CHEVY CHASE PREFERRED CAPITAL CORPORATION FORM 10-Q June 30, 2002______________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 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 incorporation or organization) Identification No.) 7501 Wisconsin Avenue Bethesda, Maryland 20814 (Address of principal executive offices) (Zip Code) (301) 986-7000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the registrant's sole class of common stock was 100 shares, $1 par value, as of July 31, 2002. ______________________________________________________________________________ CHEVY CHASE PREFERRED CAPITAL CORPORATION TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Page Item 1. Financial Statements:..................................................1 (a) Statements of Financial Condition at June 30, 2002 and December 31, 2001.......................................................2 (b) Statements of Operations for the Three Months and Six Months Ended June 30, 2002 and 2001..................................................3 (c) Statement of Stockholders' Equity for the Six Months Ended June 30, 2002.....................................................4 (d) Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001..................................................5 (e) Notes to Financial Statements............................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................8 Item 3. Quantitative and Qualitative Disclosures about Market Risk...........12 PART II - OTHER INFORMATION Item 1. Legal Proceedings....................................................13 Item 2. Changes in Securities................................................13 Item 3. Defaults Upon Senior Securities......................................13 Item 4. Submission of Matters to a Vote of Security Holders..................13 Item 5. Other Information....................................................13 Item 6. Exhibits and Reports on Form 8-K.....................................13 PART I ITEM 1. FINANCIAL STATEMENTS The following unaudited financial statements and notes of Chevy Chase Preferred Capital Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and the results of operations for the interim period presented have been included. Such unaudited financial statements and notes should be read in conjunction with the Company's financial statements and notes for the year ended December 31, 2001 included in the Company's Annual Report on Form 10-K (File No. 333-10495) filed with the Securities and Exchange Commission on March 29, 2002 (the "2001 10-K"). -1- CHEVY CHASE PREFERRED CAPITAL CORPORATION STATEMENTS OF FINANCIAL CONDITION June 30, December 31, 2002 2001 ---------------- ---------------- (Unaudited) ASSETS Cash and interest-bearing deposits $ 2,609,187 $ 5,764,867 Residential mortgage loans (net of allowance for losses of $40,333 for both periods) 290,770,651 287,523,781 Accounts receivable from parent 9,903,439 11,825,608 Accrued interest receivable 1,307,819 1,196,337 Prepaid expenses 6,065 8,000 ---------------- ---------------- Total assets $ 304,597,161 $ 306,318,593 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY Accrued expenses and accounts payable to others 37,349 69,050 Dividends payable to parent - 2,700,000 Dividends payable to others 3,890,625 3,890,625 ---------------- ---------------- Total liabilities 3,927,974 6,659,675 ---------------- ---------------- 10 3/8% Noncumulative Exchangeable Preferred Stock, $5 par value, 10,000,000 shares authorized, 3,000,000 shares issued and outstanding (liquidation value of $150,000,000 plus accrued and unpaid dividends) 15,000,000 15,000,000 Common stock, $1 par value, 1,000 shares authorized, 100 shares issued and outstanding 100 100 Capital contributed in excess of par 284,999,900 284,658,818 Retained earnings 669,187 - ---------------- ---------------- Total stockholders' equity 300,669,187 299,658,918 ---------------- ---------------- Total liabilities and stockholders' equity $ 304,597,161 $ 306,318,593 ================ ================ The accompanying Notes to Financial Statements are an integral part of these statements. -2- CHEVY CHASE PREFERRED CAPITAL CORPORATION STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ------------ Interest Income Residential mortgage loans $4,518,771 $5,394,729 $9,032,294 $10,950,881 Other 15,776 54,701 45,731 84,617 ----------- ----------- ----------- ------------ Total interest income 4,534,547 5,449,430 9,078,025 11,035,498 Gain on sales of real estate acquired in settlement of loans, net - - - 21,924 ----------- ----------- ----------- ------------ Total income 4,534,547 5,449,430 9,078,025 11,057,422 ----------- ----------- ----------- ------------ Operating Expenses Loan servicing fees paid to parent 228,633 269,896 469,317 540,601 Advisory fees paid to parent 50,000 50,000 100,000 100,000 Directors fees 12,000 8,000 20,000 16,000 General and administrative 20,999 13,653 38,271 20,340 ----------- ----------- ----------- ------------ Total operating expenses 311,632 341,549 627,588 676,941 ----------- ----------- ----------- ------------ Income before income taxes 4,222,915 5,107,881 8,450,437 10,380,481 Provision for income taxes - - - 2,300 ----------- ----------- ----------- ------------ NET INCOME $4,222,915 $5,107,881 $8,450,437 $10,378,181 =========== =========== =========== ============ PREFERRED STOCK DIVIDENDS 3,890,625 3,890,625 7,781,250 7,781,250 ----------- ----------- ----------- ------------ EARNINGS AVAILABLE TO COMMON STOCKHOLDER $ 332,290 $1,217,256 $ 669,187 $ 2,596,931 =========== =========== =========== ============ EARNINGS PER COMMON SHARE $ 3,322.90 $12,172.56 $ 6,691.87 $ 25,969.31 =========== =========== =========== ============ The accompanying Notes to Financial Statements are an integral part of these statements. -3- CHEVY CHASE PREFERRED CAPITAL CORPORATION STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) Capital Contributed Total Preferred Common In Excess Retained Stockholders' Stock Stock of Par Earnings Equity ----------- ---- ------------ ----------- ------------- Balance, December 31, 2001 $15,000,000 $100 $284,658,818 $ - $299,658,918 $ Net income - - - 8,450,437 8,450,437 Capital contribution from common stockholder - - 341,082 - 341,082 Dividends on 10 3/8% Noncumulative Exchangeable Preferred Stock, Series A - - - (7,781,250) (7,781,250) ----------- ---- ------------ ----------- -------------- Balance, June 30, 2002 $15,000,000 $100 $284,999,900 $ 669,187 $300,669,187 =========== ==== ========-=== =========== ============== The accompanying Notes to Financial Statements are an integral part of this statement. -4- CHEVY CHASE PREFERRED CAPITAL CORPORATION STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, --------------------------------- 2002 2001 --------------- --------------- Cash flows from operating activities: Net income $ 8,450,437 $ 10,378,181 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sales of real estate acquired in settlement of loans, net - (21,924) (Increase) decrease in accounts receivable from parent 1,922,169 (3,002,708) (Increase) decrease in accrued interest receivable (111,482) 39,257 (Increase) decrease in prepaid expenses 1,935 (566) Decrease in accrued expenses and accounts payable to others (31,701) (53,756) --------------- --------------- Net cash provided by operating activities 10,231,358 7,338,484 --------------- --------------- Cash flows from investing activities: Purchases of residential mortgage loans (68,993,512) (45,214,500) Repayments of residential mortgage loans 65,746,642 48,389,516 Net proceeds on sales of real estate acquired in settlement of loans - 138,330 --------------- --------------- Net cash provided by (used in) investing activities (3,246,870) 3,313,346 --------------- --------------- Cash flows from financing activities: Capital contribution from common stockholder 341,082 1,255 Dividends paid on preferred stock (7,781,250) (7,781,250) Dividends paid on common stock (2,700,000) (3,775,000) --------------- --------------- Net cash used in financing activities (10,140,168) (11,554,995) --------------- --------------- Net decrease in cash and cash equivalents (3,155,680) (903,165) Cash and cash equivalents at beginning of period 5,764,867 5,122,692 ---------------- -------------- Cash and cash equivalents at end of period $ 2,609,187 $ 4,219,527 ================ ============== Supplemental disclosures of cash flow information: Income taxes paid during the year $ 2,300 $ - ================ ============== The accompanying Notes to Financial Statements are an integral part of these statements. -5- CHEVY CHASE PREFERRED CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION: The Company is a Maryland corporation which acquires, holds and manages real estate assets. Chevy Chase Bank, F.S.B. (the "Bank"), a federally insured stock savings bank, owns all of the Company's common stock. The Bank is in compliance with its regulatory capital requirements. Certain reclassifications of prior periods' information have been made to conform with the presentation for the three months and six months ended June 30, 2002. NOTE 2 - RESIDENTIAL MORTGAGE LOANS: Residential mortgage loans consist of monthly adjustable rate mortgages ("ARMs"), one-year ARMs, three-year ARMs and five-year, seven-year and ten-year fixed-rate loans with automatic conversion to one-year ARMs after the end of the respective fixed rate period, and 30 year fixed-rate mortgages. Each of the mortgage loans is secured by a mortgage, deed of trust or other security instrument which created a first lien on the residential dwellings located in their respective jurisdictions. The following table shows the residential mortgage loan portfolio by type at the dates indicated: June 30, December 31, 2002 2001 -------------------- -------------------- Monthly ARMs $ 73,576,889 $ 79,541,872 One-year ARMs 18,798,461 21,583,666 Three-year ARMs 24,112,067 19,462,468 5/1 ARMs 50,397,703 49,804,806 7/1 ARMs 11,978,462 8,378,308 10/1 ARMs 84,807,837 99,255,916 30 year fixed-rate 27,139,565 9,537,078 -------------------- -------------------- Total 290,810,984 287,564,114 Less: Allowance for loan losses 40,333 40,333 -------------------- -------------------- Total $ 290,770,651 $ 287,523,781 ==================== ==================== NOTE 3 - PREFERRED STOCK: Cash dividends on the Company's 10 3/8% Noncumulative Exchangeable Preferred Stock, Series A ("the Series A Preferred Shares") are payable quarterly in arrears. The liquidation value of each Series A Preferred Share is $50 plus accrued and unpaid dividends. The Series A Preferred Shares are not redeemable until January 15, 2007 (except upon the occurrence of certain tax events) and are redeemable thereafter at the option of the Company. Except under certain limited -6- CHEVY CHASE PREFERRED CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) NOTE 3 - PREFERRED STOCK (continued): circumstances, the holders of the Series A Preferred Shares have no voting rights. The Series A Preferred Shares are automatically exchangeable for a new series of preferred stock of the Bank upon the occurrence of certain events relating to the Bank. NOTE 4 - DIVIDENDS: During the three months ended June 30, 2002, the Company's Board of Directors declared a cash dividend of $3,890,625 on the Company's preferred stock, out of the retained earnings of the Company. The dividend was paid on July 15, 2002. During the six months ended June 30, 2002, the Company's Board of Directors declared cash dividends of $7,781,250 on the Company's preferred stock, out of the retained earnings of the Company. There were no common dividends declared during the three and six months ended June 30, 2002. -7- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION Recent Developments Regarding Arthur Andersen LLP. On August 13, 2002 the Board of Directors of the Company approved the dismissal of Arthur Andersen LLP as independent public accountants of the Company and the engagement of Ernst and Young LLP to serve as independent public accountants to audit the financial statements of the Company for the year ending December 31, 2002. Residential Mortgage Loans At June 30, 2002, the Company had $290,770,651 invested in loans secured by first mortgages or deeds of trust on single-family residential real estate properties ("Residential Mortgage Loans"). The $3,246,870 increase from the balance at December 31, 2001, resulted from Residential Mortgage Loan purchases of $68,993,512, offset by principal collections of $65,746,642. Management intends to continue to reinvest proceeds received from repayments of loans in additional Residential Mortgage Loans to be purchased from either the Bank or its affiliates. At June 30, 2002, the Company had three non-accrual loans (contractually past due 90 days or more or with respect to which other factors indicate that full payment of principal and interest is unlikely) with an aggregate principal balance of $754,042 (or 0.26% of loans). At December 31, 2001, the Company had three non-accrual loans with an aggregate principal balance of $1,088,562 (or 0.38% of loans). At June 30, 2002, the Company had six loans, which were delinquent 30-89 days with an aggregate principal balance of $932,769 (or 0.32% 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) Allowance for Loan Losses An analysis is performed periodically to determine whether an allowance for loan loss is required. An allowance may be provided after considering such factors as the economy in lending areas, delinquency statistics and past loss experience. The allowance for loan losses are 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 three months ended June 30, 2002 and 2001. The balance of the allowance for loan losses was $40,333 at each of June 30, 2002 and 2001. -8- 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 June 30, 2002 and the interest rates on such loans, anticipated annual interest income, net of servicing fees, on the Company's loan portfolio was approximately 108.2% 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. The Company, to date, has not used any derivative instruments to manage its interest rate risk. There have been no material changes to the Company's market risk disclosures from the disclosures made in the 2001 10-K. Significant Concentration of Credit Risk Concentration of credit risk arises when a number of customers engage in similar business activities, or activities in the same geographical region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Concentration of credit risk indicates the relative sensitivity of the Company's performance to both positive and negative developments affecting a particular industry. The Company's exposure to geographic concentrations directly affects the credit risk of the Residential Mortgage Loans within the portfolio. A majority (or 57.9%) of the Company's Residential Mortgage Loans are secured by residential real estate properties located in the Washington, DC metropolitan area. Service industries and Federal, state and local governments employ a significant portion of the Washington, DC area labor force. Consequently, these loans may be subject to a greater risk of default than other comparable residential mortgage loans in the event of adverse economic, political or business developments and natural hazards in the region that may affect the ability of residential property owners in the region to make payments of principal and interest on the underlying mortgages. -9- Liquidity and Capital Resources The objective of liquidity management is to ensure the availability of sufficient cash flows to meet all of the Company's financial commitments. In managing liquidity, the Company takes into account various legal limitations placed on a real estate investment trust (a "REIT"), as discussed below in "Tax Status of the Company." The Company's principal liquidity needs will be to fund the acquisition of additional mortgage assets as current mortgage assets held by the Company are repaid and to pay dividends on the Series A Preferred Shares. The acquisition of such additional mortgage assets will be funded with the proceeds from principal repayments on its current portfolio of mortgage assets. The Company does not anticipate that it will have any other material capital expenditures. The Company 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 funds as it deems necessary. Tax Status of the Company The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. As a REIT, the Company generally will not be subject to federal income tax on its net income (excluding capital gains) provided that it distributes annually 100% of its REIT taxable income to its stockholders, meets certain organizational, stock ownership and operational requirements and meets certain income and asset tests. To remain qualified as a REIT, the Company must distribute each year at least 90% of its "REIT taxable income" (not including capital gains) for that year to stockholders. If, in any taxable year, the Company fails to qualify as a REIT, the Company would not be allowed a deduction for distributions to stockholders in computing its taxable income and would be subject to federal and state income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. In addition, the Company would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. During the six months ended June 30, 2001, the Company paid $2,300 in income taxes related to capital gains of $20,209 on the sale of two Real Estate Owned ("REO") properties in the year 2000. RESULTS OF OPERATIONS Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 During the three months ended June 30, 2002 and 2001, the Company reported net income of $4,222,915 and $5,107,881, respectively. -10- Interest income on Residential Mortgage Loans totaled $4,518,771 for the three months ended June 30, 2002 (the "2002 quarter"), compared to $5,394,729 for the three months ended June 30, 2001 (the "2001 quarter"). The decrease in interest income resulted from a decrease in the average yield on such loans to 6.18% in the 2002 quarter from 7.43% in the 2001 quarter. Partially offsetting this decrease in interest income was an increase in the average loan balance of the Residential Mortgage Loan portfolio to $292,338,160 in the 2002 quarter from $290,569,569 in the 2001 quarter. The Company would have recorded an additional $7,282 and $10,113 in interest income for the three months ended June 30, 2002 and 2001, had its non-accrual loans been current in accordance with their original terms. Other interest income of $15,776 and $54,701 was recognized on the Company's interest bearing deposits during the three months ended June 30, 2002 and 2001, respectively. No provision for loan losses was recorded for the three months ended June 30, 2002 and 2001. The Company did not sell any REO properties during the three months ended June 30, 2002 and 2001. Operating expenses totaling $311,632 and $341,549 for the three months ended June 30, 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 $228,633 and $269,896, for the three months ended June 30, 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 a servicing agreement between the Company and the Bank. Advisory fees paid to parent for the three months ended June 30, 2002 and 2001 totaled $50,000 for each quarter. Directors' fees paid for the three months ended June 30, 2002 and 2001 were $12,000 and $8,000, respectively, and represent compensation to the two independent members of the Board of Directors. General and administrative expenses totaled $20,999 and $13,653 for the three months ended June 30, 2002 and 2001, respectively. On June 25, 2002 the Company's Board of Directors declared, out of the retained earnings of the Company, a cash dividend of $1.296875 per share on the outstanding Series A Preferred Shares. Dividends of $3,890,625 were subsequently paid on July 15, 2002. There were no common dividends declared during the 2002 quarter. Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 During the six months ended June 30, 2002 and 2001, the Company reported net income of $8,450,437 and $10,378,181, respectively. Interest income on Residential Mortgage Loans totaled $9,032,294 for the six months ended June 30, 2002 (the "2002 period"), compared to $10,950,881 for the six months ended June 30, 2001 (the "2001 period"). The decrease in interest income resulted from a decrease in the average yield on such loans to 6.22% in the 2002 period from 7.49% in the 2001 period. Also contributing to the decrease in interest income was a decrease in the average loan balance of the Residential Mortgage Loan portfolio to $290,557,239 in the 2002 period from $292,587,171 in the 2001 period. The Company would have recorded an additional $6,175 and $12,413 in interest income for the 2002 period and 2001 period, respectively, had its non-accrual loans been current in accordance with their original terms. -11- Other interest income of $45,731 and $84,617 was recognized on the Company's interest bearing deposits during the 2002 period and 2001 period, respectively. No provision for loan losses was recorded for the periods ended June 30, 2002 and 2001. The Company did not sell any REO properties during the 2002 period. The Company recognized a gain of $21,924 on the sale of one REO property during the 2001 period. Operating expenses totaling $627,588 and $676,941 for the 2002 period and 2001 period, 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 $469,317 and $540,601, for the 2002 period and 2001 period, respectively, were based on a servicing fee rate of 0.375% per annum of the outstanding principal balances of Residential Mortgage Loans, pursuant to a servicing agreement between the Company and the Bank. Advisory fees paid to parent for the 2002 and 2001 periods totaled $100,000 for each period. Directors' fees paid for the 2002 and 2001 periods totaled $20,000 and $16,000, respectively, and represent compensation to the two independent members of the Board of Directors. General and administrative expenses totaled $38,271 and $20,340 for the 2002 and 2001 periods, respectively. During the six months ended June 30, 2002, the Company's Board of Directors declared $7,781,250 of preferred stock dividends out of the retained earnings of the Company. There were no common dividends declared during the 2002 period. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk Information required by this item is included in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk," which is hereby incorporated herein by reference. -12- PART II - OTHER INFORMATION ITEM 1. Legal Proceedings The Company is not the subject of any material litigation. None of the Company, the Bank or any affiliate of the Bank is currently involved in nor, to the Company's knowledge, is currently threatened with any material litigation with respect to the Residential Mortgage Loans included in the portfolio, other than routine litigation arising in the ordinary course of business, most of which is covered by liability insurance. ITEM 2. Changes in Securities None. ITEM 3. Defaults Upon Senior Securities None. ITEM 4. Submission of Matters to a Vote of Security Holders None. ITEM 5. Other Information None. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits required by Item 601 of Regulation S-K are set forth below. Exhibit No. Exhibit - ------- ------------------------------------------------------- 11 Computation of Earnings Per Common Share included in Part I, Item 1 of this report (b) 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 public accountants of the Company and engaged Ernst and Young LLP to serve as independent public accountants to audit the financial statements of the Company for the year ending December 31, 2002. -13- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHEVY CHASE PREFERRED CAPITAL CORPORATION (Registrant) August 14, 2002 By: /s/ ALEXANDER R. M. BOYLE Alexander R. M. Boyle Vice Chairman of the Board August 14, 2002 By: /s/ STEPHEN R. HALPIN, JR. Stephen R. Halpin, Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer) August 14, 2002 By: /s/ JOEL A. FRIEDMAN Joel A. Friedman Senior Vice President and Controller (Principal Accounting 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 Quarterly Report on Form 10-Q for the period ending June 30, 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. August 13, 2002 By: /s/ B. FRANCIS SAUL, II B. Francis Saul, II Chairman and Chief Executive Officer CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, Stephen R. Halpin, Jr., the Executive Vice President and Chief Financial Officer of Chevy Chase Preferred Capital Corporation (the "Company"), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company's Quarterly Report on Form 10-Q for the period ending June 30, 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. August 13, 2002 By: /s/ STEPHEN R. HALPIN, JR. Stephen R. Halpin, Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer) Exhibit Index Exhibit No. Exhibit - ------- ------------------------------------------------------------ 11 Computation of Earnings Per Common Share included in Part I, Item 1 of this report.