** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**ý****  QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended September 30, 2001**

** **

**Commission File Number 000-25193**

 

**CAPITAL CROSSING PREFERRED CORPORATION**

(Exact name of registrant as specified in its charter)

 
| **Massachusetts**                        |   | **04-3439366**                       |
|------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of          |   | (I.R.S. Employer Identification No.) |
| incorporation or organization)           |   |                                 |
|                                     |   |                                 |
| **101 Summer Street**                    |   | **02110**                            |
| **Boston, Massachusetts**                |   | (Zip Code)                           |
| (Address of principal executive offices) |   |                                 |
|                                     |   |                                 |
|                                     |   |                                 |

Registrant's telephone number, including area code: **(617) 880-1000**

 

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

 

Thenumber of shares outstanding of the registrant's sole class of common stock was100 shares, $.01 par value per share, as of November 9, 2001.

 

 

 

 

**Capital Crossing PreferredCorporation**

**Tableof Contents**

 

 
| **PART I – Financial Information** |  
 

 

 

 
 

 

 

 
 

 

 

 
Item 1.  

Financial Statements

 
 

 

 

 
 

a)

Balance Sheets

 
 

 

 

 
 

b)

Statements  of Income

 
 

 

 

 
 

c)

Statements  of Changes in Stockholders' Equity

 
 

 

 

 
 

d)

Statements  of Cash Flows

 
 

 

 

 
 

e)

Notes to Financial  Statements

 
 

 

 

 
Item  2.

Management's  Discussion and Analysis of Financial Condition and Results of Operations

 
 

 

 

 
 

Risk  Factors and Other Factors Affecting Forward-Looking Statements

 
 

 

 

 
 

 

 

 
Item  3.

Quantitative  and Qualitative Disclosures about Market Risk

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
**PART II – Other Information**

 
 

 

 

Item 1.  

Legal Proceedings

 

 

 

Item  2.  

Changes  in Securities and Uses of Proceeds

 

 

 

 

Signatures

**PART I**
**Item 1. FinancialStatements**
 

**Capital Crossing Preferred Corporation**

**Balance Sheets**

**(in thousands,except share data)**

 

 

 

 

 

 

**September 30,**

 

**December 31,**

** **

 

 

**2001**

 

**2000**

** **

 

 

**(unaudited)**

** **

 

** **

**ASSETS**

 

 

 

 

 

 

 

 

 

 

 

Cash account with Capital Crossing Bank

 

$

85

 

$

85

 

Interest-bearing deposits with Capital  Crossing Bank

 

87,736

 

55,227

 

Total cash and cash equivalents

 

87,821

 

55,312

 

Certificate of deposit

 

100

 

100

 

Loans, net of deferred loan income

 

183,166

 

178,373

 

Less discount

 

(15,801

)

(11,966

)

Less allowance for loan losses

 

(4,659

)

(3,795

)

 

 

 

 

 

 

Loans, net

 

162,706

 

162,612

 

 

 

 

 

 

 

Accrued interest receivable

 

1,007

 

1,159

 

Other assets

 

344

 

-

 

 

 

 

 

 

 

 

 

$

251,978

 

$

219,183

 

 

 

 

 

 

 

**LIABILITIES AND STOCKHOLDERS' EQUITY**

 

 

 

 

 

 

 

 

 

 

 

Accrued expenses and other liabilities

 

$

453

 

$

276

 

 

 

 

 

 

 

Total liabilities

 

453

 

276

 

 

 

 

 

 

 

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 and 946 shares issued and  outstanding, respectively

 

-

 

-

 

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 at September 30,  2001

 

18

 

-

 

Common stock, $.01 par value, 100 shares  authorized, issued and outstanding

 

-

 

-

 

Additional paid-in capital

 

235,742

 

218,893

 

Retained earnings

 

15,751

 

-

 

 

 

 

 

 

 

Total stockholders' equity

 

251,525

 

218,907

 

 

 

 

 

 

 

 

 

$

251,978

 

$

219,183

 

 

See accompanying notes to financialstatements.

 

**Capital Crossing Preferred Corporation**

**Statements of Income**

**(unaudited)**

** **

 

 

 

 

**Three Months Ended**

 

**Nine Months Ended**

 

 

 

**September 30,**

 

**September 30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

 

 

**(in thousands)**

 

Interest income:

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

5,616

 

$

5,278

 

$

14,975

 

$

14,101

 

Interest on interest-bearing deposits

 

1,002

 

920

 

2,832

 

1,707

 

Total interest income

 

6,618

 

6,198

 

17,807

 

15,808

 

 

 

 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

 

 

Guarantee fee income

 

20

 

20

 

60

 

20

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Loan servicing and advisory services

 

103

 

132

 

322

 

357

 

Other real estate owned income

 

-

 

-

 

-

 

(245

)

Gain on sale of loans

 

-

 

(123

)

-

 

(123

)

Other general and administrative

 

30

 

21

 

67

 

120

 

Total operating expenses

 

133

 

30

 

389

 

109

 

 

 

 

 

 

 

 

 

 

 

Net income

 

6,505

 

6,188

 

17,478

 

15,719

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

836

 

364

 

1,727

 

1,095

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholder

 

$

5,669

 

$

5,824

 

$

15,751

 

$

14,624

 

 

See accompanying notes to financialstatements.

**Capital Crossing Preferred Corporation**

**Statements of Changes in Stockholders' Equity**

**(unaudited)**

 

 

 

**Nine Months Ended September 30, 2001**

 

 

 

 

 

 

 

**Preferred Stock**

 

**Preferred Stock**

 

**Preferred Stock**

 

**Additional**

 

 

 

**Total**

 

 

 

**Common Stock**

 

**Series A**

 

**Series B**

 

**Series C**

 

**Paid-in**

 

**Retained**

 

**Stockholders'**

 

 

 

**Shares**

 

**Amount**

 

**Shares**

 

**Amount**

 

**Shares**

 

**Amount**

 

**Shares**

 

**Amount**

 

**Capital**

 

**Earnings**

 

**Equity**

 

 

 

**(**dollars in thousands)

** **

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2000

 

100

 

$

-

 

1,416,130

 

$

14

 

946

 

$

-

 

-

 

$

-

 

$

218,893

 

$

-

 

$

218,907

 

Net income

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

17,478

 

17,478

 

Issuance of preferred stock, Series C

 

-

 

-

 

-

 

-

 

-

 

-

 

1,840,000

 

18

 

16,854

 

-

 

16,872

 

Dividends on preferred stock, Series A

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(1,036

)

(1,036

)

Cumulative dividends on preferred stock, Series B

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(57

)

(57

)

Dividends on preferred stock, Series C

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(634

)

(634

)

Repurchase of preferred stock, Series B

 

-

 

-

 

-

 

-

 

(5

)

-

 

-

 

-

 

(5

)

-

 

(5

)

Balance at September 30, 2001

 

100

 

$

-

 

1,416,130

 

$

14

 

941

 

$

-

 

1,840,000

 

$

18

 

$

235,742

 

$

15,751

 

$

251,525

 

 

 

 

 

 

**Nine Months Ended September 30, 2000**

 

 

 

 

 

 

 

**Preferred Stock**

 

**Preferred Stock**

 

**Preferred Stock**

 

**Additional**

 

 

 

**Total**

 

 

 

**Common Stock**

 

**Series A**

 

**Series B**

 

**Series C**

 

**Paid-in**

 

**Retained**

 

**Stockholders'**

 

 

 

**Shares**

 

**Amount**

 

**Shares**

 

**Amount**

 

**Shares**

 

**Amount**

 

**Shares**

 

**Amount**

 

**Capital**

 

**Earnings**

 

**Equity**

 

 

 

(dollars  in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 1999

 

100

 

$

-

 

1,416,130

 

$

14

 

1,000

 

$

-

 

-

 

$

-

 

167,839

 

$

814

 

$

168,667

 

Net income

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

15,719

 

15,719

 

Capital contribution from common stockholder

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

80,433

 

-

 

80,433

 

Dividends on preferred stock, Series A

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(1,036

)

(1,036

)

Cumulative dividends on preferred stock, Series B

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(59

)

(59

)

Repurchase of preferred stock, Series B

 

-

 

-

 

-

 

-

 

(39

)

-

 

-

 

-

 

(39

)

-

 

(39

)

Common stock dividend

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(1,262

)

(1,262

)

Balance at September 30, 2000

 

100

 

$

-

 

1,416,130

 

$

14

 

961

 

$

-

 

-

 

$

-

 

$

248,233

 

$

14,176

 

$

262,423

 

 

See accompanying notes to financial statements.

**Capital Crossing Preferred Corporation**

**Statements of CashFlows**

**(unaudited)**

 

 

 

 

**Nine Months Ended September 30,**

 

 

 

**2001**

 

**2000**

 

 

 

**(in thousands)**

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

17,478

 

$

15,719

 

Adjustments to reconcile net income to net  cash from operating activities:

 

 

 

 

 

Net gain on sale and disposition of other  real estate owned

 

-

 

(245

)

Gain on sale of loans

 

-

 

(123

)

Other, net

 

164

 

294

 

 

 

 

 

 

 

Net cash from operating activities

 

17,642

 

15,645

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Amortization and payoffs on loans

 

34,402

 

34,101

 

Purchase of loans from Capital Crossing  Bank

 

(34,998

)

-

 

Proceeds from sales of loans

 

167

 

2,030

 

Sales of other real estate owned

 

-

 

679

 

 

 

 

 

 

 

Net cash (used in) from investing  activities

 

(429

)

36,810

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Issuance of preferred stock, Series C

 

16,872

 

-

 

Repurchase of preferred stock, Series B

 

(5

)

(39

)

Payment of common stock dividend

 

-

 

(1,262

)

Payment of preferred stock dividends

 

(1,571

)

(1,095

)

 

 

 

 

 

 

Net cash from (used in) financing  activities

 

15,296

 

(2,396

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

32,509

 

50,059

 

Cash and cash equivalents at beginning of  period

 

55,312

 

32,433

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

87,821

 

$

82,492

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

Dividends declared, not paid, on preferred  stock, Series A

 

115

 

115

 

Cumulative dividends accrued, not paid on  preferred stock, Series B

 

19

 

20

 

Dividends declared, not paid, on preferred  stock, Series C

 

157

 

-

 

Capital contributions from common  stockholder in the form of mortgage loans

 

-

 

80,433

 

 

See accompanying notes to financialstatements.

 

**Capital Crossing Preferred Corporation**

**Notesto Financial Statements**

**Three and Nine Month Periods Ended September 30, 2001 and2000**

 

**Note 1.   Basis of Presentation**

 

CapitalCrossing Preferred Corporation (“Capital Crossing Preferred”), formerlyAtlantic Preferred Capital Corporation, is a Massachusetts corporationorganized on March 20, 1998, to acquire and hold real estate assets. CapitalCrossing Bank (“Capital Crossing” or the “Bank”), a federally insuredMassachusetts trust company, owns all of Capital Crossing Preferred’s commonstock. The Bank is in compliance with its regulatory capital requirements atSeptember 30, 2001.

 

OnMarch 31, 1998, Capital Crossing Preferred was initially capitalized with theissuance to the Bank of 100 shares of Capital Crossing Preferred’s commonstock, $.01 par value, and 1,000 shares of Series B preferred stock, $.01 parvalue, with the Bank transferring to Capital Crossing Preferred a portfolio ofloans at its estimated fair value of $140,740,000. Such loans were recorded inthe accompanying balance sheet at the Bank’s historical cost, whichapproximated their estimated fair values.

 

The financial information as of September 30, 2001 andthe results of operations for the three and nine months ended September 30,2001 and 2000, changes in stockholders’ equity and cash flows for the ninemonths ended September 30, 2001 and 2000 are unaudited; however, in the opinionof management, the financial information reflects all adjustments (consistingsolely of normal recurring accruals) necessary for a fair presentation inaccordance with generally accepted accounting principles.  Interim results are not necessarilyindicative of results to be expected for the entire year.  These interim statements are intended to beread in conjunction with the financial statements presented in Capital CrossingPreferred’s Annual Report on Form 10-K as of and for the year ended December31, 2000.

 

In preparing financial statements in conformity withaccounting principles generally accepted in the United States of America,management is required to make estimates and assumptions that affect thereported amounts of assets and liabilities as of the date of the balance sheetand reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularlysusceptible to significant change in the near term relate to the determinationof the allowance for losses on loans, the allocation of purchase discountbetween amortizing and non-amortizing portions, and the rate at which discountis accreted into interest income.

 

**Note 2.   Issuanceof Series C Preferred Stock**

 

                On May 31, 2001,Capital Crossing Preferred completed its public offering of 1,840,000(including 240,000 shares issued upon the exercise of the underwriters’overallotment option) Series C preferred shares. The offering was made pursuantto a Registration Statement on Form S-11, originally filed with the Securitiesand Exchange Commission on March 14, 2001, as amended (Commission File No.333-57044), which was declared effective on May 24, 2001. The offeringcommenced on May 25, 2001 and terminated shortly thereafter upon the sale intothe public market of all of the registered Series C preferred shares.

 

The Series C preferred shares form a series of thepreferred stock of Capital Crossing Preferred. The Series C preferred sharesare validly issued, fully paid and non-assessable. The holders of the Series Cpreferred shares have no preemptive rights with respect to any shares of ourcapital stock. The Series C preferred shares are not subject to any sinkingfund or other obligation for their repurchase or retirement. The Series Cpreferred shares are not convertible into any of our other securities. TheSeries C preferred shares will be exchanged on a one hundred-for-one basis forpreferred shares of the Bank if directed by the FDIC under certaincircumstances. The Series C preferred shares rank senior to our common stockand Series B preferred stock and on parity with our Series A preferred shares,as to dividends and in liquidation. Upon our liquidation, any obligations to our creditors at that time,including any amounts due or which may become due under our guarantee of theBank’s obligations to the Federal Home Loan Bank of Boston, would rank seniorto the Series C preferred shares.

 

Holders of Series C preferred shares are entitled toreceive, if, when and as declared by our Board of Directors out of assetslegally available therefor, monthly cash dividends at the rate of 10.25% peryear of the liquidation preference, equivalent to $1.025 per share per year. Ifdeclared, dividends on the Series C preferred shares for each monthly periodshall be payable on the fifteenth day of the following month, commencing onJuly 15, 2001, to holders of record on the last business day of the monthlydividend period. Monthly dividend periods will commence on the first day ofeach month and on the date of original issue for the initial dividend period.The amount of dividends, if declared, payable for the initial period or anyperiod shorter than a full dividend period shall be computed on the basis of30-day months, a 360-day year and the actual number of days elapsed in theperiod. Dividends in each period will accrue from the first day of such period,whether or not declared or paid for the prior monthly period.

 

The right of holders of Series C preferred shares toreceive dividends is non-cumulative. Accordingly, if the Board of Directorsfails to declare a dividend on the Series C preferred shares for a monthlydividend period, then holders of the Series C preferred shares will have noright to receive the amount of the undeclared dividend for that period, andCapital Crossing Preferred will have no obligation to pay the undeclareddividend for that period, whether or not dividends are declared and paid forany future period with respect to either the Series C preferred shares, anyother series of preferred stock or the common stock. If less than fulldividends are declared on the Series C preferred shares by the Board ofDirectors for a monthly dividend period, the holders of the Series C preferredshares will have no right to receive the amount of such undeclared dividendsfor that period, and we will have no obligation to pay a full dividend for thatperiod, whether or not dividends are declared and paid for any future periodwith respect to either the Series C preferred shares, any other series ofpreferred stock or the common stock.

 

**Note3.  Commitments and Contingencies**

 

Capital CrossingPreferred has guaranteed all of the obligations of the Bank under advances theBank may receive from time to time from the Federal Home Loan Bank of Boston(“FHLBB”), and has agreed to pledge a significant amount of its assets inconnection with those advances.  Thisguarantee would rank senior to the preferred shares upon liquidation. CapitalCrossing Preferred’s obligations under this agreement are limited by applicablelaws pertaining to fraudulent conveyance and fraudulent transfer. The assetspledged to the FHLBB will vary from time to time, however the potential existsfor Capital Crossing Preferred to pledge all of its assets to the FHLBB tosecure advances to the Bank. In addition, the Bank has pledged to the FHLBB allof the shares of Capital Crossing Preferred’s capital stock it owns ascollateral for its FHLBB borrowings. Under the terms of the pledge, if the Bank becomes undercapitalized theFHLBB may require the Bank to dissolve Capital Crossing Preferred such that theassets of Capital Crossing Preferred are distributed to the Bank. In suchcircumstances, holders of the Series A and Series C preferred stock wouldreceive their liquidation preference only to the extent there are availableassets of Capital Crossing Preferred following satisfaction of its outstandingobligations, including its guarantee of the Bank’s FHLBB borrowings.  At September 30, 2001, approximately $45.4million or 18% of Capital Crossing Preferred’s assets had been pledged to andaccepted by the FHLBB to secure advances to the Bank.  The Bank 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 September 30, 2001, this restrictionwould limit the Bank’s ability to receive advances in excess of approximately$219.0 million. As of September 30, 2001, the Bank had $139.0 million inoutstanding FHLBB borrowings.

 

**Item 2.  Management's Discussion and Analysis of FinancialCondition and Results of Operations**

 

Statements made or incorporated in this QuarterlyReport on Form 10-Q include a number of forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. Forward-looking statements include, without limitation, statementscontaining the words “anticipates,” “believes,” “estimates,” “assumes”,“expects,” “intends,” “future” and words of similar import which expressmanagement’s belief, expectations or intentions regarding the futureperformance of Capital Crossing Preferred. These forward-looking statements are made as of the date of this reportand we do not undertake to update them at anytime after the date hereof.Capital Crossing Preferred’s actual results could differ materially from thoseset forth in the forward-looking statements as a result, among other factors,of changes in general, national or regional economic conditions, changes ininterest rates, changes in loan default and charge-off rates relating to adecline in the commercial real estate market or otherwise, the possibleexchange of the Series A or Series C preferred shares for preferred shares ofCapital Crossing at the direction of the FDIC if Capital Crossing becomes ormay in the near term become undercapitalized or is placed in conservatorship orreceivership, risks associated with mortgage loans generally, and particularlythe geographic concentration of Capital Crossing Preferred’s loan portfolio atSeptember 30, 2001 in New England and California, and the failure by CapitalCrossing Preferred to maintain its status as a REIT for federal income taxpurposes, changes in the assumptions used in making such forward-lookingstatements, and the factors discussed in the section entitled “Risk Factors andOther Factors Affecting Forward-Looking Statements” of this Form 10-Q.

 
**Resultsof Operations**
 

***Three Months Ended September 30, 2001and 2000***

 

Net income available to common stockholders decreased$155,000, or 2.7%, to $5.7 million for the three months ended September 30,2001 compared to $5.8 million for the three months ended September 30,2000.  This decrease is primarilyattributable to an increase in preferred stock dividends partially offset by anincrease in interest income.  Dividendson preferred stock increased $472,000, or 129.7%, to $836,000 for the threemonths ended September 30, 2001, compared to $364,000 for the three monthsended September 30, 2000 as a result of the issuance of the Series C preferredstock on May 31, 2001. Total interest income increased $420,000, or 6.8%, to$6.6 million for the three months ended September 30, 2001, compared to $6.2million for the three months ended September 30, 2000.  Interest income from loans for the threemonths ended September 30, 2001 increased $338,000, or 6.4%, to $5.6 millioncompared to $5.3 million for the three months ended September 30, 2000.

The following table sets forth the yields on Capital Crossing Preferred'searning assets for the periods indicated:

 

 

 

** Three Months  Ended September 30,**

 

 

 

**2001**

 

**2000**

 

 

 

**Average**

 

**Interest**

 

 

 

**Average**

 

**Interest**

 

 

 

 

 

**Balance**

 

**Income**

 

**Yield**

 

**Balance**

 

**Income**

 

**Yield**

 

 

 

**(dollars in thousands)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, net (1)

 

$

151,242

 

$

5,616

 

14.73

%

$

194,154

 

$

5,278

 

10.81

%

Interest-bearing deposits

 

100,500

 

1,002

 

3.96

 

67,060

 

920

 

5.46

 

 

 

$

251,742

 

$

6,618

 

10.43

%

$

261,214

 

$

6,198

 

9.44

%

 

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

 

The weighted average yield on interest-earning assets increased to10.43% for the three months ended September 30, 2001 from 9.44% for the threemonths ended September 30, 2000. The increase in yield was due primarily to anincreased yield on the loan portfolio. During the three months ended September 30, 2001 and 2000, the yield onthe loan portfolio was 14.73% and 10.81%, respectively. Thisincrease was primarily a result of an increase in income recognized at the timeof individual loan pay-offs, partially offset by a decline in regularlyscheduled interest income as a result of declining interest rates. Averageloans, net for the three months ended September 30, 2001 totaled $151.2 millioncompared to $194.2 million for the three months ended September 30, 2000.  This decrease was due primarily to pay-offson loans during the period, offset by the purchase from the Bank of  $35.0 million of loans during the threemonths ended September 30, 2001.

 

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

 

When a loan ispaid off, the excess of any cash received over the net investment is recordedas interest income. In addition to the amount of purchase discount that isrecognized at that time, income may also include interest owed by the borrowerprior to Capital 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 periods indicated, the components ofinterest and fees on loans.  We cannotassure you that future interest income, including the yields and related levelof such income, or the relative portion attributable to loan pay-offs ascompared to other sources, will increase or remain the same in the future.

 

 

 

 

 

**Three Months Ended September 30,**

 

 

 

**2001**

 

**2000**

 

 

 

**Interest**

 

 

 

**Interest**

 

 

 

 

 

**Income**

 

**Yield**

 

**Income**

 

**Yield**

 

 

 

**(dollars in thousands)**

 

 

 

 

 

 

 

 

 

 

 

Regularly scheduled interest and accretion  income

 

$

3,642

 

9.55

%

$

4,962

 

10.16

%

Interest and fee income recognized on loan  pay-offs:

 

 

 

 

 

 

 

 

 

Non-amortizing discount

 

608

 

1.60

 

112

 

0.23

 

Amortizing discount

 

1,213

 

3.18

 

91

 

0.19

 

Other interest and fee income

 

153

 

0.40

 

113

 

0.23

 

 

 

1,974

 

5.18

 

316

 

0.65

 

 

 

$

5,616

 

14.73

%

$

5,278

 

10.81

%

 

The amount of loanpay-offs and related 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 deposits at CapitalCrossing increased $33.4 million to $100.5 million for the three months endedSeptember 30, 2001, compared to $67.1 million for 2000 as a result of cashaccumulated from loan pay-offs and proceeds received from the issuance ofSeries C preferred stock offset by the purchase from the Bank of  $35.0 million of loans during the threemonths ended September 30, 2001.  Theyield on interest-bearing deposits decreased in 2001 because the rate paid bythe Bank on the money market account held by Capital Crossing Preferreddecreased in 2001 compared to 2000.

 

Guarantee fee income for the three months ended September 30, 2001and September 30, 2000 totaled $20,000 for each period. Effective July 1, 2000,Capital Crossing Preferred entered into an agreement to make certain assetsavailable to be pledged in connection with borrowings of Capital Crossing fromthe FHLBB. Capital Crossing Preferred receives an annual fee of $80,000 fromCapital Crossing under this agreement.

 

Expenses related to loanservicing and advisory services for the three months ended September 30, 2001decreased $29,000 or 22.0%, to $103,000 compared to $132,000 for the threemonths ended September 30, 2000. This decrease was due to the decrease in theaverage balance of the loan portfolio.

 

During the three monthsended September 30, 2000, non-accrual loans with a carrying value of $322,000were sold at a gain of $123,000.  Additionally, during the 2000 period, $1.6 million of non-performingloans were sold with no gain or loss to Capital Crossing prior to foreclosure aspermitted by the servicing agreement. During the 2001 period, the only loan sales were sales of $167,000 ofnon-mortgage loans to Capital Crossing at no gain or loss.

 

General andadministrative expenses for the three months ended September 30, 2001 increased$9,000, or 42.9%, to $30,000 compared to $21,000 for the three months endedSeptember 30, 2000.  This increase isdue primarily to increased printing costs related to periodic filings.

 

Preferred stock dividendsincreased as a result of dividends on Series C preferred stock issued on May31, 2001.

 

We intend to paydividends on our preferred stock and common stock in amounts necessary tocontinue to preserve our status as REIT under the Internal Revenue Code.

 

***Nine Months Ended September 30, 2001and 2000***

 

Net income available to common stockholder increased$1.1 million, or 7.7%, to $15.8 million for the nine months ended September 30,2001 compared to $14.6 million for the nine months ended September 30,2000.  This increase was primarilyattributable to an increase in interest income partially offset by an increasein preferred stock dividends.  Totalinterest income increased $2.0 million, or 12.6%, to $17.8 million for the ninemonths ended September 30, 2001, compared to $15.8 million for the nine monthsended September 30, 2000.

 

The following table sets forth the yields on Capital Crossing Preferred'searning assets for the period indicated:

 

 

 

** Nine Months  Ended September 30,**

 

 

 

**2001**

 

**2000**

 

 

 

**Average**

 

**Interest**

 

 

 

**Average**

 

**Interest**

 

 

 

 

 

** Balance**

 

**Income**

 

**Yield**

 

**Balance**

 

**Income**

 

**Yield**

 

 

 

**(dollars in thousands)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, net

 

$

153,512

 

$

14,975

 

13.04

%

$

172,400

 

$

14,101

 

10.93

%

Interest-bearing deposits

 

83,606

 

2,832

 

4.53

 

51,504

 

1,707

 

4.43

 

 

 

$

237,118

 

$

17,807

 

10.04

%

$

223,904

 

$

15,808

 

9.43

 

 

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

 

The weighted average yield on interest-earning assets increased to10.04% for the nine months ended September 30, 2001 from 9.43% for the ninemonths ended September 30, 2000.  Forthe nine months ended September 30, 2001 and 2000, the yield on the loanportfolio was 13.04% and 10.93%, respectively. This increase isprimarily a result of an increase in income recognized at the time ofindividual loan pay-offs, partially offset by a decline in regularly scheduledinterest income as a result of declining interest rates. Average loans, net forthe nine months ended September 30, 2001 totaled $153.5 million compared to$172.4 million for the nine months ended September 30, 2000. This decrease isdue primarily to pay-offs and amortization on loans during the period offset bythe purchase from the Bank of  $35.0million of loans during the three months ended September 30, 2001.

Income on loans includes the portion of the purchasediscount that is accreted into income over the remaining lives of the relatedloans using the interest method. Because the carrying value of the loanportfolio is net of purchase discount, the related yield on this portfoliogenerally is higher than the aggregate contractual rate paid on the loans. Thetotal yield includes the excess of a loan’s expected discounted future cashflows over its net investment, recognized using the interest method.

 

When a loan is paidoff, the excess of any cash received over the net investment is recorded asinterest income. In addition to the amount of purchase discount that isrecognized at that time, income may also include interest owed by the borrowerprior to Capital 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 periods indicated, the components ofinterest and fees on loans and leases. We can not assure you that future interest income, including the yieldsand related level of such income, or the relative portion attributable to loanpay-offs as compared to other sources, will increase or remain the same in thefuture.

 

 

 

 

**Nine Months Ended September 30,**

 

 

 

**2001**

 

**2000**

 

 

 

**Interest**

 

 

 

**Interest**

 

 

 

 

 

**Income**

 

**Yield**

 

**Income**

 

**Yield**

 

 

 

**(dollars in thousands)**

 

 

 

 

 

 

 

 

 

 

 

Regularly scheduled interest and accretion  income

 

$

11,416

 

9.94

%

$

13,270

 

10.29

%

Interest and fee income recognized on loan  pay-offs:

 

 

 

 

 

 

 

 

 

Non-amortizing discount

 

1,519

 

1.32

 

370

 

0.28

 

Amortizing discount

 

1,650

 

1.44

 

333

 

0.26

 

Other interest and fee income

 

390

 

0.34

 

128

 

0.10

 

 

 

3,559

 

3.10

 

831

 

0.64

 

 

 

$

14,975

 

13.04

%

$

14,101

 

10.93

%

 

The amount of loanpayoffs and related 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 deposits increased $32.1million to $83.6 million for the nine months ended September 30, 2001, comparedto $51.5 million for 2000 as a result of cash accumulated from loan paymentsand the proceeds from the issuance of Series C preferred stock offset by thepurchase of $35.0 million of loans during the three months ended September 30,2001.

 

Guarantee fee income for the nine months ended September 30, 2001increased $40,000 compared to the nine months ended September 30, 2000.Effective July 1, 2000, Capital Crossing Preferred entered into an agreement tomake certain assets available to be pledged in connection with borrowings ofCapital Crossing from the FHLBB. Capital Crossing Preferred receives an annualfee of $80,000 from Capital Crossing under this agreement.

 

Other real estate owned income of $245,000 for the ninemonths ended September 30, 2000, consisted of the gain on sale of one property.

 

During the nine monthsended September 30, 2000, non-accrual loans with a carrying value of $322,000were sold at a gain of $123,000.  Additionally, during the 2000 period, $1.6 million of non-performingloans were sold with no gain or loss to Capital Crossing Bank prior to foreclosureas permitted by the servicing agreement. During the 2001 period, the only loan sales were sales of $167,000 ofnon-mortgage loans to Capital Crossing Bank at no gain or loss.

 

General andadministrative expenses for the nine months ended September 30, 2001 decreased$53,000, or 44.2%, to $67,000 compared to $120,000 for the nine months endedSeptember 30, 2000.  This decrease wasdue primarily to a decrease in professional services, including consulting andlegal services.

**Financial Condition**
** ****Interest-bearingDeposits with Capital Crossing Bank**
 

At September 30, 2001,interest-bearing deposits consisted of money market accounts with balances of$70.2 million and certificates of deposit which totaled $17.5 million andmature in November 2001.  At December 31,2000, interest-bearing deposits consisted of a money market account with abalance of  $37.7 million andcertificates of deposit totaling $17.5 million. The increase in the moneymarket account was a result of cash accumulated from loan pay-offs and proceedsreceived from the issuance of Series C preferred stock offset by the purchaseof  $35.0 million of loans during thethree months ended September 30, 2001.

 
**LoanPortfolio**
 

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

 

 

 

**September 30,  2001**

 

**December 31,  2000**

 

 

 

**(in thousands)**

 

Mortgage loans on real estate:

 

 

 

 

 

Commercial

 

$

118,953

 

$

98,842

 

Multi-family residential

 

58,981

 

72,520

 

One-to-four family residential

 

3,868

 

6,268

 

Land

 

1,477

 

587

 

 

 

 

 

 

 

Total

 

183,279

 

178,217

 

 

 

 

 

 

 

Secured commercial

 

-

 

209

 

Other

 

-

 

29

 

 

 

 

 

 

 

Total loans, gross

 

183,279

 

178,455

 

Less:

 

 

 

 

 

Non-amortizing discount (1)

 

(7,263

)

(6,704

)

Amortizing discount

 

(8,538

)

(5,262

)

Allowance for loan losses

 

(4,659

)

(3,795

)

Net deferred loan fees

 

(113

)

(82

)

 

 

 

 

 

 

Loans, net

 

$

162,706

 

$

162,612

 

 

(1)           Non-amortizingdiscount is an allocation of the total discount on purchased loans accountedfor on the cost recovery method until it is determined that the amount andtiming of collections are reasonably estimable and collection is probable.

 

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

 

During the three months ended September 30, 2001,Capital Crossing Preferred purchased loans from the Bank with a net carryingvalue of  $35.0 million.  These loans were primarily commercial realestate loans.

 

At September 30, 2001, there were no non-performingloans. Non-performing loans, net of discount, totaled $220,000 at December 31,2000.

 

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’s anticipatedcash flows at the time of acquisition.

 

**Allowance for LoanLosses**

 

Capital Crossing Preferred maintains an allowance forloan losses that is increased by provisions charged against earnings, byrecoveries of amounts previously charged-off and by allocations of discounts onpurchased loans and is reduced by charge-offs on loans. Loans are charged-offwhen they are deemed to be uncollectible, or partially charged-off when aportion of a loan is deemed uncollectible. Recoveries are generally recordedonly when cash payments are received. In general, the loan loss allowance policy requires the maintenance ofallowances sufficient to satisfy estimated probable losses arising fromimpaired loans.

 

Capital CrossingPreferred performs 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 formula wherebythe loan portfolio is stratified by loan type and by internal risk ratingcategories. Loss factors are then applied to each strata based on variousconsiderations including delinquency trends, current economic conditions,industry standards and regulatory guidelines. An additional allowance ismaintained based on a judgmental process whereby management considersqualitative and quantitative assessments of other factors including regionalcredit concentration, industry concentration, individual borrowerconcentrations, results of regulatory examinations, historical loss ranges,portfolio composition, economic conditions such as interest rates and energycosts and other changes in the portfolio. The allowance for loan losses ismanagement’s estimate of the probable loan losses incurred as of the balancesheet date. Any remaining unallocated portion is reviewed for adequacy inrelation to the overall loan portfolio and in recognition of estimates inherentin the calculation methodology. The allowance for loan losses is management’sestimate of the probable loan losses incurred as of the balance sheet date and,as such, Capital Crossing Preferred cannot assure you that management’sestimates and the allowances for probable loan losses will be proven correct inthe future.

 

Additional factors influencing the calculation of the allowance for loanlosses are particular concentrations within the portfolio, including thegeographic concentration of loans in California, which representedapproximately 39.8% of the portfolio at September 30, 2001, and concentrationof loans to individual borrowers.

 

Capital Crossing Preferred also considers historicallosses in assessing the adequacy of the allowance for loan losses.  Due to the limited operating history ofCapital Crossing Preferred, historical losses are not currently an indicator oflosses inherent in the portfolio. Management will continue to monitor historical losses to assess theadequacy of the allowance for loan losses.

 

The following table sets forth an analysis of theallowance for loan losses for the periods indicated:

 

 

 

**Three Months Ended**

 

**Nine Months Ended**

 

 

 

**September 30,**

 

**September 30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

 

 

**(in thousands)**

** **

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

3,792

 

$

4,070

 

$

3,795

 

$

2,855

 

Transfer from Capital Crossing with loans  acquired

 

867

 

-

 

867

 

1,215

 

Transfer to Capital Crossing with loans  sold

 

-

 

-

 

(3

)

-

 

Loans charged-off

 

-

 

(275

)

-

 

(275

)

Balance at end of period

 

$

4,659

 

$

3,795

 

$

4,659

 

$

3,795

 

 

**Non-AmortizingDiscount**

 

 At the time ofacquisition, the excess of the contractual loan balances over the amount ofreasonably estimable and probable future cash collections is recorded asnon-amortizing discount. The non-amortizing discount is not transferred toamortizing discount and accreted into income until it is determined that theamount and timing of the cash flows related to the non-amortizing discount arereasonably estimable and collection is probable. Non-amortizing discountgenerally is reduced and offset against the related principal balance when theamount at which a loan is resolved or restructured is determined. There is noeffect on the income statement as a result of these reductions.

 

The followingtable sets forth certain information relating to the activity in the non–amortizingdiscount for the periods indicated:

 

 

 

** Three Months Ended**

 

**Nine Months Ended**

 

 

 

**September 30,**

 

**September 30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

 

 

**(in thousands)**

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

5,109

 

$

7,943

 

$

6,704

 

$

7,318

 

Transfers to amortizing portion, net

 

(610

)

(48

)

(1,623

)

(435

)

Transfer from Capital Crossing with loans  acquired

 

2,764

 

-

 

2,764

 

1,022

 

Net reductions related to resolutions and restructures

 

-

 

(721

)

(398

)

(731

)

Non-amortizing discount relating to loans  sold

 

-

 

(288

)

(184

)

(288

)

Balance at end of period

 

$

7,263

 

$

6,886

 

$

7,263

 

$

6,886

 

**InterestRate Risk**

 

Capital Crossing Preferred's income consists primarilyof interest income on mortgage assets. Capital Crossing Preferred does notintend to use any derivative products to manage its interest rate risk. Ifthere is a decline in market interest rates, Capital Crossing Preferred mayexperience a reduction in interest income on its mortgage loans and acorresponding decrease in funds available to be distributed to itsstockholders. The reduction in interest income may result from downwardadjustments of the indices upon which the interest rates on loans are based andfrom prepayments of mortgage loans with fixed interest rates, resulting inreinvestment of the proceeds in lower yielding mortgage loans.

 

**SignificantConcentration of Credit Risk**

 

Concentration of credit risk generally arises withrespect to Capital Crossing Preferred's loan portfolio when a significantnumber of borrowers engage in similar business activities, or activities in thesame geographical region. Concentration of credit risk indicates the relativesensitivity of Capital Crossing Preferred's performance to both positive andnegative developments affecting a particular industry or geographical region.Capital Crossing Preferred's balance sheet exposure to geographicconcentrations directly affects the credit risk of the loans within its loan portfolio.  At September 30, 2001, 39.8% and 27.3%,respectively, of Capital Crossing Preferred's total loan portfolio consisted ofloans located in California and New England. At December 31, 2000, 41.8% and31.2%, respectively, of Capital Crossing Preferred’s total loan portfolioconsisted of loans located in California and New England. Consequently, theportfolio may experience a higher default rate, than its current default rate,in the event of adverse economic, political or business developments or naturalhazards in California and New England that may affect the ability of propertyowners to make payments of principal and interest on the underlying mortgages.

 
**LiquidityRisk Management**
 

The objective of liquidity risk management is to ensurethe availability of sufficient cash flows to meet all of Capital CrossingPreferred's financial commitments and to capitalize on opportunities forCapital Crossing Preferred's business expansion. In managing liquidity risk,Capital Crossing Preferred takes into account various legal limitations placedon REITs.

 

Capital Crossing Preferred's principal liquidity needsare:

 

(1)   to increasethe current portfolio size through the acquisition of additional mortgageassets as mortgage assets currently in the loan portfolio mature, pay down orprepay, and

 

(2)  to pay dividends on the preferred shares andcommon shares.

 

 

The acquisition of additional mortgage assets isintended to be funded primarily through repayment of principal balances ofmortgage assets by individual borrowers. Capital Crossing Preferred does nothave and does not anticipate having any material capital expenditures. To theextent that the Board of Directors determines that additional funding isrequired, Capital Crossing Preferred may raise such funds through additionalequity offerings, debt financing or retention of cash flow (after considerationof provisions of the Internal Revenue Code requiring the distribution by a REITof at least 90% of its REIT taxable income and taking into account taxes that wouldbe imposed on undistributed income), or a combination of these methods. Exceptfor its obligation to guarantee certain commitments of Capital Crossing,Capital Crossing Preferred does not currently intend to incur any indebtedness.The organizational documents of Capital Crossing Preferred limit the amount ofindebtedness, including intercompany advances made by Capital Crossing toCapital Crossing Preferred, which it is permitted to incur without the approvalof the Series A and the Series C preferred stockholders to no more than 100% ofthe total stockholders' equity of Capital Crossing Preferred.

**RISK FACTORS AND OTHER FACTORSAFFECTING FORWARD LOOKING STATEMENT**

 

This Form 10-Q contains statements that are "forward–lookingstatements." Capital Crossing Preferred may also make forward–lookingstatements in other documents it files with the SEC, in press releases andother written materials, and in oral statements made by its officers, directorsor employees. You can identify forward–looking statements by the use ofthe words "believe," "expect," "anticipate,""intend," "estimate," "assume" and other similarexpressions which predict or indicate future events and trends and which do notrelate to historical matters. You should not rely on forward–lookingstatements, because they involve known and unknown risks, uncertainties andother factors, some of which are beyond the control of Capital CrossingPreferred. These risks, uncertainties and other factors may cause the actualresults, performance or achievements of Capital Crossing Preferred to bematerially different from the anticipated future results, performance orachievements expressed or implied by the forward–looking statements.

 

Some of the factors that might cause these differences include those setforth below. You should carefully review all of these factors, and you shouldbe aware that there may be other factors that could cause these differences.These forward–looking statements were based on information, plans andestimates at the date of this report, and Capital Crossing Preferred does notundertake to update any forward–looking statements to reflect changes inunderlying assumptions or factors, new information, future events or otherchanges.

 

**A decline inthe Bank's capital levels may result in the Series A and Series Cpreferred shares being subject to automatic exchange into preferred shares ofthe Bank**

 

The returns from an investment in the Series A or Series Cpreferred shares will depend to a significant extent on the performance and capitalof the Bank. A significant decline in the performance and capital levels of theBank or the placement of the Bank into bankruptcy, reorganization,conservatorship or receivership could result in the automatic exchange of theSeries A and Series C preferred shares for preferred shares of the Bank,which would represent an investment in the Bank and not in us. Under thesecircumstances:

 

                •              a holder ofSeries A or Series C preferred shares would be a preferred stockholder ofthe Bank at a time when the Bank's financial condition was deteriorating orwhen the Bank had been placed into bankruptcy, reorganization, conservatorshipor receivership and, accordingly, it is unlikely that the Bank would be in afinancial position to pay any dividends on the preferred shares of the Bank. Aninvestment in the Bank is also subject to risks that are distinct from therisks associated with an investment in us. For example, an investment in theBank would involve risks relating to the capital levels of, and other federaland state regulatory requirements applicable to, the Bank, and the performanceof the Bank's overall loan portfolio and other business lines. The Bank alsohas significantly greater liabilities and significantly less stockholders'equity than we do;

 

                •              if a liquidation ofthe Bank occurs, the claims of depositors and creditors of the Bank and of theFDIC would have priority over the claims of holders of the preferred shares ofthe Bank, and therefore, a holder of Series A and Series C preferred shareslikely would receive substantially less than such holder would receive had theSeries A and Series C preferred shares not been exchanged for preferredshares of the Bank; and

 

                •              the exchange of theSeries A or Series C preferred shares for preferred shares of the Bankwould be a taxable event to a holder of Series A or Series C preferredshares under the Internal Revenue Code, and such holder would incur a gain or aloss, as the case may be, measured by the difference between such holder'sbasis in the Series A or Series C preferred shares and the fair marketvalue of the Bank preferred shares received in the exchange.

 

**Because of ourobligations to creditors, we may not be able to make dividend or liquidationpayments to holders of the Series A and Series C preferred shares**

 

                The Series A and Series Cpreferred shares rank:

 

                •              junior to ourborrowings, including claims of the FHLBB for amounts due or which may becomedue under our guarantee of the Bank's obligations to the FHLBB, and any otherobligations to our creditors upon our liquidation; and

 

                •              senior to our commonstock and our Series B preferred stock with regard to payment of dividendsand amounts upon liquidation.

 

If we incur significant indebtedness, we may not have sufficient fundsto make dividend or liquidation payments on the Series A or Series Cpreferred shares. Upon our liquidation our obligations to our creditors wouldrank senior to the Series A and Series C preferred shares. At September30, 2001, we had approximately $162,000 in accounts payable and otherliabilities which, upon our liquidation, would be required to be paid beforeany payments could be made to holders of the Series A or Series Cpreferred shares. In addition, upon our liquidation, dissolution or winding up,if we do not have sufficient funds to pay the full liquidation amount to theholders of the Series A and Series C preferred shares, such holders mayreceive less than the $10.00 per share liquidation amount.

 

The terms of the Series A and Series C preferred shares limit ourability to incur debt in excess of 100% of our stockholders' equity without theapproval of the holders of all of the outstanding Series A and Series Cpreferred shares but do not require that we obtain the approval of the holdersof the Series A and Series C preferred shares to issue additional seriesof preferred shares which rank equal to the Series A and Series Cpreferred shares as to payment of dividends or amount upon liquidation. As aresult, subject to these limitations, we may incur obligations which mayfurther limit our ability to make dividend or liquidation payments in thefuture.

 

**Bank regulatorsmay limit our ability to implement our business plan and may restrict ourability to pay dividends**

 

Because we are a subsidiary of the Bank, federal and state regulatoryauthorities will have the right to examine us and our activities and undercertain circumstances, to impose restrictions on the Bank or us which couldimpact our ability to conduct our business according to our business plan, whichcould materially adversely affect our financial condition and results ofoperations:

 

                •              if the Bank'sregulators determine that the Bank's relationship to us results in an unsafeand unsound banking practice, the regulators could restrict our ability totransfer assets, to make distributions to our stockholders, including dividendson our Series A and Series C preferred shares, or to redeem shares ofSeries A and Series C preferred stock or even require the Bank to severits relationship with or divest its ownership interest in us. Such actionscould potentially result in our failure to qualify as a REIT.

 

                •              payment of dividendson the Series A and Series C preferred shares could also be subject toregulatory limitations if the Bank becomes undercapitalized. The Bank will bedeemed undercapitalized if its total risk-based capital ratio is less than8.0%, its Tier 1 risk-based capital ratio is less than 4.0% or its Tier 1leverage ratio is less than 4.0%. At September 30, 2001, the Bank had a totalrisk-based capital ratio of 12.18%, a Tier 1 risk-based capital ratio of 10.91%and a Tier 1 leverage ratio of 10.39%, which is sufficient for the Bank to beconsidered well-capitalized. As part of its common stock repurchase program,the Bank has agreed with the FDIC to maintain, for so long as the repurchaseprogram continues, capital levels of one percent in excess of the regulatoryminimums required to be categorized as well-capitalized. We cannot assure youthat the Bank will be well-capitalized under applicable regulations as of anyfuture date. For purposes of calculating these capital ratios as a percentageof the Bank's risk-weighted assets, as opposed to its total assets, the Bank'sassets are assigned to risk categories based on the relative credit risk of theasset in question. These risk weights consist of 0% for assets deemed leastrisky such as cash, claims backed by the full faith and credit of the U.S.government, and balances due from Federal Reserve banks; 20% for assets deemedslightly more risky such as portions of obligations conditionally guaranteed bythe U.S. government or federal funds sold; 50% for assets deemed still morerisky 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 we believethat dividends on the Series A and Series C preferred shares should not beconsidered distributions by the Bank, the FDIC may not agree with thisposition. Under FDIC regulations on capital distributions, the ability of theBank to make a capital distribution varies depending primarily on the Bank'searnings and regulatory capital levels. Capital distributions are defined toinclude payment of dividends, stock repurchases, cash-out mergers and otherdistributions charged against the capital accounts of an institution. The FDICcould limit or prohibit the payment of dividends on the Series A andSeries C preferred shares if it determines that the payment of those dividendsis a capital distribution by the Bank and that the Bank's earnings andregulatory capital levels are below specified levels.

 

**We do not haveinsurance to cover our exposure to borrower defaults and bankruptcies andspecial hazard losses that are not covered by our standard hazard insurancepolicies**

 

We do not generally obtain general credit enhancements such asmortgagor bankruptcy insurance or obtain special hazard insurance for ourmortgage assets, other than standard hazard insurance, which will in each caseonly relate to individual mortgage loans. Accordingly, we will be subject torisks of borrower defaults and bankruptcies and special hazard losses, such aslosses occurring from floods, that are not covered by standard hazardinsurance. In the event of a default on any mortgage loan held by us resultingfrom declining property values or worsening economic conditions, among otherfactors, we 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.

 

**Our resultswill be affected by factors beyond our control**

 

Our mortgage loan portfolio is subject to local economic conditionswhich could affect the value of the real estate assets underlying our loans andtherefore, our results of operations will be affected by various conditions inthe real estate market, all of which are beyond our control, such as:

 

                •              local and othereconomic conditions affecting real estate values;

 

                •              the continuedfinancial stability of a borrower and the borrower's ability to make mortgagepayments;

 

                •              the ability oftenants to make lease payments;

 

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

 

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

 

                •              increased operatingcosts, including energy costs, real estate taxes and costs of compliance withenvironmental controls and regulations.

 

**Our loans areconcentrated in California and New England and adverse conditions in thosemarkets could adversely affect our operations**

 

Properties underlying our current mortgage assets are concentratedprimarily in California and New England. As of September 30, 2001,approximately 39.8% of our mortgage assets were secured by properties locatedin California and 27.3% in New England. Adverse economic, political or businessdevelopments or natural hazards may affect these areas and the ability ofproperty owners in these areas to make payments of principal and interest onthe underlying mortgages. If either region experienced adverse economic,political or business conditions, we would likely experience higher rates ofloss and delinquency on our mortgage loans than if our loans were moregeographically diverse. Additionally, California has recently experienceddramatic increases in energy prices and periodic supply shortages. However, thevast majority of the properties underlying our current mortgage assets inCalifornia are located in southern California which continues to show signs ofa strong economy despite the recent energy problems and we do not believe theseenergy problems will materially impact the portion of our mortgage assetssecured by properties located in California.

 

**A substantialmajority of our loans were originated by other parties whose level of duediligence may be different than the Bank's level of due diligence**

 

At September 30, 2001, approximately 90.5% of our loan portfolioconsisted of loans originated by third parties that were purchased by the Bankand subsequently acquired by us from the Bank. Because these loans wereoriginated by third parties, the Bank generally is not able to conduct the samelevel of due diligence on these loans that it would have conducted had itoriginated them. Generally, while the Bank conducts an acquisition review, itrelies on the underwriting standards of the parties originating the loans itacquires. The standards of these loan originators may be substantiallydifferent than those of the Bank. These differences may include less rigorousappraisal requirements and debt service coverage ratios, and less rigorousanalysis of property location and environmental factors, building condition andage, tenant quality, compliance with zoning regulations, any use restrictions,easements or right of ways that may impact the value and the borrower's abilityto manage the property. Other disadvantages of purchased loans versus originatedloans may include the lack of current financial information, incomplete legaldocumentation and outdated appraisals.

 

**Approximately65% of our loan portfolio is made up of commercial mortgage loans which areriskier than other types of loans**

 

Commercial mortgage loans constituted approximately 64.9% of the grossloans in our loan portfolio at September 30, 2001 and generally subject usto greater risks than other types of loans. Our commercial mortgage loans, likemost commercial mortgage loans, generally lack standardized terms, tend to haveshorter maturities than residential mortgage loans and may not be fullyamortizing, meaning that they have a principal balance or "balloon"payment due on maturity. The commercial real estate properties underlying our 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 our commercial mortgage loans, we may experience higherrates of default on our mortgage loans than we would if our loan portfolio wasmore diversified and included a greater number of residential and othermortgage loans.

 

 

**We may not beable to purchase loans at the same volumes or with the same yields as we havehistorically purchased**

 

To date we have purchased all of the loans in our portfolio from theBank. Historically, the Bank has acquired such loans (1) from institutionswhich sought to eliminate certain loans or categories of loans from theirportfolios, (2) from institutions participating in securitizationprograms, (3) from failed or consolidating financial institutions and(4) from government agencies. Future loan purchases will depend on theavailability of pools of loans offered for sale and the Bank's ability tosubmit successful bids or negotiate satisfactory purchase prices. Theacquisition of whole loans is highly competitive. Consequently, we cannotassure you that the Bank will be able to purchase loans at the same volumes orwith the same yields as it has historically purchased. This may interfere withour ability to maintain the requisite level of mortgage assets to maintain ourqualification as a REIT. If volumes of loans purchased decline or the yields onthese loans decline further, we would experience a material adverse effect onour business, financial condition and results of operations.

 

**We could beheld responsible for environmental liabilities of properties we acquire throughforeclosure**

 

Approximately 64.9% of the gross loans in our portfolio atSeptember 30, 2001 were commercial mortgage loans, which generally aresubject to relatively greater environmental risks than other types of loans. Ifwe are forced to foreclose on a defaulted mortgage loan to recover ourinvestment we may be subject to environmental liabilities related to theunderlying real property. Hazardous substances or wastes, contaminants,pollutants or sources thereof may be discovered on properties during ourownership or after a sale to a third party. The amount of environmentalliability could exceed the value of the real property. There can be noassurance that we would not be fully liable for the entire cost of any removaland clean-up on an acquired property, that the cost of removal and clean-upwould not exceed the value of the property or that we could recoup any of thecosts from any third party. In addition, we may find it difficult or impossibleto sell the property prior to or following any such remediation.

 

**Tax RisksRelated to REITs**

 

***If we fail to qualify as a REIT, wewill be subject to federal income tax at regular corporate rates***

 

If we fail to qualify as a REIT for any taxable year, we would besubject to federal income tax, including any applicable alternative minimumtax, on our taxable income at regular corporate rates. As a result, the amountavailable for distribution to our stockholders, would be reduced for the yearor years involved. In addition, unless entitled to relief under statutoryprovisions, we would be disqualified from treatment as a REIT for the fourtaxable years following the year during which qualification was lost. Thefailure to qualify as a REIT would reduce our net earnings available fordistribution to our stockholders, because of the additional tax liability forthe year or years involved. Our failure to qualify as a REIT would not byitself give us the right to redeem the Series A preferred shares or SeriesC preferred shares nor would it give the holders of the Series A or SeriesC preferred shares the right to have their shares redeemed. Although wecurrently intend to operate in a manner designed to qualify as a REIT, future economic,market, legal, tax or other considerations may cause us to determine that it isin our best interest and in the best interest of holders of our common stockand preferred stock to revoke our REIT election. The tax law prohibits us fromelecting treatment as a REIT for the four taxable years following the year ofany such revocation.

 

***Ifwe do not distribute 90% of our net taxable income, we may not qualify as aREIT***

 

In order to qualify as a REIT, we generally are required each year todistribute to our stockholders at least 90% (95% for taxable years beginningbefore January 1, 2001) of our net taxable income, excluding net capitalgains. We may retain the remainder of REIT taxable income or all or part of ournet capital gain, but will be subject to tax at regular corporate rates on suchincome. In addition, we are subject to a 4% nondeductible excise tax on theamount, if any, by which certain distributions considered as paid by us withrespect to any calendar year are less than the sum of (1) 85% of ourordinary income for the calendar year, (2) 95% of our capital gains netincome for the calendar year and (3) 100% of any undistributed income fromprior periods. Under certain circumstances, federal or state regulatoryauthorities may restrict our ability, as a subsidiary of the Bank, to makedistributions to our stockholders in an amount necessary to retain our REITqualification. Such a restriction could result in us failing to qualify as aREIT. To the extent our REIT taxable income may exceed the actual cash receivedfor a particular period, we may not have sufficient liquidity to makedistributions necessary to retain our REIT qualification.

 

***Wehave imposed ownership limitations to protect our ability to qualify as a REIT,however, if ownership of the common stock of the Bank becomes concentrated in asmall number of individuals we may fail to qualify as a REIT***

 

                To maintain our status as aREIT, not more than 50% in value of our outstanding shares may be owned,directly or indirectly, by five or fewer individuals, as defined in theInternal Revenue Code, or the Code, to include certain entities, during thelast half of each taxable year. We currently satisfy this requirement becausefor this purpose our common stock held by the Bank is treated as held by theBank's stockholders. However, it is possible that the ownership of the Bankmight become sufficiently concentrated in the future such that five or fewerindividuals would be treated as having constructive ownership of more than 50%of the value of our stock. We may have difficulty monitoring the dailyownership and constructive ownership of our outstanding shares and, therefore,we cannot assure you that we will continue to meet the share ownershiprequirement. This risk may be increased in the future as the Bank implementsits common stock repurchase program because repurchases may cause ownership inthe Bank to become more concentrated. In addition, while the fact that theSeries A preferred shares and the Series C preferred shares may be redeemedor exchanged will not affect our REIT status prior to any such redemption orexchange, the redemption or exchange of all or a part of the Series A andSeries C preferred shares could adversely affect our ability to satisfy theshare ownership requirements in the future.

 

***Wemay redeem the Series 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,we will have the right to redeem the Series A and Series C preferredshares in whole, subject to the prior written approval of the FDIC. We wouldhave the right to redeem the Series A and Series C preferred shares if wereceived an opinion of counsel to the effect that, as a result of changes tothe tax laws or regulations:

 

                (1)           dividends paid by us with respect toour capital stock are not fully deductible by us for income tax purposes; or

 

                (2)           we are otherwise unable to qualify asa REIT.

 

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

 

**We aredependent in virtually every phase of our operations on the diligence and skillof the management of the Bank**

 

                The Bank, which holds all of ourcommon stock, is involved in virtually every aspect of our existence. We havefive officers and no other employees and do not have any independent corporateinfrastructure. Under an advisory agreement between us and the Bank, the Bankadministers our day-to-day activities, including monitoring our credit qualityand advising us with respect to the acquisition, management, financing anddisposition of mortgage assets and our operations generally. Under a masterservice agreement between us and the Bank, the Bank services our loanportfolio. The advisory agreement has an initial term of five years with anautomatic one-year renewal feature and the master service agreement has a oneyear term with an automatic renewal feature. Both the master service agreementand the advisory agreement are subject to earlier termination upon provision of30 days and 90 days notice, respectively. The Bank may subcontractall or a portion of its obligations under the advisory agreement to itsaffiliates or, with the approval of a majority of the Board of Directors aswell as a majority of the independent directors, subcontract its obligationsunder the advisory agreement to unrelated third parties. The Bank will not, inconnection with the subcontracting of any of its obligations under the advisoryagreement, be discharged or relieved from its obligations under the advisoryagreement. The loss of the services of the Bank, or the inability of the Bankto effectively provide such services whether as a result of the loss of keymembers of the Bank's management, early termination of the agreements orotherwise, and our inability to replace such services on favorable terms, or atall, could adversely affect our ability to conduct our operations.

 

**Ourrelationship with the Bank may create conflicts of interest**

 

                The Bank and its affiliates mayhave interests which are not identical to ours and therefore conflicts ofinterest have arisen and may arise in the future with respect to transactionsbetween us and the Bank such as:

 

***   Acquisition of mortgage assets.***  Weanticipate that we will from time to time continue to purchase additionalmortgage assets. We intend to acquire all or substantially all of such mortgageassets from the Bank, on terms that are comparable to those that could beobtained by us if such mortgage assets were purchased from unrelated thirdparties. Neither we nor the Bank currently have specific policies with respectto the purchase by us from the Bank of particular loans or pools of loans,other than that such assets must be eligible to be held by a REIT. Althoughthese purchases are structured to take advantage of the underwriting proceduresof the Bank, and while we believe that any agreements and transactions betweenus, on the one hand, and the Bank and/or its affiliates on the other hand, arefair to all parties and consistent with market terms, neither we nor the Bankhave obtained any third–party valuation to confirm whether we will bepaying fair market value for these loans, nor do we anticipate doing so in thefuture. Additionally, through limiting our source of purchased mortgage assetssolely to those originated or purchased by the Bank, our portfolio willgenerally reflect the nature, scope and risk of the Bank's portfolio ratherthan a more diverse portfolio composed of mortgage loans also purchased fromother lenders.

 
******
***   Servicing of our mortgage assets by the Bank.***  Ourloans are serviced by the Bank pursuant to the terms of the master serviceagreement. The Bank in its role as servicer under the terms of the masterservice agreement receives a fee equal to 0.20% per annum, payable monthly, onthe gross outstanding principal balances of loans serviced. The master serviceagreement requires the Bank to service the loan portfolio in a mannersubstantially the same as for similar work performed by the Bank fortransactions on its own behalf. This will become especially important as theBank services any loans which become classified or are placed on non-performingstatus, or are renegotiated due to the financial deterioration of the borrower.While we believe that the Bank will diligently pursue collection of anynon-performing loans, we cannot assure you that this will be the case. Ourability to make timely payments of dividends will depend in part upon theBank's prompt collection efforts on our behalf.

 

***   Future dispositions by us of mortgage assets to the Bank or itsaffiliates.***  The master service agreement provides thatforeclosures and dispositions of the mortgage assets are to be performed with aview toward maximizing our recovery as owner of the mortgage assets, and theBank shall service the mortgage assets solely with a view toward our interests,and without regard to the interests of the Bank or any of its affiliates.However, we cannot assure you that any such agreement or transaction will be onterms as favorable to us as would have been obtained from unaffiliated thirdparties. The Bank may seek to exercise its influence over our affairs so as tocause the sale of the mortgage assets owned by us and their replacement bylesser quality loans purchased from the Bank or elsewhere which could adverselyaffect out business and our ability to make timely payments of dividends.

 

***   Future modifications of the advisory agreement or master serviceagreement.***  Should we seek to modify either the advisoryagreement or the master service agreement, we would rely upon our officers, allof whom are also officers of the Bank, and/or our directors, a half of whom arealso officers of the Bank. Thus, our officers and/or directors would beresponsible for taking positions with respect to such agreements that, while inour best interests, would not be in the best interests of the Bank. Althoughthe termination, modification or decision not to renew the advisory agreementand/or the master service agreement requires the approval of a majority of ourindependent directors, the Bank, as holder of all of our outstanding commonstock, controls the election of all our directors, including the independentdirectors. We cannot assure you that such modifications will be on terms asfavorable to us as those that could have been obtained from unaffiliated thirdparties.

 

***   The terms of our guarantee of obligations of the Bank.***  We haveguaranteed all of the obligations of the Bank under advances the Bank mayreceive from time to time from the Federal Home Loan Bank of Boston, and haveagreed to pledge a significant amount of our assets in connection with thoseadvances. The assets we pledge to the FHLBB will vary from time to time;however, the potential exists for us to pledge all of our assets to the FHLBBto secure advances to the Bank. In addition, the Bank has pledged to the FHLBBall of the shares of our capital stock it owns as collateral for its FHLBBborrowings. Under the terms of the pledge, if the Bank becomes undercapitalizedthe FHLBB may require the Bank to dissolve Capital Crossing Preferred such thatthe assets of Capital Crossing Preferred are distributed to the Bank. In thiscircumstance the holders of Series A and Series C preferred shares, wouldreceive their liquidation preference only to the extent there are availableassets of Capital Crossing Preferred following satisfaction of our outstandingobligations, including our guarantee of the Bank's FHLBB borrowings. AtSeptember 30, 2001, approximately $45.4 million, or 18%, of ourassets have been pledged to and accepted by the FHLBB to secure advances to theBank. The Bank has also agreed that it will not request or accept advances fromthe FHLBB in excess of Capital Crossing Preferred's total stockholders equity,less the stockholders equity attributable to the Series A and Series Cpreferred shares. As of September 30, 2001, this restriction would limitthe Bank's ability to receive advances in excess of approximately$219.0 million. As of September 30, 2001, the Bank had$139.0 million in outstanding FHLBB borrowings. The guarantee and pledgewere approved by our independent directors, subject to certain requirements andlimitations, including the requirement that the Bank pay us a guarantee fee.Any default by the Bank on its obligations which would require us to satisfyour guarantee could adversely affect out business and our ability to maketimely payments of dividends.

 

***   The master loan purchase agreement was not the result of arm's–lengthnegotiations.***  We acquire loans pursuant to the mastermortgage loan puchase agreement between us and the Bank, at an amount equal tothe Bank's net carrying value for those mortgage assets. While we believe thatthe master mortgage loan puchase agreement was fair to all parties andconsistent with market terms, all of our officers and half of our directors arealso officers and/or directors of the Bank and/or affiliates of the Bank. TheBank, as holder of all of our outstanding common stock, controls the electionof all our directors, including the independent directors. We cannot assure youthat the master mortgage loan purchase agreement was entered into on terms asfavorable to us as those that could have been obtained from unaffiliated thirdparties.

 

**Neither we northe Bank have specific policies with respect to the purchase by us from theBank of particular loans or pools of loans**

 

                The lack of specific policieswith respect to the purchase by us of loans from the Bank could result in ouracquiring lower quality mortgage assets from the Bank than if such policieswere otherwise in place. Neither we nor the Bank currently have specificpolicies with respect to the purchase by us from the Bank of particular loansor pools of loans, other than that such assets must be eligible to be held by aREIT. Our Board of Directors has adopted certain policies to guide theacquisition and disposition of assets but these policies may be revised fromtime to time at the discretion of the Board of Directors without a vote of ourstockholders. We intend to acquire all or substantially all of the additionalmortgage assets we may acquire in the future from the Bank on terms that arecomparable to those that could be obtained by us if such mortgage assets werepurchased from unrelated third parties, but we cannot assure you that this willalways be the case.

 

**Our Board ofDirectors has broad discretion to revise our strategies**

 

                Our Board of Directors hasestablished our investment and operating strategies. These strategies may berevised from time to time at the discretion of the Board of Directors without avote of our stockholders. Changes in our strategies could have a negativeeffect on our stockholders.

 

**We do notobtain third–party valuations and therefore we may pay more or receiveless than fair market value for our mortgage assets**

 

                To date, we have not obtainedthird–party valuations as part of our loan acquisitions or dispositionsand do not anticipate obtaining third–party valuations for futureacquisitions and dispositions of mortgage assets. We do not intend to obtainthird–party valuations even where we are acquiring mortgage assets from,or disposing mortgage assets to, one of our affiliates, including the Bank.Accordingly, we may pay our affiliates, including the Bank, more than the fairmarket value of mortgage assets we acquire and we may receive less than thefair market value of the mortgage assets we sell based on a third–partyvaluation.

 

**We may pay morethan fair market value for mortgages we purchase from the Bank because we donot engage in arm's–length negotiations with the Bank**

 

                We acquire mortgage assets fromthe Bank under a master mortgage loan purchase agreement between us and theBank, at an amount equal to the Bank's net carrying value for those mortgagesassets, regarding the consideration to be paid. Because the Bank is anaffiliate of ours, we do not engage in any arms length negotiations.Accordingly, if the Bank's net carrying value exceeds the fair market value ofthe mortgage assets, we would pay the Bank more than the fair market value forthose mortgage assets.

 

**A decline ininterest rates could reduce our earnings and affect our ability to paydividends**

 

                Our income consists primarily ofinterest earned on our mortgage assets and short-term investments. Asignificant portion of our mortgage assets bear interest at adjustable rates.If there is a decline in interest rates, then we will experience a decrease inincome available to be distributed to our stockholders. If interest ratesdecline, we may also experience an increase in prepayments on our mortgageassets and may find it difficult to purchase additional mortgage assets bearingrates sufficient to support payment of dividends on the Series A andSeries C preferred shares. Because the dividend rates on the Series A andSeries C preferred shares are fixed, a significant decline in interest ratescould materially adversely affect our ability to pay dividends on theSeries A and Series C preferred shares.

 

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

 

Market risk is the risk of loss from adverse changes inmarket prices and interest rates.  It isthe objective of Capital Crossing Preferred to attempt to control risksassociated with interest rate movements. Capital Crossing Preferred's marketrisk arises primarily from interest rate risk inherent in holding loans. Tothat end, management actively monitors and manages the interest rate riskexposure of Capital Crossing Preferred.

 

Capital Crossing Preferred's management reviews, amongother things, the sensitivity of Capital Crossing Preferred's assets tointerest rate changes, the book and market values of assets, purchase and saleactivity, and anticipated loan pay-offs. Capital Crossing's senior managementalso approves and establishes pricing and funding decisions with respect toCapital Crossing Preferred's overall asset and liability composition.

 

Capital Crossing Preferred's methods for evaluatinginterest rate risk include an analysis of its interest-earning assets maturingor repricing within a given time period. Since Capital Crossing Preferred hasno interest-bearing liabilities, a period of rising interest rates would tendto result in an increase in net interest income. A period of falling interestrates, would tend to adversely affect net interest income.

 

                The following table sets forthCapital Crossing Preferred’s interest-rate sensitive assets categorized byrepricing dates and weighted average yields at September 30, 2001. For fixedrate instruments, 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)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Rate–sensitive assets:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest–bearing  deposits

 

$

87,836

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

87,836

 

Average interest  rate

 

3.80

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed–rate  loans (1)

 

-

 

26,742

 

8,379

 

6,627

 

4,932

 

3,781

 

11,992

 

62,453

 

Average interest  rate

 

10.29

%

9.74

%

9.91

%

9.66

%

9.76

%

9.72

%

 

 

 

 

Adjustable–rate  loans(1)

 

22,664

 

70,207

 

5,624

 

5,532

 

599

 

296

 

103

 

105,025

 

Average interest  rate

 

8.65

%

9.00

%

9.28

%

8.87

%

8.58

%

8.47

%

8.98

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total rate–sensitive  assets

 

$

110,500

 

$

96,949

 

$

14,003

 

$

12,159

 

$

5,531

 

$

4,077

 

$

12,095

 

$

255,314

 

 

(1)   Loans are presented net of discount andbefore deducting the allowance for loan losses and deferred loan fees.

 

Based on CapitalCrossing Preferred’s experience, management applies the assumption that, onaverage, approximately 11% of the outstanding fixed and adjustable rate loanswill prepay annually. The above table does not include loans which have beenplaced on non-accrual status.

 

At September 30,2001, the fair value of net loans was $167,192,000, as compared to the netcarrying value of net loans of $162,706,000. The fair value of interest-bearing deposits approximates carrying value.
****
 

**Part II**

 

**Item 1.  LegalProceedings**

 

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

 

**Item 2.Changes in Securities and Uses of Proceeds**

 

(a)           Notapplicable

 

(b)           CapitalCrossing Preferred completed its public offering of 1,600,000 Series Cpreferred shares on May 31, 2001 and sold an additional 240,000 Series Cpreferred shares in connection with the underwriters’ exercise of theirallotment option. The Series C preferred shares rank senior to the common stockand Series B preferred stock and on parity with its Series A preferred stock asto dividends and liquidation rights.

 

(c)           Notapplicable.

 

(d)           Notapplicable.

 

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

**CAPITAL CROSSING PREFERRED CORPORATION**

 

 

Date: November 9, 2001

 

By: 

/s/Richard Wayne

 

 

 

Richard Wayne

 

 

President  (Principal Executive Officer)

 

 

 

 

 

 

 

 

 

Date: November 9, 2001

 

By: 

/s/Edward F. Mehm

 

 

 

Edward F. Mehm

 

 

Treasurer (Principal Financial  Officer)

 

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