<PAGE>

================================================================================

                       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:                  COMMISSION FILE:
             December 31, 1998                           0-23131

                     PEOPLE'S PREFERRED CAPITAL CORPORATION
             (Exact name of registrant as specified in its Charter)

                MARYLAND                                95-4642529
     (State or other jurisdiction of        (I.R.S. Employer Identification No.)
      incorporation or organization)

             5900 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA, 90036
          (Address of principal executive offices, including zip code)

                                 (323) 938-6300
              (Registrant's telephone number, including area code)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
           9.75% NONCUMULATIVE EXCHANGEABLE PREFERRED STOCK, SERIES A

         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
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 ]

         All 10,000 shares of Common Stock were held by People's Bank of
California at December 31, 1998; therefore, no Common Stock is held by
non-affiliates.

      Documents incorporated by reference          Part of Form 10-K
              in this Form 10-K                    which incorporated
                    None                                  --

================================================================================
<PAGE>

                                     PART I
                                                                            Page
                                                                            ----
Item 1   Business                                                              2
Item 2   Properties                                                           30
Item 3   Legal Proceedings                                                    30
Item 4   Submission of Matters to a Vote of Security Holders                  30
         
                                    PART II
         
Item 5   Market for Registrant's Common Equity and Related Stockholder
           Matters                                                            30
Item 6   Selected Financial Data                                              32
Item 7   Management's Discussion and Analysis of Financial Condition and
           Results of Operations                                              33
Item 7A  Quantitative and Qualitative Disclosures About Market Risk           44
Item 8   Financial Statements and Supplementary Data                          45
Item 9   Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure                                               58
         
                                    PART III
         
Item 10  Directors and Executive Officers of the Corporation                  58
Item 11  Executive Compensation                                               61
Item 12  Security Ownership of Certain Beneficial Owners and Management       61
Item 13  Certain Relationships and Related Transactions                       61
         
                                    PART IV
         
Item 14  Exhibits, Financial Statement Schedules and Reports on Form 8-K      62
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION

                                     PART I

ITEM 1: BUSINESS

GENERAL

         GENERAL. People's Preferred Capital Corporation (the "Company") is a
Maryland corporation which was incorporated on June 19, 1997 to acquire, hold
and manage mortgage assets. The Company is operating in a manner so as to
qualify as a real estate investment trust ("REIT") for federal income tax
purposes under the Internal Revenue Code of 1986, as amended (the "Code"),
commencing with its taxable year ended December 31, 1997. As a REIT, the Company
will generally not be subject to federal income tax on net income and capital
gains that it distributes to the holders of its common stock and preferred
shares, including the Series A Preferred Shares. The Company is a wholly owned
subsidiary of People's Bank of California (the "Bank"), a federal savings bank
organized under the laws of the United States.

         On October 3, 1997, the Company commenced its operations upon
consummation of a public offering of 1,426,000 shares of its 9.75% Noncumulative
Exchangeable Preferred Stock, Series A (the "Series A Preferred Shares"), at a
liquidation preference of $25.00 per share. All shares of common stock are owned
by the Bank. The Series A Preferred Shares are traded on the Nasdaq National
Market under the symbol "PPCCP."

         The Company used the gross proceeds raised of $35.7 million from the
initial public offering of the Series A Preferred Shares and the concurrent
contribution of $38.8 million of additional capital by the Bank to pay expenses
incurred during the offering and the formation of the Company and to purchase
from the Bank the Company's initial portfolio of residential and commercial
mortgage loans ("Mortgage Loans") at an aggregate purchase price of $72.1
million. The Company has purchased additional Mortgage Loans from the Bank from
time to time.

         The Company's principal business objective is to acquire, hold and
manage Mortgage Assets and Other Authorized Investments that will generate net
income for distribution to stockholders. The Company expects that all of its
Mortgage Assets will be acquired from the Bank or purchased from unaffiliated
third parties as whole loans ("Mortgage Loans") secured by first mortgages or
deeds of trust on single-family (one- to four-unit) residential real estate
properties ("Residential Mortgage Loans") or by multi-family residential and
commercial properties (collectively, "Commercial Mortgage Loans"). Although the
Company has the authority to acquire an unlimited number of Residential Mortgage
Loans and Commercial Mortgage Loans from unaffiliated third parties such as
other financial institutions and mortgage banks, all of the Company's Mortgage
Assets through December 31, 1998 were acquired from the Bank. With respect to
Mortgage Loans which were purchased by the Bank from unaffiliated third parties,
the Bank evaluated the documentation relating to each purchased loan and

                                      2

<PAGE>

management believes that each such loan was originated in a manner that was
consistent with the underwriting standards of the Bank. During 1998, the Company
acquired from the Bank forty-two single-family residential mortgage loans which
were originated by the bank with an aggregate principal balance of $23 million.
The Company has no present plans or expectations with respect to purchases from
unaffiliated third parties.

         The Company may also from time to time acquire mortgage-backed
securities either issued or guaranteed by agencies of the federal government or
government sponsored agencies or issued by third parties (including the Bank)
and rated investment grade by at least one nationally recognized independent
rating organization and representing interests in or obligations backed by pools
of Mortgage Loans ("Mortgage-Backed Securities"). Mortgage Loans underlying the
Mortgage-Backed Securities will be secured by single-family residential,
multifamily or commercial real estate properties located in the United States.
The Company also has the ability to acquire any non-mortgage related securities,
in an amount equal to 20% of the value of the Company's total assets ("Other
Authorized Investments"), subject to certain diversification limitations imposed
by the Code.

         The Company expects that all Mortgage Loans to be acquired by the
Company will be whole loans, will represent first lien positions and will be
acquired on a basis consistent with general loan sale transactions conducted in
the secondary market. Management believes that the Mortgage Loans acquired to
date have been, and management currently intends that Mortgage Loans acquired in
the future will have been, originated and underwritten in conformity with
standards generally applied by the Bank at the time the Mortgage Loans were
originated. The Company's current policy prohibits the acquisition of any
Mortgage Loan or any interest in a Mortgage Loan (other than an interest
resulting from the acquisition of Mortgage-Backed Securities), in which the
Mortgage Loan (i) is delinquent in the payment of principal or interest; (ii) is
or was at any time during the preceding 12 months (a) Classified, (b) on
Nonaccrual Status, or (c) renegotiated due to financial deterioration of the
borrower; or (iii) has been, more than once during the preceding 12 months, more
than 30 days past due in the payment of principal or interest.

         SERVICING AGREEMENTS. The Bank has entered into a servicing agreement
with respect to the Commercial Mortgage Loans and certain residential mortgage
loans (the "Commercial Servicing Agreement") pursuant to which it services the
Commercial Mortgage Loans and certain residential mortgage loans held by the
Company and receives fees in connection with the servicing of such Commercial
Mortgage Loans and certain residential mortgage loans. In March 1997, the Bank
sold the servicing rights with respect to substantially all of its Residential
Mortgage Loans, including certain of the Residential Mortgage Loans that were
included in the initial portfolio, to Temple Inland Mortgage Corporation (the
"Servicing Agent"), a Nevada corporation and a wholly owned subsidiary of
Guaranty Federal Bank, F.S.B., which is wholly owned by Temple-Inland Inc., an
unrelated third party.

         In connection with the Bank's sale of servicing, the Bank in March 1997
entered into a servicing agreement with the Servicing Agent (the "Residential
Servicing Agreement"), pursuant to which the Servicing Agent services a portion
of the Bank's Residential Mortgage Loans. 

                                      3
<PAGE>

Pursuant to an Assignment, Assumption and Recognition Agreement entered into
between the Company, the Bank and the Servicing Agent (the "Residential
Assumption Servicing Agreement"), the Servicing Agent services a portion of the
Residential Mortgage Loans sold by the Bank to the Company, in accordance with
the terms of the Residential Servicing Agreement.

         The Servicing Agent is entitled to receive fees in connection with the
servicing of such Residential Mortgage Loans. The Residential Servicing
Agreement and the Commercial Servicing Agreement are collectively referred to as
the "Servicing Agreements." The Bank, in its role as servicer under the
Commercial Servicing Agreement and the Servicing Agent, in its role as servicer
under the Residential Servicing Agreement, are hereinafter referred to
individually as the "Servicer" and collectively as the "Servicers." In addition,
the Bank, in its capacity as Servicer under the Commercial Servicing Agreement,
may, from time to time, subject to approval of a majority of the Independent
Directors, subcontract all or a portion of its obligations thereunder.

         ADVISORY AGREEMENT. The Company entered into an advisory agreement with
the Bank (the "Advisory Agreement") pursuant to which the Bank administers the
day-to-day operations of the Company. The Bank in its role as advisor under the
terms of the Advisory Agreement is hereinafter referred to as the "Advisor." The
Advisor is responsible for, among other things: (i) monitoring the credit
quality of Mortgage Assets and Other Authorized Investments held by the Company;
(ii) advising the Company with respect to the acquisition, management, financing
and disposition of the Company's Mortgage Assets and Other Authorized
Investments; and (iii) representing the Company in its day-to-day dealings with
persons to whom the Company interacts. In performing its duties under the
Advisory Agreement, the Advisor is required to act in a manner that is
consistent with maintaining the Company's qualification as a REIT. The Advisor
may from time to time subcontract all or a portion of its obligations under the
Advisory Agreement to one or more of its affiliates involved in the business of
managing Mortgage Assets and Other Authorized Investments. The Advisor may, with
the approval of a majority of the Board of Directors, as well as a majority of
the Independent Directors, subcontract all or a portion of its obligations under
the Advisory Agreement to unrelated third parties. The Advisor will not, in
connection with the subcontracting of any of its obligations under the Advisory
Agreement, be discharged or relieved in any respect from its obligations under
the Advisory Agreement. The Advisor and its personnel have substantial
experience in mortgage finance and in the administration of Mortgage Loans and
Other Authorized Investments.

         The Advisory Agreement has an initial term of five years, and will be
renewed automatically for additional five-year periods unless notice of
nonrenewal is delivered to the Advisor by the Company. The Advisory Agreement
may be terminated by the Company at any time upon 90 days' prior notice. As long
as any Series A Preferred Shares remain outstanding, any decision by the Company
either not to renew the Advisory Agreement or to terminate the Advisory
Agreement must be approved by a majority of the Board of Directors, as well as
by a majority of the Independent Directors. The Advisor will be entitled to
receive an annual advisory fee equal to $200,000.

         MANAGEMENT. The Company's Board of Directors is composed of seven
members, two of 

                                      4
<PAGE>

whom are Independent Directors. The Company's Board of Directors currently has
one open seat for an independent director. Certain actions by the Company
require the prior approval of a majority of Independent Directors. As long as
there are only two Independent Directors, any action that requires the approval
of a majority of the Independent Directors must be approved by both Independent
Directors. Pursuant to the Articles of Incorporation, the Independent Directors
are required to take into account the interests of the holders of both the
Preferred Stock, including the Series A Preferred Shares, and the Common Stock
in assessing the benefit to the Company of any proposed action requiring their
approval. The Company currently has four officers. The Company has no other
employees and does not anticipate that it will require additional employees.

         ADDITIONAL INVESTMENT. The Company may from time to time purchase
additional Mortgage Loans, Mortgage-Backed Securities or Other Authorized
Investments out of proceeds received in connection with the repayment or
disposition of Mortgage Loans, Mortgage-Backed Securities, Other Authorized
Investments or the issuance of additional shares of Common Stock or Preferred
Stock. Additional shares of Preferred Stock ranking senior to the Series A
Preferred Shares may not be issued by the Company without the approval of the
holders of at least two-thirds of the outstanding Series A Preferred Shares.
Additional shares of Preferred Stock ranking on a parity with the Series A
Preferred Shares may not be issued by the Company without the approval of a
majority of the Independent Directors. The Company does not currently intend to
issue any additional shares of Preferred Stock unless it simultaneously receives
additional capital contributions from the Bank equal to the sum of the aggregate
offering price of such additional Preferred Stock and the Company's expenses
(including any underwriting commissions or placement fees) incurred in
connection with the issuance of such additional shares of Preferred Stock. The
Company anticipates that, prior to its issuance of additional shares of
Preferred Stock, it will take into consideration, among other things, the Bank's
regulatory capital requirements and an assessment of other available options for
raising any necessary capital. The Company currently anticipates that
substantially all of the Mortgage Loans that it may acquire in the future will
be purchased from the Bank, although the Company may acquire Mortgage Loans from
unaffiliated third parties (subject in all cases to satisfaction of the
Company's underwriting standards).

BUSINESS AND STRATEGY

         GENERAL. The Company's principal business objective is to acquire, hold
and manage Mortgage Assets that will generate net earnings for distribution to
stockholders. In order to preserve its status as a REIT under the Code,
substantially all of the assets of the Company will consist of Mortgage Loans,
other qualified REIT real estate assets of the type permitted by the Code and
Other Authorized Investments.

         DIVIDEND POLICY. The Company expects to distribute annually an
aggregate amount of dividends with respect to its outstanding shares of capital
stock equal to approximately 100% of the Company's "REIT taxable income"
(excluding capital gains). In order to remain qualified as a REIT, the Company
is required to distribute with respect to each taxable year dividends (other
than capital gain dividends) to its stockholders in an aggregate amount at least
equal to (i) the 

                                      5
<PAGE>

sum of (A) 95% of its "REIT taxable income" (computed without regard to the
dividends-paid deduction and its net capital gain) and (B) 95% of the net income
(after tax), if any, from foreclosure property, minus (ii) the sum of certain
items of noncash income. Such distributions must be paid in the taxable year to
which they relate, or in the following taxable year if declared before the
Company timely files its federal income tax return for such year and if paid on
or before the first regular dividend payment date after such declaration.

         Dividends will be authorized and declared at the discretion of the
Board of Directors after considering the Company's distributable funds,
financial requirements, tax considerations and other factors. Because (i) the
Mortgage Assets and Other Authorized Investments are interest bearing, (ii) the
Series A Preferred Shares represent only approximately 50% of the Company's
capitalization and (iii) the Company does not anticipate incurring any
indebtedness, the Company currently expects that both its cash available for
distribution and its "REIT taxable income" will be in excess of amounts needed
to pay dividends on the Series A Preferred Shares, even in the event of a
significant drop in interest rate levels. Accordingly, the Company expects that
it will, after paying the quarterly dividends on the Series A Preferred Shares,
pay dividends to holders of its Common Stock in an amount sufficient to comply
with applicable requirements regarding qualification as a REIT. There are,
however, several limitations that are described in the following paragraph that
restrict the Company's ability to pay dividends on the Common Stock.

         First, no cash dividends or other distributions may be paid on the
Common Stock unless and until (i) the Company has paid full dividends on the
Series A Preferred Shares for the four most recent Dividend Periods (or such
lesser number of Dividend Periods during which the Series A Preferred Shares
have been outstanding) and has declared a cash dividend on the Series A
Preferred Shares at the annual dividend rate for the current Dividend Period,
and (ii) the terms of all other stock of the Company ranking senior to the
Common Stock have been complied with. Second, the Maryland General Corporation
law ("MGCL") provides that dividends and other distributions may not be paid by
a corporation if, after giving effect to the distribution (i) the corporation
would not be able to pay its indebtedness as it becomes due in the usual course
of business or (ii) the corporation's total assets would be less than the sum of
the corporation's total liabilities plus, unless the articles of incorporation
of the corporation permits otherwise (which the Articles of Incorporation of the
Company do not), the amount that would be needed, if the corporation were to be
dissolved at the time of the distribution, to satisfy the preferential rights on
dissolution of stockholders whose preferential rights on dissolution are
superior to those receiving the distribution.

         The Office of Thrift Supervision ("OTS") prompt corrective action
regulations prohibit thrift institutions such as the Bank from making "capital
distributions" (defined to include a transaction that the OTS or Federal Deposit
Insurance Corporation ("FDIC") determines, by order or regulation, to be "in
substance a distribution of capital") unless the institution is at least
"adequately capitalized" after the distribution. There can be no assurances that
either the OTS or the FDIC would not seek to restrict the Company's payment of
dividends on the Series A Preferred Shares under this provision if the Bank were
to fail to maintain its status as "adequately capitalized." Currently, an
institution is considered "adequately capitalized" if it has a total 

                                      6
<PAGE>

risk-based capital ratio of at least 8.0%, a Tier 1 risk-based capital ratio of
at least 4.0% and a leverage (or core capital) ratio of at least 4.0%. At
December 31, 1998, the Bank's total risk-based capital ratio was 12.36%, its
Tier 1 risk-based capital ratio was 11.48% and core capital (or leverage) ratio
was 6.30%. The Bank currently intends to maintain its capital ratios in excess
of the "well-capitalized" levels under the prompt corrective action regulations.
However, there can be no assurance that the Bank will be able to maintain such
capital levels.

         Each Series A Preferred Share will be exchanged automatically (the
"Automatic Exchange") for one newly issued Series A preferred share (the "Bank
Preferred Shares") of the Bank, if the appropriate federal regulatory agency
directs in writing that an exchange of the Series A Preferred Shares for Bank
Preferred Shares occur because (i) the Bank becomes "undercapitalized" under the
prompt corrective action regulations established pursuant to the Federal Deposit
Insurance Corporation Improvement Act of 1991, as amended ("FDICIA"), (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 (an "Exchange Event"). In the event of the
Automatic Exchange, the Bank Preferred Shares would constitute a new series of
preferred shares of the Bank, would have the same dividend rights, liquidation
preference, redemption options and other attributes as the Series A Preferred
Shares, except that (i) the Bank Preferred Shares would not be redeemable upon
the occurrence of a Tax Event and (ii) the Bank Preferred Shares would not be
listed on a national stock exchange or national quotation system, and would rank
on an equal basis in terms of cash dividend payments and liquidation preference
with any shares of preferred stock of the Bank outstanding at the time of the
Automatic Exchange.

         If the Automatic Exchange were to occur, then the Bank would likely be
prohibited from paying dividends on the Bank Preferred Shares. In all
circumstances following the Automatic Exchange, the Bank's ability to pay
dividends would be subject to various restrictions under OTS regulations. In
addition, in the event of a liquidation of the Bank, the claims of the Bank's
depositors and of its creditors would be entitled to a priority of payment over
the dividend and other claims of holders of equity interests such as the Bank
Preferred Shares issued pursuant to the Automatic Exchange.

         Under certain circumstances, including any determination that the
Bank's relationship to the Company results in an unsafe and unsound banking
practice, federal regulatory authorities will have the authority to issue an
order that restricts the ability of the Company to make dividend payments to its
stockholders.

         LIQUIDITY AND CAPITAL RESOURCES. The Company's principal liquidity need
is to fund the acquisition of additional Mortgage Loans, Mortgage-Backed
Securities or Other Authorized Investments as Mortgage Loans held by the Company
are repaid. The acquisition of such additional Mortgage Loans, Mortgage-Backed
Securities or Other Authorized Investments will be funded with the proceeds of
principal repayments on its portfolio of Mortgage Loans. The Company does not
anticipate that it will have any other material capital expenditures. The
Company believes that cash generated from the payment of interest and principal
on its Mortgage Loan portfolio will provide sufficient funds to meet both
operating requirements and payment of 

                                      7
<PAGE>

dividends by the Company in accordance with the REIT Requirements so as to be
taxed as a REIT for the foreseeable future.

GENERAL DESCRIPTION OF MORTGAGE ASSETS AND OTHER AUTHORIZED INVESTMENTS;
INVESTMENT POLICY

         RESIDENTIAL MORTGAGE LOANS. The Company may from time to time acquire
both conforming and nonconforming Residential Mortgage Loans. Conforming
Residential Mortgage Loans comply with the requirements for inclusion in a loan
guarantee program sponsored by either the Federal Home Loan Mortgage Corporation
("FHLMC") or Federal National Mortgage Association ("FNMA"). Under current
regulations, the maximum principal balance allowed on conforming Residential
Mortgage Loans ranges from $240,000 for one-unit residential loans to $461,350
for four-unit residential loans. Nonconforming Residential Mortgage Loans are
Residential Mortgage Loans that do not qualify in one or more respects for
purchase by FNMA or FHLMC under their standard programs. A majority of the
nonconforming Residential Mortgage Loans acquired by the Company to date are
nonconforming because they have original principal balances which exceed the
requirements for FHLMC or FNMA programs or generally because they vary in
certain other respects from the requirements of such programs other than the
requirements relating to creditworthiness of the mortgagors. A substantial
portion of the Company's nonconforming Residential Mortgage Loans is expected to
meet the requirements for sale to national private mortgage conduit programs or
other investors in the secondary mortgage market.

         Each Residential Mortgage Loan is evidenced by a promissory note
secured by a mortgage or deed of trust or other similar security instrument
creating a first lien on single-family (one- to four-unit) residential
properties. Residential real estate properties underlying Residential Mortgage
Loans consist of individual dwelling units, individual condominium units, two-
to four-family dwelling units, planned unit developments and townhouses. All of
the Residential Mortgage Loans acquired to date by the Company are fixed rate
Mortgage Loans. However, the Company may from time to time acquire adjustable
rate Residential Mortgage Loans.

         COMMERCIAL MORTGAGE LOANS. The Company may from time to time acquire
Commercial Mortgage Loans secured by multi-family properties of five units or
more, industrial, warehouse and self-storage properties, office buildings,
office and industrial condominiums, retail space and strip shopping centers,
mixed use commercial properties, mobile home parks, nursing homes, hotels and
motels ("Commercial Properties"). Substantially all of the Commercial Mortgage
Loans that the Company acquired are secured by real estate located in
California. Unlike Residential Mortgage Loans, Commercial Mortgage Loans
generally lack standardized terms. Commercial Mortgage Loans also may not be
fully amortizing, meaning that they may have a significant principal balance or
"balloon" payment due on maturity. Moreover, commercial properties, particularly
industrial and warehouse properties, generally are subject to relatively greater
environmental risks than non-commercial properties, giving rise to increased
costs of compliance with environmental laws and regulations. There is no
requirement regarding the percentage of any commercial real estate property that
must be leased at the time the Company 

                                      8
<PAGE>

acquires a Commercial Mortgage Loan secured by such commercial real estate
property nor are Commercial Mortgage Loans required to have third party
guarantees.

         The credit quality of a Commercial Mortgage Loan may depend on, among
other factors, the existence and structure of underlying leases, the physical
condition of the property (including whether any maintenance has been deferred),
the creditworthiness of tenants, the historical and anticipated level of
vacancies and rents on the property and on other comparable properties located
in the same region, potential or existing environmental risks, the availability
of credit to refinance the Commercial Mortgage Loan at or prior to maturity and
the local and regional economic climate in general. Foreclosures of defaulted
Commercial Mortgage Loans generally are subject to a number of complicating
factors, including environmental considerations, which are not generally present
in foreclosures of Residential Mortgage Loans.

         MORTGAGE-BACKED SECURITIES. The Company may from time to time acquire
Mortgage-Backed Securities representing interests in or obligations backed by
pools of Mortgage Loans. The Company intends to acquire only investment grade
Mortgage-Backed Securities or those 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, multi-family or commercial real estate properties located
throughout the United States. The Company does not intend to acquire any
interest-only, principal-only or high-risk Mortgage-Backed Securities. The
Company will not be precluded from investing in Mortgage-Backed Securities when
the Bank is the sponsor or issuer.

         OTHER ASSETS. The Company may invest up to 20% of the total value of
its assets in investments other than Residential Mortgage Loans, Commercial
Mortgage Loans, Mortgage-Backed Securities eligible to be held by REITs, (i.e.,
qualified real estate assets under the Code), cash, cash equivalents (including
receivables) and government securities. Although the foregoing assets must
constitute at least 75% of the value of the REIT's total assets under Section
865(c)(5)(A) of the Code, up to 25% of the value of a REIT's total assets may be
comprised of non-mortgage-related securities as defined in the Investment
Company Act of 1940 (the "Investment Company Act"). Under the Investment Company
Act, the term "security" is defined broadly to include, among other things, any
note, stock, treasury stock, debenture, evidence of indebtedness, or certificate
of interest or participation in any profit sharing agreement or a group or index
of securities. The Code requires that the value of any one issuer's securities
(other than those securities included in the 75% test) may not exceed 5% of the
total assets (by volume) of the REIT and the REIT may not own more than 10% of
the voting securities (other than those securities included in the 75% test) of
any one issuer.

MANAGEMENT POLICIES AND PROGRAMS.

         GENERAL. In administering the Company's Mortgage Assets and Other
Authorized Investments, the Advisor has a high degree of autonomy. The Board of
Directors, however, has adopted certain policies to guide administration of the
Company and the Advisor with respect to the acquisition and disposition of
assets, use of capital and leverage, credit risk management and certain other
activities. These policies, which are discussed below, may be amended or revised

                                      9
<PAGE>

from time to time at the discretion of the Board of Directors (in certain
circumstances subject to the approval of a majority of the Independent
Directors) without a vote of the Company's stockholders, including holders of
the Series A Preferred Shares.

         ASSET ACQUISITION AND DISPOSITION POLICIES. The Company anticipates
that from time to time it will purchase additional Mortgage Loans from the Bank
on a basis consistent with secondary market standards pursuant to the Mortgage
Purchase Agreements, although Mortgage Loans may be acquired from unaffiliated
third parties, out of proceeds received in connection with the repayment or
disposition of Mortgage Loans or the issuance of additional shares of Common
Stock and Preferred Stock. The Company anticipates that additional Mortgage
Loans purchased from the Bank will be purchased on terms that are substantially
identical to those that could be obtained by the Company if such additional
Mortgage Loans were purchased from third parties unaffiliated with the Company.
The Company has no present plans or intentions to purchase Mortgage Loans from
unaffiliated third parties, and no arrangements or procedures are currently in
place regarding the purchase of additional Mortgage Loans from unaffiliated
third parties. The Company currently anticipates that additional Mortgage Loans
acquired by the Company will be of the types described in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Description of Portfolio," although if the Bank develops additional Mortgage
Loan products, then the Company may purchase such additional types of Mortgage
Loans and is not limited as to the amount that may be purchased. The Bank has no
current plans with respect to the development of new Mortgage Loan products. In
addition, the Company from time to time may acquire Mortgage-Backed Securities
representing interests in or obligations backed by pools of Mortgage Loans that
will be secured by single-family residential, multi-family or commercial real
estate properties located throughout the United States as well as a limited
amount of Other Authorized Investments. The Company currently anticipates that
it will not acquire the right to service any Mortgage Loan it acquires in the
future and that the Bank will act as Servicer of any such additional Commercial
or certain Residential Mortgage Loans and the Servicing Agent will act as
Servicer of any such additional Residential Mortgage Loans. The Company
anticipates that any servicing arrangement that it enters into in the future
with the Bank will contain fees and other terms that would be substantially
equivalent to those that would be contained in servicing arrangements entered
into with third parties unaffiliated with the Company.

         The Company's current policy is not to acquire any Commercial Mortgage
Loan that constitutes more than 5.0% of the total book value of the Mortgage
Assets of the Company at the time of its acquisition. In addition, the Company's
current policy prohibits the acquisition of any Mortgage Loan or any interest in
a Mortgage Loan (other than an interest resulting from the acquisition of
Mortgage-Backed Securities), which Mortgage Loan (i) is delinquent in the
payment of principal or interest at the time of proposed acquisition; (ii) is or
was at any time during the preceding 12 months (a) Classified, (b) on Nonaccrual
Status or (c) renegotiated due to financial deterioration of the borrower; or
(iii) has been, more than once during the preceding 12 months, more than 30 days
past due in the payment of principal or interest. Mortgage Loans that are in
"Nonaccrual Status" are generally loans that are past due 90 days or more in
principal or interest, and "Classified" Mortgage Loans are generally troubled
loans that are deemed substandard, doubtful or loss with respect to
collectibility.

                                      10
<PAGE>

         The Bank's Residential Servicing Agreement with the Servicing Agent
provides that the Bank can direct the Servicing Agent to transfer the servicing
and disposition functions with respect to all Residential Mortgage Loans that
enter Nonaccrual Status back to the Bank. The servicing of properties that
become REO automatically will be transferred back to the Bank for the same
purpose. The Residential Mortgage Purchase Agreement and the Residential
Assumption Servicing Agreement provide for the same treatment with respect to
Residential Mortgage Loans sold by the Bank to the Company that become
Nonaccrual or REO. Upon receipt of written direction from the Company, the
Servicing Agent is required to promptly transfer the servicing for any such
Nonaccrual Mortgage Loan to the Bank and automatically will transfer servicing
with respect to REO to the Bank. The Bank will charge a servicing fee with
respect to the Nonaccrual Mortgage Loans transferred to it by the Company. The
Bank then will service and dispose of such properties, as required, on the
Company's behalf. The Commercial Mortgage Purchase Agreement and the Commercial
Servicing Agreement provide that the Bank will service and handle the
disposition of Nonaccrual Commercial Real Estate Loans and REO for the Company.

         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 Code requiring the
distribution by a REIT of at least 95% of its "REIT taxable income" (excluding
capital gains) and taking into account taxes that would be imposed on
undistributed taxable income), or a combination of these methods.

         The Company had no debt outstanding at December 31, 1998, 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 also may 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 first obtaining the consent of holders
of at least two-thirds of the outstanding shares of 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 first obtaining the approval of a
majority of the Company's Independent Directors. The Company does not currently
intend to issue any additional series of Preferred Stock unless it
simultaneously receives additional capital contributions from the Bank equal to
the aggregate offering price of such additional Preferred Stock plus the
Company's expenses (including underwriting commissions or placement fees) in
connection with the issuance of such additional shares of Preferred Stock. Prior
to the issuance of additional shares of Preferred Stock, the Company will take
into consideration, among other things, the Bank's regulatory capital
requirements and an assessment of other available options for raising any
necessary capital.

                                      11
<PAGE>

         CREDIT RISK MANAGEMENT POLICIES. The Company expects that each Mortgage
Loan acquired in the future will represent a first lien position and will be
originated by the Bank or an unaffiliated third party in the ordinary course of
its real estate lending activities based on the underwriting standards generally
applied by the Bank (at the time of origination) for its own account. The
Company also expects that all Mortgage Loans held by the Company will be
serviced pursuant to the Servicing Agreements, which require servicing in
conformity with any servicing guidelines promulgated by the Company with respect
to Commercial Mortgage Loans and, in the case of Residential Mortgage Loans,
with FNMA and FHLMC guidelines and procedures. The Bank's Residential Servicing
Agreement with the Servicing Agent provides that the Bank can direct the
Servicing Agent to transfer the servicing and disposition functions with respect
to all Residential Mortgage Loans which enter Nonaccrual Status back to the
Bank. The servicing of properties which become REO will automatically be
transferred back to the Bank for the same purpose. The Residential Mortgage
Purchase Agreement and the Residential Assumption Servicing Agreement provide
for the same treatment with respect to Residential Mortgage Loans sold by the
Bank to the Company which become Nonaccrual or REO. Upon receipt of written
direction from the Company, the Servicing Agent is required to promptly transfer
the servicing for any such mortgage loan to the Bank and will automatically
transfer servicing with respect to REO to the Bank. The Bank will charge a
servicing fee with respect to the Nonaccrual Mortgage Loans transferred to it by
the Company. The Bank will then service and dispose of such properties, as
required, on the Company's behalf. The Commercial Mortgage Purchase Agreement
and the Commercial Servicing Agreement provide that the Bank will service and
handle the disposition of Nonaccrual Commercial Real Estate Loans and REO for
the Company.

         CONFLICT OF INTEREST POLICIES. Because of the nature of the Company's
relationship with the Bank and the Servicing Agent, it is likely that conflicts
of interest will arise with respect to certain transactions, including, without
limitation, the Company's acquisition of Mortgage Loans from, or disposition of
Mortgage Loans to, the Bank, foreclosure on defaulted Commercial Mortgage Loans
and the modification of the Advisory Agreement or any of the Servicing
Agreements. It is the Company's policy that the terms of any financial dealings
with the Bank will be consistent with those available from third parties in the
mortgage lending industry. In addition, neither the Advisory Agreement nor any
of the Servicing Agreements may be modified or terminated without the approval
of a majority of the Independent Directors.

         Conflicts of interest between the Company and the Bank may also arise
in connection with making decisions that bear upon the credit arrangements that
the Bank may have with a mortgagor under a Mortgage Loan. Conflicts also could
arise in connection with actions taken by the Bank as a controlling person in
the Company. 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 on the other
hand, including without limitation the Mortgage Purchase Agreements and
Servicing Agreements, be fair to all parties and are consistent with market
terms for such types of transactions. The requirement in the Articles of
Incorporation that certain actions of the Company be approved by a majority of
the Independent Directors also is intended to ensure fair dealings between the
Company and the Bank. There can be no assurance, however, that any such

                                      12
<PAGE>

agreement or transaction will be on terms as favorable to the Company as could
have been obtained from unaffiliated third parties.

         There are no provisions in the Company's Articles of Incorporation
limiting any officer, director, security holder or affiliate of the Company from
having any direct or indirect pecuniary interest in any Mortgage Asset to be
acquired or disposed of by the Company or in any transaction in which the
Company has an interest or from engaging in acquiring, holding and managing
Mortgage Assets. As described herein, it is expected that the Bank will have
direct interests in transactions with the Company (including without limitation
the sale of Mortgage Assets to the Company); however, no officers or directors
of the Company will have any interests in such Mortgage Assets.

         OTHER POLICIES. The Company intends to operate in a manner that will
not subject it to regulation under the Investment Company Act. The Company does
not intend to (i) invest in the securities of other issuers for the purpose of
exercising control over such issuers, (ii) underwrite securities of other
issuers, (iii) actively trade in loans or other investments, (iv) offer
securities in exchange for property or (v) make loans to third parties,
including, without limitation, officers, directors or other affiliates of the
Company. The Company may, under certain circumstances, purchase the Series A
Preferred Shares and other shares of its capital stock in the open market or
otherwise. The Company has no present intention of causing the Company to
repurchase any shares of its capital stock, and any such action would be taken
only in conformity with applicable federal and state laws and regulations and
the requirements for qualifying as a REIT.

         The Company is conducting its operations so as not to become regulated
as an investment company under the Investment Company Act. The Investment
Company Act exempts entities that, directly or through majority-owned
subsidiaries, are "primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in real estate"
("Qualifying Interests"). Under current interpretations by the Staff of the
Commission, in order to qualify for this exemption, the Company, among other
things, must maintain at least 55% of its assets in Qualifying Interests and
also may be required to maintain an additional 25% in Qualifying Interests or
other real estate-related assets. The assets that the Company may acquire
therefore may be limited by the provisions of the Investment Company Act. The
Company has established a policy of limiting Other Authorized Investments to no
more than 20% of the value of the Company's total assets.

         The Articles of Incorporation provide that the Company shall maintain
its status as a reporting company under the Securities and Exchange Act of 1934,
as amended ("Exchange Act") for so long as any of the Series A Preferred Shares
are outstanding.

         The Company currently intends to make investments and operate its
business at all times in such a manner as to be consistent with the requirements
of the Code to qualify as a REIT. However, future economic, market, legal, tax
or other considerations may cause the Board of Directors, subject to approval by
a majority of Independent Directors, to determine that it is in the best
interests of the Company and its stockholders to revoke its REIT status.
Generally, the Code prohibits the Company from electing REIT status for the four
taxable years following the 

                                      13
<PAGE>

year of such revocation.

SERVICING

         RESIDENTIAL MORTGAGE LOAN SERVICING. In March 1997, the Bank sold the
servicing rights with respect to substantially all of the Residential Mortgage
Loans held by the Bank at that time, including all of the Residential Mortgage
Loans initially acquired by the Company from the Bank to the Servicing Agent.
This sale was predicated upon management's determination that it was costly and
inefficient for the Bank to service a varied collection of loan products that it
no longer offered. In connection with such sale, the Bank entered into the
Residential Servicing Agreement with the Servicing Agent pursuant to which the
Servicing Agent services substantially all of the Bank's Residential Mortgage
Loans, including all of the Residential Mortgage Loans initially acquired by the
Company from the Bank.

         The Residential Servicing Agreement and the Residential Assumption
Servicing Agreement (collectively, the "Residential Servicing Agreements")
provide that the Servicing Agent will receive an annual servicing fee with
respect to each Residential Mortgage Loan serviced for the Company that shall be
equal to the outstanding principal balance of such Residential Mortgage Loans
multiplied by a fee of 0.25% (in the case of fixed rate Residential Mortgage
Loans (including "7/23 step rate" loans) and 0.375% (in the case of adjustable
rate Residential Mortgage Loans). The Bank's Servicing Agent, Temple Inland
Mortgage Corporation, is a Nevada corporation and wholly owned subsidiary of
Guaranty Federal Bank, F.S.B., which is wholly owned by Temple-Inland Inc. The
Bank also services for certain single family residential loans for the fee of
0.25%.

The Residential Servicing Agreements require the Servicing Agent to service the
Company's Residential Mortgage Loans in a manner generally consistent with
servicing guidelines promulgated by the Bank (and previously determined to be
acceptable to the Servicing Agent) and with FNMA and FHLMC guidelines and
procedures and as otherwise set forth in the Residential Servicing Agreements.
The Servicing Agent will collect and remit principal and interest payments,
administer mortgage, custodial and escrow accounts, submit and pursue insurance
claims and initiate and supervise foreclosure proceedings on the Residential
Mortgage Loans it services. The Servicing Agent also will provide accounting and
reporting services to the Company for such Residential Mortgage Loans.
Additionally the Servicing Agent will assume responsibility for payment of
ground rents, taxes, assessments, water rates, mortgage insurance premiums, and
other charges that are or may become liens upon the mortgaged property. The
Servicing Agent also will be responsible for any late charges or tax penalties
incurred due to its failure to pay such bills. The Residential Servicing
Agreements require the Servicing Agent to follow such collection procedures that
are consistent with the Servicing Agent's procedures for servicing mortgage
loans comparable to the Residential Mortgage Loans and to exercise the degree of
care required by FNMA and FHLMC.

         The Servicing Agent may waive, modify or vary any term of any
Residential Mortgage Loan or consent to the postponement of compliance with any
such term or in any manner grant indulgence to any borrower if in the Servicing
Agent's reasonable and prudent determination 

                                      14
<PAGE>

such waiver, modification, postponement or indulgence is not materially adverse
to the Company; provided, however, that the Servicing Agent shall not permit any
modification with respect to any Residential Mortgage Loan that would decrease
the mortgage interest rate (other than by adjustments required by the terms of
the mortgage note), defer or forgive the payment thereof or of any principal or
interest payments, reduce the outstanding principal amount (except for actual
payments of principal), make future advances or extend the final maturity date
on such Residential Mortgage Loan without the Company's prior written consent.
However, the Servicing Agent may permit forbearance or allow for suspension of
monthly payments if the borrower is in default or the Servicing Agent determines
in its reasonable discretion that default is imminent and if the Servicing Agent
determines that granting such forbearance or suspension is in the best interest
of the Company. The Servicing Agent will use its best efforts, consistent with
the procedures that the Servicing Agent would use in servicing loans for its own
accounts, to foreclose upon or otherwise comparably convert the ownership of
properties securing such of the Residential Mortgage Loans as come into and
continue in default and as to which no satisfactory agreements can be made for
collection of delinquent payments.

         The Bank's Residential Servicing Agreement with the Servicing Agent
provides that the Bank can direct the Servicing Agent to transfer the servicing
and disposition functions with respect to all Residential Mortgage Loans which
become Nonaccrual back to the Bank. The servicing of properties that become REO
automatically will be transferred back to the Bank for the same purpose. The
Residential Mortgage Purchase Agreement and the Residential Assumption Servicing
Agreement provide for the same treatment with respect to Residential Mortgage
Loans sold by the Bank to the Company that become Nonaccrual or REO. Upon
receipt of written direction from the Company, the Servicing Agent is required
to promptly transfer the servicing for any such Nonaccrual Mortgage Loan to the
Bank and automatically will transfer servicing with respect to REO to the Bank.
The Bank will charge a servicing fee with respect to the Nonaccrual Mortgage
Loans transferred to it by the Company. The Bank will then service and dispose
of such properties, as required, on the Company's behalf.

         The Residential Servicing Agreements require the Servicing Agent to pay
all expenses related to the performance of its duties under such agreements. For
advances of reimbursable out-of-pocket costs and expenses, the Servicing Agent
generally will be reimbursed out of proceeds related to such Residential
Mortgage Loan.

         In connection with any foreclosure proceedings that the Servicing Agent
may institute, the Servicing Agent may exercise any power of sale contained in
any mortgage or deed of trust, obtain a deed in lieu of foreclosure or otherwise
acquire title to a mortgaged property underlying a Residential Mortgage Loan by
operation of law or otherwise in accordance with the terms of the Residential
Servicing Agreements. In the event that title to the property securing a
Residential Mortgage Loan is acquired in foreclosure or by deed in lieu of
foreclosure, the deed or certificate of sale shall be taken in the name of the
Company with the servicing with respect to such Residential Mortgage Loan to be
transferred back to the Company. It is expected that the Bank will service such
REO on behalf of the Company.

         The Company may terminate the Residential Servicing Agreements upon the
happening 

                                      15
<PAGE>

of one or more events specified in such Residential Servicing Agreements. Such
events generally relate to either (i) the Servicer's proper and timely
performance of its duties and obligations under the Residential Servicing
Agreements or (ii) the appointment of a conservator, receiver or liquidator in
any insolvency, bankruptcy or similar proceeding. In addition, the Company also
may terminate the Residential Servicing Agreements without cause but, in such
case, would be required to pay a termination fee, which, for the first seven
years from June 1, 1997 shall be equal to 1.10% of the aggregate outstanding
principal amount of the loans then serviced and, thereafter, 1.0% of the
aggregate outstanding principal amount of the loans then serviced. As long as
any Series A Preferred Shares remain outstanding, the Company may not terminate,
or elect not to renew, the Residential Servicing Agreements without first
obtaining the approval of a majority of the Independent Directors.

         As is customary in the mortgage loan servicing industry, the Servicing
Agent will be entitled to retain any late payment charges, penalties and
assumption fees collected in connection with the Residential Mortgage Loans
serviced by it. In addition, the Servicing Agent will receive any benefit
derived from interest earned on collected principal and interest payments
between the date of collection and the date of remittance to the Company and
from interest earned on tax and insurance impound funds with respect to
Residential Mortgage Loans serviced by it. The Residential Servicing Agreements
require the Servicing Agent to remit to the Company no later than the 18th day
of each month (or the next business day if such 18th day is not a business day)
all principal and interest collected from borrowers of Residential Mortgage
Loans serviced by it during the immediately preceding month.

         When any mortgaged property underlying a Mortgage Loan is conveyed by a
mortgagor, the Servicing Agent generally will enforce any "due-on-sale" clause
contained in the Residential Mortgage Loan, to the extent permitted under
applicable law and governmental regulations and subject to the Company's prior
approval. The terms of a particular Residential Mortgage Loan or applicable law,
however, may provide that the exercise of the "due-on-sale" clause is prohibited
under certain circumstances. Under such circumstances, the Servicing Agent will
negotiate an assumption agreement with the person to whom the mortgaged property
has been conveyed or is proposed to be conveyed, pursuant to which such person
becomes liable under the mortgage note. When an assumption is allowed, the
Servicing Agent will be authorized to negotiate a substitution of liability
agreement with the person to whom the mortgage property has been conveyed or is
proposed to be conveyed pursuant to which the original mortgagor is released
from liability and such person is substituted as mortgagor and becomes liable
under the related mortgage note. The Servicing Agent will be authorized to
collect and retain such assumption fees as are permitted by the terms of the
mortgage loan documents and applicable law. Upon any assumption of a Residential
Mortgage Loan by a transferee, a fee equal to a specified percentage of the
outstanding principal balance of the Residential Mortgage Loan is typically
required, which sum will be retained by the Servicing Agent as additional
servicing compensation.

         Beginning in February 1998, the Bank has retained the servicing for
residential mortgage loans which it originated after that date. As a result,
residential mortgage loans purchased by the Company from the Bank after that
date are serviced by the Bank instead of by the Bank's Servicing Agent. The Bank
will service such residential mortgage loans pursuant to the terms of 

                                      16
<PAGE>

the Commercial Servicing Agreement, discussed below.

         COMMERCIAL MORTGAGE LOAN SERVICING. The Bank will service the
Commercial Mortgage Loans included in the Initial Portfolio pursuant to the
terms of the Commercial Servicing Agreement. The Bank will receive an annual
servicing fee with respect to each Commercial Mortgage Loan serviced for the
Company which shall equal the outstanding principal balance of such Commercial
Mortgage Loans multiplied by a fee of 0.25% to 0.375%.

         The Bank may, from time to time, subject to approval of a majority of
the Independent Directors, subcontract all or a portion of its obligations under
the Commercial Servicing Agreement. The Bank will not, to the extent it
subcontracts any of its obligations under the Commercial Servicing Agreement, be
discharged or relieved in any respect from its obligations to the Company to
perform thereunder.

         The Commercial Servicing Agreement requires the Bank to service the
Company's Commercial Mortgage Loans in a manner generally consistent with
procedures and practices customarily employed and exercised by the Bank and with
any servicing guidelines promulgated by the Company. The Bank will collect and
remit principal and interest payments, administer mortgage, custodial and escrow
accounts, submit and pursue insurance claims and initiate and supervise
foreclosure proceedings on the Commercial Mortgage Loans it services. The Bank
also will provide accounting and reporting services required by the Company for
such Commercial Mortgage Loans. Additionally, for all Commercial Mortgage Loans,
the Bank will assume responsibility for payment of taxes and other charges which
are or may become a lien upon the mortgaged property. The Bank also will be
responsible for any late charges or tax penalties incurred due to its failure to
pay such bills. The Commercial Servicing Agreement requires the Bank to follow
such collection procedures that are consistent with the Bank's procedures for
mortgage loans comparable to the Commercial Mortgage Loans held for its own
account, including contacting delinquent borrowers and supervising foreclosures
and property dispositions in the event of unremedied defaults. The Bank may, in
its discretion, arrange with a defaulting borrower a schedule for the
liquidation of delinquencies. The Bank will use its best efforts, consistent
with the procedures that the Bank would use in servicing loans for its own
account, to foreclose upon or otherwise comparably convert the ownership of
properties securing such of the Commercial Mortgage Loans as come into and
continue in default and as to which no satisfactory agreements can be made for
collection of delinquent payments. The Bank also will use its best efforts to
realize upon defaulted Commercial Mortgage Loans in such manner as will maximize
the receipt of principal and interest.

         The Commercial Servicing Agreement requires the Bank to pay all
expenses related to the performance of its duties under such Servicing
Agreement. For advances of reimbursable out of pocket costs and expenses, the
Bank generally will be reimbursed prior to the Company out of proceeds related
to such Commercial Mortgage Loan. The Bank also will be entitled to
reimbursement by the Company for expenses incurred by it in connection with the
liquidation of defaulted Commercial Mortgage Loans serviced by it and in
connection with the restoration of mortgaged property.

                                      17
<PAGE>

         If claims are not made or paid under applicable insurance policies or
if coverage thereunder has ceased, the Company will suffer a loss to the extent
that the proceeds from liquidation of the mortgaged property, after
reimbursement of the Bank's expenses in the sale, are less than the outstanding
principal balance of the related Commercial Mortgage Loan. The Bank is
responsible to the Company for any loss suffered as a result of its failure to
make and pursue timely claims or as a result of actions taken or omissions made
by it which cause the policies to be canceled by the insurer.

         In connection with any foreclosure proceedings that the Bank may
institute, the Bank may exercise any power of sale contained in any mortgage or
deed of trust, obtain a deed in lieu of foreclosure or otherwise acquire title
to a mortgaged property underlying a Commercial Mortgage Loan by operation of
law or otherwise in accordance with the terms of the Commercial Servicing
Agreement. The Bank is not permitted under the terms of the Commercial Servicing
Agreement to acquire title to any commercial real estate property underlying a
Commercial Mortgage Loan or take any action that would cause the Company to be
an "owner" or an "operator" within the meaning of certain federal environmental
laws, unless it has also previously determined, subject to the approval of the
Advisor, based on a report prepared by an independent person who regularly
conducts environmental assessments, that (i) the mortgaged property is in
compliance with applicable environmental laws or that it would be in the best
interests of the Company to take such actions as are necessary to cause the
mortgaged property to comply therewith and (ii) there are no circumstances or
conditions present at the mortgaged property relating to the use, management or
disposal of any hazardous substances, hazardous materials, hazardous wastes or
petroleum-based materials for which investigation, testing, monitoring,
containment, clean-up or remediation could be required under any federal, state
or local law or regulation, or, if any such materials are present for which such
action could be required, that it would be in the best interest of the Company
to take such actions with respect to the mortgage property.

         The Company may terminate the Commercial Servicing Agreement upon the
happening of one or more events specified in such Commercial Servicing
Agreement. Such events relate generally to (i) the Bank's proper and timely
performance of its duties and obligations under the Commercial Servicing
Agreement or (ii) the appointment of a conservator, receiver or liquidator in
any insolvency, bankruptcy or similar proceeding. In addition, the Company may
also terminate the Commercial Servicing Agreement without cause but will be
required to pay a termination fee that is competitive with that which is
generally payable in the industry, equal to 0.25% of the aggregate outstanding
principal amount of the loans then serviced under the Commercial Servicing
Agreement. As long as any Series A Preferred Shares remain outstanding, the
Company may not terminate or elect not to renew, the Commercial Servicing
Agreement without the approval of a majority of the Independent Directors.

         The Bank will be entitled to retain any late payment charges,
prepayment fees, penalties and assumption fees collected in connection with the
Commercial Mortgage Loans serviced by it. In addition, the Bank will receive any
benefit derived from interest earned on collected principal and interest
payments between the date of collection and the date of remittance to the
Company and from interest earned on tax and insurance impound funds with respect
to Commercial 

                                      18
<PAGE>

Mortgage Loans serviced by it. The Commercial Servicing Agreement requires the
Bank to remit to the Company no later than the 18th day of each month (or the
next business day if such 18th day is not a business day) all principal and
interest collected from borrowers of Commercial Mortgage Loans serviced by it on
the last day of the immediately preceding month.

         When any mortgage property underlying a Commercial Mortgage Loan is
conveyed by a mortgagor, the Bank generally will enforce any "due-on-sale"
clause contained in the Commercial Mortgage Loan, including collection of any
mortgage prepayment penalties, to the extent permitted under applicable law,
governmental regulations and the loan documents.

                                      19
<PAGE>

FEDERAL INCOME TAX CONSIDERATIONS

         The following summary of material federal income tax considerations
regarding the Offering is based upon current law, is for general information
only and is not tax advice. The discussion below is based on existing federal
income tax law, which is subject to change, with possible retroactive effect.
The discussion below does not address all aspects of taxation that may be
relevant in the particular circumstances of each stockholder or to certain types
of stockholders (including insurance companies, tax-exempt entities, financial
institutions or broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States, except to the extent discussed)
subject to special treatment under the federal income tax laws.

TAXATION OF THE COMPANY

         GENERAL. Commencing with its taxable year ended December 31, 1998, the
Company has been organized and is operating in such a manner as to qualify for
taxation as a REIT under the Code, and the Company intends to continue to
operate in such a manner, but no assurance can be given that it will operate in
a manner so as to qualify or remain qualified. The Company has elected to be
taxed as a REIT under Sections 856 through 860 of the Code and the applicable
Treasury Regulations (the "REIT Requirements" or the "REIT Provisions"), which
are the requirements for qualifying as a REIT, commencing with its taxable year
ended December 31, 1998. The REIT Requirements are technical and complex. The
following discussion sets forth only a summary of the material aspects of those
requirements. A REIT generally will not be subject to federal corporate income
taxes on that portion of its ordinary income or capital gain that is currently
distributed to stockholders. Such treatment substantially eliminates the federal
"double taxation" of earnings (at the corporate and the stockholder levels) that
generally results from investment in a corporation.

         Despite the REIT election, the Company may be subject to federal income
and excise tax as follows:

                  First, the Company will be taxed at regular corporate rates on
         any REIT taxable income, including net capital gains, less
         distributions to stockholders.

                  Second, if the REIT has a net capital gain, the applicable tax
         will be the lower of: (i) the tax imposed on REIT taxable income
         computed without regard to net capital gain and the deduction for
         capital gain dividends, and (ii) a tax on undistributed net capital
         gains at the rate provided in Section 1201(a) of the Code.

                  Third, under certain circumstances, the Company may be subject
         to the "alternative minimum tax" on certain of its items of tax
         preferences, if any.

                  Fourth, if the Company has (i) net income from the sale or
         other disposition of "foreclosure property" that is held primarily for
         sale to customers in the ordinary course of business or (ii) other
         nonqualifying net income from foreclosure property, it will be subject
         to tax at the highest corporate rate on such 


                                      20
<PAGE>

income.

                  Fifth, if the Company has net income from prohibited
         transactions (which are, in general, certain sales or other
         dispositions of property held primarily for sale to customers in the
         ordinary course of business, other than sales of foreclosure property
         and sales that qualify for a statutory safe harbor), such income will
         be subject to a 100% tax.

                  Sixth, if the Company should fail to satisfy the 75% gross
         income test or the 95% gross income test (as discussed below), but has
         nonetheless maintained its qualifications as a REIT because certain
         other requirements have been met, it will be subject to a 100% tax on
         the net income attributable to the greater of the amount by which the
         Company fails the 75% or 95% test, multiplied by a fraction intended to
         reflect the Company's profitability.

                  Seventh, if the Company should fail to distribute, or fail to
         be treated as having distributed, during each calendar year at least
         the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95%
         of its REIT capital gain net income for such year and (iii) any
         undistributed taxable income from prior periods, the Company would be
         subject to a 4% excise tax on the excess of such required distribution
         over the amounts actually distributed.

         ORGANIZATIONAL REQUIREMENTS. The Code defines a REIT as a corporation,
trust, or association (i) that is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest; (iii) that would be taxable as
a domestic corporation, but for the REIT Requirements; (iv) that is neither a
financial institution nor an insurance company subject to certain provisions of
the Code; (v) the beneficial ownership of which is held by 100 or more persons;
(vi) not more than 50% in value of the outstanding stock of which is owned,
directly or indirectly, by five or fewer individuals (the "Five or Fewer Test")
(as defined in the Code to include private foundations and certain pension
trusts and other entities) at any time during the last half of each taxable
year; and (vii) meets certain other tests, described below, regarding the nature
of its income and assets. The Code provides that conditions (i) through (iv),
inclusive, must be met during the entire taxable year and that condition (v)
must be met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. Conditions (v) and
(vi) will not apply until after the first taxable year for which an election is
made to be taxed as a REIT. For purposes of condition (vi), certain tax-exempt
entities described in Sections 501(c)(17) and 509(a) of the Code or a portion of
a trust permanently set aside or used for purposes described in Section 642(c)
of the Code, are generally treated as individuals, stock owned by a corporation
is treated as if owned by the shareholders of the organization, and the
beneficiaries of a pension trust that qualifies under Section 401(a) of the Code
and that holds shares of a REIT will generally be treated as holding shares of
the REIT in proportion to their actuarial interests in the pension trust. See
"--Taxation of United States Stockholders-- Treatment of Tax-Exempt
Stockholders."

                                      21
<PAGE>

         In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. The Company satisfies this requirement.

         INCOME TESTS. In order to maintain qualification as a REIT, the Company
must annually satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including interest on
obligations secured by mortgages on real property, certain "rents from real
property" or as gain on the sale or exchange of such property and certain fees
with respect to agreements to make or acquire mortgage loans), from certain
types of temporary investments or certain other types of gross income. Second,
at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property investments as aforesaid and from dividends, interest and gain from the
sale or other disposition of stock or securities and certain other types of
gross income (or from any combination of the foregoing). Third, short-term gain
from the sale or other disposition of stock or securities, gain from prohibited
transactions and gain on the sale or other disposition of real property (apart
from involuntary conversions and sales of foreclosure property) held for less
than four years from the date of acquisition must represent less than 30% of the
Company's gross income (including gross income from prohibited transactions) for
each taxable year. The Taxpayer Relief Act of 1997 repealed the 30-percent gross
income test requirement for tax years beginning after August 5, 1997.

         For interest to qualify as "interest on obligations secured by
mortgages on real property or on interests in real property," the obligation
must be secured by real property having a fair market value at the time of
acquisition at least equal to the principal amount of the loan. The term
"interest" includes only an amount that constitutes compensation for the use or
forbearance of money. For example, a fee received or accrued by a lender which
is in fact a charge for services performed for a borrower rather than a charge
for the use of borrowed money is not includible as interest; amounts earned as
consideration for entering into agreements to make loans secured by real
property, although not interest, are otherwise treated as within the 75% and 95%
classes of gross income so long as the determination of those amounts does not
depend on the income or profits of any person. By statute, the term interest
does not include any amount based on income or profits of any person except that
the Code provides that (i) interest "based on a fixed percentage or percentages
of receipts or sales" is not excluded and (ii) when the REIT makes a loan that
provides for interest based on the borrower's receipts or sales and the borrower
leases substantially all of its interest in the property securing the loan under
one or more leases based on income or profits, only a portion of the contingent
interest paid by the borrower will be disqualified as interest.

         Rents received or deemed to be received by the Company will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if certain statutory conditions are met that limit
rental income essentially to rentals on investment-type properties. In the event
that a REIT acquires by foreclosure, property that generates income that does
not qualify as "rents from real property," such income will be treated as
qualifying for three years following the taxable year in which the trust
acquires the property (which period may be 

                                      22
<PAGE>

extended by the IRS) so long as (i) all leases entered into after foreclosure
generate only qualifying rent, (ii) only limited construction takes place and
(iii) within 90 days of foreclosure, any trade or business in which the property
is used is conducted by an independent contractor from which the REIT derives no
income. In the event the special foreclosure property rule applies to qualify
otherwise unqualified income, the net income that qualifies only under the
special rule for foreclosure property may be subject to tax, as described above.

         The Company expects to satisfy these requirements.

         RELIEF PROVISIONS. If the Company fails to satisfy one or both of the
75% and 95% gross income tests for any taxable year, it may nevertheless qualify
as a REIT for such year if it is entitled to relief under certain provisions of
the Code. These relief provisions generally will be available if the Company's
failure to meet such tests was due to reasonable cause and not due to willful
neglect, the Company attaches a schedule of the sources of its income to its
return and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. As discussed above in "--Taxation of the Company--General," even if
these relief provisions were to apply, a tax would be imposed based upon the
greater of the amount by which the Company failed either the 75% or 95% gross
income test for that year.

         ASSET TESTS. At the close of each quarter of each taxable year, the
Company must satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by real
estate assets (including stock or debt instruments held for not more than one
year that were purchased with the proceeds of a stock offering or long-term (at
least five years) debt offering of the Company), cash, cash items and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets and the Company may not own more than 10% of any one issuer's
outstanding voting securities.

         After initially meeting the asset tests at the close of any quarter,
the Company will not lose its status as a REIT if it fails to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. The Company intends to maintain adequate records of the value of
its assets to ensure compliance with the asset tests and to take such action
within 30 days after the close of any quarter as may be required to cure any
noncompliance but no assurance can be given that such asset tests will be met.

         ANNUAL DISTRIBUTION REQUIREMENTS. In order to be treated as a REIT, the
Company is required to distribute dividends (other than capital gain dividends)
to its stockholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) plus (ii) 95% of the net income,
if any, from foreclosure property in excess of the special tax on income from
foreclosure property, minus (B) the sum of certain items of noncash income. Such

                                      23
<PAGE>

distributions must be paid in the taxable year to which they relate or in the
following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend payment
after such declaration. To the extent that the Company does not distribute (or
is not treated as having distributed) all of its net capital gain or distributes
(or is treated as having distributed) at least 95%, but less than 100% of its
"REIT taxable income," as adjusted, it will be subject to tax thereon at regular
ordinary and capital gains corporate tax rates, as the case may be. For tax
years beginning after August 5, 1997, if the Company elects to retain, rather
than distribute, its net long-term capital gains and to pay the tax on such
gains, then each stockholder must treat a designated amount of undistributed
capital gains as long-term capital gains for his tax year in which the last day
of the Company's tax year falls. The stockholder, however, is also treated as
having paid the capital gains tax imposed on the Company on the designated
amounts included in their long-term capital gains and is allowed a credit or
refund for the tax deemed paid. The Code permits a stockholder, in certain
circumstances, to be treated for tax purposes as having (i) received a
distribution in the amount specified in the election and (ii) contributed the
amount thereof to the capital of a REIT. In the event the Company fails to
distribute 100% of its income and capital gains, the Bank may, but is not
obligated to, elect to be so treated. Moreover, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income for
such year and (iii) any undistributed taxable income from prior periods, the
Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. The Company intends to make
timely distributions sufficient to satisfy the annual distribution requirement.

         "REIT taxable income" is the taxable income of a REIT, which generally
is computed in the same fashion as the taxable income of any corporation, except
that (i) certain deductions are not available, such as the deduction for
dividends received, (ii) it may deduct dividends paid (or deemed paid) during
the taxable year, (iii) net capital gains and losses are excluded and (iv)
certain other adjustments are made.

         It is possible that, from time to time, the Company may not have
sufficient cash or other liquid assets to meet the 95% distribution requirement
due to timing differences between (i) the actual receipt of income and actual
payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in calculating the taxable income of the Company. In
the event that such an insufficiency or such timing differences occur, in order
to meet the 95% distribution requirement the Company may find it necessary to
arrange for borrowings or to pay dividends in the form of taxable stock
dividends if it is practicable to do so.

         Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Thus, the Company
may be able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.

         FAILURE TO QUALIFY. If the Company fails to qualify for taxation as a
REIT in any taxable 

                                      24
<PAGE>

year, and the relief provisions described above do not apply, the Company will
be subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Distributions to stockholders in any
year in which the Company fails to qualify will not be deductible by the Company
nor will they be required to be made. In such event, to the extent of current
and accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends-received deduction.
Unless entitled to relief under specific statutory provisions, the Company also
will be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost, and will not be
permitted to requalify unless it distributes any earnings and profits
attributable to the period during which it failed to qualify. In addition, it
would be subject to tax on any built-in gains on property held during the period
during which it did not qualify if it sold such property within 10 years of
requalification. It is not possible to state whether in all circumstances the
Company would be entitled to such statutory relief.

         TAX TREATMENT OF AUTOMATIC EXCHANGE. Upon the occurrence of an Exchange
Event, the outstanding Series A Preferred Shares automatically will be exchanged
on a one-for-one basis for Bank Preferred Shares. The Automatic Exchange will be
a taxable exchange with respect to which each holder of the Series A Preferred
Shares will have a gain or loss, as the case may be, measured by the difference
between the basis of such holder in the Series A Preferred Shares and the fair
market value of the Bank Preferred Shares received in the Automatic Exchange.
Provided that such holder's Series A Preferred Shares were held as capital
assets for more than 12 months prior to the Automatic Exchange, any gain or loss
will be long-term capital gain or loss. Long-term capital losses are deductible,
subject to certain limitations. The basis of the holder in the Bank Preferred
Shares will be the shares' fair market value at the time of the Automatic
Exchange.

TAXATION OF UNITED STATES STOCKHOLDERS

         DISTRIBUTIONS GENERALLY. As long as the Company qualifies as a REIT,
distributions to a United States Stockholder up to the amount of the Company's
current or accumulated earnings and profits (and not designated as capital gains
dividends) will be taken into account as ordinary income and will not be
eligible for the dividends-received deduction for corporations. Distributions
that are designated by the Company as capital gain dividends will be treated as
long-term capital gain (to the extent they do not exceed the Company's actual
net capital gain) for the taxable year without regard to the period for which
the stockholder has held its stock. However, corporate stockholders may be
required to treat up to 20% of certain capital gains dividends as ordinary
income, pursuant to Section 291(d) of the Code. A distribution in excess of
current or accumulated earnings and profits first will be treated as a tax-free
return of capital, reducing the tax basis in the United States Stockholder's
Series A Preferred Shares, and a distribution in excess of the United States
Stockholder's tax basis in its Series A Preferred Shares will be taxable gain
realized from the sale of such shares. Dividends declared by the Company in
October, November or December of any year payable to a stockholder of record on
a specified date in any such month shall be treated as both paid by the Company
and received by the stockholder on December 31 of such year, provided that the
dividend actually is paid by the 

                                      25
<PAGE>

Company during January of the following calendar year. Stockholders may not
claim the benefit of any tax losses of the Company on their own income tax
returns.

         The Company will be treated as having sufficient earnings and profits
to treat as a dividend any distribution by the Company up to the amount required
to be distributed in order to avoid imposition of the 4% excise tax discussed
under "--Taxation of the Company--General" and "--Taxation of the
Company--Annual Distribution Requirements" above. As a result, stockholders may
be required to treat as taxable dividends certain distributions that otherwise
would result in tax-free returns of capital. Moreover, any "deficiency dividend"
will be treated as a "dividend" (an ordinary dividend or a capital gain
dividend, as the case may be), regardless of the Company's earnings and profits.

         Losses incurred on the sale or exchange of Series A Preferred Shares
held for less than six months will be deemed a long-term capital loss to the
extent of any capital gain dividends received by the selling stockholder with
respect to such stock.

         TREATMENT OF TAX-EXEMPT STOCKHOLDERS. Distributions from the Company to
a tax-exempt employee pension trust or other domestic tax-exempt stockholder
generally will not constitute "unrelated business taxable income" ("UBTI")
unless the stockholder has borrowed to acquire or carry its Series A Preferred
Shares. Qualified trusts that hold more than 10% (by value) of the shares of
certain REITs, however, may be required to treat a certain percentage of such
REIT's distributions as UBTI. This requirement will apply only if (i) the REIT
would not qualify as such for federal income tax purposes but for the
application of the "look-through" exception to the Five or Fewer Test applicable
to shares held by qualified trusts and (ii) the REIT is "predominantly held" by
qualified trusts. A REIT is predominantly held by qualified trusts if either (i)
a single qualified trust holds more than 25% by value of the interests in the
REIT or (ii) one or more qualified trusts, each owning more than 10% by value of
the interests in the REIT, hold in the aggregate more than 50% of the interests
in the REIT. The percentage of any REIT dividend treated as UBTI is equal to the
ratio of (a) the UBTI earned by the REIT (treating the REIT as if it were
qualified trust and therefore subject to tax on UBTI) to (b) the total gross
income (less certain associated expenses) of the REIT. If the Company were to
incur indebtedness to acquire property, the percentage of any REIT dividend
treated as UBTI would be increased to reflect any UBTI earned by the Company
from "debt-financed property." A de minimis exception applies where the ratio
set forth above is less than 5% for any year. For these purposes, a qualified
trust is any trust described in Section 401(a) of the Code and exempt from tax
under Section 501(a) of the Code. The provisions requiring qualified trusts to
treat a portion of REIT distributions as UBTI will not apply if the REIT is able
to satisfy the Five or Fewer Test without relying upon the "look-through"
exception.

TAXATION OF FOREIGN STOCKHOLDERS

         The following is a discussion of certain anticipated U.S. federal
income tax consequences of the ownership and disposition of the Company's stock
applicable to Non-U.S. Holders of such stock. The discussion is based on current
law and is for general information only. The discussion addresses only certain
and not all aspects of U.S. federal income taxation.

                                      26
<PAGE>

         ORDINARY DIVIDENDS. The portion of dividends received by Non-United
States Holders payable out of the Company's earnings and profits (which are not
attributable to capital gains of the Company and which are not effectively
connected with a U.S. trade or business of the Non-United States Holder) will be
subject to U.S. withholding tax at the rate of 30% (unless reduced by treaty).
In general, Non-United States Holders will not be considered engaged in a U.S.
trade or business solely as a result of their ownership of stock of the Company.
In cases where the dividend income from a Non-United States Holder's investment
in stock of the Company is (or is treated as) effectively connected with the
Non-United States Holder's conduct of a U.S. trade or business, the Non-United
States Holder generally will be subject to U.S. tax at graduated rates, in the
same manner as a United States Stockholder with respect to such dividends (and
may also be subject to the 30% branch profits tax in the case of a Non-United
States Holder that is a foreign corporation).

         NON-DIVIDEND DISTRIBUTIONS. Distributions by the Company that are not
dividends out of the earnings and profits of the Company will not be subject to
U.S. income or withholding tax. If it cannot be determined at the time a
distribution is made whether or not such distribution will be in excess of
current and accumulated earnings and profits, then the distribution will be
subject to withholding at the rate applicable to dividends. However, the
Non-United States Holder may seek a refund of such amounts from the IRS if it is
subsequently determined that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company.

         CAPITAL GAIN DIVIDENDS. Under the Foreign Investment in Real Property
Tax Act of 1980 ("FIRPTA"), a distribution made by the Company to a Non-United
States Holder, to the extent attributable to gains from dispositions of United
States Real Property Interests ("USRPIs") will be considered effectively
connected with a U.S. trade or business of the Non-United States Holder and
subject to U.S. income tax at the rate applicable to U.S. individuals or
corporations, without regard to whether such distribution is designated as a
capital gain dividend. Shares of a corporation are treated as USRPIs only if the
fair market value of the USRPIs owned by the corporation equals or exceeds 50%
of the fair market value of its total assets. If at no time during the five
years preceding the sale or exchange of shares in the Company, the Series A
Preferred Shares constituted a USRPI, gain or loss on the sale or exchange will
not be treated as effectively connected with a U.S. trade or business by reason
of FIRPTA. Although ownership of real property in the U.S. is always a USRPI, a
loan secured by a mortgage on U.S. real property does not constitute a USRPI
unless the amounts payable by the borrower are contingent on the income or
receipts of the borrower or the property or otherwise based on the property. The
Company believes that it is unlikely that its shares will be USRPIs or that it
will derive significant gain from USRPIs, although whether its shares are USRPIs
or it derives gain from USRPIs will depend on the facts as they ultimately
develop. If the shares do constitute USRPIs, the Company will be required to
withhold tax equal to 35% of the amount of dividends to the extent such
dividends constitute USRPI Capital Gains. Distributions subject to FIRPTA may
also be subject to a 30% branch profits tax in the hands of a foreign corporate
stockholder that is not entitled to treaty exemption.

                                      27
<PAGE>

         DISPOSITION OF STOCK OF THE COMPANY. Unless the Company's stock
constitutes a USRPI, a sale of such stock by a Non-United States Holder
generally will not be subject to U.S. taxation under FIRPTA. The stock will not
constitute a USRPI if the Company is a "domestically controlled REIT." A
domestically controlled REIT is a REIT in which, at all times during a specified
testing period, less than 50% in value of its shares is held directly or
indirectly by Non-United States Holders. The Company believes that it is, and it
expects to continue to be, a domestically controlled REIT, and therefore that
the sale of the Company's stock will not be subject to taxation under FIRPTA.
Because the Company's stock will be publicly traded, however, no assurance can
be given the Company will continue to be a domestically controlled REIT.

         If the Company does not constitute a domestically controlled REIT, a
Non-United States Holder's sale of stock generally will still not be subject to
tax under FIRPTA as a sale of a USRPI provided that (i) the stock is "regularly
traded" (as defined by applicable Treasury regulations) on an established
securities market (e.g., the NASDAQ National Market, on which the Series A
Preferred Stock traded) and (ii) the selling Non-United States Holder held 5% or
less of the Company's outstanding stock at all times during a specified testing
period.

         If gain on the sale of stock of the Company were subject to taxation
under FIRPTA, the Non-United States Holder would be subject to the same
treatment as a United States Stockholder with respect to such gain (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals) and the purchaser of the stock could be
required to withhold 10% of the purchase price and remit such amount to the IRS.

         Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-United States Holder in two cases: (i) if the Non-United
States Holder's investment in the stock of the Company is effectively connected
with a U.S. trade or business conducted by such Non-United States Holder, the
Non-United States Holder will be subject to the same treatment as a United
States Stockholder with respect to such gain, or (ii) if the Non-United States
Holder is a nonresident alien individual who was present in the United States
for 183 days or more during the taxable year and has a "tax home" in the United
States, the nonresident alien individual will be subject to a 30% tax on the
individual's capital gain.

                                      28
<PAGE>

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX

         The Company will report to its stockholders and the IRS the amount of
dividends paid or deemed paid during each calendar year, and the amount of tax
withheld, if any.

         UNITED STATES STOCKHOLDERS. Under certain circumstances, a United
States Stockholder of Series A Preferred Shares may be subject to backup
withholding at a rate of 31% on payments made with respect to, or cash proceeds
of a sale or exchange of, Series A Preferred Shares. Backup withholding will
apply only if the holder (i) fails to furnish the person required to withhold
with its Taxpayer Identification Number ("TIN") which, for an individual, would
be his or her Social Security Number, (ii) furnishes an incorrect TIN, (iii) is
notified by the IRS that it has failed to properly report payments of interest
and dividends, or (iv) under certain circumstances, fails to certify, under
penalty of perjury, that it has furnished a correct TIN and has not been
notified by the IRS that it is subject to backup withholding for failure to
report interest and dividend payments. Backup withholding will not apply with
respect to payments made to certain exempt recipients, such as corporations and
tax-exempt organizations. A United States Stockholder should consult with a tax
advisor regarding qualification for exemption from backup withholding and the
procedure for obtaining such an exemption. Backup withholding is not an
additional tax. Rather, the amount of any backup withholding with respect to a
payment to a United States Stockholder will be allowed as a credit against such
United States Stockholder's United States federal income tax liability and may
entitle such United States Stockholder to a refund, provided that the required
information is furnished to the IRS.

         FOREIGN STOCKHOLDERS. Additional issues may arise pertaining to
information reporting and backup withholding with respect to a Non-United States
Holder. A Non-United States Holder should consult with a tax advisor with
respect to any such information reporting and backup withholding requirements.
Backup withholding with respect to a Non-United States Holder is not an
additional tax. Rather, the amount of any backup withholding with respect to a
payment to a Non-United States Holder will be allowed as a credit against any
United States federal income tax liability of such Non-United States Holder. If
withholding results in an overpayment of taxes, a refund may be obtained
provided that the required information is furnished to the IRS.

         OTHER TAX CONSEQUENCES. The Company and its stockholders may be subject
to state or local taxation in various state or local jurisdictions, including
those in which it or they transact business or reside. The state and local tax
treatment of the Company and its stockholders may not conform to the federal
income tax consequences discussed above. The tax laws of the State of California
apply the provisions of the Code relating to REITs with certain modifications
which will not have a material beneficial nor adverse effect on the Company's
ability to operate as a REIT. Prospective stockholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Company.

                                      29

<PAGE>

ITEM 2: PROPERTIES

         The Company utilizes office space and conference room facilities 
located in Los Angeles at 5900 Wilshire Boulevard, Los Angeles, California 
90036, the building in which the Bank's principal executive offices are 
located. The cost related to this office space is included in management fees 
paid by the Company to the Bank.

ITEM 3: LEGAL PROCEEDINGS

         The Company is not involved in any litigation at December 31, 1998.
From time to time, the Company may be involved in routine litigation arising in
the ordinary course of business.

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

         None.

                                     PART II

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company is authorized to issue up to 4,000,000 shares of common
stock, $0.01 par value per share (the "Common Stock") and 4,000,000 shares of
Preferred Stock, $0.01 par value per share (the "Preferred Stock"), of which
1,426,000 shares have been issued as the Series A Preferred Shares. The Bank
owns 100% of the Company's 10,000 shares of Common Stock outstanding at December
31, 1998. Accordingly, there is no trading market for the Company's Common
Stock. In addition, the Bank intends that, as long as any Series A Preferred
Shares are outstanding, it will maintain direct or indirect ownership of at
least a majority of the outstanding Common Stock of the Company.

         DIVIDENDS. Holders of Common Stock are entitled to receive dividends
when, as and if authorized and declared by the Board of Directors 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 cumulative Preferred Stock, have been paid and any
other conditions precedent established under the terms of such series of
Preferred Stock have been satisfied. In order to remain qualified as a REIT, the
Company must distribute annually at least 95% of its annual "REIT taxable
income" (not including capital gains) to stockholders. Several limitations exist
which may restrict the Company's ability to pay dividends on the Common Stock.
See "Item 1. Business--Business and Strategy--Dividend Policy."

         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 held by the Bank.

         As the holder of all of the outstanding shares of Common Stock of the
Company, the Bank will be able, subject to the terms of the Series A Preferred
Shares and of any other class or 

                                      30
<PAGE>

series of stock subsequently issued by the Company, to elect and remove
directors, amend the Articles of Incorporation and approve other actions
requiring stockholder approval under the MGCL or otherwise.

         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.

                                      31
<PAGE>

ITEM 6: SELECTED FINANCIAL DATA

                                 FINANCIAL DATA
       As of December 31, 1998 and 1997 and for the Period from inception,
                    June 19, 1997 through December 31, 1997
                    and for the year ended December 31, 1998
                 (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                            At December 31, 1997
                                          At or For the       or For the Period
                                        Year-ended 12/31/98    6/19/97 through
                                                                   12/31/97
                                        -------------------  -------------------
STATEMENT OF EARNINGS:
<S>                                         <C>                  <C>       
Interest income                             $    5,780           $    1,476
Total revenues                                   5,780                1,476
Net earnings                                     5,250                1,367
BALANCE SHEET:                                                 
Mortgage loans, net                             69,457               70,423
Total assets                                    72,405               72,597
Total stockholders' equity                      72,363               72,137
OTHER DATA:                                                    
Dividends paid on preferred stock                3,476                  859
Dividends paid on common stock                   1,548                  460
Number of preferred shares outstanding       ,426,000            1,426,000
Number of common shares outstanding(1)          10,000               10,000
</TABLE>

----------

(1)      Because the Company's Common Stock is wholly owned by the Bank,
         EARNINGS per share data is not presented.

                                      32
<PAGE>

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

DESCRIPTION OF PORTFOLIO

         Information with respect to the Residential Mortgage Loans and the
Commercial Mortgage Loans acquired by the Company since the commencement of its
operations is presented as of December 31, 1998. References herein to
percentages of Mortgage Loans acquired by the Company refer in each case to the
percentage of the aggregate outstanding principal balance of the Mortgage Loans
in the Company's Portfolio as of December 31, 1998, based on the outstanding
principal balances of such Mortgage Loans as of such date, after giving effect
to scheduled monthly payments received and applied on or prior to such date.

         GENERAL. As of December 31, 1998, the Portfolio contained 279
Residential Mortgage Loans, representing approximately 83.4% of the unpaid
principal balance of the Mortgage Loans contained in the Company's Portfolio,
and 63 Commercial Mortgage Loans, representing approximately 16.6% of the unpaid
principal balance of the Mortgage Loans contained in the Company's Portfolio. On
December 31, 1998, the Mortgage Loans included in the Company's Portfolio had an
aggregate outstanding principal balance of $69.7 million.

         Substantially all of the Residential Mortgage Loans included in the
Company's Portfolio were originated and/or purchased by the Bank in the ordinary
course of its real estate lending activities. Management believes that
substantially all of the Residential Mortgage Loans included in the Company's
Portfolio were originated and/or purchased in a manner consistent with the
underwriting policies of the Bank at the time at which such Mortgage Loans were
originated and/or purchased.

         All of the Residential Mortgage Loans included in the Company's
Portfolio were originated and/or purchased between June 1972 and November 1998,
and had original terms to stated maturity of primarily 15, 20, 25 or 30 years.
As of December 31, 1998, the average outstanding principal balance of a
Residential Mortgage Loan was $208,337. The weighted average number of months
since origination of the Residential Mortgage Loans included in the Company's
Portfolio (calculated as of December 31, 1998) was approximately 36 months and
the weighted average expected remaining maturity was 301 months. The weighted
average Loan-to-Value Ratio (defined below) of the Residential Mortgage Loans
included in the Company's Portfolio is 63.9%; however, 6.5% of the Residential
Mortgage Loans have Loan-to-Value Ratios of greater than 80%. "Loan-to-Value
Ratio" means the ratio (expressed as a percentage) of the original principal
amount of such Mortgage Loan to the lesser of (i) the appraised value at
origination of the underlying mortgaged property or (ii) if the Mortgage Loan
was made to finance the acquisition of property, the purchase price of the
mortgaged property.

         The mortgage notes with respect to most of the Mortgage Loans included
in the Company's Portfolio contain "due-on-sale" provisions which prevent the
assumption of the Mortgage Loan by a proposed transferee and accelerate the
payment of the outstanding principal balance of the Mortgage Loan. With respect
to a limited number of Mortgage Loans included in 

                                      33
<PAGE>

the Company's Portfolio, the mortgage notes permit assumption of the Residential
Mortgage Loan provided that the proposed transferee satisfies certain criteria
with respect to his ability to repay the Mortgage Loan.

         Each Commercial Mortgage Loan included in the Company's Portfolio was
originated and/or purchased by the Bank in the ordinary course of its commercial
real estate lending activities. All of the Commercial Mortgage Loans included in
the Company's Portfolio were originated and/or purchased between September 1973
and June 1997, and had original terms to stated maturity of between 10 and 30
years. As of December 31, 1998, the average outstanding principal balance of a
Commercial Mortgage Loan was $183,864. The weighted average number of months
since origination of the Commercial Mortgage Loans included in the Company's
Portfolio (calculated as of December 31, 1998) was approximately 106 months. As
of December 31, 1998, the weighted average Loan-to-Value Ratio of the Commercial
Mortgage Loans included in the Company's Portfolio is 55.2%. In addition, as of
December 31, 1998, no Commercial Mortgage Loan included in the Company's
Portfolio had a Loan-to-Value Ratio greater than 80%.

         RESIDENTIAL MORTGAGE LOANS. The following table sets forth as of
December 31, 1998 certain information with respect to each type of Residential
Mortgage Loan included in the Company's Portfolio:

                    TYPE OF RESIDENTIAL MORTGAGE LOAN PRODUCT

<TABLE>
<CAPTION>
                                                                  Percentage of
                                    Aggregate Principal        Residential Mortgage      Weighted Average         Weighted Average
                                          Balance               Loans by Aggregate        Initial Loan to        Expected Remaining
              Type                     (In Thousands)            Principal Balance          Value Ratio          Maturity (Months)
---------------------------------- -----------------------    ------------------------ ---------------------- ----------------------
<S>                                       <C>                            <C>                    <C>                     <C>
7/23 Step Rate...................         $1,774                         3.0%                   83.5%                   285
15 Year Fixed Rate...............          4,926                         8.5                    61.4                    117
30 Year Fixed Rate...............         51,426                        88.5                    68.6                    320
                                   -----------------------    ------------------------                             
         Total...................        $58,126                       100.0%
                                   =======================    ========================
</TABLE>

         The Residential Mortgage Loans included in the Company's Portfolio
either bear interest at fixed rates or are "7/23 step rate" loans. The "7/23
step rate" loan has a fixed initial interest rate for the first seven years
(i.e., 84 monthly payments) and adjusts once thereafter to a rate which applies
for the remaining 23 years (i.e., 276 monthly payments) equal to 150 basis
points above the FNMA 30 year commitment rate for delivery as of a date
specified in the related mortgage note. The interest rates of the fixed rate
Residential Mortgage Loans included in the Company's Portfolio range from 7.00%
per annum to 13.7% per annum. The weighted average interest rate of the
Residential Mortgage Loans included in the Company's Portfolio is approximately
7.69% per annum.

         The following table contains certain additional data with respect to
the interest rates of the 


                                      34
<PAGE>

Residential Mortgage Loans included in the Company's Portfolio:

                   INTEREST RATE OF RESIDENTIAL MORTGAGE LOANS

<TABLE>
<CAPTION>
                                                                                          Percentage of the
                                                            Aggregate Principal         Company's Portfolio by
                                        Number of                 Balance                Aggregate Principal
    Current Interest Rate            Mortgage Loans           (In Thousands)                   Balance
------------------------------      ------------------     ----------------------      -------------------------
<S>                                        <C>                    <C>                           <C>  
Up to 7.499%..............                  49                    $23,796                        40.9%
 7.500 -  7.749...........                  65                     13,178                        22.7
 7.750 -  7.999...........                  60                      9,329                        16.1
 8.000 -  8.249...........                  14                      2,341                         4.0
 8.250 -  8.499...........                   7                        951                         1.7
 8.500 -  8.749...........                  14                      1,406                         2.4
 8.750 -  8.999...........                  13                      2,085                         3.6
 9.000 -  9.249...........                   9                        392                         0.7
 9.250 -  9.499...........                   4                        140                         0.2
 9.500 -  9.749...........                   4                        544                         0.9
 9.750 -  9.999...........                   7                        421                         0.7
10.000 - 10.249...........                   9                        826                         1.4
10.250 - 10.499...........                   5                        347                         0.6
10.500 - 10.749...........                   9                      1,854                         3.2
10.750 - 10.999...........                   2                        109                         0.2
11.000 - 11.249...........                   1                         38                         0.1
12.000 - 12.249...........                   1                         51                         0.1
12.250 - 12.499...........                   1                        130                         0.2
12.500 - 12.749...........                   2                        109                         0.2
12.750 - 12.999...........                   2                         57                         0.1
13.500 - 13.749...........                   1                         22                         0.0
                                    -----------------     ----------------------      -------------------------
     Total................                 279                    $58,126                       100.0%
                                    =================     ======================      =========================
</TABLE>

         Substantially all of the Mortgage Loans included in the Company's
Portfolio allow the mortgagor to prepay at any time some or all of the
outstanding principal balance of the Mortgage Loan without a fee or penalty.

         COMMERCIAL MORTGAGE LOANS. The Commercial Mortgage Loans included in
the Company's Portfolio consist of loans secured by the Commercial Properties
located in California. The borrowers of the Commercial Mortgage Loans included
in the Company's Portfolio are primarily customers of the Bank to which the Bank
has extended such Commercial Mortgage Loans in the ordinary course of its
commercial real estate lending activities. The outstanding principal balances of
the Commercial Mortgage Loans included in the Company's Portfolio ranged from
$4,097 to $2.2 million as of December 31, 1998.

         The following table sets forth as of December 31, 1998 certain
information with respect to each type of multi-family residential and commercial
property underlying each Commercial Mortgage Loan included in the Company's
Portfolio:

                                      35
<PAGE>

                        TYPE OF COMMERCIAL MORTGAGE LOAN

                                                              
<TABLE>
<CAPTION>
                                                                Percentage of                           Weighted      
                                          Aggregate              Commercial                             Average          Weighted   
                                          Principal            Mortgage Loans     Weighted Average    Current Loan    Average Months
                                           Balance              by Aggregate      Initial Loan to       to Value       Remaining to 
               Type                     (In Thousands)        Principal Balance    Value Ratio(1)       Ratio(2)         Maturity   
-----------------------------------    -----------------      ------------------ ------------------- --------------- ---------------
<S>                                        <C>                        <C>                <C>                <C>             <C>
Commercial mortgage-fixed .....
   rate balloon................             $1,428                     12.3%             74.4%              48.3%           117
Commercial mortgage-fixed
   rate........................              5,236                     45.2              68.5               66.8             97
Multi-family-fixed rate balloon              2,700                     23.3              73.6               40.7             94
Multi-family-fixed rate........              2,220                     19.2              51.5               49.9            100
                                       =================      ==================
  Total........................            $11,584                    100.0%
                                       =================      ==================
</TABLE>

----------

(1)      Represents the ratio of the outstanding principal amount of each
         Commercial Mortgage Loan at the time of loan origination or
         modification, if any, to the value of the property securing such
         Commercial Mortgage Loan at the time of loan origination or
         modification, if any.

(2)      Represents the ratio of the outstanding principal amount of the
         Commercial Mortgage Loan at December 31, 1998 to the value of the
         property securing such Commercial Mortgage Loan at the time of loan
         origination or modification, if any.

         Of the Commercial Mortgage Loans included in the Company's Portfolio,
approximately 64.4% are not fully amortizing and will have significant principal
balances or "balloon" payments due upon maturity.

         All of the Commercial Mortgage Loans included in the Company's
Portfolio bear interest at fixed rates. The interest rates of the fixed rate
Commercial Mortgage Loans included in the Company's Portfolio range from 8.50%
per annum to 11.75% per annum. The weighted average interest rate of the
Commercial Mortgage Loans in the Company's portfolio is approximately 9.49% per
annum.

         The following table contains certain additional data as of December 31,
1998 with respect to the interest rates of the fixed rate Commercial Mortgage
Loans included in the Company's Portfolio:

                   INTEREST RATE OF COMMERCIAL MORTGAGE LOANS

                                      36
<PAGE>

<TABLE>
<CAPTION>
                                                                                       Percentage of the 
                                                                 Aggregate            Company's Portfolio
                                        Number of            Principal Balance            by Aggregate   
        Interest Rate                 Mortgage Loans           (In Thousands)          Principal Balance 
------------------------------      -------------------      -------------------      ---------------------
<S>                                              <C>               <C>                        <C> 
 8.500% -  8.749%                                 1                   $493                       4.3%
 9.000 -  9.249                                   4                  2,078                      17.9
 9.250 -  9.499                                  16                  2,794                      24.1
 9.500 -  9.749                                  22                  3,178                      27.4
 9.750 -  9.999                                   6                    910                       7.9
10.000 - 10.249                                   6                  1,545                      13.3
10.250 - 10.499                                   1                    116                       1.0
10.500 - 10.749                                   3                    206                       1.8
10.750 - 10.999                                  --                     --                        --
11.000 - 11.249                                   2                    157                       1.4
11.500 - 11.749                                   2                    107                       0.9
14.750 - 14.999                                  --                     --                        --
                                    ===================      ===================      =====================
  Total                                          63                $11,584                     100.0%
                                    ===================      ===================      =====================
</TABLE>

         ASSET QUALITY. The following table schedules residential mortgage loans
with past due principal and interest payments at December 31, 1998 (dollars in
thousands):

<TABLE>
<CAPTION>
                              Number      Principal Balance    Percent of Portfolio
                           ------------ --------------------- -----------------------
<S>                              <C>            <C>                    <C>  
30 to 59 days past due           3              $299                   0.40%
</TABLE>

         The following table schedules commercial mortgage loans with past due
principal and interest payments at December 31, 1998 (dollars in thousands):

<TABLE>
<CAPTION>
                              Number      Principal Balance    Percent of Portfolio
                           ------------ --------------------- -----------------------
<S>                              <C>            <C>                    <C>  
120 days past due                1               $75                   0.10%
</TABLE>

         UNDERWRITING STANDARDS. The Bank has represented to the Company that
all of the Residential Mortgage Loans and Commercial Mortgage Loans acquired by
the Company (including those that were originated by unaffiliated third parties)
were originated in accordance with the underwriting policy customarily employed
by the Bank during the period in which the Residential Mortgage Loans and
Commercial Mortgage Loans acquired by the Company were originated.

         RESIDENTIAL MORTGAGE LOANS. The underwriting standards applied at
origination of the Residential Mortgage Loans included in the Company's
Portfolio were intended to evaluate the borrower's credit standing and repayment
ability, and the value and adequacy of the underlying mortgaged property as
collateral. Generally, each prospective borrower was required to provide a loan
application and other supporting documents describing assets and liabilities,
the 


                                      37
<PAGE>

borrower's income and expenses, as well as, to the extent required by applicable
state law, an authorization to apply for a credit report which summarized the
borrower's credit history with merchants and lenders and any record of
bankruptcy.

         For any prospective borrower, an employment verification was obtained
from the borrower's employer wherein the employer reported the length of
employment with the employer, the employee's current salary, and whether it was
expected that the borrower would continue such employment in the future or the
borrower submitted such other evidence of employment (such as pay stubs)
satisfactory to the Bank. For a self-employed prospective borrower, the borrower
generally was required to submit copies of personal and business federal income
tax returns for the previous two years. For certain prospective borrowers, the
borrower authorized verification of all deposits at financial institutions at
which the borrower had demand or savings accounts.

         After the credit report and the employment and deposit verifications
were received by the underwriting officer considering the loan application, a
determination was made as to whether the prospective borrower had sufficient
monthly income available (i) to meet the borrower's monthly obligations on the
proposed Residential Mortgage Loan (determined on the basis of the monthly
payments due in the year of origination) and other expenses related to the home
(such as property taxes and hazard insurance) and (ii) to meet other financial
obligations and monthly living expenses. In certain instances, exceptions may
have been made to the Bank's underwriting policies (including those applied in
originating the Mortgage Loans acquired by the Company) in cases deemed
appropriate by its underwriting officers.

         In determining the adequacy of the property as collateral, an appraisal
was made of each property considered for financing. Each appraiser was selected
in accordance with predetermined guidelines established for appraisers. The
appraiser was required to inspect the property and verify that it was in good
condition and that construction, if new, had been completed. If the appraiser
reported any exceptions to the verification, then the Bank or its agent
determined that such property had been substantially completed to its
satisfaction. The appraisal was based on the appraiser's judgment of value
giving appropriate weight to both the market value of comparable properties and
the cost of replacing the property and other factors as appropriate. The Bank's
underwriting standards also required a search of the public records relating to
a mortgaged property for liens and judgments against such mortgaged property, as
well as customary title insurance.

         With respect to Residential Mortgage Loans that were purchased by the
Bank, the Bank evaluated the documentation relating to each purchased loan and
management believes that each such loan was originated in a manner that was
consistent with the underwriting standards of the Bank. All Residential Mortgage
Loans acquired by the Company in the future will be originated and/or purchased
under substantially similar standards.

         COMMERCIAL MORTGAGE LOANS. The loan underwriting procedures and
guidelines utilized by the Bank in connection with the origination of the
Commercial Mortgage Loans acquired by the Company were intended to assess the
value of the related mortgaged property, the ability of 

                                      38
<PAGE>

such mortgaged property to be used by the borrower or its agents and the
financial condition of the borrower, including its ability to service the
Commercial Mortgage Loan.

         The underwriting guidelines took into account such factors as
suitability of the mortgaged property for its proposed use; the availability,
rental rates and relative value of comparable properties in the relevant market
area and the anticipated growth or decline in both the immediate and broader
geographic areas in which the mortgaged property is located; the current or
projected occupancy or leasing ratios, if relevant; the condition and age of the
mortgaged property; the management ability of the borrower, including its
business experience and financial soundness; and such other economic,
demographic or other factors as in the judgment of the Bank might affect the
value of the mortgaged property and the ability of the borrower to service the
Commercial Mortgage Loan. Each proposal for a Commercial Mortgage Loan was
presented to the appropriate lending personnel of the Bank, which analyzed the
proposed transaction focusing on economic assumptions and the feasibility of the
loan, identified and evaluated potential risks and made a recommendation to
approve or disapprove the loan. The proposed transaction was then presented to
appropriate credit officers of the Bank for approval.

         After a loan proposal was approved, a loan commitment was issued by the
Bank to the proposed borrower, subject to, among other things, an appraisal
report and, if deemed appropriate or required, environmental engineering
reports. The Bank contracted with approved firms to prepare certain required
reports for the account of the Bank.

         With respect to Commercial Mortgage Loans that were purchased by the
Bank, the Bank evaluated the documentation relating to each purchased loan and
management believes that each such loan was originated in a manner that was
consistent with the underwriting standards of the Bank. All Commercial Mortgage
Loans acquired by the Company in the future will be originated and/or purchased
under substantially similar standards.

         GEOGRAPHIC DISTRIBUTION. As of December 31, 1998, 100% of the
residential real estate properties underlying the Company's Residential Mortgage
Loans included in the Company's Portfolio are located in California. Of the
Residential Mortgage Loans included in the Company's Portfolio, as of December
31, 1998, approximately 4.8% are secured by real estate located in Northern
California and 95.2% are secured by real estate located in Southern California.
Consequently, these Residential Mortgage Loans may be subject to a greater risk
of default than other comparable Residential Mortgage Loans in the event of
adverse economic, political or business developments and natural hazards
(earthquakes, wild fires and mud slides, for example) in California that may
affect the ability of residential property owners in California to make payments
of principal and interest on the underlying mortgages. Standard hazard insurance
required to be maintained with respect to Residential Mortgage Loans held by the
Company may not protect the Company against losses occurring from earthquakes
and other natural disasters.

         As of December 31, 1998, all of the commercial mortgaged properties
underlying the Company's Commercial Mortgage Loans included in the Company's
Portfolio are located in California. Of the Commercial Mortgage Loans included
in the Company's Portfolio, 

                                      39
<PAGE>

approximately 1.4% are secured by real estate located in Northern California and
98.6% are secured by real estate located in Southern California. Consequently,
these Commercial Mortgage Loans may be subject to a greater risk of default than
other comparable Commercial Mortgage Loans in the event of adverse economic,
political or business developments in California that may affect the ability of
businesses in that area to make payments of principal and interest on the
underlying mortgages. Consequently, in the event of a natural disaster, the
Company's ability to pay dividends on the Series A Preferred Shares could be
adversely affected as it is the Company's current intention to not maintain
special hazard insurance to protect against such losses.

         LOAN-TO-VALUE RATIOS; INSURANCE. Approximately $4.9 million of the
Residential Mortgage Loans included in the Company's Portfolio as of December
31, 1998 had Loan-to-Value Ratios of greater than 80% at the time of
origination. Of such Residential Mortgage Loans, at December 31, 1998,
approximately $4.0 million were insured under primary mortgage insurance
policies. The remaining $.875 million of such Residential Mortgage Loans at
December 31, 1998 included in the Company's Portfolio with Loan-to-Value Ratios
at origination of greater than 80% did not require primary mortgage insurance
policies because the outstanding principal balances of such loans have been
reduced (due to amortization) to levels which are less than 80% of the lesser of
(i) the appraised value at origination and (ii) the purchase price of the
mortgaged property (the "Current LTV Ratio"). Residential Mortgage Loans
included in the Company's Portfolio with Loan-to-Value Ratios greater than 80%
and Current LTV Ratios less than 80% that do not require private mortgage
insurance coverage have a weighted average Current LTV Ratio of 62.2% and have a
weighted average seasoning since origination (calculated as of December 31,
1998) of 190 months. As of December 31, 1998, not more than approximately 47.5%
of the Residential Mortgage Loans that require private mortgage insurance are
insured by any one primary mortgage insurance policy issuer. At the time of
origination of the Residential Mortgage Loans, each of the primary mortgage
insurance policy insurers was approved by FNMA or FHLMC. A standard hazard
insurance policy is required to be maintained by the mortgagor with respect to
each Residential Mortgage Loan in an amount equal to the maximum insurable value
of the improvements securing such Residential Mortgage Loan or the principal
balance of such Residential Mortgage Loan, whichever is less. If the residential
real estate property underlying a Residential Mortgage Loan is located in a
flood zone, such Residential Mortgage Loan also may be covered by a flood
insurance policy as required by law. No mortgagor bankruptcy insurance will be
maintained by the Company with respect to the Residential Mortgage Loans in the
Company's Portfolio, nor will any Residential, Mortgage Loan be insured by the
Federal Housing Administration or guaranteed by the Veterans Administration. The
Company will not maintain any special hazard insurance policy with respect to
any Residential Mortgage Loan that could mitigate damages caused by any natural
disaster.

         A standard hazard insurance policy also is required to be maintained by
the mortgagor with respect to each of the Commercial Mortgage Loans included in
the Company's Portfolio. If the commercial real estate property securing a
Commercial Mortgage Loan is located in a flood zone, such Commercial Mortgage
Loan may be covered by a flood insurance policy as required by law. However, as
with the Residential Mortgage Loans in the Company's Portfolio, no special
hazard insurance or mortgagor bankruptcy insurance will be maintained by the
Company 


                                      40
<PAGE>

with respect to the Commercial Mortgage Loans in the Company's Portfolio.

FINANCIAL CONDITION

         At December 31, 1998, the Company had total assets of $72.4 million. As
of such date, an aggregate of $69.5 million or 96.0% of the Company's assets was
comprised of its loan receivables portfolio, net of the allowance for loan
losses, substantially all of which was acquired from the Bank in connection with
the Company's initial public offering completed in October 1997. As of the date
of closing of the offering, the Company acquired residential mortgage loans with
an aggregate principal balance of $58.3 million and commercial real estate loans
with an aggregate principal balance of $13.0 million. A second transaction, in
which the Company purchased from the Bank residential mortgage loans with an
aggregate principal balance of $2.6 million, was closed on December 23, 1997.
During the year 1998, the Company purchased mortgage loans with an aggregate
principal balance of $23.0 million from the Bank. The weighted average rate of
the total portfolio at December 31, 1998 was 7.99%. At December 31, 1998, due
from affiliates, aggregated $1.2 million, accrued interest amounted to $370,000
and the Company maintained a general valuation allowance of $253,000. See Note 3
of the Notes to Financial Statements included in Item 8 hereof.

         At December 31, 1998, the Company's total liabilities amounted to
$42,000. Stockholders' equity amounted to $72.4 million, after taking into
consideration earnings of $5.3 million and aggregate dividend payments on the
common stock and the preferred stock of $5.0 million during the year.

RESULTS OF OPERATIONS

         The Company reported net earnings of $5.3 million for the year ended
December 31, 1998 as compared to $1.4 million for the year ended December 31,
1997. This increase was primarily due commencement of the Company's business on
October 3, 1997. The Company paid $3,476,000 and $859,000 in dividends on the
Company's preferred stock in 1998 and 1997 respectively. The Company also
recorded $1,548,000 and $460,000 in dividends on the Company's common stock in
1998 and 1997 respectively.

         Total revenues for the year ended December 31, 1998 amounted to $5.8
million as compared to $1.5 million for year ended December 31, 1998, which was
primarily attributable to interest earned on the Company's portfolio of mortgage
loans. The Company also earned $283,000 and $16,000 of interest on deposit
accounts in 1998 and 1997 respectively.

         Total expenses for the years ended December 31, 1998 and 1997 amounted
to $530,000 and $109,000 respectively, of which $200,000 and $50,000 was paid to
the Bank as a management fee in accordance with the terms of an advisory
agreement between the Company and the Bank. The Bank received in 1998 and 1997,
$30,369 and $8,000 for servicing the Company's commercial mortgage loans and
$16,112 and $0 for servicing a portion of the Company's residential mortgage
loans. Temple Inland Mortgage Co., which services a portion of the Company's
residential mortgage loans, received $123,171 and $38,000 in 1998 and 1997


                                      41
<PAGE>

respectively.

ALLOWANCE FOR LOAN LOSSES

         The Company maintains an allowance for loan losses to absorb potential
loan losses from the entire loan portfolio. Management believes that the
allowance for loan losses as of December 31, 1998, is sufficient to absorb any
unidentified losses that currently exist in the portfolio. Management will
continue to review the loan portfolio to determine the extent to which any
changes in loss experience may require additional provisions in the future.

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.

         The Company's principal liquidity needs are to maintain its current
portfolio size through the acquisition of additional Mortgage Loans as Mortgage
Loans currently in the portfolio mature or prepay and to pay dividends on the
Series A Preferred Shares. The acquisition of additional Mortgage Loans is
intended to be funded with the proceeds obtained from repayment of principal
balances by individual mortgagees. The Company does not have and does not
anticipate having any material capital expenditures.

         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 Code requiring the distribution by a REIT of at least 95% of
its "REIT taxable income" and taking into account taxes that would be imposed on
undistributed income), or a combination of these methods. The organizational
documents of the Company do not contain any limitation on the amount or
percentage of debt, funded or otherwise, that the Company might incur.
Notwithstanding the foregoing, the Company may not, without the approval of a
majority of the Independent Directors, incur debt for borrowed money in excess
of 20% of the Company's total stockholders' equity.
Any such debt incurred may include intercompany advances made by the Bank to the
Company.

         The Company also may issue additional series of Preferred Stock.
However, the Company may not issue additional shares of Preferred Stock that is
or will be senior to the Series A Preferred Shares without obtaining the prior
consent of holders of at least 66 2/3% of the shares of Preferred Stock
outstanding 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 prior approval of a majority of the
Company's Independent Directors.

                                      42
<PAGE>

         INTEREST RATE RISK. The company's interest rate risk is primarily
related to loan prepayments and payoffs. The average maturity of loans is
substantially less than their average contractual terms because of prepayments
and, in the case of conventional mortgage loans, due-on-sale clauses, which
generally give the Bank the right to declare a loan immediately due and payable
in the event, among other things, that the borrower sells the real property
subject to the mortgage and the loan is not repaid. The average life of mortgage
loans tends to increase when the current mortgage loan rates are substantially
higher than rates on existing mortgage loans and, conversely, decrease when
rates on existing mortgages are substantially lower than current mortgage loan
rates (due to refinancings of adjustable rate and fixed rate loans at lower
rates). The following table summarizes the anticipated maturities or repricing
of the Company's interest-earning assets as of December 31, 1998, based on the
information and assumption set forth in the note below.

<TABLE>
<CAPTION>
                                            Three to    More Than    More Than   
                               Within Three  Twelve    One Year to  Three Years   Over Five
                                 Months      Months    Three Years  to Five Years   Years       Total   Net Fair Value
                                 ------      ------    -----------  -------------   -----       -----   --------------
Interest-earning assets (1):                                                      
   Loans receivable                                                               
   Single-family residential                                                      
     loans:                                                                       
<S>                              <C>         <C>         <C>          <C>          <C>         <C>         <C>    
     Fixed                       $    --     $10,049     $15,373      $10,630      $22,074     $58,126     $58,432
   Multi-family residential:                                                      
     Fixed rate balloon               --         286         471          380        1,083       2,220       2,247
     30 year fixed rate               --         586         888          610          616       2,700       2,736
   Commercial real estate:                                                        
     Fixed rate balloon               --         705       1,128          866        2,537       5,236       5,216
     30 year fixed rate               --         277         416          286          449       1,428       1,423
Other interest-earning                                                            
   assets                          1,277          --          --           --           --       1,277       1,277
                                 -------     -------     -------      -------      -------     -------     -------
     Total                       $ 1,277     $11,903     $18,276      $12,772      $26,759     $70,987     $71,331
                                 -------     -------     -------      -------      -------     -------     -------
</TABLE>

(1)      Adjustable-rate loans are included in the period in which interest
         rates are next scheduled to adjust rather than in the period in which
         they are due, and fixed-rate loans are included in the periods in which
         they are scheduled to be repaid, based on scheduled amortization, in
         each case as adjusted to take into account estimated prepayments based
         on assumptions used by the OTS in assessing the interest rate
         sensitivity.

                                      43
<PAGE>

YEAR 2000

         During 1997, the Company finalized its plan to address issues related
to the year 2000 ("Y2K") problem. The Y2K issue is primarily a result of
computer software recognizing a two-digit date field rather than the full four
digits, which identify the appropriate year. Date-sensitive computer programs,
hardware or equipment controlled by microprocessor chips may not appropriately
deal with the year "00".

         The Company' s loan portfolio is currently serviced by the Bank and
Temple Inland. The Bank utilizes Fiserv CBS, a third party vendor, to process
substantially all of its data processing functions. The Bank has contacted its
critical vendors, including Temple Inland, and has received confirmation that
they will be Year 2000 compliant. The Bank is working with Fiserv CBS and other
critical vendors to ensure that their operational and financial systems will not
be adversely effected by the Y2K problem.

         The Bank is currently in the validation or testing phase of the Year
2000 compliance plan. The Bank developed an extensive test plan that contains
test requirements and criteria, manpower assignments and target dates. A
dedicated local area network specifically for Y2K testing was established to
communicate with the Fiserv CBS test system. Detailed test scripts designed to
test date-related functions are processed on the system for the FFIEC's
recommended critical test dates. The results are reviewed to ensure the system
is functioning properly. Testing with Fiserv CBS will continue through May 1999.
Temple Inland is also testing their systems currently and has indicated that
they will be Y2K compliant.

         The Company is currently developing a contingency plan that will be
completed and tested by May 31, 1999 to address a plan of action in the unlikely
event that the Company or its servicers and/or business partners are not ready
for Year 2000. The contingency plan will address any required Company service
provider changes or need to outsource to Y2K compliant entities.

         The Company has not incurred any significant expenses to date and does
not expect to incur any in conjunction with the Y2K problem.

         The Company's plans to complete Y2K compliance are based on
management's and the Board's best estimates. There can be no guarantee that
these estimates will be achieved, and the ending results could be significantly
different due to unforeseen circumstances.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Interest Rate Risk."

                                      44
<PAGE>

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                     PEOPLE'S PREFERRED CAPITAL CORPORATION
                              FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

                          INDEX TO FINANCIAL STATEMENTS

                                                                            Page
                                                                            ----

Independent Auditors' Report...............................................  46

Statements of Financial Condition--December 31, 1998 and 1997..............  47

Statements of Earnings--Years ended December 31, 1998 and 1997.............  48

Statements of Changes in Stockholders' Equity--Years ended December 31,
1998 and 1997..............................................................  49

Statements of Cash Flows--Years ended December 31, 1998 and 1997...........  50

Notes to Financial Statements..............................................  51

                                      45
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
People's Preferred Capital Corporation:

We have audited the accompanying statements of financial condition of People's
Preferred Capital Corporation as of December 31, 1998 and 1997, and the related
statements of earnings, changes in stockholders' equity and cash flows for the
year ended December 31, 1998, and for the period from inception, June 19, 1997
through December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of People's Preferred Capital
Corporation as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for the year ended December 31, 1998 and for the period from
inception, June 19, 1997 through December 31, 1997 in conformity with generally
accepted accounting principles.


                                                      KPMG  LLP

Los Angeles, California
January 25, 1999

                                      46
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION

                        STATEMENTS OF FINANCIAL CONDITION
                           December 31, 1998 and 1997
                (Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
SSETS:                                                        December 31,  December 31,
                                                                  1998        1997
                                                                 -------     -------
<S>                                                              <C>         <C>    
Cash and cash equivalents                                        $ 1,301     $    44
Mortgage loans, net (Note 3)                                      69,457      70,423
Due from affiliate (Note 5)                                        1,277       1,723
Accrued interest receivable                                          370         407
                                                                 -------     -------

         Total assets                                            $72,405     $72,597
                                                                 =======     =======

LIABILITIES:

Accounts payable and accrued liabilities                         $    42     $    --
Dividends payable to the Bank (Notes 4 and 5)                         --         460
                                                                 -------     -------

         Total liabilities                                            42         460
                                                                 -------     -------

Commitments and contingencies                                         --          --

Stockholders' equity:

Preferred stock, par value $.01 per share, 4,000,000 shares
authorized: Preferred stock series A, issued and outstanding
  1,426,000 shares, liquidation value $35,650                         14          14
Common stock, par value $.01 per share, 4,000,000 shares
authorized: 10,000 shares issued and outstanding                      --          --

Additional paid-in capital                                        72,075      72,075

Retained earnings                                                    274          48
                                                                 -------     -------

         Total stockholders' equity                               72,363      72,137
                                                                 -------     -------

         Total liabilities and stockholders' equity              $72,405     $72,597
                                                                 =======     =======
</TABLE>

See accompanying notes to financial statements.

                                      47
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION

                             STATEMENTS OF EARNINGS
                  For the Year Ended December 31, 1998 and for
       the Period from inception, June 19, 1997 through December 31, 1997
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                          1998             1997
                                                         ------           ------
<S>                                                      <C>              <C>   
REVENUES:
Interest on mortgage loans                               $5,497           $1,460
Interest on deposits                                        283               16
                                                         ------           ------

    Total revenues:                                       5,780            1,476
                                                         ------           ------

EXPENSES:
Loan servicing fees                                         170               46
Management fees (Note 6)                                    200               50
Professional fees                                           125               11
Other                                                        35                2
                                                         ------           ------

    Total expenses                                          530              109
                                                         ------           ------

    Net earnings                                         $5,250           $1,367
                                                         ======           ======
</TABLE>

See accompanying notes to financial statements.

                                      48

<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION

                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
     For the Year Ended December 31, 1998 and for the Period from Inception,
                    June 19, 1997 through December 31, 1997
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                      Number of
                                            Number of                  Common
                                        Preferred Shares   Series A  Shares par           Additional                Total
                                         par value, $.01  Preferred  value, $.01  Common    Paid-in   Retained  Stockholders'
                                            per share       Stock     per share   Stock     Capital   Earnings      Equity
                                        -------------------------------------------------------------------------------------
<S>                                       <C>               <C>        <C>         <C>     <C>        <C>           <C>     
Balance at June 19, 1997                         --         $     --         --    $  --   $     --   $      --     $     --
                                                           
Issuance of preferred stock, Series A     1,426,000               14         --       --     33,236          --       33,250
                                                           
Issuance of common stock                         --               --     10,000       --     38,236          --       38,839
                                                           
Net earnings                                     --               --         --       --         --       1,367        1,367
                                                           
Preferred dividends                              --               --         --       --         --        (859)        (859)
                                                           
Common dividends                                 --               --         --       --         --        (460)        (460)
                                        -------------------------------------------------------------------------------------
Balance at December 31, 1997              1,426,000               14     10,000       --     72,075          48       72,137
                                                           
Net earnings                                     --               --         --       --         --       5,250        5,250
                                                           
Preferred dividends                              --               --         --       --         --      (3,476)      (3,476)
                                                           
Common dividends                                 --               --         --       --         --      (1,548)      (1,548)
                                        -------------------------------------------------------------------------------------
Balance at December 31, 1998              1,426,000         $     14     10,000    $  --   $ 72,075    $    274     $ 72,363
                                        =====================================================================================
</TABLE>

See accompanying notes to financial statements.

                                      49

<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION

                            STATEMENTS OF CASH FLOWS
     For the Year Ended December 31, 1998 and for the Period from Inception,
                     June 19, 1997 through December 31, 1997
                             (Dollars in thousands)

<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:                                      1998       1997
                                                                         --------   --------
<S>                                                                      <C>        <C>     
Net earnings                                                             $  5,250   $  1,367

Adjustments to reconcile net earnings to net cash provided by operating
activities:
    Decrease in accrued interest receivable                                    37        114
    (Increase) decrease in due from affiliates                                446     (1,723)
    Increase in accrued expenses                                               42         --
                                                                         --------   --------
    Net cash (used in) provided by operating activities                     5,775       (242)
                                                                         --------   --------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of mortgage loans                                            (23,080)   (73,952)
    Mortgage loan principal repayments                                     24,142      3,529
    Purchase of accrued interest receivable                                   (96)      (521)
                                                                         --------   --------
    Net cash (used in) provided by investing activities                       966    (70,944)
                                                                         --------   --------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Net proceeds from preferred stock offering                                 --     33,250
    Net proceeds from capital contribution from Bank                           --     38,839
    Preferred stock dividends paid                                         (3,476)      (859)
    Common stock dividends paid                                            (2,008)        --
                                                                         --------   --------
    Net cash (used in) provided by financing activities                    (5,484)    71,230
                                                                         --------   --------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                   1,257         44
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                                                                               44         --
                                                                         ========   ========

CASH AND CASH EQUIVALENTS AT END OF YEAR                                 $  1,301   $     44
                                                                         ========   ========

Supplemental schedule of non-cash financing activities:
    Common stock dividends declared and unpaid                           $     --   $    460
                                                                         ========   ========
</TABLE>

See accompanying notes to financial statements.

                                      50

<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

         The Company is a Maryland corporation incorporated on June 19, 1997
which was created for the purpose of acquiring, holding and managing mortgage
loans secured by real estate assets. The Company's outstanding common stock is
wholly owned by the Bank, a federal savings bank.

         On October 3, 1997, the Company commenced its operations with the
consummation of an initial public offering of 1,426,000 shares of Series A
Preferred Shares, $0.01 par value, which raised $33,250,000, net of underwriting
and offering expenses of $2,400,000. The Series A Preferred Shares are traded on
the NASDAQ National Market. Additional 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 $38,839,000 after reimbursement for offering expenses of
$426,000 to the Company.

         Each Series A Preferred Share will be exchanged automatically (the
"Automatic Exchange") for one newly issued preferred share of the Bank, if the
appropriate federal regulatory agency directs that the exchange occur. The
instances in which this might occur are as follows: (i) the Bank becomes
undercapitalized under the prompt corrective action regulations under the
Federal Deposit Insurance Corporation Improvements Act of 1991, (ii) the Bank is
placed into conservatorship or receivership, or (iii) the appropriate federal
agency anticipates the bank becoming "undercapitalized" in the near future. In
the event of the Automatic Exchange, the Bank preferred shares would constitute
a new series of preferred shares of the Bank, and would have the same dividend
rights, liquidation preference, redemption options and other attributes as the
Series A Preferred Shares, except that (i) the Bank preferred shares would not
be listed on a national stock exchange or national quotation system, and would
rank on an equal basis in terms of cash dividend payments and liquidation
preference with any shares of preferred stock of the Bank outstanding at the
time of the Automatic Exchange.

         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
and commercial mortgage loans at the Bank's carrying value of $71.3 million. The
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 servicing agreements with the Bank and Temple Inland
Mortgage Corporation to service the Company's mortgage assets.

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

                                      51
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)      Residential and Commercial Mortgage Loans:

                  Residential and commercial 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 on
         one-to-four-family residential mortgage loans 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.
         The initial portfolio of loans was purchased from the Bank at its
         principal amount without adjustment for deferred fees or costs and
         discounts or premiums due to immateriality. The Company purchased
         additional single family residential loans from the Bank during 1997
         and 1998. It is the Company's policy to place a loan on non-accrual
         status in the event that a borrower is 90 days or more delinquent. When
         a loan is placed on non-accrual status, the accrued and unpaid interest
         receivable is reversed. Amortization of premiums, discounts, and
         deferred fees, net of deferred direct origination costs, associated
         with loans that are on non-accrual status 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.

                  Accounting Standards No. 114, "Accounting by Creditors for
         Impairment of a Loan" ("SFAS No. 114"), as amended by Statement of
         Financial Accounting Standards No. 118, "Accounting by Creditors for
         Impairment of a Loan - Income Recognition and Disclosures" ("SFAS No.
         118"), a loan is 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. SFAS No. 114 does not apply to large
         groups of smaller balance homogeneous loans that are collectively
         evaluated for impairment. The Company collectively reviews its
         portfolio of residential mortgage loans for impairment. The Company
         reviews its commercial loans individually for impairment. There were no
         impaired loans included in the Company's loan portfolio at December 31,
         1998 and 1997.

                  Residential and commercial mortgages consist of fixed rate
         mortgages. The Company's commercial loan portfolio includes fixed rate
         mortgages which do not fully amortize and have a balloon payment due.


                                      52
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

(b)      Allowance for Loan Losses:

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

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

(c)      Cash and Cash Equivalents:

                  For purposes of the statement of cash flows, cash and cash
         equivalents include cash and amounts due from banks, and all other
         highly liquid debt investments with original maturities of three months
         or less.

(d)      Income Taxes:

                  The Company has elected to be treated as a REIT for Federal
         income tax purposes and intends to comply with the provisions of the
         Code. Accordingly, the Company will not be subject to Federal income
         tax to the extent it distributes its earnings to stockholders and as
         long as certain asset, income and stock ownership tests are met in
         accordance with the Code. As the Company expects to qualify as a REIT
         for Federal income tax purposes, no provision for income taxes is
         included in the accompanying financial statements.

(e)      Use of Estimates:

                  Management of the Company has made certain estimates and
         assumptions relating to the reporting of assets and liabilities and
         reported amounts of revenues and expenses and the disclosure of
         contingent assets and liabilities to prepare these financial statements
         in conformity with generally accepted accounting principles. Actual
         results could differ from those estimates.

                                      53
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

NOTE 3 - MORTGAGE LOANS AND ALLOWANCE FOR LOAN LOSSES

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

<TABLE>
<CAPTION>
                                    December 31, 1998       December 31, 1997
                                   --------------------    ---------------------
<S>                                 <C>                      <C>            
Single-family mortgage loans        $        58,126          $        58,142
Multifamily loans                             4,919                    5,548
Commercial loans                              6,665                    6,986
                                   --------------------    ---------------------
                                             69,710                   70,676
Allowance for loan losses                      (253)                    (253)
                                   ====================    =====================
                                     $       69,457           $       70,423
                                   ====================    =====================
</TABLE>

         There was no activity in the allowance for loan losses which had a
balance of $253,000 at the beginning and end of each period.

         As of December 31, 1998, all of the real estate properties underlying
the mortgage loans included in the Company's portfolio are located in
California. Of the residential mortgage loans included in the Company's
portfolio, as of December 31, 1998, approximately 4.8% are secured by real
estate located in northern California and 95.2% are secured by real estate
located in southern California. Of the multi-family and commercial mortgage
loans included in the Company's portfolio, approximately 1.4% are secured by
real estate located in northern California and 98.6% are secured by real estate
located in southern California.

         Consequently, these mortgage loans may be subject to a greater risk of
default than other comparable mortgage loans in the event of adverse economic,
political or business developments and natural hazards (earthquakes, wild fires
and mud slides, for example) in California that may affect the ability of
property owners in California to make payments of principal and interest on the
underlying mortgages. Standard hazard insurance required to be maintained with
respect to mortgage loans held by the Company may not protect the Company
against losses occurring from earthquakes and other natural disasters.

                                      54
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

NOTE 4 - 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 9.75% 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 for the year
ended December 31, 1998 and for the period from June 19, 1997 to December 31,
1997 to holders of the Series A Preferred Shares totaled approximately
$3,476,000 and $859,000, respectively.

         No cash dividends or other distributions may be paid on common stock
unless (i) the Company has paid full dividends on the Series A Preferred Shares
for the four most recent dividend periods (or such lesser number of dividend
periods during which the Series A Preferred Shares have been outstanding) and
has declared a cash dividend on the Series A Preferred Shares at the annual
dividend rate for the current dividend period, and (ii) the Company is in
compliance with the terms of all stock ranking senior to the common stock.

         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. There were $1,548,000 common dividends paid
for the year ended December 31, 1998. There were $460,000 common dividends
declared during the period from June 19, 1997 to December 31, 1997 which were
paid in 1998.

NOTE 5 - RELATED PARTY TRANSACTIONS

         The Company entered into servicing agreements with the Bank pursuant to
which the Bank performs the servicing of the commercial mortgage and certain
single family residential loans held by the Company in accordance with normal
industry practice. The servicing fee the Bank charges is 0.25% per year of the
outstanding principal balances of the commercial and single family residential
mortgages. Servicing fee expense paid to the Bank totaled $46,481 for the year
ended December 31, 1998 compared to $8,000 for the year ended December 31, 1997.
A portion of the Company's residential mortgage loans are serviced by Temple
Inland Mortgage Corporation through a subservicing arrangement at the Bank. The
loans are serviced in accordance with normal industry practice. The servicing
fee is 0.25% per year of the outstanding principal balances. Servicing fee
expense paid to Temple Inland Mortgage Corporation for the period from January
1, 1998 to December 31, 1998 was $123,171 compared to $38,064 for the period
from October 3, 1997 to December 31, 1997.

         In its capacity as servicer, the Bank holds in custodial accounts at
the Bank mortgage loan payments received on behalf of the Company. The Bank also
receives funds due to the Company 


                                      55
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

from Temple Inland Mortgage Corporation via wire transfer and remits them to the
Company. The balance of such accounts totaled $1,277,000 and $1,723,000 at
December 31, 1998 and 1997, respectively, and was recorded as Due From
Affiliates. Such payments were passed through to the Company in January as
provided in the servicing agreement. At December 31, 1998 and 1997, trust funds
of approximately $5,000, representing escrows advanced by the Company, are on
deposit in a trust account at the Bank and are not included in the accompanying
financial statements.

         As the owner of 100% of the outstanding common stock of the Company,
the Bank is the sole shareholder entitled to receive common dividends. There
were $1,548,000 common dividends paid for the year ended December 31, 1998. At
December 31, 1997 the Company had dividends payable to the Bank of $460,000.
This amount was paid on January 14, 1998.

NOTE 6 - MANAGEMENT/ADVISORY FEES

         The Company has an advisory contract with the Bank for an initial term
of five years which will be renewed automatically for additional five-year
periods unless notice of nonrenewal is delivered to the advisor by the Company.
The annual advisory fee is $200,000. As long as any Series A Preferred Shares
remain outstanding, a decision by the Company to terminate the advisory contract
must be approved by a majority of the Board of Directors, as well as by a
majority of the Independent Directors. Total advisory fees of $200,000 and
$50,000 were paid to the Bank during 1998 and 1997, respectively.

NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

<TABLE>
<CAPTION>
                                        1998                         1997
                                ---------------------       ---------------------
                                CARRYING       FAIR         CARRYING       FAIR
                                 AMOUNT        VALUE        AMOUNT         VALUE
                                -------       -------       -------       -------
<S>                             <C>           <C>           <C>           <C>    
Financial Assets:
Cash and cash equivalents       $ 1,301       $ 1,301       $    44       $    44
Mortgage loans, net              69,457        70,054        70,423        71,134
Due from Affiliate                1,277         1,277         1,753         1,753
</TABLE>

                                      56
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION

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

         Cash and cash equivalents - The carrying value approximates the fair
value for cash and short-term investments.

         Mortgage loans - For residential real estate loans, fair value is
estimated by discounting projected future cash flows at the current market
interest rates for mortgage-backed securities collateralized by loans of similar
coupon, duration and credit risk, adjusted for differences in market interest
rates between loans and securities. The fair value of commercial real estate
loans is estimated by discounting the future cash flows using the current
interest rates at which loans with similar terms would be made on property and
to borrowers with similar credit and other characteristics and with similar
remaining terms to maturity.

         Due from affiliates - The carrying value approximates the fair value
for due from affiliates.

                                      57
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

         None.

                                    PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION

         The Company's Board of Directors is composed of seven members, two of
whom are Independent Directors. An "Independent Director" is a director who is
not a current officer or employee of the Company or a current director, officer
or employee of the Bank or any affiliate of the Bank. These directors will serve
until their successors are duly elected and qualified. The Company's Board of
Directors currently has one open seat for an independent director. There is no
current intention to alter the number of directors comprising the Board of
Directors. Pursuant to the Articles of Incorporation, the Independent Directors
are required to consider the interests of the holders of both the Common Stock
and the 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 officers, all of whom are Bank
officers. The Company has no other employees and does not anticipate that it
will require additional employees.

The persons who were directors and executive officers of the Company as of
December 31, 1998 are as follows:

<TABLE>
<CAPTION>
          Name                Age(1)          Position and Offices Held
----------------------------------------------------------------------------------------
<S>                            <C>    <C>
Rudolf P. Guenzel              58     President, Chief Executive Officer and Director
Gerard Jervis                  50     Director
Robert W. MacDonald            51     Director
John F. Davis                  51     Director
David S. Honda                 48     Director
J. Michael Holmes              52     Executive Vice President, Chief Financial Officer,
                                      Secretary and Director
William W. Flader              50     Executive Vice President
Michael R. Hilton              47     Vice President
</TABLE>

----------


                                      58
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION

(1) As of December 31, 1998.

         Set forth below is information with respect to the principal
occupations during the last five years of the Company's directors and officers.

         RUDOLF P. GUENZEL. Mr. Guenzel is President and Chief Executive Officer
and a director of the Company, positions he has held since the Company's
inception in June 1997. Mr. Guenzel has served as President of PBOC Holdings,
Inc. and President, Chief Executive Officer and director of the Bank since March
1995. Mr. Guenzel has over 35 years of banking experience in which he has worked
in various disciplines. Mr. Guenzel began his banking career in 1963 in the
management training program of Chemical Bank, where he worked in various
capacities including Assistant Controller, prior to his departure in 1971. From
1971 through 1989, Mr. Guenzel was employed by European American Bank, starting
as head of the Credit Division and working in problem loan resolutions and
eventually as the head of the Bank's Operations and Systems Division. In 1991,
Mr. Guenzel was hired as President and Chief Executive Officer of BancFlorida
and its wholly-owned subsidiary, BancFlorida, FSB. Mr. Guenzel was hired when
the company was experiencing serious financial difficulties associated with high
non-performing assets attributable to the national recession and local economic
conditions. Mr. Guenzel directed the Company's attention to problem asset
resolution and returned BancFlorida Financial to profitability by substantially
increasing the volume of commercial and consumer loans and the amount of
transaction accounts and substantially reducing operating expenses. Mr. Guenzel
served as Chief Executive Officer through BancFlorida's merger with First Union
Corp. Following the BancFlorida acquisition, Mr. Guenzel worked as a consultant
in the area of bank profitability analysis until being approached by the
Company.

         GERARD JERVIS. Mr. Jervis, a director of the Company from inception,
the Bank and PBOC, has served as a trustee of the Bishop Estate since 1994. From
1986 through 1994, Mr. Jervis was partner in the law firm of Jervis, Winer &
Meheula located in Kailua, Hawaii.

         ROBERT W. MACDONALD. Mr. MacDonald, a director of the Company since
inception and the Bank, is Managing Director of William E. Simon & Sons, a
merchant banking firm, where he has been employed since 1991. William E. Simon &
Sons has an indirect ownership interest in PBOC through Arbur, Inc. Mr.
MacDonald was with Salomon Brothers between 1971 and 1979, at which time he
started a financial advisory firm, Catalyst Energy Corporation, a leading
developer of independent power facilities. The company went public in 1984 and
was sold to an investor group in 1988. Between 1988 and 1991, Mr. MacDonald
created a merchant banking corporation, East Rock Partners, which invested in
alternative energy products and other projects.

         JOHN F. DAVIS. Mr. Davis, a director of the Company since inception, is
an attorney who specializes in federal and state depository institution law and
regulation. Mr. Davis is Chief 


                                      59
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION

Operating Officer of First Fidelity Bancorp, Irvine, California since October
1998. Mr. Davis has served as a legal consultant for two local financial
institutions since 1993 and 1995, respectively, during which he was actively
involved in troubled real estate work-outs, foreclosed real estate disposition
and related litigation and, with one of such institutions, a reorganization and
recapitalization. During 1991 and 1992, Mr. Davis served as Of Counsel to
Griffinger, Freed, Heinemann, Cook & Foreman, San Francisco, California.

         DAVID S. HONDA. Mr. Honda, a director of the Company since inception,
has since 1980 been President of D.S. Honda Construction, Inc., a general
contracting, construction, interior design and space planning firm located in
Northridge, California. Mr. Honda has been responsible for the creation or
renovation of millions of square feet of commercial real estate in Los Angeles
and he is actively involved with economic development and small business
organizations generally and with Asian business associations in particular
throughout the city. Mr. Honda has been extensively involved with civic and
service organizations in the community for many years. His firm has been
recognized by local County Boards of Supervisors and Chambers of Commerce. As a
result of the Northridge earthquake in 1994, an office building personally owned
by Mr. Honda and his wife was severely damaged, resulting in a complete tenant
vacancy of the property. Because Mr. Honda was unable to obtain additional
financing or an acceptable work-out program on the damaged property, Mr. Honda
filed for personal bankruptcy under the federal bankruptcy laws in 1995 which
was fully discharged in July 1996.

         J. MICHAEL HOLMES. Mr. Holmes is Executive Vice President, Chief
Financial Officer and Secretary of the Company, positions he has held since the
Company's inception in June 1997. Mr. Holmes became a director of the Company in
September 1997. Mr. Holmes has experience in various phases of a financial
institution's operations, including asset and liability management, investments,
human resources and operations. Mr. Holmes joined BancFlorida, FSB in 1974 as
Controller and served in various capacities, culminating as Executive Vice
President and Chief Financial Officer in 1985, a position he held through the
company's merger with First Union in August 1994. Mr. Holmes also served as
Secretary, Treasurer and Chief Financial Officer of BancFlorida between 1985 and
August 1994.

         WILLIAM W. FLADER. Mr. Flader has served as Executive Vice President of
the Company since February 1998 and has served as Executive Vice President of
Retail Banking for the Bank since March 1995. Before joining the Bank, Mr.
Flader was employed by BancFlorida, FSB from October 1980 to August 1994 in
various capacities. Mr. Flader served as Senior Vice President of Retail Banking
for BancFlorida from December 1989 to August 1994. Mr. Flader has worked in
banking for over 20 years and at BancFlorida managed 46 branches. In addition,
Mr. Flader, who is a registered securities and insurance representative, was
responsible for the sale of various types of securities and insurance products.
Mr. Flader also has experience with alternative delivery banking services such
as ATMs.

         MICHAEL R. HILTON. Mr. Hilton is Vice President of the Company, a
position he has held 


                                      60
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION

since August of 1998. Mr. Hilton has extensive management experience in both
accounting and finance at a number of financial institutions. Mr. Hilton has
served as Vice President and Controller at the Bank since July of 1997. Prior to
that position, Mr. Hilton was the Vice President and Controller of Ventura
County National Bancorp, a commercial bank multi-holding company.

ITEM 11: EXECUTIVE COMPENSATION

         The Company does not pay any compensation to its officers or employees
or to directors who are not Independent Directors. The Company pays the
Independent Directors of the Company fees for their services as directors. The
Independent Directors will receive a fee of $1,000 for attendance (in person or
by telephone) at each meeting of the Board of Directors or Committee of the
Board. However, multiple fees shall not be paid for two or more meetings
attended on the same day.

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         As of December 31, 1998, there were 10,000 shares of Common Stock of
the Company issued and outstanding, all of which were owned by the Bank. The
following table set forth certain information concerning the ownership of the
Company's outstanding Common Stock as of that date.

<TABLE>
<CAPTION>
                             Name and Address        Amount and Nature of   Percent of
      Title of Class        of Beneficial Owner      Beneficial Ownership     Class
--------------------------------------------------------------------------------------
<S>                    <C>                                  <C>                <C> 
Common Stock           People's Bank of California          10,000             100%
                       5900 Wilshire Boulevard
                       Los Angeles, California 90036
</TABLE>

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company entered into a servicing agreement with the Bank pursuant
to which the Bank performs the actual servicing of the commercial mortgage loans
and certain single family residential loans held by the Company in accordance
with normal industry practice. The servicing fee ranges from 0.25% to 0.375% per
year of the outstanding principal balances. Servicing fee expense paid to the
Bank totaled $46,481 for 1998 and $8,000 for 1997.

         In its capacity as servicer, the Bank holds in custodial accounts at
the Bank mortgage loan payments received on behalf of the Company. The balance
of such accounts totaled $283,600 and $381,000 at December 31, 1998 and December
31, 1997 and was included in due from affiliates. Such payments were passed
through to the Company in January as provided in the servicing agreement. At
December 31, 1998, trust funds of approximately $5,000, representing 


                                      61
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION

escrows advanced by the Company, are on deposit in a trust account at the Bank
and are not included in the accompanying financial statements.

         As the owner of 100% of the outstanding common stock of the Company,
the Bank is the sole shareholder entitled to receive common dividends. There
were $1,548,000 common dividends paid during the period from January 1, 1998 to
December 31, 1998.

         The Company has an advisory contract with the Bank for an initial term
of five years which will be renewed automatically for additional five-year
periods unless notice of nonrenewal is delivered to the advisor by the Company.
The annual advisory fee is $200,000. As long as any Series A Preferred Shares
remain outstanding, a decision by the Company to terminate the advisory contract
must be approved by a majority of the Board of Directors, as well as by a
majority of the Independent Directors. Total advisory fees of $200,000 were paid
to the Bank during 1998.

                                     PART IV

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

         No Current Reports on Form 8-K were filed during the fourth quarter of
1998.

                                      62
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT           DESCRIPTION
-------           -----------
<S>               <C>                                          
3(a)(i)           Articles of Incorporation of the Company.*

3(a)(ii)          Form of Amended and Restated Articles of Incorporation of the Company.**

3(b)              By-laws of the Company.*

4                 Specimen of certificate representing Series A Preferred Shares.*

10(a)             Form of Residential Mortgage Loan Purchase and Warranties Agreement between the Company and the Bank.**

10(b)             Form of Commercial Mortgage Loan Purchase and Warranties Agreement between the Company and the Bank.**

10(c)             Residential Mortgage Loan Servicing Agreements between the Bank and the Servicing Agent.**

10(d)             Form of Commercial Mortgage Loan Servicing Agreement between the Company and the Bank.**

10(e)             Form of Advisory Agreement between the Company and the Bank.**

10(f)             Form of Assignment, Assumption and Recognition Agreement between the Company, the Bank and the Servicing Agent.**

27                Financial Data Schedule.
</TABLE>

----------
*        Incorporated by reference to the Registration Statement on Form S-11
         (File No. 333-31501) of People's Preferred Capital Corporation, as
         filed with the Securities and Exchange Commission on July 10, 1997.

**       Incorporated by reference to Amendment No. 1 to the Registration
         Statement on Form S-11 (File No. 333-31501) of People's Preferred
         Capital Corporation, as filed with the Securities and Exchange
         Commission on September 8, 1997.

                                      63
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION

                                   SIGNATURES

         Pursuant to the requirements of the section of 13 and 15 (d) 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.

                             PEOPLE'S PREFERRED CAPITAL CORPORATION

Date: March 26, 1999         By: /s/ RUDOLF P. GUENZEL
                                 -----------------------------------------------
                                 Rudolf P. Guenzel
                                 President, Chief Executive Officer and Director

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

                         NAME                                      DATE


/s/ RUDOLF P. GUENZEL                                          March 26, 1999
---------------------------------------------------------
Rudolf P. Guenzel, President, Chief Executive Officer
   and Director (Principal Executive Officer)


/s/ J. MICHAEL HOLMES                                          March 26, 1999
---------------------------------------------------------
J. Michael Holmes, Executive Vice President, Chief
   Financial Officer, Secretary and Director
   (Principal Accounting Officer)

                                      64

<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION


/s/ GERARD JERVIS                                              March 26, 1999
Gerard Jervis, Director                                      
                                                             
                                                             
/s/ ROBERT W. MACDONALD                                        March 26, 1999
-----------------------------------------------              
Robert W. MacDonald, Director                                
                                                             
                                                             
/s/ JOHN F. DAVIS                                              March 26, 1999
-----------------------------------------------              
John F. Davis, Director                                      
                                                             
                                                             
/s/ DAVID S. HONDA                                             March 26, 1999
-----------------------------------------------  
David S. Honda, Director

                                      65