<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 September 30, 1998
Commission file number: 0-23131
People's Preferred Capital Corporation
(Exact name of registrant as specified in its charter)
Maryland 95-4642529
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5900 Wilshire Boulevard,
Los Angeles, California 90036
(213) 938-6300
Indicate by check mark whether the registrant (1) has filed all
reports 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 [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Shares Outstanding at October 30, 1998
----- --------------------------------------
<S> <C>
Common Stock, $0.01 par value 10,000
Series A Preferred Shares, $0.01 1,426,000
</TABLE>
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
THIRD QUARTER 1998 REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Financial Condition - September 30, 1998
and December 31, 1997 3
Statements of Earnings - For the three and nine months ended
September 30, 1998 4
Statements of Cash Flows - For the nine months ended
September 30, 1998 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 11
PART II OTHER INFORMATION
Item 1: Legal Proceedings 12
Item 2: Changes in Securities 12
Item 3: Defaults upon Senior Securities 12
Item 4: Submission of Matters to a Vote of Security Holders 12
Item 5: Other Information 12
Item 6: Exhibits and Reports on Form 8-K 12
</TABLE>
2
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, 1997
1998
------------------ ------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 8,984 $ 44
Mortgage loans, net (Note 2) 62,399 70,423
Due from affiliate 730 1,723
Accrued interest receivable 357 407
Other assets 3 --
----------------- --------------------
Total assets $ 72,473 $ 72,597
================= ====================
LIABILITIES:
Dividends payable to the Bank $ -- $ 460
----------------- --------------------
Total liabilities -- 460
----------------- --------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share, 4,000,000
shares authorized:
Preferred stock series A, issued and outstanding
1,426,000 shares, liquidation value $35,650
("Series A Preferred Shares") 14 14
Common stock, par value $.01 per share, 4,000,000
shares authorized:
10,000 shares issued and outstanding -- --
Additional paid-in capital 72,075 72,075
Retained earnings 384 48
----------------- --------------------
Total stockholders' equity 72,473 72,137
----------------- --------------------
Total liabilities and stockholders' equity $ 72,473 $ 72,597
----------------- --------------------
----------------- --------------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
STATEMENTS OF EARNINGS
For the three and nine months ended September 30, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, 1998 September 30, 1998
-------------------- -------------------
<S> <C> <C>
REVENUES:
Interest on mortgage loans $ 1,354 $ 4,173
Interest on deposits 84 199
-------------------- -------------------
Total revenues: 1,438 4,372
-------------------- -------------------
EXPENSES:
Servicing fees 42 128
Management fees 50 150
Professional fees 15 73
Other 19 30
-------------------- -------------------
Total expenses 126 381
-------------------- -------------------
Net earnings $ 1,312 $ 3,991
-------------------- -------------------
-------------------- -------------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
For the nine months ended September 30, 1998
(Dollars in thousands)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 3,991
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Decrease in accrued interest receivable 50
Decrease in due from affiliates 993
Decrease in dividends payable (460)
Increase in other assets (3)
---------------
Net cash provided by operating activities 4,571
---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan purchases (8,100)
Mortgage loan principal repayments 16,124
---------------
Net cash provided by investing activities 8,024
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividends paid (2,607)
Common stock dividends paid (1,048)
---------------
Net cash used in financing activities (3,655)
---------------
Net increase in cash and cash equivalents 8,940
Cash and cash equivalents at beginning of period 44
---------------
---------------
Cash and cash equivalents at end of period $ 8,984
---------------
---------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
People's Preferred Capital Corporation (the "Company") is a Maryland
corporation incorporated on June 19, 1997 which was created for the purpose of
acquiring and holding mortgage loans ("mortgage loans") secured by real estate
assets. The Company commenced its operations on October 3, 1997. The Company's
outstanding common stock is wholly owned by People's Bank of California, a
federal savings bank (the "Bank").
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 period presented. All such adjustments are of a normal recurring nature.
The results of operations for the nine months ended September 30, 1998 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
audited financial statements and accompanying notes thereto as of December
31, 1997 included in the Company's Annual Report on Form 10-K. All terms used
but not defined elsewhere herein have meanings ascribed to them in the
Company's Annual Report on Form 10-K.
NOTE 2 - MORTGAGE LOANS, NET
Mortgage loans, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
----------------------------- --------------------------
<S> <C> <C>
1-4 unit residential mortgage loans $ 50,786 $ 58,142
Multi-family and commercial loans 11,866 12,534
----------------------------- --------------------------
62,652 70,676
Allowance for loan losses (253) (253)
----------------------------- --------------------------
Total residential mortgage loans, net $ 62,399 $ 70,423
----------------------------- --------------------------
----------------------------- --------------------------
</TABLE>
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
<TABLE>
<CAPTION>
At or for the
STATEMENT OF OPERATIONS: Three Months Nine Months
Ended Ended
September 30, 1998 September 30, 1998
-------------------- --------------------
<S> <C> <C>
Interest income on loans $ 1,354 $ 4,173
Total revenues 1,438 4,372
Net earnings 1,312 3,991
STATEMENT OF CONDITION:
Mortgage loans, net $ 62,399
Total assets 72,473
Total stockholders' equity 72,473
Average yield on mortgage loans 8.28%
</TABLE>
Overview
People's Preferred Capital Corporation's business is to acquire and
maintain a real estate loan portfolio. The income from this portfolio generates
net earnings that must be distributed to the Company's stockholders in order to
maintain tax exempt status as a real estate investment trust. The Company
anticipates that it will periodically reinvest excess cash from loan principal
payments into real estate loans.
Residential Mortgage Loans. The following table sets forth as of
September 30, 1998 certain information with respect to each type of Residential
Mortgage Loan included in the Company's portfolio (dollars in thousands):
Type of Residential Mortgage Loan Product
<TABLE>
<CAPTION>
Remaining
Percentage of Term Note
Type Principal Balance Portfolio Initial LTV (in months) Rate
- ------------------------ ------------------- ------------------- ------------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
7/23 step rate $ 3,242 6.4% 81.2% 292 7.65%
15 year fixed rate 6,021 11.9 60.8 116 7.98
30 year fixed rate 41,523 81.7 69.7 310 8.02
------------------- ------------------- ------------------- ----------------- ----------------
$50,786 100.0% 69.1% 286 7.99%
------------------- ------------------- ------------------- ----------------- ----------------
------------------- ------------------- ------------------- ----------------- ----------------
</TABLE>
7
<PAGE>
The Residential Mortgage Loans included in the Company's loan portfolio
are either fixed rate loans, or are "7/23 step rate" loans. The "7/23 step rate"
loan has a fixed interest rate for the first seven years, and adjusts once
thereafter to a rate which applies to the remaining 23 years equal to 150 basis
points above the FNMA 30 year commitment rate for delivery as of a date
specified in the related mortgage note.
The following table schedules residential mortgage loans with past due
principal and interest payments at September 30, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
Number Principal Balance Percent of Portfolio
------------------------- -------------------------- -------------------------
<S> <C> <C> <C>
30 to 59 days past due 2 $129,133 0.3%
60 to 89 days past due 1 74,997 0.1
</TABLE>
Commercial Mortgage Loans. The following table sets forth as of
September 30, 1998 certain information with respect to each type of Commercial
Mortgage Loan included in the Company's portfolio (dollars in thousands):
<TABLE>
<CAPTION>
Remaining
Principal Balance Percentage of Initial Term Note
Type Portfolio LTV (in months) Rate
- --------------------------------- -------------------- ----------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Commercial fixed rate
balloon $ 5,287 44.5% 68.4% 99 9.44%
Commercial fixed rate 1,477 12.4 73.5 118 10.05
Multi-family fixed rate
balloon 2,225 18.9 51.5 103 8.98
Multi-family fixed rate 2,877 24.2 73.7 96 9.74
-------------------- ----------------- ----------------- ---------------- ---------------
$11,866 100.0% 68.6% 101 9.50%
-------------------- ----------------- ----------------- ---------------- ---------------
-------------------- ----------------- ----------------- ---------------- ---------------
</TABLE>
Of the Commercial Mortgage Loans included in the Company's portfolio,
approximately 63.4% are not fully amortizing and will have significant principal
balances (or "balloon payments") due upon maturity.
All the Commercial Mortgage Loans included in the Company's portfolio
bear interest at fixed rates. The weighted average interest rate of the
portfolio at September 30, 1998 is 9.50%.
There were no commercial mortgage loans with past due principal and
interest payments at September 30, 1998.
At September 30, 1998 there were no non accrual loans in the Company's
loan portfolio.
8
<PAGE>
Allowance for loan losses
The Company maintains an allowance for loan losses to absorb potential
loan losses from the entire loan portfolio. At September 30, 1998, the allowance
for loan losses amounted to $253,000 or 0.40% of total loans. On an ongoing
basis, management monitors the loan portfolio and evaluates the adequacy of the
allowance for loan losses. Based upon its analysis, management believes that the
allowance for loan losses as of September 30, 1998, is sufficient to absorb any
unidentified losses that currently exist in the portfolio. Management will
continue to review the loan portfolio to determine the extent to which any
changes in loss experience may require additional provisions in the future.
Financial Condition
At September 30, 1998, the Company had total assets of $72.5 million, a
decrease of $124,000 from December 31, 1997. Mortgage loans totaled $62.4
million, or 86.1% of the Company's assets at the end of the quarter, compared
to $70.4 million, or 97.0% of total assets, at December 31, 1997. The reduction
in loans represented receipt of loan principal repayments. During the first nine
months of 1998, the Company purchased eight single family residential loans with
an aggregate principal balance of $8.1 million.
At September 30, 1998, the Company had no liabilities. The $460,000 of
dividends payable to the Bank at December 31, 1997, was paid during the first
quarter. Additionally, preferred stock dividends of $2.6 million and common
stock dividends of $1.0 million were both declared and paid during the first
nine months of 1998.
Results of Operations
The Company reported revenues of $1.4 million for the three-month
period ended September 30, 1998. Expenses totaled $126,000 for the same period,
including $42,000 in servicing fees, $50,000 in management fees paid to the
Bank, $15,000 in professional and $19,000 in other expenses. After deduction of
total expenses, net earnings totaled $1.3 million. When compared to the
preceding quarter ended June 30, 1998, revenues were virtually unchanged, while
expenses increased $17,000, principally relating to professional and other
expenses. Revenues were $4.4 million for the nine months ended September 30,
1998. Expenses of $381,000 for the period included $128,000 in servicing fees,
$150,000 in management fees paid to the Bank and $103,000 in professional and
other expenses. Net earnings were $3.9 million for the nine months ended
September 30, 1998.
9
<PAGE>
Liquidity and Capital Resources
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Company's financial commitments 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").
The Company's principal liquidity needs are to maintain its current
portfolio size through the acquisition of additional Mortgage Loans as Mortgage
Loans currently in the portfolio mature or prepay and to pay dividends on the
Series A Preferred Shares. The acquisition of additional Mortgage Loans is
intended to be funded with the proceeds obtained from repayment of principal
balances by individual mortgagees. The Company has not had and does not
anticipate having any material capital expenditures.
To the extent that the Board of Directors determines that additional
funding is required, the Company may raise such funds through additional equity
offerings, debt financing or retention of cash flow (after consideration of
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
requiring the distribution by a REIT of at least 95% of its "REIT taxable
income" and taking into account taxes that would be imposed on undistributed
income), or a combination of these methods. The organizational documents of the
Company do not contain any limitation on the amount or percentage of debt,
funded or otherwise, that the Company might incur. Notwithstanding the
foregoing, the Company may not, without the approval of a majority of the
Company's independent directors, incur debt in excess of 20% of the Company's
total stockholders' equity. Any such debt incurred may include intercompany
advances made by the Bank to the Company.
The Company also may issue additional series of preferred stock.
However, the Company may not issue additional shares of preferred stock that is,
or will be, senior to the Series A Preferred Shares, without obtaining the prior
consent of holders of at least 66 2/3% of the shares of preferred stock
outstanding at that time. The Company may not issue additional shares of
preferred stock on a parity with the Series A Preferred Shares without the prior
approval of a majority of the Company's independent directors.
Year 2000 Compliance Issues
The Company has adopted a plan to address Year 2000 data processing
issues. The plan includes the assessment of all internal systems, programs and
data processing applications as well as those provided to the Bank by
third-party vendors. A significant portion of the Company's data processing and
loan servicing is performed by third-party vendors from whom the Company has
received confirmation that they expect to be compliant with Year 2000 issues.
The Company has not incurred significant expense to date, and expects to incur a
nominal amount of expenses through 1999 to address Year 2000 issues.
10
<PAGE>
The Company is currently in the process of testing third party vendors'
data processing applications for Year 2000 compliance. The Company has
established a plan and task force to complete Year 2000 testing. The first step
in the Company's Year 2000 plan was initial awareness, which included defining
the Year 2000 program, impact to the business, defining critical applications,
establishing executive support, determining project responsibilities and
developing strategies. In the initial awareness phase, the Company also
established a budget for resources required and target test completion dates for
all systems and software for Year 2000 compliance.
The Company is currently in the validation phase of its Year 2000
compliance plan, which includes developing test scripts, establishing testing
controls, setting target dates, testing data exchange partners, and testing
hardware and software. The final phase in the Company's 2000 compliance plan is
the implementation phase which is scheduled to be completed in June 1999. The
implementation phase task list includes certification of Year 2000 compliance,
implementation contingency a plan for non-compliant products and compliance
assurance of any new systems or programs acquired.
No assurance can be made that such third party vendors' efforts will be
successful or that the Company's cost associated therewith will be as estimated.
However, the Company does not believe any Year 2000 issues will materially
affect the Company's products, services or competitive conditions. In addition,
the Company does not believe that the cost of addressing the Year 2000 issues or
the costs or the consequences of incomplete or untimely resolution of its Year
2000 issues does not represent a known material event or uncertainty that is
reasonably likely to affect its future financial results, or cause its reported
financial information not to be necessarily indicative of future operating
results or future financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
11
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: CHANGES IN SECURITIES
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is included herein:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
No reports on From 8-K have been
filed during the quarter ended
September 30, 1998
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PEOPLE'S PREFERRED CAPITAL CORPORATION
/s/ Rudolf P. Guenzel
-------------------------------------
Rudolf P. Guenzel
President and Chief Executive Officer
/s/ J. Michael Holmes
-------------------------------------
J. Michael Holmes
Executive Vice President and Chief
Financial Officer
Date: November 5, 1998
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PEOPLE'S
PREFERRED CAPITOL CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 8,984
<INT-BEARING-DEPOSITS> 730
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 62,399
<ALLOWANCE> 253
<TOTAL-ASSETS> 72,473
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
14
<COMMON> 0
<OTHER-SE> 72,459
<TOTAL-LIABILITIES-AND-EQUITY> 72,473
<INTEREST-LOAN> 1,354
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 84
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 1,438
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 126
<INCOME-PRETAX> 1,312
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,312
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.28
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 253
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 253
<ALLOWANCE-DOMESTIC> 253
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
