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                       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, 1999                                  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, 1999; 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                                      --

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                                       PART I
                                                                            Page
                                                                            ----

Item 1   Business........................................................      2
         - General.......................................................      2
         - General Description of Mortgage Assets and Other Authorized
           Investments; Investment Policy................................      4
         - Management Policies and Programs..............................      6
         - Servicing.....................................................     12
         - Federal Income Tax Considerations.............................     18
         - Taxation of the Company.......................................     18
         - Taxation of United States Stockholders........................     23
         - Taxation of Foreign Stockholders..............................     25
         - Information Reporting Requirements and Backup Withholding Tax.     27
         - Other Tax Consequences........................................     27
Item 2   Properties......................................................     28
Item 3   Legal Proceedings...............................................     28
Item 4   Submission of Matters to a Vote of Security Holders.............     28

                                      PART II

Item 5   Market for Registrant's Common Equity and Related Stockholder
            Matters .....................................................     28
Item 6   Selected Financial Data.........................................     30
Item 7   Management's Discussion and Analysis of Financial Condition and
            Results of Operations........................................     31
         - Description of Portfolio......................................     31
         - Financial Condition...........................................     37
         - Results of Operations.........................................     37
         - Allowance for Loan Losses.....................................     38
         - Liquidity Risk Management.....................................     38
Item 7A  Quantitative and Qualitative Disclosures About Market Risk......     40
Item 8   Financial Statements and Supplementary Data.....................     41
Item 9   Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure..........................................     55

                                      PART III

Item 10  Directors and Executive Officers of the Corporation.............     55
Item 11  Executive Compensation..........................................     58
Item 12  Security Ownership of Certain Beneficial Owners and Management..     58
Item 13  Certain Relationships and Related Transactions..................     59

                                      PART IV

Item 14  Exhibits, Financial Statement Schedules and Reports on Form 8-K.     59
<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 in June 1997 to acquire, hold and
manage mortgage assets. The Company operates as a real estate investment trust
("REIT") for federal income tax purposes under the Internal Revenue Code of
1986, as amended (the "Code"). As a REIT, the Company is not 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.

      The Company commenced its operations in October 1997 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 purchased from the Bank its initial
portfolio of residential and commercial mortgage loans ("Mortgage Loans") at an
aggregate purchase price of $71.3 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 (as defined herein) that will
generate net earnings for distribution to stockholders. All of the Company's
Mortgage Assets may 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, 1999 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
management believes that each such loan was originated in a manner that was
consistent with the underwriting standards of the Bank. During 1999, the Company
acquired forty-three single-family residential mortgage loans which were
originated by the Bank with an aggregate principal balance of $16.5 million. The
Company has no present plans or expectations with respect to purchases from
unaffiliated third parties.


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      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 annually to stockholders 95% of its "REIT taxable income"
(excluding capital gains). See "Federal Income Tax Considerations--Annual
Distribution Requirements."

      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


                                       3
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considered "adequately capitalized" if it has a total 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, 1999, the
Bank's total risk-based capital ratio was 11.96%, its Tier 1 risk-based capital
ratio was 11.08% and core capital (or leverage) ratio was 6.78%. 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.

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


                                       4
<PAGE>

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 $252,700 for
one-unit residential loans to $485,800 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 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


                                       5
<PAGE>

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 ("Mortgage-Backed Securities"). 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. At December 31, 1999, the
Company did not hold any investments in Mortgage-Backed Securities.

      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 (collectively, "Other Authorized
Investments"). 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. At December 31, 1999, the Company did not hold any such
investments.

Management Policies and Programs

      General. In administering the Company's Mortgage Assets and Other
Authorized Investments, the Advisor (defined below) 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 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.


                                       6
<PAGE>

      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.

      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 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


                                       7
<PAGE>

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.

      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 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.

      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 its Mortgage
Purchase Agreements with the Bank, 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. 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 the Company may purchase additional types of Mortgage Loans and is not
limited as to the type or the amount that may be purchased. In addition, the
Company from time to time may acquire Mortgage-Backed Securities representing
interests in or obligations backed


                                       8
<PAGE>

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 Residential Mortgage Loans and Commercial Real Estate 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. See "Servicing."

      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. See "Servicing" for a discussion of the treatment of Mortgage
Loans which become nonperforming or real estate owned ("REO").

      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, 1999, 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


                                       9
<PAGE>

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.

      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. See
"Underwriting Standards." The Company also expects that all Mortgage Loans held
by the Company will be serviced pursuant to the Servicing Agreements (defined
below), 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.

      Conflict of Interest Policies. Because of the nature of the Company's
relationship with the Bank and the Servicing Agent (defined below), 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
either 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 either 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
agreement or transaction will be on terms as favorable to the Company as could
have been obtained from unaffiliated third parties.


                                       10
<PAGE>

      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 year of such revocation.


                                       11
<PAGE>

      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 is receiving an annual
advisory fee equal to $200,000.

Servicing

      Residential Mortgage Loan Servicing. In March 1997, the Bank sold to
Temple Inland Mortgage Corporation ("TIMC"), 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, 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. In connection with such sale, the Bank entered into the
TIMC Residential Servicing Agreement with TIMC pursuant to which TIMC services,
among other things, all of the Residential Mortgage Loans initially acquired by
the Company from the Bank as well as with respect to certain Residential
Mortgage Loans sold by the Bank to the Company thereafter. The Bank again began
servicing Residential Mortgage Loans originated by it in February 1998.


                                       12
<PAGE>

      The Residential Servicing Agreements provide that the Servicing Agents
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 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 with FNMA and
FHLMC guidelines and procedures and as otherwise set forth in the Residential
Servicing Agreements. The Servicing Agents 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 they service. The Servicing Agents also will
provide accounting and reporting services to the Company for such Residential
Mortgage Loans. Additionally the Servicing Agents 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 Agents also are responsible for any late charges or tax
penalties incurred due to its failure to pay such bills. The Residential
Servicing Agreements require the Servicing Agents to follow such collection
procedures that are consistent with the Servicing Agents' 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 Agents 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 Agents'
reasonable and prudent determination such waiver, modification, postponement or
indulgence is not materially adverse to the Company; provided, however, that the
Servicing Agents 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 Agents
may permit forbearance or allow for suspension of monthly payments if the
borrower is in default or the Servicing Agents determine in their reasonable
discretion that default is imminent and if the Servicing Agents determine that
granting such forbearance or suspension is in the best interest of the Company.
The Servicing Agents will use their best efforts, consistent with the procedures
that the Servicing Agents would use in servicing loans for their 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 Residential Servicing Agreement with TIMC provides that the Company
can direct TIMC to transfer the servicing and disposition functions with respect
to all Residential Mortgage


                                       13
<PAGE>

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 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 Agents to pay
all customary reasonable and necessary expenses related to the performance of
its duties under such agreements, including, but not limited to, costs
associated with the preservation, restoration and protection of mortgaged
property and enforcement of any required judicial proceedings. For advances of
reimbursable out-of-pocket costs and expenses, the Servicing Agents generally
will be reimbursed out of proceeds related to such Residential Mortgage Loan.

      In connection with any foreclosure proceedings that the Servicing Agents
may institute, the Servicing Agents 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 of one or more events specified in such Residential Servicing
Agreements. Such events generally relate to either (i) the Servicers' proper and
timely performance of its duties and obligations under the Residential Servicing
Agreement 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 TIMC 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.
Similarly, we may terminate the Bank Residential Servicing Agreement without
cause upon payment of a termination fee equal to 1.5% of the aggregate
outstanding principal balance of the loans then serviced under the Bank
Residential Servicing Agreement. 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
Agents 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 Agents 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


                                       14
<PAGE>

impound funds with respect to Residential Mortgage Loans serviced by it. The
Residential Servicing Agreements require the Servicing Agents 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 Agents 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 Agents 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 Agents 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 Agents as additional
servicing compensation.

      Commercial Mortgage Loan Servicing. The Bank services the Commercial
Mortgage pursuant to the terms of a Commercial Servicing Agreement. The Bank
receives 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 collects and
remits principal and interest payments, administers mortgage, custodial and
escrow accounts, submits and pursues insurance claims and initiates and
supervises foreclosure proceedings on the Commercial Mortgage Loans it services.
The Bank also provides


                                       15
<PAGE>

accounting and reporting services required by the Company for such Commercial
Mortgage Loans. Additionally, for all Commercial Mortgage Loans, the Bank
assumes responsibility for payment of taxes and other charges which are or may
become a lien upon the mortgaged property. The Bank also is 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 customary,
reasonable and necessary expenses related to the performance of its duties under
the Commercial Servicing Agreement, including, but not limited to, costs
associated with the preservation of mortgaged property and enforcement of any
required judicial proceedings. 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.

      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


                                       16
<PAGE>

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 1.5% 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 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.


                                       17
<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, 1997 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, 1997. 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.


                                       18
<PAGE>

            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 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


                                       19
<PAGE>

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."

      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.


                                       20
<PAGE>

      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 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


                                       21
<PAGE>

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
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


                                       22
<PAGE>

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 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 distributes 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.

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


                                       23
<PAGE>

by the 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.

      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.

      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


                                       24
<PAGE>

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.

      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


                                       25
<PAGE>

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.

      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


                                       26
<PAGE>

a "tax home" in the United States, the nonresident alien individual will be
subject to a 30% tax on the individual's capital gain.

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


                                       27
<PAGE>

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.

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, 1999. 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, 1999.
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


                                       28
<PAGE>

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 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.


                                       29
<PAGE>

ITEM 6: SELECTED FINANCIAL DATA

                                 FINANCIAL DATA
     As of December 31, 1999, 1998 and 1997 and for the Years ended December
              31, 1999 and 1998, and for the Period from inception,
                     June 19, 1997 through December 31, 1997

                (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                            At December
                                                                           31, 1997 or for
                                                                           the Period from
                                           At or For the   At or for the      6/19/97
                                            Year-ended      Year ended        through
                                             12/31/99        12/31/98         12/31/97
                                         -------------------------------------------------
<S>                                      <C>              <C>               <C>
STATEMENT OF EARNINGS:
Interest income...................       $    5,621       $    5,780        $    1,476
Total revenues....................            5,621            5,780             1,476
Operating expenses................              483              530               109
Net earnings......................            5,138            5,250             1,367
BALANCE SHEET:
Mortgage loans, net...............           70,446           69,457            70,423
Total assets......................           72,393           72,405            72,597
Total liabilities.................               42               42               460
Total stockholders' equity........           72,351           72,363            72,137
OTHER DATA:
Dividends paid on preferred stock.            3,476            3,476               859
Dividends paid on common stock....            1,674            1,548               460
Number of preferred shares outstanding    1,426,000        1,426,000         1,426,000
Number of common shares outstanding(1)       10,000           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.


                                       30
<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, 1999. 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, 1999, 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, 1999, the Portfolio contained 260 Residential
Mortgage Loans, representing approximately 87.1% of the unpaid principal balance
of the Mortgage Loans contained in the Company's Portfolio, and 50 Commercial
Mortgage Loans, representing approximately 12.9% of the unpaid principal balance
of the Mortgage Loans contained in the Company's Portfolio. On December 31,
1999, the Mortgage Loans included in the Company's Portfolio had an aggregate
outstanding principal balance of $71.0 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 1973 and June 1999, and had
original terms to stated maturity of primarily 15, 20, 25 or 30 years. As of
December 31, 1999, the average outstanding principal balance of a Residential
Mortgage Loan was $237,829. The weighted average number of months since
origination of the Residential Mortgage Loans included in the Company's
Portfolio (calculated as of December 31, 1999) was approximately 33 months and
the weighted average expected remaining maturity was 306 months. The weighted
average Loan-to-Value Ratio (defined below) of the Residential Mortgage Loans
included in the Company's Portfolio is 66.2%; however, 5.6% 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.


                                       31
<PAGE>

      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 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 March 1974 and
June 1997, and had original terms to stated maturity of between 10 and 30 years.
As of December 31, 1999, the average outstanding principal balance of a
Commercial Mortgage Loan was $183,308. The weighted average number of months
since origination of the Commercial Mortgage Loans included in the Company's
Portfolio (calculated as of December 31, 1999) was approximately 119 months. As
of December 31, 1999, the weighted average Loan-to-Value Ratio of the Commercial
Mortgage Loans included in the Company's Portfolio is 68.1%. In addition, as of
December 31, 1999, 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, 1999 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       Residential          Weighted         Weighted Average
                       Principal      Mortgage Loans     Average Initial         Expected
                        Balance         by Aggregate      Loan to Value     Remaining Maturity
       Type         (In Thousands)   Principal Balance       Ratio              (Months)
----------------------------------------------------------------------------------------------
<S>                       <C>               <C>                <C>                 <C>
15 Year Fixed Rate        $ 4,958             8.0%             60.6%               125
30 Year Fixed Rate         56,878            92.0              66.9                322
                          -------           -----
      Total....           $61,836           100.0%
                          -======           =====
</TABLE>

      The Residential Mortgage Loans included in the Company's Portfolio bear
interest at fixed rates, which range from 5.875% per annum to 13.5% per annum.
The weighted average interest rate of the Residential Mortgage Loans included in
the Company's Portfolio is approximately 7.42% per annum.


                                       32
<PAGE>

      The following table contains certain additional data with respect to the
interest rates of the 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%......            91                  $ 39,700             64.1%
 7.500 -  7.749...            44                     7,713             12.5
 7.750 -  7.999...            45                     6,293             10.2
 8.000 -  8.249...            11                     1,308              2.1
 8.250 -  8.499...             6                       743              1.2
 8.500 -  8.749...            10                     1,039              1.7
 8.750 -  8.999...             8                     1,219              2.0
 9.000 -  9.249...             8                       452              0.7
 9.250 -  9.499...             4                       603              1.0
 9.500 -  9.749...             3                       237              0.4
 9.750 -  9.999...             5                       322              0.5
10.000 - 10.249...             7                       728              1.2
10.250 - 10.499...             5                       333              0.5
10.500 - 10.749...             5                       788              1.3
10.750 - 10.999...             1                        32              0.1
11.000 - 11.249...             1                        24              0.0
12.000 - 12.249...             1                        48              0.1
12.250 - 12.499...             1                       126              0.2
12.500 - 12.749...             2                       104              0.2
12.750 - 12.999...             1                         2             --
13.500 - 13.749...             1                        22             --
                         -------------     ---------------     -----------------
    Total.........           260                  $ 61,836            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
$285 to $ 2.1 million as of December 31, 1999.


                                       33
<PAGE>

      The following table sets forth as of December 31, 1999 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:

                        Type of Commercial Mortgage Loan

<TABLE>
<CAPTION>
                                                          Percentage of                                                  Weighted
                                                            Commercial                                   Weighted        Average
                                       Aggregate        Mortgage Loans by      Weighted Average      Average Current     Months
                                   Principal Balance   Aggregate Principal   Initial Loan to Value    Loan to Value     Remaining
                  Type              (In Thousands)           Balance               Ratio(1)              Ratio(2)      to Maturity
----------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                 <C>                    <C>                    <C>              <C>
Commercial mortgage-fixed
   rate balloon ...............          $4,039               44.1%                  68.3%                 65.4%             84
Commercial mortgage-fixed
   rate .......................           1,308               14.3                   74.4                  46.2             108
Multi-family-fixed rate balloon           1,816               19.8                   46.3                  45.5              88
Multi-family-fixed rate .......           2,002               21.8                   73.9                  38.2              85
                                         ------              -----
  Total .......................          $9,165              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, 1999 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 63.9% 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
11.00% per annum. The weighted average interest rate of the Commercial Mortgage
Loans in the Company's portfolio is approximately 9.49% per annum.


                                       34
<PAGE>

      The following table contains certain additional data as of December 31,
1999 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

                                                              Percentage of the
                                             Aggregate       Company's Portfolio
                          Number of      Principal Balance      by Aggregate
  Interest Rate        Mortgage Loans      (In Thousands)     Principal Balance
-------------------    --------------    -----------------   -------------------

 8.500% -  8.749%.            1               $   488                  5.3%
 9.000 -  9.249...            3                 1,726                 18.8
 9.250 -  9.499...           12                 1,395                 15.2
 9.500 -  9.749...           17                 2,827                 30.9
 9.750 -  9.999...            6                   870                  9.5
10.000 - 10.249...            6                 1,434                 15.7
10.250 - 10.499...            1                   100                  1.1
10.500 - 10.749...            2                   176                  1.9
11.000 - 11.249...            2                   149                  1.6
                       --------------    -----------------   -------------------
  Total...........           50               $ 9,165                100.0%
                       ==============    =================   ===================

      Asset Quality. The following table schedules residential mortgage loans
with past due principal and interest payments at December 31, 1999 (dollars in
thousands):

                         Number      Principal Balance      Percent of Portfolio
                         -------------------------------------------------------
30 to 59 days past due     1                $181                    0.3%

      There were no commercial mortgage loans with past due principal and
interest payments at December 31, 1999.

      Geographic Distribution. As of December 31, 1999, 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, 1999, approximately 3.8% are secured by real estate located in Northern
California and 96.2% 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


                                       35
<PAGE>

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, 1999, 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, approximately 1.3% are secured by real estate
located in Northern California and 98.7% 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 $3.1 million of the
Residential Mortgage Loans included in the Company's Portfolio as of December
31, 1999 had Loan-to-Value Ratios of greater than 80% at the time of
origination. Of such Residential Mortgage Loans, at December 31, 1999,
approximately $2.5 million were insured under primary mortgage insurance
policies. The remaining $613,000 of such Residential Mortgage Loans at December
31, 1999 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 58.5% and have a
weighted average seasoning since origination (calculated as of December 31,
1999) of 199 months. As of December 31, 1999, not more than approximately 26.1%
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


                                       36
<PAGE>

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

Financial Condition

      At December 31, 1999, the Company had total assets of $72.4 million. As of
such date, an aggregate of $70.4 million or 97.3% of the Company's assets was
comprised of its loan receivables portfolio, net of the discount on loan and the
allowance for loan losses, the majority of which were acquired from the Bank in
connection with the Company's initial public offering completed in October 1997.
During the years 1999 and 1998, the Company purchased residential mortgage loans
with an aggregate principal balance of $16.5 million and $23.0 million,
respectively, from the Bank. The weighted average interest rate of the total
portfolio at December 31, 1999 was 7.69%. At December 31, 1999, due from
affiliates aggregated $657,000, accrued interest amounted to $331,000 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, 1999, the Company's total liabilities amounted to $42,000.
Stockholders' equity amounted to $72.4 million, after taking into consideration
earnings of $5.1 million and aggregate dividend payments on the common stock and
the preferred stock of $5.2 million during the year.

Results of Operations

      The Company reported net earnings of $5.1 million for the year ended
December 31, 1999 as compared to $5.3 million for the year ended December 31,
1998. This decrease was primarily due to a reduction of the weighted average
yield on the loan portfolio from 7.99% to 7.69%. The Company paid $3.5 million,
$3.5 million and $859,000 in dividends on the Company's preferred stock in 1999,
1998 and 1997, respectively. The Company also declared $1.7 million, $1.5
million and $460,000 in dividends on the Company's common stock in 1999, 1998
and 1997, respectively.

      Total revenues for the year ended December 31, 1999 amounted to $5.6
million as compared to $5.8 million and $1.5 million for periods ended December
31, 1998 and 1997, respectively, which


                                       37
<PAGE>

was primarily attributable to interest earned on the Company's portfolio of
mortgage loans. The Company also earned $130,000, $283,000 and $16,000 of
interest on deposit accounts in 1999, 1998 and 1997, respectively.

      Total expenses for the periods ended December 31, 1999, 1998 and 1997
amounted to $483,000, $530,000 and $109,000, respectively, of which $200,000 was
paid to the Bank in each year of 1999 and 1998 and $50,000 was paid to the Bank
in 1997 as a management fee in accordance with the terms of the Advisory
Agreement. The Bank received in 1999, 1998 and 1997, $25,867, $30,369 and $8,413
for servicing the Company's commercial mortgage loans and $82,089, $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 $69,070, $123,171 and $38,064 in 1999, 1998 and 1997,
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, 1999, 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


                                       38
<PAGE>

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.

      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, 1999, based on the
information and assumptions set forth in the notes below.


                                       39
<PAGE>

<TABLE>
<CAPTION>
                                               Three to    More Than      More Than
                                Within Three    Twelve    One Year to    Three Years   Over Five               Net Fair
                                   Months       Months    Three Years   to Five Years    Years      Total       Value
                                ------------   --------   -----------   -------------  ---------   -------     --------
<S>                               <C>          <C>          <C>            <C>          <C>        <C>          <C>
Interest-earning assets (1):
   Loans receivable (2)
   Single-family residential
   loans:
     Fixed .................      $    --      $ 1,237      $18,738        $10,598      $31,263    $61,836      $58,690
   Multi-family residential:
     Fixed rate balloon ....           --           54          883            597          282      1,816        1,832
     30 year fixed rate ....           --           58          942            640          362      2,002        2,034
   Commercial real estate:
     Fixed rate balloon ....           --          124        2,024          1,385          505      4,038        4,020
     30 year fixed rate ....           --           38          616            423          232      1,309        1,303
Other interest-earning
   assets ..................          926           --           --             --           --        926          926
                                  -------      -------      -------        -------      -------    -------      -------

Total                             $   926      $ 1,511      $23,203        $13,643      $32,644    $71,927      $68,805
                                  =======      =======      =======        =======      =======    =======      =======
</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.

(2)   Amounts disclosed represent outstanding principal balances as of December
      31, 1999.

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."


                                       40
<PAGE>

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                     PEOPLE'S PREFERRED CAPITAL CORPORATION
                              FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 and 1997

                          INDEX TO FINANCIAL STATEMENTS

                                                                            Page
                                                                            ----

Independent Auditors' Report...............................................   42

Statements of Financial Condition--December 31, 1999 and 1998..............   43

Statements of Earnings--Periods ended December 31, 1999, 1998 and 1997 ....   44

Statements of Changes in Stockholders' Equity--Periods  ended
      December 31, 1999, 1998 and 1997.....................................   45

Statements of Cash Flows--Periods ended December 31, 1999, 1998 and 1997 ..   46

Notes to Financial Statements..............................................   47


                                       41
<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, 1999 and 1998, and the related
statements of earnings, changes in stockholders' equity and cash flows for the
years ended December 31, 1999 and 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, 1999 and 1998, and the results of its operations
and its cash flows for the years ended December 31, 1999 and 1998, and for the
period from inception, June 19, 1997 through December 31, 1997 in conformity
with generally accepted accounting principles.


                                        /s/ KPMG  LLP

Los Angeles, California
January 31, 2000


                                       42
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION
                        STATEMENTS OF FINANCIAL CONDITION
                           December 31, 1999 and 1998
                (Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                 December 31,   December 31,
ASSETS:                                                              1999           1998
                                                                 ------------   ------------
<S>                                                                 <C>            <C>
Cash and cash equivalents ....................................      $   959        $ 1,301

Mortgage loans, net (Note 3) .................................       70,446         69,457

Due from affiliate (Note 5) ..................................          657          1,277

Accrued interest receivable ..................................          331            370
                                                                 ------------   ------------

   Total assets ..............................................      $72,393        $72,405
                                                                 ============   ============

LIABILITIES AND STOCKHOLDERS' EQUITY:

Accounts payable and accrued liabilities .....................      $    42        $    42
                                                                 ------------   ------------

   Total liabilities .........................................           42             42
                                                                 ------------   ------------

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 .........................................          262            274
                                                                 ------------   ------------

   Total stockholders' equity ................................       72,351         72,363
                                                                 ------------   ------------

   Total liabilities and stockholders' equity ................      $72,393        $72,405
                                                                 ============   ============
</TABLE>

See accompanying notes to financial statements.


                                       43
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION
                             STATEMENTS OF EARNINGS
                 For the Years Ended December 31, 1999, 1998 and
       the Period from inception, June 19, 1997 through December 31, 1997
                             (Dollars in thousands)

                                           1999            1998            1997
                                          ------          ------          ------

REVENUES:

Interest on mortgage loans .....          $5,491          $5,497          $1,460

Interest on deposits ...........             130             283              16
                                          ------          ------          ------

    Total revenues: ............           5,621           5,780           1,476
                                          ------          ------          ------

EXPENSES:

Loan servicing fees ............             177             170              46

Advisory fees (Note 6) .........             200             200              50

Professional fees ..............              76             125              11

Other ..........................              30              35               2
                                          ------          ------          ------

    Total expenses .............             483             530             109
                                          ------          ------          ------

    Net earnings ...............          $5,138          $5,250          $1,367
                                          ======          ======          ======

See accompanying notes to financial statements.


                                       44
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION
                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                 For the Years Ended December 31, 1999, 1998 and
       the Period from inception, June 19, 1997 through December 31, 1997
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                        Number of               Number of
                                        Preferred                 Common
                                       Shares par    Series A   Shares par            Additional                  Total
                                       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         --      38,839          --       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

Net earnings ........................          --          --          --         --          --       5,138        5,138

Preferred dividends .................          --          --          --         --          --      (3,476)      (3,476)

Common dividends ....................          --          --          --         --          --      (1,674)      (1,674)
                                        ---------------------------------------------------------------------------------
Balance at December 31, 1999 ........   1,426,000   $      14      10,000   $     --   $  72,075   $     262    $  72,351
                                        =================================================================================
</TABLE>

See accompanying notes to financial statements.


                                       45
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION
                            STATEMENTS OF CASH FLOWS
                 For the Years Ended December 31, 1999, 1998 and
       the Period from inception, June 19, 1997 through December 31, 1997
                             (Dollars in thousands)

<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:                       1999        1998        1997
                                                          --------    --------    --------
<S>                                                       <C>         <C>         <C>
Net earnings ..........................................   $  5,138    $  5,250    $  1,367

Adjustments to reconcile net earnings to net cash
provided by operating activities:
    Decrease in accrued interest receivable ...........        111          37         114
    (Increase) decrease in due from affiliates ........        620         446      (1,723)
    Increase in accrued expenses ......................         --          42          --
                                                          --------    --------    --------
    Net cash (used in) provided by operating activities      5,869       5,775        (242)
                                                          --------    --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of mortgage loans, net of discount .......    (16,185)    (23,080)    (73,952)
    Mortgage loan principal repayments ................     15,196      24,142       3,529
    Purchase of accrued interest receivable ...........        (72)        (96)       (521)
                                                          --------    --------    --------
    Net cash (used in) provided by investing activities     (1,061)        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)     (3,476)       (859)
    Common stock dividends paid .......................     (1,674)     (2,008)         --
                                                          --------    --------    --------
    Net cash (used in) provided by financing activities     (5,150)     (5,484)     71,230
                                                          --------    --------    --------

NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ...........................................       (342)      1,257          44
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD ................................................      1,301          44          --
                                                          --------    --------    --------

CASH AND CASH EQUIVALENTS AT END OF YEAR ..............   $    959    $  1,301    $     44
                                                          ========    ========    ========

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

See accompanying notes to financial statements.


                                       46
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

      People's Preferred Capital Corporation (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 People's Bank of
California (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 $33.3 million, net of
underwriting and offering expenses of $2.4 million. 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 $38.8 million 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 Series A Preferred Shares are not redeemable prior to October 15, 2002
(except in the event the Company does not qualify as a real estate investment
trust for tax purposes or a change of control). On and after October 15, 2002,
the Series A Preferred Shares may be redeemed for cash at the option of the
Company, in whole or in part, at any time, at the redemption price of $25.00 per
share, plus authorized, declared and unpaid dividends, if any, to the date fixed
for redemption, without interest.

      Upon a change of control, the Series A Preferred Shares are redeemable at
the option of the Company, in whole, but not in part, at a price per share equal
to (i) $25.00, plus (ii) an amount equal to the authorized, declared and unpaid
dividends, if any, to the date fixed for redemption, without


                                       47
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

interest, and an additional amount of dividends that would be payable for the
period from the first day of the dividend period in which the date fixed for
redemption occurs to the date fixed for redemption plus (iii) an applicable
premium. Any redemption of Series A Preferred Shares is subject to the prior
approval of the Office of Thrift Supervision ("OTS").

      Change of control means the occurrence of any of the following events:

      (i)   any person other than a Permitted Holder (as defined herein) shall
            be the beneficial owner, directly or indirectly, of a majority of
            the voting stock of the Bank or its Holding Company, whether as a
            result of issuance of securities of the Bank or its Holding Company,
            any merger, consolidation, liquidation or dissolution of the Bank or
            its Holding Company, any direct or indirect transfer of securities
            by a Permitted Holder, or otherwise; or

      (ii)  a sale, transfer, conveyance or other disposition of more than 75%
            of the assets and 75% of the deposit liabilities of the Bank.

            "Permitted Holder" means the Bishop Estate, BIL Securities or Arbur,
            or any Person controlled, directly or indirectly, by the Bishop
            Estate, BIL Securities or Arbur.

      Upon the occurrence of a Tax Event, the Company will have the right at any
time to redeem the Series A Preferred Shares in whole, but not in part, at a
redemption price of $25.00 per share, plus the accrued and unpaid dividends, if
any, to the date fixed for redemption, without interest.

      A Tax Event means the receipt by the Company of an opinion of a law firm
experienced in such matters to the effect that, as a result of : (i) any
amendment to, clarification of, or change in, the laws or any regulations of the
United States or any political subdivision or taxing authority , (ii) any
Administrative Action or (iii) any amendment to, or change in the official
position or the interpretation of such Administrative Action by any legislative
body, court, governmental authority or regulatory body, irrespective of the
manner in which such amendment or change is made known on or after the date of
issuance of the Series A Preferred Shares, there is more than an insubstantial
risk that: (a) dividends paid or to be paid by the Company with respect to the
stock of the Company are not, or will not be, fully deductible by the Company
for federal income tax purposes or (b) the Company is, or will be, subject to
more than a de minimis amount of other taxes or governmental charges as a result
of dividends paid or to be paid by the Company.

      Any redemption of Series A Preferred Shares is subject to compliance with
applicable regulatory and other restrictions, including the prior approval of
the OTS. The Series A Preferred Shares will not be subject to any sinking fund
or mandatory redemption and will not be convertible into any other securities of
the Company.


                                       48
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

      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.

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 Company
      purchased additional single-family residential loans from the Bank during
      1998 and 1999. 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.

            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. Interest income on impaired loans is recognized on a cash basis if
      it is determined that collection of principal is probable. The Company
      collectively reviews its portfolio of residential mortgage loans for
      impairment. The Company reviews its commercial loans individually for
      impairment.

            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.


                                       49
<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.


                                       50
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

NOTE 3 - MORTGAGE LOANS AND ALLOWANCE FOR LOAN LOSSES

      At December 31, 1999 and 1998, mortgage loans, net consisted of the
following (in thousands):

                                                  December 31,     December 31,
                                                      1999             1998
                                                  ------------     ------------
Single-family mortgage loans .............          $ 61,836         $ 58,153
Multi-family loans .......................             3,818            4,919
Commercial loans .........................             5,347            6,665
                                                    --------         --------
                                                      71,001           69,737

Discount on loans ........................              (302)             (27)
Allowance for loan losses ................              (253)            (253)
                                                    --------         --------
                                                    $ 70,446         $ 69,457
                                                    ========         ========

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

      Non-accrual loans were $0 and $75,000 at December 31, 1999 and 1998,
respectively. If loans which were on non-accrual at December 31, 1999 and 1998
had performed in accordance with the terms for the year, interest income from
these loans would have been $0 and $8,000, respectively. Interest collected on
these loans for these years was $0 and $5,000, respectively.

      The Company's gross impaired loans were $0, $75,000 and $0 as of December
31, 1999, 1998 and 1997, respectively. The average impaired loans for the years
then ended were $15,000, $6,000 and $0. Interest income recognized related to
these loans was $0, $4,000 and $0 for 1999, 1998 and 1997, respectively.

      As of December 31, 1999, 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, 1999, approximately 3.8% are secured by real estate located in
northern California and 96.2% are secured by real estate located in southern
California. Of the multi-family and commercial mortgage loans included in the
Company's portfolio, approximately 1.3% are secured by real estate located in
northern California and 98.7% 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


                                       51
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

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.

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 each of
the years ended December 31, 1999, 1998, and for the period from June 19, 1997
to December 31, 1997 to holders of the Series A Preferred Shares totaled
approximately $3.5 million, $3.5 million 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 $1.7 million and $2.0 million common
dividends paid for the years ended December 31, 1999 and 1998, respectively.
There were $460,000 of common dividends declared in 1997 that 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 $108,000 for the year
ended December 31, 1999 compared to $47,000 and $8,000 for the periods ended
December 31, 1998 and 1997, respectively. A portion of the Company's residential
mortgage loans are serviced by Temple Inland Mortgage Corporation through a
sub-servicing 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 year


                                       52
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

ended December 31, 1999 was $69,000 compared to $123,000 and $38,000 for the
periods ended December 31, 1998 and 1997, respectively.

      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 from Temple Inland Mortgage Corporation via
wire transfer and remits them to the Company. The balance of such accounts
totaled $657,000 and $1.3 million at December 31, 1999 and 1998, 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,
1999 and 1998, trust funds of approximately $0 and $5,000, representing escrows
advanced by the Bank, 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
$1.7 million and $2.0 million common dividends paid for the year ended December
31, 1999 and 1998, respectively. There were $460,000 of common dividends
declared in 1997 that were paid in 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, $200,000 and $50,000
were paid to the Bank during 1999, 1998 and 1997, respectively.


                                       53
<PAGE>

                     PEOPLE'S PREFERRED CAPITAL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

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, 1999 and 1998 (Dollars in thousands):

                                             1999                    1998
                                    --------------------    --------------------
                                    Carrying       Fair     Carrying       Fair
                                     Amount       Value      Amount       Value
                                    --------------------------------------------

Financial Assets:
Cash and cash equivalents ......     $   959     $   959     $ 1,301     $ 1,301
Mortgage loans, net ............      70,446      67,879      69,457      70,054
Due from Affiliate .............         657         657       1,277       1,277

      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.


                                       54
<PAGE>

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

      Directors and Executive Officers. The Company's Board of Directors is
composed of six 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. There
is no current intention to alter the number of directors comprising the Board of
Directors. 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. 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, 1999 are as follows:

             Name        Age(1)             Position and Offices Held
--------------------------------------------------------------------------------

Rudolf P. Guenzel         59     President, Chief Executive Officer and Director
Timothy B. Matz           55     Director
Robert W. MacDonald       52     Director
John F. Davis             52     Director
David S. Honda            49     Director
J. Michael Holmes         53     Executive Vice President, Chief Financial
                                 Officer, Secretary and Director
William W. Flader         51     Executive Vice President
Michael R. Hilton         48     Vice President

----------
(1)   As of December 31, 1999.


                                       55
<PAGE>

      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 hired by the Company.

      Timothy B. Matz. Mr. Matz, a director since July 1999, has been the
Managing Partner since 1980 of Elias, Matz, Tiernan & Herrick L.L.P. ("EMTH"), a
Washington, D.C. based corporate and securities law firm specializing in the
representation of publicly traded bank and thrift holding companies and other
diversified financial institutions. EMTH serves as special counsel to PBOC
Holdings, Inc. the Bank's holding company, the Bank and the Company. Mr. Matz is
a graduate of the University of Virginia (B.A.), George Washington University
Law School (J.D.) and Georgetown University Law School (L.L.M.).

      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 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


                                       56
<PAGE>

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 served as Executive Vice President and Chief Financial
Officer of the Bank since March 1995 and as a Director of the Bank since January
1998. 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 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.


                                       57
<PAGE>

Audit Committee

      The Company has established an audit committee which will review the
engagement and independence of the Company's auditors. The audit committee will
also review the adequacy of the Company's internal accounting controls. The
audit committee currently consists of Messrs. Matz and Honda.

ITEM 11: EXECUTIVE COMPENSATION

Compensation of Directors and Officers

      The Company pays its Independent Directors fees for their services as
directors. The Independent Directors 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. The Company does not pay any compensation to its
officers or employees or to directors who are not Independent Directors.

Limitations on Liability of Directors and Officers

      The Company's Articles of Incorporation eliminate, to the fullest extent
permitted by the Maryland General Corporation Law ("MGCL"), the personal
liability of a director to the Company or its stockholders for monetary damages
for breach of such director's fiduciary duty. The Articles of Incorporation
empower the Company to indemnify, to the fullest extent permitted by the MGCL,
any of the Company's directors or officers. The Articles of Incorporation also
empower the Company to purchase and maintain insurance to protect any director
or officer against any liability asserted against him or her incurred by him or
her, arising out of his or her status as such.

      The Company's bylaws (the "Bylaws") require indemnification of its
directors and officers and specify that the right to indemnification is a
contract right, setting forth certain procedural and evidentiary standards
applicable to the enforcement of a claim under the Bylaws. The Bylaws also
entitle any director or officer to be reimbursed for the expenses of defending
any claim against him or her arising out of his or status as such. The Bylaws
also provide that the Company may enter into contracts with any director or
officer in furtherance of the indemnification provisions contained in the Bylaws
and allow the Company to create a trust fund to ensure payment of amounts
indemnified.

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      As of December 31, 1999, there were 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.


                                       58
<PAGE>

                         Name and Address       Amount and Nature of  Percent of
  Title of Class       of Beneficial Owner      Beneficial Ownership     Class
--------------------------------------------------------------------------------

Common Stock       People's Bank of California           10,000         100%
                   5900 Wilshire Boulevard
                   Los Angeles, California 90036

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 $108,000 for 1999, $47,000 for 1998 and $8,000 for 1997. See Part
I, Item I-- "Servicing."

      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$392,000 and $284,000 at December 31, 1999 and December 31,
1998 and was included in due from affiliates. Such payments were passed through
to the Company in January as provided in the servicing agreement.

      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
$1.7 million common dividends paid during the year ended December 31, 1999.

      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. Total advisory fees of $200,000 were paid to
the Bank during 1999. See Part I, Item I--"Management Policies and
Programs--Advisory Agreement."

      The Company incurred expenses of $33,000 for legal work performed by
Elias, Matz, Tiernan & Herrick during the year ended December 31, 1999. Mr.
Matz, a Director of the Company, is managing partner of Elias, Matz, Tiernan &
Herrick.

                                     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 year of 1999.


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<PAGE>

                                  Exhibit Index

Exhibit     Description
-------     -----------

3(a)(i)     Articles of Incorporation of the Company.*

3(a)(ii)    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)       Residential Mortgage Loan Purchase and Warranties Agreement between
            the Company and the Bank.

10(a)(i)    Amendment to Residential Mortgage Loan Purchase and Warranties
            Agreement between the Company and the Bank.

10(b)       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 Temple Inland Mortgage Corporation.**

10(d)       Assignment, Assumption and Recognition Agreement between the
            Company, the Bank and the Servicing Agent.

10(e)       Commercial Mortgage Loan Servicing Agreement between the Company and
            the Bank.

10(f)       Advisory Agreement between the Company and the Bank.

27          Financial Data Schedule.

------------
*     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.


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<PAGE>

                                   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 28, 2000                    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 28, 2000
---------------------------------------------------------
Rudolf P. Guenzel, President, Chief Executive Officer
   and Director (Principal Executive Officer)


/s/ J. Michael Holmes                                             March 28, 2000
---------------------------------------------------------
J. Michael Holmes, Senior Executive Vice President, Chief
   Financial Officer, Secretary and Director
   (Principal Accounting Officer)


/s/ Robert W. MacDonald                                           March 28, 2000
---------------------------------------------------------
Robert W. MacDonald, Director


/s/ John F. Davis                                                 March 28, 2000
---------------------------------------------------------
John F. Davis, Director


/s/ David S. Honda                                                March 28, 2000
---------------------------------------------------------
David S. Honda, Director


/s/ Timothy B. Matz                                               March 28, 2000
---------------------------------------------------------
Timothy B. Matz, Director


                                       61