UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2002 Commission file number: 1-12639
-------------- -------
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 94-3254883
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(State or other jurisdiction of (I.R.S. Employer Identification 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 May 9, 2002: 1,000 shares.
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
FIRST QUARTER 2002 REPORT ON FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Balance Sheets
March 31, 2002 and December 31, 2001...........................................................3
Unaudited Statements of Income
Three months ended March 31, 2002 and 2001.....................................................4
Unaudited Statement of Stockholders' Equity
Three months ended March 31, 2002..............................................................5
Unaudited Statements of Cash Flows
Three months ended March 31, 2002 and 2001.....................................................6
Notes to Unaudited Financial Statements........................................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................14
Item 6. Exhibits and Current Reports on Form 8-K......................................................14
Signature..............................................................................................15
2
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
BALANCE SHEETS
March 31, 2002 and December 31, 2001
(Unaudited)
(dollars in thousands, except per share data)
March 31, December 31,
ASSETS 2002 2001
---------- ----------
Residential mortgage loans, net $ 939,036 $ 933,168
Cash and cash equivalents 19,214 18,702
Due from affiliates 52,611 56,622
Accrued interest receivable 4,209 4,138
Foreclosed real estate, net -- 99
---------- ----------
TOTAL ASSETS $1,015,070 $1,012,729
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to affiliates $ 771 $ 638
Accounts payable and accrued liabilities 291 237
---------- ----------
Total Liabilities 1,062 875
---------- ----------
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 14,008 11,854
---------- ----------
Total Stockholders' Equity 1,014,008 1,011,854
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,015,070 $1,012,729
========== ==========
See accompanying notes to unaudited financial statements.
3
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
STATEMENTS OF INCOME
Three Months Ended March 31, 2002 and 2001
(Unaudited)
(in thousands)
2002 2001
---- ----
INTEREST INCOME
Residential mortgage loans $ 14,443 $ 18,482
Less: servicing fee expense (884) (929)
-------- --------
13,559 17,553
Short-term investments 86 205
-------- --------
Interest income, net of servicing fee expense 13,645 17,758
NONINTEREST EXPENSE
Director fees 9 8
Professional fees 54 8
Foreclosed real estate operations, net -- (14)
Other 22 24
-------- --------
Total noninterest expense 85 26
-------- --------
NET INCOME 13,560 17,732
Preferred stock dividends 11,406 11,406
-------- --------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 2,154 $ 6,326
======== ========
See accompanying notes to unaudited financial statements.
4
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2002
(Unaudited)
(dollars in thousands)
Additional Total
Preferred Common Paid-in Retained Stockholders'
Stock Stock Capital Earnings Equity
----- ----- ------- -------- ------
BALANCE AT DECEMBER 31, 2001 $ 500,000 $ -- $ 500,000 $ 11,854 $ 1,011,854
Net income -- -- -- 13,560 13,560
Dividends paid on 9 1/8% noncumulative
Exchangeable preferred stock, series A -- -- -- (11,406) (11,406)
----------- ----------- ----------- ----------- -------------
BALANCE AT MARCH 31, 2002 $ 500,000 $ -- $ 500,000 $ 14,008 $ 1,014,008
=========== =========== =========== =========== =============
See accompanying notes to unaudited financial statements.
5
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2002 and 2001
(Unaudited)
(in thousands)
2002 2001
---- ----
OPERATING ACTIVITIES:
Net income $ 13,560 $ 17,732
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of purchase discounts and premiums, net 1,275 463
Interest capitalized on negatively amortizing loans -- (33)
Gain on sales of foreclosed real estate, net -- (14)
Decrease (increase) in due from affiliates 188 (740)
Decrease (increase) in accrued interest receivable 385 514
Increase (decrease) in accounts payable and accrued liabilities 54 (45)
Increase (decrease) in due to affiliates 133 11,301
--------- ---------
Net cash provided by operating activities 15,595 29,178
INVESTING ACTIVITIES:
Purchase of mortgage loans (160,291) (53,643)
Mortgage loan principal repayments 156,911 52,813
Purchase of accrued interest receivable (456) (211)
Proceeds from sales of foreclosed real estate 159 561
--------- ---------
Net cash used in investing activities (3,677) (480)
FINANCING ACTIVITIES:
Preferred stock dividends paid (11,406) (11,406)
--------- ---------
Net cash used in financing activities (11,406) (11,406)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 512 17,292
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,702 8,526
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,214 $ 25,818
========= =========
Supplemental disclosure of cash flow information:
Non-cash investing activities:
Mortgage loan principal increase (decrease) for timing difference
between principal repayments received by servicer and related cash
received by Company during the period $ 3,823 $ (18,836)
See accompanying notes to unaudited financial statements.
6
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
accounting principles generally accepted in the United States of America
for interim financial information and the requirements of Regulation S-X,
Article 10 and therefore do not include all disclosures necessary for
complete financial statements. In the opinion of management, all
adjustments have been made that are necessary for a fair presentation of
the financial position and results of operations and cash flows as of and
for the periods presented. All such adjustments are of a normal recurring
nature. The results of operations for the three months ended March 31, 2002
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, 2001. 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 March 31, 2002 and December 31, 2001, residential mortgage loans, net,
consisted of the following (in thousands):
March 31, December 31,
2002 2001
---- ----
1-4 unit residential mortgage loans $ 938,050 $ 932,683
Purchase discounts and premiums, net 8,592 8,073
Allowance for loan losses (7,606) (7,588)
--------- ---------
Total residential mortgage loans, net $ 939,036 $ 933,168
========= =========
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, the six-month Treasury rate, and the average of interbank offered
rates for six month U.S. dollar denominated deposits in the London market
("LIBOR"). 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 March 31, 2002 and December 31, 2001,
approximately 67% and 61%, 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?% per annum of the initial liquidation preference ($25.00 per
share). Dividends on the Series A Preferred Shares, if authorized and
declared, are payable quarterly in arrears on the last day of March, June,
September and December. Dividends paid during the three month period ended
March 31, 2002 and 2001 to the holders of the Series A Preferred Shares
totalled approximately $11.4 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 three months ended March 31, 2002 and 2001.
7
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(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 $884,000 and $929,000 for the three
months ended March 31, 2002 and 2001, 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 $1,000 during the three months ended March 31,
2001. No such fees were recorded during the three months ended March 31,
2002. 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 $52.6 million and $56.6 million at
March 31, 2002 and December 31, 2001, respectively, and is included in due
from affiliates. Substantially all of such payments were passed through to
the Company in April 2002 and January 2002, respectively, as provided in
the Servicing Agreement. At March 31, 2002 and December 31, 2001, trust
funds of approximately $1.2 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 March 31, 2002 and December 31, 2001, the Company owed the Bank
approximately $771,000 and $638,000, 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 April 2002 and January
2002, respectively.
8
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. These factors
are discussed in greater detail in our 10-K for 2001, under the heading
"Business - Factors That May Affect Future Results." We assume no obligation to
update any of our forward-looking statements.
FINANCIAL HIGHLIGHTS
The following information is presented as of March 31, 2002 and 2001 and for the
three months ended March 31, 2002 and 2001 (dollars in thousands):
2002 2001
---- ----
Statements of Income - Three Months Ended March 31:
Net interest income $ 13,645 $ 17,758
Net income $ 13,560 $ 17,733
Average yield on mortgage loans 5.40% 7.06%
Balance Sheet as of March 31:
Residential mortgage loans, net $ 939,036 $ 951,947
Total assets $ 1,015,070 $1,017,799
Total stockholders' equity $ 1,014,008 $1,006,177
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.
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.
9
RESULTS OF OPERATIONS
Three months ended March 31, 2002 versus three months ended March 31, 2001
Net Income. The Company reported net income for the three months ended March 31,
2002 of $13.6 million compared with net income of $17.7 million for the
corresponding period in 2001. This decrease in 2002 compared with 2001 is
attributable to a decrease in net interest income.
During each of the three month periods ended March 31, 2002 and 2001, 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 March 31, 2002 and 2001 totalled $2.2 million and $6.3 million,
respectively. No common stock dividends were paid during the three months ended
March 31, 2002 and 2001.
Net Interest Income. The Company reported interest income, net of servicing fee
expense, for the three months ended March 31, 2002 of $13.6 million, a decrease
of $4.2 million from the $17.8 million reported for the three month period ended
March 31, 2001. This decrease in interest income is attributed to a lower
average yield on the residential mortgage loan portfolio. The lower yield of
5.40% on residential mortgage loans during the three month period ended March
31, 2002 as compared to the 7.06% yield for the same period in 2001 is primarily
due to the repricing of variable rate loans at lower rates during 2002 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 March
31, 2002 was $10.1 million higher than during the same period in 2001. Interest
income, net of servicing fee expense, during the three months ended March 31,
2002 is comprised of $13.6 million ($14.4 million gross interest less $884,000
servicing fee expense) from residential mortgage loans and $86,000 from
short-term investments, representing an average yield after servicing fees on
residential mortgage loans of 5.40% and on earning assets of 5.31%, based on
average outstanding asset balances of $1,004.3 million and $1,028.0 million,
respectively. Interest income, net of servicing fee expense, during the three
months ended March 31, 2001 is comprised of $17.5 million ($18.5 million gross
interest less $929,000 servicing fee expense) from residential mortgage loans
and $205,000 from short-term investments, representing an average yield after
servicing fees on residential mortgage loans of 7.06% and on earning assets of
7.04%, based on average outstanding asset balances of $994.2 million and
$1,009.3 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 March 31, 2002 and 2001. 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 March 31, 2002 or December 31, 2001.
10
The following table reflects residential mortgage loans with past due principal
and interest payments as of March 31, 2002 and December 31, 2001:
March 31, 2002 December 31, 2001
-------------- -----------------
Principal Balance Percent Principal Balance Percent
(in thousands) of Total Loans (in thousands) of Total Loans
-------------- -------------- -------------- --------------
30 to 59 days past due $263 0.03% $1,593 0.17%
60 to 89 days past due 38 -- 1,397 0.15
90 days or more past due 2,813 0.30 2,214 0.24
-------- ------- -------- --------
$3,114 0.33% $5,204 0.56%
======== ======= ======== =========
ALLOWANCE FOR LOAN LOSSES
As of March 31, 2002, the Company has allocated $306,000 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 March 31,
2002 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 continuing review based on quality indicators, industry and
geographic concentrations, changes in business conditions, and other external
factors such as competition, legal and regulatory requirements. The Company will
continue to periodically reassess the adequacy of the allowance for loan losses.
The following table reflects the activity in the Company's allowance for loan
losses for the three months ended March 31, 2002 and 2001 (in thousands):
2002 2001
- ------- -------
Balance - January 1 $ 7,588 $ 7,641
Provision for loan losses -- --
Recoveries (charge-offs), net 18 17
------- -------
Balance - March 31 $ 7,606 $ 7,658
======= ========
The Company's allowance coverage ratio (allowance for loan losses to loans) at
March 31, 2002 and December 31, 2001 was .80% and .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
11
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 $100.6 million and $115.2 million of the residential mortgage
loans held by the Company at March 31, 2002 and December 31, 2001, respectively,
had the potential to negatively amortize, while approximately $6.0 million and
$8.6 million of the residential mortgage loans had negatively amortized such
that the current principal balance of the loan exceeded the original principal
balance at March 31, 2002 and December 31, 2001, respectively. The current
principal balance exceeded the original principal balance on those loans by
approximately $197,000 and $264,000 as of March 31, 2002 and December 31, 2001,
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 March
31, 2002:
Book Value
(in thousands) Percent
-------------- -------
California $ 741,417 79.04%
Illinois 22,616 2.41
Florida 21,571 2.30
Colorado 20,885 2.23
Texas 17,437 1.86
New York 13,587 1.45
Nevada 13,514 1.44
Washington 12,253 1.30
Other states (31 states and Washington, D.C.; no state has more than 1%) 74,770 7.97
------ ----
$ 938,050 100.00%
========= ======
The 79.0% 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 March 31, 2002, 41% 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.
12
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. The Company currently
expects to distribute dividends annually to satisfy these REIT requirements.
The Company anticipates that cash and cash equivalents on hand and the cash flow
from the residential mortgage loans will provide adequate liquidity for its
operating, investing and financing needs.
As presented in the accompanying statement of cash flows, the primary sources of
funds during the three months ended March 31, 2002 were $15.6 million provided
by operating activities and $157.0 million provided by mortgage loan principal
repayments. The primary uses of funds were $160.3 million in purchases of
mortgage loans and $11.4 million in preferred stock dividends paid.
OTHER MATTERS
As of March 31, 2002, 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, 2001.
13
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).
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed during the quarter ended
March 31, 2002.
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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
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By: Richard H. Terzian
Executive Vice President, Chief Financial Officer and
Director
(Signing on behalf of the Registrant and as the
Principal Financial Officer)
May 9, 2002
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