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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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

THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended September 30, 2003



Commission File Number: 000-33461



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FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)



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



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



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Securities Registered Pursuant to Section 12(b) of the Act:

None



Securities Registered Pursuant to Section 12(g) of the Act:

8.875% Noncumulative Perpetual Series B Preferred Stock

7.25% Noncumulative Perpetual Series D Preferred Stock



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



The number of shares outstanding of the Registrants common stock, par value $0.01 per share, as of October 31, 2003 was 29,362,633.



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##### Table of Contents

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION



TABLE OF CONTENTS



|                               |  | Page   
|------------------------------ |  | -------
|PART I  FINANCIAL INFORMATION |  |        
|                               |  |        
|                               |  | Item 1.
|                               |  |        
|                               |  |        
|                               |  |        
|                               |  |        
|                               |  |        
|                               |  |        
|                               |  |        
|                               |  |        
|                               |  |        
|                               |  | Item 2.
|                               |  |        
|                               |  | Item 3.
|                               |  |        
|                               |  | Item 4.
|                               | 
|PART II  OTHER INFORMATION    |  |        
|                               |  |        
|                               |  | Item 1.
|                               |  |        
|                               |  | Item 2.
|                               |  |        
|                               |  | Item 3.
|                               |  |        
|                               |  | Item 4.
|                               |  |        
|                               |  | Item 5.
|                               |  |        
|                               |  | Item 6.
|                               | 
|Signatures                     |  | 22     



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PART 1 - FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



The following interim financial statements are unaudited. However, the financial statements reflect all adjustments (which include only normal recurring
adjustments) that are, in the opinion of management, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods presented.



FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Majority Owned Subsidiary of First Republic Bank)



Balance Sheet

(Unaudited)



|                                                                                                                                                                               |  | September 30, 2003 |             |   | December 31, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ----------- | - | ----------------- | -
|ASSETS                                                                                                                                                                         |  |                    |             |   |                   |  
|Cash and short-term investments on deposit with First Republic Bank                                                                                                            |  | $                  | 9,556,000   |   |                   | $
|                                                                                                                                                                               |  |                   
|Single family mortgage loans                                                                                                                                                   |  |                    | 293,421,000 |   |                   |  
|Multifamily mortgage loans                                                                                                                                                     |  |                    | 27,568,000  |   |                   |  
|Less: Allowance for loan losses                                                                                                                                                |  |                    | (481,000    | ) |                   |  
|                                                                                                                                                                               |  |                    |             |   |                   |  
|Net loans                                                                                                                                                                      |  |                    | 320,508,000 |   |                   |  
|                                                                                                                                                                               |  |                   
|Accrued interest receivable                                                                                                                                                    |  |                    | 1,623,000   |   |                   |  
|Prepaid expenses                                                                                                                                                               |  |                    | 28,000      |   |                   |  
|                                                                                                                                                                               |  |                    |             |   |                   |  
|Total assets                                                                                                                                                                   |  | $                  | 331,715,000 |   |                   | $
|                                                                                                                                                                               |  |                    |             |   |                   |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                           |  |                    |             |   |                   |  
|Liabilities:                                                                                                                                                                   |  |                    |             |   |                   |  
|Dividends payable on common stock                                                                                                                                              |  | $                  |            |   |                   | $
|Dividends payable on preferred stock                                                                                                                                           |  |                    | 1,544,000   |   |                   |  
|Payable to First Republic Bank                                                                                                                                                 |  |                    | 19,000      |   |                   |  
|Other payables                                                                                                                                                                 |  |                    | 6,000       |   |                   |  
|                                                                                                                                                                               |  |                    |             |   |                   |  
|Total liabilities                                                                                                                                                              |  |                    | 1,569,000   |   |                   |  
|                                                                                                                                                                               |  |                    |             |   |                   |  
|Stockholders equity:                                                                                                                                                          |  |                    |             |   |                   |  
|Preferred stock, $0.01 par value per share; 10,000,000 shares authorized:                                                                                                      |  |                    |             |   |                   |  
|10.50% perpetual, exchangeable, noncumulative Series A preferred stock; $1,000 liquidation value per share; 55,000 shares
authorized, issued and outstanding                   |  |                    | 55,000,000  |   |                   |  
|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  |   |                   |  
|5.70% perpetual, convertible, exchangeable, noncumulative Series C preferred stock; $1,000 liquidation value per share; 10,000
shares authorized, 7,000 issued and outstanding |  |                    | 7,000,000   |   |                   |  
|7.25% perpetual, exchangeable, noncumulative Series D preferred stock; $25 liquidation value per share; 2,400,000 shares
authorized, issued and outstanding                    |  |                    | 60,000,000  |   |                   |  
|Common stock, $0.01 par value, 50,000,000 shares authorized, 29,362,633 and 18,704,303 shares issued and outstanding at September
30, 2003 and December 31, 2002, respectively |  |                    | 294,000     |   |                   |  
|Additional paid-in capital                                                                                                                                                     |  |                    | 165,000,000 |   |                   |  
|Retained earnings                                                                                                                                                              |  |                    | 852,000     |   |                   |  
|Dividends in excess of retained earnings                                                                                                                                       |  |                    |            |   |                   |  
|                                                                                                                                                                               |  |                    |             |   |                   |  
|Total stockholders equity                                                                                                                                                     |  |                    | 330,146,000 |   |                   |  
|                                                                                                                                                                               |  |                    |             |   |                   |  
|Total liabilities and stockholders equity                                                                                                                                     |  | $                  | 331,715,000 |   |                   | $
|                                                                                                                                                                               |  |                    |             |   |                   |  



See accompanying notes
to financial statements.



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FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Majority Owned Subsidiary of First Republic Bank)



Statement of Income

(Unaudited)



|                                                      |  | Three Months Ended September 30, |           | Nine Months EndedSeptember 30,
|----------------------------------------------------- |  | -------------------------------- | --------- | ------------------------------
|                                                      |  | 2003                             |           | 2002                          
|Interest income:                                      |  |                                  |           |                               
|Interest on loans                                     |  | $                                | 4,169,000 |                               
|Interest on short-term investments                    |  |                                  | 34,000    |                               
|                                                      |  |                                  |           |                               
|Total interest income                                 |  |                                  | 4,203,000 |                               
|                                                      |  |                                  |           |                               
|Provision for loan losses                             |  |                                  |          |                               
|                                                      |  |                                  |           |                               
|Total interest income after provision for loan losses |  |                                  | 4,203,000 |                               
|                                                      |  |                                  |           |                               
|Operating expense:                                    |  |                                  |           |                               
|Advisory fees payable to First Republic Bank          |  |                                  | 18,000    |                               
|General and administrative                            |  |                                  | 50,000    |                               
|                                                      |  |                                  |           |                               
|Total operating expense                               |  |                                  | 68,000    |                               
|                                                      |  |                                  |           |                               
|Net income                                            |  | $                                | 4,135,000 |                               
|                                                      |  |                                  |           |                               
|Net income                                            |  | $                                | 4,135,000 |                               
|Dividends on preferred stock                          |  |                                  | 3,563,000 |                               
|                                                      |  |                                  |           |                               
|Net income available to common stockholders           |  | $                                | 572,000   |                               
|                                                      |  |                                  |           |                               



See accompanying notes
to financial statements.



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FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

(A Majority Owned Subsidiary of First Republic Bank)



Statement of Cash Flows

(Unaudited)



|                                                                           |  | Nine Months Ended September 30, |             
|-------------------------------------------------------------------------- |  | ------------------------------- | ------------
|                                                                           |  | 2003                            |             
|Cash flows from operating activities:                                      |  |                                 |             
|Net income                                                                 |  | $                               | 9,614,000   
|Adjustments to reconcile net income to net cash from operating activities: |  |                                 |             
|Provision for loan losses                                                  |  |                                 |            
|Amortization of net premium on loans                                       |  |                                 | 182,000     
|Changes in operating assets and liabilities:                               |  |                                 |             
|Accrued interest receivable                                                |  |                                 | (432,000    
|Receivable from First Republic Bank                                        |  |                                 |            
|Prepaid expenses                                                           |  |                                 | (18,000     
|Payable to First Republic Bank                                             |  |                                 | 6,000       
|Other payables                                                             |  |                                 | (19,000     
|                                                                           |  |                                 |             
|Net cash provided by operating activities                                  |  |                                 | 9,333,000   
|                                                                           |  |                                 |             
|Cash flows from investing activities:                                      |  |                                 |             
|Loans acquired from First Republic Bank                                    |  |                                 | (263,416,000
|Principal payments on loans                                                |  |                                 | 130,405,000 
|                                                                           |  |                                 |             
|Net cash used in investing activities                                      |  |                                 | (133,011,000
|                                                                           |  |                                 |             
|Cash flows from 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                                          |  |                                 | (7,018,000  
|Dividends paid on common stock                                             |  |                                 | (2,044,000  
|                                                                           |  |                                 |             
|Net cash provided by financing activities                                  |  |                                 | 110,938,000 
|                                                                           |  |                                 |             
|Decrease in cash and cash equivalents                                      |  |                                 | (12,740,000 
|Cash and cash equivalents at beginning of year                             |  |                                 | 22,296,000  
|                                                                           |  |                                 |             
|Cash and cash equivalents at end of period                                 |  | $                               | 9,556,000   
|                                                                           |  |                                 |             
|Supplemental disclosure of cash flow information:                          |  |                                 |             
|Preferred stock dividend payable                                           |  | $                               | 1,544,000   



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

September 30, 2003



Note 1. Summary of Significant Accounting Policies



(a) Organization and Basis of Presentation



First Republic Preferred Capital Corporation (the Company) is a Nevada corporation formed by First Republic Bank (the Bank) on
April 19, 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, the
Mortgage Assets). The Mortgage Assets presently held by the Company are loans secured by single family and multifamily real estate properties (Mortgage Loans) that were acquired from the Bank. The Company expects that all, or
substantially all, of its Mortgage Assets will continue to be Mortgage Loans acquired from the Bank. The Company has elected to be taxed as a REIT and intends to make distributions to its shareholders such that the Company is relieved of
substantially all income taxes relating to ordinary income under applicable tax regulations. Accordingly, no provision for income taxes is included in the accompanying financial statements. To date, the Company has issued 29,362,633 shares of common
stock, par value $0.01 per share (the Common Stock). The Bank owns all of the Common Stock, except for 9,840 shares held by certain of the Banks employees and directors. Earnings per share data is not presented, as the
Companys Common Stock is not publicly traded.



In June
1999, the Company completed an initial private offering of 55,000 shares of perpetual, exchangeable, noncumulative 10.5% Series A preferred shares (the Series A Preferred Shares) and received proceeds of $55 million including
underwriting fees contributed by the Bank. 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. The Company used the proceeds from the issuance of the Series A Preferred Shares to fund
a dividend distribution to the Bank as the holder of initially all of the Companys Common Stock.



In June 2001, the Company completed a private placement of $7 million of perpetual, exchangeable, noncumulative 5.7% Series C preferred shares (the
Series C Preferred Shares) that are convertible into Common Stock of the Bank. The Series C Preferred Shares are convertible into Bank shares at a price of $30.56 per share. In connection with this transaction, the Company issued, and
the Bank purchased, $7 million of additional Common Stock. The Company used the proceeds from the issuance of the Series C Preferred Shares and the additional issuance of Common Stock to acquire from the Bank approximately $14 million of single
family mortgage loans.



In January 2002, the Company completed
an initial public offering pursuant to a Registration Statement on Form S-11 (File No. 333-72510). The Company 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
connection with this transaction, the Company issued, and the Bank purchased, $42 million of additional Common Stock. The Company used the proceeds from the issuance of the Series B Preferred Shares and the additional issuance of Common Stock to
acquire from the Bank approximately $80 million of single family mortgage loans and $4 million of short-term investments.



In June 2003, the Company completed a public offering pursuant to a Registration Statement on Form S-11 (File No. 333-105434). The Company 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



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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 the Series D Preferred Shares are
collectively referred to as the Preferred Shares. These interim statements are intended to be read in conjunction with the financial statements presented in First Republic Preferred Capital Corporations Annual Report on Form 10-K
as of and for the year ended December 31, 2002. Interim results are not necessarily indicative of results to be expected for the entire year.



(b) Use of Estimates



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



(c) 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 expected lives of the loans using the interest method. Unaccreted discounts or unamortized premiums on loans sold or
paid in full are recognized in income at the time of sale or payoff.



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



Mortgage Loans consisted entirely of single family mortgages through the
first quarter of 2003. Beginning in the second quarter of 2003, the Company acquired multifamily mortgages with the proceeds of the Series D preferred stock offering. At September 30, 2003, Mortgage Loans totaled $321.0 million, of which $293.4
million were single family mortgages and $27.6 million were multifamily mortgages. At December 31, 2002, Mortgage Loans totaled $187.9 million, all of which were single family mortgages.



At September 30, 2003, 29% of the Mortgage Loans were adjustable rate loans, 58% were intermediate fixed rate loans, and 13%
were fixed rate loans. The weighted average coupon rate for each loan type was 4.76%, 5.54% and 6.27%, respectively, and the weighted average maturity was 27.5 years. At December 31, 2002, 39% were adjustable rate loans, 39% were intermediate fixed
rate loans, and 22% were fixed rate loans. The weighted average coupon rate for the each loan type was 5.09%, 6.66%, and 6.93%, respectively, and the weighted average maturity was 28.3 years.



Interest income from loans is recognized in the month earned and is net of
loan servicing fees paid to the Bank. Interest income is not recorded on loans when they become more than 90 days delinquent, except for single family loans that are well secured and in the process of collection, or at such earlier time as
management determined that the collectibility of interest is unlikely. When a loan is placed on nonaccrual status, interest income may be recorded when cash is received, provided that the Companys recorded investment in such loans is deemed
collectible. When, in managements judgment, the borrowers ability to make periodic interest and principal payments resumes, the loan is returned to accrual status. There were no nonaccrual or impaired loans as of September 30, 2003 or
December 31, 2002. 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.



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(d) Allowance for Loan Losses



The Company established an allowance for loan losses of $200,000 in the third quarter of 2002, which was the balance at
December 31, 2002. In June 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 the Company acquired using the proceeds from the issuance
of the Series D Preferred Shares. The Company maintains an allowance for loan losses that can be reasonably anticipated based upon specific conditions at the time. The Company considers a number of factors, including the Companys and the
Banks past loss experience, the Banks underwriting policies, the amount of past due and nonperforming loans, legal requirements, recommendations or requirements of regulatory authorities, current economic conditions and other factors. If
the Company determines that an additional provision is required, the Company would provide for loan losses by charging current income.



(e) Other Real Estate Owned



Real estate acquired through foreclosure is recorded at the lower of cost or fair value, minus estimated costs to sell. Costs related to holding real
estate are recorded as expenses when incurred. The Company has never owned any real estate.



(f) Statements of Cash Flows



For the purpose of reporting cash flows, cash and cash equivalents include cash on hand and cash on deposit at the Bank. As a REIT making sufficient dividend distributions, the Company paid no income taxes for the nine months ended
September 30, 2003 or 2002.



Note 2. Related Party
Transactions



Since inception in April 1999,
the Company has acquired all of its loans from the Bank. The aggregate cost of these loans acquired by the Company during the third quarter was approximately $61 million in 2003 and $30 million in 2002, including net premiums of $259,000 and net
discounts of $146,000, respectively. The aggregate cost of these loans acquired during the first nine months was approximately $264 million in 2003 and $154 million in 2002, including net premiums of $833,000 and $181,000, respectively. All
purchases were at a price equal to the Banks carrying amount, which approximated the fair value of the loans.



The Company has entered into an Amended and Restated Master Loan Purchase and Servicing Agreement with the Bank pursuant to which the Bank performs, among
other things, servicing of loans held by the Company in accordance with normal industry practice. The Bank charges an annual servicing fee of 0.25% of the outstanding principal balances of the Mortgage Loans that the Bank services. The Company
records the servicing fees as a reduction of interest income. Loan servicing fees were $181,000 and $110,000 for the third quarter ended September 30, 2003 and 2002, respectively, and $395,000 and $315,000 for the nine months ended September 30,
2003 and 2002, respectively. In its capacity as servicer, the Bank receives Mortgage Loan payments on behalf of the Company and holds the payments in custodial accounts at the Bank.



The Company entered into an Amended and Restated Advisory Agreement (the 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 Companys Mortgage Assets; and (iii) monitoring the Companys compliance with the requirements
necessary to qualify as a REIT.



The Advisory Agreement is
renewable for additional one-year periods. During 2002, the Bank received an annual advisory fee equal to $50,000, payable in equal quarterly installments. For 2003, the Board of Directors of the Company, including a majority of our independent
directors, approved an increase in the annual fee to $75,000, payable in equal quarterly installments. The Company had $19,000 payable to the Bank for advisory fees at September 30, 2003 and $13,000 at December 31, 2002.



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During 2001, the Bank purchased 13,500 shares of the Companys outstanding Series A Preferred
Shares, with a liquidation preference value of $13.5 million. During 2002, the Bank purchased 1,500 shares of the Companys outstanding Series A Preferred Shares, with a liquidation preference value of $1.5 million. During the third quarter of
2003, the Bank purchased 1,000 additional shares of the Companys outstanding Series A Preferred Shares with a liquidation preference value of $1.0 million. Accordingly, at September 30, 2003, the Bank owned 16,000 shares of the Companys
Series A Preferred Shares, with a liquidation preference value of $16.0 million.



Note 3. Dividends Payable



Dividends on the
Series A Preferred Shares, the Series B Preferred Shares, the Series C Preferred Shares and the Series D Preferred Shares are payable at the rate of 10.5%, 8.875%, 5.7%, and 7.25% per annum, respectively, if, when and as authorized by the
Companys Board of Directors. If authorized, dividends on Series A Preferred Shares and Series C Preferred Shares are payable semiannually in arrears on the 30thday of June and December in each year. If authorized, dividends on the Series B Preferred Shares and Series D Preferred Shares are payable quarterly in
arrears on the 30thof March, June, September, and December each year.



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



For the quarter ended September 30, 2003, the Company paid quarterly dividends of $932,000 to holders of the Series B Preferred Shares. The Company paid $1,136,000 to the holders of the Series D Preferred Shares for dividends accrued since
the inception date of June 27, 2003 to September 30, 2003. For the same quarter, the Company accrued dividends payable of $1,444,000 and $100,000 for the Series A and Series C 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 capital gains) in order to remain qualified as a REIT. The Company has not declared
dividends to the holders of its Common Stock for the periods from January 1 to September 30 of 2003 or 2002.



Note 4. Common Stock



As of September 30, 2003, the Company is authorized to issue 50,000,000 shares of Common Stock with a par value of $0.01 per share. At September 30, 2003, 29,362,633 shares were outstanding. The Company initially issued 10,000,000 shares to
the Bank and used the proceeds to acquire approximately $111 million of assets. Upon the issuance of $55 million of Series A Preferred Shares in June 1999, the Company made a return of capital to the Bank. In June 2001, the Company issued 1,243,472
shares of Common Stock and used the proceeds and $7 million in cash to acquire from the Bank approximately $14 million in Mortgage Assets. In January 2002, the Company issued 7,460,831 shares of Common Stock and used the proceeds and $42 million in
cash to acquire from the Bank approximately $80 million in Mortgage Assets. In June 2003, the Company issued 10,658,330 shares of Common Stock and used the proceeds and $60 million in cash to acquire approximately $120 million in Mortgage Assets
from the Bank.



Holders of Common Stock are entitled to receive
dividends if and when authorized and declared by the Board of Directors, out of funds legally available therefor after all preferred dividends have been paid for the full year. As of September 30, 2003, no Common Stock dividends have been declared
for the year 2003.



Note 5. Preferred Stock



As of September 30, 2003, the Company was authorized to issue 10,000,000
shares of preferred stock. The Company has issued each of the following series of preferred stock, par value $0.01 per share.



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|                                                                         |  | At September 30, 2003 |             | At December 31, 2002
|------------------------------------------------------------------------ |  | --------------------- | ----------- | --------------------
|Series A - 55,000 shares authorized, issued and outstanding              |  | $                     | 55,000,000  |                     
|Series B - 1,840,000 shares authorized, 1,680,000 issued and outstanding |  |                       | 42,000,000  |                     
|Series C - 10,000 shares authorized, 7,000 issued and outstanding        |  |                       | 7,000,000   |                     
|Series D - 2,400,000 shares authorized, issued and outstanding           |  |                       | 60,000,000  |                     
|                                                                         |  |                       |             |                     
|Total preferred stock                                                    |  | $                     | 164,000,000 |                     
|                                                                         |  |                       |             |                     



In June 1999, the
Company issued 55,000 shares of Series A Preferred Stock. Proceeds from this issuance were $55 million, including underwriting fees contributed by the Bank. The Series A Preferred Shares are not redeemable prior to June 1, 2009. Holders of the
Series A Preferred Shares are entitled to receive, if authorized and declared by the Board of Directors of the Company, noncumulative dividends at a rate of 10.5% per annum or $105 per annum per share. Dividends on the Series A Preferred Shares, if
authorized and declared, are payable semiannually in arrears on June 30 and December 30 of each year. The Company accrued dividends of $1,444,000 for the quarter ended September 30, 2003.



In June 2001, the Company issued 7,000 Series C Preferred Shares. Proceeds from this issuance were $7 million, including
issuance costs contributed by the Bank. 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 $30.56 per share. The single holder of the
Series C Preferred Shares is entitled to receive, if authorized and declared by the Board of Directors of the Company, noncumulative dividends at a rate of 5.7% per annum or $57 per annum per share. Dividends on the Series C Preferred Shares, if
authorized and declared, are payable semiannually in arrears on June 30 and December 30 of each year. The Company accrued dividends of $100,000 for the quarter ended September 30, 2003.



In January 2002, the Company issued 1,680,000 Series B Preferred Shares. Proceeds from this issuance were $42 million,
including underwriting fees contributed by the Bank. The Series B Preferred Shares are not redeemable prior to December 30, 2006. Holders of the Series B Preferred Shares are entitled to receive, if authorized and declared by the Board of Directors
of the Company, noncumulative dividends at a rate of 8.875% per annum or $2.21875 per annum per share. Dividends on the Series B Preferred Shares are payable quarterly in arrears on March 30, June 30, September 30, and December 30 of each year. The
Company paid dividends of $932,000 on September 30, 2003.



In
June 2003, the Company issued 2,400,000 Series D Preferred Shares. Proceeds from this issuance were $60 million including underwriting fees contributed by the Bank. 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, when the Company paid dividends of $1,136,000 for the
period inception from June 27, 2003 to 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 both 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 both 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 both the Series A Preferred Shares and the Series C Preferred Shares is 1:1. The exchange rate for both 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.



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Note 6. Concentration of Credit Risk



The Company presently holds Mortgage Loans in respect of real estate properties primarily located in the state of California
(70% of the total). Future economic, political, or other developments in this state could adversely affect the value of the Mortgage Loans. (For additional information, see Significant Concentration of Credit Risk herein.)



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Introduction



This discussion summarizes the significant factors affecting the financial condition and results of operations of the Company during the three and nine
months ended September 30, 2003. This discussion is provided to increase the understanding of, and should be read in conjunction with, the unaudited financial statements, accompanying notes, and tables included in this quarterly report.



Information Regarding Forward-Looking Statements



Except for historical information and discussions contained herein, this
Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, 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 the 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 the following:



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



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



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



In some cases, forward-looking statements can be identified by terms such as may, will,
should, could, expect, anticipate, believe, estimate, project, predict, intend, potential, continue, and similar
expressions intended to identify forward-looking statements. Statements that contain these words should be read carefully because they discuss future expectations, contain projections of future results of operations or of financial condition or
state other forward-looking information. It is important to communicate future expectations to investors. 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. Caution should be taken that all forward-looking statements involve risks and uncertainties, and actual results may differ materially from those discussed as a
result of various factors, including, but not limited to, competitive pressure in the mortgage lending industry; changes in the interest rate environment that reduce margins; general economic conditions, either nationally or regionally, that are
less favorable than expected, resulting in, among other things, a deterioration in credit quality and an increase in the provision for possible loan losses; changes in the regulatory environment; changes in business conditions, particularly in San
Francisco and Los Angeles counties and in the home mortgage and residential lending industry; and changes in the securities markets. Other risks, uncertainties and factors are discussed elsewhere in this report, in the Companys other filings
with the SEC or in materials incorporated therein by reference.



Results of
Operations



Overview



Net income was $4,135,000 for the third quarter of 2003, compared with
$2,753,000 for the third quarter of 2002. For the first nine months, net income was $9,614,000 in 2003, compared with $8,475,000 in 2002. The increase is primarily due to an increase in interest income. The ratio of earnings to fixed charges was
1.16x and 1.12x for the quarter and nine months ended September 30, 2003, compared with 1.11x and 1.18x for the same periods in 2002. Dividend payments are 100% of fixed charges.



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Interest Income



Interest income was $4,203,000 for the third quarter of 2003, compared with $3,012,000 for the third quarter of 2002. Interest income was $9,823,000 and
$8,862,000 for the first nine months of 2003 and 2002, respectively. The increase in interest income was due to higher average loan balances, offset by lower average rates on loans. The weighted average yield on earning assets was 5.08% for the
third quarter of 2003 and 5.18% for the first nine months of 2003, compared with 5.73% for the third quarter and 5.82% for the first nine months of 2002.



The following table sets forth the yields on earning assets for the periods indicated.



|                              |  | Three Months Ended September 30, |        
|----------------------------- |  | -------------------------------- | -------
|                              |  | 2003                             |        
|                              |  | AverageBalance                   |        
|                              |  | ($ in thousands)                 |        
|Loans                         |  | $                                | 316,481
|Short-term investments        |  |                                  | 13,314 
|                              |  |                                  |        
|Total interest-earning assets |  | $                                | 329,795
|                              |  |                                  |        



|                              |  | Nine Months Ended September 30, |        
|----------------------------- |  | ------------------------------- | -------
|                              |  | 2003                            |        
|                              |  | AverageBalance                  |        
|                              |  | ($ in thousands)                |        
|Loans                         |  | $                               | 238,088
|Short-term investments        |  |                                 | 14,158 
|                              |  |                                 |        
|Total interest-earning assets |  | $                               | 252,246
|                              |  |                                 |        



Loan portfolio yields
were 5.25% for the third quarter of 2003, compared with 5.88% for the third quarter of 2002. The interest rates on adjustable rate loans vary with market rates, which dropped during 2002 and the first nine months of 2003.



Servicing and Advisory Fees



The Bank retains an annual servicing fee of 25 basis points on the gross
average outstanding principal balance of the Companys loan portfolio that the Bank services, which reduces the interest income that the Company receives. For the quarters ended September 30, 2003 and 2002, loan servicing fees were $181,000 and
$110,000, respectively. For the nine months ended September 30, 2003 and 2002, loan servicing fees were $395,000 and $315,000, respectively.



The Company also incurs advisory fee expenses payable to the Bank. The Company entered into an advisory agreement with the Bank for services that the Bank
renders on its behalf for which was paid $50,000 per annum for 2002. The Board of Directors voted to increase the annual advisory fee for 2003 to $75,000. Advisory fees for the quarters ended September 30, 2003 and 2002 were $18,000 and $13,000,
respectively. For the nine months ended September 30, 2003 and 2002, advisory fees were $56,000 and $38,000, respectively.



Other Operating Expenses



Other operating expenses consisted primarily of credit agency fees and audit fees. For the quarters ended September 30, 2003 and 2002, credit agency fees
were $9,000 and $6,000, respectively, and auditing fees were $19,000 and $15,000, respectively. For the nine months ended September 30, 2003 and 2002, credit agency fees were $23,000 and $27,000, respectively, and auditing fees were $60,000 and
$56,000, respectively.



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Financial Condition



Interest-bearing Deposits with the Bank



At September 30, 2003 and December 31, 2002, 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 loan portfolio.



Mortgage Loans



The
loan portfolio at September 30, 2003 consisted of both single family and multifamily mortgage loans acquired from the Bank. At December 31, 2002, the loan portfolio consisted entirely of single family mortgage loans acquired from the Bank. The
Company anticipates that in the future it will continue to acquire all of its loans from the Bank.



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



As of September 30, 2003 and December 31, 2002, there were no nonaccrual loans, impaired loans, or loans that were troubled
debt restructurings. In addition, at September 30, 2003 and December 31, 2002, there were no accruing loans that were contractually past due more than 90 days.



The following table provides information with respect to the Companys allowance for loan losses.



|                                                  |  | Nine Months EndedSeptember 30, 2003 |         |   | Year EndedDecember 31, 2002 |  
|------------------------------------------------- |  | ----------------------------------- | ------- | - | --------------------------- | -
|                                                  |  | ($ in thousands)                    |        
|Allowance for Loan Losses:                        |  |                                     |         |   |                             |  
|Balance, beginning of period                      |  | $                                   | 200     |   |                             | $
|Provision charged to expense                      |  |                                     |        |   |                             |  
|Transfer from the Bank                            |  |                                     | 281     |   |                             |  
|Chargeoffs                                        |  |                                     |        |   |                             |  
|Recoveries                                        |  |                                     |        |   |                             |  
|                                                  |  |                                     |         |   |                             |  
|Balance, end of period                            |  | $                                   | 481     |   |                             | $
|                                                  |  |                                     |         |   |                             |  
|Average loans for the period                      |  | $                                   | 316,481 |   |                             | $
|Total loans at period end                         |  | $                                   | 320,989 |   |                             | $
|                                                  |  |                                    
|Ratio of allowance for loan losses to total loans |  |                                     | 0.15    | % |                             |  



During June 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
September 30, 2003, the Companys allowance for loan losses was 0.15% of total loans.



Significant Concentration of Credit Risk



Concentration of credit risk generally arises with respect to our 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 our 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.



At September 30, 2003, 52% of our loans were
secured by properties located in the San Francisco Bay Area, 10% in Los Angeles County, 8% in other parts of California, 19% in New York and contiguous states, and 11% in



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##### Table of Contents

other parts of the United States. At September 30, 2003, the weighted average loan-to-value ratio for the mortgage portfolio was approximately 55%, based on
the appraised values of the properties at the time the loans were originated.



The following table presents an analysis of our loan portfolio at September 30, 2003 by major geographic location.



|                    |  | San FranciscoBay Area |         |   | Los AngelesCounty |   |        | Other Calif.Areas |  |   | Greater New YorkCity Area |   |  | Other |        |   | Total |  
|------------------- |  | --------------------- | ------- | - | ----------------- | - | ------ | ----------------- |  | - | ------------------------- | - |  | ----- | ------ | - | ----- | -
|                    |  | ($ in thousands)      |        
|Mortgage loans      |  | $                     | 167,126 |   |                   | $ | 32,361 |                   |  | $ | 25,309                    |   |  | $     | 60,241 |   |       | $
|Percent by location |  |                       | 52      | % |                   |   | 10     | %                 |  |   | 8                         | % |  |       | 19     | % |       |  



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 Assets. The Company will continue 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 to pay operating expenses and dividends. The Company does not anticipate that it will have any other material capital expenditures. The cash generated from the payment
of interest and principal on the Mortgage Assets is expected to provide sufficient funds for operating requirements and to pay dividends in accordance with the requirements to maintain REIT status for the foreseeable future.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK



Interest Rate Risk Management



The Company services fixed-rate dividend obligations to preferred stockholders and operating expenses by the collection of interest income from its Mortgage Loans. To facilitate meeting dividend payments, the Company
has maintained an average earning asset balance of approximately two times the liquidation preference of its outstanding preferred shares. The Companys current earnings to fixed charges ratio is 1.16x for the third quarter of 2003, compared
with 1.07x for the second quarter of 2003 and 1.19x for the year 2002.



With the interest rate environment declining over the last year to 45-year historical lows, the yields on average interest-earning assets have dropped. The decline in yields are primarily the result of increased prepayment of
higher-yielding assets with the proceeds of the prepaid Mortgage Loans reinvested in lower-yielding Mortgage Loans. The weighted average yield on average interest-earning assets was 5.08% for the quarter and 5.18% for the first nine months of 2003,
compared with 5.11% for the second quarter of 2003 and 5.82% for all of year 2002.



At September 30, 2003, 29% of the Mortgage Loans were adjustable rate loans, 58% were intermediate fixed rate loans, and 13% were fixed rate loans. The weighted average coupon rate for each loan type was 4.76%, 5.54%
and 6.27%, respectively, and the weighted average maturity was 27.5 years. At December 31, 2002, 39% were adjustable rate loans, 39% were intermediate fixed rate loans, and 22% were fixed rate loans. The weighted average coupon rate for each loan
type was 5.09%, 6.66% and 6.93%, respectively, and the weighted average maturity was 28.3 years.



The timing of changes in the average yields on adjustable rate Mortgage Loans depends on the underlying interest rate index, the timing of changes in the
index, and the frequency of adjustments to the loan rate. At September 30, 2003, the weighted average coupon rate of adjustable rate loans had declined 33 basis points to 4.76% from 5.09% at December 31, 2002. The decline in adjustable rate loan
yields was mitigated by a significant volume of adjustable rate loans indexed to the 11thDistrict Cost of Funds
Index (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 September 30, 2003, adjustable rate loans indexed to COFI were 56% of total adjustable rate
mortgages (ARM), or 16% of total Mortgage Loans.



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##### Table of Contents

At the beginning of the third quarter of 2003, the gross principal outstanding for intermediate fixed and
fixed rate loans was $218.6 million of which $38.9 million was collected during the quarter. As a result of the low interest rates, the Company reinvested these repayment proceeds in lower-yielding Mortgage Loans. At September 30, 2003, the
Companys loan portfolio consisted of 58% intermediate fixed rate loans and 13% fixed rate loans, compared with 39% intermediate fixed loans and 22% fixed rate loans at December 31, 2002. The weighted average coupon rate for intermediate fixed
and fixed rate loans had declined 112 basis points and 66 basis points, respectively, from December 31, 2002.



The following table reflects the outstanding loan portfolio at September 30, 2003 by interest rate type.



|                            |  | Balance          |         | Net Coupon (1)(2) |      |   | Months toNext Reset (1) |    | Percentageof Portfolio |    
|--------------------------- |  | ---------------- | ------- | ----------------- | ---- | - | ----------------------- | -- | ---------------------- | ---
|                            |  | ($ in thousands) |        
|ARM loans:                  |  |                  |         |                   |      |   |                         |    |                        |    
|COFI                        |  | $                | 52,657  |                   | 4.68 | % |                         | 2  |                        | 16 
|CMT                         |  |                  | 31,603  |                   | 4.71 | % |                         | 6  |                        | 10 
|Prime                       |  |                  | 6,115   |                   | 6.07 | % |                         | 1  |                        | 2  
|LIBOR                       |  |                  | 3,785   |                   | 4.18 | % |                         | 3  |                        | 1  
|                            |  |                  |         |                   |      |   |                         |    |                        |    
|Total ARMs                  |  |                  | 94,160  |                   | 4.76 | % |                         | 3  |                        | 29 
|                            |  |                  |         |                   |      |   |                         |    |                        |    
|Intermediate fixed:         |  |                  |         |                   |      |   |                         |    |                        |    
|12 months to 36 months      |  |                  | 30,839  |                   | 6.27 | % |                         | 30 |                        | 10 
|37 months to 60 months      |  |                  | 126,532 |                   | 5.38 | % |                         | 49 |                        | 39 
|Greater than 60 months      |  |                  | 28,094  |                   | 5.43 | % |                         | 86 |                        | 9  
|                            |  |                  |         |                   |      |   |                         |    |                        |    
|Total intermediate fixed    |  |                  | 185,465 |                   | 5.54 | % |                         | 51 |                        | 58 
|                            |  |                  |         |                   |      |   |                         |    |                        |    
|Total adjustable rate loans |  |                  | 279,625 |                   | 5.28 | % |                         | 35 |                        | 87 
|                            |  |                  |         |                  
|Fixed rate loans            |  |                  | 41,364  |                   | 6.27 | % |                         |    |                        | 13 
|                            |  |                  |         |                   |      |   |                         |    |                        |    
|Total loans                 |  | $                | 320,989 |                   | 5.41 | % |                         |    |                        | 100
|                            |  |                  |         |                   |      |   |                         |    |                        |    

---

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

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



The following table illustrates principal balances outstanding net of amortized principal payments by maturity dates or interest rate adjustments as of
September 30, 2003:



|                                  |  | 0-6 Months |        |   | 7-12 Months |   |         | 1-3 Years |  |   | 3-5 Years |   |  | Over 5 Years |         |   | Not RateSensitive |   |         | Total
|--------------------------------- |  | ---------- | ------ | - | ----------- | - | ------- | --------- |  | - | --------- | - |  | ------------ | ------- | - | ----------------- | - | ------- | -----
|Cash and investments              |  | $          | 9,556  |   |             | $ |        |           |  | $ |          |   |  | $            |        |   |                   | $ |        |      
|Loans                             |  |            | 85,727 |   |             |   | 16,102  |           |  |   | 40,390    |   |  |              | 122,048 |   |                   |   | 56,722  |      
|Other assets                      |  |            |       |   |             |   |        |           |  |   |          |   |  |              |        |   |                   |   |        |      
|                                  |  |            |        |   |             |   |         |           |  |   |           |   |  |              |         |   |                   |   |         |      
|Total assets                      |  | $          | 95,283 |   |             | $ | 16,102  |           |  | $ | 40,390    |   |  | $            | 122,048 |   |                   | $ | 56,722  |      
|                                  |  |            |        |   |             |   |         |           |  |   |           |   |  |              |         |   |                   |   |         |      
|Other liabilities                 |  | $          |       |   |             | $ |        |           |  | $ |          |   |  | $            |        |   |                   | $ |        |      
|Stockholders equity              |  |            |       |   |             |   |        |           |  |   |          |   |  |              |        |   |                   |   |        |      
|                                  |  |            |        |   |             |   |         |           |  |   |           |   |  |              |         |   |                   |   |         |      
|Total liabilities and equity      |  | $          |       |   |             | $ |        |           |  | $ |          |   |  | $            |        |   |                   | $ |        |      
|                                  |  |            |        |   |             |   |         |           |  |   |           |   |  |              |         |   |                   |   |         |      
|Repricing GAP-positive (negative) |  | $          | 95,283 |   |             | $ | 16,102  |           |  | $ | 40,390    |   |  | $            | 122,048 |   |                   | $ | 56,722  |      
|                                  |  |            |        |   |             |   |         |           |  |   |           |   |  |              |         |   |                   |   |         |      
|Cumulative repricing GAP:         |  |            |        |   |             |   |         |           |  |   |           |   |  |              |         |   |                   |   |         |      
|Dollar amount                     |  | $          | 95,283 |   |             | $ | 111,385 |           |  | $ | 151,775   |   |  | $            | 273,823 |   |                   | $ | 330,545 |      
|                                  |  |            |        |   |             |   |         |           |  |   |           |   |  |              |         |   |                   |   |         |      
|Percent of total assets           |  |            | 28.7   | % |             |   | 33.6    | %         |  |   | 45.8      | % |  |              | 82.5    | % |                   |   | 99.6    | %    
|                                  |  |            |        |   |             |   |         |           |  |   |           |   |  |              |         |   |                   |   |         |      



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Risk Factors



Our results will be affected by factors beyond our control.



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



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



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



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



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



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



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



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



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



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



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



Properties underlying our current mortgage assets are concentrated primarily in California. At September 30, 2003, approximately 70% of our mortgage
assets were secured by properties located in California. Adverse economic, political, or business developments or natural hazards may affect California and the ability of property owners there to make payments of principal and interest on the
underlying mortgages and the values of those properties. If Californias economic, political or business conditions were to deteriorate substantially and differently from the rest of the United States, we would likely experience higher rates of
loss and delinquency on our mortgage loans than if our loans were more geographically diverse. California has experienced dramatic volatility in energy prices, periodic energy supply shortages, and a downturn in some technology-oriented industry
sectors. These conditions could adversely affect our mortgage loan portfolio and thus our future ability to pay dividends on our Preferred Shares.



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Defaults may negatively impact the Banks business



Increased delinquencies or loan defaults by our customers may negatively
impact business. A borrowers default on its obligations under one or more loans may result in lost principal and interest income and increased operating expenses as a result of the allocation of management time and resources to the collection
and workout of the loan.



If collection efforts are
unsuccessful or acceptable workout arrangements cannot be reached, we may have to charge-off all or a part of the loan. In such situations, we may acquire any real estate or other assets, if any, that secure the loan through foreclosure or other
similar available remedies. The amount owed under the defaulted loan may exceed the value of the assets acquired.



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



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



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



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



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



Through the first quarter of 2003, our Mortgage Loans consisted entirely of
single family mortgages. Beginning in the second quarter of 2003, we acquired multifamily real estate secured mortgages from the Bank, which can be riskier investments than single family residential loans, and we may continue to acquire multifamily
mortgages. Additionally, although we have no immediate plans to do so, we reserve the right to acquire other types of mortgages such as loans secured by commercial properties, which can be riskier investments than single family mortgages. Loans
other than single family residential 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 to the corresponding burdens and costs of compliance with environmental laws and
regulations. Also, there may be costs and delays involved in enforcing rights of a property owner against tenants in default under the terms of leases with respect to multifamily residential or commercial properties. For example, tenants may seek
the protection of the bankruptcy laws, which could result in termination of leases.



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



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



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We are dependent upon the Bank as advisor and servicer.



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



Our relationship with the Bank creates
conflicts of interest.



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



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



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



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



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



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



Although we currently intend to operate in a manner designed to qualify as a REIT, future economic, market, legal, tax or other considerations may cause
us to determine that it is in our best interest and in the best interest of holders of our Common Stock and Preferred Shares to revoke our REIT election. The tax law generally prohibits us from electing treatment as a REIT for the four taxable years
following the year of any such revocation.



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



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



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



| |  | Regulators also could prohibit or limit the payment of dividends on our Preferred Shares if the Bank were to become undercapitalized. Under current regulations and guidelines, the
Bank would be deemed undercapitalized if its total risk-based capital ratio were less than 8%, its Tier 1 risk-based capital ratio were less than 4% or its Tier 1 leverage ratio were less than 4%. At September 30, 2003, the Bank had a total
risk-based capital ratio of 13.53%, a Tier 1 risk-based capital ratio of 8.92%, and a Tier 1 leverage ratio of 5.87%, which are sufficient for the Bank to be considered well capitalized.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



Recent Legislation May Affect REITs.



Recently, legislation has been enacted which reduces the federal tax burden
with respect to certain dividends paid by regular C corporations. Such legislation decreases the tax advantage of a REIT relative to a regular C corporation, because the dividends received by an individual stockholder from the regular C corporation
are generally subject to a lower rate of federal income tax. However, it is not possible to predict with any certainty the effects this legislation may have on the value of our Preferred Shares.



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ITEM 4. CONTROLS AND PROCEDURES



A
review and evaluation was performed by the Companys management, including the Companys chief executive officer and Chief Financial Officer (the Officers), of the effectiveness of the design and operation of the Companys
disclosure controls and procedures as of the end of the quarterly period covered by this report. Based on that review and evaluation, the Officers have concluded that the Companys current disclosure controls and procedures, as designed and
implemented, were effective. There have been no significant changes in the internal controls of the Company, or the Bank, that could significantly affect the Companys internal controls subsequent to the date of their evaluation. There were no
significant deficiencies or material weaknesses identified in the course of such review and evaluation and, therefore, no corrective measures were taken by the Company.



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##### Table of Contents

PART II - OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



Not Applicable



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



Not Applicable



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



Not Applicable



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



Not Applicable



ITEM 5. OTHER INFORMATION



Not Applicable



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | a. | Exhibits
| | -- | --------



| | 12 | Statement regarding calculation of earnings to fixed charges.
| | -- | -------------------------------------------------------------



| | 31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | ------------------------------------------------------------------------



| | 31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | ------------------------------------------------------------------------



| | 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- | -----------------------------------------------------------------------------------------------------------------------



| | 32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- | -----------------------------------------------------------------------------------------------------------------------



| | b. | Reports on Form 8-K
| | -- | -------------------



| |  | Not Applicable
| |  | --------------



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SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



FIRST REPUBLIC PREFERRED CAPITAL CORPORATION



|Date: November 12, 2003 |  | /s/ JAMES J. BAUMBERGER                 
|----------------------- |  | ----------------------------------------
|                        |  | JAMES J. BAUMBERGER                     
|                        |  | President and Director                  
|                        |  | (Principal Executive Officer)           
|                        | 
|Date: November 12, 2003 |  | /s/ WILLIS H. NEWTON, JR.               
|                        |  | WILLIS H. NEWTON, JR.                   
|                        |  | Vice President, Chief Financial Officer,
|                        |  | Treasurer and Director                  
|                        |  | (Principal Financial Officer)           



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INDEX TO EXHIBITS



|Exhibit Number |  | Exhibit Title                                                                                                          
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------
|               | 
|12             |  | Statement regarding calculation of earnings to fixed charges.                                                          
|               | 
|31.1           |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|               | 
|31.2           |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|               | 
|32.1           |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|               | 
|32.2           |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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