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CHEVY CHASE
PREFERRED CAPITAL CORPORATION
FORM 10-K
December 31, 2001
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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 Identification No.)
Incorporation or organization)
7501 Wisconsin Avenue
Bethesda, Maryland 20814
(Address of principal executive office) (Zip Code)
(301) 986-7000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of Act:
Title of each class Name of each exchange on which registered
- ------------------------------- -----------------------------------------
10 3/8% Noncumulative Exchangeable New York Stock Exchange, Inc.
Preferred Stock, Series A
Securities registered pursuant to Section 12(g) of the Act:
N/A
- --------------------------------------------------------------------------------
(Title of class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
The number of shares outstanding of the registrant's sole class of common
stock was 100 shares, $1.00 par value per share, as of March 15, 2002. All of
such shares were owned by Chevy Chase Bank, F.S.B.; therefore, no common stock
was held by non-affiliates.
____________________________________________________________________________________
CHEVY CHASE PREFERRED CAPITAL CORPORATION
TABLE OF CONTENTS
PART I Page
----
Item 1.BUSINESS.................................................................1
General.................................................................1
Mortgage Assets.........................................................1
Loan Portfolio Composition.............................................1
Investment Policy......................................................4
Credit Risk Management Policies........................................5
Delinquencies..........................................................5
Geographic Distribution................................................5
Servicing...............................................................6
Dividend Policy..........................................................6
The Bank................................................................7
The Advisor.............................................................8
Capital and Leverage Policies...........................................8
Employees...............................................................9
Competition.............................................................9
Environmental Matters...................................................9
Tax Status of the Company..............................................10
Item 2.PROPERTIES..............................................................10
Item 3.LEGAL PROCEEDINGS......................................................11
Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................11
PART II
Item 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................................12
Description of Common Stock............................................12
General...............................................................12
Dividends.............................................................12
Voting Rights.........................................................13
Rights Upon Liquidation...............................................13
Description of Series A Preferred Shares...............................13
Market Information and Dividends......................................13
General...............................................................14
Automatic Exchange....................................................14
Voting Rights.........................................................15
Redemption............................................................15
Rights Upon Liquidation...............................................15
Independent Director Approval.........................................16
Item 6.SELECTED FINANCIAL DATA................................................17
Item 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................18
Financial Condition....................................................18
Critical Accounting Policies..........................................18
Allowance for Loan Losses.............................................18
Residential Mortgage Loans............................................18
Interest Rate Risk....................................................19
Significant Concentration of Credit Risk..............................20
Liquidity and Capital Resources.......................................21
Results of Operations..................................................21
Fiscal Year 2001 Compared to Fiscal Year 2000.........................21
Fiscal Year 2000 Compared to Fiscal Year 1999.........................22
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS....................................................23
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................F-1
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................................24
PART III
Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................25
Directors and Executive Officers......................................25
Audit Committee.......................................................27
Section 16(a) Beneficial Ownership Reporting Compliance...............27
Item 11.EXECUTIVE COMPENSATION................................................27
Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................................................27
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................28
PART IV
Item 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K...................................................29
PART I
ITEM 1. BUSINESS
GENERAL
Chevy Chase Preferred Capital Corporation (the "Company") is a Maryland
corporation which acquires, holds and manages real estate mortgage assets
("Mortgage Assets"). The Company has elected to be treated as a real estate
investment trust (a "REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"), and generally will not be subject to federal income tax to the
extent that it distributes its earnings to its stockholders and maintains its
qualification as a REIT. All of the shares of the Company's common stock, par
value $1.00 per share (the "Common Stock"), are owned by Chevy Chase Bank,
F.S.B., a federally chartered and federally insured stock savings bank (the
"Bank"). The Bank is in compliance with its regulatory capital requirements. The
Bank services the Company's Residential Mortgage Loans (as defined below) and
administers the day-to-day operations of the Company. The Company also has
outstanding 3,000,000 shares of 10 3/8% Noncumulative Exchangeable Preferred
Stock, Series A, par value $5.00 per share (the "Series A Preferred Shares").
The Series A Preferred Shares are listed on the New York Stock Exchange (symbol
CCP-PrA).
MORTGAGE ASSETS
Loan Portfolio Composition
The Company's current portfolio of Mortgage Assets consists of whole loans
("Mortgage Loans") secured by first mortgages or deeds of trust on single-family
residential real estate properties ("Residential Mortgage Loans"). The following
table sets forth information concerning the Company's Residential Mortgage
Loans, all of which were acquired from the Bank, as of December 31, 2001 and
December 31, 2000. A description of the types of Residential Mortgage Loans
included in the Company's portfolio follows the table.
Residential Mortgage Loan Portfolio
December 31,
------------------------------------------------------------
2001
---------------------------- -----------------------------
Aggregate Percent Aggregate Percent
Principal to Principal to
Type Balance Total Balance Total
---- -------------- ------- ------------- ----------
Monthly ARMs $ 79,541,872 27.7% $ 15,010,666 5.0%
One-Year ARMs 21,583,666 7.5% 17,405,151 5.9%
Three-Year ARMs 19,462,468 6.8% 31,244,189 10.5%
5/1 ARMs 49,804,806 17.3% 82,907,320 27.8%
7/1 ARMs 8,378,308 2.9% 12,043,834 4.0%
10/1 ARMs 99,255,916 34.5% 134,689,699 45.2%
30 Year Fixed-Rate 9,537,078 3.3% 4,884,503 1.6%
-------------- ------- -------------- ----------
287,564,114 100.0% 298,185,362 100.0%
============== ======= ============== ==========
Less:
Allowance for loan
losses 40,333 40,333
-------------- --------------
Total $ 287,523,781 $ 298,145,029
============== ==============
Purchases from the Bank of Residential Mortgage Loans during the year ended
December 31, 2001 were $97,217,311, which were offset by principal repayments on
the Company's loans of $107,838,559. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Financial Condition -
Residential Mortgage Loans."
A majority of the Residential Mortgage Loans included in the Company's portfolio
at December 31, 2001 bear interest at adjustable rates. The interest rate on an
"adjustable rate mortgage" or an "ARM" resets periodically based on an index
(such as the London Interbank Offered Rate ("LIBOR") or the interest rate on
United States Treasury Bills). ARMs are typically subject to lifetime interest
rate caps and periodic interest rate adjustment caps. As of December 31, 2001,
the interest rates on the Residential Mortgage Loans included in the Company's
portfolio ranged from 3.88% per annum to 9.75% per annum. For the year ended
December 31, 2001 the weighted average interest rate was approximately 7.16%.
The interest rate on each type of ARM product included in the Company's
portfolio adjusts at the times (each, a "Rate Adjustment Date") and in the
manner described below, subject to lifetime interest rate caps, to minimum
interest rates and, in the case of some ARMs in the portfolio, to maximum
periodic adjustment increases or decreases, each as specified in the mortgage
note relating to the ARM. Information set forth below regarding interest rate
caps and minimum interest rates applies to the current portfolio only.
Residential Mortgage Loans purchased by the Company after December 31, 2001 may
be subject to different interest rates.
ARMs, except Monthly ARMs, bear interest at its initial interest rate until the
first Rate Adjustment Date. Effective with each Rate Adjustment Date, the
monthly principal and interest payment on an ARM will be adjusted to an amount
that will fully amortize the then-outstanding principal balance of such loan
over its remaining term to stated maturity and that will be sufficient to pay
interest at the adjusted interest rate. Certain of the types of loan products
that are ARMs contain an option, which may be exercised by the mortgagor, to
convert the ARM into a fixed-rate loan for the remainder of the mortgage term.
If a loan that is an ARM is converted into a fixed-rate loan, the interest rate
on the fixed-rate loan will be determined at the time of conversion as specified
in the mortgage note relating to the loan and will remain fixed at such rate for
the remaining term of the loan. The Company's current policy is to retain these
fixed-rate loans in its portfolio. All Fixed-Rate Residential Mortgage Loans
included in the portfolio allow the mortgagor to repay, at any time, some or all
of the outstanding principal balance of the loan without a fee or penalty.
Monthly ARM. The interest rate with respect to a monthly adjustable ARM
("Monthly ARM") adjusts on the first day of each month as specified in the
related mortgage note to a rate equal to the then-current applicable LIBOR or
treasury index plus the margin set forth in such mortgage note, subject to
periodic and lifetime caps, if any, as specified in related mortgage notes.
One-Year ARM. The interest rate with respect to a one-year ARM ("One-Year ARM")
is fixed at an initial rate for the first twelve monthly payments. The loan
adjusts annually thereafter on the date specified in the related mortgage note
to a rate equal to the then-current applicable treasury index plus the margin
set forth in such mortgage note, subject to a maximum annual interest rate
increase or decrease of 2.00%, a lifetime interest rate cap as specified in the
related mortgage note and a minimum interest rate no less than the gross margin.
Three-Year ARM. The interest rate with respect to each three-year ARM
("Three-Year ARM") is fixed at an initial rate for the first 36 monthly
payments. The loan adjusts every three years thereafter in the same manner as
described for the One-Year ARM, except that the treasury index is the weekly
average yield on the United States Treasury securities adjusted to a constant
maturity of three years.
Five-Year Fixed-Rate Loan with Automatic Conversion to One-Year ARM. The
interest rate with respect to each five-year fixed-rate loan with automatic
conversion to a One-Year ARM (a "5/1 ARM") is fixed at an initial rate for the
first 60 monthly payments and adjusts annually thereafter, as if the Residential
Mortgage Loan were a One-Year ARM, with a lifetime interest cap as specified in
the related mortgage note. There is no ability to continue at a fixed rate after
the first Rate Adjustment Date under the terms of this type of Residential
Mortgage Loan.
Seven-Year Fixed-Rate Loan with Automatic Conversion to One-Year ARM. The
interest rate with respect to each seven-year fixed-rate loan with automatic
conversion to a One-Year ARM (a "7/1 ARM") is fixed at an initial rate for the
first 84 monthly payments and adjusts annually thereafter, as if the Residential
Mortgage Loan were a One-Year ARM, with a lifetime interest cap as specified in
the related mortgage note. There is no ability to continue at a fixed rate after
the first Rate Adjustment Date under the terms of this type of Residential
Mortgage Loan.
Ten-Year Fixed-Rate Loan With Automatic Conversion to One-Year ARM. The interest
rate with respect to each ten-year fixed-rate loan with automatic conversion to
a One-Year ARM (a "10/1 ARM") is fixed at an initial rate for the first 120
monthly payments and adjusts annually thereafter, as if the Residential Mortgage
Loan were a One-Year ARM, with a lifetime interest cap as specified in the
related mortgage note. There is no ability to continue at a fixed rate after the
first Rate Adjustment Date under the terms of this type of Residential Mortgage
Loan.
Investment Policy
General. The Company currently intends to maintain at least 95% of its portfolio
in Mortgage Assets consisting of either Residential Mortgage Loans or investment
grade mortgage securities representing interests in pools of Mortgage Loans
("Mortgage-Backed Securities") and may invest up to 5% of its portfolio in
Mortgage Loans secured by commercial real estate properties or multi-family
properties ("Commercial Mortgage Loans") or in other assets eligible to be held
by a REIT. The Company's current policy prohibits the acquisition of any
Mortgage Loan or any interest in a Mortgage Loan (other than an interest
resulting from the acquisition of Mortgage-Backed Securities) if the Mortgage
Loan (i) is delinquent in the payment of principal and interest; (ii) is or was
at any time during the preceding 12 months (a) classified, (b) in nonaccrual
status or (c) renegotiated due to the financial deterioration of the borrower;
or (iii) has been, more than once during the preceding 12 months, more than 30
days past due in the payment of principal or interest. Loans that are in
"non-accrual status" are generally loans that are past due 90 days or more in
principal or interest, and "classified" loans are generally troubled loans which
are deemed substandard or doubtful with respect to collectibility.
The Company may from time to time acquire both conforming and nonconforming
Residential Mortgage Loans. Conventional conforming Residential Mortgage Loans
comply with the requirements for inclusion in a loan guarantee program sponsored
by either the Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal
National Mortgage Association ("FNMA"). The nonconforming Residential Mortgage
Loans that the Company purchases will be nonconforming generally because they
have original principal balances which exceed the limits for FHLMC or FNMA
programs in effect at the time the loan was originated.
Mortgage-Backed Securities. While no Mortgage-Backed Securities are included in
the current Mortgage Asset portfolio, the Company may from time to time in the
future acquire fixed-rate or variable-rate Mortgage-Backed Securities. A portion
of any Mortgage-Backed Securities that the Company may purchase may have been
originated by the Bank by exchanging pools of Mortgage Loans for the
Mortgage-Backed Securities. The Mortgage Loans underlying the Mortgage-Backed
Securities will be secured by single-family residential properties located
throughout the United States.
The Company intends to acquire only investment grade Mortgage-Backed Securities
issued by agencies of the Federal government or government sponsored agencies,
such as FHLMC, FNMA and the Government National Mortgage Association ("GNMA").
The Company does not intend to acquire any interest-only or principal-only
Mortgage-Backed Securities.
Commercial Mortgage Loans. While no Commercial Mortgage Loans are included in
the current portfolio, the Company may from time to time in the future acquire
Commercial Mortgage Loans secured by industrial and warehouse properties,
recreational facilities, office buildings, retail space and shopping malls,
hotels and motels, hospitals, nursing homes or senior living centers. Unlike
Residential Mortgage Loans, Commercial Mortgage Loans generally lack
standardized terms. In addition, Commercial Mortgage Loans tend to be fixed-rate
loans having shorter maturities than Residential Mortgage Loans. Commercial
Mortgage Loans may also not be fully amortizing, meaning that they may have a
significant principal balance or "balloon" payment due on maturity. Moreover,
commercial properties, particularly industrial and warehouse properties, are
generally subject to relatively greater environmental risks than non-commercial
properties, generally giving rise to increased costs of compliance with
environmental laws and regulations.
Other Real Estate Assets. The Company may invest up to 5% of the total value of
its portfolio in assets (other than Residential Mortgage Loans and
Mortgage-Backed Securities) eligible to be held by REITs. Such assets could
include Commercial Mortgage Loans, Mortgage Loans secured by multi-family
properties, cash and cash equivalents.
Credit Risk Management Policies
The Company intends that each Mortgage Loan it acquires in the future will
represent a first lien position and will be originated in the ordinary course of
the originator's real estate lending activities based on the underwriting
standards generally applied (at the time of origination) for the originator's
own account. The Company also intends that all Mortgage Loans held by the
Company will be serviced pursuant to the servicing agreement between the Company
and the Bank dated December 1, 1996 (the "Servicing Agreement"). See
"Servicing."
Delinquencies
When a borrower fails to make a required payment on a Mortgage Loan, the loan is
considered delinquent and, after expiration of the applicable cure period the
borrower is charged a late fee, which is retained by the Servicer (as defined
below). The Bank and the Company follow practices customary in the banking
industry in attempting to cure delinquencies and in pursuing remedies upon
default.
Geographic Distribution
A majority (or 60.3%) of the 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 loans in the event of adverse economic, political, or business
developments in Washington, DC, Maryland, and Virginia that may affect the
ability of residential property owners in any of these areas to make payments of
the principal and interest on the underlying mortgages. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Significant Concentration of Credit Risk."
SERVICING
The Residential Mortgage Loans owned by the Company are serviced by the Bank
(the "Servicer") pursuant to the terms of the Servicing Agreement. The Servicer
receives a fee equal to 0.375% per annum on the principal balances of the
Mortgage Loans serviced. See "Certain Relationships and Related Transactions."
The Servicing Agreement requires the Servicer to service the Company's Mortgage
Loans in a manner generally consistent with accepted secondary market practices,
with any servicing guidelines promulgated by the Company and, in the case of
Residential Mortgage Loans, with FNMA and FHLMC guidelines and procedures. The
Servicing Agreement requires the Servicer to service these loans solely with a
view toward the interests of the Company and without regard to the interests of
the Bank or any of the Bank's affiliates. The Servicer collects and remits
principal and interest payments, administers mortgage escrow accounts, submits
and pursues insurance claims and initiates and supervises foreclosure
proceedings on the loans it services. The Servicer also provides accounting and
reporting services required by the Company for such loans. The Servicing
Agreement requires the Servicer to follow such collection procedures as are
customary in the industry, including contacting delinquent borrowers and
supervising foreclosures and property disposition in the event of unremedied
defaults in accordance with servicing guidelines promulgated by the Company. The
Servicer may, in its discretion, arrange with a defaulting borrower a schedule
for the liquidation of delinquencies, provided that, in the case of Residential
Mortgage Loans, no primary mortgage guaranty insurance coverage is adversely
affected.
The Servicer is entitled to retain any ancillary fees, including, but not
limited to, late payment charges, prepayment fees, penalties and assumption fees
collected in connection with the Mortgage Loans serviced by it. In addition, the
Servicer is entitled to receive any benefit derived from interest earned on
collected principal and interest payments between the date of collection and the
date of remittance to the Company and from interest earned on tax and insurance
impound funds with respect to Mortgage Loans serviced by the Servicer.
The Servicer is required to pay all expenses related to the performance of its
duties under the Servicing Agreement. The Servicer is required to make advances
of taxes and required insurance premiums that are not collected from borrowers
with respect to any Mortgage Loan serviced by it, unless it determines that such
advances are nonrecoverable from the mortgagor, insurance proceeds or other
sources with respect to such Mortgage Loan.
The Company can terminate the Servicing Agreement without cause with at least
sixty days notice to the Servicer and payment of a termination fee.
DIVIDEND POLICY
The Company expects to pay an aggregate amount of dividends each year with
respect to its outstanding shares of stock equal to approximately 100% of the
Company's "REIT taxable income" for such year (excluding capital gains). The
Company anticipates that none of the dividends on the Series A Preferred Shares
and no material portion of the dividends on the Common Stock will constitute
non-taxable returns of capital. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Operations."
Dividends are declared at the discretion of the Board of Directors of the
Company after considering the Company's distributable funds, financial
requirements, tax considerations and other factors. The Company's distributable
funds consist primarily of interest payments received on the Mortgage Assets
held by it, and the Company anticipates that most of such assets will bear
interest at adjustable rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition - Interest
Rate Risk."
Under Office of Thrift Supervision (the "OTS") regulations, the Bank is required
to apply to the OTS for approval to make any capital distribution regardless of
size if the Bank does not qualify for expedited treatment under the amended OTS
regulations. Dividends on the Series A Preferred Shares are not treated as
capital distributions for the purposes of these regulations, provided the Bank
remains "well capitalized" after the payment. At December 31, 2001, the Bank was
in compliance with all of its regulatory capital requirements under the
Financial Institutions Reform, Recovery and Enforcement Act, and its capital
ratios exceeded the ratios established for "well capitalized" institutions under
prompt corrective action regulations.
THE BANK
The Bank is a federally chartered and federally insured stock savings bank which
at December 31, 2001 was conducting business from 185 full-service offices,
including 51 grocery store banking centers, and 849 automated teller machines in
Maryland, Virginia, Delaware and the District of Columbia. The Bank's home
office is located in McLean, Virginia and its executive offices are located in
Bethesda, Maryland, both suburban communities of Washington, DC. The Bank either
directly or through a wholly-owned subsidiary also maintains a commercial loan
production office in Baltimore, Maryland, eight mortgage loan production offices
in the mid-Atlantic region, seven of which are operated by a wholly-owned
mortgage banking subsidiary, and four consumer loan production offices. At
December 31, 2001, the Bank had total assets of $11.3 billion, total deposits of
$7.5 billion and total stockholders' equity of $536.4 million. Based on total
consolidated assets at December 31, 2001, the Bank is the largest bank
headquartered in the Washington, DC metropolitan area.
The Company is a subsidiary of the Bank and therefore, federal regulatory
authorities have the right to examine the Company and its activities. Payment of
dividends on the Series A Preferred Shares could be subject to regulatory
limitations if after the payment the Bank was not "well capitalized" for
purposes of the OTS prompt corrective action regulations. "Well capitalized" is
currently defined as having a total risk-based capital ratio of at least 10.0%,
a tier 1 risk-based capital ratio of at least 6.0% and a core capital (or
leverage) ratio of at least 5.0%. At December 31, 2001, the Bank's total
risk-based capital ratio was 10.70%, its tier 1 risk-based capital ratio was
7.00% and its core capital (or leverage) ratio was 5.55%.
If the Exchange Event (as defined below under "Market for Registrant's Common
Equity and Related Stockholder Matters") occurs, the Bank would likely be
prohibited from paying dividends on the Bank Preferred Shares (as defined below
under "Market for Registrant's Common Equity and Related Stockholder Matters").
In all circumstances following the Exchange Event, the Bank's ability to pay
dividends would be subject to various restrictions under OTS regulations and
certain contractual provisions.
THE ADVISOR
On December 3, 1996, the Company entered into an advisory agreement (the
"Advisory Agreement") with the Bank (the "Advisor") to administer the day-to-day
operations of the Company. The Advisor principally is responsible for (i)
monitoring the credit quality of the Mortgage Assets held by the Company, (ii)
advising the Company with respect to the acquisition, management and financing
of the Company's Mortgage Assets, and (iii) maintaining the custody of the
documents related to the Company's Mortgage Loans. The Advisor may from time to
time subcontract all or a portion of its obligations under the Advisory
Agreement to one or more of its affiliates involved in the business of managing
Mortgage Assets.
The Advisor and its affiliates have substantial experience in the mortgage
lending industry, both in the origination and in the servicing of mortgage
loans. At December 31, 2001, the Advisor and its affiliates owned approximately
$5.0 billion of residential mortgage loans, including all of the Company's
Residential Mortgage Loans. In their residential mortgage loan business, the
Advisor and its affiliates originate and purchase residential mortgage loans. A
portion of such loans are sold to investors, primarily in the secondary market,
generally on a servicing retained basis. The Advisor and its affiliates also
purchase servicing rights on residential mortgage loans. In addition to loans
serviced for its own portfolio, the Advisor and its affiliates serviced
residential mortgage loans having an aggregate principal balance of
approximately $5.7 billion as of December 31, 2001.
The Advisory Agreement had an initial term of three years and is renewed
automatically for additional one-year periods unless notice of nonrenewal is
delivered to the Advisor by the Company. The Advisory Agreement may be
terminated by the Company at any time upon sixty days' prior written notice. As
long as any Series A Preferred Shares remain outstanding, any decision by the
Company either to not renew the Advisory Agreement or to terminate the Advisory
Agreement must be approved by a majority of the Board of Directors, as well as
by a majority of the Independent Directors (as defined below under "Market for
Registrant's Common Equity and Related Stockholder Matters"). The Advisor is
entitled to receive an annual advisory fee equal to $200,000 payable in equal
quarterly installments with respect to the advisory and management services
provided to the Company. See "Certain Relationships and Related Transactions."
CAPITAL AND LEVERAGE POLICIES
To the extent that the Board of Directors determines that additional funding is
required, the Company may raise such funds through additional equity offerings,
debt financing or retention of cash flow (after consideration of provisions of
the Code requiring the distribution by a REIT of a certain percentage of taxable
income and taking into account taxes that would be imposed on undistributed
taxable income, including capital gains), or a combination of these methods.
At December 31, 2001, the Company had no debt outstanding, and the Company does
not currently intend to incur any indebtedness. However, the organizational
documents of the Company do not contain any limitation on the amount or
percentage of debt, funded or otherwise, that the Company might incur. The
Company may not, without the approval of a majority of the Independent
Directors, incur debt for borrowed money in excess of 25% of the Company's total
stockholders' equity, including intercompany advances made by the Bank to the
Company.
The Company may also issue additional series of Preferred Stock (as defined
below under "Market for Registrant's Common Equity and Related Stockholder
Matters"). However, the Company does not currently intend to issue any
additional series of Preferred Stock unless it simultaneously receives
additional capital contributions from the Bank equal to the sum of the aggregate
offering price of such additional Preferred Stock and the Company's expenses in
connection with the issuance of such additional shares of Preferred Stock. Prior
to its issuance of additional shares of Preferred Stock, the Company will take
into consideration the Bank's regulatory capital requirements and the cost of
raising and maintaining that capital at the time.
EMPLOYEES
The Company has eight officers. The executive officers of the Company are
described further below under "Directors and Executive Officers of the
Registrant - Directors and Officers." The Company does not anticipate that it
will require any additional employees because it has retained the Advisor to
administer the day-to-day activities of the Company pursuant to the Advisory
Agreement. Each officer of the Company currently is also an officer and/or
director of the Bank and/or affiliates of the Bank. The Company maintains
corporate records and audited financial statements that are separate from those
of the Bank or any of the Bank's affiliates.
COMPETITION
The Company does not anticipate that it will engage in the business of
originating Residential Mortgage Loans. It does anticipate that it will purchase
Mortgage Assets in addition to those in the current loan portfolio and that all
these Mortgage Assets will be purchased from the Bank or affiliates of the Bank.
Accordingly, the Company does not expect to compete with mortgage conduit
programs, investment banking firms, savings and loan associations, banks, thrift
and loan associations, finance companies, mortgage bankers or insurance
companies in acquiring its Mortgage Assets.
ENVIRONMENTAL MATTERS
In the event that the Company is forced to foreclose on a defaulted Mortgage
Loan to recover its investment in such Mortgage Loan, the Company may be subject
to environmental liabilities in connection with the underlying real property
which could exceed the value of the real property. Although the Company intends
to exercise due diligence to discover potential environmental liabilities prior
to the acquisition of any property through foreclosure, hazardous substances or
waste, contaminants, pollutants or sources thereof (as defined by state and
federal laws and regulations) may be discovered on properties during the
Company's ownership or after a sale thereof to a third party. If such hazardous
substances are discovered on a property which the Company has acquired through
foreclosure or otherwise, the Company may be required to remove those substances
and clean up the property. There can be no assurance that in such a case the
Company would not incur full recourse liability for the entire costs of any
removal and clean-up, that the cost of such removal and clean-up would not
exceed the value of the property or that the Company could recoup any such costs
from any third party. The Company may also be liable to tenants and other users
of neighboring properties. In addition, the Company may find it difficult or
impossible to sell the property prior to or following any such clean-up.
TAX STATUS OF THE COMPANY
The Company has elected to be taxed as a REIT under Sections 856 through 860 of
the Code. 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% of its REIT taxable income to its stockholders, meets certain
organizational, stock ownership and operational requirements and meets certain
income and asset tests. To remain qualified as a REIT, the Company must
distribute each year at least 90% of its "REIT taxable income" (not including
capital gains) for that year to stockholders. 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.
The Company recognized a capital gain of $21,924 on the sale of one Real Estate
Owned ("REO") property during the year ended December 31, 2001. As a result, the
Company incurred and paid an income tax liability for the year ended December
31, 2001 of $8,000.
During the year ended December 31, 2000, the Company recognized capital gains of
$20,209 on the sale of two REO properties. As a result, the Company incurred an
income tax liability for the year ended December 31, 2000 of $7,073, of which
$2,373 was paid subsequent to December 31, 2000. During the year ended December
31, 1999, the Company incurred an income tax liability of $10,468 related to the
gain of $29,909 recognized on the sale of five REO properties which was paid
during the year ended December 31, 2000.
ITEM 2. PROPERTIES
None.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company during the
fourth quarter of the year ended December 31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
DESCRIPTION OF COMMON STOCK
General
In connection with the formation of the Company on November 5, 1996, the Company
issued 100 shares of Common Stock to the Bank for $1,000. These shares of Common
Stock were issued in reliance upon an exemption from registration under Section
4(2) of the Securities Act of 1933, as amended. Thus, there is no established
public trading market for the Common Stock. As of March 15, 2002, there were 100
issued and outstanding shares of Common Stock held by one stockholder, the Bank.
Dividends
The following table reflects the distributions declared by the Company on the
Common Stock for each quarter during the two most recent fiscal years. For a
discussion of the Company's distribution policy with respect to the Common
Stock, see "Business - Dividend Policy."
Period Distributions Payment Date
- ------------------------------------- -------------- -------------------------
January 1, 2000 to March 31, 2000 $ 500,000 April 17, 2000
April 1, 2000 to June 30, 2000 250,000 July 17, 2000
July 1, 2000 to September 30, 2000 1,000,000 October 16, 2000
October 1, 2000 to December 31, 2000 3,500,000 January 16, 2001
January 1, 2001 to March 31, 2001 275,000 April 16, 2001
April 1, 2001 to June 30, 2001 500,000 July 16, 2001
July 1, 2001 to September 30, 2001 1,000,000 October 15, 2001
October 1, 2001 to December 31, 2001 2,700,000 January 15, 2002
Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available. If the
Company fails to declare and pay full dividends on the Series A Preferred Shares
in any dividend period, the Company may not make any dividends or other
distributions with respect to the Common Stock until such time as dividends on
all outstanding Series A Preferred Shares have been (i) declared and paid for
three consecutive dividend periods and (ii) declared and paid or declared and a
sum sufficient for the payment thereof has been set apart for payment for the
fourth consecutive dividend period. To remain qualified as a REIT, the Company
must distribute annually at least 90% of its annual "REIT taxable income" (not
including capital gains) to stockholders. See "Business - Tax Status of the
Company."
Voting Rights
Subject to the rights, if any, of the holders of any class or series of
Preferred Stock (as defined below), all voting rights are vested in the Common
Stock. The holders of Common Stock are entitled to one vote per share.
Rights Upon Liquidation
In the event of the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, after there have been paid or set aside for
the holders of all series of Preferred Stock the full preferential amounts to
which such holders are entitled, the holders of Common Stock will be entitled to
share equally and ratably in any assets remaining after the payment of all debts
and liabilities.
DESCRIPTION OF SERIES A PREFERRED SHARES
Market Information and Dividends
The Series A Preferred Shares are listed on the New York Stock Exchange under
the trading symbol "CCP-PrA." As of February 13, 2002, there were 3,000,000
issued and outstanding Series A Preferred Shares held by approximately 178
holders of record. The following table reflects the respective high and low
sales prices for the Series A Preferred Shares for each quarter during the two
most recent fiscal years. The table also indicates the distributions declared by
the Company during these periods. For a discussion of the Company's distribution
policy with respect to the Series A Preferred Shares, see "Business - Dividend
Policy."
Price
Period High Low Distributions Payment Date
- --------------------------------------------- ----------- ----------- ----------------- ----------------------
January 1, 2000 to March 31, 2000 $ 48.94 $ 46.00 $ 3,890,625 April 17, 2000
April 1, 2000 to June 30, 2000 52.88 46.19 3,890,625 July 17, 2000
July 1, 2000 to September 30, 2000 53.75 49.50 3,890,625 October 16, 2000
October 1, 2000 to December 31, 2000 54.00 50.50 3,890,625 January 16, 2001
January 1, 2001 to March 31, 2001 54.70 52.19 3,890,625 April 16, 2001
April 1, 2001 to June 30, 2001 56.00 53.55 3,890,625 July 16, 2001
July 1, 2001 to September 30, 2001 57.50 53.30 3,890,625 October 15, 2001
October 1, 2001 to December 31, 2001 57.95 55.25 3,890,625 January 15, 2002
Holders of Series A Preferred Shares are entitled to receive, if, when and as
declared by the Board of Directors of the Company out of assets of the Company
legally available, cash dividends at the rate of 10 3/8% per annum of the
liquidation preference (equivalent to $5.1875 per share per annum).
The right of holders of Series A Preferred Shares to receive dividends is
noncumulative. Accordingly, if the Board of Directors fails to declare a
dividend on the Series A Preferred Shares for a quarterly dividend period, then
holders of the Series A Preferred Shares will have no right to receive a
dividend for that period, and the Company will have no obligation to pay a
dividend for that period, whether or not dividends are declared and paid for any
future period with respect to either the Series A Preferred Shares or the Common
Stock.
General
The Series A Preferred Shares form a series of the preferred stock of the
Company (the "Preferred Stock"), which Preferred Stock may be issued from time
to time in one or more series with such rights, preferences and limitations as
are determined by the Company's Board of Directors.
The holders of the Series A Preferred Shares have no preemptive rights with
respect to any shares of the capital stock of the Company or any other
securities of the Company convertible into or carrying rights or options to
purchase any such shares. The Series A Preferred Shares are not subject to any
sinking fund or other obligation of the Company for their repurchase or
retirement. The Series A Preferred Shares will be exchanged automatically on a
one-for-one basis for Bank Preferred Shares (as defined below) upon the
occurrence of the Exchange Event (as defined below).
Automatic Exchange
Each Series A Preferred Share will be exchanged automatically for one newly
issued Series B preferred share of the Bank ("Bank Preferred Share") if the
appropriate federal regulatory agency of the Bank directs in writing (the
"Directive") an exchange of the Series A Preferred Shares for Bank Preferred
Shares because (i) the Bank becomes "undercapitalized" under prompt corrective
action regulations established pursuant to the Federal Deposit Insurance
Corporation Improvement Act of 1991, as amended, (ii) the Bank is placed into
conservatorship or receivership or (iii) the appropriate federal regulatory
agency, in its sole discretion and even if the Bank is not "undercapitalized,"
anticipates the Bank becoming "undercapitalized" in the near term (the "Exchange
Event"). Upon the Exchange Event, each holder of Series A Preferred Shares will
be unconditionally obligated to surrender to the Bank the certificate
representing each Series A Preferred Share of such holder, and the Bank will be
unconditionally obligated to issue to such holder in exchange for each such
Series A Preferred Share a certificate representing one Bank Preferred Share
(the "Automatic Exchange"). Absent the occurrence of the Exchange Event, no
shares of Bank Preferred Shares will be issued.
Holders of Series A Preferred Shares cannot exchange their Series A Preferred
Shares for Bank Preferred Shares voluntarily. In addition, absent the occurrence
of the Automatic Exchange, holders of Series A Preferred Shares will have no
dividend, voting, liquidation preference or other rights with respect to any
security of the Bank; such rights as are conferred by the Series A Preferred
Shares exist solely as to the Company.
Voting Rights
Except as expressly required by applicable law, or except as indicated below,
the holders of the Series A Preferred Shares will not be entitled to vote. In
the event the holders of Series A Preferred Shares are entitled to vote as
indicated below, each Series A Preferred Share will be entitled to one vote on
matters on which holders of the Series A Preferred Shares are entitled to vote.
If at the time of any annual meeting of the Company's stockholders for the
election of directors, the Company has failed to pay or declare and set aside
for payment a quarterly dividend during any of the four preceding quarterly
dividend periods on any series of Preferred Stock of the Company, including the
Series A Preferred Shares, the number of directors then constituting the Board
of Directors of the Company will be increased by two (if not already increased
by two due to a default in preference dividends), and the holders of the Series
A Preferred Shares, voting together with the holders of all other series of
Preferred Stock as a single class, will be entitled to elect such two additional
directors to serve on the Company's Board of Directors at each such annual
meeting. Each director elected by the holders of shares of the Preferred Stock
shall continue to serve as such director until the later of (i) the full term
for which he or she shall have been elected or (ii) the payment of four
quarterly dividends on the Preferred Stock, including the Series A Preferred
Shares.
Redemption
The Series A Preferred Shares are not redeemable prior to January 15, 2007
(except upon the occurrence of certain tax events). On or after such date, the
Series A Preferred Shares will be redeemable at the option of the Company, in
whole or in part, at any time. Any such redemption must comply with the prompt
corrective action and capital distribution regulations of the OTS, which may
prohibit a redemption and will require the OTS' prior written approval.
The Company will also have the right at any time, upon the occurrence of certain
tax events and with the prior written approval of the OTS, to redeem the Series
A Preferred Shares, in whole (but not in part) at a redemption price of $50.00
per share, plus the quarterly accrued and unpaid dividend to the date of
redemption, if any, thereon.
Rights Upon Liquidation
In the event of any voluntary or involuntary liquidation, dissolution or winding
up of the Company, the holders of the Series A Preferred Shares at the time
outstanding will be entitled to receive out of assets of the Company available
for distribution to stockholders, before any distribution of assets is made to
holders of Common Stock or any other class of stock ranking junior to the Series
A Preferred Shares upon liquidation, liquidating distributions in the amount of
$50.00 per share, plus the quarterly accrued and unpaid dividend thereon, if
any, to the date of liquidation.
Independent Director Approval
As long as any Series A Preferred Shares are outstanding, certain actions by the
Company must be approved by a majority of the independent directors who are not
officers or employees of the Company and are not directors, officers, or
employees of the Bank or any of its affiliates (the "Independent Directors").
Any members of the Board of Directors of the Company elected by holders of
Preferred Stock, including the Series A Preferred Shares, will be deemed to be
Independent Directors for purposes of approving actions requiring the approval
of a majority of the Independent Directors.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Company herein has been derived from the
financial statements of the Company, which statements have been audited by
Arthur Andersen LLP, independent public accountants, as indicated by their
report with respect thereto included elsewhere in this Form 10-K. The data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements
included elsewhere herein.
As of or for the year ended
December 31,
-----------------------------------------------------------------------------
2001 2000 1999 1998 1997
-----------------------------------------------------------------------------
OPERATING DATA:
Interest income $21,041,424 $22,189,625 $21,795,357 $22,860,956 $23,219,408
Provision for loan losses - - 26,554 10,862 65,195
-----------------------------------------------------------------------------
Total interest income after
provision for loan losses 21,041,424 22,189,625 21,768,803 22,850,094 23,154,213
Gain on sale of real estate
acquired in settlement
of loans, net 21,924 20,209 29,909 32,937 -
Operating expenses 1,356,557 1,383,421 1,715,826 1,514,080 1,526,564
Provision for income taxes 10,373 15,168 - - -
-----------------------------------------------------------------------------
Net income $19,696,418 $20,811,245 $20,082,886 $21,368,951 $21,627,649
=============================================================================
Earnings available to common $ 4,133,918 $ 5,248,745 $ 6,065,149
stockholders $ 4,520,386 $ 5,806,451
Earnings per common share $ 41,339.18 $ 52,487.45 $ 45,203.86 $ 58,064.51 $ 60,651.49
DIVIDENDS DECLARED:
Dividends on common stock $ 4,475,000 $ 5,250,000 $ 4,690,000 $ 5,810,000 $ 6,150,000
Dividends on preferred stock $15,562,500 $15,562,500 $15,562,500 $15,562,500 $15,562,500
BALANCE SHEET DATA:
Residential mortgage loans, net $287,523,781 $298,145,029 $295,195,830 $292,682,032 $290,382,131
Total assets $306,318,593 $307,516,771 $307,146,976 $307,593,809 $306,823,316
Total stockholders' equity $299,658,918 $299,998,745 $299,830,386 $299,996,451 $299,915,149
Number of preferred shares
outstanding 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000
Number of common shares
outstanding 100 100 100 100 100
Average yield on residential
mortgage loans 7.16% 7.42% 7.35% 7.82% 7.85%
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
Critical Accounting Policies
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission (the "SEC"), encourages public companies to
include a discussion of critical accounting policies or methods used in the
preparation of financial statements. Critical accounting policies are defined as
those that are reflective of significant judgments and uncertainties, and
potentially result in materially different results under different assumptions
and conditions. The Company's significant accounting policies are described in
Note 2 in the Notes to the Financial Statements. Not all of these significant
accounting policies require management to make difficult, subjective or complex
judgements or estimates. However, the following policy could be deemed to be
critical within the SEC definition:
. estimation of allowance for loan losses
Allowance for Loan Losses
Management reviews the loan portfolio to establish an allowance for estimated
losses if deemed necessary. An analysis to determine whether an allowance for
loan losses is required is performed periodically, and an allowance is 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 for the years ended December 31, 2001, 2000 and
1999 is as follows:
Year Ended December 31,
---------------------------------------------------------------------
2001 2000 1999
--------------------- -------------------- --------------------
Beginning balance $ 40,333 $ 40,333 $ 40,333
Provision for loan losses - - 26,554
Charge-offs - - (26,554)
--------------------- -------------------- --------------------
Ending Balance $ 40,333 $ 40,333 $ 40,333
===================== ==================== ====================
Residential Mortgage Loans
At December 31, 2001, the Company had $287,523,781 invested in Residential
Mortgage Loans compared to $298,145,029 at December 31, 2000. During 2001,
Residential Mortgage Loan purchases were $97,217,311 and principal collections
were $107,838,559. In addition, the Company received proceeds of $138,330 on the
sale of one property classified as real estate acquired in settlement of loans
during the year ended December 31, 2001. Management intends to continue to
reinvest proceeds received from repayments of loans by purchasing additional
Residential Mortgage Loans from either the Bank or its affiliates.
At December 31, 2001, the Company had six non-accrual loans (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 $1,088,562 (or 0.38% of loans). At December 31, 2000, the Company had
three non-accrual loans with an aggregate principal balance of $547,069 (or
0.18% of loans).
At December 31, 2001, the Company had eight delinquent loans (loans delinquent
30-89 days) with an aggregate principal balance of $1,320,986 (or 0.46% of
loans). At December 31, 2000, the Company had five delinquent loans with an
aggregate principal balance of $655,042 (or 0.22% of loans).
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 recent periods, primarily as a result of a decline in interest
rates, the Company has experienced an increase in prepayments on its Residential
Mortgage Loans.
Based on the outstanding balance of the Company's Residential Mortgage Loans at
December 31, 2001, and the interest rates on such loans, anticipated annual
interest income on the Company's loan portfolio was approximately 125.3% of the
projected annual dividend on the Series A Preferred Shares. There can be no
assurance that an interest rate environment in which there is a continued
decline in interest rates would not adversely affect the Company's ability to
pay dividends on the Series A Preferred Shares or the Common Stock. The Company,
to date, has not used any derivative instruments to manage its interest rate
risk.
The following table contains estimated principal cash flows and fair market
values by type for the Company's Residential Mortgage Loans. Prepayment rates
are assumed for the Company's loans based on recent actual and market
experience. Fair value is estimated using discounted cash flow analyses based on
contractual repayment and anticipated prepayment schedules. The discount rates
used in these analyses are based on either the interest rates paid on U.S.
Treasury securities of comparable maturities adjusted for credit risk and
non-interest operating costs, or the interest rates currently offered for loans
with similar terms to borrowers of similar credit quality.
Expected Maturity/Repricing Date
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
December 31,
--------------------------------------------------------
Fair
2002 2003 2004 2005 2006 Thereafter Total Value
--------- ---------- ---------- --------- ---------- ------------ --------- ---------
Monthly ARMs 79,542 - - - - - 79,542 79,542
Average Interest Rate 4.896% - - - - - 4.896%
One-Year ARMs 20,769 815 - - - - 21,584 22,187
Average Interest Rate 6.253% 6.824% - - - - 6.275%
Three-Year ARMs 15,207 3,974 281 - - - 19,462 20,698
Average Interest Rate 7.820% 7.893% 7.376% - - - 7.828%
5/1 ARMs 31,871 9,142 6,551 2,156 85 - 49,805 51,907
Average Interest Rate 7.212% 6.997% 6.967% 7.491% 7.817% - 7.153%
7/1 ARMs 1,562 1,292 1,053 1,153 3,318 - 8,378 8,718
Average Interest Rate 6.757% 6.763% 6.763% 6.698% 6.793% - 6.765%
10/1 ARMs 19,350 14,757 12,111 9,932 8,137 34,969 99,256 102,985
Average Interest Rate 7.013% 6.970% 6.970% 6.970% 6.970% 6.971% 6.979%
30-Year Fixed Rate 1,187 953 854 766 686 5,091 9,537 9,782
Average Interest Rate 7.607% 7.606% 7.606% 7.606% 7.606% 7.604% 7.605%
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. A majority of the
Company's Residential Mortgage Loans are loans secured by residential real
estate properties located in the Washington, DC metropolitan area. Service
industries and Federal, state and local governments employ a significant portion
of the Washington, DC area labor force. 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 REIT as discussed in "Business - 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
Mortgage Assets held by the Company 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 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 as it deems necessary.
RESULTS OF OPERATIONS
Fiscal Year 2001 Compared to Fiscal Year 2000
The Company reported net income of $19,696,418 and $20,811,245 for the years
ended December 31, 2001 and 2000, respectively. The decrease in net income is
due primarily to a decrease in the average balance and yield on Residential
Mortgage Loans.
Interest income on Residential Mortgage Loans totaled $20,875,203 and
$22,011,411 for the years ended December 31, 2001 and 2000, respectively, which
represents an average yield on such loans of 7.16% and 7.42%, respectively. The
average loan balance of the Residential Mortgage Loan portfolio was $291,606,584
and $296,486,907 for the years ended December 31, 2001 and 2000, respectively.
The Company would have recorded an additional $37,120 and $35,879 in interest
income for the years ended December 31, 2001 and 2000, respectively, had its
non-accrual loans been current in accordance with their original terms.
Other interest income of $166,221 and $178,214 was recognized on the Company's
interest bearing deposits during the years ended December 31, 2001 and 2000,
respectively.
There were no provisions for loan losses during the years ended December 31,
2001 and 2000.
The Company recognized a gain of $21,924 on the sale of one REO property during
the year ended December 31, 2001. A gain of $20,209 on the sale of two REO
properties was recognized during the year ended December 31, 2000.
Operating expenses totaling $1,356,557 and $1,383,421 for the years ended
December 31, 2001 and 2000, 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 $1,052,549 and
$1,088,694 for the years ended December 31, 2001 and 2000, respectively, were
based on a servicing fee rate of 0.375% per annum of the outstanding principal
balances of Residential Mortgage Loans, pursuant to the Servicing Agreement.
Advisory fees paid to parent for the years ended December 31, 2001 and 2000
totaled $200,000 for each period. Directors' fees totaled $29,000 for both years
ended December 31, 2001 and 2000 and represent compensation to the two
independent members of the Board of Directors. General and administrative
expenses totaled $75,008 and $65,727 for the years ended December 31, 2001 and
2000, respectively.
During the year ended December 31, 2001, the Company's Board of Directors
declared cash dividends of $15,562,500, representing $5.1875 per share on the
outstanding shares of Series A Preferred Shares, out of the retained earnings of
the Company.
Also during the year ended December 31, 2001, the Company's Board of Directors
declared cash dividends of $44,750 per share of Common Stock, $4,133,918 of
which was paid out of the retained earnings of the Company and $341,082 of which
was treated as a return of capital.
Fiscal Year 2000 Compared to Fiscal Year 1999
The Company reported net income of $20,811,245 and $20,082,886 for the years
ended December 31, 2000 and 1999, respectively. The increase in net income is
due primarily to a increase in the average yield on Residential Mortgage Loans
and a decrease in operating expenses.
Interest income on Residential Mortgage Loans totaled $22,011,411 and
$21,628,731 for the years ended December 31, 2000 and 1999, respectively, which
represents an average yield on such loans of 7.42% and 7.35%, respectively. The
average loan balance of the Residential Mortgage Loan portfolio was $296,486,907
and $294,142,360 for the years ended December 31, 2000 and 1999, respectively.
The Company would have recorded an additional $35,879 and $38,434 in interest
income for the years ended December 31, 2000 and 1999, respectively, had its
non-accrual loans been current in accordance with their original terms.
Other interest income of $178,214 and $166,626 was recognized on the Company's
interest bearing deposits during the years ended December 31, 2000 and 1999,
respectively.
There were no provisions for loan losses during the year ended December 31,
2000. Provision for loan losses of $26,554 was recorded on the Company's loan
portfolio during the year ended December 31, 1999.
The Company recognized a gain of $20,209 on the sale of two REO properties
during the year ended December 31, 2000. A gain of $29,909 on the sale of five
REO properties was recognized during the year ended December 31, 1999. Operating
expenses totaling $1,383,421 and $1,715,826 for the years ended December 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 $1,088,694 and
$1,116,911 for the years ended December 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 the Servicing Agreement.
Advisory fees paid to parent for the years ended December 31, 2000 and 1999
totaled $200,000 for each period. Directors' fees totaled $29,000 and $26,000
for the years ended December 31, 2000 and 1999, respectively, and represent
compensation to the two independent members of the Board of Directors. General
and administrative expenses totaled $65,727 and $372,915 for the years ended
December 31, 2000 and 1999, respectively. The decrease in general and
administrative expenses is due primarily to the prior year 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 year ended December 31, 2000, the Company's Board of Directors
declared cash dividends of $15,562,500, representing $5.1875 per share on the
outstanding shares of Series A Preferred Shares, out of the retained earnings of
the Company.
Also during the year ended December 31, 2000, the Company's Board of Directors
declared cash dividends of $52,500 per share of Common Stock, $5,248,745 of
which was paid out of the retained earnings of the Company and $1,255 of which
was treated as a return of capital.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information required by this item is included in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Interest Rate Risk."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
Page
(a) Report of Independent Public Accountants.................................F-2
(b) Statements of Financial Condition at December 31, 2001 and 2000..........F-3
(c) Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999.........................................F-4
(d) Statements of Stockholders' Equity for the Years Ended
December 31, 2001, 2000 and 1999.........................................F-5
(e) Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999.........................................F-6
(f) Notes to Financial Statements............................................F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Chevy Chase Preferred Capital Corporation:
We have audited the accompanying statements of financial condition of Chevy
Chase Preferred Capital Corporation (the "Company," a Maryland corporation) as
of December 31, 2001 and 2000, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States.
Vienna, Virginia
March 13, 2002
F-2
CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
December 31,
----------------------------------
2001 2000
---------------- ----------------
ASSETS
Cash and interest-bearing deposits $ 5,764,867 $ 5,122,692
Residential mortgage loans (net of allowance
for loan losses of $40,333 for both years) 287,523,781 298,145,029
Real estate acquired in settlement of loans - 116,406
Accounts receivable from parent 11,825,608 2,519,665
Accrued interest receivable 1,196,337 1,604,979
Prepaid expenses 8,000 8,000
---------------- ---------------
Total assets $306,318,593 $307,516,771
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable to others and
accrued expenses $ 69,050 $ 127,401
Dividends payable to parent 2,700,000 3,500,000
Dividends payable to others 3,890,625 3,890,625
---------------- ---------------
Total liabilities 6,659,675 7,518,026
---------------- ---------------
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 284,658,818 284,998,645
--------------- ---------------
Total stockholders' equity 299,658,918 299,998,745
--------------- ---------------
Total liabilities and
stockholders' equity $306,318,593 $307,516,771
=============== ===============
The accompanying Notes to Financial Statements are an integral part of these statements.
F-3
CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
Year Ended December 31,
---------------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
Interest income:
Residential mortgage loans $ 20,875,203 $ 22,011,411 $ 21,628,731
Other 166,221 178,214 166,626
------------------- ------------------- -------------------
Total interest income 21,041,424 22,189,625 21,795,357
Provision for loan losses - - 26,554
------------------- ------------------- -------------------
Total interest income after
provision for loan losses 21,041,424 22,189,625 21,768,803
Gain on sale of real estate acquired in
settlement of loans, net 21,924 20,209 29,909
------------------- ------------------- -------------------
Total operating income 21,063,348 22,209,834 21,798,712
------------------- ------------------- -------------------
Operating expenses:
Loan servicing fees-parent 1,052,549 1,088,694 1,116,911
Advisory fees-parent 200,000 200,000 200,000
Directors' fees 29,000 29,000 26,000
General and administrative 75,008 65,727 372,915
------------------- ------------------- -------------------
Total operating expenses 1,356,557 1,383,421 1,715,826
------------------- ------------------- -------------------
Income before income taxes 19,706,791 20,826,413 20,082,886
Provision for income taxes 10,373 15,168 -
------------------- ------------------- -------------------
NET INCOME $ 19,696,418 $ 20,811,245 $ 20,082,886
=================== =================== ===================
PREFERRED STOCK
DIVIDENDS 15,562,500 15,562,500 15,562,500
------------------- ------------------- -------------------
EARNINGS AVAILABLE TO
COMMON STOCKHOLDER $ 4,133,918 $ 5,248,745 $ 4,520,386
=================== =================== ===================
EARNINGS PER COMMON
SHARE $ 41,339.18 $ 52,487.45 $ 45,203.86
=================== =================== ===================
The accompanying Notes to Financial Statements are an integral part of these statements.
F-4
CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Capital
Contributed
Preferred Common in Excess Retained Stockholders'
Stock Stock of Par Earnings Equity
--------------- --------------- ------------------ --------------- -----------------
Balance, December 31, 1998 $ 15,000,000 $ 100 $284,996,351 $ - $ 299,996,451
Capital contribution from
common stockholder - - 3,549 - 3,549
Net income - - - 20,082,886 20,082,886
Dividends on 10 3/8%
Noncumulative Exchangeable
Preferred Stock, Series A - - - (15,562,500) (15,562,500)
Dividends on common stock - - (169,614) (4,520,386) (4,690,000)
--------------- --------------- ------------------ --------------- -----------------
Balance, December 31, 1999 15,000,000 100 284,830,286 - 299,830,386
Capital contribution from
common stockholder - - 169,614 - 169,614
Net income - - - 20,811,245 20,811,245
Dividends on 10 3/8%
Noncumulative Exchangeable
Preferred Stock, Series A - - - (15,562,500) (15,562,500)
Dividends on common stock - - (1,255) (5,248,745) (5,250,000)
--------------- --------------- ------------------ --------------- -----------------
Balance, December 31, 2000 15,000,000 100 284,998,645 - 299,998,745
Capital contribution from
common stockholder - - 1,255 - 1,255
Net income - - - 19,696,418 19,696,418
Dividends on 10 3/8%
Noncumulative Exchangeable
Preferred Stock, Series A - - - (15,562,500) (15,562,500)
Dividends on common stock - - (341,082) (4,133,918) (4,475,000)
--------------- --------------- ------------------ --------------- -----------------
Balance, December 31, 2001 $ 15,000,000 $ 100 $284,658,818 $ - $ 299,658,918
=============== =============== ================== =============== =================
The accompanying Notes to Financial Statements are an integral part of these statements
F-5
CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------------------------
2001 2000 1999
------------------ ------------------ -------------------
Cash flows from operating activities:
Net income $ 19,696,418 $20,811,245 $ 20,082,886
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Provision for loan losses - - 26,554
Gain on sale of real estate acquired
in settlement of loans, net (21,924) (20,209) (29,909)
(Increase) decrease in accounts receivable from parent (9,305,943) 1,079,869 4,404,586
(Increase) decrease in accrued interest receivable 408,642 (333,617) 166,264
Decrease in prepaid expenses - - 327,850
Increase (decrease) in accounts payable to parent - (272,346) 37,423
Increase (decrease) in accounts payable to others and
accrued expenses (58,351) 73,782 41,809
------------------ ------------------ -------------------
Net cash provided by operating activities 10,718,842 21,338,724 25,057,463
------------------ ------------------ -------------------
Cash flows from investing activities:
Purchases of residential mortgage loans (97,217,311) (45,942,919) (73,323,320)
Repayments of residential mortgage loans 107,838,559 42,653,845 70,029,056
Net proceeds from sale of real estate acquired in
settlement of loans 138,330 243,678 1,056,018
------------------ ------------------ -------------------
Net cash provided by (used in) investing activities 10,759,578 (3,045,396) (2,238,246)
------------------ ------------------ -------------------
Cash flows from financing activities:
Capital contribution from common stockholder 1,255 169,614 3,549
Dividends paid on preferred stock (15,562,500) (15,562,500) (15,562,500)
Dividends paid on common stock (5,275,000) (4,850,000) (5,050,000)
------------------ ------------------ -------------------
Net cash used in financing activities (20,836,245) (20,242,886) (20,608,951)
------------------ ------------------ -------------------
Net increase (decrease) in cash and cash equivalents 642,175 (1,949,558) 2,210,266
Cash and cash equivalents at beginning of year 5,122,692 7,072,250 4,861,984
------------------ ------------------ -------------------
Cash and cash equivalents at end of year $ 5,764,867 $ 5,122,692 $ 7,072,250
================== ================== ===================
Supplemental disclosures of cash flow information:
Income taxes paid during the year $ 10,373 $ 15,168 $ -
================== ================== ===================
Supplemental disclosures of non-cash activities:
Net transfer of loans receivable to real
estate acquired in settlement of loans $ - $ 339,875 $ 753,912
================== ================== ===================
The accompanying Notes to Financial Statements are an integral part of these statements.
F-6
CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 and 1999
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Chevy Chase Preferred Capital Corporation (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 (as defined below). The Bank is in compliance with
its regulatory capital requirements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates:
The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
liabilities as of the date of the statements of financial condition and income
and expenses for the reporting periods. Actual results could differ from those
estimates.
Cash and Cash Equivalents:
For purposes of reporting cash flows, cash and cash equivalents include cash and
interest-bearing deposits.
Residential Mortgage Loans:
Residential mortgage loans are carried at amortized cost. Interest income is
accrued and recognized using the weighted average coupon interest rate of the
portfolio.
Loans are reviewed on a monthly basis and are placed on non-accrual status when,
in the opinion of management, the full collection of principal and interest has
become unlikely. Uncollectible accrued interest receivable on non-accrual loans
is charged against current period income. The Company had non-accrual loans at
December 31, 2001 and 2000 totaling $1,088,562 and $547,069, respectively.
Allowance for Loan Losses:
Management periodically reviews the loan portfolio to establish an allowance for
estimated losses if deemed necessary. An allowance is provided after considering
such factors as the economy in lending areas, delinquency statistics and past
loss experience. The allowance for loan losses are based on estimates and
ultimate losses may vary from current estimates. As adjustments to the allowance
become necessary, provisions for losses are reported in operations in the
periods they are determined to be necessary.
F-7
CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 and 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Concentrations of Credit:
A majority of the Company's loans are secured by properties located in the
Washington, DC metropolitan area. Service industries and Federal, state and
local governments employ a significant portion of the Washington, DC area labor
force. Adverse changes in economic conditions could have a direct impact on the
timing and amounts of payments by borrowers.
Accounts Receivable from Parent:
Accounts receivable from parent represents principal and interest payments
received from borrowers by the Bank as servicer of the mortgage loans which are
being held by the servicer in a custodial account pending remittance to the
Company. The Company receives remittances from the servicer on the 10th day of
each month. See Note 7.
Dividends:
Preferred Stock. Dividends on the Series A Preferred Shares are payable at a
rate of 10 3/8% per annum of the liquidation preference (an amount equal to
$5.1875 per annum per share), if, when and as declared by the Board of Directors
of the Company. Dividends are not cumulative and, if declared, are payable
quarterly in arrears on the fifteenth day of January, April, July and October or
the next business day when the fifteenth falls on a weekend or holiday.
Common Stock. The stockholder is entitled to receive dividends if, when and as
declared by the Board of Directors out of funds legally available after all
preferred dividends have been paid.
Earnings Per Common Share:
Dividends on preferred stock are deducted from earnings in the computation of
earnings per common share when declared by the Company's Board of Directors.
Because there are no dilutive securities, basic earnings per common share is
equal to diluted earnings per common share.
Income Taxes:
The Company has elected, for Federal income tax purposes, to be treated as a
Real Estate Investment Trust ("REIT") and intends to comply with the provisions
of the Internal Revenue Code of 1986, as amended (the "IRC"). Accordingly, the
Company is generally not subject to Federal corporate income taxes on its net
income (excluding capital gains) to the extent it distributes at least 100% of
its annual REIT taxable income to stockholders and as long as certain asset,
income and stock ownership tests are met in accordance with the IRC. To remain
qualified
F-8
CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 and 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Income Taxes (Continued):
as a REIT, the Company must distribute each year at least 90% of its "REIT
taxable income" (not including capital gains) for that year to stockholders.
Because management of the Company believes it qualifies as a REIT for Federal
income tax purposes, no provision for income taxes is included in the
accompanying financial statements other than income taxes on capital gains.
The Company recognized a capital gain of $21,924 on the sale of one Real Estate
Owned ("REO") property during the year ended December 31, 2001. As a result, the
Company incurred and paid an income tax liability for the year ended December
31, 2001 of $8,000.
During the year ended December 31, 2000, the Company recognized capital gains of
$20,209 on the sale of two REO properties. As a result, the Company incurred an
income tax liability for the year ended December 31, 2000 of $7,073, of which
$2,373 was paid subsequent to December 31, 2000. During the year ended December
31, 1999, the Company incurred an income tax liability of $10,468 related to the
gain of $29,909 recognized on the sale of five REO properties which was paid
during the year ended December 31, 2000.
NOTE 3 - RESIDENTIAL MORTGAGE LOANS:
Residential mortgage loans consist of monthly adjustable-rate mortgages
("ARMs"), one-year ARMs, three-year ARMs, five-year, seven-year and ten-year
fixed-rate loans with automatic adjustment to one-year ARMs after the respective
fixed rate period and 30 year fixed-rate mortgages. The following table shows
the residential mortgage loan portfolio by type at the dates indicated:
December 31,
-------------------------------------------------
2001 2000
---------------------- ----------------------
Monthly ARMs $ 79,541,872 $ 15,010,666
One-Year ARMs 21,583,666 17,405,151
Three-Year ARMs 19,462,468 31,244,189
5/1 ARMs 49,804,806 82,907,320
7/1 ARMs 8,378,308 12,043,834
10/1 ARMs 99,255,916 134,689,699
30 Year Fixed-Rate 9,537,078 4,884,503
---------------------- ----------------------
Total 287,564,114 298,185,362
Less:
Allowance for loan losses 40,333 40,333
---------------------- ----------------------
Total $ 287,523,781 $ 298,145,029
====================== ======================
F-9
CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 and 1999
NOTE 3 - RESIDENTIAL MORTGAGE LOANS (continued):
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.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES:
Activity in the allowance for loan losses is summarized as follows:
Year Ended December 31,
-------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Beginning balance $ 40,333 $ 40,333 $ 40,333
Provision for losses - - 26,554
Charge-offs - - (26,554)
--------------- --------------- ---------------
Ending balance $ 40,333 $ 40,333 $ 40,333
=============== =============== ===============
NOTE 5 - PREFERRED STOCK:
On December 3, 1996, the Company sold $150 million of Series A Preferred Shares,
$5.00 par value and received net cash proceeds of $144 million. Cash dividends
on the Series A Preferred Shares, if, when and as declared by the Board of
Directors, are payable quarterly in arrears at an annual rate of 10 3/8%. The
liquidation value of each Series A Preferred Share is $50 plus accrued and
unpaid dividends. Except under certain 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.
The Series A Preferred Shares are redeemable at the option of the Company at any
time on or after January 15, 2007, in whole or in part, at the following per
share redemption prices plus accrued and unpaid dividends:
If redeemed during the
12-month period Redemption
beginning January 15, Price
----------------------------------- ----------------
2007 $ 52.594
2008 52.075
2009 51.556
2010 51.038
2011 50.519
2012 and thereafter 50.000
F-10
CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 and 1999
NOTE 6 - DIVIDENDS:
During the year ended December 31, 2001, the Company's Board of Directors
declared $15,562,500 of preferred stock dividends out of retained earnings of
the Company and $4,475,000 of common stock dividends, $4,133,918 of which was
paid out of the retained earnings of the Company and $341,082 of which was
treated as a return of capital. Of these amounts, preferred stock dividends of
$3,890,625 and common stock dividends of $2,700,000 were paid subsequent to
December 31, 2001.
NOTE 7 - RELATED PARTY TRANSACTIONS:
The Company has entered into an advisory agreement (the "Advisory Agreement")
with the Bank (the "Advisor"). The Advisor provides advice to the Board of
Directors and manages the operations of the Company as defined in the Advisory
Agreement. The Advisory Agreement has an initial term of three years commencing
on December 3, 1996 and is automatically renewed for additional one-year periods
unless the Company delivers a notice of nonrenewal to the Advisor. The Advisory
Agreement may be terminated by the Company at any time upon sixty days' prior
written notice. The advisory fee is $200,000 per annum payable in equal
quarterly installments.
The Company also entered into a servicing agreement with the Bank for the
servicing of its residential mortgage loans (the "Servicing Agreement").
Pursuant to the Servicing Agreement, the Bank performs the servicing of the
loans owned by the Company, in accordance with normal industry practice. The
Servicing Agreement can be terminated without cause with at least sixty days'
notice to the servicer and payment of a termination fee. The servicing fee rate
is 0.375% of the outstanding principal balance of the loans. Servicing fees for
the years ended December 31, 2001, 2000 and 1999 totaled $1,052,549, $1,088,694
and $1,116,911 respectively.
The Company had cash balances of $5,764,867 and $5,122,692 as of December 31,
2001 and 2000, respectively, held in various deposit accounts with the Bank.
Interest earned on these accounts was $166,221, $178,214 and $166,626 for the
years ended December 31, 2001, 2000 and 1999, respectively.
NOTE 8 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
The majority of the Company's assets and liabilities are financial instruments;
however, certain of these financial instruments lack an available trading
market. Significant estimates, assumptions and present value calculations were
therefore used for the purposes of deriving the fair values of the Company's
financial instruments, resulting in a degree of subjectivity inherent in the
indicated fair value amounts. Comparability among REITs may be difficult due to
the wide range of permitted valuation techniques and the numerous estimates and
assumptions which must be made.
F-11
CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 and 1999
NOTE 8 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued):
The estimated fair values of the Company's financial instruments at December 31,
2001 and 2000 are as follows:
December 31, 2001
------------------------------------------
Carrying Fair
Amount Value
----------------- ------------------
Financial assets:
Cash and interest-bearing deposits $ 5,764,867 $ 5,764,867
Residential mortgage loans
receivable, net 287,523,781 295,779,000
Other financial assets 13,021,945 13,021,945
Financial liabilities 6,590,625 6,590,625
December 31, 2000
------------------------------------------
Carrying Fair
Amount Value
----------------- ------------------
Financial assets:
Cash and interest-bearing deposits $ 5,122,692 $ 5,122,692
Residential mortgage loans
receivable, net 298,145,029 301,929,000
Other financial assets 4,241,050 4,241,050
Financial liabilities 7,390,625 7,390,625
The following methods and assumptions were used to estimate the fair value
amounts at December 31, 2001 and 2000.
Cash and interest-bearing deposits:
Carrying amount approximates fair value.
Residential mortgage loans:
Fair value is estimated using discounted cash flow analyses based on contractual
repayment and anticipated prepayment schedules. The discount rates used in these
analyses are based on either the interest rates paid on U.S. Treasury securities
of comparable maturities adjusted for credit risk and non-interest operating
costs, or the interest rates currently offered for loans with similar terms to
borrowers of similar credit quality.
F-12
CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 and 1999
NOTE 8 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued):
Other financial assets:
The carrying amounts of accounts receivable from parent and accrued interest
receivable approximate fair value.
Financial liabilities:
The carrying amounts of accounts payable to parent, accounts payable to others,
dividends payable to parent and dividends payable to others approximate fair
value.
F-13
CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 and 1999
NOTE 9 - QUARTERLY FINANCIAL DATA (Unaudited)
The quarterly financial data of the Company herein has been derived from the
unaudited quarterly financial statements of the Company. The data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements included elsewhere
herein.
2001
For the quarter ended
--------------------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------------------------------------------------------------------
OPERATING DATA:
Interest income $ 5,586,068 $ 5,449,430 $5,218,240 $4,787,686
Provision for loan losses - - - -
--------------------------------------------------------------------------
Total interest income after
provision for loan losses 5,586,068 5,449,430 5,218,240 4,787,686
Gain on sale of real estate acquired
in settlement of loans, net 21,924 - - -
Operating expenses (335,392) (341,549) (338,365) (341,251)
Provision for income taxes (2,300) - (8,073) -
--------------------------------------------------------------------------
Net income $ 5,270,300 $ 5,107,881 $4,871,802 $4,446,435
==========================================================================
Earnings available to common stockholders $ 1,379,675 $ 1,217,256 $ 981,177 $ 555,810
Earnings per common share $ 13,796.75 $ 12,172.56 $ 9,811.77 $ 5,558.10
2000
For the quarter ended
--------------------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------------------------------------------------------------------
OPERATING DATA:
Interest income $ 5,544,202 $ 5,451,336 $5,560,967 $5,633,120
Provision for loan losses - - - -
--------------------------------------------------------------------------
Total interest income after
provision for loan losses 5,544,202 5,451,336 5,560,967 5,633,120
Gain on sale of real estate acquired
in settlement of loans, net - - 13,475 6,734
Operating expenses (343,319) (354,490) (345,205) (340,407)
Provision for income taxes (10,468) - - (4,700)
--------------------------------------------------------------------------
Net income $ 5,190,415 $ 5,096,846 $5,229,237 $5,294,747
==========================================================================
Earnings available to common stockholders $ 1,299,790 $ 1,206,221 $1,338,612 $1,404,122
Earnings per common share $ 12,997.90 $ 12,062.21 $13,386.12 $14,041.22
F-14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-24-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors currently consists of five members, two of whom
are Independent Directors. Each director was elected to serve for a term of one
year and until his successor shall have been duly elected and qualified. The
Board of Directors met four times during the year ended 2001 and all of its
members attended at least 50% of the meetings. The Company currently has eight
officers. The Company has no other employees and does not anticipate that it
will require additional employees.
The following persons are the Company's current directors and/or executive
officers, each of whom has served since 1996.
Name Age Position and Offices Held
- ------------------------------------------------------------------------------
B. Francis Saul II.............69 Chairman of the Board, President and Chief
Executive Officer
Alexander R. M. Boyle..........64 Director
Stephen R. Halpin, Jr..........46 Executive Vice President, Chief Financial
oficer, Treasurer and Director
N. Alexander MacColl, Jr.......67 Director
John J. O'Connor III...........71 Director
-25-
The following is a summary of the experience of the executive officers and/or
directors of the Company:
B. FRANCIS SAUL II serves as Chairman of the Board and Chief Executive Officer
of the Bank. He also has been President and Chief Operating Officer of B. F.
Saul Company since 1969. Mr. Saul has served as the Chairman of B. F. Saul Real
Estate Investment Trust since 1969 and as a trustee since 1964. He is also a
director of Derwood Investment Corporation. At December 31, 2001, B. F. Saul
Real Estate Investment Trust and Derwood Investment Corporation owned of record
80% and 16%, respectively, of the Bank's outstanding common stock. Mr. Saul is
also Chairman of the Board of Directors of Chevy Chase Financial Limited and
Chevy Chase Property Company Limited. He serves as Chairman of the Board and
Chief Executive Officer of Saul Centers, Inc., a public real estate investment
trust. Mr. Saul also serves as a Trustee of the National Geographic Society, a
member of the Trustees Council of the National Gallery of Art and an Honorary
Trustee of the Brookings Institute. In addition, Mr. Saul is Director Emeritus
of Colonial Williamsburg Hotel Properties, Inc., a member of the Folger
Shakespeare Library and the Board of Visitors and Governors of Washington
College.
ALEXANDER R. M. BOYLE has been Vice Chairman of the Board of Directors of the
Bank since 1985. Prior to beginning service in this position, Mr. Boyle was the
President and a member of the Board of Directors of Government Services Savings
and Loan, Inc. from 1975 until its merger with the Bank in 1985. He is also a
Trustee of the B. F. Saul Employees Profit Sharing Retirement Trust. Mr. Boyle
has served as a director of the U. S. League of Savings Institutions and as
chairman of the Maryland League of Financial Institutions. He currently serves
as a director of the Association of Financial Services Holding Companies and
serves on the Chancellor's Advisory Council of the University of Maryland and is
a member of the Rotary Club of Bethesda-Chevy Chase.
STEPHEN R. HALPIN, JR. serves as Executive Vice President and Chief Financial
Officer of the Bank. Mr. Halpin is also the Chief Financial Officer for the B.
F. Saul Company and B. F. Saul Real Estate Investment Trust. He is a Trustee of
the B. F. Saul Employees Profit Sharing Retirement Trust. Mr. Halpin currently
serves on the American Bankers Association Accounting Committee. In addition,
Mr. Halpin is a Trustee for Hospice Caring, Inc. Before joining the Bank in
1983, Mr. Halpin was with a public accounting firm.
N. ALEXANDER MACCOLL, JR. was a Senior Vice President of the Union Trust Company
Loan Production Office from 1982 until 1990 when he retired. He served as
Corporate Vice President of Colonial Bancorp. from 1977 until 1981. Prior to his
position at Colonial Bancorp., he served as Second Vice President of the
National Bank of Detroit from 1962 until 1977.
JOHN J. O'CONNOR III has been engaged in the practice of law since 1957. He was
a partner in Bryan Cave LLP. He is now of Counsel to Bryan Cave LLP.
-26-
AUDIT COMMITTEE
The Company's audit committee reviews the engagement of independent accountants
and reviews their independence. The audit committee also reviews the adequacy of
the Company's internal accounting controls. The audit committee is comprised of
the Company's Independent Directors, John J. O'Connor III and N. Alexander
MacColl, Jr. The audit committee met twice during 2001.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires the Company's officers, directors and persons who own more than
ten percent of either the Common Stock or the Series A Preferred Shares to file
reports of ownership on Form 3 and changes in ownership on Form 4 or 5 with the
SEC and the New York Stock Exchange. Such officers, directors and ten percent
shareholders are also required by SEC rules to furnish the Company with copies
of all Section 16(a) forms that they file.
Based solely on its review of copies of such reports received or representations
from certain reporting persons, the Company believes that, during the year ended
December 31, 2001, all of its officers, directors and ten percent shareholders
complied with all Section 16(a) filing requirements applicable to them with
respect to transactions during fiscal 2001
ITEM 11. EXECUTIVE COMPENSATION
Since the Company's inception on November 5, 1996, no compensation has been
awarded to, earned by or paid to any of the Company's directors (other than its
Independent Directors), officers or employees. The Company does not intend to
pay any compensation to any of its directors (other than its Independent
Directors), officers or employees. The Company pays the Independent Directors
annual compensation of $10,000, plus a fee of $750 for attendance (in person or
by telephone) at each meeting of the Board of Directors and each meeting of the
Audit Committee. In 2001, each of the Independent Directors earned $4,500 for
attending four Board of Directors meetings and two Audit Committee meetings.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 15, 2002, the number and percentage
of outstanding shares of Common Stock and Series A Preferred Shares beneficially
owned by (i) all persons known by the Company to own more than five percent of
such shares; (ii) each director of the Company; (iii) each executive officer of
the Company; and (iv) all executive officers and directors of the Company as a
group. The persons or entities named in the table have sole voting and sole
investment power with respect to each of the shares beneficially owned by such
person or entity. The calculations were based on a total of 100 shares of Common
Stock and 3,000,000 Series A Preferred Shares outstanding as of March 15, 2002.
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Names and Address of Amount of Beneficial Percent of Class of
Beneficial Owner (1) Ownership Outstanding Shares
- ------------------------------ ---------------------- --------------------
Chevy Chase Bank, F.S.B. 100 Common - 100%
B. Francis Saul II (2)(3) 0 0%
Alexander R. M. Boyle (2) 0 0%
Stephen R. Halpin, Jr. (2)(3) 1,000 Preferred - 0.033%
N. Alexander MacColl, Jr. (2) 0 0%
John J. O'Connor III (2) 0 0%
All directors and executive officers
as a group (5 persons) 1,000 Preferred - 0.033%
(1) The address of each beneficial owner is 7501 Wisconsin Avenue, Bethesda,
Maryland 20814.
(2) Indicates a director of the Company.
(3) Indicates an executive officer of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Set forth below are certain transactions between the Company and its directors
and affiliates. Management believes that the transactions with related parties
described herein have been conducted on substantially the same terms as similar
transactions with unrelated parties.
The Bank administers the day-to-day operations of the Company and is entitled to
receive fees in connection with the Advisory Agreement. Advisory fees paid to
the Bank for the year ended December 31, 2001 totaled $200,000. See "Business -
The Advisor."
The Bank services the Residential Mortgage Loans included in the Company's
portfolio and is entitled to receive fees in connection with the Servicing
Agreement. Loan servicing fees paid to the Bank for the year ended December 31,
2001 totaled $1,052,549. See "Business - Servicing."
The Company had cash balances of $5,764,867 as of December 31, 2001 held in
various deposit accounts with the Bank. Interest earned on these accounts was
$166,221 for the year ended December 31, 2001.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements of the Company are included in
Item 8 of this report:
Report of Independent Public Accountants
Statements of Financial Condition at December 31, 2001 and 2000
Statements of Operations for the Years Ended December 31, 2001,
2000 and 1999
Statements of Stockholders' Equity for the Years Ended December
31, 2001, 2000 and 1999
Statements of Cash Flows for the Years Ended December 31, 2001,
2000 and 1999
Notes to Financial Statements
(a)(2) All other schedules for which provision is made in the applicable
accounting of the Securities and Exchange Commission are not required
under the related instruction or are inapplicable and therefore have
been omitted.
(a)(3) Exhibits:
3.1 Articles of Incorporation of the Company, as amended (incorporated
herein by reference to Exhibit 3.1 of the Company's 1996 Annual Report
on Form 10-K).
3.2 Bylaws of the Company (incorporated herein by reference to Exhibit
3(b) of Form S-11 (file number 333-10495) filed by the Company).
4.1 Articles Supplementary of 10 3/8% Noncumulative Exchangeable Preferred
Stock, Series A (incorporated herein by reference to Exhibit 4.1 of the
Company's 1996 Annual Report on Form 10-K).
10.1 Residential Mortgage Loan Purchase Agreement between the Company and the
Bank (incorporated herein by reference to Exhibit 10.1 of the Company's
1996 Annual Report on Form 10-K).
10.2 Mortgage Loan Servicing Agreement between the Company and the Bank
(incorporated herein by reference to Exhibit 10.2 of the Company's 1996
Annual Report on Form 10-K).
10.3 Advisory Agreement between the Company and the Bank (incorporated herein
by reference to Exhibit 10.3 of the Company's 1996 Annual Report on Form
10-K).
*12.1 Computation of ratio of earnings to fixed charges and Preferred Stock
dividend requirements.
*99 Letter from the Company to the SEC regarding Arthur Andersen LLP.
(b) No reports on Form 8-K were issued during the three months ended
December 31, 2001.
*Filed herewith.
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EXHIBIT 12.1
CHEVY CHASE PREFERRED CAPITAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
- ----------------------------------------------------------------------------------------------
(in thousands, except ratio data)
As of or for the year ended December 31,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Net income $ 19,696 $ 20,811 $ 20,083 $ 21,369 $ 21,628
Fixed charges - - - - -
-------- -------- -------- -------- --------
Earnings before fixed charges $ 19,696 $ 20,811 $ 20,083 $ 21,369 $ 21,628
======== ======== ======== ======== ========
Fixed charges, as above $ - $ - $ - $ - $ -
Preferred stock dividend requirements 15,563 15,563 15,563 15,563 15,563
-------- -------- -------- -------- --------
Fixed charges including preferred stock
dividends $15,563 $ 15,563 $ 15,563 $ 15,563 $ 15,563
======== ======== ======== ======== ========
Ratio of earnings to fixed charges and
Preferred stock dividend requirements 1.27 1.34 1.29 1.37 1.39
Exhibit 99
March 29, 2002
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sir or Madam:
This letter is being filed by Chevy Chase Preferred Capital Corporation (the
"Company") with its Form 10-K pursuant to Temporary Note 3T to Article 3 of
Regulation S-X to set forth certain representations made to the Company by
Arthur Andersen LLP in connection with their audit.
The Company received a representation letter dated March 21, 2002, from Arthur
Andersen indicating that they have audited the consolidated financial statements
of the Company as of December 31, 2001 and for the year then ended and have
issued their report thereon dated March 13, 2002. In the letter, Arthur Andersen
represents that the audit was subject to their quality control system for the
U.S. accounting and auditing practice to provide reasonable assurance that the
engagement was conducted in compliance with professional standards and that
there was appropriate continuity of Arthur Andersen personnel working on the
audit, availability of national office consultation and availability of
personnel at foreign affiliates of Arthur Andersen to conduct the relevant
portions of the audit.
CHEVY CHASE PREFERRED CAPITAL CORPORATION
By: /s/ Joel A. Friedman
Joel A. Friedman
Senior Vice President and Controller
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Chevy Chase, Maryland on
March 29, 2002.
CHEVY CHASE PREFERRED CAPITAL CORPORATION
(Registrant)
By: /s/ B. Francis Saul II
B. Francis Saul II
Chairman of the Board of Directors
and President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following officers and directors of the Registrant
and in the capacities and on the dates indicated.
March 29, 2002 By: /s/ Alexander R. M. Boyle
Alexander R. M. Boyle
Director
March 29, 2002 By: /s/ Joel A. Friedman
Joel A. Friedman
Senior Vice President and
Controller
(Principal Accounting Officer)
March 29, 2002 By: /s/ Stephen R. Halpin, Jr.
Stephen R. Halpin, Jr.
Director,
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
March 29, 2002 By: /s/ N. Alexander MacColl, Jr.
N. Alexander MacColl, Jr.
Director
March 29, 2002 By: /s/ John J. O'Connor III
John J. O'Connor III
Director
March 29, 2002 By: /s/ B. Francis Saul II
B. Francis Saul II
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)