<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington , D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
(Address of principal executive offices)
(213) 938-6300
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(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
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 / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $0.01 par value 10,000
Series A Preferred Shares, $0.01 1,426,000
(Class)
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PEOPLE'S PREFERRED CAPITAL CORPORATION
SECOND QUARTER 1998 REPORT ON FORM 10-Q
TABLE OF CONTENTS
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<CAPTION>
Page No.
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Financial Condition - June 30, 1998
and December 31, 1997 3
Statements of Earnings - For the three and six months ended
June 30, 1998 4
Statement of Cash Flows - For the six months ended
June 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 10
PART II OTHER INFORMATION
Item 1: Legal Proceedings 11
Item 2: Changes in Securities 11
Item 3: Defaults upon Senior Securities 11
Item 4: Submission of Matters to a Vote of Security Holders 11
Item 5: Other Information 11
Item 6: Exhibits and Reports on Form 8-K 11
</TABLE>
2
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PEOPLE'S PREFERRED CAPITAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
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<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 3,783 $ 44
Mortgage loans, net (Note 2) 68,165 70,423
Due from affiliate 688 1,723
Accrued interest receivable 389 407
Other assets 5 --
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Total assets $73,030 $72,597
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LIABILITIES:
Dividends payable to the Bank -- $ 460
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Total liabilities -- 460
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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 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 941 48
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Total stockholders' equity 73,030 72,137
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Total liabilities and stockholders' equity $73,030 $72,597
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</TABLE>
See accompanying notes to financial statements.
3
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PEOPLE'S PREFERRED CAPITAL CORPORATION
STATEMENTS OF EARNINGS
For the three and six months ended June 30, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
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<S> <C> <C>
REVENUES:
Interest on mortgage loans $ 1,376 $ 2,819
Interest on deposits 78 115
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Total revenues: 1,454 2,934
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EXPENSES:
Servicing fees 44 86
Management fees 50 100
Professional fees 8 58
Other 7 11
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Total expenses 109 255
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Net earnings $ 1,345 $ 2,679
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</TABLE>
See accompanying notes to financial statements.
4
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PEOPLE'S PREFERRED CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
For the six months ended June 30, 1998
(Dollars in thousands)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,679
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Decrease in accrued interest receivable 18
Decrease in due from affiliates 1,035
Decrease in dividends payable (460)
Increase in other assets (5)
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Net cash provided by operating activities 3,267
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CASH FLOWS FROM INVESTING ACTIVITIES:
Loan purchases (8,144)
Mortgage loan principal repayments 10,402
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Net cash provided by investing activities 2,258
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CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividends paid (1,738)
Common stock dividends paid (48)
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Net cash used in financing activities (1,786)
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Net increase in cash and cash equivalents 3,739
Cash and cash equivalents at beginning of period 44
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Cash and cash equivalents at end of period $ 3,783
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</TABLE>
See accompanying notes to financial statements.
5
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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 secured by real estate assets. 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
six months ended June 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
statement of financial condition 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>
June 30, 1998 December 31, 1997
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<S> <C> <C>
1-4 unit residential mortgage loans $ 56,277 $ 58,142
Multi-family and commercial loans 12,141 12,534
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68,418 70,676
Allowance for loan losses (253) (253)
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Total residential mortgage loans, net $ 68,165 $ 70,423
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</TABLE>
6
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PEOPLE'S PREFERRED CAPITAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS: Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
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<S> <C> <C>
Interest income on loans $ 1,376 $ 2,819
Total revenues 1,454 2,934
Net earnings 1,345 2,679
STATEMENT OF CONDITION:
Mortgage loans, net $ 68,165
Total assets 73,030
Total stockholders' equity 73,030
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
June 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
Principal Percentage of Term Note
Type Balance Portfolio Initial LTV (in months) Rate
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
7/23 step rate $ 4,440 7.9% 80.0% 293 7.89%
15 year fixed rate 6,491 11.5 61.0 120 7.98
30 year fixed rate 45,346 80.6 70.0 314 8.04
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$56,277 100.0% 69.5% 290 8.02%
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</TABLE>
7
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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.
Commercial Mortgage Loans. The following table sets forth as of June
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 Percentage Initial Term Note
Type Balance of Portfolio LTV (in months) Rate
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial fixed rate
balloon $ 5,350 44.1% 68.0% 101 9.44%
Commercial fixed rate 1,517 12.5 75.0 104 10.07
Multi-family fixed rate
balloon 2,230 18.4 51.0 106 8.98
Multi-family fixed rate 3,044 25.0 74.0 107 9.73
----------- --------------- ------------ -------------- ----------
$12,141 100.0% 68.6% 104 9.51%
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----------- --------------- ------------ -------------- ----------
</TABLE>
Of the Commercial Mortgage Loans included in the Company's portfolio,
approximately 62.5% 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 June 30, 1998 is 9.51%.
The following table schedules residential mortgage loans with past due
principal and interest payments at June 30, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
Number Principal Balance Percent of Portfolio
------------------------- -------------------------- -------------------------
<S> <C> <C> <C>
30 to 59 days past due 2 $ 277 0.50%
</TABLE>
The following table schedules commercial mortgage loans with past due
principal and interest payments at June 30, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
Number Principal Balance Percent of Portfolio
------------------------- -------------------------- -------------------------
<S> <C> <C> <C>
60 to 89 days past due 1 $ 43 0.40%
</TABLE>
At June 30, 1998 there were no non accrual loans in the Company's loan
portfolio.
8
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Allowance for loan losses
The Company maintains an allowance for loan losses to absorb potential
loan losses from the entire loan portfolio. Management believes that the
allowance for loan losses as of June 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 June 30, 1998, the Company had total assets of $73.0 million, an
increase of $433,000 from December 31, 1997. Mortgage loans totaled $68.2
million, or 93.3% 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 six
months of 1998, the Company purchased eight single family residential loans with
an aggregate principal balance of $8.1 million.
At June 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 $1.7 million and common
stock dividends of $48,000 were both declared and paid during the first six
months of 1998.
Results of Operations
The Company reported revenues of $1.4 million for the three-month
period ended June 30, 1998. Expenses totaled $109,000 for the same period,
including $44,000 in servicing fees, $50,000 in management fees paid to the
Bank, and $15,000 in professional and other expenses. After deduction of total
expenses, net earnings totaled $1.3 million. When compared to the preceding
quarter ended March 31, 1998, revenues were virtually unchanged, while expenses
decreased $37,000, principally relating to professional expenses. Revenues were
$2.9 million for the six months ended June 30, 1998. Expenses of $255,000 for
the period included $86,000 in servicing fees, $100,000 in management fees paid
to the Bank and $69,000 in professional and other expenses. Net earnings were
$2.7 million for the six months ended June 30, 1998.
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
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
9
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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 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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
10
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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 June 30, 1998
11
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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: August 10, 1998
<PAGE>
Exhibit Index
Exhibit No. Description
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27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA INFORMATION EXTRACTED FROM
PEOPLE'S PREFERRED CAPITAL CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 3,783
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 68,165
<ALLOWANCE> 253
<TOTAL-ASSETS> 73,030
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
14
<COMMON> 0
<OTHER-SE> 73,016
<TOTAL-LIABILITIES-AND-EQUITY> 73,030
<INTEREST-LOAN> 2,819
<INTEREST-INVEST> 0
<INTEREST-OTHER> 78
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 2,934
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 255
<INCOME-PRETAX> 2,679
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,679
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 878
<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>
