CCPCN Capital Crossing Preferred (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2008

Commission File Number 000-25193

CAPITAL CROSSING PREFERRED CORPORATION

(Exact name of registrant as specified in its charter)

Massachusetts

04-3439366

101 Summer Street, Boston, Massachusetts
(Address of principal executive offices)

02110

(617) 880-1000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o		Accelerated filer  o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares outstanding of the registrant’s sole class of common stock was 100 shares, $.01 par value per share, as of May 15, 2008. No common stock was held by non-affiliates of the issuer.

 

 

Capital Crossing Preferred Corporation
Table of Contents

						Page
PART I – Financial Information
Item 1.				Financial Statements (unaudited):
				Balance Sheets			1
				Statements of Income			2
				Statements of Changes in Stockholders’ Equity			3
				Statements of Cash Flows			4
				Notes to Financial Statements			5
Item 2.				Management’s Discussion and Analysis of Financial Condition and Results of Operations			6
				Executive Level Overview			6
				Application of Critical Accounting Policies and Estimates			7
				Results of Operations			9
				Changes in Financial Conditions			11
				Interest Rate Risk			12
				Significant Concentration of Credit Risk			12
				Liquidity Risk Management			13
				Impact of Inflation and Changing Prices			13
Item 3.				Quantitative and Qualitative Disclosures about Market Risk			13
Item 4.				Controls and Procedures			14
PART II – Other Information
Item 1A.				Risk Factors			15
Item 4.				Submission of Matters to a Vote of Security Holders			15
Item 5.				Other Information			15
Item 6.				Exhibits			15
				Signatures			16
				Exhibit Index			17
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32 Section 906 Certification of CEO & CFO

PART I

Item 1. Financial Statements

Capital Crossing Preferred Corporation

Balance Sheets

(unaudited)

		March 31,				December 31,
		2008				2007
		(in thousands)
ASSETS
Cash account with parent		$	208			$	208
Interest bearing deposits with parent			53,495				50,373
Total cash and cash equivalents			53,703				50,581
Loans, net of discounts and net deferred loan income			64,213				66,654
Less allowance for loan losses			(1,065	)			(1,180	)
Loans, net			63,148				65,474
Accrued interest receivable			269				298
Other assets			26				5
		$	117,146			$	116,358
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accrued expenses and other liabilities		$	1,047			$	989
Total liabilities			1,047				989
Stockholders’ equity:
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 shares issued and outstanding			—				—
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 shares issued and outstanding			15				15
Common stock, $.01 par value, 100 shares authorized, issued and outstanding			—				—
Additional paid-in capital			115,354				115,354
Retained earnings			730				—
Total stockholders’ equity			116,099				115,369
		$	117,146			$	116,358

See accompanying notes to financial statements.

Capital Crossing Preferred Corporation

Statements of Income

(unaudited)

		Three Months Ended March 31,
		2008				2007
		(in thousands)
Interest income:
Interest and fees on loans		$	1,295			$	1,949
Interest on interest-bearing deposits			227				231
Total interest income			1,522				2,180
Reduction in allowance for loan losses			115				104
Total interest income, after reduction in allowance for loan losses			1,637				2,284
Other income:
Guarantee fee income			—				20
Total other income			—				20
Operating expenses:
Loan servicing and advisory services			48				62
Other general and administrative			43				43
Total operating expenses			91				105
Net income			1,546				2,199
Preferred stock dividends			816				1,560
Net income available to common stockholder		$	730			$	639

See accompanying notes to financial statements.

Capital Crossing Preferred Corporation

Statements of Changes in Stockholders’ Equity

(unaudited)

		Three Months ended March 31, 2008
		Preferred Stock								Preferred Stock																Additional								Total
		Series B								Series D								Common Stock								Paid-in				Retained				Stockholders’
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Earnings				Equity
		(In Thousands)
Balance at December 31, 2007			1			$	—				1,500			$	15				—			$	—			$	115,354			$	—			$	115,369
Net income			—				—				—				—				—				—				—				1,546				1,546
Cumulative dividends on preferred stock, Series B			—				—				—				—				—				—				—				(19	)			(19	)
Dividends on preferred stock, Series D			—				—				—				—				—				—				—				(797	)			(797	)
Balance at March 31, 2008			1			$	—				1,500			$	15				—			$	—			$	115,354			$	730			$	116,099

		Three Months ended March 31, 2007
		Preferred Stock								Preferred Stock								Preferred Stock								Preferred Stock																Additional								Total
		Series A								Series B								Series C								Series D								Common Stock								Paid-in				Retained				Stockholders’
		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Capital				Earnings				Equity
		(In Thousands)
Balance at December 31, 2006			1,416			$	14				1			$	—				1,840			$	18				1,500			$	15				—			$	—			$	172,640			$	—			$	172,687
Net income			—				—				—				—				—				—				—				—				—				—				—				2,199				2,199
Redemption of preferred stock, Series A and C			(1,416	)			(14	)			—				—				(1,840	)			(18	)			—				—				—				—				(32,529	)			—				(32,561	)
Dividends on preferred stock, Series A			—				—				—				—				—				—				—				—				—				—				—				(314	)			(314	)
Cumulative dividends on preferred stock, Series B			—				—				—				—				—				—				—				—				—				—				—				(19	)			(19	)
Dividends on preferred stock, Series C			—				—				—				—				—				—				—				—				—				—				—				(430	)			(430	)
Dividends on preferred stock, Series D			—				—				—				—				—				—				—				—				—				—				—				(797	)			(797	)
Balance at March 31, 2007			—			$	—				1			$	—				—			$	—				1,500			$	15				—			$	—			$	140,111			$	639			$	140,765

See accompanying notes to financial statements.

Capital Crossing Preferred Corporation

Statements of Cash Flows

(unaudited)

		Three Months Ended March 31,
		2008				2007
		(in thousands)
Cash flows provided by operating activities:
Net income		$	1,546			$	2,199
Adjustments to reconcile net income to net cash provided by operating activities:
Reduction in allowance for loan losses			(115	)			(104	)
Other, net			66				(292	)
Net cash provided by operating activities			1,497				1,803
Cash flows provided by investing activities:
Loan repayments			2,441				3,963
Net cash provided by investing activities			2,441				3,963
Cash flows used in financing activities:
Redemption of preferred stock, Series A and C			—				(32,561	)
Payment of preferred stock dividends			(816	)			(1,560	)
Net cash used in financing activities			(816	)			(34,121	)
Net change in cash and cash equivalents			3,122				(28,355	)
Cash and cash equivalents at beginning of period			50,581				83,900
Cash and cash equivalents at end of period		$	53,703			$	55,545

See accompanying notes to financial statements.

Capital Crossing Preferred Corporation

Notes to Financial Statements

Three Months Ended March 31, 2008 and 2007

Note 1. Basis of Presentation

     Capital Crossing Preferred Corporation (“Capital Crossing Preferred”) is a Massachusetts corporation organized on March 20, 1998, to acquire and hold real estate assets. Lehman Brothers Bank, FSB (“Lehman Bank”), a subsidiary of Lehman Brothers Holdings Inc. (“LBHI”; LBHI with its subsidiaries, “Lehman Brothers”), owns all of Capital Crossing Preferred’s common stock. Lehman Bank is in compliance with its regulatory capital requirements at March 31, 2008. Prior to the merger with Lehman Bank, which is further discussed below, Capital Crossing Preferred was a subsidiary of Capital Crossing Bank (“Capital Crossing”), a federally insured Massachusetts trust company, and Capital Crossing owned all of Capital Crossing Preferred’s common stock. Capital Crossing Preferred operates in a manner intended to allow it to be taxed as a real estate investment trust, or a “REIT”, under the Internal Revenue Code of 1986, as amended. As a REIT, Capital Crossing Preferred generally will not be required to pay federal income tax if it distributes its earnings to its shareholders and continues to meet a number of other requirements.

     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.

     On February 14, 2007, Capital Crossing was acquired by Lehman Bank through a two step merger transaction. An interim thrift subsidiary of Lehman Bank was merged into Capital Crossing. Immediately following such merger, Capital Crossing was merged into Lehman Bank. Under the terms of the agreement, Lehman Brothers paid $30.00 per share in cash in exchange for each outstanding share of Capital Crossing.

     Upon completion of the merger, Capital Crossing Preferred’s Board of Directors amended Capital Crossing Preferred’s charter. The exchange of the Series A, Series C and Series D preferred shares into preferred shares of Capital Crossing are now exchangeable into preferred shares of Lehman Bank. On March 23, 2007, Capital Crossing Preferred redeemed the Series A and C preferred shares. The Series B preferred shares and Series D preferred shares remain outstanding and remain subject to their existing terms and conditions, including their respective call features.

     The financial information as of March 31, 2008 and the results of operations, changes in stockholders’ equity and cash flows for the three months ended March 31, 2008 and 2007 are unaudited; however, in the opinion of management, the financial information reflects all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The interim financial statements for the three months ended March 31, 2008 and 2007 are comparable as there were no changes in accounting principles as a result of the merger. Interim results are not necessarily indicative of results to be expected for the entire year. These interim financial statements are intended to be read in conjunction with the financial statements presented in Capital Crossing Preferred’s Annual Report on Form 10-K as of, and for the year ended December 31, 2007.

     In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for losses on loans, the allocation of purchase discount on loans between accretable and nonaccretable portions, and the rate at which the discount is accreted into interest income.

Note 2. Recent Accounting Pronouncements

     In July 2006, to improve comparability in the reporting of income tax assets and liabilities in the absence of guidance in existing income tax accounting standards, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109.” Generally, this Interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with existing income tax accounting standards, and prescribes certain thresholds and attributes for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The provisions of the Interpretation were applied on January 1, 2007, and did not have a material impact on the Capital Crossing Preferred’s financial position or results of operations. The earliest year open to examination is 2004.

     In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements.” This new standard defines fair values, establishes a framework for measuring fair value in conformity with GAAP, and expands disclosures about fair value measurements. Prior to this standard, there were varying definitions of fair value and limited guidance for applying those definitions under GAAP. In addition, the guidance was dispersed among many accounting pronouncements that require fair value measurements. This standard is intended to increase consistency and comparability in fair value measurements and disclosures about fair value measurements. The provisions of this standard are effective January 1, 2008. Since Capital Crossing Preferred does not report any of its assets or liabilities at fair value on the balance sheet, the adoption of this standard did not have a material impact on Capital Crossing Preferred’s financial statements.

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

     This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. For purposes of these Acts, any statement that is not a statement of historical fact may be deemed a forward-looking statement. For example, statements containing the words “believes,” “anticipates,” “plans,” “expects,” “estimates,” “intends,” “may,” “projects,” “will,” “would,” and similar expressions may be forward-looking statements. Capital Crossing Preferred cautions investors not to place undue reliance on any forward-looking statements in this Quarterly Report on Form 10-Q. Capital Crossing Preferred undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. There are a number of factors that could cause Capital Crossing Preferred’s actual results to differ materially from those indicated by these forward-looking statements, including without limitation the factors set forth below in Part II, Item 1A. “Risk Factors”. These factors and the other cautionary statements made in this quarterly report should be read as being applicable to all related forward-looking statements wherever they appear in this quarterly report. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, Capital Crossing Preferred’s actual results, performance, or achievements may vary materially from any future results, performance, or achievements expressed or implied by these forward-looking statements.

     The following discussion of Capital Crossing Preferred’s financial condition, results of operations, capital resources and liquidity should be read in conjunction with the Financial Statements and related Notes included elsewhere herein and the audited Financial Statements and related Notes included in Capital Crossing Preferred’s Annual Report on Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission, (the “SEC”).

Executive Level Overview

     Net income available to the common shareholder increased $91,000, or 14.2%, to $730,000 for the three months ended March 31, 2008 compared to $639,000 for the same period in 2007. The increase from 2007 to 2008 is primarily the result of a decrease in preferred stock dividends due to the redemption of the Series A and Series C preferred shares in March 2007, partially offset by a decrease in interest and fees on loans. The decrease in interest and fees on loans is primarily due to a smaller loan portfolio as a result of loan amortization and repayments.

     All of the mortgage assets in Capital Crossing Preferred’s loan portfolio at March 31, 2008 were acquired from Capital Crossing, previously the sole common shareholder, and it is anticipated that substantially all additional mortgage assets will be acquired from Lehman Bank, currently the sole common shareholder. As of March 31, 2008, Capital Crossing Preferred held loans acquired from Capital Crossing with net investment balances of $64.2 million.

     Commercial mortgage loans constituted approximately 61.3% of the net loans in Capital Crossing Preferred’s loan portfolio at March 31, 2008. Commercial mortgage loans are generally subject to greater risks than other types of loans. Capital Crossing Preferred’s commercial mortgage loans, like most commercial mortgage loans, generally lack standardized terms, tend to have shorter maturities than other mortgage loans and may not be fully amortizing. For these reasons, Capital Crossing Preferred may experience higher rates of default on its mortgage loans than it would if its loan portfolio was more diversified and included a greater number of owner-occupied residential or other mortgage loans.

     Properties underlying Capital Crossing Preferred’s current mortgage assets are also concentrated primarily in California and New England. As of March 31, 2008, approximately 60.2% of the balances of its mortgage loans were secured by properties located in California and 6.9% in New England. In the instance where either region experiences adverse economic, political or business conditions, Capital Crossing Preferred would likely experience higher rates of loss and delinquency on its mortgage loans.

     Since Capital Crossing Preferred is a subsidiary of Lehman Bank, federal bank regulatory authorities will have the right to examine it and its activities and under certain circumstances, to impose restrictions on Lehman Bank or Capital Crossing Preferred which could impact Capital Crossing Preferred’s ability to conduct its business according to its business objectives. For instance, if Lehman Bank’s regulators determine that Lehman Bank’s relationship to Capital Crossing Preferred results in an unsafe and unsound banking

practice, the regulators could restrict Capital Crossing Preferred’s ability to transfer assets, to make distributions to its stockholders or even require Lehman Bank to sever its relationship with or divest its ownership interest in Capital Crossing Preferred.

     Decisions regarding the utilization of Capital Crossing Preferred’s cash are based, in large part, on its future commitments to pay preferred stock dividends. During the first quarter of 2008, the loan portfolio was large enough to generate income resulting in net income, which was 1.89 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.

Application of Critical Accounting Policies and Estimates

     The SEC requires that all registrants discuss their most ‘‘critical accounting policies’’ in management’s discussion and analysis of financial condition and results of operations. The SEC indicated that a ‘‘critical accounting policy’’ is one which is both important to the portrayal of the company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. While Capital Crossing Preferred’s significant accounting policies are more fully described in Note 1 to the Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2007, 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:

      Discounts on Acquired Loans.   In accordance with Statement of Position (“SOP”) No. 03-3 “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” Capital Crossing Preferred reviews acquired loans for differences between contractual cash flows and cash flows expected to be collected from Capital Crossing Preferred’s initial investment in the acquired loans to determine if those differences are attributable, at least in part, to credit quality. If those differences are attributable to credit quality, the loan’s contractually required payments receivable in excess of the amount of its cash flows expected at acquisition, or nonaccretable discount, is not accreted into income. SOP No. 03-3 requires that Capital Crossing Preferred recognize the excess of all cash flows expected at acquisition over Capital Crossing Preferred’s initial investment in the loan as interest income using the interest method over the term of the loan. This excess is referred to as accretable discount.

     No loans acquired since the adoption of SOP No. 03-3 were within the scope of the SOP.

     Loans which, at acquisition, do not have evidence of deterioration of credit quality since origination are outside the scope of SOP No. 03-3. For such loans, the discount, representing 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 loan. Prepayments are not considered in the calculation of accretion income. Additionally, discount is not accreted on non-performing loans.

     There is judgment involved in estimating the amount of Capital Crossing Preferred’s future cash flows on acquired loans. 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 of loans, 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.

     If cash flows cannot be reasonably estimated for any loan, and collection is not probable, the cost recovery method of accounting is used. Under the cost recovery method, any amounts received are applied against the recorded amount of the loan. Nonaccretable discount is generally offset against the related principal balance when the amount at which a loan is resolved or restructured is determined. There is no effect on the income statement as a result of these reductions.

     Subsequent to acquisition, if cash flow projections improve, and it is determined that the amount and timing of the cash flows related to the nonaccretable discount are reasonably estimable and collection is probable, the corresponding decrease in the nonaccretable discount is transferred to the accretable discount and is accreted into interest income over the remaining life of the loan on the interest method. If cash flow projections deteriorate subsequent to acquisition, the decline is accounted for through a provision for loan losses included in earnings.

      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 for loan losses or a reduction in the allowance for loan losses included in earnings.

     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 “Accounting by Creditors for Impairment of a Loan”. Next, management considers the level of loan allowances deemed appropriate for loans determined not to be impaired under SFAS No. 114. The allowance for these loans is 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.

     The allowance for loan losses is increased through a provision for loan losses included in earnings when management changes its estimate of probable losses inherent in the portfolio. 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 reduction in the allowance for loan losses included in earnings. 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. It is anticipated that the allowance will continue to decline as reductions in the allowance for loan losses may continue to be recorded if loans pay off and allowance allocations related to these loans are not required or if additions due to loan impairment are not required.

     Gains and losses on sales of loans are determined using the specific identification method. The excess (deficiency) of any cash received as compared to the net investment is recorded as gain (loss) on sales of loans. There were no loans held for sale at March 31, 2008 and there were no loans sold during the three months ended March 31, 2008.

Results of Operations for the Three Months Ended March 31, 2008 and 2007

Interest income

     The following table sets forth the yields on Capital Crossing Preferred’s earning assets for the periods indicated:

		Three Months Ended March 31,
		2008												2007
		Average				Interest								Average				Interest
		Balance				Income				Yield				Balance				Income				Yield
										(dollars in thousands)
Loans, net (1)		$	64,730			$	1,295				8.05	%		$	88,466			$	1,949				8.93	%
Interest-bearing deposits			52,146				227				1.75				82,584				231				1.13
Total interest-earning assets		$	116,876			$	1,522				5.24	%		$	171,050			$	2,180				5.17	%

          The decline in interest income for the three months ended March 31, 2008 compared to the three months ended March 31, 2007 is primarily due to a decrease in the average balance of loans and interest bearing deposits and a decrease in the yield on loans.

          Average loans, net for the three months ended March 31, 2008 totaled $64.7 million compared to $88.5 million for the same period in 2007. This decrease is primarily attributable to loan pay-offs, amortization and sales of loans. No loans have been acquired by Capital Crossing Preferred since 2005. For the three months ended March 31, 2008, the yield on the loan portfolio decreased to 8.05% compared to 8.93% for the same period in 2007. For the three months ended March 31, 2008, interest and fee income recognized on loan payoffs decreased $79,000, or 43.4%, to $103,000 from $182,000 for the three months ended March 31, 2007. The level of interest and fee income recognized on loan payoffs varies for numerous reasons, as further discussed below. The yield from regularly scheduled interest and accretion income decreased to 7.41% for the three months ended March 31, 2008 from 8.10% for the same period in 2007 primarily as a result of decreases in market interest rates.

          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, prepayment fees and other loan fees (''other interest and fee income’’). The following table sets forth, for the periods indicated, the components of interest and fees on loans. There can be no assurance regarding future interest income, including the yields and related level of such income, or the relative portion attributable to loan pay-offs as compared to other sources.

		Three Months Ended March 31,
		2008								2007
		Interest								Interest
		Income				Yield				Income				Yield
						(dollars in thousands)
Regularly scheduled interest and accretion income		$	1,192				7.41	%		$	1,767				8.10	%
Interest and fee income recognized on loan pay-offs:
Accretable discount			58				0.36				161				0.74
Other interest and fee income			45				0.28				21				0.09
			103				0.64				182				0.83
		$	1,295				8.05	%		$	1,949				8.93	%

          The amount of loan payoffs 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 often times 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 $30.4 million or 36.9% to $52.1 million for the three months ended March 31, 2008, compared to $82.6 million for 2007. The changes in the average balances of interest-bearing deposits are the result of periodic dividend payments and returns of capital offset by cash flows from loan repayments. Additionally, on March 23, 2007, Capital Crossing Preferred redeemed the Series A and Series C preferred shares, which caused a decrease of $32.6 million in interest-bearing deposits. The interest rate on interest-bearing deposits increased to 1.75% for the three months ended March 31, 2008 compared to 1.13% for the same period in 2007 as a result of an increased rate paid by Lehman Bank compared to the rate paid by Capital Crossing.

Reduction in allowance for loan losses

          Capital Crossing Preferred recorded reductions in the allowance for loan losses of $115,000 and $104,000 for the three months ended March 31, 2008 and 2007, respectively, to reverse unused loss reserves related to loans that have been paid off. The reduction in the allowance for loan losses is based on the volume and types of loan payoffs. As loans pay off, a reduction in the allowance 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 reductions in the allowance for loan losses may be necessary.

Other income

          On May 18, 2007, Lehman Bank paid off all its remaining outstanding Federal Home Loan Bank of Boston (“FHLBB”) advances. Prior to that, Capital Crossing Preferred had guaranteed all of the obligations of Lehman Bank under advances Lehman Bank had received from the FHLBB. These FHLBB obligations were assumed by Lehman Bank pursuant to the merger. As a result of the repayment, the guarantee was released. Capital Crossing Preferred received an annual fee of $80,000 under this agreement. Guarantee fee income for the three months ended March 31, 2007 was $20,000.

Operating expenses

          Loan servicing and advisory expenses decreased $14,000, or 22.6%, to $48,000 for the three months ended March 31, 2008 from $62,000 for the three months ended March 31, 2007 primarily as a result of the decrease in the average balance of the loan portfolio.

          Other general and administrative expenses remained constant at $43,000 for each of the three month periods ended March 31, 2008 and 2007.

Preferred stock dividends

          Preferred stock dividends decreased for the three months ended March 31, 2008 compared to the same period in 2007 due to the redemption of the Series A and Series C preferred shares on March 23, 2007.

Changes in Financial Condition

Interest-bearing deposits with parent

          Interest-bearing deposits with parent consist entirely of money market accounts with Lehman Bank. The balance of interest-bearing deposits increased $3.1 million to $53.5 million at March 31, 2008 compared to $50.4 million at December 31, 2007. The increase in the balance of interest-bearing deposits is primarily a result of cash flows from loan repayments.

Loan portfolio

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

		March 31,				December 31,
		2008				2007
		(in thousands)
Mortgage loans on real estate:
Commercial real estate		$	39,351			$	41,400
Multi-family residential			24,014				24,396
One-to-four family residential			865				877
Total			64,230				66,673
Other			13				13
Total loans, net of discounts			64,243				66,686
Less:
Allowance for loan losses			(1,065	)			(1,180	)
Net deferred loan fees			(30	)			(32	)
Loans, net		$	63,148			$	65,474

          Capital Crossing Preferred acquires primarily performing commercial real estate and multifamily residential mortgage loans. During the three month periods ended March 31, 2008 and March 31, 2007, Capital Crossing Preferred did not acquire any loans from Capital Crossing or Lehman Bank.

          Capital Crossing Preferred intends that each loan acquired from Lehman Bank in the future will be a whole loan, and will be originated or acquired by Lehman Bank in the ordinary course of its business. Capital Crossing Preferred also intends that all loans held by it will be serviced pursuant to its master service agreement with Lehman Bank.

          Non-performing loans, net of discount, totaled $492,000 for March 31, 2008. There were no non-performing loans at December 31, 2007. 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 and collection of principal and interest is probable and estimable.

           Discounts on Acquired Loans. For information relating to Capital Crossing Preferred’s accounting policies related to discounts on acquired loans, see Application of Critical Accounting Policies and Estimates — Discounts on Acquired Loans.

          The following table sets forth certain information relating to the activity in the nonaccretable discount for the periods indicated:

		Three Months Ended
		March 31,
		2008				2007
		(in thousands)
Balance at beginning of period		$	155			$	215
Amounts collected under the cost recovery method			—				(2	)
Balance at end of period		$	155			$	213

           Allowance for Loan Losses. Capital Crossing Preferred’s allowance for loan losses at March 31, 2008 was $1.1 million. The determination of this allowance requires the use of estimates and assumptions regarding the risks inherent in individual loans and the loan portfolio in its entirety. In addition, regulatory agencies periodically review the adequacy of the allowance for loan losses and may require Capital Crossing Preferred to make additions to its allowance for loan losses. While management believes its estimates and assumptions are reasonable, there can be no assurance that they will be proven to be correct in the future. The actual amount of future provisions that may be required cannot be determined, and such provisions may exceed the amounts of past provisions. Management believes that the allowance for loan losses is adequate to absorb the known and inherent risks in Capital Crossing Preferred’s loan portfolio at each date based on the facts known to management as of such date. Management continues to monitor and modify the allowances for general and specific loan losses as economic conditions dictate.

          The following table sets forth certain information relating to the activity in the allowance for loan losses for the periods indicated:

		Three Months Ended
		March 31,
		2008				2007
		(in thousands)
Balance at beginning of period		$	1,180			$	1,519
Reduction in allowance for loan losses			(115	)			(104	)
Balance at end of period		$	1,065			$	1,415

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 or geographic region. Capital Crossing Preferred’s balance sheet exposure to geographic concentrations directly affects the credit risk of the loans within its loan portfolio.

          At March 31, 2008, 60.2% and 6.9% of Capital Crossing Preferred’s net real estate loan portfolio consisted of loans in California and New England, respectively. At December 31, 2007, 59.0% and 6.8% 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. 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 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 Lehman Bank 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 D preferred shares without the consent of holders of at least two-thirds of the Series D preferred shares, each voting as a separate class, outstanding at that time. Additional shares of preferred stock ranking on a parity with the Series D preferred shares may not be issued without the approval of a majority of Capital Crossing Preferred’s independent directors.

Impact of Inflation and Changing Prices

          Capital Crossing Preferred’s asset and liability structure is substantially different from that of an industrial company in that virtually all assets of Capital Crossing Preferred are monetary in nature. Management believes the impact of inflation on financial results depends upon Capital Crossing Preferred’s ability to react to changes in interest rates and by such reaction, reduce the inflationary impact on performance. Interest rates do not necessarily move in the same direction, or at the same magnitude, as the prices of other goods and services.

          Various information shown elsewhere in this quarterly 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 3, Quantitative and Qualitative Disclosures About Market Risk, of this quarterly report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

          Market risk is the risk of loss from adverse changes in market prices and interest rates. It is the objective of Capital Crossing Preferred to attempt to control risks associated with interest rate movements. Capital Crossing Preferred’s market risk arises primarily from interest rate risk inherent in holding loans. To that end, management actively monitors and manages the interest rate risk exposure of Capital Crossing Preferred.

          Capital Crossing Preferred’s management reviews, among other things, the sensitivity of Capital Crossing Preferred’s assets to interest rate changes, the book and market values of assets, purchase and sale activity, and anticipated loan pay-offs. Lehman Bank’s senior management also approves and establishes pricing and funding decisions with respect to Capital Crossing Preferred’s overall asset and liability composition.

          Capital Crossing Preferred’s methods for evaluating interest rate risk include an analysis of its interest-earning assets maturing or repricing within a given time period. Since Capital Crossing Preferred has no interest-bearing liabilities, a period of rising interest rates

would tend to result in an increase in net interest income. A period of falling interest rates would tend to adversely affect net interest income.

          The following table sets forth Capital Crossing Preferred’s interest-rate-sensitive assets categorized by repricing dates and weighted average yields at March 31, 2008. For fixed rate instruments, the repricing date is the maturity date. For adjustable-rate instruments, the repricing date is deemed to be the earliest possible interest rate adjustment date. Assets that are subject to immediate repricing are placed in the overnight column.

						Within				Over One				Over Two				Over Three				Over Four				Over
						One				to Two				to Three				to Four				to Five				Five
		Overnight				Year				Years				Years				Years				Years				Years				Total
														(dollars in thousands)
Interest-bearing deposits		$	53,495			$	—			$	—			$	—			$	—			$	—			$	—			$	53,495
			1.75	%
Fixed-rate loans (1)			—				15,181				9,832				7,439				5,772				3,548				6,270				48,042
							7.72	%			7.57	%			7.45	%			7.54	%			6.99	%			6.77	%
Adjustable-rate loans (1)			1,033				11,763				1,734				504				386				259				—				15,679
			8.89	%			6.92	%			6.44	%			7.06	%			7.02	%			6.97	%
Total rate-sensitive assets		$	54,528			$	26,944			$	11,566			$	7,943			$	6,158			$	3,807			$	6,270			$	117,216

          Based on Capital Crossing Preferred’s experience, management applies the assumption that, on average, approximately 16% of the outstanding fixed and adjustable rate loans will prepay annually.

Item 4. Controls and Procedures

          Capital Crossing Preferred’s management, with the participation of its President and Chief Financial Officer, evaluated the effectiveness of Capital Crossing Preferred’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2008. Based on this evaluation, Capital Crossing Preferred’s President and Chief Financial Officer concluded that, as of March 31, 2008, 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 Chief Financial Officer by others within the entity, particularly during the period in which this report was being prepared, and (2) effective, in that they provide reasonable assurance that information required to be disclosed by Capital Crossing Preferred in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

          No change to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1A. Risk Factors

          There were no material changes in Capital Crossing Preferred’s risk factors compared to those previously disclosed in its Form 10-K for the year ended December 31, 2007.

Item 4. Submission of Matters to a Vote of Security Holders

          None.

Item 5. Other Information

Changes in Officers and Directors

          Following the resignations of Richard Wayne as a director and President and Nicholas Lazares as a director of Capital Crossing Preferred, which resignations were announced on December 14, 2007 and effective on December 21, 2007, the Board of Directors of Capital Crossing Preferred on March 18, 2008, appointed Nancy E. Coyle and Daniel Wallace as replacement directors and elected Nancy E. Coyle as replacement President and Jocelyn K. DeMaria as replacement Controller. Prior to her appointment as President, Ms. Coyle had been the Controller of Capital Crossing Preferred.

Item 6. Exhibits

	31.1		Certification pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) of the President.
	31.2		Certification pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) of the Chief Financial Officer.
	32		Certification pursuant to 18 U.S.C. Section 1350 of the President and Chief Financial Officer.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, Capital Crossing Preferred Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CAPITAL CROSSING PREFERRED CORPORATION

EXHIBIT INDEX

				Page
Exhibit		Item		Number
31.1		Certification pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) of the President.			18
31.2		Certification pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) of the Chief Financial Officer.			19
32		Certification pursuant to 18 U.S.C. Section 1350 of the President and Chief Financial Officer.			20

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