<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, 1997

                        Commission file number: 1-12639

 -----------------------------------------------------------------------------
                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
             (Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S>                                                                    <C>
------------------------------------------------------------------------------------------------------------
       Maryland                                                                   94-3254883
(State or other jurisdiction of incorporation or organization          (I.R.S. employer  Identification no.)
------------------------------------------------------------------------------------------------------------
200 Crescent Court, Suite 1350, Dallas, Texas                                        75201
(Address of principal executive offices)                                           (Zip code)
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</TABLE>
       Registrant's telephone number, including area code: (214) 871-5131

          Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
<S>                                                              <C>
           Title of each class                                   Name of each exchange on which registered
9-1/8% Noncumulative Exchangeable Preferred Stock, Series A                New York Stock Exchange
</TABLE>

        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, 1998: N/A

     Number of shares outstanding of registrant's common stock $0.01 par value
on March 23, 1998: 1,000 shares

                      Documents Incorporated by Reference
                                      None
                               Page 1 of 45 pages
                            Exhibit index on page 26




<PAGE>



                        1997 ANNUAL REPORT ON FORM 10-K
                               TABLE OF CONTENTS

                                    PART I
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<CAPTION>
                                                                                                                   Page
<S>            <C>                                                                                               <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....................................................    11
                              Delinquencies and Nonperforming Loans..............................................    12
                              Geographic Distribution............................................................    12
                              Servicing of Residential Mortgage Loans............................................    13
                              Capital and Leverage Policies......................................................    13
                              Employees..........................................................................    14
                              Competition........................................................................    14
                              Environmental Matters..............................................................    14
                              Tax Status of the Company..........................................................    14
ITEM 2.        Properties........................................................................................    15
ITEM 3.        Legal Proceedings.................................................................................    15
ITEM 4.        Submission of Matters to a Vote of Security Holders...............................................    15

                                                             PART II

ITEM 5.        Market for the Registrant's Common Equity and Related Stockholder Matters.........................    16
ITEM 6.        Selected Financial Data...........................................................................    17
ITEM 7.        Management's Discussion and Analysis of Financial Condition and Results of Operations.............    18
                              Overview ..........................................................................    18
                              Results of Operations..............................................................    18
                              Residential Mortgage Loans.........................................................    19
                              Allowance for Loan Losses..........................................................    19
                              Interest Rate Risk.................................................................    19
                              Significant Concentration of Credit Risk...........................................    20
                              Liquidity Risk Management..........................................................    20
                              Impact of Inflation and Changing Prices............................................    21
                              Other Matters......................................................................    21
                              Year 2000..........................................................................    21
ITEM 7A.       Quantitative and Qualitative Disclosures about Market Risk........................................    22
ITEM 8.        Financial Statements and Supplementary Data.......................................................    23
ITEM 9.        Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............    23

                                                            PART III

ITEM 10.       Directors and Executive Officers of the Registrant................................................    24
ITEM 11.       Executive Compensation............................................................................    25
ITEM 12.       Security Ownership of Certain Beneficial Owners and Management....................................    25
ITEM 13.       Certain Relationships and Related Transactions....................................................    25

                                                             PART IV

ITEM 14.       Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................    26
</TABLE>


                                       2

<PAGE>



         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 and
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," "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, 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 is wholly-owned by California Federal Bank, A Federal Savings Bank
(the "Bank"). The Bank is wholly-owned by First Nationwide Holdings Inc. ("FN
Holdings"). 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, 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 $500,000,000. 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 $500,000,000 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 $996,489,000. The residential mortgage
loans were recorded in the accompanying financial statements at the Bank's
historical cost basis which approximated their estimated fair values. The
Company has entered into a servicing agreement ("Servicing Agreement") with the
Bank's wholly-owned mortgage banking subsidiary, First Nationwide Mortgage
Corporation ("FNMC"), to service the Company's mortgage assets.

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 occurance 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 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

                                       4

<PAGE>



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 occurance 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 occurance 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 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.

                                       5

<PAGE>



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.

         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:


                                       6

<PAGE>




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.

"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

                                       7

<PAGE>



         (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 FN
         Holdings 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 FN Holdings and 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 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.

                                       8

<PAGE>



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) or during a proportionate part of a
shorter taxable year (the "Five or Fewer Test"). The Five or Fewer Test is
applied using certain constructive ownership rules. Certain significant
shareholders of FN Holdings (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. 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 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; 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.



                                       9

<PAGE>



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 or during a proportionate part of a shorter 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 year ended December 31, 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 is a diversified financial services company whose principal business
consists of (i) operating retail deposit branches to serve consumers in
California and, to a lesser extent, in Florida and Nevada, (ii) originating
and/or purchasing, on a nationwide basis, 1-4 unit residential loans and, to a
lesser extent, certain commercial real estate and consumer loans, for
investment and (iii) mortgage banking activities, including originating and
servicing 1-4 unit residential loans for others. Recently, with its entry into
the sub-prime automobile finance business, the Bank broadened its complement of
consumer lending products.

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, 1997, the Bank had assets totalling $31.3 billion, deposits
totalling $16.2 billion and operated retail branch offices at 225 locations in
three 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% and a core capital (or leverage) ratio of less than
4.0%. At December 31, 1997, the Bank's total risk-based capital ratio was
11.93%, its tier

                                       10

<PAGE>



1 risk-based capital ratio was 10.14% and its core capital (or leverage) ratio
was 5.65%.

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 $969,423,000 at December 31, 1997, 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.

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

                                       11

<PAGE>



agreement between the Company and FNMC dated January 31, 1997. See
"--Servicing."

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, 1997:

<TABLE>
<CAPTION>

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

In general, loans are placed on nonaccrual status after being contractually
delinquent for more than 90 days. When a loan is placed on nonaccrual status,
all interest previously accrued but not received is reversed and the loan is
considered nonperforming.

At December 31, 1997 residential mortgage loans on nonaccrual totalled
$3,591,000, or 0.37% of the total portfolio.

For loans on nonaccrual at December 31, 1997, the Company recognized $75,000 of
interest income during the year ended December 31, 1997. The Company would have
recognized $233,000 of interest income during the year ended December 31, 1997
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.

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

<TABLE>
<CAPTION>

<S>                                                                        <C>
Balance - January 1, 1997                                                     $          --
Allowance attributable to loans purchased from the Bank                               5,000
Provision for loan losses                                                             2,310
Charge-offs                                                                              --
Recoveries                                                                               --
                                                                               ------------

Balance - December 31, 1997                                                    $      7,310
                                                                               ============
</TABLE>

GEOGRAPHIC DISTRIBUTION

The Company's total residential mortgage loan portfolio includes $837,400,000
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
Result of Operations - Significant Concentration of

                                       12

<PAGE>



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 be 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.

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, 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

                                       13

<PAGE>



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.

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.


                                       14

<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.




                                       15

<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 1997, dividends on the Company's common stock totalled $20,400,000. 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."






                                       16

<PAGE>



ITEM 6. SELECTED FINANCIAL DATA

The data presented below represents selected financial data relative to the
Company for the year ended December 31, 1997.


                                                (dollars in thousands)
<TABLE>
<CAPTION>

<S>                                                                   <C>
STATEMENT OF OPERATIONS:

Net interest income                                                    $     65,912
Net interest income after provision for loan losses                    $     63,602
Net income                                                             $     63,495
Average yield on residential mortgage loans                                   7.33%

STATEMENT OF CONDITION AS OF DECEMBER 31, 1997:

Residential mortgage loans, net                                        $    969,423
Total assets                                                           $  1,001,495
Total stockholders' equity                                             $  1,001,146
Number of preferred shares outstanding                                   20,000,000
Number of common shares outstanding                                           1,000
</TABLE>




                                       17

<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 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.

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 $500,000,000. The Series A Preferred Shares are traded on
the NYSE. Concurrent with the sale of the Series A Preferred Shares, the Bank
contributed additional capital of $500,000,000 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

The Company reported net interest income of $65,912,000 for the year ended
December 31, 1997 which was comprised of $64,748,000 ($68,098,000 gross
interest income less $3,350,000 servicing fee expense) from residential
mortgage loans and $1,164,000 from short-term investments, representing an
average yield after servicing fees on residential mortgage loans of 7.33% and
on earning assets of 7.27%, based on average outstanding asset balances of
$883,631,000 and $906,610,000, respectively. The computation of the average
yields on residential mortgage loans and on earning assets is based on average
outstanding asset balances that include 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 sheet. Net interest income after a $2,310,000
provision for loan losses was $63,602,000. After deduction of $44,000 in
directors fees, $51,000 in professional fees and $38,000 in other expenses and
a net positive $26,000 from foreclosed real estate operations, the Company
reported net income of $63,495,000.

During the year ended December 31, 1997, the Company declared and paid
dividends during each of the four quarters, which dividends totalled
$41,949,000 on the outstanding Series A Preferred Shares. Net income available
to the common stockholder for the year ended December 31, 1997 totalled
$21,546,000. During the year ended December 31, 1997, the Company declared and
paid dividends of $20,400,000 to the Bank as common stockholder.



                                       18

<PAGE>



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 $996,489,000. The Company used principal collections to
purchase additional residential mortgage loans totalling approximately
$193,052,000 during the year ended December 31, 1997. Management intends to
continue to reinvest principal collections in additional residential mortgage
loans to be purchased from either the Bank or its affiliates on a periodic
basis.

At December 31, 1997, nonaccruing residential mortgage loans totalled
$3,591,000, or 0.37% of the total portfolio.

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


                                   Principal Balance            Percent
                                    (in thousands)           of Total Loans

   30 to 59 days past due            $  1,427                     0.15%

   60 to 89 days past due            $  1,490                     0.15%

   90 days or more past due          $  3,591                     0.37%

---------------------------------------------------------- ---------------

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, 1997 to be adequate. Although the Company
considers that it has sufficient allowances to absorb losses that currently may
exist in the portfolio, but are not yet identifiable, 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.

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




     Balance - January 1, 1997                                       $   --
     Allowance attributable to loans purchased from the Bank           5,000
     Provision for loan losses                                         2,310
     Charge-offs                                                          --
     Recoveries                                                           --
                                                                     -------
     Balance - December 31, 1997                                     $ 7,310
                                                                     =======

-----------------------------------------------------------------------------

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

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

                                       19

<PAGE>



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.

In addition, approximately 43% of the residential mortgage loans held by the
Company at December 31, 1997 have the potential to negatively amortize, while
approximately 10% of such 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 $2.0 million as of December 31, 1997. 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.

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, 1997:

<TABLE>
<CAPTION>

                                                             Book Value
                                                           (in thousands)              Percent
----------------------------------------------------------------------------------------------
<S>                                                              <C>                     <C>
California                                                       $     837,441           85.7%
Florida                                                                 41,070            4.2%
Other states (37 states and Washington, D.C.; no
     state has more than 2%)                                            98,222           10.1%
                                                               ---------------         -------
                                                                 $     976,733          100.0%
                                                                 =============          ======
----------------------------------------------------------------------------------------------
</TABLE>

The 85.7% 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
Internal Revenue Code ("IRC"), to its common and preferred stockholders. The
Company currently expects to distribute dividends annually to satisfy these
REIT requirements.

                                       20

<PAGE>



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

As presented in the accompanying statement of cash flows, the primary sources
of funds during the year ended December 31, 1997 were $500,000,000 from the
issuance of the Series A Preferred Shares, and $500,000,000 additional capital
contributed by the Bank. Additional significant sources of funds were
$67,483,000 provided by operating activities and $197,397,000 provided by
mortgage loan principal repayments. The primary uses of funds were
$1,189,541,000 and $6,896,000 in purchases of mortgage loans and accrued
interest receivable, respectively, and $41,949,000 and $20,400,000 in preferred
and common stock dividends paid, respectively.

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, 1997, 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 100% 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 98% 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

c.   none of the revenues during the year ended December 31, 1997 was subject
     to the 30% income limitation under the REIT rules.

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 for the Bank and the Company. During the
year ended December 31, 1997, the Bank finalized its plan to address such
issues. Issues arise because some computer systems and related software have
been designed to recognize only dates that relate to the 20th century.
Accordingly, if no changes are implemented, these 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 an internal task force to determine what changes are needed
in the Bank's and the Bank's affiliates' software as well as what other steps
will be necessary to ensure continued operations of the Bank's and the Bank's
affiliates equipment. The Year 2000 task force has completed an inventory of
all computer hardware and software in use at the Bank and the Bank's
affiliates, as well as other date-sensitive equipment, such as alarm and
building environmental systems, telephone systems and fax machines.

Based on its current evaluation, the Bank believes that, by December 31, 1998,
substantially all issues related to Year 2000 will be addressed, either by
programming changes to the Bank's and the Bank's affiliates' custom software,
by programming changes implemented by third party vendors to purchased systems,
or through the upgrading or purchase of Year 2000- compliant hardware and
software. Extensive testing is expected to occur during 1999. Year 2000 is the
highest priority project within the Information and Technology Services unit of
the Bank. Management believes there is no material risk that the Bank and the
Company will fail to address Year 2000 issues in a timely manner. All costs
related to Year 2000 will be expensed on the books at the Bank.

                                       21

<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, 1997 the Company's residential loan portfolio totalled
$969,423,000, had a fair value of $991,608,000 and a weighted average interest
rate, net of the service fee rate, of 7.37%. 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."

                                       22

<PAGE>



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


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


                                                          Page
Independent Auditors' Report                              F-1
Balance Sheet                                             F-2
Statement of Income                                       F-3
Statement of Stockholders' Equity                         F-4
Statement 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.



                                       23

<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 January 1, 1998):

<TABLE>
<CAPTION>

                   NAME              AGE       POSITION AND OFFICES HELD
                   ----              ---       -------------------------
<S>                                  <C>       <C>
Gerald J. Ford                       53        Chairman, Chief Executive Officer and Director
Carl B. Webb                         48        President, Chief Operating Officer and Director
Christie S. Flanagan                 59        Executive Vice President, General Counsel and
                                                  Director
P.  Richard Frieder                  63        Director
Robert Nichols                       53        Director
James R. Staff                       49        Director
Richard H. Terzian                   61        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 since October, 1994. Mr. Ford was Chairman of the Board and a
Director of First Madison Bank, FSB from 1993 to 1994. Mr. Ford previously
served as Chairman of the Board, Chief Executive Officer and a Director of
First Gibraltar Bank, FSB from 1988 through 1993. Mr. Ford served as the
Chairman of the Board, Chief Executive Officer and a Director of First United
Bank Group, Inc. from 1993 through 1994. Mr. Ford is Chairman of the Board and
a Director of FNMC, FGB Services, Inc. and Madison Realty Advisors, Inc. Mr.
Ford has also served in the following capacities over the past five years:
Chairman of the Board, Chief Executive Officer and Director, Ford Bank Group,
Inc.; Chairman of the Board, Chief Executive Officer and Director, United New
Mexico Financial Corporation. Mr. Ford is also Chairman of the Board and Chief
Executive Officer of Liberte Investors Inc., President and Director of First
Nationwide (Parent) Holdings Inc. and a Director of McMoRan Oil Corporation.

Mr. Webb has been the President, Chief Operating Officer and a Director of the
Bank since October, 1994. Mr. Webb served as President, Chief Executive Officer
and Director of First Madison Bank, FSB from 1993 through 1994. Mr. Webb
previously served as President, Chief Operating Officer and a Director of First
Gibraltar Bank, FSB from 1988 through 1993. Mr. Webb also serves as a Director
of FNMC.

Mr. Flanagan has been the Executive Vice President and General Counsel of the
Bank since October, 1994. 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 and President 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. 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

                                       24

<PAGE>



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.

Mr. Terzian has served as Executive Vice President and Chief Financial Officer
of Bank since April 1, 1995. For the five years prior to that date, Mr. Terzian
served as Chief Financial Officer of Dime Bancorp, Inc and its subsidiary, The
Dime Savings Bank of New York, FSB.


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. All of the Bank's common
stock is held by FN Holdings.

Ronald O. Perelman, a Director of the Bank and Chairman of the Board, Chief
Executive Officer and a Director of FN Holdings, 35 East 62nd Street, New York,
New York 10021, through MacAndrews & Forbes, beneficially owns 100% of the
class A common stock of FN Holdings representing 80% of its voting common stock
(representing approximately 85% of the voting power of its common stock).
Hunter's Glen/Ford, Ltd., a limited partnership controlled by Gerald J. Ford,
Chairman of the Board, Chief Executive Officer and a Director of the Bank, 200
Crescent Court, Suite 1350, Dallas, Texas 75201, owns 100% of the class B
common stock of FN Holdings, representing 20% of its voting common stock
(representing approximately 15% of the voting power 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 year ended
December 31, 1997 totalled $3,350,000. See "Business - Servicing of
Residential Mortgage Loans."




                                       25

<PAGE>



ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A) 1.   FINANCIAL STATEMENTS

The following financial statements of the Company as of and for the year ended
December 31, 1997 are included in Item 8 of this report:

                  Independent Auditors' Report
                  Balance Sheet
                  Statement of Income
                  Statement of Stockholders' Equity
                  Statement of Cash Flows
                  Notes to Financial Statements

(A) 2.   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) 3.   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.)

     24.1 Power of Attorney executed by P. Richard Frieder.

     27.1 Financial Data Schedule


(B) REPORTS ON FORM 8-K


None.




                                       26

<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.

Date: March 27, 1998


                                  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 27, 1998
--------------------------------        Executive Officer and Director
        Gerald J. Ford


    /s/ Carl B. Webb                    President, Chief Operating            March 27, 1998
--------------------------------        Officer and Director
         Carl B. Webb


    /s/ Christie S. Flanagan            Executive Vice President,             March 27, 1998
--------------------------------        General Counsel and Director
        Christie S. Flanagan


    /s/ Richard H. Terzian              Executive Vice President, Chief       March 27, 1998
--------------------------------        Financial Officer and Director
        Richard H. Terzian              (Principal Financial Officer)


                 *
--------------------------------        Director                              March 27, 1998
     P. Richard Frieder


    /s/ Robert Nichols
--------------------------------        Director                              March 27, 1998
        Robert Nichols


    /s/ James R. Staff
--------------------------------        Director                              March 27, 1998
        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 sheet of California Federal Preferred
Capital Corporation (the "Company") as of December 31, 1997 and the related
statements of income, stockholders' equity, and cash flows for the year 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 audit 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 audit provides 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, 1997, and the results of its operations
and its cash flows for the year ended December 31, 1997 in conformity with
generally accepted accounting principles.



                                                         KPMG Peat Marwick LLP

Dallas, Texas
February 23, 1998



<PAGE>


                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION


                                 BALANCE SHEET
                               December 31, 1997
                 (dollars in thousands, except per share data)

<TABLE>
<CAPTION>

<S>                                                                                               <C>
ASSETS

Residential mortgage loans, net                                                                    $      969,423
Short-term investments                                                                                      6,382
Due from affiliates                                                                                        19,800
Accrued interest receivable                                                                                 5,399
Foreclosed real estate                                                                                        491
                                                                                                    -------------

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

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable and accrued liabilities                                                            $         349
                                                                                                    -------------

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

Commitments and contingencies

Stockholders' Equity:

Preferred stock, par value $.01 per share, liquidation preference $500 million,
     30,000,000 shares authorized, 20,000,000 shares
     issued and outstanding                                                                               500,000
Common stock, par value $.01 per share, 30,000,000 shares authorized,
     1,000 shares issued and outstanding                                                                       --
Additional paid-in capital                                                                                500,000
Retained earnings                                                                                           1,146
                                                                                                    -------------

     Total Stockholders' Equity                                                                         1,001,146
                                                                                                    -------------
     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                     $   1,001,495
                                                                                                    =============
</TABLE>



See accompanying notes to financial statements.



                                      F-2

<PAGE>


                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION


                              STATEMENT OF INCOME
                          Year Ended December 31, 1997
                                 (in thousands)


<TABLE>
<CAPTION>

<S>                                                                             <C>
NET INTEREST INCOME

Residential mortgage loans                                                        $   68,098
     Less: servicing fee expense                                                      (3,350)
                                                                                  ----------
                                                                                      64,748
Short-term investments                                                                 1,164
                                                                                  ----------
     Net interest income                                                              65,912

Provision for loan losses                                                             (2,310)
                                                                                  ----------
     Net interest income after provision for loan losses                              63,602
                                                                                  ----------

NONINTEREST EXPENSE

Directors fees                                                                            44
Professional fees                                                                         51
Foreclosed real estate operations, net                                                   (26)
Other                                                                                     38
                                                                                  ----------

     Total noninterest expense                                                           107
                                                                                  ----------
NET INCOME                                                                            63,495

Preferred stock dividends                                                             41,949
                                                                                  ----------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER                                         $  21,546
                                                                                   =========
</TABLE>



See accompanying notes to financial statements.



                                      F-3

<PAGE>


                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION


                       STATEMENT OF STOCKHOLDERS' EQUITY
                          Year Ended December 31, 1997
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                                    Additional                        Total
                                                         Preferred      Common        Paid-in       Retained      Stockholders'
                                                           Stock        Stock         Capital       Earnings         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
                                                            ========    =========       ========     ==========        ==========
</TABLE>



See accompanying notes to financial statements.



                                      F-4

<PAGE>


                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION


                            STATEMENT OF CASH FLOWS
                          Year Ended December 31, 1997
                                 (in thousands)

<TABLE>
<CAPTION>

<S>                                                                                          <C>
OPERATING ACTIVITIES:

Net income                                                                                     $     63,495
Adjustments to reconcile net income to net cash provided by operating activities:
     Amortization of deferred loan fees and direct origination costs and purchase
          discounts and premiums, net                                                                     75
     Provision for loan losses                                                                         2,310
     Gain on sales of foreclosed real estate                                                             (26)
     Increase in due from affiliates                                                                    (217)
     Decrease in accrued interest receivable                                                           1,497
     Increase in accounts payable and accrued liabilities                                                349
                                                                                               -------------

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

INVESTING ACTIVITIES:

Purchase of mortgage loans                                                                        (1,189,541)
Mortgage loan principal repayments                                                                   197,397
Purchase of accrued interest receivable                                                               (6,896)
Proceeds from sales of foreclosed real estate                                                            288
                                                                                               -------------

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

FINANCING ACTIVITIES:

Proceeds from capital contributed by Bank                                                            500,000
Proceeds from preferred stock issued                                                                 500,000
Common stock dividends paid                                                                          (20,400)
Preferred stock dividends paid                                                                       (41,949)
                                                                                               -------------

Net cash provided by financing activities                                                            937,651

NET INCREASE IN CASH AND CASH EQUIVALENTS                                                              6,382

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                          --
                                                                                               -------------

CASH AND CASH EQUIVALENTS AT DECEMBER 31, 1997                                                 $       6,382
                                                                                               =============
</TABLE>


See accompanying notes to financial statements.



                                      F-5

<PAGE>


                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
                         NOTES TO FINANCIAL STATEMENTS

(1) Organization 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 $500,000,000. The Series A Preferred
Shares are traded on the New York Stock Exchange. 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 $500,000,000 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 $996,489,000. 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.

A balance sheet at December 31, 1996 is not presented as operations did not
commence until January 31, 1997.

(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 deferred loan fees and direct
         origination costs and purchase discounts and premiums. Deferred loan
         fees and direct origination costs and 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 when a borrower is 90 days or more delinquent. When a loan
         is placed on nonaccrual, the accrued and unpaid interest receivable is
         reversed. Amortization of premiums, discounts and deferred fees net of
         deferred direct origination costs associated with

                                      F-6

<PAGE>


                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
                         NOTES TO FINANCIAL STATEMENTS

         loans that are on non-accrual are 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.

         (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 and prospective 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.



                                      F-7

<PAGE>


                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
                         NOTES TO FINANCIAL STATEMENTS

         (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, 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
         Internal Revenue Code of 1986 (the "IRC"), as amended. Accordingly, no
         provision for income taxes is included in the accompanying financial
         statements.

         (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)      Capital Structure

         In February 1997, the Financial Accounting Standards Board ("FASB")
         issued Statement of Financial Accounting Standards No. 129,
         "Disclosure of Information about Capital Structure" ("SFAS No. 129").
         SFAS No. 129 establishes standards for disclosing information about an
         entity's capital structure and applies to all entities. This statement
         continues the previous requirements to disclose certain information
         about an entity's capital structure found in APB Opinions No. 10,
         Omnibus Opinion - 1966, and No. 15, Earnings per Share, and FASB
         Statement No. 47, Disclosure of Long-Term Obligations, for entities
         that were subject to the requirements of those standards. This
         statement supersedes specific disclosure requirements of Opinions 10
         and 15 and Statement 47 and consolidates them in this statement for
         ease of retrieval and for greater visibility to non-public entities.
         This statement was adopted by the Company in its financial statements
         as of and for the year ended December 31, 1997. The Company
         experienced no material revisions in its disclosures with the adoption
         of SFAS No. 129.

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

                                      F-8

<PAGE>


                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
                         NOTES TO FINANCIAL STATEMENTS

(3)      Supplemental Disclosure of Cash Flow Information

During the year ended December 31, 1997, noncash activity included transfers
from residential mortgage loans to foreclosed real estate of $753,000.

Mortgage loan principal repayments totalling $19,583,000 were received by FNMC
in its capacity as servicer, but, in accordance with the terms of the servicing
agreement, were not remitted to the Company as of December 31, 1997. This
amount was recorded as a reduction of residential mortgage loans and is
included in due from affiliates on the balance sheet as of December 31, 1997.

(4)      Residential Mortgage Loans, Net

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

<TABLE>
<CAPTION>
<S>                                                                                      <C>
1-4 unit residential mortgage loans                                                        $  976,155
Deferred loan fees and direct origination costs and purchase discounts
     and premiums, net                                                                            578
Allowance for loan losses                                                                      (7,310)
                                                                                           ----------
Total residential mortgage loans, net                                                      $  969,423
                                                                                           ==========
</TABLE>

At December 31, 1997 residential mortgage loans on nonaccrual totalled
$3,591,000.

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

The Company's total residential mortgage loan portfolio includes $837,400,000
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 year ended December 31, 1997
is summarized as follows (in thousands):

<TABLE>
<CAPTION>
<S>                                                                       <C>
Balance - January 1, 1997                                                   $            --
Allowance attributable to loans purchased from the Bank                               5,000
Provision for loan losses                                                             2,310
Charge-offs                                                                              --
Recoveries                                                                               --
                                                                               ------------

Balance - December 31, 1997                                                    $      7,310
                                                                               ============
</TABLE>


                                      F-9

<PAGE>


                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
                         NOTES TO FINANCIAL STATEMENTS

(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 as defined in the Company's
Registration Statement, declared effective by the Securities and Exchange
Commission on January 24, 1997 ("Registration Statement"), 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 as defined in the Registration
Statement.

(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 year ended December 31, 1997 to the holders of the Series A Preferred
Shares totalled $41,949,000.

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 year ended
December 31, 1997 totalled $20,400,000.

(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
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
$3,350,000 for the year ended December 31, 1997. FNMC is also entitled to a 1%
disposition fee on the aggregate proceeds obtained in the sale of a defaulted
residential mortgage loan. No disposition fees were recorded during the year
ended December 31, 1997.


                                      F-10

<PAGE>


                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
                         NOTES TO FINANCIAL STATEMENTS

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 $19,640,000 at December 31, 1997 and is included
in due from affiliates. Substantially all of such payments were passed through
to the Company in January 1998 as provided in the servicing agreement. At
December 31, 1997, trust funds of approximately $1,425,000, 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, 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.

(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, 1997, residential mortgage loans included
approximately $414,700,000 of principal balance, or approximately 43% of the
residential mortgage loans held by the Company at December 31, 1997, that had
the potential to negatively amortize. Approximately $98,400,000 or 10% of such
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 $2.0 million as of
December 31, 1997.

(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, 1997 (in thousands):


                                         Carrying               Fair
                                          Value                 Value
                                          -----                 -----
Residential mortgage loans, net        $   969,423          $   991,608
Short-term investments                       6,382                6,382


                                      F-11

<PAGE>


                CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
                         NOTES TO FINANCIAL STATEMENTS

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, readily available market information has been
utilized. However, for a significant portion of the Company's financial
instruments, active markets do not exist. Therefore, 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.

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

(10)     Newly Issued Accounting Pronouncements

On June 28, 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes
liabilities when extinguished. This statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings.

In December 1996, the FASB issued Statement of Financial Accounting Standards
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125" ("SFAS No. 127"). SFAS No. 127 defers for one year the
effective date (i) of paragraph 15 of SFAS No. 125 and (ii) of paragraphs 9-12
and 237(b) of SFAS No. 125 for repurchase agreement, dollar-roll, securities
lending and similar transactions. SFAS No. 127 provides additional guidance on
the types of transactions for which the effective date of SFAS No. 125 has been
deferred. It also requires that if it is not possible to determine whether a
transaction occurring during calendar-year 1997 is part of a repurchase
agreement, dollar-roll, securities lending or similar transaction, then
paragraphs 9-12 of SFAS No. 125 should be applied to that transfer. The Company
adopted SFAS No. 125, as amended by SFAS

                                      F-12

<PAGE>


               CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
                         NOTES TO FINANCIAL STATEMENTS


No. 127, on January 1, 1997. Such adoption did not have a material impact on
the Company's financial statements.

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. Comprehensive income is defined to include net
income and other comprehensive income. Other comprehensive income includes
revenues, expenses, gains and losses that under generally accepted accounting
principles are included in comprehensive income but excluded from net income.
SFAS No. 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. It does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. This statement
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comprehensive purposes is required. This statement has no impact on the
financial condition or results of operations of the Company. This statement
does not apply to an enterprise that has no items of comprehensive income. The
Company has no items of comprehensive income during the year ended December 31,
1997.

(11)     Selected Quarterly Financial Data

The following table represents selected quarterly financial data for the year
ended December 31, 1997 (in thousands) (unaudited):

<TABLE>
<CAPTION>

                                                                   Quarter Ended
                                          ------------------------------------------------------------------
                                           December 31,      September 30,       June 30,      March 31,
                                               1997               1997             1997          1997       Total 1997
                                               ----               ----             ----          ----       ----------
<S>                                        <C>               <C>              <C>           <C>             <C>
Net 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-13