SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: June 30, 2000 Commission file number: 1-12151
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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
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Common Stock, $171,500,000 Par Value 1
----------------------------------------------------------------------------
Number of shares outstanding of each of the issuer's classes of common stock
on June 30, 2000.
<PAGE>
================================================================================
FORM 10-Q INDEX
Part I Page
------ ----
Item 1. Financial Statements - Chase Preferred Capital Corporation:
Balance Sheet at June 30, 2000 and December 31, 1999 3
Statement of Income for the Three Months Ended June 30,
2000 and 1999 4
Statement of Income for the Six Months Ended June 30, 2000
and 1999 5
Statement of Changes in Stockholders' Equity for the Six
Months Ended June 30, 2000 and 1999 6
Statement of Cash Flows for the Six Months Ended June 30,
2000 and 1999 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Part II
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Item 4. Exhibits and Current Reports on Form 8-K 23
2
<PAGE>
Part I
Item 1.
CHASE PREFERRED CAPITAL CORPORATION
BALANCE SHEET
(in thousands, except share data)
June 30, 2000 December 31, 1999
(Unaudited)
ASSETS:
Residential first mortgage loans $ 971,107 $ 1,014,144
Commercial first mortgage loans 48,862 55,233
Second mortgage loans 3,024,235 0
Manufactured housing loans 1,979,988 0
Intercompany loans 2,627,193 0
------------ -------------
8,651,385 1,069,377
Less: allowance for loan losses (99,327) (4,962)
------------ -------------
8,552,058 1,064,415
Cash and cash equivalents 157,355 47,703
Accrued interest receivable due from
affiliates 15,034 225
Accrued interest receivable due from
third parties 25,889 6,957
Accounts receivable due from third
parties 9 0
------------ -------------
TOTAL ASSETS $ 8,750,345 $ 1,119,300
============ =============
LIABILITIES:
Due to affiliates 10,790 0
Accounts payable and accrued liabilities $ 230 126
------------ -------------
TOTAL LIABILITIES 11,020 126
------------ -------------
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $25 per share;
50,000,000 shares authorized,
22,000,000 shares Series A issued and
outstanding; stated value $25 per share 550,000 550,000
7,600 shares Series B issued and
outstanding; stated value $1,000,000 per
share 7,600,000 0
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 * 35,570 15,419
------------ -------------
TOTAL STOCKHOLDERS' EQUITY 8,739,325 1,119,174
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 8,750,345 $ 1,119,300
============ =============
-----------
* No retained earnings related to property sales
The Notes to Financial Statements are an integral part of these Statements.
3
<PAGE>
Part I
Item 1. (continued)
CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF INCOME
Three Months Ended June 30,
(in thousands)
(Unaudited)
2000 1999
INTEREST INCOME:
Residential first mortgage loans $ 16,814 $ 15,209
Commercial first mortgage loans 1,334 1,730
Second mortgage loans 50,111 0
Manufactured housing loans 24,328 0
Intercompany loans 38,981 0
Interest on overnight investments 3,325 1,913
------------ -----------
Net interest income 134,893 18,852
Provision for credit losses 1,471 0
------------ -----------
Net interest income after provision
for credit losses 133,422 18,852
------------ -----------
Other revenue 49 0
NONINTEREST EXPENSE:
Servicing fees 3,949 639
Advisory fees 146 63
Foreclosure and other expenses 155 102
------------ -----------
Total noninterest expense 4,250 804
------------ -----------
NET INCOME $ 129,221 $ 18,048
============ ===========
NET INCOME APPLICABLE TO COMMON SHARE $ 28,266 $ 6,910
============ ===========
BASIC AND FULLY DILUTED
NET INCOME PER COMMON SHARE $ 28,266 $ 6,910
============ ===========
The Notes to Financial Statements are an integral part of these Statements.
4
<PAGE>
Part I
Item 1. (continued)
CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF INCOME
Six Months Ended June 30,
(in thousands)
(Unaudited)
2000 1999
INTEREST INCOME:
Residential first mortgage loans $ 32,784 $ 30,540
Commercial first mortgage loans 2,626 3,456
Second mortgage loans 50,111 0
Manufactured housing loans 24,328 0
Intercompany loans 38,981 0
Interest on overnight investments 4,055 2,781
------------ -----------
Net interest income 152,885 36,777
------------ -----------
Provision for credit losses 1,471 0
------------ -----------
Net interest income after provision
for credit losses 151,414 36,777
------------ -----------
Other revenue 49 0
NONINTEREST EXPENSE:
Servicing fees 4,618 1,273
Advisory fees 208 126
Foreclosure and other expenses 211 183
------------ -----------
Total noninterest expense 5,037 1,582
------------ -----------
NET INCOME $ 146,426 $ 35,195
============ ===========
NET INCOME APPLICABLE TO COMMON SHARE $ 34,334 $ 12,920
============ ===========
BASIC AND FULLY DILUTED
NET INCOME PER COMMON SHARE $ 34,334 $ 12,920
============ ===========
The Notes to Financial Statements are an integral part of these Statements.
5
<PAGE>
Part I
Item 1. (continued)
CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended June 30,
(in thousands)
(Unaudited)
2000 1999
SERIES A PREFERRED STOCK:
Balance at beginning of period $ 550,000 $ 550,000
------------ ------------
Balance at end of period 550,000 550,000
============ ============
SERIES B PREFERRED STOCK:
Balance at beginning of period $ 0 $ 0
4,800 shares issued April 7, 2000 at
$1,000,000 stated value per share 4,800,000 0
2,800 shares issued May 16, 2000 at
$1,000,000 stated value per share 2,800,000 0
------------ ------------
Balance at end of period 7,600,000 0
============ ============
COMMON STOCK:
Balance at beginning of period 171,750 171,750
------------ ------------
Balance at end of period 171,750 171,750
============ ============
CAPITAL SURPLUS:
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 146,426 35,195
Capital distribution to affiliate (7,703) 0
Common dividends (6,480) (14,569)
Series A Preferred dividends (22,275) (22,275)
Series B Preferred dividends (89,817) 0
------------ ------------
Balance at end of period 35,570 15,838
============ ============
TOTAL STOCKHOLDERS' EQUITY $ 8,739,325 $ 1,119,225
============ ============
The Notes to Financial Statements are an integral part of these Statements.
6
<PAGE>
Part I
Item 1. (continued)
CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
Six Months Ended June 30,
(in thousands)
(Unaudited)
2000 1999
OPERATING ACTIVITIES:
Net income $ 146,426 $ 35,195
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization of deferred costs 5,434 1,867
Provision for loan losses 1,471 0
Net change in:
Accrued interest receivable due from
affiliates (14,809) 27,440
Accrued interest receivable due from
third parties 602 2,355
Accounts receivable due from third parties (9) 0
Accounts payable and accrued liabilities 104 (30)
Due to affiliates 10,790 0
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Net cash provided by operating activities 150,009 66,827
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INVESTING ACTIVITIES:
Intercompany loans issued (2,627,193) 0
Purchase of residential first mortgage loans (75,694) (352,139)
Purchase of second mortgage loans (3,153,288) 0
Purchase of manufactured housing loans (1,924,056) 0
Principal payments received 285,683 313,219
Purchase of accrued interest receivable (19,534) (1,365)
---------- -----------
Net cash (used) by investing activities (7,514,082) (40,285)
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FINANCING ACTIVITIES:
Capital distribution to affiliate (7,703) 0
Issuance of Series B Preferred Stock 7,600,000 0
Dividends paid (118,572) 36,844)
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Net cash provided (used) by financing activities 7,473,725 (36,844)
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NET INCREASE/DECREASE IN CASH AND CASH EQUIVALENTS 109,652 (10,302)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 47,703 25,215
--------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 157,355 $ 14,913
========= ===========
The Notes to Financial Statements are an integral part of these Statements.
7
<PAGE>
Part I
Item 1. (continued)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
-----------------------------------------------
Chase Preferred Capital Corporation (the "Company") is a Delaware corporation
incorporated on June 28, 1996 and created for the purpose of acquiring, holding,
and managing real estate assets. The Company is a 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
Stock"), which are currently traded on the New York Stock Exchange. The
Company's Common Stock, par value $171,750,000 per share ("Common Stock"), and
Floating Rate Cumulative Preferred Stock, Series B, par value $25 per share and
liquidation value $1,000,000 per share ("Series B Preferred Stock") are owned by
the Bank.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
The accounting and financial reporting policies of the Company conform to
generally accepted accounting principles and prevailing industry practices for
interim reporting. 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. In the opinion of management, all
necessary adjustments have been made for a fair presentation of this interim
financial information.
First Mortgage Loans, Second Mortgage Loans and Manufactured Housing 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 on loans held for investment, is recognized
using the interest method or on a basis approximating a level rate of return
over the term of the loan. Loans acquired, from the Chase Manhattan Bank USA,
National Association ("Chase USA"), the Bank or its affiliates, are recorded at
the respective seller's historical cost basis in the accompanying balance sheet.
Any difference between the amount paid by the Company and the historical cost
basis of the respective seller would be treated as an adjustment to equity.
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 premiums and discounts 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 measured 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 its residential First Mortgage Loans, Second Mortgage Loans and
Manufactured Housing Loans.
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.
Certain amounts in the statement of cash flows have been reclassified to conform
to the current presentation.
8
<PAGE>
NOTE 3 - RELATED PARTY TRANSACTIONS
-----------------------------------
At March 31, 2000, The Company's loan portfolio solely consisted of loans that
it had acquired from the Bank or its affiliates that are secured by first
mortgages on residential and commercial properties ("First Mortgage Loans").
In April 2000, the Company acquired approximately $2.1 billion of loans (and
related servicing rights) that had been originated or acquired by the Bank or
Chase USA or their affiliates and that are secured by second mortgages on single
family (one-to-four unit) residential real estate properties ("Second Mortgage
Loans"). In May 2000, the Company acquired approximately $2.8 billion of loans
(and related servicing rights) that had been originated or acquired by the Bank
or Chase USA or their affiliates and that are secured by first priority security
interests in manufactured housing units ("Manufactured Housing Loans"). The
Second Mortgage Loans and the Manufactured Housing Loans were acquired through
sales by the Bank and Chase USA of 100% participation interests of such loans to
the Company. The participation interests were purchased at prices equal to the
estimated fair values of the loans. On a monthly basis following the initial
acquisitions of the Second Mortgage Loans and Manufactured Housing Loans, the
Company has purchased 100% participation interests in substantially all Second
Mortgage Loans and Manufactured Housing Loans originated by the Bank and Chase
USA meeting certain specified credit criteria.
In April 2000, the Company also extended approximately $2.7 billion of
non-recourse intercompany loans ("Intercompany Loans") to the Bank and Chase USA
which are secured by a pledge by the Bank and Chase USA of all outstanding loans
under home equity lines of credit ("HELOCs") originated by the Bank or Chase
USA, as the case may be. The initial aggregate principal amount of the
Intercompany Loans equalled approximately 80% of the outstanding principal
balance of the HELOCs pledged as security therefor. On a quarterly basis, the
Company may, but is not required to, make additional Intercompany Loans to the
Bank and/or Chase USA, subject to certain limits. (The First Mortgage Loans,
Second Mortgage Loans and Manufactured Housing Loans are collectively referred
to as the "Direct Loans".)
The funds required by the Company to make the initial acquisition of the Second
Mortgage Loans and Manufactured Housing Loans, and to make the Intercompany
Loans (collectively, the "Additional Assets") were obtained through the issuance
and sale to the Bank of shares of Series B Preferred Stock. The Bank, as holder
of the Series B Preferred Stock, is entitled to receive cumulative dividends,
when, as and if declared by the Board of Directors, at a variable dividend rate
equal to the Federal funds (effective) rate. The Series B Preferred Stock ranks
junior to the Series A Preferred Stock with respect to the payment of dividends
and ranks on a parity with the Series A Preferred Stock 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 the tax treatment of the
Company or the Series B Preferred Stock. The Series B Preferred Stock is not
convertible into common stock or 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 (as defined in
the Certificate of Designation), upon receipt of an opinion of counsel, waived
all Ownership Limits (as defined in the Company's Certificate of Incorporation)
with respect to the Series B Preferred Stock .
The Company is a party to an agreement (the "Advisory Agreement") with the Bank
(the "Advisor") pursuant to which 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. The Advisory Agreement was amended effective April
2000 to increase the Advisor's annual fee from $250,000 to $500,000 in
connection with the acquisition by the Company of the Additional Assets.
The Company is also party to servicing agreements with the Bank, as servicer,
for the servicing of the commercial and residential First Mortgage Loans. The
Bank has entered into sub-servicing agreements with Chase Manhattan Mortgage
Corporation ("CMMC"), a wholly-owned subsidiary of Chase USA and an indirect
wholly-owned subsidiary of The Chase Manhattan Corporation ("CMC"), with respect
to the servicing of the First Mortgage Loans. CMMC is also the servicer of the
Second Mortgage Loans and Manufactured Housing Loans acquired by the Company.
Pursuant to each servicing agreement, the Bank and CMMC, as the case may be,
perform the servicing of the Loans owned by the Company in accordance with (i)
normal industry practices, (ii) servicing guidelines promulgated by the Company,
and (iii) in the case of residential First Mortgage Loans and Second Mortgage
Loans, FNMA and FHLMC guidelines and procedures.
Aggregate advisory fees and servicing fees for the quarters ended June 30, 2000
and 1999 totaled approximately $4,095,000 and $702,000, respectively. For the
six months ended June 30, 2000 and 1999, aggregate advisory and servicing fees
totaled approximately $4,826,000 and $1,399,000, respectively. Cash balances
included $27,889,000 and $29,144,000 at June 30, 2000, and December 31, 1999,
respectively, of loan payments received by CMMC in its capacity as sub-servicer
of First Mortgage Loans, which are maintained in a custodial account on behalf
of the Company. Pursuant to the terms of the servicing agreement and
subservicing agreements relating to the First Mortgage Loans, the Company
receives loan payments collected by the servicer (and sub-servicer) in the month
immediately following their collection. Pursuant to the terms of the servicing
agreement relating to the
9
<PAGE>
Second Mortgage Loans and Manufactured Housing Loans, the Company receives loan
payments collected by CMMC on the next business day immediately following its
collection.
The Company maintains its cash in an overnight deposit account with the Bank and
earns a market rate of interest. Interest income on these deposits for the
quarters ended June 30, 2000 and 1999 amounted to approximately $3,325,000 and
$1,913,000 respectively. Interest income on these deposits for the six months
ended June 30, 2000 and 1999 amounted to approximately $4,055,000 and
$2,781,000, respectively.
NOTE 4 - 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. The fair values for the Manufactured Housing and fixed rate
Second Mortgage Loans were estimated based on discounted cash flows. The fair
values for the adjustable rate Second Mortgage Loans are considered to
approximate carrying value due to the variable note rate. The fair value of the
Intercompany Loans is considered to approximate carrying value due to the
variable note rate.
The carrying value and fair value of the Direct Loans held by the Company at
June 30, 2000 and December 31, 1999 are as follows (in thousands):
<TABLE>
June 30, 2000 December 31, 1999
<CAPTION>
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
<S> <C> <C> <C> <C>
First mortgage loans, net of allowance $1,014,846 $1,005,799 $ 1,064,415 $ 1,070,843
for loan losses
Second Mortgage Loans, net of
allowance for loan losses $3,005,036 $2,937,309 0 0
Manufactured Housing Loans, net of
allowance for loan losses $1,904,983 $1,919,792 0 0
Intercompany Loans $2,627,193 $2,627,193 0 0
</TABLE>
Assets and Liabilities in which Fair Value Approximates Carrying Value:
The fair values of certain financial assets and liabilities carried at cost,
including accrued interest receivable due from affiliates, accrued interest
receivable due from third parties, accounts receivable due from third parties,
due to affiliates, and accounts payable and accrued liabilities, are considered
to approximate their respective carrying value due to their short-term nature
and negligible credit losses.
10
<PAGE>
Part I
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHASE PREFERRED CAPITAL CORPORATION
FINANCIAL HIGHLIGHTS
(in thousands, except per share, unit and ratio data)
(Unaudited)
<TABLE>
2000 1999 Six Months Ended
------------------------ ---------
Second First Second June 30,
--------------------
Quarter Quarter Quarter 2000 1999
------- ------- ---------- --------------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT:
Interest Income $ 134,893 $ 17,992 $ 18,852 $ 152,885 $ 36,777
Net Interest Income 133,422 17,992 18,852 151,414 36,777
Net Income 129,221 17,205 18,048 146,426 35,195
Net Income Applicable to Common Share 28,266 6,068 6,910 34,334 12,920
Income Per Common Share $ 28,266 $ 6,068 $ 6,910 $ 34,334 $ 12,920
BALANCE SHEET:
Mortgage Loans $ 6,024,192 $ 1,073,403 $ 1,059,016 $ 6,024,192 $ 1,059,016
Intercompany Loans 2,627,193 0 0 2,627,193 0
Total Assets 8,750,345 1,118,846 1,119,627 8,750,345 1,119,627
Series A Preferred Stock Outstanding 550,000 550,000 550,000 550,000 550,000
Series B Preferred Stock Outstanding 7,600,000 0 0 7,600,000 0
Total Stockholders' Equity $ 8,739,325 $ 1,118,762 $ 1,119,225 $ 8,739,325 $ 1,119,225
OTHER DATA:
Dividends paid on Series A Preferred Stock $ 11,138 $ 11,137 $ 11,138 $ 22,275 $ 22,275
Dividends paid on Series B Preferred Stock 89,817 0 0 89,817 0
Dividends paid on common shares $ 0 $ 6,480 $ 6,009 $ 6,480 $ 14,569
Number of Series A preferred shares
outstanding 22,000,000 22,000,000 22,000,000 22,000,000 22,000,000
Number of Series B preferred shares
outstanding 7,600 0 0 7,600 0
Number of Common Shares Outstanding 1 1 1 1 1
Average Yield on Mortgage Loans 8.3% 6.5% 6.9% 8.0% 7.0%
</TABLE>
11
<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
--------------------------------------------------------------------------------
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 Stock ").
The Series A Preferred Stock is 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.
At March 31, 2000, the real estate assets held by the Company consisted solely
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"). Over time, as commercial First Mortgage Loans have prepaid or
matured, the Company has replaced them with residential First Mortgage Loans. As
of March 31, 2000, approximately 94.9% of the Company's portfolio had been
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.
In April 2000, the Company acquired approximately $2.1 billion of loans (and
related servicing rights) that had been originated or acquired by the Bank or
Chase Manhattan Bank USA, National Association ("Chase USA") or their affiliates
and that are secured by second mortgages on single family (one-to-four unit)
residential real properties ("Second Mortgage Loans"). In May 2000, the Company
acquired approximately $2.8 billion of loans (and related servicing rights) that
had been originated or acquired by the Bank and Chase USA or their affiliates
and that are secured by first priority security interests in manufactured
housing units ("Manufactured Housing Loans). The Second Mortgage Loans and the
Manufactured Housing Loans were acquired through the sales of 100% participation
interests by the Bank and Chase USA, as the case may be, of such loans to the
Company. The participation interests were purchased at prices equal to the
estimated fair values of the loans. On a monthly basis following the initial
acquisitions of the Second Mortgage Loans and Manufactured Housing Loans, the
Company has purchased 100% participation interests in all Second Mortgage Loans
and Manufactured Housing Loans originated by the Bank and Chase USA meeting
certain specified credit criteria, as described below. (The First Mortgage
Loans, Second Mortgage Loans and Manufactured Housing Loans are hereinfafter
referred to as the "Direct Loans".)
In April 2000, The Company also extended approximately $2.7 billion of
non-recourse intercompany loans ("Intercompany Loans") to the Bank and Chase USA
which are secured by a pledge by the Bank and Chase USA of all outstanding loans
under home equity lines of credit ("HELOCs") originated by the Bank or Chase
USA, as the case may be. The initial aggregate principal amount of the
Intercompany Loans equalled approximately 80% of the outstanding principal
balance of the HELOCs pledged as security therefor. 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 the 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 funds required by the Company to acquire the Second Mortgage Loans and
Manufactured Housing Loans and to make the Intercompany Loans (the Second
Mortgage Loans, the Manufactured Housing Loans and the Intercompany Loans being
collectively referred to as the "Additional Assets") were obtained through the
sale by the Company to the Bank of shares of a floating rate cumulative
preferred stock, having a par value of $25 per share and a liquidation
preference of $1,000,000 per share (the "Series B Preferred Stock"). Proceeds
obtained from the sale or repayment of principal balances of Additional Assets
will generally be applied to acquire Additional Assets. However, the Company may
issue additional shares of Series B Preferred Stock to the Bank from time to
time as discussed in "Liquidity Risk Management" below.
12
<PAGE>
CONSIDERATIONS RELATING TO AFFILIATE TRANSACTIONS
The Bank administers the day-to-day activities of the Company in its role as
advisor ("Advisor") under an agreement (the "Advisory Agreement"). Chase
Manhattan Mortgage Corporation ("CMMC"), a wholly-owned subsidiary of Chase USA
(i) sub-services the Company's First Mortgage Loans on behalf of the Bank in its
capacity as servicer under servicing agreements for the First Mortgage Loans,
and (iii) is the servicer of the Company's Second Mortgage Loans and
Manufactured Housing Loans pursuant to the agreements by which the Second
Mortgage Loans and Manufactured Housing Loans were participated to the Company.
See Note 2 to Notes to Financial Statements herein.
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
The Chase Manhattan Corporation ("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.
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 Stock that
certain actions of the Company be approved by a majority of the Independent
Directors is also intended to ensure fair dealing between the Company and CMC,
the Bank and their respective affiliates.
The Company's Board of Directors, with the approval of its Independent
Directors, approved the initial acquisition of the Additional Assets and also
authorized the Company to make further acquisitions of Additional Assets as
described above. The Company believes that the prices it paid for the Second
Mortgage Loans and Manufactured Housing Loans approximated their fair value;
however, no third party appraisals for 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.
RESULTS OF OPERATIONS
For the quarters ended June 30, 2000 and 1999, the Company reported net interest
income of approximately $133,422,000 and $18,852,000, respectively. Interest
income from residential and commercial First Mortgage Loans was approximately
$16,814,000 and $1,334,000, respectively, for the quarter ended June 30, 2000
and approximately $15,209,000 and $1,730,000, respectively, for the quarter
ended June 30, 1999. Interest income from the Second Mortgage Loans and
Manufactured Housing Loans was approximately $50,111,000 and $24,328,000,
respectively, for the quarter ended June 30, 2000. The total average yield of
the Direct Loans for the quarters ended June 30, 2000 and 1999 was 8.3% and
6.9%, respectively. For the quarter ended June 30, 2000, interest income from
the Intercompany Loans was $38,981,000, which resulted in an average yield of
6.4%. After deduction of approximately $3,949,000, $146,000 and $155,000 in
servicing fees, advisory fees, and foreclosure and other expenses, respectively,
the Company reported net income of approximately $129,221,000 for the quarter
ended June 30, 2000. This compared to net income of approximately $18,048,000
for the quarter ended June 30, 1999, after deducting approximately $639,000,
$63,000 and $102,000 in servicing fees, advisory fees, and foreclosure and other
expenses, respectively.
13
<PAGE>
Part I
Item 2. (continued)
The Company reported basic earnings per share of $28,266,000 and $6,910,000 for
the quarters ended June 30, 2000 and 1999, respectively.
For the six months ended June 30, 2000 and 1999, the Company reported net
interest income of approximately $151,414,000 and $36,777,000, respectively.
Interest income from residential and commercial First Mortgage Loans was
approximately $32,784,000 and $2,626,000, respectively, for the six months ended
June 30, 2000 and approximately $30,540,000 and $3,456,000, respectively, for
the six months ended June 30, 1999. Interest income from the Second Mortgage
Loans and Manufactured Housing Loans was approximately $50,111,000 and
$24,328,000, respectively, for the six months ended June 30, 2000. The total
average yield of the Direct Loans for the six months ended June 30, 2000 and
1999 was 8.0% and 7.0%, respectively. For the six months ended June 30, 2000,
interest income from the Intercompany Loans was $38,981,000, which resulted in
an average yield of 6.4%. After deduction of approximately $4,618,000, $208,000
and $211,000 in servicing fees, advisory fees, and foreclosure and other
expenses, respectively, the Company reported net income of approximately
$146,426,000 for the six months ended June 30, 2000. This is compared to net
income of approximately $35,195,000 for the six months ended June 30, 1999,
after deducting approximately $1,273,000, $126,000 and $183,000 in servicing
fees, advisory fees, and foreclosure and other expenses, respectively.
The Company reported basic earnings per share of $34,334,000 and $12,920,000 for
the six months ended June 30, 2000 and 1999, respectively.
The Company paid $11,138,000 in each of the quarters ended June 30, 2000 and
1999 and $22,275,000 for each of the six months ended June 30, 2000 and 1999, in
dividends on the Series A Preferred Stock. As of this date, all dividend
payments on Series A Preferred Stock are current. During the quarter ended June
30, 2000, the Company paid $89,817,000 in dividends on the Series B Preferred
Stock. There were no shares of Series B Preferred Stock outstanding during the
quarter ended June 30, 1999. For the six months ended June 30, 2000 and 1999,
the Company paid Common Stock dividends of approximately $6,480,000 and
$14,569,000, respectively. Dividends on the Common Stock are paid to the Bank
when, as and if declared by the Board of Directors of the Company out of funds
legally available therefore. The Company expects to pay Common Stock dividends
at least annually in amounts necessary to continue to preserve its status as a
REIT under the Code.
LOAN PORTFOLIO
At June 30, 2000 and December 31, 1999, the Company's loan portfolio was as
follows:
($ in thousands)
<TABLE>
<CAPTION>
Loan Amounts Non-Accruing Net Charge-Offs
Loans
-------------------- ------------------ -------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
First Mortgage Loans
<S> <C> <C> <C> <C> <C> <C>
Residential $ 971,107 $ 1,014,144 $ 2,203 $ 0 $ 0 $ 87
Commercial 48,862 55,233 0 0 0 0
Second Mortgage Loans 3,024,235 0 4,850 0 98 0
Manufactured Housing Loans 1,979,988 0 4,845 0 1,374 0
TOTAL $ 6,024,192 $ 1,069,377 $ 11,898 $ 0 $ 1,472 $ 87
Intercompany Loans $ 2,627,193 $ 0 N/A N/A N/A N/A
TOTAL $ 8,651,385 $ 1,069,377 $ 11,898 $ 0 $ 1,472 $ 87
</TABLE>
14
<PAGE>
First Mortgage Loans. At June 30, 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. As commercial First Mortgage Loans continue to prepay or
mature, they will continue to be replaced with residential First Mortgage Loans.
For the quarters ended June 30, 2000 and 1999, the Company purchased First
Mortgage Loans having an outstanding principal balance of approximately
$25,344,000 and $176,307,000, respectively, from affiliates of the Bank. During
the quarters ended June 30, 2000 and 1999, there were no sales of non-performing
loans. In addition, for the quarters ended June 30, 2000 and 1999, the Company
received approximately $81,017,000 and $167,457,000, respectively, of principal
payments on its portfolio from the servicer (and sub-servicer) of the First
Mortgage Loans.
For the six months ended June 30, 2000 and 1999, the Company purchased First
Mortgage Loans having an outstanding principal balance of approximately
$75,855,000 and $352,734,000, respectively, from affiliates of the Bank. During
the six months ended June 30, 2000 and 1999, there were no sales of
non-performing loans. In addition, for the six months ended June 30, 2000 and
1999, the Company received approximately $125,837,000 and $336,566,000,
respectively, of principal payments on its portfolio from the servicer (and
sub-servicer) of the First Mortgage Loans.
Second Mortgage Loans. At June 30, 2000, Second Mortgage Loans consisted of only
residential mortgage loans. At that date, Second Mortgage Loans in the portfolio
consisted of one-year Treasury ARMs, and 15-year and 30-year fixed rate loans.
The initial portfolio of Second Mortgage Loans was acquired from the Bank and
Chase USA through the purchase by the Company of an 100% participation interest
in such Loans, including the related servicing rights.
Manufactured Housing Loans. At June 30, 2000, Manufactured Housing Loans
consisted of 15-year and 30-year fixed rate loans. The initial portfolio of
Manufactured Housing Loans was acquired through the purchase by the Company of a
100% participation interest in such Loans, including the related servicing
rights.
Intercompany Loans. The Intercompany Loans to the Bank and Chase USA are
variable rate loans bearing interest rates equal to the Federal funds
(effective) rate. The Intercompany Loans are secured by the pledge of the Bank
and Chase USA of all loans originated under home equity lines of credit extended
by those banks. 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.
Credit Policies. 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.
First Mortgage Loans. The Company's current policies relating to the First
Mortgage Loans have not changed. 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. 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.
15
<PAGE>
Second Mortgage Loans and Manufactured Housing Loans. The Company intends that
each Second Mortgage Loan and each Manufactured Housing Loan acquired from the
Bank or Chase USA or their affiliates will be originated by the Bank, Chase USA
or their respective affiliate, as the case may be, 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 Chase USA
or the affiliate that originated the Second Mortgage Loan or Manufactured
Housing Loan. The Company currently intends to continue to acquire, on a monthly
basis (i) all additional 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 Loans will be acquired by the Company prior to the
six month following its origination. Currently, the Company does not intend to
require CMMC, as servicer of the Second Mortgage Loans and Manufactured Housing
Loans, to dispose of such Loans by reason of any such Second Mortgage Loan or
Manufacturing Housing Loan becoming classified and being placed on nonaccrual
status. Accordingly, the Company anticipates that there may be nonaccruing
Second Mortgage Loans and Manufactured Housing Loans in the Company's portfolio
from time to time.
Servicing Arrangements. The First Mortgage Loans have been, and will continue to
be, sold to the Company on a servicing-retained basis. Accordingly, the
servicing rights associated with the First Mortgage Loans continue to be owned
by the Bank or the affiliate of the Bank that sold the First Mortgage Loans to
the Company. The Bank as servicer, receives an annual servicing fee from the
Company for each First Mortgage Loan it services which (i) is equal to 0.25% of
the outstanding principal balance for residential First Mortgage Loans and (ii)
ranges from 0.08% - 0.30% of the outstanding principal balances for commercial
First Mortgage Loans, depending upon the outstanding principal amount.
The Manufactured Housing Loans and the Second Mortgage Loans have been, and will
continue to be, acquired on a servicing-released basis. Accordingly, the Company
owns the servicing rights associated with the Second Mortgage Loans and
Manufactured Housing Loans. The Company has engaged CMMC to service these assets
on the Company's behalf. The servicing arrangements between the Company and CMMC
provide that the Company retains the power to direct CMMC to foreclose on any
Manufactured Housing Loan or Second Mortgage Loan. CMMC as servicer, receives an
annual servicing fee from the Company for each Manufactured Housing Loan and
Second Mortgage Loan it services.
Each of the servicing agreements for the First Mortgage Loans, Second Mortgage
Loans and Manufactured Housing Loans requires servicing in accordance with (i)
normal industry practices, (ii) with any servicing guidelines promulgated by the
Company, and (iii) in the case of the residential First Mortgage Loans and
Second Mortgage Loans, with FNMA and FHLMC guidelines and procedures,
The HELOCs securing the Intercompany Loans 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.
ALLOWANCE FOR LOAN LOSSES
The Company's allowance for loan losses is intended to cover probable credit
losses as of June 30, 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 possibilities, 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 June 30,
2000, management of the Company deemed its allowance for loan losses to be
adequate.
16
<PAGE>
Part I
Item 2. (continued)
The accompanying table reflects the activity in the Company's allowance for loan
losses for the periods indicated:
June 30, 2000 June 30, 1999
Allowance for Loan Losses
(in thousands)
--------------------------------------------------------------------------------
Total allowance at beginning of period $ 4,962 $ 4,120
Acquired allowance 94,365 595
Provision for loan losses 1,471 0
Charge-offs (1,472) 0
Recoveries 1 0
------------ -----------
Total allowance at end of period $ 99,327 $ 4,715
============ ===========
Allowance for Loan Losses to:
Total Direct Loans at period end 1.65% .45%
--------------------------------------------------------------------------------
INTEREST RATE RISK
The Company's income consists primarily of interest payments on the Direct Loans
and the Intercompany 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 adjustable rate mortgages are based and
from prepayments of Direct Loans with fixed interest rates, resulting in
reinvestment of the proceeds in lower-yielding Direct 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 shares of the Series A
Preferred Stock.
The following table sets forth certain information concerning the current
interest rates borne by the Loans constituting the Company's portfolio.
($ in thousands)
<TABLE>
<CAPTION>
Principal Balances of Principal Balances of
Variable Rate Loans Fixed Rate Loans
-------------------------- --------------------------
2000 1999 2000 1999
--------------- ----------------- ------------------ -----------------
$ % $ % $ % $ %
of portfolio of portfolio of portfolio of portfolio
------------------ ------------------ ------------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Direct Loans 973,410 16.16 1,016,006 95.01 5,050,782 83.84 53,371 4.99
--------------------------------------------------------------------------------------------------------
Intercompany Loans 2,627,193 --- --- --- --- --- --- ---
--------------------------------------------------------------------------------------------------------
</TABLE>
Estimated Estimated
Weighted Weighted
Average Average
Interest-Rate Duration
---------------- ------------------
2000 1999 2000 1999
------- ------- -------- -------
% % Years Years
------- ------- -------- -------
Direct Loans 8.94 7.23 2.3 2.3
------------------- ------- ------- -------- -------
Intercompany Loans 6.40 --- N/A
------------------- ---------------- ------------------
17
<PAGE>
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 or geographic region. The following table shows the Company's Direct
Loan portfolio by geographic area as of June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
($ in thousands)
Geographic Area June 30, 2000 December 31, 1999
--------------- ------------- -----------------
<S> <C> <C> <C> <C>
California $ 1,174,157 19.5% $ 388,166 36.3%
New York 496,036 8.2% 78,544 7.3%
Texas 347,636 5.8% 52,747 4.9%
Florida 315,448 5.2% 50,924 4.8%
Other (no state has more than 5%) 3,690,915 61.3% 498,996 46.7%
Total $ 6,024,192 100.0% $ 1,069,377 100.0%
</TABLE>
At June 30, 2000, approximately 19.5% of the Company's Direct 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 (earthquake, 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 Direct 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. In
managing liquidity, the Company takes into account various legal limitations
placed on a REIT.
During 2000, the Company's principal liquidity needs have been to maintain its
current portfolio size of First Mortgage Loans, to acquire the Additional Loans,
and to pay dividends on its outstanding securities, including on the Series A
Preferred Stock. The initial acquisition of First Mortgage Loans was funded by
the proceeds of the sale of the Series A Preferred Stock. Additional First
Mortgage Loans are intended to be funded with the proceeds obtained from the
sale or repayment by individual borrowers of the principal balances of First
Mortgage Loans that are currently held in the portfolio.
The acquisition of the Additional Assets was funded through the issuance to the
Bank of the Series B Preferred Stock. 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 more 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.
The Company does not anticipate having any material capital expenditures.
18
<PAGE>
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 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.
OTHER MATTERS
As of June 30, 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 89.8% 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 88.8% 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, the Series A Preferred Stock and the Series B Preferred Stock and
anticipates meeting the 2000 annual distribution and administrative
requirements.
19
<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 17.
CHASE PREFERRED CAPITAL CORPORATION
AVERAGE BALANCE SHEET
Three Months Ended June 30,
(in thousands, except per share data)
(Unaudited)
<TABLE>
2000 1999
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Annualized) (Annualized)
<CAPTION>
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Residential first mortgage loans $ 997,721 $ 16,814 6.7% $ 911,805 $ 15,209 6.7%
Commercial first mortgage loans 53,410 1,334 10.0% 71,690 1,730 9.7%
Second mortgage loans 2,353,202 50,111 8.5% 0 0 0%
Manufactured housing loans 1,059,532 24,328 9.2% 0 0 0%
Intercompany loans 2,453,971 38,981 6.4% 0 0 0%
Cash 242,925 3,325 5.5% 84,344 1,913 9.1%
------------ -------- ---- -------------- ---------- ----
TOTAL INTEREST-EARNING ASSETS 7,160,761 134,893 7.5% 1,067,839 18,852 7.1%
------------ -------- ---- -------------- ---------- ----
Cash - noninterest-earning 12,353 0
Allowance for credit losses (8,960) (4,442)
Due from affiliates 0 54,959
Accrued interest receivable due from
affiliates 4,431 0
Accrued interest receivable due from
third parties 16,668 7,289
Accounts receivable due from third parties 4 0
------------ --------------
TOTAL ASSETS $ 7,185,257 $ 1,125,645
============ ==============
LIABILITIES:
Accounts payable and accrued liabilities $ 6,272 $ 4,146
Due to affiliates 147,667 0
------------ --------------
TOTAL LIABILITIES 153,939 4,146
------------ --------------
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $25 per
share; 50,000,000 shares authorized,
22,000,000 shares Series A issued and
outstanding; stated value $25 per share 550,000 550,000
7,600 shares Series B issued and oustanding;
stated value $1,000,000 per share 5,898,901 0
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 28,662 18,112
------------ --------------
TOTAL STOCKHOLDERS' EQUITY 7,031,318 1,121,499
------------ --------------
TOTAL LIABILITIES AND STOCKHOLDERS' $ 7,185,257 $ 1,125,645
============ ==============
EQUITY
</TABLE>
20
<PAGE>
CHASE PREFERRED CAPITAL CORPORATION
AVERAGE BALANCE SHEET
Six Months Ended June 30,
(in thousands, except per share data)
(Unaudited)
<TABLE>
2000 1999
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Annualized) (Annualized)
<CAPTION>
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Residential first mortgage loans $ 1,003,653 $ 32,784 6.5% $ 897,375 $ 30,540 6.8%
Commercial first mortgage loans 54,046 2,626 9.7% 74,066 3,456 9.3%
Second mortgage loans 1,176,600 50,111 8.5% 0 0 0%
Manufactured housing loans 529,766 24,328 9.2% 0 0 0%
Intercompany loans 1,226,986 38,981 6.4% 0 0 0%
Cash 148,182 4,055 5.5% 95,944 2,781 5.8%
------------- ---------- ---- ------------- ---------- ----
TOTAL INTEREST-EARNING ASSETS 4,139,233 152,885 7.4% 1,067,385 36,777 6.9%
------------- ---------- ---- ------------- ---------- ----
Cash - noninterest-earning 8,952 0
Allowance for credit losses (6,968) (4,286)
Due from affiliates 0 56,573
Accrued interest receivable due from
affiliates 2,216 0
Accrued interest receivable due from third
parties 11,575 7,201
Accounts receivable due from third parties 2 0
------------- ------------
TOTAL ASSETS $ 4,155,010 $ 1,126,873
============= ============
LIABILITIES:
Accounts payable and accrued liabilities $ 4,443 $ 4,176
Due to affiliates 73,833 2
------------- ------------
TOTAL LIABILITIES 78,276 4,178
------------- ------------
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $25 per share;
50,000,000 shares authorized, 22,000,000
shares Series A issued and outstanding;
stated value $25 per share 550,000 550,000
7,600 shares Series B issued and
outstanding; stated value $1,000,000
per share 2,949,451 0
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 23,528 19,308
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 4,076,734 1,122,695
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' $ 4,155,010 $ 1,126,873
============= ============
EQUITY
</TABLE>
21
<PAGE>
CHASE PREFERRED CAPITAL CORPORATION
QUARTERLY FINANCIAL INFORMATION
(in thousands, except per share data)
(Unaudited)
<TABLE>
2000 1999
----- ----
Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter
INTEREST INCOME:
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Residential first mortgage loans $ 16,814 $ 15,970 $ 16,829 $ 15,823 $ 15,209 $ 15,331
Commercial first mortgage loans 1,334 1,292 1,528 1,300 1,730 1,726
Second mortgage loans 50,111 0 0 0 0 0
Manufactured housing loans 24,328 0 0 0 0 0
Intercompany loans 38,981 0 0 0 0 0
Interest on overnight investments 3,325 730 101 968 1,913 868
---------- --------- --------- --------- ---------- ----------
Interest income 134,893 17,992 18,458 18,091 18,852 17,925
Provision for credit losses 1,471 0 0 0 0 0
---------- --------- --------- --------- ---------- ----------
Net interest income 133,422 17,992 18,458 18,091 18,852 17,925
---------- --------- --------- --------- ---------- ----------
Other revenue 49 0 0 0 0 0
NONINTEREST EXPENSE:
Servicing fees 3,949 668 674 657 639 634
Advisory fees 146 63 62 62 63 63
Foreclosure and other expenses 155 56 104 58 102 81
---------- --------- --------- --------- ---------- ----------
Total noninterest expense 4,250 787 840 777 804 778
---------- --------- --------- --------- ---------- ----------
NET INCOME $ 129,221 $ 17,205 $ 17,618 $ 17,314 $ 18,048 $ 17,147
========== ========= ========= ========= ========== ==========
NET INCOME APPLICABLE TO
COMMON SHARE $ 28,266 $ 6,068 $ 6,480 $ 6,177 $ 6,910 $ 6,010
========== ========= ========= ========= ========== ==========
BASIC AND FULLY DILUTED
NET INCOME PER COMMON
SHARE $ 28,266 $ 6,068 $ 6,480 $ 6,177 $ 6,910 $ 6,010
========== ========= ========= ========= ========== ==========
</TABLE>
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Part II - OTHER INFORMATION
Item 4. 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:
April 4, 2000: to report acquisition of additional assets by the Company.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------
(Registrant)
Date: August 14, 2000 By /s/ Louis M. Morrell
------------------------------------
Louis M. Morrell
Treasurer
24
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