CAPITAL CROSSING PREFERRED CORP
UNRESOLVED STAFF COMMENTS         None.  27   Table of Contents          ITEM 2.  PROPERTIES         Capital Crossing Preferred conducts its business out of the corporate headquarters of Capital Crossing, located at 101 Summer Street, Boston, Massachusetts. Capital Crossing Preferred does not reimburse Capital Crossing for the use of such space.           ITEM 3.  LEGAL PROCEEDINGS         From time to time, Capital Crossing Preferred may be involved in routine litigation incidental to its business, including a variety of legal proceedings with borrowers, which would contribute to Capital Crossing Preferred’s expenses, including the costs of carrying non-performing assets. Capital Crossing Preferred is not currently a party to any such material proceedings.           ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS         No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.  28    Table of Contents    PART II           ITEM 5.  MARKET FOR CAPITAL CROSSING PREFERRED’S COMMON STOCK AND     RELATED SECURITY HOLDER MATTERS    Common Stock        In connection with its formation on March 20, 1998, Capital Crossing Preferred issued 100 shares of its common stock to Capital Crossing. These shares of common stock were issued in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. There is no established public trading market for the common stock. As of March 6, 2006, there were 100 issued and outstanding shares of common stock, all of which were held by Capital Crossing.        During 2005, 2004 and 2003, dividends of $5.9 million, $19.6 million and $16.1 million, respectively, were paid to the common stockholder. In 2003, dividends of $1.0 million were in the form of mortgage loans. In addition, during 2005, 2004 and 2003, returns of capital totaling $14.1 million, $30.4 million and $118.2 million, respectively, were paid to the common stockholder. In 2003, returns of capital of $8.3 million were in the form of mortgage loans.   Preferred Stock        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 February 1, 1999, Capital Crossing Preferred closed its public offering of 1,260,000 shares of its 9.75% Non-cumulative exchangeable preferred stock, Series A. On February 12, 1999, Capital Crossing Preferred sold an additional 156,130 Series A preferred shares in connection with the underwriters’ exercise of their overallotment option. The net proceeds to Capital Crossing Preferred from the sale of Series A preferred shares were $12.6 million. Series A preferred stock is redeemable at the option of Capital Crossing Preferred, with the prior consent of the FDIC, for shares of Capital Crossing’s 9.75% non-cumulative preferred stock, Series C.        On May 31, 2001, Capital Crossing Preferred closed its public offering of 1,840,000 shares (including 240,000 shares issued upon the exercise of the underwriters’ overallotment option) of its 10.25% Non-cumulative exchangeable preferred stock, Series C. The net proceeds to Capital Crossing Preferred from the sale of Series C preferred shares were $16.9 million. Series C preferred stock is redeemable at the option of Capital Crossing Preferred on or after May 31, 2006, with the prior consent of the FDIC, for shares of Capital Crossing’s 10.25% Non-cumulative preferred stock, Series D.        On May 11, 2004, Capital Crossing Preferred closed its public offering of 1,500,000 shares of its 8.50% Non-cumulative exchangeable preferred stock, Series D. The net proceeds to Capital Crossing Preferred from the sale of Series D preferred shares were $35.3 million. Series D preferred stock is redeemable at the option of Capital Crossing Preferred on or after July 15, 2009, with the prior consent of the FDIC, for shares of Capital Crossing’s 8.50% Non-cumulative preferred stock, Series E.   Dividend Policy        Capital Crossing Preferred currently expects to pay an aggregate amount of dividends with respect to its outstanding shares of capital stock equal to substantially all of its REIT taxable income. In order to remain qualified as a REIT, Capital Crossing Preferred must distribute annually at least 90% of its REIT taxable income, excluding capital gains, to stockholders. Because in general it will be in Capital Crossing Preferred’s interest, and in the interests of its stockholders, to remain qualified as a REIT, this tax requirement creates a significant incentive to declare and pay dividends when Capital Crossing Preferred has sufficient resources to do so. Capital Crossing, as holder of all of Capital Crossing Preferred’s common  29    Table of Contents  stock, controls the election of all of its directors and also has a significant interest in having full dividends paid on its preferred shares. Capital Crossing Preferred anticipates that none of the dividends on outstanding preferred shares will constitute non-taxable returns of capital.        Dividends will be declared at the discretion of the Board of Directors after considering Capital Crossing Preferred’s distributable funds, financial requirements, tax considerations and other factors. Capital Crossing Preferred’s distributable funds will consist primarily of interest and principal payments on the mortgage assets, and Capital Crossing Preferred anticipates that a significant portion of such assets will earn interest at adjustable rates. Accordingly, if there is a decline in interest rates, Capital Crossing Preferred will experience a decrease in income available to be distributed to its stockholders. In a period of declining interest rates, Capital Crossing Preferred also may find it difficult to purchase additional mortgage assets bearing rates sufficient for it to be able to pay dividends on the Series A, Series C and Series D preferred shares.        The FDIC’s prompt corrective action regulations prohibit entities such as Capital Crossing from making “capital distributions,” which include a transaction that the FDIC determines, by order or regulation, to be “in substance a distribution of capital,” unless the institution is at least adequately capitalized after the distribution. There can be no assurances that the FDIC would not seek to restrict Capital Crossing Preferred’s payment of dividends on the Series A, Series C and Series D preferred shares under these regulations if Capital Crossing were to fail to maintain a status of at least adequately capitalized. Currently, an institution is considered adequately capitalized if it has a total risk-based capital ratio of at least 8.0%, a Tier 1 risk-based capital ratio of at least 4.0% and a Tier 1 leverage ratio of at least 4.0%. At December 31, 2005, Capital Crossing’s total risk-based capital ratio was 16.35%, Tier 1 risk-based capital ratio was 10.68% and Tier 1 leverage ratio was 8.77%. Capital Crossing’s Board of Directors authorized a stock repurchase program whereby, following the required approvals from the FDIC, Capital Crossing is permitted to repurchase shares of its common stock in the open market or in privately negotiated transactions, subject to regulatory considerations. As part of its common stock repurchase program, Capital Crossing has agreed with the FDIC to maintain, for so long as the repurchase program continues, its Tier 1 leverage ratio at least 7.0% and that it remains well-capitalized.        In addition, the automatic exchange of shares of Capital Crossing preferred stock for shares of Capital Crossing Preferred Series A, Series C or Series D preferred shares may take place under circumstances in which Capital Crossing will be considered less than adequately capitalized for purposes of the FDIC’s prompt corrective action regulations. Thus, at the time of the automatic exchange, Capital Crossing would likely be prohibited from paying dividends on its preferred shares, including its preferred shares issued in exchange for Capital Crossing Preferred’s Series A, Series C or Series D preferred shares. Further, Capital Crossing’s ability to pay dividends on its preferred shares following the automatic exchange also would be subject to various restrictions under FDIC regulations and a resolution of Capital Crossing’s Board of Directors. If Capital Crossing did pay dividends on its preferred shares, such dividends would be paid out of its capital surplus.        Under certain circumstances, including a determination that Capital Crossing’s relationship with Capital Crossing Preferred results in an unsafe and unsound banking practice, federal and state regulatory authorities will have additional authority to restrict Capital Crossing Preferred’s ability to make dividend payments to its stockholders.  30    Table of Contents          ITEM 6.  SELECTED FINANCIAL DATA                                                        As of and for the Year Ended December 31,               2005   2004   2003   2002   2001                               (Dollars in Thousands)     Financial condition data:                                                  Total assets    $ 203,326     $ 217,686     $ 221,853     $ 331,994     $ 236,365           Loans, net of discounts    $ 116,116     $ 123,994     $ 158,444     $ 245,431     $ 152,127             Allowance for loan losses      (1,981 )     (2,497 )     (3,281 )     (7,354 )     (4,659 )           Deferred loan fees      (55 )     (62 )     (92 )     (112 )     (92 )                                           Loans, net    $ 114,080     $ 121,435     $ 155,071     $ 237,965     $ 147,376                                             Cash and cash equivalents    $ 88,406     $ 95,407     $ 65,845     $ 92,710     $ 87,989           Stockholders’ equity      202,096       216,169       221,430       331,559       235,948           Non-performing loans, net      333       1,557       17       1,621       153       Operations data:                                                  Interest income    $ 12,374     $ 14,512     $ 21,113     $ 25,461     $ 23,598           Credit for loan losses      516       810       3,910       1,500       —           Other income      80       156       3,088       2,512       236           Operating expenses      (511 )     (610 )     (531 )     (753 )     (498 )                                           Net income      12,459       14,868       27,580       28,720       23,336           Preferred stock dividends      (6,529 )     (5,387 )     (3,342 )     (3,342 )     (2,562 )                                           Net income available to common shareholder    $ 5,930     $ 9,481     $ 24,238     $ 25,378     $ 20,774                                             Ratio of earnings to fixed charges and preferred stock dividends      1.91 X     2.76 X     8.25 X     8.59 X     9.11 X     Selected other information:                                                  Non-performing assets, net, as a percent of total assets      0.16 %     0.72 %     0.01 %     0.49 %     0.06 %         Non-performing loans, net, as a percentage of loans, net of     discount and deferred loan income      0.29       1.26       0.01       0.66       0.10           Allowance for loan losses as a percent of total loans, net of     discount and deferred loan fees      1.71       2.01       2.07       3.00       3.06           Allowance for loan losses as a percent of non-performing loans,     net      594.89       160.37       19,300.00       453.67       3,045.10      31    Table of Contents          ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL     CONDITION AND RESULTS OF OPERATIONS         This Annual Report on Form 10-K 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 Annual Report on Form 10-K. 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 “Item 1A. RISK FACTORS”. These factors and the other cautionary statements made in this annual report should be read as being applicable to all related forward-looking statements wherever they appear in this annual 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.   Executive Level Overview        Net income available to common shareholder decreased $3.6 million, or 37.5%, to $5.9 million in 2005 compared to $9.5 million in 2004 and decreased $14.8 million or 60.9%, in 2004 compared to $24.2 million for 2003. The decrease from 2004 to 2005, as well as from 2003 to 2004, is primarily the result of declines in interest income and credit for loan losses. In addition, there was an increase in preferred stock dividends attributable to the issuance of Series D preferred stock on May 11, 2004. The decrease from 2003 to 2004 is also a result of gains on distribution of loans to the common stockholder in 2003.        All of the mortgage assets in Capital Crossing Preferred’s loan portfolio at December 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 December 31, 2005, Capital Crossing Preferred held loans acquired from Capital Crossing with net investment balances of $116.1 million.        Commercial mortgage loans constituted approximately 62.6% of the total loans in Capital Crossing Preferred’s loan portfolio at December 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, may 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 December 31, 2005, approximately 52.8% of the balances of its mortgage loans were secured by properties located in California and 13.1% in New England. In the instance where either region experienced adverse economic, political or business conditions or natural disasters, 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 objectives. 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  32    Table of Contents  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 2005, the loan portfolio was large enough to generate income resulting in net income, which was 1.91 times 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 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 investor after acquisition. Effective January 1, 2005, Capital Crossing Preferred is no longer allowed to increase the allowance through allocations from purchase discount and is no longer allowed to establish impairment reserves at acquisition. However, at the time of acquisition, general risk allocations are established for loans for which no nonaccretable discount is allocated through a change in earnings. 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.        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.   Application of Critical Accounting Policies and Estimates        The SEC requested 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, 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 also increased upon the allocation of purchase discount upon the acquisition of loans. Effective January 1, 2005, no allocation of discount is made to the allowance for loan losses for acquired loans with evidence of deterioration of credit quality since origination, however, additions for impairment that occur subsequent to acquisition will continue to be recognized through a provision for loan losses included in earnings. At the time of acquisition, only general risk allocations are established for loans for which no nonaccretable discount is allocated through a change to 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,  33   Table of Contents  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 Statement of Financial Accounting Standards (“SFAS”) No. 114. Next, management considers the level of general loan allowances deemed appropriate for loans. 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 and general risk allocations on loans for which no nonaccretable discount is allocated. Capital Crossing Preferred no longer increases the allowance for loan losses through allocations from purchase discount and is no longer allowed to establish impairment reserves at acquisition. However, at the time of acquisition, general risk allocations are established for loans for which no nonaccretable discount is allocated through a change to earnings. 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 adoption of SOP No. 03-3, Capital Crossing Preferred is required to change its discount accounting as it relates to acquired loans which, at acquisition, have evidence of deterioration of credit quality since origination and for which it is probable that Capital Crossing Preferred will be unable to collect all contractually required payments. For such loans, the excess of the undiscounted contractual cash flows over the undiscounted 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 since January 1, 2005, 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 the method Capital Crossing Preferred used to account 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 for loan losses through allocations from purchase discount.        No loans acquired in 2005 were within the scope of SOP No. 03-3.         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  34    Table of Contents  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 a provision for loan losses included in earnings.        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, 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 December 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 Years Ended December 31, 2005, 2004 and 2003           Interest income         The yields on Capital Crossing Preferred’s interest-earning assets are summarized as follows:                                                                                     Year Ended December 31,               2005   2004   2003                       Average       Average       Average           Balance   Interest   Yield   Balance   Interest   Yield   Balance   Interest   Yield                                               (Dollars in Thousands)         Loans, net(1)    $ 123,430     $ 11,306       9.16 %   $ 133,833     $ 13,208       9.87 %   $ 198,333     $ 19,797       9.98 %         Interest-bearing deposits      96,894       1,068       1.10       118,443       1,304       1.10       83,045       1,316       1.58                                                                     Total interest-earning assets    $ 220,324     $ 12,374       5.62 %   $ 252,276     $ 14,512       5.75 %   $ 281,378     $ 21,113       7.50 %                                                                         (1)       Non-performing loans are excluded from average balance     calculations.         The decline in interest income from 2004 to 2005 is a result of a decrease in the average balance of loans in addition to a decrease in the yield on loans. Average loans, net for 2005 totaled $123.4 million compared to $133.8 million for 2004. This decrease is primarily attributable to pay-offs and amortization of loans. Partially offsetting this decrease is an increase in the amount of loans acquired from Capital Crossing. During 2005, Capital Crossing Preferred acquired $15.3 million in loans compared to $4.3 million in 2004. The decline in yield on loans is primarily due to a decline in interest and fee income recognized on loan pay-offs, offset by a small increase in regularly scheduled interest and accretion income.        The decline in yield on interest-earning assets from 2003 to 2004 is primarily a result of a decrease in the average balance of loans, in addition to a decline in the interest rate on interest-bearing deposits. The  35    Table of Contents  decline in yield on interest-earning assets is due to a shift in the composition of average interest-bearing assets such that average loans represents a smaller percentage of total average interest-bearing assets in 2004 as compared to the same period in 2003. Average loans, net for 2004 totaled $133.8 million compared to $198.3 million for 2003. This decrease is primarily attributable to pay-offs, sales and amortization of loans. During 2004, Capital Crossing Preferred only acquired $4.3 million in loans. No loans were acquired in 2003.        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 years 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.                                                               Year Ended December 31,               2005   2004   2003                       Interest       Interest       Interest           Income   Yield   Income   Yield   Income   Yield                                   (Dollars in Thousands)         Regularly scheduled interest and accretion income    $ 9,669       7.83 %   $ 10,214       7.63 %   $ 15,284       7.70 %         Interest and fee income recognized on loan pay-offs:                                                            Nonaccretable discount      53       0.04       91       0.07       968       0.49             Accretable discount      751       0.61       2,381       1.78       2,712       1.37             Other interest and fee income      833       0.68       522       0.39       833       0.42                                                   1,637       1.33       2,994       2.24       4,513       2.28                                                 $ 11,306       9.16 %   $ 13,208       9.87 %   $ 19,797       9.98 %                                                  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 decreased $21.5 million to $96.9 million for 2005 compared to $118.4 million for 2004 and increased $35.4 million in 2004 compared to $83.0 million for 2003. The changes in the average balances of interest-bearing deposits are the result of periodic dividend payments, returns of capital and funds used to purchase additional mortgage assets, offset by cash flows from loan repayments. The yield on interest-bearing deposits remained unchanged from 2004 to 2005. In 2004 and 2003, the yield on interest-bearing deposits decreased as a result of a decline in the interest rate environment.           Credit for loan losses         Capital Crossing Preferred’s loan portfolio generated credits for loan losses of $516,000, $810,000 and $3.9 million for the years ended December 31, 2005, 2004 and 2003, respectively, to reverse unused general reserves related to loans that have been paid off. The credit for loan losses is based on the volume  36    Table of Contents  and types 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.           Other income         Guarantee fee income for the years ended December 31, 2005, 2004 and 2003 was $80,000 in each year. Effective July 1, 2000, Capital Crossing Preferred entered into an agreement to make certain assets available to be pledged in connection with borrowings of Capital Crossing from the FHLBB. Capital Crossing Preferred receives an annual fee of $80,000 from Capital Crossing under this agreement.        A gain of $3.0 million was recognized on the distribution of loans to the common stockholder during the third quarter of 2003. These loans were distributed at the estimated fair value on the transfer date, which was higher than the book value of the loans, resulting in the recognition of a gain in connection with this distribution.        During 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. There were no loan sales during 2005 or 2003.           Operating expenses         Loan servicing and advisory expenses decreased $34,000, or 9.0%, to $343,000 in 2005 from $377,000 in 2004 and decreased by $198,000, or 34.4%, from $575,000 in 2003. The decreases are a result of the decreases in the average balance of the loan portfolio from year to year.        There was no other real estate owned income, net during the years ended December 31, 2005 and 2004. Other real estate owned income for the year ended December 31, 2003 is comprised of a gain of $334,000 on the sale of one property to an unaffiliated third party and rental income of $27,000.        Other general and administrative expenses consisting primarily of professional fees, shareholder relations, directors’ fees and printing expenses decreased $65,000, or 27.9%, to $168,000 from $233,000 in 2004 and decreased $84,000, or 26.5%, from $317,000 in 2003. The decrease in 2005 is attributable to a decrease in legal fees in connection with loan-related matters, offset by increases in shareholder relations and director’s fees. The decrease in 2004 is primarily attributable to a decrease in legal fees in connection with loan-related 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.   Financial Condition           Interest-bearing Deposits with Capital Crossing         Interest-bearing deposits with Capital Crossing consist entirely of money market accounts. The balance of interest-bearing deposits decreased $7.0 million to $88.3 million for 2005 compared to $95.3 million for 2004. The decrease in the balance of interest-bearing deposits is the result of periodic dividend payments, funds used to purchase additional mortgage assets and returns of capital, offset by cash flows from loan repayments.  37   Table of Contents          Loan Portfolio         The outstanding net investments of the loan portfolio is summarized as follows:                                                   December 31,               2005   2004                   Principal   Percentage   Principal   Percentage       Balance   of Total   Balance   of Total                           (Dollars in Thousands)         Mortgage loans on real estate:                                            Commercial real estate    $ 72,650       62.57 %   $ 83,236       67.13 %           Multi-family residential      38,392       33.06       35,866       28.93             Land      3,748       3.23       4,011       3.23             One-to-four family residential      1,305       1.12       858       0.69                                             Total      116,095       99.98       123,971       99.98             Other      21       0.02       23       0.02                                           Total loans, net of discounts    $ 116,116       100.00 %   $ 123,994       100.00 %                                      Capital Crossing Preferred acquires primarily performing commercial real estate and multifamily residential mortgage loans. During 2005, Capital Crossing Preferred acquired $15.3 million in loans from Capital Crossing. During 2004, Capital Crossing Preferred acquired $4.3 million in loans from Capital Crossing.        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 the master service agreement with Capital Crossing.        Non-performing loans, net of discount, totaled $333,000 and $1.6 million at December 31, 2005 and 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.   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 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.  38    Table of Contents       At December 31, 2005, 52.8% and 13.1% of Capital Crossing Preferred’s net loan portfolio consisted of loans in California and New England, respectively. At December 31, 2004, 47.2% and 13.4% 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.  39    Table of Contents       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 repricing information of Capital Crossing Preferred’s assets is contained in Item 7A, Quantitative and Qualitative Disclosure About Market Risk, of this annual report.           ITEM 7A.  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 the Capital Crossing Preferred’s interest-rate-sensitive assets categorized by repricing dates and weighted average yields at December 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.                                                                             December 31, 2005                   Over One   Over Two   Over Three   Over Four               Within   to Two   to Three   to Four   to Five   Over Five           Overnight   One Year   Years   Years   Years   Years   Years   Total                                           (Dollars in Thousands)         Interest-bearing deposits    $ 88,304     $ —     $ —     $ —     $ —     $ —     $ —     $ 88,304           1.10 %                                                                 Certificate of deposit      —       296       —       —       —       —       —       296                   2.63 %                                                         Fixed-rate loans(1)      —       17,524       12,862       11,363       7,521       5,811       11,914       66,995                   8.23 %     7.94 %     7.93 %     7.75 %     7.63 %     7.09 %                 Adjustable-rate loans(1)      12,086       29,278       3,849       1,368       1,551       338       263       48,733           9.54 %     7.69 %     6.41 %     6.68 %     6.32 %     6.16 %     7.45 %                                                                     Total rate-sensitive assets    $ 100,390     $ 47,098     $ 16,711     $ 12,731     $ 9,072     $ 6,149     $ 12,177     $ 204,328                                                                     (1)       Loans are presented at net amounts before deducting the     allowance for loan losses and excludes non-performing loans.         Based on Capital Crossing Preferred’s experience, management applies the assumption that, on average, approximately 12% of the fixed and adjustable rates will prepay annually.        At December 31, 2005, the fair value of net loans was $112.8 million as compared to the net carrying value of net loans of $114.1 million. The fair value of interest-bearing deposits approximates carrying value.  40    Table of Contents          ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                      Page                 Report of Independent Registered Public Accounting Firm      42           Balance Sheets      43           Statements of Income      44           Statements of Changes in Stockholders’ Equity      45           Statements of Cash Flows      46           Notes to Financial Statements      47      41    Table of Contents  REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM   The Board of Directors   Capital Crossing Preferred Corporation:        We have audited the accompanying balance sheets of Capital Crossing Preferred Corporation, as of December 31, 2005 and 2004 and the related statements of income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2005. These financial statements are the responsibility of Capital Crossing Preferred Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.        In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Capital Crossing Preferred Corporation as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2005 in conformity with U.S. generally accepted accounting principles.        As discussed in Notes 1 and 2 to the financial statements, effective January 1, 2005, Capital Crossing Preferred Corporation adopted Statement of Position No. 03-3 “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.”   /s/ KPMG llp    Boston, Massachusetts   March 28, 2006  42    Table of Contents  CAPITAL CROSSING PREFERRED CORPORATION   BALANCE SHEETS   December 31, 2005 and 2004                                 2005   2004                   (In Thousands)    ASSETS         Cash account with Capital Crossing Bank    $ 102     $ 92           Interest bearing deposits with Capital Crossing Bank      88,304       95,315                               Total cash and cash equivalents      88,406       95,407                           Certificates of deposit      296       300           Loans, net of discounts and net deferred loan income      116,061       123,932             Less allowance for loan losses      (1,981 )     (2,497 )                             Loans, net      114,080       121,435                           Accrued interest receivable      544       544                         $ 203,326     $ 217,686                          LIABILITIES AND STOCKHOLDERS’ EQUITY         Due to Capital Crossing Bank    $ —     $ 289           Accrued expenses and other liabilities      1,230       1,228                               Total liabilities      1,230       1,517                           Commitments and contingencies                          Stockholders’ equity:                            Preferred stock, Series A, 9.75% non-cumulative,     exchangeable; $.01 par value; $10 liquidation value per     share; 1,449,000 shares authorized, 1,416,130 shares     issued and outstanding      14       14             Preferred stock, Series B, 8% cumulative, non-convertible;     $.01 par value; $1,000 liquidation value per share plus     accrued dividends; 1,000 shares authorized, 937 and     940 shares issued and outstanding, respectively      —       —             Preferred stock, Series C, 10.25% non-cumulative,     exchangeable; $.01 par value; $10 liquidation value per     share; 1,840,000 shares authorized, issued and outstanding      18       18             Preferred stock, Series D, 8.50% non-cumulative,     exchangeable; $.01 par value; $25 liquidation value per     share; 1,725,000 shares authorized, 1,500,000 issued and     outstanding      15       15             Common stock, $.01 par value, 100 shares authorized,     issued and outstanding      —       —             Additional paid-in capital      202,049       216,122             Retained earnings      —       —                               Total stockholders’ equity      202,096       216,169                         $ 203,326     $ 217,686                       See accompanying notes to financial statements.  43    Table of Contents  CAPITAL CROSSING PREFERRED CORPORATION   STATEMENTS OF INCOME   Years Ended December 31, 2005, 2004, and 2003                                           2005   2004   2003                       (In Thousands)         Interest income:                                    Interest and fees on loans    $ 11,306     $ 13,208     $ 19,797             Interest on interest-bearing deposits      1,068       1,304       1,316                                       Total interest income      12,374       14,512       21,113           Credit for loan losses      516       810       3,910                                 Total interest income, after credit for loan losses      12,890       15,322       25,023           Other income:                                    Guarantee fee income      80       80       80             Gain on distribution of loans to common stockholder      —       —       3,008             Gain on sales of loans      —       76       —                                       Total other income      80       156       3,088                                 Operating expenses:                                    Loan servicing and advisory services      343       377       575             Other real estate owned income, net      —       —       (361 )           Other general and administrative      168       233       317                                       Total operating expenses      511       610       531                                     Net income      12,459       14,868       27,580           Preferred stock dividends      6,529       5,387       3,342                                 Net income available to common shareholder    $ 5,930     $ 9,481     $ 24,238                             See accompanying notes to financial statements.  44    Table of Contents     CAPITAL CROSSING PREFERRED CORPORATION   STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY   Years Ended December 31, 2005, 2004 and 2003                                                                                                                     Preferred Stock   Preferred Stock   Preferred Stock   Preferred Stock                       Series A   Series B   Series C   Series D   Common Stock   Additional       Total                           Paid-in   Retained   Stockholders’       Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Earnings   Equity                                                               (Dollars In Thousands)         Balance at December 31, 2002      1,416,130     $ 14       941     $ —       1,840,000     $ 18       —     $ —       100     $ —     $ 329,475     $ 2,052     $ 331,559           Net income      —       —       —       —       —       —       —       —       —       —       —       27,580       27,580           Dividends on preferred stock, Series A      —       —       —       —       —       —       —       —       —       —       —       (1,381 )     (1,381 )         Cumulative dividends on preferred stock, Series B      —       —       —       —       —       —       —       —       —       —       —       (75 )     (75 )         Dividends on preferred stock, Series C      —       —       —       —       —       —       —       —       —       —       —       (1,886 )     (1,886 )         Return of capital to common stockholder      —       —       —       —       —       —       —       —       —       —       (118,235 )     —       (118,235 )         Common stock dividend      —       —       —       —       —       —       —       —       —       —       —       (16,132 )     (16,132 )                                                                                           Balance at December 31, 2003      1,416,130       14       941       —       1,840,000       18       —       —       100       —       211,240       10,158       221,430           Net income      —       —       —       —       —       —       —       —       —       —       —       14,868       14,868           Net proceeds from issuance of preferred stock, Series D      —       —       —       —       —       —       1,500,000       15       —       —       35,244       —       35,259           Dividends on preferred stock, Series A      —       —       —       —       —       —       —       —       —       —       —       (1,381 )     (1,381 )         Cumulative dividends on preferred stock, Series B      —       —       —       —       —       —       —       —       —       —       —       (75 )     (75 )         Dividends on preferred stock, Series C      —       —       —       —       —       —       —       —       —       —       —       (1,886 )     (1,886 )         Dividends on preferred stock, Series D      —       —       —       —       —       —       —       —       —       —       —       (2,045 )     (2,045 )         Repurchase of preferred stock, Series B      —       —       (1 )     —       —       —       —       —       —       —       (1 )     —       (1 )         Return of capital to common stockholder      —       —       —       —       —       —       —       —       —       —       (30,361 )     —       (30,361 )         Common stock dividend      —       —       —       —       —       —       —       —       —       —       —       (19,639 )     (19,639 )                                                                                           Balance at December 31, 2004      1,416,130       14       940       —       1,840,000       18       1,500,000       15       100       —       216,122       —       216,169           Net income      —       —       —       —       —       —       —       —       —       —       —       12,459       12,459           Dividends on preferred stock, Series A      —       —       —       —       —       —       —       —       —       —       —       (1,381 )     (1,381 )         Cumulative dividends on preferred stock, Series B      —       —       —       —       —       —       —       —       —       —       —       (75 )     (75 )         Dividends on preferred stock, Series C      —       —       —       —       —       —       —       —       —       —       —       (1,886 )     (1,886 )         Dividends on preferred stock, Series D      —       —       —       —       —       —       —       —       —       —       —       (3,187 )     (3,187 )         Repurchase of preferred stock, Series B      —       —       (3 )     —       —       —       —       —       —       —       (3 )     —       (3 )         Return of capital to common stockholder      —       —       —       —       —       —       —       —       —       —       (14,070 )     —       (14,070 )         Common stock dividend      —       —       —       —       —       —       —       —       —       —       —       (5,930 )     (5,930 )                                                                                           Balance at December 31, 2005      1,416,130     $ 14       937     $ —       1,840,000     $ 18       1,500,000     $ 15       100     $ —     $ 202,049     $ —     $ 202,096                                                                                         See accompanying notes to the unaudited interim financial statements.  45   Table of Contents  CAPITAL CROSSING PREFERRED CORPORATION   STATEMENTS OF CASH FLOWS   Years Ended December 31, 2005, 2004 and 2003                                           2005   2004   2003                       (In Thousands)         Cash flows provided by operating activities:                                    Net income    $ 12,459     $ 14,868     $ 27,580             Adjustments to reconcile net income to net cash provided by     operating activities:                                      Credit for loan losses      (516 )     (810 )     (3,910 )             Gain on sale and disposition of other real estate owned      —       —       (334 )             Gain on sale of loans      —       (76 )     —               Gain on distribution of loans to common stockholder      —       —       (3,008 )             Other, net      (287 )     490       470                                       Net cash provided by operating activities      11,656       14,472       20,798                                 Cash flows provided by investing activities:                                    Net decrease (increase) in certificate of deposit      4       (100 )     (100 )           Loan repayments      23,214       38,299       79,194             Purchases of loans from Capital Crossing Bank      (15,343 )     (4,272 )     —             Proceeds from sales of other real estate owned      —       —       1,585             Proceeds from loan sales      —       495       —                                       Net cash provided by investing activities      7,875       34,422       80,679                                 Cash flows used in financing activities:                                    Issuance of preferred stock, Series D      —       35,259       —             Repurchase of preferred stock, Series B      (3 )     (1 )     —             Payment of preferred stock dividends      (6,529 )     (4,590 )     (3,342 )           Payment of common stock dividend      (5,930 )     (19,639 )     (15,094 )           Return of capital to common stockholder      (14,070 )     (30,361 )     (109,906 )                                     Net cash used in financing activities      (26,532 )     (19,332 )     (128,342 )                               Net change in cash and cash equivalents      (7,001 )     29,562       (26,865 )         Cash and cash equivalents at beginning of year      95,407       65,845       92,710                                 Cash and cash equivalents at end of year    $ 88,406     $ 95,407     $ 65,845                                 Supplemental information:                                    Return of capital to common stockholder in form of mortgage loans    $ —     $ —     $ 8,329             Dividends to common stockholder in form of mortgage loans      —       —       1,038             Transfers from loans to other real estate      —       —       1,251       See accompanying notes to financial statements.  46    Table of Contents  CAPITAL CROSSING PREFERRED CORPORATION   NOTES TO FINANCIAL STATEMENTS   Years Ended December 31, 2005, 2004 and 2003         1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES            Basis of presentation         Capital Crossing Preferred Corporation (“Capital Crossing Preferred”), formerly Atlantic Preferred Capital Corporation, is a Massachusetts corporation organized on March 20, 1998, to acquire and hold real estate mortgage 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 December 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.        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. See Note 3.           Business         Capital Crossing Preferred’s business is to hold real estate assets acquired from Capital Crossing. Capital Crossing’s primary business lines include the acquisition of loans secured by commercial real estate, multi-family and residential real estate, and other business assets and leases from sellers in the financial services industry. Capital Crossing administers the day-to-day activities of Capital Crossing Preferred in its roles as servicer under a master service agreement entered into between Capital Crossing and Capital Crossing Preferred and as advisor under the advisory agreement entered into between Capital Crossing and Capital Crossing Preferred. Capital Crossing Preferred pays Capital Crossing an annual servicing fee equal to 0.20%, payable monthly, and an annual advisory fee equal to 0.05%, also payable monthly, of the gross average outstanding principal balances of loans in the loan portfolio for the immediately preceding month.           Use of estimates         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 between accretable and nonaccretable portions, and the rate at which discount is accreted into interest income.           Cash equivalents         Cash equivalents include cash and interest-bearing deposits held at Capital Crossing with original maturities of ninety days or less.  47    Table of Contents  CAPITAL CROSSING PREFERRED CORPORATION   NOTES TO FINANCIAL STATEMENTS (Continued)   Years Ended December 31, 2005, 2004 and 2003         1.   SUMMARY OF SIGNIFICANT ACCOUNTING     POLICIES (Continued)            Loans         A substantial portion of the loan portfolio is composed of loans secured by commercial real estate and multi-family loans located in California and New England. The ability of Capital Crossing Preferred’s debtors to honor their contracts is dependent upon the real estate and general economic sectors in these regions.        Loans, as reported, have been adjusted for discounts on loans purchased, net deferred loan fees and the allowance for loan losses.        Net deferred loan fees and costs are amortized to interest income using the interest method over the terms of the loans. Discount loan income and credits for loan losses are accounted for on an individual loan basis.        Effective January 1, 2005, and as a result of the required adoption of Statement of Position (“SOP”) No. 03-3, Capital Crossing Preferred was required to change its discount accounting as it relates to acquired loans which, at acquisition, have evidence of deterioration of credit quality since origination and, for which it is probable that Capital Crossing Preferred will be unable to collect all contractually required payments. For such loans, the excess of the undiscounted contractual cash flows over the undiscounted 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 since January 1, 2005, 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 the method Capital Crossing Preferred used to account 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  48    Table of Contents  CAPITAL CROSSING PREFERRED CORPORATION   NOTES TO FINANCIAL STATEMENTS (Continued)   Years Ended December 31, 2005, 2004 and 2003         1.   SUMMARY OF SIGNIFICANT ACCOUNTING     POLICIES (Continued)    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 a provision for loan losses included in earnings.        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, 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 are no loans held for sale at December 31, 2005 and 2004.        Accrual of interest on loans and discount accretion are discontinued when loan payments are ninety days or more past due or the collectibility of principal and interest is not probable or estimable. Interest income previously accrued on such loans is reversed against current period interest income, and the loan is accounted for using either the cash basis or the cost recovery method whereby any amounts received are applied against the recorded amount of the loan. A determination as to which method is used is made on a case-by-case basis.        Loans are returned to accrual status when the loan is brought current in accordance with management’s anticipated cash flows at the time of loan acquisition.        A loan purchased by Capital Crossing is considered impaired when, based on current information and events, it is determined that estimated cash flows are less than the cash flows estimated by Capital Crossing at the date of purchase of the loan by Capital Crossing. A loan originated by Capital Crossing is considered impaired when, based on current information and events, it is probable that Capital Crossing Preferred will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loan impairment is measured on a loan-by-loan basis by comparing Capital Crossing Preferred’s recorded investment in the loan to the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Substantially all of Capital Crossing Preferred’s loans which have been identified as impaired have been measured by the fair value of existing collateral.           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 also increased upon the allocation of purchase discount upon the acquisition of loans. Effective January 1, 2005, no allocation of discount is made to the allowance for loan losses for acquired  49    Table of Contents  CAPITAL CROSSING PREFERRED CORPORATION   NOTES TO FINANCIAL STATEMENTS (Continued)   Years Ended December 31, 2005, 2004 and 2003   1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)   loans with evidence of deterioration of credit quality since origination, however, additions for impairment that occur subsequent to acquisition will continue to be recognized through a provision for loan losses included in earnings. At the time of acquisition, only general risk allocations are established for loans for which no nonaccretable discount is allocated through a change to 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 Statement of Financial Accounting Standards (“SFAS”) No. 114. Next, management considers the level of general loan allowances deemed appropriate for loans. 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 52.8% of the net mortgage portfolio at December 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 and general risk allocations on loans for which no nonaccretable discount is allocated. Capital Crossing Preferred no longer increases the allowance for loan losses through allocations from purchase discount and is no longer allowed to establish impairment reserves at acquisition. However, at the time of acquisition, general risk allocations are established for loans for which no nonaccretable discount is allocated through a change to earnings. Consequently, it is anticipated that the allowance will 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. No loans acquired in 2005 were within the scope of SOP No. 03-3.            Other real estate owned         Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of cost or fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically updated by management and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Revenues and expenses from operations and changes in the valuation allowance are included in other real estate owned income, net. The excess (deficiency) of any consideration received as compared to the carrying value of other real estate owned is recorded as a gain (loss) on sale of other real estate owned.  50   Table of Contents  CAPITAL CROSSING PREFERRED CORPORATION   NOTES TO FINANCIAL STATEMENTS (Continued)   Years Ended December 31, 2005, 2004 and 2003         1.   SUMMARY OF SIGNIFICANT ACCOUNTING     POLICIES (Concluded)            Transfers of financial assets         Transfers of financial assets are accounted for as sales when control over the assets is surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets are isolated from Capital Crossing Preferred, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) Capital Crossing Preferred does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.           Income taxes         Capital Crossing Preferred has elected, for federal income tax purposes, to be treated as a real estate investment trust (“REIT”) and intends to comply with the provisions of the Internal Revenue Code of 1986, as amended (the “IRC”). Accordingly, Capital Crossing Preferred will not be subject to corporate income taxes to the extent it distributes at least 100% of its REIT taxable income to stockholders and as long as certain assets, income, distribution and stock ownership tests are met in accordance with the IRC. Because management of Capital Crossing Preferred believes it will qualify as a REIT for federal income tax purposes, no provision for income taxes is included in the accompanying financial statements.           Recent Accounting Pronouncements         In June 2005, the Financial Accounting Standards Board issued SFAS No. 154, “Accounting Changes and Error Corrections”, a replacement of Accounting Principles Board Opinion No. 20, “Accounting Changes”, and Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 changes the requirements for the accounting for and the reporting of a change in accounting principle. Previously, most voluntary changes in accounting principles required recognition by recording a cumulative effect adjustment within net income in the period of change. SFAS No. 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine either the specific period effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. Capital Crossing Preferred does not believe SFAS No. 154 will have a material effect on its financial statements.  51    Table of Contents  CAPITAL CROSSING PREFERRED CORPORATION   NOTES TO FINANCIAL STATEMENTS (Continued)   Years Ended December 31, 2005, 2004 and 2003         2.   LOANS, NET         A summary of the balances of loans follows:                                 December 31,               2005   2004                   (In Thousands)         Mortgage loans on real estate:                            Commercial real estate    $ 72,650     $ 83,236             Multi-family residential      38,392       35,866             Land      3,748       4,011             One-to-four family residential      1,305       858                               Total real estate loans      116,095       123,971             Other loans      21       23                               Total loans, net of discounts      116,116       123,994                           Less:                            Allowance for loan losses      (1,981 )     (2,497 )           Net deferred loan fees      (55 )     (62 )                             Loans, net    $ 114,080     $ 121,435                            Included in net loans are $29,100,000, which have been pledged to the Federal Home Loan Bank of Boston (“FHLBB”) in connection with advances made to Capital Crossing. Also included in net loans, at December 31, 2005 and 2004, are approximately $1,522,000 and $1,814,000 of loans (of which none are non-performing), respectively, for which the net recorded investment represents the amortized cost of these loans, where at acquisition, the amounts of reasonably estimable and probable discounted future cash collections were less than the contractual balances owed. These loans were purchased at a price to yield a market rate of interest after considering the credit quality of the loans at acquisition and the aforementioned expected future cash collections. The excess of the contractual balances over the amount of reasonably estimable and probable discounted future cash collections represents the predominant portion of the $754,000 and $883,000 of nonaccretable discount December 31, 2005 and 2004, respectively.        Activity in the allowance for loan losses follows:                                     Year Ended December 31,               2005   2004   2003                       (In Thousands)         Balance at beginning of year    $ 2,497     $ 3,281     $ 7,354           Credit for loan losses      (516 )     (810 )     (3,910 )         Additions in connection with loans purchased or transferred      —       75       —           Transfer to Capital Crossing with loans sold or distributed      —       —       (163 )         Allowance related to loans sold      —       (49 )     —                                 Balance at end of year    $ 1,981     $ 2,497     $ 3,281                            52    Table of Contents  CAPITAL CROSSING PREFERRED CORPORATION   NOTES TO FINANCIAL STATEMENTS (Continued)   Years Ended December 31, 2005, 2004 and 2003         2.   LOANS, NET (Concluded)         Activity in the nonaccretable discount follows:                                     Year Ended December 31,               2005   2004   2003                       (In Thousands)         Balance at beginning of year    $ 883     $ 1,524     $ 8,158           Accretion(1)      (75 )     (94 )     (967 )         Transfers to accretable discount upon improvements in cash flows      (54 )     (436 )     (2,273 )         Net reductions related to resolutions and restructures      —       —       (35 )         Net reductions relating to loans sold or distributed      —       (111 )     (3,359 )                               Balance at end of year    $ 754     $ 883     $ 1,524                                       (1)       Accretion of nonaccretable discount is recognized using the cost     recovery method.         No loans acquired in 2005 were within the scope of SOP No. 03-3.        The total net investment balance of impaired loans at December 31, 2005 and 2004 amounted to $333,000 and 1,557,000, respectively. There were no valuation allowances related to impaired loans at December 31, 2005 and 2004.                                     Year Ended December 31,               2005   2004   2003                       (In Thousands)         Average investment in impaired loans    $ 871     $ 400     $ 1,451                                 Interest income recognized on impaired loans    $ 122     $ 45     $ 118                                 Interest income recognized on a cash basis on impaired loans    $ 122     $ 24     $ 61                                  There were no restructured loans in 2005, 2004 or 2003.         3.   PREFERRED STOCK         On March 31, 1998, Capital Crossing Preferred issued 1,000 shares of its 8% Cumulative Non-convertible Preferred Stock, Series B, to Capital Crossing. Holders of Series B preferred stock are entitled to receive, if declared by the Board of Directors of Capital Crossing Preferred, dividends at a rate of 8% of the average daily outstanding liquidation amount, as defined. Dividends accumulate at the completion of each completed period, as defined, and payment dates are determined by the Board of Directors. Series B preferred stock may be redeemed by Capital Crossing Preferred for its outstanding liquidation amount plus accrued dividends upon the occurrence of certain events.        Series B preferred stock has a liquidation amount of $1,000 per share. In the event of a voluntary or involuntary dissolution or liquidation of Capital Crossing Preferred, preferred stockholders are entitled to the total liquidation amount, as defined, plus any accrued and accumulated dividends.        On February 12, 1999, Capital Crossing Preferred completed a public offering of 1,416,130 shares of Non-cumulative Exchangeable Preferred Stock, Series A, with a dividend rate of 9.75% and a liquidation preference of $10 per share, which raised net proceeds of $12,590,000, after related offering costs of $1,571,000. Series A preferred stock is exchangeable for preferred shares of Capital Crossing if the FDIC so directs, when or if Capital Crossing becomes or may in the near term become undercapitalized or  53    Table of Contents  CAPITAL CROSSING PREFERRED CORPORATION   NOTES TO FINANCIAL STATEMENTS (Continued)   Years Ended December 31, 2005, 2004 and 2003         3.   PREFERRED STOCK (Concluded)    Capital Crossing is placed into conservatorship or receivership. Series A preferred stock is redeemable at the option of Capital Crossing Preferred with the prior consent of the FDIC.        On May 31, 2001, Capital Crossing Preferred completed a public offering of 1,840,000 shares of Non-cumulative Exchangeable Preferred Stock, Series C, with a dividend rate of 10.25% and a liquidation preference of $10 per share, which raised net proceeds of $16,872,000, after related offering costs of $1,528,000. Series C preferred stock is exchangeable for preferred shares of Capital Crossing if the FDIC so directs, when or if Capital Crossing becomes or may in the near term become undercapitalized or Capital Crossing is placed into conservatorship or receivership. Series C preferred stock is redeemable at the option of Capital Crossing Preferred on or after May 31, 2006, with the prior consent of the FDIC.        On May 11, 2004, Capital Crossing Preferred completed a public offering of 1,500,000 shares of Non-cumulative Exchangeable Preferred Stock, Series D, with a dividend rate of 8.50% and a liquidation preference of $25 per share, which raised net proceeds of $35,259,000, after related offering costs of $2,241,000. Series D preferred stock is exchangeable for preferred shares of Capital Crossing if the FDIC so directs, when or if Capital Crossing becomes or may in the near term become undercapitalized or Capital Crossing is placed into conservatorship or receivership. Series D preferred stock is redeemable at the option of Capital Crossing Preferred on or after July 15, 2009, with the prior consent of the FDIC.        Shares of preferred stock have been and may again be issued from time-to-time in one or more series, and Capital Crossing Preferred’s Board of Directors is authorized to determine the rights, preferences, privileges, and restrictions, including the dividend rights, conversion rights, voting rights, terms of redemption, redemption price or prices, and liquidation preferences, of any series of preferred stock, and to fix the number of shares of any such series of preferred stock without any further vote or action by the shareholders. The voting and other rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. The issuance of shares of preferred stock, while providing desirable flexibility in connection with acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of Capital Crossing. At December 31, 2005, 2,000,000 shares of Undesignated Preferred Stock and 7,014,000 shares of Excess Preferred Stock are authorized and unissued. Shares of Preferred Stock of Capital Crossing Preferred may be converted into shares of Excess Preferred Stock upon the occurrence of certain events which would cause Capital Crossing Preferred to no longer be treated as a REIT for federal income tax purposes. Shares of Excess Preferred Stock would be issued, if ever, for the sole purpose of retaining Capital Crossing Preferred’s REIT status. Holders of Excess Preferred Shares shall be entitled to the same distribution, liquidation and voting rights as holders of that series of Preferred Stock which was converted into Excess Preferred Stock.         4.   RELATED PARTY TRANSACTIONS         Capital Crossing performs advisory services and services the loans owned by Capital Crossing Preferred. The servicing and advisory fee rate is .25% per annum, payable monthly, of the average outstanding principal balance of the loans for the immediately preceding month. Servicing and advisory fees for the years ended December 31, 2005, 2004 and 2003 totaled $343,000, $377,000, and $575,000, respectively, of which $27,000, $29,000, and $38,000, respectively, are included in accrued expenses and other liabilities at December 31, 2005, 2004 and 2003, respectively.        Capital Crossing Preferred periodically purchases loans from Capital Crossing. Capital Crossing also periodically makes capital contributions to Capital Crossing Preferred in the form of mortgage loans. The  54    Table of Contents  CAPITAL CROSSING PREFERRED CORPORATION   NOTES TO FINANCIAL STATEMENTS (Continued)   Years Ended December 31, 2005, 2004 and 2003         4.   RELATED PARTY TRANSACTIONS (Concluded)    carrying value of these loans approximated their fair values at the date of purchase or contribution. The total carrying value, including accrued interest, of loans purchased from Capital Crossing for the years ended December 31, 2005 and 2004 was $15,343,000 and $4,272,000, respectively. No loans were purchased in 2003. No loans were contributed in 2005, 2004 or 2003.        The following table summarizes capital transactions between Capital Crossing Preferred and Capital Crossing:                                     Year Ended December 31,               2005   2004   2003                       (In Thousands)         Returns of capital to Capital Crossing    $ 14,070     $ 30,361     $ 118,235           Common stock dividends paid to Capital Crossing      5,930       19,639       16,132           Series B preferred stock dividends paid to Capital Crossing      72       72       72            During 2003, loans with a fair value of $9,367,000 were distributed to Capital Crossing. Of this amount, $1,038,000 was classified as a dividend and the remaining $8,329,000 was classified as a return of capital. Capital Crossing Preferred recognized a gain of $3,008,000 on these distributions. The gains represent the excess of the fair values of the loans over the carrying values of the loans at the time of distribution.        Effective July 1, 2000, Capital Crossing Preferred entered into an agreement to make certain assets available to be pledged in connection with Capital Crossing’s FHLBB advances. Capital Crossing Preferred receives an annual fee of $80,000 under this agreement. Guarantee fee income for the years ended December 31, 2005, 2004 and 2003 was $80,000 in each year. At December 31, 2005, Capital Crossing Preferred had pledged $29,100,000 of its assets to secure the FHLBB advances to Capital Crossing. In connection with the guarantee agreement, 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.         5.   FAIR VALUE OF FINANCIAL INSTRUMENTS         SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” requires disclosure of estimated fair values of all financial instruments where it is practicable to estimate such values. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of Capital Crossing Preferred.        The following methods and assumptions were used by Capital Crossing Preferred in estimating fair value disclosures for financial instruments:                     Cash and cash equivalents: The carrying amounts of cash     and interest-bearing deposits approximate fair value because of     the short-term maturity of these instruments.                   Certificate of deposit: The carrying amounts of     certificates of deposit approximate fair values because of the     short-term maturity of these instruments.   55    Table of Contents  CAPITAL CROSSING PREFERRED CORPORATION   NOTES TO FINANCIAL STATEMENTS (Concluded)   Years Ended December 31, 2005, 2004 and 2003         5.   FAIR VALUE OF FINANCIAL INSTRUMENTS (Concluded)                      Loans: For variable-rate loans that reprice frequently     and with no significant change in credit risk, fair values are     based on carrying values. Fair values of other loans are     estimated using discounted cash flow analyses, with interest     rates currently being offered for loans with similar terms to     borrowers of similar credit quality. The incremental credit risk     for non-performing loans has been considered in the     determination of the fair value of loans.                   Accrued interest receivable: The carrying amount of     accrued interest receivable approximates fair value because of     the short-term nature of these financial instruments.         The estimated fair values, and related carrying amounts, of Capital Crossing Preferred’s financial instruments are as follows:                                             December 31,               2005   2004                   Carrying       Carrying           Amount   Fair Value   Amount   Fair Value                           (In Thousands)         Cash and cash equivalents    $ 88,406     $ 88,406     $ 95,407     $ 95,407           Certificate of deposit      296       296       300       300           Loans, net      114,080       112,803       121,435       124,171           Accrued interest receivable      544       544       544       544             6.   QUARTERLY DATA (UNAUDITED)                                                                              Year Ended December 31,               2005   2004                   Fourth   Third   Second   First   Fourth   Third   Second   First       Quarter   Quarter   Quarter   Quarter   Quarter   Quarter   Quarter   Quarter                                           (In Thousands)         Interest income    $ 3,048     $ 3,702     $ 2,874     $ 2,750     $ 2,879     $ 3,076     $ 4,509     $ 4,048           (Provision) credit for loan losses      (9 )     182       215       128       (55 )     101       353       411           Other income(1)      20       20       20       20       20       20       20       96           Operating expenses      112       109       150       140       141       135       149       185                                                               Net income      2,947       3,795       2,959       2,758       2,703       3,062       4,733       4,370           Preferred stock dividends(2)      1,631       1,633       1,633       1,632       1,632       1,633       1,287       835                                                               Net income available to common stockholder    $ 1,316     $ 2,162     $ 1,326     $ 1,126     $ 1,071     $ 1,429     $ 3,446     $ 3,535                                                                     (1)       Fluctuation in the first quarter of 2004 is due to gains on     sales of loans.       (2)       Increase in second quarter of 2004 is due to issuance of     Series D preferred stock.   56    Table of Contents
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING     AND FINANCIAL DISCLOSURE         Not applicable.           ITEM 9A.  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 December 31, 2005. Based on this evaluation, Capital Crossing Preferred’s President and Treasurer concluded that, as of December 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 occurred during the quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
OTHER INFORMATION         None.  57   Table of Contents    PART III           ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT    Directors and Executive Officers        The names and ages of each of Capital Crossing Preferred’s directors and executive officers and their principal occupation and business experience for at least the last five years are set forth below. The executive officers hold office until their successors are duly elected and qualified.                     Name   Age   Position(s) Held(1)                     Richard Wayne      53          President, Director         Edward F. Mehm      41          Vice President, Treasurer, Director         Bradley M. Shron      49          Vice President, Secretary         Nicholas W. Lazares      54          Director         Jeffrey Ross      61          Director         Kirk Sykes      47          Director         Dr. John Lapidus      49          Director               (1)       Unless otherwise indicated below, each person has held the same     position for at least the past five years.    Richard Wayne. Mr. Wayne has been the President and a Director of Capital Crossing Preferred since March 1998. Mr. Wayne is the President and Co-Chief Executive Officer, and a Director, of Capital Crossing.   Edward F. Mehm. Mr. Mehm has been a Vice President and Treasurer and a Director of Capital Crossing Preferred since October 2001. Mr. Mehm has served as Executive Vice President, Chief Financial Officer and Treasurer of Capital Crossing since October 2001, and served as Executive Vice President of Capital Crossing from April 2000 to October 2001.   Bradley M. Shron. Mr. Shron has been a Vice President and Secretary of Capital Crossing Preferred since March 1998. Mr. Shron has served as Executive Vice President, General Counsel and Clerk of Capital Crossing since April 2000.   Nicholas W. Lazares. Mr. Lazares has been a Director of Capital Crossing Preferred since March 1998. Mr. Lazares is the Chairman of the Board and Co-Chief Executive Officer of Capital Crossing.   Jeffrey Ross. Since October 1999, Mr. Ross has served as the Managing Partner of Ross Fialkow Capital Partners of Boston, Massachusetts. Mr. Ross has been a Director of Capital Crossing Preferred since April 1999.   Kirk Sykes. Mr. Sykes has been a Director of Capital Crossing Preferred since August, 2004. Since 2004, Mr. Sykes has served as a director and President of Urban Strategy America Fund, a real estate investment company. Since 2000, Mr, Sykes has also served as President of Primary Corporation, a company which provides real estate services. From 1986 to 2004, Mr. Sykes also served as President of Group Architects, an architectural firm.   Dr. John Lapidus. Dr. Lapidus is a partner of James L. Nager, DMD & John H. Lapidus, DMD, P.C., a group dental practice in Belmont, Massachusetts. Dr. Lapidus has been a Director of Capital Crossing Preferred since December 2002.        The Board of Directors has established a process for shareholders of Capital Crossing Preferred to communicate with the Board or a particular Director. A shareholder who is interested in communicating directly with the Board or a particular Director should send a letter addressed to Capital Crossing Preferred Corporation, Investor Relations, 101 Summer Street, Boston, MA 02110. Capital Crossing Preferred’s policy is to forward and not screen any such communication to the addressee.  58   Table of Contents  The Board of Directors and its Committees        The Board of Directors has established two standing committees. The Board of Directors held four meetings and acted by written consent ten times during 2005. During 2005, each director attended at least 75% of the total number of meetings of the Board of Directors and of the committees of which he or she was a member.        The following is a description of each committee of the Board of Directors:   Audit Committee. Capital Crossing Preferred has an Audit Committee, which consists of Messrs. Ross and Sykes and Dr. Lapidus. Each member of the Audit Committee satisfies the standards for independence promulgated by the Nasdaq Stock Market, Inc. (“Nasdaq”). The Audit Committee reports its activities to the Board of Directors. The primary function of the Audit Committee is to:            •       retain Capital Crossing Preferred’s independent registered     public accounting firm and review the scope of the independent     registered public accounting firm’s annual audit of Capital     Crossing Preferred;         •       review the audit plans of Capital Crossing Preferred and the     independent registered public accounting firm;         •       review Capital Crossing Preferred’s quarterly unaudited     financial statements and annual audited financial statements;         •       review the results of the annual audit by the independent     registered public accounting firm;         •       monitor Capital Crossing Preferred’s internal accounting     controls; and         •       review transactions between Capital Crossing Preferred and     Capital Crossing.    The Audit Committee held four meeting in 2005. The Board of Directors has determined that no member of the Audit Committee meets the specific qualification of an “audit committee financial expert” as defined in the applicable rules promulgated by the Securities and Exchange Commission. The Board of Directors has not commenced a search for an individual who meets the specific qualification of an “audit committee financial expert” because the Board believes that the members of the Audit Committee are financially literate and, further, that the Audit Committee has functioned well in the past. The Board of Directors also recognizes the fact that Capital Crossing Preferred’s financial results are consolidated into those of Capital Crossing and such results are, accordingly, also reviewed by the Audit Committee of the Board of Directors of Capital Crossing.   Nominating Committee. Capital Crossing Preferred has a Nominating Committee, which consists of Messrs. Ross and Sykes and Dr. Lapidus. Each member of the Nominating Committee satisfies the standards for independence promulgated by Nasdaq. The function of the Nominating Committee is to review and nominate qualified individuals to serve as Directors of Capital Crossing Preferred. The Nominating Committee reports its activities to the Board of Directors. The Nominating Committee will consider director nominees recommended by holders of voting securities. Any holder of voting securities wishing to nominate a candidate for director must be a shareholder of record at the time it gives notice of such nomination. Capital Crossing Bank is the sole holder of voting securities who may recommend director nominees. The Nominating Committee met once during 2005. In addition to considering director nominees recommended by shareholders, the Nominating Committee will consider nominees recommended by the Board of Directors and, if necessary, retain independent advisors to assist in identifying qualified individuals. In accordance with the charter of the Nominating Committee, a candidate for director must possess the highest personal and professional integrity, have demonstrated exceptional ability and judgment and have the ability to work effectively with other members of the Board of Directors, and provide the skills and expertise appropriate to best serve the long-term financial interests of the shareholders. The Nominating Committee’s process for evaluating candidates is to meet with the candidate to assess his or her experience and qualifications; to consider the nominee at a formal meeting of the Nominating  59    Table of Contents  Committee; and ultimately to make a recommendation to the Board of Directors as to whether the nominee should be nominated for election as a director.   Code of Ethics and Other Matters        Capital Crossing has adopted a Code of Business Conduct and Ethics which applies to the Directors of Capital Crossing Preferred. A copy of such Code of Business Conduct and Ethics has been filed as an exhibit to this Annual Report.        Capital Crossing Preferred does not hold annual shareholder meetings because Capital Crossing holds all of the outstanding voting securities of Capital Crossing Preferred and therefore would be the only shareholder entitled to vote at any such meeting. Accordingly, Capital Crossing Preferred does not have a policy with respect to whether its Directors should attend annual shareholder meetings.        The Board of Directors has determined that Capital Crossing Preferred is a “controlled company,” as defined in Rule 4350(c)(5) of the listing standards of Nasdaq, based on Capital Crossing’s beneficial ownership of 100% of the outstanding voting Common Stock of Capital Crossing Preferred. Accordingly, Capital Crossing Preferred is exempt from certain requirements of the Nasdaq listing standards, including the requirement to maintain a majority of independent directors on its Board of Directors.   Compensation of Directors        In 2005, Capital Crossing Preferred paid its non-executive directors an annual fee of $10,000 each for their services as directors. Capital Crossing Preferred does not pay any compensation to its other directors.   Section 16(a) Beneficial Ownership Reporting Compliance        Section 16(a) of the Exchange Act requires that Capital Crossing Preferred’s executive officers and directors and persons who own more than 10% of its outstanding shares of Series A, Series C and Series D preferred shares file reports of ownership and changes in ownership with the Securities Exchange Commission and Nasdaq. Executive Officers, directors and greater than 10% stockholders are required by applicable regulations to furnish Capital Crossing Preferred with copies of all reports filed by such persons pursuant to the Exchange Act, and the rules and regulations promulgated thereunder. Based on a review of Capital Crossing Preferred’s records and except as set forth below, Capital Crossing Preferred believes that all reports required by the Exchange Act were filed on a timely basis.           ITEM 11.  EXECUTIVE COMPENSATION         Capital Crossing Preferred does not have any employees and does not pay any compensation to its officers.           ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND     MANAGEMENT AND RELATED STOCKHOLDER MATTERS         The following table sets forth, as of March 6, 2006, the number and percentage of outstanding shares of common stock, Series A preferred shares and Series B preferred shares beneficially owned by (i) each person known by Capital Crossing Preferred to be the beneficial owner of more than five percent of such shares; (ii) each director of Capital Crossing Preferred; (iii) each executive officer of Capital Crossing Preferred; and (iv) all executive officers and directors of Capital Crossing Preferred as a group. The persons or entities named in the table have sole voting and sole investment power with respect to each of the shares beneficially owned by such person or entity. The calculations were based on a total of  60   Table of Contents  100 shares of common stock, 1,416,130 Series A preferred shares, 937 Series B preferred shares, 1,840,000 Series C preferred shares and 1,500,000 Series D preferred shares outstanding as of such date.                             Percentage of   Name and Address of Beneficial Owner(1)   Amount of Shares (Class)   Outstanding Shares                     Capital Crossing Bank         100 shares of common stock     100.0 %            900 Series B preferred shares     96.1 %         Edward F. Mehm(2)(3)         2 Series B preferred shares(4)     *           Nicholas W. Lazares(3)         2 Series B preferred shares(4)                    5,000 Series A preferred shares(5)     *           Bradley M. Shron(2)         —     *           Richard Wayne(2)(3)         2 Series B preferred shares(4)     *           Jeffrey Ross(3)         8,900 Series C preferred shares     *           Kirk Sykes(3)         —     *           Dr. John Lapidus(3)         2,500 Series A preferred shares     *              5,000 Series C preferred shares     *           All executive officers and directors as a Group (7 persons)         7,500 Series A preferred shares     *              6 Series B preferred shares     *              13,900 Series C preferred shares     *                    *      Less than 1%.          (1)       The address of each beneficial owner is c/o Capital     Crossing Preferred Corporation, 101 Summer Street, Boston,     Massachusetts 02110.       (2)       Executive officer of Capital Crossing Preferred.       (3)       Director of Capital Crossing Preferred.       (4)       Includes one share held of record by such person’s spouse.       (5)       Consists of shares owned by Mr. Lazares, as trustee of two     trusts for the benefit of Mr. Lazares’ parents.     Mr. Lazares disclaims beneficial ownership of these shares.            ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS    Servicing Agreement        Capital Crossing Preferred’s loan portfolio is serviced by Capital Crossing pursuant to the terms of a master service agreement entered into between the two parties. 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, of the gross outstanding principal balances of loans in the loan portfolio for the immediately preceding month. For the year ended December 31, 2005, Capital Crossing Preferred incurred $273,000 in servicing fees to Capital Crossing.        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. Capital Crossing collects and remits principal and interest payments, maintains perfected collateral positions, submits and pursues insurance claims and initiates and supervises foreclosure proceedings on the loan portfolio it services. Capital Crossing also provides accounting and reporting services required by Capital Crossing Preferred for such loans. Capital Crossing may also be directed by Capital Crossing Preferred to dispose of any loans which become classified, placed on non-performing status, or are renegotiated due to the financial deterioration of the borrower.        Capital Crossing is required to pay all expenses related to the performance of its duties under the master service agreement. Under the master mortgage loan purchase agreement, Capital Crossing is  61    Table of Contents  required to repurchase, at the request of Capital Crossing Preferred, any mortgage loan it sold to Capital Crossing Preferred in the event any material representation or warranty pertaining to the mortgage assets is untrue, unless Capital Crossing Preferred permits Capital Crossing to substitute other qualified mortgage assets for such asset. The repurchase price for any such mortgage loan is the outstanding net carrying value thereof plus accrued and unpaid interest thereon at the date of repurchase. Capital Crossing may institute foreclosure proceedings, exercise any power of sale contained in any mortgage or deed of trust, obtain a deed in lieu of foreclosure or otherwise acquire title to a mortgaged property underlying a mortgage loan by operation of law or otherwise in accordance with the terms of the master service agreement.        The master service agreement has an initial term of one year and may be terminated at any time by written agreement between the parties or at any time by either party upon 30 days prior written notice to the other party and appointment of a successor servicer. The master service agreement will automatically terminate if Capital Crossing Preferred ceases to be an affiliate of Capital Crossing.        Capital Crossing remits daily to Capital Crossing Preferred all principal and interest collected on loans serviced by Capital Crossing for Capital Crossing Preferred.        When any mortgaged property underlying a mortgage loan is conveyed by a mortgagor, Capital Crossing generally, upon notice thereof, will enforce any due-on-sale clause contained in the mortgage loan, to the extent permitted under applicable law and governmental regulations. The terms of a particular mortgage loan or applicable law, however, may provide that Capital Crossing is prohibited from exercising the due-on-sale clause under certain circumstances related to the security underlying the mortgage loan and the buyer’s ability to fulfill the obligations under the related mortgage note.   Advisory Agreement        Capital Crossing Preferred has entered into an advisory agreement with Capital Crossing to administer the day-to-day operations of Capital Crossing Preferred. Capital Crossing is paid an annual advisory fee equal to 0.05%, payable monthly, of the gross average outstanding principal balance of loans in Capital Crossing Preferred’s loan portfolio for the immediately preceding month, plus reimbursement for certain expenses incurred by Capital Crossing as advisor. For the year ended December 31, 2005, Capital Crossing Preferred incurred $70,000 in servicing fees payable to Capital Crossing. As advisor, Capital Crossing is responsible for:            •       monitoring the credit quality of the loan portfolio held by     Capital Crossing Preferred;         •       advising Capital Crossing Preferred with respect to the     acquisition, management, financing and disposition of its loans     and other assets; and         •       maintaining the corporate and shareholder records of Capital     Crossing Preferred.         Capital Crossing may, from time to time, subcontract all or a portion of its obligations under the advisory agreement to one or more of its affiliates involved in the business of managing mortgage assets or, with the approval of a majority of Capital Crossing Preferred’s Board of Directors as well as a majority of Capital Crossing Preferred’s independent directors, subcontract all or a portion of 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 in any respect from its obligations under the advisory agreement.        The advisory agreement has an initial term of five years, and will be renewed automatically for additional one-year periods unless notice of nonrenewal is delivered to Capital Crossing by Capital Crossing Preferred. After the initial five year term, the advisory agreement may be terminated by Capital Crossing Preferred at any time upon 90 days’ prior notice. As long as any Series A, Series C and Series D preferred shares remain outstanding, any decision by Capital Crossing Preferred either not to renew the advisory agreement or to terminate the advisory agreement must be approved by a majority of Capital Crossing Preferred’s independent directors. Other than the servicing fee and the advisory fee, Capital  62    Table of Contents  Crossing will not be entitled to any fee for providing advisory and management services to Capital Crossing Preferred.   Guarantee and Pledge of Assets        Capital Crossing Preferred has guaranteed obligations of Capital Crossing to the FHLBB and has agreed to pledge a significant amount of its assets as collateral for advances Capital Crossing may receive from time to time from the FHLBB. At December 31, 2005 and 2004, Capital Crossing had outstanding FHLBB advances of $211.9 million and $168.4 million, respectively, for each year. Effective July 1, 2000, Capital Crossing Preferred entered into an agreement to make certain assets available to be pledged in connection with FHLBB borrowings of Capital Crossing. Capital Crossing Preferred receives an annual fee of $80,000 from Capital Crossing under this agreement.           ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES         Audit Fees. Capital Crossing Preferred paid KPMG LLP $31,000 and $30,000 in fees for its professional services rendered for the audit of the Capital Crossing Preferred’s financial statements for the year ended December 31, 2005 and 2004, respectively, and the reviews of the financial statements included in its quarterly reports on Form 10-Q during the year. In addition, Capital Crossing Preferred paid KPMG LLP $117,900 in connection with the preferred stock Series D offering in 2004.        Tax Fees. Capital Crossing Preferred paid KPMG LLP $12,000 in fees for tax compliance, tax advice and tax planning services for 2004. No fees for tax-related work were paid in 2005.        The Audit Committee has determined that the provision of the non-audit services described above for 2004 was compatible with maintaining KPMG LLP’s independence.        Approval Policies. The Audit Committee has the sole authority to review and approve the engagement of the independent registered public accounting firm to perform audit services or any permissible non-audit services. All audit-related services to be provided by the independent registered public accounting firm must be approved in advance by the Audit Committee, and all non audit-related services to be provided by the independent registered public accounting firm must be approved in advance by either: (i) a majority of the members of the Audit Committee; or (ii) the Chairman of the Audit Committee. Since the May 6, 2003 effective date of the Securities and Exchange Commission rules stating that an auditor is not independent of an audit client if the services it provides to the client are not appropriately approved, all non-audit services provided by KPMG were approved in advance by the Audit Committee, and none of those engagements made use of the de minimus exception to pre-approval contained in the Commission’s rules.     PART IV           ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON     FORM 8-K    (a) Contents:        (1) Financial Statements: All Financial Statements are included as Part II, Item 8 of this Report.        (2) All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instruction or are inapplicable and therefore have been omitted.   (b) Reports on Form 8-K: None.  63   Table of Contents  (c) Exhibits:                 Exhibit No.   Description             3 .1        Restated Articles of Organization of Capital Crossing Preferred,     incorporated by reference from Capital Crossing Preferred’s     Annual Report on Form 10-K for the fiscal year ended December     31, 1998 (the “1998 Form 10-K”).         3 .2        Articles of Amendment to Restated Articles of Organization of     Capital Crossing Preferred reflecting change of its name filed     with the Secretary of the Commonwealth of Massachusetts on March     12, 2001, incorporated by reference from Capital Crossing     Preferred’s Annual Report on Form 10-K for the fiscal year     ended December 31, 2001.         3 .3        Amended and Restated By-laws of Capital Crossing Preferred,     incorporated by reference from the 1998 Form 10-K.         4 .1        Specimen of certificate representing Series A preferred shares,     incorporated by reference from Capital Crossing Preferred’s     registration statement on Form S-11 (No. 333-66677), filed     November 3, 1998, as amended (the “1998 Form S-11”).         10 .1        Master Mortgage Loan Purchase Agreement between Capital Crossing     Preferred and Capital Crossing Bank, incorporated by reference     from the 1998 Form S-11.         10 .2        Master Service Agreement between Capital Crossing Preferred and     Capital Crossing Bank, incorporated by reference from the 1998     Form S-11.         10 .3        Advisory Agreement between Capital Crossing Preferred and     Capital Crossing Bank, incorporated by reference from the 1998     Form S-11.         10 .4        Form of Letter Agreement between Capital Crossing Preferred and     Capital Crossing Bank regarding issuance of certain securities,     incorporated by reference from the 1998 Form S-11.         +12          Statement Regarding Computation of Ratios.         +14          Code of Business Conduct and Ethics of Capital Crossing Bank.         +31 .1        Rule 13a-14(a) Certification signed by Richard Wayne, President     (Chief Executive Officer).         +31 .2        Rule 13a-14(a) Certification signed by Edward F. Mehm, Treasurer     (Principal Financial Officer).         +32          Rule 13a-14(b) Certification signed by Richard Wayne, President     (Chief Executive Officer) and Edward F. Mehm, Treasurer     (Principal Financial Officer).         + Filed herewith  64    Table of Contents    SIGNATURES        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.            Capital Crossing Preferred     Corporation                  By:       /s/ Richard Wayne                            Richard Wayne      President    Date: March 28, 2006        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dated indicated.                     Signature   Title   Date                        /s/ Richard Wayne Richard Wayne        President and Director     (Principal Executive Officer)        March 28, 2006            /s/ Edward F. Mehm Edward F. Mehm        Vice President, Treasurer and Director (Principal Financial     Officer)        March 28, 2006            /s/ Nancy E. Coyle Nancy E. Coyle        Controller and Chief     Accounting Officer        March 28, 2006            /s/ Nicholas W. Lazares Nicholas W. Lazares        Director        March 28, 2006            /s/ Jeffrey Ross Jeffrey Ross        Director        March 28, 2006            /s/ Kirk Sykes Kirk Sykes        Director        March 28, 2006            /s/ Dr. John Lapidus Dr. John Lapidus        Director        March 28, 2006    65    Table of Contents    EXHIBIT INDEX                 Exhibit   Name             12          Statement Regarding Computation of Ratios     14          Code of Business Conduct and Ethics     31 .1        Rule 13a-14(a) Certification signed by Richard Wayne,     President (Chief Executive Officer)     31 .2        Rule 13a-14(a) Certification signed by Edward F. Mehm,     Treasurer (Principal Financial Officer)     32          Rule 13a-14(b) Certification signed by Richard Wayne,     President (Chief Executive Officer) and Edward F. Mehm,     Treasurer (Principal Financial Officer)    66       EX-12 2 b57989ccexv12.htm EX-12 STATEMENT REGARDING COMPUTATION OF RATIOS    exv12       Exhibit 12  Calculation of earnings to fixed charges                                                      2005     2004     2003     2002     2001                 (In thousands)       Earnings:                                           Net income available to common stockholders   $ 5,930     $ 9,481     $ 24,238     $ 25,378     $ 20,774     Preferred stock dividends     6,529       5,387       3,342       3,342       2,562     Income taxes     —       —       —       —       —     Interest expense     —       —       —       —       —                 $ 12,459     $ 14,868     $ 27,580     $ 28,720     $ 23,336             Fixed charges:                                           Preferred dividends   $ 6,529     $ 5,387     $ 3,342     $ 3,342     $ 2,562     Interest expense     —       —       —       —       —                 $ 6,529     $ 5,387     $ 3,342     $ 3,342     $ 2,562                                                         Ratio of earnings to fixed charges     1.91       2.76       8.25       8.59       9.11                      EX-14 3 b57989ccexv14.htm EX-14 CODE OF BUSINESS CONDUCT AND ETHICS    exv14       Exhibit 14  Capital Crossing Bank  Code of Business Conduct and Ethics  Introduction       The Board of Directors (the “Board”) of Capital Crossing Bank believes that it is imperative for our Employees and Directors to maintain high standards of honesty and integrity. This Code of Business Conduct and Ethics (the “Code”) governs the business decisions made and actions taken by the Bank’s Employees and Directors and is an expression of the Bank’s fundamental and core values, which include: (i) integrity and honesty in the Bank’s and its Employees’ dealings with customers, vendors, business partners, shareholders and the community; (ii) respect for individuality and personal experience and background; and (iii) support of the communities where the Bank and its Employees work and reside.       These core values and the other standards of conduct in this Code provide general guidance for resolving a variety of legal and ethical questions for Employees and Directors. However, while the specific provisions of this Code attempt to describe certain foreseeable circumstances and to state the Employee’s and Director’s obligations in such event, it is impossible to anticipate all possibilities. Therefore, in addition to compliance with this Code and applicable laws, rules and regulations, all Employees and Directors are expected to observe the highest standards of business and personal ethics in the discharge of their assigned duties and responsibilities.       The integrity, reputation and profitability of the Bank ultimately depend upon the individual actions of Employees and Directors. As a result, each such individual is personally responsible and accountable for compliance with this Code. This Code is designed to satisfy the standards contained in the federal Sentencing Guidelines published by the U.S. Department of Justice. Finally, this Code is in addition to any other Bank policies and/or agreements and is not intended to reduce or limit other obligations that you may have to the Bank.       Throughout this Code, certain capitalized terms are used. These terms and their accompanying definitions are as follows:       “Bank” means Capital Crossing Bank and its subsidiaries.       “Bank Official” means any Employee or Director.       “Board” means the Board of Directors of the Bank.       “Business Firm” means any company, corporation, proprietorship, organization, or enterprise.       “Designated Bank Official” means the officer of the Bank designated to receive and review reports filed and to make determinations as provided in this Code and otherwise to administer this Code. The Designated Bank Official is the Senior Vice President, Human Resources.       “Director” means any director of the Bank.       “Employee” means any person who is currently on the payroll of the Bank for whom the Bank is required to file an Internal Revenue Service Form W-2.       “FDIC” means the Federal Deposit Insurance Corporation.               “Immediate Family” means a spouse, children under twenty-five years of age or other persons living in the Bank Official’s home or persons who receive a majority of their support from the Bank Official.       “Substantial Financial Interest” means any financial interest of any Bank Official that, if considered together with the financial interest of his/her associates, may influence or may be thought to influence his/her actions or judgment in the conduct of the Bank’s business. The direct or indirect ownership of more than five percent (5%) of the shares in any Business Firm with which the Bank conducts any business or transaction shall be deemed to be a Substantial Financial Interest.  Standards of Conduct  A.    Dishonesty or Illegal Conduct       Use of Bank funds for any unlawful purpose or in violation of Bank policies is prohibited. Any Bank Official who possesses knowledge of illegal payments, unrecorded funds, or false entries maintained for the purpose of facilitating illegal payments or acts, must report this immediately to the Designated Bank Official.       Because honesty is so basic to our business, any good faith determination by the Bank that a Bank Official has engaged in theft, embezzlement or falsification of records, regardless of materiality, will be cause for immediate dismissal. See also “Misappropriation of Funds and Income”. By way of example only, dishonest conduct which would subject an Employee to immediate dismissal includes, but is not limited to, the following:       (a)   intentionally deceiving the officers of the Bank with intent to defraud;        (b)   loaning Bank funds without a good faith belief that the Bank will be repaid; or        (c)   knowingly receiving or accepting for the Bank any fictitious, valueless, inadequate, or irresponsible obligation directly.    2          B.    Financial Controls       The Bank’s books and records must accurately reflect all Bank funds, assets and transactions. Entries into Bank records must be made promptly without false or misleading information. The integrity of the Bank’s accounting practices requires that supporting documents are accurate and complete. It is the responsibility of each employee to maintain accurate and current records and to conduct the Bank’s financial, accounting, reporting, and auditing activities in compliance with all laws and regulations and in accordance with the highest ethical standards. Any Employee or Director who has concerns or questions about suspected violations of this Code, other policies and procedures of the Bank, or any applicable government law, rule or regulation involving accounting, internal accounting controls or auditing matters should contact the Audit Committee by using the Bank’s confidential employee whistleblower hotline which may be accessed via telephone at 1-866-291-6631, on-line at www.openboard.info/capx or via e-mail at capx@openboard.info. All communications are anonymous and confidential. An employee or director will receive confirmation that his/her message has been sent to the Bank’s Audit Committee. However, no one at the Bank or any member of the Audit Committee will be able to track the web site user or the e-mail address of the sender. Telephone calls are encrypted with a computer voice-over so that no one will be able to recognize your voice. By law, the Bank cannot retaliate against any employee or director for whistle blowing.  C.    Confidential Information       All Bank Officials are required to maintain the Bank’s confidential and proprietary information, including any customer information, in strictest confidence, and to refrain from the use of such information for any purpose outside of the performance of the Official’s duties and responsibilities.  D.    Conflicts of Interest       The Bank recognizes and respects the right of Bank Officials to engage in outside activities which they may deem proper and desirable, provided that Employees and Directors fulfill their obligations to act in the best interests of the Bank and to avoid situations that present a potential or actual conflict between their personal interests and the Bank’s interests.       A “conflict of interest” occurs when a Bank Official’s personal interest interferes with the interests of the Bank. Conflicts of interest may arise in many situations. They can arise when a Bank Official takes an action or has an outside interest, responsibility or obligation that may make it difficult for him or her to perform the responsibilities of his or her position objectively and/or effectively in the best interests of the Bank. They may also occur when a Bank Official or his or her family member receives some improper personal benefit as a result of a Bank Official’s position in the Bank. Each individual’s situation is different and in evaluating his or her own situation, an Employee will have to consider many factors.       Bank Officials, in connection with the business of the Bank or their other interests, must not engage or attempt to engage in self-dealing or otherwise trade or seek to trade on their positions with the Bank. Nor shall Bank Officials accept from a supplier, customer, or any person or company doing or seeking to do business with the Bank, a business opportunity not available to other persons or that is made available because of such Bank Official’s position with the Bank. In addition, any financial link between a member of a Bank Official’s Immediate Family and a customer, supplier, or other person or company dealing with the Bank, must be disclosed to the Bank to determine if it poses a potential conflict of interest.       Bank Officials must avoid any impression or implication of self-dealing for personal advantage. This includes business opportunities which come to a Bank Official’s attention through the performance of his duties with the Bank. For this reason, no Bank Official may purchase any property (other than  3       obsolete office equipment and similar items on terms and subject to conditions approved in advance by the Designated Bank Official) directly or indirectly from the Bank. This includes Bank premises and equipment, collateral disposed of in settlement of an obligation, or property held as a fiduciary.       State and federal laws impose certain restrictions and reporting and record keeping requirements on extensions of credit to certain Bank Officials and their related interests. Bank Officials are responsible for complying with such requirements. Any questions concerning these restrictions and reporting and record keeping requirements should be directed to the Designated Bank Official.       Bank Officials must avoid any relationship — including a personal relationship — with any third party that might, even by implication, injure or impair the Bank’s public position. Periodically, Bank Officials will be required to complete a questionnaire dealing with third party affiliations which must be returned as instructed to the Designated Bank Official.       Under Title VIII of the Financial Institutions Regulatory and Interest Rate Control Act of 1978, senior Bank Officials are required to file with the Bank an annual disclosure statement regarding transactions with the Bank’s correspondent banks. Furthermore, under the Depository Institution Management Interlocks Act, all Bank Officials are prohibited from serving as management officials of any other depository institution or depository holding company that is not affiliated with the Bank and is located within: (i) the same primary metropolitan area as defined by the Office of Management and Budget, except in the case of depository institutions with less than $20,000,000 in assets in which case paragraph (ii) applies, where an office of the other institution or any depository institution that is an affiliate of that institution is located, or (ii) the same city, town, or village where an office of the other institution or any depository institution that is an affiliate of that institution is located or in any adjacent city, town or village.  E.    Compliance with Laws, Rules and Regulations       The Bank seeks to conduct its business in compliance with both the letter and the spirit of applicable laws, rules and regulations. No Employee shall engage in any unlawful activity, or instruct others to do so. As an Employee conducts the Bank’s business, he or she may encounter a variety of legal issues. If Employees have questions on specific laws, rules or regulations they should contact the Designated Bank Official.  F.    Other Employment       No Bank Official may accept or solicit other employment without prior written approval of the Designated Bank Official. Outside employment may not conflict with the interests of the Bank or its customers, or involve the disclosure or use of the Bank’s confidential or proprietary information.  G.    Investment and Outside Business Activities       The Bank acknowledges that the investment of personal funds as a way to participate in the growth of the economy and to provide for the future is both proper and worthwhile. However, Bank Officials must be aware that their personal financial dealings may reflect upon the character of the Bank. All investments and transactions must be made in accordance with the Bank’s Insider Trading Policy. In addition, all Bank Officials are required to read and execute the Insider Trading Policy. The following guidelines are intended to minimize the risk that personal investments and investments in outside business activities will conflict with the interests of the Bank:       1)   The nature of a Bank Official’s position requires adherence to an appropriate and prudent investment policy. In-and-out trading or speculative trading which involves    4               a high degree of risk is not consistent with the prudent conduct expected of Bank Officials.        2)   Bank Officials are expected to take reasonable steps to assure that their personal financial affairs are managed in a sound and responsible manner.        3)   The selection of a brokerage firm is a personal decision. However, an Employee’s contact with brokers during business hours should be kept to a minimum and must not interfere with his or her normal duties.        4)   Information provided by customers in the normal course of business which is not available to the general public is confidential and must be held inviolate. Such information must never be disclosed to unauthorized persons or used as a basis for personal investment decisions.        5)   All investments by Bank Officials with knowledge of the Bank’s borrower relationships in securities issued by the Bank’s borrowers must be promptly reported, in writing, to the Designated Bank Official and may be made only in conformity with the Bank’s Insider Trading Policy and restrictions of state and federal securities laws applicable to purchases and sales of securities by “insiders.”        6)   All Bank Officials must have advance approval of the Board before investing directly or indirectly in amounts greater than five percent (5%) in the stock or business of a borrower.        7)   No Employee may participate in outside business activities (other than passive investments) or similar activities which do not interfere with his or her responsibilities to the Bank, without prior written approval from the Board.        8)   No Bank Official may use the Bank’s name, affiliations, reputation or property to promote or otherwise benefit the Official’s investments or outside business activities or those of the Official’s Immediate Family or of a third party, without prior written approval from the Designated Bank Official.        9)   It is understood that certain members of the Board may hold interests in various privately-held businesses that may from time to time have depository or borrowing relationships with the Bank. Any loans to Directors, their Immediate Families, or to any Business Firm in which a Director or any member of such Director’s Immediate Family has a significant investment interest (“Directors and/or Affiliates”) must be approved in advance by the Board. Any such loans shall be on terms offered to other customers under similar circumstances and without special concessions and must otherwise comply with applicable laws and regulatory guidelines. In any case in which Directors and/or Affiliates have depository arrangements with the Bank, such depository arrangements shall be on terms offered to other customers under similar circumstances and without special concessions.    H.    Guidelines For Acceptance of Gifts, Favors and Gratuities/Bank Bribery Laws       A gift is any type of gratuity, favor, service, discount or price concession, loan, legacy (except from a relative), fee, or compensation with anything of monetary value. Gifts to Bank Officials from customers and suppliers may be intended as sincere expressions of friendship and appreciation based on the personal relationships that often develop in the normal conduct of business. Nevertheless, gifts of any kind, whether in the form of food, merchandise, unusual discounts, entertainment, or the use of customer  5       or supplier facilities, may create an appearance of impropriety, cause embarrassment to the Bank, and, at worst, may subject the Bank Officials concerned to criminal prosecution under applicable bank bribery laws. Any Bank Official who is offered a gift should consult and adhere carefully to the guidelines described below:       1)   Federal Bank Bribery Law. The federal Bank Bribery Law (18 U.S.C. §215), as amended, provides for criminal prosecution of anyone who as an officer, director, employee, agent, or attorney of a financial institution corruptly solicits or demands ..., or corruptly accepts or agrees to accept, anything of value from any person intending to be influenced or rewarded in connection with any business or transaction of such financial institution. The Bank Bribery Law also provides for criminal prosecution of any person (whether or not an employee of a bank) who corruptly gives, offers, or promises anything of value to any person with intent to influence or reward an officer, director, employee, agent, or attorney of a financial institution in connection with any business or transaction of such financial institution.        2)   FDIC Bank Bribery Guidelines. Pursuant to the Bank Bribery Law, the FDIC and the other federal banking agencies have promulgated uniform guidelines to assist an officer, director, employee, agent, or attorney of a financial institution to comply with the Bank Bribery Law. The FDIC’s Guidelines encourage all FDIC-insured banks to adopt and enforce internal codes of conduct alerting bank personnel to the provisions of the Bank Bribery Law and providing internal policies and procedures to encourage compliance. In accordance with the recommendations set forth in the FDIC’s Bank Bribery Guidelines, the Board has adopted the policies and procedures set forth below.        3)   Bank Policies and Procedures — General Guidelines. No Bank Official may:         (a)   Solicit or demand for the benefit of the Official or any other person (other than the Bank) anything of value from any Bank customer, Bank supplier, or any other person or Business Firm in return for or consideration of any business service, consideration, or confidential information of the Bank; or        (b)   Accept or agree to accept anything of value (other than bonafide salary, wages, fees or other compensation paid, or expenses paid or reimbursed, in the usual course of business) from any Bank customer, Bank supplier, or any other person or Business Firm in connection with the business of the Bank, before, during, or after a transaction is discussed or consummated.         4)   Exceptions. In general, the acceptance of a benefit based on family or personal relationships existing independent of any business of the Bank, will not constitute a violation of the Bank Bribery Law if (a) the benefit is available to the general public under the same conditions on which it is available to the Bank Official, or (b) the benefit would be paid for by the Bank as a reasonable business expense if not paid for by another party. Therefore, the following constitute exceptions to paragraph 4(b) above:         (c)   Acceptance of gifts, gratuities, amenities, or favors based on obvious family or personal relationships (such as those between the parents, children or spouse of a Bank Official) where the circumstances make it clear that it is those relationships rather than the business of the Bank that are the motivating factors;    6           (d)   Acceptance of meals, refreshments, entertainment, accommodations, or travel arrangements of reasonable value in the course of a meeting or other occasion, the purpose of which is to hold bona fide business discussions or to foster better business relations, provided that the expense would be paid for by the Bank as a reasonable business expense if not paid for by another party;        (e)   Acceptance of loans from other banks or financial institutions on customary terms to finance proper and usual activities of Bank Officials, such as home mortgage loans, except where prohibited by law;        (f)   Acceptance of advertising or promotional material of reasonable value (no more than $50.00), such as pens, pencils, note pads, key chains, calendars and similar items;        (g)   Acceptance of discounts or rebates on merchandise or services that do not exceed those available to other customers;        (h)   Acceptance of civic, charitable, educational, or religious organization awards for recognition of service and accomplishment;        (i)   Acceptance of gifts of reasonable value (no more than $50.00) that are related to commonly recognized events or occasions, such as a promotion, new job, wedding, retirement, holiday or birthday;        (j)   Acceptance of things of value in other circumstances after written approval by the Designated Bank Official given on the basis of full written disclosure of all relevant facts.    H.    Reporting Requirements       Whenever a Bank Official receives or is offered a thing of value of a character or under circumstances other than those described in subparagraphs 5(a) through 5(h) above, the Bank Official shall immediately report the relevant facts, in writing, to the Designated Bank Official. The Designated Bank Official shall review the facts with the reporting Bank Official and shall determine whether acceptance by the reporting Bank Official of the gift or offer under the circumstances presented would be consistent with the purposes and intent of the Bank Bribery Law and the policies of the Bank. The Designated Bank Official shall record his or her determination in writing on the report submitted by the reporting Bank Official and shall retain all such reports in a central Bank file maintained for that purpose.  I.    Borrowing From Customers       Bank Officials may not borrow from or lend personal funds to customers or suppliers. Bank Officials may, of course, borrow from banks or from other companies in the normal course of business as, for example, in the normal extension of credit terms for services performed or goods sold, provided in any case that the extension of credit is on terms offered to other customers, clients, or suppliers under similar circumstances.  J.    Political and Community Activities       The Bank encourages Bank Officials to take an active interest in the political process and other community activities; however, participation in such activities must be as an individual and not as a representative of the Bank. The Bank’s name and address may not be used in any advertisement or  7       literature, nor may Bank Officials use the Bank’s name or publish any statement regarding the Bank’s business or operations without prior authorization from the Designated Bank Official.       Federal and state laws prohibit the Bank from contributing corporate funds or property in support of a political party or a candidate for public office. Similarly, the Bank may not compensate Bank Officials for time so dedicated.       No action may be undertaken by a Bank Official for the perceived benefit of the Bank if the Bank could not legally take such action directly. Questions as to the propriety of any action that may involve a political candidate or charitable campaign must be cleared by the Designated Bank Official before any steps are taken.       It is contrary to the Bank’s policy and intent to encourage or permit either directly or indirectly the payment of Bank funds or use of Bank property to secure favored business treatment for the Bank. This policy applies to inter-business contacts in the private sector, as well as any transaction involving state, federal or local governments.       Prior written approval from your supervisor and the Designated Bank Official is required if: (a) you contemplate accepting a public position or elected office; or (b) the political or community organization with which you are involved maintains a relationship with the Bank beyond that of a normal depositor relationship.       Any activity by an Employee which would significantly encroach upon working time, interfere with regular duties, adversely affect the quality of work performed, or risk subjecting the Bank to criticism or adverse publicity must be approved in advance in writing by the Employee’s supervisor and by the Designated Bank Official.       Employees may not engage in political or community activities of any kind while performing regular duties during business hours.  K.   Equal Employment Opportunity       The Bank strives to be a meritocracy by hiring, retaining and promoting based on the performance of each person. All employment decisions are made without regard to a person’s race, color, religion, national origin, sex, age, disability or military status. Also, all reasonable accommodations will be made for a person’s disability or religious practice.  L.    Sexual Harassment Policy       The Bank will not tolerate any form of harassment in the workplace, including harassment on the basis of sex. Prohibited conduct includes but is not limited to the following: unwelcome sexual advances; requests for sexual favors; and verbal or physical conduct of a sexual nature, such as uninvited touching and sexually related comments that create a hostile work environment. The Bank’s policy regarding sexual harassment and other discriminatory harassment is set forth in the Bank’s Sexual Harassment Policy.  M.    ADA Policy       The Bank is committed to complying fully with the Americans with Disabilities Act (“ADA”), which ensures equal opportunity for persons with qualified disabilities. Responsibility for compliance with the ADA is shared throughout the Bank and is specifically assigned to the Designated Bank Official, however, if you supervise others, you are also directly responsible for implementing the Bank’s ADA Policy.  8       N.    Expenses       All expenses for travel and entertainment incurred on behalf of the Bank should be ordinary and necessary to accomplish a business purpose and be documented in conformity with the established requirements of the Bank. In general, payment by Bank Officials of customary nominal gratuities for services received (“tips”) are permitted if lawful as are gifts and favors of nominal value or entertainment, to the extent they meet the guidelines for ethical business set out in the prior section, in the section “Guidelines For Acceptance of Gifts, Favors and Gratuities/Bank Bribery Laws”.  O.    Disbursements       Other than as an approved signature authority, no Bank Official shall control disbursements from Bank accounts, a branch of the Bank, or a Bank subsidiary. Further, disbursements shall be only for legitimate Bank purposes, and each shall be clearly disclosed in the financial records.  P.    Purchased Services       No Bank Official other than a member of the relevant department may commit the Bank to a vendor for any product, service, price or quantity, nor reveal competitive prices or special arrangements. Fees and commissions are a necessary part of various aspects of business activity. The Bank regularly engages the services of brokers, dealers, accountants, appraisers, lawyers, consultants, and so on. Often, evaluations designed to determine who is to be selected to perform a particular service will contain an element of subjectivity. The choice should always be predicated on quality, price and corporate responsibility. These criteria underlie the Bank’s specific purchasing policy. Fees or commissions that are received for other than clearly stated business purposes are not permitted by the Bank.  Q.    Legal Advice       The Bank is not in the business of practicing law or giving legal advice. Therefore, Bank Officials must be careful to avoid communicating anything to customers, either verbally or in writing, which could be interpreted as legal advice, and Bank Officials should not recommend a particular law firm to customers, although several names may be provided without indicating a preference.  R.    Currency Reporting Act and Bank Secrecy Act       It is the policy of the Bank to strictly comply with the Bank Secrecy Act and all related statutes and regulations. All Employees should review and maintain familiarity with the Bank’s Bank Secrecy Act Policy. The Bank must promptly report all matters that involve apparent crimes affecting its assets or affairs to the applicable governmental agencies. If a Bank Official becomes aware of suspicious activity or to facts which give a reasonable basis for believing a crime has occurred, is occurring, or may occur, the Bank Official should immediately notify the Bank’s Compliance Officer. The Compliance Officer will then coordinate the filing of the required reports. Any questions relating to these matters should be immediately directed to the Compliance Officer.  S.    Integrity of Bank Systems and Records       Accurate and complete business records are of critical importance to the Bank’s ability to meet its financial, legal and management obligations. All reports, vouchers, bills, payroll and service records, account records, measurement and performance records, transaction records, and other essential data must always be input/prepared accurately, reliably, and with care and honesty.  9            Improper business practices, such as the deliberate falsification of data, the preparation of misleading reports or records, the willful, unauthorized destruction or alteration of accounts, records or memoranda, or failure to correct records known to be inaccurate, will be cause for immediate dismissal.       Bank records are maintained in accordance with the rules of the FDIC, the Massachusetts Division of Banks, and other government agencies. The FDIC and some other government agencies require that certain records be retained for specific periods of time. Other records and documents may have to be held in connection with court and regulatory proceedings or for other specific business purposes. Records should, therefore, be kept in accordance with these requirements and destroyed only with Bank authorization.       All Bank Officials are responsible for following Bank procedures and policies for reporting banking transactions, including appropriate authorization requirements and internal accounting controls, to ensure:       1)   Bank transactions are carried out in an authorized manner.        2)   Bank transactions are reported and recorded to permit correct preparation of required reports and financial statements and to maintain accurate records of assets.        3)   Access to Bank assets and supplies is in accordance with management’s authorization.        4)   Inventories of Bank assets and supplies are taken periodically and appropriate action taken to correct discrepancies.         If, in the course of performing regular duties, a Bank Official identifies any circumstance which appears to violate the norms of sound and prudent banking or the substance of this Code, it is that Bank Official’s responsibility to promptly call the circumstances to the attention of the Designated Bank Official, the Chairman, President, or an impartial member of executive management.       Reports of suspicious or unusual activities in oral or written form may be submitted anonymously and will be accepted on a confidential basis if the reporting individual so requests. Bank Officials shall not be subject to reprisals or other adverse action for truthfully reporting suspicious or unusual activities or transactions as provided in this paragraph.  T.    Board Directorships       Bank Officials are encouraged to participate in appropriate professional groups and responsible civic organizations if such service does not interfere with their duties and responsibilities to the Bank, provided such relationships would not be prohibited or limited because of statutory or administrative requirements regarding conflicts of interest. Again, Bank Officials may not use the Bank’s name or the Official’s affiliation with the Bank to promote the interests of any group or organization without prior written authorization from the Designated Bank Official.       When participation as a director, officer, incorporator, or trustee of a major outside organization is requested of the Bank and serves the best interests of the Bank, the Chairman or President will designate the appropriate Bank Official for the assignment.       Bank Officials who are approached directly by an outside organization to join the board of directors or trustees must first obtain the approval of the Chairman, President or the Designated Bank Official. Bank Officials, however, need not obtain prior approval to participate in religious and political organizations. Periodically, Bank Officials will be required to fill out a questionnaire circulated by the  10       Designated Bank Official regarding their involvement as officers and directors of outside organizations (other than political or religious organizations).  U.    Public Inquiries       The Bank maintains a good relationship with the media and cooperates in providing the public with information about its services. The Chairman and President have primary responsibility for responding to inquiries from the news media. Occasionally, Bank Officials may receive an inquiry from a reporter or shareholder regarding some aspect of the Bank’s affairs. All such inquiries must be routed through the Chairman, President or Investor Relations, except where the information requested is factual information about Bank services offered to the general public. For example, if a reporter were to ask what the Bank’s rate on a Certificate of Deposit is or what deposit is required to open a savings account, this information may be provided. As with answers provided to a customer, the answer must comply with all applicable regulatory requirements.  V.   Misappropriation of Funds and Income       The misappropriation of Bank funds and/or Bank income and/or customer funds is a serious violation of both the law and Bank policy. Misappropriation includes, but is not limited to, theft of funds and the reallocation of funds in any manner including improper payments for gifts, meals, parties or other forms of entertainment.       If the Bank determines that a Bank Official has misappropriated funds or directed others to do so, that Bank Official’s employment or affiliation with the Bank will be terminated. Further, it is the responsibility of all Bank Officials with knowledge of such a situation to report it immediately. Failure to do so will also result in the termination of the Official’s employment or affiliation with the Bank.  W.    Overdrafts       This Code prohibits Bank Officials from overdrawing any account they may have with the Bank. The Bank will charge the same fee for overdrafts that is charged to any other customer of the Bank in similar circumstances. The Bank may pay inadvertent overdrafts by a Bank Official in an aggregate amount of $1,000 or less so long as the account is not overdrawn for more than five (5) business days. If an account is overdrawn in an aggregate amount of more than $1,000, the Bank will not pay any of the overdraft(s). At the Bank’s discretion, Officials who overdraw their accounts three (3) times are subject to having their accounts closed.  X.    Reports and Disclosures       Each year, Bank Officials are required to complete and file an annual compliance statement on the interests and activities covered by this Code. In addition to this annual disclosure, Bank Officials must promptly report any event that might involve or appear to involve any conflict of interest, including those in which the Official was inadvertently placed due to either personal or business relationships with customers, suppliers, business associates, or competitors of the Bank. The information disclosed pursuant to the annual reporting requirement shall include all relevant facts and the specific steps taken to avoid an actual conflict of interests. When in doubt, the information should be disclosed, according to the following protocol:       (a)   Employees, up to and including Executive Vice Presidents, shall disclose to, and seek approval from, the Designated Bank Official, Chairman or President.        (b)   The Chairman, President and all Directors shall disclose to, and seek approval from, the Board.    11           (c)   All disclosures including both annual and periodic, and all requests for approval, shall become part of the records of the Board.    Compliance Procedures  A.    Administration       The Board is responsible for the administration of this Code and may establish such procedures as it shall deem necessary or desirable in order to discharge this responsibility, including delegating authority to officers and engaging advisors. Administration of this Code shall include periodically reviewing this Code and proposing any changes to this Code that are deemed necessary or appropriate. The Board may appoint a Designated Bank Official to perform various ongoing administrative functions in connection with this Code, including responding to questions about this Code and circulating or otherwise communicating updates to this Code. In the event a Designated Bank Official is appointed, Employees and Directors will be informed of his or her appointment and will be provided information regarding how to contact the Designated Bank Official.  B.    Communication of Policies       A copy of this Code shall be supplied to all Employees and Directors upon beginning service at the Bank. Updates will be provided upon any change to this Code. A copy of this Code is also available to all Employees and Directors by requesting one from the Bank’s Human Resources Department.  C.    Monitoring Compliance and Disciplinary Action       The Bank’s management, under the supervision of the Board or, in the case of accounting, internal accounting controls or auditing matters, the Audit Committee, shall take reasonable steps from time to time to (i) monitor and audit compliance with this Code, including the establishment of monitoring and auditing systems that are reasonably designed to investigate and detect conduct in violation of this Code and (ii) when appropriate, impose and enforce appropriate disciplinary measures for violations of this Code. The disciplinary measures may include, but are not limited to, counseling, oral or written reprimands, warnings, probation or suspension with or without pay, demotions, reductions in salary, termination of employment or service to the Bank and restitution. The Bank’s management shall periodically report to the Board on these compliance efforts including, without limitation, regular reporting of alleged violations of this Code and the actions taken with respect to any such violation.  D.    Reporting Concerns/Receiving Advice       1)   Communication Channels.         (a)   Every Employee should act proactively, where appropriate, by asking questions, seeking guidance and reporting suspected violations with respect to compliance with this Code, other policies and procedures of the Bank, or any applicable government law, rule or regulation. If any Employee believes that actions have taken place, may be taking place, or may be about to take place that violate or would violate this Code, he or she is obligated to bring the matter to the attention of the Bank.        (b)   Unless specific sections of this Code indicate otherwise, the best starting point for an Employee seeking advice on ethics-related issues or reporting potential violations is his or her supervisor. However, if the conduct in question involves his or her supervisor, if the Employee has reported the conduct in question to his or her supervisor and does not believe that he or she has dealt with it properly, or    12               if the Employee does not feel that he or she can discuss the matter with his or her supervisor, the Employee may raise the matter with the Bank’s Human Resources Department. Any Employee may communicate with the Human Resources Department in person, by telephone or in writing (which may be done anonymously).        (c)   Any Employee or Director who has concerns or questions about violations with respect to accounting, internal accounting controls or auditing matters should contact the Audit Committee by using the Bank’s confidential employee whistleblower hotline which may be accessed via telephone at 1-866-291-6631, on-line at www.openboard.info/capx or via e-mail at capx@openboard.info. All communications are anonymous and confidential.        (d)   Employees must not use this compliance program in bad faith, or in a false or frivolous manner.         (2)   Confidentiality; Anonymous Reporting; Retaliation.         (a)   When reporting conduct suspected of violating this Code, the Bank prefers that Employees identify themselves in order to facilitate the Bank’s ability to take appropriate steps to address the report, including conducting any appropriate investigation.        (b)   If an Employee wishes to remain anonymous, he or she may do so, and the Bank will use reasonable efforts to protect the confidentiality of the reporting person subject to applicable law, rule or regulation or to any applicable legal proceedings. In the event the report is made anonymously, however, the Bank may not have sufficient information to look into or otherwise investigate or evaluate the allegations. Accordingly, persons who make reports anonymously should endeavor to provide as much detail as is reasonably necessary to permit the Bank to evaluate the matter(s) set forth in the anonymous report and, if appropriate, commence and conduct an appropriate investigation.        (c)   The Bank expressly forbids any retaliation against any Employee who, acting in good faith, reports suspected misconduct. Any person who participates in any such retaliation is subject to disciplinary action, including termination.    E.    Waivers and Amendments       No waiver of any provisions of this Code for the benefit of any Bank Official shall be effective unless (i) approved by the Board (excluding the vote of the affected Bank Official if that person is a Director), and (ii) if applicable, such waiver is promptly disclosed to the Bank’s shareholders in accordance with applicable United States securities laws and/or the rules and regulations of the exchange or system on which the Bank’s shares are traded or quoted, as the case may be.       All amendments to this Code must be approved by the Board and if applicable, must be promptly disclosed to the Bank’s shareholders in accordance with applicable United States securities laws and/or the rules and regulations of the exchange or system on which the Bank’s shares are traded or quoted, as the case may be.  13       Code of Business Conduct and Ethics  Receipt       I acknowledge receipt of the attached Code of Business Conduct and Ethics (the “Code”) of the Bank. I have read and understand the Code and agree to abide by all of the terms set forth therein.                                  Print Name    Title                             Signature    Date     Annual Compliance Report     1)   List below and then on the reverse side, if necessary, your affiliations with any business, charitable, political, community organization and other organizations, excluding subsidiaries of Capital Crossing Bank. Write the word “none” if you do not have any reportable affiliations.                  Name and Address of Organization(s)    Title and Position                        2)   List below and then on the reverse side, if necessary, any other employment you have. Write the word “none” if you do not have any other employment.                  Name and Address of Other Employer(s)    Title and Position                     14       EX-31.1 4 b57989ccexv31w1.htm EX-31.1 SECTION 302 CERTIFICATION OF C.E.O.    exv31w1       Exhibit 31.1   CERTIFICATION   I, Richard Wayne, certify that:            1.       I have reviewed this annual report on     Form 10-K of     Capital Crossing Preferred Corporation (the     “registrant”);         2.       Based on my knowledge, this report does not contain any untrue     statement of a material fact or omit to state a material fact     necessary to make the statements made, in light of the     circumstances under which such statements were made, not     misleading with respect to the period covered by this report;         3.       Based on my knowledge, the financial statements, and other     financial information included in this report, fairly present in     all material respects the financial condition, results of     operations and cash flows of the registrant as of, and for, the     periods presented in this report;         4.       The registrant’s other certifying officers and I are     responsible for establishing and maintaining disclosure controls     and procedures (as defined in Exchange Act     Rules 13a-15(e)     and 15d-15(e)) for the     registrant and have:             (a)       Designed such disclosure controls and procedures, or caused such     disclosure controls and procedures to be designed under our     supervision, to ensure that material information relating to the     registrant is made known to us by others within those entities,     particularly during the period in which this report is being     prepared;         (b)       [Paragraph omitted in accordance with SEC transition     instructions contained in Release     34-47986.]              (c)       Evaluated the effectiveness of the registrant’s disclosure     controls and procedures and presented in this report our     conclusions about the effectiveness of the disclosure controls     and procedures, as of the end of the period covered by this     report based on such evaluation; and         (d)       Disclosed in this report any change in the registrant’s     internal control over financial reporting that occurred during     the registrant’s most recent fiscal quarter (the     registrant’s fourth fiscal quarter in the case of an annual     report) that has materially affected, or is reasonably likely to     materially affect, the registrant’s internal control over     financial reporting; and             5.       The registrant’s other certifying officers and I have     disclosed, based on our most recent evaluation of internal     control over financial reporting, to the registrant’s     auditors and the audit committee of the registrant’s board     of directors (or persons performing the equivalent functions):             (a)       All significant deficiencies and material weaknesses in the     design or operation of internal control over financial reporting     which are reasonably likely to adversely affect the     registrant’s ability to record, process, summarize and     report financial information; and         (b)       Any fraud, whether or not material, that involves management or     other employees who have a significant role in the     registrant’s internal control over financial reporting.                    Date: March 28, 2006         By: /s/ Richard     Wayne  Richard Wayne     President (Principal Executive Officer)         EX-31.2 5 b57989ccexv31w2.htm EX-31.2 SECTION 302 CERTIFICATION OF P.F.O.    exv31w2       Exhibit 31.2   CERTIFICATION   I, Edward F. Mehm, certify that:            1.       I have reviewed this annual report on     Form 10-K of     Capital Crossing Preferred Corporation (the     “registrant”);         2.       Based on my knowledge, this report does not contain any untrue     statement of a material fact or omit to state a material fact     necessary to make the statements made, in light of the     circumstances under which such statements were made, not     misleading with respect to the period covered by this report;         3.       Based on my knowledge, the financial statements, and other     financial information included in this report, fairly present in     all material respects the financial condition, results of     operations and cash flows of the registrant as of, and for, the     periods presented in this report;         4.       The registrant’s other certifying officers and I are     responsible for establishing and maintaining disclosure controls     and procedures (as defined in Exchange Act     Rules 13a-15(e)     and 15d-15(e)) for the     registrant and have:             (a)       Designed such disclosure controls and procedures, or caused such     disclosure controls and procedures to be designed under our     supervision, to ensure that material information relating to the     registrant is made known to us by others within those entities,     particularly during the period in which this report is being     prepared;         (b)       [Paragraph omitted in accordance with SEC transition     instructions contained in Release     34-47986.]              (c)       Evaluated the effectiveness of the registrant’s disclosure     controls and procedures and presented in this report our     conclusions about the effectiveness of the disclosure controls     and procedures, as of the end of the period covered by this     report based on such evaluation; and         (d)       Disclosed in this report any change in the registrant’s     internal control over financial reporting that occurred during     the registrant’s most recent fiscal quarter (the     registrant’s fourth fiscal quarter in the case of an annual     report) that has materially affected, or is reasonably likely to     materially affect, the registrant’s internal control over     financial reporting; and             5.       The registrant’s other certifying officers and I have     disclosed, based on our most recent evaluation of internal     control over financial reporting, to the registrant’s     auditors and the audit committee of the registrant’s board     of directors (or persons performing the equivalent functions):             (a)       All significant deficiencies and material weaknesses in the     design or operation of internal control over financial reporting     which are reasonably likely to adversely affect the     registrant’s ability to record, process, summarize and     report financial information; and         (c)       Any fraud, whether or not material, that involves management or     other employees who have a significant role in the     registrant’s internal control over financial reporting.                    Date: March 28, 2006         By: /s/ Edward F.     Mehm  Edward F. Mehm     Treasurer (Principal Financial Officer)         EX-32 6 b57989ccexv32.htm EX-32 SECTION 906 CERTIFICATION OF C.E.O. & P.F.O.    exv32       Exhibit 32   CERTIFICATION PURSUANT TO   18 U.S.C. SECTION 1350,   AS ADOPTED PURSUANT TO   SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002        In connection with the accompanying Annual Report on Form 10-K of Capital Crossing Preferred (the “Company”) for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned, Richard Wayne, President of the Company and Edward F. Mehm, Treasurer of the Company certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:            (1)       The Report fully complies with the requirements of     section 13(a) or 15(d) of the Securities Exchange Act of     1934; and         (2)       The information contained in the Report fairly presents, in all     material respects, the financial condition and result of     operations of the Company.                    Date: March 28, 2006         By: /s/ Richard     Wayne  Richard Wayne     President (Principal Executive Officer)         Date: March 28, 2006         By: /s/ Edward F.     Mehm  Edward F. Mehm     Treasurer (Principal Financial Officer)         -----END PRIVACY-ENHANCED MESSAGE-----