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: June 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 lasses of common stock on
June 30, 1998.
<PAGE>
================================================================================
FORM 10-Q INDEX
Part I Page
- ------ ----
Item 1. Financial Statements - Chase Preferred Capital Corporation:
Balance Sheet at June 30, 1998 and December 31, 1997. 3
Statement of Income for the Three Months Ended June 30,
1998 and 1997. 4
Statement of Income for the Six Months Ended June 30,
1998 and 1997. 5
Statement of Changes in Stockholders' Equity for the Six
Months Ended June 30, 1998 and 1997. 6
Statement of Cash Flows for the Six Months Ended June 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 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Current Reports on Form 8-K. 19
================================================================================
-2-
<PAGE>
Part I
Item 1.
CHASE PREFERRED CAPITAL CORPORATION
BALANCE SHEET
(in thousands, except per share data)
June 30, 1998 December 31, 1997
(Unaudited)
ASSETS:
Residential Mortgage Loans $ 948,464 $ 889,696
Commercial Mortgage Loans 85,245 95,372
-------------- -------------
1,033,709 985,068
Less: Allowance for Credit Losses (3,555) (3,468)
-------------- -------------
1,030,154 981,600
Cash 39,257 93,919
Due from Affiliates 46,604 40,664
Accrued Interest Receivable 6,870 6,981
-------------- -------------
TOTAL ASSETS $ 1,122,885 $ 1,123,164
============== =============
LIABILITIES:
Accounts Payable $ 367 $ 367
Due to Affiliates 2,870 2,867
-------------- -------------
TOTAL LIABILITIES 3,237 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 16,261 16,543
--------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,119,648 1,119,930
--------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 1,122,885 $ 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 June 30,
(in thousands, except per share data)
(Unaudited)
1998 1997
INTEREST INCOME:
Residential Mortgage Loans $ 14,446 $ 18,619
Commercial Mortgage Loans 2,141 2,385
Interest on Overnight Investments 2,668 383
-------- --------
19,255 21,387
Less: Servicing Fees (559) (671)
-------- --------
Net Interest Income 18,696 20,716
-------- --------
NON INTEREST EXPENSE:
Advisory Fees 62 63
Other Administrative Expenses 92 98
-------- --------
Total Noninterest Expense 154 161
-------- --------
NET INCOME $ 18,542 $ 20,555
======== ========
NET INCOME APPLICABLE TO COMMON SHARES $ 7,404 $ 9,417
======== ========
NET INCOME PER COMMON SHARE $ 12.93 $ 16.45
======== ========
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
Six Months Ended June 30,
(in thousands, except per share data)
(Unaudited)
1998 1997
INTEREST INCOME:
Residential Mortgage Loans $ 30,198 $ 36,285
Commercial Mortgage Loans 4,327 4,771
Interest on Overnight Investments 4,531 1,072
-------- --------
39,056 42,128
Less: Servicing Fees (1,158) (1,336)
-------- --------
Net Interest Income 37,898 40,792
-------- --------
NON INTEREST EXPENSE:
Advisory Fees 125 125
Other Administrative Expenses 215 188
-------- --------
Total Noninterest Expense 340 313
-------- --------
NET INCOME $ 37,558 $ 40,479
======== ========
NET INCOME APPLICABLE TO COMMON SHARES $ 15,283 $ 18,204
======== ========
NET INCOME PER COMMON SHARE $ 26.69 $ 31.80
======== ========
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
Six Months Ended June 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 37,558 40,479
Common Dividends (15,565) (18,475)
Preferred Dividends (22,275) (22,275)
----------- -----------
Balance at End of Period 16,261 9,068
=========== ===========
TOTAL STOCKHOLDERS' EQUITY $ 1,119,648 $ 1,112,455
=========== ===========
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
Six Months Ended June 30,
(in thousands)
(Unaudited)
1998 1997
OPERATING ACTIVITIES:
Net Income $ 37,558 $ 40,479
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Net Change In:
Due From Affiliates (5,940) (1,774)
Accrued Interest Receivable 1,549 371
Accounts Payable 0 (63)
Due to Affiliates 3 2,620
--------- ---------
Net Cash Provided by Operating Activities 33,170 41,633
--------- ---------
INVESTING ACTIVITIES:
Purchase of Mortgage Loans Net of Reserve (309,940) (109,493)
Principal Payments Received 260,240 97,784
Purchase of Accrued Interest Receivable (1,438) (489)
Sale of Loans Net of Reserve 1,146 0
--------- ---------
Net Cash Used by Investing Activities (49,992) (12,198)
--------- ---------
FINANCING ACTIVITIES:
Dividends Paid (37,840) (40,750)
--------- ---------
Net Cash Used by Financing Activities (37,840) (40,750)
--------- ---------
NET DECREASE IN CASH (54,662) (11,315)
CASH AT BEGINNING OF PERIOD 93,919 31,091
--------- ---------
CASH AT END OF PERIOD $ 39,257 $ 19,776
========= =========
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.
For the quarters ended June 30, 1998 and 1997, advisory and servicing fees
totaled approximately $621,000 and $734,000, respectively. For the six months
ended June 30, 1998 and 1997, advisory and servicing fees totaled approximately
$1,283,000 and $1,461,000, respectively.
-8-
<PAGE>
Part I
Item 1. (Continued)
At June 30, 1998 and December 31, 1997, due from affiliates was approximately
$46,604,000 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 June 30, 1998 and 1997 amounted to approximately $2,668,000 and
$383,000, respectively. Interest income on these deposits for the six months
ended June 30, 1998 and 1997 amounted to approximately $4,531,000 and
$1,072,000, 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 June 30, 1998
and December 31, 1997 are as follows (in thousands):
June 30, 1998 December 31, 1997
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- --------- --------- ----------
Residential Mortgage Loans $ 948,464 $ 964,114 $ 889,696 $ 901,616
Commercial Mortgage Loans 85,245 90,846 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.
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)
<TABLE>
<CAPTION>
1998 1997 Six Months Ended
------------------------ ----------
Second First Second June 30,
Quarter Quarter Quarter 1998 1997
------- ------- ----------- -----------------------
INCOME STATEMENT:
<S> <C> <C> <C> <C> <C>
Interest Income $ 19,255 $ 19,801 $ 21,387 $ 39,056 $ 42,128
Net Interest Income 18,696 19,202 20,716 37,898 40,792
Net Income 18,542 19,016 20,555 37,558 40,479
Average Number of Common Shares Outstanding 572,500 572,500 572,500 572,500 572,500
Net Income Applicable to Common Shares 7,404 7,879 9,417 15,283 18,204
Income Per Common Share $ 12.93 $ 13.76 $ 16.45 $ 26.69 $ 31.80
BALANCE SHEET:
Mortgage Loans $ 1,033,709 $ 920,869 $ 1,071,919 $ 1,033,709 $ 1,071,919
Total Assets 1,122,885 1,131,044 1,115,684 1,122,885 1,115,684
Preferred Stock Outstanding 550,000 550,000 550,000 550,000 550,000
Total Stockholders' Equity $ 1,119,648 $ 1,127,809 $ 1,112,455 $ 1,119,648 $ 1,112,455
OTHER DATA:
Dividends Paid on Preferred Shares $ 11,138 $ 11,137 $ 11,138 $ 22,275 $ 22,275
Dividends Paid on Common Shares $ 15,565 $ 0 $ 18,475 $ 15,565 $ 18,475
Number of Preferred Shares Outstanding 22,000,000 22,000,000 22,000,000 22,000,000 22,000,000
Number of Common Shares Outstanding 572,500 572,500 572,500 572,500 572,500
Average Yield on Mortgage Loans 7.6% 7.5% 7.8% 7.5% 7.8%
</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 June 30, 1998 and 1997, the Company reported net interest
income of approximately $18,696,000 and $20,716,000, respectively. Interest
income from residential and commercial mortgage loans was approximately
$14,446,000 and $2,141,000, respectively, for the quarter ended June 30, 1998
and approximately $18,619,000 and $2,385,000, respectively, for the quarter
ended June 30, 1997. The total average yield for the quarters ended June 30,
1998 and 1997 was 7.6% and 7.8%, respectively. After deduction of approximately
$62,000 and $92,000 in advisory fees and other administrative expenses,
respectively, the Company reported net income of approximately $18,542,000 for
the quarter ended June 30, 1998. This compared to net income of approximately
$20,555,000 for the quarter ended June 30, 1997, after deducting approximately
$63,000 and $98,000 in advisory fees and other administrative expenses,
respectively. The Company reported basic earnings per share of $12.93 and $16.45
for the quarters ended June 30, 1998 and 1997, respectively. The lower results
for the second quarter of 1998 when compared to the second quarter of 1997
reflect the impact of lower interest rates and higher prepayments of residential
mortgage loans during the 1998 second quarter.
For the six months ended June 30, 1998 and 1997, the Company reported net
interest income of approximately $37,898,000 and $40,792,000, respectively.
Interest income from residential and commercial mortgage loans was approximately
$30,198,000 and $4,327,000, respectively, for the six months ended June 30, 1998
and approximately $36,285,000 and $4,771,000, respectively, for the six months
ended June 30, 1997. The total average yield for the six months ended June 30,
1998 and 1997 was 7.5% and 7.8%, respectively. After deduction of approximately
$125,000 and $215,000 in advisory fees and other administrative expenses,
-11-
<PAGE>
Part I
Item 2. (continued)
respectively, the Company reported net income of approximately $37,558,000 for
the six months ended June 30, 1998. This is compared to net income of
approximately $40,479,000 for the six months ended June 30, 1997, after
deducting approximately $125,000 and $188,000 in advisory fees and other
administrative expenses, respectively. The Company reported basic earnings per
share of $26.69 and $31.80 for the six months ended June 30, 1998 and 1997,
respectively. The lower results for the first half of 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 quarter
of 1998.
The Company paid $11,138,000 for each of the quarters ended June 30, 1998 and
1997 and $22,275,000 for each of the six months ended June 30, 1998 and 1997 in
dividends on the Series A Preferred Shares. As of this date, all dividend
payments on Series A Preferred Shares are current. For the six months ended June
30, 1998, the Company paid Common Stock dividends of approximately $15,565x,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
June 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 June 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 June 30, 1998 and 1997, the Company purchased Mortgage
Loans having an outstanding principal balance of approximately $250,557,000 and
$34,874,000, respectively, from affiliates of the Bank. In addition, for the
quarters ended June 30, 1998 and 1997, the Company received approximately
$136,131,000 and $60,907,000, respectively, of principal payments on its
portfolio from the Servicer (and Sub-Servicer).
For the six months ended June 30, 1998 and 1997, the Company purchased Mortgage
Loans having an outstanding principal balance of approximately $310,467,000 and
$109,722,000, respectively, from affiliates of the Bank. In addition, for the
six months ended June 30, 1998 and 1997, the Company received approximately
$260,240,000 and $97,784,000, respectively, of principal payments on its
portfolio from the Servicer (and Sub-Servicer).
The following table reflects the composition of interest-earning assets as a
percentage of total interest-earning assets:
Interest-Earning Asset Mix At June 30, 1998 At December 31, 1997
(in thousands) Amount Percent Amount Percent
- --------------------------------------------------------------------------------
Residential Mortgage Loans $ 948,464 91.8% $ 889,696 90.3%
Commercial Mortgage Loans 85,245 8.2% 95,372 9.7%
---------- ----- --------- -----
Total Interest-Earning Assets $1,033,709 100% $ 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 June 30, 1998, there were no nonaccruing residential mortgage loans compared
with $3,330,000 at December 31, 1997. At June 30, 1998, there were approximately
$350,000 of nonaccruing commercial mortgage loans compared with none at December
31, 1997. At June 30, 1998 and December 31,1997, nonaccruing loans represented
.03% and .34%, respectively, of the total loan portfolio. For the quarter and
six months ended June 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.
-12-
<PAGE>
Part I
Item 2. (continued)
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 June 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 Six Months Ended
Allowance for Credit Losses June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
(in thousands)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Allowance at Beginning of Period $ 3,572 $ 3,305 $ 3,468 $ 3,150
Acquired Allowance 423 74 527 229
Provision for Losses 0 0 0 0
Charge-Offs (78) 0 (78) 0
Recoveries 0 0 0 0
Sale of Loans (362) 0 (362) 0
------- ------- ------- -------
Total Allowance at End of Period $ 3,555 $ 3,379 $ 3,555 $ 3,379
======= ======= ======= =======
===============================================================================================================
</TABLE>
At June 30, 1998 and 1997, the Company's allowance for credit losses as a
percentage of total loans was .34% and .32%, respectively.
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
June 30, 1998 and December 31, 1997:
-13-
<PAGE>
Part I
Item 2. (continued)
<TABLE>
<CAPTION>
Geographical Breakout June 30, 1998 December 31, 1997
(in thousands) Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Residential Mortgage Loans:
California $ 415,721 40.3% $ 444,078 45.1%
New York 59,047 5.7% 66,972 6.8%
Florida 53,017 5.1% 50,559 5.1%
Colorado 52,121 5.0% -- --
Other States (no State has more than 4% of total loans) 368,558 35.7% 328,087 33.3%
------------ ----- ------------ -----
Total Residential Mortgage Loans 948,464 91.8% 889,696 90.3%
------------ ----- ------------ -----
Commercial Mortgage Loans:
New York Metropolitan Tri-State Area 81,274 7.8% 91,260 9.3%
Other States (no State has more than 3% of total loans) 3,971 .4% 4,112 0 .4%
------------ ------ ------------ -----
Total Commercial Mortgage Loans 85,245 8.2% 95,372 9.7%
------------ ------ ------------ -----
Total $ 1,033,709 100% $ 985,068 100%
============ ------ ============ ====
</TABLE>
At June 30, 1998, approximately 40.3% 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.
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.
-14-
<PAGE>
Part I
Item 2. (continued)
OTHER MATTERS
As of June 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, to be 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 86% 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 and 1997 annual
distribution and administrative requirements.
-15-
<PAGE>
CHASE PREFERRED CAPITAL CORPORATION
AVERAGE BALANCE SHEET
Three Months Ended June 30,
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Residential Mortgage Loans $ 786,721 $ 14,446 7.3% $ 974,170 $ 18,619 7.6%
Commercial Mortgage Loans 89,728 2,141 9.5% 101,831 2,385 9.4%
Cash 209,049 2,668 5.1% 31,865 383 4.8%
---------- ---------- ---- ---------- ---------- ----
TOTAL INTEREST-EARNING ASSETS 1,085,498 19,255 7.1% 1,107,866 21,387 7.7%
---------- ---------- ---- ---------- ---------- ----
Allowance for Credit Losses (3,571) (3,305)
Due from Affiliates 49,129 20,014
Accrued Interest Receivable 6,262 6,704
---------- -----------
TOTAL ASSETS $1,137,318 $ 1,131,279
========== ===========
LIABILITIES:
Accounts Payable $ 4,172 $ 4,153
Due to Affiliates 2,856 2,982
---------- -----------
TOTAL LIABILITIES 7,028 7,135
---------- -----------
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 26,903 20,757
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,130,290 1,124,144
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' $ 1,137,318 $ 1,131,279
=========== ===========
EQUITY
</TABLE>
-16-
<PAGE>
CHASE PREFERRED CAPITAL CORPORATION
AVERAGE BALANCE SHEET
Six Months Ended June 30,
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Residential Mortgage Loans $ 823,077 $ 30,198 7.3% $ 962,028 $ 36,285 7.5%
Commercial Mortgage Loans 92,214 4,327 9.4% 101,211 4,771 9.4%
Cash 173,881 4,531 5.2% 41,098 1,072 5.2%
------------ ---------- ---- ---------- --------- ----
TOTAL INTEREST-EARNING ASSETS 1,089,172 39,056 7.2% 1,104,337 42,128 7.6%
------------ ---------- ---- ---------- --------- ----
Allowance for Credit Losses (3,523) (3,229)
Due from Affiliates 41,343 18,180
Accrued Interest Receivable 6,104 6,296
------------ ----------
TOTAL ASSETS $ 1,133,096 $ 1,125,584
============ ===========
LIABILITIES:
Accounts Payable $ 4,079 $ 4,113
Due to Affiliates 2,815 2,067
------------ -----------
TOTAL LIABILITIES 6,894 6,180
------------ -----------
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 22,815 16,017
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 1,126,202 1,119,404
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' $ 1,133,096 $ 1,125,584
============ ===========
EQUITY
</TABLE>
-17-
<PAGE>
CHASE PREFERRED CAPITAL CORPORATION
QUARTERLY FINANCIAL INFORMATION
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---------------------------- -------------------------------------------------
Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter
INTEREST INCOME:
<S> <C> <C> <C> <C> <C> <C>
Residential Mortgage Loans $ 14,446 $ 15,752 $ 16,511 $ 17,994 $ 18,619 $ 17,666
Commercial Mortgage Loans 2,141 2,186 2,334 2,286 2,385 2,386
Interest on Overnight Investments 2,668 1,863 1,064 624 383 689
--------- --------- --------- --------- --------- ---------
19,255 19,801 19,909 20,904 21,387 20,741
Less: Servicing Fees (559) (599) (643) (654) (671) (665)
--------- --------- --------- --------- --------- ---------
Net Interest Income 18,696 19,202 19,266 20,250 20,716 20,076
--------- --------- --------- --------- --------- ---------
NON INTEREST EXPENSE:
Advisory Fees 62 63 62 63 63 62
Other Administrative Expenses 92 123 66 25 98 90
--------- --------- --------- --------- --------- ---------
Total Noninterest Expense 154 186 128 88 161 152
--------- --------- --------- --------- --------- ---------
NET INCOME $ 18,542 $ 19,016 $ 19,138 $ 20,162 $ 20,555 $ 19,924
========== ========= ========= ========= ========= =========
NET INCOME APPLICABLE TO COMMON
SHARES $ 7,404 $ 7,879 $ 8,001 $ 9,024 $ 9,417 $ 8,787
========= ========= ========= ========= ========= =========
NET INCOME PER COMMON SHARES $ 12.93 $ 13.76 $ 13.98 $ 15.76 $ 16.45 $ 15.35
========= ========= ========= ========= ========= =========
</TABLE>
-18-
<PAGE>
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On April 1, 1998, Deborah L. Duncan and Don B. Taggart resigned from the
Company's Board of Directors. On that day, the Bank, the holder of all
outstanding shares of Common Stock of the Company, by unanimous written consent,
elected the following persons as directors of the Company to serve until their
respective successors shall have been elected and qualified: Richard J. Boyle,
Dina Dublon, Thomas Jacob, William C. Langley, Louis M. Morrell, Joseph L.
Sclafani and Robert S. Strong.
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: August 14, 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 Six Months Ended
June 30, June 30,
--------------------- ------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------
Earnings:
<S> <C> <C> <C> <C>
Net Income $ 18,542 $ 20,555 $ 37,558 40,479
Less: Preferred Stock Dividend Requirements 11,138 11,138 22,275 22,275
----------- ----------- ----------- ---------
Net Income Applicable to Common Stock $ 7,404 $ 9,417 $ 15,283 $ 18,204
----------- ----------- ----------- ---------
Shares:
Weighted Average Number of Common Shares
Outstanding 572,500 572,500 572,500 572,500
Net Income Per Common Share: $ 12.93 $ 16.45 $ 26.69 $ 31.80
=========== =========== =========== =========
</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)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998
----------------
<S> <C>
Net income $ 37,558
-----------
Fixed charges:
Advisory fees 125
Total fixed charges 125
Earnings before fixed charges $ 37,683
===========
Fixed charges, as above $ 125
===========
Ratio of earnings to fixed charges 301.46
===========
================================================================================
</TABLE>
-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)
Six Months Ended
June 30, 1998
Net income $ 37,558
-----------
Fixed charges:
Advisory fees 125
-----------
Total fixed charges 125
-----------
Earnings before fixed charges $ 37,683
===========
Fixed charges, as above $ 125
Preferred stock dividend requirements 22,275
-----------
Fixed charges including preferred stock dividends $ 22,400
===========
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.68
===========
================================================================================
-22-
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001018450
<NAME> CHASE PREFERRED CAPITAL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> UNITED STATES DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 39,257
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,033,709
<ALLOWANCE> 3,555
<TOTAL-ASSETS> 1,122,885
<DEPOSITS> 0
<SHORT-TERM> 3,237
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
550,000
<COMMON> 171,750
<OTHER-SE> 397,898
<TOTAL-LIABILITIES-AND-EQUITY> 1,122,885
<INTEREST-LOAN> 34,525
<INTEREST-INVEST> 0
<INTEREST-OTHER> 4,531
<INTEREST-TOTAL> 39,056
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 1,158
<INTEREST-INCOME-NET> 37,898
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 340
<INCOME-PRETAX> 37,558
<INCOME-PRE-EXTRAORDINARY> 37,558
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,558
<EPS-PRIMARY> 26.69
<EPS-DILUTED> 26.69
<YIELD-ACTUAL> 7.50
<LOANS-NON> 350
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,468
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 3,555
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
