SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1997
Commission File Number: 333-10495
CHEVY CHASE PREFERRED CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-1998335
(State or other jurisdiction (I.R.S. Employer
incorporation or organization Identification No.)
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
(Address of principal executive office) (Zip Code)
(301) 986-7000
(Registrant's telephone number, including area code)
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
The number of shares outstanding of the registrant's sole class of common stock
is 100 shares, $1 par value, as of July 31, 1997.
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements: Page
(a)Statements of Financial Condition at June 30, 1997 and ----
December 31, 1996................................... 1
(b)Statements of Operations for the Three Months and
Six Months Ended June 30, 1997...................... 2
(c)Statement of Stockholders' Equity for the Six Months
Ended June 30, 1997................................. 3
(d)Statement of Cash Flows for the Six Months Ended
June 30, 1997....................................... 4
(e)Notes to Financial Statements......................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 7
Item 3. Quantitative and Qualitative Analysis about Market
Risk............................................. 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings .................................. 11
Item 2. Changes in Securities............................... 11
Item 3. Defaults Upon Senior Securities..................... 11
Item 4. Submission of Matters to a Vote of Security Holders. 11
Item 5. Other Information................................... 11
Item 6. Exhibits and Reports on Form 8-K ................... 11
i
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
June 30, December 31,
1997 1996
ASSETS ------------ ------------
Cash and interest-bearing deposits $ 4,002,259 $ 365,175
Residential mortgage loans (net of allowance for
losses of $10,659 at June 30, 1997) 297,967,799 294,504,138
Real estate acquired in settlement of loans, net 212,346 -
Accounts receivable from parent 2,620,622 5,844,149
Accrued interest receivable 1,714,445 1,604,826
Prepaid expenses 486,186 -
------------ ------------
Total assets $307,003,657 $302,318,288
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable to parent $ 151,340 $ 483,080
Accounts payable - others - 3,334
Dividends payable to parent 1,800,000 584,749
Dividends payable - others 3,890,625 1,253,640
------------ ------------
Total liabilities 5,841,965 2,324,803
------------ ------------
10 3/8% Noncumulative Exchangeable Preferred Stock,
Series A, $5 par value 10,000,000 shares
authorized, 3,000,000 shares issued and
outstanding (liquidation value of $150,000,000
plus accrued and unpaid dividends) $ 15,000,000 $ 15,000,000
Common stock, $1 par value
1,000 shares authorized, 100 shares
issued and outstanding 100 100
Capital contributed in excess of par 284,999,900 284,993,385
Retained earnings 1,161,692 -
------------ ------------
Total stockholders' equity 301,161,692 299,993,485
------------ ------------
Total liabilities and stockholders' equity $307,003,657 $302,318,288
============ ============
The Notes to Financial Statements are an integral part of this statement.
1
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Six Months
Ended Ended
June 30, 1997 June 30, 1997
------------- -------------
Interest income
Residential mortgage loans $ 5,813,882 $ 11,465,351
Other 32,184 42,226
------------- -------------
Total interest income 5,846,066 11,507,577
Provision for loan losses 19,254 19,254
------------- -------------
Total interest income after provision
for loan losses 5,826,812 11,488,323
Operating expenses
Loan servicing fees paid to parent 277,594 574,899
Advisory fees paid to parent 50,000 100,000
Directors fees 6,500 11,500
General and administrative 33,735 58,982
------------- --------------
Total operating expenses 367,829 745,381
------------- --------------
NET INCOME $ 5,458,983 $ 10,742,942
============= ==============
PREFERRED STOCK DIVIDENDS 3,890,625 7,781,250
------------- --------------
EARNINGS AVAILABLE TO
COMMON STOCKHOLDER $ 1,568,358 $ 2,961,692
============= ==============
EARNINGS PER COMMON SHARE $ 15,683.58 $ 29,616.92
============= ==============
The Notes to Financial Statements are an integral part of this statement.
2
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
Capital
Contributed Total
Preferred Common in Excess Retained Stockholders'
Stock Stock of Par Earnings Equity
----------- --------- ------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $15,000,000 $ 100 $ 284,993,385 $ - $ 299,993,485
Net income - - - 10,742,942 10,742,942
Capital contribution from
Common Stockholder - - 6,515 - 6,515
Dividends on 10 3/8%
Noncumulative Exchangeable
Preferred Stock, Series A - - - (7,781,250) 7,781,250)
Dividends on Common Stock - - - (1,800,000) (1,800,000)
----------- --------- ------------- ------------ -------------
Balance, June 30, 1997 $15,000,000 $ 100 $ 284,999,900 $ 1,161,692 $301,161,692
=========== ========= ============= ============ =============
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
3
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
(Unaudited)
For the Six Months Ended June 30, 1997
Cash flows from operating activities:
Net income $ 10,742,942
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 19,254
Decrease in accounts receivable from parent 3,223,527
Increase in accrued interest receivable (109,619)
Increase in other assets (486,186)
Decrease in accounts payable to parent (331,740)
Decrease in accounts payable - others (3,334)
--------------
Net cash provided by operating activities 13,054,844
--------------
Cash flows from investing activities:
Purchases of residential mortgage loans (35,903,553)
Repayments of residential mortgage loan 32,208,292
--------------
Net cash used in investing activities (3,695,261)
--------------
Cash flows from financing activities:
Capital contribution from common stockholder 6,515
Dividends paid on preferred stock (5,144,265)
Dividends paid on common stock (584,749)
--------------
Net cash provided by financing activities (5,722,499)
--------------
Net increase in cash and cash equivalents 3,637,084
Cash and cash equivalents at beginning of period 365,175
--------------
Cash and cash equivalents at June 30, 1997 $ 4,002,259
==============
Supplemental disclosures of non-cash activities:
Loans receivable transferred to real estate acquired in
settlement of loans $ 220,941
==============
The Notes to Financial Statements are an integral part of this statement.
4
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Chevy Chase Preferred Capital Corporation (the "Company") is a Maryland
corporation which was incorporated on August 20, 1996 and created for the
purpose of acquiring and holding real estate mortgage assets. The Company is a
wholly-owned subsidiary of Chevy Chase Bank, F.S.B. (the "Bank"), a federally
insured stock savings bank.
On November 5, 1996, the Company was initially capitalized with the issuance to
the Bank of 100 shares of the Company's common stock (the "Common Stock"), $1.00
par value. On December 3, 1996, the Company commenced its operations upon
consummation of an initial public offering of 3,000,000 shares of the Company's
10 3/8% Noncumulative Exchangeable Preferred Stock, Series A (the "Series A
Preferred Shares"), $5.00 par value. These offerings, together with a separate
capital contribution made by the Bank on December 3, 1996, raised net capital of
$300 million. All Common Stock is held by the Bank.
The Company used the proceeds raised from the initial public offering of the
Series A Preferred Shares, the sale of Common Stock to the Bank and the
additional capital contribution to the Company by the Bank to pay the expenses
related to the offering and the formation of the Company and to purchase from
the Bank the Company's initial portfolio of residential mortgage loans at their
estimated fair value of approximately $300 million. Such loans were recorded in
the accompanying statement of financial condition at the Bank's historical cost
basis which approximated their estimated fair values.
NOTE 2 - RESIDENTIAL MORTGAGE LOANS:
Residential mortgage loans consist of one-year adjustable rate mortgages
("ARMs"), three-year ARMs and five-year and ten-year fixed-rate loans with
automatic adjustment to one-year ARMs. Each of the mortgage loans is secured by
a mortgage, deed of trust or other security instrument which created a first
lien on the residential dwellings located in their respective jurisdictions. The
following shows the residential mortgage loan portfolio by type at June 30,
1997:
One-year ARMs $ 12,222,164
Three-year ARMs 97,304,109
5/1 ARMs 181,204,176
10/1 ARMs 7,248,009
------------
297,978,458
Less:
Allowance for loan losses 10,659
------------
Total $297,967,799
============
5
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 3 - PREFERRED STOCK
On December 3, 1996, the Company sold $150 million of Series A Preferred Shares,
$5.00 par value per share and received net cash proceeds of $144 million. Cash
dividends on the Series A Preferred Shares are payable quarterly in arrears at
an annual rate of 10 3/8%. The liquidation value of each Series A Preferred
Share is $50 plus accrued and unpaid dividends. The Series A Preferred Shares
are not redeemable until January 15, 2007, and are redeemable thereafter at
the option of the Company. Except under certain circumstances, the holders of
the Series A Preferred Shares have no voting rights. The Series A
Preferred Shares are automatically exchangeable for a new series of
preferred stock of the Bank upon the occurrence of certain events.
NOTE 4 - DIVIDENDS:
During the three months ended June 30, 1997, the Company's Board of Directors
declared $3,890,625 and $1,800,000 of preferred stock and common stock
dividends, respectively, out of the retained earnings of the Company. These
dividends were paid in July 1997.
6
<PAGE>
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Organization
Chevy Chase Preferred Capital Corporation (the "Company") is a newly formed
Maryland corporation incorporated on August 20, 1996, and created for the
purpose of acquiring and holding real estate mortgage assets ("Mortgage
Assets"). The Company has elected to be treated as a real estate investment
trust (a "REIT") under the Internal Revenue Code of 1986, as amended (the
"Code"), and generally will not be subject to Federal income tax to the extent
that it distributes its earnings to its stockholders and maintains its
qualification as a REIT. All of the shares of the Company's common stock, par
value $1.00 per share (the "Common Stock"), are owned by Chevy Chase Bank,
F.S.B., a federally chartered and federally insured stock savings bank (the
"Bank"). The Company was formed by the Bank to provide the Bank with a
cost-effective means of raising capital.
On November 5, 1996, the Company was initially capitalized by the issuance to
the Bank of 100 shares of Common Stock. On December 3, 1996, the Company
commenced its operations upon the closing of the initial public offering (the
"Offering") of 3,000,000 shares of the Company's 10 3/8% Noncumulative
Exchangeable Preferred Stock, Series A, par value $5.00 per share (the "Series A
Preferred Shares"). The net proceeds to the Company from the sale of the Series
A Preferred Shares were $144.0 million. Simultaneous with the consummation of
the Offering, the Bank made capital contributions to the Company with respect to
its Common Stock in the amount of $150.0 million, plus an additional $6.0
million representing the underwriting discount and the expenses of the Offering.
The Company used the aggregate net proceeds of $300.0 million received in
connection with both the Offering and the capital contributions by the Bank to
purchase from the Bank the Company's initial portfolio of Mortgage Assets,
comprised entirely of residential mortgage loans, at their estimated fair value
of approximately $300.0 million. Such loans were recorded in the accompanying
financial statements at the Bank's historical cost basis, which approximated
their estimated fair values.
Residential Mortgage Loans
At June 30, 1997, the Company had $297,967,799 invested in whole loans secured
by first mortgages or deeds of trust on single-family residential real estate
properties ("Residential Mortgage Loans"). The $3,463,661 increase over the
balance at December 31, 1996, resulted from Residential Mortgage Loan purchases
of $35,903,552, which were offset by principal collections of $32,208,292. In
addition, the Company transferred one mortgage loan with a book balance of
$220,941 to real estate acquired in settlement of loans. Management intends to
continue to reinvest proceeds received from repayments of loans in additional
Residential Mortgage Loans to be purchased from either the Bank or its
affiliates.
7
<PAGE>
At June 30, 1997, the Company had one non-accrual loan (loans contractually past
due 90 days or more or with respect to which other factors indicate that full
payment of principal and interest is unlikely) with a principal balance of
$213,173.
At June 30, 1997, the Company had two delinquent loans (loans delinquent 30-89
days) with an aggregate principal balance of $224,358 (or .08% of loans).
Allowance for Loan Losses
Management reviews the loan portfolio to establish an allowance for estimated
losses if deemed necessary. An analysis of whether an allowance for loan losses
is required is performed periodically, and an allowance is provided after
considering such factors as the economy in lending areas, delinquency
statistics, past loss experience and estimated future loan losses. The allowance
for loan losses is based on estimates, and ultimate losses may vary from current
estimates. As adjustments to the allowance become necessary, provisions for loan
losses are reported in operations in the periods they are determined to be
necessary. The activity in the allowance for loan losses for the three months
and six months ended June 30, 1997 is as follows:
Three Months
and Six Months
Ended June 30, 1997
-------------------
Balance at beginning of period $ -
Provision for loan losses 19,254
Charge-offs (8,595)
--------------------
Balance at end of period $ 10,659
====================
Interest Rate Risk
The Company's income consists primarily of interest payments on Residential
Mortgage Loans. If there is a decline in interest rates (as measured by the
indices upon which the interest rates of the Residential Mortgage Loans are
based), then the Company will experience a decrease in income available to be
distributed to its stockholders. In such an interest rate environment, the
Company may experience an increase in prepayments on its Residential Mortgage
Loans and may find it difficult to purchase additional loans bearing interest
rates sufficient to support payment of dividends on the Series A Preferred
Shares. In addition, certain Residential Mortgage Loan products which the
Company holds allow borrowers to convert an adjustable rate mortgage to a fixed
rate mortgage, thus "locking in" a fixed interest rate at a time when interest
rates have declined.
Based on the outstanding balance of the Company's Residential Mortgage Loans at
June 30, 1997 and the interest rate on such loans, anticipated annual interest
income on the Company's loan portfolio was approximately 144.3% of the projected
annual dividend on the Series A Preferred Shares. There can be no assurance that
an interest rate environment in which there is a significant decline in interest
rates would not adversely affect the Company's ability to pay dividends on the
Series A Preferred Shares.
8
<PAGE>
Significant Concentration of Credit Risk
Concentration of credit risk arises when a number of customers 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 exposure to geographic concentrations directly affects the credit
risk of the Residential Mortgage Loans within the portfolio. Substantially all
of the Company's Residential Mortgage Loans are loans secured by residential
real estate properties located in the Washington, D.C. metropolitan area.
Consequently, these loans may be subject to a greater risk of default than other
comparable residential mortgage loans in the event of adverse economic,
political or business developments and natural hazards in the region that may
affect the ability of residential property owners in the region to make payments
of principal and interest on the underlying mortgages.
Liquidity and Capital Resources
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 as discussed below in "Tax Status of the Company."
The Company's principal liquidity need will be to fund the acquisition of
additional Mortgage Assets as Mortgage Assets held by the Company are repaid.
The acquisition of such additional Mortgage Assets held by the Company will be
funded with the proceeds of principal repayments on its current portfolio of
Mortgage Assets. The Company does not anticipate that it will have any other
material capital expenditures. The Company believes that cash generated from the
payment of principal and interest on its Mortgage Asset portfolio will provide
sufficient funds to meet its operating requirements, to pay dividends in
accordance with the requirements to be treated as a REIT for income tax purposes
for the foreseeable future. The Company may borrow as it deems necessary.
Tax Status of the Company
The Company has elected to be taxed as a REIT under Sections 856 through 860 of
the Code beginning with its taxable year ended December 31, 1996. As a REIT, the
Company generally will not be subject to Federal income tax on its net income
(excluding capital gains) provided that it distributes 100 percent of its annual
REIT taxable income to its stockholders, and meets certain organizational, stock
ownership and operational requirements. If in any taxable year the Company fails
to qualify as a REIT, the Company would not be allowed a deduction for
distributions to stockholders in computing its taxable income and would be
subject to Federal and state income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates. In addition, the
Company would also be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification was lost.
9
<PAGE>
RESULTS OF OPERATIONS
During the three months ended June 30, 1997 (the "three-month period") and six
months ended June 30, 1997 (the "six-month period"), the Company reported net
income of $5,458,983 and $10,742,942, respectively.
Interest income on Residential Mortgage Loans totaled $5,813,882 and $11,465,351
for the three-month and six-month periods, respectively, which represents an
average yield on such loans of 7.87% and 7.76%, respectively. The average
balance of the Residential Mortgage Loan portfolio for the three-month period
was $295,577,912 and for the six-month period was $295,310,825. The Company
would have recorded an additional $2,081 and $6,983 in interest income for the
three-month and six-month periods, respectively, had its one non-accrual loan
been current in accordance with its original terms.
Other interest income of $32,184 and $42,226 was recognized on the Company's
interest bearing deposits during the three-month and six-month periods,
respectively.
Operating expenses totaling $367,829 and $745,381 for the three-month and
six-month periods, respectively, were comprised of loan servicing fees paid to
parent, advisory fees paid to parent, directors fees and general and
administrative expenses. Loan servicing fees paid to parent of $277,594 and
$574,899, for the three-month and six-month periods, respectively, were based on
a servicing fee rate of 0.375% of the outstanding principal balances of
Residential Mortgage Loans, pursuant to the Servicing Agreement between the
Company and the Bank. Advisory fees paid to parent for the three-month and
six-month periods totaled $50,000 and $100,000, respectively. Directors fees
totaled $6,500 and $11,500, respectively, and represent compensation to the two
independent members of the Board of Directors. General and administrative
expenses consist primarily of the amortization of organizational costs.
On June 17, 1997, the Company declared, out of the retained earnings of the
Company, a cash dividend of $1.296875 per share on the outstanding shares of
Series A Preferred Stock. Dividends of $3,890,625 were subsequently paid on
July 15, 1997.
The Company also declared, out of the retained earnings of the Company, a cash
dividend of $18,000.00 per share of common stock. The $1,800,000 dividend was
paid on July 15, 1997.
10
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not the subject of any material litigation. None of the Company,
the Bank or any affiliate of the Bank is currently involved in nor, to the
Company's knowledge, is currently threatened with any material litigation with
respect to the Residential Mortgage Loans included in the portfolio, other than
routine litigation arising in the ordinary course of business, most of which is
covered by liability insurance.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K are set forth below.
Exhibit
No. Exhibit
11 Computation of Earnings Per Common Share included in Part I, Item 1 of
this report
27 Financial Data Schedule
(b) No reports on Form 8-K were issued during the three months ended June 30,
1997.
11
<PAGE>
SIGNATURES
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.
CHEVY CHASE PREFERRED CAPITAL CORPORATION
(Registrant)
August 14, 1997 By:/s/ Stephen R. Halpin, Jr.
--------------------------
Stephen R. Halpin, Jr.
Director,
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
August 14, 1997 By:/s/ Joel A. Friedman
--------------------
Joel A. Friedman
Senior Vice President and
Controller
(Principal Accounting Officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> Jun-30-1997
<CASH> 4,002,259
<SECURITIES> [BLANK]
<RECEIVABLES> 302,302,866
<ALLOWANCES> 10,659
<INVENTORY> [BLANK]
<CURRENT-ASSETS> [BLANK]
<PP&E> [BLANK]
<DEPRECIATION> [BLANK]
<TOTAL-ASSETS> 307,003,657
<CURRENT-LIABILITIES> 5,841,965
<BONDS> [BLANK]
[BLANK]
15,000,000
<COMMON> 100
<OTHER-SE> 286,161,592
<TOTAL-LIABILITY-AND-EQUITY> 307,003,657
<SALES> [BLANK]
<TOTAL-REVENUES> 11,507,577
<CGS> [BLANK]
<TOTAL-COSTS> 745,381
<OTHER-EXPENSES> 7,781,250
<LOSS-PROVISION> 19,254
<INTEREST-EXPENSE> [BLANK]
<INCOME-PRETAX> 10,742,942
<INCOME-TAX> [BLANK]
<INCOME-CONTINUING> 10,742,942
<DISCONTINUED> [BLANK]
<EXTRAORDINARY> [BLANK]
<CHANGES> [BLANK]
<NET-INCOME> 10,742,942
<EPS-PRIMARY> 29,616.92
<EPS-DILUTED> [BLANK]
</TABLE>
