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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2002

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)

     Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     The number of shares outstanding of the Registrant’s common stock, par value $.01 per share, as of November 8, 2002 was 18,704,303.

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION

TABLE OF CONTENTS

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ITEM 1.  FINANCIAL STATEMENTS

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

FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Majority Owned Subsidiary of First Republic Bank)

Balance Sheets
(Unaudited)

See accompanying notes to financial statements.

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FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Majority Owned Subsidiary of First Republic Bank)

Statements of Income
(Unaudited)

See accompanying notes to financial statements.

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FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Majority Owned Subsidiary of First Republic Bank)

Statements of Cash Flows
(Unaudited)

See accompanying notes to financial statements.

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FIRST REPUBLIC PREFERRED CAPITAL CORPORATION
(A Majority Owned Subsidiary of First Republic Bank)

Notes to Financial Statements

September 30, 2002

(1)   Organization and Basis of Presentation

     First Republic Preferred Capital Corporation (the “Company”) is a Nevada Corporation formed by First Republic Bank (the “Bank”) on April 19, 1999 for the purpose of raising capital for the Bank. The Bank initially capitalized the Company with $111 million. The proceeds were used to fund the Company’s principal business of acquiring, holding, financing and managing assets secured by real estate mortgages and other obligations secured by real property, as well as certain other qualifying real estate investment trust (“REIT”) assets (collectively, the “Mortgage Assets”). The Mortgage Assets presently held by the Company are loans secured by single-family residential real estate properties (“Mortgage Loans”) that were acquired from the Bank. The Company expects that all, or substantially all, of its Mortgage Assets will be Mortgage Loans that the Company will acquire from the Bank. The Company has elected to be taxed as a REIT and intends to make distributions to its shareholders so as to be relieved of substantially all income taxes relating to ordinary income under applicable tax regulations. Accordingly, no provision for income taxes is included in the accompanying financial statements. To date, the Company has issued 18,704,303 shares of common stock, par value $0.01 per share (the “Common Stock”). The Bank owns all of the Common Stock, except for 9,840 shares held by certain of the Bank’s employees and directors. Earnings per share data is not presented, as the Company’s Common Stock is not publicly traded.

     On June 1, 1999, the Company completed a private offering (the “Offering”) of 55,000 shares of perpetual, exchangeable, noncumulative Series A preferred shares (the “Series A Preferred Shares”), and received proceeds of $55 million including underwriting fees contributed by the Bank.  The Series A Preferred Shares have not been registered under the Securities Act of 1933 (the “Securities Act”) or any other applicable securities law.  The Series A Preferred Shares may not be resold, pledged or otherwise transferred by the purchaser or any subsequent holder except (A)(i) to a person whom the transferor reasonably believes is a Qualified Institutional Buyer (“QIB”) in a transaction meeting the requirements of Rule 144A under the Securities Act; (ii) to Institutional Accredited Investors (of the type described in Rule 501(a)(1) or (3) under the Securities Act) in transactions exempt from the registration requirements of the Securities Act; or (iii) pursuant to the exemption from registration under the Securities Act provided by Rule 144 (if available), and (B) in accordance with all applicable securities laws of the states of the United States. The Series A Preferred Shares are not listed on any national securities exchange or for quotation through the Nasdaq National Stock Market, Inc. The Series A Preferred Shares are eligible for trading in the Private Offerings, Resales and Trading through Automated Linkages System of the National Association of Securities Dealers (“PORTAL”).

     The Company used the proceeds from the Offering to fund a dividend distribution to the Bank as the holder of initially all of the Company’s Common Stock.

     On June 20, 2001, the Company completed a private placement to an affiliate of Credit Suisse First Boston of perpetual, exchangeable, noncumulative Series C preferred shares (the “Series C Preferred Shares”) that are convertible into common stock of the Bank. The placement amount

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was $7 million at a dividend rate of 5.7%. The Series C Preferred Shares are convertible into Bank shares at a price of $30.56 per share. Dividends on the Series C Preferred Shares are paid semi-annually on June 30 and December 30. In connection with this transaction, the Company issued and the Bank purchased $7 million of additional Common Stock.  

     The Company used the proceeds from the issuance of the Series C Preferred Shares and the additional issuance of Common Stock to purchase from the Bank approximately $14 million of single family mortgage loans.

     On January 24, 2002, the Company received $42 million from the issuance of 1,680,000 shares of 8.875% Noncumulative Perpetual Series B Preferred Stock (the “Series B Preferred Shares”) in an initial public offering pursuant to a Registration Statement on Form S-11 (File No. 333-72510) that was initially filed with the Securities and Exchange Commission on October 31, 2001. The Series B Preferred Shares trade on the Nasdaq National Market under the symbol “FRCCP.” Holders of Series B Preferred Shares are entitled to receive, if, when, and as authorized and declared by our Board of Directors, cash dividends out of assets of the Company legally available therefor at an annual rate of 8.875% of the $25.00 liquidation preference per share and no more. In connection with this transaction, the Company issued and the Bank purchased $42 million of additional Common Stock.

     The Company used the proceeds from the issuance of the Series B Preferred Shares and the additional issuance of Common Stock to purchase from the Bank approximately $80 million of single family mortgage loans and $4 million of short-term investments.

     These interim statements are intended to be read in conjunction with the financial statements presented in First Republic Preferred Capital Corporation’s Annual Report on Form 10-K as of and for the year ended December 31, 2001. Interim results are not necessarily indicative of results to be expected for the entire year.

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

(2)   Summary of Significant Accounting Policies

(a)   Mortgage Loans

     Mortgage Loans are carried at the principal amount outstanding, net of purchase discounts and premiums. Discounts, or premiums on Mortgage Loans, are accreted or amortized as yield adjustments over the expected lives of the loans using the interest method. Unaccreted or unamortized discounts or premiums on loans sold or paid in full are recognized in income at the time of sale or payoff.  Mortgage Loans consist entirely of single-family mortgages as of September 30, 2002 and December 31, 2001, respectively.

     The Company has purchased Mortgage Loans from the Bank at the Bank’s carrying amount, which generally has approximated the fair value of the loans purchased.  If a significant difference were to exist between the Bank’s carrying amount and the fair value of loans

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purchased by the Company, such difference would be recorded as a capital contribution by the Bank or a capital distribution to the Bank and would not be an adjustment to the basis of the loans.

     Of the $208 million outstanding mortgage loans at September 30, 2002, 40% were adjustable rate loans, 38% were intermediate-fixed rate loans, and 22% were fixed rate loans. The weighted-average coupons for the three loan types were 5.29%, 6.58% and 6.94%, respectively. At December 31, 2001, 70% were adjustable rate loans, 20% were intermediate-fixed rate loans, and 10% were fixed rate loans. The weighted-average coupons for the three loan types were 6.28%, 6.59%, and 7.04%, respectively. The weighted-average maturities on these single-family loans as of September 30, 2002 and December 31, 2001 were 24.1 years and 24.3 years, respectively.

     Interest income from loans is recognized in the month earned. Interest income is not recorded on loans when they become more than 90 days delinquent, except for single family loans that are well secured and in the process of collection, or at such earlier time as management determined that the collectibility of interest is unlikely. When a loan is placed on nonaccrual status, interest income may be recorded when cash is received, provided that the Company’s recorded investment in such loans is deemed collectible. When, in management’s judgment, a borrower’s ability to make periodic interest and principal payments resumes, the loan is returned to accrual status.  There were no nonaccrual loans as of September 30, 2002 or December 31, 2001.

     The Company classifies a loan as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  The Company collectively reviews its portfolio of single-family mortgage loans for impairment.  There were no impaired loans included in the Company’s loan portfolio as of September 30, 2002 or December 31, 2001.

(b)   Allowance for Loan Losses

     The Company establishes an allowance for loan losses based upon specific conditions at the time.  The Company considers a number of factors, including the Company’s and the Bank’s past loss experience, the Bank’s underwriting policies, the amount of past due and nonperforming loans, legal requirements, recommendations or requirements of regulatory authorities, current economic conditions and other factors.  During the third quarter of 2002, the Company provided an allowance for loan losses in the amount of $200,000, which represents approximately 10 basis points of total outstanding loans.  If the Company determines that an additional allowance is required, the Company would provide for loan losses by charging current income.

(c)   Other Real Estate Owned

     Real estate acquired through foreclosure is recorded at the lower of cost or fair value minus estimated costs to sell. Costs related to holding real estate are recorded as expenses when incurred.  The Company has not owned any real estate since inception or as of September 30, 2002 or December 31, 2001.

(d)   Statements of Cash Flows

     For the purpose of reporting cash flows, cash and cash equivalents include cash on hand and cash on deposit at the Bank. As a REIT, the Company paid no income taxes for the nine months ended September 30, 2002 or 2001.

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(3)   Related Party Transactions

     Since inception in April 1999, the Company acquired all of its loans from the Bank. The aggregate cost of such loans acquired by the Company was approximately $30 million during the third quarter of 2002 and $20 million during the third quarter of 2001, including net discounts of $146,000 and net premiums of $135,000, respectively.  The aggregate cost of such loans for the first nine months of 2002 was approximately $154 million and $44 million for the same period in 2001, including net premiums of $181,000 and $189,000, respectively.  All purchases were at a price equal to the Bank’s carrying amount, which approximated the fair value of the loans.

     The Company entered into an Amended and Restated Master Loan Purchase and Servicing Agreement with the Bank pursuant to which the Bank performs, among other things, the servicing of loans held by the Company in accordance with normal industry practice.  The servicing fee that the Bank charges is 0.25% per year of the outstanding principal balances of all Mortgage Loans that the Bank services, which reduces interest income.  The Bank earned servicing fees on the Company’s loans of $110,000 and $69,000 for the quarters ended September 30, 2002 and 2001, respectively, and $315,000 and $205,000 for the nine months ended September 30, 2002 and 2001, respectively.  The Company records interest on loans net of the servicing fees paid to the Bank.  In its capacity as servicer, the Bank holds in custodial accounts at the Bank Mortgage Loan payments received on behalf of the Company.

     The Company entered into an Amended and Restated Advisory Agreement with the Bank pursuant to which the Bank administers the day-to-day operations of the Company.  The Bank is responsible for (i) monitoring the credit quality of the Mortgage Assets held by the Company, (ii) advising the Company with respect to the reinvestment of income from, and principal payments on, the Mortgage Assets, and with respect to the acquisition, management, financing and disposition of the Company’s Mortgage Assets, and (iii) monitoring the Company’s compliance with the requirements necessary to qualify as a REIT.  The advisory fee is $50,000 per year, payable in equal quarterly installments.  The Company had $13,000 payable to the Bank for advisory fees as of September 30, 2002 and December 31, 2001.

     During the third quarter of 2002, the Bank purchased 500 shares of the Company’s outstanding Series A Preferred Shares, with a liquidation preference value of $500,000.  Accordingly, the Bank currently owns 15,000 shares of the Company’s Series A Preferred Shares, with a liquidation preference value of $15.0 million.

(4)   Dividends Payable

     Dividends on the Series A Preferred Shares, Series B Preferred Shares and the Series C Preferred Shares are payable at the rate of 10.5%, 8.875% and 5.7% per annum, respectively, if, when and as authorized by the Company’s Board of Directors.  If authorized, dividends on Series A Preferred Shares and the Series C Preferred Shares are payable semiannually in arrears on the 30^th day of June and December each year.  If authorized, dividends on Series B Preferred Shares are payable quarterly in arrears on the 30^th of March, June, September, and December each year. Consequently, if the Board of Directors does not authorize dividends on the Series A Preferred Shares, the Series B Preferred Shares and the Series C Preferred Shares for each of its respective dividend periods, holders of each class of Preferred Shares will not be entitled to be paid that dividend later, or to recover any unpaid dividend whether or not funds are or subsequently become available.  The Board of Directors may determine, in its business judgment, that it would be in the best interest of the Company to pay less than the full amount of the stated dividend for

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each dividend period on each series of Preferred Shares.  However, to remain qualified as a REIT, the Company must distribute annually at least 90% of its “REIT taxable income” (not including capital gains) to stockholders, and generally, the Company cannot pay dividends on the Common Stock for periods in which less than full dividends are paid on each series of Preferred Shares.  For the quarter ended September 30, 2002, the Company paid quarterly dividends of $931,000 on the Series B Preferred Shares, and the Company accrued $1,444,000 and $100,000 for Series A and Series C Preferred Shares dividends, respectively, which are paid semi-annually.

     To the holders of Common Stock, the Company currently expects to pay an aggregate amount of dividends with respect to its outstanding shares of stock equal to not less than 90% of the Company’s “REIT taxable income” at year end (excluding capital gains) in order to remain qualified as a REIT. As of September 30, 2002, the Company has not declared dividends to the holders of its Common Stock.

(5)   Common Stock

     The Company was formed on April 19, 1999. According to its Articles of Incorporation, the Company has the authority to issue 25,000,000 shares of Common Stock with a par value of $0.01 per share.  The Company initially issued 10,000,000 shares to the Bank in exchange for approximately $111 million of assets.  Upon the issuance of $55 million of Preferred Shares in June 1999, the Company made a return of capital to the Bank.  In June 2001, the Company purchased from the Bank approximately $14 million in mortgage assets in exchange for 1,243,000 shares of Common Stock and $7 million in cash.  At September 30, 2002, the Company had 18,704,303 of outstanding shares of Common Stock. Holders of Common Stock are entitled to receive dividends if and when authorized and declared by the Board of Directors out of funds legally available therefor after all preferred dividends have been paid for the full year.  As of September 30, 2002, no Common Stock dividends have been declared in 2002.

(6)   Preferred Stock

     On June 1, 1999, the Company issued 55,000 Series A Preferred Shares.  Proceeds from this issuance were $55 million including underwriting fees contributed by the Bank.  The Series A Preferred Shares are not redeemable prior to June 1, 2009.  Holders of the Series A Preferred Shares are entitled to receive, if authorized and declared by the Board of Directors of the Company, noncumulative dividends at a rate of 10.5% per annum or $105 per annum per share.  Dividends on the Series A Preferred Shares are payable semiannually in arrears on June 30 and December 30 of each year.  No dividends are payable on September 30, 2002, or 2001.  However, the Company accrued $1,444,000 for dividends payable on each of those dates.

     On January 24, 2002, the Company issued 1,680,000 Series B Preferred Shares.  Proceeds from this issuance were $42 million including underwriting fees contributed by the Bank.  The Series B Preferred Shares are not redeemable prior to December 30, 2006.  Holders of the Series B Preferred Shares are entitled to receive, if authorized and declared by the Board of Directors of the Company, noncumulative dividends at a rate of 8.875% per annum or $2.21875 per annum per share.  Dividends on the Series B Preferred Shares are payable quarterly in arrears on March 30, June 30, September 30, and December 30 of each year.  The Company paid dividends of $931,000 on September 30, 2002.

     On June 20, 2001, the Company issued 7,000 Series C Preferred Shares.  Proceeds from this issuance were $7 million, including issuance costs contributed by the Bank.  The Series C

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Preferred Shares are not redeemable prior to June 16, 2007.  The Series C Preferred Shares are convertible into common stock of the Bank at a price of $30.56 per share.

     The single holder of the Series C Preferred Shares is entitled to receive, if authorized and declared by the Board of Directors of the Company, noncumulative dividends at a rate of 5.7% per annum or $57 per annum per share.  Dividends on the Series C Preferred Shares are payable semiannually in arrears on June 30 and December 30 of each year.  No dividends were payable at September 30, 2002.  However, the Company accrued $100,000 for dividends payable at that date.

     Upon the occurrence of an adverse change in relevant tax laws, the Company will have the right to redeem the Series A Preferred Shares, the Series B Preferred Shares, and the Series C Preferred Shares in whole (but not in part).  The liquidation preference of the Series A Preferred Shares and the Series C Preferred Shares is $1,000 per share, plus the semiannual dividend thereon accrued through the date of redemption for the dividend period in which the redemption occurs.  The Series B Preferred Shares have a liquidation preference of $25 per share, plus the semiannual dividend thereon accrued through the date of redemption for the dividend period in which the redemption occurs.  Each Series A Preferred Share, Series B Preferred Share, and Series C Preferred Share will be exchanged into preferred shares of the Bank upon the occurrence of certain events.  The exchange rate for the Series A Preferred Shares and the Series C Preferred Shares is 1:1.  The exchange rate for the Series B Preferred Shares is 1:1/40.

(7)   Concentration of Credit Risk

     The Company presently holds Mortgage Loans in respect of real estate properties primarily located in the state of California (78% of the total).  Future economic, political, or other developments in this state could adversely affect the value of the Mortgage Loans.

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

Introduction

     This discussion summarizes the significant factors affecting the financial condition and results of operations of the Company during the quarter and nine months ended September 30, 2002.  This discussion is provided to increase the understanding of, and should be read in conjunction with, the unaudited financial statements, accompanying notes and tables included in this quarterly report.

Information Regarding Forward-Looking Statements

     Except for historical information and discussions contained herein, this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.  Forward-looking statements include, but are not limited to:

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

Results of Operations

     Net income was $2,753,000 for the third quarter of 2002, compared to $2,055,000 for the third quarter of 2001.  For the first nine months, net income was $8,475,000 compared to $6,109,000 for the same period in 2001.  The primary reason for the increase in net income in 2002 compared to 2001 was higher average earning assets.  The ratio of earnings to fixed charges was 1.11x and 1.18x for the quarter and nine months ended September 30, 2002, respectively, compared to 1.34x for the year ended December 31, 2001.  Dividend payments are 100% of fixed charges.

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     The following tables set forth the yields on earning assets for the periods indicated.

     The weighted average yield on interest-earning assets was 5.73% for the third quarter of 2002, compared to 5.79% for the second quarter of 2002 and 6.64% for the third quarter of 2001.  Loan portfolio yields were 5.88%, 5.96%, and 6.88%, respectively.  The interest rates on adjustable rate loans vary with market rates and increased during 2001, before declining in 2002.  The yields on both loans and short-term investments were the highest during the first quarter in 2001 because the general level of interest rates peaked at the end of 2000.

     The Bank retains an annual servicing fee of 25 basis points on the gross average outstanding principal balance of the Company’s loan portfolio that the Bank services, which reduces the interest income that the Company receives.  For the quarters ended September 30, 2002 and 2001, loan servicing fees were $110,000 and $69,000, respectively.  For the nine months ended 2002 and 2001, loan servicing fees were $315,000 and $205,000, respectively.  The Company also incurs advisory fee expenses payable to the Bank.  The Company entered into an Amended and Restated Master Loan Purchase and Servicing Agreement in December 2001 with the Bank for services the Bank renders on its behalf for which the Bank is paid $50,000 per annum.  For the quarters ended September 30, 2002 and 2001, the Company paid advisory fees of $13,000.  For the nine months ended September 30, 2002 and 2001, advisory fees were $38,000.

     Other operating expenses consisted primarily of credit agency fees and audit fees.  For the quarters ended September 30, 2002 and 2001, credit agency fees were $6,000 and $19,000, respectively, and auditing fees were $15,000 and $8,000, respectively.  For the nine months

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ended 2002 and 2001, credit agency fees were $27,000 and $34,000, respectively, and auditing fees were $56,000 and $22,000, respectively.

Financial Condition

  Interest-bearing Deposits with the Bank

     At September 30, 2002 and December 31, 2001, interest-bearing deposits consisted entirely of a money market account held at the Bank.  Generally, the balance in this account reflects principal and interest received on the mortgage loan portfolio.

  Loan Portfolio

     The loan portfolio at September 30, 2002 and December 31, 2001 consisted entirely of single family mortgage loans purchased from the Bank.  The Company anticipates that in the future it will continue to purchase all of its loans from the Bank.

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

     As of September 30, 2002 and December 31, 2001, there were no nonaccrual loans or loans that were troubled debt restructurings.  Also, at September 30, 2002 and December 31, 2001, there were no accruing loans that were contractually past due more than 90 days.

     As of September 30, 2002, the Company had one loan in the amount of $1.8 million that was 90 days delinquent.  The current loan-to-value ratio for this loan is approximately 67%, and the Company considers this loan to be well secured and in the process of collection.

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

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     During the third quarter of 2002, the Company recorded a provision of $200,000 to establish the allowance for loan losses.  As of September 30, 2002, the Company’s allowance for loan losses was 0.10% of total loans.

  Significant Concentration of Credit Risk

     Concentration of credit risk generally arises with respect to our loan portfolio when a number of borrowers engage in similar business activities, or activities in the same geographical region. Concentration of credit risk indicates the relative sensitivity of our performance to both positive and negative developments affecting a particular industry.  The balance sheet exposure to geographic concentrations directly affects the credit risk of the loans within the loan portfolio.

     At September 30, 2002, 60% of our loans were secured by properties located in the San Francisco Bay Area, 11% in Los Angeles County, 7% in other parts of California, 12% in New York and contiguous states, and 10% in other parts of the United States. At September 30, 2002, the weighted average loan-to-value ratio for the mortgage portfolio was approximately 55%, based on the appraised values of the properties at the time the loans were originated.

     The following table presents an analysis of our loan portfolio at September 30, 2002 by major geographic location.

  Liquidity and Capital Resources

     The Company’s principal liquidity needs are to fund the acquisition of additional Mortgage Assets as borrowers repay Mortgage Assets held and to pay dividends. The Company will continue to fund the acquisition of additional Mortgage Loans with the proceeds of principal repayments on its current portfolio of Mortgage Loans. Proceeds from interest payments will be reinvested until used for the payment of operating expenses and dividends. The Company does not anticipate that it will have any other material capital expenditures. The cash generated from the payment of interest and principal on the Mortgage Assets should provide sufficient funds to the operating requirements and to pay dividends in accordance with the requirements to be taxed as a REIT for the foreseeable future.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     The Company services fixed-rate dividend obligations to preferred stockholders and operating expenses by the collection of interest income from its Mortgage Loans. To facilitate meeting dividend payments, the Company has maintained an average earning asset balance approximately equal to two times the liquidation preference of its outstanding preferred shares.

     At September 30, 2002, the Company’s loan portfolio consisted of 40% adjustable rate loans, 38% intermediate fixed rate loan and 22% fixed rate loans, the same percentages at June 30, 2002.  The weighted average yield on earning assets for the quarter ended September 30, 2002, was 5.73%, down 6 basis points compared to 5.79% for the quarter ended June 30, 2002.  The

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current low interest rate environment is causing prepayment speeds to increase on higher yielding Mortgage Loans.  During the quarter, the Company’s combined intermediate fixed and fixed rate portfolios were repaid at an annualized speed of 77%.  The Company has invested these prepayment proceeds in lower yielding Mortgage Loans, resulting in lower yields on earning assets.  With earning assets  approximately two times liabilities, the Company’s current fixed charges to net income ratio is 1.11x for the third quarter of 2002, compared to 1.21x for the second quarter of 2002 and  1.33x for the third quarter of 2001.

     At present, the Company attempts to reinvest its cashflow in intermediate fixed rate and fixed rate loans.  Adjustable rate loans as a percentage of total outstanding Mortgage Loans have remained at about 40% for the last three quarters.  With the interest rate environment declining over the last year to 40-year historical low levels, the interest rate on adjustable rate loans has declined.  The timing of decreases in interest income on adjustable rate loans depends on the loan’s interest rate index, the timing of a decrease in that index and the timing of the corresponding adjustments to the loan rate.  During the third quarter of 2002, the average interest rate earned on the adjustable rate loans has leveled off, primarily because the interest rate environment during 2002 has remained stable with the Federal Funds rate at 1.75% since December 2001.  At September 30, 2002, the interest rate index for 23% of the Mortgage Loans is based on the 11^th District Cost of Funds Index (COFI).  COFI is a lagging index that tends to respond much more slowly than a market rate index such as the prime rate to changes in the general interest rate environment.  Although market rate indices have remained relatively constant during the year, the COFI index increased during May and June of 2002 and decreased in July 2002.

     The following table reflects the outstanding loan portfolio at September 30, 2002 by interest rate type.

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     The following table illustrates maturities or interest rate adjustments based upon the contractual maturities or adjustment dates as of September 30, 2002:

ITEM 4.   CONTROLS AND PROCEDURES

     A review and evaluation was performed by the Company’s management, including the Company’s chief executive officer and Chief Financial Officer (the “Officers”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing of this quarterly report.  Based on that review and evaluation, the Officers have concluded that the Company’s current disclosure controls and procedures, as designed and implemented, were effective.  There have been no significant changes in the internal controls of the Company, or the Bank, or in other factors that could significantly affect the Company’s internal controls subsequent to the date of their evaluation.  There were no significant deficiencies or material weaknesses identified in the course of such review and evaluation and, therefore, no corrective measures were taken by the Company.

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PART II - OTHER INFORMATION