<PAGE>
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, 1998 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 (I.R.S. Employer Identification
incorporation or organization) No.)
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 7, 1998: 1,000 shares.
Page 1 of 17 pages
Exhibit index on page 13
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CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
FIRST QUARTER 1998 REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Balance Sheets
March 31, 1998 and December 31, 1997.......................................................3
Unaudited Statements of Income
Three months ended March 31, 1998 and 1997.................................................4
Unaudited Statements of Cash Flows
Three months ended March 31, 1998 and 1997.................................................5
Notes to Unaudited Financial Statements....................................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............................................8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................................................13
Item 6. Exhibits and Current Reports on Form 8-K..................................................13
2
<PAGE>
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
Balance Sheets
March 31, 1998 and December 31, 1997
(Unaudited)
(dollars in thousands, except per share data)
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Residential mortgage loans, net $ 951,623 $ 969,423
Cash and cash equivalents 14,328 6,382
Due from affiliates 35,846 19,800
Accrued interest receivable 5,602 5,399
Foreclosed real estate, net 1,037 491
------------ ------------
TOTAL ASSETS $ 1,008,436 $ 1,001,495
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to affiliates $ 157 $ --
Accounts payable and accrued liabilities 186 349
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Total Liabilities 343 349
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Commitments and contingencies
Stockholders' Equity:
Preferred stock, par value $0.01 per share, liquidation preference $500
million, 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 8,093 1,146
------------ ------------
Total Stockholders' Equity $ 1,008,093 $ 1,001,146
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,008,436 $ 1,001,495
============ ============
</TABLE>
See accompanying notes to unaudited financial statements.
3
<PAGE>
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
STATEMENTS OF INCOME
Three Months Ended March 31, 1998 and 1997
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
NET INTEREST INCOME
Residential mortgage loans $ 19,529 $ 11,539
Less: servicing fee expense (912) (564)
----------- ------------
18,617 10,975
Short-term investments 198 67
----------- -------------
Net interest income 18,815 11,042
Provision for loan losses (420) (420)
----------- ------------
Net interest income after provision for loan losses 18,395 10,622
----------- ------------
NONINTEREST EXPENSE
Director fees 10 34
Professional fees 10 7
Other 22 --
----------- ------------
Total noninterest expense 42 41
----------- ------------
NET INCOME 18,353 10,581
Preferred Stock dividends 11,406 7,731
----------- ------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 6,947 $ 2,850
=========== ============
</TABLE>
See accompanying notes to unaudited financial statements.
4
<PAGE>
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1998 and 1997
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 18,353 $ 10,581
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 (78) 22
Provision for loan losses 420 420
Increase in due from affiliates (501) (154)
(Increase)/decrease in accrued interest receivable 69 (245)
Increase/(decrease) in accounts payable and accrued liabilities (163) 7
Increase in due to affiliates 157 --
----------- -------------
Net cash provided by operating activities 18,257 10,631
----------- ------------
INVESTING ACTIVITIES:
Purchase of mortgage loans (57,805) (992,716)
Mortgage loan principal repayments 59,293 13,692
Purchase of accrued interest receivable (272) (6,179)
Proceeds from sales of foreclosed real estate 26 --
Foreclosed real estate advances funded (147) --
---------- ------------
Net cash provided by (used in) investing activities 1,095 (985,203)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from capital contributed by Bank -- 499,083
Proceeds from preferred stock issued -- 500,000
Preferred stock dividends paid (11,406) (7,731)
---------- -----------
Net cash provided by (used in) financing activities (11,406) 991,352
---------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,946 16,780
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,382 --
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,328 $ 16,780
=========== ============
</TABLE>
See accompanying notes to unaudited financial statements.
5
<PAGE>
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, 1998 are not necessarily indicative of the results that
may be expected for the entire fiscal year or any other interim period.
Certain amounts for the three month period in the prior year 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, 1997. 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,
A Federal Savings Bank (the "Bank"), earnings per share data is not
presented.
(2) Cash, Cash Equivalents and Statements of Cash Flows
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.
During the three months ended March 31, 1998, noncash activity included
transfers of $425,000 from residential mortgage loans to foreclosed real
estate. No such transfers occurred during the three months ended March
31, 1997.
In accordance with the servicing agreement, certain principal repayments
are not remitted by First Nationwide Mortgage Corporation ("FNMC"), in
its capacity as servicer, to the Company until the month following FNMC's
receipt of such repayments from mortgagors. The Company records mortgage
loan principal repayments during the period such repayments are received
by FNMC. During the three months ended March 31, 1998 and 1997, the
Company recorded principal reductions to residential mortgage loans which
exceeded cash received from FNMC for mortgage loan principal repayments
by $15,545,000 and $13,692,000, respectively. An equal offsetting
increase to due from affiliates was also recorded during each period.
(3) Residential Mortgage Loans, Net
At March 31, 1998 and December 31, 1997, residential mortgage loans, net,
consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------------- ---------------
<S> <C> <C>
1-4 unit residential mortgage loans $ 957,934 $ 976,155
Deferred loan fees and direct origination costs and purchase
discounts and premiums, net 858 578
Allowance for loan losses (7,169) (7,310)
-------------- ---------------
Total residential mortgage loans, net $ 951,623 $ 969,423
============= =============
</TABLE>
6
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CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
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.
(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 three months
ended March 31, 1998 and 1997 to the holders of the Series A Preferred
Shares totalled approximately $11,406,000 and $7,731,000, respectively.
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 three months ended March 31, 1998 and 1997.
(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 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 $912,000 and
$564,000 for the three months ended March 31, 1998 and 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. The Company recorded such disposition fees totalling
approximately $3,000 during the three months ended March 31, 1998. No
disposition fees were recorded during the three months ended March 31,
1997.
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 $35,846,000 and $19,640,000 at
March 31, 1998 and December 31, 1997, respectively, and is included in
due from affiliates. Substantially all of such payments were passed
through to the Company in April 1998 and January 1998, respectively, as
provided in the servicing agreement. At March 31, 1998 and December 31,
1997, trust funds of approximately $1,080,000 and $1,425,000,
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, 1998 the Company owed the Bank approximately $157,000 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 April 1998.
As of December 31, 1997 the Bank owed the Company approximately $160,000
in connection with proceeds from the Company's sale of a foreclosed real
estate property, offset by amounts related to the settlement of loans
purchased from the Bank and expenses incurred by the Company to be
reimbursed to the Bank. This amount was included in due from affiliates
on the balance sheet. The Bank paid this amount to the Company during
January 1998.
7
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CALIFORNIA FEDERAL 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 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," "deem," "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
The following information is presented as of March 31, 1998 and for the three
months ended March 31, 1998 and 1997 (dollars in thousands):
1998 1997
---------- ----------
Statements of Income:
Net interest income $ 18,815 $ 11,042
Net interest income after provision for loan losses $ 18,395 $ 10,622
Net income $ 18,353 $ 10,581
Average yield on mortgage loans 7.47% 7.16%
Balance Sheet as of March 31, 1998:
Residential mortgage loans, net $ 951,623
Total assets $1,008,436
Total stockholders' equity $1,008,093
8
<PAGE>
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
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 9.125% Noncumulative
Exchangeable Preferred Stock, Series A (the "Series A Preferred Shares"),
which raised $500,000,000. 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
$500,000,000 to the Company. All common shares are held by the Bank.
RESULTS OF OPERATIONS
Three Months ended March 31, 1998 versus Three Months ended March 31,
1997
Net Income. The Company reported net income for the three months ended March
31, 1998 of $18,353,000 compared with net income of $10,581,000 for the
corresponding period in 1997. This increase in 1998 over 1997 is attributable
to an increase in interest income and reflects three months of operations in
1998 versus two months of operations in 1997, as the Company commenced its
operations on January 31, 1997.
During the three months ended March 31, 1998 and 1997, the Company declared
and paid dividends of $11,406,000 and $7,731,000, respectively, on the
outstanding Series A Preferred Shares. Net income available to the common
stockholder for the three months ended March 31, 1998 and 1997 totalled
$6,947,000 and $2,850,000, respectively.
Interest Income. The Company reported net interest income of $18,815,000 for
the three months ended March 31, 1998, an increase of $7,773,000 over the
$11,042,000 net interest income reported for the corresponding period in 1997.
The increase is attributed primarily to volume, accounting for $7,147,000 of
the increase, while $495,000 relates to a higher average yield on the
portfolio. The average outstanding balance of residential mortgage loans
during the three month period ended March 31, 1998 was $383,013,000 higher
than during the same period in 1997, principally due to one less month of
operations in 1997 than in 1998. The higher yield of 7.47% on residential
mortgage loans during the three month period ended March 31, 1998 as compared
to 7.16% for the same period in 1997 primarily reflects the comparatively
higher rates on fully-indexed ARMs in 1998 versus 1997. Net interest income
during the three months ended March 31, 1998 is comprised of $18,617,000
($19,529,000 gross interest less $912,000 servicing fee expense) from
residential mortgage loans and $198,000 from short-term investments,
representing an average yield after servicing fees on residential mortgage
loans of 7.47% and on earning assets of 7.42%, based on average outstanding
asset balances of $996,247,000 and $1,013,869,000, respectively. Net interest
income after a $420,000 provision for loan losses was $18,395,000. Net
interest income during the three months ended March 31, 1997 is comprised of
$10,975,000 ($11,539,000 gross interest less $564,000 servicing fee expense)
from residential mortgage loans and $67,000 from short-term investments,
representing an average yield after servicing fees on residential mortgage
loans of 7.16% and on earning assets of 7.14%, based on average outstanding
asset balances of $613,234,000 and $618,036,000, respectively. Net interest
income after a $420,000 provision for loan losses was $10,622,000.
The computations of the average yields above 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, which is included in due from affiliates on the balance sheets.
9
<PAGE>
RESIDENTIAL MORTGAGE LOANS
During the three months ended March 31, 1997, 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. The Company reinvests principal collections in
additional residential mortgage loans purchased from either the Bank or its
affiliates on a periodic basis.
At March 31, 1998, nonaccruing residential mortgage loans totalled
$3,317,000, or 0.35% of the total portfolio.
The following table reflects residential mortgage loans with past due
principal and interest payments as of March 31, 1998:
<TABLE>
<CAPTION>
Principal Balance Percent
(in thousands) of Total Loans
- -------------------------------------------------------------------------------
<S> <C> <C>
30 to 59 days past due $ 2,102 0.22%
60 to 89 days past due $ 1,249 0.13%
90 days or more past due $ 3,317 0.35%
</TABLE>
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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 March 31, 1998 to be adequate. Although the
Company believes that it has sufficient allowances to absorb losses which
currently may exist in the portfolio, but are not yet identifiable, 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, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Balance - January 1 $ 7,310 $ --
Allowance attributable to loans purchased from the Bank -- 5,000
Provision for loan losses 420 420
Charge-offs (561) --
Recoveries -- --
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Balance - March 31 $ 7,169 $ 5,420
=========== ==========
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</TABLE>
The Company's allowance coverage ratio (allowance for loan losses to loans) at
March 31, 1998 was 0.75%, while the Company's ratio of allowance for loan
losses to nonaccruing loans at March 31, 1998 was 216%.
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
10
<PAGE>
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 40% of the residential mortgage loans held by the
Company at March 31, 1998 have the potential to negatively amortize, while
approximately 9% 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 March 31, 1998. 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.
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, 1998:
<TABLE>
<CAPTION>
Book Value
(in thousands) Percent
<S> <C> <C>
California $ 812,836 84.8%
Florida 39,966 4.2%
New York 22,127 2.3%
Other states (37 states and Washington, D.C.; no
state has more than 2%) 83,863 8.7%
------------- -----
$ 958,792 100.0%
============= =====
- --------------------------------------------------------------------- ---------------------
</TABLE>
The 84.8% 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 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.
11
<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 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, 1998 were $18,257,000
provided by operating activities and $59,293,000 provided by mortgage loan
principal repayments. The primary uses of funds were $57,805,000 in purchases
of mortgage loans, and $11,406,000 in preferred stock dividends paid.
OTHER MATTERS
As of March 31, 1998, 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 100% 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 100% 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.
The Company also met all REIT requirements regarding the ownership of its
stock and anticipates meeting the annual distribution requirements.
YEAR 2000
The Bank is responsible for addressing issues related to required changes in
computer systems for the year 2000 ("Year 2000") for the Bank and the Company.
During the year ended December 31, 1997, the Bank finalized its plan to
address such issues. Issues arise because computer systems and related
software have been designed to recognize only dates that relate to the 20th
century. Accordingly, if no changes are implemented, these computer systems
would interpret "01/01/00" as January 1, 1900 instead of January 1, 2000.
Additionally, some equipment, being controlled by microprocessor chips, may
not deal appropriately with a year "00."
The Bank has formed an internal task force to determine what changes are
needed in the Bank's and the Bank's affiliates' custom software and what
changes are required to be made in software purchased from third party vendors
as well as what other steps will be necessary to ensure continued operations
of the Bank's and the Bank's affiliates' equipment.
It is expected that, by December 31, 1998, all issues related to Year 2000
will be addressed, either by programming changes to the Bank's and the Bank's
affiliates' custom software, by programming changes implemented by third party
vendors to purchased systems, or through the upgrading or purchase of Year
2000-compliant hardware and software. Extensive testing is expected to occur
during 1999. Year 2000 is the highest priority project within the Information
and Technology Services unit of the Bank. Management believes there is no
material risk that the Bank and the Company will fail to address Year 2000
issues in a timely manner. All costs related to Year 2000 will be expensed on
the books of the Bank.
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, 1997.
12
<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.
Item 6. Exhibits and Current Reports on Form 8-K
(a) Exhibits:
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, 1998.
13
<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
May 13, 1998
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
CALIFORNIA PREFERRED CAPITAL CORPORATION
FINANCIAL DATA SHCEDULE
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 March 31, 1998.
</LEGEND>
<CIK> 0001027283
<NAME> CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> US $
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 0
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,328
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 958,792
<ALLOWANCE> 7,169
<TOTAL-ASSETS> 1,008,436
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 343
<LONG-TERM> 0
0
500,000
<COMMON> 0
<OTHER-SE> 508,093
<TOTAL-LIABILITIES-AND-EQUITY> 1,008,436
<INTEREST-LOAN> 18,617
<INTEREST-INVEST> 198
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 18,815
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 18,815
<LOAN-LOSSES> 420
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 42
<INCOME-PRETAX> 18,353
<INCOME-PRE-EXTRAORDINARY> 18,353
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,353<F1>
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.42
<LOANS-NON> 3,317
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 7,169
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,169
<FN>
<F1>
Net income available to common stockholders: $6,947
</TABLE>
