CHEVY CHASE
PREFERRED CAPITAL CORPORATION
FORM 10-Q
June 30, 1999
<PAGE>
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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 June 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 July 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 June 30, 1999
and December 31, 1998 2
(b) Statements of Operations for the Three Months and
Six Months Ended June 30, 1999 and 1998 3
(c) Statement of Stockholders' Equity for the Six
Months Ended June 30, 1999 4
(d) Statements of Cash Flows for the Six Months Ended
June 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)
June 30, December 31,
1999 1998
------------ ------------
ASSETS
Cash and interest-bearing deposits $ 3,790,381 $ 4,861,984
Residential mortgage loans (net of allowance for
losses of $40,333 for both periods) 297,800,509 292,682,032
Real estate acquired in settlement of loans, net 241,540 272,197
Accounts receivable from parent 2,780,197 8,004,120
Accrued interest receivable 1,555,174 1,437,626
Prepaid expenses 122,932 335,850
------------ ------------
Total assets $306,290,733 $307,593,809
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable to parent $ 244,725 $ 234,923
Accrued expenses 81,247 11,810
Dividends payable to parent 1,100,000 3,460,000
Dividends payable to others 3,890,625 3,890,625
------------ ------------
Total liabilities 5,316,597 7,597,358
------------ ------------
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 974,136 -
------------ ------------
Total stockholders' equity 300,974,136 299,996,451
------------ ------------
Total liabilities and stockholders' equity $306,290,733 $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 Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Interest Income
Residential mortgage loans $5,424,076 $5,720,076 $10,908,728 $11,421,327
Other 41,184 64,873 82,088 110,210
----------- ----------- ----------- -----------
Total interest income 5,465,260 5,784,949 10,990,816 11,531,537
Provision for loan losses 13,034 - 26,554 -
----------- ----------- ----------- -----------
Total interest income after
provision for loan losses 5,452,226 5,784,949 10,964,262 11,531,537
Gain on sale of real estate
acquired in settlement of
loans, net 286 3,991 1,671 4,951
----------- ----------- ----------- -----------
Total income 5,452,512 5,788,940 10,965,933 11,536,488
----------- ----------- ----------- -----------
Operating Expenses
Loan servicing fees paid
to parent 276,583 275,827 549,487 547,892
Advisory fees paid to parent 50,000 50,000 100,000 100,000
Directors fees 6,500 6,500 13,000 13,500
General and administrative 127,391 34,545 258,060 71,632
----------- ----------- ----------- -----------
Total operating expenses 460,474 366,872 920,547 733,024
=========== =========== =========== ===========
NET INCOME $4,992,038 $5,422,068 $10,045,386 $10,803,464
=========== =========== =========== ===========
PREFERRED STOCK DIVIDENDS 3,890,625 3,890,625 7,781,250 7,781,250
----------- ----------- ----------- -----------
EARNINGS AVAILABLE TO
COMMON STOCKHOLDER $1,101,413 $1,531,443 $ 2,264,136 $ 3,022,214
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE $11,014.13 $15,314.43 $ 22,641.36 $ 30,222.14
=========== =========== =========== ===========
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 - - - 10,045,386 10,045,386
Capital contribution from
common stockholder - - 3,549 - 3,549
Dividends on 10 3/8%
Noncumulative Exchangeable
Preferred Stock, Series A - - - (7,781,250) (7,781,250)
Dividends on Common Stock - - - (1,290,000) (1,290,000)
----------- ------- ------------- ------------ --------------
Balance, June 30, 1999 $15,000,000 $100 $284,999,900 $ 974,136 $300,974,136
=========== ======= ============= ============ ==============
</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)
Six Months Ended
June 30,
------------------------------
1999 1998
-------------- --------------
Cash flows from operating activities:
Net income $ 10,045,386 $ 10,803,464
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 26,554 -
Gain on sale of real estate acquired in
settlement of loans, net (1,671) (4,951)
Decrease in accounts receivable from parent 5,223,923 1,218,604
Increase in accrued interest receivable (117,548) (151,441)
Decrease in prepaid expenses 212,918 48,667
Increase in accrued expenses 69,437 4,125
Increase (decrease) in accounts payable
to parent 9,802 (8,068)
Decrease in accounts payable to others - (3,749)
-------------- --------------
Net cash provided by operating activities 15,468,801 11,906,651
-------------- --------------
Cash flows from investing activities:
Purchases of residential mortgage loans (47,676,236) (81,762,466)
Repayments of residential mortgage loans 41,997,591 80,593,458
Net proceeds on sale of real estate
acquired in settlement of loans 565,942 354,494
-------------- --------------
Net cash provided by (used in)
investing activities (5,112,703) (814,514)
-------------- --------------
Cash flows from financing activities:
Capital contribution from common stockholder 3,549 84,851
Dividends paid on preferred stock (7,781,250) (7,781,250)
Dividends paid on common stock (3,650,000) (3,200,000)
-------------- --------------
Net cash used in financing activities (11,427,701) (10,896,399)
-------------- --------------
Net increase (decrease) in cash and
cash equivalents (1,071,603) 195,738
Cash and cash equivalents at beginning of period 4,861,984 3,894,269
-------------- --------------
Cash and cash equivalents at end of period $ 3,790,381 $ 4,090,007
============== ==============
Supplemental disclosures of non-cash activities:
Loans receivable transferred to real estate
acquired in settlement of loans $ 533,614 $ 562,694
============== ==============
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:
June 30, December 31,
1999 1998
------------- -------------
One-year ARMs $ 13,423,490 $ 16,159,185
Three-year ARMs 27,059,220 35,684,740
5/1 ARMs 98,605,599 100,108,907
7/1 ARMs 6,844,196 -
10/1 ARMs 146,566,784 135,436,966
30 year fixed-rate 5,341,553 5,332,567
------------- -------------
Total 297,840,842 292,722,365
Less:
Allowance for loan losses 40,333 40,333
------------- -------------
Total $297,800,509 $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 June 30, 1999, the Company's Board of
Directors declared $3,890,625 and $1,100,000 of preferred stock and common stock
dividends, respectively, out of the retained earnings of the Company. These
dividends were paid in July, 1999.
During the six months ended June 30, 1999, the Company's Board of Directors
declared $7,781,250 and $1,290,000 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 June 30, 1999, the Company had $297,800,509 invested in loans secured by
first mortgages or deeds of trust on single-family residential real estate
properties ("Residential Mortgage Loans"). The $5,118,477 increase from the
balance at December 31, 1998, resulted from Residential Mortgage Loan purchases
of $47,676,236, which were offset by principal collections of $41,997,591 and
provisions for loan losses of $26,554. The Company transferred three loans with
an aggregate principal balance of $533,614 to real estate acquired in settlement
of loans ("REO") during the six months ended June 30, 1999. In addition, the
Company received proceeds of $565,942 on the sale of three REO properties during
the six months ended June 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 June 30, 1999, the Company had two 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 $377,369.
At June 30, 1999, the Company had four loans which were delinquent 30-89 days
with an aggregate principal balance of $742,793 (or 0.24% 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:
Six Months Three Months
Ended Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Balance at beginning of period $40,333 $39,999 $27,539 $40,333
Provision for loan losses 26,554 - 13,034 -
Charge-offs (26,554) (364) (240) -
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
June 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
133% 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 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.
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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 annually 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 June 30, 1999 Compared to Three Months Ended June 30, 1998
During the three months ended June 30, 1999 and 1998, the Company reported net
income of $4,992,038 and $5,422,068, respectively.
Interest income on Residential Mortgage Loans totaled $5,424,076 and $5,720,076
for the three months ended June 30, 1999 and 1998, respectively, which
represents an average yield on such loans of 7.40% and 7.93%, respectively. The
average loan balance of the Residential Mortgage Loan portfolio was $293,340,723
and $288,494,139 for the three months ended June 30, 1999 and 1998,
respectively. The Company would have recorded an additional $8,502 and $5,987 in
interest income for the three months ended June 30, 1999 and 1998, respectively,
had its non-accrual loans been current in accordance with their original terms.
Other interest income of $41,184 and $64,873 was recognized on the Company's
interest bearing deposits during the three months ended June 30, 1999 and 1998,
respectively.
A provision for loan losses of $13,034 was recorded on the Company's loan
portfolio during the three months ended June 30, 1999. No provision for loan
losses was recorded during the three months ended June 30, 1998.
The Company recognized a gain of $286 on the sale of one REO property during the
three months ended June 30, 1999. The Company recognized a gain of $3,991 on the
sale of two REO properties during the three months ended June 30, 1998.
Operating expenses totaling $460,474 and $366,872 for the three months ended
June 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 $276,583 and
$275,827, for the three months ended June 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 June 30, 1999 and 1998 totaled $50,000 for each period. Directors
fees totaled $6,500 for both the three months ended June 30, 1999 and 1998,
respectively, and represent compensation to the two independent members of the
Board of Directors. General and administrative expenses totaled $127,391 and
$34,545 for the three months ended June 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 June 29, 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 July 15,
1999.
The Company also declared on June 29, 1999, out of the retained earnings
of the Company, a cash dividend of $11,000 per share of common stock. The
$1,100,000 dividend was paid on July 15, 1999.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
During the six months ended June 30, 1999 and 1998, the Company reported net
income of $10,045,386 and $10,803,464, respectively.
Interest income on Residential Mortgage Loans totaled $10,908,728 and
$11,421,327 for the six months ended June 30, 1999 and 1998, respectively, which
represents an average yield on such loans of 7.45% and 7.94%, respectively. The
average loan balance of the Residential Mortgage Loan portfolio was $292,988,893
and $287,840,901 for the six months ended June 30, 1999 and 1998, respectively.
The Company would have recorded an additional $19,217 and $24,421 in interest
income for the six months ended June 30, 1999 and 1998, respectively, had its
non-accrual loans been current in accordance with their original terms.
Other interest income of $82,088 and $110,210 was recognized on the Company's
interest bearing deposits during the six months ended June 30, 1999 and 1998,
respectively.
The Company recorded provision for loan losses of $26,554 for the six months
ended June 30, 1999. No provision for loan losses was recorded for the six
months ended June 30, 1998.
The Company recognized a gain of $1,671 on the sale of three properties
classified as real estate acquired in settlement of loans during the six months
ended June 30, 1999.
Operating expenses totaling $920,547 and $733,024 for the six months ended June
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 $549,487 and
$547,892, for the six months ended June 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 six
months ended June 30, 1999 and 1998 totaled $100,000 for each period. Directors
fees totaled $13,000 and $13,500 for the six months ended June 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 six months ended June 30, 1999, the Company's Board of Directors
declared $7,781,250 and $1,290,000 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 June 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 June 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 June 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)
August 16, 1999 By: /s/ Stephen R. Halpin, Jr.
---------------------------
Stephen R. Halpin, Jr.
Director,
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
August 16, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,100
<INT-BEARING-DEPOSITS> 3,785,281
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 297,800,509
<ALLOWANCE> 40,333
<TOTAL-ASSETS> 306,290,733
<DEPOSITS> 0
<SHORT-TERM> 5,235,350
<LIABILITIES-OTHER> 81,247
<LONG-TERM> 0
0
15,000,000
<COMMON> 100
<OTHER-SE> 284,999,900
<TOTAL-LIABILITIES-AND-EQUITY> 306,290,733
<INTEREST-LOAN> 10,908,728
<INTEREST-INVEST> 0
<INTEREST-OTHER> 82,088
<INTEREST-TOTAL> 10,990,816
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 10,990,816
<LOAN-LOSSES> 26,554
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 920,547
<INCOME-PRETAX> 10,045,386
<INCOME-PRE-EXTRAORDINARY> 10,045,386
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,045,386
<EPS-BASIC> 22,641.36
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 377,369
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 40,333
<CHARGE-OFFS> (26,554)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 40,333
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
