##### 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, 2006
 Commission File Number 000-25193
 CAPITAL CROSSING PREFERRED CORPORATION
  Massachusetts
 04-3439366
 101 Summer Street, Boston, Massachusetts
 02110
 (617) 880-1000
 þ o
  o o þ
 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 Unaudited Interim 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
    
    
    8Changes in Financial Condition
    
    
    11Interest Rate Risk
    
    
    13Significant Concentration of Credit Risk
    
    
    13Liquidity Risk Management
    
    
    14Impact of Inflation and Changing Prices
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    14Item 4.
    
    Controls and Procedures
    
    
    15PART II Other InformationItem 1A.
    
    Risk Factors
    
    
    15Item 6.
    
    Exhibits
    
    
    23Signatures
    
    
    24Exhibit Index
    
    
    25Ex-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32 Section 906 Certification of CEO & CFO




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##### Table of Contents



PART I
 
 Item 1. Financial Statements
 Capital Crossing Preferred Corporation
 
 Balance Sheets
 (unaudited)
 September 30,
    
    
    December 31,2006
    
    
    2005(in thousands, except share data)ASSETSCash account with Capital Crossing Bank
    
    $
    201
    
    
    $
    102Interest bearing deposits with Capital Crossing Bank
    
    
    109,664
    
    
    
    88,304Total cash and cash equivalents
    
    
    109,865
    
    
    
    88,406Certificate of deposit
    
    
    200
    
    
    
    296Loans, net of discounts and net deferred loan income
    
    
    99,021
    
    
    
    116,061Less allowance for loan losses
    
    
    (1,687
    )
    
    
    (1,981
    )Loans, net
    
    
    97,334
    
    
    
    114,080Accrued interest receivable
    
    
    492
    
    
    
    544Other assets
    
    
    15
    
    
    
    $
    207,906
    
    
    $
    203,326LIABILITIES AND STOCKHOLDERS EQUITYAccrued expenses and other liabilities
    
    $
    1,254
    
    
    $
    1,230Total liabilities
    
    
    1,254
    
    
    
    1,230Stockholders 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
    
    
    
    14Preferred 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 C, 10.25% non-cumulative, exchangeable;
$.01 par value; $10 liquidation value per share; 1,840,000 shares
authorized, issued and outstanding
    
    
    18
    
    
    
    18Preferred 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
    
    
    202,049
    
    
    
    202,049Retained earnings
    
    
    4,556
    
    
    
    Total stockholders equity
    
    
    206,652
    
    
    
    202,096$
    207,906
    
    
    $
    203,326
  1




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##### Table of Contents



Capital Crossing Preferred Corporation
 
 Statements of Income
 (unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Interest income:Interest and fees on loans
    
    $
    2,978
    
    
    $
    3,437
    
    
    $
    7,643
    
    
    $
    8,544Interest on interest-bearing deposits
    
    
    287
    
    
    
    265
    
    
    
    797
    
    
    
    782Total interest income
    
    
    3,265
    
    
    
    3,702
    
    
    
    8,440
    
    
    
    9,326Credit for loan losses
    
    
    171
    
    
    
    182
    
    
    
    238
    
    
    
    525Total interest income, after credit for loan losses
    
    
    3,436
    
    
    
    3,884
    
    
    
    8,678
    
    
    
    9,851Other income:Gain on sale of loans
    
    
    272
    
    
    
    
    
    
    
    1,040
    
    
    
    Guarantee fee income
    
    
    20
    
    
    
    20
    
    
    
    60
    
    
    
    60Total other income
    
    
    292
    
    
    
    20
    
    
    
    1,100
    
    
    
    60Operating expenses:Loan servicing and advisory services
    
    
    72
    
    
    
    88
    
    
    
    228
    
    
    
    259Other general and administrative
    
    
    14
    
    
    
    21
    
    
    
    96
    
    
    
    140Total operating expenses
    
    
    86
    
    
    
    109
    
    
    
    324
    
    
    
    399Net income
    
    
    3,642
    
    
    
    3,795
    
    
    
    9,454
    
    
    
    9,512Preferred stock dividends
    
    
    1,633
    
    
    
    1,633
    
    
    
    4,898
    
    
    
    4,898Net income available to common stockholder
    
    $
    2,009
    
    
    $
    2,162
    
    
    $
    4,556
    
    
    $
    4,614
  2




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##### Table of Contents



Capital Crossing Preferred Corporation
 
 Statements of Changes in Stockholders Equity
 (unaudited)
 Nine Months Ended September 30, 2006Preferred 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(dollars in thousands)Balance at December 31, 2005
    
    
    1,416,130
    
    
    $
    14
    
    
    
    937
    
    
    $
    
    
    
    
    1,840,000
    
    
    $
    18
    
    
    
    1,500,000
    
    
    $
    15
    
    
    
    100
    
    
    $
    
    
    
    $
    202,049
    
    
    $
    
    
    
    $
    202,096Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,454
    
    
    
    9,454Dividends on preferred stock,
Series A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,036
    )
    
    
    (1,036
    )Cumulative dividends on
preferred stock, Series B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56
    )
    
    
    (56
    )Dividends on preferred stock,
Series C
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,415
    )
    
    
    (1,415
    )Dividends on preferred stock,
Series D
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,391
    )
    
    
    (2,391
    )Balance at September 30, 2006
    
    
    1,416,130
    
    
    $
    14
    
    
    
    937
    
    
    $
    
    
    
    
    1,840,000
    
    
    $
    18
    
    
    
    1,500,000
    
    
    $
    15
    
    
    
    100
    
    
    $
    
    
    
    $
    202,049
    
    
    $
    4,556
    
    
    $
    206,652
 Nine Months Ended September 30, 2005Preferred 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(dollars in thousands)Balance at December 31, 2004
    
    
    1,416,130
    
    
    $
    14
    
    
    
    940
    
    
    $
    
    
    
    
    1,840,000
    
    
    $
    18
    
    
    
    1,500,000
    
    
    $
    15
    
    
    
    100
    
    
    $
    
    
    
    $
    216,122
    
    
    $
    
    
    
    $
    216,169Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,512
    
    
    
    9,512Dividends on preferred stock,
Series A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,036
    )
    
    
    (1,036
    )Cumulative dividends on
preferred stock, Series B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56
    )
    
    
    (56
    )Dividends on preferred stock,
Series C
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,415
    )
    
    
    (1,415
    )Dividends on preferred stock,
Series D
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,391
    )
    
    
    (2,391
    )Repurchase of preferred stock,
Series B
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Balance at September 30, 2005
    
    
    1,416,130
    
    
    $
    14
    
    
    
    937
    
    
    $
    
    
    
    
    1,840,000
    
    
    $
    18
    
    
    
    1,500,000
    
    
    $
    15
    
    
    
    100
    
    
    $
    
    
    
    $
    216,119
    
    
    $
    4,614
    
    
    $
    220,780
  3




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##### Table of Contents



Capital Crossing Preferred Corporation
 
 Statements of Cash Flows
 (unaudited)
 Nine Months Ended September 30,2006
    
    
    2005(in thousands)Cash flows provided by operating activities:Net income
    
    $
    9,454
    
    
    $
    9,512Adjustments to reconcile net income to net cash provided by operating activities:Credit for loan losses
    
    
    (238
    )
    
    
    (525
    )Gain on sale of loans
    
    
    (1,040
    )
    
    
    Other, net
    
    
    61
    
    
    
    (288
    )Net cash provided by operating activities
    
    
    8,237
    
    
    
    8,699Cash flows provided by investing activities:Loan repayments
    
    
    15,352
    
    
    
    17,141Purchases of loans from Capital Crossing Bank
    
    
    
    
    
    
    (15,343
    )Proceeds from loan sales
    
    
    2,672
    
    
    
    Net decrease in certificates of deposit
    
    
    96
    
    
    
    3Net cash provided by investing activities
    
    
    18,120
    
    
    
    1,801Cash flows used in financing activities:Repurchase of preferred stock, Series B
    
    
    
    
    
    
    (3
    )Payment of preferred stock dividends
    
    
    (4,898
    )
    
    
    (4,898
    )Net cash used in financing activities
    
    
    (4,898
    )
    
    
    (4,901
    )Net change in cash and cash equivalents
    
    
    21,459
    
    
    
    5,599Cash and cash equivalents at beginning of period
    
    
    88,406
    
    
    
    95,407Cash and cash equivalents at end of period
    
    $
    109,865
    
    
    $
    101,006
  4




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##### Table of Contents



Capital Crossing Preferred Corporation
 
 Notes to Unaudited Interim Financial Statements
 Three and Nine Month Periods Ended September 30, 2006 and 2005
 Note 1. Basis of Presentation
      Note 2. Commitments and Contingencies
 Guarantees
  5




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##### Table of Contents



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




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##### Table of Contents



Application of Critical Accounting Policies and Estimates
  Allowance for Loan Losses.
   Discounts on Acquired Loans.
  7




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##### Table of Contents



Results of Operations for the Three Months Ended September 30, 2006 and 2005
 Interest Income
  Three Months Ended September 30,2006
    
    
    2005Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestBalance
    
    
    Income
    
    
    Yield
    
    
    Balance
    
    
    Income
    
    
    Yield(dollars in thousands)Loans, net (1)
    
    $
    103,329
    
    
    $
    2,978
    
    
    
    11.43
    %
    
    $
    125,824
    
    
    $
    3,437
    
    
    
    10.84
    %Interest-bearing deposits
    
    
    103,355
    
    
    
    287
    
    
    
    1.10
    
    
    
    95,328
    
    
    
    265
    
    
    
    1.10Total interest-earning assets
    
    $
    206,684
    
    
    $
    3,265
    
    
    
    6.27
    %
    
    $
    221,152
    
    
    $
    3,702
    
    
    
    6.64
    %
 
 (1)
    
    Non-performing loans are excluded from average balance calculations.  8
    Table of Contents      Three Months Ended September 30,2006
    
    
    2005Interest
    
    
    
    
    
    
    InterestIncome
    
    
    Yield
    
    
    Income
    
    
    Yield(dollars in thousands)Regularly scheduled interest and accretion income
    
    $
    2,135
    
    
    
    8.20
    %
    
    $
    2,469
    
    
    
    7.79
    %Interest and fee income recognized on loan pay-offs:Nonaccretable discount
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    Accretable discount
    
    
    284
    
    
    
    1.09
    
    
    
    542
    
    
    
    1.71Other interest and fee income
    
    
    559
    
    
    
    2.14
    
    
    
    424
    
    
    
    1.34843
    
    
    
    3.23
    
    
    
    968
    
    
    
    3.05$
    2,978
    
    
    
    11.43
    %
    
    $
    3,437
    
    
    
    10.84
    %
   Credit for loan losses
  Other Income
  Operating expenses
  9




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##### Table of Contents



Results of Operations for the Nine Months Ended September 30, 2006 and 2005
 Interest Income
  Nine Months Ended September 30,2006
    
    
    2005Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestBalance
    
    
    Income
    
    
    Yield
    
    
    Balance
    
    
    Income
    
    
    Yield(dollars in thousands)Loans, net (1)
    
    $
    108,885
    
    
    $
    7,643
    
    
    
    9.38
    %
    
    $
    124,630
    
    
    $
    8,544
    
    
    
    9.17
    %Interest-bearing deposits
    
    
    96,547
    
    
    
    797
    
    
    
    1.10
    
    
    
    94,874
    
    
    
    782
    
    
    
    1.10Total interest-earning assets
    
    $
    205,432
    
    
    $
    8,440
    
    
    
    5.49
    %
    
    $
    219,504
    
    
    $
    9,326
    
    
    
    5.68
    %
 
 (1)
    
    Non-performing loans are excluded from average balance calculations.     10




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##### Table of Contents



Nine Months Ended September 30,2006
    
    
    2005Interest
    
    
    
    
    
    
    InterestIncome
    
    
    Yield
    
    
    Income
    
    
    Yield(dollars in thousands)Regularly scheduled interest and accretion income
    
    $
    6,622
    
    
    
    8.13
    %
    
    $
    7,304
    
    
    
    7.84
    %Interest and fee income recognized on loan pay-offs:Nonaccretable discount
    
    
    14
    
    
    
    0.02
    
    
    
    37
    
    
    
    0.04Accretable discount
    
    
    436
    
    
    
    0.53
    
    
    
    743
    
    
    
    0.80Other interest and fee income
    
    
    571
    
    
    
    0.70
    
    
    
    460
    
    
    
    0.491,021
    
    
    
    1.25
    
    
    
    1,240
    
    
    
    1.33$
    7,643
    
    
    
    9.38
    %
    
    $
    8,544
    
    
    
    9.17
    %
   Credit for loan losses
  Other income
  Operating expenses
   
 Changes in Financial Condition
 Interest-bearing Deposits with Capital Crossing Bank
  11




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##### Table of Contents



Loan Portfolio
  September 30,
    
    
    December 31,2006
    
    
    2005(in thousands)Mortgage loans on real estate:Commercial real estate
    
    $
    63,751
    
    
    $
    76,398Multi-family residential
    
    
    34,324
    
    
    
    38,392One-to-four family residential
    
    
    993
    
    
    
    1,305Total
    
    
    99,068
    
    
    
    116,095Other
    
    
    14
    
    
    
    21Total loans, net of discounts
    
    
    99,082
    
    
    
    116,116Less:Allowance for loan losses
    
    
    (1,687
    )
    
    
    (1,981
    )Net deferred loan fees
    
    
    (61
    )
    
    
    (55
    )Loans, net
    
    $
    97,334
    
    
    $
    114,080
    Discounts on Acquired Loans.
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Balance at beginning of period
    
    $
    595
    
    
    $
    776
    
    
    $
    754
    
    
    $
    883Accretion (1)
    
    
    (11
    )
    
    
    (5
    )
    
    
    (45
    )
    
    
    (59
    )Transfers to accretable portion upon improvements in cash flows
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53
    )Net reductions related to loans sold
    
    
    (239
    )
    
    
    
    
    
    
    (490
    )
    
    
    Increases related to loan restructures
    
    
    
    
    
    
    
    
    
    
    126
    
    
    
    Balance at end of period
    
    $
    345
    
    
    $
    771
    
    
    $
    345
    
    
    $
    771
 
 (1)
    
    Accretion of nonaccretable discount is recognized using the cost recovery method. 12




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##### Table of Contents



Allowance for Loan Losses.
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Balance at beginning of period
    
    $
    1,894
    
    
    $
    2,154
    
    
    $
    1,981
    
    
    $
    2,497Credit for loan losses
    
    
    (171
    )
    
    
    (182
    )
    
    
    (238
    )
    
    
    (525
    )Net reduction relating to loans sold
    
    
    (36
    )
    
    
    
    
    
    
    (56
    )
    
    
    Balance at end of period
    
    $
    1,687
    
    
    $
    1,972
    
    
    $
    1,687
    
    
    $
    1,972
 
 Interest Rate Risk
  
 Significant Concentration of Credit Risk
   13




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##### Table of Contents



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
   14




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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 in banks
    
    $
    109,664
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    109,6641.10
    %Certificates of deposit
    
    
    
    
    
    
    200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2003.10
    %Fixed-rate loans (1)
    
    
    
    
    
    
    15,914
    
    
    
    10,717
    
    
    
    7,654
    
    
    
    5,712
    
    
    
    4,560
    
    
    
    15,871
    
    
    
    60,4288.32
    %
    
    
    8.10
    %
    
    
    7.97
    %
    
    
    7.58
    %
    
    
    7.52
    %
    
    
    7.11
    %Adjustable-rate loans (1)
    
    
    7,049
    
    
    
    25,813
    
    
    
    2,021
    
    
    
    1,797
    
    
    
    1,286
    
    
    
    302
    
    
    
    325
    
    
    
    38,59310.50
    %
    
    
    8.22
    %
    
    
    7.24
    %
    
    
    7.45
    %
    
    
    6.58
    %
    
    
    6.94
    %
    
    
    8.06
    %Total rate-sensitive assets
    
    $
    116,713
    
    
    $
    41,927
    
    
    $
    12,738
    
    
    $
    9,451
    
    
    $
    6,998
    
    
    $
    4,862
    
    
    $
    16,196
    
    
    $
    208,885
 
 (1)
    
    Loans are presented at net amounts before deducting the allowance for loan losses and
exclude non-performing loans.   
 Item 4. Controls and Procedures
   
 PART II
 
 Item 1A. Risk Factors
 Set forth below are a number of risk factors that may cause Capital Crossing Preferreds
actual results to differ materially from anticipated future results, performance or achievements
expressed or implied by the forward-looking statement.
 All of these factors should be carefully reviewed, and the reader of this Quarterly Report on
Form 10-Q should be aware that there may be other factors that could cause these differences.
 15




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##### Table of Contents



General Business Risks
 A decline in Capital Crossings capital levels may result in the Series A, Series C and Series D
preferred shares being subject to automatic exchange into preferred shares of Capital Crossing
  
    
    a holder of Series A, Series C or Series D preferred shares would be a preferred
stockholder of Capital Crossing at a time when Capital Crossings financial condition was
deteriorating or when Capital Crossing had been placed into bankruptcy, reorganization,
conservatorship or receivership and, accordingly, it is unlikely that Capital Crossing would
be in a financial position to pay any dividends on the preferred shares of Capital Crossing.
An investment in Capital Crossing is also subject to risks that are distinct from the risks
associated with an investment in Capital Crossing Preferred. For example, an investment in
Capital Crossing would involve risks relating to the capital levels of, and other federal
and state regulatory requirements applicable to Capital Crossing and the performance of
Capital Crossings overall loan portfolio and other business lines. Capital Crossing also
has significantly greater liabilities and significantly less stockholders equity than does
Capital Crossing Preferred;
    
    if a liquidation of Capital Crossing occurs, the claims of depositors and creditors of
Capital Crossing and of the FDIC would have priority over the claims of holders of the
preferred shares of Capital Crossing, and therefore, a holder of Series A, Series C and
Series D preferred shares likely would receive, if anything, substantially less than such
holder would receive had the Series A, Series C and Series D preferred shares not been
exchanged for preferred shares of Capital Crossing; and
    
    the exchange of the Series A, Series C or Series D preferred shares for preferred shares
of Capital Crossing would be a taxable event to a holder of Series A, Series C or Series D
preferred shares under the Internal Revenue Code, and such holder would incur a gain or a
loss, as the case may be, measured by the difference between such holders basis in the
Series A, Series C or Series D preferred shares and the fair market value of Capital
Crossing preferred shares received in the exchange.
  Because of Capital Crossing Preferreds obligations to creditors, it may not be able to make
dividend or liquidation payments to holders of the Series A, Series C and Series D preferred shares
  
    
    junior to borrowings of Capital Crossing Preferred, including claims of the FHLBB for
amounts due or which may become due under Capital Crossing Preferreds guarantee of Capital
Crossings obligations to the FHLBB, and any other obligations to Capital Crossing
Preferreds creditors upon its liquidation. As of September 30, 2006, Capital Crossing had
$120.2 million in outstanding FHLBB borrowings; and
    
    senior to Capital Crossing Preferreds common stock and its Series B preferred stock with
regard to payment of dividends and amounts upon liquidation.
   16




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##### Table of Contents



Bank regulators may limit the ability of Capital Crossing Preferred to implement its business plan
and may restrict its ability to pay dividends
     Capital Crossing Preferreds results will be affected by factors beyond its control
  
    
    local and other economic conditions affecting real estate values;
    
    the continued financial stability of a borrower and the borrowers ability to make mortgage payments;
    
    the ability of tenants to make lease payments;
 17




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##### Table of Contents




    
    the ability of a property to attract and retain tenants, which may in turn be affected by
local conditions, such as oversupply of space or a reduction in demand for rental space in
the area;
    
    regional experiences of adverse business conditions or natural disasters;
    
    interest rate levels and the availability of credit to refinance mortgage loans at or prior to maturity; and
    
    increased operating costs, including energy costs, real estate taxes and costs of
compliance with environmental controls and regulations.
 Capital Crossing Preferreds loans are concentrated in California and New England and adverse
conditions in those markets could adversely affect its operations
  A substantial majority of Capital Crossing Preferreds loans were originated by other parties
  More than half of Capital Crossing Preferreds loan portfolio is made up of commercial mortgage
loans which are generally riskier than other types of loans
  18




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##### Table of Contents



Capital Crossing Preferred may not be able to purchase loans at the same volumes or with the same
yields as it has historically purchased
  
    
    from institutions which sought to eliminate certain loans or categories of loans from their portfolios;
    
    from institutions participating in securitization programs;
    
    from failed or consolidating financial institutions; and
    
    from government agencies.
  Capital Crossing Preferred could be held responsible for environmental liabilities of properties it
acquires through foreclosure
  Capital Crossing Preferred is dependent in virtually every phase of its operations on the diligence
and skill of the management of Capital Crossing
    19




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##### Table of Contents



Capital Crossing Preferreds relationship with Capital Crossing may create conflicts of interest
  Acquisition of mortgage assets.
 Servicing of Capital Crossing Preferred mortgage assets by Capital Crossing.
 Future dispositions by Capital Crossing Preferred of mortgage assets to Capital Crossing or
its affiliates.
 Future modifications of the advisory agreement or master service agreement.
 The terms of Capital Crossing Preferreds guarantee of obligations of Capital Crossing.
 20




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##### Table of Contents



The master loan purchase agreement was not the result of arms-length negotiations.
 Neither Capital Crossing Preferred nor Capital Crossing have specific policies with respect to the
purchase by Capital Crossing Preferred from Capital Crossing of particular loans or pools of loans
  Capital Crossing Preferreds Board of Directors has broad discretion to revise Capital Crossing
Preferreds strategies
  Capital Crossing Preferred does not obtain third-party valuations and therefore it may pay more or
receive less than fair market value for its mortgage assets
  Capital Crossing Preferred may pay more than fair market value for mortgages it purchases from
Capital Crossing because it does not engage in arms- length negotiations with Capital Crossing
  21




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##### Table of Contents



Fluctuations in interest rates could reduce Capital Crossing Preferred earnings and affect its
ability to pay dividends
  Tax Risks Related to REITs
 If Capital Crossing Preferred fails to qualify as a REIT, it will be subject to federal income tax
at regular corporate rates
   If Capital Crossing Preferred does not distribute 90% of its net taxable income, it may not qualify
as a REIT
  Capital Crossing Preferred may redeem the Series A, Series C and Series D preferred shares at any
time upon the occurrence of a tax event
  22




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##### Table of Contents




    
    dividends paid by Capital Crossing Preferred with respect to its capital stock are not
fully deductible by it for income tax purposes; or
    
    Capital Crossing Preferred are otherwise unable to qualify as a REIT.
  Capital Crossing Preferred has imposed ownership limitations to protect its ability to qualify as a
REIT, however, if ownership of the common stock of Capital Crossing becomes concentrated in a small
number of individuals Capital Crossing Preferred may fail to qualify as a REIT
  
 Item 6. Exhibits
 31.1
    
    Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the President.31.2
    
    Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the Treasurer.32
    
    Certification pursuant to 18 U.S.C. Section 1350 of the President and Treasurer.
 23




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##### Table of Contents



SIGNATURES
  CAPITAL CROSSING PREFERRED CORPORATIONDate: November 8, 2006
    By:
    /s/ Richard WayneRichard WaynePresident (Principal Executive Officer)Date: November 8, 2006
    By:
    /s/ Edward F. MehmEdward F. MehmTreasurer (Principal Financial Officer) 24




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##### Table of Contents



EXHIBIT INDEX
 Exhibit
    
    Item
    
    Page Number31.1
    
    Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the President.
    
    2631.2
    
    Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the Treasurer.
    
    2732
    
    Certification pursuant to 18 U.S.C. Section 1350 of the President and Treasurer.
    
    28
 25