UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Commission File Number 000-25193

CAPITAL CROSSING PREFERRED CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(617) 880-1000

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

None

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

9.75% Non-Cumulative Exchangeable Preferred Stock, Series A

10.25% Non-Cumulative Exchangeable Preferred Stock, Series C

8.50% Non-Cumulative Exchangeable Preferred Stock, Series D

(Title of Class)

           Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

           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 statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

           Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).     Yes o          No þ

           The number of shares outstanding of the registrant’s sole class of common stock was 100 shares, $.01 par value per share, as of March 6, 2005. No common stock was held by non-affiliates of the registrant.

PART I

      This Annual Report on Form 10-K contains “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. For purposes of these Acts, any statement that is not a statement of historical fact may be deemed a forward-looking statement. Capital Crossing Preferred Corporation (“Capital Crossing Preferred”) may also make written or oral forward-looking statements in other documents filed with the Securities and Exchange Commission (“SEC”), in press releases and other written materials, and in oral statements made by officers or directors. Forward-looking statements can be identified by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “plan,” “assume,” “will,” “project,” “should,” and other similar expressions which predict or indicate future events and trends and which do not relate to historical matters. Forward-looking statements should not be unduly relied upon because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of Capital Crossing Preferred. These risks, uncertainties and other factors may cause the actual results, performance or achievements of Capital Crossing Preferred to be materially different from the anticipated future results, performance or achievements that are expressed or implied by the forward-looking statements.

      Capital Crossing Preferred’s actual results could differ materially from those projected in the forward-looking statements as a result, among other factors, or the factors discussed in the section entitled “Certain Factors That May Affect Future Results” of this Form 10-K.

      All of these factors should be carefully reviewed, and the reader of this Annual Report on Form 10-K should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and Capital Crossing Preferred does not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

General

      Capital Crossing Preferred Corporation, formerly Atlantic Preferred Capital Corporation, is a Massachusetts corporation incorporated on March 20, 1998. Capital Crossing Bank (“Capital Crossing”), formerly Atlantic Bank and Trust Company, organized Capital Crossing Preferred to acquire and hold real estate mortgage assets in a cost-effective manner and to provide Capital Crossing with an additional means of raising capital for federal and state regulatory purposes. Capital Crossing owns all of the outstanding common stock of Capital Crossing Preferred. Capital Crossing Preferred operates in a manner intended to allow it to be taxed as a real estate investment trust, or a “REIT”, under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). As a REIT, Capital Crossing Preferred generally will not be required to pay federal income tax if it distributes its earnings to its stockholders and continues to meet a number of other requirements.

      On March 31, 1998, Capital Crossing capitalized Capital Crossing Preferred by transferring mortgage loans valued at $140.7 million in exchange for 1,000 shares of Capital Crossing Preferred’s 8% Cumulative Non-Convertible Preferred Stock, Series B, valued at $1.0 million and 100 shares of Capital Crossing Preferred’s common stock valued at $139.7 million. The carrying value of these loans approximated their fair values at the date of contribution.

      On February 1, 1999, Capital Crossing Preferred closed its public offering of 1,260,000 shares of its 9.75% Non-cumulative exchangeable preferred stock, Series A. On February 12, 1999, Capital Crossing Preferred sold an additional 156,130 Series A preferred shares in connection with the underwriters’ exercise of their overallotment option. The net proceeds to Capital Crossing Preferred from the sale of Series A preferred shares were $12.6 million. Series A preferred stock is redeemable at the option of Capital Crossing Preferred, with the prior consent of the FDIC.

      On May 31, 2001, Capital Crossing Preferred closed its public offering of 1,840,000 shares (including 240,000 shares issued upon the exercise of the underwriters’ overallotment option) of its 10.25% Non-cumulative exchangeable preferred stock, Series C. The net proceeds to Capital Crossing Preferred from the sale of Series C preferred shares were $16.9 million. Series C preferred stock is redeemable at the option of Capital Crossing Preferred on or after May 31, 2006, with the prior consent of the FDIC.

      On May 11, 2004, Capital Crossing Preferred closed its public offering of 1,500,000 shares of its 8.50% Non-cumulative exchangeable preferred stock, Series D. The net proceeds to Capital Crossing Preferred from the sale of Series D preferred shares were $35.3 million. Series D preferred stock is redeemable at the option of Capital Crossing Preferred on or after July 15, 2009, with the prior consent of the FDIC.

      Capital Crossing Preferred’s principal business objective is to acquire and hold mortgage assets that will generate net income for distribution to stockholders. All of the mortgage assets in Capital Crossing Preferred’s loan portfolio at December 31, 2004 were acquired from Capital Crossing and it is anticipated that substantially all additional mortgage assets will be acquired from Capital Crossing. As of December 31, 2004, Capital Crossing Preferred held loans acquired from Capital Crossing with gross outstanding principal balances of $139.5 million. Capital Crossing Preferred’s loan portfolio at December 31, 2004 consisted primarily of mortgage assets secured by commercial and multi-family properties.

      Capital Crossing administers the day-to-day activities of Capital Crossing Preferred in its roles as servicer under a master service agreement entered into between Capital Crossing and Capital Crossing Preferred and as advisor under an advisory agreement. Capital Crossing Preferred pays Capital Crossing an annual servicing fee equal to 0.20%, payable monthly, and an annual advisory fee equal to 0.05%, also payable monthly, of the gross average outstanding principal balances of loans in the loan portfolio for the immediately preceding month. Capital Crossing and its affiliates have interests that are not identical to those of Capital Crossing Preferred. Consequently, conflicts of interest may arise with respect to transactions, including, without limitation:

      It is the intention of Capital Crossing Preferred that any agreements and transactions between Capital Crossing Preferred and Capital Crossing are fair to all parties and consistent with market terms, including the price paid and received for mortgage assets on their acquisition or disposition by Capital Crossing Preferred or in connection with the servicing of such mortgage assets. However, there can be no assurance that such agreements or transactions will be on terms as favorable to Capital Crossing Preferred as those that could have been obtained from unaffiliated third parties.

Capital Crossing

      Capital Crossing was organized as a Massachusetts-chartered trust company in December 1987, and commenced operations in February 1988. Capital Crossing operates as a commercial bank primarily focused on purchasing commercial real estate, multi-family and one-to-four family residential real estate loans, secured commercial loans and originating and purchasing leases that finance the business activities of small companies and individuals. Capital Crossing’s deposits are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation (the “FDIC”) to the extent authorized by law. Capital Crossing conducts business from its executive and main office in Boston, Massachusetts, through its website at www.capitalcrossing.com and through Dolphin Capital Corp. (“Dolphin Capital”), its leasing subsidiary in Moberly, Missouri. At December 31, 2004, Capital Crossing had total assets of $1.08 billion,

deposits of $727.9 million and stockholders’ equity of $91.4 million. At December 31, 2004, under the regulatory capital ratios developed and monitored by the federal bank regulatory agencies and applicable to banks, Capital Crossing’s capital was sufficient to enable it to be qualified as “well capitalized.”

      Capital Crossing currently focuses on purchasing and originating loans and leases through the following principal business lines:

Capital Crossing primarily utilizes a funding strategy of wholesale sources such as brokered certificates of deposit and borrowed funds.

      As a majority-owned subsidiary of Capital Crossing, the assets and liabilities and results of operations of Capital Crossing Preferred are consolidated with those of Capital Crossing for Capital Crossing’s financial reporting and regulatory capital purposes. As such, loans acquired by Capital Crossing Preferred from Capital Crossing will nevertheless be treated as assets of Capital Crossing for purposes of compliance by Capital Crossing with the FDIC’s regulatory capital requirements and in Capital Crossing’s consolidated financial statements. Interest income on those loans will be treated as interest income of Capital Crossing in Capital Crossing’s consolidated financial statements.

Acquisition of Loan Portfolio

      Pursuant to the terms of a master mortgage loan purchase agreement entered into by and between Capital Crossing Preferred and Capital Crossing, Capital Crossing assigns, from time to time, certain loans to Capital Crossing Preferred. In connection with said assignment, Capital Crossing delivers or causes to be delivered to Capital Crossing Preferred the mortgage note with respect to each mortgage endorsed to the order of Capital Crossing Preferred, the original or certified copy of the mortgage with evidence of recording indicated thereon, if available, and an original or certified copy of an assignment of the mortgage in recordable form. Such documents are initially held by Capital Crossing, acting as custodian for Capital Crossing Preferred pursuant to the terms of a master service agreement entered into by and between Capital Crossing and Capital Crossing Preferred.

      Under the terms of the master mortgage loan purchase agreement, Capital Crossing makes certain representations and warranties with respect to the mortgage assets for the benefit of Capital Crossing Preferred regarding information provided with respect to mortgage assets, liens, validity of the mortgage documents, and compliance with applicable laws. Capital Crossing is obligated to repurchase any mortgage asset sold by it to Capital Crossing Preferred as to which there is a material breach of any such representation or warranty, unless Capital Crossing Preferred permits Capital Crossing to substitute other qualified mortgage assets for such mortgage asset. Capital Crossing also indemnifies Capital Crossing Preferred for damages or costs resulting from any such breach. The repurchase price for any such mortgage asset is such asset’s net carrying value plus accrued and unpaid interest on the date of repurchase.

      From time to time, mortgage assets may be returned to Capital Crossing in the form of dividends or returns of capital. Capital Crossing will consider the amounts of such returns when assessing the adequacy of the size and composition of Capital Crossing Preferred’s loan portfolio and may, from time to time,

contribute additional mortgage assets to Capital Crossing Preferred. Capital Crossing will seek to ensure that the mortgage assets it contributes to Capital Crossing Preferred are generally of similar quality and characteristics as those returned to it.

      Future decisions regarding mortgage asset acquisitions by Capital Crossing Preferred from Capital Crossing will be based on the level of Capital Crossing Preferred’s preferred stock dividends at the time and Capital Crossing Preferred’s required level of income necessary to generate adequate dividend coverage.

Management Policies and Programs

      In administering Capital Crossing Preferred’s mortgage assets, Capital Crossing has a high degree of autonomy. Capital Crossing Preferred’s Board of Directors, however, has adopted certain policies to guide 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 Capital Crossing Preferred’s Board of Directors without a vote of Capital Crossing Preferred’s stockholders, including Series A, Series C and Series D preferred shares, or without a vote of Capital Crossing Preferred’s only common stockholder, Capital Crossing.

      Asset Acquisition and Disposition Policies. Capital Crossing Preferred anticipates that it will, from time to time, purchase additional mortgage assets. Capital Crossing Preferred intends to acquire all or substantially all of such mortgage assets from Capital Crossing on terms that are comparable to those that could be obtained by Capital Crossing Preferred if such mortgage assets were purchased from unrelated third parties. Capital Crossing Preferred and Capital Crossing do not currently have specific policies with respect to the purchase by Capital Crossing Preferred from Capital Crossing of particular loans or pools of loans, other than that such assets must be eligible to be held by a REIT. Capital Crossing Preferred intends generally to acquire only performing loans from Capital Crossing. Capital Crossing Preferred may also from time to time acquire mortgage assets from unrelated third parties. To date, Capital Crossing Preferred has not adopted any arrangements or procedures by which it would purchase mortgage assets from unrelated third parties, and it has not entered into any agreements with any third parties with respect to the purchase of mortgage assets. Capital Crossing Preferred anticipates that it would purchase mortgage assets from unrelated third parties only if neither Capital Crossing nor any of its affiliates had an amount or type of mortgage asset sufficient to meet the requirements of Capital Crossing Preferred. Capital Crossing Preferred currently anticipates that the mortgage assets that it purchases will primarily include commercial and multi-family mortgage loans, although if Capital Crossing develops an expertise in additional mortgage asset products, Capital Crossing Preferred may purchase such additional types of mortgage assets. In addition, Capital Crossing Preferred may also from time to time acquire limited amounts of other assets eligible to be held by REITs.

      In order to preserve its status as a REIT under the Internal Revenue Code, substantially all of the assets of Capital Crossing Preferred must consist of mortgage loans and other qualified assets of the type set forth in Section 856(c)(4)(A) of the Internal Revenue Code. Such other qualifying assets include cash, cash equivalents and securities, including shares or interests in other REITs, although Capital Crossing Preferred does not currently intend to invest in shares or interests in other REITs.

      Capital and Leverage Policies. To the extent that the Board of Directors determines that additional funding is required, Capital Crossing Preferred may raise such funds through additional equity offerings, debt financing or retention of cash flow (after consideration of provisions of the Internal Revenue Code requiring the distribution by a REIT of not less than 90% of its REIT taxable income and taking into account taxes that would be imposed on undistributed taxable income), or a combination of these methods.

      Capital Crossing Preferred has no debt outstanding, and it currently does not intend to incur any indebtedness. The organizational documents of Capital Crossing Preferred limit the amount of indebtedness which it is permitted to incur without approval of the Series A, Series C and Series D

preferred stockholders to no more than 100% of its total stockholders’ equity. Any such debt incurred may include intercompany advances made by Capital Crossing to Capital Crossing Preferred.

      Capital Crossing Preferred has guaranteed all of the obligations of Capital Crossing under the advances Capital Crossing may receive from time to time from the Federal Home Loan Bank of Boston (“FHLBB”), and has agreed to pledge a significant amount of its assets in connection with these advances. The assets Capital Crossing Preferred pledges to the FHLBB will vary from time to time, however the potential exists for it to pledge all of its assets to the FHLBB to secure advances to Capital Crossing. At December 31, 2004, approximately $30.5 million, or 14.0%, of its assets have been pledged to and accepted by the FHLBB to secure FHLBB advances to Capital Crossing. The FHLBB advances are used by Capital Crossing primarily for the purchase of mortgage assets and to assist in managing Capital Crossing’s interest rate risk exposure. The assets purchased using FHLBB advances generally are available for contribution to or purchase by Capital Crossing Preferred, based upon the asset quality of the assets, and whether the assets were qualified to be held by REITs. The guarantee and pledge were approved by Capital Crossing Preferred’s independent directors, subject to certain requirements and limitations, including the requirement that Capital Crossing pay Capital Crossing Preferred an annual guarantee fee of $80,000. Capital Crossing Preferred’s guarantee obligations under this arrangement are limited by applicable laws pertaining to fraudulent conveyance and fraudulent transfer. At December 31, 2004, Capital Crossing had term borrowing capacity, subject to available collateral, of $300.0 million, of which $168.4 million was outstanding from the FHLBB. Further increases in borrowings are dependent upon the qualification of additional assets as collateral and other factors as may be determined by the FHLBB.

      Capital Crossing Preferred may also issue additional series of preferred stock. However, it may not issue additional shares of preferred stock ranking senior to the Series A, Series C or Series D preferred shares without consent of holders of at least two-thirds of each of the outstanding Series A, Series C and Series D preferred shares, each voting as a separate class. Although Capital Crossing Preferred’s charter does not prohibit or otherwise restrict Capital Crossing or its affiliates from holding and voting shares of Series A, Series C or Series D preferred stock, to Capital Crossing Preferred’s knowledge the amount of shares of Series A, Series C or Series D preferred stock held by Capital Crossing or its affiliates is insignificant (less than 1%). Similarly, Capital Crossing Preferred may not issue additional shares of preferred stock ranking on parity with the Series A, Series C or Series D preferred shares without the approval of a majority of its independent directors. Prior to any future issuance of additional shares of preferred stock, Capital Crossing Preferred will take into consideration Capital Crossing’s regulatory capital requirements and the cost of raising and maintaining that capital at the time.

      Conflicts of Interest Policies. Because of the nature of Capital Crossing Preferred’s relationship with Capital Crossing and its affiliates, conflicts of interest have arisen and may arise with respect to certain transactions, including without limitation, Capital Crossing Preferred’s acquisition of mortgage assets from, or return of mortgage assets to Capital Crossing, or disposition of mortgage assets or foreclosed property to, Capital Crossing or its affiliates and the modification of the master service agreement. It is Capital Crossing Preferred’s policy that the terms of any financial dealings with Capital Crossing and its affiliates will be consistent with those available from unaffiliated third parties in the mortgage lending industry. In addition, Capital Crossing Preferred maintains an audit committee of its Board of Directors, which is comprised solely of three independent directors who satisfy the standards for independence promulgated by the Nasdaq Stock Market, Inc. Among other functions, the audit committee will review transactions between Capital Crossing Preferred and Capital Crossing and its affiliates. Under the terms of the advisory agreement, Capital Crossing may not subcontract its duties under the advisory agreement to an unaffiliated third party without the approval of Capital Crossing Preferred’s Board of Directors, including the approval of a majority of its independent directors. Furthermore, under the terms of the advisory agreement, Capital Crossing provides advice and recommendations with respect to all aspects of Capital Crossing Preferred’s business and operations, subject to the control and discretion of Capital Crossing Preferred’s Board of Directors.

      Conflicts of interest between Capital Crossing Preferred and Capital Crossing and its affiliates may also arise in connection with decisions bearing upon the credit arrangements that Capital Crossing or one

of its affiliates may have with a borrower. Conflicts could also arise in connection with actions taken by Capital Crossing as a controlling person of Capital Crossing Preferred. It is the intention of Capital Crossing Preferred and Capital Crossing that any agreements and transactions between Capital Crossing Preferred and Capital Crossing or its affiliates, including, without limitation, the master mortgage loan purchase agreement, are fair to all parties and are consistent with market terms for such types of transactions. The master service agreement provides that foreclosures and dispositions of the mortgage assets are to be performed in a manner substantially the same as for similar work performed by Capital Crossing for transactions on its own behalf. However, there can be no assurance that any such agreement or transaction will be on terms as favorable to Capital Crossing Preferred as would have been obtained from unaffiliated third parties.

      There are no provisions in Capital Crossing Preferred’s charter limiting any officer, director, security holder or affiliate of Capital Crossing Preferred from having any direct or indirect pecuniary interest in any mortgage asset to be acquired or disposed of by Capital Crossing Preferred or in any transaction in which Capital Crossing Preferred has an interest or from engaging in acquiring and holding mortgage assets. As described herein, it is expected that Capital Crossing and its affiliates will have direct interests in transactions with Capital Crossing Preferred (including, without limitation, the sale of mortgage assets to Capital Crossing Preferred). It is not currently anticipated, however, that any of the officers or directors of Capital Crossing Preferred will have any interests in such mortgage assets.

      Other Policies. Capital Crossing Preferred intends to operate in a manner that will not subject it to regulation under the Investment Company Act of 1940, as amended. Capital Crossing Preferred does not intend to:

      Capital Crossing Preferred may, under certain circumstances, and subject to applicable federal and state laws and the requirements for qualifying as a REIT, purchase Series A, Series C or Series D preferred shares in the open market or otherwise, for redemption by Capital Crossing Preferred. Any such redemption may generally only be effected with the prior approval of the FDIC.

      Capital Crossing Preferred 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 Internal Revenue Code to qualify as a REIT. However, future economic, market, legal, tax or other considerations may cause the Board of Directors to determine that it is in the best interests of Capital Crossing Preferred and its stockholders to revoke its REIT status which would have the immediate result of subjecting Capital Crossing Preferred to federal income tax at regular corporate rates.

      Under the advisory agreement, Capital Crossing monitors and reviews Capital Crossing Preferred’s compliance with the requirements of the Internal Revenue Code regarding Capital Crossing Preferred’s qualification as a REIT on a quarterly basis and has an independent public accounting firm, selected by the Board of Directors of Capital Crossing Preferred, periodically review the results of Capital Crossing’s analysis.

Servicing

      The loans in Capital Crossing Preferred’s portfolio are serviced by Capital Crossing pursuant to the terms of the master service agreement. Capital Crossing in its role as servicer under the terms of the master service agreement receives an annual servicing fee equal to 0.20%, payable monthly, on the gross

average outstanding principal balances of loans serviced for the immediately preceding month. For the years ended December 31, 2004, 2003 and 2002, Capital Crossing Preferred incurred $302,000, $460,000 and $518,000, respectively, in servicing fees to Capital Crossing.

      The master service agreement requires Capital Crossing to service the loan portfolio in a manner substantially the same as for similar work performed by Capital Crossing for transactions on its own behalf. Capital Crossing collects and remits principal and interest payments, maintains perfected collateral positions, submits and pursues insurance claims and initiates and supervises foreclosure proceedings on the loan portfolio it services. Capital Crossing also provides accounting and reporting services required by Capital Crossing Preferred for such loans. Capital Crossing Preferred may also direct Capital Crossing to dispose of any loans which become classified, placed on non-performing status, or are renegotiated due to financial deterioration of the borrower. Capital Crossing is required to pay all expenses related to the performance of its duties under the master service agreement. Capital Crossing may institute foreclosure proceedings and foreclose, manage and protect the mortgaged premises, including exercising any power of sale contained in any mortgage or deed of trust, obtaining a deed-in-lieu-of-foreclosure or otherwise acquiring title to a mortgaged property underlying a mortgage loan by operation of law or otherwise in accordance with the terms of the master service agreement.

      The master service agreement may be terminated at any time by written agreement between the parties or at any time by either party upon 30 days prior written notice to the other party and appointment of a successor servicer. The master service agreement will automatically terminate if Capital Crossing Preferred ceases to be an affiliate of Capital Crossing.

      Capital Crossing remits daily to Capital Crossing Preferred all principal and interest collected on loans serviced by Capital Crossing for Capital Crossing Preferred.

      When any mortgaged property underlying a mortgage loan is conveyed by a mortgagor, Capital Crossing generally, upon notice of the conveyance, will enforce any due-on-sale clause contained in the mortgage loan, to the extent permitted under applicable law and governmental regulations. The terms of a particular mortgage loan or applicable law, however, may prohibit Capital Crossing from exercising the due-on-sale clause under certain circumstances related to the security underlying the mortgage loan and the buyer’s ability to fulfill the obligations under the related mortgage note.

Advisory Services

      Capital Crossing Preferred has entered into an advisory agreement with Capital Crossing to administer the day-to-day operations of Capital Crossing Preferred. Capital Crossing is paid an annual advisory fee equal to 0.05%, payable monthly, of the gross average outstanding principal balances of Capital Crossing Preferred’s loans for the immediately preceding month, plus reimbursement for certain expenses incurred by Capital Crossing as advisor. For the years ended December 31, 2004, 2003 and 2002, Capital Crossing Preferred incurred $75,000, $115,000, and $130,000, respectively, in advisory fees payable to Capital Crossing. As advisor, Capital Crossing is responsible for:

      Capital Crossing 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 or, with the approval of a majority of Capital Crossing Preferred’s Board of Directors as well as a majority of our independent directors, subcontract all or a portion of its obligations under the advisory agreement to unrelated third parties. Capital Crossing 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 advisory agreement had an initial term of five years, and currently is renewed each year for an additional one-year period unless Capital Crossing Preferred delivers notice of nonrenewal to Capital Crossing. Capital Crossing Preferred may terminate the advisory agreement at any time upon 90 days’ prior notice. As long as any Series A preferred shares, any Series C preferred shares or any Series D preferred shares remain outstanding, any decision by Capital Crossing Preferred either not to renew the advisory agreement or to terminate the advisory agreement must be approved by a majority of its Board of Directors, as well as by a majority of its independent directors. Other than the servicing fee and the advisory fee, Capital Crossing will not be entitled to any fee for providing advisory and management services to Capital Crossing Preferred.

Description of Loan Portfolio

      To date, all of Capital Crossing Preferred’s loans have been acquired or were contributed from Capital Crossing. Capital Crossing Preferred’s loan portfolio may or may not have the characteristics described below at future dates.

      The following table sets forth information regarding the composition of the loan portfolio at the dates indicated:

      The following table sets forth certain information regarding the geographic location of properties securing the mortgage loans in the loan portfolio at December 31, 2004:

      The following tables set forth information regarding maturity, contractual interest rate and principal balance of all loans in the loan portfolio at December 31, 2004:

      Loan Purchasing Activities. A substantial portion of Capital Crossing Preferred’s loan portfolio consists of loans which were purchased by Capital Crossing from third parties. These loans primarily are secured by commercial real estate, multi-family or one-to-four family residential real estate or land located throughout the United States. These loans generally were purchased at discounts from their then outstanding principal balances and have been purchased from sellers in the financial services industry or government agencies. Capital Crossing does not utilize any specific threshold underwriting criteria in evaluating individual loans or pools of loans for purchase, but rather evaluates each individual loan, if it is purchasing an individual loan, or pool of loans, if it is purchasing a pool of loans, on a case by case basis in making a purchase decision as described in more detail below.

      Prior to acquiring a loan or portfolio of loans, Capital Crossing’s loan acquisition group conducts a comprehensive review and evaluation of the loan or loans to be acquired in accordance with its credit policy for purchased loans. This review includes an analysis of information provided by the seller, including

credit and collateral files, a review and valuation of the underlying collateral and a review, where applicable, of the adequacy of the income generated by the property to repay the loan. This review is conducted by Capital Crossing’s in-house loan acquisition group, which includes credit analysts, real estate appraisers, environmental specialists and legal counsel.

      The estimated value of the real property collateralizing the loan is determined by Capital Crossing’s in-house appraisal group which considers, among other factors, the type of property, its condition and location and its highest and best use in its marketplace. In many cases, real estate brokers and/or appraisers with specific knowledge of the local real estate market are also consulted. For larger loans, members of Capital Crossing’s in-house loan acquisition group typically visit the real property collateralizing the loan, conduct a site inspection and conduct an internal rental analysis of similar commercial properties in the local area. Capital Crossing analyzes the current and likely future cash flows generated by the collateral to repay the loan. Capital Crossing also considers minimum debt service coverage ratios, consisting of the ratio of net operating income to total principal and interest payments. New tax and title searches may also be obtained to verify the status of any prior liens on the collateral. Capital Crossing’s in-house environmental specialists review available information with respect to each property collateralizing a loan to assess potential environmental risk.

      In order to determine the amount that Capital Crossing is willing to bid to acquire individual loans or loan pools, Capital Crossing considers, among other factors:

      In addition to the factors listed above, Capital Crossing also considers the amount it may realize through collection efforts or foreclosure and sale of the collateral, net of expenses, and the length of time and costs required to complete the collection or foreclosure process in the event a loan becomes non-performing or is non-performing at the purchase date. Under Capital Crossing’s credit policy for purchased loans, all bids are subject to the approval of Capital Crossing’s Chairman or President and any individual loan relationship whose allocated purchase price exceeds $7.5 million is subject to approval by Capital Crossing’s Loan and Investment Committee which consists of Capital Crossing’s Chairman, President, three independent directors and certain other executive officers of Capital Crossing.

      Loan Servicing and Asset Resolution. Capital Crossing has a number of asset managers that are divided into management teams. Loans are assigned to asset managers based on their size and performance status. Additionally, Dolphin Capital employees assist in the servicing of smaller balance loans by making collection calls when such loans become delinquent. In the event that a purchased loan becomes delinquent, or if it is delinquent at the time of purchase, Capital Crossing promptly initiates collection activities. If a delinquent loan becomes non-performing, Capital Crossing may pursue a number of alternatives with the goal of maximizing the overall return on each loan in a timely manner. During this period, Capital Crossing Preferred does not recognize interest income on such loans unless regular payments are being made. In instances when a loan is not returned to performing status, Capital Crossing may seek resolution through negotiating a discounted pay-off with borrowers, which may be accomplished through refinancing by the borrower with another lender, restructuring the loan to a level that is supported by existing collateral and debt service capabilities, or foreclosure and sale of the collateral.

Asset Quality

      Payment Status of Loan Portfolio. The following table sets forth certain information relating to the payment status of loans, net in the loan portfolio at the dates indicated:

      Capital Crossing Preferred’s determination that a purchased loan is delinquent is made prospectively based upon the repayment schedule of the loan following the date of purchase by Capital Crossing and not from the origination date of the loan. Thus, if a borrower was previously in default under the loan (and the loan was not initially purchased as a “non-performing” loan), such default is disregarded by Capital Crossing Preferred in making a determination as to whether or not the purchased loan is delinquent. For example, if Capital Crossing acquires a loan that is past due at the time of acquisition, that loan would not be considered delinquent until it was 90 days past due from Capital Crossing’s purchase date. If Capital Crossing acquires a loan which is contractually delinquent, management evaluates the collectibility of principal and interest and interest would not be accrued when the collectibility of principal and interest is not probable or estimable. Interest income on purchased non-performing loans is accounted for using either the cash basis or the cost recovery method, whereby any amounts received are applied against the recorded amount of the loan. A determination as to which method is used is made on a case-by-case basis.

      As servicing agent for Capital Crossing Preferred’s loan portfolio, Capital Crossing will continue to monitor Capital Crossing Preferred’s loans through its review procedures and updated appraisals. Additionally, in order to monitor the adequacy of cash flows on income-producing properties, Capital Crossing generally obtains financial statements and other information from the borrower and the guarantor, including, but not limited to, information relating to rental rates and income, maintenance costs and an update of real estate property tax payments.

Impaired Loans

      Capital Crossing Preferred considers a purchased loan impaired when, based on current information and events, it determines that current estimated cash flows are less than the cash flows estimated by Capital Crossing at the date of purchase of the loan by Capital Crossing. A loan originated by Capital Crossing is considered impaired when, based on current information and events, it is probable that Capital Crossing Preferred will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Impairment is measured on a loan-by-loan basis by comparing the recorded investment in the loan to the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Substantially all of Capital Crossing Preferred’s loans which have been identified as impaired have been measured by the fair value of the existing collateral. At December 31, 2004, Capital Crossing Preferred had a net recorded investment in impaired loans of $1.6 million. No additional funds are committed to be advanced in connection with impaired loans. For additional information see Notes 1 and 2 to the Financial Statements.

Non-Performing Assets

      The performance of Capital Crossing Preferred’s loan portfolio is evaluated regularly by management. Management generally classifies a loan as non-performing when the collectibility of principal and interest is ninety days or more past due or the collection of principal and interest is not probable or estimable.

      The accrual of interest on loans and the accretion of discount is discontinued when loan payments are ninety days or more past due or the collectibility of principal and interest is not probable or estimable. Interest income previously accrued on such loans is reversed against current period interest income, and the loan is accounted for using either the cash basis or the cost recovery method whereby any amounts received are applied against the recorded amount of the loan. This determination is made on a case-by-case basis. Loans accounted for on the cost recovery method, in general, consist of non-performing loans.

      Loans are returned to accrual status when the loan is brought current in accordance with management’s anticipated cash flows at the time of loan acquisition or origination.

      When Capital Crossing Preferred classifies problem assets, it may establish specific allowances for loan losses or specific non-amortizing discount allocations in amounts deemed prudent by management. When Capital Crossing Preferred identifies problem loans or a portion thereof, as a loss, it will charge-off such amounts or set aside specific allowances or non-amortizing discount equal to the total loss. All of Capital Crossing Preferred’s loans are reviewed monthly to determine which loans are to be placed on non-performing status. In addition, Capital Crossing Preferred’s determination as to the classification of its assets and the amount of its valuation allowances is reviewed by the Massachusetts Commissioner of Banks and the FDIC during their examinations of Capital Crossing, which may result in the establishment of additional general or specific loss allowances.

      The following table sets forth the amount of non-performing assets by category at the dates indicated:

Non-Amortizing Discount and Allowance for Loan Losses

      Non-Amortizing Discount. At the time of acquisition of purchased pools of loans, the excess of the contractual balances over the amount of reasonably estimable and probable discounted future cash collections for each loan is allocated between non-amortizing discount and the allowance for loan losses. Depending on the timing of an acquisition, a preliminary allocation may be utilized until a final allocation is established. Generally, the allocation will be finalized no later than ninety days from the date of purchase. The remaining discount, which represents the excess of the amount of reasonably estimable and probable discounted future cash collections over the acquisition amount is accreted into interest income using the interest method over the term of the loans and is not accreted on non-performing loans. There is judgment involved in estimating the amount of future cash flows. The amount and timing of actual cash flows could differ materially from management’s estimates, which could materially affect Capital Crossing Preferred’s financial condition and results of operations.

      The non-amortizing discount is not accreted into income until management determines that the amount and timing of the related cash flows are reasonably estimable and collection is probable. If cash flows cannot be reasonably estimated for any loan, and collection is not probable, the cost recovery method of accounting is used. Under the cost recovery method, any amounts received are applied against the recorded amount of the loan. Non-amortizing discount is generally offset against the related principal balance when the amount at which a loan or lease is resolved or restructured is determined. There is no effect on Capital Crossing Preferred’s income statement as a result of these reductions.

      Subsequent to acquisition, if cash flow projections improve, and management determines that the amount and timing of the cash flows related to the non-amortizing discount are reasonably estimable and collection is probable, the corresponding decrease in the non-amortizing discount is transferred to the amortizing portion and is accreted into interest income over the remaining life of the loan on the interest method.

      Included in net loans, at December 31, 2004 and 2003, are approximately $1.8 million and $6.7 million (of which none are non-performing), respectively, for which the net recorded investment represents the amortized cost of these loans, where at acquisition, the amounts of reasonably estimable and probable discounted future cash collections were less than the contractual balances owed. These loans were purchased at a price to yield a market rate of interest after considering the credit quality of the loans at acquisition and the aforementioned expected future cash collections. The excess of the contractual balances over the amount of reasonably estimable and probable discounted future cash collections represents the predominant portion of the $883,000 and $1.5 million of non-amortizing discount at December 31, 2004 and 2003, respectively.

      The following table sets forth certain information relating to the activity in the non-amortizing discount for the years indicated:

      Allowance for Loan Losses. Capital Crossing Preferred maintains an allowance for loan losses that are known and inherent in its loan portfolio. The allowance for loan losses is increased or decreased through a provision or credit for loan losses included in earnings. Additionally, the allowance for loan losses is increased upon allocation of purchase discount upon acquisition of loans and decreased upon sales and payoffs of loans for which a related allowance remains unused. The allocation of allowance at the time of acquisition of a loan is generally finalized no later than ninety days from the date of purchase. Reductions in connection with sales are included in the calculation of the gain or loss, and reductions related to payoffs are recorded as credits for loan losses. Loans are charged-off when they are deemed to be uncollectible, or partially charged-off when a portion of a loan is deemed uncollectible. Subsequent recoveries, if any, are credited to the allowance when cash payments are received.

      Capital Crossing Preferred performs reviews of its loan portfolio to identify loans for which specific allocations are considered prudent. Specific allocations include the results of measuring impaired loans under Statement of Financial Accounting Standards (“SFAS”) No. 114. General risk allocations are

determined by a formula whereby the loan portfolio is stratified by type and by internal risk rating categories. Loss factors are then applied to each strata based on various considerations including historic loss experience, delinquency trends, current economic conditions, industry standards and regulatory guidelines. This amount is adjusted from time to time based upon actual experience. An additional allowance is maintained based on a judgment by management after consideration of qualitative and quantitative assessments of certain factors including regional credit concentration, industry concentration, results of regulatory examinations, historical loss ranges, portfolio composition, economic conditions such as interest rates and energy costs and other changes in the portfolio. The allowance for loan losses is management’s estimate of the probable loan losses incurred as of the balance sheet date.

      Additional factors influencing the calculation of the allowance for loan losses are particular concentrations within the portfolio, including the geographic concentration of loans in California, which accounted for approximately 47.22% of the portfolio at December 31, 2004, and concentrations of loans to individual borrowers.

      Capital Crossing Preferred’s allowance for loan losses at December 31, 2004 was $2.5 million. The determination of this allowance requires the use of estimates and assumptions regarding the risks inherent in individual loans and the loan portfolio in its entirety. In addition, regulatory agencies periodically review the adequacy of the allowance for loan losses and may require Capital Crossing Preferred to make additions to its allowance for loan losses. While management believes its estimates and assumptions are reasonable, there can be no assurance that they will be proven to be correct in the future. The actual amount of future provisions that may be required cannot be determined, and such provisions may exceed the amounts of past provisions. Management believes that the allowance for loan losses is adequate to absorb the known and inherent risks in Capital Crossing Preferred’s loan portfolio at each date based on the facts known to management as of such date. Management continues to monitor and modify the allowances for general and specific loan losses as economic conditions dictate.

      Effective January 1, 2005, and as a result of the required adoption of Statement of Position (“SOP”) No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” Capital Crossing Preferred’s allowance for loan loss methodology will change. SOP No. 03-3 prohibits “carrying over” or the creation of valuation allowances in the initial accounting of all loans acquired in a loan pool purchase and impaired loans acquired in a business combination. Valuation allowances should reflect only those losses incurred by the investor after acquisition. Effective January 1, 2005, Capital Crossing Preferred will no longer be allowed to increase the allowance through transfers from purchase discount. Additionally, general risk allocations will no longer be applied to purchased loans. Only specific allocations based upon the results of measuring loans that become impaired subsequent to purchase under SFAS No. 114 will be considered in the calculation of the allowance for loan losses for purchased loans. Consequently, it is anticipated that the allowance for loan losses will decline subsequent to the adoption of SOP No. 03-3 as credits for loan losses may continue to be recorded if loans pay off and allowance allocations related to these loans are not required.

      The following table sets forth management’s allocation of the allowance for loan losses by loan category and the percentage of the loans in each category to total loans in each category with respect to the loan portfolio at the dates indicated:

Employees

      Capital Crossing Preferred has six officers, including three executive officers. Each officer of Capital Crossing Preferred currently is also an officer and/or director of Capital Crossing. Capital Crossing Preferred will maintain corporate records and audited financial statements that are separate from those of Capital Crossing. Capital Crossing Preferred does not have any employees because it has retained Capital Crossing to perform all necessary functions pursuant to the advisory agreement and the master service agreement. There are no provisions in Capital Crossing Preferred’s charter limiting any of the officers or directors from having any direct or indirect pecuniary interest in any mortgage asset to be acquired or disposed of by Capital Crossing Preferred or in any transaction in which Capital Crossing Preferred has an interest or from engaging in acquiring and holding mortgage assets. None of the officers or directors currently has, nor is it anticipated that they will have, any such interest in Capital Crossing Preferred’s mortgage assets.

Competition

      Capital Crossing Preferred does not anticipate that it will engage in the business of originating mortgage loans. It does anticipate that it will acquire mortgage assets in addition to those in the loan portfolio and that substantially all these mortgage assets will be acquired from Capital Crossing. The amount of future acquisitions of mortgage assets will be determined based upon the preferred dividend required to be paid by Capital Crossing Preferred and the level of assets required to produce an adequate dividend coverage ratio. Accordingly, Capital Crossing Preferred does not expect to compete with mortgage conduit programs, investment banking firms, savings and loan associations, banks, thrift and loan associations, finance companies, mortgage bankers or insurance companies in acquiring its mortgage assets from Capital Crossing. Capital Crossing, however, faces significant competition in the purchase of mortgage loans, which could have an adverse effect on the ability of Capital Crossing Preferred to acquire mortgage loans. If Capital Crossing does not successfully compete in the purchase of mortgage loans, there could be an adverse effect on Capital Crossing Preferred’s business, financial condition and results of operations.

      The banking industry in the United States is part of the broader financial services industry which also includes insurance companies, mutual funds, consumer finance companies and securities brokerage firms. This industry also includes insurance companies, mutual funds, consumer finance companies and the securities brokerage industry. In recent years, intense market demands, technological and regulatory changes and economic pressures have eroded industry classifications which were once clearly defined. More specifically, in 1999, the U.S. Congress enacted the “Gramm-Leach-Bliley Act of 1999” (the “1999 Act”), under which banks are no longer prohibited from associating with, or having management interlocks

with, a business organization engaged principally in securities activities. The 1999 Act permits bank holding companies that elect to become financial holding companies to engage in defined securities and insurance activities as well as to affiliate with securities and insurance companies. The 1999 Act also permits banks to have financial subsidiaries that may engage in certain activities not otherwise permissible for banks.

      Existing banks have been forced to diversify their services, increase returns on deposits and become more cost-effective as a result of competition with one another and with other financial services companies, including non-bank competitors. The breakdown in traditional roles has been fueled by the pattern of rapidly fluctuating interest rates in the United States and by significant changes in federal and state laws over the past few years. These statutory changes and corresponding changes in governing regulations have resulted in increasing homogeneity in the products and financial services offered by financial institutions. As a result, some non-bank financial institutions, such as money market funds, have become increasingly strong competitors of banks in certain respects.

      Numerous banks and non-bank financial institutions compete with Capital Crossing for deposit accounts and the acquisition of loans. With respect to deposits, additional significant competition arises from corporate and government debt securities, as well as money market mutual funds. The primary factors in competing for deposit accounts include interest rates, the quality and range of financial services offered and the convenience of office and automated teller machine locations and office hours. Capital Crossing’s competition for acquiring loans includes non-bank financial institutions which may or may not be subject to the same restrictions or regulations as Capital Crossing is. The primary factor in competing for purchased loans is price. The competition for loans has recently increased as a direct result of mergers of banks in New England. These mergers have provided the resulting banks with enhanced financial resources and administrative capacity to compete for assets.

      Capital Crossing faces substantial competition both from other more established banks and from non-bank financial institutions which are aggressively expanding into markets traditionally served by banks. Most of these competitors offer products and services similar to those offered by Capital Crossing, have facilities and financial resources greater than those of Capital Crossing and have other competitive advantages over Capital Crossing.

Environmental Matters

      In the course of its business, Capital Crossing Preferred has acquired, and may in the future acquire through foreclosure, properties securing loans it has purchased which are in default and involve environmental matters. With respect to other real estate owned, there is a risk that hazardous substances or wastes, contaminants or pollutants could be discovered on such properties after acquisition. In such event, Capital Crossing Preferred may be required to remove such substances from the affected properties at its sole cost and expense and may not be able to recoup any of such costs from any third party.

      Capital Crossing Preferred conducts its business out of the corporate headquarters of Capital Crossing, located at 101 Summer Street, Boston, Massachusetts. Capital Crossing Preferred does not reimburse Capital Crossing for the use of such space.

      From time to time, Capital Crossing Preferred may be involved in routine litigation incidental to its business, including a variety of legal proceedings with borrowers, which would contribute to Capital Crossing Preferred’s expenses, including the costs of carrying non-performing assets. Capital Crossing Preferred is not currently a party to any such material proceedings.

      No matter was submitted to a vote of security holders during the period covered by this report.

PART II

Common Stock

      In connection with its formation on March 20, 1998, Capital Crossing Preferred issued 100 shares of its common stock to Capital Crossing. These shares of common stock were issued in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. There is no established public trading market for the common stock. As of March  6, 2005, there were 100 issued and outstanding shares of common stock, all of which were held by Capital Crossing.

      During 2004, 2003 and 2002, dividends of $19.6 million, $16.1 million, and $23.5 million were paid to the common stockholder. In 2003, dividends of $1.0 million were in the form of mortgage loans. In addition, during 2004, returns of capital totaling $30.4 were paid to the common stockholder. In 2003, returns of capital of $8.3 million were in the form of mortgage loans.

Preferred Stock

      On March 31, 1998, Capital Crossing capitalized Capital Crossing Preferred by transferring mortgage loans valued at $140.7 million in exchange for 1,000 shares of Capital Crossing Preferred’s 8% Cumulative Non-Convertible Preferred Stock, Series B, valued at $1.0 million and 100 shares of Capital Crossing Preferred’s common stock valued at $139.7 million. The carrying value of these loans approximated their fair values at the date of contribution.

      On February 1, 1999, Capital Crossing Preferred closed its public offering of 1,260,000 shares of its 9.75% Non-cumulative exchangeable preferred stock, Series A. On February 12, 1999, Capital Crossing Preferred sold an additional 156,130 Series A preferred shares in connection with the underwriters’ exercise of their overallotment option. The net proceeds to Capital Crossing Preferred from the sale of Series A preferred shares were $12.6 million. Series A preferred stock is redeemable at the option of Capital Crossing Preferred, with the prior consent of the FDIC, for shares of Capital Crossing’s 9.75% non-cumulative preferred stock, Series C.

      On May 31, 2001, Capital Crossing Preferred closed its public offering of 1,840,000 shares (including 240,000 shares issued upon the exercise of the underwriters’ overallotment option) of its 10.25% Non-cumulative exchangeable preferred stock, Series C. The net proceeds to Capital Crossing Preferred from the sale of Series C preferred shares were $16.9 million. Series C preferred stock is redeemable at the option of Capital Crossing Preferred on or after May 31, 2006, with the prior consent of the FDIC, for shares of Capital Crossing’s 10.25% Non-cumulative preferred stock, Series D.

      On May 11, 2004, Capital Crossing Preferred closed its public offering of 1,500,000 shares of its 8.50% Non-cumulative exchangeable preferred stock, Series D. The net proceeds to Capital Crossing Preferred from the sale of Series D preferred shares were $35.3 million. Series D preferred stock is redeemable at the option of Capital Crossing Preferred on or after July 15, 2009, with the prior consent of the FDIC, for shares of Capital Crossing’s 8.50% Non-cumulative preferred stock, Series E.

Dividend Policy

      Capital Crossing Preferred currently expects to pay an aggregate amount of dividends with respect to its outstanding shares of capital stock equal to substantially all of its REIT taxable income. In order to remain qualified as a REIT, Capital Crossing Preferred must distribute annually at least 90% of its REIT taxable income, excluding capital gains, to stockholders. Because in general it will be in Capital Crossing Preferred’s interest, and in the interests of its stockholders, to remain qualified as a REIT, this tax requirement creates a significant incentive to declare and pay dividends when Capital Crossing Preferred has sufficient resources to do so. Capital Crossing, as holder of all of Capital Crossing Preferred’s common stock, controls the election of all of its directors and also has a significant interest in having full dividends

paid on its preferred shares. Capital Crossing Preferred anticipates that none of the dividends on outstanding preferred shares will constitute non-taxable returns of capital.

      Dividends will be declared at the discretion of the Board of Directors after considering Capital Crossing Preferred’s distributable funds, financial requirements, tax considerations and other factors. Capital Crossing Preferred’s distributable funds will consist primarily of interest and principal payments on the mortgage assets, and Capital Crossing Preferred anticipates that a significant portion of such assets will earn interest at adjustable rates. Accordingly, if there is a decline in interest rates, Capital Crossing Preferred will experience a decrease in income available to be distributed to its stockholders. In a period of declining interest rates, Capital Crossing Preferred also may find it difficult to purchase additional mortgage assets bearing rates sufficient for it to be able to pay dividends on the Series A, Series C and Series D preferred shares.

      The FDIC’s prompt corrective action regulations prohibit entities such as Capital Crossing from making “capital distributions,” which include a transaction that the 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 the FDIC would not seek to restrict Capital Crossing Preferred’s payment of dividends on the Series A, Series C and Series D preferred shares under these regulations if Capital Crossing were to fail to maintain a status of at least adequately capitalized. Currently, an institution is 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 Tier 1 leverage ratio of at least 4.0%. At December 31, 2004, Capital Crossing’s total risk-based capital ratio was 18.74%, Tier 1 risk-based capital ratio was 13.37% and Tier 1 leverage ratio was 11.15%. Capital Crossing’s Board of Directors authorized a stock repurchase program whereby, following the required approvals from the FDIC, Capital Crossing is permitted to repurchase shares of its common stock in the open market or in privately negotiated transactions, subject to regulatory considerations. As part of its common stock repurchase program, Capital Crossing has agreed with the FDIC to maintain, for so long as the repurchase program continues, its Tier 1 leverage ratio at least 7.0% and that it remains well-capitalized.

      In addition, the automatic exchange of shares of Capital Crossing preferred stock for shares of Capital Crossing Preferred Series A, Series C or Series D preferred shares may take place under circumstances in which Capital Crossing will be considered less than adequately capitalized for purposes of the FDIC’s prompt corrective action regulations. Thus, at the time of the automatic exchange, Capital Crossing would likely be prohibited from paying dividends on its preferred shares, including its preferred shares issued in exchange for Capital Crossing Preferred’s Series A, Series C or Series D preferred shares. Further, Capital Crossing’s ability to pay dividends on its preferred shares following the automatic exchange also would be subject to various restrictions under FDIC regulations and a resolution of Capital Crossing’s Board of Directors. If Capital Crossing did pay dividends on its preferred shares, such dividends would be paid out of its capital surplus.

      Under certain circumstances, including a determination that Capital Crossing’s relationship with Capital Crossing Preferred results in an unsafe and unsound banking practice, federal and state regulatory authorities will have additional authority to restrict Capital Crossing Preferred’s ability to make dividend payments to its stockholders.

      This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. For purposes of these Acts, any statement that is not a statement of historical fact may be deemed a forward-looking statement. For example, statements containing the words “believes,” “anticipates,” “plans,” “expects,” “estimates,” “intends,” “may,” “projects,” “will,” “would,” and similar expressions may be forward-looking statements. Capital Crossing Preferred cautions investors not to place undue reliance on any forward-looking statements in this Annual Report on Form 10-K. Capital Crossing Preferred undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. There are a number of factors that could cause Capital Crossing Preferred’s actual results to differ materially from those indicated by these forward-looking statements, including without limitation the factors set forth below under the caption “CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS.” These factors and the other cautionary statements made in this annual report should be read as being applicable to all related forward-looking statements wherever they appear in this annual report. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, Capital Crossing Preferred’s actual results, performance, or achievements may vary materially from any future results, performance, or achievements expressed or implied by these forward-looking statements.

Executive Level Overview

      Net income available to common shareholder decreased $14.8 million, or 60.9%, to $9.5 million in 2004 compared to $24.2 million in 2003 and decreased $1.1 million or 4.5%, in 2003 compared to $25.4 million for 2002. The decrease from 2003 to 2004 is primarily the result of declines in interest income, credit for loan losses and gains on distribution of loans to the common stockholder. In addition, there was an increase in preferred stock dividends attributable to the issuance of Series D preferred stock on May 11, 2004. The decrease from 2002 to 2003 is primarily the result of a decline in interest income partially offset by an increased credit for loan losses and an increase in gains on distribution of loans to the common stockholder.

      All of the mortgage assets in Capital Crossing Preferred’s loan portfolio at December 31, 2004 were acquired from Capital Crossing and it is anticipated that substantially all additional mortgage assets will be acquired from Capital Crossing. As of December 31, 2004, Capital Crossing Preferred held loans acquired from Capital Crossing with gross outstanding principal balances of $139.5 million.

      Commercial mortgage loans constituted approximately 67.6% of the total gross loans in Capital Crossing Preferred’s loan portfolio at December 31, 2004 and commercial mortgage loans are generally subject to greater risks than other types of loans. Capital Crossing Preferred’s commercial mortgage loans, like most commercial mortgage loans, generally lack standardized terms, tend to have shorter maturities than other mortgage loans and may not be fully amortizing. For these reasons, Capital Crossing Preferred may experience higher rates of default on its mortgage loans than it would if its loan portfolio was more diversified and included a greater number of owner-occupied residential or other mortgage loans.

      Properties underlying Capital Crossing Preferred’s current mortgage assets are also concentrated primarily in California and New England. As of December 31, 2004, approximately 47.2% of the balances of its mortgage loans were secured by properties located in California and 13.4% in New England. In the instance where either region experienced adverse economic, political or business conditions, Capital Crossing Preferred would likely experience higher rates of loss and delinquency on its mortgage loans.

      Lastly, because Capital Crossing Preferred is a subsidiary of Capital Crossing, federal and state regulatory authorities will have the right to examine it and its activities and under certain circumstances, to impose restrictions on Capital Crossing or Capital Crossing Preferred which could impact Capital Crossing Preferred’s ability to conduct its business according to its business plan. For instance, if Capital Crossing’s regulators determine that Capital Crossing’s relationship to Capital Crossing Preferred results in

an unsafe and unsound banking practice, the regulators could restrict Capital Crossing Preferred’s ability to transfer assets, to make distributions to its stockholders or even require Capital Crossing to sever its relationship with or divest its ownership interest in Capital Crossing Preferred.

      During the second quarter of 2004, $35.3 million of additional capital was raised through the issuance of 1,500,000 shares of Series D preferred stock. This capital will be utilized to purchase additional mortgage assets and for other corporate purposes. During 2004, Capital Crossing Preferred acquired mortgage assets totaling $4.3 million. Returns of capital of $30.4 million were made during 2004. Decisions regarding the utilization of Capital Crossing Preferred’s cash are based, in large part, on its future commitments to pay preferred stock dividends. During 2004, the loan portfolio was large enough to generate income resulting in earnings, which were 2.76 times fixed charges and preferred stock dividends. Future decisions regarding mortgage asset acquisitions and returns of capital will be based on the level of preferred stock dividends at the time and the required level of income necessary to generate adequate dividend coverage.

      Effective January 1, 2005, and as a result of the required adoption of SOP No. 03-3, Capital Crossing Preferred’s allowance for loan loss methodology will change. SOP No. 03-3 prohibits “carrying over” or the creation of valuation allowances in the initial accounting of all loans acquired in a loan pool purchase and impaired loans acquired in a business combination. Valuation allowances should reflect only those losses incurred by the investor after acquisition. Effective January 1, 2005, Capital Crossing Preferred will no longer be allowed to increase the allowance through allocations from purchase discount. Additionally, general risk allocations will no longer be applied to purchased loans. Only specific allocations based upon the results of measuring loans that become impaired subsequent to purchase under SFAS No. 114 will be considered in the calculation of the allowance for loan losses for purchased loans. Consequently, it is anticipated that the allowance for loan losses will decline subsequent to the adoption of SOP No. 03-3 as credits for loan losses may continue to be recorded if loans pay of or loans are sold and allowance allocations related to these loans are not required.

      As a result of this accounting change, the financial statements of Capital Crossing Preferred may become more difficult to compare with those of its peers. In particular, ratios involving the allowance for loan and lease losses may not be comparable to its peers’ ratios. It is unknown what effect, if any, this accounting change will have in the marketplace with investors and analysts.

Application of Critical Accounting Policies and Estimates

      The SEC requested that all registrants discuss their most “critical accounting policies” in management’s discussion and analysis of financial condition and results of operations. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of the company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. While Capital Crossing Preferred’s significant accounting policies are more fully described in Note 1 to the Financial Statements, the following is a summary of the accounting policies believed by management to be most critical in their potential effect on Capital Crossing Preferred’s financial position or results of operations:

      Allowance for Loan and Lease Losses. Arriving at an appropriate level of allowance for loan losses requires a high degree of judgment. Capital Crossing Preferred maintains an allowance for probable loan losses that are inherent in its loan portfolio. The initial allowance for loan losses was transferred from Capital Crossing at the time of the initial transfer of loans to Capital Crossing Preferred and additional transfers are made in connection with each transfer of loans from Capital Crossing. Additionally, the allowance for loan losses is increased upon allocation of purchase discount upon acquisition of loans and decreased upon sales or payoffs of loans for which a related allowance remains unused. The allocation of allowance at the time of acquisition is generally finalized no later than ninety days from the date of purchase. Reductions in connection with sales are included in the calculation of the gain or loss, and reductions related to pay-offs are recorded as a credit for loan losses. Loan losses are charged against the

allowance when management believes the net investment of the loan, or a portion thereof, is uncollectible. Subsequent recoveries, if any, are credited to the allowance when cash payments are received.

      Management makes significant judgments in determining the adequacy of the allowance for loan losses. Management initially considers the loan loss allowances specifically allocated to individual impaired loans. Next, management considers the level of general loan loss allowances deemed appropriate for the balance of the portfolio. Factors considered include known and inherent risks in the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, historical loss ranges, the estimated value of any underlying collateral and prevailing economic conditions. An additional allowance for loan losses is maintained based on a judgmental process whereby management considers qualitative and quantitative assessments of other factors including regional credit concentration, industry concentration, results of regulatory examinations, historical loss ranges, portfolio composition, economic conditions such as interest rates and energy costs and other changes in the portfolio. The allowance for loan losses is management’s estimate of the probable loan losses incurred as of the balance sheet date. There can be no assurance that Capital Crossing Preferred’s actual losses with respect to loans will not exceed its allowance for loan losses.

      Effective January 1, 2005, and as a result of the required adoption of SOP No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” Capital Crossing Preferred’s allowance for loan loss methodology will change. SOP No. 03-3 prohibits “carrying over” or the creation of valuation allowances in the initial accounting of all loans acquired in a loan pool purchase and impaired loans acquired in a business combination. Valuation allowances should reflect only those losses incurred by the investor after acquisition. Effective January 1, 2005, Capital Crossing Preferred will no longer be allowed to increase the allowance through transfers from purchase discount. Additionally, general risk allocations will no longer be applied to purchased loans. Only specific allocations based upon the results of measuring loans that become impaired subsequent to purchase under SFAS No. 114 will be considered in the calculation of the allowance for loan losses for purchased loans. Consequently, it is anticipated that the allowance for loan losses will decline subsequent to the adoption of SOP No. 03-3 as credits for loan losses may continue to be recorded if loans pay off and allowance allocations related to these loans are not required.

      Discounts on Acquired Loans. At the time of acquisition of purchased pools of loans, the excess of the contractual balances over the amount of reasonably estimable and probable discounted future cash collections for each loan is allocated between non-amortizing discount and the allowance for loan losses. Depending on the timing of an acquisition, a preliminary allocation may be utilized until a final allocation is established. Generally, the allocation will be finalized no later than ninety days from the date of purchase. The remaining discount, which represents the excess of the amount of reasonably estimable and probable discounted future cash collections over the acquisition amount is accreted into interest income using the interest method over the term of the loans and is not accreted on non-performing loans. There is judgment involved in estimating the amount of future cash flows. The amount and timing of actual cash flows could differ materially from management’s estimates, which could materially affect Capital Crossing Preferred’s financial condition and results of operations.

      The non-amortizing discount is not accreted into income until it is determined that the amount and timing of the related cash flows are reasonably estimable and collection is probable. If cash flows cannot be reasonably estimated for any loan, and collection is not probable, the cost recovery method of accounting is used. Under the cost recovery method, any amounts received are applied against the recorded amount of the loan. Non-amortizing discount is generally offset against the related principal balance when the amount at which a loan is resolved or restructured is determined. There is no effect on the income statement as a result of these reductions.

      Subsequent to acquisition, if cash flow projections improve, and it is determined that the amount and timing of the cash flows related to the non-amortizing discount are reasonably estimable and collection is probable, the corresponding decrease in the non-amortizing discount is transferred to the amortizing portion and is accreted into interest income over the remaining life of the loan on the interest method. If

cash flow projections deteriorate subsequent to acquisition, the decline is accounted for through the allowance for loan losses.

      When a loan is paid-off, the excess of any cash received over the net investment is recorded as interest income. In addition to the amount of purchase discount that is recognized at that time, income may also include interest owed by the borrower prior to Capital Crossing Preferred’s acquisition of the loan, interest collected if on non-performing status, prepayment fees and other loan fees.

      Gains and losses on sales of loans are determined using the specific identification method. The excess (deficiency) of any cash received as compared to the net investment is recorded as gain (loss) on sales of loans. There are no loans held for sale at December 31, 2004.

      Changes in interest rates also can affect the value of Capital Crossing Preferred’s loans and its ability to realize gains on the resolution of assets. A significant portion of Capital Crossing Preferred’s earnings results from accelerated interest income resulting from loan payoffs. This type of income can vary significantly from quarter to quarter and year to year based on a number of different factors, including the interest rate environment. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on Capital Crossing Preferred’s loans may lead to a reduction of discount accreted into income, which could have a material adverse effect on its results of operations.

Results of Operations for the Years Ended December 31, 2004, 2003 and 2002

      The yields on Capital Crossing Preferred’s interest-earning assets are summarized as follows:

      The decline in yield on interest-earning assets from 2003 to 2004 is primarily a result of a decrease in the average balance of loans, in addition to a decline in the interest rate on interest-bearing deposits. The decline in yield on interest-earning assets is due to a shift in the composition of average interest-bearing assets such that average loans represents a smaller percentage of total average interest-bearing assets in 2004 as compared to the same period in 2003. Average loans, net for 2004 totaled $133.8 million compared to $198.3 million for 2003. This decrease is primarily attributable to pay-offs, sales and amortization of loans. During 2004, Capital Crossing Preferred only acquired $4.3 million in loans. No loans were acquired in 2003.

      The decline in yield on interest-earning assets from 2002 to 2003 is a result of a decline in yield on both interest-bearing deposits and the loan portfolio and a decline in total interest-earning assets. The yield on interest-bearing deposits declined due to a decline in overall market rates. The yield on the loan portfolio declined as a result of: (1) a decrease in yield attributable to regularly scheduled interest income as a result of the declining interest rate environment and (2) the purchase or contribution in 2002 of loans from Capital Crossing that were acquired from the Small Business Administration which generate lower regularly scheduled interest and accretion. Average loans, net for 2003 totaled $198.3 million compared to $226.1 million for 2002. This decrease is primarily attributable to pay-offs and amortization of loans in addition to a transfer of loans to Capital Crossing of $6.4 million during the year ended December 31, 2003.

      Income on loans includes the portion of the purchase discount that is accreted into income over the remaining lives of the related loans using the interest method. Because the carrying value of the loan portfolio is net of purchase discount, the related yield on this portfolio generally is higher than the aggregate contractual rate paid on the loans. The total yield includes the excess of a loan’s expected discounted future cash flows over its net investment, recognized using the interest method.

      When a loan is paid-off, the excess of any cash received over the net investment is recorded as interest income. In addition to the amount of purchase discount that is recognized at that time, income may also include interest owed by the borrower prior to Capital Crossing’s acquisition of the loan, interest collected if on non-performing status and other loan fees (“other interest and fee income”). The following table sets forth, for the years indicated, the components of interest and fees on loans. There can be no assurance regarding future interest income, including the yields and related level of such income, or the relative portion attributable to loan pay-offs as compared to other sources.

      The amount of loan pay-offs and related discount income is influenced by several factors, including the interest rate environment, the real estate market in particular areas, the timing of transactions, and circumstances related to individual borrowers and loans.

      The average balance of interest-bearing deposits increased $35.4 million to $118.4 million for 2004 compared to $83.0 million for 2003 and increased $4.7 million in 2003 compared to $78.3 million for 2002. The changes in the average balances of interest-bearing deposits are the result of cash flows from loan repayments, the proceeds from the Series D stock offering on May 11, 2004 and proceeds from loans sold offset by periodic dividend payments and returns of capital. The yield on interest-bearing deposits decreased in 2004 and 2003 as a result of a decline in the interest rate environment.

      Capital Crossing Preferred’s loan portfolio generated credits for loan losses of $810,000, $3.9 million and $1.5 million for the years ended December 31, 2004, 2003 and 2002, respectively, to reverse unused general reserves related to loans that have been paid off. The credit for loan losses is based on the volume of loan payoffs. As loans pay off, a credit for loan losses is recorded to reduce allowance allocations related to the loans that have paid-off for which a related allowance remains unused. The allowance for loan losses is based on the size of the portfolio and its historical performance. The determination of this allowance requires management’s use of estimates and assumptions regarding the risks inherent in individual loans and the loan portfolio in its entirety. Should the loan portfolio continue to decline without utilization of the allowance for loan losses, future credits for loans losses may be necessary.

      Guarantee fee income for the years ended December 31, 2004, 2003 and 2002 was $80,000 in each year. Effective July 1, 2000, Capital Crossing Preferred entered into an agreement to make certain assets available to be pledged in connection with borrowings of Capital Crossing from the FHLBB. Capital Crossing Preferred receives an annual fee of $80,000 from Capital Crossing under this agreement.

      A gain of $3.0 million was recognized on the distribution of loans to the common stockholder during the third quarter of 2003. These loans were distributed at the estimated fair value on the transfer date, which was higher than the book value of the loans, resulting in the recognition of a gain in connection with this distribution.

      During 2004, there was one loan sale to an unaffiliated third party comprised of two loans, with carrying values of $419,000, resulting in a gain of $76,000. There were no loan sales during 2003. During 2002, there were three loan sales to unaffiliated third parties, comprised of ten loans with carrying values of $5.1 million, which resulted in gains of $2.4 million. Additionally in 2002, four loans totaling $2.6 million were sold to Capital Crossing for no gain.

      Loan servicing and advisory expenses decreased $198,000, or 34.4%, to $377,000 in 2004 from $575,000 in 2003 and decreased by $73,000, or 11.3%, from $648,000 in 2002. The decreases are a result of the decreases in the average balance of the loan portfolio from year to year.

      There was no other real estate owned income, net during the years ended December 31, 2004 and 2002. Other real estate owned income for the year ended December 31, 2003 is comprised of a gain of $334,000 on the sale of one property to an unaffiliated third party and rental income of $27,000.

      Other general and administrative expenses consisting primarily of professional fees, shareholder relations and printing expenses decreased $84,000, or 26.5%, to $233,000 from $317,000 in 2003 and increased $212,000, or 201.9%, from $105,000 in 2002. The decrease in 2004 is primarily attributable to a decrease in legal fees in connection with loan-related matters. The increase in 2003 is primarily attributable to increases in legal fees in connection with loan-related matters and accounting fees.

      Preferred stock dividends increased as a result of the issuance of 1,500,000 shares of Series D preferred shares on May 11, 2004. These shares have a liquidation value of $25 per share and a dividend rate of 8.5%. Capital Crossing Preferred intends to pay dividends on its preferred stock and common stock in amounts necessary to continue to preserve its status as a REIT under the Internal Revenue Code.

Financial Condition

      Interest-bearing deposits with Capital Crossing consist entirely of money market accounts. The balance of interest-bearing deposits increased $29.6 million to $95.3 million for 2004 compared to $65.8 million for 2003. The increase in the balance of interest-bearing deposits is the result of cash flows from loan repayments and proceeds from the Series D preferred stock offering, offset by periodic dividend payments and returns of capital.

      The outstanding principal balance of the loan portfolio is summarized as follows:

      Capital Crossing Preferred acquires primarily performing commercial real estate and multifamily residential mortgage loans. During 2004, Capital Crossing Preferred acquired $4.3 million in loans from Capital Crossing. There were no loans acquired during 2003, as the existing portfolio was large enough to generate an adequate dividend coverage ratio.

      Capital Crossing Preferred intends that each loan acquired from Capital Crossing in the future will be a whole loan, and will be originated or acquired by Capital Crossing in the ordinary course of its business. Capital Crossing Preferred also intends that all loans held by it will be serviced pursuant to the master service agreement with Capital Crossing.

      Non-performing loans, net of discount, totaled $1.6 million and $17,000 at December 31, 2004 and 2003, respectively. Loans generally are placed on non-performing status and the accrual of interest and accretion of discount are generally discontinued when the collectibility of principal and interest is not probable or estimable. Unpaid interest income previously accrued on such loans is reversed against current period interest income. A loan is returned to accrual status when it is brought current in accordance with management’s anticipated cash flows at the time of acquisition.

Interest Rate Risk

      Capital Crossing Preferred’s income consists primarily of interest income. If there is a decline in market interest rates, Capital Crossing Preferred may experience a reduction in interest income and a corresponding decrease in funds available to be distributed to its shareholders. The reduction in interest income may result from downward adjustments of the indices upon which the interest rates on loans are based and from prepayments of mortgage loans with fixed interest rates, resulting in reinvestment of the proceeds in lower yielding mortgage loans. Capital Crossing Preferred does not intend to use any derivative products to manage its interest rate risk.

Significant Concentration of Credit Risk

      Concentration of credit risk generally arises with respect to Capital Crossing Preferred’s 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 Capital Crossing Preferred’s performance to both positive and negative developments affecting a particular industry. Capital Crossing Preferred’s balance sheet exposure to geographic concentrations directly affects the credit risk of the loans within its loan portfolio.

      At December 31, 2004, 47.2% and 13.4%, respectively, of Capital Crossing Preferred’s total real estate loan portfolio consisted of loans located in California and New England. At December 31, 2003, 44.5% and 14.5%, respectively, of Capital Crossing Preferred’s total loan portfolio consisted of loans in California and New England. Consequently, the portfolio may experience a higher default rate in the event of adverse economic, political or business developments or natural hazards in California or New England that may affect the ability of property owners to make payments of principal and interest on the underlying mortgages.

Liquidity Risk Management

      The objective of liquidity management is to ensure the availability of sufficient cash flows to meet all of Capital Crossing Preferred’s financial commitments and to capitalize on opportunities for Capital Crossing Preferred’s business expansion. In managing liquidity risk, Capital Crossing Preferred takes into account various legal limitations placed on a REIT.

      Capital Crossing Preferred’s principal liquidity needs are:

      The acquisition of additional mortgage assets is intended to be funded primarily through repayment of principal balances of mortgage assets by individual borrowers. Capital Crossing Preferred 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, Capital Crossing Preferred may raise such funds through additional equity offerings, debt financing or retention of cash flow (after consideration of provisions of the Internal Revenue Code requiring the distribution by a REIT of at least 90% of its REIT taxable income and taking into account taxes that would be imposed on undistributed income), or a combination of these methods. Except for its obligation to guarantee certain borrowings of Capital Crossing, Capital Crossing Preferred does not currently intend to incur any indebtedness. The organizational documents of Capital Crossing Preferred limit the amount of indebtedness which it is permitted to incur without the approval of the Series A, Series C and Series D preferred stockholders to no more than 100% of the total stockholders’ equity of Capital Crossing Preferred. Any such debt may include intercompany advances made by Capital Crossing to Capital Crossing Preferred.

      Capital Crossing Preferred may also issue additional series of preferred stock. However, Capital Crossing Preferred may not issue additional shares of preferred stock ranking senior to the Series A, Series C or Series D preferred shares without the consent of holders of at least two-thirds of the Series A, Series C and Series D preferred shares, each voting as a separate class, outstanding at that time. Although Capital Crossing Preferred’s charter does not prohibit or otherwise restrict Capital Crossing or its affiliates from holding and voting shares of Series A, Series C or Series D preferred stock, to Capital Crossing Preferred’s knowledge the amount of shares of Series A, Series C and Series D preferred shares held by Capital Crossing or its affiliates is insignificant (less than 1%). Additional shares of preferred stock ranking on a parity with the Series A, Series C and Series D preferred shares may not be issued without the approval of a majority of Capital Crossing Preferred’s independent directors.

Impact of Inflation and Changing Prices

      Capital Crossing Preferred’s asset and liability structure is substantially different from that of an industrial company in that virtually all assets of Capital Crossing Preferred are monetary in nature. Management believes the impact of inflation on financial results depends upon Capital Crossing Preferred’s ability to react to changes in interest rates and by such reaction, reduce the inflationary impact on performance. Interest rates do not necessarily move in the same direction, or at the same magnitude, as the prices of other goods and services.

      Various information shown elsewhere in this annual report will assist the reader in understanding how Capital Crossing Preferred is positioned to react to changing interest rates and inflationary trends. In particular, the discussion of market risk and other maturity and repricing information of Capital Crossing Preferred’s assets is contained in Item 7A, Quantitative and Qualitative Disclosure About Market Risk, of this report.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

      Set forth below are a number of risk factors that may cause Capital Crossing Preferred’s actual results to differ materially from anticipated future results, performance or achievements expressed or implied by the forward-looking statement. All of these factors should be carefully reviewed, and the reader of this Annual Report on Form 10-K should be aware that there may be other factors that could cause these differences.

General Business Risks

A decline in Capital Crossing’s capital levels may result in the Series A, Series C and Series D preferred shares being subject to automatic exchange into preferred shares of Capital Crossing

      The returns from an investment in the Series A, Series C or Series D preferred shares will depend to a significant extent on the performance and capital of Capital Crossing. A significant decline in the performance and capital levels of Capital Crossing or the placement of Capital Crossing into bankruptcy, reorganization, conservatorship or receivership could result in the automatic exchange of the Series A, Series C and Series D preferred shares for preferred shares of Capital Crossing, which would represent an investment in Capital Crossing and not in Capital Crossing Preferred. Under these circumstances:

Because of Capital Crossing Preferred’s obligations to creditors, it may not be able to make dividend or liquidation payments to holders of the Series A, Series C and Series D preferred shares

      The Series A, Series C and Series D preferred shares rank:

      If Capital Crossing Preferred incurs significant indebtedness, it may not have sufficient funds to make dividend or liquidation payments on the Series A, Series C or Series D preferred shares. Upon Capital Crossing Preferred’s liquidation, its obligations to its creditors would rank senior to the Series A, Series C and Series D preferred shares. At December 31, 2004, Capital Crossing Preferred had approximately $430,000 in accounts payable and other liabilities which, upon its liquidation, would be required to be paid before any payments could be made to holders of the Series A, Series C or Series D preferred shares. In addition, upon Capital Crossing Preferred’s liquidation, dissolution or winding up, if it does not have sufficient funds to pay the full liquidation amount to the holders of the Series A, Series C and Series D preferred shares, will share ratably in any distribution in proportion to the full liquidation amount which they otherwise would be entitled and such holders may receive less than the per share liquidation amount.

      The terms of the Series A, Series C and Series D preferred shares limit Capital Crossing Preferred’s ability to incur debt in excess of 100% of its stockholders’ equity without the approval of the holders of all of the outstanding Series A, Series C and Series D preferred shares, each voting as a separate class, but do not require that Capital Crossing Preferred obtain the approval of the holders of the Series A, Series C and Series D preferred shares to issue additional series of preferred shares which rank equal to the Series A, Series C and Series D preferred shares as to payment of dividends or amount upon liquidation. As a result, subject to these limitations, Capital Crossing Preferred may incur obligations which may further limit its ability to make dividend or liquidation payments in the future.

Bank regulators may limit the ability of Capital Crossing Preferred to implement its business plan and may restrict its ability to pay dividends

      Because Capital Crossing Preferred is a subsidiary of Capital Crossing, federal and state regulatory authorities will have the right to examine it and its activities and under certain circumstances, to impose restrictions on Capital Crossing or Capital Crossing Preferred which could impact Capital Crossing Preferred’s ability to conduct its business according to its business plan, which could materially adversely affect the financial condition and results of operations of Capital Crossing Preferred.

      If Capital Crossing’s regulators determine that Capital Crossing’s relationship to Capital Crossing Preferred results in an unsafe and unsound banking practice, the regulators could restrict Capital Crossing Preferred’s ability to transfer assets, to make distributions to its stockholders, including dividends on its Series A, Series C and Series D preferred shares, or to redeem shares of Series A, Series C and Series D preferred stock or even require Capital Crossing to sever its relationship with or divest its ownership interest in Capital Crossing Preferred. Such actions could potentially result in Capital Crossing Preferred’s failure to qualify as a REIT.

      Payment of dividends on the Series A, Series C and Series D preferred shares could also be subject to regulatory limitations if Capital Crossing becomes undercapitalized. Capital Crossing will be deemed undercapitalized if its total risk-based capital ratio is less than 8.0%, its Tier 1 risk-based capital ratio is less than 4.0% or its Tier 1 leverage ratio is less than 4.0%. At December 31, 2004, Capital Crossing had a total risk-based capital ratio of 18.74%, a Tier 1 risk-based capital ratio of 13.37% and a Tier 1 leverage ratio of 11.15%, which is sufficient for Capital Crossing to be considered well-capitalized. If Capital

Crossing becomes undercapitalized or the FDIC anticipates that it will become undercapitalized, the FDIC may direct the automatic exchange of the preferred shares of Capital Crossing Preferred for preferred shares of Capital Crossing. As part of its common stock repurchase program, Capital Crossing has also agreed with the FDIC to maintain, for so long as the repurchase program continues, its Tier 1 leverage ratio at least 7.00% as well as remaining well capitalized. Capital Crossing Preferred makes no assurance that Capital Crossing will be well-capitalized under applicable regulations as of any future date, which is required in order to continue to repurchase common stock, but which is not a condition to the payment of dividends on the preferred shares. For purposes of calculating these capital ratios as a percentage of Capital Crossing’s risk-weighted assets, as opposed to its total assets, Capital Crossing’s assets are assigned to risk categories based on the relative credit risk of the asset in question. These risk weights consist of 0% for assets deemed least risky such as cash, claims backed by the full faith and credit of the U.S. government, and balances due from Federal Reserve banks; 20% for assets deemed slightly more risky such as portions of obligations conditionally guaranteed by the U.S. government or federal funds sold; 50% for assets deemed still more risky such as government issued-revenue bonds, one-to-four family residential first mortgage loans and well-collateralized multi-family residential first mortgage loans; and 100% for all other assets, including private sector loans such as commercial mortgage loans as well as bank-owned real estate.

      While Capital Crossing Preferred believes that dividends on the Series A, Series C and Series D preferred shares should not be considered distributions by Capital Crossing, the FDIC may not agree with this position. Under FDIC regulations on capital distributions, the ability of Capital Crossing to make a capital distribution varies depending primarily on Capital Crossing’s earnings and regulatory capital levels. Capital distributions are defined to include payment of dividends, stock repurchases, cash-out mergers and other distributions charged against the capital accounts of an institution. The FDIC could limit or prohibit the payment of dividends on the Series A, Series C and Series D preferred shares if it determines that the payment of those dividends is a capital distribution by Capital Crossing and that Capital Crossing’s earnings and regulatory capital levels are below specified levels.

Capital Crossing Preferred does not have insurance to cover its exposure to borrower defaults and bankruptcies and special hazard losses that are not covered by standard hazard insurance policies

      Capital Crossing Preferred does not normally obtain general credit enhancements such as mortgagor bankruptcy insurance or obtain special hazard insurance for its mortgage assets, other than standard hazard insurance, which will in each case only relate to individual mortgage loans. Accordingly, Capital Crossing Preferred is subject to risks of borrower defaults and bankruptcies and special hazard losses, such as losses occurring from floods that are not covered by standard hazard insurance. A significant number of loans acquired in recent years are loans that were originated under the Small Business Administration’s disaster relief program. These loans are typically loans made to small businesses and individuals for the purpose of assisting those who have been the victim of a disaster and may be located in an area prone to such disasters. In the event of a default on any mortgage loan held by Capital Crossing Preferred resulting from declining property values or worsening economic conditions, among other factors, Capital Crossing Preferred would bear the risk of loss of principal to the extent of any deficiency between the value of the related mortgaged property, plus any payments from an insurer or guarantor in the case of commercial mortgage loans, and the amount owing on the mortgage loan.

Capital Crossing Preferred’s results will be affected by factors beyond its control

      Capital Crossing Preferred’s mortgage loan portfolio is subject to local economic conditions which could affect the value of the real estate assets underlying its loans and therefore, its results of operations will be affected by various conditions in the real estate market, all of which are beyond its control, such as:

Capital Crossing Preferred’s loans are concentrated in California and New England and adverse conditions in those markets could adversely affect its operations

      Properties underlying Capital Crossing Preferred’s current mortgage assets are concentrated primarily in California, particularly Southern California, and New England. As of December 31, 2004, approximately 47.2% of the balances of its mortgage loans were secured by properties located in California and 13.4% in New England. Adverse economic, political or business developments or natural hazards may affect these areas and the ability of property owners in these areas to make payments of principal and interest on the underlying mortgages. If either region experienced adverse economic, political or business conditions, Capital Crossing Preferred would likely experience higher rates of loss and delinquency on its mortgage loans than if its loans were more geographically diverse.

A substantial majority of Capital Crossing Preferred’s loans were originated by other parties

      At December 31, 2004, substantially all of Capital Crossing Preferred’s total gross loans consisted of loans originated by third parties that were purchased by Capital Crossing and subsequently acquired by Capital Crossing Preferred from Capital Crossing. When Capital Crossing purchases loans originated by third parties, it generally cannot conduct the same level of due diligence that it would have conducted had it originated the loans. In addition, loans originated by third parties may lack current financial information and may have incomplete legal documentation and outdated appraisals. Although Capital Crossing conducts a comprehensive acquisition review, it also may rely on certain information provided by the parties that originated the loans, whose underwriting standards may be substantially different than Capital Crossing’s. These differences may include less rigorous appraisal requirements and debt service coverage ratios, and less rigorous analysis of property location and environmental factors, building condition and age, tenant quality, compliance with zoning regulations, any use restrictions, easements or rights of ways that may impact the property value and the borrower’s ability to manage the property and service the mortgage. As a result, Capital Crossing may not have information with respect to an acquired loan which, if known at the time of acquisition, would have caused it to reduce its bid price or not bid for the loan at all. This may adversely affect Capital Crossing Preferred’s yield on loans or cause it to increase its provision for loan losses. In addition, Capital Crossing may acquire loans as part of a pool that, given the opportunity to review and underwrite at the outset, it would not have originated. Loans such as these could have a higher risk of becoming non-performing in the future and adversely affect Capital Crossing Preferred’s results of operations.

More than half of Capital Crossing Preferred’s loan portfolio is made up of commercial mortgage loans which are generally riskier than other types of loans

      Commercial mortgage loans constituted approximately 67.6% of the total gross loans in Capital Crossing Preferred’s loan portfolio at December 31, 2004 and commercial mortgage loans are generally subject to greater risks than other types of loans. Capital Crossing Preferred’s commercial mortgage loans, like most commercial mortgage loans, generally lack standardized terms, tend to have shorter maturities than other mortgage loans and may not be fully amortizing, meaning that they have a principal balance or “balloon” payment due on maturity. The commercial real estate properties underlying Capital Crossing Preferred’s commercial mortgage loans also tend to be unique and are more difficult to value than other real estate properties. They are also subject to relatively greater environmental risks than other types of

loans and to the corresponding burdens and costs of compliance with environmental laws and regulations. Because of these risks related to commercial mortgage loans, Capital Crossing Preferred may experience higher rates of default on its mortgage loans than it would if its loan portfolio was more diversified and included a greater number of owner-occupied residential or other mortgage loans. Higher rates of default may cause Capital Crossing Preferred’s level of impaired loans to increase, which may have a material adverse affect on its results of operation.

Capital Crossing Preferred may not be able to purchase loans at the same volumes or with the same yields as it has historically purchased

      To date Capital Crossing Preferred has purchased all of the loans in its portfolio from Capital Crossing. Historically, Capital Crossing has acquired such loans

Future loan purchases will depend on the availability of pools of loans offered for sale and Capital Crossing’s ability to submit successful bids or negotiate satisfactory purchase prices. The acquisition of whole loans is highly competitive. Moreover, the Small Business Administration has suspended all future assets sales, pending the outcome of an internal review of its loan sale program. Consequently, Capital Crossing Preferred cannot provide assurance that Capital Crossing will be able to purchase loans at the same volumes or with the same yields as it has historically purchased. This may interfere with Capital Crossing Preferred’s ability to maintain the requisite level of mortgage assets to maintain its qualification as a REIT. If volumes of loans purchased decline or the yields on these loans decline further, Capital Crossing Preferred would experience a material adverse effect on its financial condition.

Capital Crossing Preferred could be held responsible for environmental liabilities of properties it acquires through foreclosure

      If Capital Crossing Preferred chooses to foreclose on a defaulted mortgage loan to recover its investment it may be subject to environmental liabilities related to the underlying real property. Approximately 67.6% of the loans in Capital Crossing Preferred’s portfolio at December 31, 2004 were commercial mortgage loans, which generally are subject to relatively greater environmental risks than other types of loans. Hazardous substances or wastes, contaminants, pollutants or sources thereof may be discovered on properties during Capital Crossing Preferred’s ownership or after a sale to a third party. The amount of environmental liability could exceed the value of the real property. There can be no assurance that Capital Crossing Preferred would not be fully liable for the entire cost of any removal and clean-up on an acquired property, that the cost of removal and clean-up would not exceed the value of the property or that Capital Crossing Preferred could recoup any of the costs from any third party. In addition, Capital Crossing Preferred may find it difficult or impossible to sell the property prior to or following any such remediation. The incurrence of any significant environmental liabilities with respect to a property securing a mortgage loan could have a material adverse effect on Capital Crossing Preferred’s financial condition.

Capital Crossing Preferred is dependent in virtually every phase of its operations on the diligence and skill of the management of Capital Crossing

      Capital Crossing, which holds all of Capital Crossing Preferred’s common stock, is involved in virtually every aspect of Capital Crossing Preferred’s operations. Capital Crossing Preferred has six officers, including three executive officers, and no other employees and does not have any independent corporate infrastructure. All of Capital Crossing Preferred’s officers are also officers of Capital Crossing. Capital Crossing Preferred does not have any employees because it has retained Capital Crossing to perform all necessary functions pursuant to the advisory agreement and the master service agreement.

      Under an advisory agreement between Capital Crossing Preferred and Capital Crossing, Capital Crossing administers day-to-day activities, including monitoring of Capital Crossing Preferred’s credit quality and advising it with respect to the acquisition, management, financing and disposition of mortgage assets and its operations generally. Under a master service agreement between Capital Crossing Preferred and Capital Crossing, Capital Crossing services Capital Crossing Preferred’s loan portfolio. The advisory agreement has an initial term of five years with an automatic renewal feature and the master service agreement has a one-year term with an automatic renewal feature. Both the master service agreement and the advisory agreement are subject to earlier termination upon 30 days and 90 days notice, respectively. Capital Crossing may subcontract all or a portion of its obligations under the advisory agreement to its affiliates or, with the approval of a majority of Capital Crossing Preferred’s Board of Directors including a majority of Capital Crossing Preferred’s independent directors, subcontract its obligations under the advisory agreement to unrelated third parties. Capital Crossing will not, in connection with the subcontracting of any of its obligations under the advisory agreement, be discharged or relieved from its obligations under the advisory agreement.

      The loss of the services of Capital Crossing, or the inability of Capital Crossing to effectively provide such services whether as a result of the loss of key members of Capital Crossing’s management, early termination of the agreements or otherwise, and Capital Crossing Preferred’s inability to replace such services on favorable terms, or at all, could adversely affect Capital Crossing Preferred’s ability to conduct its operations.

Capital Crossing Preferred’s relationship with Capital Crossing may create conflicts of interest

      Capital Crossing and its affiliates may have interests which are not identical to Capital Crossing Preferred’s and therefore conflicts of interest have arisen and may arise in the future with respect to transactions between Capital Crossing Preferred and Capital Crossing such as:

      Acquisition of mortgage assets. Capital Crossing Preferred anticipates that it will from time to time continue to purchase additional mortgage assets. Capital Crossing Preferred intends to acquire all or substantially all of such mortgage assets from Capital Crossing, on terms that are comparable to those that could be obtained by Capital Crossing Preferred if such mortgage assets were purchased from unrelated third parties. Neither Capital Crossing Preferred nor Capital Crossing currently have specific policies with respect to the purchase by Capital Crossing Preferred from Capital Crossing of particular loans or pools of loans, other than that such assets must be eligible to be held by a REIT. Although these purchases are structured to take advantage of the underwriting procedures of Capital Crossing, and while Capital Crossing Preferred believes that any agreements and transactions between it, on the one hand, and Capital Crossing and/or its affiliates on the other hand, are fair to all parties and consistent with market terms, neither Capital Crossing Preferred nor Capital Crossing have obtained any third-party valuation to confirm that Capital Crossing Preferred is paying fair market value for these loans, nor does Capital Crossing Preferred anticipate obtaining a third-party valuation in the future. Additionally, through limiting Capital Crossing Preferred’s source of purchased mortgage assets solely to those originated or purchased by Capital Crossing, Capital Crossing Preferred’s portfolio will generally reflect the nature, scope and risk of Capital Crossing’s portfolio rather than a more diverse portfolio composed of mortgage loans also purchased from other lenders.

      Servicing of Capital Crossing Preferred mortgage assets by Capital Crossing. Capital Crossing Preferred’s loans are serviced by Capital Crossing pursuant to the terms of the master service agreement. Capital Crossing in its role as servicer under the terms of the master service agreement receives an annual servicing fee equal to 0.20%, payable monthly, on the gross average outstanding principal balances of loans serviced for the immediately preceding month. The master service agreement requires Capital Crossing to service the loan portfolio in a manner substantially the same as for similar work performed by Capital Crossing for transactions on its own behalf. This will become especially important as Capital Crossing services any loans which become classified or are placed on non-performing status, or are renegotiated due to the financial deterioration of the borrower. While Capital Crossing Preferred believes that Capital Crossing will diligently pursue collection of any non-performing loans, Capital Crossing Preferred cannot

provide assurance that this will be the case. Capital Crossing Preferred’s ability to make timely payments of dividends will depend in part upon Capital Crossing’s prompt collection efforts on behalf of Capital Crossing Preferred.

      Future dispositions by Capital Crossing Preferred of mortgage assets to Capital Crossing or its affiliates. The master service agreement provides that foreclosures and dispositions of the mortgage assets are to be performed in a manner substantially the same as for similar work performed by Capital Crossing on its own behalf. However, Capital Crossing Preferred cannot provide assurance that any such agreement or transaction will be on terms as favorable to it as would have been obtained from unaffiliated third parties. Capital Crossing may seek to exercise its influence over Capital Crossing Preferred’s affairs so as to cause the sale of the mortgage assets owned by Capital Crossing Preferred and their replacement by lesser quality loans purchased from Capital Crossing or elsewhere which could adversely affect Capital Crossing Preferred’s business and its ability to make timely payments of dividends.

      Future modifications of the advisory agreement or master service agreement. Should Capital Crossing Preferred seek to modify either the advisory agreement or the master service agreement, it would rely upon its officers, all of whom are also officers of Capital Crossing, and/or its directors, three of whom are also officers of Capital Crossing. Thus, Capital Crossing Preferred’s officers and/or directors would be responsible for taking positions with respect to such agreements that, while in Capital Crossing Preferred’s best interests, may not be in the best interests of Capital Crossing. Although the termination, modification or decision not to renew the advisory agreement and/or the master service agreement requires the approval of a majority of Capital Crossing Preferred’s independent directors, Capital Crossing, as holder of all of Capital Crossing Preferred’s outstanding common stock, controls the election of all Capital Crossing Preferred directors, including the independent directors. Capital Crossing Preferred cannot provide assurance that such modifications will be on terms as favorable to it as those that could have been obtained from unaffiliated third parties.

      The terms of Capital Crossing Preferred’s guarantee of obligations of Capital Crossing. Capital Crossing Preferred has guaranteed all of the obligations of Capital Crossing under advances Capital Crossing may receive from time to time from the FHLBB, and has agreed to pledge a significant amount of it’s assets in connection with those advances. The assets Capital Crossing Preferred pledges to the FHLBB will vary from time to time; however, the potential exists for Capital Crossing Preferred to pledge all of its assets to the FHLBB to secure advances to Capital Crossing. In addition, Capital Crossing has pledged to the FHLBB all of the shares of Capital Crossing Preferred’s capital stock it owns as collateral for its FHLBB borrowings. Under the terms of the pledge, if Capital Crossing becomes undercapitalized the FHLBB may require Capital Crossing to dissolve Capital Crossing Preferred such that the assets of Capital Crossing Preferred are liquidated. In this circumstance the holders of Series A, Series C and Series D preferred shares would receive their liquidation preference only to the extent there are available proceeds from the liquidation of the assets of Capital Crossing Preferred following satisfaction of its outstanding obligations, including its guarantee of Capital Crossing’s FHLBB borrowings. At December 31, 2004, approximately $30.5 million, or 14.0%, of Capital Crossing Preferred assets have been pledged to and accepted by the FHLBB to secure advances to Capital Crossing. As of December 31, 2004, Capital Crossing had $168.4 million in outstanding FHLBB borrowings. The guarantee and pledge were approved by Capital Crossing Preferred’s independent directors, subject to certain requirements and limitations, including the requirement that Capital Crossing pay Capital Crossing Preferred an annual guarantee fee of $80,000. Any default by Capital Crossing on its obligations which would require Capital Crossing Preferred to satisfy its guarantee could adversely affect Capital Crossing Preferred’s business and its ability to make timely payments of dividends.

      The master loan purchase agreement was not the result of arm’s-length negotiations. Capital Crossing Preferred acquires loans pursuant to the master mortgage loan purchase agreement between Capital Crossing Preferred and Capital Crossing, at an amount equal to Capital Crossing’s net carrying value for those mortgage assets. While Capital Crossing Preferred believes that the master mortgage loan purchase agreement, when entered into, was fair to all parties and consistent with market terms, all of its officers and three of its directors are, and were at the time the master service mortgage loan purchase

agreement was entered into, also officers and/or directors of Capital Crossing and/or affiliates of Capital Crossing. Capital Crossing, as holder of all of Capital Crossing Preferred’s outstanding common stock, controls the election of all Capital Crossing Preferred directors, including the independent directors. Capital Crossing Preferred cannot provide assurance that the master mortgage loan purchase agreement was entered into on terms as favorable to Capital Crossing Preferred as those that could have been obtained from unaffiliated third parties.

Neither Capital Crossing Preferred nor Capital Crossing have specific policies with respect to the purchase by Capital Crossing Preferred from Capital Crossing of particular loans or pools of loans

      The lack of specific policies with respect to the purchase by Capital Crossing Preferred of loans from Capital Crossing could result in Capital Crossing Preferred acquiring lower quality mortgage assets from Capital Crossing than if such policies were otherwise in place. Neither Capital Crossing Preferred nor Capital Crossing currently have specific policies with respect to the purchase by Capital Crossing Preferred from Capital Crossing of particular loans or pools of loans, other than that such assets must be eligible to be held by a REIT. Capital Crossing Preferred’s Board of Directors has adopted certain policies to guide the acquisition and disposition of assets but these policies may be revised from time to time at the discretion of the Board of Directors without a vote of Capital Crossing Preferred’s stockholders. Capital Crossing Preferred intends to acquire all or substantially all of the additional mortgage assets it may acquire in the future from Capital Crossing on terms that are comparable to those that could be obtained by Capital Crossing Preferred if such mortgage assets were purchased from unrelated third parties, but Capital Crossing Preferred cannot provide assurance that this will always be the case.

Capital Crossing Preferred’s Board of Directors has broad discretion to revise Capital Crossing Preferred’s strategies

      Capital Crossing Preferred’s Board of Directors has established Capital Crossing Preferred’s investment and operating strategies. These strategies may be revised from time to time at the discretion of the Board of Directors without a vote of Capital Crossing Preferred’s stockholders. Changes in Capital Crossing Preferred’s strategies could have a negative effect on shareholders.

Capital Crossing Preferred does not obtain third-party valuations and therefore it may pay more or receive less than fair market value for its mortgage assets

      To date, Capital Crossing Preferred has not obtained third-party valuations as part of its loan acquisitions or dispositions and does not anticipate obtaining third-party valuations for future acquisitions and dispositions of mortgage assets. Capital Crossing Preferred does not intend to obtain third-party valuations even where it is acquiring mortgage assets from, or disposing mortgage assets to, one of its affiliates, including Capital Crossing. Accordingly, Capital Crossing Preferred may pay its affiliates, including Capital Crossing, more than the fair market value of mortgage assets it acquires and may receive less than the fair market value of the mortgage assets it sells based on a third-party valuation.

Capital Crossing Preferred may pay more than fair market value for mortgages it purchases from Capital Crossing because it does not engage in arm’s- length negotiations with Capital Crossing

      Capital Crossing Preferred acquires mortgage assets from Capital Crossing under a master mortgage loan purchase agreement between it and Capital Crossing, at an amount equal to Capital Crossing’s net carrying value for those mortgage assets. Because Capital Crossing is an affiliate of Capital Crossing Preferred’s, Capital Crossing Preferred does not engage in any arm’s-length negotiations regarding the consideration to be paid. Accordingly, if Capital Crossing’s net carrying value exceeds the fair market value of the mortgage assets, Capital Crossing Preferred would pay Capital Crossing more than the fair market value for those mortgaged assets.

Fluctuations in interest rates could reduce Capital Crossing Preferred earnings and affect its ability to pay dividends

      Capital Crossing Preferred’s income consists primarily of interest earned on its mortgage assets and short-term investments. A significant portion of Capital Crossing Preferred’s mortgage assets bear interest at adjustable rates. If there is a decline in interest rates, then Capital Crossing Preferred will experience a decrease in income available to be distributed to its stockholders. If interest rates decline, Capital Crossing Preferred may also experience an increase in prepayments on its mortgage assets and may find it difficult to purchase additional mortgage assets bearing rates sufficient to support payment of dividends on the Series A, Series C and Series D preferred shares. Conversely, an increase in mortgage rates could result in decreased interest income and increased non-interest expense related to workouts and other collection efforts. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on Capital Crossing Preferred’s loans may lead to an increase in non-performing assets and a reduction of discount accreted into income, which could have a material adverse affect on Capital Crossing Preferred’s results of operation. Because the dividend rates on the Series A, Series C and Series D preferred shares are fixed, a significant decline or increase in interest rates, either of which result in lower net income, could materially adversely affect Capital Crossing Preferred’s ability to pay dividends on the Series A, Series C and Series D preferred shares.

Tax Risks Related to REITs

If Capital Crossing Preferred fails to qualify as a REIT, it will be subject to federal income tax at regular corporate rates.

      If Capital Crossing Preferred fails to qualify as a REIT for any taxable year, it would be subject to federal income tax, including any applicable alternative minimum tax, on its taxable income at regular corporate rates. As a result, the amount available for distribution to Capital Crossing Preferred’s stockholders would be reduced for the year or years involved. In addition, unless entitled to relief under statutory provisions, Capital Crossing Preferred would be disqualified from treatment as a REIT for the four taxable years following the year which qualification was lost. The failure to qualify as a REIT would reduce Capital Crossing Preferred’s net earnings available for distribution to its stockholders because of the additional tax liability for the year or years involved. Capital Crossing Preferred’s failure to qualify as a REIT would not by itself give it the right to redeem the Series A, Series C or Series D preferred shares, nor would it give the holders of the Series A, Series C or Series D preferred shares the right to have their shares redeemed.

      Although Capital Crossing Preferred currently intends to operate in a manner designed to qualify as a REIT, future economic, market, legal, tax or other considerations may cause it to determine that it is in its best interest and in the best interest of holders of its common stock and preferred stock to revoke its REIT election. The tax law prohibits Capital Crossing Preferred from electing treatment as a REIT for the four taxable years following the year of any such revocation.

If Capital Crossing Preferred does not distribute 90% of its net taxable income, it may not qualify as a REIT.

      In order to qualify as a REIT, Capital Crossing Preferred generally is required each year to distribute to its stockholders at least 90% of its net taxable income, excluding net capital gains. Capital Crossing Preferred may retain the remainder of REIT taxable income or all or part of its net capital gain, but will be subject to tax at regular corporate rates on such income. In addition, Capital Crossing Preferred is subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions considered as paid by Capital Crossing Preferred with respect to any calendar year are less than the sum of (1) 85% of its ordinary income for the calendar year, (2) 95% of its capital gains net income for the calendar year and (3) 100% of any undistributed income from prior periods. Under certain circumstances, federal or state regulatory authorities may restrict Capital Crossing Preferred’s ability, as a subsidiary of Capital Crossing, to make distributions to its stockholders in an amount necessary to retain its REIT qualification.

Such a restriction could result in Capital Crossing Preferred failing to qualify as a REIT. To the extent Capital Crossing Preferred’s REIT taxable income may exceed the actual cash received for a particular period, Capital Crossing Preferred may not have sufficient liquidity to make distributions necessary to retain its REIT qualification.

Capital Crossing Preferred may redeem the Series A, Series C and Series D preferred shares at any time upon the occurrence of a tax event.

      At any time following the occurrence of certain changes in the tax laws or regulations concerning REITs, Capital Crossing Preferred will have the right to redeem the Series A, Series C and Series D preferred shares in whole, subject to the prior written approval of the FDIC. Capital Crossing Preferred would have the right to redeem the Series A, Series C and Series D preferred shares if it received an opinion of counsel to the effect that, as a result of changes to the tax laws or regulations:

      The occurrence of such changes in the tax laws or regulations will not, however, give the holders of the Series A, Series C or Series D preferred shares any right to have their shares redeemed.

Capital Crossing Preferred has imposed ownership limitations to protect its ability to qualify as a REIT, however, if ownership of the common stock of Capital Crossing becomes concentrated in a small number of individuals Capital Crossing Preferred may fail to qualify as a REIT.

      To maintain Capital Crossing Preferred’s status as a REIT, not more than 50% in value of Capital Crossing Preferred’s outstanding shares may be owned, directly or indirectly, by five or fewer individuals, as defined in the Internal Revenue Code to include certain entities, during the last half of each taxable year. Capital Crossing Preferred currently satisfies this requirement because for this purpose Capital Crossing Preferred’s common stock held by Capital Crossing is treated as held by Capital Crossing’s stockholders. However, it is possible that the ownership of Capital Crossing might become sufficiently concentrated in the future such that five or fewer individuals would be treated as having constructive ownership of more than 50% of the value of Capital Crossing Preferred’s stock. Capital Crossing Preferred may have difficulty monitoring the daily ownership and constructive ownership of its outstanding shares and, therefore, Capital Crossing Preferred cannot provide assurance that it will continue to meet the share ownership requirement. This risk may be increased in the future as Capital Crossing implements common stock repurchase programs because repurchases may cause ownership in Capital Crossing to become more concentrated. In addition, while the fact that the Series A, the Series C and Series D preferred shares may be redeemed or exchanged will not affect Capital Crossing Preferred’s REIT status prior to any such redemption or exchange, the redemption or exchange of all or a part of the Series A, Series C and Series D preferred shares could adversely affect Capital Crossing Preferred’s ability to satisfy the share ownership requirements in the future.

      Market risk is the risk of loss from adverse changes in market prices and interest rates. It is the objective of Capital Crossing Preferred to attempt to control risks associated with interest rate movements. Capital Crossing Preferred’s market risk arises primarily from interest rate risk inherent in holding loans. To that end, management actively monitors and manages the interest rate risk exposure of Capital Crossing Preferred.

      Capital Crossing Preferred’s management reviews, among other things, the sensitivity of Capital Crossing Preferred’s assets to interest rate changes, the book and market values of assets, purchase and sale activity, and anticipated loan pay-offs. Capital Crossing’s senior management also approves and

establishes pricing and funding decisions with respect to Capital Crossing Preferred’s overall asset and liability composition.

      Capital Crossing Preferred’s methods for evaluating interest rate risk include an analysis of its interest-earning assets maturing or repricing within a given time period. Since Capital Crossing Preferred has no interest-bearing liabilities, a period of rising interest rates would tend to result in an increase in net interest income. A period of falling interest rates would tend to adversely affect net interest income.

      The following table sets forth the Capital Crossing Preferred’s interest-rate-sensitive assets categorized by repricing dates and weighted average yields at December 31, 2004. For fixed rate instruments, the repricing date is the maturity date. For adjustable-rate instruments, the repricing date is deemed to be the earliest possible interest rate adjustment date. Assets that are subject to immediate repricing are placed in the overnight column.

      Based on Capital Crossing Preferred’s experience, management applies the assumption that, on average, approximately 6% of the fixed and adjustable rates will prepay annually.

      At December 31, 2004, the fair value of net loans was $124.2 million as compared to the net carrying value of net loans of $121.4 million. The fair value of interest-bearing deposits approximates carrying value.

REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM

The Board of Directors

Capital Crossing Preferred Corporation:

      We have audited the accompanying balance sheets of Capital Crossing Preferred Corporation, as of December 31, 2004 and 2003 and the related statements of income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2004. These financial statements are the responsibility of Capital Crossing Preferred Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 Capital Crossing Preferred Corporation as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2004 in conformity with United States generally accepted accounting principles.

/s/ KPMG llp

Boston, Massachusetts

March 29, 2005

CAPITAL CROSSING PREFERRED CORPORATION

BALANCE SHEETS

December 31, 2004 and 2003

See accompanying notes to financial statements.

CAPITAL CROSSING PREFERRED CORPORATION

STATEMENTS OF INCOME

Years Ended December 31, 2004, 2003, and 2002

See accompanying notes to financial statements.

CAPITAL CROSSING PREFERRED CORPORATION

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 31, 2004, 2003 and 2002