CAPITAL CROSSING PREFERRED CORP - 10-K Annual Report

CAPITAL CROSSING PREFERRED CORPORATION
(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(g) of the Act:
9.75% Non-Cumulative Exchangeable Preferred Stock, Series A
10.25% Non-Cumulative Exchangeable Preferred Stock, Series C
(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /x/

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

The number of shares outstanding of the registrant's sole class of common stock was 100 shares, $.01 par value per share, as of March 6, 2004. No common stock was held by non-affiliates of the registrant.

This Form 10-K contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Capital Crossing Preferred Corporation ("Capital Crossing Preferred") may also make written or oral forward-looking statements in other documents filed with the Securities and Exchange Commission ("SEC"), in press releases and other written materials, and in oral statements made by officers or directors. Forward-looking statements can be identified by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "will," "should," and other expressions which predict or indicate future events and trends and which do not relate to historical matters. Forward-looking statements should not be unduly relied upon because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of Capital Crossing Preferred. These risks, uncertainties and other factors may cause the actual results, performance or achievements of Capital Crossing Preferred to be materially different from the anticipated future results, performance or achievements that are expressed or implied by the forward-looking statements.

Capital Crossing Preferred's actual results could differ materially from those projected in the forward-looking statements as a result, among other factors, or the factors discussed in the section entitled "Risk Factors and Factors Affecting Future Operating Results" of this Form 10-K.

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

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

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

On February 1, 1999, Capital Crossing Preferred closed its public offering of 1,260,000 shares of its 9.75% Non-cumulative exchangeable preferred stock, Series A. On February 12, 1999, Capital Crossing Preferred sold an additional 156,130 Series A preferred shares in connection with the underwriters' exercise of their overallotment option. The net proceeds to Capital Crossing Preferred from the sale of Series A preferred shares were $12.6 million. Series A preferred stock is redeemable at the option of Capital Crossing Preferred on or after February 1, 2004, with the prior consent of the FDIC.

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

Capital Crossing Preferred's principal business objective is to acquire and hold mortgage assets that will generate net income for distribution to stockholders. All of the mortgage assets in Capital Crossing Preferred's loan portfolio at December 31, 2003 were acquired from Capital Crossing and it is anticipated that substantially all mortgage assets acquired in the future will be acquired from Capital Crossing. As of December 31, 2003, Capital Crossing Preferred held loans acquired from Capital Crossing with gross outstanding principal balances of $177.9 million. Capital Crossing Preferred's loan portfolio at December 31, 2003 consisted primarily of mortgage assets secured by commercial and multi-family properties.

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

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

Capital Crossing was organized as a Massachusetts-chartered trust company in December 1987, and commenced operations in February 1988. Capital Crossing operates as a commercial bank primarily focused on purchasing commercial real estate, multi-family and one-to-four family residential real estate loans, secured commercial loans and originating and purchasing leases that finance the business activities of small companies and individuals. To the extent authorized by law, Capital Crossing's deposits are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation (the "FDIC"). Capital Crossing conducts business from its executive and main office in downtown Boston, Massachusetts, through its website at www.capitalcrossing.com and through Dolphin Capital, its leasing subsidiary in Moberly, Missouri. At December 31, 2003, Capital Crossing had total assets of $1.03 billion, deposits of $745.7 million and stockholders' equity of $88.2 million. At December 31, 2003, under the regulatory capital ratios developed and monitored by the federal bank regulatory agencies and applicable to banks, Capital Crossing's capital was sufficient to enable it to be qualified as "well capitalized."

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

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

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

Pursuant to the terms of the master mortgage loan purchase agreement, Capital Crossing delivers or causes to be delivered to Capital Crossing Preferred the mortgage note with respect to each mortgage asset (together with all amendments and modifications thereto) endorsed to the order of Capital Crossing Preferred, the original or certified copy of the mortgage (together with all amendments and modifications thereto) with evidence of recording indicated thereon, if available, and an original or certified copy of an assignment of the mortgage in recordable form. Such documents are initially held by Capital Crossing, acting as custodian for Capital Crossing Preferred pursuant to the terms of the master service agreement.

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

From time to time, mortgage assets may be returned to Capital Crossing in the form of dividends or returns of capital. Mortgage assets are returned to Capital Crossing at their estimated fair value. This will generally be done to allow Capital Crossing to increase its borrowing capacity with the FHLBB. Specifically, the FHLBB will advance Capital Crossing a higher percentage of the outstanding

balances of loans if the loans are owned directly by Capital Crossing than it would if the loans were owned by Capital Crossing Preferred. Capital Crossing will consider the amounts of such returns when assessing the adequacy of the size and composition of Capital Crossing Preferred's loan portfolio and may, from time to time, contribute additional mortgage assets to Capital Crossing Preferred. Capital Crossing will seek to ensure that the mortgage assets it contributes to Capital Crossing Preferred are generally of similar quality and characteristics as those returned to it.

Future decisions regarding mortgage asset acquisitions 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.

In administering Capital Crossing Preferred's mortgage assets, Capital Crossing has a high degree of autonomy. Capital Crossing Preferred's Board of Directors, however, has adopted certain policies to guide the acquisition and disposition of assets, use of capital and leverage, credit risk management and certain other activities. These policies, which are discussed below, may be amended or revised from time to time at the discretion of Capital Crossing Preferred's Board of Directors without a vote of Capital Crossing Preferred's stockholders, including Series A preferred shares and Series C preferred shares.

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

In order to preserve its status as a REIT under the Internal Revenue Code, substantially all of the assets of Capital Crossing Preferred must consist of mortgage loans and other qualified assets of the type set forth in Section 856(c)(6)(B) of the Internal Revenue Code. Such other qualifying assets include cash, cash equivalents and securities, including shares or interests in other REITs, although Capital Crossing Preferred does not currently intend to invest in shares or interests in other REITs.

Capital and Leverage Policies. To the extent that the Board of Directors determines that additional funding is required, Capital Crossing Preferred may raise such funds through additional equity offerings, debt financing or retention of cash flow (after consideration of provisions of the Internal Revenue Code requiring the distribution by a REIT of not less than 90% of its REIT taxable

income and taking into account taxes that would be imposed on undistributed taxable income), or a combination of these methods.

Capital Crossing Preferred has no debt outstanding, and it currently does not intend to incur any indebtedness. The organizational documents of Capital Crossing Preferred limit the amount of indebtedness which it is permitted to incur without approval of the Series A and Series C preferred stockholders to no more than 100% of its total stockholders' equity. Any such debt incurred may include intercompany advances made by Capital Crossing to Capital Crossing Preferred.

Capital Crossing Preferred has guaranteed certain obligations of Capital Crossing and has agreed to pledge a significant amount of its assets in connection with advances Capital Crossing may receive from time to time from the FHLBB. The assets Capital Crossing Preferred pledges to the FHLBB will vary from time to time, however the potential exists for it to pledge all of its assets to the FHLBB to secure advances to Capital Crossing. At December 31, 2003, it has pledged approximately $30.6 million, or 13.8%, of its assets to secure the advances to Capital Crossing. The FHLBB advances will be used by Capital Crossing primarily for the purchase of mortgage assets and to assist in managing Capital Crossing's interest rate risk exposure. The assets purchased using FHLBB advances generally would be available for contribution to or purchase by Capital Crossing Preferred, based upon the asset quality of the assets, and whether the assets were qualified to be held by REITs. The guarantee and pledge were approved by Capital Crossing Preferred's independent directors, subject to certain requirements and limitations, including the requirement that Capital Crossing pay Capital Crossing Preferred a guarantee fee. Capital Crossing Preferred's guarantee obligations under this arrangement are limited by applicable laws pertaining to fraudulent conveyance and fraudulent transfer. Capital Crossing has also agreed that it will not request or accept advances from the FHLBB in excess of Capital Crossing Preferred's total stockholders equity, less the stockholders equity attributable to the Series A and Series C preferred shares. As of December 31, 2003, this restriction would limit Capital Crossing's ability to receive advances in excess of $188.9 million. At December 31, 2003, Capital Crossing had term borrowing capacity of $139.0 million, of which $129.0 million was outstanding from the FHLBB. Further increases in borrowings are dependent upon the qualification of additional assets as collateral and other factors as may be determined by the FHLBB.

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

Conflicts of Interest Policies. Because of the nature of Capital Crossing Preferred's relationship with Capital Crossing and its affiliates, conflicts of interest have arisen and may arise with respect to certain transactions, including without limitation, Capital Crossing Preferred's acquisition of mortgage assets from, or return of mortgage assets to Capital Crossing, or disposition of mortgage assets or foreclosed property to, Capital Crossing or its affiliates and the modification of the master service agreement. It is Capital Crossing Preferred's policy that the terms of any financial dealings with Capital Crossing and its affiliates will be consistent with those available from third parties in the mortgage lending industry. In addition, Capital Crossing Preferred's Board of Directors consists of three independent directors and has established an audit committee of the Board of Directors which is comprised of the independent directors. Among other functions, the audit committee will review

transactions between Capital Crossing Preferred and Capital Crossing and its affiliates. Under the terms of the advisory agreement, Capital Crossing may not subcontract its duties under the advisory agreement to an unaffiliated third party without the approval of Capital Crossing Preferred's Board of Directors, including the approval of a majority of its independent directors. Furthermore, under the terms of the advisory agreement, Capital Crossing provides advice and recommendations with respect to all aspects of Capital Crossing Preferred's business and operations, subject to the control and discretion of Capital Crossing Preferred's Board of Directors.

Conflicts of interest between Capital Crossing Preferred and Capital Crossing and its affiliates may also arise in connection with decisions bearing upon the credit arrangements that Capital Crossing or one of its affiliates may have with a borrower. Conflicts could also arise in connection with actions taken by Capital Crossing as a controlling person of Capital Crossing Preferred. It is the intention of Capital Crossing Preferred and Capital Crossing that any agreements and transactions between Capital Crossing Preferred and Capital Crossing or its affiliates, including, without limitation, the master mortgage loan purchase agreement, are fair to all parties and are consistent with market terms for such types of transactions. The master service agreement provides that foreclosures and dispositions of the mortgage assets are to be performed with a view toward maximizing the recovery by Capital Crossing Preferred as owner of the mortgage assets, and Capital Crossing shall service the mortgage assets solely with a view toward the interests of Capital Crossing Preferred, and without regard to the interests of Capital Crossing or any of its affiliates. However, there can be no asurance that any such agreement or transaction will be on terms as favorable to Capital Crossing Preferred as would have been obtained from unaffiliated third parties.

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

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

Capital Crossing Preferred may, under certain circumstances, purchase Series A or Series C preferred shares in the open market or otherwise. Any such redemption may generally only be effected with the prior approval of the FDIC. Capital Crossing Preferred has no present intention of repurchasing any shares of its capital stock, other than shares of currently outstanding Series B preferred stock, and any such action would be taken only in conformity with applicable federal and state laws and the requirements for qualifying as a REIT.

Capital Crossing Preferred currently intends to make investments and operate its business at all times in such a manner as to be consistent with the requirements of the Internal Revenue Code to qualify as a REIT. However, future economic, market, legal, tax or other considerations may cause the Board of Directors to determine that it is in the best interests of Capital Crossing Preferred and its stockholders to revoke its REIT status.

Under the advisory agreement, Capital Crossing intends to monitor and review Capital Crossing Preferred's compliance with the requirements of the Internal Revenue Code regarding Capital Crossing Preferred's qualification as a REIT on a quarterly basis and to have an independent public accounting firm, selected by the Board of Directors of Capital Crossing Preferred, review the results of Capital Crossing's analysis.

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

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

The following table sets forth certain information regarding the geographic location of properties securing the mortgage loans in the loan portfolio at December 31, 2003:

The following tables set forth information regarding maturity, contractual interest rate and principal balance of all loans in the loan portfolio at December 31, 2003:

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

Prior to acquiring a loan or portfolio of loans, Capital Crossing's in-house loan acquisition group conducts a comprehensive review and evaluation of the loan or loans to be acquired in accordance with its credit policy for purchased loans. This review includes an analysis of information provided by the seller, including credit and collateral files, a review and valuation of the underlying collateral and a review, where applicable, of the adequacy of the income generated by the property to service the loan. Capital Crossing's in-house loan acquisition group includes credit analysts, real estate appraisers, an environmental department and legal counsel.

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

In order to determine the amount that Capital Crossing will bid to acquire loans, Capital Crossing considers, among other factors:

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

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

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

Capital Crossing Preferred determines the contractual delinquency of purchased loans prospectively from Capital Crossing's purchase date rather than from the origination date. For example, if Capital Crossing acquires a loan that is past due at the time of acquisition, that loan would not be considered delinquent until it was 90 days past due from Capital Crossing's purchase date. If Capital Crossing acquires a loan which is contractually delinquent, management evaluates the collectibility of principal and interest and interest would not be accrued when the collectibility of principal and interest is not probable or estimable. Interest income on purchased non-performing loans is accounted for using either the cash basis or the cost recovery method, whereby any amounts received are applied against the recorded amount of the loan. A determination as to which method is used is made on a case-by-case basis.

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

Capital Crossing Preferred considers a purchased loan impaired when, based on current information and events, it determines that estimated cash flows are less than the cash flows estimated at the date of purchase by Capital Crossing. A loan originated by Capital Crossing is considered impaired when, based on current information and events, it is probable that Capital Crossing Preferred will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Impairment is measured on a loan-by-loan basis by comparing the recorded investment in the loan to the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Substantially all of Capital Crossing Preferred's loans which have been identified as impaired have been measured by the fair value of the existing collateral. At December 31, 2003, Capital Crossing Preferred had a net recorded investment in impaired loans of $677,000. No additional funds are committed to be advanced in connection with impaired loans. For additional information see Notes 1 and 2 to the Financial Statements.

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

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

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

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

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

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

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

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

Included in net loans, at December 31, 2003 and 2002, are approximately $6.7 million and $32.9 million (of which none and $180,000 are non-performing), respectively, for which the net recorded investment represents the amortized cost of these loans, where at acquisition, the amounts of reasonably estimable and probable discounted future cash collections were less than the contractual balances owed. These loans were purchased at a price to yield a market rate of interest after considering the credit quality of the loans at acquisition and the aforementioned expected future cash

collections. The excess of the contractual balances over the amount of reasonably estimable and probable discounted future cash collections represents the predominant portion of the $1.5 million and $8.2 million of non-amortizing discount at December 31, 2003 and 2002, respectively.

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

Allowance for Loan Losses. Capital Crossing Preferred maintains an allowance for loan losses that are known and inherent in its loan portfolio. The allowance for loan losses is increased or decreased through a provision or credit for loan losses included in earnings. Additionally, the allowance for loan losses is increased upon allocation of purchase discount upon acquisition of loans and decreased upon sales and pay-offs of loans. Loans are charged-off when they are deemed to be uncollectible, or partially charged-off when a portion of a loan is deemed uncollectible. Subsequent recoveries, if any, are credited to the allowance when cash payments are received.

Capital Crossing Preferred performs reviews of its loan portfolio to identify loans for which specific allocations are considered prudent. Specific allocations include the results of measuring impaired loans under Statement of Financial Accounting Standards No. 114. General risk allocations are determined by a formula whereby the loan portfolio is stratified by type and by internal risk rating categories. Loss factors are then applied to each strata based on various considerations including historic loss experience, delinquency trends, current economic conditions, industry standards and regulatory guidelines. This amount is adjusted from time to time based upon actual experience. An additional allowance is maintained based on a judgment by management after consideration of qualitative and quantitative assessments of certain factors including regional credit concentration, industry concentration, results of regulatory examinations, historical loss ranges, portfolio composition, economic conditions such as interest rates and energy costs and other changes in the portfolio. The allowance for loan losses is management's estimate of the probable loan losses incurred as of the balance sheet date.

Additional factors influencing the calculation of the allowance for loan losses are particular concentrations within the portfolio, including the geographic concentration of loans in California, which accounted for approximately 44.45% of the portfolio at December 31, 2003, and concentrations of loans to individual borrowers.

Capital Crossing Preferred's allowance for loan losses at December 31, 2003 was $3.3 million. The determination of this allowance requires the use of estimates and assumptions regarding the risks inherent in individual loans and the loan portfolio in its entirety. In addition, regulatory agencies

periodically review the adequacy of the allowance for loan losses and may require Capital Crossing Preferred to make additions to its allowance for loan losses. While management believes its estimates and assumptions are reasonable, there can be no assurance that they will be proven to be correct in the future. The actual amount of future provisions that may be required cannot be determined, and such provisions may exceed the amounts of past provisions. Management believes that the allowance for loan losses is adequate to absorb the known and inherent risks in Capital Crossing Preferred's loan portfolio at each date based on the facts known to management as of such date. Management continues to monitor and modify the allowances for general and specific loan losses as economic conditions dictate.

Effective January 1, 2005, 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 expects its allowance for loan loss methodology to change. SOP No. 03-3 prohibits "carrying over" or creation of valuation allowances in the initial accounting of all loans acquired in a transfer. The prohibition of the valuation allowance carry over applies to the purchase of an individual loan, a pool of loans, a group of loans and impaired loans acquired in a business combination. For more information related to SOP No. 03-3 see Note 1—Recent Accounting Pronouncements to the Financial Statements. Capital Crossing Preferred has not yet determined how the adoption of this SOP will impact its financial condition or results of operation.

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

The 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 a fee equal to 0.20% per annum, payable monthly, on the gross average outstanding principal balance of loans serviced. For the years ended December 31, 2003, 2002 and 2001, Capital Crossing Preferred incurred $460,000, $518,000 and $345,000, respectively, in servicing fees payable to Capital Crossing.

The master service agreement requires Capital Crossing to service the loan portfolio in a manner substantially the same as for similar work performed by Capital Crossing for transactions on its own behalf. Capital Crossing collects and remits principal and interest payments, maintains perfected collateral positions, submits and pursues insurance claims and initiates and supervises foreclosure proceedings on the loan portfolio it services. Capital Crossing also provides accounting and reporting services required by Capital Crossing Preferred for such loans. Capital Crossing Preferred may also direct Capital Crossing, at any time during the servicing process, to dispose of any loans which become classified, placed on non-performing status, or are renegotiated due to financial deterioration of the

borrower. Capital Crossing is required to pay all expenses related to the performance of its duties under the master service agreement. Capital Crossing may institute foreclosure proceedings, exercise any power of sale contained in any mortgage or deed of trust, obtain a deed-in-lieu-of-foreclosure or otherwise acquire title to a mortgaged property underlying a mortgage loan by operation of law or otherwise in accordance with the terms of the master service agreement.

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

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

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

Capital Crossing Preferred has entered into an advisory agreement with Capital Crossing to administer the day-to-day operations of Capital Crossing Preferred. Capital Crossing is paid a monthly advisory fee equal to 0.05% per annum of the average gross outstanding balance of Capital Crossing Preferred's loans for the immediately preceding month, plus reimbursement for certain expenses incurred by Capital Crossing as advisor. For the years ended December 31, 2003, 2002 and 2001, Capital Crossing Preferred incurred $115,000, $130,000, and $86,000, respectively, in advisory fees payable to Capital Crossing. As advisor, Capital Crossing is responsible for:

Capital Crossing Preferred has six officers, including three executive officers. 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. Each officer of Capital Crossing Preferred currently is also an officer and/or director of Capital Crossing. Capital Crossing Preferred will maintain corporate records and audited financial statements that are separate from those of Capital Crossing. There are no provisions in the restated articles of organization limiting any of the officers or directors from having any direct or indirect pecuniary interest in any mortgage asset to be acquired or disposed of by Capital Crossing Preferred or in any transaction in which Capital Crossing Preferred has an interest or from engaging in acquiring and holding mortgage assets. None of the officers or directors currently has, nor is it anticipated that they will have, any such interest in Capital Crossing Preferred's mortgage assets.

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

The banking industry in the United States is part of the broader financial services industry. This industry also includes insurance companies, mutual funds, consumer finance companies and the securities brokerage industry. In recent years, intense market demands, technological and regulatory changes and economic pressures have eroded industry classifications which were once clearly defined. More specifically, in 1999, the U.S. Congress enacted the "Gramm-Leach-Bliley Act of 1999" (the "1999 Act"). Under the 1999 Act, banks are no longer prohibited from associating with, or having management interlocks with, a business organization engaged principally in securities activities. The 1999 Act permits bank holding companies that elect to become financial holding companies to engage in defined securities and insurance activities as well as to affiliate with securities and insurance companies. The 1999 Act also permits banks to have financial subsidiaries that may engage in certain activities not otherwise permissible for banks.

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

Numerous banks and non-bank financial institutions compete with Capital Crossing for deposit accounts and the acquisition of loans. The primary factors in competing for loans are interest rates, loan origination fees and the quality and range of lending services offered. The competition for loans has recently increased as a direct result of mergers of banks in New England. These mergers have provided the resulting banks with enhanced financial resources and administrative capacity to compete for assets.

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

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

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

Item 5. Market for Capital Crossing Preferred's Common Stock and Related Security Holder Matters

In connection with its formation on March 20, 1998, Capital Crossing Preferred issued 100 shares of its common stock to Capital Crossing. These shares of common stock were issued in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. There is no established public trading market for the common stock. As of March 6, 2004, there were 100 issued and outstanding shares of common stock, all of which were held by Capital Crossing.

During 2003, 2002 and 2001, dividends of $16.1 million, $23.5 million, and $20.6 million were paid to the common stockholder. In 2003, dividends of $1.0 million were in the form of mortgage loans. In addition, during 2003, returns of capital totaling $118.2 million were paid to the common stockholder. In 2003, returns of capital of $8.3 million were in the form of mortgage loans.

General. Capital Crossing Preferred currently expects to pay an aggregate amount of dividends with respect to its outstanding shares of capital stock equal to substantially all of its REIT taxable income, excluding capital gains. In order to remain qualified as a REIT, Capital Crossing Preferred must distribute annually at least 90% of its REIT taxable income, excluding capital gains, to stockholders. Capital Crossing Preferred anticipates that none of the dividends on the preferred shares will constitute non-taxable returns of capital.

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

The FDIC's prompt corrective action regulations prohibit entities such as Capital Crossing from making "capital distributions," which include a transaction that the FDIC determines, by order or regulation, to be "in substance a distribution of capital," unless the institution is at least adequately capitalized after the distribution. There can be no assurances that the FDIC would not seek to restrict Capital Crossing Preferred's payment of dividends on the Series A and Series C preferred shares under these regulations if Capital Crossing were to fail to maintain a status of at least adequately capitalized. Currently, an institution is considered adequately capitalized if it has a Total Risk-based capital ratio of at least 8.0%, a Tier 1 Risk-based capital ratio of at least 4.0% and a Tier 1 Leverage ratio of at least 4.0%. At December 31, 2003, Capital Crossing's Total Risk-based capital ratio was 13.96%, Tier 1 Risk-based capital ratio was 12.70% and Tier 1 Leverage ratio was 12.19%, which is sufficient for Capital Crossing to be considered well-capitalized. As part of its common stock repurchase program, Capital Crossing has agreed with the FDIC to maintain, for so long as the repurchase program continues, its Tier 1 Leverage ratio at least 8.0% and that it remains well-capitalized.

In addition, the automatic exchange may take place under circumstances in which Capital Crossing will be considered less than adequately capitalized for purposes of the FDIC's prompt corrective action regulations. Thus, at the time of the automatic exchange, Capital Crossing would likely be prohibited from paying dividends on the preferred shares of Capital Crossing. Further, Capital Crossing's ability to pay dividends on the preferred shares of Capital Crossing following the automatic exchange also would

be subject to various restrictions under FDIC regulations and a resolution of Capital Crossing's Board of Directors. If the Capital Crossing did pay dividends on the preferred shares of Capital Crossing, such dividends would be paid out of its capital surplus.

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

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Net income available to common shareholder decreased $1.1 million, or 4.5%, to $24.2 million in 2003 compared to $25.4 million in 2002 and increased $4.6 million or 22.2%, in 2002 compared to $20.8 million for 2001. The decrease from 2002 to 2003 is primarily the result of a decline in interest income partially offset by an increased credit for loan losses and an increase in gains on distribution of loans to the common stockholder. The increase from 2001 to 2002 is primarily the result of an increase in gains on sales of loans, a credit for loan losses and an increase in interest income.

During 2003, Capital Crossing Preferred did not acquire any mortgage assets. Returns of capital of $118.2 million were made during 2003. 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 2003, the loan portfolio was large enough to generate income resulting in a ratio of earnings to fixed charges and preferred stock dividends of 8.25 times.

In December 2001, the SEC requested that all registrants discuss their most "critical accounting policies" in management's discussion and analysis of financial condition and results of operations. The SEC indicated that a "critical accounting policy" is one which is both important to the portrayal of the company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. While Capital Crossing Preferred's significant accounting policies are more fully described in Note 1 to the Financial Statements, the following is a summary of the accounting policies believed by management to be most critical in their potential effect on Capital Crossing Preferred's financial position or results of operations:

Allowance for Loan Losses. Arriving at an appropriate level of allowance for loan losses requires a high degree of judgment. Capital Crossing Preferred maintains an allowance for probable loan losses that are inherent in its loan portfolio. The initial allowance for loan losses was transferred from Capital Crossing at the time of the initial transfer of loans to Capital Crossing Preferred and additional transfers are made in connection with each transfer of loans from Capital Crossing. Additionally, the allowance for loan losses is increased upon allocation of purchase discount upon acquisition of loans and decreased upon sales or pay-offs of loans. Reductions in connection with sales are included in the calculation of the gain or loss, and reductions related to pay-offs are recorded as a credit for loan losses. Loan losses are charged against the allowance when management believes the net investment of the loan, or a portion thereof, is uncollectible. Subsequent recoveries, if any, are credited to the allowance when cash payments are received.

Management makes significant judgments in determining the adequacy of the allowance for loan losses. Management initially considers the loan loss allowances specifically allocated to individual impaired loans. Next, management considers the level of general loan loss allowances deemed appropriate for the balance of the portfolio. Factors considered include known and inherent risks in the nature and volume of the loan portfolios, adverse situations that may affect the borrower's ability to repay, historical loss ranges, the estimated value of any underlying collateral and prevailing economic conditions. An additional allowance for loan losses is maintained based on a judgmental process whereby management considers qualitative and quantitative assessments of other factors including regional credit concentration, industry concentration, results of regulatory examinations, historical loss

ranges, portfolio composition, economic conditions such as interest rates and energy costs and other changes in the portfolio. The allowance for loan losses is management's estimate of the probable loan losses incurred as of the balance sheet date. There can be no assurance that Capital Crossing Preferred's actual losses with respect to loans will not exceed its allowance for loan losses.

Effective January 1, 2005, as a result of the required adoption of SOP No. 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer," Capital Crossing Preferred expects its allowance for loan loss methodology to change. SOP No. 03-3 prohibits "carrying over" or creation of valuation allowances in the initial accounting of all loans acquired in a transfer. The prohibition of the valuation allowance carry over applies to the purchase of an individual loan, a pool of loans, a group of loans and impaired loans acquired in a business combination. For more information related to SOP No. 03-3 see Note 1-Recent Accounting Pronouncements to the Financial Statements. Capital Crossing Preferred has not yet determined how the adoption of this SOP will impact its financial statements.

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

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, prepayment fees and other loan fees.

Gains and losses on sales of loans are determined using the specific identification method. The excess (deficiency) of any cash received as compared to the net investment is recorded as gain (loss) on sales of loans. There are no loans held for sale at December 31, 2003.

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 prepayments. 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.

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

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

The decline in yield on interest-earning assets from 2001 to 2002 is a result of a decline in yield on both interest-bearing deposits and the loan portfolio. The yield on interest-bearing deposits declined due to a decline in overall market rates. The yield on the loan portfolio declined as a result of: (1) a decrease in yield attributable to regularly scheduled interest income as a result of the declining interest rate environment, (2) a decline, relative to the overall yield on loans, in interest income recognized at the time of individual loan pay-offs and (3) as a result of the purchase or contribution of loans from Capital Crossing that were acquired from the Small Business Administration which generate lower regularly scheduled interest and accretion. Average loans, net for 2002 totaled $226.1 million compared to $154.9 million for 2001. This increase is due primarily to purchases of loans from or contribution of loans by Capital Crossing totaling $184.1 million, which was partially offset by pay-offs, sales, and amortization related to loans during the period.

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.

interest collected if on non-performing status and other loan fees ("other interest and fee income"). The following table sets forth, for the years indicated, the components of interest and fees on loans. There can be no assurance regarding future interest income, including the yields and related level of such income, or the relative portion attributable to loan pay-offs as compared to other sources.

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

The average balance of interest-bearing deposits increased $4.7 million to $83.0 million for 2003 compared to $78.3 million for 2002 and decreased $8.8 million in 2002 compared to $87.2 million for 2001. The changes in the average balances of interest-bearing deposits are the result of cash flows from loan repayments, offset by loan purchases and periodic dividend payments and returns of capital. The yield on interest-bearing deposits decreased in 2003 and 2002 as a result of a decline in the interest rate environment.

Capital Crossing Preferred recorded a credit for loan losses of $3.9 million and $1.5 million for the years ended December 31, 2003 and 2002, respectively. No provision or credit was recorded for the year ended December 31, 2001. Capital Crossing Preferred has experienced a high rate of loan pay-offs and thus recorded a credit for loan losses to reduce allowance allocations related to the loans that have paid off and loans which have performed above original expectations. The allowance for loan losses is based on the size of the portfolio and its historical performance. 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. Should the loan portfolio continue to decline without utilization of the allowance for loan losses, future credits for loans losses will be necessary.

Guarantee fee income for the years ended December 31, 2003, 2002 and 2001 was $80,000 in each year. Effective July 1, 2000, Capital Crossing Preferred entered into an agreement to make certain assets available to be pledged in connection with borrowings of Capital Crossing from the FHLBB. Capital Crossing Preferred receives an annual fee of $80,000 under this agreement.

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

During 2002, there were three loan sales to unaffiliated third parties, comprised of ten loans with carrying values of $5.1 million, which resulted in gains of $2.4 million. In addition, four loans totaling $2.6 million were sold to Capital Crossing for no gain. During 2001, one loan with a carrying value of $771,000 was sold at a gain of $156,000. There were no loan sales to third parties during 2003.

Loan servicing and advisory expenses decreased $73,000, or 11.3%, to $575,000 in 2003 from $648,000 in 2002 and increased by $217,000, or 50.3%, from $431,000 in 2001. The changes are a result of changes in the average balance of the loan portfolio from year to year.

Other real estate owned income for the year ended December 31, 2003 is comprised of a gain of $334,000 on the sale of one property to an unaffiliated third party and rental income of $27,000. There was no other real estate owned income during the years ended December 31, 2002 and 2001.

Other general and administrative expenses consisting primarily of professional fees, shareholder relations and printing expenses increased $212,000, or 201.9%, to $317,000 from $105,000 in 2002 and increased $38,000, or 56.7%, from $67,000 in 2001. These increases are primarily attributable to increases in legal and accounting fees in connection with loan-related matters.

Preferred stock dividends increased in 2002 and 2003 as compared to 2001 as a result of dividends on Series C preferred stock issued on May 31, 2001.

Interest-bearing deposits with Capital Crossing Bank consist entirely of a money market account at December 31, 2003 and 2002. The balance of interest-bearing deposits decreased $26.9 million to $65.8 million for 2003 compared to $92.6 million for 2002. The change in the balance of interest-bearing deposits is the result of loan purchases and periodic dividend payments and returns of capital, offset by cash flows from loan repayments.

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

Capital Crossing Preferred acquires primarily performing commercial real estate and multifamily residential mortgage loans. No loans were acquired in 2003 as the existing portfolio was large enough to generate an adequate dividend coverage ratio. Total net loans acquired in 2002 were $184.1 million consisting of $90.3 million of loans purchased from Capital Crossing and $93.3 million of loans contributed by Capital Crossing.

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

Non-performing loans, net of discount, totaled $17,000 and $1.6 million at December 31, 2003 and 2002, respectively. The decline in non-performing loans relates primarily to a loan for which the collateral was foreclosed upon and sold during 2003.

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.

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.

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

At December 31, 2003, 44.5% and 14.5%, respectively, of Capital Crossing Preferred's total real estate loan portfolio consisted of loans located in California and New England. At December 31, 2002, 43.7% and 14.1%, respectively, of Capital Crossing Preferred's total loan portfolio consisted of loans in California and New England. Consequently, the portfolio may experience a higher default rate in the event of adverse economic, political or business developments or natural hazards in California or New England that may affect the ability of property owners to make payments of principal and interest on the underlying mortgages.

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.

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 and the Series C 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 or the Series C preferred shares without the consent of holders of at least two-thirds of the Series A and Series C preferred shares 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 or Series C preferred stock, to Capital Crossing Preferred's knowledge the amount of shares of Series A and Series C 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 and Series C preferred shares may not be issued without the approval of a majority of Capital Crossing Preferred's independent directors.

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 Preferred's management also approves and establishes pricing and funding decisions with respect to Capital Crossing Preferred's overall asset and liability composition.

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

The following table sets forth the Capital Crossing Preferred's interest-rate-sensitive assets categorized by repricing dates and weighted average yields at December 31, 2003. For fixed rate instruments, the repricing date is the maturity date. For adjustable-rate instruments, the repricing date is deemed to be the earliest possible interest rate adjustment date. Assets that are subject to immediate repricing are placed in the overnight column.

Based on Capital Crossing Preferred's experience, management applies the assumption that, on average, approximately 24% of the fixed and adjustable rates will prepay annually.

At December 31, 2003, the fair value of net loans was $161,558,000 as compared to the net carrying value of net loans of $155,071,000. The fair value of interest-bearing deposits approximates carrying value.

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

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

The returns from an investment in the Series A or Series C 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 and Series C preferred shares for preferred shares of Capital Crossing, which would represent an investment in Capital Crossing and not in Capital Crossing Preferred. Under these circumstances:

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

If Capital Crossing Preferred incurs significant indebtedness, it may not have sufficient funds to make dividend or liquidation payments on the Series A or Series C preferred shares. Upon Capital Crossing Preferred's liquidation, its obligations to its creditors would rank senior to the Series A and Series C preferred shares. At December 31, 2003, Capital Crossing Preferred had approximately $132,000 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 or Series C preferred shares. In addition, upon Capital Crossing Preferred's liquidation, dissolution or winding up, if it does not have sufficient funds to pay the full liquidation amount to the holders of the Series A and Series C preferred shares, such holders may receive less than the $10.00 per share liquidation amount.

The terms of the Series A and Series C 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 and Series C preferred shares but do not require that Capital Crossing Preferred obtain the approval of the holders of the Series A and Series C preferred shares to issue additional series of preferred shares which rank equal to the Series A and Series C 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:

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

Capital Crossing Preferred does not normally obtain general credit enhancements such as mortgagor bankruptcy insurance or obtain special hazard insurance for its mortgage assets, other than standard hazard insurance, which will in each case only relate to individual mortgage loans. Accordingly, Capital Crossing Preferred will be subject to risks of borrower defaults and bankruptcies and special hazard losses, such as losses occurring from floods that are not covered by standard hazard insurance. A significant number of loans acquired in recent years are loans that were originated under the Small Business Administration's disaster relief program. These loans are typically loans made to small businesses and individuals for the purpose of assisting those who have been the victim of a disaster and may be located in an area prone to such disasters. In the event of a default on any mortgage loan held by Capital Crossing Preferred resulting from declining property values or worsening economic conditions, among other factors, it would bear the risk of loss of principal to the extent of any deficiency between (1) the value of the related mortgaged property, plus any payments from an insurer or guarantor in the case of commercial mortgage loans, and (2) the amount owing on the mortgage loan.

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

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

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

Properties underlying Capital Crossing Preferred's current mortgage assets are concentrated primarily in California, particularly Southern California, and New England. As of December 31, 2003, approximately 44.5% of the balances of its mortgage loans were secured by properties located in California and 14.5% 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 whose level of due diligence may be different than Capital Crossing's level of due diligence

At December 31, 2003, approximately 93.9% of Capital Crossing Preferred's total gross loans consisted of loans originated by third parties that were purchased by Capital Crossing and subsequently acquired by Capital Crossing Preferred from Capital Crossing. Because these loans were originated by third parties, Capital Crossing generally is not able to conduct the same level of due diligence on these loans that it would have conducted had it originated them. Generally, while Capital Crossing conducts an acquisition review, it relies on the underwriting standards of the parties originating the loans it acquires. The standards of these loan originators may be substantially different than those of Capital Crossing. 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 right of ways that may impact the value and the borrower's ability to manage the property. Other disadvantages of purchased loans versus originated loans may include the lack of current financial information, incomplete legal documentation and outdated appraisals.

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

Commercial mortgage loans constituted approximately 67.6% of the total gross loans in Capital Crossing Preferred's loan portfolio at December 31, 2003 and commercial mortgage loans are generally subject to greater risks than other types of loans. Capital Crossing Preferred's commercial mortgage loans, like most commercial mortgage loans, generally lack standardized terms, tend to have shorter maturities than other mortgage loans and may not be fully amortizing, meaning that they have a principal balance or "balloon" payment due on maturity. The commercial real estate properties underlying Capital Crossing Preferred's commercial mortgage loans also tend to be unique and are more difficult to value than other real estate properties. They are also subject to relatively greater environmental risks than other types of loans and to the corresponding burdens and costs of compliance with environmental laws and regulations. Because of these risks related to commercial mortgage loans, Capital Crossing Preferred may experience higher rates of default on its mortgage loans than it would if its loan portfolio was more diversified and included a greater number of owner-occupied residential or other mortgage loans. Higher rates of default would cause Capital Crossing Preferred to increase its provision for loan losses, which may have a material adverse affect on its business, financial condition and 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 (1) from institutions which sought to eliminate certain loans or categories of loans from their portfolios, (2) from institutions participating in securitization programs, (3) from failed or consolidating financial institutions and (4) from government agencies, specifically the Small Business Administration. 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. In fact, the Small Business Administration has recently announced that all future assets sales are on hold, pending the outcome of an internal review of its loan sale program. Consequently, Capital Crossing Preferred cannot provide assurance that Capital Crossing will be able to purchase loans at the same volumes or with the same yields as it has historically purchased. This may interfere with Capital Crossing Preferred's ability to maintain the requisite level of mortgage assets to maintain its qualification as a REIT. If volumes of loans purchased decline or the yields on these loans decline further, Capital

Crossing Preferred would experience a material adverse effect on its business, financial condition and results of operations.

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

If Capital Crossing Preferred chooses to foreclose on a defaulted mortgage loan to recover its investment it may be subject to environmental liabilities related to the underlying real property. Approximately 67.6% of the loans in Capital Crossing Preferred's portfolio at December 31, 2003 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.

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 existence. Capital Crossing Preferred has six officers and no other employees and does not have any independent corporate infrastructure. 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. All of Capital Crossing Preferred's officers are also officers of Capital Crossing. 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 provision of 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 the Board of Directors as well as a majority of the 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 whether Capital Crossing Preferred will be paying fair market value for these loans, nor does Capital Crossing Preferred anticipate doing so 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 a fee equal to 0.20% per annum, payable monthly, on the gross outstanding principal balances of loans serviced. 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 with a view toward maximizing Capital Crossing Preferred's recovery as owner of the mortgage assets, and Capital Crossing shall service the mortgage assets solely with a view toward Capital Crossing Preferred's interests, and without regard to the interests of Capital Crossing or any of its affiliates. 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, would 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 distributed to Capital Crossing. In this circumstance the holders of Series A and Series C Preferred shares would receive their liquidation preference only to the extent there are available assets of Capital Crossing Preferred following satisfaction of its outstanding obligations, including its guarantee of Capital Crossing's FHLBB borrowings. At December 31, 2003, approximately $30.6 million, or 13.8%, of Capital Crossing Preferred assets have been pledged to and accepted by the FHLBB to secure advances to Capital Crossing. Capital Crossing has also agreed with the FHLBB that it will not request or accept advances from the FHLBB in excess of Capital Crossing Preferred's total stockholders equity, less the stockholders equity attributable to the Series A and Series C preferred shares. As of December 31, 2003, this restriction would limit Capital Crossing's ability to receive advances in excess of approximately $188.9 million. As of December 31, 2003, Capital Crossing had $129.0 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 a guarantee fee. Any default by Capital Crossing on its obligations which would require Capital Crossing Preferred to satisfy its guarantee could adversely affect its 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 was fair to all parties and consistent with market terms, all of its officers and three of its directors are 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.

A decline 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 and Series C preferred shares. Because the dividend rates on the Series A and Series C preferred shares are fixed, a significant decline in interest rates could materially adversely affect Capital Crossing Preferred's ability to pay dividends on the Series A and Series C preferred shares.

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 or Series C preferred shares, nor would it give the holders of the Series A or Series C 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 and Series C 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 and Series C 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 and Series C preferred shares if it received an opinion of counsel to the effect that, as a result of changes to the tax laws or regulations:

The occurrence of such changes in the tax laws or regulations will not, however, give the holders of the Series A or Series C 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, or the 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 and the Series C 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 and Series C preferred shares could adversely affect Capital Crossing Preferred's ability to satisfy the share ownership requirements in the future.

		Page
Independent Auditors' Report		40
Balance Sheets		41
Statements of Income		42
Statements of Changes in Stockholders' Equity		43
Statements of Cash Flows		44
Notes to Financial Statements		45

We have audited the accompanying balance sheets of Capital Crossing Preferred Corporation as of December 31, 2003 and 2002, and the related statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2003. These financial statements are the responsibility of Capital Crossing Preferred Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Capital Crossing Preferred Corporation as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

CAPITAL CROSSING PREFERRED CORPORATION
BALANCE SHEETS
December 31, 2003 and 2002

CAPITAL CROSSING PREFERRED CORPORATION
STATEMENTS OF INCOME
Years Ended December 31, 2003, 2002, and 2001

CAPITAL CROSSING PREFERRED CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002 and 2001

CAPITAL CROSSING PREFERRED CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2002 and 2001

CAPITAL CROSSING PREFERRED CORPORATION
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002 and 2001

Capital Crossing Preferred Corporation ("Capital Crossing Preferred"), formerly Atlantic Preferred Capital Corporation, 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 (as defined below). Capital Crossing is in compliance with its regulatory capital requirements at December 31, 2003.

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. See Note 3.

Capital Crossing Preferred's business is to hold real estate assets acquired from Capital Crossing. Capital Crossing's primary business lines include the acquisition of commercial real estate and multi-family residential real estate loans from sellers in the financial services industry.

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 between amortizing and non-amortizing portions, and the rate at which this discount is accreted into interest income.

Cash equivalents include cash and interest-bearing deposits held at Capital Crossing with original maturities of ninety days or less.

A substantial portion of the loan portfolio is composed of commercial real estate and multi-family loans in California and New England. The ability of Capital Crossing Preferred's debtors to honor their contracts is dependent upon the real estate and general economic sectors in these regions.

Loans, as reported, have been adjusted for discounts on loans purchased, net deferred loan fees and the allowance for loan losses.

Net deferred loan fees and costs are amortized to interest income using the interest method over the terms of the loans. Discount loan income and loan loss provisions (credits) are accounted for on an individual loan basis.

At the time of acquisition of purchased pools of loans, the excess of the contractual balances over the amount of reasonably estimable and probable discounted future cash collections for each loan is recorded as non-amortizing discount. The remaining discount, which represented the excess of the amount of reasonably estimable and probable discounted future cash collections over the acquisition amount is accreted into interest income using the interest method over the terms of the loans and is not accreted on non-performing loans. The non-amortizing discount is not accreted into income until it is determined that the amount and timing of the related cash flows are reasonably estimable and collection is probable. If cash flows cannot be reasonably estimated for any loan, and collection is not probable, the cost recovery method of accounting is used. Under the cost recovery method, any amounts received are applied against the recorded amount of the loan. Non-amortizing discount is generally offset against the related principal balance when the amount at which a loan is resolved or restructured is determined.

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, prepayment fees and other loan fees.

Accrual of interest on loans and discount accretion are discontinued when loan payments are ninety days or more past due or the collectibility of principal and interest is not probable or estimable. Interest income previously accrued on such loans is reversed against current period interest income, and the loan is accounted for using either the cash basis or the cost recovery method whereby any amounts received are applied against the recorded amount of the loan. A determination as to which method is used is made on a case-by-case basis.

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

A loan purchased by Capital Crossing is considered impaired when, based on current information and events, it is determined that estimated cash flows are less than the cash flows estimated at the date

of purchase. A loan originated by Capital Crossing is considered impaired when, based on current information and events, it is probable that Capital Crossing Preferred will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loan impairment is measured on a loan-by-loan basis by comparing Capital Crossing Preferred's recorded investment in the loan to the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Substantially all of Capital Crossing Preferred's loans which have been identified as impaired have been measured by the fair value of existing collateral.

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. Additionally, the allowance for loan losses may be increased upon allocation of purchase discount upon acquisition of loans and be decreased upon sales and pay-offs of loans. Transfers to the allowance are made in connection with each transfer of loans from Capital Crossing. Subsequent to the date of transfer, the allowance for loan losses will be adjusted, if necessary, through a provision or credit for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the net investment of the loan, or a portion thereof, is uncollectible. Subsequent recoveries, if any, are credited to the allowance when cash payments are received.

Management makes significant judgments in determining the adequacy of the allowance for loan losses. Management initially considers the loan allowances specifically allocated to individual impaired loans. Next, management considers the level of general loan loss allowances deemed appropriate for the balance of the portfolio. Factors considered include known and inherent risks in the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. An additional allowance is maintained based on a judgmental process whereby management considers qualitative and quantitative assessments of other factors including regional credit concentration, industry concentration, results of regulatory examinations, historical loss ranges, portfolio composition, economic conditions such as interest rates and energy costs and other changes in the portfolio. The allowance for loan losses is management's estimate of the probable loan losses incurred as of the balance sheet date. There can be no assurance regarding the future levels of Capital Crossing Preferred's actual losses with respect to loans.

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of cost or fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically updated by management and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Revenues and expenses from operations and changes in the valuation allowance are included in other real estate owned income, net.

Transfers of financial assets are accounted for as sales when control over the assets is surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets are isolated from Capital Crossing Preferred, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) Capital Crossing Preferred does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Capital Crossing Preferred has elected, for Federal income tax purposes, to be treated as a Real Estate Investment Trust ("REIT") and intends to comply with the provisions of the Internal Revenue Code of 1986, as amended (the "IRC"). Accordingly, Capital Crossing Preferred will not be subject to corporate income taxes to the extent it distributes at least 100% of its REIT taxable income to stockholders and as long as certain assets, income, distribution and stock ownership tests are met in accordance with the IRC. Because management of Capital Crossing Preferred believes it will qualify as a REIT for federal income tax purposes, no provision for income taxes is included in the accompanying financial statements.

In December 2003, the FASB issued Statement of Position ("SOP") No. 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer." SOP No. 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes such loans acquired in purchase business combinations. This SOP does not apply to loans originated by the entity. This SOP limits the yield that may be accreted (accretable yield) to the excess of the investor's estimate of undiscounted expected principal, interest, and other cash flows (cash flows expected at acquisition to be collected) over the investor's initial investment in the loan. This SOP requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual, or valuation allowance. This SOP prohibits investors from displaying accretable yield and nonaccretable difference in the balance sheet. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan's yield over its remaining life.

Decreases in cash flows expected to be collected should be recognized as impairment.

This SOP prohibits "carrying over" or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of this SOP. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and impaired loans acquired in a purchase business combination.

This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The provisions of this SOP, as they apply to decreases in cash flows expected to be collected, should be applied prospectively for fiscal years beginning after December 15, 2004.

Capital Crossing Preferred has not yet determined how the adoption of this SOP will impact its financial condition or results of operation.

			December 31,
			2003			2002
			(in thousands)
Mortgage loans on real estate:
	Commercial real estate		$	120,317		$	191,567
	Multi-family residential			50,390			77,598
	One-to-four family residential			1,714			2,529
	Land			5,481			5,821

		Total real estate loans		177,902			277,515
	Other loans			28			—

		Total loans, gross		177,930			277,515

Less:
	Non-amortizing discount			(1,524	)		(8,158	)
	Amortizing discount			(17,962	)		(23,926	)
	Allowance for loan losses			(3,281	)		(7,354	)
	Net deferred loan fees			(92	)		(112	)

		Loans, net	$	155,071		$	237,965

Included in net loans, at December 31, 2003 and 2002, are approximately $6,703,000 and $32,929,000 (of which none and $180,000 are non-performing), respectively, for which the net recorded investment represents the amortized cost of these loans, where at acquisition, the amounts of reasonably estimable and probable discounted future cash collections were less than the contractual balances owed. These loans were purchased at a price to yield a market rate of interest after considering the credit quality of the loans at acquisition and the aforementioned expected future cash collections. The excess of the contractual balances over the amount of reasonably estimable and probable discounted future cash collections represents the predominant portion of the $1,524,000 and $8,158,000 of non-amortizing discount December 31, 2003 and 2002, respectively.

	Years Ended December 31,
	2003			2002			2001
	(in thousands)
Balance at beginning of year	$	7,354		$	4,659		$	3,795
Credit for loan losses		(3,910	)		(1,500	)		—
Additions in connection with loans purchased or transferred		—			4,250			867
Transfer to Capital Crossing with loans sold or distributed		(163	)		(53	)		(3	)
Charge-offs		—			(2	)		—

Balance at end of year	$	3,281		$	7,354		$	4,659

	Years Ended December 31,
	2003			2002			2001
	(in thousands)
Balance at beginning of year	$	8,158		$	6,062		$	6,704
Accretion		(967	)		(2,007	)		(2,523	)
Transfers to amortizing portion upon improvements in cash flows		(2,273	)		(194	)		(112	)
Additions in connection with loans acquired from Capital Crossing		—			8,131			2,764
Net reductions related to resolutions and restructures		(35	)		(1,139	)		(587	)
Net reductions relating to loans sold or distributed		(3,359	)		(2,695	)		(184	)

Balance at end of year	$	1,524		$	8,158		$	6,062

Information pertaining to the net investment in impaired and non-performing loans follows:

		December 31,
		2003		2002
		(in thousands)
Impaired loans:
	Without a valuation allowance	$	620	$	776
	With a valuation allowance		57		1,626

Total impaired loans		$	677	$	2,402

Valuation allowance related to impaired loans		$	32	$	311

Total non-performing loans		$	17	$	1,621

	Years Ended December 31,
	2003		2002		2001
	(in thousands)
Average investment in impaired loans	$	1,451	$	1,937	$	2,936

Interest income recognized on impaired loans	$	118	$	235	$	327

Interest income recognized on a cash basis on impaired loans	$	61	$	139	$	314

Included in impaired loans at December 31, 2001 are restructured loans, totaling $484,000, which were not non-performing. There were no restructured loans in 2003 or 2002.

On March 31, 1998, Capital Crossing Preferred issued 1,000 shares of its 8% Cumulative Non-convertible Preferred Stock, Series B, to Capital Crossing. Holders of Series B preferred stock are entitled to receive, if declared by the Board of Directors of Capital Crossing Preferred, dividends at a rate of 8% of the average daily outstanding liquidation amount, as defined. Dividends accumulate at the completion of each completed period, as defined, and payment dates are determined by the Board of Directors. Series B preferred stock may be redeemed by Capital Crossing Preferred for its outstanding liquidation amount plus accrued dividends upon the occurrence of certain events.

Series B preferred stock has a liquidation amount of $1,000 per share. In the event of a voluntary or involuntary dissolution or liquidation of Capital Crossing Preferred, preferred stockholders are entitled to the total liquidation amount, as defined, plus any accrued and accumulated dividends.

On February 12, 1999, Capital Crossing Preferred completed a public offering of 1,416,130 shares of Non-cumulative Exchangeable Preferred Stock, Series A, with a dividend rate of 9.75% and a liquidation preference of $10 per share, which raised net proceeds of $12,590,000, after related offering costs of $1,571,000.

Series A preferred stock is exchangeable for preferred shares of Capital Crossing if the FDIC so directs, when or if Capital Crossing becomes or may in the near term become undercapitalized or Capital Crossing is placed into conservatorship or receivership. Series A preferred stock is redeemable at the option of Capital Crossing Preferred on or after February 1, 2004, with the prior consent of the FDIC.

On May 31, 2001, Capital Crossing Preferred completed a public offering of 1,840,000 shares of Non-cumulative Exchangeable Preferred Stock, Series C, with a dividend rate of 10.25% and a liquidation preference of $10 per share, which raised net proceeds of $16,872,000, after related offering costs of $1,528,000.

Series C preferred stock is exchangeable for preferred shares of Capital Crossing if the FDIC so directs, when or if Capital Crossing becomes or may in the near term become undercapitalized or Capital Crossing is placed into conservatorship or receivership. Series C preferred stock is redeemable at the option of Capital Crossing Preferred on or after May 31, 2006, with the prior consent of the FDIC.

Capital Crossing performs advisory services and services the loans owned by Capital Crossing Preferred. The servicing and advisory fee rate is .25% annually of the average outstanding principal balance of the loans. Servicing and advisory fees for the years ended December 31, 2003, 2002 and 2001 totaled $575,000, $648,000, and $431,000, respectively, of which $38,000, $59,000, and $35,000, respectively, are included in accrued expenses and other liabilities.

Capital Crossing Preferred periodically purchases loans from Capital Crossing. Capital Crossing also periodically makes capital contributions to Capital Crossing Preferred in the form of mortgage loans. The carrying value of these loans approximated their fair values at the date of purchase or contribution. The following table summarizes the carrying value, including accrued interest, of loans purchased from or contributed by Capital Crossing:

	Years Ended December 31,
	2003		2002		2001
	(in thousands)
Loans purchased from Capital Crossing	$	—	$	90,341	$	34,998
Loans contributed by Capital Crossing		—		93,733		—

	$	—	$	184,074	$	34,998

The following table summarizes capital transactions between Capital Crossing Preferred and Capital Crossing:

	Years Ended December 31,
	2003		2002		2001
	(In thousands)
Capital contributions by Capital Crossing	$	—		$	93,733		$	—
Returns of capital to Capital Crossing		(118,235	)		—			—
Common stock dividends paid to Capital Crossing		(20,600	)		(23,500	)		(16,132	)
Series B preferred stock dividends paid to Capital Crossing		(72	)		(72	)		(72	)

During 2003, loans with a fair value of $9,367,000 were distributed to Capital Crossing. Of this amount, $1,038,000 was classified as a dividend and the remaining $8,329,000 was classified as a return of capital. Capital Crossing Preferred recognized a gain of $3,008,000 on these distributions. The gains represent the excess of the fair values of the loans over the carrying values of the loans at the time of distribution.

Effective July 1, 2000, Capital Crossing Preferred entered into an agreement to make certain assets available to be pledged in connection with borrowings of Capital Crossing. Capital Crossing Preferred receives an annual fee of $80,000 under this agreement. Guarantee fee income for the years ended December 31, 2003, 2002 and 2001 was $80,000 in each year. At December 31, 2003, Capital Crossing Preferred has pledged $30,626,000 of its assets to secure the advances to Capital Crossing.

Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" requires disclosure of estimated fair values of all financial instruments where it is practicable to estimate such values. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of Capital Crossing Preferred.

The following methods and assumptions were used by Capital Crossing Preferred in estimating fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amounts of cash and money market accounts approximate fair value because of the short-term maturity of these instruments.

Certificates of deposit: The carrying amounts of certificates of deposit approximate fair values because of the short-term maturity of these instruments.

Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values of other loans are estimated using discounted cash flow analyses, with interest rates currently being offered for loans with similar terms to borrowers

of similar credit quality. The incremental credit risk for non-performing loans has been considered in the determination of the fair value of loans.

Accrued interest receivable: The carrying amount of accrued interest receivable approximates fair value because of the short-term nature of these financial instruments.

The estimated fair values, and related carrying amounts, of Capital Crossing Preferred's financial instruments are as follows:

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of December 31, 2003, Capital Crossing Preferred carried out an evaluation under the supervision and with the participation of its management, including its Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of Capital Crossing Preferred's disclosure controls and procedures. In designing and evaluating Capital Crossing Preferred's disclosure controls and procedures, Capital Crossing Preferred and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that they believe Capital Crossing Preferred's disclosure controls and procedures are reasonably effective to ensure that information required to be disclosed by Capital Crossing Preferred in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. In connection with the rules regarding disclosure and control procedures, we intend to continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

The names and ages of each of Capital Crossing Preferred's directors and executive officers and their principal occupation and business experience for at least the last five years are set forth below. The executive officers hold office until their successors are duly elected and qualified.

Name	Age	Position(s) Held (1)
Richard Wayne	51	President, Director
Edward F. Mehm	39	Vice President, Treasurer, Director
Bradley M. Shron	47	Vice President, Clerk
Nicholas W. Lazares	52	Director
Jeffrey Ross	59	Director
Douglas Shaw	49	Director
Dr. John Lapidus	47	Director

Richard Wayne. Mr. Wayne has been the President and a Director of Capital Crossing Preferred since March 1998. Mr. Wayne is the President and Co-Chief Executive Officer, and a Director, of Capital Crossing.

Edward F. Mehm. Mr. Mehm has been a Vice President and Treasurer and a Director of Capital Crossing Preferred since October 2001. Mr. Mehm has served as Executive Vice President, Chief Financial Officer and Treasurer of Capital Crossing since October 2001, served as Executive Vice President of Capital Crossing from April 2000 to October 2001, and served as Senior Vice President of Capital Crossing from January 1997 to April 2000.

Bradley M. Shron. Mr. Shron has been Clerk of Capital Crossing Preferred since March 1998 and a Vice President since April 1999. Mr. Shron has served as Executive Vice President, General Counsel and Clerk of Capital Crossing since April 2000, and served as Senior Vice President, General Counsel and Clerk of Capital Crossing from 1998 to April 2000.

Nicholas W. Lazares. Mr. Lazares has been a Director of Capital Crossing Preferred since March 1998. Mr. Lazares is the Chairman of the Board and Co-Chief Executive Officer of Capital Crossing.

Jeffrey Ross. Since October 1999, Mr. Ross has served as the Managing Partner of Ross Fialkow Capital Partners of Boston, Massachusetts. From 1998 until October 1999, Mr. Ross acted as a management and investment consultant. During 1997, Mr. Ross was President and Chief Executive Officer of Hearthstone Assisted Living of Houston, Texas. Mr. Ross has been a Director of Capital Crossing Preferred since April 1999.

Douglas Shaw. Mr. Shaw is the Executive Vice President and a Director of M.S. Walker, Inc., a wholesale distributor of wines and spirits in Somerville, Massachusetts. Mr. Shaw has been a Director of Capital Crossing Preferred since April 2002.

Dr. John Lapidus. Dr. Lapidus is a partner of James L. Nager, DMD & John H. Lapidus, DMD, P.C., a group dental practice in Belmont, Massachusetts. Dr. Lapidus has been a Director of Capital Crossing Preferred since December 2002.

The Board of Directors has established a process for shareholders of Capital Crossing Preferred to communicate with the Board or a particular Director. A shareholder who is interested in communicating directly with the Board or a particular Director should send a letter addressed to Capital Crossing Preferred Corporation, Investor Relations, 101 Summer Street, Boston, MA 02110. Capital Crossing Preferred's policy is to forward and not screen any such communication to the addressee.

Audit Committee. Capital Crossing Preferred has an Audit Committee, which consists of Messrs. Ross and Shaw and Dr. Lapidus. Each member of the Audit Committee satisfies the standards for independence promulgated by the Nasdaq Stock Market, Inc. ("Nasdaq"). The Audit Committee reports its activities to the Board of Directors. The primary function of the Audit Committee is to: (i) retain Capital Crossing Preferred's independent auditor and review the scope of the independent auditor's annual audit of Capital Crossing Preferred; (ii) review the audit plans of Capital Crossing Preferred and the independent auditor; (iii) review Capital Crossing Preferred's quarterly unaudited financial statements and annual audited financial statements; (iv) review the results of the annual audit by the independent auditor; and (v) monitor Capital Crossing Preferred's internal accounting controls; and (vi) review transactions between Capital Crossing Preferred and Capital Crossing. The Audit Committee held two meeting in 2003. The Board of Directors has determined that no member of the Audit Committee meets the specific qualification of an "audit committee financial expert" as defined in

the applicable rules promulgated by the Securities and Exchange Commission. The Board of Directors has not commenced a search for an individual who meets the specific qualification of an "audit committee financial expert" because the Board believes that the members of the Audit Committee are financially literate and, further, that the Audit Committee has functioned well in the past. The Board of Directors also recognizes the fact that Capital Crossing Preferred's financial results are consolidated into those of Capital Crossing and such results are, accordingly, also reviewed by the Audit Committee of the Board of Directors of Capital Crossing.

Nominating Committee. Capital Crossing Preferred has a Nominating Committee, which consists of Messrs. Ross and Shaw and Dr. Lapidus. Each member of the Nominating Committee satisfies the standards for independence promulgated by Nasdaq. The function of the Nominating Committee is to review and nominate qualified individuals to serve as Directors of Capital Crossing Preferred. The Nominating Committee reports its activities to the Board of Directors. The Nominating Committee will consider director nominees recommended by holders of voting securities. Any holder of voting securities wishing to nominate a candidate for director must be a shareholder of record at the time it gives notice of such nomination. The Nominating Committee was established in February 2003 and met once during 2003. At its initial meeting, the Nominating Committee adopted a charter, which has been filed as an exhibit to this Form 10-K. In addition to considering director nominees recommended by shareholders, the Nominating Committee will consider nominees recommended by the Board of Directors and, if necessary, retain independent advisors to assist in identifying qualified individuals. In accordance with the charter of the Nominating Committee, a candidate for director must posses the highest personal and professional integrity, have demonstrated exceptional ability and judgment and have the ability to work effectively with other members of the Board of Directors, and provide the skills and expertise appropriate to best serve the long-term financial interests of the shareholders. The Nominating Committee's process for evaluating candidates is to meet with the candidate to assess his or her experience and qualifications; to consider the nominee at a formal meeting of the Nominating Committee; and ultimately to make a recommendation to the Board of Directors as to whether the nominee should be nominated for election as a director.

Capital Crossing has adopted a Code of Business Conduct and Ethics which applies to the Directors of Capital Crossing Preferred. A copy of such Code of Business Conduct and Ethics has been filed as an exhibit to this Form 10-K.

Capital Crossing Preferred does not hold annual shareholder meetings because Capital Crossing holds all of the outstanding voting securities of Capital Crossing Preferred and therefore would be the only shareholder entitled to vote at any such meeting. Accordingly, Capital Crossing Preferred does not have a policy with respect to whether its Directors should attend annual shareholder meetings.

The Board of Directors has determined that Capital Crossing Preferred is a "controlled company," as defined in Rule 4350(c)(5) of the listing standards of Nasdaq, based on Capital Crossing's beneficial ownership of 100% of the outstanding voting Common Stock of Capital Crossing Preferred. Accordingly, Capital Crossing Preferred is exempt from certain requirements of the Nasdaq listing standards, including the requirement to maintain a majority of independent directors on its Board of Directors.

Capital Crossing Preferred pays its non-executive directors a fee of $1,250 per meeting for their services as directors. Capital Crossing Preferred does not pay any compensation to its other directors.

Section 16(a) of the Exchange Act requires that Capital Crossing Preferred's executive officers and directors and persons who own more than 10% of its outstanding shares of Series A preferred shares and Series C preferred shares file reports of ownership and changes in ownership with the Securities Exchange Commission and Nasdaq. Executive Officers, directors and greater than 10% stockholders are required by applicable regulations to furnish Capital Crossing Preferred with copies of all reports filed by such persons pursuant to the Exchange Act, and the rules and regulations promulgated thereunder. Based on a review of Capital Crossing Preferred's records and except as set forth below, Capital Crossing Preferred believes that all reports required by the Exchange Act were filed on a timely basis.

Capital Crossing Preferred does not have any employees and does not pay any compensation to its officers.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth, as of March 1, 2004, the number and percentage of outstanding shares of common stock, Series A preferred shares and Series B preferred shares beneficially owned by (i) each person known by Capital Crossing Preferred to be the beneficial owner of more than five percent of such shares; (ii) each director of Capital Crossing Preferred; (iii) each executive officer of Capital Crossing Preferred; and (iv) all executive officers and directors of Capital Crossing Preferred as a group. The persons or entities named in the table have sole voting and sole investment power with respect to each of the shares beneficially owned by such person or entity. The calculations were based on a total of 100 shares of common stock, 1,416,130 Series A preferred shares, 941 Series B preferred shares and 1,840,000 Series C preferred shares outstanding as of such date.

Name and Address of Beneficial Owner (1)	Amount of Shares (Class)	Percentage of Outstanding Shares
Capital Crossing Bank	100 shares of common stock 900 Series B preferred shares	100.0% 95.6%
Edward F. Mehm (2)(3)	2 Series B preferred shares (4)	*
Nicholas W. Lazares (3)	2 Series B preferred shares (4)	*
Bradley M. Shron (2)	—	*
Richard Wayne (2)(3)	2 Series B preferred shares (4)	*
Jeffrey Ross (3)	8,900 Series C preferred shares	*
Douglas Shaw (3)	—	*
Dr. John Lapidus (3)	2,500 Series A preferred shares 5,000 Series C preferred shares	* *
All executive officers and directors as a Group (7 persons)	2,500 Series A preferred shares 6 Series B preferred shares 13,900 Series C preferred shares	* * *

Capital Crossing Preferred's loan portfolio is 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 a fee equal to 0.20% per annum, payable monthly, on the gross outstanding principal balances of loans serviced. For the year ended December 31, 2003, Capital Crossing Preferred incurred $460,000 in servicing fees payable to Capital Crossing.

The master service agreement requires Capital Crossing to service the loan portfolio in a manner substantially the same as for similar work performed by Capital Crossing for transactions on its own behalf. Capital Crossing collects and remits principal and interest payments, maintains perfected collateral positions, submits and pursues insurance claims and initiates and supervises collection efforts on the loan portfolio it services. Capital Crossing also provides accounting and reporting services required by Capital Crossing Preferred for such loans. Capital Crossing may also be directed by Capital Crossing Preferred, at any time during the servicing process, to dispose of any loans which become classified, placed on non-performing status, or are renegotiated due to the financial deterioration of the borrower.

Capital Crossing is required to pay all expenses related to the performance of its duties under the master service agreement. Under the master mortgage loan purchase agreement, Capital Crossing is required to repurchase, at the request of Capital Crossing Preferred, any mortgage loan it sold to Capital Crossing Preferred in the event any material representation or warranty pertaining to the mortgage assets is untrue, unless Capital Crossing Preferred permits Capital Crossing to substitute other qualified mortgage assets for such asset. The repurchase price for any such mortgage loan is the outstanding net carrying value thereof plus accrued and unpaid interest thereon at the date of repurchase. Capital Crossing may institute foreclosure proceedings, exercise any power of sale contained in any mortgage or deed of trust, obtain a deed in lieu of foreclosure or otherwise acquire title to a mortgaged property underlying a mortgage loan by operation of law or otherwise in accordance with the terms of the master service agreement.

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

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

Capital Crossing Preferred has entered into an advisory agreement with Capital Crossing to administer the day-to-day operations of Capital Crossing Preferred. For the year ended December 31,

2003, Capital Crossing Preferred incurred $115,000 in servicing fees payable to Capital Crossing. As advisor, Capital Crossing is responsible for:

Capital Crossing may, from time to time, subcontract all or a portion of its obligations under the advisory agreement to one or more of its affiliates involved in the business of managing mortgage assets or, with the approval of a majority of Capital Crossing Preferred's Board of Directors as well as a majority of Capital Crossing Preferred's independent directors, subcontract all or a portion of its obligations under the advisory agreement to unrelated third parties. Capital Crossing will not, in connection with the subcontracting of any of its obligations under the advisory agreement, be discharged or relieved in any respect from its obligations under the advisory agreement. Capital Crossing is paid a monthly advisory fee equal to 0.05% per annum of the average gross outstanding balance of Capital Crossing Preferred's loans for the immediately preceding month, plus reimbursement for certain expenses incurred by Capital Crossing as advisor.

The advisory agreement has an initial term of five years, and will be renewed automatically for additional one-year periods unless notice of nonrenewal is delivered to Capital Crossing by Capital Crossing Preferred. After the initial five year term, the advisory agreement may be terminated by Capital Crossing Preferred at any time upon 90 days' prior notice. As long as any Series A and Series C preferred shares remain outstanding, any decision by Capital Crossing Preferred either not to renew the advisory agreement or to terminate the advisory agreement must be approved by a majority of Capital Crossing Preferred's independent directors. Other than the servicing fee and the advisory fee, Capital Crossing will not be entitled to any fee for providing advisory and management services to Capital Crossing Preferred.

Capital Crossing Preferred has guaranteed obligations of Capital Crossing to the Federal Home Loan Bank of Boston ("FHLBB") and has agreed to pledge a significant amount of its assets as collateral for advances Capital Crossing may receive from time to time from the FHLBB. At December 31, 2003 and 2002, Capital Crossing had outstanding FHLBB advances of $129.0 million for each year. Effective July 1, 2000, Capital Crossing Preferred entered into an agreement to make certain assets available to be pledged in connection with FHLBB borrowings of Capital Crossing Bank. Capital Crossing Preferred receives an annual fee of $80,000 from Capital Crossing under this agreement.

Audit Fees. Capital Crossing Preferred paid KPMG LLP $31,000 and $24,000 in fees for its professional services rendered for the audit of the Capital Crossing Preferred's financial statements for the year ended December 31, 2003 and 2002, respectively, and the reviews of the financial statements included in its quarterly reports on Form 10-Q during the year.

Tax Fees. Capital Crossing Preferred paid KPMG LLP $25,000 and $24,000 in fees for tax compliance, tax advice and tax planning services for 2003 and 2002, respectively.

The Audit Committee has determined that the provision of the non-audit services described above is compatible with maintaining KPMG LLP's independence.

Approval Policies. The Audit Committee has the sole authority to review and approve the engagement of the independent auditors to perform audit services or any permissible non-audit

services. All audit-related services to be provided by the independent auditors must be approved in advance by the Audit Committee, and all non audit-related services to be provided by the independent auditors must be approved in advance by either: (i) a majority of the members of the Audit Committee; or (ii) the Chairman of the Audit Committee. Since the May 6, 2003 effective date of the Securities and Exchange Commission rules stating that an auditor is not independent of an audit client if the services it provides to the client are not appropriately approved, all non-audit services provided by KPMG were approved in advance by the Audit Committee, and none of those engagements made use of the de minimus exception to pre-approval contained in the Commission's rules.

Exhibit No.		Description
3.1		Restated Articles of Organization of Capital Crossing Preferred, incorporated by reference from Capital Crossing Preferred's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (the "1998 Form 10-K").
3.2		Articles of Amendment to Restated Articles of Organization of Capital Crossing Preferred reflecting change of its name filed with the Secretary of the Commonwealth of Massachusetts on March 12, 2001, incorporated by reference from Capital Crossing Preferred's Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
3.3		Amended and Restated By-laws of Capital Crossing Preferred, incorporated by reference from the 1998 Form 10-K.
4.1		Specimen of certificate representing Series A preferred shares, incorporated by reference from Capital Crossing Preferred's registration statement on Form S-11 (No. 333-66677), filed November 3, 1998, as amended (the "1998 Form S-11").
10.1		Master Mortgage Loan Purchase Agreement between Capital Crossing Preferred and Capital Crossing Bank, incorporated by reference from the 1998 Form S-11.
10.2		Master Service Agreement between Capital Crossing Preferred and Capital Crossing Bank, incorporated by reference from the 1998 Form S-11.
10.3		Advisory Agreement between Capital Crossing Preferred and Capital Crossing Bank, incorporated by reference from the 1998 Form S-11.
10.4		Form of Letter Agreement between Capital Crossing Preferred and Capital Crossing Bank regarding issuance of certain securities, incorporated by reference from the 1998 Form S-11.
12		Statement Regarding Computation of Ratios. FILED HEREWITH
14		Code of Business Conduct and Ethics. FILED HEREWITH
31.1		Rule 13a-14(a) Certification signed by Richard Wayne, President (Chief Executive Officer). FILED HEREWITH
31.2		Rule 13a-14(a) Certification signed by Edward F. Mehm, Treasurer (Principal Financial Officer). FILED HEREWITH
32		Rule 13a-14(b) Certification signed by Richard Wayne, President (Chief Executive Officer) and Edward F. Mehm, Treasurer (Principal Financial Officer). FILED HEREWITH
99		Nominating Committee Charter. FILED HEREWITH

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dated indicated.

ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Massachusetts (State of incorporation)		04-3439366 (IRS Employer Identification No.)
101 Summer Street Boston, Massachusetts (Address of principal executive offices)		02110 (Zip code)

Location	Number of Loans	Principal Balance		Percentage of Total Principal Balance
	(dollars in thousands)
California	262	$	79,074	44.45	%
Florida	26		14,123	7.94
New York	16		10,530	5.92
Connecticut	45		6,842	3.84
Nevada	5		5,637	3.17
Texas	15		5,506	3.09
New Hampshire	33		4,387	2.47
North Dakota	11		3,962	2.23
Missouri	8		3,394	1.91
All others	145		44,447	24.98

	566	$	177,902	100.00	%

Period until maturity	Number of Loans	Principal Balance		Percentage of Total Principal Balance
	(dollars in thousands)
Six months or less	38	$	15,781	8.87	%
Greater than six months to one year	17		6,687	3.76
Greater than one year to three years	74		8,786	4.94
Greater than three years to five years	79		16,993	9.55
Greater than five years to ten years	105		28,972	16.28
Greater than ten years	255		100,711	56.60

	568	$	177,930	100.00	%

Contractual Interest Rate	Number of Loans	Principal Balance		Percentage of Total Principal Balance
	(dollars in thousands)
Less than 4.00%	18	$	2,006	1.13	%
4.00 to 4.49	210		85,592	48.10
4.50 to 4.99	33		6,369	3.58
5.00 to 5.49	40		7,093	3.99
5.50 to 5.99	20		4,099	2.30
6.00 to 6.49	28		6,869	3.86
6.50 to 6.99	24		5,940	3.34
7.00 to 7.49	45		17,427	9.79
7.50 to 7.99	19		7,312	4.11
8.00 to 8.49	24		8,538	4.80
8.50 to 8.99	19		6,509	3.66
9.00 to 9.49	18		3,970	2.23
9.50 to 9.99	30		2,946	1.66
10.00 to 10.49	13		6,052	3.40
10.50 to 10.99	11		2,852	1.60
11.00% and above	16		4,356	2.45

	568	$	177,930	100.00	%

Principal Balance	Number of Loans	Principal Balance		Percentage of Total Principal Balance
	(dollars in thousands)
$50,000 and less	140	$	3,617	2.03	%
Greater than $50,000 to $100,000	93		6,972	3.92
Greater than $100,000 to $250,000	137		23,091	12.98
Greater than $250,000 to $500,000	102		36,096	20.29
Greater than $500,000 to $1,000,000	51		36,677	20.61
Greater than $1,000,000 to $2,000,000	35		45,025	25.31
Greater than $2,000,000 to $3,000,000	8		19,327	10.86
Greater than $3,000,000 to $4,000,000	2		7,125	4.00

	568	$	177,930	100.00	%

	December 31, 2003
	Overnight			Within One Year			One to Two Years			Two to Three Years			Three to Four Years			Four to Five Years			Over Five Years			Total
	(dollars in thousands)
Interest-bearing deposits	$	65,755		$	—		$	—		$	—		$	—		$	—		$	—		$	65,755
		1.10	%
Certificates of deposit		—			200			—			—			—			—			—			200
					1.34	%
Fixed-rate loans(1)		—			38,343			22,743			14,729			9,355			6,556			8,175			99,901
		—			8.38	%		8.30	%		8.06	%		7.72	%		7.73	%		7.08	%
Adjustable-rate loans(1)		23,163			32,747			1,971			497			43			7			6			58,434
		6.92	%		6.69	%		7.45	%		6.95	%		6.40	%		4.47	%		4.76	%

Total rate-sensitive assets	$	88,918		$	71,290		$	24,714		$	15,226		$	9,398		$	6,563		$	8,181		$	224,290

			2003			2002
			(in thousands)
ASSETS
Cash account with Capital Crossing Bank			$	90		$	88
Interest bearing deposits with Capital Crossing Bank				65,755			92,622

		Total cash and cash equivalents		65,845			92,710

Certificates of deposit				200			100

Loans				177,930			277,515
	Less discount and net deferred loan income			(19,578	)		(32,196	)
	Less allowance for loan losses			(3,281	)		(7,354	)

		Loans, net		155,071			237,965

Accrued interest receivable				737			1,219

			$	221,853		$	331,994

LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities			$	423		$	435

		Total liabilities		423			435

Commitments and contingencies
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, 941 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
	Common stock, $.01 par value, 100 shares authorized, issued and outstanding			—			—
	Additional paid-in capital			211,240			329,475
	Retained earnings			10,158			2,052

		Total stockholders' equity		221,430			331,559

			$	221,853		$	331,994

				2003			2002		2001
				(in thousands)
Interest income:
	Interest and fees on loans			$	19,797		$	23,244	$	20,064
	Interest on interest-bearing deposits				1,316			2,217		3,534

			Total interest income		21,113			25,461		23,598
Credit for loan losses					3,910			1,500		—

Total interest income, after credit for loan losses					25,023			26,961		23,598

Other income:
	Guarantee fee income				80			80		80
	Gains on distribution of loans to common stockholder				3,008			—		—
	Gains on sales of loans				—			2,432		156

			Total other income		3,088			2,512		236

Operating expenses:
	Loan servicing and advisory				575			648		431
	Other real estate owned income, net				(361	)		—		—
	Other general and administrative				317			105		67

			Total operating expenses		531			753		498

		Net income			27,580			28,720		23,336
Preferred stock dividends					3,342			3,342		2,562

Net income available to common shareholder				$	24,238		$	25,378	$	20,774

	Preferred Stock Series A			Preferred Stock Series B				Preferred Stock Series C
												Common Stock
												Common Stock			Additional Paid-in Capital			Retained Earnings
	Shares	Amount		Shares		Amount		Shares		Amount		Shares	Amount		Additional Paid-in Capital			Retained Earnings			Total
	(dollars in thousands)
Balance at December 31, 2000	1,416,130	$	14	946		$	—	$	—		—	100	$	—	$	218,893		$	—		$	218,907
Net income	—		—	—			—		—		—	—		—		—			23,336			23,336
Net proceeds from issuance of preferred stock, Series C	—		—	—			—		1,840,000		18	—		—		16,854			—			16,872
Dividends on preferred stock, Series A	—		—	—			—		—		—	—		—		—			(1,381	)		(1,381	)
Cumulative dividends on preferred stock, Series B	—		—	—			—		—		—	—		—		—			(76	)		(76	)
Dividends on preferred stock, Series C	—		—	—			—		—		—	—		—		—			(1,105	)		(1,105	)
Repurchase of preferred stock, Series B	—		—	(5	)		—		—		—	—		—		(5	)		—			(5	)
Common stock dividend	—		—	—			—		—		—	—		—		—			(20,600	)		(20,600	)

Balance at December 31, 2001	1,416,130		14	941			—		1,840,000		18	100		—		235,742			174			235,948
Net income	—		—	—			—		—		—	—		—		—			28,720			28,720
Capital contribution from common stockholder	—		—	—			—		—		—	—		—		93,733			—			93,733
Dividends on preferred stock, Series A	—		—	—			—		—		—	—		—		—			(1,381	)		(1,381	)
Cumulative dividends on preferred stock, Series B	—		—	—			—		—		—	—		—		—			(75	)		(75	)
Dividends on preferred stock, Series C	—		—	—			—		—		—	—		—		—			(1,886	)		(1,886	)
Common stock dividend	—		—	—			—		—		—	—		—		—			(23,500	)		(23,500	)

Balance at December 31, 2002	1,416,130		14	941			—		1,840,000		18	100		—		329,475			2,052			331,559
Net income	—		—	—			—		—		—	—		—		—			27,580			27,580
Dividends on preferred stock, Series A	—		—	—			—		—		—	—		—		—			(1,381	)		(1,381	)
Cumulative dividends on preferred stock, Series B	—		—	—			—		—		—	—		—		—			(75	)		(75	)
Dividends on preferred stock, Series C	—		—	—			—		—		—	—		—		—			(1,886	)		(1,886	)
Return of capital to common stockholder	—		—	—			—		—		—	—		—		(118,235	)		—			(118,235	)
Common stock dividend	—		—	—			—		—		—	—		—		—			(16,132	)		(16,132	)

Balance at December 31, 2003	1,416,130	$	14	941		$	—		1,840,000	$	18	100	$	—	$	211,240		$	10,158		$	221,430

				2003			2002			2001
				(in thousands)
Cash flows provided by operating activities:
	Net income			$	27,580		$	28,720		$	23,336
	Adjustments to reconcile net income to net cash provided by operating activities:
		Credit for loan losses			(3,910	)		(1,500	)		—
		Net gain on sale and disposition of other real estate owned			(334	)		—			—
		Gain on sales of loans			—			(2,432	)		(156	)
		Gain on distribution of loans to common stockholder			(3,008	)		—			—
		Other, net			470			551			579

			Net cash provided by operating activities		20,798			25,339			23,759

Cash flows provided by investing activities:
	Purchase of certificate of deposit				(100	)		—			—
	Loan repayments				79,194			86,364			48,961
	Purchases of loans from Capital Crossing Bank				—			(90,341	)		(34,998	)
	Sales of other real estate owned				1,585			—			—
	Sales of loans				—			10,201			1,094

			Net cash provided by investing activities		80,679			6,224			15,057

Cash flows used in financing activities:
	Net proceeds from issuance of preferred stock, Series C				—			—			16,872
	Repurchase of preferred stock, Series B				—			—			(5	)
	Payment of preferred stock dividends				(3,342	)		(3,342	)		(2,406	)
	Payment of common stock dividend				(15,094	)		(23,500	)		(20,600	)
	Return of capital to common stockholder				(109,906	)		—			—

			Net cash used in financing activities		(128,342	)		(26,842	)		(6,139	)

Net change in cash and cash equivalents					(26,865	)		4,721			32,677
Cash and cash equivalents at beginning of year					92,710			87,989			55,312

Cash and cash equivalents at end of year				$	65,845		$	92,710		$	87,989

Supplemental information:
	Capital contribution from common stockholder in form of mortgage loans			$	—		$	93,733		$	—
	Return of capital to common stockholder in form of mortgage loans				8,329			—			—
	Dividends to common stockholder in form of mortgage loans				1,038			—			—
	Transfers from loans to other real estate				1,251			—			—
	Income taxes refunded				—			—			(2	)

	December 31,
	2003				2002
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in thousands)
Cash and cash equivalents	$	65,845	$	65,845	$	92,710	$	92,710
Certificate of deposit		200		200		100		100
Loans, net		155,071		161,558		237,965		249,982
Accrued interest receivable		737		737		1,219		1,219

	Years Ended December 31,
	2003									2002
	Fourth Quarter		Third Quarter		Second Quarter			First Quarter		Fourth Quarter		Third Quarter		Second Quarter		First Quarter
	(in thousands)
Interest income	$	3,998	$	4,647	$	6,078		$	6,390	$	7,155	$	6,904	$	5,851	$	5,551
Credit for loan losses		510		1,000		2,400			—		1,500		—		—		—
Other income (1)		20		3,028		20			20		20		1,935		20		537
Operating expenses (2)		184		240		(124	)		231		211		234		187		121

Net income		4,344		8,435		8,622			6,179		8,464		8,605		5,684		5,967
Preferred stock dividends		836		835		836			835		835		836		836		835

Net income available to common stockholder	$	3,508	$	7,600	$	7,786		$	5,344	$	7,629	$	7,769	$	4,848	$	5,132

		CAPITAL CROSSING PREFERRED CORPORATION
Date: March 16, 2004		By:	/s/ RICHARD WAYNE Richard Wayne President

Signature		Title

/s/ RICHARD WAYNE Richard Wayne		President and Director (Principal Executive Officer)
/s/ EDWARD F. MEHM Edward F. Mehm		Vice President, Treasurer and Director (Principal Financial Officer)
/s/ NANCY E. COYLE Nancy E. Coyle		Controller and Chief Accounting Officer
/s/ NICHOLAS W. LAZARES Nicholas W. Lazares		Director
/s/ JEFFREY ROSS Jeffrey Ross		Director
/s/ DOUGLAS SHAW Douglas Shaw		Director
/s/ DR. JOHN LAPIDUS Dr. John Lapidus		Director

Exhibit		Name
12		Statement Regarding Computation of Ratios
14		Code of Business Conduct and Ethics
31.1		Rule 13a-14(a) Certification signed by Richard Wayne, President (Chief Executive Officer)
31.2		Rule 13a-14(a) Certification signed by Edward F. Mehm, Treasurer (Principal Financial Officer)
32		Rule 13a-14(b) Certification signed by Richard Wayne, President (Chief Executive Officer) and Edward F. Mehm, Treasurer (Principal Financial Officer)
99		Nominating Committee Charter