SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended: March 31, 1999 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, N.Y. 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, $171,500,000 Par Value 1
- --------------------------------------------------------------------------------
Number of shares outstanding of each of the issuer's classes common stock on
March 31, 1999.
<PAGE>
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FORM 10-Q INDEX
Part I Page
- ------ ----
Item 1. Financial Statements - Chase Preferred Capital Corporation:
Balance Sheet at March 31, 1999 and December 31, 1998. 3
Statement of Income for the Three Months Ended March 31, 1999
and 1998. 4
Statement of Changes in Stockholders' Equity for the Three
Months Ended March 31, 1999 and 1998. 5
Statement of Cash Flows for the Three Months Ended March 31,
1999 and 1998. 6
Notes to Financial Statements. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Part II
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Item 6. Exhibits and Current Reports on Form 8-K. 17
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-2-
<PAGE>
Part I
Item 1.
CHASE PREFERRED CAPITAL CORPORATION
BALANCE SHEET
(in thousands, except per share data)
March 31, 1999 December 31, 1998
(Unaudited)
ASSETS:
Residential Mortgage Loans $ 954,129 $ 944,012
Commercial Mortgage Loans 73,143 77,356
------------- ------------
1,027,272 1,021,368
Less: Allowance for Loan Losses (4,418) (4,120)
------------- ------------
1,022,854 1,017,248
Cash 16,334 25,215
Due from Affiliates 72,252 71,140
Accrued Interest Receivable 7,272 7,703
------------- ------------
TOTAL ASSETS $ 1,118,712 $ 1,121,306
============= ============
LIABILITIES:
Accounts Payable $ 388 $ 432
Due to Affiliates 0 0
------------- ------------
TOTAL LIABILITIES 388 432
------------- ------------
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 $171,750,000
per share, one share authorized,
issued and outstanding 171,750 171,750
Capital Surplus 381,637 381,637
Retained Earnings 14,937 17,487
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,118,324 1,120,874
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 1,118,712 $1,121,306
============= =============
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 March 31,
(in thousands, except per share data)
(Unaudited)
1999 1998
INTEREST INCOME:
Residential Mortgage Loans $ 15,331 $ 15,752
Commercial Mortgage Loans 1,726 2,186
Interest on Overnight Investments 868 1,863
-------------- -------------
17,925 19,801
Less: Servicing Fees (634) (599)
-------------- -------------
Net Interest Income 17,291 19,202
-------------- -------------
NON INTEREST EXPENSE:
Advisory Fees 63 63
Other Administrative Expenses 81 123
-------------- -------------
Total Noninterest Expense 144 186
-------------- -------------
NET INCOME $ 17,147 $ 19,016
============== =============
NET INCOME APPLICABLE TO COMMON SHARE $ 6,010 $ 7,879
============== =============
NET INCOME PER COMMON SHARE $ 6,010 $ 7,879
============== =============
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 CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended March 31,
(in thousands)
(Unaudited)
1999 1998
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 17,487 16,543
Net Income 17,147 19,016
Common Dividends (8,560) 0
Preferred Dividends (11,137) (11,137)
-------------- -------------
Balance at End of Period 14,937 24,422
============== =============
TOTAL STOCKHOLDERS' EQUITY $ 1,118,324 $ 1,127,809
============== =============
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 CASH FLOWS
Three Months Ended March 31,
(in thousands)
(Unaudited)
1999 1998
OPERATING ACTIVITIES:
Net Income $ 17,147 $ 19,016
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Net Change In:
Due From Affiliates (1,112) (16,629)
Accrued Interest Receivable (321) 759
Accounts Payable (44) 0
Due to Affiliates 0 1
----------- ----------
Net Cash Provided by Operating Activities 15,670 3,147
----------- ----------
INVESTING ACTIVITIES:
Purchase of Mortgage Loans Net of Reserve (176,129) (59,806)
Principal Payments Received 172,027 124,109
Purchase of Accrued Interest Receivable (752) (303)
----------- ----------
Net Cash Provided (Used) by Investing Activities (4,854) 64,000
----------- ----------
FINANCING ACTIVITIES:
Dividends Paid (19,697) (11,137)
----------- ----------
Net Cash Used by Financing Activities (19,697) (11,137)
----------- ----------
NET INCREASE (DECREASE) IN CASH (8,881) 56,010
CASH AT BEGINNING OF PERIOD 25,215 93,919
----------- ----------
CASH AT END OF PERIOD $ 16,334 $ 149,929
=========== ==========
The Notes to Financial Statements are an integral part of these Statements.
-6-
<PAGE>
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. The Company began operating in 1996, upon
completion of an initial public offering of 22,000,000 shares of its 8.10%
Cumulative Preferred Stock, Series A, $25 par value per share (the "Series A
Preferred Shares"), which are currently traded on the New York Stock Exchange.
The Company used the net proceeds of that offering (after payment of offering
expenses), together with capital invested by the Bank, to purchase a 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.
On December 29, 1998, the Bank, as sole common stockholder, approved an
amendment to the Company's Certificate of Incorporation that reduced the
Company's authorized Common Stock from 5,000,000 shares to one share and
recapitalized the outstanding Common Stock from 572,500 shares having a par
value of $300 per share ($171,750,000 in the aggregate) to one share having a
par value of $171,750,000. All references to numbers of shares of common stock,
per common share amounts and common stock par values have been restated to
reflect the effects of the amendment.
The accounting and financial reporting policies of the Company conform to
generally accepted accounting principles and prevailing industry practices. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period.
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, 1998 (the "1998 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 Advisory Agreement.
The Company also entered into two servicing agreements with the Bank for the
servicing of all the commercial and residential mortgage loans. Pursuant to each
servicing agreement ("Servicing Agreement"), the Bank ("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
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" and "sub-servicer"), a wholly-owned
subsidiary of Chase Manhattan Bank USA, National Association, an indirect
wholly-owned subsidiary of The Chase Manhattan Corporation ("CMC").
For the quarters ended March 31, 1999 and 1998, aggregate advisory fees and
servicing fees totaled approximately $697,000 and $662,000, respectively.
-7-
<PAGE>
In its capacity as sub-servicer, CMMC owed the Company approximately
$72,252,000, and $71,140,000 at March 31, 1999 and December 31, 1998,
respectively, primarily consisting of mortgage loan payments received on behalf
of the Company. Pursuant to the terms of the Servicing Agreement and
Sub-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 amounted to
approximately $868,000 and $1,863,000 for the quarters ended March 31, 1999 and
1998, 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 1998 Annual Report.
Mortgage Loans:
The book value and fair value of Mortgage Loans at March 31, 1999 and December
31, 1998 were as follows (in thousands):
3/31/99 12/31/98
Book Value Fair Value Book Value Fair Value
Residential mortgage loans $ 954,129 $ 965,381 $ 944,012 $ 957,395
Commercial mortgage loans 73,143 76,371 77,356 82,763
Allowance for loan losses (4,418) (4,418) (4,120) (4,120)
---------- ---------- ---------- ----------
Mortgage Loans, net of
allowance for loan losses $1,022,854 $1,037,334 $1,017,248 $1,036,038
Assets and liabilities for 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.
-8-
<PAGE>
Part I
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
CHASE PREFERRED CAPITAL CORPORATION
QUARTERLY FINANCIAL HIGHLIGHTS
Three Months Ended March 31,
(in thousands, except shares outstanding and ratio data)
(Unaudited)
1999 1998
INCOME STATEMENT:
Interest Income $ 17,925 $ 19,801
Net Interest Income 17,291 19,202
Net Income 17,147 19,016
Net Income Applicable to Common Share 6,010 7,879
Income Per Common Share $ 6,010 $ 7,879
BALANCE SHEET:
Mortgage Loans $ 1,027,272 $ 920,869
Total Assets 1,118,712 1,131,044
Preferred Stock Outstanding 550,000 550,000
Total Stockholders' Equity $ 1,118,324 $ 1,127,809
OTHER DATA:
Dividends Paid on Preferred Shares $ 11,137 $ 11,137
Dividends Paid on Common Share $ 8,560 $ 0
Number of Preferred Shares Outstanding (a) 22,000,000 22,000,000
Number of Common Shares Outstanding 1 1
Average Yield on Mortgage Loans 7.1% 7.5%
- ----------
(a) All common share amounts have been restated to reflect the change,
effected on December 29, 1998, of the Company's outstanding Common Stock
from 572,500 shares, par value $300 per share, to one share, par value
$171,750,000 per share.
================================================================================
-9-
<PAGE>
Part 1
Item 2. (continued)
Certain forward-looking statements contained in this Form 10-Q are subject to
risks and uncertainties. The Company's actual results may differ materially from
those included in these forward-looking statements. Reference is made to the
Company's reports filed with the Securities and Exchange Commission, in
particular the 1998 Annual Report, for a discussion of factors that may cause
such differences to occur.
================================================================================
OVERVIEW
================================================================================
The principal business of the Company is to acquire, hold and manage Mortgage
Loans that will generate net income for distribution to stockholders. The
Company currently intends 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. 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 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.
The Company began operations in 1996 upon completion of an initial public
offering of 22,000,000 Series A Preferred Shares. The Series A Preferred Shares
are traded on the New York Stock Exchange. The Company's Common Stock is held
solely by the Bank.
The Bank administers the day-to-day activities of the Company in its role as
Advisor under the Agreement. CMMC sub-services the Company's Mortgage Loans on
behalf of the Servicer under each of the Servicing Agreements.
The Bank and its affiliates may have interests that 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 CMC or any of its nonbank subsidiaries; and
the modification of the Agreement or the Servicing Agreements.
The Company intends that any agreements and transactions between the Company, on
the one hand, and CMC, the Bank or their affiliates, on the other hand, will be
fair to all parties and consistent with market terms. 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 those 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 March 31, 1999 and 1998, the Company reported net
interest income of approximately $17,291,000 and $19,202,000, respectively.
Interest income from residential and commercial mortgage loans was approximately
$15,331,000 and $1,726,000, respectively, for the quarter ended March 31, 1999
and $15,752,000 and $2,186,000, respectively, for the quarter ended March 31,
1998. The total average yield for the quarters ended March 31, 1999 and 1998
were 7.1% and 7.5%, respectively. After deduction of approximately $63,000 and
$81,000 in advisory fees and other administrative expenses, respectively, the
Company reported net income of approximately $17,147,000 for the quarter ended
March 31, 1999. This is compared to net income of approximately $19,016,000 for
the quarter ended March 31, 1998, after deducting approximately $63,000 and
$123,000 in advisory fees and other administrative expenses, respectively. The
lower results for the first quarter of 1999 compared to the first quarter of
1998 are primarily due to the lower interest rates as well as higher prepayments
of residential mortgage loans during the quarter ended March 31, 1999.
The Company reported basic earnings per share of $6,010,000 and $7,879,000 for
the quarters ended March 31, 1999 and 1998, respectively.
-10-
<PAGE>
The Company paid $11,137,000 in dividends on the Series A Preferred Shares for
the quarters ended March 31, 1999 and 1998. As of that date, all dividend
payments on Series A Preferred Shares were current. In addition, the Company
paid Common Stock dividends of approximately $8,560,000 during the quarter ended
March 31, 1999 compared with none for the quarter ended March 31, 1998.
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 Internal Revenue Code of 1986, as amended (the "Code").
MORTGAGE LOANS
At March 31, 1999, Mortgage Loans consist of both residential and commercial
mortgage loans. At that date, residential mortgage loans in the portfolio
consisted of treasury and prime rate adjustable 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. The Company's initial portfolio of Mortgage
Loans was 90% residential and 10% commercial. Over time, as commercial mortgage
loans have matured or prepaid, they have been replaced with residential mortgage
loans. At March 31, 1999, 92.9% of the Company's portfolio was comprised of
residential mortgage loans, with the balance consisting of commercial mortgage
loans, and, as commercial loans continue to prepay or mature, the proportion of
the Company's portfolio consisting of residential mortgage loans is expected to
increase.
For the quarters ended March 31, 1999 and 1998, the Company purchased Mortgage
Loans having an outstanding principal balance of approximately $176,427,000 and
$59,910,000, respectively, from the Bank and its affiliates. In addition, for
the quarters ended March 31, 1999 and 1998, the Company received approximately
$169,109,000 and $124,109,000, 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:
<TABLE>
<CAPTION>
Interest-Earning Asset Mix At March 31, 1999 At December 31, 1998
(in thousands) Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Residential Mortgage Loans $ 954,129 92.9% $ 944,012 92.4%
Commercial Mortgage Loans 73,143 7.1% 77,356 7.6%
-------------- -------- ------------- -------
Total Interest-Earning Assets $ 1,027,272 100% $ 1,021,368 100%
============== ======== ============= =======
- ------------------------------------------------------------------------------------------
</TABLE>
For further discussion on the Company's acquisition and disposition policies for
Mortgage Loans, reference is made to Note 2 of the Company's 1998 Annual Report.
At March 31, 1999 and December 31, 1998, there were no nonaccruing residential
or commercial mortgage loans. There were no sales of nonaccruing loans during
the quarters ended March 31, 1999 and 1998.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is available to absorb potential credit losses
from the entire Mortgage Loan portfolio. The Company deems its allowance for
loan losses as of March 31, 1999 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 loan losses.
-11-
<PAGE>
The accompanying table reflects the activity in the Company's allowance for loan
losses for the three months ended March 31, 1999 and 1998:
Allowance for Loan Losses March 31, 1999 March 31, 1998
(in thousands)
- -------------------------------------------------------------------------------
Total allowance at beginning of period $ 4,120 $ 3,468
Acquired allowance 298 104
Provision for loan losses 0 0
Charge-offs 0 0
Recoveries 0 0
Sale of loans 0 0
------------- ------------
Total allowance at end of period $ 4,418 $ 3,572
============= ============
================================================================================
At March 31, 1999 and December 31, 1998, the Company's allowance for loan losses
as a percentage of total loans was .43% and .40%, 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.
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
March 31, 1999 and December 31, 1998:
Geographical Breakout
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
(in thousands) Amount Percent Amount Percent
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Residential Mortgage Loans:
California $ 351,329 34.2% $ 372,200 36.4%
Colorado 75,140 7.3% 63,278 6.2%
Other States (no State has more than 5%) 527,660 51.4% 508,534 49.8%
------------ -------- ----------- --------
Total Residential Mortgage Loans 954,129 92.9% 944,012 92.4%
------------ -------- ----------- --------
Commercial Mortgage Loans:
New York Metropolitan Tri-State Area 69,393 6.7% 73,523 7.2%
Other States (no State has more than 3%) 3,750 0.4% 3,833 0.4%
------------ -------- ----------- --------
Total Commercial Mortgage Loans 73,143 7.1% 77,356 7.6%
------------ -------- ----------- --------
Total Mortgage Loans $ 1,027,272 100% $ 1,021,368 100%
============ ======== =========== ========
</TABLE>
-12-
<PAGE>
At March 31, 1999, approximately 34.2% 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 or
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 Mortgage Loans.
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 Mortgage
Loans.
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 of Mortgage Loans 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
10 of the Company's 1998 Annual Report.
OPERATIONAL RISK
YEAR 2000. As noted above, the Company is a wholly-owned subsidiary of the Bank,
which is itself a wholly-owned subsidiary of CMC. The Company has no employees.
In accordance with agreements between the Company and the Bank, the Bank manages
all of the Company's operations, including the servicing of all of the Company's
Mortgage Loans. Year 2000 efforts for the Company are likewise being
coordinated, managed and monitored as part of the Year 2000 efforts of CMC by
CMC's Year 2000 Enterprise Program Office. The Program Office, which reports
directly to CMC's Executive Committee, together with 34 business area project
offices, coordinates, manages and monitors all aspects of CMC's Year 2000 effort
on a global basis, both technical- and business-related. In addition, a Year
2000 Core Team, consisting of senior managers from CMC's internal audit,
technology risk and control, financial management and control, the technology
infrastructure division, legal and the Program Office, provides independent
oversight of the process. The Core Team, which also reports directly to CMC's
Executive Committee, is charged with identifying key risks and ensuring
necessary management attention for timely resolution of project issues.
CMC's Year 2000 Program continues to evolve. On January 1, 1999, CMC established
a Year 2000 Business Risk Council, comprised of approximately 20 senior business
leaders -- line managers, risk managers and representatives of key staff
functions -- to identify potential Year 2000 business risks and to coordinate
planning and readiness efforts, contingency plans for Year 2000 and the
establishment of a Year 2000 command center structure and rapid response teams.
CMC's Year 2000 Program is tracked against a well-defined set of milestones. CMC
completed its inventory and assessment phases on schedule on September 30, 1997,
identifying affected hardware and software, prioritizing tasks and establishing
implementation plans. Approximately 3,900 business applications (approximately
1,000 of which are provided by third-party vendors) were identified by CMC as
requiring Year 2000 remediation. Of these software applications, approximately
99% were remediated by March 31, 1999. Of the 99% of software applications
remediated, 95% of such applications have also been tested to be Year
2000-compliant at March 31, 1999. CMC projects that 100% of its software
applications will be remediated by June 30, 1999.
As remediation of systems is completed, attention will be directed to trying to
ensure that software application systems that have been remediated, tested and
certified as Year 2000-compliant remain compliant through re-certification of
those systems. Another major focus of 1999 will be continued customer and
"street" (i.e., industry-wide) testing, which began in the third quarter of
1998. In addition, CMC is increasing its tracking and risk management of third
party providers.
-13-
<PAGE>
At March 31, 1998, CMC continues to estimate that its costs to address Year 2000
remain at approximately $363 million for years 1997 through and including 1999.
These costs include the costs of remediation, testing, third party assessment
and contingency planning and will be expensed as incurred. These costs do not
include approximately $33 million of capitalizable costs for Year 2000 compliant
equipment to be expensed beyond December 31, 1999. None of these costs will be
borne by the Company.
In its normal course of business, CMC manages many types of risk. CMC has
recognized that the risks presented by Year 2000 are unique given the pervasive
nature of the problem and the fact that there may be a higher likelihood that
Year 2000 risk may present itself in multiple, simultaneous impacts. Because of
this, CMC has adjusted and will continue to adjust its risk management processes
and contingency plans to take the most probable anticipated effects into
account. In this regard, CMC has begun its "event planning" for the Year 2000
with the goal of preventing or mitigating potential disruptions. CMC's Year 2000
event planning includes the creation of command centers; the establishment of
special rapid response technology teams; the scheduling of availability of key
personnel; additional training and testing activities; and the establishment of
rapid decision processes.
CMC's expectations about completion of its Year 2000 remediation and testing
efforts, the anticipated costs to complete the project and the anticipated
business, operational and financial risks to CMC and its subsidiaries, including
the Company, are subject to a number of uncertainties. CMC's estimates as to the
cost to prepare for the Year 2000 are based on numerous assumptions regarding
future events, including, among others, continued availability of trained
personnel, expectations regarding third party modification plans and the nature
and amount of testing that may be required. The operations or financial results
of CMC and its subsidiaries, including the Company, could be materially
adversely affected if vendors, service providers, customers or securities
exchanges are unable to successfully implement their Year 2000 plans and
continue operations; if CMC is unsuccessful in identifying or fixing all Year
2000 problems in its critical operations; or if CMC is unable to retain the
staff or third party consultants necessary to implement its technology plans at
currently projected costs and timetables.
OTHER MATTERS
As of March 31, 1999, 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 95% 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
Stock and the Series A Preferred Shares and anticipates meeting the 1998 annual
distribution and administrative requirements.
-14-
<PAGE>
Part I
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For information regarding interest rate risk, see the Interest Rate Risk section
on page 12.
CHASE PREFERRED CAPITAL CORPORATION
AVERAGE BALANCE SHEET
Three Months Ended March 31,
(in thousands, except share data)
(Unaudited)
<TABLE>
1999 1998
-------------------------------- -------------------------------------
Balance Interest Rate Balance Interest Rate
(Annualized) (Annualized)
<CAPTION>
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage loans $ 882,786 $ 15,331 6.9% $ 859,836 $ 15,752 7.3%
Commercial mortgage loans 76,468 1,726 9.0% 94,727 2,186 9.2%
Cash 107,672 868 3.2% 138,323 1,863 5.4%
----------- ---------- ---- ------------- ---------- ----
TOTAL INTEREST-EARNING ASSETS 1,066,926 17,925 6.7% 1,092,886 19,801 7.2%
----------- ---------- ---- ------------- ---------- ----
Allowance for credit losses (4,130) (3,474)
Due from affiliates 58,204 33,471
Accrued interest receivable 7,112 5,945
----------- -------------
TOTAL ASSETS $ 1,128,112 $ 1,128,828
=========== =============
LIABILITIES:
Accounts payable $ 4,207 4,079
Due to affiliates 0 2,681
---------- -------------
TOTAL LIABILITIES 4,207 6,760
---------- -------------
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 $171,750,000
per share, one share authorized,
issued and outstanding
171,750 171,750
Capital surplus 381,637 381,637
Retained earnings 20,518 18,681
----------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,123,905 1,112,068
----------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' $ 1,128,112 $ 1,128,828
EQUITY =========== =============
</TABLE>
-15-
<PAGE>
CHASE PREFERRED CAPITAL CORPORATION
QUARTERLY FINANCIAL INFORMATION
(in thousands)
<TABLE>
1999 1998
-------------- --------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
INTEREST INCOME:
<CAPTION>
<S> <C> <C> <C> <C> <C>
Residential Mortgage Loans $ 15,331 $ 17,221 $ 17,011 $ 14,446 $ 15,752
Commercial Mortgage Loans 1,726 1,836 1,746 2,141 2,186
Interest on Overnight Investments 868 1,187 1,371 2,668 1,863
--------- ---------- ---------- ---------- ----------
17,925 20,244 20,128 19,255 19,801
Less: Servicing Fees (634) (421) (670) (559) (599)
--------- ---------- ---------- ---------- ----------
Net Interest Income 17,291 19,823 19,458 18,696 19,202
--------- ---------- ---------- ---------- ----------
NON INTEREST EXPENSE:
Advisory Fees 63 63 63 62 63
Other Administrative Expenses 81 61 93 92 123
--------- ---------- ---------- ---------- ----------
Total Noninterest Expense 144 124 156 154 186
--------- ---------- ---------- ---------- ----------
NET INCOME $ 17,147 $ 19,699 $ 19,302 $ 18,542 $ 19,016
========= ========== ========== ========== ==========
NET INCOME APPLICABLE TO COMMON
SHARE $ 6,010 $ 8,562 $ 8,164 $ 7,404 $ 7,879
========== ========== ========== ========== ==========
NET INCOME PER COMMON SHARE (a) $ 6,010 $ 8,562 $ 8,164 $ 7,404 $ 7,879
========== ========== ========== ========== ==========
</TABLE>
- ----------
(a) All per share amounts have been restated to reflect the change, effected
on December 29, 1998, of the Company's outstanding Common Stock from
572,500 shares, par value $300 per share, to one share, par value
$171,750,000 per share.
-16-
<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: The Company filed one report on Form 8-K during
the quarter ended March 31, 1999 as follows:
Form 8-K dated February 5, 1999: The Company disclosed information
regarding the Year 2000 efforts of CMC on behalf of CMC and its
subsidiaries, including the Company.
-17-
<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: May 14, 1999 By: /s/Louis M. Morrell
-------------------------------
Louis M. Morrell
Treasurer
EXHIBIT 11
CHASE PREFERRED CAPITAL CORPORATION
Computation of net income per share
Net income for basic earnings per share is 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 shares outstanding during the period.
Three Months Ended
March 31,
-------------------------------
1999 1998
(in thousands, except shares outstanding):
================================================================================
Earnings:
Net Income $ 17,147 $ 19,016
Less: Preferred Stock Dividend Requirements 11,137 11,137
----------- -----------
Net Income Applicable to Common Stock $ 6,010 $ 7,879
----------- -----------
Shares:
Weighted Average Number of Common Shares
Outstanding (a) 1 1
Net Income Per Share (a): $ 6,010 $ 7,879
=========== ===========
- ----------
(a) All common share and per share amounts have been restated to reflect the
change, effected December 29, 1998, of the Company's outstanding Common
Stock from 572,500 shares, par value $300 per share, to one share, par
value $171,750,000 per share.
-18-
EXHIBIT 12(a)
CHASE PREFERRED CAPITAL CORPORATION
Computation of ratio of earnings to fixed charges
Three Months Ended
March 31, 1999
(in thousands, except ratio):
================================================================================
Net income $ 17,147
-----------
Fixed charges:
Advisory fees 63
Total fixed charges 63
Earnings before fixed charges $ 17,210
===========
Fixed charges, as above $ 63
===========
Ratio of earnings to fixed charges 273.17
===========
- --------------------------------------------------------------------------------
-19-
EXHIBIT 12(b)
CHASE PREFERRED CAPITAL CORPORATION
Computation of ratio of earnings to fixed charges
and preferred stock dividend requirements
Three Months Ended
March 31, 1999
(in thousands, except ratio):
- -------------------------------------------------------------------------------
Net income $ 17,147
-----------
Fixed charges:
Advisory fees 63
Total fixed charges 63
Earnings before fixed charges $ 17,210
===========
Fixed charges, as above $ 63
Preferred stock dividend requirements 11,137
-----------
Fixed charges including preferred stock dividends $ 11,200
===========
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.54
===========
-20-
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001018450
<NAME> CHASE PREFERRED CAPITAL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> UNITED STATES DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 16,334
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,027,272
<ALLOWANCE> 4,418
<TOTAL-ASSETS> 1,118,712
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
550,000
<COMMON> 171,750
<OTHER-SE> 396,574
<TOTAL-LIABILITIES-AND-EQUITY> 1,118,712
<INTEREST-LOAN> 17,057
<INTEREST-INVEST> 0
<INTEREST-OTHER> 868
<INTEREST-TOTAL> 17,925
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 634
<INTEREST-INCOME-NET> 17,291
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 144
<INCOME-PRETAX> 17,147
<INCOME-PRE-EXTRAORDINARY> 17,147
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,147
<EPS-PRIMARY> 6,010
<EPS-DILUTED> 6,010
<YIELD-ACTUAL> 7.1
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,120
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 4,418
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
