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
------------ ----- -------------- ------------ --------------
Balance, December 31, 1999 $15,000,000 $ 100 $ 284,830,286 $ - $ 299,830,386
Net income - - - 10,287,261 10,287,261
Capital contribution from
common stockholder - - 169,614 - 169,614
Dividends on 10 3/8%
Noncumulative Exchangeable
Preferred Stock, Series A - - - (7,781,250) (7,781,250)
Dividends on Common Stock - - - (750,000) (750,000)
------------ ----- -------------- ------------ --------------
Balance, June 30, 2000 $15,000,000 $ 100 $ 284,999,900 $ 1,756,011 $ 301,756,011
============ ===== ============== ============ ==============
The Notes to Financial Statements are an integral part of this statement.
-4-
CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
-------------------------------
2000 1999
--------------- ---------------
Cash flows from operating activities:
Net income $ 10,287,261 $ 10,045,386
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses - 26,554
Gain on sales of real estate acquired in
settlement of loans, net - (1,671)
(Increase) decrease in accounts receivable
from parent (789,844) 5,223,923
Increase in accrued interest receivable (243,389) (117,548)
(Increase) decrease in prepaid expenses (565) 212,918
Increase in accrued expenses and accounts
payable to others 20,998 69,437
Increase (decrease) in accounts payable
to parent (272,346) 9,802
--------------- ---------------
Net cash provided by operating activities 9,002,115 15,468,801
--------------- ---------------
Cash flows from investing activities:
Purchases of residential mortgage loans (17,326,476) (47,676,236)
Repayments of residential mortgage loans 16,271,366 41,997,591
Net proceeds on sales of real estate
acquired in settlement of loans - 565,942
--------------- ---------------
Net cash used in investing activities (1,055,110) (5,112,703)
--------------- ---------------
Cash flows from financing activities:
Capital contribution from common
stockholder 169,614 3,549
Dividends paid on preferred stock (7,781,250) (7,781,250)
Dividends paid on common stock (3,600,000) (3,650,000)
--------------- ---------------
Net cash used in financing activities (11,211,636) (11,427,701)
--------------- ---------------
Net decrease in cash and cash equivalents (3,264,631) (1,071,603)
Cash and cash equivalents at beginning of period 7,072,250 4,861,984
--------------- ---------------
Cash and cash equivalents at end of period $ 3,807,619 $ 3,790,381
=============== ===============
Supplemental disclosures of cash flow information:
Income taxes paid during the year $ 10,468 $ -
=============== ===============
Supplemental disclosures of non-cash activities:
Loans receivable transferred to real estate
acquired in settlement of loans $ 134,013 $ 533,614
=============== ===============
The Notes to Financial Statements are an integral part of these statements.
-5-
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.
Certain reclassifications of prior periods' information have been made to
conform with the presentation for the three and six months ended June 30, 2000.
NOTE 2 - RESIDENTIAL MORTGAGE LOANS:
Residential mortgage loans consist of monthly adjustable rate mortgages
("ARMs"), one-year ARMs, three-year ARMs and three-year, 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,
2000 1999
---------------- ----------------
Monthly ARMs $ 2,067,473 $ -
One-year ARMs 9,867,103 11,854,943
Three-year ARMs 20,398,333 24,886,732
3/1 ARMs 9,260,184 -
5/1 ARMs 95,344,588 93,066,498
7/1 ARMs 11,951,793 12,243,571
10/1 ARMs 142,187,321 147,823,258
30 year fixed-rate 5,080,465 5,361,161
---------------- ----------------
Total 296,157,260 295,236,163
Less:
Allowance for loan losses 40,333 40,333
---------------- ----------------
Total $ 296,116,927 $ 295,195,830
================ ================
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
-6-
CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 - PREFERRED STOCK (continued):
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.
NOTE 4 - DIVIDENDS:
During the three months ended June 30, 2000, the Company's Board of Directors
declared $3,890,625 and $250,000 of preferred stock and common stock dividends,
respectively, out of the retained earnings of the Company. These dividends were
paid in July, 2000.
During the six months ended June 30, 2000, the Company's Board of Directors
declared $7,781,250 and $750,000 of preferred stock and common stock dividends,
respectively, out of the retained earnings of the Company.
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Residential Mortgage Loans
At June 30, 2000, the Company had $296,116,927 invested in loans secured by
first mortgages or deeds of trust on single-family residential real estate
properties ("Residential Mortgage Loans"). The $921,097 increase from the
balance at December 31, 1999, resulted from Residential Mortgage Loan purchases
of $17,326,476, which were offset by principal collections of $16,271,366. The
Company transferred one loan with an aggregate principal balance of $134,013 to
real estate acquired in settlement of loans ("REO") during the six months ended
June 30, 2000. 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, 2000, the Company had 3 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
$549,978 (or .19% of loans).
At June 30, 2000, the Company had 5 loans which were delinquent 30-89 days with
an aggregate principal balance of $923,830 (or .31% 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,
--------------------- ---------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Balance at beginning of period $ 40,333 $ 40,333 $ 40,333 $ 27,539
Provision for loan losses - 26,554 - 13,034
Charge-offs - (26,554) - (240)
---------- ---------- ---------- ----------
Balance at end of period $ 40,333 $ 40,333 $ 40,333 $ 40,333
========== ========== ========== ==========
-8-
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, 2000 and the interest rates on such loans, anticipated annual interest
income, net of servicing fees, on the Company's loan portfolio was approximately
132.7% 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
from the disclosures made in the 1999 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. Most (or 81.0%) of
the Company's Residential Mortgage Loans are secured by residential real estate
properties located in the Washington, DC 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
-9-
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.
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.
During the year ended December 31, 1999, the Company recognized capital gains on
the sale of five REO properties of $29,909. As a result, subsequent to year
1999, the Company made a tax payment of $10,468.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
During the three months ended June 30, 2000 and 1999, the Company reported net
income of $5,096,846 and $4,992,038, respectively.
Interest income on Residential Mortgage Loans totaled $5,415,954 and $5,427,145
for the three months ended June 30, 2000 and 1999, respectively, which
represents an average yield on such loans of 7.31% and 7.40%, respectively. The
average loan balance of the Residential Mortgage Loan portfolio was $296,351,889
and $293,340,723 for the three months ended June 30, 2000 and 1999,
respectively. The Company would have recorded an additional $9,912 and $8,502 in
interest income for the three months ended June 30, 2000 and 1999, respectively,
had its non-accrual loans been current in accordance with their original terms.
Other interest income of $35,382 and $41,184 was recognized on the Company's
interest bearing deposits during the three months ended June 30, 2000 and 1999,
respectively.
No provision for loan losses was recorded for the three months ended June 30,
2000. A provision for loan losses of $13,034 was recorded on the Company's loan
portfolio during the three months ended June 30, 1999.
-10-
The Company did not have any sales of REO properties during the three months
ended June 30, 2000. The Company recognized a gain of $286 on the sale of one
REO property during the three months ended June 30, 1999.
Operating expenses totaling $354,490 and $460,474 for the three months ended
June 30, 2000 and 1999, 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 $279,510 and
$276,583, for the three months ended June 30, 2000 and 1999, 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, 2000 and 1999 totaled $50,000 for each period. Directors'
fees totaled $5,000 and $6,500 for the three months ended June 30, 2000 and
1999, respectively, and represent compensation to the two independent members of
the Board of Directors. General and administrative expenses totaled $19,980 and
$127,391 for the three months ended June 30, 2000 and 1999, respectively. The
decrease in general and administrative expenses is due primarily to the
acceleration in 1999 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 during fiscal year 1999.
On June 9, 2000 the Company's Board of Directors 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 17, 2000.
The Company's Board of Directors also declared on June 9, 2000, out of the
retained earnings of the Company, a cash dividend of $2,500 per share of common
stock. The $250,000 dividend was paid on July 17, 2000.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
During the six months ended June 30, 2000 and 1999, the Company reported net
income of $10,287,261 and $10,045,386, respectively.
Interest income on Residential Mortgage Loans totaled $10,930,104 and
$10,914,772 for the six months ended June 30, 2000 and 1999, respectively, which
represents an average yield on such loans of 7.37% and 7.45%, respectively. The
average loan balance of the Residential Mortgage Loan portfolio was $296,698,481
and $292,988,893 for the six months ended June 30, 2000 and 1999, respectively.
The Company would have recorded an additional $17,404 and $19,217 in interest
income for the six months ended June 30, 2000 and 1999, respectively, had its
non-accrual loans been current in accordance with their original terms.
Other interest income of $69,543 and $82,088 was recognized on the Company's
interest bearing deposits during the six months ended June 30, 2000 and 1999,
respectively.
No provision for loan losses was recorded for the six months ended June 30,
2000. The Company recorded provision for loan losses of $26,554 for the six
months ended June 30, 1999.
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.
-11-
Operating expenses totaling $697,809 and $920,547 for the six months ended June
30, 2000 and 1999, 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 $550,877 and
$549,487, for the six months ended June 30, 2000 and 1999, 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, 2000 and 1999 totaled $100,000 for each period. Directors
fees totaled $16,000 and $13,000 for the six months ended June 30, 2000 and
1999, respectively, and represent compensation to the two independent members of
the Board of Directors. General and administrative expenses totaled $30,932 and
$258,060 for the six months ended June 30, 2000 and 1999, respectively. The
decrease in general and administrative expenses is due primarily to the
acceleration in 1999 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 during fiscal year 1999.
During the six months ended June 30, 2000, the Company's Board of Directors
declared $7,781,250 and $750,000 of preferred stock and common stock dividends,
respectively, out of the retained earnings of the Company.
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.
-12-
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,
2000.
-13-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHEVY CHASE PREFERRED CAPITAL CORPORATION
(Registrant)
August 14, 2000 By: /s/ Stephen R. Halpin, Jr.
-----------------------------
Stephen R. Halpin, Jr.
Director,
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
August 14, 2000 By: /s/ Joel A. Friedman
--------------------------
Joel A. Friedman
Senior Vice President and
Controller
(Principal Accounting Officer)
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.
