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, 1998 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 [X] No [_]
Common Stock, $300 Par Value 572,500
- -------------------------------------------------------------------------------
Number of shares outstanding of each of the issuer's classes of common stock on
September 30, 1998.
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<PAGE>
FORM 10-Q INDEX
Part I Page
- ----- ----
Item 1. Financial Statements - Chase Preferred Capital Corporation:
Balance Sheet at September 30, 1998 and December 31, 1997. 3
Statement of Income for the Three Months Ended
September 30, 1998 and 1997. 4
Statement of Income for the Nine Months Ended
September 30, 1998 and 1997. 5
Statement of Changes in Stockholders' Equity for the
Nine Months Ended September 30, 1998 and 1997. 6
Statement of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997. 7
Notes to Financial Statements. 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 10
Part II
- -------
Item 6. Exhibits and Current Reports on Form 8-K. 19
-2-
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<PAGE>
Part I
Item 1.
CHASE PREFERRED CAPITAL CORPORATION
BALANCE SHEET
(in thousands, except per share data)
September 30, December 31,
1998 1997
(Unaudited)
ASSETS:
Residential Mortgage Loans $ 956,608 $ 889,696
Commercial Mortgage Loans 78,933 95,372
----------- -----------
1,035,541 985,068
Less: Allowance for Credit Losses (3,850) (3,468)
----------- -----------
1,031,691 981,600
Cash 36,088 93,919
Due from Affiliates 48,684 40,664
Accrued Interest Receivable 7,237 6,981
----------- -----------
TOTAL ASSETS $ 1,123,700 $ 1,123,164
=========== ===========
LIABILITIES:
Accounts Payable $ 367 $ 367
Due to Affiliates 2,921 2,867
----------- -----------
TOTAL LIABILITIES 3,288 3,234
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock, Par Value $25 Per Share;
50,000,000 Shares Authorized, 22,000,000
Issued and Outstanding 550,000 550,000
Common Stock, Par Value $300 Per Share;
5,000,000 Shares Authorized, 572,500 Shares
Issued and Outstanding 171,750 171,750
Capital Surplus 381,637 381,637
Retained Earnings 17,025 16,543
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,120,412 1,119,930
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,123,700 $ 1,123,164
=========== ===========
The Notes to Financial Statements are an integral part of these Statements.
-3-
<PAGE>
Part I
Item 1. (continued)
CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF INCOME
Three Months Ended September 30,
(in thousands, except per share data)
(Unaudited)
1998 1997
INTEREST INCOME:
Residential Mortgage Loans $ 17,011 $ 17,994
Commercial Mortgage Loans 1,746 2,286
Interest on Overnight Investments 1,371 624
-------- --------
20,128 20,904
Less: Servicing Fees (670) (654)
-------- --------
Net Interest Income 19,458 20,250
-------- --------
NON INTEREST EXPENSE:
Advisory Fees 63 63
Other Administrative Expenses 93 25
-------- --------
Total Noninterest Expense 156 88
-------- --------
NET INCOME $ 19,302 $ 20,162
NET INCOME APPLICABLE TO COMMON SHARES $ 8,164 $ 9,024
======== ========
NET INCOME PER COMMON SHARE $ 14.26 $ 15.76
======== ========
The Notes to Financial Statements are an integral part of these Statements.
-4-
<PAGE>
Part I
Item 1. (continued)
CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF INCOME
Nine Months Ended September 30,
(in thousands, except per share data)
(Unaudited)
1998 1997
INTEREST INCOME:
Residential Mortgage Loans $ 47,209 $ 54,279
Commercial Mortgage Loans 6,073 7,057
Interest on Overnight Investments 5,902 1,696
-------- --------
59,184 63,032
Less: Servicing Fees (1,828) (1,990)
-------- --------
Net Interest Income 57,356 61,042
-------- --------
NON INTEREST EXPENSE:
Advisory Fees 188 188
Other Administrative Expenses 308 213
-------- --------
Total Noninterest Expense 496 401
-------- --------
NET INCOME $ 56,860 $ 60,641
NET INCOME APPLICABLE TO COMMON SHARES $ 23,447 $ 27,228
======== ========
NET INCOME PER COMMON SHARE $ 40.96 $ 47.56
======== ========
The Notes to Financial Statements are an integral part of these Statements.
-5-
<PAGE>
Part I
Item 1. (continued)
CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended September 30,
(in thousands)
(Unaudited)
1998 1997
PREFERRED STOCK:
Balance at Beginning of Year $ 550,000 $ 550,000
----------- -----------
Balance at End of Period 550,000 550,000
=========== ===========
COMMON STOCK:
Balance at Beginning of Year 171,750 171,750
----------- -----------
Balance at End of Period 171,750 171,750
=========== ===========
ADDITIONAL PAID IN CAPITAL:
Balance at Beginning of Year 381,637 381,637
----------- -----------
Balance at End of Period 381,637 381,637
=========== ===========
RETAINED EARNINGS:
Balance at Beginning of Year 16,543 9,339
Net Income 56,860 60,641
Common Dividends (22,965) (28,025)
Preferred Dividends (33,413) (33,413)
----------- -----------
Balance at End of Period 17,025 8,542
=========== ===========
TOTAL STOCKHOLDERS' EQUITY $ 1,120,412 $ 1,111,929
=========== ===========
The Notes to Financial Statements are an integral part of these Statements.
-6-
<PAGE>
Part I
Item 1. (continued)
CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
Nine Months Ended September 30,
(in thousands)
(Unaudited)
1998 1997
OPERATING ACTIVITIES:
Net Income $ 56,860 $ 60,641
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Net Change In:
Due From Affiliates (8,020) (6,822)
Accrued Interest Receivable 1,889 628
Accounts Payable 0 (63)
Due to Affiliates 54 2,607
--------- ---------
Net Cash Provided by Operating Activities 50,783 56,991
--------- ---------
INVESTING ACTIVITIES:
Purchase of Mortgage Loans Net of Reserve (483,961) (159,992)
Principal Payments Received 432,724 180,805
Purchase of Accrued Interest Receivable (2,145) (641)
Sale of Loans Net of Reserve 1,146 0
--------- ---------
Net Cash Used by Investing Activities (52,236) (20,172)
--------- ---------
FINANCING ACTIVITIES:
Dividends Paid (56,378) (61,438)
--------- ---------
Net Cash Used by Financing Activities (56,378) (61,438)
--------- ---------
NET INCREASE/(DECREASE) IN CASH (57,831) 15,725
CASH AT BEGINNING OF PERIOD 93,919 31,091
--------- ---------
CASH AT END OF PERIOD $ 36,088 $ 46,816
========= =========
The Notes to Financial Statements are an integral part of these Statements.
-7-
<PAGE>
Part I
Item 1. (continued)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
- -----------------------------------------------
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, $25 par value per share (the "Series A
Preferred Shares"), and the sale to the Bank of 572,500 shares of the Company's
Common Stock, $300 par value per share (the "Common Stock"). These offerings
raised net capital of $1,103,386,000. All shares of Common Stock 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 sales of the Common Stock and
Series A Preferred Shares to pay expenses incurred in connection with 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. The Mortgage Loans were
recorded in the accompanying financial statements at the Bank's historical cost
basis which approximated 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.
For further discussion of the Company's accounting policies, reference is made
to Note 2 of the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 (the "1997 Annual Report").
NOTE 2 - RELATED PARTY TRANSACTIONS
- -----------------------------------
The Company has entered into an Advisory Agreement (the "Agreement") with the
Bank (the "Advisor") requiring an annual payment of $250,000. The Advisor
provides advice to the Board of Directors and manages the operations of the
Company in accordance with the parameters established 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 mortgage loans. (The Bank in its
role as servicer under the terms of the servicing agreements is herein referred
to as the "Servicer"). 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 by the Company 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 ranges from 0.08% - 0.30% of the outstanding
principal balance 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, National Association, an indirect wholly-owned subsidiary of
The Chase Manhattan Corporation ("CMC").
The Company currently intends to continue to acquire all its Mortgage Loans from
the Bank or from 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.
-8-
<PAGE>
Part I
Item 1. (Continued)
For the quarters ended September 30, 1998 and 1997, advisory and servicing fees
totaled approximately $733,000 and $717,000, respectively. For the nine months
ended September 30, 1998 and 1997, advisory and servicing fees totaled
approximately $2,016,000 and $2,178,000, respectively.
At September 30, 1998 and December 31, 1997, due from affiliates was
approximately $48,684,000 and $40,664,000, respectively, which consisted
primarily of mortgage loan payments received by CMMC, in its capacity as
Sub-Servicer, on behalf of the Company. Pursuant to the terms of the servicing
and subservicing agreements, the Company receives mortgage loan payments
collected by the Servicer (and Sub-Servicer) in the month immediately following
their collection.
The Company maintains its cash in an overnight deposit account with the Bank and
earns a market rate of interest. Interest income on these deposits for the
quarters ended September 30, 1998 and 1997 amounted to approximately $1,371,000
and $624,000, respectively. Interest income on these deposits for the nine
months ended September 30, 1998 and 1997 amounted to approximately $5,902,000
and $1,696,000, respectively.
NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------
For further discussion on the methodology for determining the fair value of the
Mortgage Loans, reference is made to Note 7 of the Company's 1997 Annual Report.
Loans:
The carrying value and estimated fair value of Mortgage Loans at September 30,
1998 and December 31, 1997 are as follows (in thousands):
September 30, 1998 December 31, 1997
----------------------- --------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- --------- ----------
Residential Mortgage Loans $ 956,608 $ 974,742 $ 889,696 $ 901,616
Commercial Mortgage Loans 78,933 87,652 95,372 103,462
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 and due to affiliates, are considered to approximate their respective
carrying value due to their short-term nature and negligible credit losses.
-9-
<PAGE>
Part I
Item 2.
<TABLE>
<CAPTION>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHASE PREFERRED CAPITAL CORPORATION
FINANCIAL HIGHLIGHTS
(in thousands, except per share, unit and ratio data)
(Unaudited)
Third Third Nine Months Ended
Quarter Quarter September 30,
1998 1997 1998 1997
------------------------------ -----------------------------
INCOME STATEMENT:
<S> <C> <C> <C> <C>
Interest Income $ 20,128 $ 20,904 $ 59,184 $ 63,032
Net Interest Income 19,458 20,250 57,356 61,042
Net Income 19,302 20,162 56,860 60,641
Average Number of Common Shares Outstanding 572,500 572,500 572,500 572,500
Net Income Applicable to Common Shares 8,164 9,024 23,447 27,228
Income Per Common Share $ 14.26 $ 15.76 $ 40.96 $ 47.56
BALANCE SHEET:
Mortgage Loans $ 1,035,541 $ 1,039,386 $ 1,035,541 $ 1,039,386
Total Assets 1,123,700 1,115,145 1,123,700 1,115,145
Preferred Stock Outstanding 550,000 550,000 550,000 550,000
Total Stockholders' Equity $ 1,120,412 $ 1,111,929 $ 1,120,412 $ 1,111,929
OTHER DATA:
Dividends Paid on Preferred Shares $ 11,138 $ 11,138 $ 33,413 $ 33,413
Dividends Paid on Common Shares $ 7,400 $ 9,550 $ 22,965 $ 28,025
Number of Preferred Shares Outstanding 22,000,000 22,000,000 22,000,000 22,000,000
Number of Common Shares Outstanding 572,500 572,500 572,500 572,500
Average Yield on Mortgage Loans 7.6% 7.8% 7.6% 7.7%
</TABLE>
================================================================================
-10-
<PAGE>
Part I
Item 2. (continued)
================================================================================
OVERVIEW
================================================================================
The principal business of the Company is to acquire, hold and manage residential
and commercial mortgage loans ("Mortgage Loans") that will generate net income
for distribution to stockholders. The Company currently intends to continue to
acquire all its Mortgage Loans from The Chase Manhattan Bank (the "Bank'), a
banking corporation organized under the laws of the State of New York, or from
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, as amended (the "Code") that are rated by
at least one nationally recognized statistical rating organization and that
represent interests in or obligations backed by pools of mortgage loans
("Mortgage-Backed Securities"). Mortgage loans underlying the Mortgage-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, $25 par value per share (the "Series A Preferred Shares"), and
the sale to the Bank of 572,500 shares of the Company's Common Stock, $300 par
value per share (the "Common Stock"). These offerings raised net capital of
$1,103,386,000. All shares of Common Stock 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 administers the day-to-day activities of the
Company in its role as Advisor under the Agreement. Chase Manhattan Mortgage
Corporation ("CMMC") sub-services the Company's Mortgage Loans on behalf of the
Bank (the "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 months,
more than 30 days past due in the payment of principal and interest; future
dispositions of Mortgage Loans to The Chase Manhattan Corporation ("CMC") or any
of its nonbank subsidiaries; and the modification of the Agreement or the
Servicing Agreements.
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 its
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 (as defined in the Certificate of Designation) 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
For the quarters ended September 30, 1998 and 1997, the Company reported net
interest income of approximately $19,458,000 and $20,250,000, respectively.
Interest income from residential and commercial mortgage loans was approximately
$17,011,000 and $1,746,000, respectively, for the quarter ended September 30,
1998 and approximately $17,994,000 and $2,286,000, respectively, for the quarter
ended September 30, 1997. The total average yield for the quarters ended
September 30, 1998 and 1997 was 7.6% and 7.8%, respectively. After deduction of
approximately $63,000 and $93,000 in advisory fees and other administrative
expenses, respectively, the Company reported net income of approximately
$19,302,000 for the quarter ended September 30, 1998. This compared to net
income of approximately $20,162,000 for the quarter ended September 30, 1997,
after deducting approximately $63,000 and $25,000 in advisory fees and other
administrative expenses, respectively. The Company reported basic
-11-
<PAGE>
Part I
Item 2. (continued)
earnings per common share of $14.26 and $15.76 for the quarters ended September
30, 1998 and 1997, respectively. The lower results for the third quarter of 1998
when compared to the third quarter of 1997 reflect the impact of lower interest
rates and higher prepayments of residential mortgage loans during the third
quarter of 1998.
For the nine months ended September 30, 1998 and 1997, the Company reported net
interest income of approximately $57,356,000 and $61,042,000, respectively.
Interest income from residential and commercial mortgage loans was approximately
$47,209,000 and $6,073,000, respectively, for the nine months ended September
30, 1998 and approximately $54,279,000 and $7,057,000, respectively, for the
nine months ended September 30, 1997. The total average yield for the nine
months ended September 30, 1998 and 1997 was 7.6% and 7.7%, respectively. After
deduction of approximately $188,000 and $308,000 in advisory fees and other
administrative expenses, respectively, the Company reported net income of
approximately $56,860,000 for the nine months ended September 30, 1998. This is
compared to net income of approximately $60,641,000 for the nine months ended
September 30, 1997, after deducting approximately $188,000 and $213,000 in
advisory fees and other administrative expenses, respectively. The Company
reported basic earnings per common share of $40.96 and $47.56 for the nine
months ended September 30, 1998 and 1997, respectively. The lower results for
the nine months ended 1998 when compared with the same period in 1997 reflect
the impact of lower interest rates and higher prepayments of residential
mortgage loans, primarily during the second and third quarters of 1998.
The Company paid dividends on the Series A Preferred Shares of $11,137,500 for
each of the quarters ended September 30, 1998 and 1997, and $33,412,500 for each
of the nine months ended September 30, 1998 and 1997. As of this date, all
dividend payments on Series A Preferred Shares are current. For the nine months
ended September 30, 1998, the Company paid Common Stock dividends of
approximately $22,965,000. Dividends on the Common Stock are paid to the Bank
when, as and if declared by the Board of Directors of the Company out of funds
legally available therefor. The Company expects to pay Common Stock dividends at
least annually in amounts necessary to continue to preserve its status as a real
estate investment trust ("REIT") under the Code.
MORTGAGE LOANS
Mortgage Loans consist of both residential and commercial mortgage loans. At
September 30, 1998, residential mortgage loans in the portfolio consisted of
six-month adjustable rate mortgages ("ARMs"); one-year ARMs; three-year,
five-year, seven-year, and ten-year fixed rate loans with an automatic
conversion to one-year ARMs; three-year fixed rate loans with an automatic
conversion to three-year and six-month ARMs; and fixed rate loans. The
commercial mortgage loans consist of fixed and variable rate loans, a majority
of which have balloon payments. From inception through March 31, 1998, the
Company maintained approximately 90% of its mortgage loan portfolio in
residential mortgage loans and approximately 10% of its portfolio in commercial
mortgage loans. At September 30, 1998, the mortgage loan portfolio consisted of
approximately 92% residential mortgage loans and 8% commercial mortgage loans.
These ratios will continue to change over time as the Company expects maturing
and prepaying commercial loans to be replaced by residential mortgage loans. All
Mortgage Loans were purchased from the Bank or its affiliates. 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.
For the quarters ended September 30, 1998 and 1997, the Company purchased
Mortgage Loans having an outstanding principal balance of approximately
$174,316,000 and $50,488,000, respectively, from affiliates of the Bank. In
addition, for the quarters ended September 30, 1998 and 1997, the Company
received approximately $172,484,000 and $83,021,000, respectively, of principal
payments on its portfolio from the Servicer (and Sub-Servicer). The increase in
mortgage loans purchased and principal payments received for the third quarter
of 1998 when compared to the third quarter of 1997 reflect the impact of lower
interest rates and higher prepayments of residential mortgage loans during the
third quarter of 1998.
For the nine months ended September 30, 1998 and 1997, the Company purchased
Mortgage Loans having an outstanding principal balance of approximately
$484,783,000 and $160,210,000, respectively, from affiliates of the Bank. In
addition, for the nine months ended September 30, 1998 and 1997, the Company
received approximately $432,724,000 and $180,805,000, respectively, of principal
payments on its portfolio from the Servicer (and Sub-
-12-
<PAGE>
Part I
Item 2. (continued)
Servicer). The increase in mortgage loans purchased and principal payments
received for the nine months ended 1998 when compared with the same period in
1997 reflect the impact of lower interest rates and higher prepayments of
residential mortgage loans, primarily during the second and third quarters of
1998.
The following table reflects the composition of interest-earning assets as a
percentage of total interest-earning assets:
Interest-Earning Asset Mix At September 30, 1998 At December 31, 1997
(in thousands) Amount Percent Amount Percent
- --------------------------------------------------------------------------------
Residential Mortgage Loans $ 956,608 92.4% $ 889,696 90.3%
Commercial Mortgage Loans 78,933 7.6% 95,372 9.7%
------------- ----- ---------- -----
Total Interest-Earning Assets $ 1,035,541 100% $ 985,068 100%
============= ===== ========== =====
- -------------------------------------------------------------------------------
For a further discussion on the Company's acquisition and disposition policies
for Mortgage Loans, reference is made to Note 2 of the Company's 1997 Annual
Report.
At September 30, 1998, there were approximately $321,000 of nonaccruing
residential mortgage loans compared with $3,330,000 at December 31, 1997. At
September 30, 1998 there were approximately $337,000 of nonaccruing commercial
mortgage loans compared to none at December 31, 1997. At September 30, 1998 and
December 31,1997, nonaccruing loans represented .06% and .34%, respectively, of
the total loan portfolio. For the quarter ended September 30, 1998, there were
no nonaccrual loans sold. For the nine months ended September 30, 1998, the
Company sold approximately $2,488,000 of nonaccruing residential mortgage loans
to a wholly-owned subsidiary of The Chase Manhattan Corporation and an
unaffiliated third party.
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, 1998 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, and 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 periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Allowance for Credit Losses 9/30/98 9/30/97 9/30/98 9/30/97
(in thousands)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Allowance at Beginning of Period $ 3,555 $ 3,379 $ 3,468 $ 3,150
Acquired Allowance 295 100 822 329
Provision for Losses 0 0 0 0
Charge-Offs 0 0 (78) 0
Recoveries 0 0 0 0
Sale of Loans 0 (111) (362) (111)
------- ------- ------- ------
Total Allowance at End of Period $ 3,850 $ 3,368 $ 3,850 $ 3,368
======= ======= ======= =======
</TABLE>
At September 30, 1998 and 1997, the Company's allowance for credit losses as a
percentage of total loans was .37% and .32%, respectively.
-13-
<PAGE>
Part I
Item 2. (continued)
INTEREST RATE RISK
The Company's income consists primarily of interest payments on Mortgage Loans.
Currently, the Company does not use any derivative products to manage its
interest rate risk. If there is a decline in market interest rates, the Company
may experience a reduction in interest income on its Mortgage Loans and a
corresponding decrease in funds available to be distributed to its shareholders.
The reduction in interest income may result from downward adjustments of the
indices upon which the interest rates on ARM mortgage loans are based and from
prepayments of mortgage loans with fixed interest rates, resulting in
reinvestment of the proceeds in lower-yielding mortgage loans. There can be no
assurance that an interest rate environment in which there is a significant
decline in interest rates over an extended period of time 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 borrowers 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, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
Geographical Breakout September 30, 1998 December 31, 1997
(in thousands) Amount Percent Amount Percent
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Residential Mortgage Loans:
California $ 402,752 38.9% $ 444,078 5.1%
New York 50,390 4.9% 66,972 6.8%
Florida 48,542 4.7% 50,559 5.1%
Colorado 56,467 5.4% - -
Other States (no State has more than 4%
of total loans) 398,457 38.5% 328,087 33.3%
---------- ----- ---------- -----
Total Residential Mortgage Loans 956,608 92.4% 889,696 90.3%
---------- ----- ---------- -----
Commercial Mortgage Loans:
New York Metropolitan Tri-State Area 75,034 7.2% 91,260 9.3%
Other States (no State has more than 3%
of total loans) 3,899 0.4% 4,112 0.4%
---------- ----- ----------- -----
Total Commercial Mortgage Loans 78,933 7.6% 95,372 9.7%
---------- ----- ----------- -----
Total $1,035,541 100% $ 985,068 100%
=========== ===== =========== ====
</TABLE>
At September 30, 1998, approximately 38.9% of the Company's total Mortgage Loan
portfolio consisted of 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, at such date, the majority of the commercial mortgage properties
underlying the Company's commercial mortgage loans were 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>
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.
The Company's principal liquidity needs are to maintain the current portfolio
size through the acquisition of additional Mortgage Loans as Mortgage Loans
currently in the portfolio mature, prepay or are sold, and to pay dividends on
the Series A Preferred Shares. The acquisition of additional Mortgage Loans is
intended to be funded with the proceeds obtained from the sale or repayment of
principal balances by individual borrowers. The Company does not have and does
not anticipate having any material capital expenditures.
For further discussion on liquidity risk management, reference is made to page 9
of the Company's 1997 Annual Report.
OTHER MATTERS
As of September 30, 1998, 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 that:
o its Qualified REIT Assets, as defined in the Code, are 100% of its total
assets, as compared to the federal tax requirement that at least 75% of
its total assets must be Qualified REIT assets.
o 90% of its revenues qualify for the 75% source of income test and 100% of
its revenues qualify for the 95% source of income test under the REIT
rules.
o none of its revenues were subject to the 30% income limitation under the
REIT rules.
The Company also met all REIT requirements regarding the ownership of its common
and preferred stocks and anticipates meeting the 1998 annual distribution and
administrative requirements.
-15-
<PAGE>
<TABLE>
<CAPTION>
CHASE PREFERRED CAPITAL CORPORATION
AVERAGE BALANCE SHEET
Three Months Ended September 30,
(in thousands, except per share data)
(Unaudited)
1998 Rate 1997 Rate
Balance Interest (Annualized) Balance Interest (Annualized)
------- -------- ------------ ------- -------- ------------
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Residential Mortgage Loans $ 896,559 $ 17,011 7.6% $ 942,501 $ 17,994 7.6%
Commercial Mortgage Loans 84,232 1,746 8.3% 100,076 2,286 9.1%
Cash 89,123 1,371 6.2% 49,604 624 5.0%
----------- ----------- ----- ----------- ----------- -----
TOTAL INTEREST-EARNING ASSETS 1,069,914 20,128 7.5% 1,092,181 20,904 7.7%
----------- ----------- ----- ----------- ----------- -----
Allowance for Credit Losses (3,577) (3,355)
Due from Affiliates 56,219 26,984
Accrued Interest Receivable 6,551 6,788
----------- -----------
TOTAL ASSETS $ 1,129,107 $ 1,122,598
=========== ===========
LIABILITIES:
Accounts Payable $ 2,924 $ 4,206
Due to Affiliates 3,941 2,835
----------- -----------
TOTAL LIABILITIES 6,865 7,041
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock, Par Value $25 Per Share;
50,000,000 Shares Authorized,
22,000,000 Issued and Outstanding 550,000 550,000
Common Stock, Par Value $300 Per Share;
5,000,000 Shares Authorized, 572,500
Shares Issued and Outstanding 171,750 171,750
Capital Surplus 381,637 381,637
Retained Earnings 18,855 12,170
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,122,242 1,115,557
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 1,129,107 $ 1,122,598
=========== ===========
</TABLE>
-16-
<PAGE>
<TABLE>
<CAPTION>
CHASE PREFERRED CAPITAL CORPORATION
AVERAGE BALANCE SHEET
Nine Months Ended September 30,
(in thousands, except per share data)
(Unaudited)
1998 Rate 1997 Rate
Balance Interest (Annualized) Balance Interest (Annualized)
------- -------- ------------ ------- -------- ------------
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Residential Mortgage Loans $ 847,840 $ 47,209 7.4% $ 955,544 $ 54,279 7.6%
Commercial Mortgage Loans 89,524 6,073 9.0% 100,836 7,057 9.3%
Cash 145,318 5,902 5.4% 43,858 1,696 5.2%
----------- ----------- --- ----------- ----------- ------------
TOTAL INTEREST-EARNING ASSETS 1,082,682 59,184 7.3% 1,100,238 63,032 7.6%
----------- ----------- --- ----------- ----------- ------------
Allowance for Credit Losses (3,541) (3,271)
Due from Affiliates 46,356 15,251
Accrued Interest Receivable 6,255 6,462
----------- -----------
TOTAL ASSETS $ 1,131,752 $ 1,118,680
=========== ===========
LIABILITIES:
Accounts Payable $ 3,315 $ 525
Due to Affiliates 3,570 344
----------- -----------
TOTAL LIABILITIES 6,885 869
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock, Par Value $25 Per Share;
50,000,000 Shares Authorized,
22,000,000 Issued and Outstanding 550,000 550,000
Common Stock, Par Value $300 Per Share;
5,000,000 Shares Authorized, 572,500
Shares Issued and Outstanding 171,750 171,750
Capital Surplus 381,637 381,637
Retained Earnings 21,480 14,424
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 1,124,867 1,117,811
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 1,131,752 $ 1,118,680
=========== ============
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
CHASE PREFERRED CAPITAL CORPORATION
QUARTERLY FINANCIAL INFORMATION
(in thousands, except per share data)
(Unaudited)
1998 1997
----------------------------------- ---------------------------------------------
Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter
INTEREST INCOME:
<S> <C> <C> <C> <C> <C> <C> <C>
Residential Mortgage Loans $ 17,011 $ 14,446 $ 15,752 $ 16,511 $ 17,994 $ 18,619 $ 17,666
Commercial Mortgage Loans 1,746 2,141 2,186 2,334 2,286 2,385 2,386
Interest on Overnight Investments 1,371 2,668 1,863 1,064 624 383 689
---------- ---------- ---------- --------- -------- --------- ---------
20,128 19,255 19,801 19,909 20,904 21,387 20,741
Less: Servicing Fees (670) (559) (599) (643) (654) (671) (665)
---------- ---------- ---------- --------- --------- --------- ---------
Net Interest Income 19,458 18,696 19,202 19,266 20,250 20,716 20,076
---------- ---------- ---------- --------- --------- --------- ---------
NON INTEREST EXPENSE:
Advisory Fees 63 62 63 62 63 63 62
Other Administrative Expenses 93 92 123 66 25 98 90
---------- ---------- ---------- --------- --------- --------- ---------
Total Noninterest Expense 156 154 186 128 88 161 152
---------- ---------- ---------- --------- --------- --------- ---------
NET INCOME $ 19,302 $ 18,542 $ 19,016 $ 19,138 $ 20,162 $ 20,555 $ 19,924
========== ========== ========= = =========== ========= ========== =========
NET INCOME APPLICABLE TO COMMON
SHARES $ 8,164 $ 7,404 $ 7,879 $ 8,001 $ 9,024 $ 9,417 $ 8,787
========== ========== ========== ========= ========= ========= =========
NET INCOME PER COMMON SHARE $ 14.26 $ 12.93 $ 13.76 $ 13.98 $ 15.76 $ 16.45 $ 15.35
========== ========== ========== ========= ========= ========= =========
</TABLE>
-18-
<PAGE>
Part II - OTHER INFORMATION
Item 6. Exhibits and Current Reports on Form 8-K
- ------------------------------------------------
(A) Exhibits:
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.
(B) Reports on Form 8-K: None
-19-
<PAGE>
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 16, 1998 By /s/ Louis M. Morrell
------------------- ------------------------------
Louis M. Morrell
Treasurer
Part II
Item 6. (continued)
EXHIBIT 11
CHASE PREFERRED CAPITAL CORPORATION
Computation of net income per common share
------------------------------------------
(in thousands, except per share amounts)
(Unaudited)
Net income for basic 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 shares of common stock outstanding during the period.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Earnings:
<S> <C> <C> <C> <C>
Net Income $ 19,302 $ 20,162 $ 56,860 $ 60,641
Less: Preferred Stock Dividend Requirements 11,138 11,138 33,413 33,413
----------- --------- --------- -----------
Net Income Applicable to Common Stock $ 8,164 $ 9,024 $ 23,447 $ 27,228
----------- --------- --------- -----------
Shares:
Weighted Average Number of Common Shares
Outstanding 572,500 572,500 572,500 572,500
Net Income Per Common Share $ 14.26 $ 15.76 $ 40.96 $ 47.56
=========== ========== ======== ===========
</TABLE>
-20-
Part II
Item 6. (continued)
EXHIBIT 12(a)
CHASE PREFERRED CAPITAL CORPORATION
Computation of ratio of earnings to fixed charges
-------------------------------------------------
(in thousands, except ratios)
(Unaudited)
Nine Months Ended
September 30, 1998
Net income $ 56,860
-----------
Fixed charges:
Advisory fees 188
-----------
Total fixed charges 188
-----------
Earnings before fixed charges $ 57,048
===========
Fixed charges, as above $ 188
===========
Ratio of earnings to fixed charges 303.45
===========
-21-
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
(in thousands, except ratio)
(Unaudited)
Nine Months Ended
September 30, 1998
Net income $ 56,860
-----------
Fixed charges:
Advisory fees 188
Total fixed charges 188
Earnings before fixed charges $ 57,048
===========
Fixed charges, as above $ 188
Preferred stock dividend requirements 33,413
Fixed charges including preferred stock dividends $ 33,591
===========
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.70
-22-
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001018450
<NAME> CHASE PREFERRED CAPITAL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> UNITED STATES DOLLAR
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 36,088
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,035,541
<ALLOWANCE> 3,850
<TOTAL-ASSETS> 1,123,700
<DEPOSITS> 0
<SHORT-TERM> 3,288
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
550,000
<COMMON> 171,750
<OTHER-SE> 398,662
<TOTAL-LIABILITIES-AND-EQUITY> 1,123,700
<INTEREST-LOAN> 53,282
<INTEREST-INVEST> 0
<INTEREST-OTHER> 5,902
<INTEREST-TOTAL> 59,184
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 1,828
<INTEREST-INCOME-NET> 57,356
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 496
<INCOME-PRETAX> 56,860
<INCOME-PRE-EXTRAORDINARY> 56,860
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,860
<EPS-PRIMARY> 40.96
<EPS-DILUTED> 40.96
<YIELD-ACTUAL> 7.60
<LOANS-NON> 321
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,468
<CHARGE-OFFS> 78
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 3,850
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
