CHEVY CHASE
PREFERRED CAPITAL CORPORATION
FORM 10-Q
September 30, 1998
<PAGE>
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 quarterly period ended September 30, 1998
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
(Address of principal executive offices) (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
was 100 shares, $1 par value, as of October 31, 1998.
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------------
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements: .......................................... 1
(a) Statements of Financial Condition at September 30, 1998 and
December 31, 1997 ........................................ 2
(b) Statements of Operations for the Three and Nine Months Ended
September 30, 1998 and 1997............................... 3
(c) Statement of Stockholders' Equity for the Nine Months Ended
September 30, 1998........................................ 4
(d) Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997............................... 5
(e) Notes to Financial Statements ............................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 13
Item 2. Changes in Securities........................................... 13
Item 3. Defaults Upon Senior Securities ................................ 13
Item 4. Submission of Matters to a Vote of Security Holders ............ 13
Item 5. Other Information.............................................. 13
Item 6. Exhibits and Repor1ts on Form 8-K ............................. 13
i
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
The following unaudited financial statements and notes of Chevy Chase Preferred
Capital Corporation (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information. In
the opinion of management, all adjustments necessary for a fair presentation of
the financial position and the results of operations for the interim period
presented have been included. Such unaudited financial statements and notes
should be read in conjunction with the Company's financial statements and notes
for the year ended December 31, 1997, included in the Company's Annual Report on
Form 10-K (File No. 333-10495) filed with the Securities and Exchange Commission
on March 30, 1998.
1
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CHEVY CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------------
STATEMENTS OF FINANCIAL CONDITION
---------------------------------
(Unaudited)
September 30, December 31,
1998 1997
------------ ------------
ASSETS
Cash and interest-bearing deposits $ 4,438,425 $ 3,894,269
Residential mortgage loans (net of allowance for
losses of $40,333 and $39,999, respectively) 294,154,909 90,382,131
Real estate acquired in settlement of loans, net 417,617 173,738
Accounts receivable from parent 6,235,974 10,374,891
Accrued interest receivable 1,616,544 1,562,478
Prepaid expenses 361,246 435,809
------------ ------------
Total assets $307,224,715 $306,823,316
============ ============
IABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable to parent $ 223,769 $ 163,793
Accounts payable - others - 3,749
Dividends payable to parent 1,000,000 2,850,000
Dividends payable - others 3,890,625 3,890,625
Accrued expenses 7,783 -
------------ ------------
Total liabilities 5,122,177 6,908,167
------------ ------------
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 $50 per share 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 284,999,900 284,915,049
Retained earnings 2,102,538 -
------------ ------------
Total stockholders' equity 302,102,538 299,915,149
------------ ------------
Total liabilities and stockholders'
equity $307,224,715 $306,823,316
============ ============
The Notes to Financial Statements are an integral part of these statements.
2
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CHEVY CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------------
STATEMENT OF OPERATIONS
-----------------------
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
Interest Income
Residential mortgage
loans $5,639,820 $5,809,030 $17,061,147 $17,274,381
Other 62,268 40,576 172,478 82,802
---------- ---------- ----------- -----------
Total interest income 5,702,088 5,849,606 17,233,625 17,357,183
Provision for loan losses 10,862 16,033 10,862 35,287
---------- ---------- ----------- -----------
Total interest income after
provision for loan losses 5,691,226 5,833,573 17,222,763 17,321,896
Gain on sale of real estate
acquired in settlement of
loans, net 27,544 - 32,495 -
---------- ---------- ----------- -----------
Total income 5,718,770 5,833,573 17,255,258 17,321,896
Operating Expenses
Loan servicing fees paid
to parent 282,667 278,019 830,559 852,918
Advisory fees paid to parent 50,000 50,000 150,000 150,000
Directors fees 8,000 7,500 21,500 19,000
General and administrative 57,154 63,108 128,786 122,090
---------- ---------- ----------- -----------
Total operating expenses 397,821 398,627 1,130,845 1,144,008
---------- ---------- ----------- -----------
NET INCOME $5,320,949 $5,434,946 $16,124,413 $16,177,888
========== ========== =========== ===========
PREFERRED STOCK DIVIDENDS 3,890,625 3,890,625 11,671,875 11,671,875
---------- ---------- ----------- -----------
EARNINGS AVAILABLE TO
COMMON STOCKHOLDER $1,430,324 $1,544,321 $4,452,538 $4,506,013
========== ========== =========== ===========
EARNINGS PER COMMON SHARE $14,303.24 $15,443.21 $44,525.38 $45,060.13
========== ========== =========== ===========
The Notes to Financial Statements are an integral part of these statements.
3
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<TABLE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Capital
Contributed Total
Preferred Common in Excess Retained Stockholders'
Stock Stock of Par Earnings Equity
----------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $15,000,000 $100 $284,915,049 - $299,915,149
Net income - - - 16,124,413 16,124,413
Capital contribution from
common stockholder - - 84,851 - 84,851
Dividends on 10d%
Noncumulative Exchangeable
Preferred Stock, Series A - - - (11,671,875) (11,671,875)
Dividends on Common Stock - - - (2,350,000) (2,350,000)
----------- -------- ------------ ---------- ------------
Balance, September 30, 1998 $15,000,000 $100 $284,999,900 $2,102,538 $302,102,538
=========== ======== ============ ========== ============
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
4
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------------
STATEMENTS OF CASH FLOWS
------------------------
(Unaudited)
Nine Months Ended
September 30,
-----------------------------
1998 1997
---------- ----------
Cash flows from operating activities:
Net income $16,124,413 $16,177,888
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 10,862 35,287
Gain on sale of real estate acquired in
settlement of loans, net (32,495) -
Decrease (increase) in accounts receivable
from parent 4,138,917 (3,553,030)
Increase in accrued interest receivable (54,066) (78,573)
Decrease (increase) in prepaid expenses 74,563 (463,747)
Increase in accrued expenses 7,783 -
Increase (decrease) in accounts payable
to parent 59,976 (326,424)
Decrease in accounts payable - others (3,749) (3,334)
---------- ----------
Net cash provided by operating activities 20,326,204 11,788,067
---------- ----------
Cash flows from investing activities:
Purchases of residential mortgage loans (112,112,436) (54,740,287)
Repayments of residential mortgage loans 107,348,484 57,662,596
Net proceeds on sale of real estate
acquired in settlement of loans 768,928 214,722
---------- ----------
Net cash provided by (used in)
investing activities (3,995,024) 3,137,031
---------- ----------
Cash flows from financing activities:
Capital contribution from common stockholder 84,851 6,515
Dividends paid on preferred stock (11,671,875) (9,034,890)
Dividends paid on common stock (4,200,000) (2,384,749)
---------- ----------
Net cash used in financing activities (15,787,024) (11,413,124)
---------- ----------
Net increase in cash and cash equivalents 544,156 3,511,974
Cash and cash equivalents at beginning of period 3,894,269 365,175
---------- ----------
Cash and cash equivalents at end of period $4,438,425 $3,877,149
========== ==========
Supplemental disclosures of non-cash activities:
Loans receivable transferred to real estate
acquired in settlement of loans $980,312 $220,941
========== ==========
The Notes to Financial Statements are an integral part of these statements.
5
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
The Company is a Maryland corporation which acquires, holds and manages real
estate assets. Chevy Chase Bank, F.S.B. (the "Bank"), a federally insured stock
savings bank, owns all of the Company's common stock. The Bank is in compliance
with its regulatory capital requirements.
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 after the respective fixed rate period,
and 30 year fixed-rate mortgages. 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 table shows the residential mortgage loan portfolio by type at the
dates indicated:
September 30, December 31,
1998 1997
------------ ------------
One-year ARMs $18,577,501 $27,657,820
Three-year ARMs 41,941,620 78,228,562
5/1 ARMs 117,191,090 165,785,490
10/1 ARMs 111,288,980 16,196,915
30 year fixed-rate 5,196,051 2,553,343
Total 294,195,242 290,422,130
Less:
Allowance for loan losses 40,333 39,999
------------ ------------
Total $294,154,909 $290,382,131
============ ============
NOTE 3 - PREFERRED STOCK
Cash dividends on the Company's 10d% Noncumulative Exchangeable Preferred Stock,
Series A ("the Series A Preferred Shares") are payable quarterly in arrears. 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 (except upon the occurrence of certain tax events), and are redeemable
thereafter at the option of the Company. Except under certain limited
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
relating to the Bank.
6
<PAGE>
CHEVY CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
NOTE 4 - DIVIDENDS:
During the three months ended September 30, 1998, the Company's Board of
Directors declared $3,890,625 and $1,000,000 of preferred stock and common stock
dividends, respectively, out of the retained earnings of the Company. These
dividends were paid in October 1998.
During the nine months ended September 30, 1998, the Company's Board of
Directors declared $11,671,875 and $2,350,000 of preferred stock and common
stock dividends, respectively, out of the retained earnings of the Company.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Residential Mortgage Loans
At September 30, 1998, the Company had $294,154,909 invested in loans secured by
first mortgages or deeds of trust on single-family residential real estate
properties ("Residential Mortgage Loans"). The $3,772,778 increase from the
balance at December 31, 1997, resulted from Residential Mortgage Loan purchases
of $112,112,436, which were offset by principal collections of $107,348,184 and
provisions for loan losses of $10,862. The Company transferred five loans with
an aggregate principal balance of $980,312 to real estate acquired in settlement
of loans ("REO") during the nine months ended September 30, 1998. In addition,
the Company received proceeds of $768,928 on the sale of five REO properties
during the nine months ended September 30, 1998. 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.
At September 30, 1998, the Company had four non-accrual 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 an aggregate principal
balance of $517,970.
At September 30, 1998, the Company had three loans which were delinquent 30-89
days with an aggregate principal balance of $466,985 (or 0.16% of loans).
Allowance for Loan Losses
An analysis is performed periodically to determine whether an allowance for loan
losses is required. An allowance may be provided after considering such factors
as the economy in lending areas, delinquency statistics and past loss
experience. 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 is as follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
Balance at beginning of period $40,333 $10,659 $39,999 $ -
Provision for loan losses 10,862 16,033 10,862 5,287
Charge-offs (10,862) - (11,226) (8,595)
Recoveries - 2,376 698 2,376
------- ------- ------- -------
Balance at end of period $40,333 $29,068 $40,333 $29,068
======= ======= ======= =======
8
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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 ARMs are based), then the Company
will experience a decrease in income available to be distributed to its
stockholders. In addition, certain ARM 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.
In recent periods, primarily as a result of a decline in interest rates, the
Company has experienced an increase in prepayments on its Residential Mortgage
Loans. In response, the Company has begun to alter the mix of the loans that it
purchases. Specifically, the Company has purchased more 10/1 ARMs from the Bank,
which typically have higher yields than other adjustable rate loan types.
Based on the outstanding balance of the Company's Residential Mortgage Loans at
September 30, 1998 and the interest rate on such loans, anticipated annual
interest income, net of servicing fees, on the Company's loan portfolio was
approximately 138.4% 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 continued decline in interest rates would not adversely affect the
Company's ability to pay dividends on the Series A Preferred Shares. The
Company, to date, has not used any derivative instruments to manage its interest
rate risk.
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 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 real estate investment trust (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 and
to pay dividends on the Series A Preferred Shares. The acquisition of such
additional mortgage assets 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 and 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 funds as it deems necessary.
9
<PAGE>
Tax Status of the Company
The Company has elected to be taxed as a REIT under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended. 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 annually 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.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
During the three months ended September 30, 1998 and 1997, the Company reported
net income of $5,320,949 and $5,434,946, respectively.
Interest income on Residential Mortgage Loans totaled $5,639,820 and $5,809,030
for the three months ended September 30, 1998 and 1997, respectively, which
represents an average yield on such loans of 7.76% and 7.90%, respectively. The
average loan balance of the Residential Mortgage Loan portfolio was $290,889,994
and $293,948,202 for the three months ended September 30, 1998 and 1997,
respectively. The Company would have recorded an additional $16,290 and $11,341
in interest income for the three months ended September 30, 1998 and 1997,
respectively, had its non-accrual loans been current in accordance with their
original terms.
Other interest income of $62,268 and $40,576 was recognized on the Company's
interest bearing deposits during the three months ended September 30, 1998 and
1997, respectively.
Provisions for loan losses of $10,862 and $16,033 were recorded on the Company's
loan portfolio during the three months ended September 30, 1998 and 1997,
respectively.
The Company recognized a gain of $27,544 on the sale of two REO properties
during the three months ended September 30, 1998.
Operating expenses totaling $397,821 and $398,627 for the three months ended
September 30, 1998 and 1997, 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 $282,667 and
$278,019, for the three months ended September 30, 1998 and 1997, respectively,
were based on a servicing fee rate of 0.375% per annum of the outstanding
principal balances of Residential Mortgage Loans, pursuant to a servicing
agreement between the Company and the Bank. Advisory fees paid to parent for the
three months ended September 30, 1998 and 1997 totaled $50,000 for each period.
Directors fees totaled $8,000 and $7,500 for each period 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 September 15, 1998, the Company declared, out of the retained earnings of the
Company, a cash dividend of $1.296875 per share on the outstanding Series A
Preferred Shares. Dividends of $3,890,625 were subsequently paid on October 15,
1998.
10
<PAGE>
The Company also declared on September 15, 1998, out of the retained
earnings of the Company, a cash dividend of $10,000 per share of common stock.
The $1,000,000 dividend was paid on October 15, 1998.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
During the nine months ended September 30, 1998 and 1997, the Company reported
net income of $16,124,413 and $16,177,888, respectively.
Interest income on Residential Mortgage Loans totaled $17,061,147 and
$17,274,381 for the nine months ended September 30, 1998 and 1997, respectively,
which represents an average yield on such loans of 7.88% and 7.81%,
respectively. The average loan balance of the Residential Mortgage Loan
portfolio was $288,857,265 and $294,856,617 for the nine months ended September
30, 1998 and 1997, respectively. The Company would have recorded an additional
$40,711 and $20,440 in interest income for the nine months ended September 30,
1998 and 1997, respectively, had its non-accrual loans been current in
accordance with their original terms.
Other interest income of $172,478 and $82,802 was recognized on the Company's
interest bearing deposits during the nine months ended September 30, 1998 and
1997, respectively.
Provisions for loan losses of $10,862 and $35,287 were recorded on the Company's
loan portfolio during the nine months ended September 30, 1998 and 1997,
respectively.
The Company recognized a gain of $32,495 on the sale of five REO properties
during the nine months ended September 30, 1998.
Operating expenses totaling $1,130,845 and $1,144,008 for the nine months ended
September 30, 1998 and 1997, 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 $830,559 and
$852,918, for the nine months ended September 30, 1998 and 1997, respectively,
were based on a servicing fee rate of 0.375% per annum of the outstanding
principal balances of Residential Mortgage Loans, pursuant to a servicing
agreement between the Company and the Bank. Advisory fees paid to parent for the
nine months ended September 30, 1998 and 1997 totaled $150,000 for each period.
Directors fees totaled $21,500 and $19,000 for the nine months ended September
30, 1998 and 1997, 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.
During the nine months ended September 30, 1998, the Company's Board of
Directors declared $11,671,875 and $2,350,000 of preferred stock and common
stock dividends, respectively, out of the retained earnings of the Company.
YEAR 2000 ISSUES
As the year 2000 approaches, companies are beginning to face "Year 2000
Compliance" issues in at least three critical areas: internal systems,
dependencies with suppliers and service providers, and dependencies with
customers (or, in the Company's case, payors on the mortgage loans held by the
Company). Year 2000 Compliance means the ability of hardware, software and other
processing capabilities to interpret and manipulate correctly all date data up
to and through the year 2000, including the computation of leap years. Year 2000
Compliance issues arise because many commonly used software and hardware systems
were programmed to use two-digit year representations with the century of 19
implied. Thus, in the year 2000, those systems will treat 00 as 1900 instead of
2000 and may fail to produce proper results.
11
<PAGE>
Because the Company's operations are performed in their entirety under contract
with the Bank, the Company has no equipment or systems of its own. Therefore,
the Company does not believe that it faces any internal Year 2000 Compliance
risk.
For the same reason, the Company is heavily dependent on the Year 2000
Compliance of its sole service provider, the Bank. The Year 2000 Compliance risk
profile of the Company is tied to the Year 2000 Compliance risks of the Bank.
However, the Bank has advised the Company that it is subject to strict deadlines
for Year 2000 Compliance and other detailed Year 2000 Compliance guidelines
established by the Office of Thrift Supervision and the Federal Financial
Institutions Examination Council and that the Bank believes it has taken
appropriate steps to meet all such deadlines. Accordingly, the Company does not
expect to suffer any material adverse impact from the year 2000 on the services
provided by the Bank.
With respect to the payors of the mortgage loans held by the Company, the
Company also does not expect any material impact from the year 2000. Potential
Year 2000 Compliance risk in this area could arise from the inability of such
payors to timely make their payments because of problems with their own internal
payment systems. This would result in decreased revenues for the Company, which
could have an adverse effect on the payment of dividends by the Company and the
market price of the Company's stock. However, the investment policy of the
Company is to have 95% of its portfolio in mortgage assets consisting of either
Residential Mortgage Loans or mortgage-backed securities. As of September 30,
1998, all of the assets of the Company consisted of Residential Mortgage Loans.
The Company believes that Residential Mortgage Loans are not likely to be
materially affected by the year 2000 because the payments are made by
individuals rather than organizations that are more heavily dependent on
technology.
To date, the Company has made no material expenditures in connection with Year
2000 Compliance because of its ability to rely on the Bank's Year 2000
Compliance program. For the same reason, the Company does not expect to face any
material Year 2000 Compliance expenses in the future.
12
<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 filed during the three months ended September
30, 1998.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed1 on its behalf by the
undersigned thereunto duly authorized.
CHEVY CHASE PREFERRED CAPITAL CORPORATION
(Registrant)
November 13, 1998 By: /s/ Stephen R. Halpin, Jr.
------------------------------
Stephen R. Halpin, Jr.
Director,
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
November 13, 1998 By: /s/ Joel A. Friedman
------------------------
Joel A. Friedman
Senior Vice President and
Controller
(Principal Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,084
<INT-BEARING-DEPOSITS> 4,432,341
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
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<TOTAL-ASSETS> 307,224,715
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<LIABILITIES-OTHER> 7,783
<LONG-TERM> 0
0
15,000,000
<COMMON> 100
<OTHER-SE> 284,999,900
<TOTAL-LIABILITIES-AND-EQUITY> 307,224,715
<INTEREST-LOAN> 17,061,147
<INTEREST-INVEST> 0
<INTEREST-OTHER> 172,478
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<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
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<LOAN-LOSSES> 10,862
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,130,845
<INCOME-PRETAX> 16,124,413
<INCOME-PRE-EXTRAORDINARY> 16,124,413
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<CHANGES> 0
<NET-INCOME> 16,124,413
<EPS-PRIMARY> 44,525.38
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 517,970
<LOANS-PAST> 0
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<ALLOWANCE-OPEN> 39,999
<CHARGE-OFFS> (11,226)
<RECOVERIES> 698
<ALLOWANCE-CLOSE> 40,333
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
