** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

| **ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE** |
|------------------------------------------------------------------------|
| **SECURITIES EXCHANGE ACT OF 1934**                                    |

 

**For the Quarterly Period Ended March 31, 2002**

 

**Commission File Number 000-25193**

 

**CAPITAL CROSSING PREFERRED CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Massachusetts**                                                                  |   | **04-3439366**                       |
|------------------------------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization)                     |   | (I.R.S. Employer Identification No.) |
|                                                                               |   |                                 |
| **101 Summer Street**                                                              |   | **02110**                            |
| **Boston, Massachusetts**                                                          |   | (Zip Code)                           |
| (Address of principal executive offices)                                           |   |                                 |
|                                                                               |   |                                 |
| Registrant’s telephone number, including area code:  **(617)  880-1000** |

 

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

 

Thenumber of shares outstanding of the registrant’s sole class of common stock was100 shares, $.01 par value per share, as of May 10, 2002.

 

 

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**Capital Crossing PreferredCorporation**

**Tableof Contents**

 
| **PART I – Financial Information** |
|-----------------------------------------|
|                                    |   |
| Item 1.                            | Financial Statements: |
|                                    |   |
| a)                                      | Balance Sheets |
|                                    |   |   |
| b)                                      | Statements  of Income |
|                                    |   |   |
| c)                                      | Statements  of Changes in Stockholders’ Equity |
|                                    |   |   |
| d)                                      | Statements  of Cash Flows |
|                                    |   |   |
| e)                                      | Notes to Financial  Statements |
|                                    |   |
| Item  2.                           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                    |   |
|                                    | Risk  Factors and Other Factors Affecting Forward Looking Statements |
|                                    |   |
| Item  3.                           | Quantitative  and Qualitative Disclosures about Market Risk |
|                                    |   |
| **PART II – Other Information**    |
|                                    |   |
| Item 1.                            | Legal Proceedings |
|                                    |   |
|                                    | Signatures |
|                                         |  |  |  |  |

 

----

 

**PART I**

 

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

## **Capital Crossing Preferred Corporation**

## **Balance Sheets**

 
|                                                                                                                                                                                               |       | **March 31,  2002**                    |       | **December 31,  2001** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|------------------------|------------|
|                                                                                                                                                                                               |       | **(unaudited)**                        |       |                   |       |
|                                                                                                                                                                                               |       | **(in thousands, except share  data)** | ** ** |
| **ASSETS**                                                                                                                                                                                         | ** ** |
|                                                                                                                                                                                               |       |                                   | ** ** |                   | ** ** |
| Cash account  with Capital Crossing Bank                                                                                                                                                           |       | $                                      | 87         |                   | $          | 86 |   |
| Interest bearing  deposits with Capital Crossing Bank                                                                                                                                              |       | 89,779                                 |       | 87,903                 |       |
| Total cash and  cash equivalents                                                                                                                                                                   |       | 89,866                                 |       | 87,989                 |       |
|                                                                                                                                                                                               |       |                                   |       |                   |       |
| Certificate of  deposit                                                                                                                                                                            |       | 100                                    |       | 100                    |       |
|                                                                                                                                                                                               |       |                                   |       |                   |       |
| Loans                                                                                                                                                                                              |       | 169,246                                |       | 166,446                |       |
| Less discount  and net deferred loan income                                                                                                                                                        |       | (13,551                                | )          | (14,411                | )          |
| Less allowance  for loan losses                                                                                                                                                                    |       | (5,140                                 | )          | (4,659                 | )          |
| Loans, net                                                                                                                                                                                         |       | 150,555                                |       | 147,376                |       |
|                                                                                                                                                                                               |       |                                   |       |                   |       |
| Accrued interest  receivable                                                                                                                                                                       |       | 940                                    |       | 896                    |       |
| Other assets                                                                                                                                                                                       |       | 12                                     |       | 4                      |       |
|                                                                                                                                                                                               |       |                                   |       |                   |       |
|                                                                                                                                                                                               |       | $                                      | 241,473    |                   | $          | 236,365 |   |
|                                                                                                                                                                                               |       |                                   |       |                   |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                     | ** ** |
|                                                                                                                                                                                               |       |                                   |       |                   |       |
| Accrued expenses  and other liabilities                                                                                                                                                            |       | $                                      | 393        |                   | $          | 417 |   |
| Total  liabilities                                                                                                                                                                                 |       | 393                                    |       | 417                    |       |
|                                                                                                                                                                                               |       |                                   |       |                   |       |
| Stockholders’  equity:                                                                                                                                                                        |       |                                   |       |                   |       |
| Preferred stock,  Series A, 9.75% non-cumulative, exchangeable; $.01 par value; $10 liquidation  value per share; 1,449,000 shares authorized, 1,416,130 shares issued and  outstanding            |       | 14                                     |       | 14                     |       |
| Preferred stock,  Series B, 8% cumulative, non-convertible; $.01 par value; $1,000 liquidation  value per share plus accrued dividends; 1,000 shares authorized, 941 shares issued and outstanding |       | —                                 |       | —                 |       |
| Preferred stock,  Series C, 10.25% non-cumulative, exchangeable; $.01 par value; $10  liquidation value per share; 1,840,000 shares authorized, issued and  outstanding                            |       | 18                                     |       | 18                     |       |
| Common stock,  $.01 par value, 100 shares authorized, issued and outstanding                                                                                                                       |       | —                                 |       | —                 |       |
| Additional  paid-in capital                                                                                                                                                                        |       | 235,742                                |       | 235,742                |       |
| Retained  earnings                                                                                                                                                                                 |       | 5,306                                  |       | 174                    |       |
| Total  stockholders’ equity                                                                                                                                                                   |       | 241,080                                |       | 235,948                |       |
|                                                                                                                                                                                               |       |                                   |       |                   |       |
|                                                                                                                                                                                               |       | $                                      | 241,473    |                   | $          | 236,365 |   |

 

The accompanyingnotes are an integral part of these unaudited interim financial statements.

 

1

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**CapitalCrossing Preferred Corporation**

**Statements of Income**

**(unaudited)**

 

 
|                                       |   | **Three Months Ended March 31,** |       |
|--------------------------------------------|--------|----------------------------------|------------|
|                                       |   | **2002**                         |       | **2001** | ** ** |
|                                       |   | **(in thousands)**               | ** ** |
| Interest income:                           |   |                             |       |   |   |
| Interest and fees on loans                 |   | $                                | 4,970      |   | $ | 5,049 |   |
| Interest on interest-bearing deposits      |   | 581                              |       | 819 |   |
| Total interest income                      |   | 5,551                            |       | 5,868 |   |
|                                       |   |                             |       |   |   |
| Other income:                              |   |                             |       |   |   |
| Gains on sales of loans                    |   | 517                              |       | — |   |
| Guarantee fee income                       |   | 20                               |       | 20 |   |
| Total other income                         |   | 537                              |       | 20 |   |
| Operating expenses:                        |   |                             |       |   |   |
| Loan servicing and advisory services       |   | 104                              |       | 119 |   |
| Other general and administrative           |   | 17                               |       | 18 |   |
| Total operating expenses                   |   | 121                              |       | 137 |   |
|                                       |   |                             |       |   |   |
| Net income                                 |   | 5,967                            |       | 5,751 |   |
| Preferred stock dividends                  |   | 835                              |       | 364 |   |
| Net income available to common stockholder |   | $                                | 5,132      |   | $ | 5,387 |   |

 

The accompanying notesare an integral part of these unaudited interim financial statements.

 

2

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**Capital Crossing Preferred Corporation**

**Statements of Changes in Stockholders’ Equity**

**(unaudited)**

 
|                                              |   | **Three Months Ended March 31, 2002** |   |
|---------------------------------------------------|--------|---------------------------------------|--------|
|                                              |   |                                  |   |   |   | **Preferred Stock  Series A** |   | **Preferred Stock  Series B** |   | **Preferred Stock  Series C** |   | **Additional  Paid-in  Capital** |   |   |   | **Total  Stockholders’ Equity** |   |
|                                              |   | **Common Stock**                      |   |   |   |   |   | **Retained  Earnings** |   |   |
|                                              |   | **Shares**                            |   | **Amount** |   | **Shares** |   | **Amount** |   | **Shares** |   | **Amount** |   | **Shares** |   | **Amount** |   |   |   |   |
|                                              |   | **(dollars in thousands)**            |   |
|                                              |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at December 31, 2001                      |   | 100                                   |   | $ | — |   | 1,416,130 |   | $ | 14 |   | 941 |   | $ | — |   | 1,840,000 |   | $ | 18 |   | $ | 235,742 |   | $ |  174 |   | $ |  235,948 |   |
| Net income                                        |   | —                                |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 5,967 |   | 5,967 |   |
| Dividends on preferred stock, Series A            |   | —                                |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (345 | ) | (345 | ) |
| Cumulative dividends on preferred stock, Series B |   | —                                |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (19 | ) | (19 | ) |
| Dividends on preferred stock, Series C            |   | —                                |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (471 | ) | (471 | ) |
| Balance at March 31, 2002                         |   | 100                                   |   | $ | — |   | 1,416,130 |   | $ | 14 |   | 941 |   | $ | — |   | 1,840,000 |   | $ | 18 |   | $ | 235,742 |   | $ |  5,306 |   | $ |  241,080 |   |
|                                              |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                              |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                              |   | **Three Months Ended March 31, 2001** |   |
|                                              |   |                                  |   |   |   | **Preferred Stock  Series A** |   | **Preferred Stock  Series B** |   | **Preferred Stock  Series C** |   | **Additional  Paid-in  Capital** |   |   |   | **Total  Stockholders’ Equity** |   |
|                                              |   | **Common Stock**                      |   |   |   |   |   | **Retained  Earnings** |   |   |
|                                              |   | **Shares**                            |   | **Amount** |   | **Shares** |   | **Amount** |   | **Shares** |   | **Amount** |   | **Shares** |   | **Amount** |   |   |   |   |
|                                              |   | **(dollars in thousands)**            |   |
|                                              |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at December 31, 2000                      |   | 100                                   |   | $ | — |   | 1,416,130 |   | $ | 14 |   | 946 |   | $ | — |   | — |   | $ | — |   | $ | 218,893 |   | $ |  — |   | $ |  218,907 |   |
| Net income                                        |   | —                                |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 5,751 |   | 5,751 |   |
| Dividends on preferred stock, Series A            |   | —                                |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (345 | ) | (345 | ) |
| Cumulative dividends on preferred stock, Series B |   | —                                |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (19 | ) | (19 | ) |
| Repurchase of preferred stock, Series B           |   | —                                |   | — |   | — |   | — |   | (4 | ) | — |   | — |   | — |   | (4 | ) | — |   | (4 | ) |
| Balance at March 31, 2001                         |   | 100                                   |   | $ | — |   | 1,416,130 |   | $ | 14 |   | 942 |   | $ | — |   | — |   | $ | — |   | $ | 218,889 |   | $ |  5,387 |   | $ |  224,290 |   |

 

The accompanying notes are an integral part of these unaudited interimfinancial statements.

 

3

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**CapitalCrossing Preferred Corporation**

**Statements of Cash Flows**

**(unaudited)**

 
|                                                                        |   | **Three Months Ended March 31,** |   |
|-----------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                        |   | **2002**                         |   | **2001** |   |
|                                                                        |   | **(in thousands)**               |   |
| Cash flows from operating activities:                                       |   |                             |   |   |   |
| Net income                                                                  |   | $                                | 5,967  |   | $ | 5,751 |   |
| Adjustments to reconcile net income to net cash from operating  activities: |   |                             |   |   |   |
| Gains on sales of loans                                                     |   | (517                             | )      | — |   |
| Other, net                                                                  |   | (55                              | )      | 21 |   |
|                                                                        |   |                             |   |   |   |
| Net cash from operating activities                                          |   | 5,395                            |   | 5,772 |   |
|                                                                        |   |                             |   |   |   |
| Cash flows (used in) from investing activities:                             |   |                             |   |   |   |
| Amortization and payoffs on loans                                           |   | 11,575                           |   | 15,625 |   |
| Purchase of loans from Capital Crossing Bank                                |   | (16,944                          | )      | — |   |
| Proceeds from sales of loans                                                |   | 2,686                            |   | 171 |   |
|                                                                        |   |                             |   |   |   |
| Net cash (used in) from investing activities                                |   | (2,683                           | )      | 15,796 |   |
|                                                                        |   |                             |   |   |   |
| Cash flows used in financing activities:                                    |   |                             |   |   |   |
| Repurchase of preferred stock, Series B                                     |   | —                           |   | (4 | ) |
| Payment of preferred stock dividends                                        |   | (835                             | )      | (364 | ) |
|                                                                        |   |                             |   |   |   |
| Net cash used in financing activities                                       |   | (835                             | )      | (368 | ) |
|                                                                        |   |                             |   |   |   |
| Net change in cash and cash equivalents                                     |   | 1,877                            |   | 21,200 |   |
| Cash and cash equivalents at beginning of period                            |   | 87,989                           |   | 55,312 |   |
|                                                                        |   |                             |   |   |   |
| Cash and cash equivalents at end of period                                  |   | $                                | 89,866 |   | $ | 76,512 |   |

 

The accompanying notes are an integral part of the unaudited interimfinancial statements.

 

4

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**Capital Crossing Preferred Corporation**

**Notesto Financial Statements****(Unaudited)**

**Three Months Ended March 31, 2002 and 2001**

 

**Note 1.   Basis of Presentation**

 

Capital Crossing Preferred Corporation (“Capital Crossing Preferred”),is a Massachusetts corporation organized on March 20, 1998, to acquire and holdreal estate assets.  Capital CrossingBank (“Capital Crossing”), a federally insured Massachusetts trust company, ownsall of Capital Crossing Preferred’s common stock.  Capital Crossing is in compliance with its regulatory capitalrequirements at March 31, 2002.

 

On March 31, 1998, Capital Crossing Preferred was initially capitalizedwith the issuance to Capital Crossing of 100 shares of Capital CrossingPreferred’s common stock, $.01 par value, and 1,000 shares of Series Bpreferred stock, $.01 par value, with Capital Crossing transferring to CapitalCrossing Preferred a portfolio of loans at its estimated fair value of$140,740,000.  Such loans were recordedin the accompanying balance sheet at Capital Crossing’s historical cost, whichapproximated their estimated fair values.

 

In 1999, Capital Crossing Preferred completed the sale of 1,416,130shares of Series A preferred stock.  In2001, Capital Crossing Preferred completed the sale 1,840,000 shares of SeriesC preferred stock.

 

The financial information as of March 31, 2002 and the results ofoperations, changes in stockholders’ equity and cash flows for the three monthsended March 31, 2002 and 2001 are unaudited; however, in the opinion ofmanagement, the financial information reflects all adjustments (consistingsolely of normal recurring accruals) necessary for a fair presentation inaccordance with accounting principles generally accepted in the United Statesof America.  Interim results are notnecessarily indicative of results to be expected for the entire year.  These interim statements are intended to beread in conjunction with the financial statements presented in Capital CrossingPreferred’s Annual Report on Form 10-K as of and for the year ended December31, 2001.

 

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

 

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

 

Capital Crossing Preferred has guaranteed all of the obligations ofCapital Crossing under advances Capital Crossing may receive from time to timefrom the Federal Home Loan Bank of Boston (“FHLBB”), and Capital CrossingPreferred has agreed to pledge a significant amount of its assets in connectionwith those advances.  This guaranteewould rank senior to the preferred shares upon liquidation. Capital CrossingPreferred’s obligations under this agreement are limited by applicable lawspertaining to fraudulent conveyance and fraudulent transfer. The assets pledgedto the FHLBB will vary from time to time, however the potential exists forCapital Crossing Preferred to pledge all of its assets to the FHLBB to secureadvances to Capital Crossing. In addition, Capital Crossing has pledged to theFHLBB all of the shares of Capital Crossing Preferred’s capital stock it ownsas collateral for its FHLBB borrowings. Under the terms of the pledge, if Capital Crossing becomesundercapitalized, the FHLBB may require Capital Crossing to dissolve CapitalCrossing Preferred such that the assets of Capital Crossing Preferred aredistributed to Capital Crossing. In such circumstance, holders of the Series Aand Series C preferred stock would receive their liquidation preference only tothe extent there are available assets of Capital Crossing Preferred followingsatisfaction of its outstanding obligations, including its guarantee of CapitalCrossing’s FHLBB borrowings.  At March31, 2002, approximately $52.4 million or 21.7% of Capital Crossing Preferred’sassets had been pledged to and accepted by the FHLBB to secure advances toCapital Crossing.  Capital Crossing hasalso agreed that it will not request or accept advances from the FHLBB inexcess of Capital Crossing Preferred’s total stockholder’s equity, less thestockholder’s equity attributable to the Series A and Series C preferredshares. As of March 31, 2002, this restriction would limit Capital Crossing’sability to receive advances in excess of approximately $208.5 million. As ofMarch 31, 2002, Capital Crossing had $139.0 million in outstanding FHLBBborrowings.

 

5

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

Statements made or incorporated in this Quarterly Report on Form 10-Qinclude a number of forward-looking statements within the meaning of Section27A of the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934.  Forward-looking statementsinclude, without limitation, statements containing the words “anticipates,”“believes,”, “estimates”, “assumes”, “expects,” “intends,” “future” and wordsof similar import which express management’s belief, expectations or intentionsregarding the future performance of Capital Crossing Preferred.  These forward-looking statements are made asof the date of this report and we do not undertake to update them at anytimeafter the date hereof. Capital Crossing Preferred’s actual results could differmaterially from those set forth in the forward-looking statements as a result,among other factors, of changes in general, national or regional economicconditions, changes in interest rates, changes in loan default and charge-offrates relating to a decline in the commercial real estate market or otherwise,the possible exchange of the preferred shares for preferred shares of CapitalCrossing at the direction of the FDIC if Capital Crossing becomes or may in thenear term become undercapitalized or is placed in conservatorship orreceivership, risks associated with mortgage loans generally, and particularlythe geographic concentration of Capital Crossing Preferred’s loan portfolio atMarch 31, 2002 in New England and California, and the failure by CapitalCrossing Preferred to maintain its status as a REIT for federal income taxpurposes, changes in the assumptions used in making such forward-lookingstatements, and the factors discussed in the section entitled “Risk Factors andOther Forward-Looking Statements” of this Form 10-Q.

#### ** **

#### **Resultsof Operations**

 

***Three Months Ended March 31, 2002 and 2001***

 

Netincome available to common stockholder decreased $255,000, or 4.7%, to $5.1million for the three months ended March 31, 2002, compared to $5.4 million forthe three months ended March 31, 2001. This decrease was primarily attributable to an increase of $471,000, or129.4%, in preferred stock dividends to $835,000 for the three months endedMarch 31, 2002, compared to $364,000 for the three months ended March 31, 2001as a result of the issuance of the Series C preferred stock on May 31,2001.  Total interest income for thethree months ended March 31, 2002 decreased $317,000, or 5.4%, to $5.6 million,compared to $5.9 million for the three months ended March 31, 2001.  The decrease in interest income was offsetby gains on sales of loans of $517,000 for the three months ended March 31, 2002.  The were no gains on sales of loans for thethree months ended March 31, 2001.

 

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

 
|                      |   | **Three Months Ended March 31,** |    |
|---------------------------|--------|----------------------------------|---------|
|                      |   | **2002**                         |    | **2001** |   |
|                      |   | **Average  Balance**             |    | **Interest  Income** |   |   |   | **Average  Balance** |   | **Interest  Income** |   |   |   |
|                      |   |                             |    | **Yield** |   |   |   | **Yield** |   |
|                      |   | **(dollars in thousands)**       |    |
|                      |   |                             |    |   |   |   |   |   |   |   |   |   |   |
| Loans, net (1)            |   | $                                | 151,214 |   | $ | 4,970 |   | 13.33 | % | $ | 157,557 |   | $ | 5,049 |   | 13.00 | % |
| Interest-bearing deposits |   | 90,477                           |    | 581 |   | 2.60 |   | 62,749 |   | 819 |   | 5.29 |   |
|                      |   | $                                | 241,691 |   | $ | 5,551 |   | 9.31 | % | $ | 220,306 |   | $ | 5,868 |   | 10.80 | % |

 

----

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

 

The weightedaverage yield on interest-earning assets decreased to 9.31% for the threemonths ended March 31, 2002 from 10.80% for the three months ended March 31,2001.  The decline in the overall yieldon earning assets is primarily a result of a higher level of interest-bearingdeposits at a lower interest rate in 2002, offset by an increase in the yieldon the loan portfolio.  During the threemonths ended March 31, 2002 and 2001, the yield on the loan portfolio was13.33% and 13.00%, respectively.  Thisincrease is primarily a result of an increase in income recognized at the timeof individual loan payoffs, partially offset by a decline in the amount of regularly scheduled interest and accretionincome.  The decline in theamount of regularly scheduled interest andaccretion income is primarily a result of the declining rate environment during2001.

 

Income on loansincludes the portion of the purchase discount that is accreted into income overthe remaining lives of the related loans using the interest method. Because thecarrying value of the loan portfolio is net of purchase discount, the relatedyield on this

 

6

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portfoliogenerally is higher than the aggregate contractual rate paid on the loans. Thetotal yield includes the excess of a loan’s expected discounted future cashflows over its net investment, recognized using the interest method.

 

When a loan ispaid off, the excess of any cash received over the net investment is recordedas interest income. In addition to the amount of purchase discount that isrecognized at that time, income may also include interest owed by the borrowerprior to Capital Crossing’s acquisition of the loan, interest collected if onnon-performing status and other loan fees (“other interest income”). Thefollowing table sets forth, for the periods indicated, the components ofinterest and fees on loans.  There canbe no assurance regarding future interest income, including the yields andrelated level of such income, or that the relative portion attributable to loanpay-offs as compared to other sources, will increase or remain the same in thefuture.

 

|                                                 |   | **Three Months Ended March 31,** |      |
|------------------------------------------------------|--------|----------------------------------|-----------|
|                                                 |   | **2002**                         |      | **2001** |   |
|                                                 |   | **Interest  Income**             |      |   |   | **Interest  Income** |   |   |   |
|                                                 |   |                             | **Yield** |   |   | **Yield** |   |
|                                                 |   | **(dollars in thousands)**       |      |
|                                                 |   |                             |      |   |   |   |   |   |   |
| Regularly scheduled interest and accretion income    |   | $                                | 3,299     |   | 8.85 | % | $ | 4,126 |   | 10.62 | % |
| Interest and fee income recognized on loan pay-offs: |   |                             |      |   |   |   |   |   |   |
| Non-amortizing discount                              |   | 653                              |      | 1.75 |   | 520 |   | 1.34 |   |
| Amortizing discount                                  |   | 984                              |      | 2.64 |   | 238 |   | 0.61 |   |
| Other interest and fee income                        |   | 34                               |      | 0.09 |   | 165 |   | 0.43 |   |
|                                                 |   | 1,671                            |      | 4.48 |   | 923 |   | 2.38 |   |
|                                                 |   | $                                | 4,970     |   | 13.33 | % | $ | 5,049 |   | 13.00 | % |

 

The amount of loanpayoffs and related income is influenced by several factors, including theinterest rate environment, the real estate market in particular areas, thetiming of transactions, and circumstances related to individual borrowers andloans.  The decision to pay-off a loanrests with the borrower.

 

The averagebalance of interest-bearing deposits increased $27.7 million to $90.5 millionfor the three months ended March 31, 2002, compared to $62.7 million for 2001,as a result of cash accumulated from loan pay-offs and sales offset by thepurchase of $16.9 million of loans from Capital Crossing.  The yield on interest-bearing depositsdecreased in 2002 because the rate paid by Capital Crossing on the money marketaccount held by Capital Crossing Preferred decreased in 2002 compared to 2001.

 

Gains on sales of loansof  $517,000 is the result of the saleof one loan to an unaffiliated third party. There were no loans sold to unaffiliated third parties during the threemonths ended March 31, 2001.

 

Guarantee fee income forthe three months ended March 31, 2002 and 2001 amounted to $20,000 for eachperiod. Effective July 1, 2000, Capital Crossing Preferred entered into anagreement to make certain assets available to be pledged in connection withborrowings of Capital Crossing from the FHLBB. Capital Crossing Preferredreceives an annual fee of $80,000 from Capital Crossing under this agreement.

 

Loan servicing andadvisory services expenses for the three months ended March 31, 2002 decreased$15,000 or 12.6%, to $104,000 compared to $119,000 for the three months endedMarch 31, 2001. This decrease was due to the overall decrease in the averagebalance of the loan portfolio.

 

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

 

Capital Crossing Preferred intends to pay dividends on its preferredstock and common stock in amounts necessary to continue to preserve its statusas a REIT under the Internal Revenue Code.

 

7

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**Financial Condition**

#### ** **

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

 

Interest-bearing deposits consist of money market accounts withbalances of $72.3 million at March 31, 2002 and certificates of deposit whichtotaled $17.5 million at March 31, 2002 and mature in May 2002.

#### ** **

#### **LoanPortfolio**

 

To date, all of Capital Crossing Preferred’s loans have been acquired from CapitalCrossing.  The following table setsforth information regarding the composition of the loan portfolio at thedates indicated:

 

 

|                           |   | **March 31,  2002** |    | **December 31,  2001** |   |
|--------------------------------|--------|---------------------|---------|------------------------|--------|
|                           |   |                |    |
|                           |   | **(in thousands)**  |    |
| Mortgage loans on real estate: |   |                |    |                   |   |
| Commercial real estate         |   | $                   | 114,122 |                   | $      | 106,291 |   |
| Multi-family residential       |   | 50,944              |    | 55,868                 |   |
| One-to-four family residential |   | 2,983               |    | 3,073                  |   |
| Land                           |   | 1,197               |    | 1,214                  |   |
|                           |   |                |    |                   |   |
| Total loans, gross             |   | 169,246             |    | 166,446                |   |
|                           |   |                |    |                   |   |
| Less discount:                 |   |                |    |                   |   |
| Non-amortizing discount (1)    |   | (4,388              | )       | (6,062                 | )      |
| Amortizing discount            |   | (9,068              | )       | (8,257                 | )      |
| Allowance for loan losses      |   | (5,140              | )       | (4,659                 | )      |
| Net deferred loan fees         |   | (95                 | )       | (92                    | )      |
|                           |   |                |    |                   |   |
| Loans, net                     |   | $                   | 150,555 |                   | $      | 147,376 |   |

 

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(1)          Non-amortizing discount is an allocation of the total discount onpurchased loans accounted for on the cost recovery method until it isdetermined that the amount and timing of collections are reasonably estimableand collection is probable.

 

CapitalCrossing Preferred intends that each loan acquired from Capital Crossing in thefuture will be a whole loan, and will be originated or acquired by CapitalCrossing in the ordinary course of its business. Capital Crossing Preferredalso intends that all loans held by it will be serviced pursuant to its masterservice agreement with Capital Crossing.

 

Non-performingloans, net of discount, totaled $575,000 and $153,000 at March 31, 2002 andDecember 31, 2001, respectively.

 

Theaccrual of interest and accretion of discount are generally discontinued whenthe collectibility of principal and interest is not probable or estimable.Unpaid interest income previously accrued on such loans is reversed againstcurrent period interest income. A loan is returned to accrual status when it isbrought current in accordance with management’s anticipated cash flows at thetime of acquisition.

 

**Allowance for Loan Losses**

 

Theallowance for loan losses is based upon losses estimated to have occurred andis established through a provision for loan losses charged to earnings and byadditions in connection with loan acquisitions. Loan losses are charged againstthe allowance for loan losses when management believes the loan balance, or aportion thereof, is uncollectible. Subsequent recoveries, if any, are creditedto the allowance for loan losses.

 

Theallowance for loan losses is evaluated on a regular basis by management and isbased upon management’s periodic review of the collectibility of the loans inlight of known and inherent risks in the nature and volume of the loanportfolio, adverse situations that may affect the borrower’s ability to repay,the estimated value of any underlying collateral, and prevailing economicconditions. This evaluation is inherently subjective as it requires estimatesthat are susceptible to significant revision as more information becomesavailable. In addition, regulatory agencies periodically review the adequacy ofthe allowance for loan losses and may require Capital Crossing Preferred tomake additions to its allowance for loan losses. While management believesthese estimates and assumptions are 

 

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reasonable,there can be no assurance that they will be proven to be correct in the future.The actual amount of future provisions that may be required cannot bedetermined, and such provisions may exceed the amounts of past provisions.Management believes that the allowance for loan losses is adequate to absorbthe known and inherent risks in Capital Crossing Preferred’s loan portfolio ateach date based on the facts known to management as of such date. CapitalCrossing Preferred continues to monitor and modify its allowances for generaland specific loan losses as economic conditions dictate.

 

CapitalCrossing Preferred performs periodic reviews of its loan portfolio to identifyloans for which specific allocations are considered prudent. Specific allocationsinclude the results of measuring impaired loans under Statement of FinancialAccounting Standards No. 114. General risk allocations are determined by aformula whereby the loan portfolio is stratified by loan type and by internalrisk rating categories. Loss factors are then applied to each strata based onvarious considerations including historic loss experience, delinquency trends,current economic conditions, industry standards and regulatory guidelines. Anadditional allowance is maintained based on a judgment by management afterconsideration of qualitative and quantitative assessments of certain factorsincluding regional credit concentration, industry concentration, results ofregulatory examinations, historical loss ranges, portfolio composition,economic conditions such as interest rates and energy costs and other changesin the portfolio. The allowance for loan losses is management’s estimate of theprobable loan losses incurred as of the balance sheet date. The allowance forloan losses is increased by provisions charged to earnings and by recoveries ofamounts previously charged-off, and is reduced by charge-offs on loans. Anyremaining unallocated portion is reviewed for adequacy in relation to theoverall loan portfolio and in recognition of estimates inherent in thecalculation methodology.

 

Additionalfactors influencing the calculation of the allowance for loan losses areparticular concentrations within the portfolio, including the geographicconcentration of loans in California, which represented approximately 41.2% ofthe portfolio at March 31, 2002, and concentrations of loans to individualborrowers.

 

Capital CrossingPreferred also considers historical losses in assessing the adequacy of theallowance for loan losses.  Due to the limitedoperating history of Capital Crossing Preferred, historical losses are notcurrently an indicator of losses inherent in the portfolio.  Management will continue to monitorhistorical losses to assess the adequacy of the allowance for loan losses.

 

The following table sets forth ananalysis of the allowance for loan losses for the periods indicated:

 

|                                                 |   | **Three Months Ended  March 31,** |   |
|------------------------------------------------------|--------|-----------------------------------|--------|
|                                                 |   | **2002**                          |   | **2001** |   |
|                                                 |   | **(in thousands)**                |   |
|                                                 |   |                              |   |   |   |
| Balance at beginning of period                       |   | $                                 | 4,659  |   | $ | 3,795 |   |
| Transfer from Capital Crossing  with loans purchased |   | 487                               |   | — |   |
| Transfer to Capital Crossing  with loans sold        |   | (6                                | )      | (3 | ) |
| Balance at end of period                             |   | $                                 | 5,140  |   | $ | 3,792 |   |

 

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

 

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

 

|                                                                       |   | **Three Months Ended  March 31,** |   |
|----------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                       |   | **2002**                          |   | **2001** |   |
|                                                                       |   | **(in thousands)**                |   |
|                                                                       |   |                              |   |   |   |
| Balance at beginning of period                                             |   | $                                 | 6,062  |   | $ | 6,704 |   |
| Non-amortizing discount relating to loans purchased from Capital  Crossing |   | 208                               |   | — |   |
| Transfers to amortizing portion, net                                       |   | (897                              | )      | (622 | ) |
| Net reductions related to resolutions and restructures                     |   | (678                              | )      | (327 | ) |
| Non-amortizing discount relating to loans sold to Capital Crossing         |   | (307                              | )      | (184 | ) |
| Balance at end of period                                                   |   | $                                 | 4,388  |   | $ | 5,571 |   |

 

#### **InterestRate Risk**

 

CapitalCrossing Preferred’s income consists primarily of interest income on mortgageassets. Capital Crossing Preferred does not intend to use any derivativeproducts to manage its interest rate risk. If there is a decline in marketinterest rates, Capital Crossing Preferred may experience a reduction ininterest income on its mortgage loans and a corresponding decrease in fundsavailable to be distributed to its stockholders. The reduction in interestincome may result from downward adjustments of the indices upon which theinterest rates on loans are based and from prepayments of mortgage loans withfixed interest rates, resulting in reinvestment of the proceeds in loweryielding mortgage loans.

 

**Significant Concentration of CreditRisk**

 

Concentrationof credit risk generally arises with respect to Capital Crossing Preferred’sloan portfolio when a number of borrowers engage in similar businessactivities, or activities in the same geographical region. Concentration ofcredit risk indicates the relative sensitivity of Capital Crossing Preferred’sperformance to both positive and negative developments affecting a particular industry.Capital Crossing Preferred’s balance sheet exposure to geographicconcentrations directly affects the credit risk of the loans within its loanportfolio.

 

AtMarch 31, 2002, 41.2% and 27.8% of Capital Crossing Preferred’s total loanportfolio consisted of loans in California and New England, respectively. AtDecember 31, 2001, 39.4% and 28.4% of Capital Crossing Preferred’s totalreal estate loan portfolio consisted of loans located in California and NewEngland, respectively. Consequently, the portfolio may experience a higherdefault rate in the event of adverse economic, political or businessdevelopments or natural hazards in California or New England that may affectthe ability of property owners to make payments of principal and interest on theunderlying mortgages.

 

#### **LiquidityRisk Management**

 

Theobjective of liquidity management is to ensure the availability of sufficientcash flows to meet all of Capital Crossing Preferred’s financial commitmentsand to capitalize on opportunities for Capital Crossing Preferred’s businessexpansion. In managing liquidity risk, Capital Crossing Preferred takes intoaccount various legal limitations placed on a REIT.

 

Capital Crossing Preferred’s principal liquidity needs are:

 

(1)                                  tomaintain the current portfolio size through the acquisition of additionalmortgage assets as mortgage assets currently in the loan portfolio mature, paydown or prepay, and

 

(2)                                  topay dividends on the preferred shares and common shares.

 

Theacquisition of additional mortgage assets is intended to be funded primarilythrough repayment of principal balances of mortgage assets by individualborrowers. Capital Crossing Preferred does not have and does not anticipatehaving any material capital expenditures. To the extent that the Board ofDirectors determines that additional funding is required, Capital CrossingPreferred may raise such funds through additional equity offerings, debtfinancing or retention of cash flow (after consideration of provisions of theInternal Revenue Code requiring the distribution by a REIT of at least 90% ofits REIT taxable income and taking into account taxes that would be imposed onundistributed income), or a combination of these methods. Except for itsobligation to guarantee certain borrowings of Capital 

 

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Crossing,Capital Crossing Preferred does not currently intend to incur any indebtedness.The organizational documents of Capital Crossing Preferred limit the amount ofindebtedness which it is permitted to incur without the approval of theSeries A and the Series C preferred stockholders to no more than 100%of the total stockholders’ equity of Capital Crossing Preferred. Any such debtmay include intercompany advances made by Capital Crossing to Capital CrossingPreferred.

 

# **RISK FACTORS AND OTHER FACTORS AFFECTING FORWARDLOOKING STATEMENTS**

 

This Form 10-Q contains statements that are“forward-looking statements.” Capital Crossing Preferred may also make writtenor oral forward-looking statements in other documents it files with the SEC, inpress releases and other written materials, and in oral statements made by itsofficers, directors or employees. Forward-looking statements can be identified by the use of the words“believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume” and othersimilar expressions which predict or indicate future events and trends andwhich do not do not relate to historical matters.  Forward-looking statements should not be relied upon because theyinvolve known and unknown risks, uncertainties and other factors, some of whichare beyond the control of Capital Crossing Preferred.  These risks, uncertainties and other factors may cause the actualresults, performance or achievements of Capital Crossing Preferred to bematerially different from the anticipated future results, performance orachievements expressed or implied by the forward-looking statements.

 

Some of the factors that might cause these differences include thoseset forth below. All of these factors should be carefully reviewed, and theremay be other factors that could cause these differences. These forward-lookingstatements were based on information, plans and estimates at the date of thisreport, and Capital Crossing Preferred does not promise to update anyforward-looking statements to reflect changes in underlying assumptions orfactors, new information, future events or other changes.

 

**A decline in Capital Crossing’s capital levels mayresult in the Series A and Series C preferred shares being subject toautomatic exchange into preferred shares of Capital Crossing**

 

The returns from an investment in the Series A or Series Cpreferred shares will depend to a significant extent on the performance andcapital of Capital Crossing. A significant decline in the performance andcapital levels of Capital Crossing or the placement of Capital Crossing intobankruptcy, reorganization, conservatorship or receivership could result in theautomatic exchange of the Series A and Series C preferred shares forpreferred shares of Capital Crossing, which would represent an investment inCapital Crossing and not in Capital Crossing Preferred. Under thesecircumstances:

 

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

 

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

 

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

 

 

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

 

TheSeries A and Series C preferred shares rank:

 

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

 

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

 

IfCapital Crossing Preferred incurs significant indebtedness, it may not havesufficient funds to make dividend or liquidation payments on the Series Aor Series C preferred shares. Upon Capital Crossing Preferred’s liquidation,its obligations to creditors would rank senior to the Series A andSeries C preferred shares. At March 31, 2002, Capital Crossing Preferredhad approximately $102,000 in accounts payable and other liabilities which,upon its liquidation, would be required to be paid before any payments could bemade to holders of the Series A or Series C preferred shares. Inaddition, upon Capital Crossing Preferred’s liquidation, dissolution or windingup, if it does not have sufficient funds to pay the full liquidation amount tothe holders of the Series A and Series C preferred shares, suchholders may receive less than the $10.00 per share liquidation amount.

 

Theterms of the Series A and Series C preferred shares limit CapitalCrossing Preferred’s ability to incur debt in excess of 100% of itsstockholders’ equity without the approval of the holders of all of theoutstanding Series A and Series C preferred shares but do not requirethat Capital Crossing Preferred obtain the approval of the holders of theSeries A and Series C preferred shares to issue additional series ofpreferred shares which rank equal to the Series A and Series Cpreferred shares as to payment of dividends or amount upon liquidation. As aresult, subject to these limitations, Capital Crossing Preferred may incurobligations which may further limit its ability to make dividend or liquidationpayments in the future.

 

**Bank regulators may limit the ability of CapitalCrossing Preferred to implement its business plan and may restrict its abilityto pay dividends**

 

Because Capital Crossing Preferred is a subsidiary of Capital Crossing,federal and state regulatory authorities will have the right to examine it andits activities and under certain circumstances, to impose restrictions onCapital Crossing or Capital Crossing Preferred which could impact CapitalCrossing Preferred’s ability to conduct its business according to its businessplan, which could materially adversely affect the financial condition andresults of operations of Capital Crossing Preferred:

 

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

 

•                                          payment of dividends on the Series A andSeries C preferred shares could also be subject to regulatory limitationsif Capital Crossing becomes undercapitalized. Capital Crossing will be deemedundercapitalized if its total risk-based capital ratio is less than 8.0%, itsTier 1 risk-based capital ratio is less than 4.0% or its Tier 1 leverage ratiois less than 4.0%. At March 31, 2002, Capital Crossing had a total risk-basedcapital ratio of 13.11%, a Tier 1 risk-based capital ratio of 11.84% and a Tier1 leverage ratio of 10.05%, which is sufficient for Capital Crossing to beconsidered well-capitalized. Capital Crossing Preferred makes no assurancesthat Capital Crossing will be well-capitalized under applicable regulations asof any future date. For purposes of calculating these capital ratios as apercentage of Capital Crossing’s risk-weighted assets, as opposed to its totalassets, Capital Crossing’s assets are assigned to risk categories based on therelative credit risk of the asset in question. These risk weights consist of0%, for assets deemed least risky such as cash, claims backed by the full faithand credit of the U.S. government, and balances due from Federal Reserve banks,20%, for assets deemed slightly more risky such as portions of loansconditionally guaranteed by the U.S. government or federal funds sold, 50%, forassets deemed still more risky such as government issued–revenue bonds,one-to-four family residential first mortgage loans and well-collateralizedmulti–family residential first mortgage loans, and 100% for all otherassets, including private sector loans such as commercial mortgage loans aswell as other real estate owned.

 

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

 

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FDIC could limit or prohibit the payment of dividends on theSeries A and Series C preferred shares if it determines that thepayment of those dividends is a capital distribution by Capital Crossing andthat Capital Crossing’s earnings and regulatory capital levels are belowspecified levels.

 

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

 

Capital Crossing Preferred does not generally obtain general creditenhancements such as mortgagor bankruptcy insurance or obtain special hazardinsurance for its mortgage assets, other than standard hazard insurance, whichwill in each case only relate to individual mortgage loans. Accordingly,Capital Crossing Preferred will be subject to risks of borrower defaults andbankruptcies and special hazard losses, such as losses occurring from floods,that are not covered by standard hazard insurance. In the event of a default onany mortgage loan held by Capital Crossing Preferred resulting from decliningproperty values or worsening economic conditions, among other factors, it wouldbear the risk of loss of principal to the extent of any deficiency between(1) the value of the related mortgaged property, plus any payments from aninsurer or guarantor in the case of commercial mortgage loans, and (2) theamount owing on the mortgage loan.

 

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

 

CapitalCrossing Preferred’s mortgage loan portfolio is subject to local economicconditions which could affect the value of the real estate assets underlyingits loans and therefore, its results of operations will be affected by variousconditions in the real estate market, many of which are beyond its control,such as:

 

•                                          local and other economic conditions affecting realestate values;

 

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

 

•                                          the ability of tenants to make lease payments;

 

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

 

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

 

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

 

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

 

Properties underlying Capital Crossing Preferred’s current mortgageassets are concentrated primarily in California and New England. As of March31, 2002, approximately 41.2% of its mortgage assets were secured by propertieslocated in California and 27.8% in New England. Adverse economic, political orbusiness developments or natural hazards may affect these areas and the abilityof property owners in these areas to make payments of principal and interest onthe underlying mortgages. If either region experienced adverse economic,political or business conditions, Capital Crossing Preferred would likelyexperience higher rates of loss and delinquency on its mortgage loans than ifits loans were more geographically diverse.

 

**A substantial majority of Capital Crossing Preferred’sloans were originated by other parties whose level of due diligence may bedifferent than Capital Crossing’s level of due diligence**

 

At March 31, 2002, approximately 89.3% of Capital Crossing Preferred’sloan portfolio consisted of loans originated by third parties, purchased byCapital Crossing and subsequently acquired by Capital Crossing Preferred fromCapital Crossing. Because these loans were originated by third parties, CapitalCrossing generally is not able to conduct the same level of due diligence onthese loans that it would have conducted had it originated them. Generally,while Capital Crossing conducts an acquisition review, it relies on theunderwriting standards of the parties originating the loans it acquires. Thestandards of these loan originators may be substantially different than thoseof Capital Crossing. These differences may include less rigorous appraisalrequirements and debt service coverage ratios, and less rigorous analysis ofproperty location and environmental factors, building condition and age, tenantquality, compliance with zoning regulations, any use restrictions, easements orright of ways that may impact the value and the borrower’s ability to managethe property. Other disadvantages of purchased loans versus originated loansmay include the lack of current financial information, incomplete legaldocumentation and outdated appraisals.

 

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**More than half of Capital Crossing Preferred’s loanportfolio is made up of commercial mortgage loans which are riskier than othertypes of loans**

 

Commercial mortgage loans constituted approximately 67.4% of the grossloans in Capital Crossing Preferred’s loan portfolio at March 31, 2002 andgenerally subject Capital Crossing Preferred to greater risks than other typesof loans. Capital Crossing Preferred’s commercial mortgage loans, like mostcommercial mortgage loans, generally lack standardized terms, tend to have shortermaturities than residential mortgage loans and may not be fully amortizing,meaning that they have a principal balance or “balloon” payment due onmaturity. The commercial real estate properties underlying Capital CrossingPreferred’s commercial mortgage loans also tend to be unique and are moredifficult to value than residential real estate properties. They are alsosubject to relatively greater environmental risks than other types of loans andto the corresponding burdens and costs of compliance with environmental lawsand regulations. Because of these risks related to Capital Crossing Preferred’scommercial mortgage loans, Capital Crossing Preferred may experience higherrates of default on its mortgage loans than it would if its loan portfolio wasmore diversified and included a greater number of residential and othermortgage loans.

 

**Capital Crossing Preferred may not be able to purchaseloans at the same volumes or with the same yields as it has historicallypurchased**

 

To date Capital Crossing Preferred has purchased all of the loans inits portfolio from Capital Crossing. Historically, Capital Crossing hasacquired such loans (1) from institutions which sought to eliminatecertain loans or categories of loans from their portfolios, (2) from institutionsparticipating in securitization programs, (3) from failed or consolidatingfinancial institutions and (4) from government agencies. Future loanpurchases will depend on the availability of pools of loans offered for saleand Capital Crossing’s ability to submit successful bids or negotiatesatisfactory purchase prices. The acquisition of whole loans is highlycompetitive. Consequently, Capital Crossing Preferred cannot assure you thatCapital Crossing will be able to purchase loans at the same volumes or with thesame yields as it has historically purchased. This may interfere with CapitalCrossing Preferred’s ability to maintain the requisite level of mortgage assetsto maintain its qualification as a REIT. If the volume of loans purchased declinesor the yields on these loans decline further, Capital Crossing Preferred wouldexperience a material adverse effect on its business, financial condition andresults of operations.

 

**Capital CrossingPreferred could be held responsible for environmental liabilities of propertiesit acquires through foreclosure**

 

If Capital Crossing Preferred is forced to foreclose on a defaultedmortgage loan to recover its investment it may be subject to environmentalliabilities related to the underlying real property. Approximately 67.4% of theloans in Capital Crossing Preferred’s portfolio at March 31, 2002 werecommercial mortgage loans, which generally are subject to relatively greaterenvironmental risks than other types of loans. Hazardous substances or wastes,contaminants, pollutants or sources thereof may be discovered on propertiesduring Capital Crossing Preferred’s ownership or after a sale to a third party.The amount of environmental liability could exceed the value of the realproperty. There can be no assurance that Capital Crossing Preferred would notbe fully liable for the entire cost of any removal and clean-up on an acquiredproperty, that the cost of removal and clean-up would not exceed the value ofthe property or that Capital Crossing Preferred could recoup any of the costsfrom any third party. In addition, Capital Crossing Preferred may find itdifficult or impossible to sell the property prior to or following any suchremediation.

 

**Capital Crossing Preferred is dependent in virtuallyevery phase of its operations on the diligence and skill of the management ofCapital Crossing**

 

Capital Crossing, which holds all of Capital Crossing Preferred’scommon stock, is involved in virtually every aspect of Capital CrossingPreferred’s existence. Capital Crossing Preferred has five officers and noother employees and does not have any independent corporate infrastructure.Capital Crossing Preferred does not have any employees because it has retainedCapital Crossing to perform all necessary functions pursuant to the advisoryagreement and the master service agreement. All of Capital Crossing Preferred’sofficers are also officers of Capital Crossing. Under an advisory agreementbetween Capital Crossing Preferred and Capital Crossing, Capital Crossingadministers day-to-day activities, including monitoring of Capital CrossingPreferred’s credit quality and advising it with respect to the acquisition,management, financing and disposition of mortgage assets and its operationsgenerally. Under a master service agreement between Capital Crossing Preferredand Capital Crossing, Capital Crossing services Capital Crossing Preferred’sloan portfolio. The advisory agreement has an initial term of five years withan automatic renewal feature and the master service agreement has a one yearterm with an automatic renewal feature. Both the master service agreement andthe advisory agreement are subject to earlier termination upon provision of30 days and 90 days notice, respectively. Capital Crossing maysubcontract all or a portion of its obligations under the advisory agreement toits affiliates or, with the approval of a majority of the Board of Directors aswell as a majority of the independent directors, subcontract its obligationsunder the advisory agreement to unrelated third parties. Capital Crossing willnot, in connection with the subcontracting of any of its obligations under theadvisory agreement, be discharged or relieved from its obligations under theadvisory agreement. The loss of the services of Capital Crossing, or theinability of Capital Crossing to effectively provide such services 

 

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whether as a result of the loss of key members of Capital Crossing’smanagement, early termination of the agreements or otherwise, and CapitalCrossing Preferred’s inability to replace such services on favorable terms, orat all, could adversely affect Capital Crossing Preferred’s ability to conductits operations.

 

**Capital CrossingPreferred’s relationship with Capital Crossing may create potential conflictsof interest**

 

Capital Crossing and its affiliates may have interests which are notidentical to Capital Crossing Preferred’s and therefore conflicts of interesthave arisen and may arise in the future with respect to transactions betweenCapital Crossing Preferred and Capital Crossing such as:

 

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

 

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

 

***Future dispositions by CapitalCrossing Preferred of mortgage assets to Capital Crossing or its affiliates.***  Themaster service agreement provides that foreclosures and dispositions of themortgage assets are to be performed with a view toward maximizing CapitalCrossing Preferred’s recovery as owner of the mortgage assets, and CapitalCrossing shall service the mortgage assets solely with a view toward CapitalCrossing Preferred’s interests, and without regard to the interests of CapitalCrossing or any of its affiliates. However, Capital Crossing Preferred cannotassure you that any such agreement or transaction will be on terms as favorableto Capital Crossing Preferred as would have been obtained from unaffiliatedthird parties. Capital Crossing may seek to exercise its influence over CapitalCrossing Preferred’s affairs so as to cause the sale of the mortgage assetsowned by Capital Crossing Preferred and their replacement by lesser qualityloans purchased from Capital Crossing or elsewhere which could adversely affectCapital Crossing Preferred’s business and its ability to make timely payments ofdividends.

 

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

 

***The terms of Capital CrossingPreferred’s guarantee of obligations of Capital Crossing.***  CapitalCrossing Preferred has guaranteed all of the obligations of Capital Crossingunder advances Capital Crossing may receive from time to time from the FHLBB,and has agreed to pledge a significant amount of its assets in connection with thoseadvances. The assets Capital Crossing Preferred pledges to the FHLBB will varyfrom time to time; however, the potential exists for Capital Crossing Preferredto pledge all of its assets to the FHLBB 

 

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tosecure advances to Capital Crossing. In addition, Capital Crossing has pledgedto the FHLBB all of the shares of Capital Crossing Preferred’s capital stock itowns as collateral for its FHLBB borrowings. Under the terms of the pledge, ifCapital Crossing becomes undercapitalized the FHLBB may require CapitalCrossing to dissolve Capital Crossing Preferred such that the assets of CapitalCrossing Preferred are distributed to Capital Crossing. In this circumstancethe holders of Series A and Series C preferred shares would receivetheir liquidation preference only to the extent there are available assets ofCapital Crossing Preferred following satisfaction of its outstandingobligations, including its guarantee of Capital Crossing’s FHLBB borrowings. AtMarch 31, 2002, approximately $52.4 million, or 21.7%, of Capital CrossingPreferred’s assets have been pledged to and accepted by the FHLBB to secureadvances to Capital Crossing. Capital Crossing has also agreed that it will notrequest or accept advances from the FHLBB in excess of Capital CrossingPreferred’s total stockholders equity, less the stockholders equityattributable to the Series A and Series C preferred shares. As ofMarch 31, 2002, this restriction would limit Capital Crossing’s ability toreceive advances in excess of approximately $208.5 million. As of March31, 2002, Capital Crossing had $139.0 million in outstanding FHLBBborrowings. The guarantee and pledge were approved by Capital CrossingPreferred’s independent directors, subject to certain requirements andlimitations, including the requirement that Capital Crossing pay CapitalCrossing Preferred a guarantee fee. Any default by Capital Crossing on itsobligations which would require Capital Crossing Preferred to satisfy its guaranteecould adversely affect its business and its ability to make timely payments ofdividends.

 

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

 

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

 

The lack of specific policies with respect to the purchase by CapitalCrossing Preferred of loans from Capital Crossing could result in CapitalCrossing Preferred acquiring lower quality mortgage assets from CapitalCrossing than if such policies were otherwise in place. Neither CapitalCrossing Preferred nor Capital Crossing currently have specific policies withrespect to the purchase by Capital Crossing Preferred from Capital Crossing of particularloans or pools of loans, other than that such assets must be eligible to beheld by a REIT. Capital Crossing Preferred’s Board of Directors has adoptedcertain policies to guide the acquisition and disposition of assets but thesepolicies may be revised from time to time at the discretion of the Board ofDirectors without a vote of Capital Crossing Preferred’s stockholders. CapitalCrossing Preferred intends to acquire all or substantially all of theadditional mortgage assets it may acquire in the future from Capital Crossingon terms that are comparable to those that could be obtained by CapitalCrossing Preferred if such mortgage assets were purchased from unrelated thirdparties, but Capital Crossing Preferred cannot assure you that this will alwaysbe the case.

 

**Capital CrossingPreferred’s Board of Directors has broad discretion to revise Capital CrossingPreferred’s strategies**

 

Capital Crossing Preferred’s Board of Directors has established CapitalCrossing Preferred’s investment and operating strategies. These strategies maybe revised from time to time at the discretion of the Board of Directorswithout a vote of Capital Crossing Preferred’s stockholders. Changes in CapitalCrossing Preferred’s strategies could have a negative effect on you.

 

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

 

To date, Capital Crossing Preferred has not obtained third–partyvaluations as part of its loan acquisitions or dispositions and does notanticipate obtaining third–party valuations for future acquisitions anddispositions of mortgage assets. Capital Crossing Preferred does not intend toobtain third–party valuations even where it is acquiring mortgage assetsfrom, or disposing mortgage assets to, one of its affiliates, including CapitalCrossing. Accordingly, Capital Crossing Preferred may pay its affiliates,including Capital Crossing, more than the fair market value of mortgage assetsit acquires and may receive less than the fair market value of the mortgageassets it sells based on a third–party valuation.

 

**Capital Crossing Preferred may pay more than fairmarket value for mortgages it purchases from Capital Crossing because it doesnot engage in arm’s–length negotiations with Capital Crossing**

 

Capital Crossing Preferred acquires mortgage assets from CapitalCrossing under a master mortgage loan purchase agreement between it and CapitalCrossing, at an amount equal to Capital Crossing’s net carrying value for thosemortgage assets. Because Capital Crossing is 

 

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an affiliate of Capital Crossing Preferred’s, Capital CrossingPreferred does not engage in any arm’s–length negotiations regarding theconsideration to be paid. Accordingly, if Capital Crossing’s net carrying valueexceeds the fair market value of the mortgage assets, Capital CrossingPreferred would pay Capital Crossing more than the fair market value for thosemortgage assets.

 

**A decline ininterest rates could reduce Capital Crossing Preferred’s earnings and affectits ability to pay dividends**

 

Capital Crossing Preferred’s income consists primarily of interestearned on its mortgage assets and short-term investments. A significant portionof Capital Crossing Preferred’s mortgage assets bears interest at adjustablerates. If there is a decline in interest rates, then Capital Crossing Preferredwill experience a decrease in income available to be distributed to itsstockholders. If interest rates decline, Capital Crossing Preferred may alsoexperience an increase in prepayments on its mortgage assets and may find itdifficult to purchase additional mortgage assets bearing rates sufficient tosupport payment of dividends on the Series A and Series C preferredshares. Because the dividend rates on the Series A and Series Cpreferred shares are fixed, a significant decline in interest rates couldmaterially adversely affect Capital Crossing Preferred’s ability to paydividends on the Series A and Series C preferred shares.

 

**Tax Risks Related to REITs**

 

***If Capital Crossing Preferred failsto qualify as a REIT, it will be subject to federal income tax at regularcorporate rates.***  If Capital Crossing Preferred fails toqualify as a REIT for any taxable year, it would be subject to federal incometax, including any applicable alternative minimum tax, on its taxable income atregular corporate rates. As a result, the amount available for distribution toCapital Crossing Preferred’s stockholders would be reduced for the year oryears involved. In addition, unless entitled to relief under statutoryprovisions, Capital Crossing Preferred would be disqualified from treatment asa REIT for the four taxable years following the year during which qualificationwas lost. The failure to qualify as a REIT would reduce Capital CrossingPreferred’s net earnings available for distribution to its stockholders becauseof the additional tax liability for the year or years involved. CapitalCrossing Preferred’s failure to qualify as a REIT would not by itself giveCapital Crossing Preferred the right to redeem the Series A orSeries C preferred shares, nor would it give the holders of theSeries A or Series C preferred shares the right to have their sharesredeemed.

 

AlthoughCapital Crossing Preferred currently intends to operate in a manner designed toqualify as a REIT, future economic, market, legal, tax or other considerationsmay cause it to determine that it is in its best interest and in the bestinterest of holders of its common stock and preferred stock to revoke its REITelection. The tax law prohibits Capital Crossing Preferred from electingtreatment as a REIT for the four taxable years following the year of any suchrevocation.

 

***If Capital Crossing Preferred doesnot distribute 90% of its net taxable income, it may not qualify as a REIT.***  In orderto qualify as a REIT, Capital Crossing Preferred generally is required eachyear to distribute to its stockholders at least 90% of its net taxable income,excluding net capital gains. Capital Crossing Preferred may retain theremainder of REIT taxable income or all or part of its net capital gain, butwill be subject to tax at regular corporate rates on such income. In addition,Capital Crossing Preferred is subject to a 4% nondeductible excise tax on theamount, if any, by which certain distributions considered as paid by CapitalCrossing Preferred with respect to any calendar year are less than the sum of(1) 85% of its ordinary income for the calendar year, (2) 95% of itscapital gains net income for the calendar year and (3) 100% of anyundistributed income from prior periods. Under certain circumstances, federalor state regulatory authorities may restrict Capital Crossing Preferred’sability, as a subsidiary of Capital Crossing, to make distributions to itsstockholders in an amount necessary to retain its REIT qualification. Such arestriction could result in Capital Crossing Preferred failing to qualify as aREIT. To the extent Capital Crossing Preferred’s REIT taxable income may exceedthe actual cash received for a particular period, Capital Crossing Preferredmay not have sufficient liquidity to make distributions necessary to retain itsREIT qualification.

 

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

 

(1)                                  dividends paid by Capital Crossing Preferred withrespect to its capital stock are not fully deductible by it for income taxpurposes; or

 

(2)                                  Capital Crossing Preferred is otherwise unable toqualify as a REIT.

 

Theoccurrence of such changes in the tax laws or regulations will not, however,give the holders of the Series A and Series C preferred shares anyright to have their shares redeemed.

 

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***Capital Crossing Preferred hasimposed ownership limitations to protect its ability to qualify as a REIT;however, if ownership of the common stock of Capital Crossing becomesconcentrated in a small number of individuals Capital Crossing Preferred mayfail to qualify as a REIT.***  To maintain Capital CrossingPreferred’s status as a REIT, not more than 50% in value of Capital CrossingPreferred’s outstanding shares may be owned, directly or indirectly, by five orfewer individuals, as defined in the Internal Revenue Code, the Code, toinclude certain entities, during the last half of each taxable year. CapitalCrossing Preferred currently satisfies this requirement because for thispurpose Capital Crossing Preferred’s common stock held by Capital Crossing istreated as held by Capital Crossing’s stockholders. However, it is possiblethat the ownership of Capital Crossing might become sufficiently concentratedin the future such that five or fewer individuals would be treated as havingconstructive ownership of more than 50% of the value of Capital CrossingPreferred’s stock. Capital Crossing Preferred may have difficulty monitoringthe daily ownership and constructive ownership of its outstanding shares and,therefore, Capital Crossing Preferred cannot assure you that it will continueto meet the share ownership requirement. This risk may be increased in thefuture as Capital Crossing implements common stock repurchase programs becauserepurchases may cause ownership in Capital Crossing to become moreconcentrated. In addition, while the fact that the Series A andSeries C preferred shares may be redeemed or exchanged will not affectCapital Crossing Preferred’s REIT status prior to any such redemption orexchange, the redemption or exchange of all or a part of the Series A orSeries C preferred shares could adversely affect Capital CrossingPreferred’s ability to satisfy the share ownership requirements in the future.

 

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**Item 3. Quantitative and Qualitative Disclosures About MarketRisk**

 

Marketrisk is the risk of loss from adverse changes in market prices and interestrates. It is the objective of Capital Crossing Preferred to attempt to controlrisks associated with interest rate movements. Capital Crossing Preferred’smarket risk arises primarily from interest rate risk inherent in holding loans.To that end, management actively monitors and manages the interest rate riskexposure of Capital Crossing Preferred.

 

CapitalCrossing Preferred’s management reviews, among other things, the sensitivity ofCapital Crossing Preferred’s assets to interest rate changes, the book andmarket values of assets, purchase and sale activity, and anticipated loanpay-offs. Capital Crossing’s senior management also approves and establishespricing and funding decisions with respect to Capital Crossing Preferred’soverall asset and liability composition.

 

CapitalCrossing Preferred’s methods for evaluating interest rate risk include ananalysis of its interest–earning assets maturing or repricing within agiven time period. Since Capital Crossing Preferred has no interest–bearingliabilities, a period of rising interest rates would tend to result in anincrease in net interest income. A period of falling interest rates would tendto adversely affect net interest income.

 

Thefollowing table sets forth Capital Crossing Preferred’s interest-rate-sensitiveassets categorized by repricing dates and weighted average yields at March 31,2002. For fixed rate instruments, the repricing date is the maturity date. Foradjustable-rate instruments, the repricing date is deemed to be the earliestpossible interest rate adjustment date. Assets that are subject to immediaterepricing are placed in the overnight column.

 

|                               |   |                       |   | **Within  One  Year** |   | **One to  Two  Years** |   | **Two to  Three  Years** |   | **Three to  Four  Years** |   | **Four to  Five  Years** |   | **Over  Five  Years** |   |   |   |
|------------------------------------|--------|----------------------------|--------|-----------------------|--------|------------------------|--------|--------------------------|--------|---------------------------|--------|--------------------------|--------|-----------------------|--------|--------|--------|
|                               |   |                       |   |                  |   |                   |   |                     |   |                      |   |
|                               |   | **Overnight**              |   |                  |   |                   |   |                     |   | **Total**                 |   |
|                               |   | **(dollars in thousands)** |   |
|                               |   |                       |   |                  |   |                   |   |                     |   |                      |   |                     |   |                  |   |   |   |
| Interest-bearing deposits in banks |   | $                          | 72,279 |                  | $      | 17,600                 |   | $                        | — |                      | $      | —                   |   | $                     | — |   | $      | — |   | $ | — |   | $ | 89,879 |   |
| Average interest rate              |   | 2.69                       | %      | 2.17                  | %      |                   |   |                     |   |                      |   |                     |   |                  |   |   |   |
| Fixed-rate loans (1)               |   | —                     |   | 19,677                |   | 9,220                  |   | 7,756                    |   | 6,126                     |   | 4,130                    |   | 10,871                |   | 57,780 |   |
| Average interest rate              |   |                       |   | 9.38                  | %      | 9.49                   | %      | 9.22                     | %      | 9.11                      | %      | 9.29                     | %      | 7.89                  | %      |   |   |
| Adjustable-rate loans (1)          |   | 26,817                     |   | 61,881                |   | 5,124                  |   | 3,176                    |   | 342                       |   | —                   |   | —                |   | 97,340 |   |
| Average interest rate              |   | 8.10                       | %      | 7.78                  | %      | 8.51                   | %      | 8.29                     | %      | 7.24                      | %      |                     |   |                  |   |   |   |
|                               |   |                       |   |                  |   |                   |   |                     |   |                      |   |                     |   |                  |   |   |   |
| Total rate-sensitive assets        |   | $                          | 99,096 |                  | $      | 99,158                 |   | $                        | 14,344 |                      | $      | 10,932                   |   | $                     | 6,468  |   | $      | 4,130 |   | $ | 10,871 |   | $ | 244,999 |   |
|                                    |        |                            |        |                       |        |                        |        |                          |        |                           |        |                          |        |                       |        |        |        |  |  |  |  |  |  |  |  |  |

 

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(1) Loans arepresented at net amounts before deducting the allowance for loan losses andexclude non-accrual loans.

 

Based on CapitalCrossing Preferred’s experience, management applies the assumption that, onaverage, approximately 24% of the outstanding fixed and adjustable rate loanswill prepay annually.

 

At March 31, 2002, the fair value of net loans was $152,950,000 ascompared to the net carrying value of net loans of $150,555,000. The fair valueof interest-bearing deposits in banks approximates carrying value.

 

**Part II**

 

**Item 1.  LegalProceedings**

 

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

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

**CAPITALCROSSING PREFERRED CORPORATION**

 
| Date:  May 10, 2002 | By:  /s/ RICHARD WAYNE  |                                          |
|---------------------|-------------------------|-----------------------------------------------|
|                |                    |
|                |                    | Richard  Wayne                                |
|                |                    | President  (Principal Executive Officer) |
|                |                    |                                          |
| Date:  May 10, 2002 | By:  /s/ EDWARD F. MEHM |                                          |
|                |                    |                                          |
|                |                    | Edward  F. Mehm                               |
|                |                    | Treasurer  (Principal Financial Officer)      |
|                     |                         |                                               |  |  |  |

 

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