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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2005 Commission File Number 000-25193 CAPITAL CROSSING PREFERRED CORPORATION  Massachusetts 
  04-3439366 
  101 Summer Street, Boston, Massachusetts 
  02110 
  (617) 880-1000 
  Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ Indicate the number of shares outstanding of the issuers common stock, $.01 par value per share,
as of May 12, 2005: 100.
No common stock was held by non-affiliates of the issuer.




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Capital Crossing Preferred Corporation
Table of Contents PART I - Financial InformationPageItem 1.
    
    Financial Statements (unaudited):Balance Sheets
    
    1Statements of Income
    
    2Statements of
Changes in Stockholders Equity
    
    3Statements of Cash Flows
    
    4Notes to Unaudited Interim Financial Statements
    
    5Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of OperationsApplication of Critical Accounting Policies and Estimates
    
    7Results of Operations
    
    8Changes in Financial Conditions
    
    10Interest Rate Risk
    
    12Significant Concentration of Credit Risk
    
    13Liquidity Risk Management
    
    13Impact of Inflation and Changing Prices
    
    13Certain Factors That May Affect Future Operating Results
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    21Item 4.
    
    Controls and Procedures
    
    21PART II- Other InformationItem 6.
    
    Exhibits and Reports on Form 8-K
    
    23Signatures
    
    24Exhibit Index
    
    25EX-31.1 SECTION 302 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICEREX-31.2 SECTION 302 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICEREX-32 SECTION 906 CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICERS




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PART I 
 Item 1. Financial Statements Capital Crossing Preferred Corporation 
 Balance Sheets
(unaudited)
 March 31,
    
    
    December 31,2005
    
    
    2004(in thousands)ASSETSCash account with Capital Crossing Bank
    
    $
    111
    
    
    $
    92Interest bearing deposits with Capital Crossing Bank
    
    
    100,250
    
    
    
    95,315Total cash and cash equivalents
    
    
    100,361
    
    
    
    95,407Certificate of deposit
    
    
    300
    
    
    
    300Loans, net of discounts and net deferred loan income
    
    
    119,659
    
    
    
    123,932Less allowance for loan losses
    
    
    (2,369
    )
    
    
    (2,497
    )Loans, net
    
    
    117,290
    
    
    
    121,435Accrued interest receivable
    
    
    553
    
    
    
    544Other assets
    
    
    19
    
    
    
    $
    218,523
    
    
    $
    217,686LIABILITIES AND STOCKHOLDERS EQUITYDue to Capital Crossing Bank
    
    $
    2
    
    
    $
    289Accrued expenses and other liabilities
    
    
    1,226
    
    
    
    1,228Total liabilities
    
    
    1,228
    
    
    
    1,517Stockholders equity:Preferred stock, Series A, 9.75% non-cumulative,
exchangeable; $.01 par value; $10 liquidation value
per share; 1,449,000 shares authorized, 1,416,130 shares
issued and outstanding
    
    
    14
    
    
    
    14Preferred stock, Series B, 8% cumulative, non-convertible;
$.01 par value; $1,000 liquidation value per share plus
accrued dividends; 1,000 shares authorized, 940 shares
issued and outstanding
    
    
    
    
    
    
    Preferred stock, Series C, 10.25% non-cumulative, exchangeable;
$.01 par value; $10 liquidation value per share; 1,840,000
shares
authorized, issued and outstanding
    
    
    18
    
    
    
    18Preferred stock, Series D, 8.50% non-cumulative, exchangeable;
$.01 par value; $25 liquidation value per share; 1,725,000
shares
authorized, 1,500,000 shares issued and outstanding
    
    
    15
    
    
    
    15Common stock, $.01 par value, 100 shares authorized,
issued and outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    216,122
    
    
    
    216,122Retained earnings
    
    
    1,126
    
    
    
    Total stockholders equity
    
    
    217,295
    
    
    
    216,169$
    218,523
    
    
    $
    217,686
 See accompanying notes to unaudited interim financial statements. 1




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Capital Crossing Preferred Corporation 
 Statements of Income
(unaudited)
 Three Months Ended March 31,2005
    
    
    2004(in thousands)Interest income:Interest and fees on loans
    
    $
    2,485
    
    
    $
    3,844Interest on interest-bearing deposits
    
    
    265
    
    
    
    204Total interest income
    
    
    2,750
    
    
    
    4,048Credit for loan losses
    
    
    128
    
    
    
    411Total interest income, after credit for loan
losses
    
    
    2,878
    
    
    
    4,459Other income:Gains on sales of loans
    
    
    
    
    
    
    76Guarantee fee income
    
    
    20
    
    
    
    20Total other income
    
    
    20
    
    
    
    96Operating expenses:Loan servicing and advisory services
    
    
    80
    
    
    
    106Other general and administrative
    
    
    60
    
    
    
    79Total operating expenses
    
    
    140
    
    
    
    185Net income
    
    
    2,758
    
    
    
    4,370Preferred stock dividends
    
    
    1,632
    
    
    
    835Net income available to common
stockholder
    
    $
    1,126
    
    
    $
    3,535
 See accompanying notes to 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, 2005Preferred Stock
    
    
    Preferred Stock
    
    
    Preferred Stock
    
    
    Preferred Stock
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    TotalSeries A
    
    
    Series B
    
    
    Series C
    
    
    Series D
    
    
    Common Stock
    
    
    Paid-in
    
    
    Retained
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Equity(dollars in thousands)Balance at December 31, 2004
    
    
    1,416,130
    
    
    $
    14
    
    
    
    940
    
    
    $
    
    
    
    
    1,840,000
    
    
    $
    18
    
    
    
    1,500,000
    
    
    $
    15
    
    
    
    100
    
    
    $
    
    
    
    $
    216,122
    
    
    $
    
    
    
    $
    216,169Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,758
    
    
    
    2,758Dividends on preferred stock,
Series A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (345
    )
    
    
    (345
    )Cumulative dividends on
preferred stock, Series B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19
    )
    
    
    (19
    )Dividends on preferred stock,
Series C
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (471
    )
    
    
    (471
    )Dividends on preferred stock,
Series D
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (797
    )
    
    
    (797
    )Balance at March 31, 2005
    
    
    1,416,130
    
    
    $
    14
    
    
    
    940
    
    
    $
    
    
    
    
    1,840,000
    
    
    $
    18
    
    
    
    1,500,000
    
    
    $
    15
    
    
    
    100
    
    
    $
    
    
    
    $
    216,122
    
    
    $
    1,126
    
    
    $
    217,295Three Months Ended March 31, 2004Preferred Stock
    
    
    Preferred Stock
    
    
    Preferred Stock
    
    
    Preferred Stock
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    TotalSeries A
    
    
    Series B
    
    
    Series C
    
    
    Series D
    
    
    Common Stock
    
    
    Paid-in
    
    
    Retained
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Equity(dollars in thousands)Balance at December 31, 2003
    
    
    1,416,130
    
    
    $
    14
    
    
    
    941
    
    
    $
    
    
    
    
    1,840,000
    
    
    $
    18
    
    
    
    
    
    
    $
    
    
    
    
    100
    
    
    $
    
    
    
    $
    211,240
    
    
    $
    10,158
    
    
    $
    221,430Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,370
    
    
    
    4,370Dividends 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, 2004
    
    
    1,416,130
    
    
    $
    14
    
    
    
    941
    
    
    $
    
    
    
    
    1,840,000
    
    
    $
    18
    
    
    
    
    
    
    $
    
    
    
    
    100
    
    
    $
    
    
    
    $
    211,240
    
    
    $
    13,693
    
    
    $
    224,965
 See accompanying notes to unaudited interim financial statements. 3




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Capital Crossing Preferred Corporation 
 Statements of Cash Flows
(unaudited)
 Three Months Ended March 31,2005
    
    
    2004(in thousands)Cash flows provided by operating activities:Net income
    
    $
    2,758
    
    
    $
    4,370Adjustments to reconcile net income to net cash provided by operating activities:Credit for loan losses
    
    
    (128
    )
    
    
    (411
    )Gains on sales of loans
    
    
    
    
    
    
    (76
    )Other, net
    
    
    (317
    )
    
    
    52Net cash provided by operating activities
    
    
    2,313
    
    
    
    3,935Cash flows provided by investing activities:Loan repayments
    
    
    4,273
    
    
    
    17,566Proceeds from loan sales
    
    
    
    
    
    
    495Net cash provided by investing activities
    
    
    4,273
    
    
    
    18,061Cash flows used in financing activities:Payment of preferred stock dividends
    
    
    (1,632
    )
    
    
    (835
    )Net cash used in financing activities
    
    
    (1,632
    )
    
    
    (835
    )Net change in cash and cash equivalents
    
    
    4,954
    
    
    
    21,161Cash and cash equivalents at beginning of period
    
    
    95,407
    
    
    
    65,845Cash and cash equivalents at end of period
    
    $
    100,361
    
    
    $
    87,006
 See accompanying notes to unaudited interim financial statements. 4




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Capital Crossing Preferred Corporation 
 Notes to Unaudited Interim Financial Statements
 Three Months Ended March 31, 2005 and 2004
 Note 1.Basis of Presentation Capital Crossing Preferred Corporation (Capital Crossing Preferred) is a Massachusetts
corporation organized on March 20, 1998, to acquire and hold real estate assets. Capital Crossing
Bank (Capital Crossing), a federally insured Massachusetts trust company, owns all of Capital
Crossing Preferreds common stock. Capital Crossing is in compliance with its regulatory capital
requirements at March 31, 2005. On March 31, 1998, Capital Crossing capitalized Capital Crossing Preferred by transferring
mortgage loans valued at $140.7 million in exchange for 1,000 shares of Capital Crossing
Preferreds 8% Cumulative Non-Convertible Preferred Stock, Series B, valued at $1.0 million and 100
shares of Capital Crossing Preferreds common stock valued at $139.7 million. The carrying value of
these loans approximated their fair values at the date of contribution. On March 31, 1998, Capital
crossing Preferred was initially capitalized with the issuance to
Capital Crossing of 100 shares of Capital Crossing Preferreds
common stock, $.01 par value, and 1,000 shares of Series B preferred
stock, $.01 par value, with Capital Crossing transferring to Capital
Crossing Preferred a portfolio of loans at its estimated fair value
of $140,740,000. Such loans were recorded in the accompanying balance
sheet at Capital Crossings historical cost, which approximated
their estimated fair values. In 1999, Capital Crossing Preferred completed the sale of 1,416,130 shares of Series A
preferred stock. In 2001, Capital Crossing Preferred completed the sale of 1,840,000 shares of
Series C preferred stock. In May 2004, Capital Crossing Preferred completed the sale of 1,500,000
shares of Series D preferred stock. The financial information as of March 31, 2005 and the results of operations, changes in
stockholders equity and cash flows for the three months ended March 31, 2005 and 2004 are
unaudited; however, in the opinion of management, the financial information reflects all
adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation in
accordance with accounting principles generally accepted in the United States of America. Interim
results are not necessarily indicative of results to be expected for the entire year. These
interim financial statements are intended to be read in conjunction with the financial statements
presented in Capital Crossing Preferreds Annual Report on Form 10-K as of and for the year ended
December 31, 2004. In preparing financial statements in conformity with accounting principles generally accepted
in the United States of America, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the balance sheet and
reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for losses on loans, the allocation
of purchase discount on loans between accretable and nonaccretable portions, and the rate at which
the discount is accreted into interest income. Note 2.Commitments and Contingencies Guarantees Capital Crossing Preferred has guaranteed all of the obligations of Capital Crossing under
advances Capital Crossing may receive from time to time from the Federal Home Loan Bank of Boston
(FHLBB), and Capital Crossing Preferred has agreed to pledge a significant amount of its assets
in connection with those advances. This guarantee would rank senior to the preferred shares upon
liquidation. Capital Crossing Preferreds obligations under this agreement are limited by
applicable laws pertaining to fraudulent conveyance and fraudulent transfer. The assets pledged to
the FHLBB will vary from time to time, however the potential exists for Capital Crossing Preferred
to pledge all of its assets to the FHLBB to secure advances to Capital Crossing. In addition,
Capital Crossing has pledged to the FHLBB all of the shares of Capital Crossing Preferreds capital
stock it owns as collateral for its FHLBB borrowings. Under the terms of the pledge, if Capital
Crossing becomes undercapitalized, the FHLBB may require Capital Crossing to dissolve Capital
Crossing Preferred such that the assets of Capital Crossing Preferred are distributed to Capital
Crossing. In such circumstance, holders of the Series A, Series C and Series D preferred stock
would receive their liquidation preference only to the extent there are available proceeds from the
liquidation of the assets of Capital Crossing Preferred following satisfaction of its outstanding
obligations, including its guarantee of Capital Crossings FHLBB borrowings. At March 31, 2005,
approximately $29.8 million, or 13.7%, of Capital Crossing Preferreds assets had been pledged to
and accepted by the FHLBB to secure advances to Capital Crossing. As of March 31, 2005, Capital
Crossing had $167.5 million in outstanding FHLBB borrowings. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations 5




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This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities
Act of 1933, as amended. For purposes of these Acts, any statement that is not a statement of
historical fact may be deemed a forward-looking statement. For example, statements containing the
words believes, anticipates, plans, expects, estimates, intends, may, projects,
will, would, and similar expressions may be forward-looking statements. Capital Crossing
Preferred cautions investors not to place undue reliance on any forward-looking statements in this
Quarterly Report on Form 10-Q. Capital Crossing Preferred undertakes no obligation to publicly
update any forward-looking statements, whether as a result of new information, future events or
otherwise. There are a number of factors that could cause Capital Crossing Preferreds actual
results to differ materially from those indicated by these forward-looking statements, including
without limitation the factors set forth below under the caption CERTAIN FACTORS THAT MAY AFFECT
FUTURE RESULTS. These factors and the other cautionary statements made in this quarterly report
should be read as being applicable to all related forward-looking statements wherever they appear
in this quarterly report. If one or more of these factors materialize, or if any underlying
assumptions prove incorrect, Capital Crossing Preferreds actual results, performance, or
achievements may vary materially from any future results, performance, or achievements expressed or
implied by these forward-looking statements. The following discussion of Capital Crossing Preferreds unaudited consolidated financial
condition and results of operations and capital resources and liquidity should be read in
conjunction with the Unaudited Consolidated Interim Financial Statements and related Notes included
elsewhere herein and the audited Consolidated Financial Statements and related Notes included in
Capital Crossing Preferreds Annual Report on Form 10-K for the year ended December 31, 2004 as
filed with the Securities and Exchange Commission. Executive Level Overview Net income available to the common shareholder decreased $2.4 million, or 68.1%, to $1.1
million for the three months ended March 31, 2005 compared to $3.5 million for the same period in
2004. The decrease from 2004 to 2005 is primarily the result of a decline in interest and fees on
loans and an increase in preferred stock dividends attributable to the issuance of Series D
preferred stock on May 11, 2004. All of the mortgage assets in Capital Crossing Preferreds loan portfolio at March 31, 2005
were acquired from Capital Crossing and it is anticipated that substantially all additional
mortgage assets will be acquired from Capital Crossing. As of March 31, 2005, Capital Crossing
Preferred held loans acquired from Capital Crossing with net investment balances of $119.7 million. Commercial mortgage loans constituted approximately 67.1% of the net loans in Capital Crossing
Preferreds loan portfolio at March 31, 2005 and commercial mortgage loans are generally subject to
greater risks than other types of loans. Capital Crossing Preferreds commercial mortgage loans,
like most commercial mortgage loans, generally lack standardized terms, tend to have shorter
maturities than other mortgage loans and may not be fully amortizing. For these reasons, Capital
Crossing Preferred may experience higher rates of default on its mortgage loans than it would if
its loan portfolio was more diversified and included a greater number of owner-occupied residential
or other mortgage loans. Properties underlying Capital Crossing Preferreds current mortgage assets are also
concentrated primarily in California and New England. As of March 31, 2005, approximately 47.4% of
the balances of its mortgage loans were secured by properties located in California and 14.0% in
New England. In the instance where either region experiences adverse economic, political or
business conditions, Capital Crossing Preferred would likely experience higher rates of loss and
delinquency on its mortgage loans. Since Capital Crossing Preferred is a subsidiary of Capital Crossing, federal and state
regulatory authorities will have the right to examine it and its activities and under certain
circumstances, to impose restrictions on Capital Crossing or Capital Crossing Preferred which could
impact Capital Crossing Preferreds ability to conduct its business according to its business plan.
For instance, if Capital Crossings regulators determine that Capital Crossings relationship to
Capital Crossing Preferred results in an unsafe and unsound banking practice, the regulators could
restrict Capital Crossing Preferreds ability to transfer assets, to make distributions to its
stockholders or even require Capital Crossing to sever its relationship with or divest its
ownership interest in Capital Crossing Preferred. Decisions regarding the utilization of Capital Crossing Preferreds cash are based, in large
part, on its future commitments to pay preferred stock dividends. During the first quarter of 2005,
the loan portfolio was large enough to generate income resulting in earnings, which were 1.69 times
fixed charges and preferred stock dividends. Future decisions regarding mortgage asset acquisitions
and returns of capital will be based on the level of preferred stock dividends at the time and the
required level of income necessary to generate adequate dividend coverage. Effective January 1, 2005, and as a result of the required adoption of Statement of Position
(SOP) No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, Capital
Crossing Preferreds allowance for loan loss methodology has changed. SOP No. 03-3 prohibits
carrying over or the creation of valuation allowances in the initial accounting of all loans
acquired in a loan pool purchase and impaired loans acquired in a business combination. Valuation
allowances should reflect only those losses incurred by the 6




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investor after acquisition. Effective January 1, 2005, Capital Crossing Preferred is no longer
allowed to increase the allowance through allocations from purchase discount. Additionally, general
risk allocations are no longer applied to purchased loans acquired subsequent to December 31, 2004.
Only specific allocations based upon the results of measuring loans that become impaired subsequent
to purchase under SFAS No. 114 are considered in the calculation of the allowance for loan losses
for purchased loans. Consequently, the allowance for loan losses has
declined since the adoption of SOP No. 03-3, and it is anticipated that the allowance will continue to decline as credits for loan losses may continue to be
recorded if loans pay off and allowance allocations related to these loans are not required or
additions due to loan impairment are not required. As a result of this accounting change, the financial statements of Capital Crossing Preferred
may become more difficult to compare with those of its peers since its business is based mainly
upon the acquisition, rather than the origination, of loans. In particular, ratios involving the
allowance for loan losses may not be comparable to its peers ratios. It is unknown what effect, if
any, this accounting change will have in the marketplace with investors and analysts. 
 Application of Critical Accounting Policies and Estimates The SEC requires that all registrants discuss their most critical accounting policies in
managements discussion and analysis of financial condition and results of operations. The SEC
indicated that a critical accounting policy is one which is both important to the portrayal of
the companys financial condition and results and requires managements most difficult, subjective
or complex judgments, often as a result of the need to make estimates about the effect of matters
that are inherently uncertain. While Capital Crossing Preferreds significant accounting policies
are more fully described in Note 1 to the Financial Statements included in its Annual Report on
Form 10-K for the year ended December 31, 2004, the following is a summary of the accounting
policies believed by management to be most critical in their potential effect on Capital Crossing
Preferreds financial position or results of operations: Allowance for Loan Losses.Arriving at an appropriate level of allowance for loan losses
requires a high degree of judgment. Capital Crossing Preferred maintains an allowance for probable
loan losses that are inherent in its loan portfolio. The allowance for loan losses is increased or
decreased through a provision or credit for loan losses included in earnings. Prior to January 1,
2005, the effective date of SOP No. 03-3, the allowance for loan losses was increased upon
allocation of purchase discount upon acquisition of loans. No allocation of discount is made to the
allowance for loan losses for loans acquired subsequent to December 31, 2004, however, additions
for impairment that occur subsequent to acquisition will continue to be recognized through a
provision for loan losses included in earnings. Additionally, the allowance for loan losses is
decreased upon sales or payoffs of loans for which a related allowance remains unused. Reductions
in connection with sales are included in the calculation of the gain or loss, and reductions
related to payoffs are recorded as a credit for loan losses. Loan losses are charged against the
allowance when management believes the net investment of the loan, or a portion thereof, is
uncollectible. Subsequent recoveries, if any, are credited to the allowance when cash payments are
received. In determining the adequacy of the allowance for loan losses, management makes significant
judgments. Management initially reviews its loan portfolio to identify loans for which specific
allocations are considered prudent. Specific allocations include the results of measuring impaired
loans under SFAS No. 114. Next, management considers the level of general loan allowances deemed
appropriate for loans purchased prior to January 1, 2005. General risk allocations are determined
by a formula whereby the portfolio is stratified by type and internal risk rating categories. Loss
factors are then applied to each strata based on various considerations including collateral type,
loss experience, delinquency trends, current economic conditions, industry standards, and
regulatory guidelines. The allowance for loan losses is managements estimate of the probable loan
losses incurred as of the balance sheet date. There can be no assurance that Capital Crossing
Preferreds actual losses with respect to loans will not exceed its allowance for loan losses. Effective January 1, 2005, and as a result of the required adoption of SOP No. 03-3, additions
to the valuation allowances relating to newly acquired loans reflect only those losses incurred by
Capital Crossing Preferred subsequent to acquisition. Capital Crossing Preferred no longer
increases the allowance through allocations from purchase discount. Additionally, general risk
allocations are no longer applied to loans purchased subsequent to December 31, 2004. Consequently,
it is anticipated that the allowance will continue to decline as credits for loan losses may
continue to be recorded if loans pay off and allowance allocations related to these loans are not
required or additions due to loan impairment are not required. Discounts on Acquired Loans.Effective January 1, 2005, and as a result of the required
adoption of SOP No. 03-3 Capital Crossing Preferred is required to change its discount accounting
as it relates to loans which are acquired subsequent to December 31, 2004 and which have evidence
of deterioration of credit quality since origination and, for which it is probable, at acquisition,
that Capital Crossing Preferred will be unable to collect all contractually required payments. For
such loans, the excess of contractual cash flows over cash flows estimated at the time of
acquisition is not accreted into income (nonaccretable discount). The remaining amount,
representing the excess of the loans estimated cash flows over the purchase price, is accreted
into income over the life of the loan (accretable discount). For all other loans acquired subsequent to December 31, 2004, the discount, which represents
the excess of the amount of reasonably estimable and probable discounted future cash collections
over the purchase price is accreted into interest 7




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##### Table of Contents



income using the interest method over the term of the loans and is not accreted on
non-performing loans. This is consistent with how Capital Crossing Preferred accounted for loans
purchased prior to January 1, 2005, except an allowance allocation was also made at the time of
acquisition. Capital Crossing Preferred no longer increases the allowance through allocations from
purchase discount. Prepayments are not considered in the calculation of accretion income. There is judgment involved in estimating the amount of Capital Crossing Preferreds future
cash flows. The amount and timing of actual cash flows could differ materially from managements
estimates, which could materially affect Capital Crossing Preferreds financial condition and
results of operations. Depending on the timing of an acquisition, a preliminary allocation may be
utilized until a final allocation is established. Generally, the allocation will be finalized no
later than ninety days from the date of purchase. The nonaccretable discount is not accreted into income until it is determined that the amount
and timing of the related cash flows are reasonably estimable and collection is probable. If cash
flows cannot be reasonably estimated for any loan, and collection is not probable, the cost
recovery method of accounting is used. Under the cost recovery method, any amounts received are
applied against the recorded amount of the loan. Nonaccretable discount is generally offset against
the related principal balance when the amount at which a loan is resolved or restructured is
determined. There is no effect on the income statement as a result of these reductions. Subsequent to acquisition, if cash flow projections improve, and it is determined that the
amount and timing of the cash flows related to the nonaccretable discount are reasonably estimable
and collection is probable, the corresponding decrease in the nonaccretable discount is transferred
to the accretable discount and is accreted into interest income over the remaining life of the loan
on the interest method. If cash flow projections deteriorate subsequent to acquisition, the decline
is accounted for through the allowance for loan losses. When a loan is paid off, the excess of any cash received over the net investment is recorded
as interest income. In addition to the amount of purchase discount that is recognized at that time,
income may also include interest owed by the borrower prior to Capital Crossing Preferreds
acquisition of the loan, interest collected if on non-performing status, prepayment fees and other
loan fees. Gains and losses on sales of loans are determined using the specific identification method.
The excess (deficiency) of any cash received as compared to the net investment is recorded as gain
(loss) on sales of loans. There were no loans held for sale at March 31, 2005. Changes in interest rates also can affect the value of Capital Crossing Preferreds loans and
its ability to realize gains on the resolution of assets. A significant portion of Capital Crossing
Preferreds earnings results from accelerated interest income resulting from loan payoffs. This
type of income can vary significantly from quarter to quarter and year to year based on a number of
different factors, including the interest rate environment. An increase in interest rates that
adversely affects the ability of borrowers to pay the principal or interest on Capital Crossing
Preferreds loans may lead to a reduction of discount accreted into income, which could have a
material adverse effect on its results of operations. 
 Results of Operations for the Three Months Ended March 31, 2005 and 2004 Interest income The following table sets forth the yields on Capital Crossing Preferreds earning assets for
the periods indicated: Three Months Ended March 31,2005
    
    
    2004Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestBalance
    
    
    Income
    
    
    Yield
    
    
    Balance
    
    
    Income
    
    
    Yield(dollars in thousands)Loans, net (1)
    
    $
    120,353
    
    
    $
    2,485
    
    
    
    8.37
    %
    
    $
    151,002
    
    
    $
    3,844
    
    
    
    10.24
    %Interest-bearing deposits
    
    
    97,854
    
    
    
    265
    
    
    
    1.10
    
    
    
    74,619
    
    
    
    204
    
    
    
    1.10Total interest-earning assets
    
    $
    218,207
    
    
    $
    2,750
    
    
    
    5.11
    %
    
    $
    225,621
    
    
    $
    4,048
    
    
    
    7.22
    %
   (1)
    
    Non-performing loans are excluded from average balance calculations. The decline in interest income for the three months ended March 31, 2005 compared to the three
months ended March 31, 2004 is primarily due to the decline in interest income on loans due to both
a decline in the average balance and the yield. The yield on 8




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##### Table of Contents



interest-earning assets also decreased primarily due to a shift in the composition of average
interest-earning assets such that average loans represents a smaller percentage of total average
interest-earning assets for the three months ended March 31, 2005 as compared to the same period in
2004. Average loans, net for the three months ended March 31, 2005 totaled $120.4 million compared
to $151.0 million for the same period in 2004. This decrease is primarily attributable to loan
payoffs and amortization. No loans were acquired in the first quarter of 2005. During 2004,
Capital Crossing Preferred only acquired $4.3 million in loans. The yield on the loan portfolio
decreased primarily as a result of a decrease in interest income recognized at the time of
individual loan pay-offs. Income on loans includes the portion of the purchase discount that is accreted into income
over the remaining lives of the related loans using the interest method. Because the carrying value
of the loan portfolio is net of purchase discount, the related yield on this portfolio generally is
higher than the aggregate contractual rate paid on the loans. The total yield includes the excess
of a loans expected discounted future cash flows over its net investment, recognized using the
interest method. When a loan is paid off, the excess of any cash received over the net investment is recorded
as interest income. In addition to the amount of purchase discount that is recognized at that time,
income may also include interest owed by the borrower prior to Capital Crossings acquisition of
the loan, interest collected if on non-performing status and other loan fees (other
interest and fee income). The following table sets forth, for the periods indicated, the
components of interest and fees on loans. There can be no assurance regarding future interest
income, including the yields and related level of such income, or the relative portion attributable
to loan pay-offs as compared to other sources. Three Months Ended March 31,2005
    
    
    2004Interest
    
    
    
    
    
    
    InterestIncome
    
    
    Yield
    
    
    Income
    
    
    Yield(dollars in thousands)Regularly scheduled interest and accretion income
    
    $
    2,345
    
    
    
    7.90
    %
    
    $
    2,916
    
    
    
    7.77
    %Interest and fee income recognized on loan payoffs:Nonaccretable discount
    
    
    
    
    
    
    
    
    
    
    91
    
    
    
    0.24Accretable discount
    
    
    104
    
    
    
    0.35
    
    
    
    719
    
    
    
    1.92Other interest and fee income
    
    
    36
    
    
    
    0.12
    
    
    
    118
    
    
    
    0.31140
    
    
    
    0.47
    
    
    
    928
    
    
    
    2.47$
    2,485
    
    
    
    8.37
    %
    
    $
    3,844
    
    
    
    10.24
    %
 The amount of loan pay-offs and related discount income is influenced by several factors,
including the interest rate environment, the real estate market in particular areas, the timing of
transactions, and circumstances related to individual borrowers and loans. The amount of individual
loan payoffs is oftentimes a result of negotiations between Capital Crossing Preferred and the
borrower. Based upon credit risk analysis and other factors, Capital Crossing Preferred will, in
certain instances, accept less than the full amount contractually due in accordance with the loan
terms. The average balance of interest-bearing deposits increased $23.3 million or 31.1% to $97.9
million for the three months ended March 31, 2005, compared to $74.6 million for 2004. The changes
in the average balances of interest-bearing deposits are the result of cash flows from loan
repayments and the proceeds from the Series D stock offering on May 11, 2004 offset by periodic
dividend payments and funds used to purchase additional mortgage assets. Credit for loan losses Capital Crossing Preferred recorded credits for loan losses of $128,000 and $411,000 for the
three months ended March 31, 2005 and 2004, respectively, to reverse unused general reserves
related to loans that have been paid off. The credit for loan losses is based on the volume of loan
payoffs. As loans pay off, a credit for loan losses is recorded to reduce allowance allocations
related to the loans that have paid-off for which a related allowance remains unused. The allowance
for loan losses is based on the size of the portfolio and its historical performance. The
determination of this allowance requires managements use of estimates and assumptions regarding
the risks inherent in individual loans and the loan portfolio in its entirety. Should the loan
portfolio continue to decline without utilization of the allowance for loan losses, future credits
for loans losses may be necessary. 9




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##### Table of Contents



Other income There were no loan sales during the three months ended March 31, 2005. During the three months
ended March 31, 2004, there was one loan sale to an unaffiliated third party comprised of two
loans, with carrying values of $419,000, resulting in a gain of $76,000. Operating expenses Loan servicing and advisory services expenses for the three months ended March 31, 2005
decreased $26,000 or 24.5%, to $80,000 compared to $106,000 for the three months ended March 31,
2004. This decrease was due to the decrease in the average balance of the loan portfolio. Other general and administrative expenses decreased $19,000 or 24.1%, to $60,000 for the three
months ended March 31, 2005 compared to $79,000 for the three months ended March 31, 2004. This
decrease is primarily attributable to a decrease in legal fees related to loan collection matters. Preferred stock dividends Preferred stock dividends increased as a result of the issuance of 1,500,000 shares of Series
D preferred shares on May 11, 2004. These shares have a liquidation value of $25 per share and a
dividend rate of 8.5%. Capital Crossing Preferred intends to pay dividends on its preferred stock
and common stock in amounts necessary to continue to preserve its status as a REIT under the
Internal Revenue Code of 1986, as amended. 
 Financial Condition Interest-bearing Deposits with Capital Crossing Bank Interest-bearing deposits with Capital Crossing Bank consist entirely of money market accounts
at March 31, 2005 and December 31, 2004. The balance of interest-bearing deposits increased $4.9
million to $100.3 million at March 31, 2005 compared to $95.3 million at December 31, 2004. The
increase in the balance of interest-bearing deposits is the result of cash flows from loan
repayments, offset by periodic dividend payments. Loan Portfolio To date, all of Capital Crossing Preferreds loans have been acquired from Capital Crossing.
The following table sets forth information regarding the composition of the loan portfolio at the
dates indicated: March 31,
    
    
    December 31,2005
    
    
    2004(in thousands)Mortgage loans on real estate:Commercial real estate
    
    $
    80,349
    
    
    $
    83,236Multi-family residential
    
    
    34,611
    
    
    
    35,866Land
    
    
    3,947
    
    
    
    4,011One-to-four family residential
    
    
    803
    
    
    
    858Total
    
    
    119,710
    
    
    
    123,971Other
    
    
    22
    
    
    
    23Total loans, net of discounts
    
    
    119,732
    
    
    
    123,994Less:Allowance for loan losses
    
    
    (2,369
    )
    
    
    (2,497
    )Net deferred loan fees
    
    
    (73
    )
    
    
    (62
    )Loans, net
    
    $
    117,290
    
    
    $
    121,435
 Capital Crossing Preferred acquires primarily performing commercial real estate and
multifamily residential mortgage loans. There were no loans acquired during the three months ended
March 31, 2005, as the existing portfolio was large enough to generate an adequate dividend ratio.
During the three months ended December 31, 2004, Capital Crossing Preferred acquired $4.3 million in
loans from Capital 10




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##### Table of Contents



Crossing. Gross loans at March 31, 2005 totaled $134.8 million compared to $139.5 million at
December 31, 2004 and total loan discount amounted to $15.1 million and $19.5 million at March 31,
2005 and December 31, 2004, respectively. Capital Crossing Preferred intends that each loan acquired from Capital Crossing in the future
will be a whole loan, and will be originated or acquired by Capital Crossing in the ordinary course
of its business. Capital Crossing Preferred also intends that all loans held by it will be serviced
pursuant to its master service agreement with Capital Crossing. Non-performing loans, net of discount, totaled $1.3 million and $1.6 million at March 31, 2005
and December 31, 2004, respectively. Loans generally are placed on non-performing status and the
accrual of interest and accretion of discount are generally discontinued when the collectibility of
principal and interest is not probable or estimable. Unpaid interest income previously accrued on
such loans is reversed against current period interest income. A loan is returned to accrual status
when it is brought current in accordance with managements anticipated cash flows at the time of
acquisition. Discounts on Acquired Loans.Effective January 1, 2005, and as a result of the required
adoption of SOP No. 03-3 Capital Crossing Preferred is required to change its discount accounting
as it relates to loans which are acquired subsequent to December 31, 2004 and which have evidence
of deterioration of credit quality since origination and, for which it is probable, at acquisition,
that Capital Crossing Preferred will be unable to collect all contractually required payments. For
such loans, the excess of contractual cash flows over cash flows estimated at the time of
acquisition is not accreted into income (nonaccretable discount). The remaining amount,
representing the excess of the loans estimated cash flows over the purchase price, is accreted
into income over the life of the loan (accretable discount). For all other loans acquired subsequent to December 31, 2004, the discount, which represents
the excess of the amount of reasonably estimable and probable discounted future cash collections
over the purchase price is accreted into interest income using the interest method over the term of
the loans and is not accreted on non-performing loans. This is consistent with how Capital Crossing
Preferred accounted for loans purchased prior to January 1, 2005, except an allowance allocation
was also previously made at the time of acquisition. Capital Crossing Preferred no longer increases
the allowance through allocations from purchase discount. Prepayments are not considered in the calculation of accretion income. There is judgment involved in estimating the amount of Capital Crossing Preferreds future
cash flows. The amount and timing of actual cash flows could differ materially from managements
estimates, which could materially affect Capital Crossing Preferreds financial condition and
results of operations. Depending on the timing of an acquisition, a preliminary allocation may be
utilized until a final allocation is established. Generally, the allocation will be finalized no
later than ninety days from the date of purchase. The nonaccretable discount is not accreted into income until it is determined that the amount
and timing of the related cash flows are reasonably estimable and collection is probable. If cash
flows cannot be reasonably estimated for any loan, and collection is not probable, the cost
recovery method of accounting is used. Under the cost recovery method, any amounts received are
applied against the recorded amount of the loan. Nonaccretable discount is generally offset against
the related principal balance when the amount at which a loan or lease is resolved or restructured
is determined. There is no effect on the income statement as a result of these reductions. Subsequent to acquisition, if cash flow projections improve, and it is determined that the
amount and timing of the cash flows related to the nonaccretable discount are reasonably estimable
and collection is probable, the corresponding decrease in the nonaccretable discount is transferred
to the accretable discount and is accreted into interest income over the remaining life of the loan
on the interest method. If cash flow projections deteriorate subsequent to acquisition, the decline
is accounted for through the allowance for loan losses. The following table sets forth certain information relating to the activity in the
nonaccretable discount for the periods indicated: Three Months EndedMarch 31,2005
    
    
    2004(in thousands)Balance at beginning of period
    
    $
    883
    
    
    $
    1,524Accretion
    
    
    (11
    )
    
    
    (91
    )Transfers to accretable portion upon improvements in cash flows
    
    
    (53
    )
    
    
    (130
    )Net reductions relating to loans sold
    
    
    
    
    
    
    (111
    )Balance at end of period
    
    $
    819
    
    
    $
    1,192
 11




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##### Table of Contents



Allowance for Loan Losses.Arriving at an appropriate level of allowance for loan losses
requires a high degree of judgment. Capital Crossing Preferred maintains an allowance for probable
loan losses that are inherent in its loan portfolio. The allowance
for loan losses is increased or decreased through a provision or credit for loan losses included in
earnings. Prior to January 1, 2005, the effective
date of SOP No. 03-3, the allowance for loan losses was increased upon allocation of purchase
discount upon acquisition of loans. No allocation of discount is made to the allowance for loan
losses for loans acquired subsequent to December 31, 2004, however, additions for impairment that
occur subsequent to acquisition will continue to be recognized through a provision for loan losses
included in earnings. Additionally, the allowance for loan losses is decreased upon sales or
payoffs of loans for which a related allowance remains unused. Reductions in connection with sales
are included in the calculation of the gain or loss, and reductions related to payoffs are recorded
as a credit for loan losses. Loan losses are charged against the allowance when management believes
the net investment of the loan, or a portion thereof, is uncollectible. Subsequent recoveries, if
any, are credited to the allowance when cash payments are received. In determining the adequacy of the allowance for loan losses, management makes significant
judgments. Management initially reviews its loan portfolio to identify loans for which specific
allocations are considered prudent. Specific allocations include the results of measuring impaired
loans under SFAS No. 114. Next, management considers the level of general loan allowances deemed
appropriate for originated loans and loans purchased prior to January 1, 2005. General risk
allocations are determined by a formula whereby the portfolio is stratified by type and internal
risk rating categories. Loss factors are then applied to each strata based on various
considerations including collateral type, loss experience, delinquency trends, current economic
conditions, industry standards, and regulatory guidelines. Additional considerations influencing
such loss factors are particular concentrations within the portfolio, such as the concentration of
loans in California, which accounted for approximately 47.4% of the net portfolio at March 31, 2005
and concentrations of loans to individual borrowers. The allowance for loan losses is managements
estimate of the probable loan losses incurred as of the balance sheet date. There can be no
assurance that Capital Crossing Preferreds actual losses with respect to loans will not exceed its
allowance for loan losses. Effective January 1, 2005, and as a result of the required adoption of SOP No. 03-3, additions
to the valuation allowances relating to newly acquired loans reflect only those losses incurred by
Capital Crossing Preferred subsequent to acquisition. Capital Crossing Preferred no longer
increases the allowance through allocations from purchase discount. Additionally, general risk
allocations are no longer applied to loans purchased subsequent to December 31, 2004. Consequently,
it is anticipated that the allowance will continue to decline as credits for loan losses may
continue to be recorded if loans pay off and allowance allocations related to these loans are not
required or additions due to impairment are not required. Capital Crossing Preferreds allowance for loan losses at March 31, 2005 was $2.4 million. The
determination of this allowance requires the use of estimates and assumptions regarding the risks
inherent in individual loans and the loan portfolio in its entirety. In addition, regulatory
agencies periodically review the adequacy of the allowance for loan losses and may require Capital
Crossing Preferred to make additions to its allowance for loan losses. While management believes
its estimates and assumptions are 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 be
determined, and such provisions may exceed the amounts of past provisions. Management believes that
the allowance for loan losses is adequate to absorb the known and inherent risks in Capital
Crossing Preferreds loan portfolio at each date based on the facts known to management as of such
date. Management continues to monitor and modify the allowances for general and specific loan
losses as economic conditions dictate. The following table sets forth certain information relating to the activity in the allowance
for loan losses for the periods indicated: Three Months Ended March 31,2005
    
    
    2004(in thousands)Balance at beginning of period
    
    $
    2,497
    
    
    $
    3,281Credit for loan losses
    
    
    (128
    )
    
    
    (411
    )Net reduction relating to loans sold
    
    
    
    
    
    
    (49
    )Balance at end of period
    
    $
    2,369
    
    
    $
    2,821
 
 Interest Rate Risk Capital Crossing Preferreds income consists primarily of interest income. If there is a
decline in market interest rates, Capital Crossing Preferred may experience a reduction in interest
income and a corresponding decrease in funds available to be distributed to its shareholders. The
reduction in interest income may result from downward adjustments of the indices upon which the
interest rates on 12




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loans are based and from prepayments of mortgage loans with fixed interest rates,
resulting in reinvestment of the proceeds in lower yielding mortgage loans. Capital Crossing
Preferred does not intend to use any derivative products to manage its interest rate risk. 
 Significant Concentration of Credit Risk Concentration of credit risk generally arises with respect to Capital Crossing Preferreds
loan portfolio when a number of borrowers engage in similar business activities, or activities in
the same geographical region. Concentration of credit risk indicates the relative sensitivity of
Capital Crossing Preferreds performance to both positive and negative developments affecting a
particular industry. Capital Crossing Preferreds balance sheet exposure to geographic
concentrations directly affects the credit risk of the loans within its loan portfolio. At March 31, 2005, 47.4% and 14.0% of Capital Crossing Preferreds net loan portfolio
consisted of loans in California and New England, respectively. At December 31, 2004, 47.4% and
14.2% of Capital Crossing Preferreds net real estate loan portfolio consisted of loans located in
California and New England, respectively. Consequently, the portfolio may experience a higher
default rate in the event of adverse economic, political or business developments or natural
hazards in California or New England that may affect the ability of property owners to make
payments of principal and interest on the underlying mortgages. 
 Liquidity Risk Management The objective of liquidity management is to ensure the availability of sufficient cash flows to
meet all of Capital Crossing Preferreds financial commitments and to capitalize on opportunities
for Capital Crossing Preferreds business expansion. In managing liquidity risk, Capital Crossing
Preferred takes into account various legal limitations placed on a REIT. Capital Crossing Preferreds principal liquidity needs are:  
    to maintain an adequate portfolio size through the acquisition of additional
mortgage assets as mortgage assets currently in the loan portfolio mature, pay down
or prepay, and
    to pay dividends on the preferred shares and common shares. The acquisition of additional mortgage assets is intended to be funded primarily through
repayment of principal balances of mortgage assets by individual borrowers. Capital Crossing
Preferred does not have and does not anticipate having any material capital expenditures. To the
extent that the Board of Directors determines that additional funding is required, Capital Crossing
Preferred may raise such funds through additional equity offerings, debt financing or retention of
cash flow (after consideration of provisions of the Internal Revenue Code requiring the
distribution by a REIT of at least 90% of its REIT taxable income and taking into account taxes
that would be imposed on undistributed income), or a combination of these methods. Except for its
obligation to guarantee certain borrowings of Capital Crossing, Capital Crossing Preferred does not
currently intend to incur any indebtedness. The organizational documents of Capital Crossing
Preferred limit the amount of indebtedness which it is permitted to incur without the approval of
the Series A, Series C and Series D preferred stockholders to no more than 100% of the total
stockholders equity of Capital Crossing Preferred. Any such debt may include intercompany advances
made by Capital Crossing to Capital Crossing Preferred. Capital Crossing Preferred may also issue additional series of preferred stock. However,
Capital Crossing Preferred may not issue additional shares of preferred stock ranking senior to the
Series A, Series C or Series D preferred shares without the consent of holders of at least
two-thirds of the Series A, Series C and Series D preferred shares, each voting as a separate
class, outstanding at that time. Although Capital Crossing Preferreds charter does not prohibit or
otherwise restrict Capital Crossing or its affiliates from holding and voting shares of Series A,
Series C or Series D preferred stock, to Capital Crossing Preferreds knowledge the amount of
shares of Series A, Series C and Series D preferred shares held by Capital Crossing or its
affiliates is insignificant (less than 1%). Additional shares of preferred stock ranking on a
parity with the Series A, Series C and Series D preferred shares may not be issued without the
approval of a majority of Capital Crossing Preferreds independent directors. 
 Impact of Inflation and Changing Prices Capital Crossing Preferreds asset and liability structure is substantially different from
that of an industrial company in that virtually all assets of Capital Crossing Preferred are
monetary in nature. Management believes the impact of inflation on financial results depends upon
Capital Crossing Preferreds ability to react to changes in interest rates and by such reaction,
reduce the inflationary impact on performance. Interest rates do not necessarily move in the same
direction, or at the same magnitude, as the prices of other goods and services. Various information shown elsewhere in this annual report will assist the reader in
understanding how Capital Crossing Preferred is positioned to react to changing interest rates and
inflationary trends. In particular, the discussion of market risk and other maturity and 13




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##### Table of Contents



repricing
information of Capital Crossing Preferreds assets is contained in Item 3, Quantitative and
Qualitative Disclosure About Market Risk, of this report. 
 CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS Set forth below are a number of risk factors that may cause Capital Crossing Preferreds
actual results to differ materially from anticipated future results, performance or achievements
expressed or implied by the forward-looking statement. All of these factors should be carefully
reviewed, and the reader of this Quarterly Report onForm 10-Qshould be aware that there may be
other factors that could cause these differences. General Business Risks A decline in Capital Crossings capital levels may result in the Series A, Series C and Series D
preferred shares being subject to automatic exchange into preferred shares of Capital Crossing The returns from an investment in the Series A, Series C or Series D preferred shares will
depend to a significant extent on the performance and capital of Capital Crossing. A significant
decline in the performance and capital levels of Capital Crossing or the placement of Capital
Crossing into bankruptcy, reorganization, conservatorship or receivership could result in the
automatic exchange of the Series A, Series C and Series D preferred shares for preferred shares of
Capital Crossing, which would represent an investment in Capital Crossing and not in Capital
Crossing Preferred. Under these circumstances:  
    a holder of Series A, Series C or Series D preferred shares would be a preferred
stockholder of Capital Crossing at a time when Capital Crossings financial condition was
deteriorating or when Capital Crossing had been placed into bankruptcy, reorganization,
conservatorship or receivership and, accordingly, it is unlikely that Capital Crossing would
be in a financial position to pay any dividends on the preferred shares of Capital Crossing.
An investment in Capital Crossing is also subject to risks that are distinct from the risks
associated with an investment in Capital Crossing Preferred. For example, an investment in
Capital Crossing would involve risks relating to the capital levels of, and other federal
and state regulatory requirements applicable to Capital Crossing and the performance of
Capital Crossings overall loan portfolio and other business lines. Capital Crossing also
has significantly greater liabilities and significantly less stockholders equity than does
Capital Crossing Preferred;
    if a liquidation of Capital Crossing occurs, the claims of depositors and creditors of
Capital Crossing and of the FDIC would have priority over the claims of holders of the
preferred shares of Capital Crossing, and therefore, a holder of Series A, Series C and
Series D preferred shares likely would receive, if anything, substantially less than such
holder would receive had the Series A, Series C and Series D preferred shares not been
exchanged for preferred shares of Capital Crossing; and
    the exchange of the Series A, Series C or Series D preferred shares for preferred shares
of Capital Crossing would be a taxable event to a holder of Series A, Series C or Series D
preferred shares under the Internal Revenue Code, and such holder would incur a gain or a
loss, as the case may be, measured by the difference between such holders basis in the
Series A, Series C or Series D preferred shares and the fair market value of Capital
Crossing preferred shares received in the exchange. Because of Capital Crossing Preferreds obligations to creditors, it may not be able to make
dividend or liquidation payments to holders of the Series A, Series C and Series D preferred shares The Series A, Series C and Series D preferred shares rank:  
    junior to borrowings of Capital Crossing Preferred, including claims of the FHLBB for
amounts due or which may become due under Capital Crossing Preferreds guarantee of Capital
Crossings obligations to the FHLBB, and any other obligations to Capital Crossing
Preferreds creditors upon its liquidation. As of March 31, 2005, Capital Crossing had
$167.5 million in outstanding FHLBB borrowings; and
    senior to Capital Crossing Preferreds common stock and its Series B preferred stock with
regard to payment of dividends and amounts upon liquidation. If Capital Crossing Preferred incurs significant indebtedness, it may not have sufficient
funds to make dividend or liquidation payments on the Series A, Series C or Series D preferred
shares. Upon Capital Crossing Preferreds liquidation, its obligations to its creditors would rank
senior to the Series A, Series C and Series D preferred shares. At March 31, 2005, Capital Crossing
Preferred had approximately $141,000 in accounts payable and other liabilities which, upon its
liquidation, would be required to be paid before any payments could be made to holders of the
Series A, Series C or Series D preferred shares. In addition, upon Capital Crossing Preferreds
liquidation, dissolution or winding up, if it does not have sufficient funds to pay the full
liquidation amount, the holders of the Series A, 14




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Series C and Series D preferred shares will share
ratably in any distribution in proportion to the full liquidation amount which they otherwise would
be entitled and such holders may receive less than the per share liquidation amount. The terms of the Series A, Series C and Series D preferred shares limit Capital Crossing
Preferreds ability to incur debt in excess of 100% of its stockholders equity without the
approval of the holders of all of the outstanding Series A, Series C and Series D preferred shares,
each voting as a separate class, but do not require that Capital Crossing Preferred obtain the
approval of the holders of the Series A, Series C and Series D preferred shares to issue additional
series of preferred shares which rank equal to the Series A, Series C and Series D preferred shares
as to payment of dividends or amount upon liquidation. As a result, subject to these limitations,
Capital Crossing Preferred may incur obligations which may further limit its ability to make
dividend or liquidation payments in the future. Bank regulators may limit the ability of Capital Crossing Preferred to implement its business plan
and may restrict its ability to pay dividends Because Capital Crossing Preferred is a subsidiary of Capital Crossing, federal and state
regulatory authorities will have the right to examine it and its activities and under certain
circumstances, to impose restrictions on Capital Crossing or Capital Crossing Preferred which could
impact Capital Crossing Preferreds ability to conduct its business according to its business plan,
which could materially adversely affect the financial condition and results of operations of
Capital Crossing Preferred. If Capital Crossings regulators determine that Capital Crossings relationship to Capital
Crossing Preferred results in an unsafe and unsound banking practice, the regulators could restrict
Capital Crossing Preferreds ability to transfer assets, to make distributions to its stockholders,
including dividends on its Series A, Series C and Series D preferred shares, or to redeem shares of
Series A, Series C and Series D preferred stock or even require Capital Crossing to sever its
relationship with or divest its ownership interest in Capital Crossing Preferred. Such actions
could potentially result in Capital Crossing Preferreds failure to qualify as a REIT. Payment of dividends on the Series A, Series C and Series D preferred shares could also be
subject to regulatory limitations if Capital Crossing becomes undercapitalized. Capital Crossing
will be deemed undercapitalized if its total risk-based capital ratio is less than 8.0%, its Tier 1
risk-based capital ratio is less than 4.0% or its Tier 1 leverage ratio is less than 4.0%. At March
31, 2005, Capital Crossing had a total risk-based capital ratio of 19.27%, a Tier 1 risk-based
capital ratio of 13.76% and a Tier 1 leverage ratio of 11.16%, which is sufficient for Capital
Crossing to be considered well-capitalized. If Capital Crossing becomes undercapitalized or the
FDIC anticipates that it will become undercapitalized, the FDIC may direct the automatic exchange
of the preferred shares of Capital Crossing Preferred for preferred shares of Capital Crossing. As
part of its common stock repurchase program, Capital Crossing has also agreed with the FDIC to
maintain, for so long as the repurchase program continues, its Tier 1 leverage ratio at least 7.00%
as well as remaining well capitalized. Capital Crossing Preferred makes no assurance that Capital
Crossing will be well-capitalized under applicable regulations as of any future date, which is
required in order to continue to repurchase common stock, but which is not a condition to the
payment of dividends on the preferred shares. For purposes of calculating these capital ratios as a
percentage of Capital Crossings risk-weighted assets, as opposed to its total assets, Capital
Crossings assets are assigned to risk categories based on the relative credit risk of the asset in
question. These risk weights consist of 0% for assets deemed least risky such as cash, claims
backed by the full faith and credit of the U.S. government, and balances due from Federal Reserve
banks; 20% for assets deemed slightly more risky such as portions of obligations conditionally
guaranteed by the U.S. government or federal funds sold; 50% for assets deemed still more risky
such as government issued-revenue bonds, one-to-four family residential first mortgage loans and
well-collateralized multi-family residential first mortgage loans; and 100% for all other assets,
including private sector loans such as commercial mortgage loans as well as bank-owned real estate. While Capital Crossing Preferred believes that dividends on the Series A, Series C and Series
D preferred shares should not be considered distributions by Capital Crossing, the FDIC may not
agree with this position. Under FDIC regulations on capital distributions, the ability of Capital
Crossing to make a capital distribution varies depending primarily on Capital Crossings earnings
and regulatory capital levels. Capital distributions are defined to include payment of dividends,
stock repurchases, cash-out mergers and other distributions charged against the capital accounts of
an institution. The FDIC could limit or prohibit the payment of dividends on the Series A, Series C
and Series D preferred shares if it determines that the payment of those dividends is a capital
distribution by Capital Crossing and that Capital Crossings earnings and regulatory capital levels
are below specified levels. Capital Crossing Preferreds results will be affected by factors beyond its control Capital Crossing Preferreds mortgage loan portfolio is subject to local economic conditions
which could affect the value of the real estate assets underlying its loans and therefore, its
results of operations will be affected by various conditions in the real estate market, all of
which are beyond its control, such as:  
    local and other economic conditions affecting real estate values;
    the continued financial stability of a borrower and the borrowers ability to make mortgage payments; 15




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
    the ability of tenants to make lease payments;
    the ability of a property to attract and retain tenants, which may in turn be affected by
local conditions, such as oversupply of space or a reduction in demand for rental space in
the area;
    interest rate levels and the availability of credit to refinance mortgage loans at or
prior to maturity; and
    increased operating costs, including energy costs, real estate taxes and costs of
compliance with environmental controls and regulations. Capital Crossing Preferreds loans are concentrated in California and New England and adverse
conditions in those markets could adversely affect its operations Properties underlying Capital Crossing Preferreds current mortgage assets are concentrated
primarily in California, particularly Southern California, and New England. As of March 31, 2005,
approximately 47.4% of the net balances of its mortgage loans were secured by properties located in
California and 14.0% in New England. Adverse economic, political or business developments or
natural hazards may affect these areas and the ability of property owners in these areas to make
payments of principal and interest on the underlying mortgages. If either region experienced
adverse economic, political or business conditions, Capital Crossing Preferred would likely
experience higher rates of loss and delinquency on its mortgage loans than if its loans were more
geographically diverse. A substantial majority of Capital Crossing Preferreds loans were originated by other parties At March 31, 2005, substantially all of Capital Crossing Preferreds net loans consisted of
loans originated by third parties that were purchased by Capital Crossing and subsequently acquired
by Capital Crossing Preferred from Capital Crossing. When Capital Crossing purchases loans
originated by third parties, it generally cannot conduct the same level of due diligence that it
would have conducted had it originated the loans. In addition, loans originated by third parties
may lack current financial information and may have incomplete legal documentation and outdated
appraisals. Although Capital Crossing conducts a comprehensive acquisition review, it also may rely

on certain information provided by the parties that originated the loans, whose underwriting
standards may be substantially different than Capital Crossings. These differences may include
less rigorous appraisal requirements and debt service coverage ratios, and less rigorous analysis
of property location and environmental factors, building condition and age, tenant quality,
compliance with zoning regulations, any use restrictions, easements or rights of ways that may
impact the property value and the borrowers ability to manage the property and service the
mortgage. As a result, Capital Crossing may not have information with respect to an acquired loan
which, if known at the time of acquisition, would have caused it to reduce its bid price or not bid
for the loan at all. This may adversely affect Capital Crossing Preferreds yield on loans or cause
it to increase its provision for loan losses. In addition, Capital Crossing may acquire loans as
part of a pool that, given the opportunity to review and underwrite at the outset, it would not
have originated. Loans such as these could have a higher risk of becoming non-performing in the
future and adversely affect Capital Crossing Preferreds results of operations. More than half of Capital Crossing Preferreds loan portfolio is made up of commercial mortgage
loans which are generally riskier than other types of loans Commercial mortgage loans constituted approximately 67.1% of the total gross loans in Capital
Crossing Preferreds loan portfolio at March 31, 2005 and commercial mortgage loans are generally
subject to greater risks than other types of loans. Capital Crossing Preferreds commercial
mortgage loans, like most commercial mortgage loans, generally lack standardized terms, tend to
have shorter maturities than other mortgage loans and may not be fully accretable, meaning that
they have a principal balance or balloon payment due on maturity. The commercial real estate
properties underlying Capital Crossing Preferreds commercial mortgage loans also tend to be unique
and are more difficult to value than other real estate properties. They are also subject to
relatively greater environmental risks than other types of loans and to the corresponding burdens
and costs of compliance with environmental laws and regulations. Because of these risks related to
commercial mortgage loans, Capital Crossing Preferred may experience higher rates of default on its
mortgage loans than it would if its loan portfolio was more diversified and included a greater
number of owner-occupied residential or other mortgage loans. Higher rates of default will cause
Capital Crossing Preferreds level of impaired loans to increase, which may have a material adverse
affect on its results of operation. Capital Crossing Preferred may not be able to purchase loans at the same volumes or with the same
yields as it has historically purchased To date Capital Crossing Preferred has purchased all of the loans in its portfolio from
Capital Crossing. Historically, Capital Crossing has acquired such loans  
    from institutions which sought to eliminate certain loans or categories of loans from their portfolios; 16




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
    from institutions participating in securitization programs;
    from failed or consolidating financial institutions; and
    from government agencies. Future loan purchases will depend on the availability of pools of loans offered for sale and
Capital Crossings ability to submit successful bids or negotiate satisfactory purchase prices. The
acquisition of whole loans is highly competitive. Capital Crossing Preferred cannot provide
assurance that Capital Crossing will be able to purchase loans at the same volumes or with the same
yields as it has historically purchased. This may interfere with Capital Crossing Preferreds
ability to maintain the requisite level of mortgage assets to maintain its qualification as a REIT.
If volumes of loans purchased decline or the yields on these loans decline further, Capital
Crossing Preferred would experience a material adverse effect on its financial condition. Capital Crossing Preferred could be held responsible for environmental liabilities of properties it
acquires through foreclosure If Capital Crossing Preferred chooses to foreclose on a defaulted mortgage loan to recover its
investment it may be subject to environmental liabilities related to the underlying real property.
Approximately 67.1% of the net loans in Capital Crossing Preferreds portfolio at March 31, 2005
were commercial mortgage loans, which generally are subject to relatively greater environmental
risks than other types of loans. Hazardous substances or wastes, contaminants, pollutants or
sources thereof may be discovered on properties during Capital Crossing Preferreds ownership or
after a sale to a third party. The amount of environmental liability could exceed the value of the
real property. There can be no assurance that Capital Crossing Preferred would not be fully liable
for the entire cost of any removal and clean-up on an acquired property, that the cost of removal
and clean-up would not exceed the value of the property or that Capital Crossing Preferred could
recoup any of the costs from any third party. In addition, Capital Crossing Preferred may find it
difficult or impossible to sell the property prior to or following any such remediation. The
incurrence of any significant environmental liabilities with respect to a property securing a
mortgage loan could have a material adverse effect on Capital Crossing Preferreds financial
condition. Capital Crossing Preferred is dependent in virtually every phase of its operations on the diligence
and skill of the management of Capital Crossing Capital Crossing, which holds all of Capital Crossing Preferreds common stock, is involved in
virtually every aspect of Capital Crossing Preferreds operations. Capital Crossing Preferred has
six officers, including three executive officers, and no other employees and does not have any
independent corporate infrastructure. All of Capital Crossing Preferreds officers are also
officers of Capital Crossing. Capital Crossing Preferred does not have any employees because it has
retained Capital Crossing to perform all necessary functions pursuant to the advisory agreement and
the master service agreement. Under an advisory agreement between Capital Crossing Preferred and Capital Crossing, Capital
Crossing administers day-to-day activities, including monitoring of Capital Crossing Preferreds
credit quality and advising it with respect to the acquisition, management, financing and
disposition of mortgage assets and its operations generally. Under a master service agreement
between Capital Crossing Preferred and Capital Crossing, Capital Crossing services Capital Crossing
Preferreds loan portfolio. The advisory agreement has an initial term of five years with an
automatic renewal feature and the master service agreement has a one-year term with an automatic
renewal feature. Both the master service agreement and the advisory agreement are subject to
earlier termination upon 30 days and 90 days notice, respectively. Capital Crossing may subcontract
all or a portion of its obligations under the advisory agreement to its affiliates or, with the
approval of a majority of Capital Crossing Preferreds Board of Directors including a majority of
Capital Crossing Preferreds independent directors, subcontract its obligations under the advisory
agreement to unrelated third parties. Capital Crossing will not, in connection with the
subcontracting of any of its obligations under the advisory agreement, be discharged or relieved
from its obligations under the advisory agreement. The loss of the services of Capital Crossing, or the inability of Capital Crossing to
effectively provide such services whether as a result of the loss of key members of Capital
Crossings management, early termination of the agreements or otherwise, and Capital Crossing
Preferreds inability to replace such services on favorable terms, or at all, could adversely
affect Capital Crossing Preferreds ability to conduct its operations. Capital Crossing Preferreds relationship with Capital Crossing may create conflicts of interest Capital Crossing and its affiliates may have interests which are not identical to Capital
Crossing Preferreds and therefore conflicts of interest have arisen and may arise in the future
with respect to transactions between Capital Crossing Preferred and Capital Crossing such as: Acquisition of mortgage assets.Capital Crossing Preferred anticipates that it will from time
to time continue to purchase additional mortgage assets. Capital Crossing Preferred intends to
acquire all or substantially all of such mortgage assets from Capital Crossing, on 17




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terms that are
comparable to those that could be obtained by Capital Crossing Preferred if such mortgage assets
were purchased from unrelated third parties. Neither Capital Crossing Preferred nor Capital
Crossing currently have specific policies with respect to the
purchase by Capital Crossing Preferred from Capital Crossing of particular loans or pools of
loans, other than that such assets must be eligible to be held by a REIT. Although these purchases
are structured to take advantage of the underwriting procedures of Capital Crossing, and while
Capital Crossing Preferred believes that any agreements and transactions between it, on the one
hand, and Capital Crossing and/or its affiliates on the other hand, are fair to all parties and
consistent with market terms, neither Capital Crossing Preferred nor Capital Crossing have obtained
any third-party valuation to confirm that Capital Crossing Preferred is paying fair market value
for these loans, nor does Capital Crossing Preferred anticipate obtaining a third-party valuation
in the future. Additionally, through limiting Capital Crossing Preferreds source of purchased
mortgage assets solely to those originated or purchased by Capital Crossing, Capital Crossing
Preferreds portfolio will generally reflect the nature, scope and risk of Capital Crossings
portfolio rather than a more diverse portfolio composed of mortgage loans also purchased from other
lenders. Servicing of Capital Crossing Preferred mortgage assets by Capital Crossing.Capital Crossing
Preferreds loans are serviced by Capital Crossing pursuant to the terms of the master service
agreement. Capital Crossing in its role as servicer under the terms of the master service agreement
receives an annual servicing fee equal to 0.20%, payable monthly, on the gross average outstanding
principal balances of loans serviced for the immediately preceding month. The master service
agreement requires Capital Crossing to service the loan portfolio in a manner substantially the
same as for similar work performed by Capital Crossing for transactions on its own behalf. This
will become especially important as Capital Crossing services any loans which become classified or
are placed on non-performing status, or are renegotiated due to the financial deterioration of the
borrower. While Capital Crossing Preferred believes that Capital Crossing will diligently pursue
collection of any non-performing loans, Capital Crossing Preferred cannot provide assurance that
this will be the case. Capital Crossing Preferreds ability to make timely payments of dividends
will depend in part upon Capital Crossings prompt collection efforts on behalf of Capital Crossing
Preferred. Future dispositions by Capital Crossing Preferred of mortgage assets to Capital Crossing or
its affiliates.The master service agreement provides that foreclosures and dispositions of the
mortgage assets are to be performed in a manner substantially the same as for similar work
performed by Capital Crossing on its own behalf. However, Capital Crossing Preferred cannot provide
assurance that any such agreement or transaction will be on terms as favorable to it as would have
been obtained from unaffiliated third parties. Capital Crossing may seek to exercise its influence
over Capital Crossing Preferreds affairs so as to cause the sale of the mortgage assets owned by
Capital Crossing Preferred and their replacement by lesser quality loans purchased from Capital
Crossing or elsewhere which could adversely affect Capital Crossing Preferreds business and its
ability to make timely payments of dividends. Future modifications of the advisory agreement or master service agreement.Should Capital
Crossing Preferred seek to modify either the advisory agreement or the master service agreement, it
would rely upon its officers, all of whom are also officers of Capital Crossing, and/or its
directors, three of whom are also officers of Capital Crossing. Thus, Capital Crossing Preferreds
officers and/or directors would be responsible for taking positions with respect to such agreements
that, while in Capital Crossing Preferreds best interests, may not be in the best interests of
Capital Crossing. Although the termination, modification or decision not to renew the advisory
agreement and/or the master service agreement requires the approval of a majority of Capital
Crossing Preferreds independent directors, Capital Crossing, as holder of all of Capital Crossing
Preferreds outstanding common stock, controls the election of all Capital Crossing Preferred
directors, including the independent directors. Capital Crossing Preferred cannot provide assurance
that such modifications will be on terms as favorable to it as those that could have been obtained
from unaffiliated third parties. The terms of Capital Crossing Preferreds guarantee of obligations of Capital Crossing.
Capital Crossing Preferred has guaranteed all of the obligations of Capital Crossing under advances
Capital Crossing may receive from time to time from the FHLBB, and has agreed to pledge a
significant amount of its assets in connection with those advances. The assets Capital Crossing
Preferred pledges to the FHLBB will vary from time to time; however, the potential exists for
Capital Crossing Preferred to pledge all of its assets to the FHLBB to secure advances to Capital
Crossing. In addition, Capital Crossing has pledged to the FHLBB all of the shares of Capital
Crossing Preferreds capital stock it owns as collateral for its FHLBB borrowings. Under the terms
of the pledge, if Capital Crossing becomes undercapitalized the FHLBB may require Capital Crossing
to dissolve Capital Crossing Preferred such that the assets of Capital Crossing Preferred are
liquidated. In this circumstance the holders of Series A, Series C and Series D preferred shares
would receive their liquidation preference only to the extent there are available proceeds from the
liquidation of the assets of Capital Crossing Preferred following satisfaction of its outstanding
obligations, including its guarantee of Capital Crossings FHLBB borrowings. At March 31, 2005,
approximately $29.8 million, or 13.7%, of Capital Crossing Preferred assets have been pledged to
and accepted by the FHLBB to secure advances to Capital Crossing. As of March 31, 2005, Capital
Crossing had $167.5 million in outstanding FHLBB borrowings. The guarantee and pledge were approved
by Capital Crossing Preferreds independent directors, subject to certain requirements and
limitations, including the requirement that Capital Crossing pay Capital Crossing Preferred an
annual guarantee fee of $80,000. Any default by Capital Crossing on its obligations which would
require Capital Crossing Preferred to satisfy its guarantee could adversely affect Capital Crossing
Preferreds business and its ability to make timely payments of dividends. The master loan purchase agreement was not the result of arms-length negotiations.Capital
Crossing Preferred acquires loans pursuant to the master mortgage loan purchase agreement between
Capital Crossing Preferred and Capital Crossing, at an amount equal to 18




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Capital Crossings net
carrying value for those mortgage assets. While Capital Crossing Preferred believes that the master
mortgage loan purchase agreement, when entered into, was fair to all parties and consistent with
market terms, all of its officers and three of its directors
are, and were at the time the master service mortgage loan purchase agreement was entered
into, also officers and/or directors of Capital Crossing and/or affiliates of Capital Crossing.
Capital Crossing, as holder of all of Capital Crossing Preferreds outstanding common stock,
controls the election of all Capital Crossing Preferred directors, including the independent
directors. Capital Crossing Preferred cannot provide assurance that the master mortgage loan
purchase agreement was entered into on terms as favorable to Capital Crossing Preferred as those
that could have been obtained from unaffiliated third parties. Neither Capital Crossing Preferred nor Capital Crossing have specific policies with respect to the
purchase by Capital Crossing Preferred from Capital Crossing of particular loans or pools of loans The lack of specific policies with respect to the purchase by Capital Crossing Preferred of
loans from Capital Crossing could result in Capital Crossing Preferred acquiring lower quality
mortgage assets from Capital Crossing than if such policies were otherwise in place. Neither
Capital Crossing Preferred nor Capital Crossing currently have specific policies with respect to
the purchase by Capital Crossing Preferred from Capital Crossing of particular loans or pools of
loans, other than that such assets must be eligible to be held by a REIT. Capital Crossing
Preferreds Board of Directors has adopted certain policies to guide the acquisition and
disposition of assets but these policies may be revised from time to time at the discretion of the
Board of Directors without a vote of Capital Crossing Preferreds stockholders. Capital Crossing
Preferred intends to acquire all or substantially all of the additional mortgage assets it may
acquire in the future from Capital Crossing on terms that are comparable to those that could be
obtained by Capital Crossing Preferred if such mortgage assets were purchased from unrelated third
parties, but Capital Crossing Preferred cannot provide assurance that this will always be the case. Capital Crossing Preferreds Board of Directors has broad discretion to revise Capital Crossing
Preferreds strategies Capital Crossing Preferreds Board of Directors has established Capital Crossing Preferreds
investment and operating strategies. These strategies may be revised from time to time at the
discretion of the Board of Directors without a vote of Capital Crossing Preferreds stockholders.
Changes in Capital Crossing Preferreds strategies could have a negative effect on shareholders. Capital Crossing Preferred does not obtain third-party valuations and therefore it may pay more or
receive less than fair market value for its mortgage assets To date, Capital Crossing Preferred has not obtained third-party valuations as part of its
loan acquisitions or dispositions and does not anticipate obtaining third-party valuations for
future acquisitions and dispositions of mortgage assets. Capital Crossing Preferred does not intend
to obtain third-party valuations even where it is acquiring mortgage assets from, or disposing
mortgage assets to, one of its affiliates, including Capital Crossing. Accordingly, Capital
Crossing Preferred may pay its affiliates, including Capital Crossing, more than the fair market
value of mortgage assets it acquires and may receive less than the fair market value of the
mortgage assets it sells based on a third-party valuation. Capital Crossing Preferred may pay more than fair market value for mortgages it purchases from
Capital Crossing because it does not engage in arms- length negotiations with Capital Crossing Capital Crossing Preferred acquires mortgage assets from Capital Crossing under a master
mortgage loan purchase agreement between it and Capital Crossing, at an amount equal to Capital
Crossings net carrying value for those mortgage assets. Because Capital Crossing is an affiliate
of Capital Crossing Preferreds, Capital Crossing Preferred does not engage in any arms-length
negotiations regarding the consideration to be paid. Accordingly, if Capital Crossings net
carrying value exceeds the fair market value of the mortgage assets, Capital Crossing Preferred
would pay Capital Crossing more than the fair market value for those mortgaged assets. Fluctuations in interest rates could reduce Capital Crossing Preferred earnings and affect its
ability to pay dividends Capital Crossing Preferreds income consists primarily of interest earned on its mortgage
assets and short-term investments. A significant portion of Capital Crossing Preferreds mortgage
assets bear interest at adjustable rates. If there is a decline in interest rates, then Capital
Crossing Preferred will experience a decrease in income available to be distributed to its
stockholders. If interest rates decline, Capital Crossing Preferred may also experience an increase
in prepayments on its mortgage assets and may find it difficult to purchase additional mortgage
assets bearing rates sufficient to support payment of dividends on the Series A, Series C and
Series D preferred shares. Conversely, an increase in mortgage rates could result in decreased
interest income and increased non-interest expense related to workouts and other collection
efforts. An increase in interest rates that adversely affects the ability of borrowers to pay the
principal or interest on Capital Crossing Preferreds loans may lead to an increase in
non-performing assets and a reduction of discount accreted into income, which could have a material
adverse affect on Capital Crossing Preferreds results of operation. Because the dividend rates on
the Series A, Series C and Series D preferred shares are fixed, a significant decline or increase
in interest rates, either of 19




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which result in lower net income, could materially adversely affect
Capital Crossing Preferreds ability to pay dividends on the Series A, Series C and Series D
preferred shares. Tax Risks Related to REITs If Capital Crossing Preferred fails to qualify as a REIT, it will be subject to federal income tax
at regular corporate rates. If Capital Crossing Preferred fails to qualify as a REIT for any taxable year, it would be
subject to federal income tax, including any applicable alternative minimum tax, on its taxable
income at regular corporate rates. As a result, the amount available for distribution to Capital
Crossing Preferreds stockholders would be reduced for the year or years involved. In addition,
unless entitled to relief under statutory provisions, Capital Crossing Preferred would be
disqualified from treatment as a REIT for the four taxable years following the year which
qualification was lost. The failure to qualify as a REIT would reduce Capital Crossing Preferreds
net earnings available for distribution to its stockholders because of the additional tax liability
for the year or years involved. Capital Crossing Preferreds failure to qualify as a REIT would not
by itself give it the right to redeem the Series A, Series C or Series D preferred shares, nor
would it give the holders of the Series A, Series C or Series D preferred shares the right to have
their shares redeemed. Although Capital Crossing Preferred currently intends to operate in a manner designed to
qualify as a REIT, future economic, market, legal, tax or other considerations may cause it to
determine that it is in its best interest and in the best interest of holders of its common stock
and preferred stock to revoke its REIT election. The tax law prohibits Capital Crossing Preferred
from electing treatment as a REIT for the four taxable years following the year of any such
revocation. If Capital Crossing Preferred does not distribute 90% of its net taxable income, it may not qualify
as a REIT. In order to qualify as a REIT, Capital Crossing Preferred generally is required each year to
distribute to its stockholders at least 90% of its net taxable income, excluding net capital gains.
Capital Crossing Preferred may retain the remainder of REIT taxable income or all or part of its
net capital gain, but will 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 the amount, if
any, by which certain distributions considered as paid by Capital Crossing 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 its capital gains net income for the calendar year and (3) 100% of any undistributed
income from prior periods. Under certain circumstances, federal or state regulatory authorities may
restrict Capital Crossing Preferreds ability, as a subsidiary of Capital Crossing, to make
distributions to its stockholders in an amount necessary to retain its REIT qualification. Such a
restriction could result in Capital Crossing Preferred failing to qualify as a REIT. To the extent
Capital Crossing Preferreds REIT taxable income may exceed the actual cash received for a
particular period, Capital Crossing Preferred may not have sufficient liquidity to make
distributions necessary to retain its REIT qualification. Capital Crossing Preferred may redeem the Series A, Series C and Series D preferred shares at any
time upon the occurrence of a tax event. At any time following the occurrence of certain changes in the tax laws or regulations
concerning REITs, Capital Crossing Preferred will have the right to redeem the Series A, Series C
and Series D preferred shares in whole, subject to the prior written approval of the FDIC. Capital
Crossing Preferred would have the right to redeem the Series A, Series C and Series D preferred
shares if it received an opinion of counsel to the effect that, as a result of changes to the tax
laws or regulations:  
    dividends paid by Capital Crossing Preferred with respect to its capital stock are not
fully deductible by it for income tax purposes; or
    Capital Crossing Preferred are otherwise unable to qualify as a REIT. The occurrence of such changes in the tax laws or regulations will not, however, give the
holders of the Series A, Series C or Series D preferred shares any right to have their shares
redeemed. Capital Crossing Preferred has imposed ownership limitations to protect its ability to qualify as a
REIT, however, if ownership of the common stock of Capital Crossing becomes concentrated in a small
number of individuals Capital Crossing Preferred may fail to qualify as a REIT. To maintain Capital Crossing Preferreds status as a REIT, not more than 50% in value of
Capital Crossing Preferreds outstanding shares may be owned, directly or indirectly, by five or
fewer individuals, as defined in the Internal Revenue Code to include certain entities, during the
last half of each taxable year. Capital Crossing Preferred currently satisfies this requirement
because for this purpose Capital Crossing Preferreds common stock held by Capital Crossing is
treated as held by Capital Crossings stockholders. However, it is possible that the ownership of
Capital Crossing might become sufficiently concentrated in the future such that five or fewer
individuals 20




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##### Table of Contents



would be treated as having constructive ownership of more than 50% of the value of
Capital Crossing Preferreds stock. Capital Crossing Preferred may have difficulty monitoring the
daily ownership and constructive ownership of its outstanding shares and, therefore, Capital
Crossing Preferred cannot provide assurance that it will continue to meet the share ownership
requirement. This risk may be increased in
the future as Capital Crossing implements common stock repurchase programs because repurchases
may cause ownership in Capital Crossing to become more concentrated. In addition, while the fact
that the Series A, the Series C and Series D preferred shares may be redeemed or exchanged will not
affect Capital Crossing Preferreds REIT status prior to any such redemption or exchange, the
redemption or exchange of all or a part of the Series A, Series C and Series D preferred shares
could adversely affect Capital Crossing Preferreds ability to satisfy the share ownership
requirements in the future. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk is the risk of loss from adverse changes in market prices and interest rates. It
is the objective of Capital Crossing Preferred to attempt to control risks associated with interest
rate movements. Capital Crossing Preferreds market risk arises primarily from interest rate risk
inherent in holding loans. To that end, management actively monitors and manages the interest rate
risk exposure of Capital Crossing Preferred. Capital Crossing Preferreds management reviews, among other things, the sensitivity of
Capital Crossing Preferreds assets to interest rate changes, the book and market values of assets,
purchase and sale activity, and anticipated loan pay-offs. Capital Crossings senior management
also approves and establishes pricing and funding decisions with respect to Capital Crossing
Preferreds overall asset and liability composition. Capital Crossing Preferreds methods for evaluating interest rate risk include an analysis of
its interest-earning assets maturing or repricing within a given time period. Since Capital
Crossing Preferred has no interest-bearing liabilities, a period of rising interest rates would
tend to result in an increase in net interest income. A period of falling interest rates would tend
to adversely affect net interest income. The following table sets forth Capital Crossing Preferreds interest-rate-sensitive assets
categorized by repricing dates and weighted average yields at March 31, 2005. For fixed rate
instruments, the repricing date is the maturity date. For adjustable-rate instruments, the
repricing date is deemed to be the earliest possible interest rate adjustment date. Assets that are
subject to immediate repricing are placed in the overnight column. Within
    
    
    One to
    
    
    Two to
    
    
    Three to
    
    
    Four to
    
    
    OverOne
    
    
    Two
    
    
    Three
    
    
    Four
    
    
    Five
    
    
    FiveOvernight
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    Total(dollars in thousands)Interest-bearing deposits in banks
    
    $
    100,250
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    100,2501.10
    %Certificates of deposit
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3001.23
    %Fixed-rate loans (1)
    
    
    
    
    
    
    15,947
    
    
    
    12,172
    
    
    
    11,494
    
    
    
    9,284
    
    
    
    7,001
    
    
    
    19,025
    
    
    
    74,9238.56
    %
    
    
    8.40
    %
    
    
    8.28
    %
    
    
    7.84
    %
    
    
    7.71
    %
    
    
    7.12
    %Adjustable-rate loans (1)
    
    
    13,713
    
    
    
    24,861
    
    
    
    1,623
    
    
    
    847
    
    
    
    832
    
    
    
    669
    
    
    
    942
    
    
    
    43,4878.20
    %
    
    
    7.07
    %
    
    
    6.55
    %
    
    
    6.52
    %
    
    
    6.21
    %
    
    
    5.96
    %
    
    
    7.08
    %Total rate-sensitive assets
    
    $
    113,963
    
    
    $
    41,108
    
    
    $
    13,795
    
    
    $
    12,341
    
    
    $
    10,116
    
    
    $
    7,670
    
    
    $
    19,967
    
    
    $
    218,960
    Based on Capital Crossing Preferreds experience, management applies the assumption that,
on average, approximately 6% of the outstanding fixed and adjustable rate loans will prepay
annually. At March 31, 2005, the fair value of net loans was $118.9 million as compared to the net
carrying value of net loans of $117.3 million. The fair value of interest-bearing deposits in banks
approximates carrying value. ITEM 4. Changes in and Disagreements with Accountants in Accounting and Financial Disclosure Not applicable 21




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##### Table of Contents



Item 4A. Controls and Procedures Capital Crossing Preferreds management, with the participation of its President and
Treasurer, evaluated the effectiveness of Capital Crossing Preferreds disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31,
2005. Based on this evaluation, Capital Crossing Preferreds President and Treasurer concluded
that, as of March 31, 2005, Capital Crossing Preferreds disclosure controls and procedures were
(1) designed to ensure that material information relating to Capital Crossing Preferred is made
known to the President and Treasurer by others within the entity, particularly during the period in
which this report was being prepared, and (2) effective, in that they provide reasonable assurance
that information required to be disclosed by Capital
Crossing Preferred in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in the SECs rules and forms. No change to our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the quarter ended March 31, 2005 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting. Item 4B. Other Information Not applicable. 22




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##### Table of Contents



PART II 
 Item 6. Exhibits  31.1
    Certification pursuant to Exchange Act Rules 13a-14(a)
and 15d-14(a) of the President. Rule 13a-14(a) Certification signed
by Richard Wayne, President (Principal Executive Officer). FILED
HEREWITH.31.2
    Certification pursuant to Exchange Act Rules 13a-14(a)
and 15d-14(a) of the Treasurer. Rule 13a-14(a) Certification signed
by Edward F. Mehm, Treasurer (Principal Financial Officer). FILED
HEREWITH.32
    Certification pursuant to 18 U.S.C. Section 1350 of the
President and Treasurer. Rule 13a-14(b) Certification signed
by Richard Wayne, President (Principal Executive Officer), and Edward F. Mehm, Treasurer (Principal Financial Officer). FILED
HEREWITH. 23




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Capital Crossing
Preferred Corporation has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized. CAPITAL CROSSING PREFERRED CORPORATION Date: May 13, 2005
    
    
    
    By:
    
    /s/ Richard WayneRichard WaynePresident (Principal Executive Officer)
 Date: May 13, 2005
    
    
    
    By:
    
    /s/ Edward F. MehmEdward F. MehmTreasurer (Principal Financial Officer)
 24




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##### Table of Contents



EXHIBIT INDEX PageExhibit
    
    Item
    
    Number31.1
    
    Certification pursuant to Exchange Act Rules
13a-14(a) and 15d-14(a) of the President. Rule 13a-14(a) Certification signed
by Richard Wayne, President (Principal Executive Officer).
    
    
    2631.2
    
    Certification pursuant to Exchange Act Rules
13a-14(a) and 15d-14(a) of the Treasurer. Rule 13a-14(a) Certification signed
by Edward F. Mehm, Treasurer (Principal Financial Officer).
    
    
    2732
    
    Certification pursuant to 18 U.S.C. Section
1350 of the President and Treasurer. Rule 13a-14(b) Certification signed
by Richard Wayne, President (Principal Executive Officer), and Edward F. Mehm, Treasurer (Principal Financial Officer).
    
    
    28
 25