<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED: SEPTEMBER 30, 1996 COMMISSION FILE NUMBER: 1-12151
CHASE PREFERRED CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3899576
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
270 PARK AVENUE, NEW YORK, NEW YORK 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 270-6000
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.... NO.X..
COMMON STOCK, $300 PAR VALUE 572,500
NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON
STOCK ON OCTOBER 31,1996.
<PAGE> 2
================================================================================
FORM 10-Q INDEX
<TABLE>
<CAPTION>
PART I Page
- ------ ----
<S> <C>
Item 1. Financial Statements - Chase Preferred Capital Corporation:
Balance Sheet at September 30, 1996. 3
Statement of Income for the Period from Inception (September 18, 1996)
through September 30, 1996. 4
Statement of Changes in Stockholders' Equity for the Period from
Inception (September 18, 1996) through September 30, 1996. 5
Statement of Cash Flows for the Period from Inception (September 18, 1996)
to September 30, 1996. 6
Notes to Financial Statements. 7-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations. 11-15
PART II
Item 1. Legal Proceedings 16
Item 6. Exhibits and Current Reports on Form 8-K 17
Signatures 18
</TABLE>
================================================================================
-2-
<PAGE> 3
Part I
Item 1.
<TABLE>
<CAPTION>
CHASE PREFERRED CAPITAL CORPORATION
BALANCE SHEET
AT SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C>
ASSETS:
Residential mortgage loans $ 899,382
Commercial mortgage loans 107,683
-----------
1,007,065
Less: allowance for credit losses (2,942)
-----------
1,004,123
Cash 83,931
Due from affiliates 13,507
Accrued interest receivable 5,743
-----------
TOTAL ASSETS $ 1,107,304
===========
LIABILITIES:
Accounts payable $ 1,788
Due to affiliates 89
Dividends payable 1,609
-----------
TOTAL LIABILITIES 3,486
-----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $25 per share; authorized,
50,000,000 shares, issued and outstanding 22,000,000 shares 550,000
Common stock, par value $300 per share; authorized,
5,000,000 shares, issued and outstanding 572,500 shares 171,750
Additional paid in capital 381,637
Retained earnings 431
-----------
TOTAL STOCKHOLDERS' EQUITY 1,103,818
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,107,304
===========
</TABLE>
The Notes to Financial Statements are an integral part of these Statements.
-3-
<PAGE> 4
Part I
Item 1. (continued)
<TABLE>
<CAPTION>
CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF INCOME
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 18, 1996) THROUGH SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C>
INTEREST INCOME:
Residential mortgage loans $ 1,814
Commercial mortgage loans 315
-------
2,129
Less: servicing fees (81)
-------
Net interest income 2,048
-------
NONINTEREST EXPENSE:
Advisory fees 8
-------
Total noninterest expense 8
-------
NET INCOME $ 2,040
=======
NET INCOME APPLICABLE TO COMMON SHARES $ 431
=======
NET INCOME PER COMMON SHARE $ 0.75
=======
</TABLE>
The Notes to Financial Statements are an integral part of these Statements.
-4-
<PAGE> 5
Part I
Item 1. (continued)
<TABLE>
<CAPTION>
CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 18, 1996) THROUGH SEPTEMBER 30, 1996
(IN THOUSANDS)
<S> <C>
PREFERRED STOCK:
Initial public offering on September 18, 1996 $ 550,000
-----------
Balance at end of period $ 550,000
===========
COMMON STOCK:
Shares issued at incorporation (June 28, 1996) $ 1
Issuance of common stock on September 18, 1996 171,749
-----------
Balance at end of period $ 171,750
===========
ADDITIONAL PAID IN CAPITAL:
Shares issued at incorporation (June 28, 1996) $ 0
Issuance of common stock on September 18, 1996 381,637
-----------
Balance at end of period $ 381,637
===========
RETAINED EARNINGS:
Net Income $ 2,040
Preferred dividends (1,609)
-----------
Balance at end of period $ 431
===========
TOTAL STOCKHOLDERS' EQUITY $ 1,103,818
===========
</TABLE>
The Notes to Financial Statements are an integral part of these Statements.
-5-
<PAGE> 6
Part I
Item 1. (continued)
<TABLE>
<CAPTION>
CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 18, 1996) THROUGH SEPTEMBER 30, 1996
(IN THOUSANDS)
<S> <C>
OPERATING ACTIVITIES:
Net income $ 2,040
Adjustments to reconcile net income to net cash provided
by operating activities:
Net change In:
Accrued interest receivable (2,129)
Due to affiliates 89
-----------
Net cash provided by operating activities 0
-----------
INVESTING ACTIVITIES:
Purchase of mortgage loans (1,017,630)
Purchase of accrued interest receivable (3,614)
-----------
Net cash used by investing activities (1,021,244)
-----------
FINANCING ACTIVITIES:
Proceeds from common stock issued 572,499
Proceeds from preferred stock issued 550,000
Underwriting discount paid (17,325)
-----------
Net cash provided by financing activities 1,105,174
-----------
NET INCREASE IN CASH 83,930
CASH AT BEGINNING OF PERIOD 1
-----------
CASH AT SEPTEMBER 30, 1996 $ 83,931
===========
</TABLE>
The Notes to Financial Statements are an integral part of these Statements.
-6-
<PAGE> 7
Part I
Item 1. (continued)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
- -----------------------------------------------
The Chase Preferred Capital Corporation (the "Company") is a Delaware
corporation incorporated on June 28, 1996 and created for the purpose of
acquiring, holding and managing real estate assets. The Company is a
wholly-owned subsidiary of The Chase Manhattan Bank (the "Bank"), a banking
corporation organized under the laws of the State of New York.
On September 18, 1996, the Company commenced its operations upon consummation of
an initial public offering of 22,000,000 shares of the Company's 8.10%
Cumulative Preferred Stock, Series A (the "Series A Preferred Shares"), $25 par
value and the sale to the Bank of 572,500 shares of the Company's Common Stock,
$300 par value. These offerings raised net capital of $1,103,386,000. All Common
shares are held by the Bank. The Series A Preferred Shares are traded on the New
York Stock Exchange.
The Company used the proceeds raised from the initial public offering of the
Series A Preferred Shares and the sale of Common Stock to the Bank to pay any
expenses incurred during the offering and the formation of the Company and to
purchase from the Bank the Company's initial portfolio of residential and
commercial mortgage loans ("Mortgage Loans") at their estimated fair values of
$1,017,630,000. The Mortgage Loans were recorded in the accompanying financial
statements at the Bank's historical cost basis which approximates their
estimated fair values.
The unaudited financial statements of the Company are prepared in accordance
with generally accepted accounting principles for interim financial information.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
position and the results of operations for the interim period presented have
been included.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Mortgage Loans:
Mortgage loans are carried at the principal amount outstanding, net of deferred
loan fees and direct origination costs. Loans held for sale are carried at the
lower of aggregate cost or fair value. Interest income is recognized using the
interest method or on a basis approximating a level rate of return over the term
of the loan.
Nonaccrual loans are those loans on which the accrual of interest has ceased.
Loans are placed on nonaccrual status immediately if, in the opinion of
management, principal or interest is not likely to be paid in accordance with
the terms of the loan agreement, or when principal or interest is past due 90
days or more and collateral, is insufficient to cover principal and interest.
Interest accrued but not collected at the date a loan is placed on nonaccrual
status is reversed against interest income. In addition, the amortization of net
deferred loan fees and costs are suspended when a loan is placed on nonaccrual
status. Interest income on nonaccrual loans is recognized only to the extent of
cash receipts. However, where there is doubt regarding the ultimate
collectibility of the loan principal, cash receipts, whether designated as
principal or interest, are thereafter applied to reduce the carrying value of
the loan. Loans are restored to accrual status only when interest and principal
payments are brought current and future payments are reasonably assured.
Statement of Financial Accounting Standards No. 114, entitled "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114"), requires that the carrying
value of an impaired loan be based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price, or the fair value or the
collateral, if the loan is collateral dependent. Under SFAS 114, a loan is
considered impaired when, based on current information, it is probable that the
borrower will be unable to pay contractual interest or principal payments as
scheduled in the loan agreement. SFAS 114 applies to all loans except
smaller-balance homogeneous consumer loans, loans carried at fair value or the
lower of cost or fair value, debt securities and leases. The Company applies
SFAS 114 to nonaccrual commercial mortgage loans. In addition, SFAS 114 modifies
the accounting for in-substance foreclosures ("ISF"). A collateralized loan is
considered an ISF and is reclassified to Assets Acquired as Loan Satisfactions
only when the Company has taken physical possession of the collateral regardless
of whether formal foreclosure proceedings have taken place.
-7-
<PAGE> 8
Part I
Item 1. (continued)
Statement of Financial Accounting Standards No. 118, entitled "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosure" ("SFAS
118"), permits a creditor to use existing methods for recognizing interest
revenue on impaired loans. The Company recognizes interest income on impaired
loans pursuant to the discussion above for nonaccrual loans.
Allowance for credit losses:
The allowance for credit losses provide for risk of losses inherent in the
credit extension process. The allowance is a general allowance and is based on a
periodic review and analysis of the portfolio, which is comprised of residential
and commercial mortgage loans. The periodic analysis includes consideration of
such factors as the risk rating of individual credits, the size and diversity of
the portfolio, economic conditions and market conditions, prior loss experience
and results of periodic credit reviews of the portfolio. The allowance for
credit losses is increased by provisions for losses charged against income and
is reduced by charge-offs, net of recoveries. Charge-offs are recorded when, in
the judgment of management, an extension of credit is deemed uncollectible, in
whole or in part.
Cash and Cash Equivalents:
The Company considers all short-term, highly liquid investments that are both
readily convertible to cash and have a maturity of generally three months or
less at the time of purchase to be cash equivalents. At September 30, 1996, the
Company's cash was held in custody of the Bank and there were no cash
equivalents.
Offering Costs:
Costs incurred in connection with the raising of capital through the sale of
preferred stock were charged against shareholders' equity upon the issuance of
shares to shareholders.
Dividends:
Preferred Stock. Dividends on the Series A Preferred Shares are cumulative from
issuance (September 18, 1996) and will be payable quarterly on the last day of
March, June, September and December at a rate of 8.10% per annum of the initial
liquidation preference ($25.00 per share).
Common Stock. Shareholders are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available after all
preferred dividends have been paid.
Net Income Per Common Share:
Net income per share is computed by dividing net income after preferred
dividends by the weighted average number of common shares outstanding.
Income Taxes:
The Company has elected for Federal income tax purposes, to be treated as a Real
Estate Investment Trust ("REIT") and intends to comply with the provisions of
the Internal Revenue Code of 1986 (the "IRC"), as amended. Accordingly, the
Company will not be subject to federal income tax to the extent it distributes
its income to shareholders and as long as certain asset, income and stock
ownership tests are met in accordance with the IRC. As the Company expects to
qualify as a REIT for federal income tax purposes, no provision for income taxes
is included in the accompanying financial statements.
-8-
<PAGE> 9
Part I
Item 1. (continued)
NOTE 3 - MORTGAGE LOANS
- -----------------------
Mortgage loans consist of both residential and commercial mortgage loans.
Residential mortgage loans consist of Six-Month Prime Rate Adjustable Rate
Mortgages ("ARMs"), Six-Month Treasury ARMs, One-Year ARMs, Three-Year,
Five-Year, Seven-Year and Ten-Year Fixed Rate Loans with an Automatic Conversion
to One-Year ARMs and Fixed Rate Loans. The commercial mortgage loans consist of
Fixed and Variable Rate loans, certain of which have balloon payments.
The following represents the Mortgage Loan portfolio before allowance for credit
losses as of September 30, 1996:
<TABLE>
<S> <C>
Residential mortgage loans $ 899,382
Commercial mortgage loans 107,683
------------
Total portfolio $ 1,007,065
============
</TABLE>
Each of the Mortgage Loans are secured by a mortgage, deed of trust or other
security instrument which created a first lien on the residential dwellings
and/or commercial property located in their respective jurisdictions.
NOTE 4 - DIVIDENDS
- ------------------
As of September 30, 1996, the Company has accrued preferred stock dividends from
inception (September 18, 1996) in the amount of $1,609,000.
NOTE 5 - RELATED PARTY TRANSACTIONS
- -----------------------------------
The Company has entered into an Advisory Agreement (the "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 Agreement. The Agreement
has an initial term of five years commencing on September 18, 1996 and
automatically renews for an additional five years unless the Company delivers a
notice of nonrenewal to the Advisor as defined in the Agreement.
The Company also entered into two servicing agreements with the Bank for the
servicing of the commercial and residential loans. Pursuant to each servicing
agreement, the servicer performs the actual servicing of the Mortgage Loans held
by the Company, in accordance with normal industry practice. The Servicing
Agreements can be terminated without cause with at least thirty days notice to
the servicer. The servicing fee is 0.25% of the outstanding principal balance
for the residential mortgage loans and range from 0.08% - 0.30% of the
outstanding principal balances for the commercial mortgage loans depending upon
the outstanding principal amount.
The Bank has entered into sub-servicing agreements ("Sub-Agreements") with Chase
Manhattan Mortgage Corporation ("CMMC") a wholly-owned subsidiary of Chase
Manhattan Bank USA, N.A., a direct wholly-owned subsidiary of The Chase
Manhattan Corporation.
Accrued advisory fees and servicing fees for the period ended September 30, 1996
totaled approximately $89,000.
In addition, in its capacity as Sub-Servicer, CMMC owes the Company $13,507,000
primarily consisting of mortgage loan payments received on behalf of the
Company.
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------
Statement of Financial Accounting Standards No. 107, entitled "Disclosures About
Fair Value of Financial Instruments" ("SFAS 107"), requires the Company to
disclose fair value information about financial instruments for which it is
practicable to estimate the value, whether or not such financial instruments are
recognized on the balance sheet. Fair value is defined as the amount at which a
financial instrument could be exchanged in a current transaction between willing
parties, other
-9-
<PAGE> 10
Part I
Item 1. (continued)
than in a forced sale or liquidation, and is best evidenced by a quoted market
price, if one exists. The calculation of estimated fair value is based on market
conditions at a specific point in time and may not be reflective of future fair
values.
Certain financial instruments and all nonfinancial instruments are excluded from
the scope of SFAS 107. Accordingly, the fair value disclosures required by SFAS
107 provide only a partial estimate of the fair value of the Company. Fair
values among REITs are not comparable due to the wide-range of limited valuation
techniques and numerous estimates which must be made. This lack of objective
valuation standard introduces a great degree of subjectivity to these derived or
estimated fair values. Therefore, readers are cautioned in using this
information for purposes of evaluating the financial condition of the Company
compared with other REITs.
Loans:
Loans were valued using methodologies suitable for each loan type. Certain of
these methodologies and key assumptions made are discussed below.
The fair value of the Company's commercial loans was estimated by assessing the
two main risk components: credit and interest. The estimated cash flows were
adjusted to reflect the inherent credit risk and then discounted, using rates
appropriate for each maturity that incorporates the effects of interest rate
changes.
For residential mortgage loans for which market rates for comparable loans are
readily available, the fair value was estimated by discounting cash flows,
adjusted for prepayments. The discount rates used for residential mortgages were
secondary market yields for comparable mortgage-backed securities, adjusted for
risk. The discount rates used incorporated the effects of interest rate changes
only, since the estimated cash flows were adjusted for credit risk.
The carrying amounts reflected on the balance sheet at September 30, 1996
approximates fair value as these loans were transferred on September 18, 1996 at
an estimate of their fair values based on the valuation techniques described in
the preceeding paragraph.
Assets and liabilities in which fair value approximates carrying value:
The fair values of certain financial assets and liabilities carried at cost,
including cash, due from affiliates, accrued interest receivable, accounts
payable, due to affiliates and dividends payable, are considered to approximate
their respective carrying value due to their short-term nature and negligible
credit losses.
-10-
<PAGE> 11
Part I
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
CHASE PREFERRED CAPITAL CORPORATION
FINANCIAL HIGHLIGHTS
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 18, 1996) THROUGH SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<TABLE>
<S> <C>
OPERATING STATEMENT:
Interest income $ 2,129
Net interest income 2,048
Net income 2,040
Net income applicable to common shares 431
Average number of common shares outstanding 572,500
Income per common share $ 0.75
BALANCE SHEET:
Mortgage loans $ 1,007,065
Total assets 1,107,304
Total shareholders' equity $ 1,103,818
Number of preferred shares outstanding 22,000,000
Number of common shares outstanding 572,500
Average yield on mortgage loans 5.85%
</TABLE>
- --------------------------------------------------------------------------------
-11-
<PAGE> 12
Part I
Item 2. (continued)
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
The Chase Preferred Capital Corporation's (the "Company") principal business
objective is to acquire, hold and manage residential and commercial mortgage
loans ("Mortgage Loans") that will generate net income for distribution to
stockholders. The Company will continue to acquire all its Mortgage Loans from
The Chase Manhattan Bank, a banking corporation organized under the laws of the
State of New York (the "Bank") or affiliates of the Bank as whole loans secured
by first mortgages or deeds of trust on single-family (one to four-unit)
residential real estate properties or on commercial real estate properties. The
Company may also from time to time acquire securities that qualify as real
estate assets under Section 856(c)(6)(B) of the Internal Revenue Code of 1986
(the"Code") that are rated by at least one nationally independent rating
organization and that represent interests in or obligations backed by pools of
mortgage loans ("Mortgage-Backed Securities"). Mortgage loans underlying the
Mortgaged-Backed Securities will be secured by single-family residential,
multifamily or commercial real estate properties located in the United States.
On September 18, 1996, the Company commenced its operations upon the initial
public offering of 22,000,000 shares of the Company's 8.10% Cumulative Preferred
Stock, Series A (the "Series A Preferred Shares"), and the sale to the Bank of
572,500 shares of the Company's Common Stock, $300 par value. These offerings
raised net capital of $1,103,386,000. All Common shares are held by the Bank.
The Series A Preferred Shares are traded on the New York Stock Exchange.
The Bank and its affiliates are involved in virtually every aspect of the
Company's existence. The Bank is the sole holder of the Common Stock of the
Company and administers the day-to-day activities of the Company in its role as
Advisor under the Advisory Agreement. The Bank also services the Company's
Mortgage Loans in its role as Servicer under each of the Servicing Agreements.
The Bank and its affiliates may have interests which are not identical to those
of the Company. Consequently, conflicts of interest may arise with respect to
transactions, including without limitation, future acquisitions of Mortgage
Loans from the Bank or its affiliates; servicing of Mortgage Loans, particularly
with respect to Mortgage Loans that become classified or placed in nonaccrual
status or which have been, more than once during the preceding twelve month,
more than 30 days past due in the payment of principal and interest; future
dispositions of Mortgage Loans of The Chase Manhattan Corporation ("CMC") or any
of its non-bank subsidiaries; and the modification of the Advisory Agreement or
the Servicing Agreement.
It is the intention of the Company, CMC and the Bank that any agreements and
transactions between the Company, on the one hand, and CMC, the Bank or their
affiliates, on the other hand, are fair to all parties and consistent with
market terms, including the price paid and received for Mortgage Loans,
including those in the initial portfolio, on their acquisition or disposition by
the Company or in connection with the servicing of such Mortgage Loans. The
requirement in the Certificate of Designation establishing the Series A
Preferred Shares that certain actions of the Company be approved by a majority
of the independent Directors is also intended to ensure fair dealing between the
Company and CMC, the Bank and their respective affiliates. However, there can be
no assurance that such agreements or transactions will be on terms as favorable
to the Company as those that could have been obtained from unaffiliated third
parties.
RESULTS OF OPERATIONS
The Company reported interest income of approximately $2,129,000 ($2,048,000
after deducting servicing fees) which was comprised of approximately $1,814,000
from residential mortgages and $315,000 from commercial mortgages, representing
a total average yield of 5.85%. After deduction of approximately $8,000 in
advisory fees the Company reported net income of approximately $2,040,000.
On November 14, 1996, the Company declared a dividend of $0.57938 per share on
the outstanding shares of Series A Preferred Shares payable on December 31, 1996
to stockholders of record at the close of business December 13, 1996.
The Company accrued $1,609,000 in dividends payable and reported earnings per
share of $0.75 on its common stock for the period from September 18, 1996
through September 30, 1996.
-12-
<PAGE> 13
Part I
Item 2. (continued)
MORTGAGE LOANS
The Company used the proceeds from the offerings described above to purchase
Mortgage Loans totaling approximately $1,017,630,000; comprised of residential
and commercial mortgage loans. As of September 30, 1996, the Company had
$1,007,065,000 invested in Mortgage Loans; which represents a 1% decline in the
initial amount invested on September 18, 1996 due to principal collections.
Management intends to reinvest these proceeds and remaining proceeds from the
initial capital raised in additional Mortgage Loans to be purchased from either
the Bank or its affiliates before December 31, 1996. Reinvestments in Mortgage
Loans will be consistent in maintaining a 90% and 10% ratio between residential
and commercial mortgage loans, respectively.
The following table reflects the composition of interest-earning assets as a
percentage of total interest-earning assets as of September 30, 1996:
<TABLE>
<CAPTION>
AVERAGE INTEREST-EARNING ASSET MIX AT SEPTEMBER 18, 1996 AT SEPTEMBER 30, 1996
(in thousands) AMOUNT PERCENT AMOUNT PERCENT
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Residential mortgage loans $ 909,455 89.4% $ 897,522 89.4%
Commercial mortgage loans 108,175 10.6% 106,601 10.6%
-------------- ----- ------------- -----
Total interest-earning assets $ 1,017,630 $ 1,004,123
============== =============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1996, there were no nonaccrual Mortgage Loans nor past due
principal and interest payments.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is available to absorb potential credit losses
from the entire Mortgage Loan portfolio. The Company deems its allowance for
credit losses as of September 30, 1996 to be adequate. Although the Company
considers that it has sufficient reserves to absorb losses that currently may
exist in the portfolio, but are not yet identifiable, the precise loss content
is subject to continuing review based on quality indicators, industry and
geographic concentrations, changes in business conditions, and other external
factors such as competition, legal and regulatory requirements. The Company will
continue to reassess the adequacy of the allowance for credit losses.
The accompanying table reflects the activity in the Company's allowance for
credit losses for the period from September 18, 1996 to September 30, 1996.
<TABLE>
<CAPTION>
ALLOWANCE FOR CREDIT LOSSES
(in thousands)
- --------------------------------------------------------------------------------
<S> <C>
Total allowance at beginning of period $2,942
Provision for losses 0
Charge-offs 0
Recoveries 0
------
Total allowance at end of period $2,942
======
</TABLE>
================================================================================
The following table presents the Company's allowance coverage ratios at
September 30, 1996.
<TABLE>
<CAPTION>
ALLOWANCE COVERAGE RATIO
- --------------------------------------------------------------------------------
<S> <C>
Allowance for credit losses to:
Loans at period-end 0.29%
================================================================================
</TABLE>
-13-
<PAGE> 14
Part I
Item 2. (continued)
INTEREST RATE RISK
The Company's income consists primarily of interest payments on Mortgage Loans.
If there is a decline in interest rates (as measured by the indices upon which
the interest rates of the Mortgage Loans are based), then the Company will
experience a decrease in income available to be distributed to its shareholders.
In such an interest rate environment, the Company may experience an increase in
prepayments on its Residential Mortgage Loans and may find it more difficult to
purchase additional Mortgage Loans bearing rates sufficient to support payment
of the dividend on the Series A Preferred Shares. In addition, certain
Residential Mortgage Loan products which the Company holds will allow borrowers
in such an interest rate environment to convert an adjustable rate mortgage to a
fixed rate mortgage, thus "locking in" a low fixed interest rate.
There can be no assurance that an interest rate environment in which there is a
significant decline in interest rates would not adversely affect the Company's
ability to pay dividends on the Series A Preferred Shares.
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 balance sheet exposure to geographic concentrations directly
affects the credit risk of the Mortgage Loans within the portfolio. The
following table shows the Mortgage Loan portfolio by geographical area as of
September 30, 1996:
<TABLE>
<CAPTION>
LOANS
(in thousands) AMOUNT PERCENT
- --------------------------------------------------------------------------------
<S> <C> <C>
Residential Mortgage Loans:
California $ 500,464 49.7%
Florida 59,325 5.9%
Other States (no State has more than 4%) 339,593 33.7%
---------- -------
Total Residential mortgage loans 899,382 89.3%
---------- -------
Commercial Mortgage Loans:
New York Metropolitan Tri-State Area 97,459 9.7%
Other States (no State has more than 3%) 10,224 1.0%
---------- -------
Total Commercial Mortgage Loans 107,683 10.7%
---------- -------
Total $1,007,065 100.0%
========== =======
</TABLE>
Approximately 49.7% of the Company's total Mortgage Loan portfolio are loans
secured by residential real estate properties located in California.
Consequently, these residential mortgage 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
(earthquakes, for example) in California that may affect the ability of
residential property owners in California to make payments of principal and
interest on the underlying mortgages.
In addition, the majority of the commercial mortgage properties underlying the
Company's commercial mortgage loans are located in the New York metropolitan
tri-state area. Substantially all of these mortgaged properties were, at the
time of their origination, at least 70% occupied by the borrowers or their
affiliates. Consequently, these commercial mortgage loans may be subject to
greater risk of default than other comparable commercial mortgage loans in the
event of adverse economic, political or business developments in the New York
metropolitan tri-state areas that may affect the ability of businesses in that
area to make payments of principal and interest on the underlying mortgages.
-14-
<PAGE> 15
Part I
Item 2. (continued)
LIQUIDITY RISK MANAGEMENT
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Company's financial commitments and to
capitalize on opportunities for the Company's business expansion. In managing
liquidity, the Company takes into account various legal limitations placed on a
REIT as discussed below in Other Matters.
The Company's principal liquidity needs are to maintain the current portfolio
size through the acquisition of additional Mortgage Loans and to pay dividends
on the Series A Preferred Shares. The acquisition of additional Mortgage Loans
are funded with the proceeds obtained from repayment of principal balances by
individual Mortgagees. The Company does not have and does not anticipate having
any material capital expenditures.
OTHER MATTERS
As of September 30, 1996, the Company believed that it was in full compliance
with the REIT tax rules and that it will continue to qualify as a REIT under the
provisions of the Code. The Company calculates:
o its Qualified REIT Assets, as defined in the Code, to be 100% of its total
assets, as compared to the federal tax requirements that at least 75% of
its total assets must be Qualified REIT assets.
o that 100% of its revenues qualifies for the 75% source of income test and
100% of its revenues qualifies for the 95% source of income test under the
REIT rules.
o none of the revenues during the period ended September 30, 1996 were
subject to the 30% income limitation under the REIT rules.
The Company also met all REIT requirements regarding the ownership of its common
stock and anticipates meeting the annual distribution requirements.
-15-
<PAGE> 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not the subject of any material litigation. None of the
Company's, the Advisor's, the Bank's or any of its affiliates are
currently involved in nor, to the Company's knowledge is currently
threatened with any material litigation with respect to the 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.
-16-
<PAGE> 17
Part II
Item 6. Exhibits and Current Reports on Form 8-K
No Current Reports on Form 8-K were filed during the third quarter.
INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBITS
- ----------- --------
<S> <C>
11 Computation of net income
per share
12(a) Computation of ratio of
earnings to fixed charges
12(b) Computation of ratio of
earnings to fixed charges
and preferred stock dividend
requirements
27 Financial Data Schedule
</TABLE>
-17-
<PAGE> 18
SIGNATURE
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.
CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------
(Registrant)
Date: November 14, 1996 By /s/ Don B. Taggart
----------------------------------
Don B. Taggart
Treasurer and Director
-18-
<PAGE> 1
Part II
Item 6. (continued)
EXHIBIT 11
CHASE PREFERRED CAPITAL CORPORATION
COMPUTATION OF NET INCOME PER SHARE
Net income for primary earnings per share are computed by subtracting from the
applicable earnings the dividend requirements on preferred stock to arrive at
earnings applicable to common stock and dividing this amount by the weighted
average number of common outstanding during the period.
<TABLE>
<CAPTION>
For the Period from Inception
(September 18, 1996)
(in thousands, except per share amounts): through September 30, 1996
- --------------------------------------------------------------------------------
<S> <C>
Earnings:
Net income $ 2,040
Less: preferred stock dividend requirements 1,609
--------
Net income applicable to common stock $ 431
========
Shares:
Average common shares outstanding 572,500
Net income per share: $ 0.75
========
================================================================================
</TABLE>
<PAGE> 1
Part II
Item 6. (continued)
EXHIBIT 12(A)
CHASE PREFERRED CAPITAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
<TABLE>
<CAPTION>
For the Period from Inception
(September 18, 1996)
(in thousands, except ratios): through September 30, 1996
- --------------------------------------------------------------------------------
<S> <C>
Net income $ 2,040
--------
Fixed charges:
Advisory fees 8
--------
Total fixed charges 8
--------
Earnings before fixed charges $ 2,048
========
Fixed charges, as above $ 8
========
Ratio of earnings to fixed charges 256%
===
</TABLE>
================================================================================
<PAGE> 1
Part II
Item 6. (continued)
EXHIBIT 12(B)
CHASE PREFERRED CAPITAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
<TABLE>
<CAPTION>
For the Period from Inception
(September 18, 1996)
(in thousands, except ratio): through September 30, 1996
- --------------------------------------------------------------------------------
<S> <C>
Net income $ 2,040
--------
Fixed charges:
Advisory fees 8
--------
Total fixed charges 8
--------
Earnings before fixed charges $ 2,048
========
Fixed charges, as above $ 8
Preferred stock dividend requirements 1,609
--------
Fixed charges including preferred stock dividends $ 1,617
========
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.27%
========
</TABLE>
================================================================================
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001018450
<NAME> CHASE PREFERRED CAPITAL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> SEP-18-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 83,931
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,007,065
<ALLOWANCE> 2,942
<TOTAL-ASSETS> 1,107,304
<DEPOSITS> 0
<SHORT-TERM> 3,486
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
550,000
<COMMON> 171,750
<OTHER-SE> 382,068
<TOTAL-LIABILITIES-AND-EQUITY> 1,107,304
<INTEREST-LOAN> 2,048
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,048
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 2,048
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8
<INCOME-PRETAX> 2,040
<INCOME-PRE-EXTRAORDINARY> 2,040
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,040
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.75
<YIELD-ACTUAL> 5.85
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,942
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,942
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
