# CHEVY CHASE

# PREFERRED CAPITAL CORPORATION

# FORM 10-Q

# September 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 September 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 October 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 September 30, 2003 and
       December 31, 2002.......................................................2
 (b) Statements of Operations for the Three and Nine Months Ended
       September 30, 2003 and 2002 ............................................3
 (c) Statement of Stockholders' Equity for the Nine Months
       Ended September 30, 2003................................................4
 (d) Statements of Cash Flows for the Nine Months Ended
       September 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.......................................7

Item 3.Quantitative and Qualitative Disclosures about Market Risk.............10

Item 4.Controls and Procedures................................................10`

# PART II - OTHER INFORMATION

`Item 1.Legal Proceedings......................................................12

Item 2.Changes in Securities..................................................12

Item 3.Defaults Upon Senior Securities........................................12

Item 4.Submission of Matters to a Vote of Security Holders....................12

Item 5.Other Information......................................................12

Item 6.Exhibits and Reports on Form 8-K.......................................12`

---



# 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

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

Cash and interest-bearing deposits            $     3,553,558   $     2,986,496
Residential mortgage loans (net of
 allowance for losses of $40,333
 for both periods)                                293,420,717       285,395,464
Accounts receivable from parent                     5,881,720        15,297,140
Accrued interest receivable                         1,270,305         1,138,246
Prepaid expenses                                       10,250             8,000
                                              ----------------  ----------------
  Total assets                                $   304,136,550   $   304,825,346
                                              ================  ================

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable to parent                    $        20,800   $         -
Accounts payable to others and accrued
  expenses                                             59,114             -
Dividends payable to parent                             -             1,100,000
Dividends payable to others                         3,890,625         3,890,625
                                              ----------------  ----------------
 Total liabilities                                  3,970,539         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                                     166,011             -
                                              ----------------  ----------------
 Total stockholders' equity                       300,166,011       299,834,721
                                              ----------------  ----------------
  Total liabilities and stockholders' equity  $   304,136,550   $   304,825,346
                                              ================  ================




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

---



# CHEVY CHASE
PREFERRED CAPITAL CORPORATION

# STATEMENTS
OF OPERATIONS

# (Unaudited)

`Three Months Ended           Nine Months Ended
                                         September 30,               September 30,
                                 --------------------------  --------------------------
                                     2003          2002          2003          2002
                                 ------------  ------------  ------------  ------------
Interest Income
 Residential mortgage loans      $ 4,235,601   $ 4,369,082   $12,676,633   $13,401,376
 Other                                 2,741        19,108        18,579        64,839
                                -------------  ------------  ------------  ------------
   Total income                    4,238,342     4,388,190    12,695,212    13,466,215
                                -------------  ------------  ------------  ------------
Operating Expenses
 Loan servicing fees paid to
  parent                             141,925       238,284       589,276       707,601
 Advisory fees paid to parent         50,000        50,000       150,000       150,000
 Directors' fees                       9,750         4,000        28,000        24,000
 General and administrative           23,822        10,490        90,050        48,761
                                 ------------  ------------  ------------  ------------
   Total operating expenses          225,497       302,774       857,326       930,362
                                 ------------  ------------  ------------  ------------
NET INCOME                       $ 4,012,845   $ 4,085,416   $11,837,886   $12,535,853
                                 ============   ===========  ============  ============
PREFERRED STOCK DIVIDENDS          3,890,625     3,890,625    11,671,875    11,671,875
                                 ------------   -----------  ------------  ------------

EARNINGS AVAILABLE TO COMMON
   STOCKHOLDER                   $   122,220    $  194,791    $  166,011   $   863,978
                                 ============   ===========   ===========  ============

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

EARNINGS PER COMMON SHARE        $  1,222.20   $  1,947.91   $  1,660.11   $  8,639.78
                                 ============   ============  ===========  ============






               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                                -       -             -      11,837,886     11,837,886


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

Dividends on 10 3/8%
  Noncumulative Exchangeable
  Preferred Stock, Series A               -       -             -     (11,671,875)   (11,671,875)
                                ------------- -------- -------------  ------------ ----------------
Balance, September 30, 2003      $15,000,000   $ 100   $284,999,900    $  166,011   $300,166,011
                                ============= ======== =============  ============ ================

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

---



# CHEVY CHASE
PREFERRED CAPITAL CORPORATION

# STATEMENTS
OF CASH FLOWS

# (Unaudited)

`Nine Months Ended
                                                            September 30,
                                                 ------------------------------------
                                                       2003                2002
                                                 ----------------   -----------------
Cash flows from operating activities:

Net income                                       $    11,837,886    $     12,535,853
Adjustments to reconcile net income to net
 cash provided by operating activities:
 (Increase) decrease in accounts receivable
   from parent                                         9,415,420          (4,744,600)
  Increase in accrued interest receivable               (132,059)             (8,896)
 (Increase) decrease in prepaid expenses                  (2,250)                467
  Increase in accounts payable to others and
    accrued expenses                                      59,114               7,226
  Increase in accounts payable to parent                  20,800                 -
                                                 ----------------   -----------------
   Net cash provided by operating activities          21,198,911           7,790,050
                                                 ----------------   -----------------
Cash flows from investing activities:

 Purchases of residential mortgage loans            (229,611,053)       (108,359,099)
 Repayments of residential mortgage loans            221,585,800         111,824,257
                                                 ----------------   -----------------
  Net cash provided by (used in) investing
   activities                                         (8,025,253)          3,465,158
                                                 ----------------   -----------------
Cash flows from financing activities:

 Capital contribution from common stockholder            165,279             341,082
 Dividends paid on preferred stock                   (11,671,875)        (11,671,875)
 Dividends paid on common stock                       (1,100,000)         (2,700,000)
                                                 ----------------   -----------------
  Net cash used in financing activities              (12,606,596)        (14,030,793)
                                                 ----------------   -----------------
Net increase (decrease) in cash and
   cash equivalents                                      567,062          (2,775,585)
Cash and cash equivalents at beginning of period       2,986,496           5,764,867
                                                 ----------------   -----------------
Cash and cash equivalents at end of period       $     3,553,558    $      2,989,282
                                                 ================   =================



               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 in the jurisdiction in which
they are located. The following table shows the residential mortgage loan
portfolio by type at the dates indicated:

`September 30,          December 31,
                                                2003                   2002
                                           ----------------     ----------------
     Monthly ARMs                          $    52,172,639      $    67,406,366
     One-year ARMs                              13,952,982           16,966,406
     Three-year ARMs                            14,165,995           20,126,451
     Five-year ARMs                             70,730,182           58,544,908
     7/1 ARMs                                   18,443,708           16,056,192
     10/1 ARMs                                  48,203,036           62,040,642
     30 year fixed-rate                         75,792,508           44,294,832
                                           ----------------      ---------------
       Total                                   293,461,050          285,435,797
        Less:
         Allowance for loan losses                  40,333               40,333
                                           ----------------      ---------------
        Total                              $   293,420,717       $  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 limitedcircumstances, 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 nine
months ended September 30, 2003, the Company's Board of Directors declared
cash dividends of $3,890,625 and $11,671,875, respectively, on the
Company's preferred stock, out of the retained earnings of the Company. The
dividends were paid on April 15, July 15, and October 15, 2003.

There were no common
dividends declared during the nine months ended September 30, 2003.

`-6-`

---



## 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 September 30, 2003
and the interest rates on such loans, anticipated annual income, net of
operating expenses, on the Company's loan portfolio was approximately
104.6% 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%.

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 September 30, 2003 and
December 31, 2002, the Company had $293,420,717 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 nine months ended September 30, 2003, Residential Mortgage Loan
purchases were $229,611,053 and principal collections were $221,585,800.
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 September 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 $1,056,730 (or
0.36% 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).

At September 30, 2003, the
Company had seven loans which were delinquent 30-89 days with an aggregate
principal balance of $2,166,893 (or 0.74% 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 losses 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
nine months ended September 30, 2003 and 2002. The balance of the allowance for
loan losses was $40,333 at September 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

`-7-`

---



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 2002 10-K.

## Significant
Concentration of Credit Risk

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

The Company's exposure
to geographic concentrations directly affects the credit risk of the Residential
Mortgage Loans within the portfolio. A majority (or 51.87%) 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 anticipated annual income, based
on our mortgage loan portfolio at September 30, 2003, is 104.6% 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.

`-8-`

---



## 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 the nine month periods ended September 30,
2003 and 2002.

## RESULTS OF
OPERATIONS

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

During the three months
ended September 30, 2003 and 2002, the Company reported net income of $4,012,845
and $4,085,416, respectively.

Interest income on
Residential Mortgage Loans totaled $4,235,601 for the three months ended
September 30, 2003 (the "2003 quarter"), compared to $4,369,082 for
the three months ended September 30, 2002 (the "2002 quarter"). The
decrease in interest income resulted from a decrease in the average yield on
such loans to 5.84% in the 2003 quarter from 6.10% in the 2002 quarter. The
average balance of the Residential Mortgage Loan portfolio was $290,118,557 in
the 2003 quarter compared to $286,465,516 in the 2002 quarter. The Company would
have recorded an additional $22,371 and $29,899 in interest income for the three
months ended September 30, 2003 and 2002, respectively, had its non-accrual
loans been current in accordance with their original terms.

Other interest income of
$2,741 and $19,108 was recognized on the Company's interest bearing
deposits during the three months ended September 30, 2003 and 2002,
respectively. The decrease was due to a lower average yield on interest bearing
deposits, which decreased by 79 basis points (to 0.53% from 1.32%) from the
average yield in the 2002 quarter. Also contributing to the decreased other
interest income was a decrease in the average balance of interest bearing
deposits to $2,051,781 in the 2003 quarter from $5,045,071 in the 2002 quarter.

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

Operating expenses totaling
$225,497 and $302,774 for the three months ended September 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 were $141,925 and $238,284, for the
three months ended September 30, 2003 and 2002, 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 three months ended
September 30, 2003 and 2002 totaled $50,000 for each quarter. Directors'
fees paid for the three months ended September 30, 2003 and 2002 were $9,750 and
$4,000, respectively, and represent compensation to the two independent members
of the Board of Directors. General and administrative expenses totaled $23,822
and $10,490 for the three months ended September 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 September 15, 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 October 15, 2003.

`-9-`

---



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

## Nine Months
Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002

During the nine months
ended September 30, 2003 and 2002, the Company reported net income of
$11,837,886 and $12,535,853 respectively.

Interest income on
Residential Mortgage Loans totaled $12,676,633 for the nine months ended
September 30, 2003 (the "2003 period"), compared to $13,401,376 for
the nine months ended September 30, 2002 (the "2002 period"). The
decrease in interest income resulted from a decrease in the average yield on
such loans to 5.91% in the 2003 period from 6.18% in the 2002 period. The
average balance of the Residential Mortgage Loan portfolio was $286,101,237 in
the 2003 period compared to $289,193,331 in the 2002 period. The Company would
have recorded an additional $39,005 and $35,756 in interest income for the nine
months ended September 30, 2003 and 2002, had its non-accrual loans been current
in accordance with their original terms.

Other interest income of
$18,579 and $64,839 was recognized on the Company's interest bearing
deposits during the nine months ended September 30, 2003 and 2002, respectively.
The decrease was due to a lower average balance and a lower average yield on
interest bearing deposits which decreased by 83 basis points (to 0.66% from
1.49%) from the average yield in the 2002 period. Also contributing to the
decreased other interest income was a decrease in the average balance of
interest bearing deposits to $3,738,822 in the 2003 quarter from $4,954,854 in
the 2002 quarter.

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

Operating expenses totaling
$857,326 and $930,362 for the nine months ended September 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 were $589,276 and $707,601 for the
nine months ended September 30, 2003 and 2002, 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 nine months ended
September 30, 2003 and 2002 totaled $150,000 for each period. Directors'
fees paid for the nine months ended September 30, 2003 and 2002 totaled $28,000
and $24,000, respectively, and represent compensation to the two independent
members of the Board of Directors. General and administrative expenses totaled
$90,050 and $48,761 for the nine months ended September 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 nine months
ended September 30, 2003, the Company's Board of Directors declared
$11,671,875 of preferred stock dividends out of the retained earnings of the
Company.

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

## 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

`-10-`

---



"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 September 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 September 30, 2003.

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

`-11-`

---



# 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(incorporated herein by reference to Exhibit 10.4 of Form 10-Q for the quarter
           ended June 30, 2003 filed with the SEC).
* 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
                                      -12-`

---



# 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)


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


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


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

---



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