SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: March 31, 2000 Commission file number: 1-12151
-------
CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3899576
- ------------------------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
270 Park Avenue, New York, New York 10017
- ---------------------------------------- ------------
(Address of principal executive offices) Zip Code)
Registrant's telephone number, including area code (212) 270-6000
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Common Stock, $171,500,000 Par Value 1
-----------------------------------------------------------------
Number of shares outstanding of each of the issuer's classes of common stock on
March 31, 2000.
<PAGE>
================================================================================
FORM 10-Q INDEX
Part I Page
- ------ ----
Item 1. Financial Statements - Chase Preferred Capital Corporation:
Balance Sheet at March 31, 2000 and December 31, 1999 3
Statement of Income for the Three Months Ended
March 31, 2000 and 1999 4
Statement of Changes in Stockholders' Equity for
the Three Months Ended March 31, 2000 and 1999 5
Statement of Cash Flows for the Three Months Ended
March 31, 2000 and 1999 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II
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Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Current Reports on Form 8-K 19
================================================================================
-2-
<PAGE>
Part I
Item 1.
CHASE PREFERRED CAPITAL CORPORATION
BALANCE SHEET
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
(Unaudited)
-------------- -----------------
ASSETS:
<S> <C> <C>
Residential first mortgage loans $ 1,019,117 $ 1,014,144
Commercial first mortgage loans 54,286 55,233
-------------- -------------
1,073,403 1,069,377
Less: allowance for loan losses (5,029) (4,962)
-------------- -------------
1,068,374 1,064,415
Cash and cash equivalents 43,487 47,703
Due from affiliates 305 225
Accrued interest receivable 6,680 6,957
-------------- -------------
TOTAL ASSETS $ 1,118,846 $ 1,119,300
============== =============
LIABILITIES:
Accounts payable and accrued liabilities $ 84 126
-------------- -------------
TOTAL LIABILITIES 84 126
-------------- -------------
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $25 per share;
50,000,000 shares authorized, 22,000,000
issued and outstanding 550,000 550,000
Common stock, par value $171,750,000 per share;
one share authorized and outstanding 171,750 171,750
Capital surplus 382,005 382,005
Retained earnings* 15,007 15,419
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,118,762 1,119,174
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,118,846 $ 1,119,300
============== =============
* No retained earnings related to property sales
</TABLE>
The Notes to Financial Statements are an integral part of these Statements.
-3-
<PAGE>
Part I
Item 1. (continued)
CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF INCOME
Three Months Ended March 31,
(in thousands)
(Unaudited)
2000 1999
---- ----
INTEREST INCOME:
Residential first mortgage loans $ 15,970 $ 15,331
Commercial first mortgage loans 1,292 1,726
Interest on overnight investments 730 868
-------------- -------------
Net interest income 17,992 17,925
-------------- -------------
NONINTEREST EXPENSE:
Servicing fees 668 634
Advisory fees 63 63
Other administrative expenses 56 81
-------------- -------------
Total noninterest expense 787 778
-------------- -------------
NET INCOME $ 17,205 $ 17,147
============== =============
NET INCOME APPLICABLE TO COMMON SHARE $ 6,068 $ 6,010
============== =============
BASIC AND FULLY DILUTED
NET INCOME PER COMMON SHARE $ 6,068 $ 6,010
============== =============
The Notes to Financial Statements are an integral part of these Statements.
-4-
<PAGE>
Part I
Item 1. (continued)
CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended March 31,
(in thousands)
(Unaudited)
2000 1999
---- ----
PREFERRED STOCK:
Balance at beginning of period $ 550,000 $ 550,000
----------- -----------
Balance at end of period 550,000 550,000
=========== ===========
COMMON STOCK:
Balance at beginning of period 171,750 171,750
----------- -----------
Balance at end of period 171,750 171,750
=========== ===========
ADDITIONAL PAID IN CAPITAL:
Balance at beginning of period 382,005 381,637
----------- -----------
Balance at end of period 382,005 381,637
=========== ===========
RETAINED EARNINGS:
Balance at beginning of period 15,419 17,487
Net income 17,205 17,147
Common dividends (6,480) (8,560)
Preferred dividends (11,137) (11,137)
----------- -----------
Balance at end of period 15,007 14,937
=========== ===========
TOTAL STOCKHOLDERS' EQUITY $ 1,118,762 $ 1,118,324
=========== ===========
The Notes to Financial Statements are an integral part of these Statements.
-5-
<PAGE>
Part I
Item 1. (continued)
CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
Three Months Ended March 31,
(in thousands)
(Unaudited)
2000 1999
---- ----
OPERATING ACTIVITIES:
Net income $ 17,205 $ 17,147
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Amortization of deferred costs 1,665 967
Net change in:
Due from affiliates (80) (1,112)
Accrued interest receivable 491 (321)
Accounts payable and accrued
liabilities (42) (44)
--------- ---------
Net cash provided by operating activities 19,239 16,637
--------- ---------
INVESTING ACTIVITIES:
Purchase of residential first mortgage loans (50,511) (176,129)
Acquired allowance 67 298
Principal payments received 44,820 170,762
Purchase of accrued interest receivable (214) (752)
--------- ---------
Net cash (used) by investing activities (5,838) (5,821)
--------- ---------
FINANCING ACTIVITIES:
Dividends paid (17,617) (19,697)
--------- ---------
Net cash (used) by financing activities (17,617) (19,697)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,216) (8,881)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 47,703 25,215
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 43,487 $ 16,334
========= =========
The Notes to Financial Statements are an integral part of these Statements.
-6-
<PAGE>
Part I
Item 1. (continued)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
- -----------------------------------------------
Chase Preferred Capital Corporation (the "Company") is a Delaware corporation
incorporated on June 28, 1996 and created for the purpose of acquiring, holding,
and managing real estate assets. The Company is a 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 estimated 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.
For further discussion of the Company's accounting policies, reference is made
to Note 2 in Notes to Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 (the "1999 Annual
Report").
NOTE 2 - 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 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.
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").
Aggregate advisory fees and servicing fees for the quarters ended March 31, 2000
and 1999 totaled approximately $731,000 and $697,000, respectively.
-7-
<PAGE>
Part I
Item 1. (Continued)
In its capacity as Sub-Servicer, CMMC owed the Company approximately $305,000
and $225,000 at March 31, 2000 and December 31, 1999, respectively, primarily
consisting of mortgage loan payments received on behalf of the Company. Pursuant
to the terms of the Servicing Agreement and Subservicing Agreements, the Company
receives mortgage loan payments collected by the Servicer (and sub-servicer) in
the month immediately following their collection.
The Company maintains its cash in an overnight deposit account with the Bank and
earns a market rate of interest. Interest income on these deposits for the
quarters ended March 31, 2000 and 1999 amounted to approximately $730,000 and
$868,000 respectively.
NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------
For further discussion on the methodology for determining the fair value of the
First Mortgage Loans, reference is made to Note 8 included in the Company's 1999
Annual Report.
First Mortgage Loans:
The carrying value and fair value of the First Mortgage Loans at March 31, 2000
and December 31, 1999 are as follows (in thousands):
March 31, 2000 December 31, 1999
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
First mortgage loans,
net of allowance for
loan losses $ 1,068,374 $ 1,064,850 $ 1,064,415 $ 1,070,843
Assets and Liabilities in which Fair Value Approximates Carrying Value:
The fair values of certain financial assets and liabilities carried at cost,
including cash, due from affiliates, accrued interest receivable, accounts
payable and due to affiliates, are considered to approximate their respective
carrying value due to their short-term nature and negligible credit losses.
-8-
<PAGE>
Part I
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
CHASE PREFERRED CAPITAL CORPORATION
QUARTERLY FINANCIAL HIGHLIGHTS
Three Months Ended March 31,
(in thousands, except per share, unit and ratio data)
(Unaudited)
2000 1999
---- ----
INCOME STATEMENT:
Interest income $ 17,992 $ 17,925
Net interest income 17,992 17,925
Net income 17,205 17,147
Net income applicable to common share 6,068 6,010
Income per common share $ 6,068 $ 6,010
BALANCE SHEET:
Mortgage loans $ 1,073,403 $ 1,027,272
Total assets 1,118,846 1,118,712
Preferred stock outstanding 550,000 550,000
Total stockholders' equity 1,118,762 1,118,324
OTHER DATA:
Dividends paid on preferred shares $ 11,137 $ 11,137
Dividends paid on common shares $ 6,480 $ 8,560
Number of preferred shares outstanding 22,000,000 22,000,000
Number of common shares outstanding 1 1
Average yield on mortgage loans 6.5% 7.1%
- --------------------------------------------------------------------------------
-9-
<PAGE>
Part I
Item 2. (continued)
Certain forward-looking statements contained in this Form 10-Q are subject to
risks and uncertainties. The Company's actual results may differ materially from
those included in these forward-looking statements. Reference is made to the
Company's reports filed with the Securities and Exchange Commission, in
particular the 1999 Annual Report, for a discussion of factors that may cause
such differences to occur.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
The Company, a Delaware corporation, is a real estate investment trust ("REIT")
under the Internal Revenue Code of 1986 (the "Code"). 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.
CONSIDERATIONS RELATING TO AFFILIATE TRANSACTIONS
The Bank administers the day-to-day activities of the Company in its role as
Advisor under the Agreement. CMMC sub-services the Company's Mortgage Loans on
behalf of the Servicer under each of the Servicing Agreements.
The Bank and its affiliates may have interests that are not identical to those
of the Company. Consequently, conflicts of interest may arise with respect to
transactions, including without limitation, future acquisitions of assets from
the Bank or its affiliates; servicing of those assets, particularly with respect
to assets that become classified or placed in nonaccrual status or which have
been, more than once during the preceding twelve months, more than 30 days past
due in the payment of principal and interest; future dispositions of assets to
CMC or any of its nonbank subsidiaries; the modification of the Agreement or the
Servicing Agreements; and the entry into additional agreements with CMC, the
Bank or their affiliates (including agreements to acquire additional assets, as
further described herein).
The Company intends that any agreements and transactions between the Company, on
the one hand, and CMC, the Bank or their affiliates, on the other hand, will be
fair to all parties and consistent with market terms. The requirement in the
Certificate of Designation establishing the Series A Preferred Shares that
certain actions of the Company be approved by a majority of the Independent
Directors (as defined in the Certificate of Designation) is also intended to
ensure fair dealing between the Company and CMC, the Bank and their respective
affiliates. However, there can be no assurance that those agreements or
transactions will be on terms as favorable to the Company as those that could
have been obtained from unaffiliated third parties.
RESULTS OF OPERATIONS
For the quarters ended March 31, 2000 and 1999, the Company reported net
interest income of approximately $17,324,000 and $17,291,000, respectively.
Interest income from residential and commercial first mortgage loans was
approximately $15,970,000 and $1,292,000, respectively, for the quarter ended
March 31, 2000 and approximately $15,331,000 and $1,726,000, respectively, for
the quarter ended March 31, 1999. The total average yield for the quarters ended
March 31, 2000 and 1999 was 6.5% and 7.1%, respectively. After deduction of
approximately $63,000 and $56,000 in advisory fees and other administrative
expenses, respectively, the Company reported net income of approximately
$17,205,000 for the quarter ended March 31, 2000. This compared to net income of
approximately $17,147,000 for the quarter ended March 31, 1999, after deducting
approximately $63,000 and $81,000 in advisory fees and other administrative
expenses, respectively.
-10-
<PAGE>
Part I
Item 2. (continued)
The Company reported basic earnings per share of $6,068,000 and $6,010,000 for
the quarters ended March 31, 2000 and 1999, respectively.
The Company paid $11,137,000 in each of the quarters ended March 31, 2000 and
1999, in dividends on the Series A Preferred Shares. As of this date, all
dividend payments on Series A Preferred Shares are current. For the quarters
ended March 31, 2000 and 1999, the Company paid Common Stock dividends of
approximately $6,480,000 and $8,560,000, respectively. 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 therefore.
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 March 31, 2000, First Mortgage loans consisted of both residential and
commercial mortgage loans. At that date, residential first mortgage loans in the
portfolio consisted of treasury and prime rate adjustable mortgages ("ARMs");
one-year and six-month ARMs; three-year, five-year, seven-year, and ten-year
fixed rate loans with an automatic conversion to one-year ARMs; three-year fixed
rate loans with an automatic conversion to three-year and six-month ARMs; and
fixed rate loans. The commercial first mortgage loans consisted of fixed and
variable rate loans, a majority of which have balloon payments. The Company's
initial portfolio of First Mortgage Loans was 90% residential and 10%
commercial. Over time, as commercial mortgage loans have matured or prepaid,
they have been replaced with residential first mortgage loans. At March 31,
2000, 94.9% of the Company's portfolio was comprised of residential first
mortgage loans, with the balance consisting of commercial first mortgage loans,
and, as the commercial loans continue to prepay or mature, the proportion of the
Company's first mortgage loan portfolio consisting of commercial loans is
expected to decrease.
For the quarters ended March 31, 2000 and 1999, the Company purchased First
Mortgage Loans having an outstanding principal balance of approximately
$50,511,000 and $176,129,000, respectively, from affiliates of the Bank. In
addition, for the quarters ended March 31, 2000 and 1999, the Company received
approximately $44,820,000 and $170,762,000, respectively, of principal payments
on its portfolio from the Servicer (and Sub-Servicer).
The following table reflects the composition of interest-earning assets as a
percentage of total interest-earning assets:
<TABLE>
<CAPTION>
Interest-Earning Asset Mix At March 31, 2000 At December 31, 1999
(in thousands) Amount Percent Amount Percent
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Residential first mortgage loans $ 1,019,117 94.9% $ 1,014,144 94.8%
Commercial first mortgage loans 54,286 5.1% 55,233 5.2%
------------ -------- ------------- -------
Total first mortgage loans $ 1,073,403 100% $ 1,069,377 100%
============ ======== ============= =======
- --------------------------------------------------------------------------------------------------
</TABLE>
For a further discussion on the Company's acquisition and disposition policies
for First Mortgage Loans, reference is made to Note 2 included in the Company's
1999 Annual Report.
At March 31, 2000 there were approximately $143,000 of nonaccruing residential
mortgage loans, which represented .01% of the total loan portfolio. At December
31, 1999, there were no nonaccruing residential mortgage loans. During the
quarters ended March 31, 2000 and 1999, there were no sales of nonaccruing
loans.
-11-
<PAGE>
Part I
Item 2. (continued)
ALLOWANCE FOR LOAN LOSSES
The Company's allowance for loan losses is intended to cover probable credit
losses as of March 31, 2000 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 possiblilites, 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 March 31,
2000, management of the Company deemed its allowance for loan losses to be
adequate.
The accompanying table reflects the activity in the Company's allowance for loan
losses for the periods indicated:
March 31, 2000 March 31, 1999
-------------- --------------
Allowance for Loan Losses
(in thousands)
- --------------------------------------------------------------------------------
Total allowance at beginning of period $ 4,962 $ 4,120
Acquired allowance 67 298
------------- ------------
Total allowance at end of period $ 5,029 $ 4,418
============= ============
- --------------------------------------------------------------------------------
At March 31, 2000 and 1999, the Company's allowance for loan losses as a
percentage of total first mortgage loans was .47% and .43%, 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 March 31, 2000, the estimated weighted average interest rate and the
estimated weighted average duration of the First Mortgage Loans were 7.3% and
two to three years, respectively.
-12-
<PAGE>
Part I
Item 2. (continued)
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 March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
Geographical Breakout March 31, 2000 December 31, 1999
(in thousands) Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------
Residential first mortgage loans:
<S> <C> <C> <C> <C>
California $ 396,918 37.0% $ 385,874 36.1%
Colorado 73,459 6.8% 74,438 7.0%
Texas 50,434 4.7% 52,747 4.9%
Florida 49,330 4.6% 49,689 4.6%
Other states (no state has more than 4%) 448,976 41.8% 451,396 42.2%
---------- ----- ---------- -----
Total residential first mortgage loans 1,019,117 94.9% 1,014,144 94.8%
---------- ----- ---------- -----
Commercial first mortgage loans:
New York metropolitan tri-state area 50,831 4.8% 51,705 4.9%
Other states 3,455 0.3% 3,528 0.3%
---------- ----- ---------- -----
Total commercial first mortgage loans 54,286 5.1% 55,233 5.2%
---------- ----- ---------- -----
Total $1,073,403 100% $1,069,377 100%
========== ===== ========== =====
</TABLE>
At March 31, 2000, approximately 37.0% 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.
In addition, at such date, approximately 94% of the commercial mortgage
properties underlying the Company's commercial mortgage loans were located in
the New York metropolitan tri-state area. Substantially all of these mortgaged
properties were, at the time of their origination, at least 70% occupied by the
borrowers or their affiliates. Consequently, these commercial mortgage loans may
be subject to greater risk of default than other comparable commercial mortgage
loans in the event of adverse economic, political or business developments in
the New York metropolitan tri-state area that may affect the ability of
businesses in that area to make payments of principal and interest on the
underlying mortgages.
LIQUIDITY RISK MANAGEMENT
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Company's financial commitments and to
capitalize on opportunities for the Company's business expansion. In managing
liquidity, the Company takes into account various legal limitations placed on a
REIT.
-13-
<PAGE>
Part I
Item 2. (continued)
During 2000, the Company's principal current liquidity needs are to maintain its
portfolio size through the acquisition of additional First Mortgage Loans as
First Mortgage Loans currently in the portfolio mature, prepay or are sold, and
to pay dividends on the Series A Preferred Shares. The acquisition of additional
First Mortgage Loans is intended to be 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.
As discussed 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.
For further discussion on liquidity risk management, reference is made to page
10 of the Company's 1999 Annual Report.
OPERATIONAL 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 of 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.
ACQUISITION OF ADDITIONAL ASSETS
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
O 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").
-14-
<PAGE>
Part I
Item 2. (continued)
The Company initially acquired approximately $2.1 billion of Second Mortgage
Loans and extended approximately $2.7 billion of Intercompany Loans in April
2000. It is currently anticipated that the Company will acquire up to $2.8
billion of Manufactured Housing Loans in May 2000. On a monthly basis following
the initial acquisitions of the Second Mortgage Loans and Manufactured Housing
Loans, the Company intends to 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 Second Mortgage Loans was, and upon their acquisition the participation
interests in the Manufactured Housing Loans will be, treated as a sale for
accounting purposes, and those loans will accordingly appear as assets on the
Company's balance sheet for the quarter ended June 30, 2000.
The initial aggregate principal amount of the Intercompany Loans, extended in
April 2000, equaled 80% of the outstanding principal balance of the HELOCs
pledged as security therefor. 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 paid by the Company for the Second Mortgage
Loans approximated their fair value, and that the price to be paid for the
Manufactured Housing Loans will approximate their fair value on the date of
their acquisition; 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 was 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
Second Mortgage Loans and (ii) the initial principal amount of the Intercompany
Loans. Additional shares of Series B Preferred Stock will be issued to the Bank
on May 16, 2000, the proceeds of which will be used to purchase the initial
portfolio of Manufactured Housing 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.
The Series B Preferred Stock has a par value per share of $25.00 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 ranks junior to the Series A
Preferred Shares with respect to the payment of dividends and ranks on a parity
with the Series A Preferred Shares upon liquidation, dissolution or winding up
of the Company. The Series B Preferred Stock is 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 does 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
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
-15-
<PAGE>
Part I
Item 2. (continued)
Mortgage Loan or Manufactured Housing Loan will be acquired prior to the sixth
month following its origination. The Second Mortgage Loans acquired by the
Company in April met, and the Manufactured Housing Loans to be acquired in May
are expected to meet, these credit quality conditions. 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
Second Mortgage Loans were, and the Manufactured Housing Loans will be, acquired
on a servicing released basis. The Company has engaged CMMC to service those
assets on the Company's behalf. The servicing arrangements between the Company
and CMMC 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 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.
OTHER MATTERS
As of March 31, 2000 the Company believed that it was in full compliance with
the REIT tax rules and that it will continue to qualify as a REIT under the
provisions of the Code. The Company calculates that:
o its Qualified REIT Assets, as defined in the Code, are 100% of its total
assets, as compared to the federal tax requirement that at least 75% of
its total assets must be Qualified REIT assets.
o 95.9% of its revenues qualify for the 75% source of income test and 100%
of its revenues qualify for the 95% source of income test under the REIT
rules.
o none of its revenues were subject to the 30% income limitation under the
REIT rules.
The Company also met all REIT requirements regarding the ownership of its Common
Stock and the Series A Preferred Shares and anticipates meeting the 2000 annual
distribution and administrative requirements.
-16-
<PAGE>
Part I
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
For information regarding interest rate risk, see the Interest Rate Risk section
on page 12.
CHASE PREFERRED CAPITAL CORPORATION
AVERAGE BALANCE SHEET
Three Months Ended March 31,
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Annualized) (Annualized)
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Residential first mortgage loans $ 1,009,585 $ 15,970 6.3% $ 882,786 $15,331 6.9%
Commercial first mortgage loans 54,682 1,292 9.5% 76,468 1,726 9.0%
Cash 53,439 730 5.5% 107,672 868 3.2%
------------- --------- ---- ---------- ------- ----
TOTAL INTEREST-EARNING ASSETS 1,117,706 17,992 6.4% 1,066,926 17,925 6.7%
------------- --------- ---- ---------- -------- ----
Cash - noninterest-earning 5,432 0
Allowance for credit losses (4,976) (4,130)
Due from affiliates 122 58,204
Accrued interest receivable 6,482 7,112
------------- ----------
TOTAL ASSETS $ 1,124,766 $1,128,112
============= ==========
LIABILITIES:
Accounts payable and accrued liabilities $ 4,335 $ 4,207
------------- ----------
TOTAL LIABILITIES 4,335 4,207
------------- ----------
STOCKHOLDERS' EQUITY:
Preferred Stock, Par Value $25 Per Share;
50,000,000 Shares Authorized, 22,000,000
Issued and Outstanding 550,000 550,000
Common Stock, Par Value $171,750,000 Per Share;
One Share Authorized, Issued and Outstanding 171,750 171,750
Capital surplus 382,005 381,637
Retained earnings 16,676 20,518
------------- ----------
TOTAL STOCKHOLDERS' EQUITY 1,120,431 1,123,905
------------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' $ 1,124,766 $1,128,112
============= ==========
EQUITY
</TABLE>
-17-
<PAGE>
CHASE PREFERRED CAPITAL CORPORATION
QUARTERLY FINANCIAL INFORMATION
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
INTEREST INCOME:
<S> <C> <C> <C> <C> <C>
Residential first mortgage loans $ 15,970 $ 16,829 $ 15,823 $ 15,209 $ 15,331
Commercial first mortgage loans 1,292 1,528 1,300 1,730 1,726
Interest on overnight investments 730 101 968 1,913 868
---------- ---------- --------- ---------- --------
Net interest income 17,992 18,458 18,091 18,852 17,925
---------- ---------- --------- ---------- --------
NONINTEREST EXPENSE:
Servicing fees 668 674 657 639 634
Advisory fees 63 62 62 63 63
Other administrative expenses 56 104 58 102 81
---------- ---------- --------- ---------- --------
Total noninterest expense 787 840 777 804 778
---------- ---------- --------- ---------- --------
NET INCOME $ 17,205 $ 17,618 $ 17,314 $ 18,048 $ 17,147
========== ========== ========= ========== ========
NET INCOME APPLICABLE TO
COMMON SHARE $ 6,068 $ 6,480 $ 6,177 $ 6,910 $ 6,010
========== ========== ========= ========== ========
BASIC AND FULLY DILUTED
NET INCOME PER COMMON
SHARE $ 6,068 $ 6,480 $ 6,177 $ 6,910 $ 6,010
========== ========== ========= ========== ========
</TABLE>
-18-
<PAGE>
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On September 17, 1999, the Bank, the sole holder of the Company's Common Stock,
by written consent, elected the following persons as directors of the Company to
serve until their respective successors shall have been elected and qualified:
Richard J. Boyle, Dina Dublon, Thomas Jacob, William C. Langley, Louis M.
Morrell, Joseph L. Sclafani and Robert S. Strong.
Item 6. Exhibits and Current Reports on Form 8-K
----------------------------------------
(A) Exhibits:
11 - Computation of net income per share.
12 - Computation of ratio of earnings to fixed charges and preferred
stock dividend requirements.
27 - Financial Data Schedule.
(B) Reports on Form 8-K: March 16, 2000
-19-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------
(Registrant)
Date: May 15, 2000 By /s/Louis M. Morrell
------------ ---------------------------------
Louis M. Morrell
Treasurer
20
Part II
Item 6. (continued)
EXHIBIT 11
CHASE PREFERRED CAPITAL CORPORATION
Computation of net income per common share
------------------------------------------
(in thousands, except share and per share amounts)
(Unaudited)
Net income for basic 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 shares of common shares outstanding during the
period.
Three Months Ended
March 31,
2000 1999
(in thousands, except shares outstanding)
================================================================================
Earnings:
Net income $ 17,205 $ 17,147
Less: preferred stock dividend requirements 11,137 11,137
----------- -----------
Net income applicable to common stock $ 6,068 $ 6,010
----------- -----------
Shares:
Average common shares outstanding 1 1
Basic and fully diluted net income per share: $ 6,068 $ 6,010
=========== ===========
================================================================================
-21-
Part II
Item 6. (continued)
EXHIBIT 12
CHASE PREFERRED CAPITAL CORPORATION
Computation of ratio of earnings to fixed charges
-------------------------------------------------
and preferred stock dividend requirements
-----------------------------------------
(Unaudited)
Three Months Ended
(in thousands, except ratio): March 31, 2000
- -------------------------------------------------------------------------------
Net income $ 17,205
-----------
Fixed charges 0
Total fixed charges 0
-----------
Earnings before fixed charges $ 17,205
===========
Fixed charges, as above $ 0
Preferred stock dividend requirements 11,137
-----------
Fixed charges including preferred stock dividends $ 11,137
===========
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.55
===========
-22-
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001018450
<NAME> CHASE PREFERRED CAPITAL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> UNITED STATES DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 43,487
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,073,403
<ALLOWANCE> 5,029
<TOTAL-ASSETS> 1,118,846
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
550,000
<COMMON> 171,750
<OTHER-SE> 397,012
<TOTAL-LIABILITIES-AND-EQUITY> 1,118,846
<INTEREST-LOAN> 17,262
<INTEREST-INVEST> 0
<INTEREST-OTHER> 730
<INTEREST-TOTAL> 17,992
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 17,992
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 787
<INCOME-PRETAX> 17,205
<INCOME-PRE-EXTRAORDINARY> 17,205
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,205
<EPS-BASIC> 6,068
<EPS-DILUTED> 6,068
<YIELD-ACTUAL> 6.5
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,962
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 5,029
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
