory
fees paid to parent, directors fees and general and administrative expenses.
Loan servicing fees paid to parent of $220,743 and $228,633, for the three
months ended June 30, 2003 and 2002, respectively, were based on a servicing fee
rate of 0.375% per annum of the outstanding principal balances of Residential
Mortgage Loans, pursuant to a servicing agreement between the Company and the
Bank. Effective July 1, 2003, the agreement was modified to reduce the servicing
fee rate to 0.250%. Advisory fees paid to parent for the three months ended June
30, 2003 and 2002 totaled $50,000 for each quarter. Directors' fees paid
for the three months ended June 30, 2003 and 2002 were $10,250 and $12,000,
respectively, and represent compensation to the two independent members of the
Board of Directors. General and administrative expenses totaled $36,618 and
$20,999 for the three months ended June 30, 2003 and 2002, respectively. The
increase in general and administrative expenses is largely due to increases in
the fees paid to the Company's external auditors and the New York Stock
Exchange.

On June 17, 2003, the
Company's Board of Directors declared, out of the retained earnings of the
Company, a cash dividend of $1.296875 per share on the outstanding Series A
Preferred Shares which was paid on July 15, 2003.

There were no common
dividends declared during the quarter ended June 30, 2003.

`-12-`

---



## Six Months
Ended June 30, 2003 Compared to Six Months Ended June 30, 2002

During the six months ended
June 30, 2003 and 2002, the Company reported net income of $7,825,041 and
$8,450,437, respectively.

Interest income on
Residential Mortgage Loans totaled $8,441,032 for the six months ended June 30,
2003 (the "2003 period"), compared to $9,032,294 for the six months
ended June 30, 2002 (the "2002 period"). The decrease in interest
income resulted from a decrease in the average yield on such loans to 5.94% in
the 2003 period from 6.22% in the 2002 period. The average balance of the
Residential Mortgage Loan portfolio was $284,092,577 in the 2003 period compared
to $290,557,239 in the 2002 period. The Company would have recorded an
additional $16,634 and $6,175 in interest income for the six months ended June
30, 2003 and 2002, had its non-accrual loans been current in accordance with
their original terms.

Other interest income of
$15,838 and $45,731 was recognized on the Company's interest bearing
deposits during the six months ended June 30, 2003 and 2002, respectively. The
decrease was primarily due to a lower average yield on interest bearing deposits
which decreased by 88 basis points (from 1.57% to 0.69%) from the average yield
in the 2002 period.

No provision for loan
losses was recorded for the six months ended June 30, 2003 and 2002.

Operating expenses totaling
$631,829 and $627,588 for the six months ended June 30, 2003 and 2002,
respectively, were comprised of loan servicing fees paid to parent, advisory
fees paid to parent, directors fees and general and administrative expenses.
Loan servicing fees paid to parent of $447,351 and $469,317 for the six months
ended June 30, 2003 and 2002, respectively, were based on a servicing fee rate
of 0.375% per annum of the outstanding principal balances of Residential
Mortgage Loans, pursuant to a servicing agreement between the Company and the
Bank. Effective July 1, 2003, the agreement was modified to reduce the servicing
fee rate to 0.250%. Advisory fees paid to parent for the six months ended June
30, 2003 and 2002 totaled $100,000 for each period. Directors' fees paid
for the six months ended June 30, 2003 and 2002 totaled $18,250 and $20,000,
respectively, and represent compensation to the two independent members of the
Board of Directors. General and administrative expenses totaled $66,228 and
$38,271 for the six months ended June 30, 2003 and 2002, respectively. The
increase in general and administrative expenses is largely due to increases in
the fees paid to the Company's external auditors and the New York Stock
Exchange.

During the six months ended
June 30, 2003, the Company's Board of Directors declared $7,781,250 of
preferred stock dividends out of the retained earnings of the Company.

There were no common
dividends declared during the period ended June 30, 2003.

`-13-`

---



## ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk

Information required by
this item is included in Item 2, "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Interest Rate Risk,"
which is hereby incorporated herein by reference.

## ITEM 4.
Controls and Procedures

The Company maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Company's reports filed under SEC
regulations is recorded, processed, summarized and reported within the time
periods specified in the rules and forms adopted by the SEC, which the Company
must comply with under SEC regulations, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and its Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure, based closely on the definition of
"disclosure controls and procedures" in Rule 13a-15(e) promulgated
under the Securities Exchange Act of 1934, as amended. In designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.

The Company carried out an
evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures, as of June 30, 2003.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures
were effective as of June 30, 2003.

During the three months
ended June 30, 2003, there were no significant changes in internal control over
financial reporting that materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.

`-14-`

---



# PART II -
OTHER INFORMATION

## ITEM 1. Legal
Proceedings

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

## ITEM 2.
Changes in Securities

## ITEM 3. Defaults
Upon Senior Securities

## ITEM 4.
Submission of Matters to a Vote of Security Holders

## ITEM 5. Other
Information

## ITEM 6.
Exhibits and Reports on Form 8-K

`(a) Exhibits required by Item 601 of Regulation S-K are set forth below.

Exhibit
   No.      Exhibit
-------   ----------
* 10.4    Amendment to Servicing Agreement as modified on June 17, 2003 effective July 1,
           2003.
* 31.1    Certification of Chief Executive Officer, Pursuant to Rule 15d-14 as Adopted
           Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
* 31.2    Certification of Chief Financial Officer, Pursuant to Rule 15d-14 as Adopted
           Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
* 32.1    Certification of Chief Executive Officer,  Pursuant to 18 U.S.C. Section 1350 as
           Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* 32.2    Certification of Chief Financial Officer,  Pursuant to 18 U.S.C.  Section 1350 as
           Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Filed herewith
                                      -15-`

---



# SIGNATURES

Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.

`CHEVY CHASE PREFERRED CAPITAL CORPORATION
                                  (Registrant)


August 14, 2003                     By:  /s/ ALEXANDER R. M. BOYLE
                                         --------------------------------
                                         Alexander R. M. Boyle
                                         Vice Chairman of the Board


August 14, 2003                     By:  /s/ STEPHEN R. HALPIN, JR.
                                         --------------------------------
                                         Stephen R. Halpin, Jr.
                                         Executive Vice President and
                                         Chief Financial Officer
                                         (Principal Financial Officer)


August 14, 2003                     By:  /s/ JOEL A. FRIEDMAN
                                         ----------------------------------
                                         Joel A. Friedman
                                         Senior Vice President and Controller
                                         (Principal Accounting Officer)`

---



# FIRST AMENDEMENT TO SERVICING AGREEMENT

`WHEREAS,  Chevy  Chase  Bank,  F.S.B.,  a  federal  savings  bank  (hereinafter,
"Servicer")  and  Chevy  Chase  Preferred   Capital   Corporation,   a  Maryland
corporation  (hereinafter,  "Purchaser"),  entered into that Servicing Agreement
dated  December 1, 1996 (the  "Agreement")  whereby  Servicer  agreed to service
mortgage loans owned by Purchaser; and

WHEREAS,  in consideration for such services Purchaser agreed to pay to Servicer
a  servicing  fee for  each  Mortgage  Loan  (as  that  term is  defined  in the
Agreement)  at a rate equal to 0.375% per annum  (the  "Servicing  Fee Rate") or
such other rate as the parties thereto may agree; and

WHEREAS, Purchaser has requested, and Servicer has agreed, to a reduction in the
Servicing Fee Rate as set forth herein.

NOW, therefore,  the definition of "Servicing Fee Rate" in Ariticle I, Section 1
is amended by deleting the  reference to "0.375%" and  inserting in lieu thereof
"0.250%".  All other terms and conditions of the Agreement  remain unchanged and
continue in full force and effect.

     AGREED this 1st day of July, 2003.

     CHEVY CHASE PREFERRED CAPITAL CORPORATION

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


     CHEVY CHASE BANK, F.S.B.

     By:          /s/ JOEL A. FRIEDMAN
                  --------------------
                  Joel A. Friedman
                  Senior Vice President
                  and Controller`

---



# CERTIFICATION

`I, B. Francis Saul II, certify that:

1.   I have reviewed this quarterly report on Form 10-Q 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  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
     (a)  designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this report is being prepared;
     (b)  evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures and presented in this report our conclusions  about the
          effectiveness of the disclosure  controls and procedures as of the end
          of the period covered by this report based on such evaluations; and
     (c)  disclosed  in this  report  any  change in the  registrant's  internal
          control over financial reporting that occurred during the registrant's
          most recent  quarter that has  materially  affected,  or is reasonably
          likely to materially  affect,  the registrant's  internal control over
          financial reporting;

5.   The registrant's other certifying  officers 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.



Date: August 14, 2003                /s/ B.FRANCIS SAUL II
                                     --------------------------
                                     B.Francis Saul II
                                     Chairman and Chief Executive Officer`

---



# CERTIFICATION

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

1.   I have reviewed this quarterly report on Form 10-Q 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  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
     (a)  designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this report is being prepared;
     (b)  evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures and presented in this report our conclusions  about the
          effectiveness of the disclosure  controls and procedures as of the end
          of the period covered by this report based on such evaluations; and
     (c)  disclosed  in this  report  any  change in the  registrant's  internal
          control over financial reporting that occurred during the registrant's
          most recent  quarter that has  materially  affected,  or is reasonably
          likely to materially  affect,  the registrant's  internal control over
          financial reporting;

5.   The registrant's other certifying  officers 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.




Date: August 14, 2003               /s/ STEPHEN R. HALPIN, JR.
                                    --------------------------
                                    Stephen R. Halpin, Jr.
                                    Chief Financial Officer and
                                    Executive Vice President`

---



# CERTIFICATION
OF CHIEF EXECUTIVE OFFICER

# PURSUANT TO
18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO

# SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

The undersigned, B. Francis
Saul II, the Chairman and Chief Executive Officer of Chevy Chase Preferred
Capital Corporation (the "Company"), has executed this certification
in connection with the filing with the Securities and Exchange Commission of the
Company's Quarterly Report on Form 10-Q for the period ended June 30, 2003
(the "Report"). The undersigned hereby certifies that:

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

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


Date:  August 14, 2003                  /s/ B.FRANCIS SAUL II
                                        --------------------------
                                        B.Francis Saul II
                                        Chairman and Chief Executive Officer`

---



# CERTIFICATION
OF CHIEF FINANCIAL OFFICER

# PURSUANT TO
18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO

# SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

The undersigned, Stephen R.
Halpin, Jr., the Executive Vice President and Chief Financial Officer of Chevy
Chase Preferred Capital Corporation (the "Company"), has executed this
certification in connection with the filing with the Securities and Exchange
Commission of the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2003 (the "Report"). The undersigned hereby certifies
that:

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

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


Date: August 14, 2003                   /s/ STEPHEN R. HALPIN, JR.
                                        --------------------------
                                        Stephen R. Halpin, Jr.
                                        Chief Financial Officer and
                                        Executive Vice President`