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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: September 30, 1997
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Commission file number: 1-12639
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CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
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(Exact name of registrant as specified in its charter)
Maryland 94-3254883
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(State or other jurisdiction of (I.R.S. employer Identification no.)
incorporation or 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.
Yes...X.... No.....
Number of shares outstanding of registrant's common stock $0.01 par
value on November 7, 1997: 1,000 shares
Page 1 of 24 pages
Exhibit index on page 20
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CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
THIRD QUARTER 1997 REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
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PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Financial Condition
September 30, 1997 (unaudited) 3
Statements of Operations
Nine Months and Three Months
ended September 30,1997 (unaudited) 4
Statement of Cash Flows
Nine Months ended September 30, 1997 (unaudited) 5
Notes to Unaudited Financial Statements 6-11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 12-18
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Current Reports on Form 8-K 20
Signature 21
2
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CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
STATEMENT OF FINANCIAL CONDITION
September 30, 1997
(Unaudited)
(dollars in thousands, except per share data)
ASSETS:
Residential mortgage loans, net $ 964,519
Short-term investments 20,894
Due from affiliates 23,897
Accrued interest receivable 5,711
Foreclosed real estate 262
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TOTAL ASSETS $1,015,283
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LIABILITIES:
Due to affiliates $ 77
Accounts payable and accrued liabilities 286
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TOTAL LIABILITIES 363
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Commitments and contingencies --
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share,
liquidation value $25.00 per share,
30,000,000 shares authorized, 20,000,000
shares issued and outstanding 500,000
Common stock, par value $.01 per share,
30,000,000 shares authorized, 1,000
shares issued and outstanding --
Additional paid-in capital 500,000
Retained earnings 14,920
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TOTAL STOCKHOLDERS' EQUITY 1,014,920
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,015,283
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See accompanying notes to unaudited financial statements.
3
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CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
Nine Months and Three Months Ended September 30, 1997
(Unaudited)
(in thousands)
NINE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
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NET INTEREST INCOME:
Residential mortgage loans $48,869 $19,550
Less: servicing fee expense (2,410) (918)
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46,459 18,632
Short-term investments 787 373
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Net interest income 47,246 19,005
Provision for loan losses (1,680) (630)
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Net interest income after
provision for loan losses 45,566 18,375
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NONINTEREST EXPENSE:
Director fees 34 --
Professional fees 37 14
Other 32 12
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Total noninterest expense 103 26
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NET INCOME 45,463 18,349
Preferred stock dividends 30,543 11,406
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NET INCOME AVAILABLE TO COMMON
STOCKHOLDER $14,920 $ 6,943
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See accompanying notes to unaudited financial statements.
4
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CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 1997
(Unaudited)
(in thousands)
OPERATING ACTIVITIES:
Net income $ 45,463
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of deferred loan fees and
direct origination costs and
purchase discounts and premiums, net 120
Provision for loan losses 1,680
Increase in due from affiliates (342)
Decrease in accrued interest receivable 858
Increase in due to affiliates 77
Increase in accounts payable and accrued liabilities 286
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Net cash provided by operating activities 48,142
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INVESTING ACTIVITIES:
Purchase of mortgage loans (1,117,112)
Mortgage loan principal repayments 126,976
Purchase of accrued interest receivable (6,569)
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Net cash used by investing activities (996,705)
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FINANCING ACTIVITIES:
Proceeds from capital contributed by Bank 500,000
Proceeds from preferred stock issued 500,000
Preferred stock dividends paid (30,543)
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Net cash provided by financing activities 969,457
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NET INCREASE IN CASH AND CASH EQUIVALENTS 20,894
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD --
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CASH AND CASH EQUIVALENTS AT SEPTEMBER 30, 1997 $ 20,894
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See accompanying notes to unaudited financial statements.
5
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CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
California Federal Preferred Capital Corporation, formerly First Nationwide
Preferred Capital Corporation (the "Company"), is a Maryland corporation
incorporated on November 19, 1996 which was created for the purpose of
acquiring, holding and managing real estate assets. The Company's outstanding
common stock is wholly-owned by California Federal Bank, A Federal Savings Bank
(the "Bank").
On January 31, 1997, the Company commenced its operations with the consummation
of an initial public offering of 20,000,000 shares of the Company's 9.125%
Noncumulative Exchangeable Preferred Stock, Series A (the "Series A Preferred
Shares"), $0.01 par value, which raised $500,000,000. The Series A Preferred
Shares are traded on the New York Stock Exchange. Expenses incurred relative to
the offering and the formation of the Company were borne by the Bank.
Concurrent with the issuance of the Series A Preferred Shares, the Bank
contributed additional capital of $500,000,000 to the Company.
The Company used the proceeds raised from the initial public offering of the
Series A Preferred Shares and the additional capital contributed by the Bank to
purchase from the Bank the Company's initial portfolio of residential mortgage
loans at their estimated fair value of $996,489,000. The residential mortgage
loans were recorded in the accompanying financial statements at the Bank's
historical cost basis which approximates their estimated fair values. The
Company has entered into a servicing agreement with the Bank's wholly-owned
mortgage banking subsidiary, First Nationwide Mortgage Corporation ("FNMC") to
service the Company's mortgage assets.
The accompanying financial statements 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 and nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the entire
fiscal year or any other interim period.
The financial statements should be read in conjunction with the statement of
financial condition and accompanying note thereto as of December 31, 1996
included in the Company's Registration Statement on Form S-11. All terms used
but not defined elsewhere herein have meanings ascribed to them in the
Company's Registration Statement on Form S-11.
As the Company's common stock is wholly owned by the Bank, earnings per share
data is not presented.
A statement of financial condition at December 31, 1996 is not presented as
operations did not commence until January 31, 1997.
6
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CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Residential Mortgage Loans:
Residential mortgage loans are carried at the principal amount
outstanding, net of unamortized deferred loan fees and direct
origination costs and purchase discounts and premiums. Deferred loan
fees and direct origination costs and discounts or premiums on
one-to-four-family residential mortgage loans are accreted or
amortized to income using the interest method over the contractual
term of the loans. Unaccreted or unamortized discounts or premiums on
loans sold or paid in full are recognized in income at the time of
sale or payoff. It is the Company's policy to place a loan on
non-accrual status in the event that a borrower is 90 days or more
delinquent. When a loan is placed on non-accrual status, the accrued
and unpaid interest receivable is reversed. Amortization of premiums,
discounts and deferred fees net of deferred direct origination costs
associated with loans that are on non-accrual status are discontinued.
Income is subsequently recognized only to the extent that cash
payments are received. When, in management's judgment, the borrower's
ability to make periodic interest and principal payments resumes, the
loan is returned to accrual status.
Under Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan" ("SFAS No. 114"), as amended by
Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures" ( "SFAS No. 118"), a loan is impaired when it is
"probable" that a creditor will be unable to collect all amounts due
(i.e., both principal and interest) according to the contractual terms
of the loan agreement. The measurement of impairment may be based on
(i) the present value of the expected future cash flows of the
impaired loan discounted at the loan's original effective interest
rate, (ii) the observable market price of the impaired loan, or (iii)
the fair value of the collateral of a collateral-dependent loan. SFAS
No. 114 does not apply to large groups of smaller balance homogeneous
loans that are collectively evaluated for impairment. The Company
collectively reviews its portfolio of residential mortgage loans for
impairment.
Residential mortgage loans consist primarily of adjustable rate
mortgages 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.
7
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CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(b) Allowance for Loan Losses:
The allowance for loan losses is a general allowance which is
increased by charges to income and decreased by charge-offs (net of
recoveries). Management's periodic evaluation of the adequacy of the
allowance is based on such factors as the Bank's and the Company's
past loan loss experience, delinquency trends, known and inherent
risks in the portfolio, potential adverse situations that may affect
the borrower's ability to repay, the estimated value of underlying
collateral, and current and prospective economic conditions.
Although management believes that its present allowance for loan
losses is adequate, it will continue to review its loan portfolio to
determine the extent to which any changes in loss experience may
require additional provisions in the future.
(c) Cash and Cash Equivalents:
For purposes of the statement of cash flows, cash and cash equivalents
include cash and amounts due from banks, and other short-term
investments with original maturities of three months or less.
(d) Income Taxes:
The Company will elect to be treated as a Real Estate Investment Trust
("REIT") for Federal income tax purposes and intends to comply with
the provisions of the Internal Revenue Code of 1986 (the "IRC"), as
amended. Accordingly, the Company will not be subject to Federal
income tax to the extent it distributes its income to shareholders and
as long as certain asset, income and stock ownership tests are met in
accordance with the IRC. As the Company expects to qualify as a REIT
for Federal income tax purposes, no provision for income taxes is
included in the accompanying financial statements.
NOTE 3 - RESIDENTIAL MORTGAGE LOANS, NET
At September 30, 1997, residential mortgage loans, net consisted of the
following (in thousands):
1-4 Unit residential mortgage loans $970,741
Deferred loan fees and direct origination costs
and purchase discounts and premiums, net 458
Allowance for loan losses (6,680)
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Total residential mortgage loans, net $964,519
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8
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CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 4 - DIVIDENDS
Holders of Series A Preferred Shares 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 9.125% 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
the nine months ended September 30, 1997 to the holders of the Series A
Preferred Shares totaled approximately $30,543,000.
Dividends on common stock are paid when, as and if authorized and declared by
the Board of Directors out of funds legally available after all preferred
dividends have been paid. There were no common dividends paid during the nine
months ended September 30, 1997.
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company entered into a servicing agreement with 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
can be terminated without cause with at least 30 days 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
totaled $2,410,000 and $918,000 for the nine and three months ended September
30, 1997, respectively. FNMC is also entitled to a 1% disposition fee on the
aggregate proceeds obtained in the sale of a defaulted residential mortgage
loan. No disposition fees were earned during the nine months and three months
ended September 30, 1997.
In its capacity as servicer, FNMC holds in custodial accounts at the Bank
mortgage loan payments received on behalf of the Company. The balance of such
accounts totaled approximately $23,897,000 at September 30, 1997 and was
recorded as due from affiliates. Substantially all of such payments were passed
through to the Company in October as provided in the servicing agreement. At
September 30, 1997, trust funds of approximately $2,489,000, representing
escrows received from borrowers, are on deposit in a trust account at the Bank
and are not included in the accompanying unaudited financial statements.
As of September 30, 1997 the Company owed the Bank approximately $77,000 in
connection with the settlement of loans purchased from the Bank and expenses
incurred by the Company to be reimbursed to the Bank. This amount was paid to
the Bank during October 1997.
9
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CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 6 - NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
On June 28, 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes
liabilities when extinguished. This statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings.
In December 1996, the FASB issued Statement of Financial Accounting Standards
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125" ("SFAS No. 127"). SFAS No. 127 defers for one year the
effective date (i) of paragraph 15 of SFAS No. 125 and (ii) of paragraphs 9-12
and 237(b) of SFAS No. 125 for repurchase agreement, dollar-roll, securities
lending and similar transactions. SFAS No. 127 provides additional guidance on
the types of transactions for which the effective date of SFAS No. 125 has been
deferred. It also requires that if it is not possible to determine whether a
transaction occurring during calendar-year 1997 is part of a repurchase
agreement, dollar-roll, securities lending or similar transaction, then
paragraphs 9-12 of SFAS No. 125 should be applied to that transfer. The Company
adopted SFAS No. 125, as amended by SFAS No. 127, on January 1, 1997. Such
adoption did not have a material impact on the Company's financial statements.
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 129, "Disclosure of Information about Capital Structure" ("SFAS No. 129").
SFAS No. 129 establishes standards for disclosing information about an entity's
capital structure and applies to all entities. This statement continues the
previous requirements to disclose certain information about an entity's capital
structure found in APB Opinions No. 10, Omnibus Opinion - 1966, and No. 15,
Earnings per Share, and FASB Statement No. 47, Disclosure of Long-Term
Obligations, for entities that were subject to the requirements of those
standards. This statement supersedes specific disclosure requirements of
Opinions 10 and 15 and Statement 47 and consolidates them in this statement for
ease of retrieval and for greater visibility to non-public entities. This
statement is effective for financial statements for periods ending after
December 15, 1997. It is not expected that the Company will experience any
material revision in its disclosures when SFAS No. 129 is adopted.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements.
10
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CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
It does not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive income
for the period in that financial statement. This statement is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comprehensive purposes is required.
This statement has no impact on the financial condition or results of
operations of the Company, but will require changes in the Company's disclosure
requirements.
11
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
(formerly First Nationwide Preferred Capital Corporation)
The statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities and Exchange Act
of 1934, including statements regarding the Company's expectations, intentions,
beliefs or strategies regarding the future. Forward-looking statements include
the Company's statements regarding liquidity, provision for loan losses,
capital resources and investment activities in "Management's Discussion and
Analysis of Financial Condition and Results of Operations." In addition, in
those and other portions of this document, the words "anticipate," "believe,"
"estimate," "expect," "intend," and other similar expressions, as they relate
to the Company or the Company's management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. It is important to note that the Company's
actual results could differ materially from those described herein as
anticipated, believed, estimated or expected. Among the factors that could
cause results to differ materially are the risks discussed in the "Risk
Factors" section included in the Company's Registration Statement on Form
S-11(File No. 333-11609), with respect to the Series A Preferred Shares
declared effective by the Securities and Exchange Commission on January 24,
1997. The Company assumes no obligation to update any such forward-looking
statement.
FINANCIAL HIGHLIGHTS
As of September 30, 1997 and for the Nine Months and
Three Months Ended September 30, 1997
(dollars in thousands)
NINE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
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STATEMENTS OF OPERATIONS:
Net interest income $ 47,246 $19,005
Net interest income after provision
for loan losses $ 45,566 $18,375
Net income $ 45,463 $18,349
Average yield on mortgage loans 7.22% 7.55%
STATEMENT OF CONDITION AS OF
SEPTEMBER 30, 1997:
Residential mortgage loans, net $ 964,519
Total assets $1,015,283
Total stockholders' equity $1,014,920
12
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OVERVIEW
California Federal Preferred Capital Corporation'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 single-family (one-to-four-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 Series A Preferred
Shares, which raised $500,000,000. The Series A Preferred Shares are traded on
the New York Stock Exchange. Concurrent with the sale of the Series A Preferred
Shares, the Bank contributed additional capital of $500,000,000 to the Company.
All common shares are held by the Bank.
The Bank and its affiliates are involved in virtually every aspect of the
Company's existence. FNMC services the Company's residential mortgage loans in
its role as Servicer under the Servicing Agreement.
The Bank and its affiliates may have interests which are not identical to those
of the Company. Consequently, conflicts of interest may arise with respect to
transactions, including without limitation, (i) future acquisitions of
residential mortgage loans from, or sales of residential mortgage loans to, the
Bank, FNMC or their affiliates and (ii) the modification of the Servicing
Agreement.
It is the intention of the Company and the Bank that any agreements and
transactions between the Company on the one hand and the Bank or one of its
affiliates on the other hand are fair to all parties and consistent with market
terms for such types of transactions. The requirement in the Company's charter
that certain actions of the Company be approved by a majority of the
independent directors is also intended to promote fair dealings between the
Company and the Bank and its affiliates. However, there can be no assurance
that such agreements or transactions will be on terms as favorable to the
Company as would have been obtained from unaffiliated third parties.
13
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RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997
The Company reported net interest income of approximately $47,246,000 for the
nine months ended September 30, 1997 which was comprised of approximately
$46,459,000 ($48,869,000 gross interest income less $2,410,000 servicing fee
expense) from residential mortgage loans and $787,000 from short-term
investments, representing an average yield after servicing fees on residential
mortgage loans of 7.22% and on earning assets of 7.16%, based on average
outstanding asset balances of approximately $858,434,000 and $880,238,000,
respectively. The computation of the average yields on residential mortgage
loans and on earning assets is based on average outstanding asset balances that
include the amount of principal payments collected by FNMC but not yet remitted
to the Company included in due from affiliates on the statement of financial
condition. Net interest income after a $1,680,000 provision for loan losses was
approximately $45,566,000. After deduction of approximately $34,000 in director
fees, $37,000 in professional fees and $32,000 in other expenses, the Company
reported net income of approximately $ 45,463,000.
During the nine months ended September 30, 1997, the Company declared and paid
dividends of approximately $30,543,000 on the outstanding Series A Preferred
Shares. Net income available to the common stockholder for the nine months
ended September 30, 1997 totaled $14,920,000.
Three Months Ended September 30, 1997
The Company reported net interest income of approximately $19,005,000 for the
three months ended September 30, 1997 which was comprised of approximately
$18,632,000 ($19,550,000 gross interest income less $918,000 servicing fee
expense) from residential mortgage loans and $373,000 from short-term
investments, representing an average yield after servicing fees on residential
mortgage loans of 7.55% and on earning assets of 7.49%, based on average
outstanding asset balances of approximately $987,171,000 and $1,015,306,000,
respectively. The computation of the average yields on residential mortgage
loans and on earning assets is based on average outstanding asset balances that
include the amount of principal payments collected by FNMC but not yet remitted
to the Company included in due from affiliates on the statement of financial
condition. Net interest income after a $630,000 provision for loan losses was
approximately $18,375,000. After deduction of approximately $14,000 in
professional fees and $12,000 in other expenses, the Company reported net
income of approximately $18,349,000.
During the three months ended September 30, 1997, the Company declared and paid
dividends of approximately $11,406,000 on the outstanding Series A Preferred
Shares. Net income available to the common stockholder for the three months
ended September 30, 1997 totaled $6,943,000.
14
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RESIDENTIAL MORTGAGE LOANS
The Company used the proceeds from its offering of Series A Preferred Shares,
coupled with a capital contribution from the Bank, to purchase the Company's
initial portfolio of residential mortgage loans with estimated fair values
totaling approximately $996,489,000. The Company used principal collections to
purchase additional residential mortgage loans totaling approximately
$120,623,000 during the nine months ended September 30, 1997. As of September
30, 1997, the Company had $964,519,000 invested in net residential mortgage
loans, representing a 3.2% decline in the initial amount invested principally
due to principal collections. Management intends to continue to reinvest
principal collections in additional residential mortgage loans to be purchased
from either the Bank or its affiliates on a periodic basis.
At September 30, 1997, nonaccruing residential mortgage loans totaled
$2,058,000, or .21% of the total portfolio.
The following table reflects residential mortgage loans with past due principal
and interest payments as of September 30, 1997:
Principal Balance Percent
(in thousands) of Total Loans
- -------------------------------------------------------------------------------
30 to 59 days past due $ 1,964 .20%
60 to 89 days past due $ 2,631 .27%
90 days or more past due $ 2,058 .21%
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ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is available to absorb potential loan losses from
the entire residential mortgage loan portfolio. The Company deems its allowance
for loan losses as of September 30, 1997 to be adequate. Although the Company
considers that it has sufficient allowances to absorb losses that currently may
exist in the portfolio, but are not yet identifiable, the precise loss content
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 reassess the adequacy of the allowance for loan losses.
15
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The following table reflects the activity in the Company's allowance for loan
losses for the nine months ended September 30, 1997:
ALLOWANCE FOR LOAN LOSSES
(in thousands)
- -------------------------------------------------------------------------------
Balance - January 1, 1997 $ --
Allowance attributable to loans purchased from the Bank 5,000
Provision for loan losses 1,680
Charge-offs --
Recoveries --
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Balance - September 30, 1997 $ 6,680
=======
- -------------------------------------------------------------------------------
The Company's allowance coverage ratio (allowance for loan losses to loans at
period-end) at September 30, 1997 was .69%, while the Company's ratio of
allowance for loan losses to non-performing loans at September 30, 1997 was
325%.
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.
In addition, approximately 46% of the residential mortgage loans held by the
Company at September 30, 1997 have the potential to negatively amortize, while
approximately 11% of such loans have negatively amortized such that the current
principal balance of the loan exceeds the original principal balance. The
current principal balance exceeded the original principal balance by
approximately $1.9 million as of September 30, 1997. 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), the
Company may experience a decrease in cash available to be distributed to its
common stockholder where such increase in the interest rate does not coincide
with a corresponding adjustment of the borrowers' monthly payments.
16
<PAGE>
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
September 30, 1997:
Book Value
(in thousands) Percent
- -------------------------------------------------------------------------------
California $842,527 86.8%
Florida 38,595 4.0%
Other states (35 states and Washington, D.C.; no
state has more than 2%) 90,077 9.2%
-------- ------
$971,199 100.0%
======== ======
- -------------------------------------------------------------------------------
The 86.8% 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
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.
17
<PAGE>
In order to remain qualified as a REIT, the Company must distribute annually at
least 95% of its adjusted REIT taxable income, as provided for under the
Internal Revenue Code ("IRC"), to its common and preferred stockholders. The
Company currently expects to distribute dividends annually equal to
approximately 100% of the its adjusted REIT taxable income.
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 nine months ended September 30, 1997 were $500,000,000 from
the issuance of the Series A Preferred Shares, and $500,000,000 additional
capital contributed by the Bank. Additional significant sources of funds were
$48,142,000 provided by operating activities and $126,976,000 provided by
mortgage loan principal repayments. The primary uses of funds were
$1,117,112,000 and $6,569,000 in purchases of mortgage loans and accrued
interest receivable, respectively, and $30,543,000 in preferred stock dividends
paid.
OTHER MATTERS:
As of September 30, 1997, the Company believes that it was in full compliance
with the REIT tax rules and 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 98% of its
total assets, as compared to the Federal tax requirements that at
least 75% of its total assets must be Qualified REIT assets;
b. that 98% of its revenue qualifies for the 75% source of income test
and 100% of its revenue qualifies for the 95% source of income test
under the REIT rules; and
c. none of the revenues during the nine months ended September 30, 1997
was subject to the 30% income limitation under the REIT rules.
The Company also met all REIT requirements regarding the ownership of its stock
and anticipates meeting the annual distribution requirements.
18
<PAGE>
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.
19
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Current Reports on Form 8-K
No Current Reports on Form 8-K were filed during the quarter ended September
30, 1997.
INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED
EXHIBIT
NO. 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.)
3.2 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.
20
<PAGE>
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 Financial Officer)
November 12, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet and Statement of Income included in the Company's Form 10-Q for the period
ended September 30, 1997.
</LEGEND>
<CIK> 0001027283
<NAME> CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 0
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,894
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 971,199
<ALLOWANCE> 6,680
<TOTAL-ASSETS> 1,015,283
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 363
<LONG-TERM> 0
0
500,000
<COMMON> 0
<OTHER-SE> 514,920
<TOTAL-LIABILITIES-AND-EQUITY> 1,015,283
<INTEREST-LOAN> 46,459
<INTEREST-INVEST> 787
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 47,246
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 47,246
<LOAN-LOSSES> 1,680
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 103
<INCOME-PRETAX> 45,463
<INCOME-PRE-EXTRAORDINARY> 45,463
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,463<F1>
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.16
<LOANS-NON> 2,058
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 6,680
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,680
<FN>
<F1>Tag 43-Net income available to common stockholders: $14,920
</FN>
</TABLE>
