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, 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, 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, $171,500,000 Par Value 1
- ------------------------------------------------------------------------------
Number of shares outstanding of each of the issuer's classes of common stock on
June 30, 1999.
<PAGE>
FORM 10-Q INDEX
Part I Page
- ------ ----
Item 1.
Financial Statements - Chase Preferred Capital Corporation:
Balance Sheet at June 30, 1999 and December 31, 1998. 3
Statement of Income for the Three Months Ended
June 30, 1999 and 1998. 4
Statement of Income for the Six Months Ended
June 30, 1999 and 1998. 5
Statement of Changes in Stockholders' Equity for
the Six Months Ended June 30, 1999 and 1998. 6
Statement of Cash Flows for the Six Months Ended
June 30, 1999 and 1998. 7
Notes to Financial Statements. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II
- -------
Item 6. Exhibits and Current Reports on Form 8-K. 20
-2-
<PAGE>
Part I
Item 1.
CHASE PREFERRED CAPITAL CORPORATION
BALANCE SHEET
(in thousands, except share data)
June 30, 1999 December 31, 1998
(Unaudited)
ASSETS:
Residential Mortgage Loans $ 993,554 $ 944,012
Commercial Mortgage Loans 65,462 77,356
-------------- -------------
1,059,016 1,021,368
Less: Allowance for Loan Losses (4,715) (4,120)
-------------- -------------
1,054,301 1,017,248
Cash 14,913 25,215
Due from Affiliates 43,700 71,140
Accrued Interest Receivable 6,713 7,703
-------------- -------------
TOTAL ASSETS $ 1,119,627 $ 1,121,306
============== =============
LIABILITIES:
Accounts Payable $ 402 432
-------------- -------------
TOTAL LIABILITIES 402 432
-------------- -------------
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 15,838 17,487
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,119,225 1,120,874
-------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,119,627 $ 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 June 30,
(in thousands)
(Unaudited)
1999 1998
INTEREST INCOME:
Residential Mortgage Loans $ 15,209 $ 14,446
Commercial Mortgage Loans 1,730 2,141
Interest on Overnight Investments 1,913 2,668
-------------- -------------
18,852 19,255
Less: Servicing Fees (639) (559)
-------------- -------------
Net Interest Income 18,213 18,696
-------------- -------------
NON INTEREST EXPENSE:
Advisory Fees 63 62
Other Administrative Expenses 102 92
-------------- -------------
Total Noninterest Expense 165 154
-------------- -------------
NET INCOME $ 18,048 $ 18,542
============== =============
NET INCOME APPLICABLE TO COMMON SHARE $ 6,910 $ 7,404
============== =============
NET INCOME PER COMMON SHARE $ 6,910 $ 7,404
============== =============
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)
(Unaudited)
1999 1998
INTEREST INCOME:
Residential Mortgage Loans $ 30,540 $ 30,198
Commercial Mortgage Loans 3,456 4,327
Interest on Overnight Investments 2,781 4,531
-------------- -------------
36,777 39,056
Less: Servicing Fees (1,273) (1,158)
-------------- -------------
Net Interest Income 35,504 37,898
-------------- -------------
NON INTEREST EXPENSE:
Advisory Fees 126 125
Other Administrative Expenses 183 215
-------------- -------------
Total Noninterest Expense 309 340
-------------- -------------
NET INCOME $ 35,195 $ 37,558
============== =============
NET INCOME APPLICABLE TO COMMON SHARE $ 12,920 $ 15,283
============== =============
NET INCOME PER COMMON SHARE $ 12,920 $ 15,283
============== =============
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)
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 35,195 37,558
Common Dividends (14,569) (15,565)
Preferred Dividends (22,275) (22,275)
-------------- -------------
Balance at End of Period 15,838 16,261
============== =============
TOTAL STOCKHOLDERS' EQUITY $ 1,119,225 $ 1,119,648
============== =============
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)
1999 1998
OPERATING ACTIVITIES:
Net Income $ 35,195 $ 37,558
Adjustments to Reconcile Net Income
to Net Cash Provided by
Operating Activities:
Net Change In:
Due From Affiliates 27,440 (5,940)
Accrued Interest Receivable 2,355 1,549
Accounts Payable (30) 0
Due to Affiliates 0 3
Receivable for Loan Payment
Collected in Subsequent Month (23,347) (2,197)
Amortization of Deferred Costs 1,867 1,089
---------- ----------
Net Cash Provided by Operating
Activities 43,480 32,062
---------- ----------
INVESTING ACTIVITIES:
Purchase of Mortgage Loans (352,734) (310,467)
Acquired Reserve 595 527
Principal Payments Received 336,566 261,348
Purchase of Accrued Interest
Receivable (1,365) (1,438)
Sale of Loans Net of Reserve 0 1,146
---------- ----------
Net Cash Used by Investing Activities (16,938) (48,884)
---------- ----------
FINANCING ACTIVITIES:
Dividends Paid (36,844) (37,840)
---------- ----------
Net Cash Used by Financing Activities (36,844) (37,840)
---------- ----------
NET DECREASE IN CASH (10,302) (54,662)
CASH AT BEGINNING OF PERIOD 25,215 93,919
---------- ----------
CASH AT END OF PERIOD $ 14,913 $ 39,257
========== ==========
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. 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 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 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.
Certain amounts in the statement of cash flows have been reclassified to conform
to the current presentation.
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 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").
-8-
<PAGE>
Part I
Item 1. (Continued)
For the quarters ended June 30, 1999 and 1998, aggregate advisory and servicing
fees totaled approximately $703,000 and $621,000, respectively. For the six
months ended June 30, 1999 and 1998, aggregate advisory and servicing fees
totaled approximately $1,399,000 and $1,283,000, respectively.
In its capacity as Sub-Servicer, CMMC owed the Company approximately $43,700,000
and $71,140,000 at June 30, 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 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, 1999 and 1998 amounted to approximately $1,913,000 and
$2,668,000, respectively. Interest income on these deposits for the six months
ended June 30, 1999 and 1998 amounted to approximately $2,781,000 and
$4,531,000, 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 1998 Annual Report.
Mortgage Loans:
The book value and fair value of Mortgage Loans at June 30, 1999 and December
31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
<S> <C> <C> <C> <C>
Residential mortgage loans $ 993,554 $ 1,001,025 $ 944,012 $ 957,395
Commercial mortgage loans 65,462 68,257 77,356 82,763
Allowance for loan losses (4,715) (4,715) (4,120) 4,120)
----------- ----------- ------------- ----------
Mortgage Loans, net of
allowance for loan losses $ 1,054,301 $ 1,064,567 $ 1,017,248 $ 1,036,038
</TABLE>
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>
1999 1998 Six Months Ended
------------------------ ----------
Second First Second June 30,
Quarter Quarter Quarter 1999 1998
------- ------- ----------- -----------------------------
INCOME STATEMENT:
<S> <C> <C> <C> <C> <C>
Interest Income $ 18,852 $ 17,925 $ 19,255 $ 36,777 $ 39,056
Net Interest Income 18,213 17,291 18,696 35,504 37,898
Net Income 18,048 17,147 18,542 35,195 37,558
Net Income Applicable to Common Share 6,910 6,010 7,404 12,920 15,283
Income Per Common Share (a) $ 6,910 $ 6,010 $ 7,404 $ 12,920 $ 15,283
BALANCE SHEET:
Mortgage Loans $ 1,059,016 $ 1,027,272 $ 1,033,709 $ 1,059,016 $ 1,033,709
Total Assets 1,119,627 1,118,712 1,122,885 1,119,627 1,122,885
Preferred Stock Outstanding 550,000 550,000 550,000 550,000 550,000
Total Stockholders' Equity $ 1,119,225 $ 1,118,324 $ 1,119,648 $ 1,119,225 $ 1,119,648
OTHER DATA:
Dividends Paid on Preferred Shares $ 11,138 $ 11,137 $ 11,138 $ 22,275 $ 22,275
Dividends Paid on Common Shares $ 6,009 $ 8,560 $ 15,565 $ 14,569 $ 15,565
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 (a) 1 1 1 1 1
Average Yield on Mortgage Loans 6.9% 7.1% 7.6% 7.0% 7.5%
</TABLE>
- --------------------------------------------------------------------------------
(a) All common and 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.
-10-
<PAGE>
Part I
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 June 30, 1999 and 1998, the Company reported net interest
income of approximately $18,213,000 and $18,696,000, respectively. Interest
income from residential and commercial mortgage loans was approximately
$15,209,000 and $1,730,000, respectively, for the quarter ended June 30, 1999
and approximately $14,446,000 and $2,141,000, respectively, for the quarter
ended June 30, 1998. The total average yield for the quarters ended June 30,
1999 and 1998 was 6.9% and 7.6%, respectively. After deduction of approximately
$63,000 and $102,000 in advisory fees and other administrative expenses,
respectively, the Company reported net income of approximately $18,048,000 for
the quarter ended June 30, 1999. This compared to net income of approximately
$18,542,000 for the quarter ended June 30, 1998, after deducting approximately
$62,000 and $92,000 in advisory fees and other administrative expenses,
respectively. The lower results for the second quarter of 1999 compared to the
second quarter of 1998 are primarily due to the lower yield on mortgage loans
and to the higher prepayments of residential mortgage loans during the quarter
ended June 30, 1999.
-11-
<PAGE>
Part I
Item 2. (continued)
The Company reported basic earnings per share of $6,910,000 and $7,404,000 for
the quarters ended June 30, 1999 and 1998, respectively. The lower results for
the second quarter of 1999 when compared to the second quarter of 1998 reflect
the impact of lower yield on mortgage loans and higher prepayments of
residential mortgage loans during the 1999 second quarter.
For the six months ended June 30, 1999 and 1998, the Company reported net
interest income of approximately $35,504,000 and $37,898,000, respectively.
Interest income from residential and commercial mortgage loans was approximately
$30,540,000 and $3,456,000, respectively, for the six months ended June 30, 1999
and approximately $30,198,000 and $4,327,000, respectively, for the six months
ended June 30, 1998. The total average yield for the six months ended June 30,
1999 and 1998 was 7.0% and 7.5%, respectively. After deduction of approximately
$126,000 and $183,000 in advisory fees and other administrative expenses,
respectively, the Company reported net income of approximately $35,195,000 for
the six months ended June 30, 1999. This is compared to net income of
approximately $37,558,000 for the six months ended June 30, 1998, after
deducting approximately $125,000 and $215,000 in advisory fees and other
administrative expenses, respectively. The Company reported basic earnings per
share of $12,920,000 and $15,283,000 for the six months ended June 30, 1999 and
1998, respectively. The lower results for the first half of 1999 when compared
with the same period in 1998 reflect the impact of lower yield on mortgage loans
and higher prepayments of residential mortgage loans.
The Company paid $11,138,000 for each of the quarters ended June 30, 1999 and
1998 and $22,275,000 for each of the six months ended June 30, 1999 and 1998 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, 1999, the Company paid Common Stock dividends of approximately $14,569,000.
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
At June 30, 1999, mortgage loans consisted 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 and
six-month 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 June 30, 1999, 93.8% 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 commercial loans is expected
to decrease.
For the quarters ended June 30, 1999 and 1998, the Company purchased Mortgage
Loans having an outstanding principal balance of approximately $176,307,000 and
$250,557,000, respectively, from affiliates of the Bank. In addition, for the
quarters ended June 30, 1999 and 1998, the Company received approximately
$167,457,000 and $136,131,000, respectively, of principal payments on its
portfolio from the Servicer (and Sub-Servicer).
For the six months ended June 30, 1999 and 1998, the Company purchased Mortgage
Loans having an outstanding principal balance of approximately $352,734,000 and
$310,467,000, respectively, from affiliates of the Bank. In addition, for the
six months ended June 30, 1999 and 1998, the Company received approximately
$336,566,000 and $260,240,000, respectively, of principal payments on its
portfolio from the Servicer (and Sub-Servicer).
-12-
<PAGE>
Part I
Item 2. (continued)
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 June 30, 1999 At December 31, 1998
(in thousands) Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Residential Mortgage Loans $ 993,554 93.8% $ 944,012 92.4%
Commercial Mortgage Loans 65,462 6.2% 77,356 7.6%
------------- -------- -------------- -------
Total Interest-Earning Assets $ 1,059,016 100% $ 1,021,368 100%
============= ======== ============== =======
- ----------------------------------------------------------------------------------------
</TABLE>
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 1998 Annual
Report.
At June 30, 1999 and December 31, 1998, there were no nonaccruing residential
mortgage loans. For the quarter and six months ended June 30, 1999, there were
no sales of nonaccruing loans. 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.
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 June 30, 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.
The accompanying table reflects the activity in the Company's allowance for loan
losses for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Allowance for Loan Losses June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
(in thousands)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Allowance at Beginning of Period $ 4,418 $ 3,572 $ 4,120 $ 3,468
Acquired Allowance 297 423 595 527
Provision for Losses 0 0 0 0
Charge-Offs 0 (78) 0 (78)
Recoveries 0 0 0 0
Sale of Loans 0 (362) 0 (362)
-------- ---------- ------------ -------------
Total Allowance at End of Period $ 4,715 $ 3,555 $ 4,715 $ 3,555
======== ========== ============ =============
==================================================================================================================
</TABLE>
At June 30, 1999 and 1998, the Company's allowance for loan losses as a
percentage of total loans was .45% and .34%, 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
June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
Geographical Breakout June 30, 1999 December 31, 1998
(in thousands) Amount Percent Amount Percent
- -------------------------------------------------------------------------------------------------------------------------------
Residential Mortgage Loans:
<S> <C> <C> <C> <C>
California $ 350,327 33.1% $ 372,200 36.4%
Colorado 90,072 8.5% 63,278 6.2%
Other States (no State has more than 5% of total loans) 553,155 52.2% 508,534 49.8%
------------ ----- ------------ -----
Total Residential Mortgage Loans 993,554 93.8% 944,012 92.4%
------------ ----- ------------ -----
Commercial Mortgage Loans:
New York Metropolitan Tri-State Area 61,696 5.8% 73,523 7.2%
Other States (no State has more than .25% of total loans) 3,766 .4% 3,833 0 .4%
------------ ------ ------------ -----
Total Commercial Mortgage Loans 65,462 6.2% 77,356 7.6%
------------ ----- ------------ -----
Total $ 1,059,016 100% $ 1,021,368 100%
============= ==== ============= ====
</TABLE>
At June 30, 1999, approximately 33.1% 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, a substantial 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 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.
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 in 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. At June 30, 1999, 100% of CMC's software applications were
remediated, and 99.66% of such application systems had also been tested to be
Year 2000 compliant and implemented. With remediation and testing of systems
essentially completed, CMC's information technology teams will continue to
manage system changes to ensure that applications remain Year 2000 compliant.
The major focus of CMC's Year 2000 efforts for the balance of this year is
business risk management, contingency planning and event preparation. Under the
auspices of CMC's Year 2000 Business Risk Council, contingency plans have been
refined and are in the process of being tested. Approximately 250 different risk
scenarios have been identified across all geographies and CMC businesses,
resulting in the development of approximately 1,400 individual Year 2000
contingency plans. These plans include identification of possible alternative
methods by which to provide service, alternative locations for operations,
increased staff support to service customers, as well as ways for CMC to
maintain critical services in the event of environmental infrastructure outages.
In addition, CMC has performed a Year 2000 credit assessment of its loan
portfolios. CMC has also developed Year 2000 stress scenarios in order to stress
test market-sensitive portfolios. These senarios will continue to be updated
throughout the year as more information about world-wide Year 2000 readiness
evolves. CMC has performed stress testing, and will continue to perform stress
testing, on at least a monthly basis through 1999, for its market sensitive
portfolios utilizing these scenarios. CMC is also in the process of making
prepartions to have appropriate liquidity funding available at year-end,
including increased cash reserves for ATM machines.
-15-
<PAGE>
Part I
Item 2. (continued)
Event preparation activities also continue. Year 2000 command centers are being
created; problem tracking and reporting tools designed; key operational and
service performance measures identified for tracking; "wellness checks" of
facilities, services, and systems planned; and training of "rapid response
teams" scheduled. Dress rehearsals have been scheduled for three weekends during
the fourth quarter of 1999 and command centers will become operational in late
December.
CMC currently estimates that full year 1999 Year 2000 costs will increase to
approximately $158 million (versus the $127 million reported in CMC's Quarterly
Report on 10-Q for the quarter ended March 31, 1999). The largest portion of the
$31 million increase is directly related to the cost of the independent
validation and verification testing efforts of applications systems undertaken
by CMC. The balance is due to increased levels of testing and additional costs
associated with event preparation and contingency planning. None of these costs
will be borne by the Company.
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 June 30,1999 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 92% 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 1999 annual
distribution and administrative requirements.
-16-
<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 14.
CHASE PREFERRED CAPITAL CORPORATION
AVERAGE BALANCE SHEET
Three Months Ended June 30,
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Annualized) (Annualized)
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Residential Mortgage Loans $ 911,805 $ 15,209 6.7% $ 786,721 $ 14,446 7.3%
Commercial Mortgage Loans 71,690 1,730 9.7% 89,728 2,141 9.5%
Cash 84,344 1,913 9.1% 209,049 2,668 5.1%
------------- ---------- ---- -------------- ---------- ----
TOTAL INTEREST-EARNING ASSETS 1,067,839 18,852 7.1% 1,085,498 19,255 7.1%
------------- ---------- ---- -------------- ---------- ----
Allowance for Loan Losses (4,442) (3,571)
Due from Affiliates 54,959 49,129
Accrued Interest Receivable 7,289 6,262
------------- --------------
TOTAL ASSETS $ 1,125,645 $ 1,137,318
============= ========0=====
LIABILITIES:
Accounts Payable $ 4,146 $ 4,172
Due to Affiliates 0 2,856
------------- --------------
TOTAL LIABILITIES 4,146 7,028
------------- --------------
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 18,112 26,903
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 1,121,499 1,130,290
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' $ 1,125,645 $ 1,137,318
============= ==============
EQUITY
</TABLE>
-17-
<PAGE>
CHASE PREFERRED CAPITAL CORPORATION
AVERAGE BALANCE SHEET
Six Months Ended June 30,
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Annualized) Annualized)
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Residential Mortgage Loans $ 897,375 $ 30,540 6.8% $ 823,077 $ 30,198 7.3%
Commercial Mortgage Loans 74,066 3,456 9.3% 92,214 4,327 9.4%
Cash 95,944 2,781 5.8% 173,881 4,531 5.2%
------------- ---------- ---- -------------- ---------- ----
TOTAL INTEREST-EARNING ASSETS 1,067,385 36,777 6.9% 1,089,172 39,056 7.2%
------------- ---------- ---- -------------- ---------- ----
Allowance for Credit Losses (4,286) (3,523)
Due from Affiliates 56,573 41,343
Accrued Interest Receivable 7,201 6,104
------------- --------------
TOTAL ASSETS $ 1,126,873 $ 1,133,096
============= ==============
LIABILITIES:
Accounts Payable $ 4,176 $ 4,079
Due to Affiliates 2 2,815
------------- --------------
TOTAL LIABILITIES 4,178 6,894
------------- --------------
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 19,308 22,815
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 1,122,695 1,126,202
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' $ 1,126,873 $ 1,133,096
============= ==============
EQUITY
</TABLE>
-18-
<PAGE>
CHASE PREFERRED CAPITAL CORPORATION
QUARTERLY FINANCIAL INFORMATION
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------------------------- --------------------------------------------------
Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter
INTEREST INCOME:
<S> <C> <C> <C> <C> <C> <C>
Residential Mortgage Loans $ 15,209 $ 15,331 $ 17,221 $ 17,011 $ 14,446 $ 15,752
Commercial Mortgage Loans 1,730 1,726 1,836 1,746 2,141 2,186
Interest on Overnight Investments 1,913 868 1,187 1,371 2,668 1,863
---------- --------- ---------- ---------- --------- ---------
18,852 17,925 20,244 20,128 19,255 19,801
Less: Servicing Fees (639) (634) (421) (670) (559) (599)
---------- --------- ---------- ---------- --------- ---------
Net Interest Income 18,213 17,291 19,823 19,458 18,696 19,202
---------- --------- ---------- ---------- --------- ---------
NON INTEREST EXPENSE:
Advisory Fees 63 63 63 63 62 63
Other Administrative Expenses 102 81 61 93 92 123
--------- --------- --------- --------- --------- ---------
Total Noninterest Expense 165 144 124 156 154 186
--------- --------- --------- --------- --------- ---------
NET INCOME $ 18,048 $ 17,147 $ 19,699 $ 19,302 $ 18,542 $ 19,016
========= ========== ========== =========== ========= =========
NET INCOME APPLICABLE TO COMMON
SHARE $ 6,910 $ 6,010 $ 8,562 $ 8,164 $ 7,404 $ 7,879
========= ========== ========== ========= ========= =========
NET INCOME PER COMMON SHARE (a) $ 6,910 $ 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.
-19-
<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
-20-
<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 13, 1999 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 share and 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,
------------------------------ ----------------------------
1999 1998 1999 1998
===================================================================================================================
Earnings:
<S> <C> <C> <C> <C>
Net Income $ 18,048 $ 18,542 $ 35,195 37,558
Less: Preferred Stock Dividend Requirements 11,138 11,138 22,275 22,275
----------- ----------- ----------- -----------
Net Income Applicable to Common Stock $ 6,910 $ 7,404 $ 12,920 $ 15,283
----------- ----------- ----------- -----------
Shares:
Weighted Average Number of Common Shares
Outstanding (a) 1 1 1 1
Net Income Per Share: (a) $ 6,910 $ 7,404 $ 12,920 $ 15,283
=========== =========== =========== ===========
===================================================================================================================
</TABLE>
(a) All common and 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.
-21-
Part II
Item 6. (continued)
EXHIBIT 12(a)
CHASE PREFERRED CAPITAL CORPORATION
Computation of ratio of earnings to fixed charges
-------------------------------------------------
(in thousands, except ratio)
(Unaudited)
Six Months Ended
June 30, 1999
----------------
Net income $ 35,195
-----------
Fixed charges:
Advisory fees 126
Total fixed charges 126
Earnings before fixed charges $ 35,321
===========
Fixed charges, as above $ 126
===========
Ratio of earnings to fixed charges 280.33
===========
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, 1999
----------------
Net income $ 35,195
-----------
Fixed charges:
Advisory fees 126
Total fixed charges 126
Earnings before fixed charges $ 35,321
===========
Fixed charges, as above $ 126
Preferred stock dividend requirements 22,275
-----------
Fixed charges including preferred stock dividends $ 22,401
===========
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.58
-23-
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 14,913
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,059,016
<ALLOWANCE> 4,715
<TOTAL-ASSETS> 1,119,627
<DEPOSITS> 0
<SHORT-TERM> 402
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
550,000
<COMMON> 171,750
<OTHER-SE> 397,475
<TOTAL-LIABILITIES-AND-EQUITY> 1,119,627
<INTEREST-LOAN> 33,996
<INTEREST-INVEST> 0
<INTEREST-OTHER> 2,781
<INTEREST-TOTAL> 36,777
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 1,273
<INTEREST-INCOME-NET> 35,504
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 309
<INCOME-PRETAX> 35,195
<INCOME-PRE-EXTRAORDINARY> 35,195
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,195
<EPS-BASIC> 12,920
<EPS-DILUTED> 12,920
<YIELD-ACTUAL> 7.0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,715
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 4,715
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
