UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2001 Commission file number: 1-12639
-------------- -------
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 94-3254883
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(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
200 Crescent Court, Suite 1350, Dallas, Texas 75201
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(Address of principal executive offices) (Zip Code)
214-871-5131
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
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. X Yes No
The number of shares outstanding of registrant's $0.01 par value common
stock, as of the close of business on May 4, 2001: 1,000 shares.
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
FIRST QUARTER 2001 REPORT ON FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
March 31, 2001 (unaudited) and December 31, 2000...............................................3
Unaudited Statements of Income
Three months ended March 31, 2001 and 2000.....................................................4
Unaudited Statement of Stockholders' Equity
Three months ended March 31, 2001..............................................................5
Unaudited Statements of Cash Flows
Three months ended March 31, 2001 and 2000.....................................................6
Notes to Unaudited Financial Statements........................................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................14
Item 6. Exhibits and Current Reports on Form 8-K......................................................14
Signature..............................................................................................15
2
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
BALANCE SHEETS
March 31, 2001 and December 31, 2000
(Unaudited)
(dollars in thousands, except per share data)
March 31, December 31,
ASSETS 2001 2000
---- ----
Residential mortgage loans, net $ 951,947 $ 970,398
Cash and cash equivalents 25,818 8,526
Due from affiliates 34,685 15,109
Accrued interest receivable 5,312 5,615
Foreclosed real estate, net 37 569
----------- -----------
TOTAL ASSETS $ 1,017,799 $ 1,000,217
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to affiliates $ 11,357 $ 56
Accounts payable and accrued liabilities 265 310
----------- -----------
Total Liabilities 11,622 366
----------- -----------
Commitments and contingencies -- --
Stockholders' Equity:
Preferred stock, par value $0.01 per share, liquidation preference
$500,000, 30,000,000 shares authorized, 20,000,000 shares
issued and outstanding 500,000 500,000
Common stock, par value $0.01 per share, 30,000,000 shares authorized,
1,000 shares issued and outstanding -- --
Additional paid-in capital 500,000 500,000
Retained earnings (accumulated deficit) 6,177 (149)
----------- -----------
Total Stockholders' Equity 1,006,177 999,851
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,017,799 $ 1,000,217
=========== ===========
See accompanying notes to unaudited financial statements.
3
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
STATEMENTS OF INCOME
Three Months Ended March 31, 2001 and 2000
(Unaudited)
(in thousands)
2001 2000
---- ----
INTEREST INCOME
Residential mortgage loans $ 18,482 $ 17,645
Less: servicing fee expense (929) (904)
-------- --------
17,553 16,741
Short-term investments 205 172
-------- --------
Interest income, net of servicing fee expense 17,758 16,913
NONINTEREST EXPENSE
Director fees 8 6
Professional fees 8 29
Foreclosed real estate operations, net (14) (67)
Other 24 72
-------- --------
Total noninterest expense 26 40
-------- --------
NET INCOME 17,732 16,873
Preferred stock dividends 11,406 11,406
-------- --------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 6,326 $ 5,467
======== ========
See accompanying notes to unaudited financial statements.
4
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2001
(Unaudited)
(dollars in thousands)
Retained
Additional Earnings Total
Preferred Common Paid-in (Accumulated Stockholders'
Stock Stock Capital Deficit) Equity
----- ----- ------- -------- ------
BALANCE AT DECEMBER 31, 2000 $ 500,000 $ -- $ 500,000 $ (149) $ 999,851
Net income -- -- -- 17,732 17,732
Dividends paid on 9 1/8% noncumulative
exchangeable preferred stock, series A -- -- -- (11,406) (11,406)
--------- ------- --------- -------- -----------
BALANCE AT MARCH 31, 2001 $ 500,000 $ -- $ 500,000 $ 6,177 $ 1,006,177
========= ======= ========= ======== ===========
See accompanying notes to unaudited financial statements.
5
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2001 and 2000
(Unaudited)
(in thousands)
2001 2000
---- ----
OPERATING ACTIVITIES:
Net income $ 17,732 $ 16,873
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of purchase discounts and premiums, net 463 205
Interest capitalized on negatively amortizing loans (33) (23)
Gain on sales of foreclosed real estate, net (14) (67)
(Increase)/decrease in due from affiliates (740) 293
Decrease/(increase) in accrued interest receivable 514 (210)
(Decrease)/increase in accounts payable and accrued liabilities (45) 2
Increase in due to affiliates 11,301 60
-------- --------
Net cash provided by operating activities 29,178 17,133
-------- --------
INVESTING ACTIVITIES:
Purchase of mortgage loans (53,643) (38,519)
Mortgage loan principal repayments 52,813 37,982
Purchase of accrued interest receivable (211) (174)
Proceeds from sales of foreclosed real estate 561 737
-------- --------
Net cash (used in) provided by investing activities (480) 26
-------- --------
FINANCING ACTIVITIES:
Preferred stock dividends paid (11,406) (11,406)
-------- --------
Net cash used in financing activities (11,406) (11,406)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 17,292 5,753
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,526 5,485
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,818 $ 11,238
======== ========
Supplemental disclosure of cash flow information:
Non-cash investing activities:
Mortgage loan principal (decrease) increase for timing difference
between principal repayments received by servicer and related cash
received by Company during the period $(18,836) $ 2,163
See accompanying notes to unaudited financial statements.
6
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying financial statements of California Federal Preferred
Capital Corporation (the "Company") were prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions for meeting the requirements of Regulation S-X,
Article 10 and therefore do not include all disclosures necessary for
complete financial statements. In the opinion of management, all
adjustments have been made that are necessary for a fair presentation of
the financial position and results of operations and cash flows as of and
for the periods presented. All such adjustments are of a normal recurring
nature. The results of operations for the three months ended March 31, 2001
are not necessarily indicative of the results that may be expected for the
entire fiscal year or any other interim period. Certain amounts from prior
periods have been reclassified to conform with the current period's
presentation.
The accompanying financial statements should be read in conjunction with
the financial statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 2000. All terms used but not defined
elsewhere herein have meanings ascribed to them in the Company's Annual
Report on Form 10-K.
As the Company's common stock is wholly owned by California Federal Bank
(the "Bank"), earnings per share data is not presented.
(2) Residential Mortgage Loans, Net
At March 31, 2001 and December 31, 2000, residential mortgage loans, net,
consisted of the following (in thousands):
March 31, December 31,
2001 2000
---- ----
1-4 unit residential mortgage loans $ 952,620 $ 971,145
Purchase discounts and premiums, net 6,985 6,894
Allowance for loan losses (7,658) (7,641)
--------- ---------
Total residential mortgage loans, net $ 951,947 $ 970,398
========= =========
Residential mortgage loans consist primarily of adjustable rate mortgages
("ARMs") which adjust periodically based on changes in various indices
including the FHLB Eleventh District Cost of Funds, the one-year Treasury
rate and the six-month Treasury rate. Certain types of residential mortgage
loans contain an option for the mortgagor to convert the ARM to a fixed
rate loan for the remainder of the term.
(3) Dividends
Holders of Series A Preferred Shares (as defined herein) are entitled to
receive, if, when and as authorized and declared by the Board of Directors
of the Company out of funds legally available, noncumulative dividends at a
rate of 9 1/8% per annum of the initial liquidation preference ($25.00 per
share). Dividends on the Series A Preferred Shares, if authorized and
declared, are payable quarterly in arrears on the last day of March, June,
September and December. Dividends paid during each of the three month
periods ended March 31, 2001 and 2000 to the holders of the Series A
Preferred Shares totalled approximately $11.4 million.
Dividends on common stock are paid if, when and as authorized and declared
by the Board of Directors out of funds legally available after all
preferred dividends have been paid. There were no common stock dividends
paid during the three months ended March 31, 2001 or 2000.
(4) Related Party Transactions
The Company entered into a servicing agreement with First Nationwide
Mortgage Corporation ("FNMC") pursuant to which FNMC performs the actual
servicing of the residential mortgage loans held by the Company in
accordance with normal industry practice (the "Servicing Agreement"). The
Servicing Agreement can be terminated without
7
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
cause with at least 30 days prior written notice to FNMC and payment to
FNMC of a termination fee equal to 2% of the outstanding principal balances
of the loans. The servicing fee ranges from 0.25% to 0.50% per year of the
outstanding principal balances. Servicing fee expense paid totalled
$929,000 and $904,000 for the three months ended March 31, 2001 and 2000,
respectively. FNMC is also entitled to a 1% disposition fee on the
aggregate proceeds obtained in the sale of a defaulted residential mortgage
loan. The Company recorded such disposition fees totalling approximately
$1,000 and $7,000 during the three months ended March 31, 2001 and 2000,
respectively. These disposition fees are included in other noninterest
expense in the accompanying statements of income.
In its capacity as servicer, FNMC holds mortgage loan payments received on
behalf of the Company in a custodial account at the Bank. The balance of
this account totalled approximately $34.7 million and $15.1 million at
March 31, 2001 and December 31, 2000, respectively, and is included in due
from affiliates. Substantially all of such payments were passed through to
the Company in April 2001 and January 2001, respectively, as provided in
the Servicing Agreement. At March 31, 2001 and December 31, 2000, trust
funds of approximately $1.2 million and $1.4 million, respectively,
representing escrows received from borrowers, were on deposit in a trust
account at the Bank and are not included in the accompanying financial
statements.
As of March 31, 2001 and December 31, 2000, the Company owed the Bank
approximately $11.4 million and $56,000, respectively. The $11.4 million
due to the Bank at March 31, 2001 primarily represented $11.4 million of
preferred stock dividends that were paid by the Bank on behalf of the
Company. The $56,000 owed to the Bank at December 31, 2000 related to
amounts incurred in connection with the settlement of loans purchased from
the Bank, advances related to foreclosed real estate and expenses incurred
by the Company to be reimbursed to the Bank. These amounts were paid to the
Bank during April 2001 and January 2001, respectively.
(5) Newly Issued Accounting Pronouncements
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
On September 29, 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities ("SFAS No. 140"). SFAS No. 140
replaces SFAS No. 125, which was issued in June of 1996. It revises the
standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it
carries over most of the provisions of SFAS No. 125 without
reconsideration. In general, SFAS No. 140 is effective for transfers of
financial assets occurring after March 31, 2001 and for disclosures
relating to securitization transactions and collateral for fiscal years
ending after December 15, 2000.
The implementation of SFAS No. 140 is not expected to materially impact the
Company's financial results.
Recognition of Interest Income and Impairment on Purchased and Returned
Beneficial Interests in Securitized Financial Assets
On September 21, 2000, the Emerging Issues Task Force ("EITF") issued EITF
No. 99-20, Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets ("EITF No.
99-20"). This document, which is effective in the second quarter of 2001,
establishes guidance for (1) recognizing interest income (including
amortization of premiums or discounts) on (a) all credit-sensitive mortgage
and asset-backed securities and (b) certain prepayment-sensitive securities
including agency interest-only strips and (2) determining when these
securities must be written down to fair value because of impairment.
Existing GAAP did not provide interest recognition and impairment guidance
for securities on which cash flows change as a result of both prepayments
and credit losses and, in some cases interest rate adjustments.
The implementation of EITF No. 99-20 is not expected to materially impact
the Company's financial results.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements. This Report contains forward-looking statements,
within the meaning of the Private Securities Litigation Reform Act of 1995, that
pertain to our future operating results. Words such as "anticipate," "believe,"
"expect," "intend," and other similar expressions are intended to identify these
statements. Forward-looking statements are not historical facts and are
inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control. Our
actual results could differ materially from those in the forward-looking
statements due to such factors as (i) the Company's dependence upon the
operations of its affiliated servicer and upon the financial condition and
operations of its parent, California Federal Bank; (ii) regulatory restrictions
on the Company's operations; (iii) interest rate changes; (iv) declines in real
estate values and increases in uncollected or uncollectable mortgage loans; (v)
the concentration of the Company's portfolio in loans secured by residential
properties located in California; (vi) the inclusion of high balance mortgage
loans in the Company's portfolio; (vii) changes made by the Company's Board of
Directors in the Company's investment and operating policies and strategies,
including whether or not to incur indebtedness; and (viii) failure to qualify as
a real estate investment trust for federal income tax purposes. In January 1997,
we filed an S-11 Registration Statement with the SEC that discusses these
factors in greater detail. We assume no obligation to update any of our
forward-looking statements.
FINANCIAL HIGHLIGHTS
The following information is presented as of March 31, 2001 and for the three
months ended March 31, 2001 and 2000 (dollars in thousands):
2001 2000
---- ----
Statements of Income - Three Months Ended March 31:
Net interest income $ 17,758 $ 16,913
Net income $ 17,732 $ 16,873
Average yield on mortgage loans 7.06% 6.75%
Balance Sheet as of March 31, 2001:
Residential mortgage loans, net $ 951,947
Total assets $1,017,799
Total stockholders' equity $1,006,177
OVERVIEW
The Company's principal business objective is to acquire, hold and manage
residential mortgage loans that will generate net income for distribution to
stockholders. The Company currently intends to invest in residential mortgage
loans only. The Company's current policy prohibits the acquisition of any
mortgage loan which is delinquent at the time of the proposed acquisition or
which meets certain criteria for non-performance during the preceding 12 months.
The Company currently expects that substantially all of the residential mortgage
loans to be acquired will be adjustable rate loans; however, the Company may
from time to time acquire fixed interest rate residential mortgage loans. The
Company anticipates it will continue to acquire all of its residential mortgage
loans from the Bank or affiliates of the Bank as whole loans secured by first
mortgages or deeds of trust on 1-4 unit residential real estate properties,
although mortgage loans may be acquired from unaffiliated third parties. The
Company may from time to time acquire fixed rate or variable rate
mortgage-backed securities issued or guaranteed by agencies of the federal
government or government sponsored agencies. The mortgage loans underlying the
mortgage-backed securities will be secured by single-family residential,
multifamily or commercial real estate properties located throughout the United
States.
On January 31, 1997, the Company commenced its operations upon the initial
public offering of 20,000,000 shares of the Company's 9 1/8% Noncumulative
Exchangeable Preferred Stock, Series A (the "Series A Preferred Shares"), which
raised $500 million. The Series A Preferred Shares are traded on the New York
Stock Exchange under the trading symbol "CFP." Concurrent with the sale of the
Series A Preferred Shares, the Bank contributed additional capital of $500
million to the Company. All common shares are held by the Bank.
9
RESULTS OF OPERATIONS
Three months ended March 31, 2001 versus three months ended March 31, 2000
Net Income. The Company reported net income for the three months ended March 31,
2001 of $17.7 million compared with net income of $16.9 million for the
corresponding period in 2000. This increase in 2001 compared with 2000 is
attributable to an increase in net interest income.
During each of the three month periods ended March 31, 2001 and 2000, the
Company declared and paid dividends of $11.4 million on the outstanding Series A
Preferred Shares. Net income available to the common stockholder for the three
months ended March 31, 2001 and 2000 totalled $6.3 million and $5.5 million,
respectively. There were no common stock dividends paid during the three months
ended March 31, 2001 or 2000.
Net Interest Income. The Company reported interest income, net of servicing fee
expense, for the three months ended March 31, 2001 of $17.8 million, an increase
of $845,000 from the $16.9 million reported for the three month period ended
March 31, 2001. This increase in interest income is attributed to a higher
average yield on the residential mortgage loan portfolio. The higher yield of
7.06% on residential mortgage loans during the three month period ended March
31, 2001 as compared to the 6.75% yield for the same period in 2000 is primarily
due to the lagging effect of the repricing of variable rate loans at higher
rates during the year 2000. The average outstanding balance of residential
mortgage loans during the three month period ended March 31, 2001 was $1.5
million higher than during the same period in 2000. Interest income, net of
servicing fee expense, during the three months ended March 31, 2001 is comprised
of $17.6 million ($18.5 million gross interest less $929,000 servicing fee
expense) from residential mortgage loans and $205,000 from short-term
investments, representing an average yield after servicing fees on residential
mortgage loans of 7.06% and on earning assets of 7.04%, based on average
outstanding asset balances of $994.2 million and $1,009.3 million, respectively.
Interest income, net of servicing fee expense, during the three months ended
March 31, 2000 is comprised of $16.7 million ($17.6 million gross interest less
$904,000 servicing fee expense) from residential mortgage loans and $172,000
from short-term investments, representing an average yield after servicing fees
on residential mortgage loans of 6.75% and on earning assets of 6.73%, based on
average outstanding asset balances of $992.7 million and $1,006.1 million,
respectively.
The computation of the average yield on residential mortgage loans and on
earning assets is based on daily average outstanding asset balances that include
nonaccruing loans and the amount of principal payments collected by FNMC but not
yet remitted to the Company, which is included in due from affiliates on the
balance sheets.
Provision for Loan Losses. The Company recorded no provision for loan losses in
either of the three month periods ended March 31, 2001 and 2000. The
determination to record no provision for loan losses during these periods is the
result of management's evaluation of the adequacy of the allowance for loan
losses based on, among other things, the Bank's and the Company's past loan loss
experience, known and inherent risks in the residential mortgage loan portfolio,
adverse situations that have occurred but are not yet known and that may affect
the borrower's ability to repay, the estimated value of the underlying
collateral, and economic conditions.
RESIDENTIAL MORTGAGE LOANS
The Company reinvests principal collections in additional residential mortgage
loans purchased from either the Bank or its affiliates on a periodic basis.
It is the Company's policy to place a loan on nonaccrual when a borrower is 90
days or more delinquent. There were no accruing loans contractually past due 90
days or more at March 31, 2001 or December 31, 2000.
10
The following table reflects residential mortgage loans with past due principal
and interest payments as of March 31, 2001 and December 31, 2000:
March 31, 2001 December 31, 2000
-------------- -----------------
Principal Balance Percent Principal Balance Percent
(in thousands) of Total Loans (in thousands) of Total Loans
-------------- -------------- -------------- --------------
30 to 59 days past due $2,287 0.24% $1,775 0.18%
60 to 89 days past due 1,246 0.13% 1,162 0.12%
90 days or more past due 746 0.08% 1,628 0.17%
------ ---- ------ ----
$4,279 0.45% $4,565 0.47%
====== ==== ====== ====
ALLOWANCE FOR LOAN LOSSES
As of March, 2001, the Company has allocated $142,000 of its allowance for loan
losses against specific problem loans, with the remaining $7.5 million available
to absorb potential loan losses from the entire residential mortgage loan
portfolio. The Company deems its allowance for loan losses as of March 31, 2001
to be adequate. Although the Company believes that it has sufficient allowances
to absorb losses which currently exist in the portfolio, the precise loss is
subject to continuing review based on quality indicators, industry and
geographic concentrations, changes in business conditions, and other external
factors such as competition, legal and regulatory requirements. The Company will
continue to periodically reassess the adequacy of the allowance for loan losses.
The following table reflects the activity in the Company's allowance for loan
losses for the three months ended March 31, 2001 and 2000 (in thousands):
2001 2000
---- ----
Balance - January 1 $ 7,641 $ 7,883
Provision for loan losses -- --
Recoveries (charge-offs), net 17 (35)
------- -------
Balance - March 31 $ 7,658 $ 7,848
======= =======
The Company's allowance coverage ratio (allowance for loan losses to loans) at
March 31, 2001 and December 31, 2000 was 0.80% and 0.78%, respectively.
INTEREST RATE RISK
The Company's income consists primarily of interest payments on residential
mortgage loans. The Company anticipates that most of its residential mortgage
loans will bear interest at adjustable rates. If there is a decline in interest
rates (as measured by the indices upon which the interest rates of the
residential mortgage loans are based), then the Company will experience a
decrease in income available to be distributed to its stockholders. In such an
interest rate environment the Company may experience an increase in prepayments
on its residential mortgage loans and may find it more difficult to purchase
additional residential mortgage loans bearing rates sufficient to support
payment of the dividends on the Series A Preferred Shares. In addition, certain
residential mortgage loan products which the Company holds will allow borrowers
in such an interest rate environment to convert an adjustable rate mortgage to a
fixed rate mortgage, thus "locking in" a lower fixed interest rate. Because the
dividend rate on the Series A Preferred Shares is fixed, there can be no
assurance that an interest rate environment in which there is a significant
decline in interest rates would not adversely affect the Company's ability to
pay such dividends.
Residential mortgage loans which have interest rates that adjust monthly based
upon the FHLB Eleventh District Cost of Funds limit payment changes to no more
than 7.5% of the payment amount per year. This may lead to monthly payments
which are less than the amount necessary to amortize the loan to maturity at the
interest rate in effect for any particular month. In the event that the monthly
payment is not sufficient to pay interest accruing on the loan during the month,
this deficiency is added to the loan's principal balance (i.e., negative
amortization). The total outstanding
11
principal balance for a particular loan is generally not allowed to exceed 125%
of the original loan amount as a result of negative amortization. Every five
years and at any time the loan reaches its maximum amount, the loan payment is
recalculated to the payment sufficient to repay the unpaid balance in full at
the maturity date. Approximately $160.4 million and $172.2 million of the
residential mortgage loans held by the Company at March 31, 2001 and December
31, 2000, respectively, had the potential to negatively amortize, while
approximately $16.8 million and $18.9 million of the residential mortgage loans
had negatively amortized such that the current principal balance of the loan
exceeded the original principal balance at March 31, 2001 and December 31, 2000,
respectively. The current principal balance exceeded the original principal
balance on those loans by approximately $656,000 and $712,000 as of March 31,
2001 and December 31, 2000, respectively. If there is an increase in interest
rates on such residential mortgage loans (as measured by the indices upon which
the interest rates of the residential mortgage loans are based), where such
increase in the interest rate does not coincide with a corresponding adjustment
of the borrower's monthly payment, the Company may experience a decrease in cash
available to be distributed to its common stockholder.
SIGNIFICANT CONCENTRATION OF CREDIT RISK
Certain geographic regions of the United States from time to time may experience
natural disasters or weaker regional economic conditions and housing markets
and, consequently, may experience higher rates of loss and delinquency on
residential mortgage loans generally. Any concentration of the residential
mortgage loans in such a region may present risks in addition to those generally
present with respect to residential mortgage loans.
The Company's exposure to geographic concentrations directly affects the credit
risk of the residential mortgage loans within the portfolio. The following table
shows the residential mortgage loan portfolio by geographical area as of March
31, 2001:
Book Value
(in thousands) Percent
-------------- -------
California $ 801,387 83.5 %
Florida 26,558 2.8
New York 17,753 1.9
Nevada 14,940 1.6
Texas 12,572 1.3
Hawaii 10,898 1.1
Colorado 9,850 1.0
Other states (32 states and Washington, D.C.; no state has more than 1%) 65,647 6.8
----------- -----
$ 959,605 100.0 %
=========== =====
The 83.5% of the Company's total residential mortgage loan portfolio comprised
of loans secured by residential real estate properties located in California may
be subject to a greater risk of default than other comparable residential
mortgage loans in the event of natural hazards or other adverse conditions in
California that may affect the ability of residential property owners in
California to make payments of principal and interest on underlying mortgages.
LIQUIDITY RISK MANAGEMENT
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Company's financial commitments and to
capitalize on opportunities for the Company's business expansion. In managing
liquidity, the Company takes into account various legal limitations placed on a
Real Estate Investment Trust ("REIT"). See " --Other Matters."
The Company's principal liquidity needs are to maintain the current portfolio
size through the acquisition of additional residential mortgage loans and to pay
dividends on the Series A Preferred Shares. The acquisition of additional
residential mortgage loans is funded with the proceeds obtained from repayment
of principal balances by individual mortgagees. The payment of dividends on the
Series A Preferred Shares will be made from legally available funds, principally
arising from the operating activities of the Company. The Company's cash flows
from operating activities principally consist of the collection of interest on
the residential mortgage loans. The Company does not have and does not
anticipate having any material capital expenditures.
In order to remain qualified as a REIT, the Company must distribute annually at
least 90% of its REIT taxable income, as provided for under the Internal Revenue
Code ("IRC"), to its common and preferred stockholders. Prior to 2001, the
12
Company was required to distribute 95% of its REIT taxable income. The Company
currently expects to distribute dividends annually to satisfy these REIT
requirements.
The Company anticipates that cash and cash equivalents on hand and the cash flow
from the residential mortgage loans will provide adequate liquidity for its
operating, investing and financing needs.
As presented in the accompanying statement of cash flows, the primary sources of
funds during the three months ended March 31, 2001 were $29.2 million provided
by operating activities and $52.8 million provided by mortgage loan principal
repayments. The primary uses of funds were $53.6 million in purchases of
mortgage loans and $11.4 million in preferred stock dividends paid.
OTHER MATTERS
As of March 31, 2001, the Company was in full compliance with the REIT tax rules
and believes that it will continue to qualify as a REIT under the provisions of
the IRC. The Company calculates:
a. its Qualified REIT Assets, as defined in the Code, to be 97% of its total
assets, as compared to the Federal tax requirements that at least 75% of
its total assets must be Qualified REIT assets; and
b. that 99% of its revenue qualifies for the 75% source of income test and 98%
of its revenue qualifies for the 95% source of income test under the REIT
rules.
The Company also met all REIT requirements regarding the ownership of its stock
and anticipates meeting the annual distribution requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in reported market risks faced by the
Company since the Company's report in Item 7A of its Form 10-K for the year
ended December 31, 2000.
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 of its affiliates 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 6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Amended and Restated Charter of the Registrant
(Incorporated by reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997).
3.1 By-laws of the Registrant, as amended (Incorporated
by reference to Exhibit 3(b) to Amendment No. 2 to
the Registrant's Registration Statement on Form S-11
(File No. 333-11609)).
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed during the quarter
ended March 31, 2001.
14
SIGNATURE
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.
California Federal Preferred Capital Corporation
/s/ Richard H.Terzian
-------------------------------------------------------------
By: Richard H. Terzian
Executive Vice President, Chief Financial Officer and Director
(Signing on behalf of the Registrant and as the Principal
May 8, 2001