<PAGE>





                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended: December 31, 1998

                         Commission file number: 1-12639

                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
             (Exact name of registrant as specified in its charter)
 -------------------------------------------------------------------------------

                  Maryland                               94-3254883
   (State or other jurisdiction of         (I.R.S. employer  Identification no.)
    incorporation or organization         
 -------------------------------------------------------------------------------

200 Crescent Court, Suite 1350, Dallas, Texas              75201
  (Address of principal executive offices)               (Zip code)
 -------------------------------------------------------------------------------

       Registrant's telephone number, including area code: (214) 871-5131

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

         Title of each class           Name of each exchange on which registered
         -------------------           -----------------------------------------
9-1/8% Noncumulative Exchangeable             New York Stock Exchange
     Preferred Stock, Series A                            

        Securities registered pursuant to Section 12(g) of the Act: None

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the securities exchange act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]


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


     The aggregate market value of the voting stock held by non-affiliates of
the registrant as of the close of business on March 23, 1999: N/A

     Number of shares outstanding of registrant's common stock $0.01 par value
on March 23, 1999: 1,000 shares

                       Documents Incorporated by Reference
                       -----------------------------------
                                      None
                               Page 1 of 47 pages
                            Exhibit index on page 29



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<TABLE>
<CAPTION>

                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION

                         1998 ANNUAL REPORT ON FORM 10-K
                                TABLE OF CONTENTS

                                     PART I
                                                                                                      Page
                                                                                                      ----
<S>                                                                                                   <C>  
ITEM 1.  Business...................................................................................    3   
              General...............................................................................    3
              Description of Common Stock...........................................................    3
              Description of Series A Preferred Shares..............................................    4
              Dividend Policy.......................................................................   10
              The Bank..............................................................................   10
              Residential Mortgage Loans............................................................   11
              Credit Risk Management Policies.......................................................   12
              Delinquencies and Nonperforming Loans.................................................   12
              Geographic Distribution...............................................................   13
              Servicing of Residential Mortgage Loans...............................................   13
              Capital and Leverage Policies.........................................................   14
              Employees.............................................................................   14
              Competition...........................................................................   14
              Environmental Matters.................................................................   14
              Tax Status of the Company.............................................................   15
ITEM 2.  Properties.................................................................................   16
ITEM 3.  Legal Proceedings..........................................................................   16
ITEM 4.  Submission of Matters to a Vote of Security Holders........................................   16
                                                                                                       
                                     PART II
                                                                                                       
ITEM 5.  Market for the Registrant's Common Equity and Related Stockholder Matters..................   17
ITEM 6.  Selected Financial Data....................................................................   18
ITEM 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations......   19
              Overview .............................................................................   19
              Results of Operations.................................................................   19
              Residential Mortgage Loans............................................................   20
              Allowance for Loan Losses.............................................................   20
              Interest Rate Risk....................................................................   21
              Significant Concentration of Credit Risk..............................................   21
              Liquidity Risk Management.............................................................   22
              Impact of Inflation and Changing Prices...............................................   23
              Other Matters.........................................................................   23
              Year 2000.............................................................................   23
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.................................   25
ITEM 8.  Financial Statements and Supplementary Data................................................   26
ITEM 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......   26
                                                                                                       
                                    PART III
                                                                                                       
ITEM 10. Directors and Executive Officers of the Registrant.........................................   27
ITEM 11. Executive Compensation.....................................................................   28
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.............................   28
ITEM 13. Certain Relationships and Related Transactions.............................................   28
                                                                                                       
                                     PART IV
                                                                                                       
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................   29
                                                                                                       
Audited Financial Statements........................................................................  F-1
                                                                                                        
</TABLE>

                                        2

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The statements contained in this Report on Form 10-K that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, intentions,
beliefs or strategies regarding the future. Forward-looking statements include
the Company's statements regarding liquidity, provision for loan losses, capital
resources and investment activities in "Management's Discussion and Analysis of
Financial Condition and Results of Operations." In addition, in those and other
portions of this document, the words "anticipate," "believe," "estimate,"
"deem," "expect," "intend," and other similar expressions, as they relate to the
Company or the Company's management, are intended to identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions. It is important to note that the Company's actual results could
differ materially from those described herein as anticipated, believed,
estimated or expected. Among the factors that could cause results to differ
materially are the risks discussed in the "Risk Factors" section included in the
Company's Registration Statement on Form S-11(File No. 333-11609), with respect
to the Series A Preferred Shares declared effective by the Securities and
Exchange Commission on January 24, 1997. The Company assumes no obligation to
update any such forward-looking statement.

                                     PART I

ITEM 1. Business

General

California Federal Preferred Capital Corporation (the "Company"), is a Maryland
corporation incorporated on November 19, 1996 which was created for the purpose
of acquiring, holding and managing real estate assets. The Company's outstanding
common stock is wholly-owned by California Federal Bank, A Federal Savings Bank
(the "Bank"). The Bank is wholly-owned indirectly by Golden State Bancorp Inc.
("Golden State"). The Company has elected to be treated as a Real Estate
Investment Trust ("REIT") for Federal income tax purposes and intends to comply
with the provisions of the Internal Revenue Code of 1986 (the "IRC"), as
amended. Accordingly, in general, the Company is not subject to Federal income
tax to the extent it distributes its income to shareholders and as long as
certain asset, income and stock ownership tests are met in accordance with the
IRC.

On January 31, 1997, the Company commenced its operations with the consummation
of an initial public offering of 20,000,000 shares of the Company's 9.125%
Noncumulative Exchangeable Preferred Stock, Series A (the "Series A Preferred
Shares"), $0.01 par value, which raised $500 million. The Series A Preferred
Shares are traded on the New York Stock Exchange ("NYSE") under the trading
symbol "CFP." Expenses incurred relative to the offering and the formation of
the Company were borne by the Bank. Concurrent with the issuance of the Series A
Preferred Shares, the Bank contributed additional capital of $500 million to the
Company.

The Company used the proceeds raised from the initial public offering of the
Series A Preferred Shares and the additional capital contributed by the Bank to
purchase from the Bank the Company's initial portfolio of residential mortgage
loans at their estimated fair value of $996.5 million. The residential mortgage
loans were recorded in the accompanying financial statements at the Bank's
carrying value which approximated their estimated fair values. The Company has
entered into a servicing agreement (the "Servicing Agreement") with the Bank's
wholly-owned mortgage banking subsidiary, First Nationwide Mortgage Corporation
("FNMC"), to service the Company's residential mortgage loans.

Description of Common Stock

     Dividends

Holders of common stock are entitled to receive dividends when, as and if
authorized and declared by the Company's Board of Directors (the "Board") out of
assets legally available therefor, provided that, so long as any shares of
preferred stock are outstanding, no dividends or other distributions (including
redemptions and purchases) may be made with respect to the common stock unless
full dividends on the shares of all series of preferred stock, including
accumulations in the case of any cumulative preferred stock, have been paid. In
order to remain qualified as a REIT, the Company must distribute annually at
least 95% of its annual REIT taxable income to the stockholders. See "-- Tax
Status of the Company."



                                        3

<PAGE>





     Voting Rights

Subject to the rights, if any, of the holders of any class or series of
preferred stock, including the Series A Preferred Shares, all voting rights are
vested in the common stock. The holders of common stock are entitled to one vote
per share. All of the issued and outstanding shares of common stock are
currently held by the Bank.

     Rights Upon Liquidation

In the event of the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, after there have been paid or set aside for
the holders of all series of preferred stock the full preferential amounts to
which such holders are entitled, the holders of common stock will be entitled to
share equally and ratably in any assets remaining after the payment of all debts
and liabilities.

Description of Series A Preferred Shares

     General

The Series A Preferred Shares form a series of the preferred stock of the
Company, which preferred stock may be issued from time to time in one or more
series with such designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms and conditions of redemption as are determined by the
Board.

The holders of the Series A Preferred Shares have no preemptive rights with
respect to any shares of the stock of the Company or any other securities of the
Company convertible into or carrying rights or options to purchase any such
shares. The Series A Preferred Shares are perpetual and will not be convertible
into shares of common stock or any other class or series of stock of the Company
and will not be subject to any sinking fund or other obligation of the Company
for its repurchase or retirement. The Series A Preferred Shares will be
exchanged automatically on a one-for-one basis for Bank Preferred Shares (as
defined below) upon the occurrence of the Exchange Event (as defined below).

The transfer agent, registrar and dividend disbursement agent for the Series A
Preferred Shares is American Stock Transfer & Trust Co. The registrar for shares
of Series A Preferred Shares will send notices to stockholders of any meetings
at which holders of the Series A Preferred Shares have the right to elect
directors of the Company or to vote on any other matter.

     Dividends

Holders of Series A Preferred Shares are entitled to receive, if, when and as
authorized and declared by the Board out of assets of the Company legally
available therefor, noncumulative cash dividends at the rate of 91/8% per annum
of the initial liquidation preference of $25.00 per share. Dividends on the
Series A Preferred Shares are payable, if authorized and declared, quarterly in
arrears on the last day of March, June, September and December. Dividends in
each quarterly period accrue from the first day of such period. Each authorized
and declared dividend is payable to holders of record as they appear on the
stock register of the Company on such record dates, not more than 45 calendar
days nor less than 10 calendar days preceding the payment dates thereof, as
shall be fixed by the Board.

The right of holders of Series A Preferred Shares to receive dividends is
noncumulative. Accordingly, if the Board fails to declare a dividend on the
Series A Preferred Shares for a quarterly dividend period, then holders of the
Series A Preferred Shares have no right to receive a dividend for that period,
and the Company has no obligation to pay a dividend for that period, whether or
not dividends are declared and paid for any future period.

If any Series A Preferred Shares are outstanding, no full dividends or other
distributions shall be authorized, declared or paid or set apart for payment on
any common stock or other capital stock of the Company ranking junior to
("Junior Stock") or on a parity with ("Parity Stock") the Series A Preferred
Shares for any quarterly period unless full dividends have been or
contemporaneously are authorized, declared and paid, or authorized and declared
and a sum sufficient for the payment thereof is set apart for such payments on
the Series A Preferred Shares for (i) the immediately preceding

                                        4

<PAGE>



quarterly dividend period, in the case of Parity Stock, and (ii) the
then-current quarterly dividend period, in the case of Junior Stock. When
dividends are not paid in full (or a sum sufficient for such full payment is not
so set apart) for any quarterly dividend period upon the Series A Preferred
Shares and the shares of Parity Stock, all dividends authorized and declared on
the Series A Preferred Shares and the shares of Parity Stock shall only be
authorized and declared pro rata based upon the respective amounts that would
have been paid on the Series A Preferred Shares and any shares of Parity Stock
had dividends been authorized and declared in full.

In addition to the foregoing restriction, the Company shall not authorize,
declare, pay or set apart funds for any dividends or other distributions (other
than in common stock or other Junior Stock) with respect to any common stock or
other Junior Stock or repurchase, redeem or otherwise acquire, or set apart
funds for repurchase, redemption or other acquisition of, any common stock or
other Junior Stock through a sinking fund or otherwise, unless and until (i)
full dividends on the Series A Preferred Shares for the four most recent
preceding quarterly dividend periods (or such lesser number of quarterly
dividend periods during which shares of Series A Preferred Shares have been
outstanding) are authorized and declared and paid or a sum sufficient for
payment has been paid over to the dividend disbursing agent for payment of such
dividends and (ii) the Company has authorized and declared a cash dividend on
the Series A Preferred Shares at the annual dividend rate for the then-current
quarterly dividend period, and sufficient funds have been paid over to the
dividend disbursing agent for the payment of such cash dividend for such
then-current quarterly dividend period.

     Automatic Exchange

Each Series A Preferred Share will be exchanged automatically for one newly
issued share of Bank preferred stock if the appropriate federal regulatory
agency directs in writing (the "Directive") an exchange of the Series A
Preferred Shares for Bank preferred stock because (i) the Bank becomes
"undercapitalized" under prompt corrective action regulations, (ii) the Bank is
placed into conservatorship or receivership or (iii) the appropriate federal
regulatory agency, in its sole discretion, anticipates the Bank becoming
"undercapitalized" in the near term (the "Exchange Event"). Upon the Exchange
Event, each holder of Series A Preferred Shares shall be unconditionally
obligated to surrender to the Bank all certificates representing the Series A
Preferred Shares of such holder, and the Bank shall be unconditionally obligated
to issue to such holder in exchange for such certificate(s), a certificate or
certificates representing an equal number of shares of Bank preferred stock (the
"Automatic Exchange"). Any Series A Preferred Shares purchased or redeemed by
the Company prior to the Time of Exchange (as defined below) shall not be deemed
outstanding and shall not be subject to the Automatic Exchange.

The Automatic Exchange shall occur as of 8:00 a.m. Eastern time on the effective
date of such exchange set forth in the Directive, or, if such date is not set
forth in the Directive, as of 8:00 a.m. Eastern time on the first business day
immediately following the date of issuance of the Directive (the "Time of
Exchange"). As of the Time of Exchange, all shares of Series A Preferred Shares
will be canceled without any further action by the Company, all rights of the
holders of Series A Preferred Shares as stockholders of the Company will cease,
and such persons shall thereupon and thereafter be deemed to be and shall be for
all purposes the holders of Bank preferred stock. The Company will mail notice
of the occurrence of the Exchange Event to each holder of Series A Preferred
Shares within 30 days of such event, and the Bank will deliver to each such
holder certificates for Bank preferred stock upon surrender of such holder's
certificates for Series A Preferred Shares. Until such replacement stock
certificates are delivered (or in the event such replacement certificates are
not delivered), certificates previously representing Series A Preferred Shares
shall be deemed for all purposes to represent Bank preferred stock. Once the
Directive is issued, no action will be required to be taken by holders of Series
A Preferred Shares, by the Bank or by the Company in order to effect the
Automatic Exchange as of the Time of Exchange.

Holders of Series A Preferred Shares, by purchasing such shares of Series A
Preferred Shares, are deemed to have agreed to be bound by the unconditional
obligation to exchange such shares of Series A Preferred Shares for Bank
preferred stock upon the occurrence of the Exchange Event. The obligation of the
holders of Series A Preferred Shares to surrender such shares and the obligation
of the Bank to issue Bank preferred stock in exchange for Series A Preferred
Shares shall be enforceable by the Bank and such holders, respectively, against
the other.

Absent the occurrence of the Exchange Event, no shares of Bank preferred stock
will be issued. Upon the occurrence of the Exchange Event, the Bank preferred
stock to be issued as part of the Automatic Exchange would constitute a newly
issued series of preferred stock of the Bank and would have the same dividend
rights, liquidation preference, redemption options and other attributes as to
the Bank as holders of Series A Preferred Shares have as to the Company. Any
accrued

                                        5

<PAGE>



and unpaid dividends on the Series A Preferred Shares as of the Time of Exchange
would be deemed to be accrued and unpaid dividends on the Bank preferred stock.
The Bank preferred stock would rank pari passu in terms of dividend payment and
liquidation preference with any outstanding shares of preferred stock of the
Bank. The Bank has registered the Bank preferred stock with the Office of Thrift
Supervision ("OTS"). The Bank preferred stock will not be registered with the
Commission and will be offered pursuant to an exemption from registration under
Section 3(a)(5) of the Securities Act. Absent the occurrence of the Exchange
Event, however, the Bank will not issue any Bank preferred stock, although the
Bank will be able to issue preferred stock in series other than that of the Bank
preferred stock discussed herein. In the event of the issuance of Bank preferred
stock, application will be made to list the Bank preferred stock on the NYSE.
However, there can be no assurance as to the liquidity of the trading markets
for the Bank preferred stock, if issued, or that an active public market for the
Bank preferred stock would develop or be maintained.

Holders of Series A Preferred Shares cannot exchange their Series A Preferred
Shares for Bank preferred stock voluntarily. In addition, absent the occurrence
of the Automatic Exchange, holders of Series A Preferred Shares will have no
dividend, voting, liquidation preference or other rights with respect to any
security of the Bank; such rights as are conferred by the Series A Preferred
Shares exist solely as to the Company.

     Voting Rights

Except as indicated below, the holders of Series A Preferred Shares are not
entitled to vote. In the event the holders of Series A Preferred Shares are
entitled to vote, each Series A Preferred Share will be entitled to one vote.

If full dividends on shares of Series A Preferred Shares shall not have been
paid for six quarterly dividend periods, the maximum authorized number of
directors of the Company shall thereupon be increased by two. Subject to
compliance with any requirement for regulatory approval of (or non-objection to)
persons serving as directors, the holders of Series A Preferred Shares, voting
together as a class with the holders of any Parity Stock upon which the same
voting rights as those of the Series A Preferred Shares have been conferred and
are irrevocable, shall have the exclusive right to elect the two additional
directors at the Company's next annual meeting of shareholders and at each
subsequent annual meeting until full dividends have been authorized, declared
and paid or authorized and declared and a sum sufficient for payment thereof is
set apart for payment on the Series A Preferred Shares for four consecutive
quarterly dividend periods. The term of such directors elected thereby shall
terminate, and the total number of directors shall be decreased by two, upon the
first annual meeting of stockholders after the payment or the authorization or
declaration and setting aside for payment of full dividends on the Series A
Preferred Shares for four consecutive quarterly dividend periods.

So long as any shares of Series A Preferred Shares are outstanding, the Company
shall not, without the consent or vote of the holders of at least two-thirds of
the outstanding shares of Series A Preferred Shares, voting separately as a
class, (a) amend, alter or repeal or otherwise change any provision of the
Charter (including the terms of the Series A Preferred Shares) if such
amendment, alteration, repeal or change would materially and adversely affect
the rights, preferences, powers or privileges of the Series A Preferred Shares,
or (b) authorize, create or increase the authorized amount of or issue any class
or series of any equity securities of the Company, or any warrants, options or
other rights convertible or exchangeable into any class or series of any equity
securities of the Company, ranking prior to the Series A Preferred Shares,
either as to dividend rights or rights on liquidation, dissolution or winding up
of the Company or (c) merge, consolidate, reorganize or effect any other
business combination involving the Company, unless the resulting corporation
will thereafter have no class or series of equity securities either authorized
or outstanding ranking prior to the Series A Preferred Shares as to dividends or
as to the distribution of assets upon liquidation, dissolution or winding up,
except the same number of shares of such equity securities with the same
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications or terms or
conditions or redemption as the shares of equity securities of the Company that
are authorized and outstanding immediately prior to such transaction, and each
holder of Series A Preferred Shares immediately prior to such transaction shall
receive shares with the same preferences, conversion or other rights, voting
powers, restrictions, limitations as to the dividends or other distributions,
qualifications or terms or conditions or redemption of the resulting corporation
as the Series A Preferred Shares held by such holder immediately prior thereto.



                                        6

<PAGE>



Redemption

The Series A Preferred Shares are not redeemable prior to January 31, 2002
(except upon the occurrence of a Tax Event or a Change of Control, as defined
below). On or after such date, the Series A Preferred Shares are redeemable by
the Company or its successor or any acquiring or resulting entity with respect
to the Company (including by any parent or subsidiary of the Company, any such
successor, or any such acquiring or resulting entity), as applicable, at its
option, in whole or in part, at any time or from time to time, at the redemption
prices set forth below in cash, plus authorized, declared and unpaid dividends
to the date of redemption, without interest:


If Redeemed During the                        Redemption Price
     12-month Period                          Per Share of the
  Beginning January 31,                 Series A Preferred Shares
  --------------------                  -------------------------
2002................................              $26.14
2003................................               25.91
2004................................               25.68
2005................................               25.46
2006................................               25.23
2007 and thereafter.................               25.00
                                    
The Company also has the right at any time, upon the occurrence of a Tax Event,
to redeem the Series A Preferred Shares, in whole (but not in part) at a
redemption price of $25.00 per share, plus all accumulated and unpaid dividends
for the then current quarter to the date of redemption, without interest. "Tax
Event" means the receipt by the Company of an opinion of a nationally recognized
legal counsel to the Company experienced in such matters to the effect that, as
a result of (i) any amendment to, clarification of, or change (including any
announced prospective change) in, the laws, treaties or any regulations
thereunder of the United States or any political subdivision or taxing authority
thereof or therein affecting taxation, (ii) any judicial decision, official
administrative pronouncement, published or private ruling, regulatory procedure,
notice or announcement (including any notice or announcement of intent to adopt
such procedures or regulations) ("Administrative Action") or (iii) any amendment
to, clarification of, or change in the official position or the interpretation
of such Administrative Action or any interpretation or pronouncement that
provides for a position with respect to such Administrative Action that differs
from the theretofore generally accepted position, in each case, by any
legislative body, court, governmental authority or regulatory body, irrespective
of the manner in which such amendment, clarification or change is made known,
which amendment, clarification, or change is effective or such pronouncement or
decision is announced on or after the date of issuance of the Series A Preferred
Shares, there is more than an insubstantial risk that (a) dividends paid or to
be paid by the Company with respect to the stock of the Company are not, or will
not be, fully deductible by the Company for United States federal income tax
purposes or (b) the Company is, or will be, subject to more than a de minimis
amount of other taxes, duties or other governmental charges.

Upon a Change of Control (as defined below), the Series A Preferred Shares are
redeemable on or prior to January 31, 2002, at the option of the Company or its
successor or any acquiring or resulting entity with respect to the Company
(including by any parent or subsidiary of the Company, any such successor, or
any such acquiring or resulting entity), as applicable, in whole, but not in
part, at a redemption price per share equal to (i) $25.00, plus (ii) an amount
equal to all authorized, declared and unpaid dividends, if any, to the date
fixed for redemption, without interest, and without duplication, an additional
amount equal to the amount of dividends that would be payable on the Series A
Preferred Shares in respect of the period from the first day of the quarterly
dividend period in which the date fixed for redemption occurs to the date fixed
for redemption (assuming all such dividends were to be authorized and declared),
plus (iii) the Applicable Premium (as defined below), payable in cash.

The Company or any such successor or any acquiring or resulting entity will be
entitled to issue a notice of redemption after the Company or a parent company
has entered into a definitive binding agreement with a third party that will
result in a Change of Control, provided that (i) the date fixed for redemption
is not earlier than the date on which the related Change of Control occurs and
(ii) the obligation to effect such redemption is contingent upon the occurrence
of such Change of Control.

"Applicable Premium" means the greater of (i) $1.14 and (ii) the excess of (A)
the present value of (1) an amount equal to the amount of dividends that would
be payable on the preferred shares in respect of the period from the date fixed
for redemption through January 31, 2002 (assuming all such dividends were to be
authorized and declared) plus (2) $26.14, computed using a discount rate equal
to the Treasury Rate plus 75 basis points, over (B) $25.00.

                                        7

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"Change of Control" means the occurrence of any of the following events:

         (i) any Person (as defined herein) other than a Permitted Holder (as
         defined below) shall be the "beneficial owner" (as defined in Rules
         13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of a
         majority in the aggregate of the total voting power of the voting stock
         of the Bank, whether as a result of issuance of securities of the Bank,
         any merger, consolidation, liquidation or dissolution of the Bank, any
         direct or indirect transfer of securities by a Permitted Holder, or
         otherwise; or

         (ii) a sale, transfer, conveyance or other disposition, in a single
         transaction or in a series of related transactions (other than to an
         affiliate of the Bank or any of its subsidiaries), in either case
         occurring outside the ordinary course of business, of more than 75% of
         the assets and 75% of the deposit liabilities of the Bank shown on the
         consolidated balance sheet of the Bank as of the end of the most recent
         fiscal quarter ending at least 45 days prior to such transaction (or
         the first in such related series of transactions); or

         (iii) a transaction or series of related transactions as a result of
         which 20% or more of the voting stock or common stock (or capital stock
         convertible or exchangeable into 20% of the voting stock or common
         stock) of the Bank is held by one or more Persons other than Golden
         State Financial Corporation (successor by merger to First Nationwide
         Holdings Inc.) or its wholly owned subsidiaries.

"Permitted Holder" means Ronald O. Perelman (or in the event of his incompetence
or death, his estate, heirs, executor, administrator, committee or other
personal representative (collectively, "heirs")) or any entity controlled,
directly or indirectly, by Ronald O. Perelman or his heirs.

"Treasury Rate" means the yield to maturity at the time of computation of United
States Treasury securities with a constant maturity (as compiled and published
in the most recent Federal Reserve Statistical Release H. 15 (519)) which has
become publicly available at least two business days prior to the date fixed for
redemption (or, if such Statistical Release is no longer published, any publicly
available source of similar market data)) most nearly equal to the period of
time to January 31, 2002; provided, however, that if such period is not equal to
the constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yields of United States Treasury securities for which such yields are
given, except that, if such remaining life is less than one year, the weekly
average yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used.

If redemption is being effected by the Company, on and as of the date fixed for
redemption, dividends shall cease to accrue on the Series A Preferred Shares
called for redemption, and they shall be deemed to cease to be outstanding,
provided that the redemption price (including any authorized and declared but
unpaid dividends to the date fixed for redemption, without interest) has been
duly paid or provided for. If redemption is being effected by an entity other
than the Company, on and as of the redemption date such entity shall be deemed
to own the Series A Preferred Shares being redeemed for all purposes of the
Charter, provided that the redemption price (including the amount of any
authorized and declared but unpaid dividends to the date fixed for redemption)
has been duly paid or provided for.

Notice of any redemption will be mailed at least 30 days, but not more than 60
days, prior to any redemption date to each holder of Series A Preferred Shares
to be redeemed at such holder's registered address.

The Company's ability to redeem any Series A Preferred Shares, whether as a
result of a Change of Control or otherwise, is subject to compliance with
applicable regulatory requirements, including the prior approval of the OTS,
relating to the redemption of capital instruments. Under current policies of the
OTS, such approval would be granted only if the redemption were to be made out
of the proceeds of the issuance of another capital instrument or if the OTS
determines that the condition and circumstances of the Bank warrant the
reduction of a source of permanent capital.

     Rights Upon Liquidation

In the event of any voluntary or involuntary liquidation, dissolution or winding
up of the Company, the holders of the Series A Preferred Shares at the time
outstanding are entitled to receive in respect of each share, out of assets of
the Company legally available for distribution to its stockholders under
applicable law, before any distribution of assets is made to holders of any
Junior Stock and subject to the rights of the holders of any class or series of
equity securities

                                        8

<PAGE>



having preference with respect to distributions upon liquidation and the rights
of the Company's general creditors, liquidating distributions in the amount of
$25.00 per share, plus authorized, declared and unpaid dividends thereon, if
any, without interest.

After payment of the full amount of the liquidating distributions to which they
are entitled, the holders of Series A Preferred Shares will have no right or
claim to any of the remaining assets of the Company. In the event that, upon any
such voluntary or involuntary liquidation, dissolution or winding up, the
available assets of the Company are insufficient to pay the amount of the
liquidation distributions on all outstanding Series A Preferred Shares and the
corresponding amounts payable on any Parity Stock, then the holders of the
Series A Preferred Shares and any Parity Stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled. For such purposes, the
consolidation or merger of the Company with or into any other entity, or the
sale, lease or conveyance of all or substantially all of the assets of the
Company, shall not be deemed to constitute a liquidation, dissolution or winding
up of the Company.

     Restrictions on Ownership and Transfer

In order for the Company to qualify, and to continue to qualify, as a REIT under
the IRC, not more than 50% of the value of its outstanding shares of stock may
be owned, directly or indirectly, by five or fewer individuals (as defined in
the IRC to include certain entities) during the last half of a taxable year
(other than the first year) (the "Five or Fewer Test"). The Five or Fewer Test
is applied using certain constructive ownership rules. Certain significant
shareholders of Golden State (i.e., Ronald O. Perelman and Gerald J. Ford)
("Significant Shareholders"), through their constructive ownership of a
beneficial interest in the Bank, constitute two individuals for the purposes of
this test and, under the Internal Revenue Service ("IRS") rules for determining
percentages of ownership, are deemed to own constructively approximately 39% of
the value of the outstanding shares of stock in the Company during the last half
of the taxable year. Presently, there are no restrictions which prevent either
(i) any Significant Shareholder from increasing or decreasing its percentage
ownership of the Company, (ii) any Significant Shareholder from increasing or
decreasing its percentage ownership of the Bank (and thus its percentage
ownership in the Company) or (iii) any other person from becoming a significant
constructive shareholder of the Company by acquiring an equity interest in the
Bank. Moreover, any increase or decrease in the value of the common stock as
compared to the value of the preferred stock will increase or decrease the
percentage of ownership held by the Significant Shareholders.

The Company's Charter, subject to certain exceptions, provides that no
individual or entity other than a Significant Shareholder may own, or be deemed
to own by virtue of the attribution rules of the IRC, stock of the Company in
amounts in excess of the lesser of 2.5% of the number of issued and outstanding
shares of preferred stock, including the Series A Preferred Shares, or 1.25% of
the value of all classes of issued and outstanding shares of the Company (the
"Ownership Limit"). However, certain entities whose interests are widely held
(generally, an entity in which no Person actually or constructively owns more
than 9.9% of the value) will be permitted to own up to the lesser of 20% of the
number of the issued and outstanding shares of preferred stock, including the
Series A Preferred Shares, or 10% of the value of all of the classes of issued
and outstanding shares of stock of the Company, if they satisfy certain
notification requirements. The Board may (but will not be required to), upon the
receipt of a ruling from the IRS or the advice of counsel satisfactory to it,
waive the Ownership Limit with respect to a holder if such holder's ownership
will not then or in the future jeopardize the Company's status as a REIT.

The constructive ownership rules of the IRC are complex and may cause preferred
stock owned, directly or indirectly, by one individual or entity to be deemed to
be owned by other related individuals or entities. Similarly, under the
constructive ownership rules, an individual or entity that owns stock of the
Bank will be deemed to own a proportionate share of the common stock of the
Company owned by the Bank. As a result, the acquisition by an individual or
entity of stock of the Company in amounts below the Ownership Limit (or the
acquisition of an entity that owns such shares) may cause that individual or
entity (or another individual or entity) to violate the Ownership Limit. In
addition, other events, such as changes in relative values of the common and
preferred stock, could cause an individual or entity to violate the Ownership
Limit.

The Charter provides that any shares in excess of the Ownership Limit ("Excess
Shares") will automatically be transferred, by operation of law, to a trustee as
a trustee of a trust for the exclusive benefit of a charitable beneficiary to be
named by the Company as of the day prior to the day the prohibited transfer took
place. Any distributions paid prior to the discovery of the prohibited transfer
are to be repaid by the original transferee to the Company and by the Company to
the trustee;

                                        9

<PAGE>



subject to applicable law, any vote of the holder of the shares while the shares
were held by the original transferee prior to the Company's discovery thereof
shall be void ab initio and the original transferee shall be deemed to have
given its proxy to the trustee. Any unpaid distributions with respect to the
original transferee will be rescinded as void ab initio. In liquidation, the
original transferee stockholder's ratable share of the Company's assets would be
limited to the price paid by the original transferee for the Excess Shares or,
if no value was given, the price per share equal to the closing market price on
the date of the purported transfer. The trustee of the trust shall promptly sell
the shares to any person whose ownership is not prohibited, whereupon the
interest of the trust shall terminate. Proceeds of the sale shall be paid to the
original transferee up to its purchase price (or, if the original transferee did
not purchase the shares, the value on its date of acquisition) and any remaining
proceeds shall be paid to a charity to be named by the Company.

All certificates representing shares of preferred stock will bear a legend
referring to the restrictions described above.

The Ownership Limit provisions will not be automatically removed even if the
REIT rules are changed so as to eliminate any ownership concentration limitation
or if the ownership concentration limitation is increased. The foregoing
restrictions on transferability and ownership will not apply, however, if the
Company determines that it is no longer in the best interests of the Company to
attempt to qualify, or continue to qualify, as a REIT.

In addition, the REIT provisions of the IRC require that the stock of the
Company must be beneficially owned by 100 or more persons during at least 335
days of a taxable year (the "One Hundred Persons Test"). The Charter contains
restrictions in order to ensure compliance with the One Hundred Persons Test.
Specifically, such provisions require that if any transfer of shares of stock of
the Company would cause the Company to be beneficially owned by fewer than 100
persons, such transfer shall be null and void and the intended transferee will
acquire no rights to the stock.

The Charter requires that any person who beneficially owns 1.0% (or such lower
percentage as may be required by the IRC or the Treasury regulations) of the
outstanding shares of any class or series of preferred stock of the Company must
provide certain information to the Company within 30 days of June 30 and
December 31 of each year. In addition, each stockholder shall upon demand be
required to disclose to the Company in writing such information as the Company
may request in order to determine the effect, if any, of such stockholder's
actual and constructive ownership on the Company's status as a REIT and to
ensure compliance with the Five or Fewer and One Hundred Persons Tests.

Dividend Policy

In order to remain qualified as a REIT, the Company must distribute annually at
least 95% of its REIT taxable income to its stockholders. The Company currently
expects to distribute dividends annually to satisfy these REIT requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations" for a discussion of dividends declared and
paid to the common stockholder and to the holders of the Series A Preferred
Shares during the years ended December 31, 1998 and 1997.

Dividends are declared at the discretion of the Board of Directors after
considering the Company's distributable funds, financial requirements, tax
considerations and other factors. The Company's distributable funds consist
primarily of interest payments received in respect of the residential mortgage
loans held by it, and the Company anticipates that most of such assets will bear
interest at adjustable rates. See " Management's Discussion and Analysis of
Financial Condition and Results of Operations - Interest Rate Risk."

The Bank

The Bank, which is headquartered in San Francisco, California, is a diversified
financial services company that primarily serves consumers in California and to
a lesser extent, in Nevada. The Bank's principal business consists of (i)
operating retail deposit branches that provide retail consumers and small
businesses with deposit products such as demand, transaction and savings
accounts; investment products such as mutual funds, annuities and insurance; and
(ii) mortgage banking activities, including originating and purchasing 1-4 unit
residential loans for sale to various investors in the secondary market and
servicing loans for itself and others. To a lesser extent, the Bank originates
and/or purchases certain commercial real estate, commercial and consumer loans
for investment.



                                       10

<PAGE>



The Bank is chartered as a federal stock savings bank under the Home Owners'
Loan Act ("HOLA") and regulated by the OTS and the Federal Deposit Insurance
Corporation ("FDIC"), which, through the Savings Association Insurance Fund
("SAIF"), insures the deposit accounts of the Bank, up to applicable limits. The
Bank is also a member of the Federal Home Loan Bank System ("FHLBS").

As of December 31, 1998, the Bank had assets totalling $54.7 billion, deposits
totalling $24.8 billion and operated retail branch offices at 358 locations in
two states.

Because the Company is a subsidiary of the Bank, federal regulatory authorities
will have the right to examine the Company and its activities. Payment of
dividends on the Series A Preferred Shares could be subject to regulatory
limitations if the Bank became "undercapitalized" for purposes of the OTS prompt
corrective action regulations, which is currently defined as having a total
risk-based capital ratio of less than 8.0%, a tier 1 risk-based capital ratio of
less than 4.0% or a core capital (or leverage) ratio of less than 4.0%. At
December 31, 1998, the Bank's total risk-based capital ratio was 11.69%, its
tier 1 risk-based capital ratio was 10.27% and its core capital (or leverage)
ratio was 5.29%.

If the Exchange Event occurs, the Bank would likely be prohibited from paying
dividends on the Bank preferred shares. In all circumstances following the
Exchange Event, the Bank's ability to pay dividends would be subject to various
restrictions under OTS regulations, a resolution of the Bank's board of
directors and certain contractual provisions.

The Bank and its affiliates are involved in virtually every aspect of the
Company's existence. FNMC services the Company's residential mortgage loans in
its role as Servicer under the Servicing Agreement. See "-- Servicing of
Residential Mortgage Loans."

The Bank and its affiliates may have interests which are not identical to those
of the Company. Consequently, conflicts of interest may arise with respect to
transactions, including without limitation, (i) future acquisitions of
residential mortgage loans from, or sales of residential mortgage loans to, the
Bank, FNMC or their affiliates and (ii) the modification of the Servicing
Agreement.

It is the intention of the Company and the Bank that any agreements and
transactions between the Company on the one hand and the Bank or one of its
affiliates on the other hand are fair to all parties and consistent with market
terms for such types of transactions. The requirement in the Company's charter
that certain actions of the Company be approved by a majority of the independent
directors is also intended to promote fair dealings between the Company and the
Bank and its affiliates. However, there can be no assurance that such agreements
or transactions will be on terms as favorable to the Company as would have been
obtained from unaffiliated third parties.

Residential Mortgage Loans

The Company's portfolio of mortgage loans consisted of 1-4 unit residential
mortgage loans totalling $946.0 million and $969.4 million at December 31, 1998
and 1997, respectively, which were primarily adjustable rate mortgages ("ARMs")
which adjust periodically based on changes in various indices including the FHLB
Eleventh District Cost of Funds, the one-year Treasury rate and the six-month
Treasury rate. Certain types of residential mortgage loans contain an option for
the mortgagor to convert the ARM to a fixed rate loan for the remainder of the
term.

The Company currently intends to invest in residential mortgage loans only. The
Company's current policy prohibits the acquisition of any mortgage loan which is
delinquent at the time of the proposed acquisition or which meets certain
criteria for non-performance during the preceding 12 months. The Company
currently expects that substantially all of the residential mortgage loans to be
acquired will be adjustable rate loans; however, the Company may from time to
time acquire fixed interest rate residential mortgage loans. The Company
anticipates it will continue to acquire all of its residential mortgage loans
from the Bank or affiliates of the Bank as whole loans secured by first
mortgages or deeds of trust on single-family (one-to-four-unit) residential real
estate properties, although mortgage loans may be acquired from unaffiliated
third parties. The Company may from time to time acquire fixed rate or variable
rate mortgage-backed securities issued or guaranteed by agencies of the federal
government or government sponsored agencies. The mortgage loans underlying the
mortgage-backed securities will be secured by single-family residential,
multifamily or commercial real estate properties located throughout the United
States.



                                       11

<PAGE>



The Company may choose to dispose of any residential mortgage loan which
subsequent to its acquisition by the Company (i) becomes classified, (ii) falls
into nonaccrual status, (iii) has to be renegotiated due to the financial
deterioration of the borrower or (iv) is more than 30 days past due in the
payment of principal or interest more than once in any 12 month period. The Bank
has indicated to the Company that it does not intend to purchase any residential
mortgage loans of the Company that fall into any of the foregoing categories;
accordingly, the Company currently anticipates that any such residential
mortgage loan may be sold at its then current fair value by the Company only to
a subsidiary of the Bank or an unrelated third party. The Company does not
generally intend to dispose of any residential mortgage loans.

Credit Risk Management Policies

The Company expects that each residential mortgage loan acquired from the Bank
or one of its affiliates in the future will represent a first lien position and
will be originated by the Bank or such affiliate or by financial institutions
acquired by the Bank by merger in the ordinary course of its or their real
estate lending activities based on the underwriting standards generally applied
(at the time of origination) for the originator's own account.

The Company also intends that all residential mortgage loans held by the Company
will be serviced pursuant to the Servicing Agreement between the Company and
FNMC dated January 31, 1997. See "-- Servicing of Residential Mortgage Loans."

Delinquencies and Nonperforming Loans

When a borrower fails to make a contractually required payment on a loan, the
loan is characterized as delinquent. In most cases delinquencies are cured
promptly; however, foreclosure proceedings, and in some cases workout
proceedings, are generally commenced if the delinquency is not cured. The
procedures for foreclosure actions vary from state to state, but generally if a
loan is not reinstated within certain periods specified by statute, the property
securing the loan can be acquired through foreclosure by the lender. While
deficiency judgments against the borrower are available in some of the states in
which the Company originates loans, the value of the underlying collateral
property is usually the principal source of recovery available to satisfy the
loan balance.

The following table reflects residential mortgage loans with past due principal
and interest payments as of December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                     1998                                          1997
                                   ----------------------------------------      -----------------------------------------
                                     Principal Balance        Percent              Principal Balance         Percent
                                      (in thousands)       of Total Loans           (in thousands)       of Total Loans
---------------------------------  --------------------- ------------------      --------------------- -------------------
<S>                                        <C>                 <C>                     <C>                  <C>  
       30 to 59 days past due              $2,362              0.25%                   $1,427               0.15%
       60 to 89 days past due              $2,005              0.21%                   $1,490               0.15%
       90 days or more past due            $1,563              0.16%                   $3,591               0.37%
---------------------------------  --------------------- ------------------      --------------------- -------------------
</TABLE>

It is the Company's policy to place a loan on nonaccrual status when a borrower
is 90 days or more delinquent. There were no accruing loans contractually past
due 90 days or more at December 31, 1998 and 1997.

For loans on nonaccrual at December 31, 1998 and 1997, the Company recognized
$52,000 and $75,000 of interest income during the years ended December 31, 1998
and 1997, respectively. The Company would have recognized $127,000 and $233,000
of interest income during the years ended December 31, 1998 and 1997,
respectively, on such loans had the borrowers performed under the contractual
terms of the loans.

The allowance for loan losses is a general allowance which is increased by
charges to income and decreased by charge-offs (net of recoveries). Management's
periodic evaluation of the adequacy of the allowance is based on such factors as
the Bank's and the Company's past loan loss experience, delinquency trends,
known and inherent risks in the portfolio, potential adverse situations that may
affect the borrower's ability to repay, the estimated value of underlying
collateral, and current and prospective economic conditions.



                                       12

<PAGE>



Activity in the allowance for loan losses for the years ended December 31, 1998
and 1997 is summarized as follows (in thousands):


                                                             1998       1997
                                                             ----       ----
Balance - beginning of year                               $  7,310     $    --
Allowance attributable to loans purchased from the Bank         --       5,000
Provision for loan losses                                    2,310       2,310
Charge-offs                                                 (1,207)         --
Recoveries                                                      --          --
                                                          --------     -------

Balance - end of year                                     $  8,413     $ 7,310
                                                          ========     =======

Geographic Distribution

At December 31, 1998, the Company's total residential mortgage loan portfolio
included $795.8 million of loans secured by residential real estate properties
located in California. These loans may be subject to a greater risk of default
than other comparable residential mortgage loans in the event of natural hazards
or other adverse conditions in California that may affect the ability of
residential property owners in California to make payments of principal and
interest on underlying mortgages. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Significant Concentration of
Credit Risk."

Servicing of Residential Mortgage Loans

The Company entered into the Servicing Agreement with FNMC pursuant to which
FNMC, in its capacity as servicer under the Servicing Agreement ("Servicer"),
performs the actual servicing of the residential mortgage loans held by the
Company in accordance with normal industry practice. The Servicing Agreement can
be terminated without cause with at least 30 days written prior notice to the
Servicer and payment to the Servicer of a termination fee equal to 2% of the
outstanding principal balances of the loans. The servicing fee ranges from 0.25%
to 0.50% per year of the outstanding principal balances. The Servicer is also
entitled to a 1% disposition fee on the aggregate proceeds obtained in the sale
of a defaulted residential mortgage loan.

The Servicer collects and remits principal and interest payments, administers
mortgage escrow accounts, submits and pursues insurance claims and initiates and
supervises foreclosure proceedings on the residential mortgage loans it
services. The Servicer also provides accounting and reporting services required
by the Company for such residential mortgage loans. The Servicer is required to
follow such collection procedures as are customary in the industry. The Servicer
may, in its discretion, arrange with a defaulting borrower a schedule for the
liquidation of delinquencies, provided that any primary mortgage insurance
coverage is not adversely affected. The Servicer may from time to time
subcontract all or a portion of its servicing obligations under the Servicing
Agreement to the Bank or other affiliates of the Bank, or to an unrelated third
party subject to approval of the majority of the independent directors of the
Company. FNMC will not be discharged or relieved in any respect from performing
its obligations under the Servicing Agreement in connection with subcontracting
any of the obligations thereunder.

The Servicer is required to pay all expenses related to the performance of its
duties under the Servicing Agreement. The Servicer is required to make advances
of the principal and interest, taxes and required insurance premiums that are
not collected from borrowers with respect to any residential mortgage loan,
unless it determines that such advances are nonrecoverable from the borrower,
insurance proceeds or other sources with respect to such residential mortgage
loan. If such advances are made, the Servicer generally will be reimbursed prior
to the Company out of proceeds related to such residential mortgage loan. The
Servicer is also entitled to reimbursement by the Company for expenses incurred
by it in connection with the liquidation of defaulted residential mortgage loans
and in connection with the restoration of mortgaged property.

As is customary in the mortgage loan servicing industry, the Servicer is
entitled to retain any late payment charges, prepayment fees or penalties,
assumption fees and ARM conversion fees collected in connection with the
residential mortgage loans. The Servicer receives any benefit derived from
interest earned on collected principal and interest payments between the date of
collection and the date of remittance to the Company and, to the extent
permitted under applicable law, from interest earned on tax and insurance
impound funds with respect to residential mortgage loans.


                                       13

<PAGE>



Capital and Leverage Policies

To the extent that the Board of Directors determines that additional funding is
required, the Company may raise such funds through additional equity offerings,
debt financing or retention of cash flow (after consideration of provisions of
the IRC requiring the distribution by a REIT of a certain percentage of taxable
income and taking into account taxes that would be imposed on undistributed
taxable income), or a combination of these methods.

At December 31, 1998 and 1997, the Company had no debt outstanding, and the
Company does not currently intend to incur any indebtedness. However, the
organizational documents of the Company do not contain any limitation on the
amount or percentage of debt, funded or otherwise, the Company might incur,
except that the incurrence by the Company of debt for borrowed money in excess
of 20% of the Company's total stockholders' equity will require the approval of
a majority of the independent directors. Any such debt incurred may include
intercompany advances made by the Bank to the Company.

The Company may also issue additional series of preferred stock. However, the
Company may not issue additional shares of preferred stock senior to the Series
A Preferred Shares without the consent of holders of at least two-thirds of the
outstanding shares of preferred stock at that time, including the Series A
Preferred Shares, and the Company may not issue additional shares of preferred
stock on a parity with the Series A Preferred Shares without the approval of a
majority of the Company's independent directors. In addition, the Company does
not currently intend to issue any additional series of preferred stock unless it
simultaneously receives additional capital contributions from the Bank equal to
the aggregate offering price of such additional preferred stock plus the
Company's expenses (including underwriting discounts or placement fees) in
connection with the issuance of such additional shares of preferred stock.

Employees

The Company has four executive officers, each of whom is described further below
under "Directors and Executive Officers of the Registrant." The Company does not
require significantly more employees because it has retained FNMC to perform
certain functions pursuant to the Servicing Agreement. All of the executive
officers of the Company are also executive officers of the Bank and/or its
affiliates. The Company maintains corporate records and audited financial
statements that are separate from those of the Bank and its affiliates.

Competition

The Company does not engage in the business of originating residential mortgage
loans. The Company does anticipate that it will purchase residential mortgage
loans in addition to those in the current loan portfolio and that substantially
all of these residential mortgage loans will be purchased from the Bank or
affiliates of the Bank. Accordingly, the Company does not compete, and does not
expect to compete, with mortgage conduit programs, investment banking firms,
savings and loan associations, banks, thrift and loan associations, finance
companies, mortgage bankers or insurance companies in the acquisition of its
residential mortgage loans.

Environmental Matters

In the event that the Company is forced to foreclose on a defaulted residential
mortgage loan to recover its investment in such residential mortgage loan, the
Company may be subject to environmental liabilities in connection with the
underlying real property which could exceed the value of the real property.
Although the Company intends to continue to exercise due diligence to discover
potential environmental liabilities prior to the acquisition of any property
through foreclosure, hazardous substances or waste, contaminants, pollutants or
sources thereof (as defined by state and federal laws and regulations) may be
discovered on properties during the Company's ownership or after a sale thereof
to a third party. If such hazardous substances are discovered on a property
which the Company has acquired through foreclosure or otherwise, the Company may
be required to remove those substances and clean up the property. There can be
no assurance that in such a case the Company would not incur full recourse
liability for the entire costs of any removal and clean-up, that the cost of
such removal and clean-up would not exceed the value of the property or that the
Company could recoup any such costs from any third party. The Company may also
be liable to tenants and other users of neighboring properties. In addition, the
Company may find it difficult or impossible to sell the property prior to or
following any such clean-up.



                                       14

<PAGE>



Tax Status of the Company

The Company has elected to be taxed as a REIT under Sections 856 through 860 of
the IRC, commencing with its taxable year ended December 31, 1997. As a REIT,
the Company generally is not subject to Federal income tax on its net income and
capital gains that it distributes to the holders of its common stock and
preferred stock, including the Series A Preferred Shares. The Company must also
meet certain organizational, stock ownership and operational requirements. If in
any taxable year the Company fails to qualify as a REIT, the Company would not
be allowed a deduction for distributions to stockholders in computing its
taxable income and would be subject to Federal and state income tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate rates. In addition, the Company would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification was lost.







                                       15

<PAGE>



ITEM 2. Properties


None.


ITEM 3. Legal Proceedings


The Company is not the subject of any material litigation. None of the Company,
the Bank or any of its affiliates is currently involved in nor, to the Company's
knowledge, is currently threatened with any material litigation with respect to
the residential mortgage loans included in the portfolio other than routine
litigation arising in the ordinary course of business, most of which is covered
by liability insurance.


ITEM 4. Submission of Matters to a Vote of Security Holders


None.




                                       16

<PAGE>



                                     PART II


ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
        Matters


All of the Company's common shares are owned by the Bank. There is no
established public trading market for the Company's common stock.

During 1998 and 1997, dividends on the Company's common stock totalled $30.5
million and $20.4 million, respectively. For a discussion of the Company's
dividend distribution policy and any restrictions on the payment of dividends
with respect to its common stock, see "Business - Dividend Policy."






                                       17

<PAGE>



ITEM 6. Selected Financial Data

The data presented below represents selected financial data relative to the
Company for, and as of the end of, the years ended December 31, 1998 and 1997
(dollars in thousands).

                                                    
Statements of Income:

<TABLE>
<CAPTION>
                                                         1998                 1997
                                                         ----                 ----
<S>                                                    <C>              <C>    

Interest income, net of servicing fee expense          $     72,268     $    65,912
Net interest income                                    $     72,179     $    65,912
Net interest income after provision for loan losses    $     69,869     $    63,602
Net income                                             $     69,840     $    63,495
Average yield on residential mortgage loans                    7.19%           7.25%

Balance Sheets:

Residential mortgage loans, net                         $   945,970     $   969,423
Total assets                                            $   995,746     $ 1,001,495
Total stockholders' equity                              $   994,910     $ 1,001,146
Number of preferred shares outstanding                   20,000,000      20,000,000
Number of common shares outstanding                           1,000           1,000

</TABLE>



                                       18

<PAGE>



ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

Overview

The Company's principal business objective is to acquire, hold and manage
residential mortgage loans that will generate net income for distribution to
stockholders. The Company currently intends to invest in residential mortgage
loans only. The Company's current policy prohibits the acquisition of any
mortgage loan which is delinquent at the time of the proposed acquisition or
which meets certain criteria for non-performance during the preceding 12 months.
The Company currently expects that substantially all of the residential mortgage
loans to be acquired will be adjustable rate loans; however, the Company may
from time to time acquire fixed interest rate residential mortgage loans. The
Company anticipates it will continue to acquire all of its residential mortgage
loans from the Bank or affiliates of the Bank as whole loans secured by first
mortgages or deeds of trust on 1-4 unit residential real estate properties,
although mortgage loans may be acquired from unaffiliated third parties. The
Company may from time to time acquire fixed rate or variable rate
mortgage-backed securities issued or guaranteed by agencies of the federal
government or government sponsored agencies. The mortgage loans underlying the
mortgage-backed securities will be secured by single-family residential,
multifamily or commercial real estate properties located throughout the United
States.

On January 31, 1997, the Company commenced its operations upon the initial
public offering of 20,000,000 shares of the Company's Series A Preferred Shares,
which raised $500 million. The Series A Preferred Shares are traded on the NYSE
under the trading symbol "CFP." Concurrent with the sale of the Series A
Preferred Shares, the Bank contributed additional capital of $500 million to the
Company. All common shares are held by the Bank.

The Bank and its affiliates are involved in virtually every aspect of the
Company's existence. FNMC services the Company's residential mortgage loans in
its role as Servicer under the Servicing Agreement.

The Bank and its affiliates may have interests which are not identical to those
of the Company. Consequently, conflicts of interest may arise with respect to
transactions, including without limitation, (i) future acquisitions of
residential mortgage loans from, or sales of residential mortgage loans to, the
Bank, FNMC or their affiliates and (ii) the modification of the Servicing
Agreement.

It is the intention of the Company and the Bank that any agreements and
transactions between the Company on the one hand and the Bank or one of its
affiliates on the other hand are fair to all parties and consistent with market
terms for such types of transactions. The requirement in the Company's charter
that certain actions of the Company be approved by a majority of the independent
directors is also intended to promote fair dealings between the Company and the
Bank and its affiliates. However, there can be no assurance that such agreements
or transactions will be on terms as favorable to the Company as would have been
obtained from unaffiliated third parties.

Results of Operations

     Years ended December 31, 1998 versus December 31, 1997

Net Income. The Company reported net income for the year ended December 31, 1998
of $69.8 million compared with net income of $63.5 million for the year ended
December 31, 1997. This increase in 1998 over 1997 is attributable to an
increase in net interest income and reflects twelve months of operations in 1998
versus eleven months of operations in 1997, as the Company commenced its
operations on January 31, 1997. During the year ended December 31, 1998, the
Company reported interest expense of $89,000 related to borrowings from the Bank
and income tax expense of $65,000 related to net gains on the sale of foreclosed
real estate.

During the years ended December 31, 1998 and 1997, the Company declared and paid
dividends of $45.6 million and $41.9 million, respectively, on the outstanding
Series A Preferred Shares. Net income available to the common stockholder for
the years ended December 31, 1998 and 1997 totalled $24.2 million and $21.5
million, respectively. During the years ended December 31, 1998 and 1997, the
Company declared and paid dividends of $30.5 million and $20.4 million,
respectively, to the Bank as common stockholder.

Net Interest Income. The Company reported interest income, net of servicing fee
expense of $72.3 million for the year ended December 31, 1998, an increase of
$6.4 million over the $65.9 million interest income, net of servicing fee
expense reported for the year ended December 31, 1997.

                                       19

<PAGE>



Of this increase in interest income, $6.6 million is attributed to residential
mortgage loans, offset in part by a $201,000 decrease in interest on short-term
investments. The increase in residential mortgage loan interest income is
attributed primarily to an increase in the average outstanding balance of the
portfolio, accounting for $7.1 million of the increase, offset by $0.5 million
relating to a lower average yield on the portfolio. The average outstanding
balance of residential mortgage loans during the year ended December 31, 1998
was $99.4 million higher than during the same period in 1997, principally due to
one less month of operations in 1997 than in 1998. Interest income, net of
servicing fee expense during the year ended December 31, 1998 is comprised of
$71.3 million ($75.0 million gross interest less $3.7 million servicing fee
expense) from residential mortgage loans and $1.0 million from short-term
investments, representing an average yield after servicing fees on residential
mortgage loans of 7.19% and on earning assets of 7.14%, based on average
outstanding asset balances of $991.9 million and $1,012.1 million, respectively.
Net interest income after $89,000 of interest expense and a $2.3 million
provision for loan losses was $69.9 million. Interest income, net of servicing
fee expense during the year ended December 31, 1997 was comprised of $64.7
million ($68.1 million gross interest income less $3.4 million servicing fee
expense) from residential mortgage loans and $1.2 million from short-term
investments, representing an average yield after servicing fees on residential
mortgage loans of 7.25% and on earning assets of 7.20%, based on average
outstanding asset balances of $892.5 million and $915.5 million, respectively.
Net interest income after a $2.3 million provision for loan losses was $63.6
million.

The computation of the average yield on residential mortgage loans and on
earning assets is based on daily average outstanding asset balances that include
nonaccruing loans and the amount of principal payments collected by FNMC but not
yet remitted to the Company, which is included in due from affiliates on the
balance sheets.

Residential Mortgage Loans

The Company used the proceeds from its offering of Series A Preferred Shares,
coupled with a capital contribution from the Bank, to purchase the Company's
initial portfolio of residential mortgage loans with estimated fair values
totalling approximately $996.5 million. The Company reinvests principal
collections in additional residential mortgage loans purchased from either the
Bank or its affiliates on a periodic basis.

It is the Company's policy to place a loan on nonaccrual status when a borrower
is 90 days or more delinquent. There were no accruing loans contractually past
due 90 days or more at December 31, 1998 and 1997.

The following table reflects residential mortgage loans with past due principal
and interest payments as of December 31, 1998 and 1997:

<TABLE>
<CAPTION>

                                              1998                                      1997
                            ----------------------------------------  ----------------------------------------
                                 Principal                                 Principal
                                  Balance             Percent               Balance             Percent
                              (in thousands)       of Total Loans       (in thousands)       of Total Loans
--------------------------- ------------------- --------------------  ------------------- --------------------
<S>                         <C>                 <C>                   <C>                 <C>   
  30 to 59 days past due          $ 2,362              0.25%               $ 1,427                0.15%
                                                                           
  60 to 89 days past due          $ 2,005              0.21%               $ 1,490                0.15%
                                                                           
  90 days or more past due        $ 1,563              0.16%               $ 3,591                0.37%
--------------------------- ------------------- --------------------  ------------------- --------------------
</TABLE>

Allowance for Loan Losses

The allowance for loan losses is available to absorb potential loan losses from
the entire residential mortgage loan portfolio. The Company deems its allowance
for loan losses as of December 31, 1998 to be adequate. Although the Company
considers that it has sufficient allowances to absorb losses that currently may
exist in the portfolio, the precise loss is subject to continuing review based
on quality indicators, industry and geographic concentrations, changes in
business conditions, and other external factors such as competition, legal and
regulatory requirements. The Company will continue to reassess the adequacy of
the allowance for loan losses.



                                       20

<PAGE>



The following table reflects the activity in the Company's allowance for loan
losses for the years ended December 31, 1998 and 1997 (in thousands):

<TABLE>
<CAPTION>


                                                                    1998          1997
                                                                    ----          ----
<S>                                                             <C>            <C>       
     Balance - beginning of year                                $     7,310    $       --
     Allowance attributable to loans purchased from the Bank             --         5,000
     Provision for loan losses                                        2,310         2,310
     Charge-offs                                                     (1,207)           --
                                                                -----------    ----------
     Balance - end of year                                      $     8,413    $    7,310
                                                                ===========    ==========
</TABLE>

The Company's allowance coverage ratio (allowance for loan losses to loans) at
December 31, 1998 and 1997 was 0.88% and 0.75%, respectively, while the
Company's ratio of allowance for loan losses to non-performing loans at December
31, 1998 and 1997 was 538% and 204%, respectively.

Interest Rate Risk

The Company's income consists primarily of interest payments on residential
mortgage loans. The Company anticipates that most of its residential mortgage
loans will bear interest at adjustable rates. If there is a decline in interest
rates (as measured by the indices upon which the interest rates of the
residential mortgage loans are based), then the Company will experience a
decrease in income available to be distributed to its stockholders. In such an
interest rate environment the Company may experience an increase in prepayments
on its residential mortgage loans and may find it more difficult to purchase
additional residential mortgage loans bearing rates sufficient to support
payment of the dividends on the Series A Preferred Shares. In addition, certain
residential mortgage loan products which the Company holds will allow borrowers
in such an interest rate environment to convert an adjustable rate mortgage to a
fixed rate mortgage, thus "locking in" a lower fixed interest rate. Because the
dividend rate on the Series A Preferred Shares is fixed, there can be no
assurance that an interest rate environment in which there is a significant
decline in interest rates would not adversely affect the Company's ability to
pay such dividends.

Residential mortgage loans which have interest rates that adjust monthly based
upon the FHLB Eleventh District Cost of Funds limit payment changes to no more
than 7.5% of the payment amount per year. This may lead to monthly payments
which are less than the amount necessary to amortize the loan to maturity at the
interest rate in effect for any particular month. In the event that the monthly
payment is not sufficient to pay interest accruing on the loan during the month,
this deficiency is added to the loan's principal balance (i.e., negative
amortization). The total outstanding principal balance for a particular loan is
generally not allowed to exceed 125% of the original loan amount as a result of
negative amortization. Every five years and at any time the loan reaches its
maximum amount, the loan payment is recalculated to the payment sufficient to
repay the unpaid principal balance in full at the maturity date. Approximately
31% of the residential mortgage loans held by the Company at December 31, 1998
have the potential to negatively amortize, while approximately 6% of residential
mortgage loans have negatively amortized such that the current principal balance
of the loan exceeds the original principal balance. The current principal
balance exceeded the original principal balance by approximately $1.6 million as
of December 31, 1998. If there is an increase in interest rates on such
residential mortgage loans (as measured by the indices upon which the interest
rates of the residential mortgage loans are based), the Company may experience a
decrease in cash available to be distributed to its common stockholder where
such increase in the interest rate does not coincide with a corresponding
adjustment of the borrowers' monthly payments.

Significant Concentration of Credit Risk

Certain geographic regions of the United States from time to time may experience
natural disasters or weaker regional economic conditions and housing markets
and, consequently, may experience higher rates of loss and delinquency on
residential mortgage loans generally. Any concentration of the residential
mortgage loans in such a region may present risks in addition to those generally
present with respect to residential mortgage loans.



                                       21

<PAGE>



The Company's exposure to geographic concentrations directly affects the credit
risk of the residential mortgage loans within the portfolio. The following table
shows the residential mortgage loan portfolio by geographical area as of
December 31, 1998:

<TABLE>
<CAPTION>

                                                                             Book Value
                                                                           (in thousands)    Percent
                                                                           --------------    -------
<S>                                                                        <C>               <C> 
California                                                                    $ 795,839       83.4%
Florida                                                                          40,381        4.2%
New York                                                                         24,163        2.5%
Other states (37 states and Washington, D.C.; no state has more than 2%)         94,000        9.8%
                                                                              ---------      ------
                                                                              $ 954,383      100.0%
                                                                              =========      ======
</TABLE>

The 83.4% of the Company's total residential mortgage loan portfolio comprised
of loans secured by residential real estate properties located in California may
be subject to a greater risk of default than other comparable residential
mortgage loans in the event of natural hazards or other adverse conditions in
California that may affect the ability of residential property owners in
California to make payments of principal and interest on underlying mortgages.

Liquidity Risk Management

The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Company's financial commitments and to
capitalize on opportunities for the Company's business expansion. In managing
liquidity, the Company takes into account various legal limitations placed on a
REIT. See " -- Other Matters."

The Company's principal liquidity needs are to maintain the current portfolio
size through the acquisition of additional residential mortgage loans and to pay
dividends on the Series A Preferred Shares. The acquisition of additional
residential mortgage loans is funded with the proceeds obtained from repayment
of principal balances by individual mortgagees. The payment of dividends on the
Series A Preferred Shares will be made from legally available funds, principally
arising from the operating activities of the Company. The Company's cash flows
from operating activities principally consist of the collection of interest on
the residential mortgage loans. The Company does not have and does not
anticipate having any material capital expenditures.

In order to remain qualified as a REIT, the Company must distribute annually at
least 95% of its adjusted REIT taxable income, as provided for under the IRC, to
its common and preferred stockholders. The Company currently expects to
distribute dividends annually to satisfy these REIT requirements.

The Company anticipates that cash and cash equivalents on hand and the cash flow
from the residential mortgage loans will provide adequate liquidity for its
operating, investing and financing needs.

Net cash provided by operating activities for the year ended December 31, 1998,
totalled $73.9 million, an increase of $6.4 million from net cash provided by
operating activities for the year ended December 31, 1997. The increase was
principally due to the increase in interest income on residential mortgage
loans.

Net cash used in investing activities for the year ended December 31, 1998,
totalled $1.7 million, a decrease of $997.0 million from net cash used in
investing activities for the year ended December 31, 1997. The decrease is
principally due to the purchase of the Company's initial portfolio of
residential mortgage loans during the year ended December 31, 1997. Cash flows
used in investing activities in 1998 included purchases of mortgage loans and
accrued interest receivable of $352.1 million and $1.6 million, respectively.
Cash flows provided by investing activities in 1998 included mortgage loan
principal repayments of $349.6 million and proceeds from sales of foreclosed
real estate of $2.5 million.

Net cash used in financing activities for the year ended December 31, 1998,
totalled $76.1 million. Repayment of note payable to Bank totalled $11.4 million
and preferred and common stock dividends paid totalled $76.1 million. Cash flows
provided by financing activities included $11.4 million in proceeds from a note
payable to the Bank.




                                       22

<PAGE>



Net cash provided by financing activities for the year ended December 31, 1997,
totalled $937.7 million. Proceeds from capital contributed by the Bank totalled
$500 million and proceeds from preferred stock issued totalled $500 million.
Cash flows used in financing activities included preferred and common stock
dividends paid totalling $62.3 million.

Impact of Inflation and Changing Prices

Prevailing interest rates have a more significant impact on the Company's
performance than does the general level of inflation. While interest rates may
bear some relationship to the general level of inflation (particularly in the
long run), over short periods of time interest rates may not necessarily move in
the same direction or change in the same magnitude as the general level of
inflation. As a result, the business of the Company is generally not affected by
inflation in the short run, but may be affected by inflation in the long run.

Other Matters

As of December 31, 1998, the Company believes that it was in full compliance
with the REIT tax rules and that it will continue to qualify as a REIT under the
provisions of the IRC. The Company calculates:

a.  its Qualified REIT Assets, as defined in the Code, to be 99% of its total
    assets, as compared to the Federal tax requirements that at least 75% of its
    total assets must be Qualified REIT assets;

b.  that 99% of its revenue qualifies for the 75% source of income test and
    100% of its revenue qualifies for the 95% source of income test under the
    REIT rules; and

The Company also met all REIT requirements regarding the ownership of its stock
and anticipates meeting the annual distribution requirements.

Year 2000

The Bank is responsible for addressing issues related to required changes in
computer systems for the year 2000 ("Year 2000") for the Bank and its
affiliates, including the Company. The Bank has developed and is currently
executing a comprehensive plan to make the Bank's and its affiliates' computer
systems, applications and facilities Year 2000 ready. The Bank's and its
affiliates' operations, like those of most financial institutions, are
substantially dependent upon computer systems for lending and deposit
activities. Issues regarding Year 2000 arise because computer systems and
related software may have been designed to recognize only dates that relate to
the 20th century. Accordingly, if no changes are implemented, some computer
systems would interpret "01/01/00" as January 1, 1900 instead of January 1,
2000. Additionally, some equipment, being controlled by microprocessor chips,
may not deal appropriately with a year "00."

The Bank has formed a Year 2000 Project Steering Committee with senior
representatives from every functional area of the Bank and its affiliates. At
the direction of the Board of Directors, the Committee is leading the efforts to
ensure that the Bank and its affiliates are ready for the Year 2000. The Board
of Directors has approved the Bank's Year 2000 Plan that was developed in
accordance with the guidelines set forth by the Federal Financial Institutions
Examination Council ("FFIEC"). The Bank's plan covers four stages including (i)
inventory, (ii) assessment, (iii) remediation and (iv) testing and
certification. Inventory involves taking stock of and recording known computer
hardware, software and chip-embedded technologies. The assessment stage includes
evaluation and identification of actions necessary to ensure Year 2000
compliance. Remediation consists of the corrective actions, including
modifications, upgrades or replacement of non-compliant hardware, software and
chip-embedded technologies. Testing and certification entails validation that
the system will operate correctly for Year 2000, and includes exercising
predefined tests that simulate specific activities known to be problematic for
otherwise non-compliant technologies, such as century roll-over, Year 2000 leap
year, etc.

At December 31, 1998, the Bank had completed the inventory and assessment stages
for systems and applications owned by the Bank and its affiliates, and was
substantially complete with the remediation stage. During this remediation
process, the Bank is utilizing both internal and external resources to reprogram
and/or replace, and test the software for Year 2000 modifications. The
remediation process for existing mission-critical systems is targeted to be
complete by March 31, 1999; testing and certification of these systems and
applications are currently targeted for completion at the same time. In
addition, during February and March of 1999, the Bank has participated in
industry-wide Year 2000 integration testing sponsored by the Mortgage Bankers
Association. The Bank is currently assessing risks related to the potential
failure of material third parties to be ready for Year 2000.


                                       23

<PAGE>



The Bank also completed its inventory and assessment of electrical and
electronic equipment which may be controlled by microprocessor chips, including
automatic teller machines, telecommunications systems, building management
systems, security equipment and systems, telecommunications equipment, vehicles
and office equipment. All such equipment and systems not certified as Year 2000
ready are planned to be upgraded, discarded or replaced by March 31, 1999. In
addition, the Bank has completed its inventory of business forms to identify
those containing a preprinted "19__". All such forms have been redesigned and
replacement supplies have been ordered.

All costs related to Year 2000 will be expensed on the books of the Bank. No
critical projects in the Information and Technology Services ("ITS") unit of the
Bank have been deferred as a result of the Year 2000 efforts. Instead,
incremental resources including consultants, contractors, software utilities and
hardware were obtained from outside the Bank to supplement existing staff. In
addition, the Bank has prioritization mechanisms in place to ensure that other
critical projects are addressed. The Bank is currently unaware of any asserted
or unasserted claims of breach of contract or warranty, and, at the present
time, does not anticipate any assertion of such claims in the future.

The Bank has initiated communications with its critical external relationships
to determine the extent to which the Bank and its affiliates may be vulnerable
to such parties' failure to remediate their own Year 2000 issues. From its
critical service providers, the Bank has obtained written statements indicating
they will be Year 2000-ready. However, through the testing and certification
stage, the Bank will continue to assess and attempt to mitigate the Bank's and
its affiliates' risks with respect to the failure of these entities to be Year
2000-ready. The effect, if any, on the Bank's or its affiliates' results of
operations from the failure of such parties to be Year 2000-ready cannot be
reasonably estimated.

The Bank has completed its risk assessment of each of the Bank's and its
affilates' loan portfolios and identified material borrowers which are most
likely to experience Year 2000 related problems. In an effort to educate
borrowers and further assess Year 2000 preparedness, material borrowers have
been contacted through questionnaires, surveys, or loan officer phone calls and
visits. Educational materials have been sent to the majority of borrowers not
categorized as material customers for Year 2000 purposes. Ongoing efforts to
mitigate potential Year 2000 problems in higher-risk portfolios include
incorporating Year 2000 compliance requirements in loan documents and assessing
Year 2000 readiness in the Bank's underwriting process for new loans and
renewals.

Year 2000 is the highest priority project within the ITS unit of the Bank.
Management believes there is no material risk that the Bank will fail to address
Year 2000 issues in a timely manner, and little possibility of material changes
in its estimates of reserves, allowances for capitalized software costs,
litigation and deferred revenue. In light of normal ongoing field visits by Bank
regulatory examiners, there is little likelihood of enforcement action on the
Bank's Year 2000 project. The Bank does not anticipate material loan losses or
acceleration of prepayments due to Year 2000. However, the amount of potential
liability and lost revenue, if any, cannot be reasonably estimated at this time
nor can the Bank identify specifically the most likely worst case scenario.

If unforeseen circumstances were to arise, the Year 2000 issue could disrupt the
Bank's and its affiliates' normal business operations. The most reasonably
likely worst case Year 2000 scenario foreseeable at this time would include the
inability to systematically process, in some combination, various types of
customer transactions. This could affect the Bank's and its affiliates' ability
to accept deposits or process withdrawals, originate new loans or accept loan
payments in the automated manner currently utilized. Depending upon how long
this scenario lasted, this could have a material adverse effect on the Bank's
and its affiliates' operations. In the unlikely event the Bank or its vendors
and/or business partners are not ready for the Year 2000, the Bank has been
developing a contingency plan of action. This contingency plan addresses
possible failures of the remediated systems and failure to remediate a system on
time, and will address a support infrastructure for specific systems. The
contingency plan focuses on three main areas: service providers, critical supply
vendors and in-house systems.

At December 31, 1998, contingency plans have been completed for all but seven of
the Bank's and its affilates' 45 service providers. Contingency plans for the
services provided by these vendors were completed in January, 1999. The
contingency plans for the critical supply vendors were completed in mid-February
1999. Finally, since remediation, testing and certification of in-house
maintained systems will have been substantially completed by the March 31, 1999
date established by federal regulators, no specific contingencies will be
developed for these systems. However, a plan will be developed to address how
the Bank will treat the possibility of Year 2000-related problems with in-house
maintained systems after they have been tested and certified. This plan will
address a 1999-2000 schedule of events and a support infrastructure necessary to
see the Bank and its affiliates through Year 2000 with its systems. The support
plan for in-house maintained applications will be completed by September 30,
1999.



                                       24

<PAGE>



ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

The Company's primary market risk exposure is interest rate risk. As of December
31, 1998 the Company's residential loan portfolio totalled $946.0 million, had a
fair value of $970.9 million and a weighted average interest rate, net of the
service fee rate, of 7.19%. The portfolio consisted primarily of ARM loans.
Certain types of residential mortgage loans contain an option for the mortgagor
to convert the ARM loan to a fixed rate loan for the remainder of the term. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Interest Rate Risk."



                                       25

<PAGE>



ITEM 8. Financial Statements and Supplementary Data


The following financial statements of the Company as of and for the years ended
December 31, 1998 and 1997 are included in this report at the pages indicated.


                                                                  Page
                                                                  ----
Independent Auditors' Report                                      F-1
Balance Sheets                                                    F-2
Statements of Income                                              F-3
Statements of Stockholders' Equity                                F-4
Statements of Cash Flows                                          F-5
Notes to Financial Statements                                     F-6
                                       

ITEM 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosures


None.



                                       26

<PAGE>



                                    PART III

ITEM 10. Directors and Executive Officers of the Registrant

The Company's Board of Directors is currently composed of seven members, two of
whom are not current officers or employees of the Company or current directors,
officers or employees of the Bank or any affiliate or the Bank (the "Independent
Directors"). The Charter provides that the Independent Directors will consider
the interests of the holders of both the Company's common stock and preferred
stock, including the Series A Preferred Shares, in determining whether any
proposed action requiring their approval is in the best interests of the
Company. The Company currently has four executive officers.

The following persons are directors and/or executive officers of the Company
(ages as of March 1, 1999):

<TABLE>
<CAPTION>

              Name                 Age       Position and Offices Held
              ----                 ---       -------------------------
<S>                                <C>       <C>
Gerald J. Ford                     54        Chairman, Chief Executive Officer and Director
Carl B. Webb                       49        President, Chief Operating Officer and Director
Christie S. Flanagan               60        Executive Vice President, General Counsel and Director
P.  Richard Frieder                64        Director
Robert Nichols                     54        Director
James R. Staff                     51        Director
Richard H. Terzian                 62        Executive Vice President, Chief Financial Officer
                                               and Director
</TABLE>

Each of the executive officers has held his position with the Company since its
inception in November, 1996. The following is a summary of the experience of the
executive officers and directors of the Company:

Mr. Ford has been Chairman of the Board, Chief Executive Officer and a Director
of the Bank and its predecessors since 1988 and Chairman of the Board and Chief
Executive Officer of Golden State Bancorp Inc. ("Golden State") since September
1998. Mr. Ford was previously President and a Director of First Nationwide
(Parent) Holdings Inc. ("Parent Holdings"), Golden State's predecessor, from its
inception in 1994 until its merger with Golden State. Mr. Ford has also been
Chairman of the Board and Chief Executive Officer of Golden State Holdings since
its formation in 1998. Mr. Ford was Chairman of the Board of First Madison Bank,
FSB ("First Madison") from 1993 to 1994 and Chairman of the Board and Chief
Executive Officer of First Gibraltar Bank, FSB ("First Gibraltar") from 1988
through 1993, both predecessors of the Bank. Mr. Ford served as the Chairman of
the Board and Chief Executive Officer of First United Bank Group from 1993
through 1994. Mr. Ford is Chairman of the Board of FNMC. Mr. Ford is also
Chairman of the Board and Chief Executive Officer of Liberte Investors Inc., and
a Director of McMoRan Exploration Co.

Mr. Webb has served as President, Chief Operating Officer and a Director of the
Bank and its predecessors since 1988, and as the President, Chief Operating
Officer and a Director of Golden State since September 1998. Mr. Webb has also
been President and Chief Operating Officer of Golden State Holdings Inc. since
its formation in 1998. Mr. Webb served as President, Chief Executive Officer and
a Director of First Madison from 1993 through 1994, and as President, Chief
Operating Officer and a Director of First Gibraltar from 1988 through 1993. Mr.
Webb also serves as a Director of FNMC.

Mr. Flanagan has been Executive Vice President and General Counsel of the Bank
since October 1994 and Executive Vice President and General Counsel of Golden
State since September 1998. He also serves as Director of FNMC. Mr. Flanagan has
been associated with the law firm of Jenkins & Gilchrist, P.C. and its
predecessors since 1968 in various capacities, including Managing Partner, and
he is currently Of Counsel to that firm.

Mr. Frieder has been a Director of the Company since January, 1997. He has been
President and Chief Executive Officer of KSD Industries, Inc., a company engaged
in the manufacturing and sale of household hardware, for the past twenty-six
years. Mr. Frieder also is an attorney admitted to practice in the State of
Pennsylvania.

Mr. Nichols has been a Director of the Company since January, 1997. He has been
Chairman of the Board of Conley, Lott, Nichols Machinery Company, a Dallas based
company engaged in machinery sales, since 1978.

Mr. Staff has been an Executive Vice President of the Bank since October 17,
1994 and an Executive Vice President of Golden State since September 1998. He
also serves as a Director of FNMC and as Chairman and a Director of FGB Realty
Advisors, Inc. Mr. Staff previously was associated with the public accounting
firm of KPMG Peat Marwick LLP and its predecessors since 1979, including most
recently as Partner-in-charge of Financial Services for the Southwest-Dallas
area.

                                       27

<PAGE>



Mr. Terzian has served as Executive Vice President and Chief Financial Officer
of the Bank since April 1, 1995 and as Executive Vice President and Chief
Financial Officer of Golden State since September 1998. For the five years prior
to April 1, 1995, Mr. Terzian served as Chief Financial Officer of Dime Bancorp,
Inc and its subsidiary, The Dime Savings Bank of New York, FSB. Mr. Terzian also
serves as a Director of the Federal Home Loan Bank of San Francisco.

ITEM 11. Executive Compensation

The Company pays the Independent Directors of the Company for their services as
directors annual compensation of $15,000 plus a fee of $2,000 for attendance (in
person or by telephone) at each meeting of the Board of Directors. Independent
Directors who are members of the audit committee receive a fee of $1,000 for
attendance (in person or by telephone) at each meeting of the audit committee.

The Company does not pay any compensation to its officers or employees or to
directors who are not Independent Directors.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

The Bank owns 100% of the common stock of the Company. The Bank is an indirectly
wholly owned subsidiary of Golden State.

GSB Investments Corp. owns 33.9% of the common stock of Golden State as of
January 31, 1999. Ronald O. Perelman, who is a Director of Golden State and the
Bank, is the indirect beneficial owner of all of the outstanding capital stock
of GSB Investments Corp. Accordingly, Mr. Perelman may be deemed to be the
beneficial owner of all of the shares of common stock of Golden State owned by
GSB Investments Corp. The shares of common stock of Golden State owned by GSB
Investments Corp. are or may be from time to time pledged to secure obligations
of GSB Investments Corp. or its affiliates.

Hunter's Glen/Ford, Ltd. ("Hunter's Glen"), a Texas limited partnership, owns
12.5% of the common stock of Golden State as of January 31, 1999. Mr. Ford is
the indirect beneficial owner of all the outstanding capital stock of Ford
Diamond Corporation, the general partner of Hunter's Glen. Accordingly, Mr. Ford
may be deemed to be the beneficial owner of all of the shares of common stock of
Golden State owned by Hunter's Glen.

Both GSB Investments Corp. and Hunter's Glen are entitled to receive from Golden
State, on a contingent basis, additional shares of common stock of Golden State
in accordance with the terms of that certain plan of reorganization and merger
dated February 4, 1998, as amended pursuant to which Parent Holdings, the then
indirect owner of the Bank, was merged into Golden State. Among the
circumstances that result in the issuance of additional shares to GSB
Investments Corp. and Hunter's Glen is the use by Golden State of potential tax
benefits resulting from certain net operating loss carry forwards of Parent
Holdings, its former subsidiary First Nationwide Holdings Inc. and the Bank. The
total value of the contingent shares issued in any one year is limited to $100
million.

The Company is not aware of any other shareholder of Golden State who
beneficially owns 5% or more of its common stock.


ITEM 13. Certain Relationships and Related Transactions


FNMC services the residential mortgage loans included in the Company's portfolio
and is entitled to receive fees in connection with the related servicing
agreement. Loan servicing fees paid to FNMC for the years ended December 31,
1998 and 1997 totalled $3.7 million and $3.4 million, respectively. See
"Business - Servicing of Residential Mortgage Loans."

On September 29, 1998, the Company borrowed $11.4 million from the Bank for the
purpose of disbursing a portion of the common stock dividends paid during
September 1998. The note bore interest at 5% per annum, compounded annually. The
outstanding balance of this note was repaid in November 1998. Interest expense
totalling $89,000 was recorded by the Company with respect to this note during
the year ended December 31, 1998.



                                       28

<PAGE>



ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)  1. Financial Statement Schedules

Schedules are omitted because of the absence of conditions under which they are
required or because the required information is provided in the financial
statements or notes thereto.


(a)  2. Exhibits


      3.1      Amended and Restated Charter of the Registrant (Incorporated by
               reference to Exhibit 3.1 to the Registrant's Quarterly Report on
               Form 10-Q for the quarter ended March 31, 1997 (the "March 1997
               Form 10-Q")).
      3.2      By-laws of the Registrant, as amended (Incorporated by reference 
               to Exhibit 3(b) to Amendment No. 2 to the Registrant's 
               Registration Statement on Form S-11 (File No.  333-11609)).
     10.1      Mortgage Loan Purchase and Warranties Agreement, dated as of
               January 24, 1997, by and between California Federal Preferred
               Capital Corporation and California Federal Bank, A Federal
               Savings Bank. (Incorporated by reference to Exhibit 10.1 to the
               March 1997 Form 10-Q).
     10.2      Servicing Agreement, entered into as of January 31, 1997, by and
               between First Nationwide Mortgage Corporation and California
               Federal Preferred Capital Corporation. (Incorporated by reference
               to Exhibit 10.2 to the March 1997 Form 10-Q).
     10.3      Promissory Note, entered into as of September 29, 1998, between
               California Federal Bank, A Federal Savings Bank, lender, and
               California Federal Preferred Capital Corporation, borrower
               (Incorporated by reference to the Registrant's Quarterly Report
               on Form 10-Q for the quarter ended September 30, 1998).
     24.1      Power of Attorney executed by P. Richard Frieder.
     24.2      Power of Attorney executed by Robert Nichols.
     27.1      Financial Data Schedule

(b)  Reports on Form 8-K

None.




                                       29

<PAGE>


                                   SIGNATURES

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

Dated: March 25, 1999


                                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION

                                

                                By: /s/ Gerald J. Ford
                                    ----------------------------    
                                    Gerald J. Ford
                                    Chairman of the Board
                                    and Chief Executive Officer


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


<TABLE>
<CAPTION>
              NAME                                 TITLE                                        DATE
<S>                                                <C>                                          <C>
      /s/ Gerald J. Ford                           Chairman of the Board, Chief                 March 25, 1999
---------------------------------                  Executive Officer and Director
         Gerald J. Ford                            

      /s/ Carl B. Webb                             President, Chief Operating                   March 25, 1999
---------------------------------                  Officer and Director
          Carl B. Webb                             

      /s/ Christie S. Flanagan                     Executive Vice President,                    March 25, 1999
---------------------------------                  General Counsel and Director
      Christie S. Flanagan                         

      /s/ Richard H. Terzian                       Executive Vice President, Chief              March 25, 1999
---------------------------------                  Financial Officer and Director
        Richard H. Terzian                         (Principal Financial Officer)
                                 

               *                                   Director                                     March 25, 1999
---------------------------------
       P. Richard Frieder

               *                                   Director                                     March 25, 1999
---------------------------------
         Robert Nichols

      /s/ James R. Staff                           Director                                     March 25, 1999
---------------------------------
         James R. Staff
</TABLE>

* By: /s/ Eric K. Kawamura 
      ---------------------------         
      Eric K. Kawamura, Their Attorney-in-Fact




                                      
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
California Federal Preferred Capital Corporation:


We have audited the accompanying balance sheets of California Federal Preferred
Capital Corporation (the "Company") as of December 31, 1998 and 1997 and the
related statements of income, stockholders' equity, and cash flows for each of
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of California Federal Preferred
Capital Corporation as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.



                                                          KPMG LLP

San Francisco, California
January 22, 1999



<PAGE>
<TABLE>
<CAPTION>


                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION


                                 Balance Sheets
                           December 31, 1998 and 1997
                  (dollars in thousands, except per share data)


                                                                                          1998               1997
                                                                                          ----               ----
<S>                                                                                    <C>               <C>   

ASSETS

Residential mortgage loans, net                                                        $    945,970      $     969,423
Cash and cash equivalents                                                                     2,505              6,382
Due from affiliates                                                                          41,444             19,800
Accrued interest receivable                                                                   5,044              5,399
Foreclosed real estate, net                                                                     783                491
                                                                                       ------------      -------------

     TOTAL ASSETS                                                                      $    995,746      $   1,001,495
                                                                                       ============      =============

LIABILITIES AND STOCKHOLDERS' EQUITY

Due to affiliates                                                                      $        712      $          --
Accounts payable and accrued liabilities                                                        124                349
                                                                                       ------------      -------------

     Total Liabilities                                                                          836                349
                                                                                       ------------      -------------

Commitments and contingencies                                                                    --                 --

Stockholders' Equity:

Preferred stock, par value $0.01 per share, liquidation preference $500,000,
     30,000,000 shares authorized, 20,000,000 shares issued and outstanding                 500,000            500,000
Common stock, par value $0.01 per share, 30,000,000 shares authorized,
     1,000 shares issued and outstanding                                                         --                 --
Additional paid-in capital                                                                  500,000            500,000
Retained earnings (accumulated deficit)                                                      (5,090)             1,146
                                                                                       ------------       ------------

     Total Stockholders' Equity                                                             994,910          1,001,146
                                                                                       ------------      -------------

     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                        $    995,746       $  1,001,495
                                                                                       ============       ============

</TABLE>

See accompanying notes to financial statements.



                                       F-2

<PAGE>


                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION


                              Statements of Income
                     Years Ended December 31, 1998 and 1997
                                 (in thousands)


                                                         
                                                            1998        1997
                                                            ----        ----
INTEREST INCOME

Residential mortgage loans                               $  74,984    $  68,098 
     Less: servicing fee expense                            (3,679)      (3,350)
                                                         ---------    ---------
                                                            71,305       64,748
Short-term investments                                         963        1,164
                                                         ---------    ---------
     Interest income, net of servicing fee expense          72,268       65,912
                                                                     
INTEREST EXPENSE                                                     
                                                                     
Borrowing from Bank                                             89           --
                                                         ---------    ---------
     Net interest income                                    72,179       65,912
                                                                     
Provision for loan losses                                    2,310        2,310
                                                         ---------    ---------
                                                                     
     Net interest income after provision for loan losses    69,869       63,602
                                                         ---------    ---------
                                                                     
NONINTEREST EXPENSE                                                  
                                                                     
Directors fees                                                  52           44
Professional fees                                               65           51
Foreclosed real estate operations, net                        (206)         (26)
Other                                                           53           38
                                                         ---------    ---------
                                                                     
     Total noninterest expense                                 (36)         107
                                                         ---------    ---------
                                                                     
Income before income taxes                                  69,905       63,495
Income taxes                                                    65           --
                                                         ---------    ---------
                                                                     
NET INCOME                                                  69,840       63,495
                                                                     
Preferred stock dividends                                   45,625       41,949
                                                         ---------    ---------
                                                                     
NET INCOME AVAILABLE TO COMMON STOCKHOLDER               $  24,215    $  21,546
                                                         =========    =========
                                                                     
                                                                   

See accompanying notes to financial statements.



                                       F-3

<PAGE>
<TABLE>
<CAPTION>


                                 CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION


                                        Statements of Stockholders' Equity
                                      Years Ended December 31, 1998 and 1997
                                                  (in thousands)

                                         
                                                                                              Retained
                                                                             Additiona        Earnings             Total
                                                Preferred       Common       l Paid-in      (Accumulated       Stockholders'
                                                  Stock          Stock        Capital         Deficit)            Equity
                                                  -----          -----        -------         --------            ------
<S>                                             <C>           <C>           <C>               <C>              <C>        
BALANCE AT DECEMBER 31, 1996 (note (1))         $     --      $     --      $     --          $     --         $        --

Initial public offering of 9-1/8%
     noncumulative exchangeable
     preferred stock, series A
     on January 31, 1997                         500,000            --            --                 --            500,000

Capital contribution from common
      stockholder                                     --            --       500,000                 --            500,000

Net income                                            --            --            --             63,495             63,495

Dividends paid on 9-1/8% Noncumulative
     exchangeable preferred stock,
     series A                                         --            --            --            (41,949)           (41,949)

Dividends paid on common stock                        --            --             --           (20,400)           (20,400)
                                                ---------     --------       --------        ----------         ----------

BALANCE AT DECEMBER  31, 1997                    500,000            --       500,000              1,146          1,001,146

Net income                                            --            --            --             69,840             69,840

Dividends paid on 9-1/8% Noncumulative
     exchangeable preferred stock,
     series A                                         --            --            --            (45,625)           (45,625)

Dividends paid on common stock                        --            --             --           (30,451)           (30,451)
                                                --------      --------      ---------        ----------        -----------

BALANCE AT DECEMBER  31, 1998                   $500,000      $     --      $500,000         $   (5,090)       $   994,910
                                                ========      ========      ========         ==========        ===========


</TABLE>

See accompanying notes to financial statements.



                                       F-4

<PAGE>

<TABLE>
<CAPTION>

                                     CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
                                               NOTES TO FINANCIAL STATEMENTS

                                             Statements of Cash Flows
                                      Years Ended December 31, 1998 and 1997
                                                  (in thousands)


                                                                                            1998             1997
                                                                                            ----             ----
<S>                                                                                       <C>               <C>   

OPERATING ACTIVITIES:

Net income                                                                                $     69,840      $     63,495
Adjustments to reconcile net income to net cash provided by operating activities:
     Amortization of  purchase discounts and premiums, net                                         350                75
     Provision for loan losses                                                                   2,310             2,310
     Provision for losses on foreclosed real estate                                                  9                --
     Gain on sales of foreclosed real estate, net                                                 (224)              (26)
     Increase in due from affiliates                                                              (795)             (217)
     Decrease in accrued interest receivable                                                     1,932             1,497
     (Decrease)/Increase in accounts payable and accrued liabilities                              (225)              349
     Increase in due to affiliates                                                                 712                --
                                                                                         -------------     -------------

Net cash provided by operating activities                                                       73,909            67,483
                                                                                         -------------     -------------

INVESTING ACTIVITIES:

Purchase of mortgage loans                                                                    (352,109)       (1,189,541)
Mortgage loan principal repayments                                                             349,600           197,397
Purchase of accrued interest receivable                                                         (1,577)           (6,896)
Proceeds from sales of foreclosed real estate                                                    2,452               288
Foreclosed real estate advances funded                                                             (76)               --
                                                                                         -------------      ------------

Net cash used in investing activities                                                           (1,710)         (998,752)
                                                                                         -------------      ------------

FINANCING ACTIVITIES:

Proceeds from note payable to Bank                                                              11,406                --
Repayment of note payable to Bank                                                              (11,406)               --
Proceeds from capital contributed by Bank                                                           --           500,000
Proceeds from preferred stock issued                                                                --           500,000
Common stock dividends paid                                                                    (30,451)          (20,400)
Preferred stock dividends paid                                                                 (45,625)          (41,949)
                                                                                         -------------     -------------

Net cash (used in) provided by financing activities                                            (76,076)          937,651

NET(DECREASE)/ INCREASE IN CASH AND CASH EQUIVALENTS                                            (3,877)            6,382

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                 6,382                --
                                                                                         -------------     -------------

CASH AND CASH EQUIVALENTS AT DECEMBER 31, 1998                                           $       2,505     $       6,382
                                                                                         =============     =============

Supplemental disclosures of cash flow information:
     Cash paid for interest                                                              $          89     $          --
                                                                                         =============     =============
     Cash paid for income taxes                                                          $          65     $          --
                                                                                         =============     =============

</TABLE>

See accompanying notes to financial statements.



                                       F-5

<PAGE>


                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

(1)  Organizational and Basis of Presentation

California Federal Preferred Capital Corporation, formerly First Nationwide
Preferred Capital Corporation (the "Company"), is a Maryland corporation
incorporated on November 19, 1996 which was created for the purpose of
acquiring, holding and managing real estate assets. The Company's outstanding
common stock was issued on November 19, 1996 and is wholly-owned by California
Federal Bank, A Federal Savings Bank (the "Bank").

On January 31, 1997, the Company commenced its operations with the consummation
of an initial public offering of 20,000,000 shares of the Company's 9.125%
Noncumulative Exchangeable Preferred Stock, Series A (the "Series A Preferred
Shares"), $0.01 par value, which raised $500 million. The Series A Preferred
Shares are traded on the New York Stock Exchange under the trading symbol "CFP."
Expenses incurred relative to the offering and the formation of the Company were
borne by the Bank. Concurrent with the issuance of the Series A Preferred
Shares, the Bank contributed additional capital of $500 million to the Company.

The Company used the proceeds raised from the initial public offering of the
Series A Preferred Shares and the additional capital contributed by the Bank to
purchase from the Bank the Company's initial portfolio of residential mortgage
loans at their estimated fair value of $996.5 million. The residential mortgage
loans were recorded in the accompanying financial statements at the Bank's
carrying value which approximated their estimated fair values. Pursuant to a
servicing agreement with the Bank's wholly-owned mortgage banking subsidiary,
First Nationwide Mortgage Corporation ("FNMC") services the Company's mortgage
assets.

(2)  Summary of Significant Accounting Policies

The accounting and reporting policies of the Company conform to generally
accepted accounting principles. The following summarizes the more significant of
these polices:

         (a)  Residential Mortgage Loans

         Residential mortgage loans are carried at the principal amount
         outstanding, net of unamortized purchase discounts and premiums.
         Discounts or premiums are accreted or amortized to income using the
         interest method over the contractual term of the loans. Unaccreted or
         unamortized discounts or premiums on loans sold or paid in full are
         recognized in income at the time of sale or payoff. It is the Company's
         policy to place a loan on nonaccrual status when a borrower is 90 days
         or more delinquent. When a loan is placed on nonaccrual status, the
         accrued and unpaid interest receivable is reversed. Amortization or
         accretion of premiums or discounts associated with loans that are on
         non-accrual status is discontinued. Income is subsequently recognized
         only to the extent that cash payments are received. When, in
         management's judgment, the borrower's ability to make periodic interest
         and principal payments resumes, the loan is returned to accrual status.

         The Company considers a loan to be impaired when it is "probable" that
         a creditor will be unable to collect all amounts due (i.e., both
         principal and interest) according to the contractual terms of the loan
         agreement. The measurement of impairment may be based on (i) the
         present value of the expected future cash flows of the impaired loan
         discounted at the loan's original effective interest rate, (ii) the
         observable market price of the impaired loan, or (iii) the fair value
         of the collateral of a collateral-dependent loan. Large groups of
         smaller balance homogeneous loans are collectively evaluated for
         impairment. The Company collectively reviews its portfolio of
         residential mortgage loans for impairment due to its homogeneous
         composition.

         Residential mortgage loans consist primarily of adjustable rate
         mortgages ("ARMs") which adjust periodically based on changes in
         various indices including the FHLB Eleventh District Cost of Funds, the
         one-year Treasury rate and the six-month Treasury rate. Certain types
         of residential mortgage loans contain an option for the mortgagor to
         convert the ARM to a fixed rate loan for the remainder of the term.



                                       F-6

<PAGE>


                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

         (b)  Allowance for Loan Losses

         The allowance for loan losses is a general allowance which is increased
         by charges to income and decreased by charge-offs (net of recoveries).
         Management's periodic evaluation of the adequacy of the allowance is
         based on such factors as the Bank's and the Company's past loan loss
         experience, delinquency trends, known and inherent risks in the
         portfolio, potential adverse situations that may affect the borrower's
         ability to repay, the estimated value of underlying collateral, and
         current economic conditions.

         Although management believes that its present allowance for loan losses
         is adequate, it will continue to review its loan portfolio to determine
         the extent to which any changes in loss experience may require
         additional provisions in the future.

         (c)  Cash and Cash Equivalents

         For purposes of the statement of cash flows, cash and cash equivalents
         include cash and amounts due from banks, and other short-term
         investments with original maturities of three months or less.

         (d)  Foreclosed Real Estate

         Real estate acquired through foreclosure consists of 1-4 unit
         residential real estate and is carried at the lower of cost or fair
         value less estimated disposal costs at the time of foreclosure.
         Subsequent to foreclosure, the Company charges current earnings with a
         provision for estimated losses when the carrying value of the
         collateral property exceeds its fair value.

         (e)  Income Taxes

         The Company has elected to be treated as a Real Estate Investment Trust
         ("REIT") for Federal income tax purposes. Accordingly, in general, the
         Company is not subject to Federal income tax to the extent it
         distributes its income to stockholders and as long as certain asset,
         income and stock ownership tests are met in accordance with the
         Internal Revenue Code of 1986 (the "IRC"), as amended. The Company is
         subject to Federal income tax on net gains on the sale of foreclosed
         real estate. The Company recorded $65,000 of income tax expense during
         1998 related to foreclosure sale gains.

         Pursuant to IRC Section 857(a), the Company is required to distribute
         95% of its taxable income. Taxable income may vary from book earnings
         as a result of temporary differences. For the year ended December 31,
         1998, taxable income before dividend distributions was estimated to be
         $73.7 million and, for the year ended December 31, 1997, taxable income
         before dividend distributions was $66.8 million. Temporary differences
         consisted primarily of differences in the book basis and tax basis of
         residential mortgage loans and provisions for loan losses in excess of
         chargeoffs.

         (f)  Management's Use of Estimates

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect (i) the reported amounts of assets and
         liabilities, (ii) disclosure of contingent assets and liabilities at
         the date of the financial statements and (iii) the reported amounts of
         revenues and expenses during the reporting period. Actual results could
         differ from those estimates.

          (g)  Earnings per share

         As all the Company's common stock is owned by the Bank, earnings per
         share data is not presented.


                                       F-7

<PAGE>


                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

         (h)  Newly Issued Accounting Pronouncements

         In June 1998, the FASB issued Statement of Financial Accounting
         Standards No. 133, Accounting for Derivative Instruments and Hedging
         Activities ("SFAS No. 133"). SFAS No. 133 establishes standards for
         derivative instruments and for hedging activities, and requires that an
         entity recognize all derivatives as either assets or liabilities in the
         statement of financial position and measure those instruments at fair
         value. Under SFAS No. 133, an entity that elects to apply hedge
         accounting is required to establish at the inception of the hedge the
         method it will use for assessing the effectiveness of the hedging
         derivative and the measurement approach for determining the ineffective
         aspect of the hedge. SFAS No. 133 applies to all entities and amends
         FASB Statement No. 107, Disclosures About Fair Values of Financial
         Instruments, to include in Statement 107 the disclosure provisions
         about concentrations of credit risk from Statement 105. SFAS No. 133
         supersedes FASB Statements No. 80, Accounting for Futures Contracts,
         No. 105, Disclosure of Information about Financial Instruments with
         Off-Balance Sheet Risk and Financial Instruments with Concentrations of
         Credit Risk, and No. 119, Disclosure about Derivative Financial
         Instruments and Fair Value of Financial Instruments. SFAS No. 133 also
         nullifies or modifies the consensuses reached in a number of issues
         addressed by the Emerging Issues Task Force. SFAS No. 133 is effective
         for all fiscal quarters of fiscal years beginning after September 15,
         1999. Initial application of this statement should be as of the
         beginning of an entity's fiscal quarter; on that date, hedging
         relationships must be designated anew and documented pursuant to the
         provisions of this statement. Earlier application of all of the
         provisions of SFAS No. 133 is encouraged, but is permitted only as of
         the beginning of any fiscal quarter that begins after issuance of this
         statement. SFAS No. 133 should not be applied retroactively to
         financial statements of prior periods. The Company owns no derivative
         instruments and was involved in no hedging activities at December 31,
         1998, accordingly, SFAS No. 133 is expected to have no impact on the
         Company's financial statements.

(3)  Supplemental Disclosure of Cash Flow Information

During the years ended December 31,1998 and 1997, noncash activity included
transfers from residential mortgage loans to foreclosed real estate of $2.5
million and $753,000, respectively.

In accordance with the servicing agreement, certain principal repayments are not
remitted by FNMC, in its capacity as servicer, to the Company until the month
following FNMC's receipt of such repayments from mortgagors. The Company records
mortgage loan principal repayments during the period such repayments are
received by FNMC. During the years ended December 31, 1998 and 1997, the Company
recorded principal reductions to residential mortgage loans which exceeded cash
received from FNMC for mortgage loan principal repayments by $20.8 million and
$19.6 million, respectively. An equal offsetting increase to due from affiliates
was also recorded during each period.

(4)  Residential Mortgage Loans, Net

At December 31, 1998 and 1997, residential mortgage loans, net consisted of the
following (in thousands):

                                           
                                                        At December 31,
                                                        ---------------
                                                     1998              1997
                                                     ----              ----
1-4 unit residential mortgage loans             $     951,454       $  976,155
Purchase discounts and premiums, net                    2,929              578
Allowance for loan losses                              (8,413)          (7,310)
                                                -------------       ----------
Total residential mortgage loans, net           $     945,970       $  969,423
                                                =============       ==========

At December 31, 1998 and 1997 residential mortgage loans on nonaccrual totalled
$1.6 million and $3.6 million, respectively.



                                       F-8

<PAGE>


                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

For loans on nonaccrual at December 31, 1998 and 1997, the Company recognized
$52,000 and $75,000 of interest income during the years ended December 31, 1998
and 1997, respectively. The Company would have recognized $127,000 and $233,000
of interest income during the years ended December 31, 1998 and 1997,
respectively, on such loans had the borrowers performed under the contractual
terms of the loans.

At December 31, 1998, the Company's total residential mortgage loan portfolio
includes $795.8 million of loans secured by residential real estate properties
located in California. These loans may be subject to a greater risk of default
than other comparable residential mortgage loans in the event of natural hazards
or other adverse conditions in California that may affect the ability of
residential property owners in California to make payments of principal and
interest on underlying mortgages.

Activity in the allowance for loan losses for the years ended December 31, 1998
and 1997 is summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                1998           1997
                                                                ----           ----
<S>                                                          <C>             <C>  
Balance - beginning of year                                  $   7,310       $     --
Allowance attributable to loans purchased from the Bank             --          5,000
Provision for loan losses                                        2,310          2,310
Charge-offs                                                     (1,207)            --
                                                             ---------       --------

Balance - end of year                                        $   8,413       $  7,310
                                                             =========       ========
</TABLE>

(5)  Preferred Stock

The liquidation value of each Series A Preferred Share is $25 plus any
authorized, declared and unpaid dividends. Except upon the occurrence of certain
events, the Series A Preferred Shares are not redeemable until January 31, 2002,
and are redeemable thereafter at the option of the Company. If, due to the
occurrence of certain events, the Series A Preferred Shares are redeemed prior
to January 31, 2002, the per share redemption price will be $25.00 plus any
authorized, declared and unpaid dividends. If redeemed during the twelve-month
period beginning January 31, 2002, the per share redemption price will be $26.14
plus any authorized, declared and unpaid dividends. This per share redemption
price incrementally declines annually after January 31, 2002 down to $25.00 plus
any authorized declared and unpaid dividends on January 31, 2007. Except under
certain limited circumstances, the holders of the Series A Preferred Shares have
no voting rights. The Series A Preferred Shares are automatically exchangeable
for a new series of preferred stock of the Bank upon the occurrence of certain
limited events.

(6)  Dividends

Holders of Series A Preferred Shares are entitled to receive, if, when and as
authorized and declared by the Board of Directors of the Company out of funds
legally available, noncumulative dividends at a rate of 9.125% per annum of the
initial liquidation preference ($25.00 per share). Dividends on the Series A
Preferred Shares, if authorized and declared, are payable quarterly in arrears
on the last day of March, June, September and December. Dividends paid during
the years ended December 31, 1998 and 1997 to the holders of the Series A
Preferred Shares totalled $45.6 million and $41.9 million, respectively.

Dividends on common stock are paid when, as and if authorized and declared by
the Board of Directors out of funds legally available after all preferred
dividends have been paid. Common stock dividends paid during the years ended
December 31, 1998 and 1997 totalled $30.5 million and $20.4 million,
respectively.

(7)  Related Party Transactions

The Company entered into a servicing agreement with FNMC pursuant to which FNMC
performs the actual servicing of the residential mortgage loans held by the
Company in accordance with normal industry practice (the "Servicing Agreement").
The Servicing Agreement can be terminated without cause with at least 30 days
written prior notice to FNMC and payment to FNMC of a termination fee equal to
2% of the outstanding principal balances of the loans. The servicing fee ranges
from 0.25% to 0.50% per year of the outstanding principal balances. Servicing
fee expense totalled $3.7 million and $3.4 million for the years ended December
31, 1998 and 1997, respectively. FNMC is also entitled to a 1% disposition fee
on the aggregate proceeds obtained in the sale of a foreclosed residential
mortgage loan. The Company recorded such disposition fees totalling

                                       F-9

<PAGE>


                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

$27,000 during the year ended December 31, 1998. No disposition fees were
recorded during the year ended December 31, 1997.

In its capacity as servicer, FNMC holds mortgage loan payments received on
behalf of the Company in a custodial account at the Bank. The balance of this
account totalled approximately $41.4 million and $19.6 million at December 31,
1998 and 1997, respectively, and is included in due from affiliates.
Substantially all of such payments were passed through to the Company in January
1999 and 1998, respectively, as provided in the Servicing Agreement. At December
31, 1998 and 1997, trust funds of approximately $1.5 million and $1.4 million,
respectively, representing escrows received from borrowers, are on deposit in a
trust account at the Bank and are not included in the accompanying financial
statements.

As of December 31, 1998 the Company owed the Bank approximately $712,000 in
connection with the settlement of loans purchased from the Bank, advances
related to foreclosed real estate and expenses incurred by the Company to be
reimbursed to the Bank. This amount was paid to the Bank during January 1999.

As of December 31, 1997 the Bank owed the Company approximately $160,000 in
connection with proceeds from the Company's sale of a foreclosed real estate
property, offset by amounts related to the settlement of loans purchased from
the Bank and expenses incurred by the Company to be reimbursed to the Bank. This
amount is included in due from affiliates.
The Bank paid this amount to the Company during January 1998.

On September 29, 1998, the Company borrowed $11.4 million from the Bank for the
purpose of disbursing a portion of the common stock dividends paid during
September 1998. The note bore interest at 5% per annum, compounded annually. The
outstanding balance of this note was repaid in November 1998. Interest expense
totalling $89,000 was recorded by the Company with respect to this note during
the year ended December 31, 1998.

(8)  Commitments and Contingencies

ARMs whose interest rates adjust monthly based upon the FHLB Eleventh District
Cost of Funds limit payment changes to no more than 7.5% of the payment amount
per year. This may lead to monthly payments which are less than the amount
necessary to amortize the loan to maturity at the interest rate in effect for
any particular month. In the event that the monthly payment is not sufficient to
pay interest accruing on the loan during the month, this deficiency is added to
the loan's principal balance (i.e., negative amortization). The total
outstanding principal balance for a particular loan is generally not allowed to
exceed 125% of the original loan amount as a result of negative amortization. If
the loan reaches its maximum amount, the loan payment is recalculated to the
payment sufficient to repay the unpaid principal balance in full at the maturity
date. At December 31, 1998, residential mortgage loans included approximately
$291.0 million of principal balance, or approximately 31% of the residential
mortgage loans held by the Company at December 31, 1998, that had the potential
to negatively amortize. Approximately $58.8 million or 6% of residential
mortgage loans have negatively amortized such that the current principal balance
of the loan exceeds the original principal balance. The current principal
balance exceeded the original principal balance by approximately $1.6 million as
of December 31, 1998.

(9)  Fair Value of Financial Instruments

The following table represents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1998 and 1997 (in thousands):

<TABLE>
<CAPTION>

                                                 1998                                  1997
                                   ---------------------------------      ------------------------------
                                       Carrying            Fair              Carrying          Fair
                                         Value            Value                Value          Value
                                         -----            -----                -----          -----
<S>                                     <C>             <C>                  <C>            <C>    
Residential mortgage loans, net         $945,970         970,907             $969,423       $991,608
Short-term investments                     2,505           2,505                6,382          6,382
</TABLE>

The carrying amounts in the table are included in the accompanying balance sheet
under the indicated captions.

The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Company's financial
instruments. Much of the information used to determine fair value is highly
subjective. When applicable,

                                      F-10

<PAGE>


                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

readily available market information has been utilized. However, considerable
judgment was required in estimating fair value for certain items. The subjective
factors include, among other things, the estimated timing and amount of cash
flows, risk characteristics, and interest rates, all of which are subject to
changes.

Residential mortgage loans, net: Fair values are estimated for residential
mortgage loans in groups with similar financial and risk characteristics.
Residential mortgage loans are segregated into fixed and variable interest rate
terms and by performing and non-performing categories in order to estimate fair
values. For performing residential mortgage loans, fair value is estimated by
discounting contractual cash flows adjusted for prepayment estimates using
discount rates based on secondary market sources. Fair value for nonperforming
residential mortgage loans is based on discounting estimated cash flows using a
rate commensurate with the risk associated with the estimated cash flows, or
underlying collateral values, where appropriate. Fair value of residential
mortgage loans has not been reduced by the value of the Servicing Agreement.

Short-term investments: The carrying value of short-term investments reflects
fair value.


(10) Selected Quarterly Financial Data

The following table represents selected quarterly financial data for the years
ended December 31, 1998 and 1997 (in thousands) (unaudited):
<TABLE>
<CAPTION>


                                                              Quarter Ended
                                       -----------------------------------------------------
                                       December 31,    September 30,    June 30,   March 31,                    
                                           1998             1998          1998       1998      Total 1998
                                           ----             ----          ----       ----      ----------
<S>                                     <C>            <C>             <C>         <C>         <C>    
             
Interest income (1)                     $  17,335       $   18,046     $  18,072   $  18,815    $ 72,268
Interest expense                               89              --            --          --           89
                                        ---------       ----------     ---------   ---------    --------
     Net interest income                   17,246           18,046        18,072      18,815      72,179
Provision for loan losses                    (630)            (630)         (630)       (420)     (2,310)
                                        ---------       ----------     ---------   ---------    --------
     Net interest income after                                         
          provision for loan losses        16,616           17,416        17,442      18,395      69,869
Total noninterest expense                     (80)             (65)           67          42         (36)
                                        ---------       ----------     ---------   ---------    --------
Income before income taxes                 16,696           17,481        17,375      18,353      69,905
Income taxes                                   21               44           --          --           65
                                        ---------       ----------     ---------   ---------    --------
Net income                              $  16,675       $   17,437     $  17,375   $  18,353    $ 69,840
                                        =========       ==========     =========   =========    ========
                                                                       
                                                            Quarter Ended
                                        ----------------------------------------------------
                                        December 31,    September 30,   June 30,   March 31,
                                            1997            1997          1997        1997     Total 1997
                                            ----            ----          ----        ----     ----------
                                        
Interest income (1)                     $  18,666       $   19,005     $  17,199   $  11,042   $  65,912
Provision for loan losses                    (630)            (630)         (630)       (420)     (2,310)
                                         --------       ----------     ---------   ---------   ---------
     Net interest income after
         provision for loan losses         18,036           18,375        16,569      10,622      63,602
Total noninterest expense                      (4)             (26)          (36)        (41)       (107)
                                         --------       ----------     ---------   ---------   ---------

Net income                               $ 18,032       $   18,349     $  16,533   $  10,581   $  63,495
                                         ========        =========     =========   =========   =========

</TABLE>

 ----------------------------
(1) Gross interest income less servicing fee expense

                                      F-11