<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: June 30, 2000 Commission file number: 1-12639
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 94-3254883
--------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
200 Crescent Court, Suite 1350, Dallas, Texas 75201
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
214-871-5131
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
--------------------------------------------------------------------------------
(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 August 4, 2000: 1,000 shares.
<PAGE>
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
SECOND QUARTER 2000 REPORT ON FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION --------
Item 1. Financial Statements
Balance Sheets
June 30, 2000 (unaudited) and December 31, 1999...............3
Unaudited Statements of Income
Six months ended June 30, 2000 and 1999.......................4
Unaudited Statements of Income
Three months ended June 30, 2000 and 1999.....................5
Unaudited Statement of Stockholders' Equity
Six months ended June 30, 2000................................6
Unaudited Statements of Cash Flows
Six months ended June 30, 2000 and 1999.......................7
Notes to Unaudited Financial Statements.......................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................17
Item 6. Exhibits and Current Reports on Form 8-K.....................17
Signature.............................................................18
2
<PAGE>
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
Balance Sheets
June 30, 2000 and December 31, 1999
(Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
---- ----
<S> <C> <C>
Residential mortgage loans, net $ 968,792 $ 967,286
Cash and cash equivalents 16,872 5,485
Due from affiliates 16,708 18,065
Accrued interest receivable 5,225 4,649
Foreclosed real estate, net 333 1,037
----------- ---------
TOTAL ASSETS $ 1,007,930 $ 996,522
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to affiliates $ 121 $ 96
Accounts payable and accrued liabilities 247 245
----------- ---------
Total Liabilities 368 341
----------- ---------
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) 7,562 (3,819)
----------- ---------
Total Stockholders' Equity 1,007,562 996,181
----------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,007,930 $ 996,522
=========== =========
</TABLE>
See accompanying notes to unaudited financial statements.
3
<PAGE>
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
STATEMENTS OF INCOME
Six Months Ended June 30, 2000 and 1999
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
INTEREST INCOME
Residential mortgage loans $35,577 $34,422
Less: servicing fee expense (1,817) (1,825)
------- -------
33,760 32,597
Short-term investments 447 355
------- -------
Interest income, net of servicing fee expense 34,207 32,952
NONINTEREST EXPENSE
Director fees 10 12
Professional fees 42 56
Foreclosed real estate operations, net (119) 3
Other 81 80
------- -------
Total noninterest expense 14 151
------- -------
NET INCOME 34,193 32,801
Preferred stock dividends 22,812 22,812
------- -------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $11,381 $ 9,989
======= =======
</TABLE>
See accompanying notes to unaudited financial statements.
4
<PAGE>
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
STATEMENTS OF INCOME
Three Months Ended June 30, 2000 and 1999
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
INTEREST INCOME
Residential mortgage loans $17,932 $16,762
Less: servicing fee expense (913) (915)
------- -------
17,019 15,847
Short-term investments 275 201
------- -------
Interest income, net of servicing fee expense 17,294 16,048
NONINTEREST EXPENSE
Director fees 4 2
Professional fees 13 15
Foreclosed real estate operations, net (52) (1)
Other 9 49
------- -------
Total noninterest expense (26) 65
------- -------
NET INCOME 17,320 15,983
Preferred stock dividends 11,406 11,406
------- -------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 5,914 $ 4,577
======= =======
</TABLE>
See accompanying notes to unaudited financial statements.
5
<PAGE>
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
Six Months Ended June 30, 2000
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Retained
Additional Earnings Total
Preferred Common Paid-in (Accumulated Stockholders'
Stock Stock Capital Deficit) Equity
----- ----- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999 $ 500,000 $ -- $ 500,000 $ (3,819) $ 996,181
Net income -- -- -- 34,193 34,193
Dividends paid on 9 1/8% noncumulative
exchangeable preferred stock, series A -- -- -- (22,812) (22,812)
--------- ------- --------- --------- -----------
BALANCE AT JUNE 30, 2000 $ 500,000 $ -- $ 500,000 $ 7,562 $ 1,007,562
========= ======= ========= ========= ===========
</TABLE>
See accompanying notes to unaudited financial statements.
6
<PAGE>
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2000 and 1999
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 34,193 $ 32,801
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of purchase discounts and premiums, net 482 563
Provision for losses on foreclosed real estate -- 16
Interest capitalized on negatively amortizing loans (51) (159)
Gain on sales of foreclosed real estate, net (119) (13)
Decrease/(increase) in due from affiliates 308 (343)
(Increase)/decrease in accrued interest receivable (243) 829
Increase in accounts payable and accrued liabilities 2 293
Increase/(decrease) in due to affiliates 25 (273)
-------- ---------
Net cash provided by operating activities 34,597 33,714
-------- ---------
INVESTING ACTIVITIES:
Purchase of mortgage loans (78,597) (196,443)
Mortgage loan principal repayments 77,582 197,413
Purchase of accrued interest receivable (333) (782)
Proceeds from sales of foreclosed real estate 950 165
-------- ---------
Net cash (used in)/provided by investing activities (398) 353
-------- ---------
FINANCING ACTIVITIES:
Preferred stock dividends paid (22,812) (22,812)
-------- ---------
Net cash used in financing activities (22,812) (22,812)
-------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 11,387 11,255
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,485 2,505
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,872 $ 13,760
======== =========
Supplemental disclosure of cash flow information:
Non-cash investing activities:
Mortgage loan principal reductions due to foreclosure $ 127 $ 687
Mortgage loan principal increase for timing difference between
principal repayments received by servicer and related cash
received by Company during the period 1,049 11,817
</TABLE>
See accompanying notes to unaudited financial statements.
7
<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 six months ended June 30, 2000
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 six
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, 1999. 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 June 30, 2000 and December 31, 1999, residential mortgage loans, net,
consisted of the following (in thousands):
June 30, December 31,
2000 1999
---- ----
1-4 unit residential mortgage loans $ 969,797 $ 968,725
Purchase discounts and premiums, net 6,716 6,444
--------- ---------
Subtotal 976,513 975,169
Allowance for loan losses (7,721) (7,883)
--------- ---------
Total residential mortgage loans, net $ 968,792 $ 967,286
========= =========
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 six month periods
ended June 30, 2000 and 1999 to the holders of the Series A Preferred
Shares totalled approximately $22.8 million.
8
<PAGE>
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
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 six months ended June 30, 2000 and 1999.
(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 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 $1,817,000 and $1,825,000 for the six
months ended June 30, 2000 and 1999. Servicing fee expense paid totalled
$913,000 and $915,000 for the three months ended June 30, 2000 and 1999,
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
$10,000 and $7,000 during the six months ended June 30, 2000 and 1999. The
Company recorded such disposition fees totalling approximately $3,000 and
$1,000 during the three months ended June 30, 2000 and 1999, 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 $16.7 million and $18.1 million at June
30, 2000 and December 31, 1999, respectively, and is included in due from
affiliates. Substantially all of such payments were passed through to the
Company in July 2000 and January 2000, respectively, as provided in the
Servicing Agreement. At June 30, 2000 and December 31, 1999, trust funds of
approximately $1.9 million and $1.5 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 June 30, 2000 and December 31, 1999, the Company owed the Bank
approximately $121,000 and $96,000, respectively, 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 July 2000 and January
2000, respectively.
(5) Newly Issued Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS No. 133"). SFAS No. 133 establishes standards for derivative
instruments and for hedging activities, and requires that an entity
recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. Under SFAS No. 133, an
entity that elects to apply hedge accounting is required to establish at
the inception of the hedge the method it will use for assessing the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge.
SFAS No. 133 applies to all entities and amends SFAS No. 107, Disclosures
About Fair Values of Financial Instruments, to include in SFAS No. 107 the
disclosure provisions about concentrations of credit risk from SFAS No.
105. SFAS No. 133 supersedes SFAS No. 80, Accounting for Futures Contracts,
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of
Credit Risk, and SFAS No. 119, Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments. SFAS No. 133 also
nullifies or modifies the consensuses reached in a number of issues
addressed by the Emerging Issues Task Force.
9
<PAGE>
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SFAS No. 133 as amended by SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133 and by SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement
No. 133, is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. Initial application of this statement should be as of
the beginning of an entity's fiscal quarter. On that date, hedging
relationships must be designated anew and documented pursuant to the
provisions of this statement. Earlier application of all of the provisions
of SFAS No. 133 is encouraged, but is permitted only as of the beginning of
any fiscal quarter that begins after issuance of this statement. SFAS No.
133 should not be applied retroactively to financial statements of prior
periods. The Company owns no derivative instruments and was involved in no
hedging activities at June 30, 2000; accordingly, SFAS No. 133 is expected
to have no impact on the Company's financial statements.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Quarterly 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 June 30, 2000 and for the six and
three months ended June 30, 2000 and 1999 (dollars in thousands):
2000 1999
---- ----
Statements of Income - Six Months Ended June 30:
Net interest income $ 34,207 $32,952
Net income $ 34,193 $32,801
Average yield on mortgage loans 6.80% 6.56%
Statements of Income - Three Months Ended June 30:
Net interest income $ 17,294 $16,048
Net income $ 17,320 $15,983
Average yield on mortgage loans 6.85% 6.38%
Balance Sheet as of June 30, 2000:
Residential mortgage loans, net $ 968,792
Total assets $1,007,930
Total stockholders' equity $1,007,562
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.
11
<PAGE>
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 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.
RESULTS OF OPERATIONS
Six months ended June 30, 2000 versus six months ended June 30, 1999
Net Income. The Company reported net income for the six months ended June 30,
2000 of $34.2 million compared with net income of $32.8 million for the
corresponding period in 1999. This increase in 2000 compared with 1999 is
attributable to an increase in net interest income.
During each of the six month periods ended June 30, 2000 and 1999, the Company
declared and paid dividends of $22.8 million on the outstanding Series A
Preferred Shares. Net income available to the common stockholder for the six
months ended June 30, 2000 and 1999 totalled $11.4 million and $10.0 million,
respectively. There were no common stock dividends paid during the six months
ended June 30, 2000 and 1999, respectively.
Interest Income. The Company reported net interest income for the six months
ended June 30, 2000 of $34.2 million compared with net interest income of $33.0
million for the six month period ended June 30, 1999. This increase in interest
income is attributed to a higher average yield on the residential mortgage loan
portfolio. The higher yield of 6.80% on residential mortgage loans during the
six month period ended June 30, 2000 as compared to the 6.56% yield for the same
period in 1999 is primarily due to the repricing of variable rate loans
resulting from comparatively higher market rates during the six months ended
June 30, 2000 versus the same period in 1999 and the purchase of new loans at
higher current market rates. The average outstanding balance of residential
mortgage loans during the six month period ended June 30, 2000 was $1.6 million
lower than during the same period in 1999. Net interest income during the six
months ended June 30, 2000 is comprised of $33.8 million ($35.6 million gross
interest less $1.8 million servicing fee expense) from residential mortgage
loans and $447,000 from short-term investments, representing an average yield
after servicing fees on residential mortgage loans of 6.80% and on earning
assets of 6.78%, based on average outstanding asset balances of $992.9 million
and $1,009.5 million, respectively. Net interest income during the six months
ended June 30, 1999 is comprised of $32.6 million ($34.4 million gross interest
less $1.8 million servicing fee expense) from residential mortgage loans and
$355,000 from short-term investments, representing an average yield after
servicing fees on residential mortgage loans of 6.56% and on earning assets of
6.53%, based on average outstanding asset balances of $994.5 million and
$1,009.9 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 six month periods ended June 30, 2000 and 1999. 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.
Three months ended June 30, 2000 versus three months ended June 30, 1999
Net Income. The Company reported net income for the three months ended June 30,
2000 of $17.3 million compared with net income of $16.0 million for the
corresponding period in 1999. This increase in 2000 compared with 1999 is
attributable to an increase in net interest income.
12
<PAGE>
During each of the three month periods ended June 30, 2000 and 1999, 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 June 30, 2000 and 1999 totalled $5.9 million and $4.6 million,
respectively. There were no common stock dividends paid during the three months
ended June 30, 2000 and 1999, respectively.
Interest Income. The Company reported net interest income for the three months
ended June 30, 2000 of $17.3 million compared with net interest income of $16.0
million for the three month period ended June 30, 1999. This increase in
interest income is attributed to a higher average yield on the residential
mortgage loan portfolio. The higher yield of 6.85% on residential mortgage loans
during the three month period ended June 30, 2000 as compared to the 6.38% yield
for the same period in 1999 is primarily due to the repricing of variable rate
loans resulting from comparatively higher market rates during the three months
ended June 30, 2000 versus the same period in 1999 and the purchase of new loans
at higher current market rates. The average outstanding balance of residential
mortgage loans during the three month period ended June 30, 2000 was $1.1
million lower than during the same period in 1999. Net interest income during
the three months ended June 30, 2000 is comprised of $17.0 million ($17.9
million gross interest less $913,000 servicing fee expense) from residential
mortgage loans and $275,000 from short-term investments, representing an average
yield after servicing fees on residential mortgage loans of 6.85% and on earning
assets of 6.83%, based on average outstanding asset balances of $993.0 million
and $1,013.0 million, respectively. Net interest income during the three months
ended June 30, 1999 is comprised of $15.8 million ($16.8 million gross interest
less $915,000 servicing fee expense) from residential mortgage loans and
$201,000 from short-term investments, representing an average yield after
servicing fees on residential mortgage loans of 6.38% and on earning assets of
6.34%, based on average outstanding asset balances of $994.1 million and
$1,012.5 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 June 30, 2000 and 1999. 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 June 30, 2000 or December 31, 1999.
The following table reflects residential mortgage loans with past due principal
and interest payments as of June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
Principal Balance Percent Principal Balance Percent
(in thousands) of Total Loans (in thousands) of Total Loans
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
30 to 59 days past due $3,161 0.33% $ 950 0.10%
60 to 89 days past due $ 169 0.02% $1,199 0.12%
90 days or more past due $ 781 0.08% $1,042 0.11%
</TABLE>
ALLOWANCE FOR LOAN LOSSES
As of June 30, 2000, the Company has allocated $101,000 of its allowance for
loan losses against specific problem loans, with the remaining $7.6 million
available to absorb potential loan losses from the entire residential mortgage
loan portfolio. The Company deems its allowance for loan losses as of June 30,
2000 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
13
<PAGE>
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 six months ended June 30, 2000 and 1999 (in thousands):
2000 1999
---- ----
Balance - January 1 $ 7,883 $ 8,413
Provision for loan losses -- --
Charge-offs (162) (137)
-------- --------
Balance - June 30 $ 7,721 $ 8,276
======= =======
The Company's allowance coverage ratio (allowance for loan losses to loans) at
June 30, 2000 and December 31, 1999 was 0.79% and 0.81%, 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 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 $190.1
million and $208.6 million of the residential mortgage loans held by the Company
at June 30, 2000 and December 31, 1999, respectively, had the potential to
negatively amortize, while approximately $24.8 million and $31.9 million of the
residential mortgage loans had negatively amortized such that the current
principal balance of the loan exceeded the original principal balance at June
30, 2000 and December 31, 1999, respectively. The current principal balance
exceeded the original principal balance on those loans by approximately $885,000
and $1.0 million as of June 30, 2000 and December 31, 1999, 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 June
30, 2000:
14
<PAGE>
Book Value
(in thousands) Percent
-------------- -------
California $ 816,276 83.6%
Florida 30,681 3.1
New York 19,105 2.0
Other states (37 states and Washington, D.C.;
no state has more than 2%) 110,451 11.3
--------- -----
$ 976,513 100.0%
========= =====
The 83.6% 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 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 six months ended June 30, 2000 were $34.6 million provided by
operating activities and $77.6 million provided by mortgage loan principal
repayments. The primary uses of funds were $78.6 million in purchases of
mortgage loans and $22.8 million in preferred stock dividends paid.
OTHER MATTERS
As of June 30, 2000, 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 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; and
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.
The Company also met all REIT requirements regarding the ownership of its stock
and anticipates meeting the annual distribution requirements.
15
<PAGE>
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, 1999.
16
<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:
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
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed during the quarter
ended June 30, 2000.
17
<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)
August 8, 2000
18
