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Previous: ARC COMMUNICATIONS INC, 10QSB, 2000-05-15 |
Next: DELPHOS CITIZENS BANCORP INC, 10-Q, 2000-05-15 |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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.
The number of shares outstanding of the registrant's sole class of common stock was 100 shares, $1 par value, as of April 30, 2000.
________________________________________________________________________________CHEVY CHASE PREFERRED CAPITAL CORPORATION -----------------------------------------
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements:................................................1
(a) Statements of Financial Condition at March 31, 2000 and
December 31, 1999....................................................2
(b) Statements of Operations for the Three Months Ended
March 31, 2000 and 1999..............................................3
(c) Statement of Stockholders' Equity for the Three Months Ended
March 31, 2000...........................................................................4
(d) Statements of Cash Flows for the Three Months Ended
March 31, 2000 and 1999..................................................................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.......................................11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................................12
Item 2. Changes in Securities............................................................................12
Item 3. Defaults Upon Senior Securities..................................................................12
Item 4. Submission of Matters to a Vote of Security Holders..............................................12
Item 5. Other Information................................................................................12
Item 6. Exhibits and Reports on Form 8-K.................................................................12
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, 1999, included in the Company's Annual Report on Form 10-K (File No. 333-10495) filed with the Securities and Exchange Commission on March 27, 2000 (the "1999 10-K").
CHEVY CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------------
STATEMENTS OF FINANCIAL CONDITION
---------------------------------
March 31, December 31,
2000 1999
---------------------- ---------------------
---------------------- ---------------------
ASSETS
Cash and interest-bearing deposits $ 3,231,136 $ 7,072,250
Residential mortgage loans (net of allowance for
losses of $40,333 for both periods) 296,900,558 295,195,830
Accounts receivable from parent 3,820,150 3,599,534
Accrued interest receivable 1,518,779 1,271,362
Prepaid expenses 8,097 8,000
---------------------- ---------------------
---------------------- ---------------------
Total assets $ 305,478,720 $ 307,146,976
====================== =====================
====================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable to parent $ 274,768 $ 272,346
Accrued expenses and accounts payable to others 13,537 53,619
Dividends payable to parent 500,000 3,100,000
Dividends payable to others 3,890,625 3,890,625
----------------------
---------------------- ---------------------
Total liabilities 4,678,930 7,316,590
---------------------- ---------------------
---------------------- ---------------------
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 284,999,900 284,830,286
Retained earnings 799,790 -
---------------------- ---------------------
---------------------- ---------------------
Total stockholders' equity 300,799,790 299,830,386
---------------------- ---------------------
---------------------- ---------------------
Total liabilities and stockholders' equity $ 305,478,720 $ 307,146,976
====================== =====================
The Notes to Financial Statements are an integral part of these statements.
CHEVY CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------------
STATEMENTS OF OPERATIONS
------------------------
Three Months Ended
March 31,
---------------------------------------------
2000 1999
--------------------- --------------------
Interest Income
Residential mortgage loans $ 5,510,041 $ 5,484,652
Other 34,161 40,904
--------------------- --------------------
Total interest income 5,544,202 5,525,556
Provision for loan losses - 13,520
--------------------- --------------------
Total interest income after
provision for loan losses 5,544,202 5,512,036
Gain on sale of real estate acquired in
settlement of loans, net - 1,385
--------------------- --------------------
Total income 5,544,202 5,513,421
--------------------- --------------------
Operating Expenses
Loan servicing fees paid to parent 271,367 272,904
Advisory fees paid to parent 50,000 50,000
Directors fees 11,000 6,500
General and administrative 10,952 130,669
--------------------- --------------------
Total operating expenses 343,319 460,073
--------------------- --------------------
Income before income taxes 5,200,883 5,053,348
Provision for income taxes 10,468 -
--------------------- --------------------
NET INCOME $ 5,190,415 $ 5,053,348
===================== ====================
PREFERRED STOCK DIVIDENDS 3,890,625 3,890,625
--------------------- --------------------
COMMON STOCKHOLDER $ 1,299,790 $ 1,162,723
===================== ====================
EARNINGS PER COMMON SHARE $ 12,997.90 $ 11,627.23
===================== ====================
The Notes to Financial Statements are an integral part of these statements.
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 - - - 5,190,415 5,190,415
common stockholder - - 169,614 - 169,614
Dividends on 10 3/8% Noncumulative
Exchangeable
Preferred Stock, Series A - - - (3,890,625) (3,890,625)
Dividends on Common Stock - - - (500,000) (500,000)
----------------- ---------------- ------------------- ---------------- ------------------
Balance, March 31, 2000 $ 15,000,000 $ 100 $ 284,999,900 $ 799,790 $ 300,799,790
================= ================ =================== ================ ==================
The Notes to Financial Statements are an integral part of this statement.
CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-------------------------------------------
-------------------------------------------
2000 1999
----------------- -------------------
----------------- -------------------
Net income $5,190,415 $ 5,053,348
Adjustments to reconcile net income to net cash
--------------------------------------------------------------------------------------
provided by operating activities:
Provision for loan losses - 13,520
Gain on sale of real estate acquired in
settlement of loans, net - (1,385)
(Increase) decrease in accounts receivable from parent (220,616) 967,050
Increase in accrued interest receivable (247,417) (79,711)
(Increase) decrease in prepaid expenses (97) 98,379
Increase (decrease) in accrued expenses and accounts
payable to others (40,082) 61,637
Increase in accounts payable to parent 2,423 2,975
----------------- -------------------
Net cash provided by operating activities 4,684,626 6,115,813
----------------- -------------------
----------------- -------------------
Cash flows from investing activities:
Purchases of residential mortgage loans (8,141,068) (23,292,328)
Repayments of residential mortgage loans 6,436,340 22,284,891
Net proceeds on sale of real estate acquired
in settlement of loans - 260,062
----------------- -------------------
----------------- -------------------
Net cash used in investing activities (1,704,728) (747,375)
----------------- -------------------
----------------- -------------------
Capital contribution from common stockholder 169,614 3,549
Dividends paid on preferred stock (3,890,625) (3,890,625)
Dividends paid on common stock (3,100,000) (3,460,000)
----------------- -------------------
----------------- -------------------
(6,821,011)
Net cash used in financing activities (6,821,011) (7,347,076)
----------------- -------------------
----------------- -------------------
Net decrease in cash and cash equivalents (3,841,114) (1,978,638)
Cash and cash equivalents at beginning of period 7,072,250 4,861,984
----------------- -------------------
----------------- -------------------
Cash and cash equivalents at end of period $3,231,136 $ 2,883,346
===================
================= ===================
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 $ - $ 292,314
================= ===================
The Notes to Financial Statements are an integral part of these statements.
CHEVY CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
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.
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:
March 31, December 31,
2000 1999
------------------- ---------------------
------------------- ---------------------
One-year ARMs $ 11,098,905 $ 11,854,943
Three-year ARMs 21,082,223 24,886,732
3/1 ARMs 4,103,300 -
5/1 ARMs 97,395,260 93,066,498
7/1 ARMs 12,188,145 12,243,571
10/1 ARMs 145,968,189 147,823,258
30 year fixed-rate 5,104,869 5,361,161
------------------- ---------------------
------------------- ---------------------
Total 296,940,891 295,236,163
Less:
Allowance for loan losses 40,333 40,333
------------------- ---------------------
------------------- ---------------------
Total $296,900,558 $ 295,195,830
=================== =====================
=======================================================================================================================================
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.
CHEVY CHASE PREFERRED CAPITAL CORPORATION
-----------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
During the three months ended March 31, 2000, the Company's Board of Directors declared $3,890,625 and $500,000 of preferred stock and common stock dividends, respectively, out of the retained earnings of the Company. These dividends were paid in April, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
At March 31, 2000, the Company had $296,900,558 invested in loans secured by first mortgages or deeds of trust on single-family residential real estate properties ("Residential Mortgage Loans"). The $1,704,728 increase from the balance at December 31, 1999, resulted from Residential Mortgage Loan purchases of $8,141,068, which were offset by principal collections of $6,436,340. 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 March 31, 2000, 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 $409,566 (or 0.14% of loans).
At March 31, 2000, the Company had five loans which were delinquent 30-89 days with an aggregate principal balance of $879,128 (or 0.30% of loans).
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
Ended
March 31,
--------------------------------------------------
2000 1999
---------------------- ----------------------
---------------------- ----------------------
Balance at beginning of period $ 40,333 $ 40,333
Provision for loan losses - 13,520
Charge-offs - (26,314)
---------------------- ----------------------
Balance at end of period $ 40,333 $ 27,539
====================== ======================
====================== ======================
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 March 31, 2000 and the interest rates on such loans, anticipated annual interest income, net of servicing fees, on the Company's loan portfolio was approximately 129.9% 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.
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 82.2%) 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.
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.
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.
There were no capital gains recognized on Real Estate Owned ("REO") properties for quarter ended March 31, 2000. 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.
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
During the three months ended March 31, 2000 and 1999, the Company reported net income of $5,190,415 and $5,053,348, respectively.
Interest income on Residential Mortgage Loans totaled $5,510,041 and $5,484,652 for the three months ended March 31, 2000 and 1999, respectively, which represents an average yield on such loans of 7.42% and 7.50%, respectively. The average loan balance of the Residential Mortgage Loan portfolio was $297,045,073 and $292,637,062 for the three months ended March 31, 2000 and 1999, respectively. The Company would have recorded an additional $7,492 and $10,715 in interest income for the three months ended March 31, 2000 and 1999, respectively, had its non-accrual loans been current in accordance with their original terms.
Other interest income of $34,161 and $40,904 were recognized on the Company's interest bearing deposits during the three months ended March 31, 2000 and 1999, respectively.
No provision for loan losses was recorded for the three months ended March 31, 2000. A provision for loan losses of $13,520 was recorded on the Company's loan portfolio during the three months ended March 31, 1999.
The Company did not have any REO properties during the three months ended March 31, 2000. The Company recognized aggregate gains of $1,385 on the sale of one REO property during the three months ended March 31, 1999.
Operating expenses totaling $343,319 and $460,073 for the three months ended March 31, 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 $271,367 and $272,904, for the three months ended March 31, 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 March 31, 2000 and 1999 totaled $50,000 for each period. Directors' fees totaled $11,000 and $6,500 for the three months ended March 31, 2000 and 1999, respectively, and represent compensation to the two independent members of the Board of Directors. General and administrative expenses totaled $10,952 and $130,669 for the three months ended March 31, 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 March 21, 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 April 17, 2000.
The Company's Board of Directors also declared on March 21, 2000, out of the retained earnings of the Company, a cash dividend of $5,000 per share of common stock. The $500,000 dividend was paid on April 17, 2000.
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.
PART II - OTHER INFORMATION
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.
None.
None. ITEM 4. Submission of Matters to a Vote of Security Holders None.
None.
(a) Exhibits required by Item 601 of Regulation S-K are set forth below.
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 March 31, 2000.
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.
No. Exhibit
-------------------------------------------
11 Computation of Earnings Per Common Share included in Part I, Item
1 of this report.
27 Financial Data Schedule.
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