Back to GetFilings.com
CHEVY CHASE
PREFERRED CAPITAL CORPORATION
FORM 10-Q
September 30, 2002
______________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
Commission File Number: 333-10495
CHEVY CHASE PREFERRED CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-1998335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7501 Wisconsin Avenue
Bethesda, Maryland 20814
(Address of principal executive offices) (Zip Code)
(301)986-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's sole class of common stock
was 100 shares, $1 par value, as of October 31, 2002.
______________________________________________________________________________
CHEVY CHASE PREFERRED CAPITAL CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements:..................................................1
(a) Statements of Financial Condition at September 30, 2002 and
December 31, 2001........................................................2
(b) Statements of Operations for the Three Months and Nine Months Ended
September 30, 2002 and 2001..............................................3
(c) Statement of Stockholders' Equity for the Nine Months
Ended September 30, 2002.................................................4
(d) Statements of Cash Flows for the Nine Months Ended
September 30, 2002 and 2001..............................................5
(e) Notes to Financial Statements.............................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................8
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........13
Item 4. Controls and Procedures..............................................13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................14
Item 2. Changes in Securities................................................14
Item 3. Defaults Upon Senior Securities......................................14
Item 4. Submission of Matters to a Vote of Security Holders..................14
Item 5. Other Information....................................................14
Item 6. Exhibits and Reports on Form 8-K.....................................14
PART I
ITEM 1. FINANCIAL STATEMENTS
The following unaudited financial statements and notes of Chevy Chase Preferred
Capital Corporation (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information. In
the opinion of management, all adjustments necessary for a fair presentation of
the financial position and the results of operations for the interim period
presented have been included. Such unaudited financial statements and notes
should be read in conjunction with the Company's financial statements and notes
for the year ended December 31, 2001 included in the Company's Annual Report on
Form 10-K (File No. 333-10495) filed with the Securities and Exchange Commission
on March 29, 2002 (the "2001 10-K").
-1-
CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
2002 2001
--------------- ---------------
(Unaudited)
ASSETS
Cash and interest-bearing deposits $ 2,989,282 $ 5,764,867
Residential mortgage loans (net of
allowance for losses of $40,333
for both periods) 284,058,623 287,523,781
Accounts receivable from parent 16,570,208 11,825,608
Accrued interest receivable 1,205,233 1,196,337
Prepaid expenses 7,533 8,000
--------------- ---------------
Total assets $ 304,830,879 $ 306,318,593
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and accounts payable
to others 76,276 69,050
Dividends payable to parent - 2,700,000
Dividends payable to others 3,890,625 3,890,625
--------------- ---------------
Total liabilities 3,966,901 6,659,675
--------------- ---------------
Preferred Stock, 10,000,000 shares authorized:
10 3/8% Noncumulative Exchangeable
Preferred Stock, $5 par value,
3,000,000 shares issued and outstanding
(liquidation value of $150,000,000 plus
accrued and unpaid dividends) 15,000,000 15,000,000
Common stock, $1 par value,
1,000 shares authorized, 100 shares
issued and outstanding 100 100
Capital contributed in excess of par 284,999,900 284,658,818
Retained earnings 863,978 -
--------------- ---------------
Total stockholders' equity 300,863,978 299,658,918
--------------- ---------------
Total liabilities and stockholders' equity $ 304,830,879 $ 306,318,593
=============== ===============
See the accompanying Notes to Financial Statements.
-2-
CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ------------ ------------
Interest Income
Residential mortgage loans $4,369,082 $5,174,390 $13,401,376 $16,125,271
Other 19,108 43,850 64,839 128,467
---------- ---------- ------------ ------------
Total interest income 4,388,190 5,218,240 13,466,215 16,253,738
Gain on sales of real estate
acquired in settlement of
loans, net - - - 21,924
---------- ---------- ------------ ------------
Total income 4,388,190 5,218,240 13,466,215 16,275,662
---------- ---------- ------------ ------------
Operating Expenses
Loan servicing fees paid to
parent 238,284 252,719 707,601 793,320
Advisory fees paid to parent 50,000 50,000 150,000 150,000
Directors fees 4,000 6,500 24,000 22,500
General and administrative 10,490 29,146 48,761 49,486
---------- ---------- ------------ ------------
Total operating expenses 302,774 338,365 930,362 1,015,306
---------- ---------- ------------ ------------
Income before income taxes 4,085,416 4,879,875 12,535,853 15,260,356
Provision for income taxes - 8,073 - 10,373
---------- ---------- ------------ ------------
NET INCOME $4,085,416 $4,871,802 $12,535,853 $15,249,983
========== ========== ============ ============
PREFERRED STOCK DIVIDENDS 3,890,625 3,890,625 11,671,875 11,671,875
---------- ---------- ------------ ------------
EARNINGS AVAILABLE TO
COMMON STOCKHOLDER $ 194,791 $ 981,177 $ 863,978 $ 3,578,108
========== ========== ============ ============
EARNINGS PER COMMON SHARE $ 1,947.91 $ 9,811.77 $ 8,639.78 $ 35,781.08
========== ========== ============ ============
See the accompanying Notes to Financial Statements.
-3-
CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Capital
Contributed Total
Preferred Common In Excess Retained Stockholders'
Stock Stock of Par Earnings Equity
------------ ------ -------------- ------------- --------------
Balance, December 31, 2001 $15,000,000 $100 $ 284,658,818 $ - $ 299,658,918
Net income - - - 12,535,853 12,535,853
Capital contribution from
common stockholder - - 341,082 - 341,082
Dividends on 10 3/8 %
Noncumulative Exchangeable
Preferred Stock, Series A - - - (11,671,875) (11,671,875)
------------ ------ --------------- ------------ --------------
Balance, September 30, 2002 $15,000,000 $100 $ 284,999,900 $ 863,978 $ 300,863,978
============ ====== =============== ============ ==============
See the accompanying Notes to Financial Statements.
-4-
CHEVY CHASE PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
---------------------------------
2002 2001
--------------- ---------------
Cash flows from operating activities:
Net income $ 12,535,853 $ 15,249,983
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sales of real estate acquired in
settlement of loans, net - (21,924)
Increase in accounts receivable from parent (4,744,600) (3,372,922)
(Increase) decrease in accrued interest
receivable (8,896) 75,833
Decrease in prepaid expenses 467 467
Increase (decrease) in accrued expenses
and accounts payable 7,226 (93,380)
--------------- ---------------
Net cash provided by operating activities 7,790,050 11,838,057
--------------- ---------------
Cash flows from investing activities:
Purchases of residential mortgage loans (108,359,099) (69,030,307)
Repayments of residential mortgage loans 111,824,257 72,134,994
Net proceeds on sales of real estate
acquired in settlement of loans - 138,330
--------------- ---------------
Net cash provided by investing activities 3,465,158 3,243,017
--------------- ---------------
Cash flows from financing activities:
Capital contribution from common stockholder 341,082 1,255
Dividends paid on preferred stock (11,671,875) (11,671,875)
Dividends paid on common stock (2,700,000) (4,275,000)
--------------- ---------------
Net cash used in financing activities (14,030,793) (15,945,620)
--------------- ---------------
Net decrease in cash and cash equivalents (2,775,585) (864,546)
Cash and cash equivalents at beginning of
period 5,764,867 5,122,692
--------------- ---------------
Cash and cash equivalents at end of period $ 2,989,282 $ 4,258,146
=============== ===============
Supplemental disclosures of cash flow
information:
Income taxes paid during the year $ - $ 10,373
=============== ===============
See the accompanying Notes to Financial Statements.
-5-
CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
The Company is a Maryland corporation which acquires, holds and manages real
estate assets. Chevy Chase Bank, F.S.B. (the "Bank"), a federally insured stock
savings bank, owns all of the Company's common stock. The Bank is in compliance
with its regulatory capital requirements.
Certain reclassifications of prior periods' information have been made to
conform with the presentation for the three months and nine months ended
September 30, 2002.
NOTE 2 - RESIDENTIAL MORTGAGE LOANS:
Residential mortgage loans consist of monthly adjustable rate mortgages
("ARMs"), one-year ARMs, three-year ARMs and five-year, seven-year and ten-year
fixed-rate loans with automatic conversion to one-year ARMs after the end of the
respective fixed rate period, and 30 year fixed-rate mortgages. Each of the
mortgage loans is secured by a mortgage, deed of trust or other security
instrument which created a first lien on the residential dwellings located in
their respective jurisdictions. The following table shows the residential
mortgage loan portfolio by type at the dates indicated:
September 30, December 31,
2002 2001
----------------- ------------------
Monthly ARMs $ 70,181,721 $ 79,541,872
One-year ARMs 17,866,978 21,583,666
Three-year ARMs 23,775,471 19,462,468
5/1 ARMs 52,655,895 49,804,806
7/1 ARMs 13,167,619 8,378,308
10/1 ARMs 70,001,670 99,255,916
30 year fixed-rate 36,449,602 9,537,078
---------------- ------------------
Total 284,098,956 287,564,114
Less:
Allowance for loan losses 40,333 40,333
---------------- ------------------
Total $ 284,058,623 $ 287,523,781
================ ==================
NOTE 3 - PREFERRED STOCK:
Cash dividends on the Company's 10 3/8 % Noncumulative Exchangeable Preferred
Stock, Series A ("the Series A Preferred Shares") are payable quarterly in
arrears. The liquidation value of each Series A Preferred Share is $50 plus
accrued and unpaid dividends. The Series A Preferred Shares are not redeemable
until January 15, 2007 (except upon the occurrence of certain tax events) and
are redeemable thereafter at the option of the Company. Except under certain
limited
-6-
CHEVY CHASE PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 - PREFERRED STOCK (continued):
circumstances, the holders of the Series A Preferred Shares have no voting
rights. The Series A Preferred Shares are automatically exchangeable for a new
series of preferred stock of the Bank upon the occurrence of certain events
relating to the Bank.
NOTE 4 - DIVIDENDS:
During the three months ended September 30, 2002, the Company's Board of
Directors declared a cash dividend of $3,890,625 on the Company's preferred
stock, out of the retained earnings of the Company. The dividend was paid on
October 15, 2002.
During the nine months ended September 30, 2002, the Company's Board of
Directors declared cash dividends of $11,671,875 on the Company's preferred
stock, out of the retained earnings of the Company.
There were no common dividends declared during the nine months ended September
30, 2002.
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
Recent Developments. On August 13, 2002 the Company filed a Current Report on
Form 8-K with the SEC reporting the Company had dismissed Arthur Andersen LLP as
independent public accountants of the Company and engaged Ernst and Young LLP to
serve as independent public accountants to audit the financial statements of the
Company for the year ended December 31, 2002.
Residential Mortgage Loans
At September 30, 2002 and December 31, 2001, the Company had $284,058,623 and
$287,523,781, respectively, invested in loans secured by first mortgages or
deeds of trust on single-family residential real estate properties ("Residential
Mortgage Loans"). During the nine months ended September 30, 2002, Residential
Mortgage Loan purchases were $108,359,099 and principal collections were
$111,824,257. Management intends to continue to reinvest proceeds received from
repayments of loans in additional Residential Mortgage Loans to be purchased
from either the Bank or its affiliates.
At September 30, 2002, the Company had six non-accrual loans (contractually past
due 90 days or more or with respect to which other factors indicate that full
payment of principal and interest is unlikely) with an aggregate principal
balance of $1,313,253 (or 0.46% of loans). At December 31, 2001, the Company had
three non-accrual loans with an aggregate principal balance of $1,088,562 (or
0.38% of loans). The increase reflects the general economic downturn.
At September 30, 2002, the Company had three loans, which were delinquent 30-89
days with an aggregate principal balance of $555,954 (or 0.20% of loans). At
December 31, 2001, the Company had eight delinquent loans with an aggregate
principal balance of $1,320,986 (or 0.46% of loans).
Allowance for Loan Losses
An analysis is performed periodically to determine whether an allowance for loan
loss is required. An allowance may be provided after considering such factors as
the economy in lending areas, delinquency statistics and past loss experience.
The allowance for loan losses is based on estimates, and ultimate losses may
vary from current estimates. As adjustments to the allowance become necessary,
provisions for loan losses are reported in operations in the periods that are
determined to be necessary. There was no activity in the allowance for loan
losses during the three months ended September 30, 2002 and 2001. The balance of
the allowance for loan losses was $40,333 at each of September 30, 2002 and
2001.
-8-
Interest Rate Risk
The Company's income consists primarily of interest payments on Residential
Mortgage Loans. If there is a decline in interest rates, then the Company will
experience a decrease in income available to be distributed to its stockholders.
Certain Residential Mortgage Loans which the Company holds allow borrowers to
convert an ARM to a fixed-rate mortgage, thus "locking in" a fixed interest rate
at a time when interest rates have declined. In addition, when interest rates
decline, holders of fixed-rate mortgages are more likely to prepay such
mortgages. In 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
September 30, 2002 and the interest rates on such loans, anticipated annual
interest income, net of servicing fees, on the Company's loan portfolio was
approximately 104.0% 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. The
Company, to date, has not used any derivative instruments to manage its interest
rate risk.
There have been no material changes to the Company's market risk disclosures
from the disclosures made in the 2001 10-K.
Significant Concentration of Credit Risk
Concentration of credit risk arises when a number of customers engage in similar
business activities, or activities in the same geographical region, or have
similar economic features that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic conditions.
Concentration of credit risk indicates the relative sensitivity of the Company's
performance to both positive and negative developments affecting a particular
industry.
The Company's exposure to geographic concentrations directly affects the credit
risk of the Residential Mortgage Loans within the portfolio. A majority (or
55.2%) of the Company's Residential Mortgage Loans are 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.
-9-
Liquidity and Capital Resources
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Company's financial commitments. In
managing liquidity, the Company takes into account various legal limitations
placed on a real estate investment trust (a "REIT"), as discussed below in "Tax
Status of the Company."
The Company's principal liquidity needs will be to fund the acquisition of
additional mortgage assets as current mortgage assets held by the Company are
repaid and to pay dividends on the Series A Preferred Shares. The acquisition of
such additional mortgage assets will be funded with the proceeds from principal
repayments on its current portfolio of mortgage assets. The Company does not
anticipate that it will have any other material capital expenditures. The
Company believes that cash generated from the payment of principal and interest
on its mortgage asset portfolio will provide sufficient funds to meet its
operating requirements and to pay dividends in accordance with the requirements
to be treated as a REIT for income tax purposes for the foreseeable future. The
Company may borrow funds as it deems necessary.
Tax Status of the Company
The Company has elected to be taxed as a REIT under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended. As a REIT, the Company generally
will not be subject to federal income tax on its net income (excluding capital
gains) provided that it distributes annually 100% 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.
No income tax was paid during the nine months ended September 30, 2002. During
the nine months ended September 30, 2001, the Company paid $10,373 in income
taxes related to capital gains of $42,833 on the sale of one Real Estate Owned
("REO") property in the year 2001, and two REO properties sold in the year 2000.
-10-
RESULTS OF OPERATIONS
Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001
During the three months ended September 30, 2002 and 2001, the Company reported
net income of $4,085,416 and $4,871,802, respectively.
Interest income on Residential Mortgage Loans totaled $4,369,082 for the three
months ended September 30, 2002 (the "2002 quarter"), compared to $5,174,390 for
the three months ended September 30, 2001 (the "2001 quarter"). The decrease in
interest income resulted from a decrease in the average yield on such loans to
6.10% in the 2002 quarter from 7.08% in the 2001 quarter. The average balance of
the Residential Mortgage Loan portfolio was $286,465,516 in the 2002 quarter
compared to $292,427,219 in the 2001 quarter. The Company would have recorded an
additional $29,899 and $5,395 in interest income for the three months ended
September 30, 2002 and 2001, had its non-accrual loans been current in
accordance with their original terms.
Other interest income of $19,108 and $43,850 was recognized on the Company's
interest bearing deposits during the three months ended September 30, 2002 and
2001, respectively. The decrease was primarily due to a lower average yield on
interest bearing deposits which decreased by 216 basis points (from 3.48% to
1.32%) from the average yield in the 2001 quarter. Partially offsetting this
decrease was an increase in the average balance on interest bearing deposits of
$765,889 in the 2002 quarter.
No provision for loan losses was recorded for the three months ended September
30, 2002 and 2001.
The Company did not sell any REO properties during the three months ended
September 30, 2002 and 2001.
Operating expenses totaling $302,774 and $338,365 for the three months ended
September 30, 2002 and 2001, 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 $238,284 and
$252,719, for the three months ended September 30, 2002 and 2001, respectively,
were based on a servicing fee rate of 0.375% per annum of the outstanding
principal balances of Residential Mortgage Loans, pursuant to a servicing
agreement between the Company and the Bank. Advisory fees paid to parent for the
three months ended September 30, 2002 and 2001 totaled $50,000 for each quarter.
Directors' fees paid for the three months ended September 30, 2002 and 2001 were
$4,000 and $6,500, respectively, and represent compensation to the two
independent members of the Board of Directors. General and administrative
expenses totaled $10,490 and $29,146 for the three months ended September 30,
2002 and 2001, respectively. The decrease in general and administrative expenses
is primarily due to a decrease in independent auditor fees and trustee fees
compared to the 2001 period.
-11-
On September 24, 2002, the Company's Board of Directors declared, out of the
retained earnings of the Company, a cash dividend of $1.296875 per share on the
outstanding Series A Preferred Shares. Dividends of $3,890,625 were subsequently
paid on October 15, 2002.
There were no common dividends declared during the 2002 quarter.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30,
2001
During the nine months ended September 30, 2002 and 2001, the Company reported
net income of $12,535,853 and $15,249,983, respectively.
Interest income on Residential Mortgage Loans totaled $13,401,376 for the nine
months ended September 30, 2002 (the "2002 period"), compared to $16,125,271 for
the nine months ended September 30, 2001 (the "2001 period"). The decrease in
interest income resulted from a decrease in the average yield on such loans to
6.18% in the 2002 period from 7.35% in the 2001 period. Also contributing to the
decrease in interest income was a decrease in the average balance of the
Residential Mortgage Loan portfolio to $289,193,331 in the 2002 period from
$292,533,854 in the 2001 period. The Company would have recorded an additional
$35,756 and $17,808 in interest income for the 2002 period and 2001 period,
respectively, had its non-accrual loans been current in accordance with their
original terms.
Other interest income of $64,839 and $128,467 was recognized on the Company's
interest bearing deposits during the 2002 period and 2001 period, respectively.
The decrease was primarily due to a lower average yield on interest bearing
deposits which decreased by 197 basis points (from 3.46% to 1.49%) from the
average yield in the 2001 quarter. Partially offsetting this decrease was an
increase in the average balance on interest bearing deposits of $868,325 in the
2002 period.
No provision for loan losses was recorded for the periods ended September 30,
2002 and 2001.
The Company did not sell any REO properties during the 2002 period. The Company
recognized a gain of $21,924 on the sale of one REO property during the 2001
period.
Operating expenses totaling $930,362 and $1,015,306 for the 2002 period and 2001
period, 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 $707,601 and $793,320, for the
2002 period and 2001 period, respectively, were based on a servicing fee rate of
0.375% per annum of the outstanding principal balances of Residential Mortgage
Loans, pursuant to a servicing agreement between the Company and the Bank.
Advisory fees paid to parent for the 2002 and 2001 periods totaled $150,000 for
each period. Directors' fees paid for the 2002 and 2001 periods totaled $24,000
and $22,500, respectively, and represent compensation to the two independent
members of the Board of Directors. General and administrative expenses totaled
$48,761 and $49,486 for the 2002 and 2001 periods, respectively.
-12-
During the nine months ended September 30, 2002, the Company's Board of
Directors declared out of the retained earnings of the Company cash dividends of
$11,671,875 on the outstanding Series A Preferred shares.
There were no common dividends declared during the 2002 period.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Information required by this item is included in Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Interest Rate Risk," which is hereby incorporated herein by reference.
ITEM 4. Controls and Procedures
Within the 90-day period prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company required to be included in the
Company's filings under the Securities Exchange Act of 1934, as amended.
There have been no significant changes in the Company's internal controls, or in
other factors that could significantly affect internal controls, subsequent to
the date the Company carried out its evaluation.
-13-
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is not the subject of any material litigation. None of the Company,
the Bank or any affiliate of the Bank is currently involved in nor, to the
Company's knowledge, is currently threatened with any material litigation with
respect to the Residential Mortgage Loans included in the portfolio, other than
routine litigation arising in the ordinary course of business, most of which is
covered by liability insurance.
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K are set forth below.
Exhibit
No. Exhibit
- ------------------------
11 Computation of Earnings Per Common Share included in Part I, Item 1
of this report
99.1 Certification of Chief Executive Officer, Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer, Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) A current report on Form 8-K, dated August 13, 2002, was filed by the
Company with the SEC reporting the Company had dismissed Arthur Andersen LLP as
independent public accountants of the Company and engaged Ernst and Young LLP to
serve as independent public accountants to audit the financial statements of the
Company for the year ending December 31, 2002. (Item reported: Item 4)
-14-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHEVY CHASE PREFERRED CAPITAL CORPORATION
(Registrant)
November 14, 2002 By: /s/ ALEXANDER R. M. BOYLE
Alexander R. M. Boyle
Vice Chairman of the Board
November 14, 2002 By: /s/ STEPHEN R. HALPIN, JR.
Stephen R. Halpin, Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
November 14, 2002 By: /s/ JOEL A. FRIEDMAN
Joel A. Friedman
Senior Vice President and Controller
(Principal Accounting Officer)
CERTIFICATION
I, B. Francis Saul, II, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chevy Chase Preferred
Capital Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared; (
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ B. FRANCIS SAUL, II
------------------------------------------
B. Francis Saul, II
Chairman and Chief Executive Officer
CERTIFICATION
I, Stephen R. Halpin, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chevy Chase Preferred
Capital Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ STEPHEN R. HALPIN, Jr.
------------------------------------------
Stephen R. Halpin, Jr.
Executive Vice President and
Chief Financial Officer
Exhibit 11
Computation of Earnings Per Common Share included in Part I, Item 1 of this
report.
Exhibit 99.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, B. Francis Saul, II, the Chairman and Chief Executive Officer
of Chevy Chase Preferred Capital Corporation (the "Company"), has executed this
certification in connection with the filing with the Securities and Exchange
Commission of the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 2002 (the "Report"). The undersigned hereby certifies that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: November 14, 2002 /s/ B. FRANCIS SAUL, II
------------------------------------
B. Francis Saul, II
Chairman and Chief Executive Officer
Exhibit 99.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Stephen R. Halpin, Jr., the Executive Vice President and Chief
Financial Officer of Chevy Chase Preferred Capital Corporation (the "Company"),
has executed this certification in connection with the filing with the
Securities and Exchange Commission of the Company's Quarterly Report on Form
10-Q for the period ended September 30, 2002 (the "Report"). The undersigned
hereby certifies that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: November 14, 2002 /s/ STEPHEN R. HALPIN, JR.
---------------------------
Stephen R. Halpin, Jr.
Executive Vice President and
Chief Financial Officer