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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K



ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934



For the Fiscal Year Ended December 31, 2004



Commission File Number: 000-33461



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FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)



|                                                                                              |  |                                     
|--------------------------------------------------------------------------------------------- |  | ------------------------------------
|Nevada                                                                                        |  | 91-1971389                          
|(State or other jurisdiction of incorporation or organization)                                |  | (I.R.S. Employer Identification No.)
|                                                                                              | 
|111 Pine Street, 2nd Floor San Francisco, California (Address of principal executive offices) |  | 94111 (Zip code)                    



Registrants
telephone number, including area code:(415) 392-1400



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Securities registered pursuant to Section 12(b) of the Act:

None



Securities registered pursuant to Section 12(g) of the Act:

8.875% Noncumulative
Perpetual Series B Preferred Stock

7.25% Noncumulative Perpetual Series D Preferred Stock



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.        Yes x    No ̈



Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule
12b-2).        Yes ̈No x



The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the book value per share of such common equity as of June 30, 2004 was approximately $23,000.



The number of shares outstanding of the registrants common stock, par value $.01 per share, as of March 14, 2005 was 29,354,393.



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FIRST REPUBLIC PREFERRED CAPITAL CORPORATION



TABLE OF CONTENTS



|                                                                                                                         |  |   
|------------------------------------------------------------------------------------------------------------------------ |  | --
|                                                                                                                         | 
|PART I                                                                                                                   |  |   
|                                                                                                                         | 
|Item 1.    Business.                                                                                                     |  | 3 
|                                                                                                                         | 
|Item 2.    Properties.                                                                                                   |  | 12
|                                                                                                                         | 
|Item 3.    Legal Proceedings.                                                                                            |  | 12
|                                                                                                                         | 
|Item 4.    Submission of Matters to a Vote of Security Holders.                                                          |  | 12
|                                                                                                                         | 
|PART II                                                                                                                  |  |   
|                                                                                                                         | 
|Item 5.    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |  | 12
|                                                                                                                         | 
|Item 6.    Selected Financial Data.                                                                                      |  | 15
|                                                                                                                         | 
|Item 7.    Managements Discussion and Analysis of Financial Condition and Results of Operations.                        |  | 16
|                                                                                                                         | 
|Item 7A. Quantitative and Qualitative Disclosures About Market Risk.                                                     |  | 19
|                                                                                                                         | 
|Item 8.    Financial Statements and Supplementary Data.                                                                  |  | 25
|                                                                                                                         | 
|Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.                         |  | 25
|                                                                                                                         | 
|Item 9A. Controls and Procedures.                                                                                        |  | 25
|                                                                                                                         | 
|Item 9B. Other Information.                                                                                              |  | 25
|                                                                                                                         | 
|PART III                                                                                                                 |  |   
|                                                                                                                         | 
|Item 10.  Directors and Executive Officers of the Registrant.                                                            |  | 25
|                                                                                                                         | 
|Item 11.  Executive Compensation.                                                                                        |  | 27
|                                                                                                                         | 
|Item 12.  Security Ownership of Certain Beneficial Owners and Management.                                                |  | 28
|                                                                                                                         | 
|Item 13.  Certain Relationships and Related Transactions.                                                                |  | 29
|                                                                                                                         | 
|Item 14.  Principal Accounting Fees and Services.                                                                        |  | 29
|                                                                                                                         | 
|PART IV                                                                                                                  |  |   
|                                                                                                                         | 
|Item 15.  Exhibits, Financial Statement Schedules.                                                                       |  | 29
|                                                                                                                         | 
|SIGNATURES                                                                                                               |  | 31



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PART I



Information Regarding Forward-Looking Statements



This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the
Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be
materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to statements regarding, the following:



| |  |  | business strategy;
| | - |  | ------------------



| |  |  | estimates regarding capital requirements and the need for additional financing; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | plans, objectives, expectations and intentions contained in this report that are not historical facts.
| | - |  | ------------------------------------------------------------------------------------------------------



You can identify forward-looking statements by terms such as may, will, should,
could, expect, anticipate, believe, estimate, project, predict, intend, potential, continue and similar expressions intended to
identify forward-looking statements. Statements that contain these words should be read carefully because they discuss future expectations, contain projections of future results of operations or financial condition or state other
forward-looking information. There may be events in the future, however, that cannot be accurately predicted or controlled, and that may cause actual results to differ materially from the expectations described in the forward-looking
statements. The reader is cautioned that all forward-looking statements involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including, but not limited to, competitive
pressure in the mortgage lending industry; changes in the interest rate environment that reduce margins; general economic conditions, either nationally or regionally, that are less favorable than expected, resulting in, among other things, a
deterioration in credit quality and an increase in the provision for possible loan losses; changes in the regulatory environment; changes in business conditions, particularly in San Francisco and Los Angeles counties and in the home mortgage lending
industry; and changes in the securities markets. Other risks, uncertainties and factors are discussed elsewhere in this report, in other First Republic Preferred Capital Corporations filings with the Securities and Exchange Commission
(SEC) and in materials incorporated therein by reference.



Throughout this document, Company, we, our or us refers to First Republic Preferred Capital Corporation and Bank refers to First Republic Bank.



|Item  1. | BUSINESS.
|-------- | ---------



General



First Republic
Preferred Capital Corporation (the Company) is a Nevada corporation formed by First Republic Bank (the Bank), a Nevada chartered commercial bank, in April 1999 for the purpose of raising capital for the Bank. The Bank
initially capitalized the Company with $111 million. The Company used this initial capital to acquire mortgage loans from the Bank. The Companys principal business is acquiring, holding, financing and managing assets secured by real estate
mortgages and other obligations secured by real property, as well as certain other qualifying real estate investment trust (REIT) assets (collectively referred to herein as the Mortgage Assets). All of the Mortgage Assets
presently held by the Company are loans secured by single family and multifamily real estate properties (Mortgage Loans) that were acquired from the Bank. The Company expects that all, or substantially all, of its Mortgage Assets will
continue to be Mortgage Loans acquired from the Bank. The Company has elected to be taxed as a REIT and intends to make distributions to its shareholders such that the Company is relieved of substantially all income taxes relating to ordinary income
under applicable tax regulations. Accordingly, no provision for income taxes is included in the accompanying financial statements. At December 31, 2004, the Company had issued 29,362,633 shares of common stock, par



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value $0.01 per share, and the Bank owned all of the common stock except for 9,840 shares held by certain of the Banks employees and directors at
December 31, 2004. Earnings per share data is not presented, as the common stock is not publicly traded.



General Description of Mortgage Assets



Current Mortgage Assets. The Companys Mortgage Assets as of December 31, 2004 consisted of Mortgage Loans originated by the Bank and secured by single family (one-to-four unit) homes and multifamily
properties. At December 31, 2004, the aggregate outstanding principal balance of those loans was $325.7 million.



Single Family Mortgage Loans. The Bank originates and may acquire from time to time both conforming and nonconforming single family mortgage loans.
Conventional conforming single family mortgage loans comply with the requirements for inclusion in a loan guarantee program sponsored by either Freddie Mac or Fannie Mae. Substantially all of the single family mortgage loans that the Company
acquires from the Bank are nonconforming because the loans have original principal balances that exceed the limits for Freddie Mac or Fannie Mae programs. The Company believes that all of its single family mortgage loans meet the requirements for
sale to national private mortgage conduit programs or other investors in the secondary mortgage market.



Each single family mortgage loan is evidenced by a promissory note secured by a mortgage or deed of trust or other similar security instrument creating a
first lien on single family (one-to-four unit) residential properties, including shares allocated to a dwelling unit in a residential cooperative housing corporation. Real estate properties underlying single family mortgage loans consist of
individual dwelling units, individual cooperative apartment units, individual condominium units, two- to four-family dwelling units, planned unit developments and townhouses. The Company currently expects that most of the single family mortgage
loans acquired will be adjustable rate or intermediate fixed rate mortgage loans; however, the Company may also purchase longer-term fixed rate single family mortgage loans.



Multifamily Mortgage Loans.The Companys multifamily mortgage loans are predominately for established buildings
in the urban neighborhoods of San Francisco and Los Angeles and for recently constructed properties in Las Vegas. The buildings securing the Companys multifamily loans are, generally, operating properties with proven occupancy, rental rates
and expense levels. The neighborhoods tend to be densely populated; the properties are generally close to employment opportunities; and rent levels are appropriate for the target occupants. Typically, the borrowers are property owners who are
experienced at managing these properties. The Companys current policy is not to acquire multifamily mortgage loans if total multifamily mortgage loans, together with commercial mortgage loans, if any, would constitute more than 15% of Mortgage
Assets immediately following the acquisition.



Commercial
Mortgage Loans. Although the Company currently does not own any commercial mortgage loans, the Company may acquire from time to time in the future commercial mortgage loans secured by industrial and warehouse properties, recreational facilities,
office buildings, retail space and shopping malls, hotels and motels, hospitals, nursing homes or senior living centers. The Companys current policy is not to acquire any interest in a commercial mortgage loan if commercial mortgage loans and
multifamily mortgage loans together would constitute more than 15% of Mortgage Assets immediately following the acquisition. For a variety of reasons, commercial mortgage loans can be significantly more risky than single family mortgage loans.



Management Policies and Programs



As discussed elsewhere in this report, the Bank administers the
Companys Mortgage Assets. In doing so, the Bank has a high degree of autonomy. The Companys board of directors, however, has adopted certain policies to guide the acquisition and disposition of assets, use of capital and leverage, credit
risk management and certain other activities. These policies, which are discussed below, may be amended or revised from time to time at the discretion of the board of directors without a vote of the Companys shareholders.



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Asset Acquisition Policies. The Company purchases from time to time additional Mortgage Assets.
Although not required to do so, the Company expects to acquire all or substantially all of these Mortgage Assets from the Bank. As a majority-owned subsidiary of the Bank, the Company acquires loans from the Bank at prices equal to the Banks
carrying amount that generally has approximated their fair values. If a significant difference were to exist between the Banks carrying amount and the fair value of the loans at the date of purchase from the Company, the difference would be
recorded as a capital contribution by the Bank or a capital distribution to the Bank and would not be an adjustment to the basis of the loans. In the future, the Company would expect these prices to approximate the fair value for recently originated
loans; however, the prices that the Company pays will not be determined through arms-length transactions with third parties. Neither the Company nor the Bank currently has specific policies with respect to the acquisition by the Company from
the Bank of particular loans or pools of loans, other than the Companys requirement that these assets must be eligible to be held by a REIT. The Company intends to acquire only performing loans from the Bank. The Company may also periodically
acquire Mortgage Assets from unrelated third parties. To date, the Company has not entered into any arrangements or adopted any procedures to purchase Mortgage Assets from unrelated third parties and has not entered into any agreements with third
parties to purchase Mortgage Assets. The Bank, however, has purchased Mortgage Assets from unrelated third parties, and these assets are eligible to be purchased by the Company. The Company anticipates purchasing Mortgage Assets from unrelated third
parties only if neither the Bank nor any of its affiliates has amounts or types of Mortgage Assets sufficient to meet the Companys requirements. The Company currently anticipates purchasing Mortgage Assets comprised of primarily single family
mortgage loans and multifamily housing mortgage loans, although the Company may purchase commercial real estate mortgages and other types of Mortgage Assets.



In addition, the Company is permitted under the REIT guidelines to invest up to 25% of the total value of its assets in assets eligible to be held by
REITs other than those described above. These assets could include shares or interests in other REITs and partnership interests. Since inception, the Company has not acquired any such assets.



In order to preserve the Companys status as a REIT under the Internal
Revenue Code of 1986, as amended, (the Internal Revenue Code), substantially all of the Companys assets must consist of mortgage loans and other qualified assets of the type set forth in Section 856(c)(5)(B) of the Internal Revenue
Code. The other qualifying assets include cash, cash equivalents and securities, including shares or interests in other REITs, although the Company currently does not intend to invest in shares or interests in other REITs.



Capital and Leverage Policies. If the Companys board of
directors decides that additional funding is required, the Company may seek to raise funds through equity offerings or debt financings. The Company may also seek to retain cash that otherwise would be used to pay dividends, but only after
considering the consequences of such action under the provisions of the Internal Revenue Code requiring a REIT to distribute not less than 90% of its REIT taxable income (excluding deductions for any dividends paid and any net capital gains) and
taking into account taxes that would be imposed on undistributed taxable income.



The Company has no debt outstanding and currently does not intend to incur any indebtedness. Its articles of incorporation, however, do not contain any limitation on the amount or percentage of debt, funded or
otherwise, that the Company may incur. Notwithstanding the foregoing, the terms of the Companys preferred shares provide that the Company may not incur debt for borrowed money in excess of 25% of our total stockholders equity without the
approval of a majority of the Companys independent directors. Any debt incurred may include intercompany advances made by the Bank to the Company.



The Company may also issue additional preferred shares. The Company is prohibited, however, from issuing preferred shares ranking senior to the Series A
preferred shares, the Series B preferred shares, the Series C preferred shares or the Series D preferred shares without consent of holders of at least two-thirds of each of the respective classes of outstanding preferred shares. The Bank has advised
the Company that, at the date of this report, it owns approximately $25.4 million of the Companys Series A preferred shares. Because the Companys



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articles of incorporation do not prohibit or otherwise restrict the Bank or its affiliates from holding or voting the Companys preferred shares, the
Bank may be in a position to significantly affect the outcome of any future vote by the holders of the Companys preferred shares. In addition, the Company is prohibited from issuing preferred shares ranking either senior or equal to the Series
A preferred shares, Series B preferred shares, the Series C preferred shares or the Series D preferred shares without the approval of a majority of the Companys independent directors. The Company currently does not intend to issue any
additional series of preferred shares.



Credit Risk
Management Policies. The Company intends that each mortgage loan acquired from the Bank or any other party will represent a first lien position and will be originated in the ordinary course of the originators real estate lending activities
based on the underwriting standards generally applied (at the time of origination) for the originators own account. The Company also intends that all Mortgage Assets held will be serviced pursuant to a servicing agreement with the Bank, which
requires servicing in conformity with accepted secondary market standards, with any servicing guidelines promulgated by the Company and, in the case of the single family mortgage loans, with Freddie Mac and Fannie Mae guidelines and procedures.



Conflict of Interest Policies. Because of the nature of
the Companys relationship with the Bank, conflicts of interest may arise with respect to certain transactions, including, without limitation, the acquisition of Mortgage Assets from the Bank and the modification of the advisory agreement or
the loan purchase and servicing agreement. It is the Companys policy, and the policy of the Bank, to keep the terms of any financial dealings with the Bank consistent with those available from unrelated third parties in the mortgage lending
industry. In addition, neither the advisory agreement nor the loan purchase and servicing agreement, each discussed elsewhere in this report, may be modified or terminated without the approval of a majority of the Companys independent
directors.



Conflicts of interest between the Company and the
Bank may arise in connection with making decisions that bear upon the credit arrangements that the Bank may have with a borrower. Conflicts of interest may arise in connection with actions taken by the Bank as the Companys controlling
shareholder. It is the Companys intention and the intention of the Bank that any agreements and transactions between the Company, on the one hand, and the Bank, on the other hand, including without limitation the loan purchase and servicing
agreement, are fair to both parties and are consistent with market terms for such types of transactions. The loan purchase and servicing agreement provides that the Bank must perform foreclosures and dispositions of the Mortgage Loans with a view
toward the Companys interests. However, there can be no assurance that any such agreement or transaction in fact will be on terms as favorable to the Company as would have been obtained from unaffiliated third parties.



There are no provisions in the Companys articles of incorporation
limiting any of its officers, directors, security holders or affiliates from having any direct or indirect interest in any Mortgage Assets to be acquired or disposed of by the Company or in any transaction in which the Company has an interest or
from engaging in acquiring, holding or managing such Mortgage Assets. As described elsewhere in this report, the Company expects that the Bank will have direct interests in transactions with the Company, including without limitation, the transfer of
Mortgage Assets to the Company. The Company does not currently anticipate, however, that any of its officers or directors will have any interests in such Mortgage Assets.



Insurance Policies. The Bank follows what it believes to be standard practices in the mortgage banking industry by
requiring borrowers to obtain and thereafter to maintain insurance covering fire and casualty losses in respect of the mortgaged properties, but not requiring insurance coverage for natural disasters such as earthquakes. The Company believes that
the properties underlying the Mortgage Loans held are adequately insured against these types of losses.



Other Policies. The Company does not intend to make direct investments in real estate or to own other interests in real estate, except as a result
of foreclosure proceedings related to Mortgage Assets. The Company does not intend to invest in securities such as bonds, preferred stock and common stock or in the securities of or



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other interests in entities engaged in real estate activities, although the Company is permitted under REIT guidelines to invest up to 25% of its portfolio
in eligible real estate securities, including shares or interests in other REITs and partnership interests. The Company intends to operate in a manner that will not subject it to regulation under the Investment Company Act of 1940. The Company does
not intend to (i) invest in the securities of other issuers for the purpose of exercising control over such issuers, (ii) underwrite securities of other issuers, (iii) actively trade in loans and other investments, (iv) offer securities in exchange
for property or (v) make loans to third parties, including, without limitation, its officers, directors or other affiliates.



The Company may, under certain circumstances, purchase its preferred shares or common shares in the open market or otherwise. Any action of this type
would be taken only in conformity with applicable federal and state laws and the requirements for qualifying as a REIT, and only upon approval by the Companys board of directors.



The Company currently intends to make investments and to operate its business at all times in such a manner as to be
consistent with the requirements of the Internal Revenue Code to qualify as a REIT. Future economic, market, legal, tax or other considerations, however, may cause the Companys board of directors, subject to approval by a majority of the
independent directors, to determine that it is in the Companys best interests and in the best interest of the shareholders to revoke the Companys REIT status.



The Company currently does not intend to borrow money or issue securities senior to the preferred shares, or otherwise to
incur any indebtedness in connection with operations. However, the Company reserves the right to do so at any time, although under its articles of incorporation, indebtedness in excess of 25% of total stockholders equity may not be incurred
without the approval of a majority of the independent directors.



The investment and operating policies described above may be revised from time to time at the discretion of the Companys board of directors without a vote of the shareholders.



Description of Loan Portfolio



General. Except for certain home loans purchased by the Bank in 1998,
the Mortgage Loans held by the Company were originated by the Bank in the ordinary course of its real estate lending activities. The Mortgage Loans consisted solely of single family mortgages through the first quarter of 2003. Beginning in the
second quarter of 2003, the Company acquired multifamily mortgages using the proceeds of the Series D Preferred Stock offering. At December 31, 2004, the Mortgage Loans totaled $325.7 million, of which $288.2 million were secured by single family
residences and $37.5 million were secured by multifamily properties. At December 31, 2003, Mortgage Loans totaled $322.5 million, of which $296.1 million were secured by single family residences and $26.4 million were secured by multifamily
properties.



At December 31, 2004, the Mortgage Loans had
interest rates generally ranging from 3.29% to 8.53% per annum, a weighted average note rate of 4.98% per annum, and a weighted average remaining term of approximately 23.6 years. The Mortgage Loans were originated between October 1983 and March
2004 and had original terms to stated maturity of primarily 27 years. The weighted average number of months from origination of the loans through December 31, 2004 was 46 months. At December 31, 2003, the Mortgage Loans had rates ranging from 3.18%
to 8.51%, a weighted average note rate of 5.30%, a weighted average remaining term of 24 years and weighted average number of months from origination of 35 months.



The weighted average loan-to-value ratio for the Mortgage Loans was approximately 54% at December 31, 2004,
compared with 57% at December 31, 2003. Loan-to-value ratio means the ratio (expressed as a percentage) of the current principal amount of a mortgage loan to the lesser of (i) the most recent appraised value of the underlying mortgage
property, and (ii) if the mortgage loan was made to finance the acquisition of a property, the purchase price of the mortgaged property. The provisions governing the Companys Mortgage Loans include due-on-sale clauses, which
prevent the unauthorized transfer of property serving as collateral for the mortgage loan and accelerate the obligation to repay the entire outstanding principal balance of the loan or any such transfer.



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Mortgage Loans.The Mortgage Loan portfolio consists of adjustable and fixed interest rate types,
which are more fully described below. The interest rate types for adjustable rate mortgage (ARM) loans include Monthly Eleventh District Cost of Funds Index (COFI) ARM, Six-Month Eleventh District COFI ARM, and One-Year
Treasury (CMT) ARM; intermediate fixed rate types, which are adjustable after an initial period, include 5/1 Year ARM, 7/1 Year ARM, 10/1 Year ARM, and 5/5 Year ARM; and fixed interest rate types include 15-Year Fixed and 30-Year Fixed.



A majority of the Mortgage Loans have adjustable interest rate
types. As of December 31, 2004, of the $325.7 million of total Mortgage Loans, 47% (by principal balance) are ARMs that bear interest at rates that adjust within one year, and 39% are intermediate fixed rate Mortgage Loans that bear interest at
rates that will adjust after an initial period during which the interest rate is fixed. The interest rate on an ARM typically is tied to either the COFI or the CMT index and is adjustable periodically. Generally, ARMs are subject to lifetime
interest rate caps and periodic interest rate caps.



The
interest rate on an ARM generally includes a gross margin. The gross margin with respect to a mortgage loan that is an ARM is an applicable fixed percentage that is added to the applicable index in order to calculate the current interest
rate paid by the borrower of such mortgage loan (without taking into account any interest rate caps or minimum interest rates). The concept of gross margin is not applicable to longer-term fixed rate mortgage loans.



The interest rate on each type of ARM loan product such as the COFI ARM or
the CMT ARM periodically adjusts subject to lifetime interest rate caps, minimum interest rates and, in the case of most ARMs, maximum periodic adjustment increases or decreases, each as specified in the mortgage note relating to the ARM. Each ARM
loan bears interest at its initial interest rate until its first rate adjustment date. Except for the COFI ARMs, effective with each rate adjustment date, the monthly principal and interest payment on an ARM will be adjusted to an amount that will
fully amortize the then-outstanding principal balance of such mortgage loan over its remaining term to stated maturity and that will be sufficient to pay interest at the adjusted interest rate.



As of December 31, 2004, of the $325.7 million of total Mortgage Loans, 36%
are intermediate fixed rate loans that are automatically convertible (the 5/1 Year ARMs, 7/1 Year ARMs and 10/1 year ARMs), compared with 53% at December 31, 2003. The interest rate for these automatically convertible mortgage loans is fixed at an
initial rate for a certain amount of years (five to ten years in the case of the loans referenced above), after which time the loan generally converts to a One-Year ARM, and the interest rate adjusts annually thereafter as if the mortgage loan were
a One-Year ARM with a lifetime interest rate cap. At December 31, 2004 and 2003 an additional 3% are mortgage loans that reprice every five years. These loans are repriced based on the 5-year CMT index.



Underwriting Standards. The Bank has represented to the Company that
all of the Mortgage Loans in the portfolio were originated or subsequently underwritten generally in accordance with the underwriting policies customarily employed by the Bank during the period in which the Mortgage Loans were originated or
purchased by the Bank, as applicable.



In the mortgage loan
approval process, the Bank assesses both the borrowers ability to repay the mortgage loan and, in the appropriate cases, the adequacy of the proposed security. Credit policies and procedures are established by the board of directors of the
Bank, which delegates credit approval to certain executive officers and senior credit officers in accordance therewith.



The approval process for each type of mortgage loan includes on-site appraisals of the properties securing such loans and a review of the applicants
financial statements and credit, payment and banking history, financial statements of any guarantors, and tax returns of guarantors of commercial mortgage loans. The Bank generally lends up to 80% of the appraised value of single family residential
owner-occupied dwellings. The maximum loan-to-value ratio generally applied by the Bank to multifamily or commercial mortgage loans has been 75% of the lesser of the appraised value of the property or the sale price.



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The Bank requires title insurance policies protecting the priority of the Banks liens for all
Mortgage Loans and fire and casualty insurance for Mortgage Loans. Generally, for any single family mortgage loan in an amount exceeding 80% of the appraised value of the security property, the Bank currently requires mortgage insurance from an
independent mortgage insurance company.



Substantially all
fixed-rate mortgage loans originated by the Bank contain a due-on-sale clause providing that the Bank may declare a mortgage loan immediately due and payable in the event, among other things, that the borrower sells the property securing
the loan without the consent of the Bank. The Banks ARMs generally are assumable by a borrower determined to be qualified by the Bank.



Geographic Distribution; Loan Size. Approximately 79% of the outstanding principal balance of the Companys Mortgage Loan portfolio is secured
by properties located in California. Consequently, the Companys loan portfolio will be particularly affected by adverse developments in California, including economic, political and business developments and natural catastrophes such as storms
or earthquakes, to the extent any such developments may affect the ability or willingness of property owners in that state to make payments of principal and interest on the Mortgage Loans. The Bank has historically emphasized and specialized in the
origination of loans that are nonconforming as to size.



Loan-to-Value Ratios; Insurance. For single family mortgage loans, the Companys general policy is not to exceed a loan-to-value ratio of greater than 80% unless the borrower obtains mortgage insurance. At the time of
origination of the single family mortgage loans, each of the primary mortgage insurance policy insurers was approved by Fannie Mae or Freddie Mac. A standard hazard insurance policy is required to be maintained by the mortgagor with respect to each
single family mortgage loan in an amount equal to the maximum replacement cost of the improvements securing such single family mortgage loan or the principal balance of such single family mortgage loan, whichever is less. If the real estate property
underlying a single family mortgage loan is located in a flood zone, the loan may also be covered by a flood insurance policy as required by law. The Company does not maintain any special hazard insurance policy or mortgagor bankruptcy insurance
with respect to single family mortgage loans, nor is any single family mortgage loan insured by the Federal Housing Administration or guaranteed by the Veterans Administration. For multifamily loans, the Companys policies are to obtain an
appraisal on each loan and, generally, to not exceed a loan-to-value ratio of 75%.



The Companys Relationship with the Bank



Amended and Restated Master Loan Purchase and Servicing Agreement. The Company acquires Mortgage Loans from the Bank pursuant to an Amended and Restated Master Loan Purchase and Servicing Agreement (the Servicing
Agreement). Of the Mortgage Loans serviced by the Bank pursuant to the terms of the Servicing Agreement, the Bank, as servicer, retains a service fee equal to 0.25% per annum calculated monthly based on the gross outstanding principal balances
of loans in the loan portfolio.



The Servicing Agreement
requires the Bank to service the Mortgage Loans in a manner generally consistent with accepted secondary market practices, with any servicing guidelines promulgated by the Company and, in the case of single family mortgage loans, with Fannie Mae and
Freddie Mac guidelines and procedures. The Servicing Agreement requires the Bank to service the Mortgage Loans with a view toward the Companys interests. The Bank collects and remits principal and interest payments, administers mortgage escrow
accounts, submits and pursues insurance claims, and initiates and supervises foreclosure proceedings on the Mortgage Loans it services. The Bank also provides accounting and reporting services required by the Company for the Mortgage Loans. The
Servicing Agreement requires the Bank to follow collection procedures customary in the industry, including contacting delinquent borrowers and supervising both foreclosures and property disposition in the event of unremedied defaults in accordance
with servicing guidelines promulgated by the Company. The Bank may from time to time transfer, assign and sell all of its servicing obligations under the Servicing Agreement, subject to the Companys reasonable consent.



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The Bank is required to pay all expenses related to the performance of its duties under the Servicing
Agreement. The Bank is required to make advances of the taxes and required insurance premiums that are not collected from borrowers with respect to any mortgage loan serviced by it, unless it determines that such advances are nonrecoverable from the
mortgagor, insurance proceeds or other sources with respect to such mortgage loan. If the Bank makes advances, the Bank generally is reimbursed prior to our receipt of the proceeds of the mortgage loan. The Bank also is entitled to reimbursement for
expenses incurred by it in connection with the liquidation of defaulted mortgage loans serviced by it and in connection with the restoration of mortgaged property. The Bank is responsible to the Company for any loss suffered as a result of the
Banks failure to make and pursue timely claims or as a result of actions taken or omissions made by the Bank that cause the policies to be canceled by the insurer. The Bank may institute foreclosure proceedings, exercise any power of sale
contained in any mortgage or deed of trust, obtain a deed in lieu of foreclosure or otherwise, hold mortgage proceeds for the Companys benefit and acquire title to mortgaged property underlying a mortgage loan by operation of law or otherwise
in accordance with the terms of the Servicing Agreement. However, the Bank does not have the authority to enter into contracts in the Companys name.



The Company may terminate the Servicing Agreement upon the occurrence of one or more events specified in the Servicing Agreement. These events relate
generally to the Banks proper and timely performance of its duties and obligations under the Servicing Agreement. The Company may not terminate the Servicing Agreement without the approval of a majority of its independent directors.



As is customary in the mortgage loan servicing industry, the
Bank is entitled to retain any late payment charges, prepayment fees, penalties and assumption fees collected in connection with the Mortgage Loans serviced by it. The Bank receives any benefit derived from interest earned on collected principal and
interest payments between the date of collection and the date of remittance to the Company and from interest earned on tax and insurance impound funds with respect to Mortgage Loans serviced by it.



When any mortgaged property underlying a mortgage loan is conveyed by a
mortgagor, the Bank generally enforces any due-on-sale clause contained in the mortgage loan, to the extent permitted under applicable law and governmental regulations. The terms of a particular mortgage loan or applicable law, however,
may prohibit the Bank be prohibited from exercising the due-on-sale clause under certain circumstances related to the security underlying the mortgage loan and the buyers ability to fulfill the obligations under the loan. Upon a
formal assumption of a mortgage loan by a permitted transferee, a fee equal to a specified percentage of the outstanding principal balance of the mortgage loan is often required, which the Bank retains as additional servicing compensation.



Advisory Agreement.The Company has an Amended and
Restated Advisory Agreement (the Advisory Agreement) with the Bank pursuant to which the Bank administers the Companys day-to-day operations. As advisor, the Bank is responsible for: (i) monitoring the credit quality of the
Mortgage Assets; (ii) advising the Company with respect to the reinvestment of income from, and principal payments on, the Mortgage Assets, and with respect to the acquisition, management, financing and disposition of the Mortgage Assets; and (iii)
monitoring the Companys compliance with the requirements necessary to qualify as a REIT for federal income tax purposes. The Bank may from time to time subcontract all or a portion of its obligations under the Advisory Agreement to one or more
of its affiliates involved in the business of mortgage finance and the administration of Mortgage Assets. The Bank may, with the approval of a majority of the Companys board of directors as well as a majority of the Companys independent
directors, subcontract all or a portion of its obligations under the Advisory Agreement to unrelated third parties. The Bank, in connection with the subcontracting of any of its obligations under the Advisory Agreement, may not be discharged or
relieved in any respect from its obligations under the Advisory Agreement.



The Bank has substantial experience in the mortgage lending industry, both in the origination and in the servicing of Mortgage Loans. At December 31, 2004, the Bank owned approximately $3.25 billion of single



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##### Table of Contents

family mortgage loans, $564.0 million of multifamily loans and $1.76 billion of other loans secured by real estate. In its single family mortgage loan
business, the Bank originates loans and then sells or securitizes the loans to investors in the secondary market, while generally retaining the rights to service the loans. At December 31, 2004, in addition to loans serviced for its own portfolio,
the Bank serviced single family mortgage loans having an aggregate principal balance of approximately $3.49 billion.



The Advisory Agreement had an initial term of one year, and it has been and will be renewed for additional one-year periods unless the Company terminates
the agreement, which the Company may do at any time upon 90 days prior written notice to the Bank. The Bank cannot refuse the Companys request to renew the agreement. As long as any of its preferred shares remain outstanding, any
decision by the Company either to renew the Advisory Agreement or to terminate the Advisory Agreement must be approved by a majority of the Companys board of directors, as well as by a majority of its independent directors. During 2004, the
Bank received an annual advisory fee equal to $75,000 payable in equal quarterly installments with respect to the advisory and management services. For the calendar year 2005, the Company and the Bank negotiated an increase in the fee to $100,000,
payable in equal quarterly installments. That fee may be increased with the approval of a majority of the Companys board of directors, including a majority of its independent directors.



As a result of the Companys relationship with the Bank, certain
conflicts of interest may arise with respect to transactions, including future acquisitions of Mortgage Assets from the Bank, servicing Mortgage Loans, future dispositions of Mortgage Assets to the Bank, and the renewal, termination or modification
of the Advisory Agreement or the Servicing Agreement.



Employees



The Company currently has no employees. However, the
Company does have five executive officers who are described in Item 10 of this report. The Company does not anticipate that it will require any employees because it has retained the Bank to perform certain functions pursuant to the Servicing
Agreement and the Advisory Agreement. Each of the Companys executive officers currently is also an employee and/or director of the Bank. The Company maintains corporate records and audited financial statements that are separate from those of
the Bank. Currently, none of the Companys officers or directors has any direct or indirect pecuniary interest in any Mortgage Asset owned by the Company, and the Company does not expect any of its officers, directors or employees (if any) to
have any direct or indirect pecuniary interest in any Mortgage Asset acquired or disposed of in any transaction in which the Company has an interest or will engage in acquiring, holding and managing Mortgage Assets. However, there is no provision in
the Companys articles of incorporation prohibiting such persons from having direct or indirect interests in Mortgage Loans. See Management Policies and ProgramsConflict of Interest Policies.



Competition



The Company does not engage in the business of originating mortgage loans. While the Company intends to acquire additional
Mortgage Assets, the Company anticipates that these additional Mortgage Assets will be acquired from the Bank. Accordingly, the Company does not compete or expect to compete with mortgage conduit programs, investment banking firms, savings and loan
associations, banks, thrift and loan associations, finance companies, mortgage bankers or insurance companies in acquiring Mortgage Assets. The Bank, from which the Company expects to continue to purchase most or all of its Mortgage Assets in the
future, will face competition from these organizations.



Qualification as a
REIT



The Company elected to be taxed as a REIT commencing
with its initial taxable year ended December 31, 1999 and intends to comply with the provisions of the Internal Revenue Code with respect thereto. The Company qualifies as a REIT if 90% of the Companys adjusted REIT taxable income is
distributed to stockholders and as long as certain assets, income and stock ownership tests are met. For 2004, 2003 and 2002, all Internal Revenue



11



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##### Table of Contents

Code requirements for a REIT were met. For each year prior to 2004, the Company has paid 100% of its net earnings as cash dividends to the holders of its
common stock shares. The Bank is the primary holder, owning 99.9% of the outstanding common shares. For the calendar year ended December 31, 2004, the dividend on the common stock shares owned by the Bank was treated as a consent dividend under
Section 565 of the Internal Revenue Code.



Available Information



The Companys annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are accessible on the SECs website, www.sec.gov, as soon as
reasonably practicable after those reports have been electronically filed or submitted to the SEC.



|Item  2. | PROPERTIES.
|-------- | -----------



The Company neither owns nor leases any property.



|Item  3. | LEGAL PROCEEDINGS.
|-------- | ------------------



The Company is not currently involved in nor, to its knowledge, currently threatened with any material legal proceedings.



|Item  4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|-------- | ----------------------------------------------------



No matters were submitted to a vote of security holders during the fourth quarter of 2004.



PART II



|Item  5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
|-------- | -------------------------------------------------------------------------------------------------------------



Common Stock



There is no established trading market for the Companys common stock, and the common stock is not listed on any
exchange or automated quotation system. In addition to the Bank, there were approximately 125 holders of the common stock at December 31, 2004, all of whom are or were employees or directors of the Bank. The Company currently expects to pay to
holders of its common stock an aggregate amount of dividends equal to not less than 90% of the Companys REIT taxable income (excluding the deduction for dividends paid on common stock and any net capital gains) in order to remain qualified as
a REIT. The Company declared dividends on common stock of $1,924,000 for 2004, $1,255,000 for 2003 and $2,044,000 for 2002, which represents 100% of the Companys REIT taxable income, calculated after the deduction for dividends paid on
preferred shares. Dividends on common stock generally cannot be paid, however, for periods in which less than full dividends are paid on the Companys preferred shares. For 2004, the Bank elected to treat its share of dividend as a consent
dividend under Section 565 of the Internal Revenue Code.



As of
December 31, 2004, the Company was authorized to issue 50,000,000 shares of common stock with a par value of $0.01 per share. At December 31, 2004, 29,362,633 shares of common stock were outstanding.



Series A Preferred Shares



In June 1999, the Company completed a private offering of 55,000 shares of
its Perpetual, Exchangeable, Noncumulative Series A Preferred Shares (Series A Preferred Shares) and received proceeds of $55 million. The Bank paid all expenses of the offering, including underwriting commissions and discounts. The
Series A Preferred Shares have not been registered under the Securities Act or any other applicable securities law. The



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##### Table of Contents

Series A Preferred Shares may not be resold, pledged or otherwise transferred by the purchaser or any subsequent holder except (A)(i) to a person whom the
transferor reasonably believes is a Qualified Institutional Buyer (QIB) in a transaction meeting the requirements of Rule 144A under the Securities Act; (ii) to institutional accredited investors (of the type described in Rule 501(a)(1)
or (3) under the Securities Act) in transactions exempt from the registration requirements of the Securities Act; or (iii) pursuant to the exemption from registration under the Securities Act provided by Rule 144 (if available), and (B) in
accordance with all applicable securities laws of the states of the United States. The Series A Preferred Shares are not listed on any national securities exchange or quoted on the Nasdaq National Stock Market, Inc. The Series A Preferred Shares are
eligible for trading in the Private Offerings, Resales and Trading through Automated Linkages System of the National Association of Securities Dealers (PORTAL).



The Company used the proceeds from the offering to fund a dividend distribution to the Bank as the then holder of all of the
common stock.



The Series A Preferred Shares are not redeemable
prior to June 1, 2009. Holders of the Series A Preferred Shares are entitled to receive, if authorized and declared by the board of directors of the Company, noncumulative dividends at a rate of 10.5% per annum or $105 per annum per share. Dividends
on the Series A Preferred Shares, if authorized and declared, are payable semiannually in arrears on June 30 and December 30 of each year. The Company paid dividends on the Series A Preferred Shares of $5,775,000 for the year ended December 31,
2004.



Series B Preferred Shares



In January 2002, the Company issued and sold 1,680,000 shares of its 8.875%
Noncumulative Perpetual Series B Preferred Stock (Series B Preferred Shares) in a public offering. The Bank paid all expenses of the offering, including underwriting commissions and discounts. The proceeds of $42 million and the
additional issuance of 7,460,831 shares of common stock to the Bank were used to acquire from the Bank approximately $80 million of single family mortgage loans and $4 million of short-term investments.



The Companys Series B Preferred Shares are quoted on the Nasdaq
National Stock Market, Inc. under the symbol FRCCP. Material holders of Series B Preferred Shares, if any, are set forth in Item 12 of this report. Holders of Series B Preferred Shares are entitled to receive, if, when and as authorized
and declared by the Companys board of directors, out of the Companys assets legally available therefor, cash dividends at an annual rate of 8.875%, or $2.21875 per annum per share, of the $25 liquidation preference per share, and no
more. Dividends on the Series B Preferred Shares are payable quarterly in arrears on March 30, June 30, September 30, and December 30 of each year. The Company paid dividends on the Series B Preferred Shares of $3,728,000 for the year ended December
31, 2004.



The Series B Preferred Shares are not redeemable
prior to December 30, 2006, except upon the occurrence of certain tax events, including, among other things, the Banks becoming undercapitalized, being placed into bankruptcy, or being ordered by the Federal Deposit Insurance Corporation
(FDIC) or the Commissioner of Financial Institutions of the State of Nevadas Department of Business and Industry (Nevada Commissioner) to perform an exchange of shares. Upon the occurrence of these events, the Series B
Preferred Shares will be exchanged automatically for newly issued shares of preferred stock of the Bank.



The following table presents the high and low sales prices for the Series B Preferred Shares for each quarter during the past two years:



|        |  |      |       |      |   |       |  |     |       |  |   |      
|------- |  | ---- | ----- | ---- | - | ----- |  | --- | ----- |  | - | -----
|        |  | 2004 |       | 2003
|Quarter |  | High |       | Low  |   | High  |  | Low
|First   |  | $    | 27.28 |      | $ | 26.25 |  | $   | 26.76 |  | $ | 25.26
|Second  |  | $    | 27.30 |      | $ | 25.50 |  | $   | 27.60 |  | $ | 25.75
|Third   |  | $    | 26.75 |      | $ | 25.32 |  | $   | 27.07 |  | $ | 25.62
|Fourth  |  | $    | 27.94 |      | $ | 26.35 |  | $   | 27.32 |  | $ | 26.00



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##### Table of Contents

Series C Preferred Shares



In June 2001, the Company issued and sold 7,000 shares of its 5.7% Noncumulative Series C Exchangeable Preferred Stock
(Series C Preferred Shares) in a private placement to a single holder and received proceeds of $7 million. The Bank paid all expenses of the offering, including underwriting commissions and discounts. The Series C Preferred Shares do not
have an established public trading market and are not listed on any exchange or automated quotation system. The sale of the Series C Preferred Shares was effected in reliance upon the exemption from securities registration afforded by Regulation D
under the Securities Act. A holder of the Series C Preferred Shares is entitled to receive, if, when and as authorized and declared by the board of directors, out of the Companys assets legally available therefor, cash dividends at an annual
rate of 5.7%, or $57 per annum per share, of the $1,000 stated value per share, and no more. Dividends on the Series C Preferred Shares, if authorized and declared, are payable semiannually in arrears on June 30 and December 30 of each year. The
Company paid dividends on the Series C Preferred Shares of $399,000 for the year ended December 31, 2004.



The Company used the proceeds of $7 million and the additional issuance of 1,243,000 shares of common stock to acquire from the Bank approximately $14
million of single family mortgage loans.



The Series C
Preferred Shares are not redeemable by the Company prior to June 15, 2007. However, a holder of the Series C Preferred Shares has the right at any time or from time to time, at the holders option, to exchange all or any of the Series C
Preferred Shares held of record by the holder into fully paid and nonassessable shares of common stock, par value $.01 per share, of the Bank, at a rate of 49.0758 shares of the Banks common stock for each Series C Preferred Share surrendered
for exchange, subject to adjustment. This conversion feature would result in the issuance of 343,530 shares at an effective conversion price of approximately $20.38. In addition, the Series C Preferred Shares will be exchanged automatically for
newly issued shares of preferred stock of the Bank upon the occurrence of any of the tax events described above, including by order of the FDIC or the Nevada Commissioner.



Series D Preferred Shares



In June 2003, the Company completed a public offering and received proceeds of $60 million from the issuance of 2,400,000 shares of its 7.25%
Noncumulative Perpetual Series D Preferred Stock (Series D Preferred Shares). The Bank paid all expenses of the offering, including underwriting commissions and discounts. The Series D Preferred Shares are quoted on the Nasdaq National
Market under the symbol FRCCO. In connection with this transaction, the Company issued, and the Bank purchased, $60 million of additional common stock. The Series D Preferred Shares are not redeemable prior to June 27, 2008. Holders of
the Series D Preferred Shares are entitled to receive, if authorized and declared by the board of directors of the Company, noncumulative dividends at a rate of 7.25% per annum or $1.8125 per annum per share. Dividends on the Series D Preferred
Shares are payable quarterly in arrears on March 30, June 30, September 30, and December 30 of each year. The Company paid dividends on the Series D Preferred Shares of $4,350,000 for the year ended December 31, 2004.



The Company used the proceeds from the issuance of the Series D Preferred
Shares and the additional issuance of common stock to acquire from the Bank approximately $87 million of single family loans, $30 million of multifamily loans and $3 million of short-term investments.



The following table presents the high and low sales prices for the Series D
Preferred Shares for each quarter during the period from July 1, 2003 through December 31, 2004:



|        |  |      |       |      |   |       |  |     |       |  |   |      
|------- |  | ---- | ----- | ---- | - | ----- |  | --- | ----- |  | - | -----
|        |  | 2004 |       | 2003
|Quarter |  | High |       | Low  |   | High  |  | Low
|First   |  | $    | 25.77 |      | $ | 24.70 |  | $   | n/a   |  | $ | n/a  
|Second  |  | $    | 25.25 |      | $ | 23.04 |  | $   | n/a   |  | $ | n/a  
|Third   |  | $    | 25.34 |      | $ | 23.75 |  | $   | 25.35 |  | $ | 20.75
|Fourth  |  | $    | 25.86 |      | $ | 25.05 |  | $   | 25.00 |  | $ | 23.43



Except under certain
limited circumstances, holders of the Companys Preferred Shares have no voting rights.



There were no repurchases of the Companys common stock or Preferred Shares in the fourth quarter of 2004.



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##### Table of Contents

|Item  6. | SELECTED FINANCIAL DATA.
|-------- | ------------------------



The following table presents certain financial data for each year ended December 31, 2004, 2003, 2002, 2001 and 2000. The selected data presented below
under the captions Selected Balance Sheet Data and Selected Financial Information are derived from the Companys financial statements, which have been audited by KPMG LLP, independent registered public accounting firm.
This selected financial data is qualified in its entirety by, and should be read in connection with, the financial statements, including the notes thereto, included in Item 8 of this report and managements discussion and analysis of the
Companys financial condition and results of operations in Item 7 of this report.



|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|--------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - | ---- | - | ------- |  | - | -------
|                                                                            |  | As of December 31,     
|(Dollars in thousands)                                                      |  | 2004                    |         |   | 2003 |   |         | 2002 |  |   | 2001    |   | 2000
|Selected Balance Sheet Data                                                 |  |                         |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Assets:                                                                     |  |                         |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Cash and short-term investments                                             |  | $                       | 4,476   |   |      | $ | 6,766   |      |  | $ | 22,296  |   |      | $ | 9,880   |  | $ | 3,400  
|Single family mortgage loans                                                |  |                         | 288,211 |   |      |   | 296,051 |      |  |   | 187,879 |   |      |   | 116,751 |  |   | 109,195
|Multifamily mortgage loans                                                  |  |                         | 37,517  |   |      |   | 26,454  |      |  |   |        |   |      |   |        |  |   |       
|Less: Allowance for loan losses                                             |  |                         | (481    | ) |      |   | (481    | )    |  |   | (200    | ) |      |   |        |  |   |       
|Other assets                                                                |  |                         | 1,436   |   |      |   | 1,607   |      |  |   | 1,201   |   |      |   | 750     |  |   | 699    
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Total assets                                                                |  | $                       | 331,159 |   |      | $ | 330,397 |      |  | $ | 211,176 |   |      | $ | 127,381 |  | $ | 113,294
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Liabilities:                                                                |  |                         |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Dividends payable on common stock                                           |  | $                       | 1       |   |      | $ | 1,255   |      |  | $ | 2,044   |   |      | $ | 2,053   |  | $ | 1,976  
|Other payables                                                              |  |                         | 141     |   |      |   | 48      |      |  |   | 38      |   |      |   | 34      |  |   | 24     
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Total liabilities                                                           |  |                         | 142     |   |      |   | 1,303   |      |  |   | 2,082   |   |      |   | 2,087   |  |   | 2,000  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Stockholders equity:                                                       |  |                         |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Series A Preferred Shares                                                   |  |                         | 55,000  |   |      |   | 55,000  |      |  |   | 55,000  |   |      |   | 55,000  |  |   | 55,000 
|Series B Preferred Shares                                                   |  |                         | 42,000  |   |      |   | 42,000  |      |  |   | 42,000  |   |      |   |        |  |   |       
|Series C Preferred Shares                                                   |  |                         | 7,000   |   |      |   | 7,000   |      |  |   | 7,000   |   |      |   | 7,000   |  |   |       
|Series D Preferred Shares                                                   |  |                         | 60,000  |   |      |   | 60,000  |      |  |   |        |   |      |   |        |  |   |       
|Common stock                                                                |  |                         | 294     |   |      |   | 294     |      |  |   | 187     |   |      |   | 112     |  |   | 100    
|Additional paid-in capital                                                  |  |                         | 166,923 |   |      |   | 165,000 |      |  |   | 105,107 |   |      |   | 63,182  |  |   | 56,194 
|Dividends in excess of retained earnings                                    |  |                         | (200    | ) |      |   | (200    | )    |  |   | (200    | ) |      |   |        |  |   |       
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Total stockholders equity                                                  |  |                         | 331,017 |   |      |   | 329,094 |      |  |   | 209,094 |   |      |   | 125,294 |  |   | 111,294
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Total liabilities and stockholders equity                                  |  | $                       | 331,159 |   |      | $ | 330,397 |      |  | $ | 211,176 |   |      | $ | 127,381 |  | $ | 113,294
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|                                                                            |  |                         |         |   |     
|Selected Asset Quality Information                                          |  |                         |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Nonperforming loans                                                         |  | $                       |        |   |      | $ |        |      |  | $ |        |   |      | $ |        |  | $ |       
|Other real estate owned                                                     |  |                         |        |   |      |   |        |      |  |   |        |   |      |   |        |  |   |       
|Loans 90+ days past due and in accrual status                               |  |                         |        |   |      |   |        |      |  |   |        |   |      |   |        |  |   |       
|Nonperforming assets, as a percent of total assets                          |  |                         |        |   |      |   |        |      |  |   |        |   |      |   |        |  |   |       
|Loans 90+ days past due and in accrual status, as a percent of total assets |  |                         |        |   |      |   |        |      |  |   |        |   |      |   |        |  |   |       
|                                                                            | 
|                                                                            |  | Year Ended December 31,
|(Dollars in thousands)                                                      |  | 2004                    |         |   | 2003 |   |         | 2002 |  |   | 2001    |   | 2000
|Selected Financial Information                                              |  |                         |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Interest income:                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Interest on loans                                                           |  | $                       | 16,398  |   |      | $ | 13,502  |      |  | $ | 11,799  |   |      | $ | 7,941   |  | $ | 7,583  
|Interest on short-term investments                                          |  |                         | 89      |   |      |   | 152     |      |  |   | 154     |   |      |   | 240     |  |   | 293    
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Total interest income                                                       |  |                         | 16,487  |   |      |   | 13,654  |      |  |   | 11,953  |   |      |   | 8,181   |  |   | 7,876  
|Provision for loan losses                                                   |  |                         |        |   |      |   |        |      |  |   | 200     |   |      |   |        |  |   |       
|Operating expenses                                                          |  |                         | 311     |   |      |   | 274     |      |  |   | 246     |   |      |   | 141     |  |   | 125    
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Net income before preferred stock dividends                                 |  |                         | 16,176  |   |      |   | 13,380  |      |  |   | 11,507  |   |      |   | 8,040   |  |   | 7,751  
|Dividends on preferred stock                                                |  |                         | 14,252  |   |      |   | 12,125  |      |  |   | 9,663   |   |      |   | 5,987   |  |   | 5,775  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Net income available to common stockholders                                 |  | $                       | 1,924   |   |      | $ | 1,255   |      |  | $ | 1,844   |   |      | $ | 2,053   |  | $ | 1,976  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Ratio of earnings to fixed charges                                          |  |                         | 1.13x   |   |      |   | 1.10x   |      |  |   | 1.19x   |   |      |   | 1.34x   |  |   | 1.34x  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        



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|Item  7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|-------- | --------------------------------------------------------------------------------------



Critical Accounting Policies



The discussion and analysis of the Companys financial condition and results of operations are based upon the Companys financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to allowance for loan losses, credit risks, estimated loan lives,
interest rate risk, investments, and contingencies and litigation. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of the Companys assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



The Company considers the accounting policy for allowance for loan losses to
be a critical accounting policy because it is a complex process involving difficult and subjective judgments, assumptions and estimates. The allowance for loan losses is an estimate that can change under different assumptions and conditions. The
allowance for loan losses has historically been recorded by transfer from the Bank at loan purchase or by charging current income in such amounts as to establish and maintain an allowance at a level that can be reasonably anticipated. The Company
estimates future losses resulting from the inability of customers to make required payments. If the financial condition of borrowers were to deteriorate, resulting in an impairment of their ability to make payments, or the value of collateral
securing Mortgage Loans were to decline, an increase in the allowance may be required. A significant decline in the credit quality of the Companys loan portfolio could have a material adverse affect on the Companys financial condition
and results of operations.



Results of Operations



Overview



Net income before preferred stock dividends was $16,176,000 for 2004,
$13,380,000 for 2003 and $11,507,000 for 2002. The increase was primarily due to an increase in average interest-earning assets, resulting in higher total interest income. However, the drop in interest rates during the past two years resulted in
lower average yields for 2004 and 2003 compared with 2002. The ratio of earnings to fixed charges was 1.13x in 2004, 1.10x in 2003 and 1.19x in 2002. Preferred stock dividend payments were 100% of fixed charges.



Total Interest Income



Total interest income on loans increased to $16,398,000 for 2004, compared
with $13,502,000 for 2003 and $11,799,000 for 2002 due to an increase in loan volume, offset by lower loan rates. The following table presents average balances and yields on the Companys interest-earning assets for the periods indicated:



|                              |  |                |         |                |      |        |  |      |                |  |                |         |       |   |        |                |      |                |  |       |         |  |   |        |  |      |  
|----------------------------- |  | -------------- | ------- | -------------- | ---- | ------ |  | ---- | -------------- |  | -------------- | ------- | ----- | - | ------ | -------------- | ---- | -------------- |  | ----- | ------- |  | - | ------ |  | ---- | -
|                              |  | 2004           |         |                | 2003 |        |  | 2002 |               
|(Dollars in thousands)        |  | AverageBalance |         | InterestIncome |      | Yield  |  |      | AverageBalance |  | InterestIncome |         | Yield |   |        | AverageBalance |      | InterestIncome |  | Yield |        
|Loans                         |  | $              | 323,720 |                | $    | 16,398 |  | 5.07 | %              |  | $              | 259,096 |       | $ | 13,502 |                | 5.21 | %              |  | $     | 195,904 |  | $ | 11,799 |  | 6.02 | %
|Short-term investments        |  |                | 7,486   |                |      | 89     |  | 1.19 |                |  |                | 13,445  |       |   | 152    |                | 1.13 |                |  |       | 9,417   |  |   | 154    |  | 1.63 |  
|                              |  |                |         |                |      |        |  |      |                |  |                |         |       |   |        |                |      |                |  |       |         |  |   |        |  |      |  
|Total interest-earning assets |  | $              | 331,206 |                | $    | 16,487 |  | 4.98 | %              |  | $              | 272,541 |       | $ | 13,654 |                | 5.01 | %              |  | $     | 205,321 |  | $ | 11,953 |  | 5.82 | %
|                              |  |                |         |                |      |        |  |      |                |  |                |         |       |   |        |                |      |                |  |       |         |  |   |        |  |      |  



Interest income on
Mortgage Loans increased in 2004 and 2003, compared with 2002, due to higher loan volume; however, loan portfolio yields declined. Loan portfolio yields were 5.07%, 5.21%, and 6.02%,



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##### Table of Contents

respectively. The decline in loan yields reflects the decline in the overall rate environment over the last several years, including the repayment of loans
with higher interest rates than the new loans that the Company acquired to replace them. At December 31, 2004, the weighted average coupon rate was 4.98%, down from 5.30% at December 31, 2003 and 6.10% at December 31, 2002.



The Bank retains an annual servicing fee of 25 basis points on the gross
average outstanding principal balance of the Companys loan portfolio that the Bank services, which reduces the interest income that the Company receives. For 2004, 2003 and 2002, loan servicing fees were $775,000, $582,000 and $428,000,
respectively. The increases in loan servicing fees were consistent with the increases in average loan balances.



Interest income on short-term investments decreased in 2004, compared with 2003 and 2002, due to lower volume. In addition, interest rates had been
decreasing since 2002. However, the average yield on the interest-bearing money market account rose slightly in 2004 compared with 2003 as interest rates began to rise mid-year.



Interest income is affected by changes in volume and changes in rates. Volume changes are caused by differences in the level
of interest-earning assets and interest-bearing liabilities. Rate changes result from differences in yields earned on assets.



The following table presents a summary of the changes in interest earned resulting from changes in average asset balances (volume) and changes in average
interest rates for the periods indicated. Where significant, the changes in interest due to both volume and rate have been allocated to the changes due to volume and rate in proportion to the relationship of absolute dollar amounts in each.
Tax-exempt income from short-term investments is presented on a tax-equivalent basis.



|                          |  |               |       |   |               |   |      |       |  |   |        |   |      |   |       |       |   |        |   |  |   |       |  
|------------------------- |  | ------------- | ----- | - | ------------- | - | ---- | ----- |  | - | ------ | - | ---- | - | ----- | ----- | - | ------ | - |  | - | ----- | -
|                          |  | 2004 vs. 2003 |       |   | 2003 vs. 2002 |  
|(Dollars in thousands)    |  | Volume        |       |   | Rate          |   |      | Total |  |   | Volume |   | Rate |   |       | Total |  
|Loans                     |  | $             | 3,272 |   |               | $ | (376 | )     |  | $ | 2,896  |   |      | $ | 3,489 |       | $ | (1,786 | ) |  | $ | 1,703 |  
|Short-term investments    |  |               | (71   | ) |               |   | 8    |       |  |   | (63    | ) |      |   | 57    |       |   | (59    | ) |  |   | (2    | )
|                          |  |               |       |   |               |   |      |       |  |   |        |   |      |   |       |       |   |        |   |  |   |       |  
|Total increase (decrease) |  | $             | 3,201 |   |               | $ | (368 | )     |  | $ | 2,833  |   |      | $ | 3,546 |       | $ | (1,845 | ) |  | $ | 1,701 |  
|                          |  |               |       |   |               |   |      |       |  |   |        |   |      |   |       |       |   |        |   |  |   |       |  



Operating Expense



The Company incurs advisory fee expenses payable to the
Bank. The Company has entered into an advisory agreement with the Bank for services that the Bank renders on the Companys behalf for which it was paid $50,000 per annum through 2002. The Companys board of directors voted to increase the
annual advisory fee for 2003 to $75,000 and as a result, advisory fees were $75,000 for the years ended December 31, 2004 and 2003 and $50,000 for the year ended December 31, 2002. For the year ended December 31, 2005, the advisory fee will be
$100,000.



General and administrative expenses were primarily
related to audit fees, rating agency fees, exchange listings and other shareholder costs. Collectively, these fees and other operating expenses were $236,000, $199,000 and $196,000 for each year ended December 31, 2004, 2003, and 2002, respectively.
Audit fees have increased with the size and complexity of being a public company and were $107,000, $80,000 and $66,000 and credit agency fees were $35,000, $32,000 and $33,000, for each year, respectively.



Financial Condition



Interest-bearing Deposits with the Bank



At December 31, 2004 and 2003, interest-bearing deposits consisted entirely of a money market account held at the Bank.
Generally, the balance in this account reflects principal and interest received on the Mortgage Loans.



17



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##### Table of Contents

Mortgage Loans



The loan portfolio at December 31, 2004 and 2003 consisted of both single family and multifamily mortgage loans acquired
from the Bank. The Company anticipates that in the future it will continue to acquire all of its loans from the Bank.



A loan is placed on nonaccrual status when any installment of principal or interest is over 90 days past due, except for single family loans that are well
secured and in the process of collection, or when the Company determines that the ultimate collection of all contractually due principal or interest is unlikely.



As of December 31, 2004 and 2003, there were no nonaccrual loans, impaired loans, or loans that were troubled debt
restructurings. In addition, at December 31, 2004 and 2003, there were no accruing loans that were contractually past due more than 90 days. The following table presents an analysis of the Companys allowance for loan losses at December 31 for
each of the last three years:



|                                                  |  |                                 |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------- |  | ------------------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                  |  | For the Year Ended December 31, |            
|                                                  |  | 2004                            |             |   | 2003 |   |             | 2002 | 
|Allowance for Loan Losses:                        |  |                                 |             |   |      |   |             |      |  |   |             |  
|Balance, beginning of period                      |  | $                               | 481,000     |   |      | $ | 200,000     |      |  | $ |            |  
|Provision for loan losses                         |  |                                 |            |   |      |   |            |      |  |   | 200,000     |  
|Transfer from the Bank                            |  |                                 |            |   |      |   | 281,000     |      |  |   |            |  
|Chargeoffs                                        |  |                                 |            |   |      |   |            |      |  |   |            |  
|Recoveries                                        |  |                                 |            |   |      |   |            |      |  |   |            |  
|                                                  |  |                                 |             |   |      |   |             |      |  |   |             |  
|Balance, end of period                            |  | $                               | 481,000     |   |      | $ | 481,000     |      |  | $ | 200,000     |  
|                                                  |  |                                 |             |   |      |   |             |      |  |   |             |  
|Average loans for the period                      |  | $                               | 323,720,000 |   |      | $ | 259,096,000 |      |  | $ | 195,904,000 |  
|Total loans at period end                         |  | $                               | 325,728,000 |   |      | $ | 322,505,000 |      |  | $ | 187,879,000 |  
|                                                  |  |                                 |            
|Ratio of allowance for loan losses to total loans |  |                                 | 0.15        | % |      |   | 0.15        | %    |  |   | 0.11        | %



The Company
established an allowance for loan losses of $200,000 in 2002. During 2003, the Company recorded a transfer to the allowance for loan losses of $281,000, which was the amount of the Banks allowance for loan losses associated with the loans that
the Company acquired upon the issuance of the Series D Preferred Shares. As of December 31, 2004, the Companys allowance for loan losses was 0.15% of total loans.



Significant Concentration of Credit Risk



Concentration of credit risk generally arises with respect to the loan portfolio when a number of borrowers engage in
similar business activities or activities in the same geographical region. Concentration of credit risk indicates the relative sensitivity of the Companys performance to both positive and negative developments affecting a particular industry.
The balance sheet exposure to geographic concentrations directly affects the credit risk of the loans within the Companys loan portfolio. See Risk FactorsOur loans are concentrated in California and adverse conditions there could
adversely affect our operations below.



At December 31,
2004, 60% of the Companys loans were secured by properties located in the San Francisco Bay Area, 9% in Los Angeles County, 10% in other parts of California, 12% in New York and contiguous states and 9% in other parts of the United States. At
December 31, 2004, the weighted average loan to value ratio on the Mortgage Loans was approximately 54%, based on the appraised values of the properties at the time the loans were originated.



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##### Table of Contents

The following table presents an analysis of the Companys Mortgage Loans at December 31, 2004 by
major geographic location:



|                       |  |                       |         |   |                          |   |        |                     |  |   |                   |   |  |                  |        |   |       |   |       |       |  |   |        |   |  |   |         |  
|---------------------- |  | --------------------- | ------- | - | ------------------------ | - | ------ | ------------------- |  | - | ----------------- | - |  | ---------------- | ------ | - | ----- | - | ----- | ----- |  | - | ------ | - |  | - | ------- | -
|(Dollars in thousands) |  | San FranciscoBay Area |         |   | GreaterNew YorkCity Area |   |        | OtherCalforniaAreas |  |   | Los AngelesCounty |   |  | Las Vegas,Nevada |        |   | Other |   |       | Total | 
|Single family          |  | $                     | 164,463 |   |                          | $ | 39,142 |                     |  | $ | 29,127            |   |  | $                | 27,636 |   |       | $ | 1,362 |       |  | $ | 26,481 |   |  | $ | 288,211 |  
|Multifamily            |  |                       | 30,825  |   |                          |   | 857    |                     |  |   | 2,662             |   |  |                  | 3,173  |   |       |   |      |       |  |   |       |   |  |   | 37,517  |  
|                       |  |                       |         |   |                          |   |        |                     |  |   |                   |   |  |                  |        |   |       |   |       |       |  |   |        |   |  |   |         |  
|Total                  |  | $                     | 195,288 |   |                          | $ | 39,999 |                     |  | $ | 31,789            |   |  | $                | 30,809 |   |       | $ | 1,362 |       |  | $ | 26,481 |   |  | $ | 325,728 |  
|                       |  |                       |         |   |                          |   |        |                     |  |   |                   |   |  |                  |        |   |       |   |       |       |  |   |        |   |  |   |         |  
|Percent by location    |  |                       | 60      | % |                          |   | 12     | %                   |  |   | 10                | % |  |                  | 9      | % |       |   | 1     | %     |  |   | 8      | % |  |   | 100     | %



Liquidity and
Capital Resources



The Companys principal liquidity
needs are to pay dividends and to fund the acquisition of additional Mortgage Assets as borrowers repay Mortgage Loans. The Company intends to fund the acquisition of additional Mortgage Loans with the proceeds of principal repayments on its current
portfolio of Mortgage Loans. Proceeds from interest payments will be reinvested until used for the payment of operating expenses and dividends. The Company does not anticipate that it will have any other material capital expenditures. The cash
generated from interest and principal payments on Mortgage Assets will provide sufficient funds for operating requirements and dividend payments in accordance with the requirements to be taxed as a REIT for the foreseeable future.



|Item  7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|--------- | -----------------------------------------------------------



Interest Rate Risk Management



The Company services fixed-rate dividend obligations to preferred stockholders and operating expenses by the collection of interest income from its
Mortgage Loans. To facilitate meeting dividend payments, the Company has maintained an average interest-earning asset balance of approximately two times the liquidation preference of its outstanding preferred shares. The Companys earnings to
fixed charges ratio was 1.13x for the year 2004, compared with 1.10x for 2003 and 1.19x for 2002.



With the interest rate environment declining until mid-2004 to 40-year historical lows, the yields on average interest-earning loans have dropped. The
declines in yields are primarily the result of increased prepayment of higher-yielding loans with the proceeds of the prepaid Mortgage Loans reinvested in lower-yielding Mortgage Loans. The weighted average yield on average interest-earning assets
was 4.98% for 2004, compared with 5.01% for 2003.



At December
31, 2004, 47% of the Mortgage Loans were adjustable rate loans, 39% were intermediate fixed rate loans and 14% were fixed rate loans. The weighted average coupon rate for each loan type was 4.42%, 5.36% and 5.70%, respectively, and the weighted
average remaining maturity was 23.6 years. At December 31, 2003, 28% were adjustable rate loans, 56% were intermediate fixed rate loans and 16% were fixed rate loans. The weighted average coupon rate for each loan type was 4.68%, 5.43% and 5.92%,
respectively, and the weighted average remaining maturity was 24 years.



For adjustable rate Mortgage Loans, the timing of changes in average yields depends on the underlying interest rate index, the timing of changes in the index, and the frequency of adjustments to the loan rate. At December 31, 2004, the
weighted average coupon rate of adjustable rate loans had declined 26 basis points to 4.42% from 4.68% at December 31, 2003. The decline in adjustable rate loan yields was mitigated by a significant volume of adjustable rate loans indexed to COFI.
COFI is a lagging index that tends to respond more slowly to changes in the general interest rate environment than a market rate index. At December 31, 2004, adjustable rate loans indexed to COFI were 76% of total ARMs, or 35% of total Mortgage
Loans.



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##### Table of Contents

For intermediate fixed and fixed rate loans, the gross principal outstanding at December 31, 2004 was
$177.4 million, or 54% of total loans. The weighted average coupon rate for intermediate fixed rate loans declined 7 basis points during 2004, and the weighted average coupon rate for fixed rate loans declined 22 basis points during 2004. Repayments
of intermediate fixed and fixed rate loans during 2004 were a significant portion of the total repayment proceeds. The high level of repayments was the result of low interest rates. The Company reinvested these repayment proceeds in lower-yielding
Mortgage Loans.



The following table presents an analysis of
Mortgage Loans at December 31, 2004 by interest rate type:



|                            |  |         |         |                   |      |   |                         |    |                        |     |  
|--------------------------- |  | ------- | ------- | ----------------- | ---- | - | ----------------------- | -- | ---------------------- | --- | -
|(Dollars in thousands)      |  | Balance |         | NetCoupon (1) (2) |      |   | Months to NextReset (1) |    | Percentageof Portfolio |    
|ARM loans:                  |  |         |         |                   |      |   |                         |    |                        |     |  
|COFI                        |  | $       | 112,960 |                   | 4.37 | % |                         | 1  |                        | 35  | %
|CMT                         |  |         | 31,271  |                   | 4.51 |   |                         | 6  |                        | 10  |  
|Libor                       |  |         | 2,260   |                   | 4.23 |   |                         | 3  |                        | 1   |  
|Prime                       |  |         | 1,837   |                   | 5.80 |   |                         | 1  |                        | 1   |  
|                            |  |         |         |                   |      |   |                         |    |                        |     |  
|Total ARMs                  |  |         | 148,328 |                   | 4.42 |   |                         | 2  |                        | 47  |  
|                            |  |         |         |                   |      |   |                         |    |                        |     |  
|Intermediate fixed:         |  |         |         |                   |      |   |                         |    |                        |     |  
|13 months to 36 months      |  |         | 64,519  |                   | 5.43 |   |                         | 29 |                        | 20  |  
|37 months to 60 months      |  |         | 42,141  |                   | 5.36 |   |                         | 39 |                        | 13  |  
|Greater than 60 months      |  |         | 20,946  |                   | 5.13 |   |                         | 83 |                        | 6   |  
|                            |  |         |         |                   |      |   |                         |    |                        |     |  
|Total intermediate fixed    |  |         | 127,606 |                   | 5.36 |   |                         | 41 |                        | 39  |  
|                            |  |         |         |                   |      |   |                         |    |                        |     |  
|Total adjustable rate loans |  |         | 275,934 |                   | 4.85 |   |                         | 20 |                        | 86  |  
|Fixed rate loans            |  |         | 49,794  |                   | 5.70 |   |                         |    |                        | 14  |  
|                            |  |         |         |                   |      |   |                         |    |                        |     |  
|Total loans                 |  | $       | 325,728 |                   | 4.98 | % |                         |    |                        | 100 | %
|                            |  |         |         |                   |      |   |                         |    |                        |     |  

---

|(1) | Weighted average.
|--- | -----------------

|(2) | Net of servicing fees retained by the Bank.
|--- | -------------------------------------------



The following table illustrates maturities or interest rate adjustments based upon the contractual maturities or adjustment dates as of December 31, 2004:



|                                   |  |            |         |             |   |           |  |           |         |              |   |                   |  |   |         |  |   |          |   |  |   |        
|---------------------------------- |  | ---------- | ------- | ----------- | - | --------- |  | --------- | ------- | ------------ | - | ----------------- |  | - | ------- |  | - | -------- | - |  | - | -------
|(Dollars in thousands)             |  | 0-6 Months |         | 7-12 Months |   | 1-3 Years |  | 3-5 Years |         | Over 5 Years |   | Not RateSensitive |  |   | Total  
|Cash and investments               |  | $          | 4,476   |             | $ |          |  | $         |        |              | $ |                  |  | $ |        |  | $ |         |   |  | $ | 4,476  
|Loans                              |  |            | 136,899 |             |   | 17,125    |  |           | 75,476  |              |   | 37,825            |  |   | 58,403  |  |   |         |   |  |   | 325,728
|Other assets                       |  |            |        |             |   |          |  |           |        |              |   |                  |  |   |        |  |   | 955      |   |  |   | 955    
|                                   |  |            |         |             |   |           |  |           |         |              |   |                   |  |   |         |  |   |          |   |  |   |        
|Total assets                       |  | $          | 141,375 |             | $ | 17,125    |  | $         | 75,476  |              | $ | 37,825            |  | $ | 58,403  |  | $ | 955      |   |  | $ | 331,159
|                                   |  |            |         |             |   |           |  |           |         |              |   |                   |  |   |         |  |   |          |   |  |   |        
|                                   |  |            |         |             |   |           | 
|Other liabilities                  |  | $          |        |             | $ |          |  | $         |        |              | $ |                  |  | $ |        |  | $ | 142      |   |  | $ | 142    
|Stockholders equity               |  |            |        |             |   |          |  |           |        |              |   |                  |  |   |        |  |   | 331,017  |   |  |   | 331,017
|                                   |  |            |         |             |   |           |  |           |         |              |   |                   |  |   |         |  |   |          |   |  |   |        
|Total liabilities and equity       |  | $          |        |             | $ |          |  | $         |        |              | $ |                  |  | $ |        |  | $ | 331,159  |   |  | $ | 331,159
|                                   |  |            |         |             |   |           |  |           |         |              |   |                   |  |   |         |  |   |          |   |  |   |        
|Repricing GAP positive (negative) |  | $          | 141,375 |             | $ | 17,125    |  | $         | 75,476  |              | $ | 37,825            |  | $ | 58,403  |  | $ | (330,204 | ) |  |   |        
|                                   |  |            |         |             |   |           |  |           |         |              |   |                   |  |   |         |  |   |          |   |  |   |        
|Cumulative repricing GAP:          |  |            |         |             |   |           |  |           |         |              |   |                   |  |   |         |  |   |          |   |  |   |        
|Dollar amount                      |  | $          | 141,375 |             | $ | 158,500   |  | $         | 233,976 |              | $ | 271,801           |  | $ | 330,204 |  |   |          |   |  |   |        
|                                   |  |            |         |             |   |           |  |           |         |              |   |                   |  |   |         |  |   |          |   |  |   |        
|Percent of total assets            |  |            | 42.7%   |             |   | 47.9%     |  |           | 70.7%   |              |   | 82.1%             |  |   | 99.7%   |  |   |          |   |  |   |        
|                                   |  |            |         |             |   |           |  |           |         |              |   |                   |  |   |         |  |   |          |   |  |   |        



The Company does not
intend to sell mortgage loans. Furthermore, the Company has not engaged in business activities related to foreign currency transactions or commodity based instruments and has not made any investments in equity securities subject to price
fluctuations.



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Risk Factors



Our results will be affected by factors beyond our control.



The value of our mortgage loan portfolio and the amount of cash flow generated by the portfolio will be affected by a number
of factors beyond our control. These factors may include the following:



| |  |  | the condition of the national economy and the local economies of the regions in which our mortgage borrowers live, particularly insofar as they affect interest rates and real estate
values;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | sudden or unexpected changes in economic conditions, including changes that might result from recent or future terrorist attacks and the U.S. response to such attacks;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the financial condition of our borrowers and those borrowers ability to make mortgage payments;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | factors that affect the rates at which obligors on Mortgage Loans may refinance them, including interest rate levels and the availability of credit; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other factors that affect the affordability and value of real estate, including energy costs and real estate taxes.
| | - |  | -------------------------------------------------------------------------------------------------------------------



A decline in interest rates could reduce our earnings and affect our
ability to pay dividends.



Our income consists primarily
of interest earned on Mortgage Loans and short-term investments. A significant portion of Mortgage Assets bears interest at adjustable rates. If there is a decline in interest rates, we will experience a decrease in income available to be
distributed to our shareholders. If interest rates decline, we may also experience an increase in prepayments on Mortgage Loans and may find it difficult to purchase additional mortgage assets bearing rates sufficient to support payment of dividends
on our preferred shares. Because the dividend rates on the preferred shares are fixed, a significant and sustained decline in interest rates could materially adversely affect our ability to pay dividends on the preferred shares. Although we are
permitted to do so, we do not currently hedge our interest rate exposure, and do not expect to do so.



We may not be able to continue to purchase loans at the same volumes or with the same yields as we have historically purchased.



Although not required to do so, to date we have purchased all of the loans
in our portfolio from the Bank. Almost all of these loans were originated by the Bank. The quantity and quality of future loan originations by the Bank will depend on conditions in the markets in which the Bank operates, particularly real estate
values and interest rates. Consequently, we cannot assure you that the Bank will be able to originate loans at the same volumes or with the same yields as it has historically originated. If the volume of loans originated by the Bank declines or the
yields on those loans decline further, we would experience a material adverse effect on our business, financial condition and results of operations.



Our loans are concentrated in California and adverse conditions there could adversely affect our operations.



Properties underlying Mortgage Assets were concentrated primarily in
California. At December 31, 2004, approximately 79% of Mortgage Assets were secured by properties located in California. Adverse economic, political or business developments or natural hazards may affect California and the ability of property owners
there to make payments of principal and interest on the underlying mortgages and the values of those properties. If Californias economic, political or business conditions were to deteriorate substantially and differently from the rest of the
United States, we would likely experience higher rates of loss and delinquency on Mortgage Loans than if our loans were more geographically diverse. California has experienced dramatic volatility in energy prices, periodic energy supply shortages
and a downturn in some technology-oriented industry sectors. These conditions could adversely affect our mortgage loan portfolio and thus our future ability to pay dividends on our preferred shares.



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##### Table of Contents

Defaults may negatively impact our earnings.



Increased delinquencies or loan defaults by our borrowers may negatively
affect business. A borrowers default on its obligations under one or more loans may result in lost principal and interest income. If collection efforts are unsuccessful or acceptable workout arrangements cannot be reached, we may have to
charge-off all or a part of the loan. In such situations, we may acquire any real estate or other assets, if any, that secure the loan through foreclosure or other similar available remedies. The amount owed under the defaulted loan may exceed the
value of the assets acquired.



We do not have insurance to
cover our exposure to borrowers defaults and bankruptcies or to hazard losses that are not covered by our standard hazard insurance policies.



We generally do not obtain general credit enhancements such as mortgagor bankruptcy insurance or obtain special hazard insurance for Mortgage Assets,
other than standard hazard insurance, which, in each case, will only relate to individual mortgage loans. Accordingly, we will be subject to risks of borrower defaults and bankruptcies and special hazard losses, such as losses occurring from
earthquakes or floods that are not covered by standard hazard insurance. In the event of a default on any mortgage loan held by us resulting from declining property values or worsening economic conditions, among other factors, we would bear the risk
of loss of principal to the extent of any deficiency between (i) the value of the related mortgaged property plus any payments from an insurer (or guarantor in the case of commercial mortgage loans), and (ii) the amount owing on the mortgage loan.



We could be held responsible for environmental liabilities
of properties we acquire through foreclosure.



If we are
forced to foreclose on a defaulted mortgage loan to recover our investment we may be subject to environmental liabilities related to the underlying real property. Hazardous substances or wastes, contaminants, pollutants or sources thereof may be
discovered on properties during our ownership or after a sale to a third party. The amount of environmental liability could exceed the value of the real property. There can be no assurance that we would not be fully liable for the entire cost of any
removal and clean-up on an acquired property, that the cost of removal and clean-up would not exceed the value of the property or that we could recoup any of the costs from any third party. In addition, we may find it difficult or impossible to sell
the property prior to or following any environmental remediation.



We may acquire different kinds of mortgage loans, which could be riskier than the loans we primarily hold.



Through the first quarter of 2003, our Mortgage Loans consisted entirely of single family mortgages. Beginning in the second quarter of 2003, we acquired
multifamily real estate secured mortgages from the Bank, which can be riskier investments than single family mortgage loans, and we may continue to acquire multifamily mortgages. Additionally, although we have no immediate plans to do so, we reserve
the right to acquire other types of mortgages. Loans other than single family mortgages tend to have shorter maturities and may not be fully amortizing, meaning that they may have significant principal balances or balloon payments due on
maturity. The properties that secure commercial mortgage loans, particularly industrial and warehouse properties, are generally subject to greater environmental risks than non-commercial properties and the corresponding burdens and costs of
compliance with environmental laws and regulations. Also, there may be costs and delays involved in enforcing rights of property owner against tenants in default under the terms of leases with respect to multifamily residential or commercial
properties. For example, tenants may seek the protection of the bankruptcy laws, which could result in termination of leases.



We expect to acquire all of our mortgage loans from the Bank and the composition of our portfolio will be affected by changes in the Banks credit
policies.



We have acquired all of our Mortgage Loans from
the Bank and, although we are not required to do so, we expect that we will continue to acquire all our mortgage loans from the Bank in the future. If the Bank were to relax its credit policies by, for example, lowering the credit quality standards
it applies, or increasing the loan-to-value ratios it accepts, the mortgages subsequently purchased by us would be riskier investments.



22



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##### Table of Contents

We are dependent upon the Bank as advisor and servicer.



The Bank, which holds 99.9% of our common shares, is involved in virtually
every aspect of our business. We do not have any employees because we have retained the Bank to perform all necessary functions pursuant to the advisory agreement and the servicing agreement. Accordingly, we are dependent for the selection,
structuring and monitoring of Mortgage Assets on the officers and employees of the Bank, as advisor. In addition, we are dependent upon the expertise of the Bank, as servicer, for the servicing of the Mortgage Loans. Neither the advisory agreement
nor the servicing agreement resulted from arms-length negotiations. We also face significant restrictions on obtaining such services from third parties; the termination of the advisory and servicing agreements with the Bank requires the
affirmative vote of a majority of our board of directors, a majority of which is composed of directors and officers of the Bank. With the approval of a majority of our independent directors, the Bank, as advisor and servicer, may subcontract all or
a portion of its obligations under these agreements to non-affiliates involved in the business of managing mortgage assets. In the event the Bank subcontracts its obligations in such a manner, we will be dependent upon the subcontractor to provide
services.



Our relationship with the Bank creates conflicts
of interest.



The Bank is, and is expected to continue to
be, involved in virtually every aspect of our operations. The Bank is the holder of 99.9% of our common stock and will administer our day-to-day activities in its role as advisor under the advisory agreement. The Bank will also act as servicer of
the Mortgage Loans on our behalf under the servicing agreement. In addition, other than the independent directors, all of our officers and directors are also officers and/or directors of the Bank. Their compensation is paid by the Bank, and they
have substantial responsibilities in connection with their work as employees and officers of the Bank. As the holder of 99.9% of our outstanding voting shares, the Bank has the right to elect all of our directors, including the independent
directors.



The Bank has interests that are dissimilar to or in
conflict with our interests. Consequently, conflicts of interest arise with respect to transactions, including without limitation, future acquisitions of mortgage assets from the Bank; servicing of mortgage loans; and the renewal, termination or
modification of the advisory agreement or the servicing agreement. It is our intention and the intention of the Bank that any agreements and transactions between us, on the one hand, and the Bank, on the other hand, are fair to both parties and
consistent with market terms, including prices that are paid and received on the acquisition of mortgage assets by us or in connection with the servicing of mortgage loans. There is a requirement in the terms of our Preferred Shares that certain of
our actions be approved by a majority of the independent directors; this is also intended to ensure fair dealings between the Company and the Bank, although the independent directors are appointed by the Bank. There can be no assurance, however,
that such agreements or transactions will be on terms as favorable to us as those that could have been obtained from unaffiliated third parties.



Although not required to do so, we currently acquire all mortgage loans from the Bank under a loan purchase and servicing agreement between the Company
and the Bank. We do not have independent underwriting criteria for the loans we purchase and rely on the Banks underwriting standards for loan originations. Those criteria may change over time. Our board of directors has adopted certain
policies to guide the acquisition and disposition of assets, but these policies may be revised from time to time at the discretion of the board of directors without a vote of our shareholders. We intend to acquire all or substantially all of the
additional mortgage loans we may acquire in the future from the Bank on terms that are comparable to those that could be obtained by us if such mortgage loans were purchased from unrelated third parties, but we cannot assure you that this will
always be the case.



As a result of the fact that the Bank is
our controlling shareholder and our advisor, it is possible that, notwithstanding our good faith belief to the contrary, we in fact pay more for these loans than if we bought them from an unaffiliated third party and loans purchased from the Bank in
the future may be of lesser quality than those currently in our loan portfolio.



23



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##### Table of Contents

If we were to fail to qualify as a REIT, we would be subject to federal income tax at regular
corporate rates.



If we were to fail to qualify as a REIT
for any taxable year, we would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. As a result, the amount available for distribution to our shareholders, including
the holders of our preferred shares, would be reduced for the year or years involved, and we would not be subject to the REIT requirement that we distribute substantially all of our income. In addition, unless entitled to relief under statutory
provisions, we would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. The failure to qualify as a REIT would reduce our net earnings available for distribution to our
shareholders, including holders of our Preferred Shares, because of the additional federal tax liability for the year or years involved. Our failure to qualify as a REIT would neither by itself give us the right to redeem the preferred shares, nor
would it give the holders of the preferred shares the right to have their shares redeemed.



Although we currently intend to operate in a manner designed to qualify as a REIT, future economic, market, legal, tax or other considerations including actions by banking regulators as discussed below, may cause us
to determine that it is in our best interest and in the best interest of holders of our common shares and preferred shares to revoke our REIT election. The tax law generally prohibits us from electing treatment as a REIT for the four taxable years
following the year of any such revocation.



Bank regulators
may limit our ability to implement our business plan and may restrict our ability to pay dividends.



Because we are a subsidiary of the Bank, federal and state regulatory authorities have the right to examine us and our activities and under certain
circumstances, to impose restrictions on the Bank or us that could impact our ability to conduct our business according to our business plan, which could materially adversely affect our financial condition and results of operations. Regulatory
actions might include the following:



| |  |  | If the Banks regulators were to determine that the Banks relationship to us results in an unsafe and unsound banking practice, the regulators could restrict our ability
to transfer assets, to make distributions to our shareholders, including dividends on our preferred shares, or to redeem our preferred shares or even require the Bank to sever its relationship with or divest its ownership interest in us. These types
of actions potentially could have a material adverse affect on our financial condition and results of operations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Regulators also could prohibit or limit the payment of dividends on our preferred shares if the Bank were to become undercapitalized. Under current regulations and guidelines, the
Bank would be deemed undercapitalized if its total risk-based capital ratio were less than 8%, its Tier 1 risk-based capital ratio were less than 4% or its Tier 1 leverage ratio were less than 4%.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The FDIC could limit or prohibit the payment of dividends on the preferred shares, if it determined that the payment of those dividends constituted a capital distribution by the
Bank and that the Banks earnings and regulatory capital levels were below specified levels. Under the FDICs regulations on capital distributions, the ability of the Bank to make a capital distribution varies depending primarily on the
Banks earnings and regulatory capital levels. Capital distributions are defined to include payment of dividends, share repurchases, cash-out mergers and other distributions charged against the capital accounts of an institution.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | If regulators were to impose restrictions on payment of dividends, we could be prevented from complying with the requirement for continued REIT status that we distribute 90% of our
REIT taxable income (excluding deductions for any dividends paid and any net capital gains) for any calendar year. If this caused us to cease to qualify as a REIT, we would become subject to corporate level taxation. Additional taxation would reduce
the amount of income available for us to pay dividends.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



24



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##### Table of Contents

|Item  8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
|-------- | --------------------------------------------



See Financial Statements table of contents on page F-2.



|Item  9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
|-------- | -------------------------------------------------------------------------------------



There have been no changes in, or disagreements with, our accountants on any matter of accounting principles, practices or
financial statement disclosures since our inception in April 1999.



|Item  9A. | CONTROLS AND PROCEDURES.
|--------- | ------------------------



Evaluation of Disclosure Controls and Procedures



As required by SEC rules, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and
procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act as of the end of the period covered by this report. The Companys management, including the Companys chief executive officer and chief financial
officer, supervised and participated in the evaluation. Based on that evaluation, the chief executive officer and the chief financial officer concluded that the Banks disclosure controls and procedures, as of December 31, 2004, were effective
for providing reasonable assurance that information required to be disclosed by the Company in such reports was accumulated and communicated to the Companys management, including its chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required disclosure.



Changes in Internal Control Over Financial Reporting



There were no significant changes in the Companys internal control over financial reporting during the quarter ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.



PART III



|Item  9B. | OTHER INFORMATION.
|--------- | ------------------



Not applicable.



|Item  10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
|--------- | ---------------------------------------------------



Directors and Executive Officers



As the holder of 99.9% of the Companys common stock, the Bank has the right to elect the directors, including the independent directors. The
Companys board of directors presently consists of seven members, including two independent directors. The Company currently has five officers, four of whom are also directors, and it estimated that they will spend between 5% and 10% of their
time managing the Companys business. The Company has no employees and does not anticipate requiring employees.



25



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##### Table of Contents

The Companys directors and executive officers are listed below. Each director or officer has served
in his/her capacity since our inception in April 1999, except for Mr. Merrill who was elected in December 2004. In February 2005, Director Mr. Kent Willson passed away.



|                        |  |     |  |                                                             
|----------------------- |  | --- |  | ------------------------------------------------------------
|Name                    |  | Age |  | Position and Offices Held                                   
|James J. Baumberger     |  | 62  |  | President, Director                                         
|Thomas A. Cunningham(1) |  | 69  |  | Director                                                    
|Jerry Lykins(1)         |  | 69  |  | Director                                                    
|Barrant V. Merrill      |  | 74  |  | Director                                                    
|Edward J. Dobranski     |  | 54  |  | Vice President, General Counsel, Director                   
|Julie N. Miyachi        |  | 47  |  | Vice President, Operations, Director                        
|Willis H. Newton, Jr.   |  | 55  |  | Vice President, Chief Financial Officer, Treasurer, Director
|May Chan                |  | 32  |  | Assistant Vice President, Corporate Secretary               

---

|(1) | Independent Director and Audit Committee Member.
|--- | ------------------------------------------------



The following is a summary of the experience of our executive officers and directors:



Mr. Baumberger is currently a senior consultant and director for the Bank. He was employed by the Bank and its predecessors
from 1990 to 2002. From December 1993 until October 1996, Mr. Baumberger was President of First Republic Savings Bank, an FDIC insured financial institution. Mr. Baumberger has been involved in banking and real estate lending in the Las Vegas,
Nevada area for more than thirty years.



Mr. Cunningham is
retired. From 1986 to 1994, he was President of the California Thrift Guarantee Corporation. Previously Mr. Cunningham held senior executive positions in several banking institutions. He was a member of the U.S. Marine Corp. until 1971. From 1988 to
1998, Mr. Cunningham served as a director of the Bank and one of its predecessor financial institutions.



Mr. Lykins is a retired mortgage banker. His career included executive and operational management responsibilities in both California and Nevada for Mason
McDuffie. From 1994 until 1998, Mr. Lykins was a director of the Bank and one of its predecessor financial institutions.



Mr. Merrill is the Managing Partner of Sun Valley Partners. From 1985 to 2004, Mr. Merrill was a director of the Bank and its legal predecessors.
Previously, he was a General Partner of Dakota Partners and Chairman of Pershing & Co., Inc., a division of Donaldson, Lufkin & Jenrette.



Mr. Dobranski joined the Bank in 1992 and has served as Executive Vice President and General Counsel since that time. Mr. Dobranski currently serves as
the Secretary of the Bank and has been the Banks Compliance Officer. From 1980 to 1987, Mr. Dobranski was Vice President and Senior Counsel at Wells Fargo Bank. From 1987 to 1992, he was in private law practice in San Francisco specializing in
banking, real estate and corporate law.



Ms. Miyachi has been
Director of Financial Analysis and Planning in the executive offices of the Bank since 1994. In such capacity, she has assisted executive management of the Bank in complex analysis of business operations. Ms. Miyachi has over nineteen years
experience with the accounting, reporting, analysis and planning of mortgage oriented financial institutions.



Mr. Newton is Executive Vice President and Chief Financial Officer of the Bank and has held such position since August 1988. Previously, Mr. Newton was
Vice President and Controller of Homestead Financial and was a Certified Public Accountant with KPMG LLP for nine years.



Ms. Chan joined the Bank in 2004 and is the Tax Manager of the Bank. Prior to that, Ms. Chan was with KPMG LLP for nine years, five of which were in the
tax department.



26



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##### Table of Contents

Independent Directors



The terms of the preferred shares require that, as long as any preferred shares are outstanding, certain actions by us be approved by a majority of the
Companys independent directors. In order to be considered independent, a director must not be or have been in the last three years one of the Companys officers or employees or a director, officer or employee of the Bank or an
affiliate of the Bank and otherwise in accordance with the rules of the Nasdaq National Market. Members of our board of directors elected by holders of preferred shares will not be deemed to be independent directors for purposes of approving actions
requiring the approval of a majority of the independent directors. Mr. Cunningham (Chairman) and Mr. Lykins are currently our independent directors. The death of Mr. Willson has created a vacancy for an independent director.



If, at the time of any of the Companys annual shareholder meetings, the
Company has failed to pay or declare and set aside for payment a full quarterly dividend during any of the four preceding quarterly dividend periods on any series of the Companys preferred shares, the number of directors then constituting our
board of directors will be increased by two, and the holders of the Companys outstanding series of preferred shares voting as a single class at that meeting will be entitled to elect the two additional directors to serve on the board of
directors. Any member of the board of directors elected by holders of the preferred shares will not be deemed an independent director for purposes of the actions requiring the approval of a majority of the independent directors.



Audit Committee



The Companys board of directors has established an audit committee that reviews the engagement and independence of the
Companys independent registered public accounting firm. The audit committee also reviews the adequacy of the Companys internal accounting controls. The audit committee is comprised of two independent directors: Messrs. Cunningham and
Lykins, each of which is an audit committee financial expert.



Compensation
of Directors



The independent directors receive no annual
compensation; however, they are paid a fee of $1,000 for attendance to each regularly scheduled Board meeting (in person or by telephone) at each meeting of the board of directors and $500 for any separate Audit Committee meeting or for any non
scheduled board of directors meeting attended (in person or by telephone).



|Item  11. | EXECUTIVE COMPENSATION.
|--------- | -----------------------



The Company does not pay any compensation to its officers or employees.



27



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##### Table of Contents

|Item  12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
|--------- | ---------------------------------------------------------------



During January 2005, the Company offered to repurchase the 9,840 shares of common stock not held by the Bank. As of February 2005, 7,920 shares were
repurchased including 80 shares owned by Messrs. Baumberger, Dobranski, Merrill and Newton and Ms. Miyachi. The following table sets forth, as of February 25, 2005, the number and percentage of outstanding shares of common shares, Series A Preferred
Shares, Series B Preferred Shares, Series C Preferred Shares and Series D Shares beneficially owned by (i) all persons known by us to own more than five percent of such shares; (ii) each of our directors; (iii) each of our executive officers; and
(iv) all of our executive officers and directors as a group. The persons or entities named in the table have sole voting and sole investment power with respect to each of the shares beneficially owned by such person or entity. The calculations were
based on a total of 29,362,633 Common Shares, 55,000 Series A Preferred Shares, 1,680,000 Series B Preferred Shares, 7,000 Series C Preferred Shares and 2,400,000 Series D Preferred Shares outstanding as of December 31, 2004.



|                                                            |  |                                                         |  |      |                          |  |        |                          |      |   |                           |        |  |                          |   |  |        |  |       |   |  |        |  |     |  
|----------------------------------------------------------- |  | ------------------------------------------------------- |  | ---- | ------------------------ |  | ------ | ------------------------ | ---- | - | ------------------------- | ------ |  | ------------------------ | - |  | ------ |  | ----- | - |  | ------ |  | --- | -
|                                                            |  | Common Shares                                           |  |      | Series APreferred Shares |  |        | Series BPreferred Shares |      |   | Series C Preferred Shares |        |  | Series DPreferred Shares |  
|                                                            |  | (Number of Shares and Percentage of Outstanding Shares) | 
|Name and Address of Beneficial Owner                        |  | Number                                                  |  | %    |                          |  | Number |                          | %    |   |                           | Number |  | %                        |   |  | Number |  | %     |   |  | Number |  | %   |  
|First Republic Bank                                         |  | 29,352,793                                              |  | 99.9 | %                        |  | 25,410 |                          | 46.2 | % |                           |       |  |                         |   |  |       |  |      |   |  |       |  |    |  
|111 Pine Street San Francisco, California 94111             |  |                                                         |  |      |                          |  |        |                          |      |   |                           |        |  |                          |   |  |        |  |       |   |  |        |  |     |  
|                                                            |  |                                                         |  |      |                          |  |        |                          |      |  
|The Calvert Group                                           |  |                                                        |  |     |                          |  | 7,050  |                          | 12.8 | % |                           |       |  |                         |   |  |       |  |      |   |  |       |  |    |  
|4550 Montgomery Avenue Suite 1000N Bethesda, MD 20814       |  |                                                         |  |      |                          |  |        |                          |      |   |                           |        |  |                          |   |  |        |  |       |   |  |        |  |     |  
|                                                            |  |                                                         |  |      |                          |  |        |                          |      |  
|Credit Suisse First Boston                                  |  |                                                        |  |     |                          |  |       |                          |     |   |                           |       |  |                         |   |  | 7,000  |  | 100.0 | % |  |       |  |    |  
|11 Madison Avenue New York, New York 10010                  |  |                                                         |  |      |                          |  |        |                          |      |   |                           |        |  |                          |   |  |        |  |       |   |  |        |  |     |  
|                                                            |  |                                                         |  |      |                          |  |        |                          |      |  
|Executive Officers and Directors:                           |  |                                                         |  |      |                          |  |        |                          |      |   |                           |        |  |                          |   |  |        |  |       |   |  |        |  |     |  
|James J. Baumberger(2) (3)                                  |  |                                                        |  |     |                          |  |       |                          |     |   |                           | 12,000 |  | 0.7                      | % |  |       |  |      |   |  | 4,000  |  | 0.2 | %
|Thomas A. Cunningham(3)                                     |  |                                                        |  |     |                          |  |       |                          |     |   |                           |       |  |                         |   |  |       |  |      |   |  |       |  |    |  
|Jerry Lykins(3)                                             |  |                                                        |  |     |                          |  |       |                          |     |   |                           | 12,000 |  | 0.7                      | % |  |       |  |      |   |  | 3,000  |  | 0.1 | %
|Barrant V. Merrill(3)                                       |  |                                                        |  |     |                          |  |       |                          |     |   |                           |        |  |                          |   |  |       |  |      |   |  |       |  |    |  
|Edward J. Dobranski(2) (3)                                  |  |                                                        |  |     |                          |  |       |                          |     |   |                           |       |  |                         |   |  |       |  |      |   |  |       |  |    |  
|Julie N. Miyachi(2) (3)                                     |  |                                                        |  |     |                          |  |       |                          |     |   |                           | 400    |  | *                        |   |  |       |  |      |   |  | 1,000  |  | *   |  
|Willis H. Newton, Jr.(2) (3)                                |  |                                                        |  |     |                          |  |       |                          |     |   |                           |       |  |                         |   |  |       |  |      |   |  |       |  |    |  
|May Chan                                                    |  |                                                        |  |     |                          |  |       |                          |     |   |                           |       |  |                         |   |  |       |  |      |   |  |       |  |    |  
|                                                            |  |                                                         |  |      |                          |  |        |                          |      |   |                           |        |  |                          |   |  |        |  |       |   |  |        |  |     |  
|All Executive Officers and Directors as a group (8 persons) |  |                                                        |  |     |                          |  |       |                          |     |   |                           | 24,400 |  | 1.5                      | % |  |       |  |      |   |  | 8,000  |  | 0.3 | %
|                                                            |  |                                                         |  |      |                          |  |        |                          |      |   |                           |        |  |                          |   |  |        |  |       |   |  |        |  |     |  

---

|* | Less than 1/10 of 1%.
|- | ---------------------

|(1) | Unless otherwise indicated, the address of each beneficial owner is c/o First Republic Preferred Capital Corporation, 111 Pine Street, San Francisco, California 94111.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Executive Officer.
|--- | ------------------

|(3) | Director.
|--- | ---------



28



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##### Table of Contents

|Item  13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
|--------- | -----------------------------------------------



Transactions with Management and Others



Please see the discussion in Item 1 of this report under the heading The Companys Relationship with the Bank.



Certain Business Relationships



All of the Companys executive officers are also officers or employees
of the Bank.



Indebtedness of Management



None of the Companys directors, officers, or any of their immediate
family or other affiliates, is indebted to the Company since the beginning of the year ended December 31, 2004, in an amount in excess of $60,000.



|Item  14. | PRINCIPAL ACCOUNTING FEES AND SERVICES.
|--------- | ---------------------------------------



The following table presents fees for professional audit services rendered by KPMG LLP for the audit of the Companys annual financial statements for
2004 and 2003 and fees billed for other services rendered by KPMG LLP.



|                   |  |      |         |      |   |        
|------------------ |  | ---- | ------- | ---- | - | -------
|                   |  | 2004 |         | 2003
|Audit fees         |  | $    | 88,000  |      | $ | 162,000
|Audit related fees |  |      |        |      |   |       
|Tax fees           |  |      | 14,000  |      |   |       
|All other fees     |  |      |        |      |   |       
|                   |  |      |         |      |   |        
|Total fees         |  | $    | 102,000 |      | $ | 162,000
|                   |  |      |         |      |   |        



The Audit Committee
implemented a policy in May 2003 to have all future auditing services and permitted non-audit services of KPMG LLP pre-approved by the Audit Committee, including fees and terms. Following the implementation of this policy, the Audit Committee
pre-approved all of the engagements and fees for the audit of the Company.



PART IV



|Item  15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
|--------- | ----------------------------------------



|(a) | Financial Statements.
|--- | ---------------------



| | (1) | Please Financial Statements table of contents on page F-2 of this report.
| | --- | -------------------------------------------------------------------------



| | (2) | Financial statement schedules are omitted because either the required information is not present in amounts sufficient to require submission of the schedules or the information
required is included in the financial statements and notes thereto.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Exhibits:
| | --- | ---------



The majority of the following exhibits were previously filed as exhibits to other reports or registration statements filed by the Company and are incorporated herein by reference to such reports or registration
statements as indicated parenthetically below.



29



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##### Table of Contents

EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                     
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                         
|3.1         |  | Articles of Incorporation of First Republic Preferred Capital Corporation (incorporated herein by reference to Exhibit 3.1 of Form S-11 (File No. 333-72510)).                                                                      
|            | 
|3.2         |  | Certificate of Designations of First Republic Preferred Capital Corporation relating to the Noncumulative Series A Preferred Shares (incorporated herein by reference to Exhibit 3.2 of
Form S-11 (File No. 333-72510)).            
|            | 
|3.3         |  | Certificate of Designations of First Republic Preferred Capital Corporation relating to the Noncumulative Series B Preferred Shares (incorporated herein by reference to Exhibit 3 of
Form 8-K (File No. 000-33461)).               
|            | 
|3.4         |  | Certificate of Designations of First Republic Preferred Capital Corporation relating to the Noncumulative Series C Preferred Shares (incorporated herein by reference to Exhibit 3.4 of
Form S-11 (File No. 333-72510)).            
|            | 
|3.5         |  | Code of Bylaws of First Republic Preferred Capital Corporation (incorporated herein by reference to Exhibit 3.5 of Form S-11 (File No. 333-72510)).                                                                                 
|            | 
|3.6         |  | Certificate of Designations of First Republic Preferred Capital Corporation relating to the Noncumulative Series D Preferred Shares (incorporated herein by reference to Exhibit 3.6 of
Form S-11 (File No. 333-105434)).           
|            | 
|4.1         |  | Specimen certificate representing Noncumulative Series B shares (incorporated herein by reference to Exhibit 4 of Form S-11 (File No. 333-72510)).                                                                                  
|            | 
|4.2         |  | Specimen certificate representing Noncumulative Series D shares (incorporated herein by reference to Exhibit 4 of Form S-11 (file No. 333-105434).                                                                                  
|            | 
|10.1        |  | Amended and Restated Master Loan Purchase and Servicing Agreement between First Republic Preferred Capital Corporation and First Republic Bank (incorporated herein by reference to Exhibit
10.1 of Form S-11 (File No. 333-72510)).
|            | 
|10.2        |  | Amended and Restated Advisory Agreement between First Republic Preferred Capital Corporation and First Republic Bank (incorporated herein by reference to Exhibit 10.2 of Form S-11 (File
No. 333-72510)).                          
|            | 
|12*         |  | Statement regarding calculation of ratio of earnings to fixed charges.                                                                                                                                                              
|            | 
|31.1*       |  | Certification pursuant to 15 U.S.C. 7m(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                    
|            | 
|31.2*       |  | Certification pursuant to 15 U.S.C. 7m(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                    
|            | 
|32.1*       |  | Certification pursuant to 18 U.S.C. Section 1350(a), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                          
|            | 
|32.2*       |  | Certification pursuant to 18 U.S.C. Section 1350(a), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                          

---

|* | Filed herewith.
|- | ---------------



30



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##### Table of Contents

SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, First Republic Preferred Capital Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



FIRST REPUBLIC PREFERRED CAPITAL CORPORATION



|                                                      |  |                                                                                               |  |               
|----------------------------------------------------- |  | --------------------------------------------------------------------------------------------- |  | --------------
|By:/s/    WILLIS H. NEWTON, JR. Willis H. Newton, Jr. |  | Vice President, Chief Financial Officer, Treasurer and Director (Principal Financial Officer) |  | March 16, 2005



Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of First Republic Preferred Capital Corporation and in the capacities and on the dates indicated.



|                                                  |  |                                                              |  |               
|------------------------------------------------- |  | ------------------------------------------------------------ |  | --------------
|Signature                                         |  | Title                                                        |  | Date          
|                                                  |  |                                                             
|/s/    JAMES J. BAUMBERGERJames J. Baumberger     |  | President, Director                                          |  | March 16, 2005
|                                                  |  |                                                             
|/s/    THOMAS A. CUNNINGHAMThomas A. Cunningham   |  | Director                                                     |  | March 16, 2005
|                                                  |  |                                                             
|/s/    JERRY LYKINSJerry Lykins                   |  | Director                                                     |  | March 16, 2005
|                                                  |  |                                                             
|/s/    BARRANT V. MERRILLBarrant V. Merrill       |  | Director                                                     |  | March 16, 2005
|                                                  |  |                                                             
|/s/    EDWARD J. DOBRANKSIEdward J. Dobranski     |  | Executive Vice President, General Counsel, Director          |  | March 16, 2005
|                                                  |  |                                                             
|/s/    JULIE N. MIYACHIJulie N. Miyachi           |  | Vice President, Operations, Director                         |  | March 16, 2005
|                                                  |  |                                                             
|/s/    WILLIS H. NEWTON. JR.Willis H. Newton, Jr. |  | Vice President, Chief Financial Officer, Treasurer, Director |  | March 16, 2005
|                                                  |  |                                                             
|/s/    MAY CHANMay Chan                           |  | Assistant Vice President, Corporate Secretary                |  | March 16, 2005



31



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##### Table of Contents





FIRST REPUBLIC PREFERRED CAPITAL CORPORATION



(A Majority Owned Subsidiary of First Republic Bank)



Financial Statements



December 31, 2004 and 2003



(With Report of Independent Registered Public Accounting Firm Thereon)



F-1



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##### Table of Contents

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION



---



TABLE OF CONTENTS



|                                                        |  |     
|------------------------------------------------------- |  | ----
|                                                        |  | Page
|                                                        | 
|Report of Independent Registered Public Accounting Firm |  | F-3 
|                                                        | 
|Balance Sheet                                           |  | F-4 
|                                                        | 
|Statement of Income                                     |  | F-5 
|                                                        | 
|Statement of Stockholders Equity                       |  | F-6 
|                                                        | 
|Statement of Cash Flows                                 |  | F-7 
|                                                        | 
|Notes to Financial Statements                           |  | F-8 



All other schedules
are omitted since the required information is not present in amounts sufficient to require submission of the schedules or the information required is included in the financial statements and notes thereto.



F-2



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders

First Republic Preferred Capital Corporation:



We have audited the accompanying balance sheet of First Republic Preferred
Capital Corporation (the Company) as of December 31, 2004 and 2003, and the related statements of income, stockholders equity, and cash flows for each of the years in the three-year period ended December 31, 2004. These financial statements
are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.



In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial position of First Republic Preferred Capital Corporation as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.





/s/    KPMG LLP

San Francisco, California

March 9, 2005



F-3



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##### Table of Contents

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Majority Owned Subsidiary of First Republic Bank)



BALANCE SHEET



|                                                                                                                                                                               |  |              |             |   |      |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ----------- | - | ---- | - | ----------- | -
|                                                                                                                                                                               |  | December 31, |            
|                                                                                                                                                                               |  | 2004         |             |   | 2003 |  
|ASSETS                                                                                                                                                                         |  |              |             |   |      |   |             |  
|Cash and short-term investments on deposit with First Republic Bank                                                                                                            |  | $            | 4,476,000   |   |      | $ | 6,766,000   |  
|                                                                                                                                                                               |  |             
|Single family mortgage loans                                                                                                                                                   |  |              | 288,211,000 |   |      |   | 296,051,000 |  
|Multifamily mortgage loans                                                                                                                                                     |  |              | 37,517,000  |   |      |   | 26,454,000  |  
|Less: Allowance for loan losses                                                                                                                                                |  |              | (481,000    | ) |      |   | (481,000    | )
|                                                                                                                                                                               |  |              |             |   |      |   |             |  
|Net loans                                                                                                                                                                      |  |              | 325,247,000 |   |      |   | 322,024,000 |  
|                                                                                                                                                                               |  |              |             |   |      |   |             |  
|Accrued interest receivable                                                                                                                                                    |  |              | 1,431,000   |   |      |   | 1,593,000   |  
|Prepaid expenses                                                                                                                                                               |  |              | 5,000       |   |      |   | 14,000      |  
|                                                                                                                                                                               |  |              |             |   |      |   |             |  
|Total assets                                                                                                                                                                   |  | $            | 331,159,000 |   |      | $ | 330,397,000 |  
|                                                                                                                                                                               |  |              |             |   |      |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                           |  |              |             |   |      |   |             |  
|Liabilities:                                                                                                                                                                   |  |              |             |   |      |   |             |  
|Dividends payable on common stock                                                                                                                                              |  | $            | 1,000       |   |      | $ | 1,255,000   |  
|Payable to First Republic Bank                                                                                                                                                 |  |              | 19,000      |   |      |   | 19,000      |  
|Other payables                                                                                                                                                                 |  |              | 122,000     |   |      |   | 29,000      |  
|                                                                                                                                                                               |  |              |             |   |      |   |             |  
|Total liabilities                                                                                                                                                              |  |              | 142,000     |   |      |   | 1,303,000   |  
|                                                                                                                                                                               |  |              |             |   |      |   |             |  
|Stockholders equity:                                                                                                                                                          |  |              |             |   |      |   |             |  
|Preferred stock, $0.01 par value per share; 10,000,000 shares authorized:                                                                                                      |  |              |             |   |      |   |             |  
|10.50% perpetual, exchangeable, noncumulative Series A preferred stock; $1,000 liquidation value per share; 55,000 shares authorized, issued
and outstanding                   |  |              | 55,000,000  |   |      |   | 55,000,000  |  
|8.875% perpetual, exchangeable, noncumulative Series B preferred stock; $25 liquidation value per share; 1,840,000 authorized, 1,680,000
shares issued and outstanding         |  |              | 42,000,000  |   |      |   | 42,000,000  |  
|5.70% perpetual, convertible, exchangeable, noncumulative Series C preferred stock; $1,000 liquidation value per share; 10,000 shares
authorized, 7,000 issued and outstanding |  |              | 7,000,000   |   |      |   | 7,000,000   |  
|7.25% perpetual, exchangeable, noncumulative Series D preferred stock; $25 liquidation value per share; 2,400,000 shares authorized, issued
and outstanding                    |  |              | 60,000,000  |   |      |   | 60,000,000  |  
|Common stock; $0.01 par value, 50,000,000 shares authorized, 29,362,633 shares issued and outstanding at December 31, 2004 and
2003                                            |  |              | 294,000     |   |      |   | 294,000     |  
|Additional paid-in capital                                                                                                                                                     |  |              | 166,923,000 |   |      |   | 165,000,000 |  
|Dividends in excess of retained earnings                                                                                                                                       |  |              | (200,000    | ) |      |   | (200,000    | )
|                                                                                                                                                                               |  |              |             |   |      |   |             |  
|Total stockholders equity                                                                                                                                                     |  |              | 331,017,000 |   |      |   | 329,094,000 |  
|                                                                                                                                                                               |  |              |             |   |      |   |             |  
|Total liabilities and stockholders equity                                                                                                                                     |  | $            | 331,159,000 |   |      | $ | 330,397,000 |  
|                                                                                                                                                                               |  |              |             |   |      |   |             |  



See accompanying notes
to financial statements.



F-4



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##### Table of Contents

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Majority Owned Subsidiary of First Republic Bank)



STATEMENT OF INCOME



|                                                      |  |                         |            |      |   |            |  |   |           
|----------------------------------------------------- |  | ----------------------- | ---------- | ---- | - | ---------- |  | - | ----------
|                                                      |  | Year ended December 31,
|                                                      |  | 2004                    |            | 2003 |   | 2002      
|Interest income:                                      |  |                         |            |      |   |            |  |   |           
|Interest on loans                                     |  | $                       | 16,398,000 |      | $ | 13,502,000 |  | $ | 11,799,000
|Interest on short-term investments                    |  |                         | 89,000     |      |   | 152,000    |  |   | 154,000   
|                                                      |  |                         |            |      |   |            |  |   |           
|Total interest income                                 |  |                         | 16,487,000 |      |   | 13,654,000 |  |   | 11,953,000
|Provision for loan losses                             |  |                         |           |      |   |           |  |   | 200,000   
|                                                      |  |                         |            |      |   |            |  |   |           
|Total interest income after provision for loan losses |  |                         | 16,487,000 |      |   | 13,654,000 |  |   | 11,753,000
|                                                      |  |                         |            |      |   |            |  |   |           
|Operating expense:                                    |  |                         |            |      |   |            |  |   |           
|Advisory fees payable to First Republic Bank          |  |                         | 75,000     |      |   | 75,000     |  |   | 50,000    
|General and administrative                            |  |                         | 236,000    |      |   | 199,000    |  |   | 196,000   
|                                                      |  |                         |            |      |   |            |  |   |           
|Total operating expense                               |  |                         | 311,000    |      |   | 274,000    |  |   | 246,000   
|                                                      |  |                         |            |      |   |            |  |   |           
|Net income before preferred stock dividends           |  |                         | 16,176,000 |      |   | 13,380,000 |  |   | 11,507,000
|Dividends on preferred stock                          |  |                         | 14,252,000 |      |   | 12,125,000 |  |   | 9,663,000 
|                                                      |  |                         |            |      |   |            |  |   |           
|Net income available to common stockholders           |  | $                       | 1,924,000  |      | $ | 1,255,000  |  | $ | 1,844,000 
|                                                      |  |                         |            |      |   |            |  |   |           



See accompanying notes
to financial statements.



F-5



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##### Table of Contents

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Majority Owned Subsidiary of First Republic Bank)



STATEMENT OF STOCKHOLDERS EQUITY



|                                                                                  |  |                 |             |             |   |                           |  |                  |             |  |       |             |   |  |   |             |  
|--------------------------------------------------------------------------------- |  | --------------- | ----------- | ----------- | - | ------------------------- |  | ---------------- | ----------- |  | ----- | ----------- | - |  | - | ----------- | -
|                                                                                  |  | Preferred stock |             | Commonstock |   | Additionalpaid-in capital |  | Retainedearnings |             |  | Total |            
|Balance as of December 31, 2001                                                   |  | $               | 62,000,000  |             | $ | 112,000                   |  | $                | 63,182,000  |  | $     |            |   |  | $ | 125,294,000 |  
|Issuance of 1,680,000 shares of Series B preferred stock                          |  |                 | 42,000,000  |             |   |                          |  |                  |            |  |       |            |   |  |   | 42,000,000  |  
|Capital contribution by First Republic Bank for 7,460,831 shares of common stock  |  |                 |            |             |   | 75,000                    |  |                  | 41,925,000  |  |       |            |   |  |   | 42,000,000  |  
|Net income before preferred stock dividends                                       |  |                 |            |             |   |                          |  |                  |            |  |       | 11,507,000  |   |  |   | 11,507,000  |  
|Dividends paid on Series A, Series B, and Series C preferred stock                |  |                 |            |             |   |                          |  |                  |            |  |       | (9,663,000  | ) |  |   | (9,663,000  | )
|Dividends payable on common stock                                                 |  |                 |            |             |   |                          |  |                  |            |  |       | (2,044,000  | ) |  |   | (2,044,000  | )
|                                                                                  |  |                 |             |             |   |                           |  |                  |             |  |       |             |   |  |   |             |  
|Balance as of December 31, 2002                                                   |  |                 | 104,000,000 |             |   | 187,000                   |  |                  | 105,107,000 |  |       | (200,000    | ) |  |   | 209,094,000 |  
|Issuance of 2,400,000 shares of Series D preferred stock                          |  |                 | 60,000,000  |             |   |                          |  |                  |            |  |       |            |   |  |   | 60,000,000  |  
|Capital contribution by First Republic Bank for 10,658,330 shares of common stock |  |                 |            |             |   | 107,000                   |  |                  | 59,893,000  |  |       |            |   |  |   | 60,000,000  |  
|Net income before preferred stock dividends                                       |  |                 |            |             |   |                          |  |                  |            |  |       | 13,380,000  |   |  |   | 13,380,000  |  
|Dividends paid on Series A, Series B, Series C and Series D preferred stock       |  |                 |            |             |   |                          |  |                  |            |  |       | (12,125,000 | ) |  |   | (12,125,000 | )
|Dividends payable on common stock                                                 |  |                 |            |             |   |                          |  |                  |            |  |       | (1,255,000  | ) |  |   | (1,255,000  | )
|                                                                                  |  |                 |             |             |   |                           |  |                  |             |  |       |             |   |  |   |             |  
|Balance as of December 31, 2003                                                   |  |                 | 164,000,000 |             |   | 294,000                   |  |                  | 165,000,000 |  |       | (200,000    | ) |  |   | 329,094,000 |  
|Net income before preferred stock dividends                                       |  |                 |            |             |   |                          |  |                  |            |  |       | 16,176,000  |   |  |   | 16,176,000  |  
|Dividends paid on Series A, Series B, Series C and Series D preferred stock       |  |                 |            |             |   |                          |  |                  |            |  |       | (14,252,000 | ) |  |   | (14,252,000 | )
|Dividends payable on common stock                                                 |  |                 |            |             |   |                          |  |                  |            |  |       | (1,000      | ) |  |   | (1,000      | )
|Consent dividend on common stock                                                  |  |                 |            |             |   |                          |  |                  | 1,923,000   |  |       | (1,923,000  | ) |  |   |            |  
|                                                                                  |  |                 |             |             |   |                           |  |                  |             |  |       |             |   |  |   |             |  
|Balance as of December 31, 2004                                                   |  | $               | 164,000,000 |             | $ | 294,000                   |  | $                | 166,923,000 |  | $     | (200,000    | ) |  | $ | 331,017,000 |  
|                                                                                  |  |                 |             |             |   |                           |  |                  |             |  |       |             |   |  |   |             |  



See accompanying notes
to financial statements.



F-6



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##### Table of Contents

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Majority Owned Subsidiary of First Republic Bank)



STATEMENT OF CASH FLOWS



|                                                                                  |  |                         |              |   |      |   |              |      |  |   |              |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ------------ | - | ---- | - | ------------ | ---- |  | - | ------------ | -
|                                                                                  |  | Year Ended December 31, |             
|                                                                                  |  | 2004                    |              |   | 2003 |   |              | 2002 | 
|Operating Activities:                                                             |  |                         |              |   |      |   |              |      |  |   |              |  
|Net income before preferred stock dividends                                       |  | $                       | 16,176,000   |   |      | $ | 13,380,000   |      |  | $ | 11,507,000   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |              |   |      |   |              |      |  |   |              |  
|Provision for loan losses                                                         |  |                         |              |   |      |   |             |      |  |   | 200,000      |  
|Amortization of premium on loans, net                                             |  |                         | 25,000       |   |      |   | 594,000      |      |  |   | 216,000      |  
|Changes in operating assets and liabilities:                                      |  |                         |              |   |      |   |              |      |  |   |              |  
|Accrued interest receivable                                                       |  |                         | 162,000      |   |      |   | (402,000     | )    |  |   | (480,000     | )
|Receivable from First Republic Bank                                               |  |                         |             |   |      |   |             |      |  |   | 21,000       |  
|Prepaid expenses                                                                  |  |                         | 9,000        |   |      |   | (4,000       | )    |  |   | 8,000        |  
|Payable to First Republic Bank                                                    |  |                         |             |   |      |   | 6,000        |      |  |   |             |  
|Other payables                                                                    |  |                         | 93,000       |   |      |   | 4,000        |      |  |   | 4,000        |  
|                                                                                  |  |                         |              |   |      |   |              |      |  |   |              |  
|Net cash provided by operating activities                                         |  |                         | 16,465,000   |   |      |   | 13,578,000   |      |  |   | 11,476,000   |  
|                                                                                  |  |                         |              |   |      |   |              |      |  |   |              |  
|Investing Activities:                                                             |  |                         |              |   |      |   |              |      |  |   |              |  
|Loans purchased from First Republic Bank                                          |  |                         | (108,886,000 | ) |      |   | (294,644,000 | )    |  |   | (182,353,000 | )
|Principal payments on loans                                                       |  |                         | 105,638,000  |   |      |   | 159,705,000  |      |  |   | 111,009,000  |  
|                                                                                  |  |                         |              |   |      |   |              |      |  |   |              |  
|Net cash used in investing activities                                             |  |                         | (3,248,000   | ) |      |   | (134,939,000 | )    |  |   | (71,344,000  | )
|                                                                                  |  |                         |              |   |      |   |              |      |  |   |              |  
|Financing Activities:                                                             |  |                         |              |   |      |   |              |      |  |   |              |  
|Issuance of preferred stock                                                       |  |                         |             |   |      |   | 60,000,000   |      |  |   | 42,000,000   |  
|Issuance of common stock to First Republic Bank                                   |  |                         |             |   |      |   | 60,000,000   |      |  |   | 42,000,000   |  
|Dividends paid on preferred stock                                                 |  |                         | (14,252,000  | ) |      |   | (12,125,000  | )    |  |   | (9,663,000   | )
|Dividends paid on common stock                                                    |  |                         | (1,255,000   | ) |      |   | (2,044,000   | )    |  |   | (2,053,000   | )
|                                                                                  |  |                         |              |   |      |   |              |      |  |   |              |  
|Net cash (used in) provided by financing activities                               |  |                         | (15,507,000  | ) |      |   | 105,831,000  |      |  |   | 72,284,000   |  
|                                                                                  |  |                         |              |   |      |   |              |      |  |   |              |  
|Increase (decrease) in cash and cash equivalents                                  |  |                         | (2,290,000   | ) |      |   | (15,530,000  | )    |  |   | 12,416,000   |  
|Cash and cash equivalents at beginning of year                                    |  |                         | 6,766,000    |   |      |   | 22,296,000   |      |  |   | 9,880,000    |  
|                                                                                  |  |                         |              |   |      |   |              |      |  |   |              |  
|Cash and cash equivalents at end of year                                          |  | $                       | 4,476,000    |   |      | $ | 6,766,000    |      |  | $ | 22,296,000   |  
|                                                                                  |  |                         |              |   |      |   |              |      |  |   |              |  
|Supplemental disclosure of cash flow information:                                 |  |                         |              |   |      |   |              |      |  |   |              |  
|Common stock dividends payable                                                    |  | $                       | 1,000        |   |      | $ | 1,255,000    |      |  | $ | 2,044,000    |  



See accompanying notes
to financial statements.



F-7



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##### Table of Contents

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Majority Owned Subsidiary of First Republic Bank)



NOTES TO FINANCIAL STATEMENTS



December 31, 2004



Note 1.    Organization and Basis of Presentation



First Republic Preferred Capital Corporation (the Company) is a
Nevada corporation formed by First Republic Bank (the Bank) in April 1999 for the purpose of raising capital for the Bank. The Companys principal business is acquiring, holding, financing and managing assets secured by real estate
mortgages and other obligations secured by real property, as well as certain other qualifying real estate investment trust (REIT) assets (collectively, the Mortgage Assets). The Mortgage Assets presently held by the Company
are loans secured by single family and multifamily real estate properties (Mortgage Loans) that were acquired from the Bank. The Company expects that all, or substantially all, of its Mortgage Assets will continue to be Mortgage Loans
acquired from the Bank. The Company has elected to be taxed as a REIT and intends to make distributions to its shareholders such that the Company is relieved of substantially all income taxes relating to ordinary income under applicable tax
regulations. Accordingly, no provision for income taxes is included in the accompanying financial statements. To date, the Company has issued 29,362,633 shares of common stock, par value $0.01 per share. The Bank owns all of the common stock, except
for 9,840 shares held by certain of the Banks employees and directors. Earnings per share data is not presented, as the Companys common stock is not publicly traded.



In June 1999, the Company completed an initial private offering of 55,000 shares of perpetual, exchangeable, noncumulative
10.5% Series A preferred shares (the Series A Preferred Shares) and received proceeds of $55 million. The Bank paid all expenses of the offering, including underwriting commissions and discounts. The Series A Preferred Shares have not
been registered under the Securities Act of 1933 (the Securities Act) or any other applicable securities law, are not listed on any national securities exchange or for quotation through the Nasdaq National Stock Market, Inc. or any other
quotation system and are subject to significant restrictions on transfer.



In June 2001, the Company completed a private placement of $7 million of perpetual, exchangeable, noncumulative 5.7% Series C preferred shares (the Series C Preferred Shares) that are convertible into
common stock of the Bank. The Series C Preferred Shares are convertible into Bank shares at a price of $30.56 per share.



In January 2002, the Company completed an initial public offering and received $42 million from the issuance of 1,680,000 shares of 8.875% noncumulative
perpetual Series B preferred stock (the Series B Preferred Shares). The Bank paid all expenses of the offering, including underwriting commissions and discounts. The Series B Preferred Shares are included for quotation on the Nasdaq
National Market under the symbol FRCCP.



In June
2003, the Company completed a public offering and received $60 million from the issuance of 2,400,000 shares of 7.25% noncumulative perpetual Series D preferred stock (the Series D Preferred Shares). The Bank paid all expenses of the
offering, including underwriting commissions and discounts. The Series D Preferred Shares trade on the Nasdaq National Market under the symbol FRCCO. In connection with this transaction, the Company issued, and the Bank purchased, $60
million of additional common stock. The Company used the proceeds from the issuance of the Series D Preferred Shares and the additional issuance of common stock to acquire from the Bank approximately $87 million of single family, $30 million of
multifamily mortgage loans, and $3 million of short-term investments.



The Series A Preferred Shares, Series B Preferred Shares, Series C Preferred Shares and Series D Preferred Shares are collectively referred to as the Preferred Shares.



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Note 2.    Summary of Significant Accounting Policies



Use of Estimates



The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the
allowance for losses on loans.



Mortgage Loans



Mortgage Loans are carried at the principal amount
outstanding, net of purchase discounts and premiums. Discounts or premiums on Mortgage Loans are accreted or amortized as yield adjustments over the contractual lives of the loans using the interest method. The unaccredited discount or unamortized
premium on a loan sold or paid in full is recognized in income at the time of sale or payoff.



The Company has purchased Mortgage Loans from the Bank at the Banks carrying amount, which generally has approximated the fair value of the loans purchased. If a significant difference were to exist between the
Banks carrying amount and the fair value of loans at the date of purchased by the Company, the difference would be recorded as a capital contribution by the Bank or a capital distribution to the Bank and would not be an adjustment to the basis
of the loans.



Mortgage Loans consisted entirely of single
family mortgages through the first quarter of 2003. Beginning in the second quarter of 2003, the Company acquired multifamily mortgages with the proceeds of the Series D preferred stock offering. At December 31, 2004, Mortgage Loans totaled $325.7
million, of which $288.2 million were single family mortgages and $37.5 million were multifamily mortgages. At December 31, 2003, Mortgage Loans totaled $322.5 million, of which $296.1 million were single family mortgages and $26.4 million were
multifamily mortgages.



Interest income from loans is
recognized in the month earned and is net of service fees paid to the Bank. Interest income is not recorded on loans when they become more than 90 days delinquent, except for single family loans that are well secured and in the process of
collection, or at such earlier time as management determined that the collectibility of interest is unlikely. When a loan is placed on nonaccrual status, interest income may be recorded when cash is received if the Companys recorded investment
in such loans is deemed collectible. When, in managements judgment, the borrowers ability to make periodic interest and principal payments resumes, the loan is returned to accrual status. There were no nonaccrual loans as of December 31,
2004 or 2003. The Company classifies a loan as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. There were no
impaired loans in the Companys loan portfolio at December 31, 2004 and 2003.



Allowance for Loan Losses



In 2002, the Company established an allowance for loan losses of $200,000. In 2003, the Company increased its allowance for loan losses by $281,000, which was the amount of the Banks allowance for loan losses associated with the loans
that the Company acquired using the proceeds from the issuance of the Series D Preferred Shares. The Company maintains an allowance for loan losses that can be reasonably anticipated based upon specific conditions at the time. The Company considers
a number of factors, including the Companys and the Banks past loss experience, the Banks underwriting policies, the amount of past due and nonperforming loans, legal requirements, recommendations or requirements of regulatory
authorities, current economic conditions and other factors. If the Company determines that an additional provision is required, the Company would provide for loan losses by charging current income.



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Other Real Estate Owned



Real estate acquired through foreclosure is recorded at the lower of cost or fair value minus estimated costs to sell such
real estate. Costs related to holding real estate are recorded as expenses when incurred. The Company has not owned any real estate since inception or as of December 31, 2004 or 2003.



Statements of Cash Flows



For the purpose of reporting cash flows, cash and cash equivalents include cash on hand and short-term investments on deposit with the Bank. As a REIT
making sufficient dividend distributions, the Company paid no income taxes for each year ended December 31, 2004, 2003, and 2002.



Recent Accounting Pronouncements



In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position No.
03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3), which addresses the accounting and disclosure requirements for an investor that acquires a loan for which the credit quality has
deteriorated since the loan was originated and for which it is probable that the investor will not collect all contractually required payments receivable. SOP 03-3 is effective for loans, including loans classified as debt securities, which are
acquired in fiscal years beginning after December 15, 2004. SOP 03-3 requires initially recording these loans and debt securities at fair value and prohibits recognition of a valuation allowance upon transfer. The excess of total expected cash flows
at acquisition over the investors initial investment in the loan is the accretable yield, which is recognized as interest income on a level-yield basis over the life of the loan. The excess of total contractual cash flows less total expected
cash flows is a nonaccretable yield that is not recognized upon acquisition. Subsequent increases in total expected cash flows are recognized prospectively as a yield adjustment over the remaining life of the loan; decreases are recognized as
impairment. Since the Company intends to acquire only performing loans from the Bank or other third parties, SOP 03-3 is not expected to have a material effect on the Companys financial condition or results of operations.



Note 3.    Related Party Transactions



Since inception in April 1999, the Company has acquired all of its Mortgage
Loans from the Bank. The aggregate cost of these loans acquired by the Company was $108.9 million in 2004 and $294.6 million in 2003, including net premiums of $161,000 and $971,000, respectively. In addition, the cost in 2003 included an allowance
for loan losses of $281,000 that was transferred from the Bank. All purchases were at a price equal to the Banks carrying amount, which approximated the fair value of the Mortgage Loans.



The Company has a loan purchase and servicing agreement with the Bank
pursuant to which the Bank performs, among other things, servicing of loans held by the Company in accordance with normal industry practice. The Bank charges an annual servicing fee of 0.25% of the outstanding principal balances of the Mortgage
Loans that the Bank services. The Company records the servicing fees as a reduction of interest income. Loan servicing fees were $775,000 and $582,000 for the year ended December 31, 2004 and 2003, respectively. In its capacity as servicer, the Bank
receives Mortgage Loan payments on behalf of the Company and holds the payments in custodial accounts at the Bank.



The Company entered into an advisory agreement with the Bank under which the Bank administers the day-to-day operations of the Company. The Bank is
responsible for: (i) monitoring the credit quality of the Mortgage Assets held by the Company; (ii) advising the Company with respect to the reinvestment of income from, and principal payments on, the Mortgage Assets, and with respect to the
acquisition, management, financing and disposition of the Mortgage Assets; and (iii) monitoring the Companys compliance with the requirements necessary to qualify as a REIT.



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The advisory agreement is renewable on an annual basis. During 2003, the board of directors of the
Company, including a majority of the independent directors, approved an increase in the annual fee from $50,000 to $75,000, payable in equal quarterly installments. The Company had $19,000 payable to the Bank for advisory fees at December 31, 2004
and 2003.



At December 31, 2002, the Bank owned 15,000 shares
of the Companys outstanding Series A Preferred Shares, with a liquidation preference value of $15.0 million. During 2003, the Bank purchased on the open market 10,260 additional shares of the Companys outstanding Series A Preferred
Shares with a liquidation preference value of $10.3 million. During 2004, the Bank purchased on the open market 150 shares of the Companys outstanding Series A Preferred Shares, with a liquidation preference value of $150,000. Accordingly, at
December 31, 2004, the Bank owned 25,410 shares of the Companys Series A Preferred Shares, with a liquidation preference value of $25.4 million.



Note 4.    Preferred Stock



As of December 31, 2004, the Company was authorized to issue 10,000,000 shares of preferred stock, of which 4,142,000 shares are outstanding. The Company
has issued and outstanding each of the following series of preferred stock, par value $0.01 per share.



|                                                                       |  |                      |             |      |   |            
|---------------------------------------------------------------------- |  | -------------------- | ----------- | ---- | - | -----------
|                                                                       |  | At December 31, 2004
|                                                                       |  | 2004                 |             | 2003
|Series A55,000 shares authorized, issued and outstanding              |  | $                    | 55,000,000  |      | $ | 55,000,000 
|Series B1,840,000 shares authorized, 1,680,000 issued and outstanding |  |                      | 42,000,000  |      |   | 42,000,000 
|Series C10,000 shares authorized, 7,000 issued and outstanding        |  |                      | 7,000,000   |      |   | 7,000,000  
|Series D2,400,000 shares authorized, issued and outstanding           |  |                      | 60,000,000  |      |   | 60,000,000 
|                                                                       |  |                      |             |      |   |            
|Total preferred stock                                                  |  | $                    | 164,000,000 |      | $ | 164,000,000
|                                                                       |  |                      |             |      |   |            



In June 1999, the
Company issued 55,000 shares of Series A Preferred Shares. Proceeds from this issuance were $55 million; the Bank paid all expenses of the offering, including underwriting commissions and discounts. The Series A Preferred Shares are not redeemable
prior to June 1, 2009. Holders of the Series A Preferred Shares are entitled to receive, if authorized and declared by the board of directors of the Company, noncumulative dividends at a rate of 10.5% per annum or $105 per annum per share. Dividends
on the Series A Preferred Shares, if authorized and declared, are payable semiannually in arrears on June 30 and December 30 of each year. The Company paid dividends of $5,775,000 for each year ended December 31, 2004, 2003, and 2002.



In June 2001, the Company issued 7,000 Series C Preferred Shares. Proceeds
from this issuance were $7 million; the Bank paid all expenses of the offering, including underwriting commissions and discounts. The Series C Preferred Shares are not redeemable prior to June 16, 2007. The Series C Preferred Shares are convertible
into common stock of the Bank at a price of $20.38 per share. The single holder of the Series C Preferred Shares is entitled to receive, if authorized and declared by the board of directors of the Company, noncumulative dividends at a rate of 5.7%
per annum or $57 per annum per share. Dividends on the Series C Preferred Shares, if authorized and declared, are payable semiannually in arrears on June 30 and December 30 of each year. The Company paid dividends of $399,000 for each year ended
December 31, 2004, 2003 and 2002.



In January 2002, the Company
issued 1,680,000 Series B Preferred Shares. Proceeds from this issuance were $42 million; the Bank paid all expenses of the offering, including underwriting commissions and discounts. The Series B Preferred Shares are not redeemable prior to
December 30, 2006. Holders of the Series B Preferred Shares are entitled to receive, if authorized and declared by the board of directors of the Company, noncumulative dividends at a rate of 8.875% per annum or $2.21875 per annum per share.
Dividends on the Series B Preferred Shares are payable quarterly in arrears on March 30, June 30, September 30, and December 30 of each year. The Company paid dividends of $3,728,000 for the years ended December 31, 2004 and 2003, and $3,489,000 for
the period from issuance, January 24, 2002 through December 31, 2002.



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In June 2003, the Company issued 2,400,000 Series D Preferred Shares. Proceeds from this issuance were
$60 million; the Bank paid all expenses of the offering, including underwriting commissions and discounts. The Series D Preferred Shares are not redeemable prior to June 27, 2008. Holders of the Series D Preferred Shares are entitled to receive, if
authorized and declared by the board of directors of the Company, noncumulative dividends at a rate of 7.25% per annum or $1.8125 per annum per share. Dividends on the Series D Preferred Shares are payable quarterly in arrears on March 30, June 30,
September 30, and December 30 of each year. The first dividend payment date for the Series D Preferred Shares was September 30, 2003. The Company paid dividends of $4,350,000 for the year ended December 31, 2004. The first dividend payment date for
the Series D Preferred Shares was September 30, 2003 and the Company paid dividends of $2,223,000 for the period from inception, June 27, 2003 to December 31, 2003.



Upon the occurrence of an adverse change in relevant tax laws, the Company will have the right to redeem the Preferred
Shares, in whole (but not in part). The liquidation preference for each of the Series A Preferred Shares and the Series C Preferred Shares is $1,000 per share plus the semiannual dividend thereon accrued through the date of redemption for the
dividend period in which the redemption occurs. The liquidation preference for each of the Series B Preferred Shares and the Series D Preferred Share is $25 per share plus the quarterly dividend thereon accrued through the date of redemption for the
dividend period in which the redemption occurs.



The Preferred
Shares will be exchanged into preferred shares of the Bank upon the occurrence of certain events. The exchange rate for each of the Series A Preferred Shares and the Series C Preferred Shares is 1:1. The exchange rate for each of the Series B
Preferred Shares and Series D Preferred Shares is 1:1/40. Except under certain limited circumstances, the holders of the Preferred Shares have no voting rights.



Note 5.    Common Stock



As of December 31, 2004, the Company was authorized to issue 50,000,000 shares of common stock with a par value of $0.01 per share. At December 31, 2004,
there were 29,362,633 shares were outstanding. The Company initially issued 10,000,000 shares to the Bank. In June 2003, January 2002 and June 2001, the Company issued 10,658,330, 7,460,831 and 1,243,472 shares of common stock, respectively, to
acquire Mortgage Assets from the Bank.



Holders of common stock
are entitled to receive dividends if and when authorized and declared by the board of directors out of funds legally available therefor after all preferred dividends have been paid for the full year. Common stock dividends of $0.0655, $0.0428 and
$0.1093 per common shares were declared on December 8, 2004, December 9, 2003 and December 11, 2002, respectively.



Note 6.    Dividends on Preferred Stock and Common Stock



The following table presents the dividends on preferred stock that the Company paid in 2004, 2003 and 2002.



|                          |  |                         |            |      |   |            |  |   |          
|------------------------- |  | ----------------------- | ---------- | ---- | - | ---------- |  | - | ---------
|                          |  | Year ended December 31,
|                          |  | 2004                    |            | 2003 |   | 2002      
|Series A Preferred Shares |  | $                       | 5,775,000  |      | $ | 5,775,000  |  | $ | 5,775,000
|Series B Preferred Shares |  |                         | 3,728,000  |      |   | 3,728,000  |  |   | 3,489,000
|Series C Preferred Shares |  |                         | 399,000    |      |   | 399,000    |  |   | 399,000  
|Series D Preferred Shares |  |                         | 4,350,000  |      |   | 2,223,000  |  |   |         
|                          |  |                         |            |      |   |            |  |   |          
|Total                     |  | $                       | 14,252,000 |      | $ | 12,125,000 |  | $ | 9,663,000
|                          |  |                         |            |      |   |            |  |   |          



Dividends on the
Series A Preferred Shares, the Series B Preferred Shares, the Series C Preferred Shares and the Series D Preferred Shares are payable at the rate of 10.5%, 8.875%, 5.7%, and 7.25% per annum,



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respectively, if, when and as authorized by the Companys board of directors. If authorized, dividends on Series A Preferred Shares and Series C
Preferred Shares are payable semiannually in arrears on the 30thday of June and December of each year. If
authorized, dividends on the Series B Preferred Shares and Series D Preferred Shares are payable quarterly in arrears on the 30thof March, June, September, and December of each year.



If the board of directors does not authorize a dividend on any of the Preferred Shares for any respective dividend period, holders of each class of Preferred Shares will not be entitled to be paid that dividend later or to recover any
unpaid dividend whether or not funds are, or subsequently become, available. The board of directors, in its business judgment, may determine that it would be in the best interest of the Company to pay less than the full amount of the stated dividend
on each series of Preferred Shares for any dividend period. However, to remain qualified as a REIT, the Company must distribute annually at least 90% of its REIT taxable income (excluding deductions for any dividends paid and any net
capital gains) to stockholders, and, generally, the Company cannot pay dividends on common stock for periods in which less than full dividends are paid on each series of Preferred Shares.



The Company expects to pay the holders of common stock an amount of dividends that when aggregated with the dividends paid
to holders of the Preferred Shares is not less than 90% of the Companys REIT taxable income (excluding deductions for any dividends paid and any net capital gains) in order to remain qualified as a REIT. The Company declared
dividends to the holders of common stock of $1,924,000 for 2004, $1,255,000 for 2003 and $2,044,000 for 2002. For the calendar year ended December 31, 2004, the dividend on the common stock shares owned by the Bank was treated as a consent dividend
under Section 565 of the Internal Revenue Code.



Note
7.    Fair Value of Financial Instruments



The following table presents the carrying amounts and fair values of the Companys financial instruments as of December 31, 2004 and 2003:



|                       |  |                |         |            |   |                |  |            |         |  |   |        
|---------------------- |  | -------------- | ------- | ---------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                       |  | 2004           |         | 2003      
|(Dollars in thousands) |  | CarryingAmount |         | Fair Value |   | CarryingAmount |  | Fair Value
|Cash                   |  | $              | 4,476   |            | $ | 4,476          |  | $          | 6,766   |  | $ | 6,766  
|Mortgage loans         |  | $              | 325,247 |            | $ | 328,830        |  | $          | 322,024 |  | $ | 324,835



The following methods
and assumptions were used to estimate the fair value of each type of financial instrument:



Cash: The carrying value approximates the estimated fair value.



Mortgage Loans: The carrying amount of loans is net of the allowance for loan losses. To estimate fair value of the Companys loans, the
Company segments each loan collateral type into categories based on fixed or adjustable interest rate terms (index, margin, current rate and time to next adjustment), maturity, estimated credit risk, and accrual status.



The Company bases the fair value of single family and multifamily mortgages
loans primarily upon prices of loans with similar terms obtained by or quoted to the Company, adjusted for differences in loan characteristics and market conditions.



Note 8.    Concentration of Credit Risk



Concentration of credit risk generally arises with respect to the loan portfolio when a number of borrowers engage in
similar business activities or activities in the same geographical region. Concentration of credit risk indicates the relative sensitivity of the Companys performance to both positive and negative developments affecting a particular industry.
The balance sheet exposure to geographic concentrations directly affects the credit risk of the loans within the loan portfolio.



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At December 31, 2004, 60% of the Companys loans were secured by properties located in the
San Francisco Bay Area, 9% in Los Angeles County, 10% in other areas of California, 12% in New York and contiguous states and 9% in other parts of the United States. At December 31, 2004, the weighted average loan-to-value ratio for the
mortgage portfolio was approximately 54%, based on the appraised values of the properties at the time the loans were originated.



The following table presents an analysis of Mortgage Loans at December 31, 2004 by major geographic location:



|                       |  |                       |         |                          |   |                      |  |                   |        |                  |   |        |  |       |       |  |   |        |  |   |        
|---------------------- |  | --------------------- | ------- | ------------------------ | - | -------------------- |  | ----------------- | ------ | ---------------- | - | ------ |  | ----- | ----- |  | - | ------ |  | - | -------
|(Dollars in thousands) |  | San FranciscoBay Area |         | GreaterNew YorkCity Area |   | OtherCaliforniaAreas |  | Los AngelesCounty |        | Las Vegas,Nevada |   | Other  |  | Total
|Single family          |  | $                     | 164,463 |                          | $ | 39,142               |  | $                 | 29,127 |                  | $ | 27,636 |  | $     | 1,362 |  | $ | 26,481 |  | $ | 288,211
|Multifamily            |  |                       | 30,825  |                          |   | 857                  |  |                   | 2,662  |                  |   | 3,173  |  |       |      |  |   |       |  |   | 37,517 
|                       |  |                       |         |                          |   |                      |  |                   |        |                  |   |        |  |       |       |  |   |        |  |   |        
|Total                  |  | $                     | 195,288 |                          | $ | 39,999               |  | $                 | 31,789 |                  | $ | 30,809 |  | $     | 1,362 |  | $ | 26,481 |  | $ | 325,728
|                       |  |                       |         |                          |   |                      |  |                   |        |                  |   |        |  |       |       |  |   |        |  |   |        
|Percent by location    |  |                       | 60%     |                          |   | 12%                  |  |                   | 10%    |                  |   | 9%     |  |       | 1%    |  |   | 8%     |  |   | 100%   



Note
9.    Quarterly Data (unaudited)



The
following table presents the Companys summary unaudited financial information on a quarterly basis for 2004 and 2003:



|                                            |  |               |       |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      
|------------------------------------------- |  | ------------- | ----- | ------------ | - | ------------- |  | ------------ | ----- | ------------- | - | ------------ |  | ------------- | ----- | ------------ | - | ----- |  | - | ----- |  | - | -----
|                                            |  | 2004          |       | 2003        
|(Dollars in thousands)                      |  | FourthQuarter |       | ThirdQuarter |   | SecondQuarter |  | FirstQuarter |       | FourthQuarter |   | ThirdQuarter |  | SecondQuarter |       | FirstQuarter
|Interest income                             |  | $             | 4,325 |              | $ | 4,040         |  | $            | 4,052 |               | $ | 4,070        |  | $             | 3,831 |              | $ | 4,203 |  | $ | 2,765 |  | $ | 2,855
|Provision for loan losses                   |  |               |      |              |   |              |  |              |      |               |   |             |  |               |      |              |   |      |  |   |      |  |   |     
|Operating expenses                          |  |               | 72    |              |   | 75            |  |              | 92    |               |   | 72           |  |               | 65    |              |   | 68    |  |   | 68    |  |   | 73   
|                                            |  |               |       |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      
|Net income before preferred stock dividends |  |               | 4,253 |              |   | 3,965         |  |              | 3,960 |               |   | 3,998        |  |               | 3,766 |              |   | 4,135 |  |   | 2,697 |  |   | 2,782
|Preferred stock dividends                   |  |               | 3,563 |              |   | 3,563         |  |              | 3,563 |               |   | 3,563        |  |               | 3,563 |              |   | 3,563 |  |   | 2,524 |  |   | 2,475
|                                            |  |               |       |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      
|Net income available to common stockholders |  | $             | 690   |              | $ | 402           |  | $            | 397   |               | $ | 435          |  | $             | 203   |              | $ | 572   |  | $ | 173   |  | $ | 307  
|                                            |  |               |       |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      



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