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# SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

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# FORM 10-K

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

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

# For the fiscal year ended: December 31, 2003________________

# OR

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

# For the transition period from __________________to___________________

# Commission
File Number: 333-10495

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

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

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

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

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

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

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

# _______________________________________________________N/A_______________________________________________________
(Title of class)

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

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

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

The number of shares
outstanding of the registrant's sole class of common stock was 100 shares,
$1.00 par value per share, as of March 15, 2004. All of such shares were owned
by Chevy Chase Bank, F.S.B.; therefore, no common stock was held by
non-affiliates.

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# CHEVY CHASE
PREFERRED CAPITAL CORPORATION

# TABLE OF
CONTENTS

`PART I                                   Page
                                                                                                            ----

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

                                    PART II

Item 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS...................................................9
         Description of Common Stock...........................................9
            General............................................................9
            Dividends..........................................................9
            Voting Rights.....................................................10
            Rights Upon Liquidation...........................................10
         Description of Series A Preferred Shares.............................10
            Market Information and Dividends..................................10
            General...........................................................10
            Automatic Exchange................................................11
            Voting Rights.....................................................11
            Redemption........................................................11
            Rights Upon Liquidation...........................................12
            Independent Director Approval.....................................12
Item 6.  SELECTED FINANCIAL DATA..............................................12
Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS..................................13
         Financial Condition..................................................13
            Critical Accounting Policies......................................13
            Allowance for Loan Losses.........................................13
            Residential Mortgage Loans........................................13
            Interest Rate Risk................................................13
            Significant Concentration of Credit Risk..........................14
            Liquidity and Capital Resources...................................15
         Results of Operations................................................15
            Year 2003 Compared to Year 2002...................................15
            Year 2002 Compared to Year 2001...................................16
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
         ABOUT MARKET RISK....................................................17
Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................F-1
Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
         ON ACCOUNTING AND FINANCIAL DISCLOSURE...............................18
Item 9A. CONTROLS AND PROCEDURES..............................................18

                                    PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................18
         Directors and Executive Officers.....................................18
         Code of Business Conduct.............................................19
         Audit Committee......................................................20
         Section 16(a) Beneficial Ownership Reporting Compliance..............20
Item 11. EXECUTIVE COMPENSATION...............................................20
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
         OWNERS AND MANAGEMENT................................................21
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................21
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...............................22

                                    PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
         REPORTS ON FORM 8-K..................................................23`

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# PART I

## ITEM 1.
BUSINESS

## GENERAL

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

## DIVIDEND
COVERAGE

Based on the outstanding
balance of the Company's Residential Mortgage Loans (as defined below) at
December 31, 2003 and the interest rates on such loans, anticipated annual
income, net of operating expenses, on the Company's loan portfolio was
approximately 104.1% of the projected annual dividend of $15,562,500 on the
Series A Preferred Shares.

If market interest rates
remain at or near their recent 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 assurance
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.

## MORTGAGE ASSETS

## Loan Portfolio
Composition

The Company's current portfolio
of Mortgage Assets consists of loans secured by first mortgages or deeds of
trust ("Mortgage Loans") on single-family residential real estate
properties ("Residential Mortgage Loans"). The following table sets
forth information concerning the Company's Residential Mortgage Loans as of
December 31, 2003 and December 31, 2002. All of the Mortgage Loans were acquired
from the Bank or its affiliates. A description of the types of Residential
Mortgage Loans included in the Company's portfolio follows the table.

## -1-

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`Residential Mortgage Loan Portfolio
                                        -----------------------------------
                                                             December 31,
                            ----------------------------------------------------------------------------
                                            2003                                   2002
                            -------------------------------------  -------------------------------------
                                           Weighted                               Weighted
                             Aggregate     Average     Percent     Aggregate      Average      Percent
                             Principal     Coupon        to        Principal       Coupon        to
Type                          Balance       Rate        Total       Balance         Rate        Total
----                        ------------  -----------  ----------  ------------  -----------  ----------
Monthly ARMs                $ 47,833,336       3.45%       16.2%   $ 67,406,366       4.02%       23.6%
One-Year ARMs                 12,988,634       4.16%        4.4%     16,966,406       5.04%        5.9%
Three-Year ARMs               12,224,073       5.50%        4.1%     20,126,451       6.77%        7.1%
Five-Year ARMs                62,720,041       5.99%       21.2%     58,544,908       6.63%       20.5%
7/1 ARMs                      12,478,626       6.80%        4.2%     16,056,192       6.74%        5.6%
10/1 ARMs                     38,215,901       6.77%       12.9%     62,040,642       6.85%       21.7%
15 & 30 Year Fixed-Rate      109,642,464       6.68%       37.0%     44,294,832       7.11%       15.6%
                            ------------  -----------  ----------  ------------  -----------  ----------
                             296,103,075       5.87%      100.0%    285,435,797       6.06%      100.0%
                                          ===========  ==========                ===========  ==========
Less:
 Allowance for loan losses       40,333                                 40,333
                            ------------                           ------------
Total                       $296,062,742                           $285,395,464
                            ============                           ============`

Purchases from the Bank of
Residential Mortgage Loans during the year ended December 31, 2003 were
$279,698,324 and principal collections were $269,031,046. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financial Condition - Residential Mortgage
Loans."

A majority (or 63.0%) of
the Residential Mortgage Loans included in the Company's portfolio at
December 31, 2003 bear interest at adjustable rates. The interest rate on an
adjustable rate mortgage ("ARM") resets periodically based on an index
(such as the London Interbank Offered Rate ("LIBOR") or the interest
rate on United States Treasury Bills). ARMs are typically subject to lifetime
interest rate caps and may be subject to periodic interest rate adjustment caps.
As of December 31, 2003, the weighted average interest rate on the Residential
Mortgage Loans included in the Company's portfolio was 5.87% and the
interest rates on individual loans ranged from 2.88% per annum to 11.50% per
annum. For the year ended December 31, 2003, the weighted average interest rate
was approximately 5.92%.

The interest rate on each
type of ARM product included in the Company's portfolio adjusts at the time
(each "Rate Adjustment Date") and in the manner described below. If
specified in the related mortgage note, an ARM may be subject to lifetime
interest rate adjustment caps, to minimum interest rates and to maximum periodic
adjustment increases or decreases. Information set forth below regarding
interest rate adjustment caps and minimum interest rates applies to the current
portfolio only. Residential Mortgage Loans purchased by the Company after
December 31, 2003 may be subject to different terms.

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

Monthly ARM. The
interest rate on each monthly ARM ("Monthly ARM") will adjust monthly
on each Rate Adjustment Date as specified in the related mortgage note to a rate
equal to the sum (rounded to the nearest multiple of 0.125%) of the index and
the related margin, subject to certain limitations. The initial payment on each
Monthly ARM is based on an initial interest rate, in effect only until the first
Rate Adjustment

## -2-

---

Date, which is lower, and may be significantly lower, than the
sum of the index and the margin. No Monthly ARM contains a periodic interest
rate adjustment cap. The interest rate, however, may not exceed the maximum
interest rate specified for such Monthly ARM in the related mortgage note. The
amount of the minimum monthly payment due on each Monthly ARM adjusts, on the
dates and in the manner specified in the related mortgage note, to an amount
that would fully amortize the outstanding principal balance of the mortgage loan
over its remaining term to maturity at the interest rate applicable.

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

Three-Year ARM. The
interest rate with respect to each three-year ARM ("Three-Year ARM")
is fixed at an initial rate for the first 36 monthly payments. The interest rate
adjusts on the date specified in the related mortgage note and periodically
thereafter to a rate equal to the then-current applicable index plus the margin
set forth in such mortgage note, subject to a maximum periodic interest rate
increase or decrease, a lifetime interest rate adjustment cap, and a minimum
interest rate as specified in the related mortgage note.

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

Seven-Year Fixed-Rate
Loan with Automatic Conversion to One-Year ARM. The interest rate with
respect to each seven-year fixed-rate loan with automatic conversion to a
One-Year ARM (a "7/1 ARM") is fixed at an initial rate for the first
84 monthly payments and adjusts on the date specified in the related mortgage
note, and annually thereafter, to a rate equal to the then-current applicable
index plus the margin set forth in such mortgage note, subject to a maximum
annual interest rate increase or decrease, a lifetime interest rate adjustment
cap, and a minimum interest rate as specified in the related mortgage note.
There is no ability to continue at a fixed rate after the first Rate Adjustment
Date under the terms of this type of Residential Mortgage Loan.

Ten-Year Fixed-Rate Loan
With Automatic Conversion to One-Year ARM. The interest rate with respect to
each ten-year fixed-rate loan with automatic conversion to a One-Year ARM (a
"10/1 ARM") is fixed at an initial rate for the first 120 monthly
payments and adjusts on the date specified in the related mortgage note, and
annually thereafter, to a rate equal to the then-current applicable index plus
the margin set forth in such mortgage note, subject to a maximum annual interest
rate increase or decrease, a lifetime interest rate adjustment cap, and a
minimum interest rate as specified in the related mortgage note. There is no
ability to continue at a fixed rate after the first Rate Adjustment Date under
the terms of this type of Residential Mortgage Loan.

## Investment
Policy

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

## -3-

---

past due 90 days or more in principal or interest,  and  "classified"  loans are generally
troubled loans which are deemed substandard or doubtful with respect to collectibility.

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

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

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

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

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

## Credit Risk
Management Policies

The Company intends that
each Mortgage Loan it acquires in the future will represent a first lien
position and will be originated in the ordinary course of the originator's
real estate lending activities based on the underwriting standards generally
applied (at the time of origination) for the originator's own account. The
Company also intends that all Mortgage Loans held by the Company will be
serviced pursuant to the servicing agreement between the Company and the Bank
dated December 1, 1996 as amended on June 17, 2003 (the "Servicing
Agreement"). See "Servicing."

## Delinquencies

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

## Geographic
Distribution

A majority (or 54.3%) of
the Residential Mortgage Loans are secured by residential real estate properties
located in the Washington, DC metropolitan area. Consequently, these loans may
be subject to a greater risk of default than other comparable loans in the event
of adverse

## -4-

---

economic, political, or business developments in Washington, DC,
Maryland, and Virginia that may affect the ability of residential property
owners in any of these areas to make payments of principal and interest on the
underlying mortgages. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Significant Concentration
of Credit Risk."

## SERVICING

The Residential Mortgage
Loans owned by the Company are serviced by the Bank (the "Servicer")
pursuant to the terms of the Servicing Agreement. Effective July 1, 2003, the
servicing agreement between the Bank and the Company was modified to reduce the
servicing fee paid to the Bank to 0.250% of the outstanding loan balance from
0.375%. See "Certain Relationships and Related Transactions."

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

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

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

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

## DIVIDEND POLICY

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

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

Under Office of Thrift
Supervision ("OTS") regulations, the Bank is required to apply to the
OTS for approval to make any capital distribution, regardless of size, if the
Bank does not qualify for expedited treatment under OTS regulations. Dividends
on the Series A Preferred

## -5-

---

Shares are not treated as capital distributions for
the purposes of these regulations, provided the Bank remains "well
capitalized" after the payment. At December 31, 2003, the Bank was in
compliance with all of its regulatory capital requirements under the Financial
Institutions Reform, Recovery and Enforcement Act, and its capital ratios
exceeded the ratios established for "well capitalized" institutions
under prompt corrective action regulations.

## THE BANK

The Bank is a federally
chartered and federally insured stock savings bank which, at December 31, 2003,
was conducting business from 214 full-service offices, including 54 grocery
store banking centers, and 827 automated teller machines in Maryland, Virginia,
Delaware and the District of Columbia. The Bank's home office is located in
McLean, Virginia and its executive offices are located in Bethesda, Maryland,
both suburban communities of Washington, DC. The Bank either directly or through
a wholly-owned subsidiary also maintains a commercial loan production office in
Baltimore, Maryland and six mortgage loan production offices in the mid-Atlantic
region. At December 31, 2003, the Bank had total assets of $12.6 billion, total
deposits of $8.3 billion and total stockholders' equity of $623.8 million.
Based on total assets at December 31, 2003, the Bank is the largest full-service
bank headquartered in the Washington, DC metropolitan area.

The Company is a subsidiary
of the Bank and, therefore, federal regulatory authorities have the right to
examine the Company and its activities. Payment of dividends on the Series A
Preferred Shares could be subject to regulatory limitations if after the payment
the Bank were not "well capitalized" for purposes of the OTS prompt
corrective action regulations. "Well capitalized" is currently defined
as having a core capital (leverage) ratio of at least 5.0%, a tier 1 risk-based
capital ratio of at least 6.0% and a total risk-based capital ratio of at least
10.0%. At December 31, 2003, the Bank's core capital (or leverage) ratio
was 5.73%, its tier 1 risk-based capital ratio was 7.96% and its total
risk-based capital ratio was 13.52%. The Bank's total risk-based capital
includes $250.0 million of subordinated debentures which the Bank redeemed on
January 2, 2004. The pro forma total risk-based capital ratio at December 31,
2003, excluding the $250.0 million of subordinated debentures which were
subsequently redeemed, is 10.65%.

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

## THE ADVISOR

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

The Advisor and its
affiliates have substantial experience in the mortgage lending industry, both in
the origination and in the servicing of mortgage loans. At December 31, 2003,
the Advisor and its affiliates owned approximately $6.4 billion of residential
mortgage loans, including all of the Company's Residential Mortgage Loans.
In their residential mortgage loan business, the Advisor and its affiliates
originate and purchase residential mortgage loans. A portion of such loans are
sold to investors, primarily in the secondary market, generally on a servicing
retained basis. The Advisor and its affiliates may purchase servicing rights on
residential mortgage loans. Including loans serviced for its own portfolio, the
Advisor and its affiliates serviced residential mortgage loans having an
aggregate principal balance of approximately $14.8 billion as of December 31,
2003.

The Advisory Agreement had
an initial term of three years and is renewed automatically for additional
one-year periods unless notice of nonrenewal is delivered to the Advisor by the
Company. The Advisory Agreement may be terminated by the Company at any time
upon sixty

## -6-

---

days' prior written notice. As long as any Series A Preferred
Shares remain outstanding, any decision by the Company either to not renew the
Advisory Agreement or to terminate the Advisory Agreement must be approved by a
majority of the Board of Directors, as well as by a majority of the Independent
Directors (as defined below under "Market for Registrant's Common
Equity and Related Stockholder Matters"). The Advisor is entitled to
receive an annual advisory fee equal to $200,000 payable in equal quarterly
installments with respect to the advisory and management services provided to
the Company. See "Certain Relationships and Related Transactions."

## CAPITAL AND
LEVERAGE POLICIES

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

At December 31, 2003, the
Company had no debt outstanding, and the Company does not currently intend to
incur any indebtedness. However, the organizational documents of the Company do
not contain any limitation on the amount or percentage of debt, funded or
otherwise, that the Company might incur. The Company may not, without the
approval of a majority of the Independent Directors, incur debt for borrowed
money in excess of 25% of the Company's total stockholders' equity,
including intercompany advances made by the Bank to the Company.

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

## EMPLOYEES

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

## COMPETITION

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

## ENVIRONMENTAL
MATTERS

In the event that the
Company is forced to foreclose on a defaulted Mortgage Loan to recover its
investment in such Mortgage Loan, the Company may be subject to environmental
liabilities in connection with the underlying real property which could exceed
the value of the real property. Although the Company intends to exercise due
diligence to discover potential environmental liabilities prior to the
acquisition of any property through foreclosure, hazardous substances or waste,
contaminants, pollutants or sources thereof (as defined by state and federal
laws

## -7-

---

and regulations) may be discovered on properties during the Company's
ownership or after a sale thereof to a third party. If such hazardous substances
are discovered on a property which the Company has acquired through foreclosure
or otherwise, the Company may be required to remove those substances and
decontaminate the property. There can be no assurance that in such a case the
Company would not incur full recourse liability for the entire costs of any
removal and decontamination, that the cost of such removal and decontamination
would not exceed the value of the property or that the Company could recoup any
such costs from any third party. The Company may also be liable to tenants and
other users of neighboring properties. In addition, the Company may find it
difficult or impossible to sell the property prior to or following any such
decontamination.

## TAX STATUS OF
THE COMPANY

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

On March 16, 2004, the
Company's Board of Directors declared a cash dividend of $426.14 per share
of Common Stock, which was paid out of retained earnings of the Company and
which will be treated, for tax purposes, as a distribution made in 2003.
Including this dividend, the Company will have distributed 100% of its REIT
taxable income.

There are two income tests
that must be satisfied for each taxable year.         o
At least 75% of the Company's gross income (excluding income from certain
prohibited transactions) must be from interest on            obligations secured by
mortgages on real property or on interests in real property, gains from the sale
or other disposition of real            property (including interests in mortgages on real
property), and certain other sources;         o
At least 95% of the Company's gross income (excluding income from
prohibited transactions) must be from income included under the            75% income test,
other interest, dividends, and gains from the sale or other disposition of
certain stocks and securities.

There are three relevant
asset tests that must be satisfied at the close of each quarter of the
Company's taxable year.         o At least 75% of the value of the Company's
total assets must be represented by real estate assets, cash, cash items, and government            securities;        o Not more than 25% of the
Company's total assets may be represented by securities other than those in
the 75% asset class; and         o The value of any one issuer's securities
included in the 25% asset class may not exceed 5% of the value of the
Company's total assets and            the Company may not own more than 10% of the total voting power or
value of the outstanding securities of any one issuer.

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

During 2003, the Company
met the requirements of each test.

## ITEM 2.
PROPERTIES

## -8-

---

## ITEM 3. LEGAL
PROCEEDINGS

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

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

No matter was submitted to
a vote of security holders of the Company during the fourth quarter of the year
ended December 31, 2003.

# PART II

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

## DESCRIPTION OF COMMON
STOCK

## General

In connection with the
formation of the Company on November 5, 1996, the Company issued 100 shares of
Common Stock to the Bank for $1,000. These shares of Common Stock were issued in
reliance upon an exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended. Thus, there is no established public trading
market for the Common Stock. As of March 15, 2004, there were 100 issued and
outstanding shares of Common Stock held by one stockholder, the Bank.

## Dividends

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

`Period                       Distributions      Payment Date
-----------------------------------------   -------------   ------------------
January 1, 2002 to March 31, 2002              $        -                 N/A
April 1, 2002 to June 30, 2002                          -                 N/A
July 1, 2002 to September 30, 2002                      -                 N/A
October 1, 2002 to December 31, 2002            1,100,000    January 15, 2003
January 1, 2003 to March 31, 2003                       -                 N/A
April 1, 2003 to June 30, 2003                          -                 N/A
July 1, 2003 to September 30, 2003                      -                 N/A
October 1, 2003 to December 31, 2003              350,000    January 15, 2004`

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

## -9-

---

## Voting Rights

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

## Rights Upon
Liquidation

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

## DESCRIPTION OF
SERIES A PREFERRED SHARES

## Market
Information and Dividends

The Series A Preferred
Shares are listed on the New York Stock Exchange under the trading symbol
"CCP-PrA." As of February 2, 2004, there were 3,000,000 issued and
outstanding Series A Preferred Shares held by approximately 176 holders of
record. The following table reflects the respective high and low sales prices
for the Series A Preferred Shares for each quarter during the two most recent
years. The table also indicates the distributions declared by the Company during
these periods. For a discussion of the Company's distribution policy with
respect to the Series A Preferred Shares, see "Business - Dividend
Policy."

`Price
                                         -----------------
               Period                      High      Low    Distributions    Payment Date
--------------------------------------   --------  -------  -------------  -----------------
January 1, 2002 to March 31, 2002        $ 57.60   $ 55.20   $  3,890,625     April 15, 2002
April 1, 2002 to June 30, 2002             57.35     55.95      3,890,625      July 15, 2002
July 1, 2002 to September 30, 2002         58.05     55.85      3,890,625   October 15, 2002
October 1, 2002 to December 31, 2002       57.20     54.35      3,890,625   January 15, 2003
January 1, 2003 to March 31, 2003          57.80     55.60      3,890,625     April 15, 2003
April 1, 2003 to June 30, 2003             56.55     55.10      3,890,625      July 15, 2003
July 1, 2003 to September 30, 2003         57.50     55.25      3,890,625   October 15, 2003
October 1, 2003 to December 31, 2003       60.30     56.80      3,890,625   January 15, 2004`

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

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

## General

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

The holders of the Series A
Preferred Shares have no preemptive rights with respect to any shares of the
capital stock of the Company or any other securities of the Company convertible
into or carrying rights or options to purchase any such shares. The Series A
Preferred Shares are

## -10-

---

not subject to any sinking fund or other obligation of the
Company for their repurchase or retirement. The Series A Preferred Shares will
be exchanged automatically on a one-for-one basis for Bank Preferred Shares (as
defined below) upon the occurrence of the Exchange Event (as defined below).

## Automatic
Exchange

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

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

## Voting Rights

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

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

## Redemption

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

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

## -11-

---

## Rights Upon
Liquidation

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

## Independent
Director Approval

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

## ITEM 6.
SELECTED FINANCIAL DATA

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

`As of or for the year ended
                                                                 December 31,
                                 -------------------------------------------------------------------------
                                      2003           2002           2001          2000           1999
                                 -------------  -------------  -------------  -------------  -------------
OPERATING DATA:
Interest income                  $  17,035,160  $  17,729,403  $  21,041,424  $  22,189,625  $  21,795,357
Provision for loan losses                    -              -              -              -         26,554
                                 -------------  -------------  -------------  -------------  -------------
  Total interest income after
    provision for loan losses       17,035,160     17,729,403     21,041,424     22,189,625     21,768,803
Gain on sale of real estate acquired
  in settlement of loans, net                -              -         21,924         20,209         29,909
Operating expenses                  (1,103,037)    (1,232,182)    (1,356,557)    (1,383,421)    (1,715,826)
Provision for income taxes                   -              -        (10,373)       (15,168)             -
                                 -------------  -------------  -------------  -------------  -------------
  Net income                     $  15,932,123  $  16,497,221  $  19,696,418  $  20,811,245  $  20,082,886
                                 =============  =============  =============  =============  =============
Earnings available to common
    Stockholders                 $     369,623  $     934,721  $   4,133,918  $   5,248,745  $   4,520,386
Earnings per common share        $    3,696.23  $    9,347.21  $   41,339.18  $   52,487.45  $   45,203.86

DIVIDENDS DECLARED:

Dividends on common stock        $     350,000  $   1,100,000  $   4,475,000  $   5,250,000   $   4,690,000
Dividends on preferred stock     $  15,562,500  $  15,562,500  $  15,562,500  $  15,562,500   $  15,562,500

BALANCE SHEET DATA:

Residential mortgage loans, net  $ 296,062,742  $ 285,395,464  $ 287,523,781  $ 298,145,029   $ 295,195,830
Total assets                     $ 304,266,967  $ 304,825,346  $ 306,318,593  $ 307,516,771   $ 307,146,976
Total stockholders' equity       $ 300,019,623  $ 299,834,721  $ 299,658,918  $ 299,998,745   $ 299,830,386
Number of preferred shares
    Outstanding                      3,000,000      3,000,000      3,000,000      3,000,000       3,000,000
Number of common shares
    Outstanding                            100            100            100            100             100
Average yield on residential1
    mortgage loans                        5.90%          6.14%          7.16%          7.42%           7.35%`

## -12-

---

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

## FINANCIAL
CONDITION

## Critical
Accounting Policies

Critical accounting
policies are defined as those that are reflective of significant judgments and
uncertainties, and potentially result in materially different outcomes under
different assumptions and conditions. The Company's significant accounting
policies are described in Note 2 in the Notes to the Financial Statements. Not
all of these significant accounting policies require management to make
difficult, subjective or complex judgments or estimates; however, the following
policy could be deemed to be critical within the Securities and Exchange
Commission (the "SEC") definition:

## Allowance for
Loan Losses

Management reviews the loan
portfolio to establish an allowance for estimated losses if deemed necessary. An
analysis to determine whether an allowance for loan loss is required is
performed periodically, and an allowance is provided after considering such
factors as historical loss performance, delinquency status, current economic
conditions and geographical concentrations. The allowance for loan losses is
based on estimates, and ultimate losses may vary from current estimates. As
adjustments to the allowance become necessary, provisions for loan losses are
reported in operations. There was no activity in the allowance for loan losses
during the years ended December 31, 2003, 2002 and 2001, and the balance of the
allowance was $40,333 at the end of each year.

## Residential
Mortgage Loans

At December 31, 2003, the
Company had $296,062,742 invested in Residential Mortgage Loans compared to
$285,395,464 at December 31, 2002. During 2003, Residential Mortgage Loan
purchases totaled $279,698,324 and principal collections totaled $269,031,046.
Management intends to continue to reinvest proceeds received from repayments of
loans by purchasing additional Residential Mortgage Loans from either the Bank
or its affiliates.

At December 31, 2003, the
Company had five non-accrual loans (loans contractually past due 90 days or more
or with respect to which other factors indicate that full payment of principal
and interest is unlikely) with an aggregate principal balance of $1,589,670 (or
0.54% 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 December 31, 2003, the
Company had three delinquent loans (loans delinquent 30-89 days) with an
aggregate principal balance of $807,205 (or 0.27% of loans). At December 31,
2002, the Company had five delinquent loans with an aggregate principal balance
of $1,307,482 (or 0.46% of loans).

## Interest Rate
Risk

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

Based on the outstanding
balance of the Company's Residential Mortgage Loans at December 31, 2003,
and the interest rates on such loans, anticipated annual interest income on the
Company's loan portfolio, net of operating expenses, was approximately
104.1% of the projected annual dividend of $15,562,500 on the Series A Preferred
Shares.

## -13-

---

If market interest rates
remain at or near their recent 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 assurance
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.

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

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

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

                                            (Dollars in thousands)
                                                 December 31,
                      -------------------------------------------------------
                        2004      2005      2006      2007      2008    Thereafter   Total    Fair Value
                      --------- --------- --------- --------- --------- ---------- ---------- ----------

Monthly ARMs          $ 47,833  $      -  $      -  $      -  $      -  $       -  $  47,833   $ 49,482
Average Interest Rate     3.45%        -         -         -         -          -       3.45%

One-Year ARMs           12,989         -         -         -         -          -     12,989     13,577
Average Interest Rate     4.16%        -         -         -         -          -       4.16%

Three-Year ARMs         10,347     1,601       276         -         -          -     12,224     12,508
Average Interest Rate     5.36%     6.24%     6.75%        -         -          -       5.50%

Five-Year ARMs          44,268     9,065     2,819     5,765       803          -     62,720     64,289
Average Interest Rate     5.71%     6.96%     6.47%     6.35%     6.19%         -       5.99%

7/1 ARMs                 5,217     3,902     3,285        75         -          -     12,479     12,808
Average Interest Rate     6.80%     6.77%     6.85%     6.75%        -          -       6.80%

10/1 ARMs               16,249     9,189     5,357     3,465     2,049      1,907     38,216     39,244
Average Interest Rate     6.76%     6.78%     6.78%     6.82%     6.80%      6.69%    6.77%

15 & 30-Year
  Fixed Rate            44,902    27,085    15,793     9,198     5,346      7,318    109,642    111,530
Average Interest Rate     6.69%     6.68%     6.68%     6.68%     6.68%      6.67%      6.68%`

## 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

## -14-

---

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 54.3%) of the Company's
Residential Mortgage Loans are loans secured by residential real estate
properties located in the Washington, DC metropolitan area. Service industries
and Federal, state and local governments employ a significant portion of the
Washington, DC area labor force. Consequently, these loans may be subject to a
greater risk of default than other comparable residential mortgage loans in the
event of adverse economic, political or business developments and natural
hazards in the region that may affect the ability of residential property owners
in the region to make payments of principal and interest on the underlying
mortgages.

## Liquidity and
Capital Resources

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

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

## RESULTS OF
OPERATIONS

## Year 2003
Compared to Year 2002

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

Total interest income was
$17,035,160 and $17,729,403 for the years ended December 31, 2003 and 2002,
respectively. Interest income on Residential Mortgage Loans totaled $17,012,620
and $17,643,920 for the years ended December 31, 2003 and 2002, respectively,
which represents an average yield on such loans of 5.90% and 6.14%,
respectively. The average loan balance of the Residential Mortgage Loan
portfolio was $288,265,768 and $287,453,466 for the years ended December 31,
2003 and 2002, respectively. The Company would have recorded an additional
$49,507 and $56,457 in interest income for the years ended December 31, 2003 and
2002, respectively, had its non-accrual loans been current in accordance with
their original terms.

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

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

Operating expenses totaling
$1,103,037 and $1,232,182 for the years ended December 31, 2003 and 2002,
respectively, were comprised of loan servicing fees paid to parent, advisory
fees paid to parent, directors' fees and general and administrative
expenses. Loan servicing fees paid to parent were $747,976 and $939,336 for the
years ended December 31, 2003 and 2002, respectively. Effective July 1, 2003 the
servicing agreement between the Bank and the Company was modified to reduce the
servicing fee paid to the Bank to 0.250% of the outstanding loan

## -15-

---

balance from 0.375%. Advisory fees paid to parent for the years ended December 31, 2003 and
2002 totaled $200,000 for each period. Directors' fees paid were $36,000
and $30,500 for the years ended December 31, 2003 and 2002, respectively, and
represent compensation to the two independent members of the Board of Directors.
General and administrative expenses totaled $119,061 and $62,346 for the years
ended December 31, 2003 and 2002, respectively. The increase in general and
administrative expenses is largely due to increases in trustee fees, auditing
expenses and New York Stock Exchange expenses.

During the year ended
December 31, 2003, the Company's Board of Directors declared cash dividends
of $15,562,500, representing $5.1875 per share on the outstanding shares of
Series A Preferred Shares, out of the retained earnings of the Company.

Also during the year ended
December 31, 2003, the Company's Board of Directors declared a cash
dividend of $3,500 per share of Common Stock, which was paid out of the retained
earnings of the Company.

## Year 2002
Compared to Year 2001

The Company reported net
income of $16,497,221 and $19,696,418 for the years ended December 31, 2002 and
2001, respectively. The decrease in net income is due primarily to a decrease in
the average yield and, to a lesser extent, a decrease in the average balance of
Residential Mortgage Loans.

Total interest income was
$17,729,403 and $21,041,424 for the years ended December 31, 2002 and 2001,
respectively. Interest income on Residential Mortgage Loans totaled $17,643,920
and $20,875,203 for the years ended December 31, 2002 and 2001, respectively,
which represents an average yield on such loans of 6.14% and 7.16%,
respectively. The average loan balance of the Residential Mortgage Loan
portfolio was $287,453,466 and $291,606,584 for the years ended December 31,
2002 and 2001, respectively. The Company would have recorded an additional
$56,457 and $37,120 in interest income for the years ended December 31, 2002 and
2001, respectively, had its non-accrual loans been current in accordance with
their original terms.

Other interest income of
$85,483 and $166,221 was recognized on the Company's interest bearing
deposits during the years ended December 31, 2002 and 2001, respectively. The
decrease was due to a lower average yield on interest bearing deposits, which
decreased by 167 basis points (to 1.37% from 3.04%) from the average yield in
the 2001 period. Partially offsetting the decrease in other interest income was
an increase in the average balance of interest bearing deposits to $6,242,020 in
the 2002 period from $5,464,100 in the 2001 period.

There were no provisions
for loan losses during the years ended December 31, 2002 and 2001.

The Company recognized a gain
of $21,924 on the sale of one REO property during the year ended December 31,
2001.

Operating expenses totaling
$1,232,182 and $1,356,557 for the years ended December 31, 2002 and 2001,
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 $939,336 and $1,052,549 for the
years ended December 31, 2002 and 2001, respectively, were based on a servicing
fee rate of 0.375% per annum of the outstanding principal balances of
Residential Mortgage Loans, pursuant to the Servicing Agreement. Advisory fees
paid to parent for the years ended December 31, 2002 and 2001 totaled $200,000
for each period. Directors' fees paid were $30,500 and $29,000 for the
years ended December 31, 2002 and 2001, respectively, and represent compensation
to the two independent members of the Board of Directors. General and
administrative expenses totaled $62,346 and $75,008 for the years ended December
31, 2002 and 2001, respectively. The decrease in general and administrative
expenses was due to decreases in trustee fees and auditing expenses.

During the year ended
December 31, 2002, the Company's Board of Directors declared cash dividends
of $15,562,500, representing $5.1875 per share on the outstanding shares of
Series A Preferred Shares, out of the retained earnings of the Company.

## -16-

---

Also during the year ended
December 31, 2002, the Company's Board of Directors declared cash dividends
of $11,000 per share of Common Stock, $934,721 of which was paid out of the
retained earnings of the Company and $165,279 of which was treated as a return
of capital.

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

## -17-

---

## ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

# CONTENTS

`Page

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

(b)  Statements of Financial Condition at December 31, 2003 and 2002.........F-3

(c)  Statements of Operations for the Years Ended
     December 31, 2003, 2002 and 2001........................................F-4

(d)  Statements of Stockholders' Equity for the Years Ended
     December 31, 2003, 2002 and 2001........................................F-5

(e)  Statements of Cash Flows for the Years Ended
     December 31, 2003, 2002 and 2001........................................F-6

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

## F-1

---

# REPORT OF INDEPENDENT AUDITORS

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

We have audited the
accompanying statement of financial condition of Chevy Chase Preferred Capital
Corporation (the "Company," a Maryland corporation) as of December 31,
2003 and 2002, and the related statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
financial statements of the Company for the year ended December 31, 2001 were
audited by other auditors who have ceased operations and whose report dated
March 13, 2002, expressed an unqualified opinion on those financial statements.

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

In our opinion, the 2003
and 2002 financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 2003 and
2002, and the results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States.

/s/ Ernst & Young LLP McLean, Virginia
March 5, 2004

## F-2

---

# CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION

`December 31,
                                                        ---------------------------
                                                            2003           2002
                                                        ------------   ------------

                                     ASSETS

Cash and interest-bearing deposits                      $  5,411,004   $  2,986,496
Residential mortgage loans (net of allowance
for loan losses of $40,333 for both years)               296,062,742    285,395,464
Accounts receivable from parent                            1,755,369     15,297,140
Accrued interest receivable                                1,031,352      1,138,246
Prepaid expenses                                               6,500          8,000
                                                        ------------   ------------
Total assets                                            $304,266,967   $304,825,346
                                                        ============   ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable to others and accrued expenses         $      6,719   $          -
Dividends payable to parent                                  350,000      1,100,000
Dividends payable to others                                3,890,625      3,890,625
                                                        ------------   ------------
Total liabilities                                          4,247,344      4,990,625
                                                        ------------   ------------

Preferred Stock, 10,000,000 shares authorized:
10 3/8% Noncumulative Exchangeable Preferred Stock,
$5 par value, 3,000,000 shares issued and outstanding
(liquidation value of $150,000,000 plus accrued and
unpaid dividends)                                         15,000,000     15,000,000
Common Stock, $1 par value 1,000 shares authorized,
100 shares issued and outstanding                                100            100
Capital contributed in excess of par                     284,999,900    284,834,621
Retained Earnings                                             19,623              -
                                                        ------------   ------------
Total stockholders' equity                               300,019,623    299,834,721
                                                        ------------   ------------
Total liabilities and stockholders' equity              $304,266,967   $304,825,346
                                                        ============   ============








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

## F-3

---

# CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF OPERATIONS

`Year Ended December 31,
                                          ---------------------------------------
                                             2003          2002          2001
                                          -----------   -----------   -----------
Interest income:
Residential mortgage loans                $17,012,620   $17,643,920   $20,875,203
Other                                          22,540        85,483       166,221
                                          -----------   -----------   -----------

  Total interest income                    17,035,160    17,729,403    21,041,424

Gain on sale of real estate acquired in
 settlement of loans, net                           -            -        21,924
                                          -----------   -----------   -----------

  Total operating income                   17,035,160    17,729,403    21,063,348
                                          -----------   -----------   -----------

Operating expenses:
Loan servicing fees-parent                    747,976       939,336     1,052,549
Advisory fees-parent                          200,000       200,000       200,000
Directors' fees                                36,000        30,500        29,000
General and administrative                    119,061        62,346        75,008
                                          -----------   -----------   -----------
  Total operating expenses                  1,103,037     1,232,182     1,356,557
                                          -----------   -----------   -----------

  Income before income taxes               15,932,123    16,497,221    19,706,791
Provision for income taxes                          -             -        10,373
                                          -----------   -----------   -----------
NET INCOME                                $15,932,123   $16,497,221   $19,696,418
                                          ===========   ===========   ===========
PREFERRED STOCK DIVIDENDS                  15,562,500    15,562,500    15,562,500
                                          -----------   -----------   -----------
EARNINGS AVAILABLE TO
 COMMON STOCKHOLDER                    $   369,623   $   934,721   $ 4,133,918
                                          ===========   ===========   ===========
EARNINGS PER COMMON SHARE                 $  3,696.23   $  9,347.21   $ 41,339.18
                                          ===========   ===========   ===========



















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

## F-4

---

# CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY

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

Balance, December 31, 2000   $ 15,000,000   $     100   $ 284,998,645   $          -   $ 299,998,745

Capital contribution from
common stockholder                      -           -           1,255              -           1,255
Net income                              -           -               -     19,696,418      19,696,418
Dividends on 10 3/8%
Noncumulative Exchangeable
Preferred Stock, Series A               -           -               -    (15,562,500)    (15,562,500)
Dividends on common stock               -           -        (341,082)    (4,133,918)     (4,475,000)
                             ------------   ---------   -------------   ------------   -------------

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

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

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

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

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













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

## F-5

---

# CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS

`Year Ended December 31,
                                                         ---------------------------------------------
                                                              2003             2002             2001
                                                         -------------  -------------  -------------
Cash flows from operating activities:

Net income                                               $  15,932,123  $  16,497,221  $  19,696,418

Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on sale of real estate acquired in settlement of
loans, net                                                           -              -        (21,924)
(Increase) decrease in accounts receivable from parent      13,541,771     (3,471,532)    (9,305,943)
Decrease in accrued interest receivable                        106,894         58,091        408,642
Decrease in prepaid expenses                                     1,500              -              -
Increase (decrease) in accounts payable to others and
accrued expenses                                                 6,719        (69,050)       (58,351)
                                                         -------------  -------------  -------------
Net cash provided by operating activities                   29,589,007     13,014,730     10,718,842
                                                         -------------  -------------  -------------

Cash flows from investing activities:

Purchases of residential mortgage loans                   (279,698,324)  (173,247,015)   (97,217,311)
Repayments of residential mortgage loans                   269,031,046    175,375,332    107,838,559
Net proceeds from sale of real estate acquired in
settlement of loans                                                  -              -        138,330
                                                         -------------  -------------  -------------
Net cash provided by (used in) investing activities        (10,667,278)     2,128,317     10,759,578
                                                         -------------  -------------  -------------
Cash flows from financing activities:

Capital contribution from common stockholder                   165,279        341,082          1,255
Dividends paid on preferred stock                          (15,562,500)   (15,562,500)   (15,562,500)
Dividends paid on common stock                              (1,100,000)    (2,700,000)    (5,275,000)
                                                         -------------  -------------  -------------
Net cash used in financing activities                      (16,497,221)   (17,921,418)   (20,836,245)
                                                         -------------  -------------  -------------
Net increase (decrease) in cash and cash equivalents         2,424,508     (2,778,371)       642,175

Cash and cash equivalents at beginning of year               2,986,496      5,764,867      5,122,692
                                                         -------------  -------------  -------------

Cash and cash equivalents at end of year                 $   5,411,004  $   2,986,496  $   5,764,867
                                                         =============  =============  =============

Supplemental disclosures of cash flow information:

Income taxes paid during the year                        $           -  $           -  $      10,373
                                                         =============  =============  =============













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

## F-6

---

# CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 and 2001

## NOTE 1 -
ORGANIZATION AND BASIS OF PRESENTATION:

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

## NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

## Use of Estimates:

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

## Cash and Cash Equivalents:

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

## Residential Mortgage Loans:

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

Loans are reviewed on a
monthly basis and are placed on non-accrual status when, in the opinion of
management, the full collection of principal and interest has become unlikely.
Uncollectible accrued interest receivable on non-accrual loans is charged
against current period income. The Company had non-accrual loans at December 31,
2003 and 2002 totaling $1,589,670 and $1,436,859, respectively.

## Allowance for Loan Losses:

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

## Concentrations of Credit:

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

## Accounts Receivable from Parent:

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

## F-7

---

# CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 and 2001

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

## Dividends:

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

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

## Earnings Per Common Share:

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

## Income Taxes:

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

The Company recognized a
capital gain of $21,924 on the sale of one Real Estate Owned ("REO")
property during the year ended December 31, 2001. As a result, the Company
incurred and paid an income tax liability for the year ended December 31, 2001
of $10,373.

On March 16, 2004, the
Company's Board of Directors declared a cash dividend of $426.14 per share
of Common Stock, which was paid out of retained earnings of the Company and
which will be treated, for tax purposes, as a distribution made in 2003.
Including this dividend, the Company will have distributed 100% of its REIT
taxable income.

There are two income tests
that must be satisfied for each taxable year.         o
At least 75% of the Company's gross income (excluding income from certain
prohibited transactions) must be from interest on            obligations secured by
mortgages on real property or on interests in real property, gains from the sale
or other disposition of real            property (including interests in mortgages on real
property), and certain other sources;         o
At least 95% of the Company's gross income (excluding income from
prohibited transactions) must be from income included under the            75% income test,
other interest, dividends, and gains from the sale or other disposition of
certain stocks and securities.

## F-8

---

# CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 and 2001

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

## Income Taxes (Continued):

There are three relevant
asset tests that must be satisfied at the close of each quarter of the
Company's taxable year.         o At least 75% of the value of the Company's
total assets must be represented by real estate assets, cash, cash items, and government            securities;        o Not more than 25% of the
Company's total assets may be represented by securities other than those in
the 75% asset class; and         o The value of any one issuer's securities
included in the 25% asset class may not exceed 5% of the value of the
Company's total assets and            the Company may not own more than 10% of the total voting power or
value of the outstanding securities of any one issuer.

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

During 2003, the Company
met the requirements of each test.

## NOTE 3 -
RESIDENTIAL MORTGAGE LOANS:

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

`December 31,
                             ----------------------------
                                 2003           2002
                             -------------   ------------
Monthly ARMs                  $ 47,833,336   $ 67,406,366
One-Year ARMs                   12,988,634     16,966,406
Three-Year ARMs                 12,224,073     20,126,451
Five-Year ARMs                  62,720,041     58,544,908
7/1 ARMs                        12,478,626     16,056,192
10/1 ARMs                       38,215,901     62,040,642
15 & 30 Year Fixed-Rate        109,642,464     44,294,832
                              ------------   ------------
   Total                       296,103,075    285,435,797
Less:
   Allowance for loan losses        40,333         40,333
                              ------------   ------------
Total                         $296,062,742   $285,395,464
                              ============   ============`

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

## NOTE 4 -
ALLOWANCE FOR LOAN LOSSES:

There was no activity in
the allowance for loan losses during the years ended December 31, 2003, 2002 and
2001, and the balance of the allowance for loan losses was $40,333 at the end of
each year.

## F-9

---

# CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 and 2001

## NOTE 5 -
PREFERRED STOCK:

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

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

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

## NOTE 6 -
DIVIDENDS:

During the year ended
December 31, 2003, the Company's Board of Directors declared $15,562,500 of
preferred stock dividends out of retained earnings of the Company. The
Company's Board of Directors also declared $350,000 of common stock
dividends out of retained earnings of the Company.

Of these amounts, preferred
stock dividends of $3,890,625 and common stock dividends of $350,000 were paid
subsequent to December 31, 2003.

## NOTE 7 -
RELATED PARTY TRANSACTIONS:

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

The Company also entered
into a servicing agreement with the Bank for the servicing of its residential
mortgage loans (the "Servicing Agreement"). Pursuant to the Servicing
Agreement, the Bank performs the servicing of the loans owned by the Company, in
accordance with normal industry practice. The Servicing Agreement can be
terminated without cause upon sixty days' notice to the servicer and
payment of a termination fee. Effective July 1, 2003, the servicing
agreement was modified to reduce the servicing fee paid to the Bank to 0.250% of
the outstanding loan balance from 0.375%. Servicing fees for the years ended
December 31, 2003, 2002 and 2001 totaled $747,976, $939,336 and $1,052,549,
respectively.

The Company had cash
balances of $5,411,004 and $2,986,496 as of December 31, 2003 and 2002,
respectively, held in various deposit accounts with the Bank. Interest earned on
these accounts was $22,540, $85,483 and $166,221 for the years ended December
31, 2003, 2002 and 2001, respectively.

## F-10

---

# CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 and 2001

## NOTE 8 -
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:

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

The estimated fair values
of the Company's financial instruments at December 31, 2003 and 2002 are as
follows:

`December 31, 2003
                                     ---------------------------
                                       Carrying        Fair
                                        Amount         Value
                                     ------------   ------------
Financial assets:
  Cash and interest-bearing deposits $  5,411,004   $  5,411,004
  Residential mortgage loans, net     296,062,742    303,438,000

                                           December 31, 2002
                                     ---------------------------
                                       Carrying        Fair
                                        Amount         Value
                                     ------------   ------------
Financial assets:
  Cash and interest-bearing deposits $  2,986,496   $  2,986,496
  Residential mortgage loans, net     285,395,464    295,657,000`

The following methods and
assumptions were used to estimate the fair value amounts at December 31, 2003
and 2002.

## Cash and
interest-bearing deposits:

Carrying amount
approximates fair value.

## Residential
mortgage loans:

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

## F-11

---

# CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 and 2001

## NOTE 9 -
QUARTERLY FINANCIAL DATA (Unaudited):

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

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

Interest income                       $ 4,251,760    $ 4,205,110    $ 4,238,342    $ 4,339,948
Operating expenses                       (314,218)      (317,611)      (225,497)      (245,711)
                                      ------------   ------------   ------------   ------------
Net income                            $ 3,937,542    $ 3,887,499    $ 4,012,845    $ 4,094,237
                                      ============   ============   ============   ============

Preferred Stock dividends             $ 3,890,625    $ 3,890,625    $ 3,890,625    $ 3,890,625
                                      ------------   ------------   ------------   ------------
Earnings (loss) available to common
stockholders                          $    46,917    $    (3,126)   $   122,220    $   203,612
                                      ============   ============   ============   ============
Earnings (loss) per common share      $    469.17    $    (31.26)   $  1,222.20    $  2,036.12
                                      ============   ============   ============   ============


                                                               2002
                                                        For the quarter ended
                                      ---------------------------------------------------------
                                        March 31       June 30      September 30   December 31
                                      ------------   ------------   ------------   ------------
OPERATING DATA:

Interest income                       $ 4,543,478    $ 4,534,547    $ 4,388,190    $ 4,263,188
Operating expenses                       (315,956)      (311,632)      (302,774)      (301,820)
                                      ------------   ------------   ------------   ------------
Net income                            $ 4,227,522    $ 4,222,915    $ 4,085,416    $ 3,961,368
                                      ============   ============   ============   ============
Preferred Stock dividends             $ 3,890,625    $ 3,890,625    $ 3,890,625    $ 3,890,625
                                      ------------   ------------   ------------   ------------
Earnings available to common
stockholders                          $   336,897    $   332,290    $   194,791    $    70,743
                                      ============   ============   ============   ============
Earnings per common share             $  3,368.97    $  3,322.90    $  1,947.91    $    707.43
                                      ============   ============   ============   ============`

## F-12

---

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

## ITEM 9A.
CONTROLS AND PROCEDURES

Within the 90-day period
prior to the date of this report, the Company carried out an evaluation, under
the supervision and with the participation of the Company's management,
including its Chairman and Chief Executive Officer and its Executive Vice
President and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures as of
December 31, 2003. Based on the foregoing, the Company's Chairman and Chief
Executive Officer and its Executive Vice President and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were
effective at the reasonable assurance level as of December 31, 2003.

During the three months
ended December 31, 2003, there were no significant changes in the Company's
internal control over financial reporting that materially affected, or are
reasonably likely to materially affect, the Company's control over
financial reporting.

# PART III

## ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

## DIRECTORS AND
EXECUTIVE OFFICERS

The Company's Board of
Directors currently consists of six members, two of whom are Independent
Directors. Each director was elected to serve for a term of one year and until
his successor shall have been duly elected and qualified. The Board of Directors
is elected by the Bank, which is the sole holder of common stock of the Company.
The holders of the Series A Preferred Shares may elect directors only under
certain limited circumstances. See DESCRIPTION OF SERIES A PREFERRED SHARES
- Voting Rights. The Board of Directors met four times during the year
ended 2003 and all of its members attended at least 80% of the meetings. The
Company currently has nine officers. The Company has no other employees and does
not anticipate that it will require additional employees.

The following persons are
the Company's current directors and/or executive officers.

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

B. Francis Saul II...............71  Chairman of the Board, President and Chief
                                        Executive Officer
Alexander R. M. Boyle............66  Director
Stephen R. Halpin, Jr............48  Executive Vice President, Chief Financial
                                        Officer, Treasurer and Director
R. Timothy Hanlon................67  Executive Vice President, General Counsel
                                        and Director
N. Alexander MacColl, Jr.........69  Director

H. Gregory Platts................56  Director`

## -18-

---

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

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

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

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

R.  TIMOTHY  HANLON  joined the Bank as  Executive  Vice  President  and General  Counsel in March  2002.  Prior to
joining the Bank, Mr. Hanlon was a partner in the Shaw Pittman LLP law firm in  Washington,  DC, where he practiced
law from 1964 to 2002.

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

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

## CODE OF
BUSINESS CONDUCT

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

## -19-

---

## AUDIT COMMITTEE

The Company's audit
committee reviews the engagement of independent accountants and reviews their
independence. The audit committee also reviews the adequacy of the
Company's internal accounting controls. The audit committee is comprised of
the Company's Independent Directors, H. Gregory Platts and N. Alexander
MacColl, Jr. The audit committee met four times during 2003.

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

## SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

Based solely on its review
of copies of such reports received or representations from certain reporting
persons, the Company believes that, during the year ended December 31, 2003, all
of its officers, directors and ten percent shareholders complied with all
Section 16(a) filing requirements applicable to them with respect to
transactions during fiscal 2003.

## ITEM 11.
EXECUTIVE COMPENSATION

Since the Company's
inception on November 5, 1996, no compensation has been awarded to, earned by or
paid to any of the Company's directors (other than its Independent
Directors), officers or employees. The Company does not intend to pay any
compensation to any of its directors (other than its Independent Directors),
officers or employees. The Company pays the Independent Directors annual
compensation of $10,000, plus a fee of $750 for attendance (in person or by
telephone) at each meeting of the Board of Directors and each meeting of the
Audit Committee. In 2003, each of the Independent Directors earned $6,000 for
attending four meetings of the Board of Directors and four meetings of the Audit
Committee.

## -20-

---

## ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The Company had no
compensation plan under which its equity securities are authorized for issuance.
The following table sets forth, as of March 15, 2004, the number and percentage
of outstanding shares of Common Stock and Series A Preferred Shares beneficially
owned by (i) all persons known by the Company to own more than five percent of
such shares; (ii) each director of the Company; (iii) each executive officer of
the Company; and (iv) all executive officers and directors of the Company as a
group. The persons or entities named in the table have sole voting and sole
investment power with respect to each of the shares beneficially owned by such
person or entity. The calculations were based on a total of 100 shares of Common
Stock and 3,000,000 Series A Preferred Shares outstanding as of March 15, 2004.

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

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

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

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

R. Timothy Hanlon (2)(3)                           0                     0%

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

H. Gregory Platts (2)                              0                     0%
    All directors and executive officers
        as a group (6 persons)                   1,000           Preferred - 0.033%
__________

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

## ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

The Bank administers the
day-to-day operations of the Company and is entitled to receive fees in
connection with the Advisory Agreement. Advisory fees paid to the Bank for the
year ended December 31, 2003 totaled $200,000. See "Business - The Advisor."

The Bank services the
Residential Mortgage Loans included in the Company's portfolio and is
entitled to receive fees in connection with the Servicing Agreement. Loan
servicing fees paid to the Bank for the year ended December 31, 2003 totaled
$747,976. See "Business - Servicing."

The Company had cash
balances of $5,411,004 as of December 31, 2003 held in various deposit accounts
with the Bank. Interest earned on these accounts was $22,540 for the year ended
December 31, 2003.

## -21-

---

## ITEM 14.
PRINCIPAL ACCOUNTANTS FEES AND SERVICES

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

`December 31,
                                       ---------------------------------
    Types of Fees and Services               2003              2002
    -------------------------------    ---------------    --------------
    Audit                                   $  26,392         $  12,429

    Tax (1)                                     4,000             3,675
                                       ---------------    --------------
        Total                               $  30,392         $  16,104
                                       ===============    ==============

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

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

## -22-

---

# PART IV

## ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

Report of Independent Auditors
                              Statements of Financial Condition at December 31, 2003 and 2002
                              Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001
                              Statements of Stockholders' Equity for the Years Ended December 31, 2003, 2002 and 2001
                              Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001

                              Notes to Financial Statements

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

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

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

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

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

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

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

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

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

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

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

            *  32.1          Section 1350 Certifications of Chief Executive Officer.

            *  32.1          Section 1350 Certifications of Chief Financial Officer.

                (b)             No reports on Form 8-K were issued during the three months ended December 31, 2003.

## -23-

---

# EXHIBIT 12.1

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

---

`(in thousands, except ratio data)
                                                  As of or for the year ended December 31,
                                         -----------------------------------------------------------
                                            2003        2002        2001        2000        1999
                                         ----------- ----------- ----------- ----------- -----------
Net income                               $   15,932  $   16,497  $   19,696  $   20,811  $   20,083
Fixed charges                                     -           -           -           -           -
                                         ----------- ----------- ----------- ----------- -----------
Earnings before fixed charges            $   15,932  $   16,497  $   19,696  $   20,811  $   20,083
                                         =========== =========== =========== =========== ===========

Fixed charges, as above                  $        -  $        -  $        -  $        -  $        -
Preferred stock dividend requirements        15,563      15,563      15,563      15,563      15,563
                                         ----------- ----------- ----------- ----------- -----------
Fixed charges including preferred stock
   dividends                             $   15,563  $   15,563  $   15,563  $   15,563  $   15,563
                                         =========== =========== =========== =========== ===========

Ratio of earnings to fixed charges and
   Preferred stock dividend requirements      1.02x       1.06x       1.27x       1.34x      1.29x`

---

# SIGNATURES

Pursuant to the  requirements  of Section 13 or 15(d) of the  Securities  Exchange Act of 1934,  the Registrant has
duly caused this report to be signed on its behalf by the  undersigned  thereunto  duly  authorized,  in  Bethesda,
Maryland on March 24,2004.

# CHEVY CHASE PREFERRED CAPITAL CORPORATION

`March 24,2004                        By:  /s/ B. Francis Saul II
                                          -------------------------------------
                                          B. Francis Saul II
                                          Chairman of the Board of Directors,
                                          President and Chief Executive Officer
                                          (Principal Executive Officer)`

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

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


/s/ Alexander R.M. Boyle                    Director                       March 24,2004
------------------------------
Alexander R.M. Boyle


/s/ Joel A. Friedman                    Senior Vice President              March 24,2004
------------------------------             and Controller
Joel A. Friedman                    (Principal Accounting Officer)


/s/ Stephen R. Halpin, Jr.           Executive Vice President and          March 24,2004
------------------------------          Chief Financial Officer
Stephen R. Halpin, Jr.              (Principal Financial Officer)


/s/ R. Timothy Hanlon              Director, Executive Vice President      March 24,2004
------------------------------           and General Counsel
R. Timothy Hanlon


/s/ N. Alexander MacColl, Jr.               Director                       March 24,2004
------------------------------
N. Alexander MacColl, Jr.


/s/ H. Gregory Platts                       Director                       March 24,2004
-------------------------------
H. Gregory Platts


/s/ B. Francis Saul II             Chairman of the Board of Directors,     March 24,2004
-------------------------------   President and Chief Executive Officer
B. Francis Saul II                   (Principal Executive Officer)`

---

# Exhibit 31.1

# CERTIFICATION

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

         1.    I have reviewed this annual report on Form 10-K for the year ending December 31, 2003 of Chevy
               Chase Preferred Capital Corporation;

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

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

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

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

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

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

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

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

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



March 24,2004                                    /s/ B. FRANCIS SAUL II
                                                 --------------------------------------
                                                 B. Francis Saul II
                                                 Chairman and Chief Executive Officer`

---

# Exhibit 31.2

# CERTIFICATION

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

         1.    I have reviewed this annual report on Form 10-K for the year ending December 31, 2003 of Chevy
               Chase Preferred Capital Corporation;

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

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

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

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

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

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

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

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

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




March 24,2004                                    /s/ STEPHEN R. HALPIN, JR.
                                                 -----------------------------------------------
                                                 Stephen R. Halpin, Jr.
                                                 Executive Vice President and Chief Financial Officer`

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# Exhibit 32.1

# CERTIFICATION OF CHIEF EXECUTIVE OFFICER

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

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




March 24,2004                                     /s/  B. FRANCIS SAUL II
                                                  -------------------------------------
                                                  B. Francis Saul II
                                                  Chairman and Chief Executive Officer`

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# Exhibit 32.2

# CERTIFICATION OF CHIEF FINANCIAL OFFICER

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

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


March 24,2004                                 /s/ STEPHEN R. HALPIN, JR.
                                              --------------------------------------------------
                                              Stephen R. Halpin, Jr.
                                              Executive Vice President and Chief Financial Officer`

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