SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended Commission file
December 31, 1999 number 1-12151
CHASE PREFERRED CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3899576
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(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
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class which Registered
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8.10% Cumulative Preferred Stock, Series A New York Stock Exchange, Inc
(Par Value --$25 Per Share)
Securities registered pursuant to Section 12(g) of
the Act: None
Number of Shares of Common Stock outstanding on
December 31, 1999: 1
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|_|
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in
definitive proxy or information statements
incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. |X|
All outstanding shares of Common Stock were held by The Chase Manhattan
Bank at December 31, 1999; therefore, no Common Stock is held by nonaffiliates.
Document incorporated by reference Part of Form 10-K
in this Form 10-K which incorporated
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None ---
<PAGE>
FORM 10-K
PART I PAGE
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Item 1 Business...........................................................1
Item 2 Properties.........................................................4
Item 3 Legal Proceedings..................................................4
Item 4 Submission of Matters to a Vote of Security Holders................4
Part II
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Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters............................................................5
Item 6 Selected Financial Data............................................6
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................7
Item 7A Quantitative and Qualitative Disclosures Regarding Market Risk....12
Item 8 Financial Statements and Supplementary Data.......................13
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................26
Part III
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Item 10 Directors and Executive Officers of the Corporation...............26
Item 11 Executive Compensation............................................27
Item 12 Security Ownership of Certain Beneficial Owners and Management....27
Item 13 Certain Relationships and Related Transactions....................27
Part IV
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Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K...27
<PAGE>
ITEM 1: BUSINESS
Overview
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Chase Preferred Capital Corporation (the "Company") is a Delaware corporation
and a subsidiary of The Chase Manhattan Bank (the "Bank"), a banking corporation
organized under the laws of the State of New York. The Company began operations
in 1996 upon completion of an initial public offering of 22,000,000 shares of
8.10% Cumulative Preferred Stock, Series A (the "Series A Preferred Shares").
The Series A Preferred Shares are traded on the New York Stock Exchange.
The Company is a real estate investment trust ("REIT") under the Internal
Revenue Code of 1986 (the "Code"). The principal business of the Company is to
acquire, hold and manage assets that qualify as REIT real estate assets under
the Code in order to generate net income for distribution to stockholders.
To date, the real estate assets acquired by the Company have consisted of
mortgage loans acquired from The Chase Manhattan Bank (the "Bank") or its
affiliates as whole loans secured by first mortgages or deeds of trust on single
family (one- to four-unit) residential or commercial real properties ("First
Mortgage Loans"). The Company may also acquire securities that qualify as real
estate assets under Section 856(c)(6)(B) of 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 Mortgage-Backed Securities are secured
by single-family residential, multifamily or commercial real estate properties
located in the United States.
Over time, as commercial First Mortgage Loans have prepaid or matured, the
Company has replaced them with residential First Mortgage Loans. As of December
31, 1999, approximately 94.8% of the Company's portfolio was comprised of
residential First Mortgage Loans, with the balance consisting of commercial
First Mortgage Loans. The Company expects the percentage of First Mortgage Loans
consisting of commercial First Mortgage Loans to continue to decline over time.
The Company's residential First Mortgage Loans consist of the following:
o six-month prime rate adjustable rate mortgages ("ARMs");
o six-month treasury ARMs;
o three-year fixed rate loans with an automatic conversion to six-month,
one-year and three-year treasury ARMs;
o one, five, seven and ten-year fixed rate loans with an automatic
conversion to one-year treasury ARMs; and
o fixed rate loans.
The Company's commercial First Mortgage Loans consist of fixed and variable rate
loans.
The Company has no foreign operations.
Competition
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The Company does not originate loans and currently acquires and intends to
continue to acquire its assets only from affiliates. Accordingly, the Company
does not compete with mortgage conduit programs, investment banking firms,
savings and loan associations, banks, thrift and loan associations, finance
companies, mortgage banks or insurance companies in acquiring its assets.
Agreements Relating to Management of the Company's Operations
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Operations. The Company has entered into an agreement (the "Advisory Agreement")
with the Bank (the "Advisor") pursuant to which the Advisor administers the
Company's day-to-day operations. In performing its responsibilities, the Advisor
has a high degree of autonomy. The Board of Directors, however, has adopted
certain policies to guide the administration of the Company relating to the
Company's acquisition and disposition of assets, use of capital and leverage,
credit risk management and certain other activities. These policies may be
amended or revised from time to time at the discretion of the Board of Directors
without a vote of the Company's stockholders, including holders of the Series A
Preferred Shares (but in certain circumstances subject to the approval of a
majority of the Independent Directors (as defined in the Certificate of
Designation for the Series A Preferred Shares)).
Servicing. The First Mortgage Loans have been and continue to be sold to the
Company by the Bank on a servicing retained basis. The Bank services the First
Mortgage Loans on its own behalf pursuant to the terms of servicing agreements
("First Mortgage Servicing Agreements") between the Company and the Bank. The
Bank in its capacity as servicer of the Company's assets is referred to as the
"Servicer". The Servicer has entered into sub-servicing agreements with Chase
Manhattan Mortgage Corporation ("CMMC" or "sub-servicer"), a wholly-owned
subsidiary of Chase Manhattan Bank USA, National Association ("Chase USA"), an
affiliate of the Company. The Servicer receives an annual servicing fee with
respect to each First Mortgage Loan it services equal to: (1) in the case of
residential First Mortgage Loans, their outstanding principal balance times
0.25%; and (2) in the case of commercial First Mortgage Loans, their outstanding
principal balance times a percentage ranging from 0.08% to 0.30%, depending upon
the outstanding principal amount of the particular loan.
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<PAGE>
Investment Company Act Considerations
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The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940.
Certain REIT Requirements
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In order to preserve its status as a real estate investment trust ("REIT") under
the Code, the Company must distribute annually at least 95% of its "REIT taxable
income" (excluding capital gains) to stockholders and meet certain capital
ownership and administrative tests as defined by the Code. The Company must also
annually satisfy three gross income requirements. First, at least 75% of the
Company's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (as interest on
obligations secured by mortgages on real property, certain "rents from real
property" or as gain on the sale or exchange of such property and certain fees
with respect to agreements to make or acquire mortgage loans), from certain
types of temporary investments or certain other types of gross income. Second,
at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property investments as aforesaid and from dividends, interest, and gain from
the sale or other disposition of stock or securities and certain other types of
gross income (or from any combination of the foregoing). Third, short-term gain
from the sale or other disposition of stock or securities, gain from prohibited
transactions, and gain on the sale or other disposition of real property held
for less than four years from the date of acquisition (apart from involuntary
conversions and sales of foreclosure property), must represent less than 30% of
the Company's gross income (including gross income from prohibited transactions)
for each taxable year. The Company must also satisfy three tests relating to the
nature of its assets at the close of each quarter of each taxable year. First,
at least 75% of the value of the Company's total assets must be represented by
real estate assets (including stock or debt instruments held for not more than
one year that were purchased with the proceeds of a stock offering or long-term
(at least five years) debt offering of the Company), cash, cash items, and
government securities. Second, not more than 25% of the Company's total assets
may be represented by securities other than those in the 75% asset class. Third,
of the investments included in the 25% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the value of the
Company's total assets and the Company may not own more than 10% of any one
issuer's outstanding voting securities.
The Company's Certificate of Incorporation contains certain restrictions on the
number of shares of Common Stock and Preferred Stock that individual
stockholders may own. For the Company to qualify as a REIT under the Code, no
more than 50% in number or value of its outstanding shares of capital stock may
be owned, directly or indirectly, by five or fewer individuals (as defined in
the Code to include certain entities) during the last half of a taxable year
(other than the first year) or during a proportionate part of a shorter taxable
year (the "Five or Fewer Test"). The capital stock of the Company must also be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year or during a proportionate part of a shorter taxable year (the "One Hundred
Persons Test"). The ownership by the Bank of 100% of the shares of Common Stock
of the REIT will not adversely affect the Company's REIT qualification because
each stockholder of The Chase Manhattan Corporation ("CMC"), the sole
stockholder of the Bank, counts as a separate beneficial owner for purposes of
the Five or Fewer Test and the capital stock of CMC is widely held. Further, the
Company's Certificate of Incorporation contains restrictions on the acquisition
of Preferred Stock intended to ensure compliance with the One Hundred Persons
Test, including a provision voiding any transfer of shares of capital stock of
the Company that would cause the Company to be beneficially owned by fewer than
100 persons.
Subject to certain exceptions specified in the Company's Certificate of
Incorporation, no holder of Preferred Stock is permitted to own (including by
virtue of the attribution provisions of the Code) more than 9.9% (the "Ownership
Limit") of any issued and outstanding class or series of Preferred Stock. The
Board of Directors is permitted but not required to waive the Ownership Limit
with respect to a holder upon receipt of an Internal Revenue Service ("IRS")
ruling or an opinion of counsel satisfactory to the Company, to the effect that
the holder's ownership will not then or in the future jeopardize the Company's
status as a REIT.
The Company's Certificate of Incorporation provides that shares of any class or
series of Preferred Stock owned or deemed owned by or transferred to a
stockholder in excess of the Ownership Limit (the "Excess Shares") will
automatically be transferred, by operation of law, to a trust for the exclusive
benefit of a charity to be named by the Company as of the day prior to the date
of the prohibited transfer. Any distributions paid prior to the discovery of the
prohibited transfer must be repaid by the original transferee to the Company and
by the Company to the trustee and any unpaid distributions payable to the
original transferee will be rescinded as void. Any vote of those shares on
behalf of the original transferee prior to the Company's discovery of the
prohibited transfer will be void and the original transferee will be deemed to
have given its proxy to the trustee. In liquidation, the original transferee's
ratable share of the Company's assets would be limited to the price paid by the
original transferee for the Excess Shares or, if no value was given, the price
per share equal to the closing market price on the date of the purported
transfer. The trustee of the trust will promptly sell the shares to any person
whose ownership is not prohibited, and the interest of the trust will then
terminate. Proceeds of the sale will be paid to the original transferee up to
its purchase price (or, if the original transferee did not purchase the shares,
the value on the date of acquisition by that transferee) and any remaining
proceeds shall be paid to a charity to be named by the Company.
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<PAGE>
The constructive ownership rules of the Code are complex and may cause Preferred
Stock owned, directly or indirectly, by a group of related individuals and/or
entities to be deemed to be constructively owned by one individual or entity. As
a result, the acquisition of less than 9.9% of a class or series of Preferred
Stock, or the acquisition of an interest in an entity that owns shares of a
class or series of Preferred Stock could cause an individual or entity to own
constructively in excess of 9.9% of that class or series, and thus subject
shares of that class or series to the Ownership Limit. Direct or constructive
ownership in excess of the Ownership Limit would cause the Excess Shares to be
transferred to the trustee.
All certificates representing the Series A Preferred Shares bear a legend
referring to the applicable restrictions described above. The applicable
Ownership Limit provisions will not be automatically removed even if sections
856 through 860 of the Code and the applicable Treasury regulations are changed
so as to eliminate any ownership concentration limitation or to increase the
ownership concentration limitation currently in effect. The Certificate of
Incorporation may not be amended to alter, change, repeal or amend any of the
Ownership Limit provisions without the prior approval of a majority of the
Independent Directors.
The Company's Certificate of Incorporation requires that any person who
beneficially owns 1% (or such lower percentage as may be required by the Code or
the Treasury Regulations) of the outstanding shares of any class or series of
Preferred Stock of the Company must provide certain information to the Company
within 30 days of June 30 and December 31 of each year. In addition, each
stockholder shall upon demand be required to disclose to the Company in writing
such information as the Company may request in order to determine the effect, if
any, of that stockholder's actual and constructive ownership on the Company's
status as a REIT and to ensure compliance with the Ownership Limit.
As of December 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 as of such date:
o its Qualified REIT Assets, as defined in the Code, were 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 94.7% of its revenues qualified for the 75% source of income test and 100%
of its revenues qualified 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.
Important Factors that May Affect Future Results
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From time to time, the Company has made and will make forward-looking
statements. These statements can be identified by the fact that they do not
relate strictly to historical or current facts. Forward-looking statements often
use words such as "anticipate", "expect", "estimate", "intend", "target",
"plan", "goal", "believe", or other words of similar meaning. Forward-looking
statements give the Company's current expectations or forecasts of future
events, circumstances or results. The Company's disclosure in this report
contains forward-looking statements. Any forward-looking statements made by or
on behalf of the Company speak only as of the date they are made. The Company
does not undertake to update forward-looking statements. The reader should,
however, consult any further disclosures of a forward-looking nature the Company
may make in its reports filed with the Securities and Exchange Commission.
All forward-looking statements, by their nature, are subject to risks and
uncertainties. The Company's actual future results may differ materially from
those set forth in its forward-looking statements. Factors that might cause the
Company's future financial performance to vary from that described in its
forward-looking statements include the interest rate, credit and other risks
discussed in the "Management's Discussion and Analysis" section of this report.
In addition, set forth below are certain risks and uncertainties that the
Company believes could cause its actual future results to differ materially from
expected results. However, other factors besides those discussed in this or the
Company's other reports to the SEC could also adversely affect the Company's
results and the reader should not consider any such list of factors to be a
complete set of all potential risks and uncertainties. This discussion is
provided as permitted by the Private Securities Litigation Reform Act of 1995.
Impact of General Economic Downturn
The Company's profitability could be adversely impacted by a worsening of
general economic conditions in the United States. An economic downturn could
increase the risk that customers would refrain from obtaining mortgage loans
from Chase and its affiliates or that a greater number of the existing obligors
with respect to the Company's assets would become delinquent on their
obligations. A higher rate of delinquencies could in turn result in more
chargeoffs and a higher level of provision for the Company, which would
adversely affect the Company's income.
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<PAGE>
Interest Rate Risk
The Company's income consists primarily of interest payments on the assets held
by it. The Company anticipates that a substantial portion of its assets will
bear interest at adjustable rates. If there is a decline in interest rates (as
measured by the indices upon which the interest rates of the assets are based),
then the Company will experience a decrease in income available for distribution
to stockholders. In such an interest rate environment, the Company may
experience an increase in prepayments on its residential mortgage loans and may
find it more difficult to purchase additional loans bearing rates sufficient to
support payment of dividends to stockholders. In addition, certain residential
mortgage loans convert an adjustable-rate mortgage to a fixed-rate mortgage,
thus "locking in" a low fixed interest rate. Because the dividend rate on the
Company's outstanding Series A Preferred Shares is fixed, there can be no
assurance that a significant decline in prevailing interest rates would not
adversely affect the Company's ability to pay those dividends.
Factors Affecting Allowance for Loan Losses
The Company's allowance for loan losses is based upon management's estimate of
probable losses inherent in the Company's portfolio. Estimating losses is
inherently uncertain. The estimation process assumes that past experience is a
valid indicator for estimating prospective losses, which may not always be the
case. The accuracy of estimates reflected in the allowance may be impacted by a
number of factors, ranging from external macroeconomic factors to limitations
inherent in the estimation process itself. These factors include, among others:
general economic and political developments; structural changes that may impact
particular mortgagors; changes in underwriting standards; legal and regulatory
requirements affecting reserving practices; the volatility of default
probabilities, rating migrations and loss severity; and the quality of available
data.
Dependence Upon Affiliates as Advisor and Servicer
The Company is dependent for the selection, structuring and monitoring of its
assets on the diligence and skill of its officers (all of whom are also officers
of the Bank or its affiliates) and the officers and employees of the Bank who
are acting on behalf of the Bank as Advisor to the Company. In addition, the
Company is dependent upon the expertise of the Bank and CMMC for the servicing
of its assets. In the event that the Bank or CMMC subcontract any of their
respective obligations, the Company will be dependent upon the parties to whom
those obligations are subcontracted.
Potential Conflicts of Interest with the Bank and its Affiliates
The Bank and its affiliates are involved in virtually every aspect of the
Company's existence. The Bank is the sole holder of the Company's Common Stock
and administers its day-to-day activities as Advisor. In addition, the Bank and
CMMC are responsible for servicing all of the Company's assets. The Bank and its
affiliates may have interests that are not identical to those of the Company,
and conflicts of interest may arise with respect to transactions, including
acquisitions, dispositions and servicing of assets, particularly assets placed
on classified or nonaccrual status. For example, in the case of commercial First
Mortgage Loans, the Company's interest will be limited to the loan, while the
Bank may have other interests as a result of an overall banking relationship
with the mortgagor. In addition, if the Bank acts as lender with respect to
other credit facilities for a particular mortgagor, the Bank, in its role as
Advisor, may become subject to a conflict of interest if a loan of that
mortgagor owned by the Company becomes classified or placed on nonaccrual
status. The Company intends that any agreement and transactions between the
Company and the Bank or any affiliate of the Bank are conducted on an arm's
length basis and are fair to all parties. In addition, certain actions of the
Company must be approved by a majority of the Company's independent Directors.
ITEM 2: PROPERTIES
The Company, a subsidiary of the Bank, utilizes space at the headquarters of the
Bank, located in New York City at 270 Park Avenue.
ITEM 3: LEGAL PROCEEDINGS
The Company is not currently the subject of any material litigation. None of the
Company, the Bank or any of the Bank's affiliates is currently involved in or,
to the Company's knowledge, currently threatened with any material litigation
with respect to the Company's assets which would have a material adverse effect
on the business or operations of the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE>
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At December 31, 1999, the Company was authorized to issue one share of Common
Stock and 50,000,000 shares of Preferred Stock, $25 par value per share
("Preferred Stock"), of which 22,000,000 Series A Preferred Shares had been
issued. The Bank is the owner of the Company's sole share of Common Stock.
Accordingly, there is no trading market for the Company's Common Stock. In
addition, CMC intends that, as long as any Series A Preferred Shares are
outstanding, it will maintain direct or indirect ownership of at least 80% of
the outstanding Common Stock of the Company. Subject to the rights, if any, of
the holders of any outstanding series of Preferred Stock, all voting rights are
vested in the Common Stock.
The holder of Common Stock is entitled to receive dividends when, as and if
declared by the Board of Directors of the Company out of funds legally available
therefor. However, so long as any shares of Preferred Stock are outstanding, no
dividends or other distributions (including redemptions and purchases) may be
made with respect to the Common Stock unless full dividends on the shares of the
Preferred Stock, including accumulations in the case of cumulative Preferred
Stock, have been paid. The Company must distribute annually at least 95% of its
annual "REIT taxable income" (not including capital gains) to stockholders.
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<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
FINANCIAL DATA
(in thousands, except share and yield data)
<TABLE>
<CAPTION>
For the Period from Inception
Year Ended Year Ended Year Ended (September 18, 1996) through
12/31/99 12/31/98 12/31/97 December 31, 1996
----------- ------------ ----------- -----------------------------
INCOME STATEMENT:
<S> <C> <C> <C> <C>
Interest income $ 73,326 $ 79,428 $ 82,941 $ 22,830
Net interest income 70,722 77,179 80,308 22,156
Net income 70,127 76,559 79,779 22,085
Net income applicable to common shares 25,577 32,009 35,229 9,339
Income per common share $ 25,577 $ 32,009 $ 35,229 9,339
BALANCE SHEET:
Mortgage loans $ 1,069,377 $ 1,021,368 $ 985,068 $ 1,059,981
Total assets 1,119,300 1,121,306 1,123,164 1,113,398
Preferred stock outstanding 550,000 550,000 550,000 550,000
Total stockholders' equity $ 1,119,174 $ 1,120,874 $ 1,119,930 $ 1,112,726
OTHER DATA:
Dividends paid on preferred shares $ 44,550 $ 44,550 $ 44,550 $ 12,746
Dividends paid on common share $ 27,645 $ 31,065 $ 28,025 $ 0
Number of preferred shares outstanding 22,000,000 22,000,000 22,000,000 22,000,000
Number of common shares outstanding (a) 1 1 1 1
Average yield on mortgage loans 6.9% 7.6% 7.8% 7.4%
</TABLE>
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(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.
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<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis contains certain forward-looking
statements, which are subject to risks and uncertainties. The Company's actual
results may differ materially from those included in the forward-looking
statements. Certain factors which may cause such differences to occur are
discussed in Item 1 above, under the caption "Important Factors that May Affect
Future Results".
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OVERVIEW
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The Company, a Delaware corporation, is a REIT and a subsidiary of the Bank. The
Company's principal business is to acquire, hold and manage assets that qualify
as REIT real estate assets under the Code in order to generate net income for
distribution to stockholders. To date, the Company has acquired First Mortgage
Loans from the Bank or its affiliates. The Company may also acquire
Mortgage-Backed Securities from time to time. 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 sole share of Common Stock is held by the Bank.
The Bank administers the day-to-day activities of the Company in its role as
Advisor. CMMC sub-services the Company's First Mortgage Loans on behalf of the
Bank in its capacity as Servicer.
RESULTS OF OPERATIONS
The Company reported net interest income of approximately $70,722,000 for 1999
compared with $77,179,000 in 1998 and $80,308,000 in 1997. The Company's basic
earnings per share were $25,577,000, $32,009,000 and $35,229,000 in 1999, 1998
and 1997, respectively. In 1999, interest income from residential and commercial
First Mortgage Loans was $63,192,000 and $6,284,000, respectively, representing
a total average yield of 6.9%. In 1998, interest income from residential and
commercial First Mortgage Loans was $64,430,000 and $7,909,000, respectively,
representing a total average yield of 7.6% for 1998. In 1997, interest income
from residential and commercial First Mortgage Loans was $70,790,000 and
$9,391,000, respectively, representing a total average yield of 7.8% for 1997.
After deductions of approximately $250,000, $345,000 and $370,000 in advisory
fees and other administrative expenses, respectively, the Company reported net
income of approximately $70,127,000 for 1999 compared with reported net income
of $76,559,000 and $79,779,000 in 1998 and 1997, respectively. The lower results
for 1999 when compared to 1998 reflect the impact of lower interest rates on
residential First Mortgage Loans purchased during 1999. The lower results for
1998 when compared to 1997 reflect the impact of lower interest rates and higher
prepayments of residential mortgage loans during 1998.
In 1999, 1998 and 1997, the Company paid $44,550,000 in dividends on the Series
A Preferred Shares. As of the date of this report, all dividend payments on the
Series A Preferred Shares are current. In addition, the Company paid Common
Stock dividends of approximately $27,645,000 in 1999, compared with $31,065,000
in 1998 and $28,025,000 in 1997. 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 REIT under the Code.
FIRST MORTGAGE LOANS
At December 31, 1999, the Company had $1,069,377,000 invested in First Mortgage
Loans, compared with $1,021,368,000 at December 31, 1998. For the years ended
December 31, 1999 and 1998, the Company purchased First Mortgage Loans having an
outstanding aggregate principal balance of $555,490,000 and $643,947,000,
respectively, from the Bank or its affiliates. The Company also sold $922,000 of
residential First Mortgage Loans in foreclosure to a wholly-owned subsidiary of
CMC during the twelve months ended December 31, 1999. In addition, during 1999,
the Company applied approximately $501,795,000 of principal payments on its
portfolio from the Servicer (and sub-servicer), and amortized loan purchase
premiums and discounts of approximately $4,764,000.
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<PAGE>
The following table reflects residential and commercial First Mortgage Loans as
a percentage of total First Mortgage Loans:
First Mortgage Loans At December 31, 1999 At December 31, 1998
(in thousands) Amount Percent Amount Percent
- -------------------------------------------------------------------------------
Residential First Mortgage Loans $1,014,144 94.8% $ 944,012 92.4%
Commercial First Mortgage Loans 55,233 5.2% 77,356 7.6%
---------- ------- ---------- ----
Total First Mortgage Loans $1,069,377 100% $1,021,368 100%
---------- ------- ---------- ----
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The Company intends that each First Mortgage Loan acquired from the Bank or one
of its affiliates in the future will be a whole loan, will represent a first
lien position and will be originated by the Bank or such affiliate in the
ordinary course of its real estate lending activities based on the underwriting
standards generally applied at the time of origination for its own account by
the Bank or the affiliate of the Bank that originated the First Mortgage Loan.
The Company also intends that all First Mortgage Loans held by the Company will
be serviced pursuant to the Servicing Agreements, which require servicing in
conformity with (1) generally accepted secondary market standards, (2) all
servicing guidelines promulgated by the Company and (3) in the case of
residential First Mortgage Loans, FNMA and FHLMC guidelines and procedures.
Currently, the Company does not intend to acquire any additional commercial
First Mortgage Loans. In addition, the Company's current policy prohibits the
acquisition of any First Mortgage Loan or any interest in a First Mortgage Loan
(other than an interest resulting from the acquisition of Mortgage-Backed
Securities), that (i) is delinquent in the payment of principal or interest at
the time of proposed acquisition; (ii) is or was at any time during the
preceding 12 months (a) classified, (b) in nonaccrual status, or (c)
renegotiated due to financial deterioration of the borrower; or (iii) has been,
more than once during the preceding 12 months, more than 30 days past due in the
payment of principal or interest.
The Company may choose, at any time subsequent to its acquisition of any First
Mortgage Loan, to require the Servicer to dispose of the First Mortgage Loan,
for any reason, including as a result of the First Mortgage Loan becoming
classified or being placed in nonaccrual status or having been, more than once
during the preceding 12 months, more than 30 days past due in the payment of
principal or interest. The Bank has indicated to the Company that it will not
purchase any First Mortgage Loan of the Company that the Company chooses to
dispose of for the foregoing reasons. Accordingly, the Company currently
anticipates that the Company would continue to sell any such First Mortgage Loan
at its then current fair value only to CMC, a nonbank subsidiary of CMC, or an
unrelated third party.
There were no nonaccruing First Mortgage Loans at December 31, 1999 or December
31, 1998. The Company sold $922,000 of residential First Mortgage Loans in
foreclosure to a wholly-owned subsidiary of CMC during the twelve months ended
December 31, 1999. No gain or loss was recognized from this sale.
ALLOWANCE FOR LOAN LOSSES
The Company's allowance for loan losses is intended to cover probable credit
losses as of December 31, 1999 for which either the asset is not specifically
identified or the size of the loss has not been fully determined. The allowance
for loan losses is based upon management estimates, which are inherently
uncertain. Factors affecting the uncertainty of specific loss and expected loss
estimates include the volatility of default probabilities, rating migrations and
loss severity. These uncertainties also could relate to current macroeconomic
conditions, changes in underwriting standards, unexpected correlations within
the portfolio or other factors.
The allowance for loan losses is reviewed in light of the risk profile of the
portfolio and current economic conditions. The allowance is adjusted based on
that review if, in management's judgment, changes are warranted. At December 31,
1999, management of the Company deemed its allowance for loan losses to be
adequate.
-8-
<PAGE>
The accompanying table reflects the activity in the Company's allowance for loan
losses during 1999 and 1998:
Allowance for Loan Losses Year Ended Year Ended
(in thousands) 12/31/99 12/31/98
- -------------------------------------------------------------------------------
Total allowance at beginning of period $ 4,120 $ 3,468
Acquired allowance 929 1,092
Provision for loan losses 0 0
Charge-offs (87) (440)
Recoveries 0 0
----------- ---------
Total allowance at end of period $ 4,962 $ 4,120
=========== =========
- -------------------------------------------------------------------------------
At December 31, 1999 and 1998, the Company's allowance for loan losses as a
percentage of total loans was .46% and .40%, respectively.
INTEREST RATE RISK
The Company's income currently consists primarily of interest payments on First
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 and a corresponding
decrease in funds available to be distributed to its stockholders. The reduction
in interest income may result from downward adjustments of the indices upon
which the interest rates on ARMs are based and from prepayments of First
Mortgage Loans with fixed interest rates, resulting in reinvestment of the
proceeds in lower-yielding First 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.
At December 31, 1999, the estimated weighted average interest rate and the
estimated weighted average maturity of the First Mortgage Loans were 7.2% and
three to five years, respectively.
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 First Mortgage Loans within the
portfolio. The following table shows the First Mortgage Loan portfolio by
geographic area as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Geographical Breakout
December 31, 1999 December 31, 1998
(in thousands) Amount Percent Amount Percent
- -------------------------------------------------------------------------------------------------
Residential First Mortgage Loans:
<S> <C> <C> <C> <C>
California $ 385,874 36.1% $ 372,200 36.4%
Colorado 74,438 7.0% 63,278 6.2%
Texas 52,747 4.9% -- --
Florida 49,689 4.6% -- --
Other States (no State has more than 4%) 451,396 42.2% 508,534 49.8%
--------- -------- ---------- ------
Total Residential First Mortgage Loans 1,014,144 94.8% 944,012 92.4%
--------- -------- ---------- ------
=================================================================================================
Commercial Mortgage Loans:
New York Metropolitan Tri-State Area 51,705 4.9% 73,523 7.2%
Other States 3,528 0.3% 3,833 0.4%
--------- -------- ---------- ------
Total Commercial First Mortgage Loans 55,233 5.2% 77,356 7.6%
--------- -------- ---------- ------
Total $1,069,377 100% $1,021,368 100%
========== ======== ========== ======
</TABLE>
-9-
<PAGE>
At December 31, 1999, approximately 36.1% of the Company's total First Mortgage
Loan portfolio consisted of loans collateralized 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 First 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.
During 1999, the Company's principal liquidity needs were to maintain its
portfolio size through the acquisition of additional First Mortgage Loans as
First Mortgage Loans in the portfolio matured, prepaid or were sold, and to pay
dividends on the Series A Preferred Shares. The acquisition of additional First
Mortgage Loans was funded with the proceeds obtained from the sale or repayment
of principal balances of First Mortgage Loans by individual borrowers. The
Company did not have and does not anticipate having any material capital
expenditures.
If the Board of Directors determines that the Company requires additional
funding for any reason, the Company may raise such funds through additional
equity offerings, debt financing, retention of cash flow (after consideration of
provisions of the Code requiring the distribution by a REIT of at least 95% of
its "REIT taxable income" and taking into account taxes that would be imposed on
undistributed income), or a combination of these methods. The Company's
organizational documents do not contain any limitation on the amount or
percentage of debt, funded or otherwise, the Company might incur. However, the
Company may not, without the approval of a majority of the Independent
Directors, incur debt for borrowed money in excess of 20% of the aggregate
amount of net proceeds received in connection with the issuance of all
outstanding Preferred Stock and Common Stock of the Company. The above
limitation would also apply to any intercompany advances from the Bank to the
Company.
The Company may also issue additional series of Preferred Stock. However, the
Company may not issue additional shares of Preferred Stock senior to the Series
A Preferred Shares without the consent of holders of at least 66 2/3% of the
shares of Preferred Stock outstanding at that time, including the Series A
Preferred Shares. In addition, the Company may not issue additional shares of
Preferred Stock ranking on a parity with the Series A Preferred Shares without
the approval of a majority of the Company's Independent Directors.
As discussed under "Subsequent Developments" below, on March 16, 2000, the
Company's Board of Directors, with the approval of its Independent Directors,
approved the Company's acquisition of approximately $4.7 billion of new real
estate assets from affiliates and the extension of approximately $2.4 billion of
intercompany loans to the Bank and Chase USA (the "Additional Assets"). The
acquisition of the Additional Assets, which is expected to be effected in the
second quarter of 2000, will be funded through the issuance to the Bank of a new
series of Preferred Stock (the "Series B Preferred Stock"). The Series B
Preferred Stock will rank junior to the Series A Preferred Shares with respect
to the payment of dividends and will rank on a parity with the Series A
Preferred Shares upon liquidation, dissolution or winding up of the Company.
Following the initial acquisition of the Additional Assets, proceeds obtained
from the sale or repayment of principal balances of the Additional Assets will
be used to purchase Additional Assets or First Mortgage Loans. The Company may
also increase the size of its portfolio of Additional Assets from time to time.
Any such increases may be funded either through intercompany advances made by
the Bank to the Company or through the sale to the Bank of additional shares of
Series B Preferred Stock. In addition, the Bank may advance funds to the Company
on a temporary basis from time to time pending completion of a planned sale of
Series B Preferred Stock.
OPERATING RISK MANAGEMENT
As noted above, the Company is a 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 servicing all of the Company's First Mortgage
Loans. Accordingly, the Company may be subject to certain operating risks
impacting the operations of CMC and the Bank. Such operating risks include the
risk of fraud by employees of the Bank or its affiliates or by outsiders,
unauthorized transactions by such employees and errors relating to computer and
telecommunications systems. Although CMC and the Bank maintain a system of
controls designed to provide management with timely and accurate operational
information and to keep operating risks at appropriate levels, there can be no
assurance that the Company will not suffer loss from operating risk in the
future.
Year 2000 efforts for the Company were coordinated as part of CMC's Year 2000
program. As a result of extensive efforts undertaken since 1995, CMC
successfully managed the millennium date change without experiencing any
material interruptions or disruptions to customers. CMC will continue ongoing
problem tracking and reporting throughout 2000 in order to manage any latent
Year 2000 issues that may arise.
-10-
<PAGE>
COMPARISON BETWEEN 1998 AND 1997
The Company's net interest income was $77,179,000 in 1998 compared with
$80,308,000 in 1997. Basic earnings per share were $32,009,000 and $35,229,000
for 1998 and 1997, respectively. In 1998, interest income from residential and
commercial First Mortgage Loans was $64,430,000 and $7,909,000, respectively,
representing a total average yield of 7.6% compared with interest income from
residential and commercial First Mortgage Loans of $70,790,000 and $9,391,000,
respectively, and representing a total average yield of 7.8% for 1997.
After deductions of $620,000 for advisory and other administrative expenses, the
Company reported net income of $76,559,000 in 1998 compared with a deduction of
$529,000 for advisory fees and other administrative expenses and net income of
$79,779,000 in 1997.
The decrease in operating results in 1998 when compared to 1997 reflects the
impact of lower interest rates and higher prepayments of residential First
Mortgage Loans during 1998.
SUBSEQUENT DEVELOPMENTS
General
On March 16, 2000, the Company's Board of Directors (with the approval of its
Independent Directors) authorized a series of transactions pursuant to which the
Company will acquire Additional Assets consisting of the following:
o a 100% participation interest in loans (and the related servicing rights)
originated or acquired by the Bank and Chase USA or their affiliates that
are secured by first priority security interests in manufactured housing
units ("Manufactured Housing Loans");
o a 100% participation interest in loans (and the related servicing rights)
originated or acquired by the Bank and Chase USA or their affiliates that
are secured by second mortgages on single family (one- to four-unit)
residential real properties ("Second Mortgage Loans")
o nonrecourse intercompany loans (the "Intercompany Loans") made by the
Company to the Bank and Chase USA, secured by a pledge by the Bank and
Chase USA of all outstanding loans under home equity lines of credit
originated by the Bank or Chase USA, as the case may be ("HELOCs").
The Company expects that it will initially acquire approximately $2.1 billion of
Manufactured Housing Loans and approximately $2.6 billion of Second Mortgage
Loans. It is currently intended that, on a monthly basis following the initial
acquisition of Second Mortgage Loans and Manufactured Housing Loans, the Company
will purchase a 100% participation interest in all Second Mortgage Loans and
Manufactured Housing Loans originated by the Bank and Chase USA satisfying the
criteria described below. The participation interests in the Manufactured
Housing Loans and Second Mortgage Loans will be treated as a sale for accounting
purposes, and those loans will accordingly appear as assets on the Company's
balance sheet following their acquisition.
The initial aggregate principal amount of the Intercompany Loans, which will
equal 80% of the outstanding principal balance of the HELOCs pledged as
security, is expected to be approximately $2.4 billion. In addition, on a
quarterly basis, the Company may, but is not required to, make additional
Intercompany Loans to the Bank and/or Chase USA in an aggregate amount not to
exceed 80% of the then outstanding principal balance of HELOCS pledged by the
applicable entity. The Intercompany Loan documents also require that the
outstanding principal balance of the Intercompany Loans will at no time exceed
85% of the outstanding principal balance of HELOCs pledged as security and
require the Bank and/or Chase USA to make prepayments of their respective
Intercompany Loans to ensure that such ceiling is not exceeded.
The Company believes that the price to be paid by the Company for the
Manufactured Housing Loans and Second Mortgage Loans will approximate their fair
value; however, no third party appraisals of those assets have been or will be
obtained. Similarly, no third party appraisals will be obtained to determine the
value of the HELOCs securing the Intercompany Loans.
Funding of Additional Assets
The Company's initial acquisition of the Additional Assets will be funded
through the issuance and sale to the Bank of shares of Series B Preferred Stock
having an aggregate liquidation value equal to the total of (i) the price paid
for the Manufactured Housing Loans and Second Mortgage Loans and (ii) the
initial principal amount of the Intercompany Loans. Proceeds obtained from the
sale or repayment of principal balances of Additional Assets will be applied to
acquire Additional Assets or First Mortgage Loans. Any increases in the
aggregate amount of Additional Assets held by the Company will be funded either
through intercompany advances by the Bank to the Company or through the sale to
the Bank of additional shares of Series B Preferred Stock.
-11-
<PAGE>
The Series B Preferred Stock will have a par value per share of $25 and a
liquidation value per share of $1,000,000. The Bank, as holder of the Series B
Preferred Stock, will be entitled to receive cumulative dividends, when, as and
if declared by the Board of Directors, at a variable dividend rate to be
determined by a committee of the Board of Directors prior to the initial
issuance of the Series B Preferred Stock and tied to the Federal funds
(effective) rate. The Series B Preferred Stock will rank junior to the Series A
Preferred Shares with respect to the payment of dividends and will rank on a
parity with the Series A Preferred Shares upon liquidation, dissolution or
winding up of the Company. The Series B Preferred Stock will be redeemable at
the option of the Company on or after September 18, 2001 or at any time upon the
occurrence of certain events relating to tax treatment of the Company or the
Series B Preferred Stock. The Series B Preferred Stock is not convertible into
common stock or any other securities. Except as required by Delaware law, the
holder of the Series B Preferred Stock will not have any voting rights, other
than the right to approve the issuance of senior Preferred Stock or certain
amendments to the Company's certificate of incorporation that would adversely
affect the Series B Preferred Stock. In approving the acquisition of the
Additional Assets, the Independent Directors, upon receipt of an opinion of
counsel, waived all Ownership Limits with respect to the Series B Preferred
Stock (see "Certain REIT Requirements" in Item 1 above).
Credit Quality and Related Matters
It is currently anticipated that the Company will purchase participation
interests in (i) all Second Mortgage Loans and Manufactured Housing Loans
originated by the Bank and (ii) all Second Mortgage Loans and Manufactured
Housing Loans originated by Chase USA other than those that would be considered
"low quality" assets under applicable regulatory standards. No Second Mortgage
Loan or Manufactured Housing Loan will be acquired prior to the sixth month
following its origination. The security agreements with respect to the
Intercompany Loans provide that all HELOCs, regardless of their credit quality,
will be pledged to the Company, although the Company has the discretion to
release its security interest in any particular HELOC or to require the Bank or
Chase USA, as the case may be, to take appropriate action with respect to the
borrower under the HELOC, including, without limitation, initiating foreclosure
proceedings with respect to the property securing the HELOC.
The Board of Directors, with the approval of the Independent Directors, has
implemented certain amendments to its policies to permit the acquisition of the
Manufactured Housing Loans and the Second Mortgage Loans and the extension of
the Intercompany Loans. The Company's current policies and contractual terms
relating to the First Mortgage Loans were not changed, and it is currently
anticipated that the Company will continue to maintain its portfolio of First
Mortgage Loans, and to acquire new residential First Mortgage Loans, in
accordance with its customary practices.
Servicing Arrangements
The Manufactured Housing Loans and the Second Mortgage Loans will be acquired on
a servicing released basis. The Company will engage CMMC to service those assets
on the Company's behalf. The servicing arrangements between the Company and CMMC
will provide that the Company will retain the power to direct CMMC to foreclose
on any Manufactured Housing Loan or Second Mortgage Loan.
The HELOCs securing the Intercompany Loans will continue to be owned by the Bank
or Chase USA, as the case may be, and will continue to be serviced in accordance
with their current servicing arrangements. However, as noted above, the security
agreements with respect to the Intercompany Loans will give the Company the
power to direct the servicer of the HELOCs to foreclose on HELOCs under certain
circumstances specified in the security agreements.
Amendment to Advisory Agreement
In connection with the acquisition of the Additional Assets, the Company and the
Advisor have agreed to amend the Advisory Agreement to increase the Advisor's
annual fee from $250,000 to $500,000.
Required Approvals
All requisite board and regulatory approvals required to consummate the
acquisition of the Additional Assets have been obtained, and the rating agencies
currently rating the Series A Preferred Stock have confirmed that the
acquisition of the Additional Assets will not adversely affect their ratings on
the Series A Preferred Stock. Accordingly, the Company anticipates that the
initial acquisitions of the Additional Assets will occur in the second quarter
of 2000.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
For information related to interest rate risk, see the Interest Rate Risk
section on page 9.
-12-
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants
---------------------------------
To the Board of Directors and Stockholders
of Chase Preferred Capital Corporation
In our opinion, the accompanying balance sheets and the related statements of
income, of changes in stockholders' equity and of cash flows present fairly, in
all material respects, the financial position of Chase Preferred Capital
Corporation (the "Company") at December 31, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
New York, New York
March 20, 2000
-13-
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHASE PREFERRED CAPITAL CORPORATION
BALANCE SHEET
(in thousands, except share data)
12/31/99 12/31/98
-------- --------
ASSETS:
Residential First Mortgage Loans $ 1,014,144 $ 944,012
Commercial First Mortgage Loans 55,233 77,356
------------ -----------
1,069,377 1,021,368
Less: allowance for loan losses (4,962) (4,120)
------------ -----------
1,064,415 1,017,248
Cash and cash equivalents 47,703 25,215
Due from affiliates 225 71,140
Accrued interest receivable 6,957 7,703
------------ -----------
TOTAL ASSETS $ 1,119,300 $ 1,121,306
============ ===========
LIABILITIES:
Accounts payable $ 126 $ 432
------------ -----------
TOTAL LIABILITIES 126 432
------------ -----------
Commitments and contingencies (See Note 7)
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, one share authorized and
outstanding, par value $171,750,000 per share 171,750 171,750
Capital surplus 382,005 381,637
Retained earnings * 15,419 17,487
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 1,119,174 1,120,874
------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,119,300 $ 1,121,306
============ ===========
* No retained earnings related to property sales
The Notes to Financial Statements are an integral part of these Statements.
-14-
<PAGE>
CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF INCOME
(in thousands)
Year Ended Year Ended Year Ended
12/31/99 12/31/98 12/31/97
INTEREST INCOME:
Residential First Mortgage Loans $ 63,192 $ 64,430 $ 70,790
Commercial First Mortgage Loans 6,284 7,909 9,391
Interest on overnight investments 3,850 7,089 2,760
----------- ---------- ---------
73,326 79,428 82,941
Less: servicing fees (2,604) (2,249) (2,633)
----------- ---------- ---------
Net interest income 70,722 77,179 80,308
----------- ---------- ---------
NONINTEREST EXPENSE:
Advisory fees 250 250 250
Other administrative expenses 345 370 279
----------- ---------- --------
Total noninterest expense 595 620 529
----------- ---------- --------
NET INCOME $ 70,127 $ 76,559 $ 79,779
=========== ========== ========
NET INCOME APPLICABLE TO COMMON SHARE $ 25,577 $ 32,009 $ 35,229
=========== ========== ========
BASIC AND FULLY DILUTED
NET INCOME PER COMMON SHARE $ 25,577 $ 32,009 $ 35,229
=========== ========== ========
The Notes to Financial Statements are an integral part of these Statements.
-15-
<PAGE>
CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
Year Ended Year Ended Year Ended
12/31/99 12/31/98 12/31/97
PREFERRED STOCK:
Balance at beginning of period $ 550,000 $ 550,000 $ 550,000
----------- ----------- -----------
Balance at end of period $ 550,000 $ 550,000 $ 550,000
=========== =========== ===========
COMMON STOCK:
Balance at beginning of period 171,750 171,750 171,750
----------- ----------- -----------
Balance at end of period $ 171,750 $ 171,750 $ 171,750
=========== =========== ===========
CAPITAL SURPLUS:
Balance at beginning of period $ 381,637 $ 381,637 $ 381,637
Other 368 0 0
----------- ----------- -----------
Balance at end of period $ 382,005 $ 381,637 $ 381,637
=========== =========== ===========
RETAINED EARNINGS:
Balance at beginning of period $ 17,487 $ 16,543 $ 9,339
Net Income 70,127 76,559 79,779
Common dividends (27,645) (31,065) (28,025)
Preferred dividends (44,550) (44,550) (44,550)
----------- ----------- -----------
Balance at end of period $ 15,419 $ 17,487 $ 16,543
=========== =========== ===========
TOTAL STOCKHOLDERS' EQUITY $ 1,119,174 $ 1,120,874 $ 1,119,930
=========== =========== ===========
The Notes to Financial Statements are an integral part of these Statements.
-16-
<PAGE>
CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
12/31/99 12/31/98 12/31/97
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 70,127 $ 76,559 $ 79,779
Adjustments to reconcile net income to net cash
provided (used) by operating
activities:
Amortization of deferred costs 4,764 2,140 1,955
Net change in:
Due from affiliates 70,915 (30,476) (21,921)
Accrued interest receivable 2,634 1,896 585
Accounts payable 62 65 (63)
Due to affiliates 0 (2,867) 2,625
--------- --------- ---------
Net cash provided (used) by operating activities 148,502 47,317 62,960
--------- --------- ---------
INVESTING ACTIVITIES:
Purchase of First Mortgage Loans (555,490) (643,947) (210,588)
Acquired reserve 929 1,093 429
Principal payments received 501,795 603,920 283,085
Purchase of accrued interest receivable (1,888) (2,618) (833)
Chargeoffs (87) (362) (111)
Sale of loans 922 1,508 461
--------- --------- ---------
Net cash provided (used) by investing activities (53,819) (40,406) 72,443
--------- --------- ---------
FINANCING ACTIVITIES:
Dividends paid (72,195) (75,615) (72,575)
--------- --------- ---------
Net cash provided (used) by financing activities (72,195) (75,615) (72,575)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,488 (68,704) 62,828
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,215 93,919 31,091
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 47,703 $ 25,215 $ 93,919
========= ========= =========
</TABLE>
The Notes to Financial Statements are an integral part of these Statements.
-17-
<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 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 at their estimate fair
values a portfolio of mortgage loans secured by first mortgages on residential
and commercial properties ("First Mortgage Loans"). The First 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 changed
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.
Certain amounts in the statement of cash flows have been reclassified to conform
to the current presentation.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
First Mortgage Loans:
First Mortgage Loans are carried at the principal amount outstanding, net of any
premium or discount associated with these loans. Loans held for sale are carried
at the lower of aggregate cost or fair value. Interest income, including
amortization of premiums and accretion of discounts, is recognized using the
interest method or on a basis approximating a level rate of return over the term
of the loan. First Mortgage Loans acquired from the Bank or its affiliates are
recorded at the Bank's historical cost basis in the accompanying balance sheet.
Any difference between the amount paid and the Bank's historical cost basis
would be treated as an adjustment to capital surplus.
Nonaccrual loans are those loans on which the accrual of interest has ceased.
Loans are placed on nonaccrual status immediately if, in the opinion of
management, full payment of principal or interest is in doubt, or when principal
or interest is past due 90 days or more and collateral, if any, is insufficient
to cover principal and interest. Interest accrued but not collected at the date
a loan is placed on nonaccrual status is reversed against interest income. In
addition, the amortization of net deferred loan fees and costs are suspended
when a loan is placed on nonaccrual status. Interest income on nonaccrual loans
is recognized only to the extent received in cash. However, where there is doubt
regarding the ultimate collectibility of the loan principal, cash receipts,
whether designated as principal or interest, are thereafter applied to reduce
the carrying value of the loan. Loans are restored to accrual status only when
interest and principal payments are brought current and future payments are
reasonably assured.
A loan is considered impaired when, based on current information, it is probable
that the borrower will be unable to pay contractual interest or principal
payments as scheduled in the loan agreement. The Company accounts for and
discloses nonaccrual commercial First Mortgage Loans as impaired. Impaired loans
are carried at the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price, or the fair value of the collateral, if the loan is
collateral dependent. The Company recognizes interest income on impaired loans
in the manner set forth above for nonaccrual loans. The Company excludes from
impaired loans small-balance homogeneous consumer loans, loans carried at fair
value or the lower of cost or fair value, debt securities and leases.
A collateralized loan is reclassified to Assets Acquired as Loan Satisfactions
only when the Company has taken physical possession of the collateral regardless
of whether formal foreclosure proceedings have taken place.
-18-
<PAGE>
Allowance for Loan Losses:
The Company's allowance for loan losses is intended to cover probable credit
losses as of December 31, 1999 for which either the asset is not specifically
identified or the size of the loss has not been fully determined. The allowance
for loan losses is reviewed in light of the risk profile of the portfolio and
current economic conditions. The allowance is adjusted based on that review if,
in management's judgment, changes are warranted.
The allowance for loan losses is increased by allowances related to purchased
First Mortgage Loan portfolios and by provisions for losses charged against
income and is reduced by charge-offs, net of recoveries. Charge-offs are
recorded when, in the judgment of management, an extension of credit is deemed
uncollectible, in whole or in part.
Cash and Cash Equivalents:
The Company considers all short-term, highly liquid investments that are both
readily convertible to cash and have a maturity of generally three months or
less at the time of purchase to be cash equivalents. At December 31, 1999, the
Company's cash was held in custody at a third party financial institution, and
the cash equivalents (overnight deposits) were held in custody at the Bank.
Dividends:
Preferred Stock. Dividends on the Series A Preferred Shares are cumulative and
are payable quarterly on the last day of March, June, September and December at
a rate of 8.10% per annum of the initial liquidation preference ($25.00 per
share).
Common Stock. The common shareholder is entitled to receive dividends when, as
and if declared by the Board of Directors out of funds legally available after
all preferred dividends have been paid.
Net Income Per Common Share:
Net income per share is computed by dividing net income after preferred
dividends by the weighted average number of shares of Common Stock outstanding.
Income Taxes:
The Company has elected to be treated as a Real Estate Investment Trust ("REIT")
pursuant to provisions of the Internal Revenue Code of 1986, as amended (the
"Code"). As a result, the Company will not be subject to federal income tax on
its taxable income to the extent it distributes at least 95% of its taxable
income to its shareholders and it meets certain other requirements set forth in
the Code. The Company intends to maintain its qualification as a REIT for
federal income tax purposes. The Company intends to pay qualifying dividends
(for federal income tax purposes) on all of its taxable income to the holders of
its Common Stock and Series A Preferred Shares, a portion of which may be in the
form of "consent" dividends or "subsequent year" dividends, pursuant to the
Code. As a result, the Company has made no provision for income taxes in the
accompanying financial statements.
NOTE 3 - FIRST MORTGAGE LOANS
- -----------------------------
First Mortgage Loans consist of both residential and commercial First Mortgage
Loans. Residential First Mortgage Loans consist of six-month prime rate
adjustable rate mortgages ("ARMs"); six-month treasury ARMs; three-year fixed
rate loans with an automatic conversion to six-month, one-year and three-year
treasury ARMs; one, five, seven and ten-year fixed rate loans with an automatic
conversion to one-year treasury ARMs; and fixed rate loans. The commercial First
Mortgage Loans consist of fixed and variable rate loans, a majority of which
have balloon payments.
-19-
<PAGE>
The following represents the First Mortgage Loan portfolio before allowance for
loan losses as of the dates indicated:
12/31/99 12/31/98
(in thousands) (in thousands)
Residential First Mortgage Loans $ 1,014,144 $ 944,012
Commercial First Mortgage Loans 55,233 77,356
------------- -----------
Total portfolio $ 1,069,377 $ 1,021,368
============= ===========
All of the First Mortgage Loans are secured by a mortgage, deed of trust or
other security instrument which created a first lien on the residential dwelling
or commercial property.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
- ----------------------------------
The table below summarizes the changes in the allowance for loan losses during
1999, 1998, and 1997:
Allowance for Loan Losses
(in thousands)
12/31/99 12/31/98 12/31/97
- --------------------------------------------------------------------------------
Total allowance at beginning
of period $ 4,120 $ 3,468 $ 3,150
Acquired allowance 929 1,092 429
Provision for loan losses 0 0 0
Charge-offs (87) (440) (111)
Recoveries 0 0 0
--------- --------- ---------
Total allowance at end of period $ 4,962 $ 4,120 $ 3,468
========= ========= =========
================================================================================
At December 31, 1999, 1998 and 1997, the Company's allowance for loan losses as
a percentage of total loans was .46%, .40% and .35%, respectively.
NOTE 5 - DIVIDENDS
- ------------------
For each of the years ended December 31, 1999, 1998 and 1997, the Company paid
dividends on the Series A Preferred Shares in the amount of approximately
$44,550,000. For the year ended December 31, 1999, the Company paid dividends on
Common Stock in the amount of approximately $27,645,000, compared with
$31,065,000 and $28,025,000 in 1998 and 1997, respectively.
NOTE 6 - RELATED PARTY TRANSACTIONS
- -----------------------------------
The Company has entered into an agreement (the "Advisory 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 Advisory Agreement.
The Advisory 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 First Mortgage Loans. Pursuant
to each servicing agreement ("Servicing Agreement"), the Bank ("Servicer")
performs the actual servicing of the First 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.
-20-
<PAGE>
The Bank has entered into sub-servicing 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").
For the years ended December 31, 1999, 1998 and 1997, the Company purchased
First Mortgage Loans having an outstanding principal balance of $555,490,000,
$643,947,000 and $210,588,000, respectively, from the Bank or its affiliates.
The Company also sold $922,000 of residential First Mortgage Loans in
foreclosure to a wholly-owned subsidiary of CMC during the twelve months ended
December 31, 1999. No gain or loss was recognized from this sale.
Advisory fees and servicing fees incurred in 1999, 1998 and 1997 totaled
approximately $2,854,000, $2,500,000, and $2,883,000, respectively.
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 $3,850,000, $7,089,000 and $2,760,000 for the years ended December
31, 1999, 1998 and 1997, respectively.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Legal Proceedings:
At December 31, 1999, the Company is not subject to any material litigation.
None of the Company, the Bank nor any of the Bank's'affiliates is currently
involved in any material litigation with respect to the Company's assets that
would, in the opinion of the Company's management, have a material adverse
effect on the financial statements of the Company.
Credit Risk Concentrations:
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 First Mortgage Loans within the
portfolio. The following table shows the First Mortgage Loan portfolio by
geographical area as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Geographical Breakout
December 31, 1999 December 31, 1998
(in thousands) Amount Percent Amount Percent
Residential First Mortgage Loans:
<S> <C> <C> <C> <C>
California $ 385,874 36.1% $ 372,200 36.4%
Colorado 74,438 7.0% 63,278 6.2%
Texas 52,747 4.9% -- --
Florida 49,689 4.6% -- --
Other States (no State has more than 4%) 451,396 42.2% 508,534 49.8%
----------- ------ ----------- -----
Total Residential First Mortgage Loans 1,014,144 94.8% 944,012 92.4%
----------- ------ ----------- -----
Commercial Mortgage Loans:
New York Metropolitan Tri-State Area 51,705 4.9% 73,523 7.2%
Other States 3,528 0.3% 3,833 0.4%
----------- ------ ----------- -----
Total Commercial First Mortgage Loans 55,233 5.2% 77,356 7.6%
----------- ------ ----------- -----
Total $ 1,069,377 100% $ 1,021,368 100%
=========== ====== =========== =====
</TABLE>
At December 31, 1999, approximately 36.1% of the Company's total First Mortgage
Loan portfolio consisted of loans collateralized 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 First Mortgage Loans.
-21-
<PAGE>
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------
Statement of Financial Accounting Standards No. 107, entitled "Disclosures About
Fair Value of Financial Instruments" ("SFAS 107"), requires the Company to
disclose fair value information about financial instruments for which it is
practicable to estimate the value, whether or not such financial instruments are
recognized on the balance sheet. Fair value is defined as the amount at which a
financial instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation, and is best evidenced by a
quoted market price, if one exists. The calculation of estimated fair value is
based on market conditions at a specific point in time and may not be reflective
of future fair values.
Certain financial instruments and all nonfinancial instruments are excluded from
the scope of SFAS 107. Accordingly, the fair value disclosures required by SFAS
107 provide only a partial estimate of the fair value of the Company. Fair
values among REITs are not comparable due to the wide range of valuation
techniques and numerous estimates which must be made. This lack of objective
valuation standard introduces a great degree of subjectivity to these derived or
estimated fair values. Therefore, readers are cautioned in using this
information for purposes of evaluating the financial condition of the Company
compared with other REITs.
First Mortgage Loans:
First Mortgage Loans were valued using methodologies suitable for each loan
type. Certain of these methodologies and the key assumptions made are discussed
below.
The fair value of the Company's commercial First Mortgage Loans was estimated by
assessing the two main risk components of the portfolio: credit and interest.
The estimated cash flows were adjusted to reflect the inherent credit risk and
then discounted, using rates appropriate for each maturity that incorporate the
effects of interest rate changes.
For residential First Mortgage Loans for which market rates for comparable loans
are readily available, the fair values were estimated by discounting cash flows,
adjusted for prepayments. The discount rates used for residential First Mortgage
Loans were secondary market yields for comparable mortgage-backed securities,
adjusted for credit risk. The discount rates used incorporated the effects of
interest rate changes only, since the estimated cash flows were adjusted for
credit risk.
The carrying value and fair value of First Mortgage Loans at December 31, 1999
and 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
12/31/99 12/31/98
Estimated Estimated
Carrying Value Fair Value Carrying Value Fair Value
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
First Mortgage Loans, net of
allowance for loan losses $ 1,064,415 $ 1,070,843 $ 1,017,248 $1,036,038
</TABLE>
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.
NOTE 9 - SUBSEQUENT EVENTS
- --------------------------
On March 16, 2000, the Company's Board of Directors (with the approval of its
Independent Directors) authorized a series of transactions pursuant to which the
Company will acquire Additional Assets consisting of the following:
o a 100% participation interest in loans (and the related servicing rights)
originated or acquired by the Bank and Chase USA or their affiliates that
are secured by first priority security interests in manufactured housing
units ("Manufactured Housing Loans");
o a 100% participation interest in loans (and the related servicing rights)
originated or acquired by the Bank and Chase USA or their affiliates that
are secured by second mortgages on single family (one- to four-unit)
residential real properties ("Second Mortgage Loans")
o nonrecourse intercompany loans (the "Intercompany Loans") made by the
Company to the Bank and Chase USA, secured by a pledge by the Bank and
Chase USA of all outstanding loans under home equity lines of credit
originated by the Bank or Chase USA, as the case may be ("HELOCs").
-22-
<PAGE>
The Company expects that it will initially acquire approximately $2.1 billion of
Manufactured Housing Loans and approximately $2.6 billion of Second Mortgage
Loans. It is currently intended that, on a monthly basis following the initial
acquisition of Second Mortgage Loans and Manufactured Housing Loans, the Company
will purchase a 100% participation interest in all Second Mortgage Loans and
Manufactured Housing Loans originated by the Bank and Chase USA satisfying
specified criteria. The participation interests in the Manufactured Housing
Loans and Second Mortgage Loans will be treated as a sale for accounting
purposes, and those loans will accordingly appear as assets on the Company's
balance sheet following their acquisition.
The initial aggregate principal amount of the Intercompany Loans, which will
equal 80% of the outstanding principal balance of the HELOCs pledged as
security, is expected to be approximately $2.4 billion. In addition, on a
quarterly basis, the Company may, but is not required to, make additional
Intercompany Loans to the Bank and/or Chase USA in an aggregate amount not to
exceed 80% of the then outstanding principal balance of HELOCS pledged by the
applicable entity. The Intercompany Loan documents also require that the
outstanding principal balance of the Intercompany Loans will at no time exceed
85% of the outstanding principal balance of HELOCs pledged as security and
require the Bank and/or Chase USA to make prepayments of their respective
Intercompany Loans to ensure that such ceiling is not exceeded.
The Company believes that the price to be paid by the Company for the
Manufactured Housing Loans and Second Mortgage Loans will approximate their fair
value; however, no third party appraisals of those assets have been or will be
obtained. Similarly, no third party appraisals will be obtained to determine the
value of the HELOCs securing the Intercompany Loans.
-23-
<PAGE>
CHASE PREFERRED CAPITAL CORPORATION
AVERAGE BALANCE SHEET
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------------------------------ --------------------------------
Balance Interest Rate Balance Interest Rate
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage loans $ 938,334 63,192 6.7% $ 866,792 64,430 7.4%
Commercial mortgage loans 68,175 6,284 9.2% 86,552 7,909 9.1%
Cash 72,801 3,850 5.3% 130,466 7,089 5.4%
----------- ----------- --- ----------- -------- ---
TOTAL INTEREST-EARNING ASSETS 1,079,310 73,326 6.8% 1,083,810 79,428 7.3%
----------- ----------- --- ----------- -------- ---
Cash - Noninterest-earning 16,694 0
Allowance for credit losses (4,567) (3,631)
Due from affiliates 28,287 47,547
Accrued interest receivable 6,801 6,526
----------- -----------
TOTAL ASSETS $ 1,126,525 $ 1,134,252
=========== ===========
LIABILITIES:
Accounts payable $ 4,496 $ 6,931
Due to affiliates 0 2,666
----------- -----------
TOTAL LIABILITIES 4,496 9,597
----------- -----------
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, one share authorized and
outstanding, par value $171,750,000 per share 171,750 171,750
Capital surplus 381,732 381,637
Retained earnings 18,547 21,268
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,122,029 1,124,655
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' 1,126,525 $ 1,134,252
=========== ===========
EQUITY
</TABLE>
-24-
<PAGE>
CHASE PREFERRED CAPITAL CORPORATION
QUARTERLY FINANCIAL INFORMATION
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------------------------------------- --------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
INTEREST INCOME:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage loans $ 16,829 $ 15,823 $ 15,209 $ 15,331 $ 17,221 $ 17,011 $ 14,446 $ 15,752
Commercial mortgage loans 1,528 1,300 1,730 1,726 1,836 1,746 2,141 2,186
Interest on overnight investments 101 968 1,913 868 1,187 1,371 2,668 1,863
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
18,458 18,091 18,852 17,925 20,244 20,128 19,255 19,801
Less: servicing fees (674) (657) (639) (634) (421) (670) (559) (599)
---------- ---------- ---------- ---------- --------- ---------- ---------- ----------
Net interest income 17,784 17,434 18,213 17,291 19,823 19,458 18,696 19,202
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NON INTEREST EXPENSE:
Advisory fees 62 62 63 63 63 62 62 63
Other administrative expenses 104 58 102 81 61 94 92 123
---------- ---------- ---------- ---------- --------- ---------- ---------- ----------
Total noninterest expense 166 120 165 144 124 156 154 186
---------- ---------- ---------- ---------- --------- ---------- ---------- ----------
NET INCOME: $ 17,618 $ 17,314 $ 18,048 $ 17,147 $ 19,699 $ 19,302 $ 18,542 $ 19,016
========== ========== ========== ========== ========= ========== ========== ========
NET INCOME APPLICABLE TO
COMMON SHARE $ 6,480 $ 6,177 $ 6,910 $ 6,010 $ 8,562 $ 8,164 $ 7,404 $ 7,879
========== ========== ========== ========== ========= ========== ========== ========
BASIC AND FULLY DILUTED
NET INCOME PER COMMON
SHARE (a) $ 6,480 $ 6,177 $ 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.
-25-
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION
The following persons are directors of the Company as of the date hereof:
Richard J. Boyle 56 Director. Retired as Vice Chairman of the Board
of The Chase Manhattan Corporation ("Heritage
Chase") and The Chase Manhattan Bank, N.A. upon
consummation of the merger of Heritage Chase
with Chemical Banking Corporation on March
31,1996 (the "Merger"). Mr. Boyle served in
such positions since 1987. Mr. Boyle is
Chairman of the Board and Chief Executive
Officer of The Buckhill Falls Company.
Dina Dublon 46 President and Director. An Executive Vice
President, the Chief Financial Officer of CMC
and the Bank, and a member of CMC's management
committee. Ms. Dublon joined the Bank in 1981
and has served in various positions at the
Bank, including Corporate Treasurer and
Executive Vice President, Corporate Planning.
Ms. Dublon is a director of govWorks.com and
the Hartford Financial Services Group.
Thomas Jacob 61 Director. The Chief Executive Officer of Chase
Manhattan Mortgage Corporation, the mortgage
subsidiary of CMC. Mr. Jacob is also the
President of Chase USA, and an Executive Vice
President and a member of CMC's management
committee. For the six years prior to the
Merger, Mr. Jacob was the executive responsible
for the residential retail mortgage business of
Chemical Banking Corporation.
William C. Langley 61 Director. Retired as an Executive Vice
President and Chief Credit and Risk Policy
Officer of Chemical Banking Corporation and
Chemical Bank, effective July 31, 1996. Prior
to becoming an Executive Vice President of
Chemical Banking Corporation and Chemical Bank
in 1991, Mr. Langley had served as an Executive
Vice President since 1983, and the Chief Credit
Officer since 1990, of Manufacturers Hanover
Corporation.
Louis M. Morrell 53 Treasurer and Director. A Managing Director of
the Bank and CMC. Mr. Morrell joined the Bank
in 1970 and, since joining, has held various
corporate finance and corporate
treasury-related positions with the Bank.
Neila B. Radin 46 Secretary. A Senior Vice President and
Associate General Counsel of the Bank. Ms.
Radin joined the Bank in 1987 and has been a
member of its legal department since 1988.
Joseph L. Sclafani 51 Director. An Executive Vice President of CMC
and the Bank, Controller of CMC since the
Merger (with responsibility for corporate
accounting, reporting, tax, insurance and
operating risk functions) and a member of CMC's
management committee. Prior to the Merger, Mr.
Sclafani was Controller of Chemical Banking
Corporation since August 1992.
Robert S. Strong 50 Chairman and Director. An Executive Vice
President and the Chief Credit Officer of CMC
and the Bank and a member of CMC's management
council. Mr. Strong joined Heritage Chase in
1971 and served in various positions at
Heritage Chase, including as executive in
charge of the Global Portfolio Management
Group, the Real Estate Finance Group, the
Transportation and Defense Group, the
Diversified Industries Group and the Public
Utilities Group.
-26-
<PAGE>
ITEM 11: EXECUTIVE COMPENSATION
The Company does not pay any compensation to its officers or to directors who
are not Independent Directors. The Independent Directors (Messrs. Boyle and
Langley) each receive annual compensation of $10,000 plus a fee of $750 for
attendance (in person or by telephone) at each meeting of the Board of
Directors.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is hereby made to "Item 1. Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a
discussion of the Company's various relationships with the Bank, the sole holder
of all its outstanding Common Stock.
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed during the fourth quarter of 1999.
-27-
<PAGE>
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. EXHIBITS
- ----------- --------
3(a) (i) Form of Amended and Restated Certificate of Incorporation of the
Company (Incorporated by reference to Exhibit 3(a) (iii) to the
Registration Statement on Form S-11 (File No. 333- 08001) of
Chase Preferred Capital Corporation).
3(a) (ii) Form of Certificate of Designation establishing the Series A
Preferred Shares (Incorporated by reference to Exhibit 3(a) (ii)
to the Registration Statement on Form S-11 (File No. 333- 08001)
of Chase Preferred Capital Corporation).
3(a) (iii) Certificate of Amendment to Amended and Restated Certificate of
Incorporation of the Company.
3(b) Form of Amended and Restated By-laws of the Company (Incorporated
by reference to Exhibit 3(b) (ii) to the Registration Statement
on Form S-11 (File No. 333-08001) of Chase Preferred Capital
Corporation).
4 Specimen of certificate representing Series A Preferred Shares
(Incorporated by reference to Exhibit 4 to the Registration
Statement on Form S-11 (File No. 333-08001 of Chase Preferred
Capital Corporation).
10(a) Form of Residential Mortgage Loan Purchase and Warranties
Agreement between the Company and The Chase Manhattan Bank
(Incorporated by reference to Exhibit 10(a) to the Registration
Statement on Form S-11 (File No. 333-08001) of Chase Preferred
Capital Corporation).
10(b) Form of Commercial Mortgage Loan Purchase and Warranties
Agreement between the Company and The Chase Manhattan Bank
(Incorporated by reference to Exhibit 10(b) to the Registration
Statement on Form S-11 (File No. 333-08001) of Chase Preferred
Capital Corporation).
10(c) Form of Residential Mortgage Loan Servicing Agreement between the
Company and The Chase Manhattan Bank (Incorporated by reference
to Exhibit 10(c) to the Registration Statement on Form S-11 (File
No. 333-08001) of Chase Preferred Capital Corporation).
10(d) Form of Commercial Mortgage Loan Servicing Agreement between the
Company and The Chase Manhattan Bank (Incorporated by reference
to Exhibit 10(d) to the Registration Statement on Form S-11 (File
No. 333-08001) of Chase Preferred Capital Corporation).
10(e) Form of Advisory Agreement between the Company and The Chase
Manhattan Bank (Incorporated by reference to Exhibit 10(e) to The
Registration Statement on Form S-11 (File No. 333-08001) of Chase
Preferred Capital Corporation).
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
-28-
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 and 15 (d) 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: March 30, 2000 By: /s/Louis M. Morrell
--------------------------------
Louis M. Morrell
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert S. Strong Chairman and Director March 30, 2000
- -------------------------------- (Principal Executive )
Robert S. Strong Officer
/s/ Dina Dublon President and Director March 30, 2000
- --------------------------------
Dina Dublon
/s/ Louis M. Morrell Treasurer and Director March 30, 2000
- -------------------------------- (Principal financial
Louis M. Morrell and accounting officer)
/s/ Richard J. Boyle Director March 30, 2000
- --------------------------------
Richard J. Boyle
/s Thomas Jacob Director March 30, 2000
- --------------------------------
Thomas Jacob
/s/ William C. Langley Director March 30, 2000
- --------------------------------
William C. Langley
/s/ Joseph L. Sclafani Director March 30, 2000
- --------------------------------
Joseph L. Sclafani
EXHIBIT 11
----------
CHASE PREFERRED CAPITAL CORPORATION
Computation of net income per share
-----------------------------------
Net income for basic and fully diluted 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.
For the Year For the Year
(in thousands, except shares outstanding): Ended 12/31/99 Ended 12/31/98
- --------------------------------------------------------------------------------
Earnings:
Net income $ 70,127 $ 76,559
Less: preferred stock dividend requirements 44,550 44,550
------------ ---------
Net income applicable to common stock $ 25,577 $ 32,009
============ =========
Shares:
Average common shares outstanding (a) 1 1
Basic and fully diluted net income
per share:(a) $ 25,577 $ 32,009
============ =========
================================================================================
(a) All common share 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.
-29-
EXHIBIT 12(a)
-------------
CHASE PREFERRED CAPITAL CORPORATION
Computation of ratio of earnings to fixed charges
-------------------------------------------------
For the Year For the Year
(in thousands, except ratio): Ended 12/31/99 Ended 12/31/98
- -------------------------------------------------------------------------------
Net income $ 70,127 $ 76,559
------------ -----------
Fixed charges:
Advisory fees 250 250
------------ -----------
Total fixed charges 250 250
------------ -----------
Earnings before fixed charges $ 70,377 $ 76,809
============ ===========
Fixed charges, as above $ 250 $ 250
============ ===========
Ratio of earnings to fixed charges 281.51 307.24
============ ===========
================================================================================
-30-
EXHIBIT 12(b)
-------------
CHASE PREFERRED CAPITAL CORPORATION
Computation of ratio of earnings to fixed charges
and preferred stock dividend requirements
-----------------------------------------
For the Year For the Year
(in thousands, except ratio: Ended 12/31/99 Ended 12/31/98
- --------------------------------------------------------------------------------
Net income $ 70,127 $ 76,559
------------ ------------
Fixed charges:
Advisory fees 250 250
------------ ------------
Total fixed charges 250 250
------------ ------------
Earnings before fixed charges $ 70,377 $ 76,809
============ ============
Fixed charges, as above $ 250 $ 250
Preferred stock dividend requirements 44,550 44,550
------------ ------------
Fixed charges including preferred stock
dividends $ 44,800 $ 44,800
============ ============
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.57 1.71
============ ============
================================================================================
-31-
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001018450
<NAME> CHASE PREFERRED CAPITAL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> UNITED STATES DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
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<ALLOWANCE> 4,962
<TOTAL-ASSETS> 1,119,300
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0
550,000
<COMMON> 171,750
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<EXPENSE-OTHER> 595
<INCOME-PRETAX> 70,127
<INCOME-PRE-EXTRAORDINARY> 70,127
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,127
<EPS-BASIC> 25,577
<EPS-DILUTED> 25,577
<YIELD-ACTUAL> 6.9
<LOANS-NON> 0
<LOANS-PAST> 0
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<ALLOWANCE-OPEN> 4,120
<CHARGE-OFFS> 87
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</TABLE>
