##### 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
   CAPITAL CROSSING PREFERRED CORPORATION
  Massachusetts  (State or other jurisdiction of incorporation or organization)
 04-3439366  (I.R.S. Employer Identification Number)
 101 Summer Street, Boston, Massachusetts
 02110  (Zip Code)
 (617) 880-1000  (Registrants telephone number, including area code)
 þ 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 Unaudited Interim Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsExecutive Level Overview
    
    
    6Application of Critical Accounting Policies and Estimates
    
    
    7Results of Operations
    
    
    9Changes in Financial Condition
    
    
    12Interest Rate Risk
    
    
    15Significant Concentration of Credit Risk
    
    
    15Liquidity Risk Management
    
    
    15Impact of Inflation and Changing Prices
    
    
    16Certain Factors That May Affect Future Operating Results
    
    
    16Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    24PART II Other InformationItem 6. Exhibits and Reports on Form 8-K
    
    
    25Signatures
    
    
    26Exhibit Index
    
    
    27EX-31.1 Section 302 Certification of CEOEX-31,2 Section 302 Certification of CFOEX-32 Section 906 Certification of CEO and CFO




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##### Table of Contents



PART I
 
 Item 1. Financial Statements
 Capital Crossing Preferred Corporation
 
 Balance Sheets
(unaudited)
 June 30,
    
    December 31,2005
    
    2004(in thousands)ASSETSCash account with Capital Crossing Bank
    
    $
    99
    
    
    $
    92Interest bearing deposits with Capital Crossing Bank
    
    
    89,680
    
    
    
    95,315Total cash and cash equivalents
    
    
    89,779
    
    
    
    95,407Certificate of deposit
    
    
    296
    
    
    
    300Loans, net of discounts and net deferred loan income
    
    
    131,248
    
    
    
    123,932Less allowance for loan losses
    
    
    (2,154
    )
    
    
    (2,497
    )Loans, net
    
    
    129,094
    
    
    
    121,435Accrued interest receivable
    
    
    635
    
    
    
    544Other assets
    
    
    28
    
    
    
    $
    219,832
    
    
    $
    217,686LIABILITIES AND STOCKHOLDERS EQUITYDue to Capital Crossing Bank
    
    $
    3
    
    
    $
    289Accrued expenses and other liabilities
    
    
    1,210
    
    
    
    1,228Total liabilities
    
    
    1,213
    
    
    
    1,517Stockholders 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, 938 and 940 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
    
    
    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
    
    
    216,120
    
    
    
    216,122Retained earnings
    
    
    2,452
    
    
    
    Total stockholders equity
    
    
    218,619
    
    
    
    216,169$
    219,832
    
    
    $
    217,686
  1




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##### Table of Contents



Capital Crossing Preferred Corporation
 
 Statements of Income
(unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(in thousands)Interest income:Interest and fees on loans
    
    $
    2,622
    
    
    $
    4,195
    
    
    $
    5,107
    
    
    $
    8,039Interest on interest-bearing deposits
    
    
    252
    
    
    
    314
    
    
    
    517
    
    
    
    518Total interest income
    
    
    2,874
    
    
    
    4,509
    
    
    
    5,624
    
    
    
    8,557Credit for loan losses
    
    
    215
    
    
    
    353
    
    
    
    343
    
    
    
    764Total interest income, after credit for loan losses
    
    
    3,089
    
    
    
    4,862
    
    
    
    5,967
    
    
    
    9,321Other income:Gain on sale of loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76Guarantee fee income
    
    
    20
    
    
    
    20
    
    
    
    40
    
    
    
    40Total other income
    
    
    20
    
    
    
    20
    
    
    
    40
    
    
    
    116Operating expenses:Loan servicing and advisory services
    
    
    91
    
    
    
    95
    
    
    
    171
    
    
    
    201Other general and administrative
    
    
    59
    
    
    
    54
    
    
    
    119
    
    
    
    133Total operating expenses
    
    
    150
    
    
    
    149
    
    
    
    290
    
    
    
    334Net income
    
    
    2,959
    
    
    
    4,733
    
    
    
    5,717
    
    
    
    9,103Preferred stock dividends
    
    
    1,633
    
    
    
    1,287
    
    
    
    3,265
    
    
    
    2,122Net income available to common stockholder
    
    $
    1,326
    
    
    $
    3,446
    
    
    $
    2,452
    
    
    $
    6,981
  2




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##### Table of Contents



Capital
Crossing Preferred Corporation
 
 Statements of Changes in Stockholders Equity
(unaudited)
 Six Months Ended June 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,717
    
    
    
    5,717Dividends on preferred stock,
Series A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (690
    )
    
    
    (690
    )Cumulative dividends on
preferred stock, Series B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38
    )
    
    
    (38
    )Dividends on preferred stock,
Series C
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (943
    )
    
    
    (943
    )Dividends on preferred stock,
Series D
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,594
    )
    
    
    (1,594
    )Repurchase of preferred stock,
Series B
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )Balance at June 30, 2005
    
    
    1,416,130
    
    
    $
    14
    
    
    
    938
    
    
    $
    
    
    
    
    1,840,000
    
    
    $
    18
    
    
    
    1,500,000
    
    
    $
    15
    
    
    
    100
    
    
    $
    
    
    
    $
    216,120
    
    
    $
    2,452
    
    
    $
    218,619
 Six Months Ended June 30, 2004Preferred 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, 2003
    
    
    1,416,130
    
    
    $
    14
    
    
    
    941
    
    
    $
    
    
    
    
    1,840,000
    
    
    $
    18
    
    
    
    
    
    
    $
    
    
    
    
    100
    
    
    $
    
    
    
    $
    211,240
    
    
    $
    10,158
    
    
    $
    221,430Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,103
    
    
    
    9,103Net proceeds from issuance of
preferred stock, Series D
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,500,000
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    35,244
    
    
    
    
    
    
    
    35,259Dividends on preferred stock,
Series A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (690
    )
    
    
    (690
    )Cumulative dividends on
preferred stock, Series B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38
    )
    
    
    (38
    )Dividends on preferred stock,
Series C
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    (943
    )
    
    
    (943
    )Dividends on preferred stock,
Series D
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (451
    )
    
    
    (451
    )Repurchase of preferred stock,
Series B
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Balance at June 30, 2004
    
    
    1,416,130
    
    
    $
    14
    
    
    
    940
    
    
    $
    
    
    
    
    1,840,000
    
    
    $
    18
    
    
    
    1,500,000
    
    
    $
    15
    
    
    
    100
    
    
    $
    
    
    
    $
    246,483
    
    
    $
    17,139
    
    
    $
    263,669
  3




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##### Table of Contents



Capital Crossing Preferred Corporation
 
 Statements of Cash Flows
(unaudited)
 Six Months Ended June 30,2005
    
    2004(in thousands)Cash flows provided by operating activities:Net income
    
    $
    5,717
    
    
    $
    9,103Adjustments to reconcile net income to net cash provided by operating activities:Credit for loan losses
    
    
    (343
    )
    
    
    (764
    )Gain on sale of loans
    
    
    
    
    
    
    (76
    )Other, net
    
    
    (423
    )
    
    
    904Net cash provided by operating activities
    
    
    4,951
    
    
    
    9,167Cash flows (used in) provided by investing activities:Loan repayments
    
    
    8,027
    
    
    
    29,346Purchases of loans from Capital Crossing Bank
    
    
    (15,343
    )
    
    
    Proceeds from loan sales
    
    
    
    
    
    
    495Proceeds from redemption of certificate of deposit
    
    
    4
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (7,312
    )
    
    
    29,841Cash flows (used in) provided by financing activities:Issuance of preferred stock, series D
    
    
    
    
    
    
    35,259Repurchase of preferred stock, Series B
    
    
    (2
    )
    
    
    (1
    )Payment of preferred stock dividends
    
    
    (3,265
    )
    
    
    (2,122
    )Net cash (used in) provided by financing activities
    
    
    (3,267
    )
    
    
    33,136Net change in cash and cash equivalents
    
    
    (5,628
    )
    
    
    72,144Cash and cash equivalents at beginning of period
    
    
    95,407
    
    
    
    65,845Cash and cash equivalents at end of period
    
    $
    89,779
    
    
    $
    137,989
  4




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##### Table of Contents



Capital Crossing Preferred Corporation
 
 Notes to Unaudited Financial Statements
Three and Six Month Periods Ended June 30, 2005 and 2004
 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.
   7




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##### Table of Contents



Discounts on Acquired Loans.
        8




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##### Table of Contents



Results of Operations for the Three Months Ended June 30, 2005 and 2004
 Interest Income
  Three Months Ended June 30,2005
    
    2004Average
    
    Interest
    
    
    
    
    
    Average
    
    InterestBalance
    
    Income
    
    Yield
    
    Balance
    
    Income
    
    Yield(dollars in thousands)Loans, net (1)
    
    $
    127,652
    
    
    $
    2,622
    
    
    
    8.24
    %
    
    $
    134,358
    
    
    $
    4,195
    
    
    
    12.56
    %Interest-bearing deposits
    
    
    91,469
    
    
    
    252
    
    
    
    1.11
    
    
    
    114,765
    
    
    
    314
    
    
    
    1.10Total interest-earning assets
    
    $
    219,121
    
    
    $
    2,874
    
    
    
    5.26
    %
    
    $
    249,123
    
    
    $
    4,509
    
    
    
    7.28
    %
 
 (1)
    
    Non-performing loans are excluded from average balance and average yield calculations.     Three Months Ended June 30,2005
    
    2004Interest
    
    
    
    
    
    InterestIncome
    
    Yield
    
    Income
    
    Yield(dollars in thousands)Regularly scheduled interest and accretion income
    
    $
    2,490
    
    
    
    7.82
    %
    
    $
    2,618
    
    
    
    7.84
    %Interest and fee income recognized on loan pay-offs:Nonaccretable discount
    
    
    35
    
    
    
    0.11
    
    
    
    
    
    
    
    Accretable discount
    
    
    97
    
    
    
    0.31
    
    
    
    1,392
    
    
    
    4.17Other interest and fee income
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    0.55132
    
    
    
    0.42
    
    
    
    1,577
    
    
    
    4.72$
    2,622
    
    
    
    8.24
    %
    
    $
    4,195
    
    
    
    12.56
    %
 9




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##### Table of Contents



Credit for loan losses
  Operating expenses
   Preferred stock dividends
  Results of Operations for the Six Months Ended June 30, 2005 and 2004
 Interest Income
  Six Months Ended June 30,2005
    
    2004Average
    
    Interest
    
    
    
    
    
    Average
    
    InterestBalance
    
    Income
    
    Yield
    
    Balance
    
    Income
    
    Yield(dollars in thousands)Loans, net (1)
    
    $
    124,023
    
    
    $
    5,107
    
    
    
    8.30
    %
    
    $
    142,680
    
    
    $
    8,039
    
    
    
    11.33
    %Interest-bearing deposits
    
    
    94,644
    
    
    
    517
    
    
    
    1.10
    
    
    
    94,692
    
    
    
    518
    
    
    
    1.10Total interest-earning assets
    
    $
    218,667
    
    
    $
    5,624
    
    
    
    5.19
    %
    
    $
    237,372
    
    
    $
    8,557
    
    
    
    7.25
    %
 
 (1)
    
    Non-performing loans are excluded from average balance and average yield calculations. 10




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##### Table of Contents



Six Months Ended June 30,2005
    
    2004Interest
    
    
    
    
    
    InterestIncome
    
    Yield
    
    Income
    
    Yield(dollars in thousands)Regularly scheduled interest and accretion income
    
    $
    4,835
    
    
    
    7.86
    %
    
    $
    5,534
    
    
    
    7.80
    %Interest and fee income recognized on loan pay-offs:Nonaccretable discount
    
    
    35
    
    
    
    0.06
    
    
    
    91
    
    
    
    0.13Accretable discount
    
    
    201
    
    
    
    0.32
    
    
    
    2,111
    
    
    
    2.97Other interest and fee income
    
    
    36
    
    
    
    0.06
    
    
    
    303
    
    
    
    0.43272
    
    
    
    0.44
    
    
    
    2,505
    
    
    
    3.53$
    5,107
    
    
    
    8.30
    %
    
    $
    8,039
    
    
    
    11.33
    %
   Credit for loan losses
  11




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##### Table of Contents



Other income
  Operating expenses
   Preferred stock dividends
  
 Changes in Financial Condition
 Interest-bearing Deposits with Capital Crossing Bank
  Loan Portfolio
  June 30,
    
    December 31,2005
    
    2004(in thousands)Mortgage loans on real estate:Commercial real estate
    
    $
    82,979
    
    
    $
    83,236Multi-family residential
    
    
    43,094
    
    
    
    35,866Land
    
    
    3,882
    
    
    
    4,011One-to-four family residential
    
    
    1,337
    
    
    
    858Total
    
    
    131,292
    
    
    
    123,971Other
    
    
    21
    
    
    
    23Total loans, net of discounts
    
    
    131,313
    
    
    
    123,994Less:Allowance for loan losses
    
    
    (2,154
    )
    
    
    (2,497
    )Net deferred loan fees
    
    
    (65
    )
    
    
    (62
    )Loans, net
    
    $
    129,094
    
    
    $
    121,435
  12




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##### Table of Contents



Discounts on Acquired Loans.
       Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(in thousands)Balance at beginning of period
    
    $
    819
    
    
    $
    1,192
    
    
    $
    883
    
    
    $
    1,524Accretion
    
    
    (43
    )
    
    
    
    
    
    
    (54
    )
    
    
    (91
    )Transfers to accretable portion upon improvements in cash flows
    
    
    
    
    
    
    (25
    )
    
    
    (53
    )
    
    
    (155
    )Net reductions related to loans sold
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (111
    )Balance at end of period
    
    $
    776
    
    
    $
    1,167
    
    
    $
    776
    
    
    $
    1,167
 13




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##### Table of Contents



Allowance for Loan Losses.
     Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(in thousands)Balance at beginning of period
    
    $
    2,369
    
    
    $
    2,821
    
    
    $
    2,497
    
    
    $
    3,281Credit for loan losses
    
    
    (215
    )
    
    
    (353
    )
    
    
    (343
    )
    
    
    (764
    )Net reduction relating to loans sold
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49
    )Balance at end of period
    
    $
    2,154
    
    
    $
    2,468
    
    
    $
    2,154
    
    
    $
    2,468
 14




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##### Table of Contents



Interest Rate Risk
  
 Significant Concentration of Credit Risk
   
 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.
   15




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##### Table of Contents



Impact of Inflation and Changing Prices
   
 CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
 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.
 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 June 30, 2005, Capital Crossing had $163.7
million in outstanding FHLBB borrowings; and
 16




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##### Table of Contents




    
    senior to Capital Crossing Preferreds common stock and its Series B preferred stock with
regard to payment of dividends and amounts upon liquidation.
   Bank regulators may limit the ability of Capital Crossing Preferred to implement its business plan
and may restrict its ability to pay dividends
     17




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##### Table of Contents



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;
    
    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;
    
    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
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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
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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 3. Quantitative and Qualitative Disclosures About Market Risk
     Within
    
    One to
    
    Two to
    
    Three to
    
    Four to
    
    OverOne
    
    Two
    
    Three
    
    Four
    
    Five
    
    FiveOvernight
    
    Year
    
    Years
    
    Years
    
    Years
    
    Years
    
    Years
    
    Total(dollars in thousands)Interest-bearing deposits in banks
    
    $
    89,680
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    89,6801.10
    %Certificates of deposit
    
    
    
    
    
    
    296
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2964.33
    %Fixed-rate loans (1)
    
    
    
    
    
    
    16,737
    
    
    
    11,675
    
    
    
    12,216
    
    
    
    8,584
    
    
    
    6,991
    
    
    
    20,120
    
    
    
    76,3238.42
    %
    
    
    8.55
    %
    
    
    8.36
    %
    
    
    7.93
    %
    
    
    7.73
    %
    
    
    7.18
    %Adjustable-rate loans (1)
    
    
    12,485
    
    
    
    32,237
    
    
    
    4,010
    
    
    
    1,406
    
    
    
    1,268
    
    
    
    1,407
    
    
    
    904
    
    
    
    53,7178.55
    %
    
    
    7.06
    %
    
    
    6.04
    %
    
    
    6.97
    %
    
    
    6.22
    %
    
    
    6.27
    %
    
    
    6.93
    %Total rate-sensitive assets
    
    $
    102,165
    
    
    $
    49,270
    
    
    $
    15,685
    
    
    $
    13,622
    
    
    $
    9,852
    
    
    $
    8,398
    
    
    $
    21,024
    
    
    $
    220,016
 23




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##### Table of Contents



(1)
    
    Loans are presented at net amounts before deducting the allowance for loan losses and
exclude non-performing loans.   
 Item 4. Controls and Procedures
   24




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##### Table of Contents



PART II
 
 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.
 25




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##### Table of Contents



SIGNATURES
  CAPITAL CROSSING PREFERRED CORPORATION
 Date: August 11, 2005
    
    By:
    
    /s/ Richard WayneRichard WaynePresident (Principal Executive Officer)Date: August 11, 2005
    
    By:
    
    /s/ Edward F. MehmEdward F. MehmTreasurer (Principal Financial Officer)
 26




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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.
    
    
    2831.2
    
    Certification pursuant to Exchange Act Rules
13a-14(a) and 15d-14(a) of the Treasurer.
    
    
    2932
    
    Certification pursuant to 18 U.S.C. Section
1350 of the President and Treasurer.
    
    
    30
 27