**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

** **

**For theQuarterly Period Ended March 31, 2003**

** **

**Commission FileNumber 000-25193**

 

**CAPITAL CROSSING PREFERRED CORPORATION**

(Exact name of registrant as specified in its charter)

 

**Massachusetts**

(State or other jurisdiction of incorporation or organization)

 

**04-3439366**

(I.R.S. Employer Identification Number)

 

**101 Summer Street, Boston, Massachusetts**

(Address of principal executive offices)

 

**02110**

(Zip Code)

 

**(617) 880-1000**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý  No o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act). Yes o  No ý

 

Indicatethe number of shares outstanding of the issuer’s common stock, $.01 par valueper share, as of May 6, 2003: 100.

Nocommon stock was held by non-affiliates of the issuer.

 

 

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**Capital Crossing PreferredCorporation**

**Table of Contents**

 
| **PART I – Financial Information**                                                                    |
|------------------------------------------------------------------------------------------------------------|
|                                                                                                       |
| Item 1.   Financial Statements:                                                                       |
|                                                                                                       |   |
|                                                                                                       | Balance Sheets |
|                                                                                                       |   |
|                                                                                                       | Statements  of Income |
|                                                                                                       |   |
|                                                                                                       | Statements of Changes in Stockholders’  Equity |
|                                                                                                       |   |
|                                                                                                       | Statements of Cash Flows |
|                                                                                                       |   |
|                                                                                                       | Notes to Financial Statements |
|                                                                                                       |   |
| Item 2.   Management’s Discussion and Analysis of Financial Condition and  Results of Operations |
|                                                                                                       |   |
|                                                                                                       | Critical Accounting Policies |
|                                                                                                       |   |
|                                                                                                       | Results of Operations |
|                                                                                                       |   |
|                                                                                                       | Changes in Financial Condition |
|                                                                                                       |   |
|                                                                                                       | Interest  Rate Risk |
|                                                                                                       |   |
|                                                                                                       | Significant Concentration of Credit Risk |
|                                                                                                       |   |
|                                                                                                       | Liquidity Risk Management |
|                                                                                                       |   |
|                                                                                                       | Risk Factors and Factors Affecting Future  Operating Results |
|                                                                                                       |   |
| Item 3.   Quantitative and Qualitative Disclosures about Market Risk                                  |
|                                                                                                       |   |
| Item 4.   Controls and Procedures                                                                     |
|                                                                                                       |   |
| **PART II – Other  Information**                                                                      |
|                                                                                                       |   |
| Item 1.   Legal Proceedings                                                                           |
|                                                                                                       |   |
|                                                                                                       | Signatures |
|                                                                                                       |   |
|                                                                                                       | Certifications |
|                                                                                                       |   |
|                                                                                                       | Exhibit Index |

 

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**PART I**

 

##### **Item 1**. Financial Statements

## **Capital Crossing Preferred Corporation**

## **Balance** Sheets

 
|                                                                                                                                                                                                 |   | **March 31,  2003**                    |       | **December 31,  2002** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|------------|------------------------|------------|
|                                                                                                                                                                                                 |   | **(in  thousands, except share data)** |       |
| **ASSETS**                                                                                                                                                                                           |   |                                   |       |                   |       |
|                                                                                                                                                                                                 |   |                                   |       |                   |       |
| Cash  account with Capital Crossing Bank                                                                                                                                                             |   | $                                      | 89         |                   | $          | 88 |   |
| Interest  bearing deposits with Capital Crossing Bank                                                                                                                                                |   | 116,338                                |       | 92,622                 |       |
| Total  cash and cash equivalents                                                                                                                                                                     |   | 116,427                                |       | 92,710                 |       |
|                                                                                                                                                                                                 |   |                                   |       |                   |       |
| Certificate  of deposit                                                                                                                                                                              |   | 100                                    |       | 100                    |       |
|                                                                                                                                                                                                 |   |                                   |       |                   |       |
| Loans                                                                                                                                                                                                |   | 257,622                                |       | 277,515                |       |
| Less  discount and net deferred loan income                                                                                                                                                          |   | (30,624                                | )          | (32,196                | )          |
| Less  allowance for loan losses                                                                                                                                                                      |   | (7,354                                 | )          | (7,354                 | )          |
| Loans,  net                                                                                                                                                                                          |   | 219,644                                |       | 237,965                |       |
|                                                                                                                                                                                                 |   |                                   |       |                   |       |
| Accrued  interest receivable                                                                                                                                                                         |   | 1,142                                  |       | 1,219                  |       |
| Other  assets                                                                                                                                                                                        |   | 16                                     |       | —                 |       |
|                                                                                                                                                                                                 |   |                                   |       |                   |       |
|                                                                                                                                                                                                 |   | $                                      | 337,329    |                   | $          | 331,994 |   |
|                                                                                                                                                                                                 |   |                                   |       |                   |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                       |   |                                   | ** ** |                   | ** ** |
|                                                                                                                                                                                                 |   |                                   |       |                   |       |
| Accrued  expenses and other liabilities                                                                                                                                                              |   | $                                      | 426        |                   | $          | 435 |   |
| Total  liabilities                                                                                                                                                                                   |   | 426                                    |       | 435                    |       |
|                                                                                                                                                                                                 |   |                                   |       |                   |       |
| 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                                                                                                                                                                          |   | 329,475                                |       | 329,475                |       |
| Retained  earnings                                                                                                                                                                                   |   | 7,396                                  |       | 2,052                  |       |
| Total  stockholders’ equity                                                                                                                                                                     |   | 336,903                                |       | 331,559                |       |
|                                                                                                                                                                                                 |   |                                   |       |                   |       |
|                                                                                                                                                                                                 |   | $                                      | 337,329    |                   | $          | 331,994 |   |

 

See accompanyingnotes to unaudited interim financial statements.

 

1

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### **Capital CrossingPreferred Corporation**

**Statements of Income**

 
|                                       |   | **Three Months Ended March 31,** |   |
|--------------------------------------------|--------|----------------------------------|--------|
|                                       |   | **2003**                         |   | **2002** |   |
|                                       |   | **(in thousands)**               |   |
| Interest income:                           |   |                             |   |   |   |
| Interest and fees on loans                 |   | $                                | 5,671  |   | $ | 4,970 |   |
| Interest on interest-bearing deposits      |   | 719                              |   | 581 |   |
| Total interest income                      |   | 6,390                            |   | 5,551 |   |
|                                       |   |                             |   |   |   |
| Other income:                              |   |                             |   |   |   |
| Gains on sales of loans                    |   | —                           |   | 517 |   |
| Guarantee fee income                       |   | 20                               |   | 20 |   |
| Total other income                         |   | 20                               |   | 537 |   |
|                                       |   |                             |   |   |   |
| Operating expenses:                        |   |                             |   |   |   |
| Loan servicing and advisory services       |   | 172                              |   | 104 |   |
| Other general and administrative           |   | 59                               |   | 17 |   |
| Total operating expenses                   |   | 231                              |   | 121 |   |
| Net income                                 |   | 6,179                            |   | 5,967 |   |
|                                       |   |                             |   |   |   |
| Preferred stock dividends                  |   | 835                              |   | 835 |   |
| Net income available to common stockholder |   | $                                | 5,344  |   | $ | 5,132 |   |

 

See accompanyingnotes to unaudited interim financial statements.

 

2

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**Capital Crossing Preferred Corporation**

**Statementsof Changes in Stockholders’ Equity**

 
|                                              |   | **Three Months Ended March 31, 2003** |   |
|---------------------------------------------------|--------|---------------------------------------|--------|
|                                              |   | **Preferred Stock  Series A**         |   | **Preferred Stock  Series B** |   | **Preferred Stock  Series C** |   | **Common Stock** |   | **Additional  Paid-in** |   | **Retained** |   | **Total  Stockholders’** |   |
|                                              |   | **Shares**                            |   | **Amount** |   | **Shares** |   | **Amount** |   | **Shares** |   | **Amount** |   | **Shares** |   | **Amount** |   | **Capital** |   | **Earnings** |   | **Equity** |   |
|                                              |   | **(dollars in thousands)**            |   |
|                                              |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at December 31, 2002                      |   | 1,416,130                             |   | $ | 14 |   | 941 |   | $ | — |   | 1,840,000 |   | $ | 18 |   | 100 |   | $ | — |   | $ | 329,475 |   | $ | 2,052 |   | $ | 331,559 |   |
| Net income                                        |   | —                                |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 6,179 |   | 6,179 |   |
| Dividends on preferred stock, Series A            |   | —                                |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (345 | ) | (345 | ) |
| Cumulative dividends on preferred stock, Series B |   | —                                |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (19 | ) | (19 | ) |
| Dividends on preferred stock, Series C            |   | —                                |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (471 | ) | (471 | ) |
| Balance at March 31, 2003                         |   | 1,416,130                             |   | $ | 14 |   | 941 |   | $ | — |   | 1,840,000 |   | $ | 18 |   | 100 |   | $ | — |   | $ | 329,475 |   | $ | 7,396 |   | $ | 336,903 |   |

 
|                                              |   | **Three Months Ended March 31, 2002** |   |
|---------------------------------------------------|--------|---------------------------------------|--------|
|                                              |   | **Preferred Stock  Series A**         |   | **Preferred Stock  Series B** |   | **Preferred Stock  Series C** |   | **Common Stock** |   | **Additional  Paid-in** |   | **Retained** |   | **Total  Stockholders’** |   |
|                                              |   | **Shares**                            |   | **Amount** |   | **Shares** |   | **Amount** |   | **Shares** |   | **Amount** |   | **Shares** |   | **Amount** |   | **Capital** |   | **Earnings** |   | **Equity** |   |
|                                              |   | **(dollars in thousands)**            |   |
|                                              |   |                                  |   |
| Balance at December 31, 2001                      |   | 1,416,130                             |   | $ | 14 |   | 941 |   | $ | — |   | 1,840,000 |   | $ | 18 |   | 100 |   | $ | — |   | $ | 235,742 |   | $ | 174 |   | $ | 235,948 |   |
| Net income                                        |   | —                                |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 5,967 |   | 5,967 |   |
| Dividends on preferred stock, Series A            |   | —                                |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (345 | ) | (345 | ) |
| Cumulative dividends on preferred stock, Series B |   | —                                |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (19 | ) | (19 | ) |
| Dividends on preferred stock, Series C            |   | —                                |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (471 | ) | (471 | ) |
| Balance at March 31, 2002                         |   | 1,416,130                             |   | $ | 14 |   | 941 |   | $ | — |   | 1,840,000 |   | $ | 18 |   | 100 |   | $ | — |   | $ | 235,742 |   | $ | 5,306 |   | $ | 241,080 |   |

 

See accompanying notes to the unaudited interim financial statements.

 

3

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**CapitalCrossing Preferred Corporation**

**Statements of Cash Flows**

 
|                                                                               |   | **Three Months Ended March 31,** |    |
|------------------------------------------------------------------------------------|--------|----------------------------------|---------|
|                                                                               |   | **2003**                         |    | **2002** |   |
|                                                                               |   | **(in thousands)**               |    |
| Cash flows provided by operating activities:                                       |   |                             |    |   |   |
| Net income                                                                         |   | $                                | 6,179   |   | $ | 5,967 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |   |                             |    |   |   |
| Gains on sales of loans                                                            |   | —                           |    | (517 | ) |
| Other, net                                                                         |   | 52                               |    | (55 | ) |
|                                                                               |   |                             |    |   |   |
| Net cash provided by operating activities                                          |   | 6,231                            |    | 5,395 |   |
|                                                                               |   |                             |    |   |   |
| Cash flows provided by (used in) investing activities:                             |   |                             |    |   |   |
| Amortization and payoffs on loans                                                  |   | 18,321                           |    | 11,575 |   |
| Purchase of loans from Capital Crossing Bank                                       |   | —                           |    | (16,944 | ) |
| Proceeds from sales of loans                                                       |   | —                           |    | 2,686 |   |
|                                                                               |   |                             |    |   |   |
| Net cash provided by (used in) investing activities                                |   | 18,321                           |    | (2,683 | ) |
|                                                                               |   |                             |    |   |   |
| Cash flows used in financing activities:                                           |   |                             |    |   |   |
| Payment of preferred stock dividends                                               |   | (835                             | )       | (835 | ) |
|                                                                               |   |                             |    |   |   |
| Net cash used in financing activities                                              |   | (835                             | )       | (835 | ) |
|                                                                               |   |                             |    |   |   |
| Net change in cash and cash equivalents                                            |   | 23,717                           |    | 1,877 |   |
| Cash and cash equivalents at beginning of period                                   |   | 92,710                           |    | 87,989 |   |
|                                                                               |   |                             |    |   |   |
| Cash and cash equivalents at end of period                                         |   | $                                | 116,427 |   | $ | 89,866 |   |

 

See accompanyingnotes to unaudited interim financial statements.

 

4

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**Capital Crossing PreferredCorporation**

**Notes****toFinancial Statements**

**Three Months Ended March 31, 2003 and2002**

 

**Note 1.   Basis ofPresentation**

 

Capital Crossing Preferred Corporation (“CapitalCrossing Preferred), is a Massachusetts corporation organized on March 20,1998, to acquire and hold real estate assets. Capital Crossing Bank (“Capital Crossing”), a federally insuredMassachusetts trust company, owns all of Capital Crossing Preferred’soutstanding common stock.  CapitalCrossing is in compliance with its regulatory capital requirements at March 31,2003.

 

On March 31, 1998,Capital Crossing Preferred was initially capitalized with the issuance toCapital 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 ofloans at its estimated fair value of $140,740,000.  Such loans were recorded in the accompanying balance sheet atCapital Crossing’s historical cost, which approximated their estimated fairvalues.

 

In 1999, Capital CrossingPreferred completed the sale of 1,416,130 shares of Series A preferredstock.  In 2001, Capital CrossingPreferred completed the sale 1,840,000 shares of Series C preferred stock.

 

The financial informationas of March 31, 2003 and the results of operations, changes in stockholders’equity and cash flows for the three months ended March 31, 2003 and 2002 areunaudited; however, in the opinion of management, the financial informationreflects all adjustments (consisting solely of normal recurring accruals)necessary for a fair presentation in accordance with accounting principlesgenerally accepted in the United States of America.  Interim results are not necessarily indicative of results to beexpected for the entire year.  Theseinterim statements are intended to be read in conjunction with the financialstatements presented in Capital Crossing Preferred’s Annual Report on Form 10-Kas of and for the year ended December 31, 2002.

 

In preparing financialstatements in conformity with accounting principles generally accepted in theUnited States of America, management is required to make estimates andassumptions that affect the reported amounts of assets and liabilities as ofthe date of the balance sheet and reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates. Material estimates that are particularly susceptible to significantchange in the near term relate to the determination of the allowance for losseson loans, the allocation of purchase discount between amortizing andnon-amortizing portions, and the rate at which the discount is accreted intointerest income.

 

#### **Note 2.   Commitments and Contingencies**

 

*Guarantees*

 

Capital CrossingPreferred has guaranteed all of the obligations of Capital Crossing underadvances Capital Crossing may receive from time to time from the Federal HomeLoan Bank of Boston (“FHLBB”), and Capital Crossing Preferred has agreed topledge a significant amount of its assets in connection with those advances.This guarantee would rank senior to the preferred shares upon liquidation.Capital Crossing Preferred’s obligations under this agreement are limited byapplicable laws pertaining to fraudulent conveyance and fraudulent transfer.The assets pledged to the FHLBB will vary from time to time, however thepotential exists for Capital Crossing Preferred to pledge all of its assets tothe FHLBB to secure advances to Capital Crossing. In addition, Capital Crossinghas pledged to the FHLBB all of the shares of Capital Crossing Preferred’scapital stock it owns as collateral for its FHLBB borrowings.  Under the terms of the pledge, if CapitalCrossing becomes undercapitalized, the FHLBB may require Capital Crossing todissolve Capital Crossing Preferred such that the assets of Capital CrossingPreferred are distributed to Capital Crossing. In such circumstance, holders ofthe Series A and Series C preferred stock would receive their liquidationpreference only to the extent there are available assets of Capital CrossingPreferred following satisfaction of its outstanding obligations, including itsguarantee of Capital Crossing’s FHLBB borrowings.  At March 31, 2003, approximately $39.6 million, or 11.9%, ofCapital Crossing Preferred’s assets had been pledged to and accepted by theFHLBB to secure advances to Capital Crossing. Capital Crossing has also agreed that it will not request or acceptadvances from the FHLBB in excess of Capital Crossing Preferred’s totalstockholder’s equity, less the stockholder’s equity attributable to the SeriesA and Series C preferred shares. As of March 31, 2003, this restriction wouldlimit Capital Crossing’s ability to receive advances in excess of approximately$304.3 million. As of March 31, 2003, Capital Crossing had $129.0 million inoutstanding FHLBB borrowings.

 

5

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*Taxassessment*

 

The Massachusetts Department ofRevenue (“DOR”) has issued tax assessments to Capital Crossing and numerousother financial institutions in Massachusetts that reported a deduction fordividends received from a REIT on their Massachusetts financial institutionexcise tax returns.

 

On March 5, 2003, theGovernor of Massachusetts signed a bill which includes an amendment to existinglaw to expressly deny a dividends received deduction for dividends from a REIT.This amendment applies retroactively to tax years ending on or afterDecember 31, 1999. Capital Crossing intends to challenge this legislation,especially the retroactive application to prior years, on constitutional andother grounds and to vigorously defend its position.

 

Capital Crossing Preferred hasalso received a Notice of Assessment (“Notice”) for additional taxes from theDOR. This Notice indicates that, if the dividend received deduction is held tobe available to Capital Crossing, the DOR believes the dividend paid deductionis not available to Capital Crossing Preferred. The Notice received relates to1999 and is in the amount of $2.7 million, including interest. CapitalCrossing Preferred’s total exposure through March 31, 2003 is approximately$9.6 million.

 

6

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**Item 2****.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

This Form 10-Q contains“forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934. Capital Crossing Preferred may also make written or oral forward-lookingstatements in other documents filed with the Securities and Exchange Commission(“SEC”), in press releases and other written materials, and in oral statementsmade by its officers or directors. Forward-looking statements can be identifiedby the use of the words “believe,” “expect,” “anticipate,” “intend,”“estimate,” “assume,” “will,” “should,” and other expressions which predict orindicate future events and trends and which do not relate to historicalmatters. Forward-looking statements should not be unduly relied upon becausethey involve known and unknown risks, uncertainties and other factors, some ofwhich are beyond the control of Capital Crossing Preferred. These risks,uncertainties and other factors may cause the actual results, performance orachievements of Capital Crossing Preferred to be materially different from theanticipated future results, performance or achievements that are expressed orimplied by the forward-looking statements.

 

Capital Crossing Preferred’sactual results could differ materially from those projected in theforward-looking statements as a result, among other factors, of the factorsdiscussed in the section entitled “Risk Factors and Factors Affecting FutureOperating Results” of this Form 10-Q.

 

All of these factors should becarefully reviewed, and the reader of this Form 10-Q should be aware thatthere may be other factors that could cause these differences. These forward-lookingstatements were based on information, plans and estimates at the date of thisreport, and Capital Crossing Preferred does not promise to update anyforward-looking statements to reflect changes in underlying assumptions orfactors, new information, future events or other changes.

 

#### **Critical**Accounting Policies

 

In December 2001, the SECrequested that all registrants discuss their most “critical accountingpolicies” in management’s discussion and analysis of financial condition andresults of operations. The SEC indicated that a “critical accounting policy” isone which is both important to the portrayal of the company’s financialcondition and results and requires management’s most difficult, subjective orcomplex judgments, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain. While Capital CrossingPreferred’s significant accounting policies are more fully described inNote 1 to the Financial Statements included in its Annual Report on Form10-K, management believes the following accounting policies to be most criticalin their potential effect on Capital Crossing Preferred’s financial position orresults of operations:

 

**Allowance for Loan Losses.**  Arrivingat an appropriate level of allowance for loan losses requires a high degree ofjudgment. Capital Crossing Preferred maintains an allowance for probable loanlosses that are inherent in its loan portfolio. The initial allowance for loanlosses was transferred from Capital Crossing at the time of the initialtransfer of loans to Capital Crossing Preferred and additional transfers aremade in connection with each transfer of loans from Capital Crossing.Subsequent to the date of transfer, the allowance for loan losses will beincreased or decreased through a provision or credit for loan losses includedin earnings. Additionally, the allowance for loan losses is increased uponallocation of purchase discount upon acquisition of loans. Loan losses arecharged against the allowance when management believes the loan balance, or aportion thereof, is uncollectible. Subsequent recoveries, if any, are creditedto the allowance when cash payments are received.

 

Management makes significantjudgments in determining the adequacy of the allowance for loan losses.Management initially considers the loan loss allowances specifically allocatedto individual impaired loans. Next, management considers the level of generalloan loss allowances deemed appropriate for the balance of the portfolio.Factors considered include known and inherent risks in the nature and volume ofthe loan portfolio, adverse situations that may affect the borrower’s abilityto repay, historical loss ranges, the estimated value of any underlyingcollateral and prevailing economic conditions. An additional allowance for loanlosses is maintained based on a judgmental process whereby management considersqualitative and quantitative assessments of other factors including regionalcredit concentration, industry concentration, results of regulatoryexaminations, historical loss ranges, portfolio composition, economicconditions such as interest rates and energy costs and other changes in theportfolio. The allowance for loan losses is management’s estimate of theprobable loan losses incurred as of the balance sheet date. There can be noassurance that Capital Crossing Preferred’s actual losses with respect to loanswill not exceed its allowance for loan losses.

 

7

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**Discounts on Acquired Loans.**  At thetime of acquisition of purchased pools of loans, the excess of the contractualbalances over the amount of reasonably estimable and probable discounted futurecash collections for each loan is recorded as non-amortizing discount. Theremaining discount, which represented the excess of the amount of reasonablyestimable and probable discounted future cash collections over the acquisitionamount is accreted into interest income using the interest method over the termof the loans and is not accreted on non-performing loans. There is a highdegree of judgment involved in estimating the amount of future cash flows. Theamount and timing of actual cash flows could differ materially frommanagement’s estimates, which could materially affect financial condition andresults of operations.

 

The non-amortizing discount isnot accreted into income until it is determined that the amount and timing ofthe related cash flows are reasonably estimable and collection is probable. Ifcash flows cannot be reasonably estimated for any loan, and collection is notprobable, the cost recovery method of accounting is used. Under the costrecovery method, any amounts received are applied against the recorded amountof the loan. Non-amortizing discount is generally offset against the relatedprincipal balance when the amount at which a loan is resolved or restructuredis determined.

 

Subsequent to acquisition, ifcash flow projections improve, and it is determined that the amount and timingof the cash flows related to the non-amortizing discount are reasonablyestimable and collection is probable, the corresponding decrease in thenon-amortizing discount is transferred to the amortizing portion and isaccreted into interest income over the remaining life of the loan on the interestmethod. If cash flow projections deteriorate subsequent to acquisition, thedecline is accounted for through the allowance for loan losses.

 

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

 

Changes in interest rates alsocan affect the value of Capital Crossing Preferred’s loans (and otherinterest-earning assets) and its ability to realize gains on the resolution ofassets. A significant portion of Capital Crossing Preferred’s earnings resultsfrom accelerated interest income resulting from loan prepayments. This type ofincome can vary significantly from quarter to quarter and year to year based ona number of different factors, including the interest rate environment. An increasein interest rates that adversely affects the ability of borrowers to pay theprincipal or interest on Capital Crossing Preferred’s loans may lead to areduction of discount accreted into income, which could have a material adverseeffect on its results of operations.

 

#### **Results** of Operations

 

***Three Months Ended March 31, 2003 and 2002***

 

Net income available to commonstockholder increased $212,000, or 4.1%, to $5.3 million for the three monthsended March 31, 2003, compared to $5.1 million for the three months ended March31, 2002.  This increase was primarilyattributable to an increase in total interest income; offset by: (1) a decreasein total other income as there were no gains on sales of loans for the threemonths ended March 31, 2003 and (2) an increase in operating expenses.  Total interest income for the three monthsended March 31, 2003 increased $839,000, or 15.1%, to $6.4 million, compared to$5.6 million for the three months ended March 31, 2002.

 

Thefollowing table sets forth the yields on Capital Crossing Preferred’s earningassets for the periods indicated:

 
|                      |   | **Three Months Ended March 31,** |    |
|---------------------------|--------|----------------------------------|---------|
|                      |   | **2003**                         |    | **2002** |   |
|                      |   | **Average  Balance**             |    | **Interest  Income** |   | **Yield** |   | **Average  Balance** |   | **Interest  Income** |   | **Yield** |   |
|                      |   | **(dollars in thousands)**       |    |
|                      |   |                             |    |   |   |   |   |   |   |   |   |   |   |
| Loans, net (1)            |   | $                                | 235,135 |   | $ | 5,671 |   | 9.78 | % | $ | 151,214 |   | $ | 4,970 |   | 13.33 | % |
| Interest-bearing deposits |   | 103,820                          |    | 719 |   | 2.81 |   | 90,477 |   | 581 |   | 2.60 |   |
|                      |   | $                                | 338,955 |   | $ | 6,390 |   | 7.65 | % | $ | 241,691 |   | $ | 5,551 |   | 9.31 | % |

 

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(1)Non-performing loans are excluded from average balance calculations.

 

8

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The decline in yield oninterest-earning assets from 2002 to 2003 is a result of a decline in yield onthe loan portfolio, partially offset by an increase in the yield on interest-bearingdeposits. The yield on the loan portfolio declined as a result of: (1) adecrease in yield attributable to regularly scheduled interest income as aresult of the declining interest rate environment, (2) a decline, relativeto the overall yield on loans, in interest income recognized at the time ofindividual loan pay-offs and (3) as a result of the purchase orcontribution in 2002 of loans from Capital Crossing that were acquired from theSmall Business Administration which generate lower regularly scheduled interestand accretion. Average loans, net for the three months ended March 31, 2003totaled $235.1 million compared to $151.2 million for the same periodin 2002. This increase is due primarily to purchases of loans from or contributionof loans by Capital Crossing totaling $167.2 million, which was partiallyoffset by payoffs, sales, and amortization related to loans, since the firstquarter of 2002.

 

Income on loans includes theportion of the purchase discount that is accreted into income over theremaining lives of the related loans using the interest method. Because thecarrying value of the loan portfolio is net of purchase discount, the relatedyield on this portfolio generally is higher than the aggregate contractual ratepaid on the loans. The total yield includes the excess of a loan’s expecteddiscounted future cash flows over its net investment, recognized using theinterest method.

 

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

 
|                                                 |   | **Three Months Ended March 31,** |   |
|------------------------------------------------------|--------|----------------------------------|--------|
|                                                 |   | **2003**                         |   | **2002** |   |
|                                                 |   | **Interest  Income**             |   | **Yield** |   | **Interest  Income** |   | **Yield** |   |
|                                                 |   | **(dollars in thousands)**       |   |
|                                                 |   |                             |   |   |   |   |   |   |   |
| Regularly scheduled interest and accretion income    |   | $                                | 4,472  |   | 7.71 | % | $ | 3,299 |   | 8.85 | % |
| Interest and fee income recognized on loan pay-offs: |   |                             |   |   |   |   |   |   |   |
| Non-amortizing discount                              |   | 560                              |   | 0.97 |   | 653 |   | 1.75 |   |
| Amortizing discount                                  |   | 634                              |   | 1.09 |   | 984 |   | 2.64 |   |
| Other interest and fee income                        |   | 5                                |   | 0.01 |   | 34 |   | 0.09 |   |
|                                                 |   | 1,199                            |   | 2.07 |   | 1,671 |   | 4.48 |   |
|                                                 |   | $                                | 5,671  |   | 9.78 | % | $ | 4,970 |   | 13.33 | % |

 

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

 

The average balance of interest-bearing depositsincreased $13.3 million to $103.8 million for the three months ended March 31,2003, compared to $90.5 million for 2002, as a result of cash flows from loanrepayments, offset by loan purchases and periodic dividend payments. The yield on interest-bearing deposits increasedbecause the rate paid by Capital Crossing on the money market account held byCapital Crossing Preferred increased in 2003 compared to 2002.

 

During the three months ended March 31, 2003 therewere no sales of loans to unaffiliated third parties compared to a gain on asale of one loan to an unaffiliated third party of $517,000 during the threemonths ended March 31, 2002.

 

Loan servicing andadvisory services expenses for the three months ended March 31, 2003 increased$68,000, or 65.4%, to $172,000 compared to $104,000 for the three months endedMarch 31, 2002. This increase was due to the increase in the average balance ofthe loan portfolio.

 

Other general and administrativeexpenses increased $42,000, or 247.1%, to $59,000 for the three months endedMarch 31, 2003 compared to $17,000 for the three months ended March 31, 2002.This increase is primarily attributable to an increase in professional fees,consisting of legal, audit and tax preparation services.

 

Capital Crossing Preferred intends to pay dividends onits preferred stock and common stock in amounts necessary to continue topreserve its status as a REIT under the Internal Revenue Code.

 

9

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**Changes****in****Financial Condition**

#### ** **

#### **Interest-bearingDeposits with Capital Crossing Bank**

 

Interest-bearing depositswith Capital Crossing Bank consist entirely of a money market account at March31, 2003.

#### ** **

#### **LoanPortfolio**

 

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

 

|                           |   | **March 31,  2003** |       | **December 31,  2002** |       |
|--------------------------------|--------|---------------------|------------|------------------------|------------|
|                           |   | **(in thousands)**  |       |
| Mortgage loans on real estate: |   |                | ** ** |                   | ** ** |
| Commercial real estate         |   | $                   | 179,029    |                   | $          | 191,567 |   |
| Multi-family residential       |   | 70,669              |       | 77,598                 |       |
| One-to-four family residential |   | 2,188               |       | 2,529                  |       |
| Land                           |   | 5,736               |       | 5,821                  |       |
|                           |   |                |       |                   |       |
| Total loans, gross             |   | 257,622             |       | 277,515                |       |
|                           |   |                |       |                   |       |
| Less discount:                 |   |                |       |                   |       |
| Non-amortizing discount        |   | (7,267              | )          | (8,158                 | )          |
| Amortizing discount            |   | (23,128             | )          | (23,926                | )          |
| Net deferred loan fees         |   | (229                | )          | (112                   | )          |
| Allowance for loan losses      |   | (7,354              | )          | (7,354                 | )          |
|                           |   |                |       |                   |       |
| Loans, net                     |   | $                   | 219,644    |                   | $          | 237,965 |   |

 

Included in net loans, at March 31, 2003 and December31, 2002, are approximately $26.3 million and $32.9 million (of which $180,000at December 31, 2002 are non-performing), respectively, for which the netrecorded investment represents the amortized cost of these loans, where atacquisition, the amounts of reasonably estimable and probable discounted futurecash collections were less than the contractual balances owed. These loans werepurchased at a price to yield a market rate of interest after considering thecredit quality of the loans at acquisition and the aforementioned expectedfuture cash collections. The excess of the contractual balances over the amountof reasonably estimable and probable discounted future cash collectionsrepresents the predominant portion of the $7.3 million and $8.2 million ofnon-amortizing discount at March 31, 2003 and December 31, 2002, respectively.

 

Capital Crossing Preferredintends that each loan acquired from Capital Crossing in the future will be awhole loan, and will be originated or acquired by Capital Crossing in theordinary course of its business. Capital Crossing Preferred also intends thatall loans held by it will be serviced pursuant to its master service agreementwith Capital Crossing.

 

From time to time, returns ofcapital may be made to Capital Crossing. This would have the effect of reducingthe asset size of Capital Crossing Preferred.

 

Non-performingloans, net of discount, totaled $1.4 million and $1.8 million at March 31, 2003and December 31, 2002, respectively.

 

Loans generally are placed onnon-performing status and the accrual of interest and accretion of discount aregenerally discontinued when the collectibility of principal and interest is notprobable or estimable. Unpaid interest income previously accrued on such loansis reversed against current period interest income. A loan is returned toaccrual status when it is brought current in accordance with management’santicipated cash flows at the time of acquisition.

 

10

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***Non-Amortizing Discount.***  At the time of acquisition, the excess ofthe contractual loan balances over the amount of reasonably estimable and probablefuture cash collections is recorded as non-amortizing discount. Thenon-amortizing discount is not transferred to amortizing discount and accretedinto income until it is determined that the amount and timing of the cash flowsrelated to the non-amortizing discount are reasonably estimable and collectionis probable. Non-amortizing discount generally is reduced and offset againstthe related principal balance when the amount at which a loan is resolved orrestructured is determined. There is no effect on the income statement as aresult of these reductions.  If cash flow projections deteriorate subsequent toacquisition, the decline is accounted for through the allowance for loanlosses.

 

The following table sets forth certain informationrelating to the activity in the non-amortizing discount for the periodsindicated:

 

|                                                                |   | **Three  Months Ended  March 31,** |   |
|---------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                |   | **2003**                           |   | **2002** |   |
|                                                                |   | **(in thousands)**                 |   |
|                                                                |   |                               |   |   |   |
| Balance at beginning of period                                      |   | $                                  | 8,158  |   | $ | 6,062 |   |
| Additions in connection with loans acquired from Capital  Crossing  |   | —                             |   | 208 |   |
| Accretion                                                           |   | (560                               | )      | (653 | ) |
| Transfers to amortizing portion upon improvements in  cash flows    |   | (321                               | )      | (244 | ) |
| Net reductions related to resolutions and restructures              |   | (10                                | )      | (678 | ) |
| Non-amortizing discount relating to loans sold to  Capital Crossing |   | —                             |   | (307 | ) |
| Balance at end of period                                            |   | $                                  | 7,267  |   | $ | 4,388 |   |

#### ** **

***Allowance for LoanLosses.***Capital Crossing Preferred maintains an allowancefor probable loan losses that are inherent in its loan portfolio. The allowancefor probable loan losses is increased or decreased by provisions or credits forloan losses included in earnings. Additionally, the allowance for loan lossesis increased upon allocations of discounts on purchased loans and reduced bynet loan charge-offs. Loans are charged-off when they are deemed to beuncollectible, or partially charged-off when a portion of a loan is deemeduncollectible. Recoveries are generally recorded only when cash payments arereceived. The loan loss allowance policy requires the maintenance of allowancessufficient to satisfy estimated probable losses arising from impaired realestate or other secured commercial loans.

 

Capital Crossing Preferredperforms periodic reviews of its loan portfolio to identify loans for whichspecific allocations are considered prudent. Specific allocations include theresults of measuring impaired loans under Statement of Financial AccountingStandards No. 114. General risk allocations are determined by a formulawhereby the loan portfolio is stratified by loan type and by internal riskrating categories. Loss factors are then applied to each strata based onvarious considerations including historic loss experience, delinquency trends,current economic conditions, industry standards and regulatory guidelines. Anadditional allowance is maintained based on a judgment by management afterconsideration of qualitative and quantitative assessments of certain factorsincluding regional credit concentration, industry concentration, results ofregulatory examinations, historical loss ranges, portfolio composition,economic conditions such as interest rates and energy costs and other changesin the portfolio. The allowance for loan losses is management’s estimate of theprobable loan losses incurred as of the balance sheet date.

 

Additional factors influencingthe calculation of the allowance for loan losses are particular concentrationswithin the portfolio, including the geographic concentration of loans inCalifornia, which accounted for approximately 43.4% of the portfolio at March 31,2003, and concentrations of loans to individual borrowers.

 

Capital Crossing Preferred’sallowance for loan losses at March 31, 2003 was $7.4 million. Thedetermination of this allowance requires the use of estimates and assumptionsregarding the risks inherent in individual loans and the loan portfolio in itsentirety. In addition, regulatory agencies periodically review the adequacy ofthe allowance for loan losses and may require Capital Crossing Preferred tomake additions to its allowance for loan losses. While management believes itsestimates and assumptions are reasonable, there can be no assurance that theywill be proven to be correct in the future. The actual amount of futureprovisions that may be required cannot be determined, and such provisions mayexceed the amounts of past provisions. Management believes that the allowancefor loan losses is adequate to absorb the known and inherent risks in CapitalCrossing Preferred’s loan portfolio at each date based on the facts known tomanagement as of such date. Management continues to monitor and modify theallowances for general and specific loan losses as economic conditions dictate.

 

11

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The following table sets forth certain informationrelating to the activity in the allowance for loan losses for the periodsindicated:

 

|                                                |   | **Three Months Ended  March 31,** |   |
|-----------------------------------------------------|--------|-----------------------------------|--------|
|                                                |   | **2003**                          |   | **2002** |   |
|                                                |   | **(in thousands)**                |   |
|                                                |   |                              |   |   |   |
| Balance at beginning of period                      |   | $                                 | 7,354  |   | $ | 4,659 |   |
| Transfer from Capital Crossing with loans purchased |   | —                            |   | 487 |   |
| Transfer to Capital Crossing with loans sold        |   | —                            |   | (6 | ) |
| Balance at end of period                            |   | $                                 | 7,354  |   | $ | 5,140 |   |

 

#### **InterestRate Risk**

 

CapitalCrossing Preferred’s income consists primarily of interest income. If there isa decline in market interest rates, Capital Crossing Preferred may experience areduction in interest income and a corresponding decrease in funds available tobe distributed to its shareholders. The reduction in interest income may resultfrom downward adjustments of the indices upon which the interest rates on loansare 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 tomanage its interest rate risk.

 

**Significant****Concentration ofCredit Risk**

 

Concentration of credit riskgenerally arises with respect to Capital Crossing Preferred’s loan portfoliowhen a number of borrowers engage in similar business activities, or activitiesin the same geographical region. Concentration of credit risk indicates therelative sensitivity of Capital Crossing Preferred’s performance to bothpositive and negative developments affecting a particular industry. CapitalCrossing Preferred’s balance sheet exposure to geographic concentrationsdirectly affects the credit risk of the loans within its loan portfolio.

 

At March 31, 2003, 43.4% and13.4% of Capital Crossing Preferred’s total loan portfolio consisted of loansin California and New England, respectively. At December 31, 2002, 43.7%and 14.1% of Capital Crossing Preferred’s total real estate loan portfolioconsisted of loans located in California and New England, respectively.Consequently, the portfolio may experience a higher default rate in the eventof adverse economic, political or business developments or natural hazards inCalifornia or New England that may affect the ability of property owners tomake payments of principal and interest on the underlying mortgages.

 

#### **Liquidity** Risk Management

 

The objective of liquiditymanagement is to ensure the availability of sufficient cash flows to meet allof Capital Crossing Preferred’s financial commitments. In managing liquidityrisk, Capital Crossing Preferred takes into account various legal limitationsplaced on a REIT. Capital Crossing Preferred’s principal liquidity need is topay dividends on the preferred shares and common shares.

 

12

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The acquisition of additionalmortgage assets is intended to be funded primarily through repayment ofprincipal balances of mortgage assets by individual borrowers. Capital CrossingPreferred does not have and does not anticipate having any material capitalexpenditures. To the extent that the Board of Directors determines thatadditional funding is required, Capital Crossing Preferred may raise such fundsthrough additional equity offerings, debt financing or retention of cash flow(after consideration of provisions of the Internal Revenue Code requiring thedistribution by a REIT of at least 90% of its REIT taxable income and takinginto account taxes that would be imposed on undistributed income), or acombination of these methods. Except for its obligation to guarantee certainborrowings of Capital Crossing, Capital Crossing Preferred does not currentlyintend to incur any indebtedness. The organizational documents of CapitalCrossing Preferred limit the amount of indebtedness which it is permitted toincur without the approval of the Series A and the Series C preferredstockholders to no more than 100% of the total stockholders’ equity of CapitalCrossing Preferred. Any such debt may include intercompany advances made byCapital Crossing to Capital Crossing Preferred.

 

# **RISK** FACTORS AND FACTORS AFFECTING FUTUREOPERATING RESULTS

 

Set forth below are a number of risk factors thatinvestors should carefully consider in making an investment in Capital CrossingPreferred’s preferred stock. These factors may cause Capital CrossingPreferred’s actual results to differ materially from anticipated futureresults, performance or achievements expressed or implied by theforward-looking statements.

 

All of these factorsshould be carefully reviewed, and the reader of this Form 10-Q should be awarethat there may be other factors that could cause these differences.

 

**A decline in Capital Crossing’s capital levels may result inthe Series A and Series C preferred shares being subject to automaticexchange into preferred shares of Capital Crossing**

 

The returns from an investment inthe Series A or Series C preferred shares will depend to asignificant extent on the performance and capital of Capital Crossing. Asignificant decline in the performance and capital levels of Capital Crossingor the placement of Capital Crossing into bankruptcy, reorganization,conservatorship or receivership could result in the automatic exchange of theSeries A and Series C preferred shares for preferred shares ofCapital Crossing, which would represent an investment in Capital Crossing andnot in Capital Crossing Preferred. Under these circumstances:

 

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

 

•                  if a liquidation of Capital Crossing occurs, theclaims of depositors and creditors of Capital Crossing and of the FDIC wouldhave priority over the claims of holders of the preferred shares of CapitalCrossing, and therefore, a holder of Series A and Series C preferredshares likely would receive substantially less than such holder would receivehad the Series A and Series C preferred shares not been exchanged forpreferred shares of Capital Crossing; and

 

•                  the exchange of the Series A or Series Cpreferred shares for preferred shares of Capital Crossing would be a taxableevent to a holder of Series A or Series C preferred shares under theInternal Revenue Code, and such holder would incur a gain or a loss, as thecase may be, measured by the difference between such holder’s basis in theSeries A or Series C preferred shares and the fair market value ofCapital Crossing preferred shares received in the exchange.

 

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

 

TheSeries A and Series C preferred shares rank:

 

•                  junior to borrowings of Capital CrossingPreferred, including claims of the FHLBB for amounts due or which may becomedue under Capital Crossing Preferred’s guarantee of Capital Crossing’sobligations to the FHLBB, and any other obligations to Capital CrossingPreferred’s creditors upon its liquidation; and

 

13

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

 

If Capital Crossing Preferredincurs significant indebtedness, it may not have sufficient funds to makedividend or liquidation payments on the Series A or Series Cpreferred shares. Upon Capital Crossing Preferred’s liquidation, itsobligations to its creditors would rank senior to the Series A and Series Cpreferred shares. At March 31, 2003, Capital Crossing Preferred hadapproximately $139,000 in accounts payable and other liabilities which, uponits liquidation, would be required to be paid before any payments could be madeto holders of the Series A or Series C preferred shares. In addition,upon Capital Crossing Preferred’s liquidation, dissolution or winding up, if itdoes not have sufficient funds to pay the full liquidation amount to theholders of the Series A and Series C preferred shares, such holdersmay receive less than the $10.00 per share liquidation amount.

 

The terms of the Series Aand Series C preferred shares limit Capital Crossing Preferred’s abilityto incur debt in excess of 100% of its stockholders’ equity without theapproval of the holders of all of the outstanding Series A andSeries C preferred shares but do not require that Capital CrossingPreferred obtain the approval of the holders of the Series A andSeries C preferred shares to issue additional series of preferred shareswhich rank equal to the Series A and Series C preferred shares as topayment of dividends or amount upon liquidation. As a result, subject to theselimitations, Capital Crossing Preferred may incur obligations which may furtherlimit its ability to make dividend or liquidation payments in the future.

 

**Bank regulators may limit the ability of Capital CrossingPreferred to implement its business plan and may restrict its ability to paydividends**

 

Because Capital CrossingPreferred is a subsidiary of Capital Crossing, federal and state regulatoryauthorities will have the right to examine it and its activities and undercertain circumstances, to impose restrictions on Capital Crossing or CapitalCrossing Preferred which could impact Capital Crossing Preferred’s ability to conductits business according to its business plan, which could materially adverselyaffect the financial condition and results of operations of Capital CrossingPreferred:

 

•                  if Capital Crossing’s regulators determine thatCapital Crossing’s relationship to Capital Crossing Preferred results in anunsafe and unsound banking practice, the regulators could restrict CapitalCrossing Preferred’s ability to transfer assets, to make distributions to itsstockholders, including dividends on its Series A and Series Cpreferred shares, or to redeem shares of Series A and Series Cpreferred stock or even require Capital Crossing to sever its relationship withor divest its ownership interest in Capital Crossing Preferred. Such actionscould potentially result in Capital Crossing Preferred’s failure to qualify asa REIT.

 

•                  payment of dividends on the Series A andSeries C preferred shares could also be subject to regulatory limitationsif Capital Crossing becomes undercapitalized. Capital Crossing will be deemedundercapitalized if its total risk-based capital ratio is less than 8.0%, itsTier 1 risk-based capital ratio is less than 4.0% or its Tier 1 leverage ratiois less than 4.0%. At March 31, 2003, Capital Crossing had a totalrisk-based capital ratio of 12.76%, a Tier 1 risk-based capital ratio of 11.49%and a Tier 1 leverage ratio of 9.12%, which is sufficient for Capital Crossingto be considered well-capitalized. As part of its common stock repurchaseprogram, Capital Crossing has also agreed with the FDIC to maintain, for solong as the repurchase program continues, its Tier 1 leverage ratio at least8.00%. Capital Crossing Preferred makes no assurance that Capital Crossing willbe well-capitalized under applicable regulations as of any future date. Forpurposes of calculating these capital ratios as a percentage of CapitalCrossing’s risk-weighted assets, as opposed to its total assets, CapitalCrossing’s assets are assigned to risk categories based on the relative creditrisk of the asset in question. These risk weights consist of 0% for assetsdeemed least risky such as cash, claims backed by the full faith and credit ofthe U.S. government, and balances due from Federal Reserve banks; 20% forassets deemed slightly more risky such as portions of obligations conditionallyguaranteed by the U.S. government or federal funds sold; 50% for assets deemedstill more risky such as government issued-revenue bonds, one-to-four familyresidential first mortgage loans and well-collateralized multi-familyresidential first mortgage loans; and 100% for all other assets, includingprivate sector loans such as commercial mortgage loans as well as bank-ownedreal estate.

 

•                  while Capital Crossing Preferred believes thatdividends on the Series A and Series C preferred shares should not beconsidered distributions by Capital Crossing, the FDIC may not agree with thisposition. Under FDIC regulations on capital distributions, the ability ofCapital Crossing to make a capital distribution varies depending primarily onCapital Crossing’s earnings and regulatory capital levels. Capitaldistributions are defined to include payment of dividends, stock repurchases,cash-out mergers and other distributions charged against the capital accountsof an institution. The FDIC could limit or prohibit the payment of dividends onthe Series A and Series C preferred shares if it determines that thepayment of those dividends is a capital distribution by Capital Crossing andthat Capital Crossing’s earnings and regulatory capital levels are below specifiedlevels.

 

14

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**Capital Crossing Preferred does not have insurance to coverits exposure to borrower defaults and bankruptcies and special hazard lossesthat are not covered by its standard hazard insurance policies**

 

Capital Crossing Preferred doesnot generally obtain general credit enhancements such as mortgagor bankruptcyinsurance or obtain special hazard insurance for its mortgage assets, otherthan standard hazard insurance, which will in each case only relate toindividual mortgage loans. Accordingly, Capital Crossing Preferred will besubject to risks of borrower defaults and bankruptcies and special hazardlosses, such as losses occurring from floods that are not covered by standardhazard insurance. A significant number of loans acquired in recent years areloans that were originated under the Small Business Administration’s disasterrelief program. These loans are typically loans made to small businesses andindividuals for the purpose of assisting those who have been the victim of adisaster and may be located in an area prone to such disasters. In the event ofa default on any mortgage loan held by Capital Crossing Preferred resultingfrom declining property values or worsening economic conditions, among otherfactors, it would bear the risk of loss of principal to the extent of anydeficiency between (1) the value of the related mortgaged property, plusany payments from an insurer or guarantor in the case of commercial mortgageloans, and (2) the amount owing on the mortgage loan.

 

**Capital Crossing Preferred’s results will be affected byfactors beyond its control**

 

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

 

•                  local and other economic conditions affecting realestate values;

 

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

 

•                  the ability of tenants to make lease payments;

 

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

 

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

 

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

 

**Capital Crossing Preferred’s loans are concentrated inCalifornia and New England and adverse conditions in those markets couldadversely affect its operations**

 

Properties underlying CapitalCrossing Preferred’s current mortgage assets are concentrated primarily inCalifornia, particularly Southern California, and New England. As ofMarch 31, 2003, approximately 43.4% of its mortgage assets were secured byproperties located in California and 13.4% in New England. Adverse economic,political or business developments or natural hazards may affect these areasand the ability of property owners in these areas to make payments of principaland interest on the underlying mortgages. If either region experienced adverseeconomic, political or business conditions, Capital Crossing Preferred wouldlikely experience higher rates of loss and delinquency on its mortgage loansthan if its loans were more geographically diverse.

 

15

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**A substantial majority of Capital Crossing Preferred’s loanswere originated by other parties whose level of due diligence may be differentthan Capital Crossing’s level of due diligence**

 

At March 31, 2003,approximately 93.8% of Capital Crossing Preferred’s loan portfolio consisted ofloans originated by third parties that were purchased by Capital Crossing andsubsequently acquired by Capital Crossing Preferred from Capital Crossing.Because these loans were originated by third parties, Capital Crossinggenerally is not able to conduct the same level of due diligence on these loansthat it would have conducted had it originated them. Generally, while CapitalCrossing conducts an acquisition review, it relies on the underwritingstandards of the parties originating the loans it acquires. The standards ofthese loan originators may be substantially different than those of CapitalCrossing. These differences may include less rigorous appraisal requirements anddebt service coverage ratios, and less rigorous analysis of property locationand environmental factors, building condition and age, tenant quality,compliance with zoning regulations, any use restrictions, easements or right ofways that may impact the value and the borrower’s ability to manage theproperty. Other disadvantages of purchased loans versus originated loans mayinclude the lack of current financial information, incomplete legaldocumentation and outdated appraisals.

 

**More than half of Capital Crossing Preferred’s loan portfoliois made up of commercial mortgage loans which are generally riskier than othertypes of loans**

 

Commercial mortgage loansconstituted approximately 69.5% of the total gross loans in Capital CrossingPreferred’s loan portfolio at March 31, 2003 and commercial mortgage loansare generally subject it to greater risks than other types of loans. CapitalCrossing Preferred’s commercial mortgage loans, like most commercial mortgageloans, generally lack standardized terms, tend to have shorter maturities thanresidential mortgage loans and may not be fully amortizing, meaning that theyhave a principal balance or “balloon” payment due on maturity. The commercialreal estate properties underlying Capital Crossing Preferred’s commercialmortgage loans also tend to be unique and are more difficult to value thanresidential real estate properties. They are also subject to relatively greaterenvironmental risks than other types of loans and to the corresponding burdensand costs of compliance with environmental laws and regulations. Because ofthese risks related to commercial mortgage loans, Capital Crossing Preferredmay experience higher rates of default on its mortgage loans than it would ifits loan portfolio was more diversified and included a greater number ofresidential and other mortgage loans.

 

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

 

To date Capital CrossingPreferred has purchased all of the loans in its portfolio from CapitalCrossing. Historically, Capital Crossing has acquired such loans (1) frominstitutions which sought to eliminate certain loans or categories of loansfrom their portfolios, (2) from institutions participating insecuritization programs, (3) from failed or consolidating financialinstitutions and (4) from government agencies, specifically the SmallBusiness Administration. Future loan purchases will depend on the availabilityof pools of loans offered for sale and Capital Crossing’s ability to submitsuccessful bids or negotiate satisfactory purchase prices. The acquisition ofwhole loans is highly competitive. In fact, the Small Business Administrationhas recently announced that all future assets sales are on hold, pending theoutcome of an internal review of its loan sale program. Consequently, CapitalCrossing Preferred cannot provide assurance that Capital Crossing will be ableto purchase loans at the same volumes or with the same yields as it has historicallypurchased. This may interfere with Capital Crossing Preferred’s ability tomaintain the requisite level of mortgage assets to maintain its qualificationas a REIT. If volumes of loans purchased decline or the yields on these loansdecline further, Capital Crossing Preferred would experience a material adverseeffect on its business, financial condition and results of operations.

 

**Capital Crossing Preferred could be held responsible forenvironmental liabilities of properties it acquires through foreclosure**

 

If Capital Crossing Preferredchooses to foreclose on a defaulted mortgage loan to recover its investment itmay be subject to environmental liabilities related to the underlying realproperty. Approximately 69.5% of the loans in Capital Crossing Preferred’sportfolio at March 31, 2003 were commercial mortgage loans, whichgenerally are subject to relatively greater environmental risks than othertypes of loans. Hazardous substances or wastes, contaminants, pollutants orsources thereof may be discovered on properties during Capital CrossingPreferred’s ownership or after a sale to a third party. The amount ofenvironmental liability could exceed the value of the real property. There canbe no assurance that Capital Crossing Preferred would not be fully liable forthe entire cost of any removal and clean-up on an acquired property, that thecost of removal and clean-up would not exceed the value of the property or thatCapital Crossing Preferred could recoup any of the costs from any third party.In addition, Capital Crossing Preferred may find it difficult or impossible tosell the property prior to or following any such remediation.

 

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**Capital Crossing Preferred is dependent in virtually everyphase of its operations on the diligence and skill of the management of CapitalCrossing**

 

Capital Crossing, which holds allof Capital Crossing Preferred’s common stock, is involved in virtually everyaspect of Capital Crossing Preferred’s existence. Capital Crossing Preferredhas five officers and no other employees and does not have any independentcorporate infrastructure. Capital Crossing Preferred does not have anyemployees because it has retained Capital Crossing to perform all necessaryfunctions pursuant to the advisory agreement and the master service agreement.All of Capital Crossing Preferred’s officers are also officers of CapitalCrossing. Under an advisory agreement between Capital Crossing Preferred andCapital Crossing, Capital Crossing administers day-to-day activities, includingmonitoring of Capital Crossing Preferred’s credit quality and advising it withrespect to the acquisition, management, financing and disposition of mortgageassets and its operations generally. Under a master service agreement betweenCapital Crossing Preferred and Capital Crossing, Capital Crossing servicesCapital Crossing Preferred’s loan portfolio. The advisory agreement has aninitial term of five years with an automatic renewal feature and the masterservice agreement has a one-year term with an automatic renewal feature. Boththe master service agreement and the advisory agreement are subject to earliertermination upon provision of 30 days and 90 days notice,respectively. Capital Crossing may subcontract all or a portion of itsobligations under the advisory agreement to its affiliates or, with theapproval of a majority of the Board of Directors as well as a majority of theindependent directors, subcontract its obligations under the advisory agreementto unrelated third parties. Capital Crossing will not, in connection with thesubcontracting of any of its obligations under the advisory agreement, bedischarged or relieved from its obligations under the advisory agreement. Theloss of the services of Capital Crossing, or the inability of Capital Crossingto effectively provide such services whether as a result of the loss of keymembers of Capital Crossing’s management, early termination of the agreementsor otherwise, and Capital Crossing Preferred’s inability to replace suchservices on favorable terms, or at all, could adversely affect Capital CrossingPreferred’s ability to conduct its operations.

 

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

 

Capital Crossing and itsaffiliates may have interests which are not identical to Capital CrossingPreferred’s and therefore conflicts of interest have arisen and may arise inthe future with respect to transactions between Capital Crossing Preferred andCapital Crossing such as:

 

***Acquisition of mortgage assets.***  CapitalCrossing Preferred anticipates that it will from time to time continue topurchase additional mortgage assets. Capital Crossing Preferred intends toacquire all or substantially all of such mortgage assets from Capital Crossing,on terms that are comparable to those that could be obtained by CapitalCrossing Preferred if such mortgage assets were purchased from unrelated thirdparties. Neither Capital Crossing Preferred nor Capital Crossing currently havespecific policies with respect to the purchase by Capital Crossing Preferredfrom Capital Crossing of particular loans or pools of loans, other than thatsuch assets must be eligible to be held by a REIT. Although these purchases arestructured to take advantage of the underwriting procedures of CapitalCrossing, and while Capital Crossing Preferred believes that any agreements andtransactions between it, on the one hand, and Capital Crossing and/or itsaffiliates on the other hand, are fair to all parties and consistent withmarket terms, neither Capital Crossing Preferred nor Capital Crossing haveobtained any third-party valuation to confirm whether Capital CrossingPreferred will be paying fair market value for these loans, nor does CapitalCrossing Preferred anticipate doing so in the future. Additionally, throughlimiting Capital Crossing Preferred’s source of purchased mortgage assetssolely to those originated or purchased by Capital Crossing, Capital CrossingPreferred’s portfolio will generally reflect the nature, scope and risk ofCapital Crossing’s portfolio rather than a more diverse portfolio composed ofmortgage loans also purchased from other lenders.

 

***Servicing of Capital Crossing Preferredmortgage assets by Capital Crossing.***  CapitalCrossing Preferred’s loans are serviced by Capital Crossing pursuant to theterms of the master service agreement. Capital Crossing in its role as servicerunder the terms of the master service agreement receives a fee equal to 0.20%per annum, payable monthly, on the gross outstanding principal balances ofloans serviced. The master service agreement requires Capital Crossing toservice the loan portfolio in a manner substantially the same as for similarwork performed by Capital Crossing for transactions on its own behalf. Thiswill become especially important as Capital Crossing services any loans whichbecome classified or are placed on non-performing status, or are renegotiateddue to the financial deterioration of the borrower. While Capital CrossingPreferred believes that Capital Crossing will diligently pursue collection ofany non-performing loans, Capital Crossing Preferred cannot provide assurancethat this will be the case. Capital Crossing Preferred’s ability to make timelypayments of dividends will depend in part upon Capital Crossing’s promptcollection efforts on behalf of Capital Crossing Preferred.

 

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***Future dispositions by Capital CrossingPreferred of mortgage assets to Capital Crossing or its affiliates.***  Themaster service agreement provides that foreclosures and dispositions of themortgage assets are to be performed with a view toward maximizing CapitalCrossing Preferred’s recovery as owner of the mortgage assets, and CapitalCrossing shall service the mortgage assets solely with a view toward CapitalCrossing Preferred’s interests, and without regard to the interests of CapitalCrossing or any of its affiliates. However, Capital Crossing Preferred cannotprovide assurance that any such agreement or transaction will be on terms asfavorable to it as would have been obtained from unaffiliated third parties.Capital Crossing may seek to exercise its influence over Capital CrossingPreferred’s affairs so as to cause the sale of the mortgage assets owned byCapital Crossing Preferred and their replacement by lesser quality loanspurchased from Capital Crossing or elsewhere which could adversely affectCapital Crossing Preferred’s business and its ability to make timely paymentsof dividends.

 

***Future modifications of the advisoryagreement or master service agreement.***  ShouldCapital Crossing Preferred seek to modify either the advisory agreement or themaster service agreement, it would rely upon its officers, all of whom are alsoofficers of Capital Crossing, and/or its directors, three of whom are alsoofficers of Capital Crossing. Thus, Capital Crossing Preferred’s officersand/or directors would be responsible for taking positions with respect to suchagreements that, while in Capital Crossing Preferred’s best interests, wouldnot be in the best interests of Capital Crossing. Although the termination,modification or decision not to renew the advisory agreement and/or the masterservice agreement requires the approval of a majority of Capital CrossingPreferred’s independent directors, Capital Crossing, as holder of all ofCapital Crossing Preferred’s outstanding common stock, controls the election ofall Capital Crossing Preferred directors, including the independent directors.Capital Crossing Preferred cannot provide assurance that such modificationswill be on terms as favorable to it as those that could have been obtained fromunaffiliated third parties.

 

***The terms of Capital Crossing Preferred’sguarantee of obligations of Capital Crossing.***  CapitalCrossing Preferred has guaranteed all of the obligations of Capital Crossingunder 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 withthose advances. The assets Capital Crossing Preferred pledges to the FHLBB willvary from time to time; however, the potential exists for Capital CrossingPreferred to pledge all of its assets to the FHLBB to secure advances toCapital Crossing. In addition, Capital Crossing has pledged to the FHLBB all ofthe shares of Capital Crossing Preferred’s capital stock it owns as collateralfor its FHLBB borrowings. Under the terms of the pledge, if Capital Crossingbecomes undercapitalized the FHLBB may require Capital Crossing to dissolveCapital Crossing Preferred such that the assets of Capital Crossing Preferredare distributed to Capital Crossing. In this circumstance the holders ofSeries A and Series C Preferred shares would receive theirliquidation preference only to the extent there are available assets of CapitalCrossing Preferred following satisfaction of its outstanding obligations,including its guarantee of Capital Crossing’s FHLBB borrowings. AtMarch 31, 2003, approximately $39.6 million, or 11.9%, of Capital CrossingPreferred assets have been pledged to and accepted by the FHLBB to secureadvances to Capital Crossing. Capital Crossing has also agreed with the FHLBBthat it will not request or accept advances from the FHLBB in excess of CapitalCrossing Preferred’s total stockholders equity, less the stockholders equityattributable to the Series A and Series C preferred shares. As ofMarch 31, 2003, this restriction would limit Capital Crossing’s ability toreceive advances in excess of approximately $304.3 million. As ofMarch 31, 2003, Capital Crossing had $129.0 million in outstandingFHLBB borrowings. The guarantee and pledge were approved by Capital CrossingPreferred’s independent directors, subject to certain requirements andlimitations, including the requirement that Capital Crossing pay CapitalCrossing Preferred a guarantee fee. Any default by Capital Crossing on itsobligations which would require Capital Crossing Preferred to satisfy itsguarantee could adversely affect its business and its ability to make timelypayments of dividends.

 

***The master loan purchase agreement was notthe result of arm’s-length negotiations.***  CapitalCrossing Preferred acquires loans pursuant to the master mortgage loan purchaseagreement between Capital Crossing Preferred and Capital Crossing, at an amountequal to Capital Crossing’s net carrying value for those mortgage assets. WhileCapital Crossing Preferred believes that the master mortgage loan purchaseagreement was fair to all parties and consistent with market terms, all of it’sofficers and three of its directors are also officers and/or directors ofCapital Crossing and/or affiliates of Capital Crossing. Capital Crossing, asholder of all of Capital Crossing Preferred’s outstanding common stock,controls the election of all Capital Crossing Preferred directors, includingthe independent directors. Capital Crossing Preferred cannot provide assurancethat the master mortgage loan purchase agreement was entered into on terms asfavorable to Capital Crossing Preferred as those that could have been obtainedfrom unaffiliated third parties.

 

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**Neither Capital Crossing Preferred nor Capital Crossing havespecific policies with respect to the purchase by Capital Crossing Preferredfrom Capital Crossing of particular loans or pools of loans**

 

The lack of specific policieswith respect to the purchase by Capital Crossing Preferred of loans fromCapital Crossing could result in Capital Crossing Preferred acquiring lowerquality mortgage assets from Capital Crossing than if such policies wereotherwise in place. Neither Capital Crossing Preferred nor Capital Crossingcurrently have specific policies with respect to the purchase by CapitalCrossing 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. CapitalCrossing Preferred’s Board of Directors has adopted certain policies to guidethe acquisition and disposition of assets but these policies may be revisedfrom time to time at the discretion of the Board of Directors without a vote ofCapital Crossing Preferred’s stockholders. Capital Crossing Preferred intendsto acquire all or substantially all of the additional mortgage assets it mayacquire in the future from Capital Crossing on terms that are comparable tothose that could be obtained by Capital Crossing Preferred if such mortgageassets were purchased from unrelated third parties, but Capital CrossingPreferred cannot provide assurance that this will always be the case.

 

**Capital Crossing Preferred’s Board of Directors has broaddiscretion to revise Capital Crossing Preferred’s strategies**

 

Capital Crossing Preferred’sBoard of Directors has established Capital Crossing Preferred’s investment and operatingstrategies. These strategies may be revised from time to time at the discretionof the Board of Directors without a vote of Capital Crossing Preferred’sstockholders. Changes in Capital Crossing Preferred’s strategies could have anegative effect on shareholders.

 

**Capital Crossing Preferred does not obtain third-partyvaluations and therefore it may pay more or receive less than fair market valuefor its mortgage assets**

 

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

 

**Capital Crossing Preferred may pay more than fair marketvalue for mortgages it purchases from Capital Crossing because it does notengage in arm’s- length negotiations with Capital Crossing**

 

Capital Crossing Preferredacquires mortgage assets from Capital Crossing under a master mortgage loanpurchase agreement between it and Capital Crossing, at an amount equal toCapital Crossing’s net carrying value for those mortgage assets. BecauseCapital Crossing is an affiliate of Capital Crossing Preferred’s, CapitalCrossing Preferred does not engage in any arm’s-length negotiations regardingthe consideration to be paid. Accordingly, if Capital Crossing’s net carryingvalue exceeds the fair market value of the mortgage assets, Capital CrossingPreferred would pay Capital Crossing more than the fair market value for thosemortgaged assets.

 

**A decline in interest rates could reduce Capital CrossingPreferred earnings and affect its ability to pay dividends**

 

Capital Crossing Preferred’sincome consists primarily of interest earned on its mortgage assets andshort-term investments. A significant portion of Capital Crossing Preferred’smortgage assets bear interest at adjustable rates. If there is a decline ininterest rates, then Capital Crossing Preferred will experience a decrease inincome available to be distributed to its stockholders. If interest ratesdecline, Capital Crossing Preferred may also experience an increase inprepayments on its mortgage assets and may find it difficult to purchaseadditional mortgage assets bearing rates sufficient to support payment ofdividends on the Series A and Series C preferred shares. Because the dividendrates on the Series A and Series C preferred shares are fixed, asignificant decline in interest rates could materially adversely affect CapitalCrossing Preferred’s ability to pay dividends on the Series A andSeries C preferred shares.

 

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**Tax Risks Related to REITs**

 

***If Capital Crossing Preferred fails toqualify as a REIT, it will be subject to federal income tax at regularcorporate rates.***  If Capital Crossing Preferred fails toqualify as a REIT for any taxable year, it would be subject to federal incometax, including any applicable alternative minimum tax, on its taxable income atregular corporate rates. As a result, the amount available for distribution toCapital Crossing Preferred’s stockholders would be reduced for the year oryears involved. In addition, unless entitled to relief under statutoryprovisions, Capital Crossing Preferred would be disqualified from treatment asa REIT for the four taxable years following the year which qualification waslost. The failure to qualify as a REIT would reduce Capital CrossingPreferred’s net earnings available for distribution to its stockholders becauseof the additional tax liability for the year or years involved. CapitalCrossing Preferred’s failure to qualify as a REIT would not by itself give itthe right to redeem the Series A or Series C preferred shares, norwould it give the holders of the Series A or Series C preferredshares the right to have their shares redeemed.

 

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

 

***If Capital Crossing Preferred does notdistribute 90% of its net taxable income, it may not qualify as a REIT.***  In orderto qualify as a REIT, Capital Crossing Preferred generally is required eachyear to distribute to its stockholders at least 90% of its net taxable income,excluding net capital gains. Capital Crossing Preferred may retain theremainder of REIT taxable income or all or part of its net capital gain, butwill 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 theamount, if any, by which certain distributions considered as paid by CapitalCrossing 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 capitalgains net income for the calendar year and (3) 100% of any undistributedincome from prior periods. Under certain circumstances, federal or stateregulatory authorities may restrict Capital Crossing Preferred’s ability, as asubsidiary of Capital Crossing, to make distributions to its stockholders in anamount necessary to retain its REIT qualification. Such a restriction couldresult in Capital Crossing Preferred failing to qualify as a REIT. To theextent Capital Crossing Preferred’s REIT taxable income may exceed the actualcash received for a particular period, Capital Crossing Preferred may not havesufficient liquidity to make distributions necessary to retain its REITqualification.

 

***Capital Crossing Preferred may redeem theSeries A and Series C preferred shares at any time upon theoccurrence of a tax event.***  At any time following theoccurrence of certain changes in the tax laws or regulations concerning REITs,Capital Crossing Preferred will have the right to redeem the Series A andSeries C preferred shares in whole, subject to the prior written approvalof the FDIC. Capital Crossing Preferred would have the right to redeem theSeries A and Series C preferred shares if it received an opinion ofcounsel to the effect that, as a result of changes to the tax laws orregulations:

 

(1)          dividendspaid by Capital Crossing Preferred with respect to its capital stock are notfully deductible by it for income tax purposes; or

 

(2)          CapitalCrossing Preferred are otherwise unable to qualify as a REIT.

 

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

 

***Capital Crossing Preferred has imposedownership limitations to protect its ability to qualify as a REIT, however, ifownership of the common stock of Capital Crossing becomes concentrated in asmall number of individuals Capital Crossing Preferred may fail to qualify as aREIT.***  To maintain Capital Crossing Preferred’sstatus as a REIT, not more than 50% in value of Capital Crossing Preferred’soutstanding shares may be owned, directly or indirectly, by five or fewerindividuals, as defined in the Internal Revenue Code, or the Code, to includecertain entities, during the last half of each taxable year. Capital CrossingPreferred currently satisfies this requirement because for this purpose CapitalCrossing Preferred’s common stock held by Capital Crossing is treated as heldby Capital Crossing’s stockholders. However, it is possible that the ownershipof Capital Crossing might become sufficiently concentrated in the future suchthat five or fewer individuals would be treated as having constructiveownership of more than 50% of the value of Capital Crossing Preferred’s stock.Capital Crossing Preferred may have difficulty monitoring the daily ownershipand constructive ownership of its outstanding shares and, therefore, CapitalCrossing Preferred cannot provide assurance that it will continue to meet theshare ownership requirement. This risk may be increased in the future asCapital Crossing implements common stock repurchase programs becauserepurchases may cause ownership in Capital Crossing to become moreconcentrated. In addition, while the fact that the Series A and the Series Cpreferred shares may be redeemed or exchanged will not affect Capital CrossingPreferred’s REIT status prior to any such redemption or exchange, theredemption or exchange of all or a part of the Series A and Series Cpreferred shares could adversely affect Capital Crossing Preferred’s ability tosatisfy the share ownership requirements in the future.

 

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**Item 3****. Quantitative andQualitative Disclosures About Market Risk**

 

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

 

Capital Crossing Preferred’smanagement reviews, among other things, the sensitivity of Capital CrossingPreferred’s assets to interest rate changes, the book and market values ofassets, purchase and sale activity, and anticipated loan pay-offs. CapitalCrossing’s senior management also approves and establishes pricing and fundingdecisions with respect to Capital Crossing Preferred’s overall asset andliability composition.

 

Capital Crossing Preferred’smethods for evaluating interest rate risk include an analysis of itsinterest-earning assets maturing or repricing within a given time period. SinceCapital Crossing Preferred has no interest-bearing liabilities, a period ofrising interest rates would tend to result in an increase in interest income. Aperiod of falling interest rates would tend to adversely affect interestincome.

 

The following table sets forthCapital Crossing Preferred’s interest-rate-sensitive assets categorized byrepricing dates and weighted average yields at March 31, 2003. For fixed rateinstruments, the repricing date is the maturity date. For adjustable-rateinstruments, the repricing date is deemed to be the earliest possible interestrate adjustment date. Assets that are subject to immediate repricing are placedin the overnight column. 

 
|                               |   | **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 in banks |   | $                          | 116,338 |                  | $      | 100                    |   | $                        | — |                      | $      | —                   |   | $                     | — |      | $      | — |   | $ | — |   | $ | 116,438 |   |
| Average interest rate              |   | 2.66                       | %       | 2.00                  | %      |                   |   |                     |   |                      |   |                     |   |                  |   |      |   |
| Fixed-rate loans (1)               |   | —                     |    | 40,820                |   | 27,643                 |   | 21,621                   |   | 14,055                    |   | 11,447                   |   | 19,752                |   | 135,338   |   |
| Average interest rate              |   |                       |    | 8.33                  | %      | 8.23                   | %      | 8.31                     | %      | 7.90                      | %      | 7.82                     | %      | 7.00                  | %      |      |   |
| Adjustable-rate loans (1)          |   | 27,696                     |    | 56,949                |   | 5,346                  |   | 248                      |   | —                    |   | —                   |   | —                |   | 90,239    |   |
| Average interest rate              |   | 7.60                       | %       | 6.59                  | %      | 8.88                   | %      | 8.96                     | %      |                      |   |                     |   |                  |   |      |   |
|                               |   |                       |    |                  |   |                   |   |                     |   |                      |   |                     |   |                  |   |      |   |
| Total rate-sensitive assets        |   | $                          | 144,034 |                  | $      | 97,869                 |   | $                        | 32,989 |                      | $      | 21,869                   |   | $                     | 14,055 |      | $      | 11,447 |   | $ | 19,752 |   | $ | 342,015 |   |

 

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

 

Based on Capital Crossing Preferred’s experience,management applies the assumption that, on average, approximately 14% of theoutstanding fixed and adjustable rate loans will prepay annually.

 

At March 31, 2003, thefair value of net loans was $239.0 million as compared to the net carryingvalue of net loans of $219.6 million. The fair value of interest-bearingdeposits in banks approximates carrying value.

 

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**Item 4****. Controlsand Procedures**

 

(a)           Evaluation of disclosure controls andprocedures.

 

As required by Rule 13a-15under the Exchange Act, within the 90 days prior to the date of this report,Capital Crossing Preferred carried out an evaluation under the supervision andwith the participation of its management, including its Principal ExecutiveOfficer and Principal Financial Officer, of the effectiveness of the design andoperation of Capital Crossing Preferred’s disclosure controls and procedures.In designing and evaluating Capital Crossing Preferred’s disclosure controlsand procedures, Capital Crossing Preferred and its management recognize thatany controls and procedures, no matter how well designed and operated, canprovide only a reasonable assurance of achieving the desired controlobjectives, and management necessarily was required to apply its judgment inevaluating and implementing possible controls and procedures. Based upon thatevaluation, the Principal Executive Officer and Principal Financial Officerconcluded that they believe Capital Crossing Preferred’s disclosure controlsand procedures are reasonably effective to ensure that information required tobe disclosed by Capital Crossing Preferred in the reports it files or submitsunder the Exchange Act is recorded, processed, summarized and reported, withinthe time periods specified in the Securities and Exchange Commission’s rulesand forms. In connection with the rules regarding disclosure controls andprocedures, we intend to continue to review and document our disclosurecontrols and procedures, including our internal controls and procedures forfinancial reporting, and may from time to time make changes aimed at enhancingtheir effectiveness and to ensure that our systems evolve with our business.

 

(b)           Changesin internal controls.

 

None.

 

**Part II**

 

**Item 1.  Legal Proceedings**

 

Fromtime to time, Capital Crossing Preferred may be involved in routine litigationincidental to its business, including a variety of legal proceedings withborrowers, which would contribute to Capital Crossing Preferred’s expenses,including the costs of carrying non-performing assets. Capital CrossingPreferred is not currently a party to any material proceedings.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, Capital CrossingPreferred Corporation has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

**CAPITAL CROSSING PREFERRED CORPORATION**

 

 
| Date:  May 13, 2003 | By:                                        | /s/  Richard Wayne  |   |
|---------------------|--------------------------------------------|---------------------|--------|
|                | Richard Wayne                              |
|                | *President (Principal Executive  Officer)* |
|                |                                       |
|                |                                       |
| Date:  May 13, 2003 | By:                                        | /s/  Edward F. Mehm |   |
|                | Edward F. Mehm                             |
|                | *Treasurer (Principal Financial  Officer)* |

 

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**CERTIFICATIONS**

 

I, Richard Wayne, certifythat:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Capital Crossing PreferredCorporation;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)                                      Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, is made known to us by others within thoseentities, particularly during the period in which this quarterly report isbeing prepared;

 

b)                                     Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      Presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)                                      Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     Anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  May 13, 2003 | By:                                             | /s/  Richard Wayne |   |
|---------------------|-------------------------------------------------|--------------------|--------|
|                | Richard Wayne                                   |
|                | *President  (Principal Executive Officer)* |

 

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I, Edward F. Mehm,certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Capital Crossing PreferredCorporation;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)                                      Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, is made known to us by others within thoseentities, particularly during the period in which this quarterly report isbeing prepared;

 

b)                                     Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      Presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)                                      Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     Anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date:  May 13, 2003 | By:                                        | /s/  Edward F. Mehm |   |
|---------------------|--------------------------------------------|---------------------|--------|
|                | Edward  F. Mehm                            |
|                | *Treasurer (Principal Financial  Officer)* |

 

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**EXHIBIT INDEX**

 
| **Exhibit** |   | **Item**                                                                                                                                     |   | **Page Number** |
|-------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|
|        |   |                                                                                                                                         |   |            |
| 99.1        |   | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Richard Wayne, President (Prinicipal Executive Officer).  |   | 27              |
| 99.2        |   | Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Edward F.  Mehm, Treasurer (Principal Financial Officer). |   | 28              |

 

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