##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2008
 Commission File Number 000-25193
 CAPITAL CROSSING PREFERRED CORPORATION
  Massachusetts
 04-3439366
 101 Summer Street, Boston, Massachusetts
 02110
 (617) 880-1000
 þ o
  Large accelerated filer oAccelerated filer oNon-accelerated filer þ(Do not check if a smaller reporting company)Smaller reporting company o o þ




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##### 



Capital Crossing Preferred Corporation
Table of Contents
 PagePART I  Financial InformationItem 1. Financial Statements (unaudited):Balance Sheets
    
    
    1Statements of Income
    
    
    2Statements of Changes in Stockholders Equity
    
    
    3Statements of Cash Flows
    
    
    4Notes to Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    6Executive Level Overview
    
    
    6Application of Critical Accounting Policies and Estimates
    
    
    7Results of Operations
    
    
    9Changes in Financial Conditions
    
    
    13Interest Rate Risk
    
    
    14Significant Concentration of Credit Risk
    
    
    14Liquidity Risk Management
    
    
    15Impact of Inflation and Changing Prices
    
    
    15Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    16PART II Other InformationItem 1A. Risk Factors
    
    
    17Item 4. Submission of Matters to a Vote of Security Holders
    
    
    17Item 5. Other Information
    
    
    17Item 6. Exhibits
    
    
    17Signatures
    
    
    18Exhibit Index
    
    
    19Ex-31.1 Certification of the PresidentEx-31.2 Certification of the Chief Financial OfficerEx-32 Certification of the President and Chief Financial Officer




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##### Table of Contents



PART I
 
 Item 1. Financial Statements
 
 Capital Crossing Preferred Corporation
Balance Sheets
(unaudited)
 September 30,
    
    
    December 31,2008
    
    
    2007(in thousands)ASSETSCash account with parent
    
    $
    208
    
    
    $
    208Interest bearing deposits with parent
    
    
    63,092
    
    
    
    50,373Total cash and cash equivalents
    
    
    63,300
    
    
    
    50,581Loans, net of discounts and net deferred loan income
    
    
    55,792
    
    
    
    66,654Less allowance for loan losses
    
    
    (970
    )
    
    
    (1,180
    )Loans, net
    
    
    54,822
    
    
    
    65,474Accrued interest receivable
    
    
    223
    
    
    
    298Other assets
    
    
    11
    
    
    
    5$
    118,356
    
    
    $
    116,358LIABILITIES AND STOCKHOLDERS EQUITYAccrued expenses and other liabilities
    
    $
    964
    
    
    $
    989Total liabilities
    
    
    964
    
    
    
    989Stockholders equity:Preferred stock, Series B, 8% cumulative, non-convertible;
$.01 par value; $1,000 liquidation value per share plus
accrued dividends; 1,000 shares authorized, 937 shares
issued and outstanding
    
    
    
    
    
    
    Preferred stock, Series D, 8.50% non-cumulative, exchangeable;
$.01 par value; $25 liquidation value per share; 1,725,000 shares
authorized, 1,500,000 shares issued and outstanding
    
    
    15
    
    
    
    15Common stock, $.01 par value, 100 shares authorized,
issued and outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    115,354
    
    
    
    115,354Retained earnings
    
    
    2,023
    
    
    
    Total stockholders equity
    
    
    117,392
    
    
    
    115,369$
    118,356
    
    
    $
    116,358
  1




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##### Table of Contents



Capital Crossing Preferred Corporation
Statements of Income
(unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)Interest income:Interest and fees on loans
    
    $
    1,298
    
    
    $
    1,532
    
    
    $
    3,845
    
    
    $
    5,449Interest on interest-bearing deposits
    
    
    269
    
    
    
    187
    
    
    
    739
    
    
    
    580Total interest income
    
    
    1,567
    
    
    
    1,719
    
    
    
    4,584
    
    
    
    6,029Reduction in allowance for loan losses
    
    
    55
    
    
    
    85
    
    
    
    210
    
    
    
    284Total interest income, after reduction in allowance for loan losses
    
    
    1,622
    
    
    
    1,804
    
    
    
    4,794
    
    
    
    6,313Other income:Guarantee fee income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30Total other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30Operating expenses:Loan servicing and advisory services
    
    
    52
    
    
    
    60
    
    
    
    151
    
    
    
    136Other general and administrative
    
    
    72
    
    
    
    52
    
    
    
    173
    
    
    
    118Total operating expenses
    
    
    124
    
    
    
    112
    
    
    
    324
    
    
    
    254Net income
    
    
    1,498
    
    
    
    1,692
    
    
    
    4,470
    
    
    
    6,089Preferred stock dividends
    
    
    816
    
    
    
    816
    
    
    
    2,447
    
    
    
    3,191Net income available to common stockholder
    
    $
    682
    
    
    $
    876
    
    
    $
    2,023
    
    
    $
    2,898
  2




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##### Table of Contents



Capital Crossing Preferred Corporation
Statements of Changes in Stockholders Equity
(unaudited)
 Nine Months ended September 30, 2008Preferred Stock
    
    
    Preferred Stock
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    TotalSeries B
    
    
    Series D
    
    
    Common Stock
    
    
    Paid-in
    
    
    Retained
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Equity(in thousands)Balance at December 31, 2007
    
    
    1
    
    
    $
    
    
    
    
    1,500
    
    
    $
    15
    
    
    
    
    
    
    $
    
    
    
    $
    115,354
    
    
    $
    
    
    
    $
    115,369Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,470
    
    
    
    4,470Cumulative dividends on preferred stock, Series B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56
    )
    
    
    (56
    )Dividends on preferred stock, Series D
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,391
    )
    
    
    (2,391
    )Balance at September 30, 2008
    
    
    1
    
    
    $
    
    
    
    
    1,500
    
    
    $
    15
    
    
    
    
    
    
    $
    
    
    
    $
    115,354
    
    
    $
    2,023
    
    
    $
    117,392
 Nine Months Ended September 30, 2007Preferred Stock
    
    
    Preferred Stock
    
    
    Preferred Stock
    
    
    Preferred Stock
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    TotalSeries A
    
    
    Series B
    
    
    Series C
    
    
    Series D
    
    
    Common Stock
    
    
    Paid-in
    
    
    Retained
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Equity(in thousands)Balance at December 31, 2006
    
    
    1,416
    
    
    $
    14
    
    
    
    1
    
    
    $
    
    
    
    
    1,840
    
    
    $
    18
    
    
    
    1,500
    
    
    $
    15
    
    
    
    
    
    
    $
    
    
    
    $
    172,640
    
    
    $
    
    
    
    $
    172,687Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,089
    
    
    
    6,089Redemption of preferred stock, Series
A and C
    
    
    (1,416
    )
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    (1,840
    )
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,529
    )
    
    
    
    
    
    
    (32,561
    )Dividends on preferred stock, Series A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (314
    )
    
    
    (314
    )Cumulative dividends on preferred
stock, Series B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56
    )
    
    
    (56
    )Dividends on preferred stock, Series C
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (430
    )
    
    
    (430
    )Dividends on preferred stock, Series D
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,391
    )
    
    
    (2,391
    )Balance at September 30, 2007
    
    
    
    
    
    $
    
    
    
    
    1
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    1,500
    
    
    $
    15
    
    
    
    
    
    
    $
    
    
    
    $
    140,111
    
    
    $
    2,898
    
    
    $
    143,024
  3




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Capital Crossing Preferred Corporation
Statements of Cash Flows
(unaudited)
 Nine Months EndedSeptember 30,2008
    
    
    2007(in thousands)Cash flows provided by operating activities:Net income
    
    $
    4,470
    
    
    $
    6,089Adjustments to reconcile net income to net cash provided by operating activities:Reduction in allowance for loan losses
    
    
    (210
    )
    
    
    (284
    )Other, net
    
    
    44
    
    
    
    (193
    )Net cash provided by operating activities
    
    
    4,304
    
    
    
    5,612Cash flows provided by investing activities:Loan repayments
    
    
    10,862
    
    
    
    17,183Net cash provided by investing activities
    
    
    10,862
    
    
    
    17,183Cash flows used in financing activities:Redemption of preferred stock, Series A and C
    
    
    
    
    
    
    (32,561
    )Payment of preferred stock dividends
    
    
    (2,447
    )
    
    
    (3,191
    )Net cash used in financing activities
    
    
    (2,447
    )
    
    
    (35,752
    )Net change in cash and cash equivalents
    
    
    12,719
    
    
    
    (12,957
    )Cash and cash equivalents at beginning of period
    
    
    50,581
    
    
    
    83,900Cash and cash equivalents at end of period
    
    $
    63,300
    
    
    $
    70,943
  4




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Capital Crossing Preferred Corporation
Notes to Financial Statements
Three and Nine Months Ended September 30, 2008 and 2007
 Note 1. Basis of Presentation
         Note 2. Recent Accounting Pronouncements
  5




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Note 3. Liquidation and Dissolution
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   
 Executive Level Overview
  6




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Application of Critical Accounting Policies and Estimates
  Discounts on Acquired Loans.
  7




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Allowance for Loan Losses.
    8




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Results of Operations for the Three Months Ended September 30, 2008 and 2007
 Interest income
  Three Months Ended September 30,2008
    
    
    2007Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestBalance
    
    
    Income
    
    
    Yield
    
    
    Balance
    
    
    Income
    
    
    Yield(dollars in thousands)Loans, net (1)
    
    $
    56,466
    
    
    $
    1,298
    
    
    
    9.14
    %
    
    $
    76,754
    
    
    $
    1,532
    
    
    
    7.92
    %Interest-bearing deposits
    
    
    61,181
    
    
    
    269
    
    
    
    1.75
    
    
    
    67,224
    
    
    
    187
    
    
    
    1.10Total interest-earning assets
    
    $
    117,647
    
    
    $
    1,567
    
    
    
    5.30
    %
    
    $
    143,978
    
    
    $
    1,719
    
    
    
    4.74
    %
 
 (1)
    
    Non-performing loans are excluded from average balance calculations.    9




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##### Table of Contents



Three Months Ended September 30,2008
    
    
    2007Interest
    
    
    
    
    
    
    InterestIncome
    
    
    Yield
    
    
    Income
    
    
    Yield(dollars in thousands)Regularly scheduled interest and accretion income
    
    $
    1,023
    
    
    
    7.20
    %
    
    $
    1,526
    
    
    
    7.89
    %Interest and fee income recognized on loan payoffs:Nonaccretable discount
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    0.00Accretable discount
    
    
    271
    
    
    
    1.91
    
    
    
    5
    
    
    
    0.03Other interest and fee income
    
    
    4
    
    
    
    0.03
    
    
    
    
    
    
    
    275
    
    
    
    1.94
    
    
    
    6
    
    
    
    0.03$
    1,298
    
    
    
    9.14
    %
    
    $
    1,532
    
    
    
    7.92
    %
   Reduction in allowance for loan losses
  Operating expenses
   10




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Results of Operations for the Nine Months Ended September 30, 2008 and 2007
 Interest income
  Nine Months Ended September 30,2008
    
    
    2007Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestBalance
    
    
    Income
    
    
    Yield
    
    
    Balance
    
    
    Income
    
    
    Yield(dollars in thousands)Loans, net (1)
    
    $
    60,766
    
    
    $
    3,845
    
    
    
    8.45
    %
    
    $
    82,967
    
    
    $
    5,449
    
    
    
    8.78
    %Interest-bearing deposits
    
    
    56,431
    
    
    
    739
    
    
    
    1.75
    
    
    
    69,485
    
    
    
    580
    
    
    
    1.12Total interest-earning assets
    
    $
    117,197
    
    
    $
    4,584
    
    
    
    5.22
    %
    
    $
    152,452
    
    
    $
    6,029
    
    
    
    5.29
    %
 
 (1)
    
    Non-performing loans are excluded from average balance calculations.    11




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Nine Months Ended September 30,2008
    
    
    2007Interest
    
    
    
    
    
    
    InterestIncome
    
    
    Yield
    
    
    Income
    
    
    Yield(dollars in thousands)Regularly scheduled interest and accretion income
    
    $
    3,324
    
    
    
    7.31
    %
    
    $
    5,009
    
    
    
    8.07
    %Interest and fee income recognized on loan payoffs:Nonaccretable discount
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    0.09Accretable discount
    
    
    459
    
    
    
    1.01
    
    
    
    292
    
    
    
    0.47Other interest and fee income
    
    
    62
    
    
    
    0.13
    
    
    
    92
    
    
    
    0.15521
    
    
    
    1.14
    
    
    
    440
    
    
    
    0.71$
    3,845
    
    
    
    8.45
    %
    
    $
    5,449
    
    
    
    8.78
    %
   Reduction in allowance for loan losses
  Other income
  Operating expenses
 12




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Preferred stock dividends
   
 Changes in Financial Condition
 Interest-bearing deposits with parent
  Loan portfolio
  September 30,
    
    
    December 31,2008
    
    
    2007(in thousands)Mortgage loans on real estate:Commercial real estate
    
    $
    32,886
    
    
    $
    41,400Multi-family residential
    
    
    21,921
    
    
    
    24,396One-to-four family residential
    
    
    1,000
    
    
    
    877Total
    
    
    55,807
    
    
    
    66,673Other
    
    
    13
    
    
    
    13Total loans, net of discounts
    
    
    55,820
    
    
    
    66,686Less:Allowance for loan losses
    
    
    (970
    )
    
    
    (1,180
    )Net deferred loan fees
    
    
    (28
    )
    
    
    (32
    )Loans, net
    
    $
    54,822
    
    
    $
    65,474
  13




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Discounts on Acquired Loans.
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)Balance at beginning of period
    
    $
    155
    
    
    $
    156
    
    
    $
    155
    
    
    $
    215Amounts collected under the cost recovery method
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (60
    )Balance at end of period
    
    $
    155
    
    
    $
    155
    
    
    $
    155
    
    
    $
    155
 Allowance for Loan Losses.
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)Balance at beginning of period
    
    $
    1,025
    
    
    $
    1,320
    
    
    $
    1,180
    
    
    $
    1,519Reduction in allowance for loan losses
    
    
    (55
    )
    
    
    (85
    )
    
    
    (210
    )
    
    
    (284
    )Balance at end of period
    
    $
    970
    
    
    $
    1,235
    
    
    $
    970
    
    
    $
    1,235
 
 Interest Rate Risk
  
 Significant Concentration of Credit Risk
  14




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Liquidity Risk Management
   
    
    to maintain an adequate portfolio size through the acquisition of additional
mortgage assets as mortgage assets currently in the loan portfolio mature, pay down
or prepay, and
    
    to pay dividends on the preferred shares and common shares.
   
 Impact of Inflation and Changing Prices
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   15




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##### Table of Contents



Within
    
    
    Over One
    
    
    Over Two
    
    
    Over Three
    
    
    Over Four
    
    
    OverOne
    
    
    to Two
    
    
    to Three
    
    
    to Four
    
    
    to Five
    
    
    FiveOvernight
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    Total(dollars in thousands)Interest-bearing deposits
    
    $
    63,092
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    63,0921.75
    %Fixed-rate loans (1)
    
    
    
    
    
    
    11,048
    
    
    
    7,971
    
    
    
    6,810
    
    
    
    5,181
    
    
    
    3,254
    
    
    
    7,092
    
    
    
    41,3567.83
    %
    
    
    7.46
    %
    
    
    7.60
    %
    
    
    7.44
    %
    
    
    6.99
    %
    
    
    6.72
    %Adjustable-rate loans (1)
    
    
    720
    
    
    
    10,603
    
    
    
    1,096
    
    
    
    550
    
    
    
    413
    
    
    
    291
    
    
    
    81
    
    
    
    13,75410.48
    %
    
    
    6.08
    %
    
    
    7.17
    %
    
    
    6.30
    %
    
    
    6.18
    %
    
    
    6.11
    %
    
    
    6.30
    %Total rate-sensitive assets
    
    $
    63,812
    
    
    $
    21,651
    
    
    $
    9,067
    
    
    $
    7,360
    
    
    $
    5,594
    
    
    $
    3,545
    
    
    $
    7,173
    
    
    $
    118,202
 
 (1)
    
    Loans are presented at net amounts before deducting the allowance for loan losses and exclude
non-performing loans.  
 Item 4. Controls and Procedures
   16




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##### Table of Contents



PART II
 
 Item 1A. Risk Factors
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 31.1
    
    Certification pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) of the President.31.2
    
    Certification pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) of the Chief Financial Officer.32
    
    Certification pursuant to 18 U.S.C. Section 1350 of the President and Chief Financial Officer.
 17




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##### Table of Contents



SIGNATURES
  CAPITAL CROSSING PREFERRED CORPORATION
 Date: November 14, 2008
    By:
    /s/  Daniel WallaceDaniel WallacePresident (Principal Executive Officer)Date: November 14, 2008
    By:
    /s/  Thomas OSullivanThomas OSullivanChief Financial Officer (Principal Financial Officer) 18




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##### Table of Contents



EXHIBIT INDEX
 PageExhibit
    
    Item
    
    Number31.1
    
    Certification pursuant to Exchange Act Rules
13a-15(e) and 15d-15(e) of the President.
    
    
    2031.2
    
    Certification pursuant to Exchange Act Rules
13a-15(e) and 15d-15(e) of the Chief Financial
Officer.
    
    
    2132
    
    Certification pursuant to 18 U.S.C. Section 1350
of the President and Chief Financial Officer.
    
    
    22
 19