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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, 2005

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 ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)
|                                                              | 
|111 Pine Street, 2nd FloorSan Francisco, California           |  | 94111 (Zip Code)                   
|(Address of principal executive offices)                      | 

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.        Yes ̈No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.        Yes ̈No x

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). 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, 2005 was approximately $3,000.

The number of shares outstanding of the registrants common stock, par value $.01 per share, as of March 7, 2006 was 29,353,273.



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FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

TABLE OF CONTENTS



|         |  |                                                                                                              |  |   
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | --
|PART I  
|         |  |                                                                                                             
|Item 1.  |  | Business                                                                                                     |  | 3 
|         |  |                                                                                                             
|Item 1A. |  | Risk Factors                                                                                                 |  | 12
|         |  |                                                                                                             
|Item 1B. |  | Unresolved Staff Comments                                                                                    |  | 16
|         |  |                                                                                                             
|Item 2.  |  | Properties                                                                                                   |  | 16
|         |  |                                                                                                             
|Item 3.  |  | Legal Proceedings                                                                                            |  | 17
|         |  |                                                                                                             
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 17
|        
|PART II 
|         |  |                                                                                                             
|Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 17
|         |  |                                                                                                             
|Item 6.  |  | Selected Financial Data                                                                                      |  | 20
|         |  |                                                                                                             
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operation                         |  | 21
|         |  |                                                                                                             
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 24
|         |  |                                                                                                             
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 26
|         |  |                                                                                                             
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 26
|         |  |                                                                                                             
|Item 9A. |  | Controls and Procedures                                                                                      |  | 26
|         |  |                                                                                                             
|Item 9B. |  | Other Information                                                                                            |  | 26
|        
|PART III
|         |  |                                                                                                             
|Item 10. |  | Directors and Executive Officers of the Registrant                                                           |  | 26
|         |  |                                                                                                             
|Item 11. |  | Executive Compensation                                                                                       |  | 28
|         |  |                                                                                                             
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 29
|         |  |                                                                                                             
|Item 13. |  | Certain Relationships and Related Transactions                                                               |  | 30
|         |  |                                                                                                             
|Item 14. |  | Principal Accounting Fees and Services                                                                       |  | 30
|        
|PART IV 
|         |  |                                                                                                             
|Item 15. |  | Exhibits, Financial Statement Schedules                                                                      |  | 30
|         |  |                                                                                                             
|         |  | SIGNATURES                                                                                                   |  | 32



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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 operation or of 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 loan losses; changes in the regulatory environment; changes in business conditions, particularly in San Francisco and Los Angeles counties and the New York area 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 stockholders 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.



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At December 31, 2005, the Company had issued 29,353,353 shares of common stock, par value $0.01 per
share. The Bank owned all of the common stock except for 560 shares held by certain of the Banks former employees at December 31, 2005. Earnings per share data is not presented, as the Companys common stock is not publicly traded.

General Description of Mortgage Assets

Mortgage Assets. As of December 31, 2005, the Companys Mortgage Assets consisted of Mortgage Loans originated by the Bank and secured by single family (one-to-four unit) homes and multifamily properties. The aggregate
outstanding principal balance of those loans was $314.8 million as of December 31, 2005.

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 has acquired from the Bank are nonconforming loans because the original loan principal balances 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 used as collateral for the Companys multifamily loans generally are operating properties with proven occupancy, rental rates and expense
levels. The neighborhoods tend to be densely populated, the properties generally are 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 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 currently anticipates purchasing Mortgage Assets comprised
primarily of single family mortgage loans and multifamily mortgage loans, although the Company may purchase commercial real estate mortgages and other types of 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, which 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, the Company would record the difference as a capital contribution by the Bank or a capital distribution to the
Bank and would not record an adjustment to the basis of the loans. In the future, the Company would expect the purchase price to approximate the fair value of the loans for recently originated loans; however, the price that the Company pays will not
be determined through arms-length transactions with unrelated third parties. The Company intends to acquire only performing loans from the Bank. However, neither the Company nor the Bank currently has specific policies with respect to the
Companys acquisition 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 may periodically acquire Mortgage Assets from unrelated
third parties. To date, the Company has not entered into any agreements, arrangements or adopted any procedures to purchase Mortgage Assets from unrelated third parties. However, the Bank 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.

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.
However, in order to preserve the Companys status as a REIT under the Internal Revenue Code of 1986, as amended, (the Internal Revenue Code), at least 75% of the Companys total 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 indebtedness in excess of 25% of 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 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



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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 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



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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 mortgage loans through the first quarter of 2003. Beginning in the second quarter of 2003, the Company acquired multifamily mortgages using the proceeds from the Series D Preferred Stock offering. At
December 31, 2005, Mortgage Loans totaled $314.8 million, of which $283.5 million were secured by single family residences and $31.3 million were secured by multifamily properties. At December 31, 2004, 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, 2005, the Mortgage Loans had interest rates generally ranging from 4.23% to 8.31% per annum and a weighted average note rate of 5.30% per annum. The Mortgage Loans were originated between October 1983 and March 2005, and
the average original term to stated maturity was 28 years. The weighted average number of months from origination of the loans through December 31, 2005 was approximately 4.3 years, and the weighted average remaining term was approximately 23.7
years. At December 31, 2004, the Mortgage Loans had rates generally ranging from 3.29% to 8.53%, a weighted average note rate of 4.98%, a weighted average number of months from origination of 3.8 years and a weighted average remaining term of
approximately 23.6 years.

The weighted average loan-to-value ratio for the Mortgage Loans was approximately 53% at
December 31, 2005, compared with 54% at December 31, 2004. The 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 a due-on-sale clause, which prevents the unauthorized transfer of property serving as collateral for the mortgage loans and accelerates the obligation to repay the entire outstanding principal balance of the loan on 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.

The interest rate on an ARM typically is tied to either the COFI or the CMT index and is adjustable periodically. A majority of the
Mortgage Loans have adjustable interest rate types. At December 31, 2005, 61% (by principal balance) of the Mortgage Loans were ARMs that bear interest at rates that adjust within one year, and 26% were intermediate fixed rate Mortgage Loans
that bear interest rates that are fixed for an initial period and then adjust after the initial period. 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, which is a fixed percentage that is added to the loans index in order to
calculate the interest rate to be paid by the borrower (without taking into account any interest rate caps or minimum interest rates). 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 adjusts periodically, subject to lifetime interest rate caps,
minimum interest rates and, for 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. Effective with each rate adjustment date, the monthly principal and interest payment on substantially all of the ARM loans 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.

For intermediate fixed
rate loans that are automatically convertible (5/1 Year ARMs, 7/1 Year ARMs and 10/1 Year ARMs), the interest rate is fixed at an initial rate for a certain amount of years (five, seven or ten years), 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, 2005, these automatically convertible mortgage loans comprised 24% of the Mortgage
Loans, compared with 36% at December 31, 2004. In addition, 2% of the Mortgage Loans at December 31, 2005 were indexed to the 5-year CMT and reprice every five years based, compared with 3% at December 31, 2004.

The Company has purchased from the Bank certain adjustable rate single family home loans that contain provisions for the negative amortization of
principal in the event that the amount of interest and principal due is greater than the required monthly payment. The borrowers ability to make payments is determined based on a rate in excess of the fully accrued interest rate, which is well
above the initial rate on the negative amortization loan. The amount of any payment shortfall is added to the principal balance of the loan to be repaid through future monthly payments, which, in turn, could cause increases in the principal amount
owed by the borrower over the original amount advanced. At December 31, 2005, loans with the potential for negative amortization were $7.4 million, or 2.36% of the total loan portfolio, and loans that had increases in principal balance
since origination were $2.0 million, or only 0.64% of the total loan portfolio. Of the Companys loans that had increases in principal since origination, the average increase was 0.38% of the original principal balance. The aggregate
amount of interest that has been added to the principal of such negative amortization loans was only $11,000 at December 31, 2005.

In
addition, the Company has purchased from the Bank loans with a period of interest only payments. Underwriting standards for all loans have required a high level of borrower net worth, substantial post-loan liquidity, excellent FICO scores and
significant down payments. As of December 31, 2005, approximately $156.2 million of loans, or 55% of the Companys single family loan portfolio, allowed interest only payments



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for varying periods. These interest only loans had an average LTV ratio of approximately 54%, based on appraised value at the time of origination. None of
the Companys interest only home loans had an LTV ratio at origination of more than 80%.

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 for multifamily mortgage loans has been 75% of the lesser of the
appraised value of the property or the sale price and 70% for commercial mortgage loans.

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 at December 31, 2005 was 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%.



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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 average 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.

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 the Companys 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 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



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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, 2005, the Bank owned approximately $3.44 billion of single family mortgage loans, $701.4 million of multifamily loans and $2.08 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, 2005, in addition to loans serviced for its own portfolio, the Bank serviced single family mortgage loans having an aggregate principal balance of approximately $4.36 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 2005, the
Bank received an annual advisory fee equal to $100,000 payable in equal quarterly installments with respect to the advisory and management services. For the calendar year 2006, the Company and the Bank maintained the fee at $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



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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 (excluding deductions for any dividends paid and any net capital gains) is distributed to stockholders and
as long as certain assets, income and stock ownership tests are met. For 2005, 2004 and 2003, all Internal Revenue 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. Beginning in 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 1A. | RISK FACTORS.
|-------- | -------------

The Companys results will be affected by
factors beyond its control.

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



| |  |  | the condition of the national economy and the local economies of the regions in which the Companys 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 the Companys 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------



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A decline in interest rates could reduce earnings and affect payment of dividends.

The Companys 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, the Company will experience a decrease in income available to stockholders. If interest rates decline, the Company 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 the payment of dividends on preferred shares. Because the dividend rates on the preferred shares are fixed, a significant and
sustained decline in interest rates could materially adversely affect the Companys ability to pay dividends on preferred shares. Although the Company is permitted to do so, it does not currently hedge its interest rate exposure and does not
expect to do so.

The Company may not be able to continue to purchase loans at the same volumes or with the same yields as it has historically
purchased.

Although not required to do so, to date the Company has purchased all of the loans in its 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,
the Company cannot provide assurance 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, the Company would experience a material adverse effect on its business, financial condition and results of operations.

The
Companys loans are concentrated in California and adverse conditions there could adversely affect its operations.

Properties
underlying Mortgage Assets were concentrated primarily in California. At December 31, 2005, 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, the Company would likely experience higher rates of loss and delinquency on Mortgage Loans than if the 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 the mortgage loan portfolio and thus the future ability to pay dividends on
preferred shares.

Defaults may negatively affect earnings.

Increased delinquencies or loan defaults by 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, part or all of a loan may be charged-off. In such situations, the Company 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.

The Company does
not have insurance to cover its exposure to borrowers defaults and bankruptcies or to hazard losses that are not covered by standard hazard insurance policies.

The Company generally does 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, the Company will be subject to risks of



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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 the Company resulting from declining property values or worsening economic conditions, among other factors, the Company 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.

The Company could be held responsible for environmental liabilities of properties it acquires through foreclosure.

If the Company is forced to foreclose on a defaulted mortgage loan to recover its investment, it 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 its 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 the Company 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 the Company could recoup any of the costs from any third party. In addition, the Company may find it difficult or impossible to sell the property prior to or following any environmental remediation.

The Company may acquire different kinds of mortgage loans, which could be riskier than the loans it primarily holds.

Through the first quarter of 2003, Mortgage Loans consisted entirely of single family mortgages. Beginning in the second quarter of 2003, the Company
acquired multifamily real estate secured mortgages from the Bank, which can be riskier investments than single family mortgage loans, and may continue to acquire multifamily mortgages. Additionally, although there are no immediate plans to do so,
the Company may 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 owners 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.

The Company expects to
acquire all mortgage loans from the Bank and the composition of the loan portfolio will be affected by changes in the Banks credit policies.

The Company has acquired Mortgage Loans from the Bank and, although it is not required to do so, it expects to continue to acquire all 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 would be riskier investments.

The Company is dependent upon the Bank as advisor and servicer.

The Bank, which holds 99.9% of the Companys common stock, is involved in virtually every aspect of the Companys business. The Company has no employees because it has retained the Bank to perform all
necessary functions pursuant to the advisory agreement and the servicing agreement. Accordingly, the Company is dependent for the selection, structuring and monitoring of Mortgage Assets on the officers and employees of the Bank, as advisor. In
addition, the Company is 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. The Company also faces
significant restrictions on obtaining such services from third



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parties; the termination of the advisory and servicing agreements with the Bank requires the affirmative vote of a majority of the board of directors, a
majority of which is composed of directors and officers of the Bank. With the approval of a majority of 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, the Company will be dependent upon the subcontractor to provide services.

The Companys relationship with the Bank creates conflicts of interest.

The Bank is, and is expected to continue to be, involved in virtually every aspect of the Companys operations. The Bank is the holder of 99.9% of the Companys common stock and will administer the
Companys day-to-day activities in its role as advisor under the advisory agreement. The Bank will also act as servicer of the Mortgage Loans under the servicing agreement. In addition, other than the independent directors, all of the
Companys 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 outstanding voting shares of the Company, the Bank has the right to elect all of the directors, including the independent directors.

The Bank has interests that are dissimilar to or in conflict with the Companys 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 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, are fair to both parties and consistent with market terms, including prices that are paid and received on the acquisition of mortgage assets or in connection
with the servicing of mortgage loans. There is a requirement in the terms of the Preferred Shares that certain 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 favorable terms as those that could have been obtained from unaffiliated third parties.

Although not required to do so, the Company acquires all mortgage loans from the Bank under a loan purchase and servicing agreement. The
Company does not have independent underwriting criteria for the loans that it purchases and relies on the Banks underwriting standards for loan originations. Those criteria may change over time. The 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 shareholders. The Company intends to acquire all or substantially all of
the additional mortgage loans that may be acquired in the future from the Bank on terms that are comparable to those that could be purchased from unrelated third parties, but the Company cannot provide assurance that this will always be the case.

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

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

If the Company were to fail to qualify as a REIT for any taxable year, it would be subject to federal income tax, including any applicable alternative
minimum tax, on taxable income at regular corporate rates. As a result, the amount available for distribution to shareholders, including the holders of preferred shares, would be reduced for the year or years involved, and the Company would not be
subject to the REIT requirement to distribute substantially all of its net taxable income. In addition, unless entitled to relief under statutory provisions, the



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Company 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 net earnings available for distribution to shareholders, including holders of preferred shares, because of the additional federal tax liability for the year or years involved. Failure to qualify as a REIT would neither
by itself give the Company 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 the Company intends 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 determine
that it is in the best interest of the Company and in the best interest of holders of common shares and preferred shares to revoke REIT election. The tax law generally prohibits electing treatment as a REIT for the four taxable years following the
year of any such revocation.

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

Because the Company is a subsidiary of the Bank, federal and state regulatory authorities have the right to examine the Company and its
activities and under certain circumstances, to impose restrictions on the Bank or the Company that could impact conducting business according to the business plan, which could materially adversely affect the Companys 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 the Company results in an unsafe and unsound banking practice, the regulators could restrict
transferring assets, making distributions to shareholders, including dividends on the preferred shares, or redeeming the preferred shares or even require the Bank to sever its relationship with or divest its ownership interest in the Company. These
types of actions potentially could have a material adverse affect on the Companys financial condition and results of operations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Regulators also could prohibit or limit the payment of dividends on the 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, the Company could be prevented from complying with the requirement for continued REIT status to distribute 90% of
REIT taxable income (excluding deductions for any dividends paid and any net capital gains) for any calendar year. If, as a result, the Company ceased to qualify as a REIT, it would become subject to corporate level taxation. Additional taxation
would reduce the amount of income available to pay dividends.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 1B. | UNRESOLVED STAFF COMMENTS.
|-------- | --------------------------

Not applicable.



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

The Company neither owns nor leases
any property.



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|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 2005.

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. At December 31, 2005, the Company was authorized to issue 50,000,000 shares of common stock with a par value of $0.01 per
share and 29,353,353 shares of common stock were outstanding. In addition to the Bank, there were approximately 7 holders of the common stock at December 31, 2005, 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. At the end of each year, the Company has declared dividends on common stock of $1,924,000 for 2005 and 2004, and $1,255,000 for 2003, which represented 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 2005 and 2004, the Bank
elected to treat its share of dividend as a consent dividend under Section 565 of the Internal Revenue Code.

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 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,



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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, 2005.

Series B Preferred Shares

In January 2002, the
Company issued and sold 1,680,000 shares of its 8.875% Non-cumulative 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 therefore, 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, 2005.

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 in 2005 and
2004:



|        |  |      |       |      |   |       |  |     |       |  |   |      
|------- |  | ---- | ----- | ---- | - | ----- |  | --- | ----- |  | - | -----
|        |  | 2005 |       | 2004
|Quarter |  | High |       | Low  |   | High  |  | Low
|First   |  | $    | 27.77 |      | $ | 25.80 |  | $   | 27.28 |  | $ | 26.25
|Second  |  | $    | 27.20 |      | $ | 25.86 |  | $   | 27.30 |  | $ | 25.50
|Third   |  | $    | 27.45 |      | $ | 26.07 |  | $   | 26.75 |  | $ | 25.32
|Fourth  |  | $    | 26.50 |      | $ | 25.11 |  | $   | 27.94 |  | $ | 26.35

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 affected 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 therefore, 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, 2005.



18



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##### Table of Contents

The Company used the proceeds of $7 million and the additional issuance of 1,243,472 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 non-assessable 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% Non cumulative 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, non-cumulative 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, 2005.

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 in 2005 and 2004:



|        |  |      |       |      |   |       |  |     |       |  |   |      
|------- |  | ---- | ----- | ---- | - | ----- |  | --- | ----- |  | - | -----
|        |  | 2005 |       | 2004
|Quarter |  | High |       | Low  |   | High  |  | Low
|First   |  | $    | 26.45 |      | $ | 24.80 |  | $   | 25.77 |  | $ | 24.70
|Second  |  | $    | 25.77 |      | $ | 24.65 |  | $   | 25.25 |  | $ | 23.04
|Third   |  | $    | 25.75 |      | $ | 24.75 |  | $   | 25.34 |  | $ | 23.75
|Fourth  |  | $    | 25.45 |      | $ | 24.00 |  | $   | 25.86 |  | $ | 25.05

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



19



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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, 2005, 2004, 2003, 2002 and 2001. 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 operation in Item 7 of this report.



|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                            |  | As of December 31,      |        
|($ in thousands)                                                            |  | 2005                    |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|Selected Balance Sheet Data                                                 |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Assets:                                                                     |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Cash and short-term investments                                             |  | $                       | 17,250  |   |      | $ | 4,476   |      |  | $ | 6,766   |   |  | $    | 22,296  |   |  | $ | 9,880   |  
|Single family mortgage loans                                                |  |                         | 283,530 |   |      |   | 288,211 |      |  |   | 296,051 |   |  |      | 187,879 |   |  |   | 116,751 |  
|Multifamily mortgage loans                                                  |  |                         | 31,249  |   |      |   | 37,517  |      |  |   | 26,454  |   |  |      |        |   |  |   |        |  
|Less: allowance for loan losses                                             |  |                         | (481    | ) |      |   | (481    | )    |  |   | (481    | ) |  |      | (200    | ) |  |   |        |  
|Other assets                                                                |  |                         | 1,472   |   |      |   | 1,436   |      |  |   | 1,607   |   |  |      | 1,201   |   |  |   | 750     |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total Assets                                                                |  | $                       | 333,020 |   |      | $ | 331,159 |      |  | $ | 330,397 |   |  | $    | 211,176 |   |  | $ | 127,381 |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Liabilities:                                                                |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Dividends payable on common stock                                           |  | $                       |        |   |      | $ | 1       |      |  | $ | 1,255   |   |  | $    | 2,044   |   |  | $ | 2,053   |  
|Other payables                                                              |  |                         | 102     |   |      |   | 141     |      |  |   | 48      |   |  |      | 38      |   |  |   | 34      |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total liabilities                                                           |  |                         | 102     |   |      |   | 142     |      |  |   | 1,303   |   |  |      | 2,082   |   |  |   | 2,087   |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|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  |   |  |      | 42,000  |   |  |   |        |  
|Series C Preferred Shares                                                   |  |                         | 7,000   |   |      |   | 7,000   |      |  |   | 7,000   |   |  |      | 7,000   |   |  |   | 7,000   |  
|Series D Preferred Shares                                                   |  |                         | 60,000  |   |      |   | 60,000  |      |  |   | 60,000  |   |  |      |        |   |  |   |        |  
|Common stock                                                                |  |                         | 294     |   |      |   | 294     |      |  |   | 294     |   |  |      | 187     |   |  |   | 112     |  
|Additional paid-in capital                                                  |  |                         | 168,824 |   |      |   | 166,923 |      |  |   | 165,000 |   |  |      | 105,107 |   |  |   | 63,182  |  
|Dividends in excess of retained earnings                                    |  |                         | (200    | ) |      |   | (200    | )    |  |   | (200    | ) |  |      | (200    | ) |  |   |        |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total stockholders equity                                                  |  |                         | 332,918 |   |      |   | 331,017 |      |  |   | 329,094 |   |  |      | 209,094 |   |  |   | 125,294 |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total Liabilities and Stockholders Equity                                  |  | $                       | 333,020 |   |      | $ | 331,159 |      |  | $ | 330,397 |   |  | $    | 211,176 |   |  | $ | 127,381 |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Selected Asset Quality Information                                          |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Nonperforming loans                                                         |  | $                       |        |   |      | $ |        |      |  | $ |        |   |  | $    |        |   |  | $ |        |  
|Other real estate owned                                                     |  | $                       |        |   |      | $ |        |      |  | $ |        |   |  | $    |        |   |  | $ |        |  
|Loans 90+ days past due and on accrual status                               |  | $                       |        |   |      | $ |        |      |  | $ |        |   |  | $    |        |   |  | $ |        |  
|Nonperforming assets as a percent of total assets                           |  |                         |        | % |      |   |        | %    |  |   |        | % |  |      |        | % |  |   |        | %
|Loans 90+ days past due and on accrual status, as a percent of total assets |  |                         |        | % |      |   |        | %    |  |   |        | % |  |      |        | % |  |   |        | %
|                                                                            | 
|                                                                            |  | Year ended December 31, |        
|($ in thousands)                                                            |  | 2005                    |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|Selected Financial Information                                              |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Interest income:                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Interest on loans                                                           |  | $                       | 16,327  |   |      | $ | 16,398  |      |  | $ | 13,502  |   |  | $    | 11,799  |   |  | $ | 7,941   |  
|Interest on short-term investments                                          |  |                         | 182     |   |      |   | 89      |      |  |   | 152     |   |  |      | 154     |   |  |   | 240     |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total interest income                                                       |  |                         | 16,509  |   |      |   | 16,487  |      |  |   | 13,654  |   |  |      | 11,953  |   |  |   | 8,181   |  
|Provision for loan losses                                                   |  |                         |        |   |      |   |        |      |  |   |        |   |  |      | 200     |   |  |   |        |  
|Operating expenses                                                          |  |                         | 333     |   |      |   | 311     |      |  |   | 274     |   |  |      | 246     |   |  |   | 141     |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income                                                                  |  |                         | 16,176  |   |      |   | 16,176  |      |  |   | 13,380  |   |  |      | 11,507  |   |  |   | 8,040   |  
|Dividends on preferred stock                                                |  |                         | 14,252  |   |      |   | 14,252  |      |  |   | 12,125  |   |  |      | 9,663   |   |  |   | 5,987   |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income available to common stockholders                                 |  | $                       | 1,924   |   |      | $ | 1,924   |      |  | $ | 1,255   |   |  | $    | 1,844   |   |  | $ | 2,053   |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Ratio of earnings to fixed charges                                          |  |                         | 1.13x   |   |      |   | 1.13x   |      |  |   | 1.10x   |   |  |      | 1.19x   |   |  |   | 1.34x   |  
|                                                                            |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  



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##### Table of Contents

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

Critical Accounting Policies

The discussion and analysis of the Companys financial condition
and results of operation 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 accounting 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 Company estimates
credit losses resulting from the inability of borrowers 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 by charging current income. 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 was $16,176,000 for 2005 and 2004, and $13,380,000 for 2003. The results for
2005 compared with 2004 reflected a slight increase in interest income, offset by higher operating expenses. The increase in 2005 compared with 2003 was primarily due to an increase in interest income as average interest-earning assets grew by $60.6
million. The drop in interest rates during the past two years resulted in lower average loan yields for 2005 and 2004 compared with 2003. The ratio of earnings to fixed charges was 1.13x in 2005 and in 2004, and 1.10x in 2003. Preferred stock
dividend payments were 100% of fixed charges.

Total Interest Income

Total interest income increased from 2003 through 2005 due to higher loan volume; however, the increase was offset by lower loan rates. The following
table presents average balances and yields on the Companys interest-earning assets for the periods indicated:



|                              |  |                |         |                |      |        |  |      |                |  |                |         |       |   |        |                |      |                |  |       |         |  |   |        |  |      |  
|----------------------------- |  | -------------- | ------- | -------------- | ---- | ------ |  | ---- | -------------- |  | -------------- | ------- | ----- | - | ------ | -------------- | ---- | -------------- |  | ----- | ------- |  | - | ------ |  | ---- | -
|                              |  | 2005           |         |                | 2004 |        |  | 2003 |               
|($ in thousands)              |  | AverageBalance |         | InterestIncome |      | Yield  |  |      | AverageBalance |  | InterestIncome |         | Yield |   |        | AverageBalance |      | InterestIncome |  | Yield |        
|Loans                         |  | $              | 326,174 |                | $    | 16,327 |  | 5.01 | %              |  | $              | 323,720 |       | $ | 16,398 |                | 5.07 | %              |  | $     | 259,096 |  | $ | 13,502 |  | 5.21 | %
|Short-term investments        |  |                | 6,979   |                |      | 182    |  | 2.61 |                |  |                | 7,486   |       |   | 89     |                | 1.19 |                |  |       | 13,445  |  |   | 152    |  | 1.13 |  
|                              |  |                |         |                |      |        |  |      |                |  |                |         |       |   |        |                |      |                |  |       |         |  |   |        |  |      |  
|Total interest-earning assets |  | $              | 333,153 |                | $    | 16,509 |  | 4.96 | %              |  | $              | 331,206 |       | $ | 16,487 |                | 4.98 | %              |  | $     | 272,541 |  | $ | 13,654 |  | 5.01 | %
|                              |  |                |         |                |      |        |  |      |                |  |                |         |       |   |        |                |      |                |  |       |         |  |   |        |  |      |  

Interest income on Mortgage Loans increased in 2005 and 2004, compared with 2003, due to higher
loan volume; however, loan portfolio yields declined. Loan portfolio yields declined 6 basis points in 2005 from 2004



21



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##### Table of Contents

and 20 basis points from 2003. The decline in loan yields reflected the decline in the overall rate environment over the last several years. Repayments of
higher-yielding intermediate fixed and fixed rate loans during 2004 and early 2005 were reinvested in lower-yielding adjustable rate loans that the Company acquired. The percentage of ARMs to total Mortgage Loans was 61% at December 31, 2005,
compared with 47% at December 31, 2004. However, interest rates on Mortgage Loans started to rise during 2005. At December 31, 2005, the weighted average coupon rate was 5.30%, up from 4.98% at December 31, 2004 and the same as 5.30%
at December 31, 2003. See Quantitative and Qualitative Disclosures about Market Risks.

The Bank retains an annual
servicing fee of 25 basis points on the gross average outstanding principal balance of the Mortgage Loans that the Bank services, which reduces the interest income that the Company receives. Loan servicing fees were $788,000 in 2005, $775,000 in
2004 and $582,000 in 2003. The increases in loan servicing fees were consistent with the increases in average loan balances.

Interest
income on short-term investments increased in 2005, compared with 2004 and 2003, due to higher yields, offset by lower short-term investment volume. The average yield on the Companys interest-bearing money market account continued to rise in
2005 compared with 2004 as interest rates began to rise.

Interest income is affected by changes in both volume and interest rates. Volume
changes are caused by increases or decreases during the year in the level of the Companys average interest-earning assets. Rate changes cause increases or decreases in the yields earned on assets. The following table presents for each of the
last two years a summary of the changes in interest income resulting from changes in the volume of average asset balances and in the average yields compared with the preceding year. If significant, the change in interest income due to both volume
and rate has been prorated between the volume and the rate variances based on the dollar amount of each variance.



|                          |  |               |     |   |               |   |      |       |  |   |        |   |  |      |       |   |       |   |      |   |  |   |       |  
|------------------------- |  | ------------- | --- | - | ------------- | - | ---- | ----- |  | - | ------ | - |  | ---- | ----- | - | ----- | - | ---- | - |  | - | ----- | -
|                          |  | 2005 vs. 2004 |     |   | 2004 vs. 2003 |  
|($ in thousands)          |  | Volume        |     |   | Rate          |   |      | Total |  |   | Volume |   |  | Rate |       |   | Total |  
|Loans                     |  | $             | 124 |   |               | $ | (195 | )     |  | $ | (71    | ) |  | $    | 3,272 |   |       | $ | (376 | ) |  | $ | 2,896 |  
|Short-term investments    |  |               | (7  | ) |               |   | 100  |       |  |   | 93     |   |  |      | (71   | ) |       |   | 8    |   |  |   | (63   | )
|                          |  |               |     |   |               |   |      |       |  |   |        |   |  |      |       |   |       |   |      |   |  |   |       |  
|Total increase (decrease) |  | $             | 117 |   |               | $ | (95  | )     |  | $ | 22     |   |  | $    | 3,201 |   |       | $ | (368 | ) |  | $ | 2,833 |  
|                          |  |               |     |   |               |   |      |       |  |   |        |   |  |      |       |   |       |   |      |   |  |   |       |  

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. The Companys board of directors has approved increases in the annual advisory fee to $100,000 for 2005 from $75,000 for 2004 and 2003. For the year ended December 31, 2006, the advisory fee will be
$100,000.

General and administrative expenses primarily consisted of audit fees, rating agency fees, exchange listing fees and other
stockholder costs. For the year, total general and administrative expenses were $233,000 in 2005, $236,000 in 2004 and $199,000 in 2003. Audit fees were $77,000 in 2005, $107,000 in 2004 and $80,000 in 2003. Credit agency fees were $35,000 in 2005,
$35,000 in 2004 and $32,000 in 2003.

Financial Condition

Short-term Investments on Deposit with the Bank

At December 31, 2005 and 2004, 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.



22



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##### Table of Contents

Mortgage Loans

The loan portfolio at December 31, 2005 and 2004 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 any single family loan that is 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. 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.

At December 31, 2005 and 2004, there were no nonaccrual loans, impaired loans, or loans that were troubled debt restructurings. In addition, at
December 31, 2005 and 2004, there were no accruing loans that were contractually past due more than 90 days. The following table presents information with respect to the Companys allowance for loan losses for each of the last three years:



|                                                  |  |                                       |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------- |  | ------------------------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                  |  | At or For the Year Ended December 31, |            
|                                                  |  | 2005                                  |             |   | 2004 |   |             | 2003 | 
|Allowance for loan losses                         |  |                                       |             |   |      |   |             |      |  |   |             |  
|Balance at beginning of year                      |  | $                                     | 481,000     |   |      | $ | 481,000     |      |  | $ | 200,000     |  
|Provision for loan losses                         |  |                                       |            |   |      |   |            |      |  |   |            |  
|Transfer from the Bank                            |  |                                       |            |   |      |   |            |      |  |   | 281,000     |  
|Chargeoffs                                        |  |                                       |            |   |      |   |            |      |  |   |            |  
|Recoveries                                        |  |                                       |            |   |      |   |            |      |  |   |            |  
|                                                  |  |                                       |             |   |      |   |             |      |  |   |             |  
|Balance at end of year                            |  | $                                     | 481,000     |   |      | $ | 481,000     |      |  | $ | 481,000     |  
|                                                  |  |                                       |             |   |      |   |             |      |  |   |             |  
|                                                  |  |                                       |            
|Average total loans for the period                |  | $                                     | 326,174,000 |   |      | $ | 323,720,000 |      |  | $ | 259,096,000 |  
|Total loans at December 31                        |  | $                                     | 314,779,000 |   |      | $ | 325,728,000 |      |  | $ | 322,505,000 |  
|Ratio of allowance for loan losses to total loans |  |                                       | 0.15        | % |      |   | 0.15        | %    |  |   | 0.15        | %

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, 2005, the Companys allowance for loan losses was 0.15%
of total loans.

Significant Concentration of Credit Risk

The balance sheet exposure to geographic concentrations directly affects the credit risk of the loans within the Companys loan portfolio. See Risk
Factors, The Companys loans are concentrated in California and adverse conditions there could adversely affect its operations, above. The following table presents an analysis of Mortgage Loans at December 31, 2005 by major
geographic location:



|                    |  |                       |         |   |                          |   |        |                      |  |   |                   |   |  |                  |        |   |       |   |       |       |  |   |        |   |  |   |         |  
|------------------- |  | --------------------- | ------- | - | ------------------------ | - | ------ | -------------------- |  | - | ----------------- | - |  | ---------------- | ------ | - | ----- | - | ----- | ----- |  | - | ------ | - |  | - | ------- | -
|($ in thousands)    |  | San FranciscoBay Area |         |   | GreaterNew YorkCity Area |   |        | OtherCaliforniaAreas |  |   | Los AngelesCounty |   |  | Las Vegas,Nevada |        |   | Other |   |       | Total | 
|Single family       |  | $                     | 162,998 |   |                          | $ | 34,613 |                      |  | $ | 26,956            |   |  | $                | 25,722 |   |       | $ | 4,068 |       |  | $ | 29,173 |   |  | $ | 283,530 |  
|Multifamily         |  |                       | 24,785  |   |                          |   | 857    |                      |  |   | 2,610             |   |  |                  | 2,997  |   |       |   |      |       |  |   |       |   |  |   | 31,249  |  
|                    |  |                       |         |   |                          |   |        |                      |  |   |                   |   |  |                  |        |   |       |   |       |       |  |   |        |   |  |   |         |  
|Total               |  | $                     | 187,783 |   |                          | $ | 35,470 |                      |  | $ | 29,566            |   |  | $                | 28,719 |   |       | $ | 4,068 |       |  | $ | 29,173 |   |  | $ | 314,779 |  
|                    |  |                       |         |   |                          |   |        |                      |  |   |                   |   |  |                  |        |   |       |   |       |       |  |   |        |   |  |   |         |  
|Percent by location |  |                       | 60      | % |                          |   | 11     | %                    |  |   | 10                | % |  |                  | 9      | % |       |   | 1     | %     |  |   | 9      | % |  |   | 100     | %

Properties underlying Mortgage Loans were concentrated primarily in California. At
December 31, 2005, approximately 79% of Mortgage Loans were secured by properties located in California, and the weighted



23



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average loan to value ratio on the Mortgage Loans was approximately 53%, based upon the appraised values of the properties at the time the loans were
originated.

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 is expected to 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 meet dividend payments, the Company maintains 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 2005 and 2004, compared with 1.10x for 2003.

Since
mid-2004, interest rates have moved up from 40-year historical lows. However, higher-yielding intermediate fixed and fixed rate loans continued to pay off during 2005. The repayment proceeds were primarily reinvested in lower-yielding adjustable
rate loans. The average yield on average interest-earning assets was 4.96% for 2005, compared with 4.98% for 2004.

At December 31,
2005, 61% of the Mortgage Loans were adjustable rate loans, 26% were intermediate fixed rate loans and 13% were fixed rate loans. The weighted average coupon rate for each interest rate type at December 31, 2005 was 5.26%, 5.23% and 5.65%,
respectively, and the weighted average remaining maturity was 23.7 years. In comparison, at December 31, 2004, 47% were adjustable rate loans, 39% were intermediate fixed rate loans and 14% were fixed rate loans. The weighted average coupon
rate for each interest rate type at December 31, 2004 was 4.42%, 5.36% and 5.70%, respectively, and the weighted average remaining maturity was 23.6 years.

For ARMs, 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. The weighted average coupon rate
for ARMs was 5.26% at December 31, 2005, up 84 basis points from 4.42% at December 31, 2004 due to the rise in short-term rates. The increase in ARM loan yields was mitigated by a significant volume of ARM 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, 2005, ARM loans indexed to COFI were 80% of total ARMs, or 49% of Mortgage Loans, compared with 76% of
total ARMs at December 31, 2004, or 35% of Mortgage Loans.

For intermediate fixed and fixed rate loans, the gross principal
outstanding at December 31, 2005 was $124.9 million, or 39% of total Mortgage Loans, down from $177.4 million at December 31, 2004, or 54% of total Mortgage Loans. The weighted average coupon rate for intermediate fixed rate loans declined
13 basis points to 5.23% during 2005, and the weighted average coupon rate for fixed rate loans declined 5 basis points to 5.65% during 2005. Repayments of intermediate fixed and fixed rate loans during 2005 were a significant portion of the total
repayment proceeds. The Company reinvested these repayment proceeds in lower-yielding Mortgage Loans.



24



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##### Table of Contents

The following table presents an analysis of Mortgage Loans at December 31, 2005 by interest rate
type:



|                            |  |         |         |                   |      |   |                         |    |                 |     |  
|--------------------------- |  | ------- | ------- | ----------------- | ---- | - | ----------------------- | -- | --------------- | --- | -
|($ in thousands)            |  | Balance |         | NetCoupon (1) (2) |      |   | Months to NextReset (1) |    | % of TotalLoans |    
|ARM loans:                  |  |         |         |                   |      |   |                         |    |                 |     |  
|COFI                        |  | $       | 152,228 |                   | 5.11 | % |                         | 1  |                 | 49  | %
|CMT                         |  |         | 29,257  |                   | 5.91 |   |                         | 7  |                 | 9   |  
|LIBOR                       |  |         | 8,371   |                   | 5.63 |   |                         | 3  |                 | 3   |  
|                            |  |         |         |                   |      |   |                         |    |                 |     |  
|Total ARMs                  |  |         | 189,856 |                   | 5.26 |   |                         | 2  |                 | 61  |  
|                            |  |         |         |                   |      |   |                         |    |                 |     |  
|Intermediate fixed:         |  |         |         |                   |      |   |                         |    |                 |     |  
|12 months to 36 months      |  |         | 52,686  |                   | 5.18 |   |                         | 24 |                 | 16  |  
|37 months to 60 months      |  |         | 20,730  |                   | 5.35 |   |                         | 41 |                 | 7   |  
|Greater than 60 months      |  |         | 9,350   |                   | 5.22 |   |                         | 90 |                 | 3   |  
|                            |  |         |         |                   |      |   |                         |    |                 |     |  
|Total intermediate fixed    |  |         | 82,766  |                   | 5.23 |   |                         | 36 |                 | 26  |  
|                            |  |         |         |                   |      |   |                         |    |                 |     |  
|Total adjustable rate loans |  |         | 272,622 |                   | 5.25 |   |                         | 12 |                 | 87  |  
|Fixed rate loans            |  |         | 42,157  |                   | 5.65 |   |                         |    |                 | 13  |  
|                            |  |         |         |                   |      |   |                         |    |                 |     |  
|Total loans                 |  | $       | 314,779 |                   | 5.30 | % |                         |    |                 | 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, 2005:



|                                  |  |                 |         |   |                |   |         |              |  |   |              |   |  |         |         |   |                   |   |         |       |  |   |          |   |  |   |        
|--------------------------------- |  | --------------- | ------- | - | -------------- | - | ------- | ------------ |  | - | ------------ | - |  | ------- | ------- | - | ----------------- | - | ------- | ----- |  | - | -------- | - |  | - | -------
|($ in thousands)                  |  | 6 Monthsor Less |         |   | >6 to 12Months |   |         | >1 to 3Years |  |   | >3 to 5Years |   |  | >5Years |         |   | Not RateSensitive |   |         | Total
|Cash and investments              |  | $               | 17,250  |   |                | $ |        |              |  | $ |             |   |  | $       |        |   |                   | $ |        |       |  | $ |         |   |  | $ | 17,250 
|Loans                             |  |                 | 183,687 |   |                |   | 28,227  |              |  |   | 67,597       |   |  |         | 21,506  |   |                   |   | 13,762  |       |  |   |         |   |  |   | 314,779
|Other assets                      |  |                 |        |   |                |   |        |              |  |   |             |   |  |         |        |   |                   |   |        |       |  |   | 991      |   |  |   | 991    
|                                  |  |                 |         |   |                |   |         |              |  |   |              |   |  |         |         |   |                   |   |         |       |  |   |          |   |  |   |        
|Total assets                      |  | $               | 200,937 |   |                | $ | 28,227  |              |  | $ | 67,597       |   |  | $       | 21,506  |   |                   | $ | 13,762  |       |  | $ | 991      |   |  | $ | 333,020
|                                  |  |                 |         |   |                |   |         |              |  |   |              |   |  |         |         |   |                   |   |         |       |  |   |          |   |  |   |        
|Other liabilities                 |  | $               |        |   |                | $ |        |              |  | $ |             |   |  | $       |        |   |                   | $ |        |       |  | $ | 101      |   |  | $ | 101    
|Stockholders equity              |  |                 |        |   |                |   |        |              |  |   |             |   |  |         |        |   |                   |   |        |       |  |   | 332,919  |   |  |   | 332,919
|                                  |  |                 |         |   |                |   |         |              |  |   |              |   |  |         |         |   |                   |   |         |       |  |   |          |   |  |   |        
|Total liabilities and equity      |  | $               |        |   |                | $ |        |              |  | $ |             |   |  | $       |        |   |                   | $ |        |       |  | $ | 333,020  |   |  | $ | 333,020
|                                  |  |                 |         |   |                |   |         |              |  |   |              |   |  |         |         |   |                   |   |         |       |  |   |          |   |  |   |        
|Repricing gappositive (negative) |  | $               | 200,937 |   |                | $ | 28,227  |              |  | $ | 67,597       |   |  | $       | 21,506  |   |                   | $ | 13,762  |       |  | $ | (332,029 | ) |  |   |        
|                                  |  |                 |         |   |                |   |         |              |  |   |              |   |  |         |         |   |                   |   |         |       |  |   |          |   |  |   |        
|Cumulative repricing gap:         |  |                 |         |   |                |   |         |              |  |   |              |   |  |         |         |   |                   |   |         |       |  |   |          |   |  |   |        
|Dollar amount                     |  | $               | 200,937 |   |                | $ | 229,164 |              |  | $ | 296,761      |   |  | $       | 318,267 |   |                   | $ | 332,029 |       |  |   |          |   |  |   |        
|                                  |  |                 |         |   |                |   |         |              |  |   |              |   |  |         |         |   |                   |   |         |       |  |   |          |   |  |   |        
|Percent of total assets           |  |                 | 60.3    | % |                |   | 68.8    | %            |  |   | 89.1         | % |  |         | 95.6    | % |                   |   | 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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|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, the Companys accountants on any matter of accounting principles, practices or financial
statement disclosures since the Companys 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, 2005, 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, 2005 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 Companys
directors, including the independent directors. The Companys board of directors presently consists of eight members, including three 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.



26



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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 the Companys inception in April 1999, except for Ms. Chan, who was elected in September 2004, and Mr. Merrill, who was elected in December 2004, and Ms. Moulds, who was elected in March 2005.



|                        |  |     |  |                                                             
|----------------------- |  | --- |  | ------------------------------------------------------------
|Name                    |  | Age |  | Position and Offices Held                                   
|James J. Baumberger     |  | 63  |  | President, Director                                         
|Thomas A. Cunningham(1) |  | 72  |  | Director                                                    
|Jerry Lykins(1)         |  | 70  |  | Director                                                    
|Barrant V. Merrill      |  | 75  |  | Director                                                    
|Linda G. Moulds(1)      |  | 56  |  | Director                                                    
|Edward J. Dobranski     |  | 55  |  | Vice President, General Counsel, Director                   
|Julie N. Miyachi        |  | 48  |  | Vice President, Operations, Director                        
|Willis H. Newton, Jr.   |  | 56  |  | Vice President, Chief Financial Officer, Treasurer, Director
|May Chan                |  | 33  |  | Assistant Vice President, Corporate Secretary               

---

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

The
following is a summary of the experience of the Companys 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.

Ms. Moulds was Vice President, Secretary and Controller of the Bank from 1985 to 1996 and was a director of the Bank from 1997 to 1998. Previously,
Ms. Moulds was Secretary and Controller of San Francisco Bancorp and a director of First United Thrift and Loan.

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.



27



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##### Table of Contents

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 2003 and is the Director of Corporate Tax of the Bank. Prior to that, Ms. Chan was with KPMG LLP for nine years,
five of which were in the tax department.

Independent Directors

The terms of the preferred shares require that, as long as any preferred shares are outstanding, certain actions by the Company need to 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 the Companys 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), Mr. Lykins and Ms. Moulds are currently the Companys independent directors.

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 the Companys 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 three independent directors: Mr. Cunningham, Mr. Lykins and
Ms. Moulds, 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 at each regularly scheduled Board meeting
(in person or by telephone) 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.



28



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##### Table of Contents

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

During January 2005, the Company offered to repurchase the 9,840 shares of common stock not held by the Bank. As of February 2006, 9,280 shares were
repurchased, including 80 shares owned by Messrs. Baumberger, Dobranski, Merrill, Newton and Ms. Miyachi. The following table sets forth, as of February 15, 2006, 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 the Company to own more than five percent of such shares; (ii) each of the Companys directors;
(iii) each of the Companys executive officers; and (iv) all of the Companys 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 29,353,353 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, 2005.



|                                                            |  |                                                         |  |      |                          |  |        |                          |      |   |                          |        |  |                          |   |  |        |  |       |   |  |        |  |     |  
|----------------------------------------------------------- |  | ------------------------------------------------------- |  | ---- | ------------------------ |  | ------ | ------------------------ | ---- | - | ------------------------ | ------ |  | ------------------------ | - |  | ------ |  | ----- | - |  | ------ |  | --- | -
|                                                            |  | Common Shares                                           |  |      | Series APreferred Shares |  |        | Series BPreferred Shares |      |   | Series CPreferred 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                      | % |  |       |  |      |   |  | 4,575  |  | 0.2 | %
|Barrant V. Merrill(3)                                       |  |                                                        |  |     |                          |  |       |                          |     |   |                          |       |  |                         |   |  |       |  |      |   |  |       |  |    |  
|Linda G. Moulds(3)                                          |  |                                                        |  |     |                          |  |       |                          |     |   |                          |       |  |                         |   |  |       |  |      |   |  |       |  |    |  
|Edward J. Dobranski(2) (3)                                  |  |                                                        |  |     |                          |  |       |                          |     |   |                          |       |  |                         |   |  |       |  |      |   |  |       |  |    |  
|Julie N. Miyachi(2) (3)                                     |  |                                                        |  |     |                          |  |       |                          |     |   |                          | 400    |  | *                        |   |  |       |  |      |   |  | 1,300  |  | 0.1 | %
|Willis H. Newton, Jr.(2) (3)                                |  |                                                        |  |     |                          |  |       |                          |     |   |                          |       |  |                         |   |  |       |  |      |   |  |       |  |    |  
|May Chan                                                    |  |                                                        |  |     |                          |  |       |                          |     |   |                          |       |  |                         |   |  |       |  |      |   |  |       |  |    |  
|                                                            |  |                                                         |  |      |                          |  |        |                          |      |   |                          |        |  |                          |   |  |        |  |       |   |  |        |  |     |  
|All Executive Officers and Directors as a group (8 persons) |  |                                                        |  |     |                          |  |       |                          |     |   |                          | 24,400 |  | 1.5                      | % |  |       |  |      |   |  | 9,875  |  | 0.4 | %
|                                                            |  |                                                         |  |      |                          |  |        |                          |      |   |                          |        |  |                          |   |  |        |  |       |   |  |        |  |     |  

---

|* | 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
|--- | --------



29



---

##### 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, 2005, 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 2005 and 2004 and fees billed for other services rendered by KPMG LLP.



|                   |  |      |        |      |   |        
|------------------ |  | ---- | ------ | ---- | - | -------
|                   |  | 2005 |        | 2004
|Audit fees         |  | $    | 74,000 |      | $ | 88,000 
|Audit-related fees |  |      |       |      |   |       
|Tax fees           |  |      | 4,700  |      |   | 14,000 
|All other fees     |  |      |       |      |   |       
|                   |  |      |        |      |   |        
|Total fees         |  | $    | 78,700 |      | $ | 102,000
|                   |  |      |        |      |   |        

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) | Financial Statements:
| | --- | ---------------------

Please see Financial Statements
table of contents on page F-2 of this report.



| | (2) | Financial Statement Schedules:
| | --- | ------------------------------

Financial statement
schedules are omitted because either the required information is not present in amounts sufficient to require submission of the schedules of 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.



30



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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 B 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.
|- | ---------------



31



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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 23, 2006

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



|                                                     |  |                                                              |  |               
|---------------------------------------------------- |  | ------------------------------------------------------------ |  | --------------
|Signature                                            |  | Title                                                        |  | Date          
|                                                     |  |                                                             
|/s/    JAMES J. BAUMBERGER (James J. Baumberger)     |  | President, Director                                          |  | March 23, 2006
|                                                     |  |                                                             
|/s/    THOMAS A. CUNNINGHAM (Thomas A. Cunningham)   |  | Director                                                     |  | March 23, 2006
|                                                     |  |                                                             
|/s/    JERRY LYKINS (Jerry Lykins)                   |  | Director                                                     |  | March 23, 2006
|                                                     |  |                                                             
|/s/    BARRANT V. MERRILL (Barrant V. Merrill)       |  | Director                                                     |  | March 23, 2006
|                                                     |  |                                                             
|/s/    LINDA G. MOULDS (Linda G. Moulds)             |  | Director                                                     |  | March 23, 2006
|                                                     |  |                                                             
|/s/    EDWARD J. DOBRANSKI (Edward J. Dobranski)     |  | Vice President, General Counsel, Director                    |  | March 23, 2006
|                                                     |  |                                                             
|/s/    JULIE N. MIYACHI (Julie N. Miyachi)           |  | Vice President, Operations, Director                         |  | March 23, 2006
|                                                     |  |                                                             
|/s/    WILLIS H. NEWTON, JR. (Willis H. Newton, Jr.) |  | Vice President, Chief Financial Officer, Treasurer, Director |  | March 23, 2006



32



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##### Table of Contents

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Majority Owned Subsidiary of First Republic Bank)

Financial Statements

December 31, 2005 and 2004

(With Report of Independent Registered Public Accounting Firm Thereon)



F-1



---

##### 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



---

##### 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, 2005 and 2004, and the related statements of income, stockholders equity, and cash flows for each of the years in the three-year
period ended December 31, 2005. 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, 2005 and 2004, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting
principles.

/s/    KPMG LLP

San Francisco, California

March 13, 2006



F-3



---

##### Table of Contents

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Majority Owned Subsidiary of First Republic Bank)

BALANCE SHEET



|                                                                                                                                                                                      |  |              |             |   |      |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----------- | - | ---- | - | ----------- | -
|                                                                                                                                                                                      |  | December 31, |            
|                                                                                                                                                                                      |  | 2005         |             |   | 2004 |  
|ASSETS                                                                                                                                                                                |  |              |             |   |      |   |             |  
|Cash and short-term investments on deposit with First Republic Bank                                                                                                                   |  | $            | 17,250,000  |   |      | $ | 4,476,000   |  
|                                                                                                                                                                                      |  |             
|Single family mortgage loans                                                                                                                                                          |  |              | 283,530,000 |   |      |   | 288,211,000 |  
|Multifamily mortgage loans                                                                                                                                                            |  |              | 31,249,000  |   |      |   | 37,517,000  |  
|                                                                                                                                                                                      |  |              |             |   |      |   |             |  
|Total mortgage loans (Note 3)                                                                                                                                                         |  |              | 314,779,000 |   |      |   | 325,728,000 |  
|Less: Allowance for loan losses                                                                                                                                                       |  |              | (481,000    | ) |      |   | (481,000    | )
|                                                                                                                                                                                      |  |              |             |   |      |   |             |  
|Loans, net                                                                                                                                                                            |  |              | 314,298,000 |   |      |   | 325,247,000 |  
|Accrued interest receivable                                                                                                                                                           |  |              | 1,469,000   |   |      |   | 1,431,000   |  
|Prepaid expenses                                                                                                                                                                      |  |              | 3,000       |   |      |   | 5,000       |  
|                                                                                                                                                                                      |  |              |             |   |      |   |             |  
|Total Assets                                                                                                                                                                          |  | $            | 333,020,000 |   |      | $ | 331,159,000 |  
|                                                                                                                                                                                      |  |              |             |   |      |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                  |  |              |             |   |      |   |             |  
|Liabilities:                                                                                                                                                                          |  |              |             |   |      |   |             |  
|Dividends payable on common stock                                                                                                                                                     |  | $            |            |   |      | $ | 1,000       |  
|Payable to First Republic Bank (Note 4)                                                                                                                                               |  |              | 25,000      |   |      |   | 19,000      |  
|Other payables                                                                                                                                                                        |  |              | 77,000      |   |      |   | 122,000     |  
|                                                                                                                                                                                      |  |              |             |   |      |   |             |  
|Total liabilities                                                                                                                                                                     |  |              | 102,000     |   |      |   | 142,000     |  
|                                                                                                                                                                                      |  |              |             |   |      |   |             |  
|Stockholders equity (Notes 5 and 6):                                                                                                                                                 |  |              |             |   |      |   |             |  
|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 shares 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 shares 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; 29,353,353 and 29,362,633 shares issued and outstanding at December 31, 2005
and December 31, 2004, respectively         |  |              | 294,000     |   |      |   | 294,000     |  
|Additional paid-in capital                                                                                                                                                            |  |              | 168,824,000 |   |      |   | 166,923,000 |  
|Dividends in excess of retained earnings                                                                                                                                              |  |              | (200,000    | ) |      |   | (200,000    | )
|                                                                                                                                                                                      |  |              |             |   |      |   |             |  
|Total stockholders equity                                                                                                                                                            |  |              | 332,918,000 |   |      |   | 331,017,000 |  
|                                                                                                                                                                                      |  |              |             |   |      |   |             |  
|Total Liabilities and Stockholders Equity                                                                                                                                            |  | $            | 333,020,000 |   |      | $ | 331,159,000 |  
|                                                                                                                                                                                      |  |              |             |   |      |   |             |  

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,
|                                                                       |  | 2005                    |            | 2004 |   | 2003      
|Interest income:                                                       |  |                         |            |      |   |            |  |   |           
|Interest on loans                                                      |  | $                       | 16,327,000 |      | $ | 16,398,000 |  | $ | 13,502,000
|Interest on short-term investments on deposit with First Republic Bank |  |                         | 182,000    |      |   | 89,000     |  |   | 152,000   
|                                                                       |  |                         |            |      |   |            |  |   |           
|Total interest income                                                  |  |                         | 16,509,000 |      |   | 16,487,000 |  |   | 13,654,000
|                                                                       |  |                         |            |      |   |            |  |   |           
|Operating expense:                                                     |  |                         |            |      |   |            |  |   |           
|Advisory fees payable to First Republic Bank (Note 4)                  |  |                         | 100,000    |      |   | 75,000     |  |   | 75,000    
|General and administrative                                             |  |                         | 233,000    |      |   | 236,000    |  |   | 199,000   
|                                                                       |  |                         |            |      |   |            |  |   |           
|Total operating expense                                                |  |                         | 333,000    |      |   | 311,000    |  |   | 274,000   
|                                                                       |  |                         |            |      |   |            |  |   |           
|Net income                                                             |  |                         | 16,176,000 |      |   | 16,176,000 |  |   | 13,380,000
|Dividends on preferred stock (Note 7)                                  |  |                         | 14,252,000 |      |   | 14,252,000 |  |   | 12,125,000
|                                                                       |  |                         |            |      |   |            |  |   |           
|Net income available to common stockholders                            |  | $                       | 1,924,000  |      | $ | 1,924,000  |  | $ | 1,255,000 
|                                                                       |  |                         |            |      |   |            |  |   |           

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, 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                                                                        |  |                 |            |             |   |                          |  |   |                 |   |  |       | 13,380,000  |   |  |   | 13,380,000  |  
|Dividends paid on 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                                                                        |  |                 |            |             |   |                          |  |   |                 |   |  |       | 16,176,000  |   |  |   | 16,176,000  |  
|Dividends paid on 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 |  
|Net income                                                                        |  |                 |            |             |   |                          |  |   |                 |   |  |       | 16,176,000  |   |  |   | 16,176,000  |  
|Dividends paid on preferred stock                                                 |  |                 |            |             |   |                          |  |   |                 |   |  |       | (14,252,000 | ) |  |   | (14,252,000 | )
|Repurchase shares of common stock                                                 |  |                 |            |             |   |                          |  |   | (23,000          | ) |  |       |            |   |  |   | (23,000     | )
|Consent dividend on common stock                                                  |  |                 |            |             |   |                          |  |   | 1,924,000        |   |  |       | (1,924,000  | ) |  |   |            |  
|                                                                                  |  |                 |             |             |   |                           |  |   |                  |   |  |       |             |   |  |   |             |  
|Balance as of December 31, 2005                                                   |  | $               | 164,000,000 |             | $ | 294,000                   |  | $ | 168,824,000      |   |  | $     | (200,000    | ) |  | $ | 332,918,000 |  
|                                                                                  |  |                 |             |             |   |                           |  |   |                  |   |  |       |             |   |  |   |             |  

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, |            
|                                                                                  |  | 2005                    |             |   | 2004 |   |              | 2003 | 
|Operating activities:                                                             |  |                         |             |   |      |   |              |      |  |   |              |  
|Net income                                                                        |  | $                       | 16,176,000  |   |      | $ | 16,176,000   |      |  | $ | 13,380,000   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |             |   |      |   |              |      |  |   |              |  
|Amortization of premium on loans                                                  |  |                         | 235,000     |   |      |   | 25,000       |      |  |   | 594,000      |  
|Changes in operating assets and liabilities:                                      |  |                         |             |   |      |   |              |      |  |   |              |  
|Accrued interest receivable                                                       |  |                         | (38,000     | ) |      |   | 162,000      |      |  |   | (402,000     | )
|Prepaid expenses                                                                  |  |                         | 2,000       |   |      |   | 9,000        |      |  |   | (4,000       | )
|Payable to First Republic Bank                                                    |  |                         | 6,000       |   |      |   |             |      |  |   | 6,000        |  
|Other payables                                                                    |  |                         | (46,000     | ) |      |   | 93,000       |      |  |   | 4,000        |  
|                                                                                  |  |                         |             |   |      |   |              |      |  |   |              |  
|Net cash provided by operating activities                                         |  |                         | 16,335,000  |   |      |   | 16,465,000   |      |  |   | 13,578,000   |  
|                                                                                  |  |                         |             |   |      |   |              |      |  |   |              |  
|Investing activities:                                                             |  |                         |             |   |      |   |              |      |  |   |              |  
|Loans acquired from First Republic Bank                                           |  |                         | (73,563,000 | ) |      |   | (108,886,000 | )    |  |   | (294,644,000 | )
|Principal payments on loans                                                       |  |                         | 84,278,000  |   |      |   | 105,638,000  |      |  |   | 159,705,000  |  
|                                                                                  |  |                         |             |   |      |   |              |      |  |   |              |  
|Net cash provided by (used for) investing activities                              |  |                         | 10,715,000  |   |      |   | (3,248,000   | )    |  |   | (134,939,000 | )
|                                                                                  |  |                         |             |   |      |   |              |      |  |   |              |  
|Financing activities:                                                             |  |                         |             |   |      |   |              |      |  |   |              |  
|Issuance of preferred stock                                                       |  |                         |            |   |      |   |             |      |  |   | 60,000,000   |  
|Issuance of common stock to First Republic Bank                                   |  |                         |            |   |      |   |             |      |  |   | 60,000,000   |  
|Dividends paid on preferred stock                                                 |  |                         | (14,252,000 | ) |      |   | (14,252,000  | )    |  |   | (12,125,000  | )
|Dividends paid on common stock                                                    |  |                         | (1,000      | ) |      |   | (1,255,000   | )    |  |   | (2,044,000   | )
|Repurchase of common stock                                                        |  |                         | (23,000     | ) |      |   |             |      |  |   |             |  
|                                                                                  |  |                         |             |   |      |   |              |      |  |   |              |  
|Net cash provided by (used for) financing activities                              |  |                         | (14,276,000 | ) |      |   | (15,507,000  | )    |  |   | 105,831,000  |  
|                                                                                  |  |                         |             |   |      |   |              |      |  |   |              |  
|Increase (decrease) in cash and cash equivalents                                  |  |                         | 12,774,000  |   |      |   | (2,290,000   | )    |  |   | (15,530,000  | )
|Cash and cash equivalents at beginning of year                                    |  |                         | 4,476,000   |   |      |   | 6,766,000    |      |  |   | 22,296,000   |  
|                                                                                  |  |                         |             |   |      |   |              |      |  |   |              |  
|Cash and cash equivalents at end of year                                          |  | $                       | 17,250,000  |   |      | $ | 4,476,000    |      |  | $ | 6,766,000    |  
|                                                                                  |  |                         |             |   |      |   |              |      |  |   |              |  
|Supplemental disclosure of cash flow information:                                 |  |                         |             |   |      |   |              |      |  |   |              |  
|Common stock dividends payable                                                    |  | $                       |            |   |      | $ | 1,000        |      |  | $ | 1,255,000    |  

See accompanying notes to financial statements.



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FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Majority Owned Subsidiary of First Republic Bank)

NOTES TO FINANCIAL STATEMENTS

December 31, 2005

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 secure 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.

At December 31, 2005, the Company has issued 29,353,353 shares of common stock, par value $
0.01 per share. The Bank owns all of the common stock, except for 560 shares held by certain of the Banks former employees. 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 for 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 $20.38 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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##### Table of Contents

Note 2.    Summary of Significant Accounting Policies

Use of Estimates

The preparation of
financial statements in conformity with generally accepted accounting principals requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets
and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for
loan losses.

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
methods that approximate 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 purchase, the Company would record the difference as a capital contribution by the Bank or a capital distribution
to the Bank and would not adjust the basis of the loans.

Interest income from loans is recognized in the month earned and is net of
service fees paid to the Bank. The Company places a loan on nonaccrual status, and interest income is not recorded on the loan, when the loan becomes more than 90 days delinquent, except for a single family loan that is well secured and in the
process of collection, or at such earlier times as management determines that the ultimate collection of all contractually due principal or 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 loan 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. 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.

Allowance for Loan Losses

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 were to determine that an
additional provision is required, the Company would provide for loan losses by charging current income.

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.

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, 2005, 2004 or 2003.



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Recent Accounting Pronouncements

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which supersedes Accounting Principles Board Opinion
No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial StatementsAn Amendment of APB Opinion No. 28. SFAS No. 154 provides guidance for recognizing and reporting
changes in accounting principles, changes in accounting estimates, changes in reporting entities and error corrections. For a change in accounting principle, SFAS No. 154 requires retrospective application to prior period financial statements,
unless a new accounting pronouncement includes other specific provisions. SFAS No. 154 is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005. The Company does not expect the
adoption of SFAS No. 154 to have a material impact on its financial condition or results of operation.

Note 3.    Loans

The Companys Mortgage Loans are secured by single family and multifamily properties located primarily in California. The Mortgage
Loans generally mature over periods of up to thirty years. The following table presents the Mortgage Loan portfolio at December 31, 2005 and 2004:



|                             |  |      |             |      |   |            
|---------------------------- |  | ---- | ----------- | ---- | - | -----------
|                             |  | 2005 |             | 2004
|Single family mortgage loans |  | $    | 283,530,000 |      | $ | 288,211,000
|Multifamily mortgage loans   |  |      | 31,249,000  |      |   | 37,517,000 
|                             |  |      |             |      |   |            
|Total mortgage loans         |  | $    | 314,779,000 |      | $ | 325,728,000
|                             |  |      |             |      |   |            

There were no nonaccrual loans and no impaired loans at December 31, 2005 or 2004. 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,
|                           |  | 2005                            |         | 2004 |   | 2003   
|Allowance for loan losses  |  |                                 |         |      |   |         |  |   |        
|Balance, beginning of year |  | $                               | 481,000 |      | $ | 481,000 |  | $ | 200,000
|Provision for loan losses  |  |                                 |        |      |   |        |  |   |       
|Transfer from the Bank     |  |                                 |        |      |   |        |  |   | 281,000
|Chargeoffs                 |  |                                 |        |      |   |        |  |   |       
|Recoveries                 |  |                                 |        |      |   |        |  |   |       
|                           |  |                                 |         |      |   |         |  |   |        
|Balance, end of year       |  | $                               | 481,000 |      | $ | 481,000 |  | $ | 481,000
|                           |  |                                 |         |      |   |         |  |   |        

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. There have been no changes to the Companys allowance for the past two years because the size and composition of the loan portfolio has been
relatively unchanged.

Note 4.    Related Party Transactions

Since inception, the Company has acquired all of its Mortgage Loans from the Bank. The aggregate cost of these loans acquired by the Company was $73.6
million in 2005, $108.9 million in 2004 and $294.6 million in 2003, including net premiums of $190,000, $161,000 and $971,000, respectively. All purchases were at a price equal to the Banks carrying value of the loans, 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



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##### Table of Contents

Mortgage Loans that the Bank services. The Company records the servicing fees as a reduction of interest income. Loan servicing fees were $788,000 in 2005,
$775,000 in 2004 and $582,000 in 2003. 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.

The advisory agreement is renewable on an annual basis. For 2005, the board of directors of the Company, including a majority of the independent
directors, approved an increase in the annual fee to $100,000 from $75,000 in 2004 and in 2003, payable in equal quarterly installments. The Company had advisory fees payable to the Bank of $25,000 at December 31, 2005 and $19,000 at
December 31, 2004.

At December 31, 2005, the Bank owned 25,410 shares of the Companys Series A Preferred Shares, with a
liquidation preference value of $25.4 million. During 2005, the Bank did not purchase any of the Companys outstanding Series A Preferred Shares. 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. 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.

Note 5.    Preferred Stock

At December 31, 2005, 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.



|                                                                       |  |              |             |      |   |            
|---------------------------------------------------------------------- |  | ------------ | ----------- | ---- | - | -----------
|                                                                       |  | December 31,
|                                                                       |  | 2005         |             | 2004
|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. The Companys
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.

In June 2001, the Company
issued 7,000 Series C Preferred Shares. The Companys 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.



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##### Table of Contents

In January 2002, the Company issued 1,680,000 Series B Preferred Shares. The Companys 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.

In June 2003, the
Company issued 2,400,000 Series D Preferred Shares. The Companys 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.

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 6.    Common Stock

At December 31, 2005, the Company was authorized to issue 50,000,000 shares of common stock with a par value of $0.01 per share,
of which 29,353,353 shares were outstanding. The Company issued no common stock in 2005 or in 2004 and had issued 10,658,330 in 2003 to acquire Mortgage Assets from the Bank. In January 2005, the Company tendered an offer to repurchase the 9,840
shares that were issued to 123 current and former employees of the Bank. As of December 31, 2005, 116 individuals had accepted the offer of $2.50 per share, or $200 for each owner. As of December 31, 2005, a total of 560 shares were held
by the Banks former employees.

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 therefore after all preferred dividends have been paid for the full year.

Note
7.    Dividends on Preferred Stock and Common Stock

The following table presents the dividends on preferred stock
that the Company paid in 2005, 2004 and 2003:



|                          |  |                         |            |      |   |            |  |   |           
|------------------------- |  | ----------------------- | ---------- | ---- | - | ---------- |  | - | ----------
|                          |  | Year Ended December 31,
|                          |  | 2005                    |            | 2004 |   | 2003      
|Series A Preferred Shares |  | $                       | 5,775,000  |      | $ | 5,775,000  |  | $ | 5,775,000 
|Series B Preferred Shares |  |                         | 3,728,000  |      |   | 3,728,000  |  |   | 3,728,000 
|Series C Preferred Shares |  |                         | 399,000    |      |   | 399,000    |  |   | 399,000   
|Series D Preferred Shares |  |                         | 4,350,000  |      |   | 4,350,000  |  |   | 2,223,000 
|                          |  |                         |            |      |   |            |  |   |           
|Total                     |  | $                       | 14,252,000 |      | $ | 14,252,000 |  | $ | 12,125,000
|                          |  |                         |            |      |   |            |  |   |           



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##### Table of Contents

Dividends on the Preferred Shares are payable if, when and as authorized by the Companys board of
directors. 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 on its common stock of
$1,924,000 for each of 2005 and 2004 and $1,255,000 for 2003. For each of 2005 and 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 8.    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, 2005 and 2004:



|                 |  |                |         |            |   |                |  |            |         |  |   |        
|---------------- |  | -------------- | ------- | ---------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                 |  | 2005           |         | 2004      
|($ in thousands) |  | CarryingAmount |         | Fair Value |   | CarryingAmount |  | Fair Value
|Cash             |  | $              | 17,250  |            | $ | 17,250         |  | $          | 4,476   |  | $ | 4,476  
|Mortgage loans   |  | $              | 314,298 |            | $ | 315,769        |  | $          | 325,247 |  | $ | 328,830

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 based 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 9.    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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##### Table of Contents

Properties underlying Mortgage Assets were concentrated primarily in California. At December 31,
2005, approximately 79% of Mortgage Assets were secured by properties located in California. The following table presents an analysis of Mortgage Loans at December 31, 2005 by major geographic location:



|                    |  |                       |         |   |                          |   |        |                      |  |   |                   |   |  |                  |        |   |       |   |       |       |  |   |        |   |  |   |         |  
|------------------- |  | --------------------- | ------- | - | ------------------------ | - | ------ | -------------------- |  | - | ----------------- | - |  | ---------------- | ------ | - | ----- | - | ----- | ----- |  | - | ------ | - |  | - | ------- | -
|($ in thousands)    |  | San FranciscoBay Area |         |   | GreaterNew YorkCity Area |   |        | OtherCaliforniaAreas |  |   | Los AngelesCounty |   |  | Las Vegas,Nevada |        |   | Other |   |       | Total | 
|Single family       |  | $                     | 162,998 |   |                          | $ | 34,613 |                      |  | $ | 26,956            |   |  | $                | 25,722 |   |       | $ | 4,068 |       |  | $ | 29,173 |   |  | $ | 283,530 |  
|Multifamily         |  |                       | 24,785  |   |                          |   | 857    |                      |  |   | 2,610             |   |  |                  | 2,997  |   |       |   |      |       |  |   |       |   |  |   | 31,249  |  
|                    |  |                       |         |   |                          |   |        |                      |  |   |                   |   |  |                  |        |   |       |   |       |       |  |   |        |   |  |   |         |  
|Total               |  | $                     | 187,783 |   |                          | $ | 35,470 |                      |  | $ | 29,566            |   |  | $                | 28,719 |   |       | $ | 4,068 |       |  | $ | 29,173 |   |  | $ | 314,779 |  
|                    |  |                       |         |   |                          |   |        |                      |  |   |                   |   |  |                  |        |   |       |   |       |       |  |   |        |   |  |   |         |  
|Percent by location |  |                       | 60      | % |                          |   | 11     | %                    |  |   | 10                | % |  |                  | 9      | % |       |   | 1     | %     |  |   | 9      | % |  |   | 100     | %

Note 10.    Quarterly Data (unaudited)

The following table presents the Companys summary unaudited financial information on a quarterly basis for 2005 and 2004:



|                                            |  |               |       |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      
|------------------------------------------- |  | ------------- | ----- | ------------ | - | ------------- |  | ------------ | ----- | ------------- | - | ------------ |  | ------------- | ----- | ------------ | - | ----- |  | - | ----- |  | - | -----
|                                            |  | 2005          |       | 2004        
|($ in thousands)                            |  | FourthQuarter |       | ThirdQuarter |   | SecondQuarter |  | FirstQuarter |       | FourthQuarter |   | ThirdQuarter |  | SecondQuarter |       | FirstQuarter
|Interest income                             |  | $             | 4,259 |              | $ | 4,138         |  | $            | 4,079 |               | $ | 4,033        |  | $             | 4,325 |              | $ | 4,040 |  | $ | 4,052 |  | $ | 4,070
|Provision for loan losses                   |  |               |      |              |   |              |  |              |      |               |   |             |  |               |      |              |   |      |  |   |      |  |   |     
|Operating expense                           |  |               | 63    |              |   | 90            |  |              | 94    |               |   | 86           |  |               | 72    |              |   | 75    |  |   | 92    |  |   | 72   
|                                            |  |               |       |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      
|Net income                                  |  |               | 4,196 |              |   | 4,048         |  |              | 3,985 |               |   | 3,947        |  |               | 4,253 |              |   | 3,965 |  |   | 3,960 |  |   | 3,998
|Preferred stock dividends                   |  |               | 3,563 |              |   | 3,563         |  |              | 3,564 |               |   | 3,562        |  |               | 3,563 |              |   | 3,563 |  |   | 3,563 |  |   | 3,563
|                                            |  |               |       |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      
|Net income available to common stockholders |  | $             | 633   |              | $ | 485           |  | $            | 421   |               | $ | 385          |  | $             | 690   |              | $ | 402   |  | $ | 397   |  | $ | 435  
|                                            |  |               |       |              |   |               |  |              |       |               |   |              |  |               |       |              |   |       |  |   |       |  |   |      



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