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, 2001 Commission file number: 1-12639
-------------- -------
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
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(Exact name of registrant as specified in its charter)
Maryland 94-3254883
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 Crescent Court, Suite 1350, Dallas, Texas 75201
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(Address of principal executive offices) (Zip Code)
214-871-5131
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [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 3, 2001: 1,000 shares.
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
SECOND QUARTER 2001 REPORT ON FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Balance Sheets
June 30, 2001 and December 31, 2000...........................3
Unaudited Statements of Income
Six months ended June 30, 2001 and 2000.......................4
Unaudited Statements of Income
Three months ended June 30, 2001 and 2000.....................5
Unaudited Statement of Stockholders' Equity
Six months ended June 30, 2001................................6
Unaudited Statements of Cash Flows
Six months ended June 30, 2001 and 2000.......................7
Notes to Unaudited Financial Statements.......................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................16
Item 6. Exhibits and Current Reports on Form 8-K.....................16
Signature.............................................................17
2
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
BALANCE SHEETS
June 30, 2001 and December 31, 2000
(Unaudited)
(dollars in thousands, except per share data)
June 30, December 31,
2001 2000
---- ----
ASSETS
Residential mortgage loans, net $ 948,393 $ 970,398
Cash and cash equivalents 19,059 8,526
Due from affiliates 39,776 15,109
Accrued interest receivable 5,077 5,615
Foreclosed real estate, net 38 569
----------- -----------
TOTAL ASSETS $ 1,012,343 $ 1,000,217
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to affiliates $ 410 $ 56
Accounts payable and accrued liabilities 272 310
----------- -----------
Total Liabilities 682 366
----------- -----------
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) 11,661 (149)
----------- -----------
Total Stockholders' Equity 1,011,661 999,851
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,012,343 $ 1,000,217
=========== ===========
See accompanying notes to unaudited financial statements.
3
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
STATEMENTS OF INCOME
Six Months Ended June 30, 2001 and 2000
(Unaudited)
(in thousands)
2001 2000
---- ----
INTEREST INCOME
Residential mortgage loans $36,052 $35,577
Less: servicing fee expense (1,839) (1,817)
------- -------
34,213 33,760
Short-term investments 446 447
------- -------
Interest income, net of servicing fee expense 34,659 34,207
NONINTEREST EXPENSE
Director fees 14 10
Professional fees 38 42
Foreclosed real estate operations, net (47) (119)
Other 32 81
------- -------
Total noninterest expense 37 14
------- -------
NET INCOME 34,622 34,193
Preferred stock dividends 22,812 22,812
------- -------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $11,810 $11,381
======= =======
See accompanying notes to unaudited financial statements.
4
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
STATEMENTS OF INCOME
Three Months Ended June 30, 2001 and 2000
(Unaudited)
(in thousands)
2001 2000
---- ----
INTEREST INCOME
Residential mortgage loans $17,570 $17,932
Less: servicing fee expense (910) (913)
------- -------
16,660 17,019
Short-term investments 241 275
------- -------
Interest income, net of servicing fee expense 16,901 17,294
NONINTEREST EXPENSE
Director fees 6 4
Professional fees 30 13
Foreclosed real estate operations, net (33) (52)
Other 8 9
------- -------
Total noninterest expense 11 (26)
------- -------
NET INCOME 16,890 17,320
Preferred stock dividends 11,406 11,406
------- -------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 5,484 $ 5,914
======= =======
See accompanying notes to unaudited financial statements.
5
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
Six Months Ended June 30, 2001
(Unaudited)
(dollars in thousands)
Retained
Additional Earnings Total
Preferred Common Paid-in (Accumulated Stockholders'
Stock Stock Capital Deficit) Equity
----- ----- ------- -------- ------
BALANCE AT DECEMBER 31, 2000 $500,000 $ -- $500,000 $ (149) $ 999,851
Net income -- -- -- 34,622 34,622
Dividends paid on 9 1/8% noncumulative
exchangeable preferred stock, series A -- -- -- (22,812) (22,812)
-------- ----- -------- ------- ----------
BALANCE AT JUNE 30, 2001 $500,000 $ -- $500,000 $ 11,661 $1,011,661
======== ===== ======== ======== ==========
See accompanying notes to unaudited financial statements.
6
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2001 and 2000
(Unaudited)
(in thousands)
2001 2000
---- ----
OPERATING ACTIVITIES:
Net income $ 34,622 $ 34,193
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of purchase discounts and premiums, net 1,158 482
Interest capitalized on negatively amortizing loans (57) (51)
Gain on sales of foreclosed real estate, net (47) (119)
(Increase)/decrease in due from affiliates (324) 308
Decrease/(increase) in accrued interest receivable 1,126 (243)
(Decrease)/increase in accounts payable and accrued liabilities (38) 2
Increase in due to affiliates 354 25
--------- --------
Net cash provided by operating activities 36,794 34,597
--------- --------
INVESTING ACTIVITIES:
Purchase of mortgage loans (154,862) (78,597)
Mortgage loan principal repayments 151,408 77,582
Purchase of accrued interest receivable (588) (333)
Proceeds from sales of foreclosed real estate 593 950
--------- --------
Net cash used in investing activities (3,449) (398)
--------- --------
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 10,533 11,387
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,526 5,485
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,059 $ 16,872
========= ========
Supplemental disclosure of cash flow information:
Non-cash investing activities:
Mortgage loan principal (decrease) increase for timing difference
between principal repayments received by servicer and related cash
received
by Company during the period $(24,343) $ 1,049
See accompanying notes to unaudited financial statements.
7
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, 2001
are not necessarily indicative of the results that may be expected for the
entire fiscal year or any other interim period. Certain amounts from prior
periods 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, 2000. 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, 2001 and December 31, 2000, residential mortgage loans, net,
consisted of the following (in thousands):
June 30, December 31,
2001 2000
-------- ------------
1-4 unit residential mortgage loans $ 948,547 $ 971,145
Purchase discounts and premiums, net 7,503 6,894
Allowance for loan losses (7,657) (7,641)
--------- ---------
Total residential mortgage loans, net $ 948,393 $ 970,398
========= =========
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. Included in residential mortgage
loans are hybrid ARMs, which have an initial three or five-year fixed rate
period, followed by annual interest rate adjustments. As of June 30, 2001
and December 31, 2000, approximately 54% and 46%, respectively, of
residential mortgage loans consisted of such hybrid ARMs.
(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, 2001 and 2000 to the holders of the Series A Preferred
Shares totalled approximately $22.8 million.
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, 2001 or 2000.
(4) Related Party Transactions
The Company entered into a servicing agreement with First Nationwide
Mortgage Corporation ("FNMC") pursuant
8
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 $1.8
million for each of the six months ended June 30, 2001 and 2000,
respectively. Servicing fee expense paid totalled $910,000 and $913,000 for
the three months ended June 30, 2001 and 2000, 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 $5,000 and $10,000 during the six
months ended June 30, 2001 and 2000, respectively. The Company recorded
such disposition fees totalling approximately $4,000 and $3,000 during the
three months ended June 30, 2001 and 2000, 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 $39.8 million and $15.1 million at June
30, 2001 and December 31, 2000, respectively, and is included in due from
affiliates. Substantially all of such payments were passed through to the
Company in July 2001 and January 2001, respectively, as provided in the
Servicing Agreement. At June 30, 2001 and December 31, 2000, trust funds of
approximately $1.9 million and $1.4 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, 2001 and December 31, 2000, the Company owed the Bank
approximately $410,000 and $56,000, 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 2001 and January
2001, respectively.
(5) Newly Issued Accounting Pronouncements
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
On September 29, 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities ("SFAS No. 140"). SFAS No. 140
replaces SFAS No. 125, which was issued in June of 1996. It revises the
standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it
carries over most of the provisions of SFAS No. 125 without
reconsideration. In general, SFAS No. 140 was effective for transfers of
financial assets occurring after March 31, 2001 and for disclosures
relating to securitization transactions and collateral for fiscal years
ending after December 15, 2000.
The implementation of SFAS No. 140 did not materially impact the Company's
financial results.
Recognition of Interest Income and Impairment on Purchased and Returned
Beneficial Interests in Securitized Financial Assets
On September 21, 2000, the Emerging Issues Task Force ("EITF") issued EITF
No. 99-20, Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets ("EITF No.
99-20"). This document, which was effective on April 1, 2001, establishes
guidance for (1) recognizing interest income (including amortization of
premiums or discounts) on (a) all credit-sensitive mortgage and
asset-backed securities and (b) certain prepayment-sensitive securities
including agency interest-only strips and (2) determining when these
securities must be written down to fair value because of impairment.
Existing GAAP did not provide interest recognition and impairment guidance
for securities on which cash flows change as a result of both prepayments
and credit losses and, in some cases, interest rate adjustments.
The implementation of EITF No. 99-20 did not materially impact the
Company's financial results.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements. This Report contains forward-looking statements,
within the meaning of the Private Securities Litigation Reform Act of 1995, that
pertain to our future operating results. Words such as "anticipate," "believe,"
"expect," "intend," and other similar expressions are intended to identify these
statements. Forward-looking statements are not historical facts and are
inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control. Our
actual results could differ materially from those in the forward-looking
statements due to such factors as (i) the Company's dependence upon the
operations of its affiliated servicer and upon the financial condition and
operations of its parent, California Federal Bank; (ii) regulatory restrictions
on the Company's operations; (iii) interest rate changes; (iv) declines in real
estate values and increases in uncollected or uncollectable mortgage loans; (v)
the concentration of the Company's portfolio in loans secured by residential
properties located in California; (vi) the inclusion of high balance mortgage
loans in the Company's portfolio; (vii) changes made by the Company's Board of
Directors in the Company's investment and operating policies and strategies,
including whether or not to incur indebtedness; and (viii) failure to qualify as
a real estate investment trust for federal income tax purposes. In January 1997,
we filed an S-11 Registration Statement with the SEC that discusses these
factors in greater detail. We assume no obligation to update any of our
forward-looking statements.
FINANCIAL HIGHLIGHTS
The following information is presented as of June 30, 2001 and for the six and
three months ended June 30, 2001 and 2000 (dollars in thousands):
2001 2000
---- ----
Statements of Income - Six Months Ended June 30:
Net interest income $ 34,659 $34,207
Net income $ 34,622 $34,193
Average yield on mortgage loans 6.89% 6.80%
Statements of Income - Three Months Ended June 30:
Net interest income $ 16,901 $17,294
Net income $ 16,890 $17,320
Average yield on mortgage loans 6.71% 6.85%
Balance Sheet as of June 30, 2001:
Residential mortgage loans, net $ 948,393
Total assets $1,012,343
Total stockholders' equity $1,011,661
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 conventional or hybrid 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.
10
On January 31, 1997, the Company commenced its operations upon the initial
public offering of 20,000,000 shares of the Company's 9 1/8% 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, 2001 versus six months ended June 30, 2000
Net Income. The Company reported net income for the six months ended June 30,
2001 of $34.6 million compared with net income of $34.2 million for the
corresponding period in 2000. This increase in 2001 compared with 2000 is
attributable to an increase in net interest income.
During each of the six month periods ended June 30, 2001 and 2000, 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, 2001 and 2000 totalled $11.8 million and $11.4 million,
respectively. There were no common stock dividends paid during the six months
ended June 30, 2001 or 2000.
Net Interest Income. The Company reported interest income, net of servicing fee
expense, for the six months ended June 30, 2001 of $34.7 million, an increase of
$452,000 from the $34.2 million reported for the six month period ended June 30,
2001. This increase in interest income is attributed to a higher average yield
on the residential mortgage loan portfolio. The higher yield of 6.89% on
residential mortgage loans during the six month period ended June 30, 2001 as
compared to the 6.80% yield for the same period in 2000 is primarily due to the
lagging effect of the repricing of variable rate loans at higher rates. The
average outstanding balance of residential mortgage loans during the six month
period ended June 30, 2001 was $964,000 higher than during the same period in
2000. Interest income, net of servicing fee expense, during the six months ended
June 30, 2001 is comprised of $34.2 million ($36.0 million gross interest less
$1.8 million servicing fee expense) from residential mortgage loans and $446,000
from short-term investments, representing an average yield after servicing fees
on residential mortgage loans of 6.89% and on earning assets of 6.84%, based on
average outstanding asset balances of $993.8 million and $1,012.9 million,
respectively. Interest income, net of servicing fee expense, 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.
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, 2001 and 2000. 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, 2001 versus three months ended June 30, 2000
Net Income. The Company reported net income for the three months ended June 30,
2001 of $16.9 million compared with net income of $17.3 million for the
corresponding period in 2000. This decrease in 2001 compared with 2000 is
attributable to a decrease in net interest income.
During each of the three month periods ended June 30, 2001 and 2000, 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, 2001 and 2000 totalled $5.5 million and $5.9 million,
respectively. There were no common stock dividends paid during the three months
ended June 30, 2001 or 2000.
11
Net Interest Income. The Company reported interest income, net of servicing fee
expense, for the three months ended June 30, 2001 of $16.9 million, a decrease
of $393,000 from the $17.3 million reported for the three month period ended
June 30, 2000. This decrease in interest income is attributed to a lower average
yield on the residential mortgage loan portfolio. The lower yield of 6.71% on
residential mortgage loans during the three month period ended June 30, 2001 as
compared to the 6.85% yield for the same period in 2000 is primarily due to the
repricing of variable rate loans at lower rates during 2001 and the purchase of
new loans at lower current market rates. The average outstanding balance of
residential mortgage loans during the three month period ended June 30, 2001 was
$439,000 higher than during the same period in 2000. Interest income, net of
servicing fee expense, during the three months ended June 30, 2001 is comprised
of $16.7 million ($17.6 million gross interest less $910,000 servicing fee
expense) from residential mortgage loans and $241,000 from short-term
investments, representing an average yield after servicing fees on residential
mortgage loans of 6.71% and on earning assets of 6.65%, based on average
outstanding asset balances of $993.5 million and $1,016.4 million, respectively.
Interest income, net of servicing fee expense, 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 $993.1 million and $1,013.0 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, 2001 and 2000. 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, 2001 or December 31, 2000.
The following table reflects residential mortgage loans with past due principal
and interest payments as of June 30, 2001 and December 31, 2000:
June 30, 2001 December 31, 2000
------------- -----------------
Principal Balance Percent Principal Balance Percent
(in thousands) of Total Loans (in thousands) of Total Loans
-------------- -------------- -------------- --------------
30 to 59 days past due $ 767 0.08% $1,775 0.18%
60 to 89 days past due 2,493 0.26 1,162 0.12
90 days or more past due 1,877 0.20 1,628 0.17
------ ---- ------- ----
$5,137 0.54% $4,565 0.47%
====== ==== ====== ====
ALLOWANCE FOR LOAN LOSSES
As of June 30, 2001, the Company has allocated $321,000 of its allowance for
loan losses against specific problem loans, with the remaining $7.3 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,
2001 to be adequate. Although the Company believes that it has sufficient
allowances to absorb losses which currently exist in the portfolio, the amount
is subject to
12
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 six months ended June 30, 2001 and 2000 (in thousands):
2001 2000
---- ----
Balance - January 1 $ 7,641 $ 7,883
Provision for loan losses -- --
Recoveries (charge-offs), net 16 (162)
------- -------
Balance - June 30 $ 7,657 $ 7,721
======= =======
The Company's allowance coverage ratio (allowance for loan losses to loans) at
June 30, 2001 and December 31, 2000 was 0.80% and 0.78%, 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 $141.4
million and $172.2 million of the residential mortgage loans held by the Company
at June 30, 2001 and December 31, 2000, respectively, had the potential to
negatively amortize, while approximately $14.2 million and $18.9 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, 2001 and December 31, 2000, respectively. The current principal balance
exceeded the original principal balance on those loans by approximately $542,000
and $712,000 as of June 30, 2001 and December 31, 2000, 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.
13
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, 2001:
Book Value
(in thousands) Percent
-------------- -------
California $ 792,684 82.9%
Florida 23,991 2.5
New York 17,376 1.8
Nevada 15,310 1.6
Texas 11,576 1.2
Colorado 10,787 1.1
Hawaii 10,345 1.1
Washington 10,338 1.1
Other states (31 states and Washington,
D.C.; no state has more than 1%) 63,643 6.7
----------- -----
$ 956,050 100.0%
=========== =====
The 82.9% 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.
There is evidence of deterioration in some real estate markets, especially in
northern California. As of June 30, 2001, 40.9% of the Company's total
residential mortgage loan portfolio was comprised of loans secured by properties
located in northern California.
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 90% of its REIT taxable income, as provided for under the Internal Revenue
Code ("IRC"), to its common and preferred stockholders. Prior to 2001, the
Company was required to distribute 95% of its REIT taxable income. 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, 2001 were $36.8 million provided by
operating activities and $151.4 million provided by mortgage loan principal
repayments. The primary uses of funds were $154.9 million in purchases of
mortgage loans and $22.8 million in preferred stock dividends paid.
14
OTHER MATTERS
As of June 30, 2001, 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 97% 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 99% 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.
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, 2000.
15
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).
3.1 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)).
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed during the quarter ended
June 30, 2001.
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 7, 2001