CHEVY CHASE
PREFERRED CAPITAL CORPORATION
FORM 10-Q
September 30, 1999
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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, 1999
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, 1999.
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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, 1999
and December 31, 1998 2
(b) Statements of Operations for the Three and Nine Months
Ended September 30, 1999 and 1998 3
(c) Statement of Stockholders' Equity for the Nine Months
Ended September 30, 1999 4
(d) Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 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 12
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 Reports on Form 8-K 13
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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, 1998, included in the Company's Annual Report on
Form 10-K (File No. 333-10495) filed with the Securities and Exchange Commission
on March 31, 1999 (the "1998 10-K").
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CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
September 30, December 31,
1999 1998
------------- -------------
ASSETS
Cash and interest-bearing deposits $ 3,998,961 $ 4,861,984
Residential mortgage loans (net of allowance for
losses of $40,333 for both periods) 296,562,427 292,682,032
Real estate acquired in settlement of loans, net 220,298 272,197
Accounts receivable from parent 3,892,811 8,004,120
Accrued interest receivable 1,422,627 1,437,626
Prepaid expenses 58,782 335,850
------------- -------------
Total assets $ 306,155,906 $ 307,593,809
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable to parent $ 257,784 $ 234,923
Accrued expenses 75,636 11,810
Dividends payable to parent 300,000 3,460,000
Dividends payable to others 3,890,625 3,890,625
------------- -------------
Total liabilities 4,524,045 7,597,358
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10 3/8% Noncumulative Exchangeable Preferred
Stock, $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 284,999,900 284,996,351
Retained earnings 1,631,861 -
------------- -------------
Total stockholders' equity 301,631,861 299,996,451
------------- -------------
Total liabilities and stockholders' equity $ 306,155,906 $ 307,593,809
============= =============
The Notes to Financial Statements are an integral part of these statements.
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CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Interest Income
Residential mortgage loans $ 5,263,395 $ 5,639,820 $16,172,123 $17,061,147
Other 38,207 62,268 120,295 172,478
----------- ----------- ----------- -----------
Total interest income 5,301,602 5,702,088 16,292,418 17,233,625
----------- ----------- ----------- -----------
Provision for loan losses - 10,862 26,554 10,862
----------- ----------- ----------- -----------
Total interest income after
provision for loan losses 5,301,602 5,691,226 16,265,864 17,222,763
Gain on sale of real estate
acquired in settlement of
loans, net 8 27,544 1,679 32,495
----------- ----------- ----------- -----------
Total income 5,301,610 5,718,770 16,267,543 17,255,258
----------- ----------- ----------- -----------
Operating Expenses
Loan servicing fees paid
to parent 278,113 282,667 827,600 830,559
Advisory fees paid to parent 50,000 50,000 150,000 150,000
Directors fees 6,500 8,000 19,500 21,500
General and administrative 118,647 57,154 376,707 128,786
----------- ----------- ----------- -----------
Total operating expenses 453,260 397,821 1,373,807 1,130,845
----------- ----------- ----------- -----------
NET INCOME $ 4,848,350 $ 5,320,949 $14,893,736 $16,124,413
=========== =========== =========== ===========
PREFERRED STOCK DIVIDENDS 3,890,625 3,890,625 11,671,875 11,671,875
----------- ----------- ----------- -----------
EARNINGS AVAILABLE TO
COMMON STOCKHOLDER $ 957,725 $ 1,430,324 $ 3,221,861 $ 4,452,538
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE $ 9,577.25 $ 14,303.24 $ 32,218.61 $ 44,525.38
=========== =========== =========== ===========
The Notes to Financial Statements are an integral part of these statements.
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CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
Capital
Contributed Total
Preferred Common in Excess Retained Stockholders'
Stock Stock of Par Earnings Equity
----------- ------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $15,000,000 $ 100 $284,996,351 $ - $299,996,451
Net income - - - 14,893,736 14,893,736
Capital contribution from
common stockholder - - 3,549 - 3,549
Dividends on 10 3/8%
Noncumulative Exchangeable
Preferred Stock, Series A - - - (11,671,875) (11,671,875)
Dividends on Common Stock - - - (1,590,000) (1,590,000)
----------- ------ ------------ ------------- -------------
Balance, September 30, 1999 $15,000,000 $ 100 $284,999,900 $ 1,631,861 $301,631,861
=========== ====== ============ ============= =============
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
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CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
---------------------------
1999 1998
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Cash flows from operating activities:
Net income $ 14,893,736 $ 16,124,413
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 26,554 10,862
Gain on sale of real estate acquired in
settlement of loans, net (1,679) (32,495)
Decrease in accounts receivable from parent 4,111,309 4,138,917
(Increase) decrease in accrued interest receivable 14,999 (54,066)
Decrease in prepaid expenses 277,068 74,563
Increase in accrued expenses 63,826 7,783
Increase in accounts payable to parent 22,861 59,976
Decrease in accounts payable to others - (3,749)
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Net cash provided by operating activities 19,408,674 20,326,204
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Cash flows from investing activities:
Purchases of residential mortgage loans (64,109,973) (112,112,436)
Repayments of residential mortgage loans 59,449,112 107,348,484
Net proceeds on sale of real estate acquired
in settlement of loans 807,490 768,928
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Net cash provided by (used in) investing activities (3,853,371) (3,995,024)
------------- -------------
Cash flows from financing activities:
Capital contribution from common stockholder 3,549 84,851
Dividends paid on preferred stock (11,671,875) (11,671,875)
Dividends paid on common stock (4,750,000) (4,200,000)
------------- -------------
Net cash used in financing activities (16,418,326) (15,787,024)
------------- -------------
Net increase (decrease) in cash and cash equivalents (863,023) 544,156
Cash and cash equivalents at beginning of period 4,861,984 3,894,269
------------- -------------
Cash and cash equivalents at end of period $ 3,998,961 $ 4,438,425
============= =============
Supplemental disclosures of non-cash activities:
Loans receivable transferred to real estate
acquired in settlement of loans $ 753,912 $ 980,312
The Notes to Financial Statements are an integral part of these statements.
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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, seven-year and ten-year fixed-rate
loans with automatic conversion to one-year ARMs after the end of 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,
1999 1998
--------------- ---------------
One-year ARMs $ 12,485,988 $ 16,159,185
Three-year ARMs 23,838,568 35,684,740
5/1 ARMs 92,890,218 100,108,907
7/1 ARMs 12,307,244 -
10/1 ARMs 149,761,730 135,436,966
30 year fixed-rate 5,319,012 5,332,567
--------------- ---------------
Total 296,602,760 292,722,365
Less:
Allowance for loan losses 40,333 40,333
--------------- ---------------
Total $ 296,562,427 $ 292,682,032
=============== ===============
NOTE 3 - PREFERRED STOCK
Cash dividends on the Company's 10 3/8% 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.
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CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - DIVIDENDS:
During the three months ended September 30, 1999, the Company's Board of
Directors declared $3,890,625 and $300,000 of preferred stock and common stock
dividends, respectively, out of the retained earnings of the Company. These
dividends were paid in October, 1999.
During the nine months ended September 30, 1999, the Company's Board of
Directors declared $11,671,875 and $1,590,000 of preferred stock and common
stock dividends, respectively, out of the retained earnings of the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Residential Mortgage Loans
At September 30, 1999, the Company had $296,562,427 invested in loans secured by
first mortgages or deeds of trust on single-family residential real estate
properties ("Residential Mortgage Loans"). The $3,880,395 increase from the
balance at December 31, 1998, resulted from Residential Mortgage Loan purchases
of $64,109,973, which were offset by principal collections of $59,449,112 and
provisions for loan losses of $26,554. The Company transferred four loans with
an aggregate principal balance of $753,912 to real estate acquired in settlement
of loans ("REO") during the nine months ended September 30, 1999. In addition,
the Company received proceeds of $807,490 on the sale of four REO properties
during the nine months ended September 30, 1999. 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, 1999, the Company had three 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 $530,036.
At September 30, 1999, the Company had 6 loans which were delinquent 30-89 days
with an aggregate principal balance of $1,273,468 (or .43% 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,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Balance at beginning of period $40,333 $40,333 $40,333 $39,999
Provision for loan losses - 10,862 26,554 10,862
Charge-offs - (10,862) (26,554) (11,226)
Recoveries - - - 698
-------- -------- -------- --------
Balance at end of period $40,333 $40,333 $40,333 $40,333
======== ======== ======== ========
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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 then the Company will
experience a decrease in income available to be distributed to its stockholders.
Certain Residential Mortgage Loans which the Company holds allow borrowers to
convert an ARM to a fixed-rate mortgage, thus "locking in" a fixed interest rate
at a time when interest rates have declined. In addition, when interest rates
decline, holders of fixed-rate mortgages are more likely to prepay such
mortgages. 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.
Based on the outstanding balance of the Company's Residential Mortgage Loans at
September 30, 1999 and the interest rates on such loans, anticipated annual
interest income, net of servicing fees, on the Company's loan portfolio was
approximately 131.6% 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 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.
There have been no material changes to the Company's market risk disclosures for
the year ended December 31, 1998 included in the 1998 10-K.
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 from 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.
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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 100 percent of its annual REIT taxable
income to its stockholders, meets certain organizational, stock ownership and
operational requirements and meets certain income and asset tests. 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, 1999 Compared to Three Months Ended September
30, 1998
During the three months ended September 30, 1999 and 1998, the Company reported
net income of $4,848,350 and $5,320,949, respectively.
Interest income on Residential Mortgage Loans totaled $5,263,395 and $5,639,820
for the three months ended September 30, 1999 and 1998, respectively, which
represents an average yield on such loans of 7.14% and 7.76%, respectively. The
average loan balance of the Residential Mortgage Loan portfolio was $294,710,389
and $290,889,994 for the three months ended September 30, 1999 and 1998,
respectively. The Company would have recorded an additional $10,317 and $16,290
in interest income for the three months ended September 30, 1999 and 1998,
respectively, had its non-accrual loans been current in accordance with their
original terms.
Other interest income of $38,207 and $62,268 were recognized on the Company's
interest bearing deposits during the three months ended September 30, 1999 and
1998, respectively.
No provision for loan losses was recorded for the three months ended September
30, 1999. A provision for loan losses of $10,862 was recorded on the Company's
loan portfolio during the three months ended September 30,1998.
The Company recognized a gain of $8 on the sale of one REO property during the
three months ended September 30, 1999. The Company recognized aggregate gains of
$27,544 on the sales of two REO properties during the three months ended
September 30, 1998.
Operating expenses totaling $453,261 and $397,821 for the three months ended
September 30, 1999 and 1998, 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 $278,113 and
$282,667, for the three months ended September 30, 1999 and 1998, 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, 1999 and 1998 totaled $50,000 for each period.
Directors fees totaled $6,500 and $8,000 for the three months ended September
30, 1999 and 1998, respectively, and represent compensation to the two
independent members of the Board of Directors. General and administrative
expenses totaled $118,647 and $57,154 for the three months ended September 30,
1999 and 1998, respectively, and consist primarily of the amortization of
organizational costs. The increase in general and administrative expenses is due
primarily to the acceleration of the amortization of organizational costs in
accordance with the American Institute of Certified Public Accountants'
Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities,"
which the Company adopted effective January 1, 1999.
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On September 14, 1999, 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,
1999. 1 The Company's Board of Directors also declared on September 14 , 1999,
out of the retained earnings of the Company, a cash dividend of $3,000 per share
of common stock. The $300,000 dividend was paid on October 15, 1999.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
During the nine months ended September 30, 1999 and 1998, the Company reported
net income of $14,893,736 and $16,124,413, respectively.
Interest income on Residential Mortgage Loans totaled $16,172,123 and
$17,061,147 for the nine months ended September 30, 1999 and 1998, respectively,
which represents an average yield on such loans of 7.35% and 7.88%,
respectively. The average loan balance of the Residential Mortgage Loan
portfolio was $293,562,725 and $288,857,265 for the nine months ended September
30, 1999 and 1998, respectively. The Company would have recorded an additional
$29,534 and $40,711 in interest income for the nine months ended September 30,
1999 and 1998, respectively, had its non-accrual loans been current in
accordance with their original terms.
Other interest income of $120,295 and $172,478 was recognized on the Company's
interest bearing deposits during the nine months ended September 30, 1999 and
1998, respectively.
The Company recorded provisions for loan losses of $26,554 and $10,862 for the
nine months ended September 30, 1999 and 1998, respectively.
The Company recognized aggregate gains of $1,679 on the sales of four properties
classified as real estate acquired in settlement of loans during the nine months
ended September 30, 1999. The Company recognized aggregate gains of $32,495 on
the sales of five REO properties during the nine months ended September 30,
1998.
Operating expenses totaling $1,373,807 and $1,130,845 for the nine months ended
September 30, 1999 and 1998, 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 $827,600 and
$830,559, for the nine months ended September 30, 1999 and 1998, 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, 1999 and 1998 totaled $150,000 for each period.
Directors fees totaled $19,500 and $21,500 for the nine months ended September
30, 1999 and 1998, 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. The
increase in general and administrative expenses is due primarily to the
acceleration of the amortization of organizational costs in accordance with the
American Institute of Certified Public Accountants' Statement of Position 98-5
"Reporting on the Costs of Start-Up Activities," which the Company adopted
effective January 1, 1999.
During the nine months ended September 30, 1999, the Company's Board of
Directors declared $11,671,875 and $1,590,000 of preferred stock and common
stock dividends, respectively, out of the retained earnings of the Company.
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YEAR 2000 ISSUES
As the year 2000 approaches, companies are facing "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.
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 Bank 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. The Bank has advised the Company
that as of September 30, 1999, all such deadlines have been met and all phases
of the Bank's Year 2000 program have been completed with respect to mission
critical systems. 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,
1999, 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 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 Year 2000
Compliance expenses in the future.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Information required by this item is included in Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Interest Rate Risk", which is hereby incorporated herein by reference.
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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, 1999.
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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)
November __, 1999 By: /s/ Stephen R. Halpin, Jr.
Stephen R. Halpin, Jr.
Director,
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
November __, 1999 By: /s/ Joel A. Friedman
Joel A. Friedman
Senior Vice President and
Controller
(Principal Accounting Officer)
<PAGE>
Exhibit Index
Exhibit
No. Exhibit
- ------- -------
11 Computation of Earnings Per Common Share included in Part I, Item 1 of
this report.
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,576
<INT-BEARING-DEPOSITS> 3,994,385
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 296,562,427
<ALLOWANCE> 40,333
<TOTAL-ASSETS> 306,155,906
<DEPOSITS> 0
<SHORT-TERM> 4,448,409
<LIABILITIES-OTHER> 75,636
<LONG-TERM> 0
0
15,000,000
<COMMON> 100
<OTHER-SE> 284,999,900
<TOTAL-LIABILITIES-AND-EQUITY> 306,155,906
<INTEREST-LOAN> 16,172,123
<INTEREST-INVEST> 0
<INTEREST-OTHER> 120,295
<INTEREST-TOTAL> 16,292,418
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 16,292,418
<LOAN-LOSSES> 26,554
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,373,807
<INCOME-PRETAX> 14,893,736
<INCOME-PRE-EXTRAORDINARY> 14,893,736
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,893,736
<EPS-BASIC> 32,218.61
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 530,036
<LOANS-PAST> 1,273,468
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 40,333
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 40,333
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
