`CHEVY CHASE
                          PREFERRED CAPITAL CORPORATION
                                    FORM 10-K
                                December 31, 2002





________________________________________________________________________________

                       SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                                   FORM 10-K

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

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

For the fiscal year ended:  December 31, 2002                                                                                             .
--------------------------------------------------------------------------------
                                       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

                   CHEVY CHASE PREFERRED CAPITAL CORPORATION

             (Exact name of registrant as specified in its charter)

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

                             7501 Wisconsin Avenue
                            Bethesda, Maryland 20814

               (Address of principal executive office) (Zip Code)

                                 (301)986-7000

              (Registrant's telephone number, including area code)

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

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

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

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

Yes  X  No
    ---    ----

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

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,  2003.  All of such
shares were owned by Chevy Chase Bank,  F.S.B.;  therefore,  no common stock was
held by non-affiliates.

________________________________________________________________________________







                   CHEVY CHASE PREFERRED CAPITAL CORPORATION
                               TABLE OF CONTENTS

                                   PART I
                                                                           Page
                                                                           ----

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

                                    PART II

Item 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
       STOCKHOLDER MATTERS....................................................12
Description of Common Stock...................................................12
 General......................................................................12
 Dividends....................................................................12
 Voting Rights................................................................13
 Rights Upon Liquidation......................................................13
Description of Series A Preferred Shares......................................13
 Market Information and Dividends.............................................13
 General......................................................................14
 Automatic Exchange...........................................................14
 Voting Rights................................................................15
 Redemption...................................................................15
 Rights Upon Liquidation......................................................15
 Independent Director Approval................................................16
Item 6.SELECTED FINANCIAL DATA................................................17
Item 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
       CONDITION AND RESULTS OF OPERATIONS....................................18
       Financial Condition....................................................18
        Critical Accounting Policies..........................................18
        Allowance for Loan Losses.............................................18
        Residential Mortgage Loans............................................18
        Interest Rate Risk....................................................19
        Significant Concentration of Credit Risk..............................20
        Liquidity and Capital Resources.......................................21
       Results of Operations..................................................21
        Fiscal Year 2002 Compared to Fiscal Year 2001.........................21
        Fiscal Year 2001 Compared to Fiscal Year 2000.........................22
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES
        ABOUT MARKET RISKS....................................................23
Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................F-1
Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
       ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................24

                                    PART III

Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................25
        Directors and Executive Officers......................................25
        Audit Committee.......................................................27
        Section 16(a) Beneficial Ownership Reporting Compliance...............27
Item 11.EXECUTIVE COMPENSATION................................................27
Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
        OWNERS AND MANAGEMENT.................................................27
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................28
Item 14.CONTROLS AND PROCEDURES...............................................29

                                    PART IV

Item 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
        REPORTS ON FORM 8-K...................................................30






                                     PART I

ITEM 1.BUSINESS

GENERAL

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


MORTGAGE ASSETS

Loan Portfolio Composition

The  Company's  current  portfolio  of Mortgage  Assets  consists of whole loans
("Mortgage Loans") secured by first mortgages or deeds of trust on single-family
residential real estate properties ("Residential Mortgage Loans"). The following
table sets forth  information  concerning  the  Company's  Residential  Mortgage
Loans,  all of which were  acquired  from the Bank,  as of December 31, 2002 and
December 31, 2001. A  description  of the types of  Residential  Mortgage  Loans
included in the Company's portfolio follows the table.









                          Residential Mortgage Loan Portfolio
                          -----------------------------------
                                      December 31,
                      -------------------------------------------
                              2002                   2001
                      --------------------   --------------------
                        Aggregate  Percent     Aggregate  Percent
                        Principal    to        Principal    to
    Type                 Balance    Total       Balance    Total
    ----              ------------- ------   ------------- ------
Monthly ARMs          $ 67,406,366   23.6%   $ 79,541,872   27.7%
One-Year ARMs           16,966,406    5.9%     21,583,666    7.5%
Three-Year ARMs         20,126,451    7.1%     19,462,468    6.8%
Five-Year ARMs          58,544,908   20.5%     49,804,806   17.3%
7/1 ARMs                16,056,192    5.6%      8,378,308    2.9%
10/1 ARMs               62,040,642   21.7%     99,255,916   34.5%
30 Year Fixed-Rate      44,294,832   15.6%      9,537,078    3.3%
                      ------------- ------   ------------- ------
                       285,435,797  100.0%    287,564,114  100.0%
                                    ======                 ======
Less:
Allowance for loan
 losses                     40,333                 40,333
                      -------------          -------------
  Total               $285,395,464           $287,523,781
                      =============          =============

Purchases  from the Bank of  Residential  Mortgage  Loans  during the year ended
December 31, 2002 were $173,247,015 and principal collections were $175,375,332.
See "Management's  Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Residential Mortgage Loans."

Most (or 84.5%) of the  Residential  Mortgage  Loans  included in the  Company's
portfolio at December 31, 2002 bear interest at adjustable  rates.  The interest
rate on an "adjustable rate mortgage" or an "ARM" resets  periodically  based on
an index (such as the London  Interbank  Offered Rate  ("LIBOR") or the interest
rate on United States Treasury  Bills).  ARMs are typically  subject to lifetime
interest rate caps and periodic  interest rate  adjustment  caps. As of December
31, 2002, the interest rates on the  Residential  Mortgage Loans included in the
Company's portfolio ranged from 3.25% per annum to 9.75% per annum. For the year
ended December 31, 2002, the weighted  average  interest rate was  approximately
6.14%.

The  interest  rate  on each  type  of ARM  product  included  in the  Company's
portfolio  adjusts  at the times  (each,  a "Rate  Adjustment  Date") and in the
manner  described  below,  subject to lifetime  interest  rate caps,  to minimum
interest  rates  and,  in the case of some  ARMs in the  portfolio,  to  maximum
periodic  adjustment  increases or decreases,  each as specified in the mortgage
note relating to the ARM.  Information set forth below  regarding  interest rate
caps  and  minimum  interest  rates  applies  to  the  current  portfolio  only.
Residential  Mortgage Loans purchased by the Company after December 31, 2002 may
be subject to different interest rates.

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.

                                       -2-


Monthly ARM. The interest rate on each monthly ARM  ("Monthly  ARM") will adjust
monthly on each 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 first  month's
payment on each  mortgage loan is based on an initial  interest  rate, in effect
only until the first  adjustment  date, which is lower, and may be significantly
lower,  than the sum of the index and the margin.  No mortgage  note  contains a
periodic  interest  rate cap. The  interest  rate,  however,  may not exceed the
maximum  interest rate specified for such mortgage loan in the related  mortgage
note.  The amount of the  minimum  monthly  payment  due on each  mortgage  loan
adjusts  annually  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.  Generally,  the annual  adjustment to the minimum
monthly  payment  is  limited  to  a  maximum  increase  or  decrease  of  7.5%.


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  treasury
index  plus the  margin set forth in such  mortgage  note,  subject to a maximum
annual interest rate increase or decrease of 2.00%, a lifetime interest rate cap
as specified in the related  mortgage  note and a minimum  interest rate no less
than the margin.

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

Five-Year 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 either  semi-annually or
annually  thereafter,  to the sum of the specified  index and margin  subject to
periodic and lifetime  interest  rate caps 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, as if the Residential Mortgage Loan were
a One-Year ARM,  with  periodic and lifetime  interest rate caps 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.

                                      -3-


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,  as if the  Residential  Mortgage Loan were a One-Year
ARM, with  periodic and lifetime  interest rate caps as specified in the related
mortgage  note.  There is no ability to continue at a fixed rate after the first
Rate Adjustment Date under the terms of this type of Residential  Mortgage Loan.


Investment Policy

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

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

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

                                      -4-



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

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

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

Credit Risk Management Policies

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

Delinquencies

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

                                      -5-



Geographic Distribution

A  majority  (or  54.0%)  of the  Residential  Mortgage  Loans  are  secured  by
residential real estate  properties  located in the Washington,  DC metropolitan
area. Consequently, these loans may be subject to a greater risk of default than
other comparable loans in the event of adverse economic,  political, or business
developments  in  Washington,  DC,  Maryland,  and Virginia  that may affect the
ability of residential property owners in any of these areas to make payments of
principal and interest on the underlying mortgages. See "Management's Discussion
and  Analysis of Financial  Condition  and Results of  Operations -  Significant
Concentration of Credit Risk."

SERVICING

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

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

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


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

                                      -6-



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

DIVIDEND POLICY

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


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

Under Office of Thrift Supervision (the "OTS") regulations, the Bank is required
to apply to the OTS for approval to make any capital distribution, regardless of
size,  if  the  Bank  does  not  qualify  for  expedited   treatment  under  OTS
regulations.  Dividends  on the Series A  Preferred  Shares  are not  treated as
capital  distributions for the purposes of these regulations,  provided the Bank
remains "well capitalized" after the payment. At December 31, 2002, 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, 2002,  was  conducting  business  from 198  full-service
offices,  including 54 grocery store banking  centers,  and 771 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,  seven mortgage loan
production offices in the mid-Atlantic  region and five consumer loan production
offices. At December 31, 2002, the Bank had total assets of $11.6 billion, total
deposits of $7.7 billion and total stockholders' equity of $542.4 million. Based
on total assets at December 31, 2002, the Bank is the largest  full-service bank
headquartered in the Washington, DC metropolitan area.

                                      -7-



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 total risk-based  capital ratio of at least 10.0%,
a tier 1  risk-based  capital  ratio of at least  6.0%  and a core  capital  (or
leverage)  ratio of at least  5.0%.  At  December  31,  2002,  the Bank's  total
risk-based  capital  ratio was 10.76%,  its tier 1 risk-based  capital ratio was
6.96% and its core capital (or leverage) ratio was 5.52%.

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, 2002, the Advisor and its affiliates owned  approximately
$5.0 billion of  residential  mortgage  loans,  including  all of the  Company's
Residential  Mortgage Loans. In their  residential  mortgage loan business,  the
Advisor and its affiliates  originate and purchase residential mortgage loans. A
portion of such loans are sold to investors,  primarily in the secondary market,
generally on a servicing  retained  basis.  The Advisor and its affiliates  also
purchase  servicing  rights on residential  mortgage loans. In addition to loans
serviced  for its own  portfolio,  the Advisor and its  affiliates  serviced for
third parties  residential  mortgage loans having an aggregate principal balance
of approximately $6.8 billion as of December 31, 2002.

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

                                      -8-



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, 2002, the Company had no debt outstanding,  and the Company does
not currently  intend to incur any  indebtedness.  However,  the  organizational
documents  of the  Company  do not  contain  any  limitation  on the  amount  or
percentage  of debt,  funded or  otherwise,  that the Company  might incur.  The
Company  may  not,  without  the  approval  of a  majority  of  the  Independent
Directors, incur debt for borrowed money in excess of 25% of the Company's total
stockholders'  equity,  including  intercompany advances made by the Bank to the
Company.

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

EMPLOYEES

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

                                      -9-



COMPETITION

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

ENVIRONMENTAL MATTERS

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


TAX STATUS OF THE COMPANY

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

                                      -10-



The Company  recognized a capital gain of $21,924 on the sale of one Real Estate
Owned ("REO") property during the year ended December 31, 2001. As a result, the
Company  incurred and paid an income tax liability  for the year ended  December
31, 2001 of $8,000.  The Company also paid $2,373 during the year ended December
31,  2001  related to an income  tax  liability  incurred  during the year ended
December 31, 2000.

ITEM 2. PROPERTIES

None.

ITEM 3. LEGAL PROCEEDINGS

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

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

No matter was submitted to a vote of security  holders of the Company during the
fourth quarter of the year ended December 31, 2002.

                                      -11-



                                    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, 2003, 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, 2001 to March 31, 2001      $    275,000             April 16, 2001
April 1, 2001 to June 30, 2001              500,000              July 16, 2001
July 1, 2001 to September 30, 2001        1,000,000           October 15, 2001
October 1, 2001 to December 31, 2001      2,700,000           January 15, 2002
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

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

                                      -12-



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 10, 2003,  there were  3,000,000
issued and  outstanding  Series A  Preferred  Shares held by  approximately  169
holders of record.  The following  table  reflects the  respective  high and low
sales prices for the Series A Preferred  Shares for each quarter  during the two
most recent fiscal years. The table also indicates the distributions declared by
the Company during these periods. For a discussion of the Company's distribution
policy with respect to the Series A Preferred  Shares,  see "Business - Dividend
Policy."

                                          Price
                                      -------------
              Period                   High   Low   Distributions  Payment Date
------------------------------------  ------ ------ -------------- -------------
January 1, 2001 to March 31, 2001     $54.70 $52.19 $3,890,625    April 16, 2001
April 1, 2001 to June 30, 2001         56.00  53.55  3,890,625     July 16, 2001
July 1, 2001 to September 30, 2001     57.50  53.30  3,890,625  October 15, 2001
October 1, 2001 to December 31, 2001   57.95  55.25  3,890,625  January 15, 2002
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

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

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

                                      -13-



General

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

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

Automatic Exchange

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

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

                                      -14-




Voting Rights

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


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

Redemption

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


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

Rights Upon Liquidation

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

                                      -15-



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.

                                      -16-



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,
                               --------------------------------------------------------------
                                  2002         2001         2000         1999         1998
                               -----------  -----------  -----------  -----------  -----------
OPERATING DATA:

 Interest income               $17,729,403  $21,041,424  $22,189,625  $21,795,357  $22,860,956
 Provision for loan losses             -            -            -         26,554       10,862
                               -----------  -----------  -----------  -----------  -----------
  Total interest income after   17,729,403   21,041,424   22,189,625   21,768,803   22,850,094
   provision for loan losses
  Gain on sale of real estate
   acquired in settlement of
   loans, net                          -         21,924       20,209       29,909      32,937
  Operating expenses             1,232,182    1,356,557    1,383,421    1,715,826   1,514,080
Provision for income taxes             -         10,373       15,168          -           -
                               -----------  -----------  -----------  -----------  -----------
    Net income                 $16,497,221  $19,696,418  $20,811,245  $20,082,886  $21,368,951
                               ===========  ===========  ===========  ===========  ===========
Earnings available to common     $ 934,721  $ 4,133,918  $ 5,248,745  $ 4,520,386  $ 5,806,451
      stockholders
Earnings per common share       $ 9,347.21  $ 41,339.18  $ 52,487.45  $ 45,203.86  $ 58,064.51

DIVIDENDS DECLARED:

Dividends on common stock      $ 1,100,000  $ 4,475,000  $ 5,250,000  $ 4,690,000  $ 5,810,000
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                          $285,395,464 $287,523,781 $298,145,029 $295,195,830 $292,682,032
Total assets                  $304,825,346 $306,318,593 $307,516,771 $307,146,976 $307,593,809
Total stockholders' equity    $299,834,721 $299,658,918 $299,998,745 $299,830,386 $299,996,451
Number of preferred shares
   outstanding                   3,000,000    3,000,000    3,000,000    3,000,000    3,000,000
Number of common shares
   outstanding                         100          100          100          100          100
Average yield on residential
   mortgage loans                    6.14%        7.16%        7.42%        7.35%        7.82%


                                      -17-



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  judgements or estimates;
however,  the  following  policy  could be  deemed  to be  critical  within  the
Securities and Exchange Commission (the "SEC") definition:

     o estimation of allowance for loan losses

Allowance for Loan Losses

Management  reviews the loan  portfolio to establish an allowance  for estimated
losses if deemed  necessary.  An analysis to determine  whether an allowance for
loan loss is required is  performed  periodically,  and an allowance is provided
after  considering  such  factors as the economy in lending  areas,  delinquency
statistics and past loss  experience.  The allowance for loan losses is based on
estimates,  and ultimate losses may vary from current estimates.  As adjustments
to the allowance  become  necessary,  provisions for loan losses are reported in
operations  in the periods they are  determined  to be  necessary.  There was no
activity in the allowance  for loan losses  during the years ended  December 31,
2002,  2001 and 2000, and the balance of the allowance was $40,333 at the end of
each year.

Residential Mortgage Loans

At December  31,  2002,  the Company had  $285,395,464  invested in  Residential
Mortgage  Loans  compared to  $287,523,781  at December 31,  2001.  During 2002,
Residential Mortgage Loan purchases were $173,247,015 and principal  collections
were $175,375,332.  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,  2002,  the  Company  had  seven   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 $1,436,859 (or 0.50% of loans). At December 31,
2001, the Company had six non-accrual loans with an aggregate  principal balance
of $1,088,562 (or 0.38% of loans).

At December 31, 2002, the Company had five  delinquent  loans (loans  delinquent
30-89  days) with an  aggregate  principal  balance of  $1,307,482  (or 0.46% of
loans).  At December 31, 2001,  the Company had eight  delinquent  loans with an
aggregate principal balance of $1,320,986 (or 0.46% of loans).


                                      -18-



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,  2002,  and the interest  rates on such loans,  anticipated  annual
interest income on the Company's loan portfolio was approximately  105.2% of the
projected  annual  dividend  on the Series A Preferred  Shares.  There can be no
assurance  that an  interest  rate  environment  in which  there is a  continued
decline in interest  rates would not adversely  affect the Company's  ability to
pay dividends on the Series A Preferred Shares or the Common Stock. The Company,
to date,  has not used any  derivative  instruments  to manage its interest rate
risk.

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

                                      -19-






                        Expected Maturity/Repricing Date
----------------------------------------------------------------------------------------------------------------------
                             (Dollars in thousands)
                                  December 31,
-----------------------------------------------------------------------------------
                              2003       2004        2005        2006       2007     Thereafter     Total      Fair                                                                                                             Value
-------------------------  ---------  ----------  ----------  ---------  ---------- ------------  ---------  ---------
Monthly ARMs                 67,406           -           -          -           -            -     67,406     69,689
 Average Interest Rate       3.862%           -           -          -           -            -     3.862%

One-Year ARMs                15,706       1,260           -          -           -            -     16,966     17,281
 Average Interest Rate       5.039%      4.630%           -          -           -            -     5.009%

Three-Year ARMs              17,844       1,402         880          -           -            -     20,126     20,918
 Average Interest Rate       6.690%      6.817%      6.534%          -           -            -     6.692%

Five-Year ARMs               33,161      16,270       5,939        907       2,268            -     58,545     60,130
 Average Interest Rate       6.293%      6.926%      7.397%     6.921%      6.600%            -     6.603%

7/1 ARMs                      3,042       2,518       3,286      7,210           -            -     16,056     16,666
 Average Interest Rate       6.730%      6.732%      6.674%     6.774%           -            -     6.739%

10/1 ARMs                    11,708       9,345       7,647      6,258       6,295       20,788     62,041     64,435
 Average Interest Rate       6.804%      6.855%      6.855%     6.855%      6.923%       6.832%     6.845%

30-Year Fixed Rate            5,083       4,640       4,150      3,712       3,318       23,392     44,295     46,578
 Average Interest Rate       7.102%      7.103%      7.104%     7.104%      7.105%       7.115%     7.110%

Significant Concentration of Credit Risk

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

The Company's exposure to geographic  concentrations directly affects the credit
risk of the  Residential  Mortgage  Loans within the  portfolio.  A majority (or
54.0%)  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.

                                      -20-



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

Fiscal Year 2002 Compared to Fiscal 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.

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.

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.

                                      -21-


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.

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.

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.

Fiscal Year 2001 Compared to Fiscal Year 2000

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

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


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

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

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

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

                                      -22-



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

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

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

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


                                      -23-



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                    CONTENTS

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

(b)Statements of Financial Condition at December 31, 2002 and 2001...........F-3

(c)Statements of Operations for the Years Ended
   December 31, 2002, 2001 and 2000..........................................F-4

(d)Statements of Stockholders' Equity for the Years Ended
   December 31, 2002, 2001 and 2000..........................................F-5

(e)Statements of Cash Flows for the Years Ended
   December 31, 2002, 2001 and 2000..........................................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,  2002,  and the related  statements  of  operations,  stockholders'
equity and cash flows for the year 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  audit.  The  financial
statements  of the  Company  as of  December  31,  2001 and for the years  ended
December  31,  2001 and 2000,  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 audit in accordance with auditing standards  generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audit  provides a  reasonable  basis for our
opinion.

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

McLean, Virginia
February 24, 2003













                                      F-2











                                     CHEVY CHASE PREFERRED CAPITAL CORPORATION
                                         STATEMENTS OF FINANCIAL CONDITION


                                                           December 31,
                                               --------------------------------------
                                                      2002                   2001
                                               ------------------  ------------------

                                     ASSETS

Cash and interest-bearing deposits                 $  2,986,496        $  5,764,867
Residential mortgage loans (net of allowance
   for loan losses of $40,333 for both years)       285,395,464         287,523,781
Accounts receivable from parent                      15,297,140          11,825,608
Accrued interest receivable                           1,138,246           1,196,337
Prepaid expenses                                          8,000               8,000
                                              ------------------  ------------------

Total assets                                       $304,825,346        $306,318,593
                                              ==================  ==================

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Accrued expenses                                   $        -          $     69,050
Dividends payable to parent                           1,100,000           2,700,000
Dividends payable to others                           3,890,625           3,890,625
                                              ------------------  ------------------

Total liabilities                                     4,990,625           6,659,675
                                              ------------------  ------------------

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                284,834,621         284,658,818
                                              ------------------  ------------------
Total stockholders' equity                          299,834,721         299,658,918
                                              ------------------  ------------------

Total liabilities and stockholders' equity         $304,825,346        $306,318,593
                                              ==================  ==================



 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,
                                          -------------------------------------------------
                                               2002             2001             2000
                                          ---------------  ---------------  ---------------
Interest income:
Residential mortgage loans                  $ 17,643,920     $ 20,875,203     $ 22,011,411
Other                                             85,483          166,221          178,214
                                          ---------------  ---------------  ---------------

         Total interest income                17,729,403       21,041,424       22,189,625

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

         Total operating income               17,729,403       21,063,348       22,209,834
                                          ---------------  ---------------  ---------------

Operating expenses:
Loan servicing fees-parent                       939,336        1,052,549        1,088,694
Advisory fees-parent                             200,000          200,000          200,000
Directors' fees                                   30,500           29,000           29,000
General and administrative                        62,346           75,008           65,727
                                          ---------------  ---------------  ---------------
      Total operating expenses                 1,232,182        1,356,557        1,383,421
                                          ---------------  ---------------  ---------------

      Income before income taxes              16,497,221       19,706,791       20,826,413
Provision for income taxes                             -           10,373           15,168
                                          ---------------  ---------------  ---------------

NET INCOME                                  $ 16,497,221     $ 19,696,418     $ 20,811,245
                                          ===============  ===============  ===============

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

EARNINGS AVAILABLE TO
  COMMON STOCKHOLDER                        $    934,721     $  4,133,918     $  5,248,745
                                          ===============  ===============  ===============

EARNINGS PER COMMON
  SHARE                                     $   9,347.21     $  41,339.18     $  52,487.45
                                          ===============  ===============  ===============







 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, 1999              $ 15,000,000       $    100        $284,830,286          $     -     $ 299,830,386

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

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

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

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

 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
                                       ================ =============== ================== ================ =================








 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,
                                                               -------------------------------------------
                                                                    2002           2001          2000
                                                               -------------  -------------  -------------
Cash flows from operating activities:

Net income                                                     $ 16,497,221   $ 19,696,418    $20,811,245

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)       (20,209)
      (Increase) decrease in accounts receivable from parent     (3,471,532)    (9,305,943)     1,079,869
      (Increase) decrease in accrued interest receivable             58,091        408,642       (333,617)
       Decrease in accounts payable to parent                             -              -       (272,346)
       Increase (decrease) in accounts payable to others and
          accrued expenses                                          (69,050)       (58,351)        73,782
                                                               -------------  -------------  -------------

      Net cash provided by operating activities                  13,014,730     10,718,842     21,338,724
                                                               -------------  -------------  -------------

Cash flows from investing activities:

Purchases of residential mortgage loans                        (173,247,015)   (97,217,311)   (45,942,919)
Repayments of residential mortgage loans                        175,375,332    107,838,559     42,653,845
Net proceeds from sale of real estate acquired in
    settlement of loans                                                   -        138,330        243,678
                                                               -------------  -------------  -------------
      Net cash provided by (used in) investing activities         2,128,317     10,759,578     (3,045,396)
                                                               -------------  -------------  -------------
Cash flows from financing activities:

Capital contribution from common stockholder                        341,082          1,255        169,614
Dividends paid on preferred stock                               (15,562,500)   (15,562,500)   (15,562,500)
Dividends paid on common stock                                   (2,700,000)    (5,275,000)    (4,850,000)
                                                               -------------  -------------  -------------
      Net cash used in financing activities                     (17,921,418)   (20,836,245)   (20,242,886)
                                                               -------------  -------------  -------------

Net increase (decrease) in cash and cash equivalents             (2,778,371)       642,175     (1,949,558)

Cash and cash equivalents at beginning of year                    5,764,867      5,122,692      7,072,250
                                                               -------------  -------------  -------------
Cash and cash equivalents at end of year                        $ 2,986,496   $  5,764,867    $ 5,122,692
                                                               =============  =============  =============
Supplemental disclosures of cash flow information:
     Income taxes paid during the year                          $         -   $     10,373    $    15,168
                                                               =============  =============  =============
Supplemental disclosures of non-cash activities:
     Net transfer of loans receivable to real
       estate acquired in settlement of loans                   $         -   $          -    $   339,875
                                                               =============  =============  =============





 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, 2002, 2001 and 2000

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Use of Estimates:

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

Cash and Cash Equivalents:

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

Residential Mortgage Loans:

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

Loans are reviewed on a monthly basis and are placed on non-accrual status when,
in the opinion of management,  the full collection of principal and interest has
become unlikely.  Uncollectible accrued interest receivable on non-accrual loans
is charged against current period income.  The Company had non-accrual  loans at
December 31, 2002 and 2001 totaling  $1,436,859  and  $1,088,562,  respectively.


Allowance for Loan Losses:

Management periodically reviews the loan portfolio to establish an allowance for
estimated losses if deemed necessary. An allowance is provided after considering
such factors as the economy in lending  areas,  delinquency  statistics and past
loss  experience.  The  allowance  for loan  losses  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.

                                      F-7



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

Concentrations of Credit:

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

Accounts Receivable from Parent:

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

Dividends:

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

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

Earnings Per Common Share:

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

Income Taxes:

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

                                      F-8



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

Income Taxes (Continued):

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


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

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

NOTE 3 - RESIDENTIAL MORTGAGE LOANS:

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

                                                    December 31,
                                          --------------------------------
                                                2002             2001
                                          ---------------  ---------------
         Monthly ARMs                      $  67,406,366    $  79,541,872
         One-Year ARMs                        16,966,406       21,583,666
         Three-Year ARMs                      20,126,451       19,462,468
         Five-Year ARMs                       58,544,908       49,804,806
         7/1 ARMs                             16,056,192        8,378,308
         10/1 ARMs                            62,040,642       99,255,916
         30 Year Fixed-Rate                   44,294,832        9,537,078
                                          ---------------  ---------------
              Total                          285,435,797      287,564,114
         Less:
              Allowance for loan losses           40,333           40,333
                                          ---------------  ---------------
              Total                        $ 285,395,464    $ 287,523,781
                                          ===============  ===============



                                      F-9



NOTE 3 - RESIDENTIAL MORTGAGE LOANS (Continued):

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

NOTE 4 - ALLOWANCE FOR LOAN LOSSES:

Activity in the allowance for loan losses is summarized as follows:
                                         Year Ended December 31,
                                     -------------------------------
                                        2002      2001       2000
                                     ---------  ---------  ---------

      Beginning balance              $ 40,333   $ 40,333   $ 40,333

           Provision for losses             -          -          -
           Charge-offs                      -          -          -
                                     ---------  ---------  ---------
      Ending balance                 $ 40,333   $ 40,333   $ 40,333
                                     =========  =========  =========

NOTE 5 - PREFERRED STOCK:

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

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

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


                                      F-10


NOTE 6 - DIVIDENDS:

During the year ended  December  31,  2002,  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 $1,100,000 of common
stock dividends,  $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.  Of these
amounts,  preferred  stock dividends of $3,890,625 and common stock dividends of
$1,100,000 were paid subsequent to December 31, 2002.

NOTE 7 - RELATED PARTY TRANSACTIONS:

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

The  Company  also  entered  into a  servicing  agreement  with the Bank for the
servicing  of  its  residential  mortgage  loans  (the  "Servicing  Agreement").
Pursuant to the  Servicing  Agreement,  the Bank  performs the  servicing of the
loans owned by the Company,  in accordance  with normal industry  practice.  The
Servicing  Agreement can be  terminated  without cause with at least sixty days'
notice to the servicer and payment of a termination  fee. The servicing fee rate
is 0.375% of the outstanding principal balance of the loans.  Servicing fees for
the years ended December 31, 2002,  2001 and 2000 totaled  $939,336,  $1,052,549
and $1,088,694 respectively.

The Company had cash  balances of $2,986,496  and  $5,764,867 as of December 31,
2002 and 2001,  respectively,  held in various  deposit  accounts with the Bank.
Interest  earned on these  accounts was  $85,483,  $166,221 and $178,214 for the
years ended December 31, 2002, 2001 and 2000, respectively.

NOTE 8 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:

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

                                      F-11



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

The estimated fair values of the Company's financial instruments at December 31,
2002 and 2001 are as follows:

                                                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
 Other financial assets                   16,435,386               16,435,386

  Financial liabilities                    4,990,625                4,990,625

                                                   December 31, 2001
                                      ------------------------------------------
                                           Carrying                  Fair
                                            Amount                   Value
                                      -----------------       ------------------
Financial assets:
 Cash and interest-bearing deposits      $ 5,764,867              $ 5,764,867
 Residential mortgage loans, net         287,523,781              295,779,000
 Other financial assets                   13,021,945               13,021,945

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

The  following  methods and  assumptions  were used to  estimate  the fair value
amounts at December 31, 2002 and 2001.

Cash and interest-bearing deposits:

Carrying amount approximates fair value.

Residential mortgage loans:

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

                                      F-12



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

Other financial assets:

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

Financial liabilities:

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

                                      F-13



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.

                                                                 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
   Provision for loan losses                     -               -               -               -
                                     --------------  --------------  --------------  --------------
      Total interest income after
         provision for loan losses       4,543,478       4,534,547       4,388,190       4,263,188

   Operating expenses                     (315,956)       (311,632)       (302,774)       (301,820)
Provision for income taxes                       -               -               -               -
                                     --------------  --------------  --------------  --------------
      Net income                      $  4,227,522    $  4,222,915    $  4,085,416    $  3,961,368
                                     ==============  ==============  ==============  ==============
  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


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

   Interest income                    $  5,586,068    $  5,449,430    $  5,218,240      $4,787,686
   Provision for loan losses                     -               -               -               -
                                     --------------  --------------  --------------  --------------
      Total interest income after
         provision for loan losses       5,586,068       5,449,430       5,218,240       4,787,686

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




                                      F-14



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

A current  report on Form 8-K,  dated August 13, 2002,  was filed by the Company
with  the SEC  reporting  the  Company  had  dismissed  Arthur  Andersen  LLP as
independent  auditors of the Company and engaged Ernst and Young LLP to serve as
independent  auditors to audit the  financial  statements of the Company for the
year ending December 31, 2002. (Item reported: Item 4)

                                      -24-



                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

The Company's Board of Directors currently consists of 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.  H.
Gregory Platts was elected to the Board of Directors  effective  January 2, 2003
following the  resignation of John J. O'Connor III effective  December 31, 2002.
The Board of Directors  met four times during the year ended 2002 and all of its
members attended at least 50% of the meetings.  The Company  currently has eight
officers.  The Company has no other  employees and does not  anticipate  that it
will require additional employees.

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

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

B. Francis Saul II.............70  Chairman of the Board, President and Chief
                                      Executive Officer
Alexander R. M. Boyle..........65  Director
Stephen R. Halpin, Jr..........47  Executive Vice President, Chief Financial
                                      Officer, Treasurer and Director
R. Timothy Hanlon..............66  Executive Vice President, General Counsel and
                                      Director
N. Alexander MacColl, Jr.......68  Director

H. Gregory Platts..............55  Director



                                      -25-



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

B. FRANCIS SAUL II serves as Chairman of the Board and Chief  Executive  Officer
of the Bank.  He also has been  President and Chief  Operating  Officer of B. F.
Saul Company since 1969.  Mr. Saul has served as the Chairman of B. F. Saul Real
Estate  Investment  Trust since 1969 and as a trustee  since 1964.  He is also a
director of Derwood  Investment  Corporation.  At December 31, 2002,  B. F. Saul
Real Estate Investment Trust and Derwood Investment  Corporation owned of record
80% and 16%,  respectively,  of the Bank's outstanding common stock. Mr. Saul is
also  Chairman of the Board of  Directors of Chevy Chase  Financial  Limited and
Chevy Chase  Property  Company  Limited.  He serves as Chairman of the Board and
Chief Executive  Officer of Saul Centers,  Inc., a public real estate investment
trust. Mr. Saul also serves as a Trustee of the National  Geographic  Society, a
member of the Trustees  Council of the  National  Gallery of Art and an Honorary
Trustee of the Brookings Institute.  In addition,  Mr. Saul is Director Emeritus
of  Colonial  Williamsburg  Hotel  Properties,  Inc.,  a  member  of the  Folger
Shakespeare  Library  and the Board of  Visitors  and  Governors  of  Washington
College.

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

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

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.

                                      -26-



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.

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 three times during 2002.

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, 2002, 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 2002.

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 2002, each of the Independent  Directors earned $5,250 for
attending  four Board of Directors  and three  meetings of the Audit  Committee.


                                      -27-



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, 2003,
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, 2003.

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, 2002 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,
2002 totaled $939,336. See "Business - Servicing."

                                      -28-



The Company  had cash  balances of  $2,986,496  as of December  31, 2002 held in
various  deposit  accounts with the Bank.  Interest earned on these accounts was
$85,483 for the year ended December 31, 2002.

ITEM 14. 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 the Company's Chief Executive Officer and Chief
Financial  Officer,  of the  effectiveness  of the design and  operation  of the
Company's  disclosure controls and procedures.  Based upon that evaluation,  the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure  controls and  procedures  are  effective in timely  alerting them to
material  information  relating  to the  Company  required to be included in the
Company's  filings  under  the  Securities  Exchange  Act of 1934,  as  amended.


There have been no significant changes in the Company's internal controls, or in
other factors that could significantly  affect internal controls,  subsequent to
the date the Company carried out its evaluations.


                                      -29-






                                     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, 2002 and 2001
       Statements of Operations for the Years Ended December 31, 2002, 2001 and
        2000
       Statements of Stockholders' Equity for the Years Ended December 31, 2002,
        2001 and 2000
       Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and
        2000

       Notes to Financial Statements

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

(a)(3)    Exhibits:

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

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

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

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

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

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


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

(b)   No reports on Form 8-K were issued during the three months ended December
      31, 2002.

*Filed herewith.

                                      -30-






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,
                                          ----------------------------------------------------------------------------

                                                2002            2001           2000            1999            1998
                                          --------------- --------------- --------------- --------------- ---------------

Net income                                       $16,497         $19,696         $20,811         $20,083         $21,369
Fixed charges                                         -               -               -               -               -
                                          --------------- --------------- --------------- --------------- ---------------
Earnings before fixed charges                    $16,497         $19,696         $20,811         $20,083         $21,369
                                          =============== =============== =============== =============== ===============

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

Ratio of earnings to fixed charges and
   Preferred stock dividend requirements            1.06            1.27           1.34            1.29          1.37







                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned thereunto duly authorized, in Chevy Chase, Maryland on
March 27, 2003.

                    CHEVY CHASE PREFERRED CAPITAL CORPORATION
                                  (Registrant)




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

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

March 27, 2003                  By:  /s/ Alexander R. M. Boyle
                                     -------------------------------------
                                     Alexander R. M. Boyle
                                     Director



March 27, 2003                  By:  /s/ Joel A. Friedman
                                     ----------------------------------------
                                     Joel A. Friedman
                                     Senior Vice President and
                                     Controller
                                     (Principal Accounting Officer)



March 27, 2003                  By:  /s/ Stephen R. Halpin, Jr.
                                     ----------------------------------------
                                     Stephen R. Halpin, Jr.
                                     Director,
                                     Executive Vice President, Treasurer and
                                     Chief Financial Officer
                                     (Principal Financial Officer)





March 27, 2003                   By: /s/ R. Timothy Hanlon
                                     ---------------------
                                     R. Timothy Hanlon
                                     Director, Executive Vice President and
                                     General Counsel



March 27, 2003                   By:  /s/ N. Alexander MacColl, Jr.
                                      --------------------------------------
                                      N. Alexander MacColl, Jr.
                                      Director


March 27, 2003                    By:  /s/ H. Gregory Platts
                                       -------------------------------------
                                       H/ Gregory Platts
                                       Director



March 27, 2003                    By:  /s/ B. Francis Saul II
                                       --------------------------------------
                                       B. Francis Saul II
                                       Chairman of the Board,
                                       President and Chief Executive Officer
                                       (Principal Executive Officer)





                                  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, 2002 (the  "Annual  Report")  of Chevy  Chase  Preferred
          Capital Corporation;

     2.   Based on my knowledge,  this Annual 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  Annual  Report;  and

     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this  Annual  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 Annual Report.

     4.   The registrant's  other certifying  officers and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and have:

          a)   designed such  disclosure  controls and procedures 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
               Annual Report is being prepared;

          b)   evaluated  the  effectiveness  of  the  registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing  date of  this  Annual  Report  (the  "Evaluation  Date");
               and

          c)   presented  in  this  Annual  Report  our  conclusions  about  the
               effectiveness of the disclosure  controls and procedures based on
               our evaluation as of the Evaluation Date.

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee  of  registrant's  board of trustees (or persons  performing  the
     equivalent functions):


     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and


     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and



6.   The  registrant's  other  certifying  officers and I have indicated in this
     Annual Report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.

March 27, 2003                 /s/ B. FRANCIS SAUL, II
                               --------------------------------------
                               B. Francis Saul, II
                               Chairman and Chief Executive Officer





                                 CERTIFICATION

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

1.   I have  reviewed  this  annual  report  on Form  10-K for the  year  ending
     December 31, 2002 (the "Annual  Report") of Chevy Chase  Preferred  Capital
     Corporation;

2.   Based on my  knowledge,  this  Annual  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 Annual Report; and

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this Annual 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 Annual Report.


4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in  Exchange  Act Rules  13a-14 and 15d-14)  for the  registrant  and have:

     a)   designed  such  disclosure  controls  and  procedures  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 Annual Report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this Annual Report (the "Evaluation Date"); and

     c)   presented   in  this   Annual   Report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date.

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee  of  registrant's  board of trustees (or persons  performing  the
     equivalent functions):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and



6.   The  registrant's  other  certifying  officers and I have indicated in this
     Annual Report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.

March 27, 2003              /s/ STEPHEN R. HALPIN, JR.
                            -----------------------------------------------
                            Stephen R. Halpin, Jr.
                            Executive Vice President and Chief Financial Officer





                    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, 2002 (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 27, 2003               /s/  B. FRANCIS SAUL, II
                             -------------------------------------
                             B. Francis Saul, II
                             Chairman and Chief Executive Officer





                    CERTIFICATION OF CHIEF FINANCIAL OFFICER

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

                 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

          The undersigned,  Stephen R. Halpin, Jr., the Executive Vice President
     and Chief Financial  Officer of Chevy Chase Preferred  Capital  Corporation
     (the  "Company"),  has executed this  certification  in connection with the
     filing with the Securities and Exchange  Commission of the Company's Annual
     Report on Form 10-K for the year ending  December 31, 2002 (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 27, 2003          /s/ STEPHEN R. HALPIN, JR.
                        --------------------------------------------------
                        Stephen R. Halpin, Jr.
                        Executive Vice President and Chief Financial Officer`