CAPITAL CROSSING PREFERRED CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2005

Commission File Number 000-25193

CAPITAL CROSSING PREFERRED CORPORATION

(Exact name of registrant as specified in its charter)

Massachusetts

(State or other jurisdiction of incorporation or organization)

04-3439366

(I.R.S. Employer Identification Number)

101 Summer Street, Boston, Massachusetts

(Address of principal executive offices)

02110

(Zip Code)

(617) 880-1000

(Registrant’s telephone number, including area code)

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

Indicate the number of shares outstanding of the issuer’s common stock, $.01 par value per share, as of May 12, 2005: 100.
No common stock was held by non-affiliates of the issuer.

PART I

Item 1. Financial Statements

Capital Crossing Preferred Corporation

Balance Sheets
(unaudited)


	March 31,			December 31,
	2005			2004
	(in thousands)
ASSETS

Cash account with Capital Crossing Bank	$	111		$	92
Interest bearing deposits with Capital Crossing Bank		100,250			95,315

Total cash and cash equivalents		100,361			95,407

Certificate of deposit		300			300
Loans, net of discounts and net deferred loan income		119,659			123,932
Less allowance for loan losses		(2,369	)		(2,497	)

Loans, net		117,290			121,435

Accrued interest receivable		553			544
Other assets		19			—

	$	218,523		$	217,686


LIABILITIES AND STOCKHOLDERS’ EQUITY

Due to Capital Crossing Bank	$	2		$	289
Accrued expenses and other liabilities		1,226			1,228

Total liabilities		1,228			1,517

Stockholders’ equity:
Preferred stock, Series A, 9.75% non-cumulative, exchangeable; $.01 par value; $10 liquidation value per share; 1,449,000 shares authorized, 1,416,130 shares issued and outstanding		14			14
Preferred stock, Series B, 8% cumulative, non-convertible; $.01 par value; $1,000 liquidation value per share plus accrued dividends; 1,000 shares authorized, 940 shares issued and outstanding		—			—
Preferred stock, Series C, 10.25% non-cumulative, exchangeable; $.01 par value; $10 liquidation value per share; 1,840,000 shares authorized, issued and outstanding		18			18
Preferred stock, Series D, 8.50% non-cumulative, exchangeable; $.01 par value; $25 liquidation value per share; 1,725,000 shares authorized, 1,500,000 shares issued and outstanding		15			15
Common stock, $.01 par value, 100 shares authorized, issued and outstanding		—			—
Additional paid-in capital		216,122			216,122
Retained earnings		1,126			—

Total stockholders’ equity		217,295			216,169

	$	218,523		$	217,686

See accompanying notes to unaudited interim financial statements.

Capital Crossing Preferred Corporation

Statements of Changes in Stockholders’ Equity
(unaudited)


	Three Months Ended March 31, 2005
	Preferred Stock				Preferred Stock				Preferred Stock				Preferred Stock								Additional					Total
	Series A				Series B				Series C				Series D				Common Stock				Paid-in		Retained			Stockholders’
	Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Capital		Earnings			Equity
											(dollars in thousands)
Balance at December 31, 2004		1,416,130	$	14		940	$	—		1,840,000	$	18		1,500,000	$	15		100	$	—	$	216,122	$	—		$	216,169
Net income		—		—		—		—		—		—		—		—		—		—		—		2,758			2,758
Dividends on preferred stock, Series A		—		—		—		—		—		—		—		—		—		—		—		(345	)		(345	)
Cumulative dividends on preferred stock, Series B		—		—		—		—		—		—		—		—		—		—		—		(19	)		(19	)
Dividends on preferred stock, Series C		—		—		—		—		—		—		—		—		—		—		—		(471	)		(471	)
Dividends on preferred stock, Series D		—		—		—		—		—		—		—		—		—		—		—		(797	)		(797	)

Balance at March 31, 2005		1,416,130	$	14		940	$	—		1,840,000	$	18		1,500,000	$	15		100	$	—	$	216,122	$	1,126		$	217,295


	Three Months Ended March 31, 2004
	Preferred Stock				Preferred Stock				Preferred Stock				Preferred Stock								Additional					Total
	Series A				Series B				Series C				Series D				Common Stock				Paid-in		Retained			Stockholders’
	Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Capital		Earnings			Equity
											(dollars in thousands)
Balance at December 31, 2003		1,416,130	$	14		941	$	—		1,840,000	$	18		—	$	—		100	$	—	$	211,240	$	10,158		$	221,430
Net income		—		—		—		—		—		—		—		—		—		—		—		4,370			4,370
Dividends on preferred stock, Series A		—		—		—		—		—		—		—		—		—		—		—		(345	)		(345	)
Cumulative dividends on preferred stock, Series B		—		—		—		—		—		—		—		—		—		—		—		(19	)		(19	)
Dividends on preferred stock, Series C		—		—		—		—		—		—		—		—		—		—		—		(471	)		(471	)

Balance at March 31, 2004		1,416,130	$	14		941	$	—		1,840,000	$	18		—	$	—		100	$	—	$	211,240	$	13,693		$	224,965

See accompanying notes to unaudited interim financial statements.

Capital Crossing Preferred Corporation

Notes to Unaudited Interim Financial Statements

Three Months Ended March 31, 2005 and 2004

Note 1. Basis of Presentation

Capital Crossing Preferred Corporation (‘‘Capital Crossing Preferred’’) is a Massachusetts corporation organized on March 20, 1998, to acquire and hold real estate assets. Capital Crossing Bank (‘‘Capital Crossing’’), a federally insured Massachusetts trust company, owns all of Capital Crossing Preferred’s common stock. Capital Crossing is in compliance with its regulatory capital requirements at March 31, 2005.

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 March 31, 1998, Capital crossing Preferred was initially capitalized with the issuance to Capital Crossing of 100 shares of Capital Crossing Preferred’s common stock, $.01 par value, and 1,000 shares of Series B preferred stock, $.01 par value, with Capital Crossing transferring to Capital Crossing Preferred a portfolio of loans at its estimated fair value of $140,740,000. Such loans were recorded in the accompanying balance sheet at Capital Crossing’s historical cost, which approximated their estimated fair values.

In 1999, Capital Crossing Preferred completed the sale of 1,416,130 shares of Series A preferred stock. In 2001, Capital Crossing Preferred completed the sale of 1,840,000 shares of Series C preferred stock. In May 2004, Capital Crossing Preferred completed the sale of 1,500,000 shares of Series D preferred stock.

The financial information as of March 31, 2005 and the results of operations, changes in stockholders’ equity and cash flows for the three months ended March 31, 2005 and 2004 are unaudited; however, in the opinion of management, the financial information reflects all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation in accordance with accounting principles generally accepted in the United States of America. Interim results are not necessarily indicative of results to be expected for the entire year. These interim financial statements are intended to be read in conjunction with the financial statements presented in Capital Crossing Preferred’s Annual Report on Form 10-K as of and for the year ended December 31, 2004.

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

Note 2. Commitments and Contingencies

Guarantees

Capital Crossing Preferred has guaranteed all of the obligations of Capital Crossing under advances Capital Crossing may receive from time to time from the Federal Home Loan Bank of Boston (“FHLBB”), and Capital Crossing Preferred has agreed to pledge a significant amount of its assets in connection with those advances. This guarantee would rank senior to the preferred shares upon liquidation. Capital Crossing Preferred’s obligations under this agreement are limited by applicable laws pertaining to fraudulent conveyance and fraudulent transfer. The assets pledged 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 distributed to Capital Crossing. In such circumstance, holders of the Series A, Series C and Series D preferred stock 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 March 31, 2005, approximately $29.8 million, or 13.7%, of Capital Crossing Preferred’s assets had been pledged to and accepted by the FHLBB to secure advances to Capital Crossing. As of March 31, 2005, Capital Crossing had $167.5 million in outstanding FHLBB borrowings.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q. 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 quarterly report should be read as being applicable to all related forward-looking statements wherever they appear in this quarterly 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.

The following discussion of Capital Crossing Preferred’s unaudited consolidated financial condition and results of operations and capital resources and liquidity should be read in conjunction with the Unaudited Consolidated Interim Financial Statements and related Notes included elsewhere herein and the audited Consolidated Financial Statements and related Notes included in Capital Crossing Preferred’s Annual Report on Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission.

Executive Level Overview

Net income available to the common shareholder decreased $2.4 million, or 68.1%, to $1.1 million for the three months ended March 31, 2005 compared to $3.5 million for the same period in 2004. The decrease from 2004 to 2005 is primarily the result of a decline in interest and fees on loans and an increase in preferred stock dividends attributable to the issuance of Series D preferred stock on May 11, 2004.

All of the mortgage assets in Capital Crossing Preferred’s loan portfolio at March 31, 2005 were acquired from Capital Crossing and it is anticipated that substantially all additional mortgage assets will be acquired from Capital Crossing. As of March 31, 2005, Capital Crossing Preferred held loans acquired from Capital Crossing with net investment balances of $119.7 million.

Commercial mortgage loans constituted approximately 67.1% of the net loans in Capital Crossing Preferred’s loan portfolio at March 31, 2005 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 March 31, 2005, approximately 47.4% of the balances of its mortgage loans were secured by properties located in California and 14.0% in New England. In the instance where either region experiences adverse economic, political or business conditions, Capital Crossing Preferred would likely experience higher rates of loss and delinquency on its mortgage loans.

Since 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.

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 the first quarter of 2005, the loan portfolio was large enough to generate income resulting in earnings, which were 1.69 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 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 has changed. 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 is no longer allowed to increase the allowance through allocations from purchase discount. Additionally, general risk allocations are no longer applied to purchased loans acquired subsequent to December 31, 2004. Only specific allocations based upon the results of measuring loans that become impaired subsequent to purchase under SFAS No. 114 are considered in the calculation of the allowance for loan losses for purchased loans. Consequently, the allowance for loan losses has declined since the adoption of SOP No. 03-3, and it is anticipated that the allowance will continue to decline as credits for loan losses may continue to be recorded if loans pay off and allowance allocations related to these loans are not required or additions due to loan impairment 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 since its business is based mainly upon the acquisition, rather than the origination, of loans. In particular, ratios involving the allowance for loan 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 requires 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 included in its Annual Report on Form 10-K for the year ended December 31, 2004, 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 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 allowance for loan losses is increased or decreased through a provision or credit for loan losses included in earnings. Prior to January 1, 2005, the effective date of SOP No. 03-3, the allowance for loan losses was increased upon allocation of purchase discount upon acquisition of loans. No allocation of discount is made to the allowance for loan losses for loans acquired subsequent to December 31, 2004, however, additions for impairment that occur subsequent to acquisition will continue to be recognized through a provision for loan losses included in earnings. Additionally, the allowance for loan losses is decreased upon sales or payoffs of loans for which a related allowance remains unused. Reductions in connection with sales are included in the calculation of the gain or loss, and reductions related to payoffs 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.

In determining the adequacy of the allowance for loan losses, management makes significant judgments. Management initially reviews its loan portfolio to identify loans for which specific allocations are considered prudent. Specific allocations include the results of measuring impaired loans under SFAS No. 114. Next, management considers the level of general loan allowances deemed appropriate for loans purchased prior to January 1, 2005. General risk allocations are determined by a formula whereby the portfolio is stratified by type and internal risk rating categories. Loss factors are then applied to each strata based on various considerations including collateral type, loss experience, delinquency trends, current economic conditions, industry standards, and regulatory guidelines. 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, additions to the valuation allowances relating to newly acquired loans reflect only those losses incurred by Capital Crossing Preferred subsequent to acquisition. Capital Crossing Preferred no longer increases the allowance through allocations from purchase discount. Additionally, general risk allocations are no longer applied to loans purchased subsequent to December 31, 2004. Consequently, it is anticipated that the allowance will continue to decline as credits for loan losses may continue to be recorded if loans pay off and allowance allocations related to these loans are not required or additions due to loan impairment are not required.

Discounts on Acquired Loans. Effective January 1, 2005, and as a result of the required adoption of SOP No. 03-3 Capital Crossing Preferred is required to change its discount accounting as it relates to loans which are acquired subsequent to December 31, 2004 and which have evidence of deterioration of credit quality since origination and, for which it is probable, at acquisition, that Capital Crossing Preferred will be unable to collect all contractually required payments. For such loans, the excess of contractual cash flows over cash flows estimated at the time of acquisition is not accreted into income (nonaccretable discount). The remaining amount, representing the excess of the loan’s estimated cash flows over the purchase price, is accreted into income over the life of the loan (accretable discount).

income using the interest method over the term of the loans and is not accreted on non-performing loans. This is consistent with how Capital Crossing Preferred accounted for loans purchased prior to January 1, 2005, except an allowance allocation was also made at the time of acquisition. Capital Crossing Preferred no longer increases the allowance through allocations from purchase discount.

Prepayments are not considered in the calculation of accretion income.

There is judgment involved in estimating the amount of Capital Crossing Preferred’s 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. 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 nonaccretable 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. Nonaccretable 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 nonaccretable discount are reasonably estimable and collection is probable, the corresponding decrease in the nonaccretable discount is transferred to the accretable discount 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.

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 were no loans held for sale at March 31, 2005.

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 Three Months Ended March 31, 2005 and 2004

Interest income

The following table sets forth the yields on Capital Crossing Preferred’s earning assets for the periods indicated:


	Three Months Ended March 31,
	2005							2004
	Average		Interest					Average		Interest
	Balance		Income		Yield			Balance		Income		Yield
	(dollars in thousands)
Loans, net (1)	$	120,353	$	2,485		8.37	%	$	151,002	$	3,844		10.24	%
Interest-bearing deposits		97,854		265		1.10			74,619		204		1.10

Total interest-earning assets	$	218,207	$	2,750		5.11	%	$	225,621	$	4,048		7.22	%

(1)

Non-performing loans are excluded from average balance calculations.

The decline in interest income for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 is primarily due to the decline in interest income on loans due to both a decline in the average balance and the yield. The yield on

interest-earning assets also decreased primarily due to a shift in the composition of average interest-earning assets such that average loans represents a smaller percentage of total average interest-earning assets for the three months ended March 31, 2005 as compared to the same period in 2004.

Average loans, net for the three months ended March 31, 2005 totaled $120.4 million compared to $151.0 million for the same period in 2004. This decrease is primarily attributable to loan payoffs and amortization. No loans were acquired in the first quarter of 2005. During 2004, Capital Crossing Preferred only acquired $4.3 million in loans. The yield on the loan portfolio decreased primarily as a result of a decrease in interest income recognized at the time of individual loan pay-offs.

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 periods 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.


	Three Months Ended March 31,
	2005					2004
	Interest					Interest
	Income		Yield			Income		Yield
	(dollars in thousands)
Regularly scheduled interest and accretion income	$	2,345		7.90	%	$	2,916		7.77	%

Interest and fee income recognized on loan payoffs:
Nonaccretable discount		—		—			91		0.24
Accretable discount		104		0.35			719		1.92
Other interest and fee income		36		0.12			118		0.31

		140		0.47			928		2.47

	$	2,485		8.37	%	$	3,844		10.24	%

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 amount of individual loan payoffs is oftentimes a result of negotiations between Capital Crossing Preferred and the borrower. Based upon credit risk analysis and other factors, Capital Crossing Preferred will, in certain instances, accept less than the full amount contractually due in accordance with the loan terms.

The average balance of interest-bearing deposits increased $23.3 million or 31.1% to $97.9 million for the three months ended March 31, 2005, compared to $74.6 million for 2004. The changes in the average balances of interest-bearing deposits are the result of cash flows from loan repayments and the proceeds from the Series D stock offering on May 11, 2004 offset by periodic dividend payments and funds used to purchase additional mortgage assets.

Credit for loan losses

Capital Crossing Preferred recorded credits for loan losses of $128,000 and $411,000 for the three months ended March 31, 2005 and 2004, 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.

Other income

There were no loan sales during the three months ended March 31, 2005. During the three months ended March 31, 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.

Operating expenses

Loan servicing and advisory services expenses for the three months ended March 31, 2005 decreased $26,000 or 24.5%, to $80,000 compared to $106,000 for the three months ended March 31, 2004. This decrease was due to the decrease in the average balance of the loan portfolio.

Other general and administrative expenses decreased $19,000 or 24.1%, to $60,000 for the three months ended March 31, 2005 compared to $79,000 for the three months ended March 31, 2004. This decrease is primarily attributable to a decrease in legal fees related to loan collection matters.

Preferred stock dividends

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 of 1986, as amended.

Financial Condition

Interest-bearing Deposits with Capital Crossing Bank

Interest-bearing deposits with Capital Crossing Bank consist entirely of money market accounts at March 31, 2005 and December 31, 2004. The balance of interest-bearing deposits increased $4.9 million to $100.3 million at March 31, 2005 compared to $95.3 million at December 31, 2004. The increase in the balance of interest-bearing deposits is the result of cash flows from loan repayments, offset by periodic dividend payments.

Loan Portfolio

To date, all of Capital Crossing Preferred’s loans have been acquired from Capital Crossing. The following table sets forth information regarding the composition of the loan portfolio at the dates indicated:


	March 31,			December 31,
	2005			2004
	(in thousands)
Mortgage loans on real estate:
Commercial real estate	$	80,349		$	83,236
Multi-family residential		34,611			35,866
Land		3,947			4,011
One-to-four family residential		803			858

Total		119,710			123,971
Other		22			23

Total loans, net of discounts		119,732			123,994

Less:
Allowance for loan losses		(2,369	)		(2,497	)
Net deferred loan fees		(73	)		(62	)


Loans, net	$	117,290		$	121,435

Capital Crossing Preferred acquires primarily performing commercial real estate and multifamily residential mortgage loans. There were no loans acquired during the three months ended March 31, 2005, as the existing portfolio was large enough to generate an adequate dividend ratio. During the three months ended December 31, 2004, Capital Crossing Preferred acquired $4.3 million in loans from Capital

Crossing. Gross loans at March 31, 2005 totaled $134.8 million compared to $139.5 million at December 31, 2004 and total loan discount amounted to $15.1 million and $19.5 million at March 31, 2005 and December 31, 2004, respectively.

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 its master service agreement with Capital Crossing.

Non-performing loans, net of discount, totaled $1.3 million and $1.6 million at March 31, 2005 and December 31, 2004, 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.

Discounts on Acquired Loans. Effective January 1, 2005, and as a result of the required adoption of SOP No. 03-3 Capital Crossing Preferred is required to change its discount accounting as it relates to loans which are acquired subsequent to December 31, 2004 and which have evidence of deterioration of credit quality since origination and, for which it is probable, at acquisition, that Capital Crossing Preferred will be unable to collect all contractually required payments. For such loans, the excess of contractual cash flows over cash flows estimated at the time of acquisition is not accreted into income (nonaccretable discount). The remaining amount, representing the excess of the loan’s estimated cash flows over the purchase price, is accreted into income over the life of the loan (accretable discount).

For all other loans acquired subsequent to December 31, 2004, the discount, which represents the excess of the amount of reasonably estimable and probable discounted future cash collections over the purchase price is accreted into interest income using the interest method over the term of the loans and is not accreted on non-performing loans. This is consistent with how Capital Crossing Preferred accounted for loans purchased prior to January 1, 2005, except an allowance allocation was also previously made at the time of acquisition. Capital Crossing Preferred no longer increases the allowance through allocations from purchase discount.

Prepayments are not considered in the calculation of accretion income.

The nonaccretable 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. Nonaccretable 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 the income statement as a result of these reductions.

The following table sets forth certain information relating to the activity in the nonaccretable discount for the periods indicated:


	Three Months Ended
	March 31,
	2005			2004
	(in thousands)
Balance at beginning of period	$	883		$	1,524
Accretion		(11	)		(91	)
Transfers to accretable portion upon improvements in cash flows		(53	)		(130	)
Net reductions relating to loans sold		—			(111	)

Balance at end of period	$	819		$	1,192

Allowance for Loan 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 allowance for loan losses is increased or decreased through a provision or credit for loan losses included in earnings. Prior to January 1, 2005, the effective
date of SOP No. 03-3, the allowance for loan losses was increased upon allocation of purchase discount upon acquisition of loans. No allocation of discount is made to the allowance for loan losses for loans acquired subsequent to December 31, 2004, however, additions for impairment that occur subsequent to acquisition will continue to be recognized through a provision for loan losses included in earnings. Additionally, the allowance for loan losses is decreased upon sales or payoffs of loans for which a related allowance remains unused. Reductions in connection with sales are included in the calculation of the gain or loss, and reductions related to payoffs 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.

In determining the adequacy of the allowance for loan losses, management makes significant judgments. Management initially reviews its loan portfolio to identify loans for which specific allocations are considered prudent. Specific allocations include the results of measuring impaired loans under SFAS No. 114. Next, management considers the level of general loan allowances deemed appropriate for originated loans and loans purchased prior to January 1, 2005. General risk allocations are determined by a formula whereby the portfolio is stratified by type and internal risk rating categories. Loss factors are then applied to each strata based on various considerations including collateral type, loss experience, delinquency trends, current economic conditions, industry standards, and regulatory guidelines. Additional considerations influencing such loss factors are particular concentrations within the portfolio, such as the concentration of loans in California, which accounted for approximately 47.4% of the net portfolio at March 31, 2005 and concentrations of loans to individual borrowers. 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.

Capital Crossing Preferred’s allowance for loan losses at March 31, 2005 was $2.4 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.

The following table sets forth certain information relating to the activity in the allowance for loan losses for the periods indicated:


	Three Months Ended March 31,
	2005			2004
	(in thousands)
Balance at beginning of period	$	2,497		$	3,281
Credit for loan losses		(128	)		(411	)
Net reduction relating to loans sold		—			(49	)

Balance at end of period	$	2,369		$	2,821

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 March 31, 2005, 47.4% and 14.0% of Capital Crossing Preferred’s net loan portfolio consisted of loans in California and New England, respectively. At December 31, 2004, 47.4% and 14.2% of Capital Crossing Preferred’s net real estate loan portfolio consisted of loans located in California and New England, respectively. 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:

• to maintain an adequate portfolio size through the acquisition of additional mortgage assets as mortgage assets currently in the loan portfolio mature, pay down or prepay, and

• to pay dividends on the preferred shares and common shares.

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 3, 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 Quarterly Report on Form 10-Q 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:

•   a holder of Series A, Series C or Series D preferred shares would be a preferred stockholder of Capital Crossing at a time when Capital Crossing’s financial condition was deteriorating or when Capital Crossing had been placed into bankruptcy, reorganization, conservatorship or receivership and, accordingly, it is unlikely that Capital Crossing would be in a financial position to pay any dividends on the preferred shares of Capital Crossing. An investment in Capital Crossing is also subject to risks that are distinct from the risks associated with an investment in Capital Crossing Preferred. For example, an investment in Capital Crossing would involve risks relating to the capital levels of, and other federal and state regulatory requirements applicable to Capital Crossing and the performance of Capital Crossing’s overall loan portfolio and other business lines. Capital Crossing also has significantly greater liabilities and significantly less stockholders’ equity than does Capital Crossing Preferred;

•   if a liquidation of Capital Crossing occurs, the claims of depositors and creditors of Capital Crossing and of the FDIC would have priority over the claims of holders of the preferred shares of Capital Crossing, and therefore, a holder of Series A, Series C and Series D preferred shares likely would receive, if anything, substantially less than such holder would receive had the Series A, Series C and Series D preferred shares not been exchanged for preferred shares of Capital Crossing; and

•   the exchange of the Series A, Series C or Series D preferred shares for preferred shares of Capital Crossing would be a taxable event to a holder of Series A, Series C or Series D preferred shares under the Internal Revenue Code, and such holder would incur a gain or a loss, as the case may be, measured by the difference between such holder’s basis in the Series A, Series C or Series D preferred shares and the fair market value of Capital Crossing preferred shares received in the exchange.

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:

• junior to borrowings of Capital Crossing Preferred, including claims of the FHLBB for amounts due or which may become due under Capital Crossing Preferred’s guarantee of Capital Crossing’s obligations to the FHLBB, and any other obligations to Capital Crossing Preferred’s creditors upon its liquidation. As of March 31, 2005, Capital Crossing had $167.5 million in outstanding FHLBB borrowings; and

• senior to Capital Crossing Preferred’s common stock and its Series B preferred stock with regard to payment of dividends and amounts upon liquidation.

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 March 31, 2005, Capital Crossing Preferred had approximately $141,000 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, 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 March 31, 2005, Capital Crossing had a total risk-based capital ratio of 19.27%, a Tier 1 risk-based capital ratio of 13.76% and a Tier 1 leverage ratio of 11.16%, 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’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:

• local and other economic conditions affecting real estate values;

• the continued financial stability of a borrower and the borrower’s ability to make mortgage payments;

•   the ability of tenants to make lease payments;

•   the ability of a property to attract and retain tenants, which may in turn be affected by local conditions, such as oversupply of space or a reduction in demand for rental space in the area;

•   interest rate levels and the availability of credit to refinance mortgage loans at or prior to maturity; and

•   increased operating costs, including energy costs, real estate taxes and costs of compliance with environmental controls and regulations.

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 March 31, 2005, approximately 47.4% of the net balances of its mortgage loans were secured by properties located in California and 14.0% 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 March 31, 2005, substantially all of Capital Crossing Preferred’s net 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 67.1% of the total gross loans in Capital Crossing Preferred’s loan portfolio at March 31, 2005 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 accretable, 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 will 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

• from institutions which sought to eliminate certain loans or categories of loans from their portfolios;

•   from institutions participating in securitization programs;

•   from failed or consolidating financial institutions; and

•   from government agencies.

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. 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 67.1% of the net loans in Capital Crossing Preferred’s portfolio at March 31, 2005 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 March 31, 2005, approximately $29.8 million, or 13.7%, of Capital Crossing Preferred assets have been pledged to and accepted by the FHLBB to secure advances to Capital Crossing. As of March 31, 2005, Capital Crossing had $167.5 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:

• dividends paid by Capital Crossing Preferred with respect to its capital stock are not fully deductible by it for income tax purposes; or

• Capital Crossing Preferred are otherwise unable to qualify as a REIT.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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 Capital Crossing Preferred’s interest-rate-sensitive assets categorized by repricing dates and weighted average yields at March 31, 2005. 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.


				Within			One to			Two to			Three to			Four to			Over
				One			Two			Three			Four			Five			Five
	Overnight			Year			Years			Years			Years			Years			Years			Total
										(dollars in thousands)
Interest-bearing deposits in banks	$	100,250		$	—		$	—		$	—		$	—		$	—		$	—		$	100,250
		1.10	%
Certificates of deposit		—			300			—			—			—			—			—			300
					1.23	%
Fixed-rate loans (1)		—			15,947			12,172			11,494			9,284			7,001			19,025			74,923
					8.56	%		8.40	%		8.28	%		7.84	%		7.71	%		7.12	%
Adjustable-rate loans (1)		13,713			24,861			1,623			847			832			669			942			43,487
		8.20	%		7.07	%		6.55	%		6.52	%		6.21	%		5.96	%		7.08	%


Total rate-sensitive assets	$	113,963		$	41,108		$	13,795		$	12,341		$	10,116		$	7,670		$	19,967		$	218,960

(1) Loans are presented at net amounts before deducting the allowance for loan losses and exclude non-performing loans.

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

At March 31, 2005, the fair value of net loans was $118.9 million as compared to the net carrying value of net loans of $117.3 million. The fair value of interest-bearing deposits in banks approximates carrying value.

ITEM 4. Changes in and Disagreements with Accountants in Accounting and Financial Disclosure

Not applicable

Item 4A. Controls and Procedures

Capital Crossing Preferred’s management, with the participation of its President and Treasurer, evaluated the effectiveness of Capital Crossing Preferred’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2005. Based on this evaluation, Capital Crossing Preferred’s President and Treasurer concluded that, as of March 31, 2005, Capital Crossing Preferred’s disclosure controls and procedures were (1) designed to ensure that material information relating to Capital Crossing Preferred is made known to the President and Treasurer by others within the entity, particularly during the period in which this report was being prepared, and (2) effective, in that they provide reasonable assurance that information required to be disclosed by Capital Crossing Preferred in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

No change to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 4B. Other Information

Not applicable.


	Three Months Ended March 31,
	2005			2004
	(in thousands)
Cash flows provided by operating activities:
Net income	$	2,758		$	4,370
Adjustments to reconcile net income to net cash provided by operating activities:
Credit for loan losses		(128	)		(411	)
Gains on sales of loans		—			(76	)
Other, net		(317	)		52


Net cash provided by operating activities		2,313			3,935


Cash flows provided by investing activities:
Loan repayments		4,273			17,566
Proceeds from loan sales		—			495


Net cash provided by investing activities		4,273			18,061


Cash flows used in financing activities:
Payment of preferred stock dividends		(1,632	)		(835	)


Net cash used in financing activities		(1,632	)		(835	)


Net change in cash and cash equivalents		4,954			21,161
Cash and cash equivalents at beginning of period		95,407			65,845


Cash and cash equivalents at end of period	$	100,361		$	87,006

	31.1	Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the President. Rule 13a-14(a) Certification signed by Richard Wayne, President (Principal Executive Officer). FILED HEREWITH.

	31.2	Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the Treasurer. Rule 13a-14(a) Certification signed by Edward F. Mehm, Treasurer (Principal Financial Officer). FILED HEREWITH.

	32	Certification pursuant to 18 U.S.C. Section 1350 of the President and Treasurer. Rule 13a-14(b) Certification signed by Richard Wayne, President (Principal Executive Officer), and Edward F. Mehm, Treasurer (Principal Financial Officer). FILED HEREWITH.

Date: May 13, 2005

/s/ Richard Wayne

Richard Wayne

President (Principal Executive Officer)


	PART I - Financial Information

		Page
Item 1.	Financial Statements (unaudited):

	Balance Sheets	1

	Statements of Income	2

	Statements of Changes in Stockholders’ Equity	3

	Statements of Cash Flows	4

	Notes to Unaudited Interim Financial Statements	5

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations

	Application of Critical Accounting Policies and Estimates	7

	Results of Operations	8

	Changes in Financial Conditions	10

	Interest Rate Risk	12

	Significant Concentration of Credit Risk	13

	Liquidity Risk Management	13

	Impact of Inflation and Changing Prices	13

	Certain Factors That May Affect Future Operating Results	14

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21

Item 4.	Controls and Procedures	21

	PART II - Other Information

Item 6.	Exhibits and Reports on Form 8-K	23

	Signatures	24

	Exhibit Index	25
EX-31.1 SECTION 302 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
EX-31.2 SECTION 302 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
EX-32 SECTION 906 CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICERS

	•	to maintain an adequate portfolio size through the acquisition of additional mortgage assets as mortgage assets currently in the loan portfolio mature, pay down or prepay, and

	•	to pay dividends on the preferred shares and common shares.

	•	a holder of Series A, Series C or Series D preferred shares would be a preferred stockholder of Capital Crossing at a time when Capital Crossing’s financial condition was deteriorating or when Capital Crossing had been placed into bankruptcy, reorganization, conservatorship or receivership and, accordingly, it is unlikely that Capital Crossing would be in a financial position to pay any dividends on the preferred shares of Capital Crossing. An investment in Capital Crossing is also subject to risks that are distinct from the risks associated with an investment in Capital Crossing Preferred. For example, an investment in Capital Crossing would involve risks relating to the capital levels of, and other federal and state regulatory requirements applicable to Capital Crossing and the performance of Capital Crossing’s overall loan portfolio and other business lines. Capital Crossing also has significantly greater liabilities and significantly less stockholders’ equity than does Capital Crossing Preferred;

	•	if a liquidation of Capital Crossing occurs, the claims of depositors and creditors of Capital Crossing and of the FDIC would have priority over the claims of holders of the preferred shares of Capital Crossing, and therefore, a holder of Series A, Series C and Series D preferred shares likely would receive, if anything, substantially less than such holder would receive had the Series A, Series C and Series D preferred shares not been exchanged for preferred shares of Capital Crossing; and

	•	the exchange of the Series A, Series C or Series D preferred shares for preferred shares of Capital Crossing would be a taxable event to a holder of Series A, Series C or Series D preferred shares under the Internal Revenue Code, and such holder would incur a gain or a loss, as the case may be, measured by the difference between such holder’s basis in the Series A, Series C or Series D preferred shares and the fair market value of Capital Crossing preferred shares received in the exchange.

	•	junior to borrowings of Capital Crossing Preferred, including claims of the FHLBB for amounts due or which may become due under Capital Crossing Preferred’s guarantee of Capital Crossing’s obligations to the FHLBB, and any other obligations to Capital Crossing Preferred’s creditors upon its liquidation. As of March 31, 2005, Capital Crossing had $167.5 million in outstanding FHLBB borrowings; and

	•	senior to Capital Crossing Preferred’s common stock and its Series B preferred stock with regard to payment of dividends and amounts upon liquidation.

	•	local and other economic conditions affecting real estate values;

	•	the continued financial stability of a borrower and the borrower’s ability to make mortgage payments;

	•	the ability of tenants to make lease payments;

	•	the ability of a property to attract and retain tenants, which may in turn be affected by local conditions, such as oversupply of space or a reduction in demand for rental space in the area;

	•	interest rate levels and the availability of credit to refinance mortgage loans at or prior to maturity; and

	•	increased operating costs, including energy costs, real estate taxes and costs of compliance with environmental controls and regulations.

	•	from institutions participating in securitization programs;

	•	from failed or consolidating financial institutions; and

	•	from government agencies.

	•	dividends paid by Capital Crossing Preferred with respect to its capital stock are not fully deductible by it for income tax purposes; or

	•	Capital Crossing Preferred are otherwise unable to qualify as a REIT.


		Page
Exhibit	Item	Number
31.1	Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the President. Rule 13a-14(a) Certification signed by Richard Wayne, President (Principal Executive Officer).		26

31.2	Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the Treasurer. Rule 13a-14(a) Certification signed by Edward F. Mehm, Treasurer (Principal Financial Officer).		27

32	Certification pursuant to 18 U.S.C. Section 1350 of the President and Treasurer. Rule 13a-14(b) Certification signed by Richard Wayne, President (Principal Executive Officer), and Edward F. Mehm, Treasurer (Principal Financial Officer).		28