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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-25193
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CAPITAL CROSSING PREFERRED CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3439366
(State of incorporation) (IRS Employer Identification No.)
101 SUMMER STREET 02110
BOSTON, MASSACHUSETTS (Zip code)
(Address of principal executive
offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 880-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
9 3/4% NON-CUMULATIVE EXCHANGEABLE PREFERRED STOCK, SERIES A
(Title of Class)
ATLANTIC PREFERRED CAPITAL CORPORATION
(Former name, former address and former fiscal year, if changed since last
report)
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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 /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The number of shares outstanding of the registrant's sole class of common
stock was 100 shares, $.01 par value per share, as of February 15, 2001. No
common stock was held by non-affiliates of the registrant.
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PART I
ITEM 1. BUSINESS
This Form 10-K contains certain statements that may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Capital Crossing Preferred's actual results could differ materially
from those set forth in the forward-looking statements. Factors that might cause
such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" on page 27 of this Form 10-K.
GENERAL
Capital Crossing Preferred Corporation ("Capital Crossing Preferred"),
formerly Atlantic Preferred Capital Corporation, is a Massachusetts corporation
incorporated on March 20, 1998. Capital Crossing Bank ("Capital Crossing")
organized Capital Crossing Preferred to acquire and hold real estate mortgage
assets in a cost-effective manner and to provide Capital Crossing with an
additional means of raising capital for federal and state regulatory purposes.
Capital Crossing owns all of the outstanding common stock of Capital Crossing
Preferred. 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 stockholders 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.
On February 1, 1999, Capital Crossing Preferred closed its public offering
of 1,260,000 shares of its 9 3/4% 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.
During 2000, Capital Crossing contributed loans to Capital Crossing
Preferred in the amount of $80.4 million. The carrying value of these loans
approximated their fair values at the date of contribution.
Capital Crossing Preferred's principal business objective is to acquire and
hold mortgage assets that will generate net income for distribution to
stockholders. All of the mortgage assets in Capital Crossing Preferred's loan
portfolio at December 31, 2000 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, 2000, Capital Crossing Preferred held
loans acquired from Capital Crossing with gross outstanding principal balances
of $178.5 million. Capital Crossing Preferred's loan portfolio at December 31,
2000 consisted primarily of mortgage assets secured by commercial and
multi-family properties.
Capital Crossing administers the day-to-day activities of Capital Crossing
Preferred in its roles as servicer under the master service agreement and as
advisor under the advisory agreement. Capital Crossing Preferred pays Capital
Crossing an annual servicing fee equal to 0.20% and an annual advisory fee equal
to 0.05%, respectively, of the gross average outstanding principal balances of
loans in the loan portfolio. Capital Crossing and its affiliates have interests
that are not identical to those of
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Capital Crossing Preferred. Consequently, conflicts of interest will arise with
respect to transactions, including, without limitation:
(1) future acquisitions of mortgage assets from Capital Crossing or its
affiliates;
(2) servicing of mortgage assets, particularly with respect to mortgage
assets that become classified or placed on non-accrual status;
(3) the modification of the advisory agreement and the master service
agreement; and
(4) the terms of our guarantee of obligations of Capital Crossing.
It is the intention of Capital Crossing Preferred that any agreements and
transactions between Capital Crossing Preferred and Capital Crossing are fair to
all parties and consistent with market terms, including the price paid and
received for mortgage assets on their acquisition or disposition by Capital
Crossing Preferred or in connection with the servicing of such mortgage assets.
However, there can be no assurance that such agreements or transactions will be
on terms as favorable to Capital Crossing Preferred as those that could have
been obtained from unaffiliated third parties.
CAPITAL CROSSING BANK
Capital Crossing was organized as a Massachusetts-chartered trust company in
December 1987, and commenced operations in February 1988. Capital Crossing
operates as a commercial bank primarily focused on purchasing and originating
commercial loans and leases that finance the business activities of individuals
and small companies. To the extent authorized by law, Capital Crossing's
deposits are insured by the Bank Insurance Fund of the Federal Deposit Insurance
Corporation (the "FDIC"). Capital Crossing conducts business from its executive
and main office in downtown Boston, Massachusetts, and a branch in Chestnut
Hill, Massachusetts, through its website at www.capitalcrossing.com and through
its leasing subsidiary in Moberly, Missouri. At December 31, 2000, Capital
Crossing had total assets of $771.5 million, deposits of $673.9 million and
stockholders' equity of $68.4 million. At December 31, 2000, under the
regulatory capital ratios developed and monitored by the federal bank regulatory
agencies and applicable to banks, Capital Crossing's capital was sufficient to
enable it to be qualified as "well capitalized."
Capital Crossing focuses on selected business lines that management has
identified as having the potential to provide higher levels of profitability
consistent with prudent banking practices. These business lines include:
- the acquisition of loans secured primarily by commercial real estate,
multi-family residential real estate and one-to-four family residential
real estate, generally at a discount from their outstanding principal
balances;
- to offer cash management and commercial lending services to its business
customers; and
- providing lease financing to businesses and individuals through its
wholly-owned subsidiary, Dolphin Capital Corp.
Capital Crossing funds its activities with deposits consisting primarily of
certificates of deposit and money market accounts. Capital Crossing also offers
retail deposit services, including checking and savings accounts, and related
services to businesses and individuals through the nationwide electronic banking
networks.
As a majority-owned subsidiary of Capital Crossing, the assets and
liabilities and results of operations of Capital Crossing Preferred are
consolidated with those of Capital Crossing for Capital Crossing's financial
reporting and regulatory capital purposes. As such, loans acquired by Capital
Crossing Preferred from Capital Crossing will nevertheless be treated as assets
of Capital Crossing for purposes of compliance by Capital Crossing with the
FDIC's regulatory capital requirements and in
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Capital Crossing's consolidated financial statements. Interest income on those
loans will be treated as interest income of Capital Crossing in Capital
Crossing's consolidated financial statements.
ACQUISITION OF LOAN PORTFOLIO
Pursuant to the terms of the master mortgage loan purchase agreement,
Capital Crossing delivers or causes to be delivered to Capital Crossing
Preferred the mortgage note with respect to each mortgage asset (together with
all amendments and modifications thereto) endorsed in blank, the original or
certified copy of the mortgage (together with all amendments and modifications
thereto) with evidence of recording indicated thereon, if available, and an
original or certified copy of an assignment of the mortgage in recordable form.
Such documents are initially held by Capital Crossing, acting as custodian for
Capital Crossing Preferred pursuant to the terms of the master service
agreement.
Under the master mortgage loan purchase agreement, Capital Crossing makes
certain representations and warranties with respect to the mortgage assets for
the benefit of Capital Crossing Preferred regarding information provided with
respect to mortgage assets, liens, validity of the mortgage documents, and
compliance with laws. Capital Crossing is obligated to repurchase any mortgage
asset sold by it to Capital Crossing Preferred as to which there is a material
breach of any such representation or warranty, unless Capital Crossing Preferred
permits Capital Crossing to substitute other qualified mortgage assets for such
mortgage asset. Capital Crossing also indemnifies Capital Crossing Preferred for
damages or costs resulting from any such breach. The repurchase price for any
such mortgage asset is such asset's net carrying value plus accrued and unpaid
interest on the date of repurchase.
From time to time, mortgage assets may be returned to Capital Crossing in
the form of dividends or returns of capital. This will generally be done to
allow Capital Crossing to increase its borrowing capacity with the Federal Home
Loan Bank of Boston ("FHLBB"). Specifically, the FHLBB will advance Capital
Crossing a higher percentage of the outstanding balances of loans if the loans
are owned directly by Capital Crossing than it would if the loans were owned by
Capital Crossing Preferred. Capital Crossing will consider the amounts of such
returns when assessing the adequacy of the size and composition of Capital
Crossing Preferred's loan portfolio and may, from time to time, contribute
additional mortgage assets to Capital Crossing Preferred. Capital Crossing will
seek to ensure that the mortgage assets it contributes to Capital Crossing
Preferred are generally of similar quality and characteristics as those that had
been returned to it.
MANAGEMENT POLICIES AND PROGRAMS
In administering Capital Crossing Preferred's mortgage assets, Capital
Crossing has a high degree of autonomy. Capital Crossing Preferred's Board of
Directors, however, has adopted certain policies to guide the acquisition and
disposition of assets, use of capital and leverage, credit risk management and
certain other activities. These policies, which are discussed below, may be
amended or revised from time to time at the discretion of Capital Crossing
Preferred's Board of Directors.
ASSET ACQUISITION AND DISPOSITION POLICIES. Capital Crossing Preferred
anticipates that it will, from time to time, purchase additional mortgage
assets. Capital Crossing Preferred intends to acquire all or substantially all
of such mortgage assets from Capital Crossing on terms that are comparable to
those that could be obtained by Capital Crossing Preferred if such mortgage
assets were purchased from unrelated third parties. Capital Crossing Preferred
and Capital Crossing do not currently have specific policies with respect to the
purchase by Capital Crossing Preferred from Capital Crossing of particular loans
or pools of loans, other than that such assets must be eligible to be held by a
REIT. Capital Crossing Preferred intends generally to acquire only performing
loans from Capital Crossing. Capital Crossing Preferred may also from time to
time acquire mortgage assets from unrelated third parties. To date, Capital
Crossing Preferred has not adopted any arrangements or procedures by which
4
it would purchase mortgage assets from unrelated third parties, and it has not
entered into any agreements with any third parties with respect to the purchase
of mortgage assets. Capital Crossing Preferred anticipates that it would
purchase mortgage assets from unrelated third parties only if neither Capital
Crossing nor any of its affiliates had an amount or type of mortgage asset
sufficient to meet the requirements of Capital Crossing Preferred. Capital
Crossing Preferred currently anticipates that the mortgage assets that it
purchases will primarily include commercial and multi-family mortgage loans,
although if Capital Crossing develops an expertise in additional mortgage asset
products, Capital Crossing Preferred may purchase such additional types of
mortgage assets. In addition, Capital Crossing Preferred may also from time to
time acquire limited amounts of other assets eligible to be held by REITs.
In order to preserve its status as a REIT under the Internal Revenue Code,
substantially all of the assets of Capital Crossing Preferred must consist of
mortgage loans and other qualified assets of the type set forth in
Section 856(c)(6)(B) of the Internal Revenue Code. Such other qualifying assets
include cash, cash equivalents and securities, including shares or interests in
other REITs, although Capital Crossing Preferred does not currently intend to
invest in shares or interests in other REITs.
CAPITAL AND LEVERAGE POLICIES. 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 not less than 90% (95% for
taxable years beginning before January 1, 2001) of its REIT taxable income and
taking into account taxes that would be imposed on undistributed taxable
income), or a combination of these methods.
Capital Crossing Preferred has no debt outstanding and it 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 approval of its Series A stockholders to no more than 100% of the
total stockholders' equity of Capital Crossing Preferred. Any such debt incurred
may include intercompany advances made by Capital Crossing to Capital Crossing
Preferred. Capital Crossing Preferred has guaranteed certain obligations of
Capital Crossing and has agreed to pledge certain of its assets in connection
with advances Capital Crossing may receive from time to time from the FHLBB. The
advances from the FHLBB will be used by Capital Crossing primarily for the
purchase of mortgage assets and assist in managing the Bank's interest rate
exposure. These assets generally would be available for contribution to or
purchase by Capital Crossing Preferred. The guarantee and pledge were approved
by the independent directors of Capital Crossing Preferred, subject to certain
requirements and limitations, including the requirement that Capital Crossing
pay Capital Crossing Preferred a guarantee fee. The amount of Capital Crossing's
borrowings from the FHLBB were $139.0 million at March 8, 2001.
Capital Crossing Preferred may also issue additional series of preferred
stock. However, it may not issue any new class or series of capital stock
ranking senior to the Series A preferred shares without the consent of the
holders of at least two-thirds of the outstanding Series A preferred shares and
may not issue additional shares of preferred stock ranking on parity with the
Series A preferred shares without the approval of a majority of the independent
directors. Prior to any future issuance of additional shares of preferred stock,
Capital Crossing Preferred will take into consideration Capital Crossing's
regulatory capital requirements and the cost of raising and maintaining that
capital at the time.
CONFLICTS OF INTEREST POLICIES. Because of the nature of Capital Crossing
Preferred's relationship with Capital Crossing and its affiliates, conflicts of
interest have arisen and may arise with respect to certain transactions,
including without limitation, Capital Crossing Preferred's acquisition of
mortgage assets from a return of mortgage assets to Capital Crossing, or
disposition of mortgage assets or foreclosed property to, Capital Crossing or
its affiliates and the modification of the master service agreement. It is
Capital Crossing Preferred's policy that the terms of any financial dealings
with Capital
5
Crossing and its affiliates will be consistent with those available from third
parties in the mortgage lending industry. In addition, Capital Crossing
Preferred has elected two independent directors and has established an audit
committee of the Board of Directors which is comprised of the independent
directors. Among other functions, the audit committee will review transactions
between Capital Crossing Preferred and Capital Crossing and its affiliates.
Under the terms of the advisory agreement, certain activities of Capital
Crossing, as advisor for Capital Crossing Preferred, are subject to the approval
of the Board of Directors of Capital Crossing Preferred, including the approval
of a majority of the independent directors.
Conflicts of interest between Capital Crossing Preferred and Capital
Crossing and its affiliates may also arise in connection with decisions bearing
upon the credit arrangements that Capital Crossing or one of its affiliates may
have with a borrower. Conflicts could also arise in connection with actions
taken by Capital Crossing as a controlling person of Capital Crossing Preferred.
It is the intention of Capital Crossing Preferred and Capital Crossing that any
agreements and transactions between Capital Crossing Preferred and Capital
Crossing or its affiliates, including, without limitation, the master mortgage
loan purchase agreement, are fair to all parties and are consistent with market
terms for such types of transactions. The master service agreement provides that
foreclosures and dispositions of the mortgage assets are to be performed with a
view toward maximizing the recovery by Capital Crossing Preferred as owner of
the mortgage assets, and Capital Crossing shall service the mortgage assets
solely with a view toward the interests of Capital Crossing Preferred, and
without regard to the interests of Capital Crossing or any of its affiliates.
However, we cannot assure you that any such agreement or transaction will be on
terms as favorable to Capital Crossing Preferred as would have been obtained
from unaffiliated third parties.
There are no provisions in Capital Crossing Preferred's Restated Articles of
Organization limiting any officer, director, security holder or affiliate of
Capital Crossing Preferred from having any direct or indirect pecuniary interest
in any mortgage asset to be acquired or disposed of by Capital Crossing
Preferred or in any transaction in which Capital Crossing Preferred has an
interest or from engaging in acquiring and holding mortgage assets. As described
herein, it is expected that Capital Crossing and its affiliates will have direct
interests in transactions with Capital Crossing Preferred (including, without
limitation, the sale of mortgage assets to Capital Crossing Preferred). It is
not currently anticipated, however, that any of the officers or directors of
Capital Crossing Preferred will have any interests in such mortgage assets.
OTHER POLICIES. Capital Crossing Preferred intends to operate in a manner
that will not subject it to regulation under the Investment Company Act of 1940,
as amended. Capital Crossing Preferred does not intend to:
(1) invest in the securities of other issuers for the purpose of exercising
control over such issuers;
(2) underwrite securities of other issuers;
(3) actively trade in loans or other investments;
(4) offer securities in exchange for property; or
(5) make loans to third parties, including without limitation officers,
directors or other affiliates of Capital Crossing Preferred.
Capital Crossing Preferred may, under certain circumstances, purchase the
Series A preferred shares in the open market or otherwise.
6
Capital Crossing Preferred currently intends to make investments and operate
its business at all times in such a manner as to be consistent with the
requirements of the Internal Revenue Code to qualify as a REIT. However, future
economic, market, legal, tax or other considerations may cause the Board of
Directors to determine that it is in the best interests of Capital Crossing
Preferred and its stockholders to revoke its REIT status.
Under the advisory agreement, Capital Crossing intends to monitor and review
Capital Crossing Preferred's compliance with the requirements of the Internal
Revenue Code regarding Capital Crossing Preferred's qualification as a REIT on a
quarterly basis and to have an independent public accounting firm, selected by
the Board of Directors of Capital Crossing Preferred, review the results of
Capital Crossing's analysis.
DESCRIPTION OF LOAN PORTFOLIO
To date, all of Capital Crossing Preferred's loans have been acquired from
Capital Crossing. At December 31, 2000, 1999 and 1998, Capital Crossing
Preferred's loan portfolio was comprised of 663, 394 and 416 loans,
respectively. Capital Crossing Preferred's loan portfolio may or may not have
the characteristics described below at future dates.
The following table sets forth information regarding the composition of the
loan portfolio at the dates indicated:
DECEMBER 31,
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2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Loan portfolio:
Mortgage loans on real estate:
Commercial real estate.................................... $ 98,842 $ 98,748 $ 99,695
Multi-family residential.................................. 72,520 42,677 49,854
One-to-four family residential............................ 6,268 8,415 12,339
Land...................................................... 587 820 1,458
-------- -------- --------
178,217 150,660 163,346
Secured commercial.......................................... 209 232 251
Other....................................................... 29 29 250
-------- -------- --------
Total loans, gross.................................... 178,455 150,921 163,847
Less:
Non-amortizing discount(1)................................ (6,704) (7,318) (10,737)
Amortizing discount....................................... (5,262) (5,544) (6,537)
Net deferred loan fees.................................... (82) (41) (76)
Allowance for loan losses................................. (3,795) (2,855) (1,337)
-------- -------- --------
Loans, net............................................ $162,612 $135,163 $145,160
======== ======== ========
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(1) Non-amortizing discount is an allocation of the total discount on purchased
loans accounted for on the cost recovery method until it is determined that
the amount and timing of collections are reasonably estimable and collection
is probable.
7
The following table sets forth certain information regarding the geographic
location of properties securing the mortgage loans in the loan portfolio at
December 31, 2000:
PERCENTAGE OF TOTAL
LOCATION NUMBER OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------- --------------- ----------------- -------------------
(IN THOUSANDS)
California.................................... 358 $ 74,479 41.79%
Massachusetts................................. 95 26,008 14.59
Connecticut................................... 67 15,350 8.61
New York...................................... 16 7,784 4.37
New Hampshire................................. 55 7,658 4.30
New Jersey.................................... 10 7,066 3.96
Washington, D.C............................... 2 5,265 2.95
Rhode Island.................................. 13 5,008 2.81
Texas......................................... 4 4,966 2.79
Arizona....................................... 4 4,876 2.74
All others.................................... 34 19,757 11.09
--- -------- ------
658 $178,217 100.00%
=== ======== ======
The following tables set forth information regarding maturity, contractual
interest rate and principal balance of all loans in the loan portfolio at
December 31, 2000:
PERCENTAGE OF TOTAL
PERIOD UNTIL MATURITY NUMBER OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- --------------- ----------------- -------------------
(IN THOUSANDS)
Six months or less............................ 59 $ 19,735 11.06%
Greater than six months to one year........... 18 16,943 9.49
Greater than one year to three years.......... 115 32,578 18.26
Greater than three years to five years........ 73 20,633 11.56
Greater than five years to ten years.......... 195 29,424 16.49
Greater than ten years........................ 203 59,142 33.14
--- -------- ------
663 $178,455 100.00%
=== ======== ======
PERCENTAGE OF TOTAL
CONTRACTUAL INTEREST RATE AT DECEMBER 31, 2000 NUMBER OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------------------- --------------- ----------------- -------------------
(IN THOUSANDS)
Less than 7.00%............................... 13 $ 1,053 0.59%
7.00 to 7.49.................................. 14 2,449 1.37
7.50 to 7.99.................................. 67 26,440 14.82
8.00 to 8.49.................................. 123 32,347 18.13
8.50 to 8.99.................................. 59 20,542 11.51
9.00 to 9.49.................................. 82 24,599 13.78
9.50 to 9.99.................................. 108 14,762 8.27
10.00 to 10.49................................ 45 8,723 4.89
10.50 to 10.99................................ 49 22,848 12.80
11.00 to 11.49................................ 34 9,326 5.23
11.50 to 11.99................................ 44 8,380 4.70
12.00 to 12.49................................ 14 5,433 3.04
12.50% and above.............................. 11 1,553 0.87
--- -------- ------
663 $178,455 100.00%
=== ======== ======
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PERCENTAGE OF TOTAL
PRINCIPAL BALANCE NUMBER OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- --------------- ----------------- -------------------
(IN THOUSANDS)
Less than $50,000............................. 187 $ 5,040 2.82%
Greater than $50,000 to $100,000.............. 140 10,190 5.71
Greater than $100,000 to $250,000............. 169 26,507 14.86
Greater than $250,000 to $500,000............. 81 27,624 15.48
Greater than $500,000 to $1,000,000........... 45 32,359 18.13
Greater than $1,000,000 to $2,000,000......... 26 34,637 19.41
Greater than $2,000,000 to $3,000,000......... 11 25,822 14.47
Greater than $3,000,000 to $4,000,000......... 2 6,890 3.86
Greater than $4,000,000 to $5,000,000......... 2 9,386 5.26
--- -------- ------
663 $178,455 100.00%
=== ======== ======
A substantial portion of the loan portfolio consists of loans which were
purchased by Capital Crossing from third parties and which management of Capital
Crossing considers to be undervalued due to market or economic conditions or as
a result of special circumstances which might have required a seller to dispose
of such assets. These loans generally are secured by commercial real estate,
multi-family residential real estate, one-to-four family residential real estate
or land located throughout the United States. These loans generally were
purchased at discounts from their then outstanding principal balances and have
been purchased from private sector sellers in the financial services industry or
government agencies, such as banks, including investment banking institutions,
or from government agencies such as the FDIC. Capital Crossing does not utilize
any specific threshold underwriting criteria in evaluating individual loans or
pools of loans for purchase, but rather evaluates each individual loan or pool
of loans, as applicable, on a case by case basis in making a purchase decision
as described in more detail below.
In order to determine the amount that Capital Crossing will bid to acquire
loans, Capital Crossing considers, among other factors:
(1) the yield expected to be earned;
(2) the geographic location of the loans;
(3) servicing restrictions, if any;
(4) the type and value of the collateral securing the loans;
(5) the length of time during which the loans have performed in accordance
with their repayment terms;
(6) the recourse nature of the debt;
(7) the age and performance of the loans; and
(8) the resources of the borrowers or guarantors, if any.
In addition to the factors listed above, Capital Crossing also considers the
amount it may realize through collection efforts or foreclosure and sale of the
collateral, net of expenses, and the length of time and costs required to
complete the collection or foreclosure process in the event a loan becomes
non-performing or is non-performing at the purchase date. Under Capital
Crossing's credit policy for purchased loans, all bids are subject to the
approval of Chairman or President and any individual loan whose allocated
purchase price exceeds $5 million is the subject to approval by the Loan and
Investment Committee which consists of Capital Crossing's Chairman, President,
two independent directors and certain officers of Capital Crossing.
9
Prior to acquiring any loan or portfolio of loans, Capital Crossing's loan
acquisition group conducts a comprehensive review and evaluation of each loan to
be acquired in accordance with its credit policy for purchased loans. This
review includes an analysis of information provided by the seller, including
credit and collateral files, a review and valuation of the underlying collateral
and a review, where applicable, of the adequacy of the income produced by the
property to service the loan. This review is conducted by Capital Crossing's
in-house loan acquisition group, which includes credit analysts, real estate
appraisers, an environmental department and legal counsel.
The current value of the collateral is determined by Capital Crossing's
in-house appraisal group considering, among other factors, the type of property,
its condition and location and its highest and best use. In many cases, real
estate brokers and/or appraisers with specific knowledge of the local real
estate market are also consulted. For larger loans, members of Capital
Crossing's loan acquisition group typically visit the collateral, conduct a site
inspection and conduct an internal rental analysis of competing commercial
properties. Capital Crossing also analyzes the capacity of the collateral to
service the loan. Capital Crossing requires that any loans in excess of $250,000
meet minimum debt service coverage ratio requirements, consisting of the ratio
of net operating income of the borrower to total principal and interest
payments. New tax and title searches may also be obtained. Capital Crossing's
in-house environmental specialists review available information with respect to
each property to assess potential environmental risk.
Upon purchase of a loan pool, each loan in the pool is assigned to a loan
officer. In managing purchased loans, the loan officers seek, among other
things, to establish good working relationships with the borrowers. In the event
that a purchased loan becomes delinquent, or if it is delinquent at the time of
purchase, Capital Crossing promptly pursues repayment of the loan. In the event
that a delinquent purchased loan becomes non-performing, Capital Crossing may
pursue a number of alternatives with the goal of maximizing its overall return
on each loan in a timely manner, including restructuring the loans to levels
that are supported by existing collateral and debt service capabilities. During
the restructuring period, Capital Crossing Preferred does not recognize interest
income on such loans unless regular payments are being made. In instances where
the loan is not restructured, Capital Crossing generally seeks resolution
through either foreclosure and sale of the collateral or, under limited
circumstances, negotiating a discounted pay-off with borrowers, which may be
accomplished through refinancing by the borrower with another lender.
Although Capital Crossing purchases primarily performing loans, from
time-to-time it may purchase delinquent or non-performing loans as a part of a
pool of purchased loans. Capital Crossing Preferred determines the contractual
delinquency of purchased loans prospectively from Capital Crossing's purchase
date rather than from the origination date. For example, if Capital Crossing
acquires a loan that is past due at the time of acquisition, that loan would not
be considered delinquent until it was 90 days past due from Capital Crossing's
purchase date. If Capital Crossing acquires a loan which is contractually
delinquent, management evaluates the collectibility of principal and interest
and interest would not be accrued when the collectibility of principal and
interest is not probable or estimable. Interest income on purchased
non-performing loans 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.
As servicing agent for Capital Crossing Preferred's loan portfolio, Capital
Crossing will continue to monitor Capital Crossing Preferred's loans through its
review procedures and updated appraisals. Additionally, in order to monitor the
adequacy of cash flows on income-producing properties, Capital Crossing
generally obtains financial statements and other information from the borrower
and the guarantor, including, but not limited to, information relating to rental
rates and income, maintenance costs and an update of real estate property tax
payments.
ACCOUNTING FOR PURCHASED LOAN PORTFOLIO. Capital Crossing Preferred
accounts for purchased loans under the guidance of AICPA Practice Bulletin 6,
AMORTIZATION OF DISCOUNTS ON CERTAIN ACQUIRED
10
LOANS. Prior to January 1, 1999, this guidance was applied using unique and
exclusive static pools. Static pools were established based on Capital
Crossing's original acquisition timing. Once a static pool was established, the
loans remained in the pool, unless restructured on terms consistent with Capital
Crossing Preferred's loan policy and documentation standards and transferred to
Capital Crossing Preferred's originated loan portfolio.
Prior to January 1, 1999, at the time of acquisition of purchased pools of
loans, the excess of the contractual balances over the amount of reasonably
estimable and probable discounted future cash collections for the pool was
recorded as non-amortizing discount. The remaining discount, which represented
the excess of the amount of reasonably estimable and probable discounted future
cash collections over the acquisition amount, referred to as the amortizing
discount, was accreted into interest income using the interest method and was
not accreted on non-accrual loans. The non-amortizing discount was not accreted
into income until it was determined that the amount and timing of the related
cash flows were reasonably estimable and collection was probable. If cash flows
could not be reasonably estimated for any loan within a pool, and collection was
not probable, the cost recovery method of accounting was used. Under the cost
recovery method, any amounts received were applied against the recorded amount
of the loan.
Subsequent to acquisition, if cash flow projections improved and it was
determined that the amount and timing of the cash flows related to the
non-amortizing discount were reasonably estimable and collection was probable,
the corresponding decrease in the non-amortizing discount was transferred to the
amortizing portion and was accreted into interest income over the estimated
remaining lives of the loans on the interest method. Under our loan rating
system, each loan was evaluated for impairment and, where necessary, a portion
of the respective loan pool's non-amortizing discount was allocated to the loan.
If no non-amortizing discount was available, an allowance was established
through a provision for loan losses. In addition, if this evaluation revealed
that cash flows could not be estimated or the collection of the loan was not
otherwise probable, the loan was accounted for on the cost recovery method.
Effective January 1, 1999, Capital Crossing Preferred changed, on a
prospective basis, its method of accounting for purchased loan discounts and the
related recognition of discount loan income and provisions for loan losses.
Under this accounting change, discount loan income and loan loss provisions are
accounted for on an individual loan basis, rather than as previously recognized
in the aggregate on a static purchased pool basis and was accounted for as a
"change in estimate" in accordance with Accounting Principles Board Opinion
No. 20. Accounting for loans on an individual basis rather than a pool basis
allows Capital Crossing Preferred to selectively acquire qualified individual
loans from Capital Crossing, rather than acquiring entire pools which may
contain individual loans that do not meet the criteria for favorable tax
treatment allowed for REITs. There was no impact on stockholders' equity as a
result of the accounting change. However, the timing of subsequent earnings will
be affected by changes in the amount of estimated collections on individual
loans rather than by changes in the aggregate amount of estimated collections on
purchased loan pools. Over the lives of the respective loans, management does
not anticipate that there will be any material differences in the reported
amounts of related discount loan income, loan loss provisions and loan
charge-offs and recoveries, net.
ALLOWANCE FOR LOAN LOSSES. Capital Crossing Preferred maintains an
allowance for loan losses that is increased by provisions charged against
earnings and allocations of discounts on purchased loans and reduced by net loan
charge-offs. Loans are charged-off when they are deemed to be uncollectible, or
partially charged-off when a portion of a loan is deemed uncollectible.
Recoveries are generally recorded only when cash payments are received. In
general, the loan loss allowance policy requires the maintenance of allowances
sufficient to satisfy estimated probable losses arising from impaired real
estate or other secured commercial loans and leases.
11
In determining the adequacy of the allowance, management initially considers
the loan loss allowances specifically allocated to individual impaired loans,
and next considers the level of general loan loss allowances deemed appropriate
for the balance of the portfolio based on factors including general portfolio
trends relative to asset and portfolio size, asset categories, potential credit
concentrations, non-accrual loan levels, the level of risks associated with
changes in economic and business conditions and other factors. An additional
allowance is maintained based on a judgmental process whereby management
considers qualitative and quantitative assessments of other factors including
regional credit concentration, industry concentration, results of regulatory
examinations, historical loss ranges, portfolio composition, economic conditions
such as interest rates and energy costs and other changes in the portfolio. The
allowance for loan losses is management's estimate of the probable loan losses
incurred as of the balance sheet date. The allowance is increased by provisions
charged to earnings and by recoveries of amounts previously charged off, and is
reduced by charge-offs on loans.
The following table sets forth certain information relating to the payment
status of Capital Crossing Preferred's loan portfolio at the dates indicated:
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Current..................................................... $178,110 $149,277 $156,459
Over thirty days to eighty-nine days past due............... 125 173 3,163
Ninety days or more past due................................ -- -- 357
-------- -------- --------
Total performing loans...................................... 178,235 149,450 159,979
Non-accrual loans........................................... 220 1,471 3,868
-------- -------- --------
Total loan portfolio........................................ $178,455 $150,921 $163,847
======== ======== ========
NON-AMORTIZING DISCOUNT. At the time of acquisition, the excess of the
contractual loan balances over the amount of reasonably estimable and probable
discounted future cash collections is recorded as non-amortizing discount. The
non-amortizing discount is not transferred to amortizing discount and accreted
into income until it is determined that the amount and timing of the cash flows
related to the non-amortizing discount are reasonably estimable and collection
is probable. Non-amortizing discount is generally reduced and 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.
12
The following table sets forth certain information relating to the activity
in the non-amortizing discount for the periods indicated:
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Balance at beginning of period.............................. $7,318 $10,737 $ --
Additions in connection with loans purchased or
transferred............................................... 1,022 10 12,761
Transfers to amortizing discount............................ (614) (2,048) (1,057)
Transfer to allowance for loan losses (1)................... -- (860) --
Net reductions related to resolutions and restructures...... (734) (521) (967)
Non-amortizing discount relating to loans sold.............. (288) -- --
------ ------- -------
$6,704 $ 7,318 $10,737
====== ======= =======
- ------------------------
(1) Effective January 1, 1999, $860,000 was transferred from non-amortizing
discount to the allowance for loan losses, representing general reserve
allocations. See "Business--Accounting for Purchased Loan Portfolio."
The following table sets forth management's allocation of the allowance for
loan losses by loan category and the percentage of the loans in each category to
total loans in each category with respect to Capital Crossing Preferred's loan
portfolio at the dates indicated:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------------------
ALLOWANCE % OF GROSS ALLOWANCE % OF GROSS ALLOWANCE % OF GROSS
FOR LOAN LOANS FOR LOAN LOANS FOR LOAN LOANS
LOSSES TO TOTAL LOSSES TO TOTAL LOSSES TO TOTAL
--------- ---------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
Loan Categories:
Commercial real estate................ $2,320 55.39% $2,081 65.43% $1,108 60.85%
Multi-family residential.............. 1,372 40.64 665 28.28 76 30.43
One-to-four family residential........ 100 3.51 97 5.58 128 7.53
Land.................................. 1 0.31 2 0.54 25 0.89
Other................................. 2 0.15 10 0.17 -- 0.30
------ ------ ------ ------ ------ ------
Total............................. $3,795 100.00% $2,855 100.00% $1,337 100.00%
====== ====== ====== ====== ====== ======
13
CREDIT RISK MANAGEMENT POLICY
In managing Capital Crossing Preferred's loan portfolio in accordance with
the master service agreement and in purchasing and originating loans which may
ultimately be acquired by Capital Crossing Preferred, Capital Crossing utilizes
certain credit risk management procedures. These procedures are designed to
achieve an acceptable level of quality and to identify the need for management
to take action to address any probable losses or potential defaults in existing
loans. Each application for a loan is subject to a two-tier review by the
applicable loan committee comprised of certain of Capital Crossing's officers
and either Capital Crossing's Chairman or President, or in the case of loans of
$5 million or more, the Loan and Investment Committee of Capital Crossing's
Board of Directors. Each lending officer has primary responsibility to conduct
credit and documentation reviews of the loans for which he or she is
responsible. Capital Crossing's President and Chairman are responsible for the
general supervision of the loan portfolio and adherence by the loan officers to
Capital Crossing's loan policies.
Loan officers evaluate the applicant's financial statements, credit reports,
business reports and plans and other data to determine if the credit and
collateral satisfy Capital Crossing's standards as to historic debt service
coverage, reasonableness of projections, strength of management and sufficiency
of secondary repayment.
Under Capital Crossing's credit risk management policies, management
presents to the Board of Directors of Capital Crossing a monthly report of loan
delinquencies showing all loans which are more than 30 days past due. In
addition, loans are reviewed monthly by management to determine which credits
should be placed on non-performing status. Management and the Board of Directors
also review all loan evaluations made during periodic examinations by the FDIC
and the Commissioner of Banks of the Commonwealth of Massachusetts (the
"Commissioner"). Additionally, Capital Crossing engages an outside firm to
perform an annual review of its loan portfolio.
NON-PERFORMING ASSETS
The performance of Capital Crossing Preferred's loan portfolio is evaluated
regularly by management. Capital Crossing Preferred generally classifies a loan
as non-performing when the collectibility of principal and interest is not
probable or estimable. When management determines the ultimate collection of
principal or interest on a loan is not probable, the loan is transferred to the
"impaired" loan classification.
The accrual of interest on loans and the accretion of discount is
discontinued when 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. This determination is made
on a case-by-case basis. Loans accounted for on the cost recovery method, in
general, consist of non-accrual loans.
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 or origination.
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 at the date of purchase. 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 note. 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
14
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
the existing collateral. General valuation allowances are maintained for all
categories of loans. No additional funds are committed to be advanced in
connection with impaired loans.
When Capital Crossing Preferred classifies problem assets, it may establish
specific allowances for loan losses or specific non-amortizing discount
allocations in amounts deemed prudent by management. When Capital Crossing
Preferred identifies problem loans or a portion thereof, as a loss, it will
charge-off such amounts or set aside specific allowances or non-amortizing
discount equal to the total loss. All of Capital Crossing Preferred's loans are
reviewed monthly to determine which loans are to be placed on non-accrual
status. In addition, Capital Crossing Preferred's determination as to the
classification of its assets and the amount of its valuation allowances is
reviewed by the Commissioner and the FDIC during their examinations of Capital
Crossing, which may result in the establishment of additional general or
specific loss allowances.
The following table sets forth the amount of non-performing assets by
category at the dates indicated:
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
Commercial................................................ $ 221 $1,471 $1,811
Multi-family.............................................. -- -- 2,057
----- ------ ------
221 1,471 3,868
Less:
Amortizing discount (1)................................... (1) (58) --
Non-amortizing discount................................... -- (298) --
----- ------ ------
Non-accrual loans, net................................ 220 1,115 3,868
Other real estate owned..................................... -- 434 --
----- ------ ------
Non-performing assets, net............................ $ 220 $1,549 $3,868
===== ====== ======
Non-accrual loans, net, as a percent of loans, net of
discount and deferred loan income......................... 0.13% 0.81% 2.64%
Non-performing assets, net, as a percent of total assets.... 0.10 0.92 2.47
- ------------------------
(1) Prior to January 1, 1999, amortizing discounts were accounted for on a
static pool basis only. Accordingly, at December 31, 1998, there was no
allocation of amortizing discounts to impaired or non-accrual loans.
SERVICING
The mortgage assets are serviced by Capital Crossing pursuant to the terms
of the master service agreement. Capital Crossing in its role as servicer under
the terms of the master service agreement receives a fee equal to 0.20% per
annum, payable monthly, on the gross average outstanding principal balances of
loans serviced. For the years ended December 31, 2000, 1999 and 1998, Capital
Crossing Preferred incurred $381,000, $328,000 and $238,000, respectively in
servicing fees payable 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
15
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,
at any time during the servicing process, to dispose of any loans which become
classified, placed on non-accrual 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 makes certain representations and
warranties for the benefit of Capital Crossing Preferred with respect to the
mortgage assets, including representations and warranties regarding information
provided with respect to mortgage assets, liens, validity of the mortgage
documents, and compliance with laws.
Capital Crossing makes certain representations and warranties for the
benefit of Capital Crossing Preferred with respect to the mortgage assets,
including representations and warranties regarding information provided with
respect to mortgage assets, liens, validity of the mortgage documents, and
compliance with laws. Capital Crossing is 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. Capital
Crossing also indemnifies Capital Crossing Preferred for damages or costs
resulting from such breach. 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 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.
EMPLOYEES
Capital Crossing Preferred has five officers. Capital Crossing Preferred
does not have any employees because it has retained Capital Crossing to perform
all necessary functions pursuant to the advisory agreement and the master
service agreement. Each officer of Capital Crossing Preferred currently is also
an officer and/or director of Capital Crossing. Capital Crossing Preferred will
maintain corporate records and audited financial statements that are separate
from those of Capital Crossing. None of the officers or directors of Capital
Crossing Preferred will have any direct or indirect pecuniary interest in any
mortgage asset to be acquired or disposed of by Capital Crossing Preferred or in
any transaction in which Capital Crossing Preferred has an interest or will
engage in acquiring and holding mortgage assets.
16
COMPETITION
Capital Crossing Preferred does not anticipate that it will engage in the
business of originating mortgage loans. It does anticipate that it will acquire
mortgage assets in addition to those in the loan portfolio and that
substantially all these mortgage assets will be acquired from Capital Crossing.
Accordingly, Capital Crossing Preferred does not expect to compete with mortgage
conduit programs, investment banking firms, savings and loan associations,
banks, thrift and loan associations, finance companies, mortgage bankers or
insurance companies in acquiring its mortgage assets from Capital Crossing.
Capital Crossing, however, faces significant competition in the purchase and
origination of mortgage loans, which could have an adverse effect on the ability
of Capital Crossing Preferred to acquire mortgage loans. If Capital Crossing
does not successfully compete in the origination and purchase of mortgage loans,
there could be an adverse effect on Capital Crossing Preferred's business,
financial condition and results of operations.
The banking industry in the United States is part of the broader financial
services industry. This industry also includes insurance companies, mutual
funds, consumer finance companies and the securities brokerage industry. In
recent years, intense market demands, technological and regulatory changes and
economic pressures have eroded industry classifications which were once clearly
defined. Existing banks have been forced to diversify their services, increase
returns on deposits and become more cost-effective as a result of competition
with one another and with other financial services companies, including non-bank
competitors. The breakdown in traditional roles has been fueled by the pattern
of rapidly fluctuating interest rates in the United States and by significant
changes in federal and state laws over the past five years. These statutory
changes and corresponding changes in governing regulations have resulted in
increasing homogeneity in the products and financial services offered by
financial institutions. As a result, some non-bank financial institutions, such
as money market funds, have become increasingly strong competitors of banks in
certain respects.
Numerous banks compete with Capital Crossing for deposit accounts, the
origination of commercial loans and the acquisition of undervalued loans. With
respect to deposits, additional significant competition arises from corporate
and governmental debt securities, as well as money market mutual funds. The
factors in competing for deposit accounts include interest rates, the quality
and range of financial services offered, the convenience of office and automated
teller machine locations and office hours and the reliability and convenience of
banking services provided by Capital Crossing through its website. The primary
factors in competing for loans are interest rates, loan origination fees and the
quality and range of lending services offered. The competition for both deposits
and loans has recently increased as a direct result of mergers of banks in New
England. Such mergers have provided the resulting banks with enhanced financial
resources and administrative capacity to compete for assets.
In these circumstances, small financial institutions, such as Capital
Crossing, must offer financial products and services in a way which
differentiates them from the larger financial organization competitors. Capital
Crossing has taken steps to do so by, among other things, working to establish
continuing customer relationships with the borrowers in its purchased loan
portfolios. Management believes that these relationships may be a source of
lending and other business in the future because, in certain instances, the
banking and other financial services needs of these borrowers are not adequately
served by Capital Crossing's larger bank and non-bank financial services
competitors. Management believes that the recent consolidations and mergers by
certain larger banks in New England have enhanced the opportunities available to
Capital Crossing to serve small-to-mid-sized businesses which may not be
well-served by larger banks.
Capital Crossing faces strong competition in its market area both from other
more established banks and from non-bank financial institutions which are
aggressively expanding into markets traditionally served by banks. Most of these
competitors offer products and services similar to those
17
offered by Capital Crossing, have facilities and financial resources greater
than those of Capital Crossing and have other competitive advantages over
Capital Crossing. Among the advantages of these larger institutions is their
ability:
(1) to make larger loans;
(2) to finance extensive advertising campaigns;
(3) to access international money markets;
(4) to conduct retail operations at a significant number of branches; and
(5) generally, to allocate their investment assets to business lines of
highest yield and demand.
For the reasons stated above, among others, there can be no assurance that
Capital Crossing will obtain sufficient deposits or purchase or originate a
sufficient volume of quality loans to operate profitably in this competitive
environment or that Capital Crossing will maintain its competitive position in
the commercial lending market in the future.
In 1994, the U.S. Congress enacted the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "1994 Act") that will allow, under
different implementation guidelines, bank holding companies and banks to acquire
or merge with depository institutions across state lines. In 1996, Massachusetts
enacted interstate banking laws in response to the 1994 Act. The laws permit,
subject to certain deposit and other limitations, interstate acquisitions,
mergers and branching on a reciprocal basis. Competition in Capital Crossing's
primary market area could increase in the event that financial institutions from
other jurisdictions branch into Massachusetts or merge with
Massachusetts-chartered banks.
In 1999, the U.S. Congress enacted the "Gramm-Leach-Bliley Act of 1999" (the
"1999 Act"). Under the 1999 Act, banks are no longer prohibited from associating
with, or having management interlocks with, a business organization engaged
principally in securities activities. The 1999 Act permits bank holding
companies that elect to become financial holding companies to engage in defined
securities and insurance activities as well as to affiliate with securities and
insurance activities. The 1999 Act also permits banks to have financial
subsidiaries that may engage in certain activities not otherwise permissible for
banks.
ITEM 2. PROPERTIES
None.
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 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 period
covered by this report.
18
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
February 15, 2001, there were 100 issued and outstanding shares of common stock,
all of which were held by Capital Crossing.
During 2000, 1999 and 1998, dividends of $21.9 million, $18.8 million and
$12.0 million were paid to the common stockholder.
DIVIDEND POLICY
GENERAL. 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, excluding capital gains.
In order to remain qualified as a REIT, Capital Crossing Preferred must
distribute annually at least 90% (95% for taxable years beginning before
January 1, 2001) of its REIT taxable income, excluding capital gains, to
stockholders. Capital Crossing Preferred anticipates that none of the dividends
on the Series A 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 held by it, and Capital Crossing Preferred anticipates that
a majority of such assets will bear 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 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 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%. In connection with,
and during the period of, Capital Crossing's stock repurchase program, Capital
Crossing has committed to maintain its capital ratios at 1% above each minimum
ratio required to be well capitalized. Thus, Capital Crossing must maintain Tier
1 Leverage ratio of 6.00%; Tier 1 Risk-based capital ratio of 7.00%; and Total
Risk-based capital ratio of 11.00% until the completion or termination of the
program.At December 31, 2000, Capital Crossing's Total Risk-based capital ratio
was 13.52%, Tier 1 Risk-based capital ratio was 12.26% and Tier 1 Leverage ratio
was 10.48%. 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, capital levels of one percent in excess of the regulatory minimums
required to be categorized as well-capitalized.
In addition, an automatic exchange of the Series A preferred shares for
shares of Capital Crossing Bank's Preferred Stock may occur if, among other
things, Capital Crossing Preferred becomes
19
"undercapitalized." This automatic exchange 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 the preferred shares of Capital Crossing. Further, Capital
Crossing's ability to pay dividends on the preferred shares of Capital Crossing
following the automatic exchange also would be subject to various restrictions
under FDIC regulations and a resolution of Capital Crossing's Board of
Directors. In the event that Capital Crossing did pay dividends on the preferred
shares of Capital Crossing, such dividends would be paid out of its capital
surplus.
Under certain circumstances, including a determination that Capital
Crossing's relationship to Capital Crossing Preferred results in an unsafe and
unsound banking practice, federal and state regulatory authorities will have
additional authority to restrict the ability of Capital Crossing Preferred to
make dividend payments to its stockholders.
The holders of common stock are entitled to receive such dividends, if any,
as may be declared from time to time by the Board of Directors from funds
legally available therefor, subject to any preferential dividend rights of any
outstanding preferred stock.
ITEM 6. SELECTED FINANCIAL DATA
AS OF AND FOR THE
AS OF AND FOR THE PERIOD FROM MARCH 20,
YEAR ENDED DECEMBER 31, 1998
----------------------- THROUGH DECEMBER 31,
2000 1999 1998
---------- ---------- ---------------------
(DOLLARS IN THOUSANDS)
FINANCIAL CONDITION DATA (YEAR END):
Total assets...................................... $219,183 $168,873 $156,742
Loans, gross...................................... 178,455 150,921 163,847
Total discount (1).............................. (11,966) (12,862) (17,274)
Allowance for loan losses (1)................... (3,795) (2,855) (1,337)
Deferred loan fees.............................. (82) (41) (76)
-------- -------- --------
Loans, net........................................ 162,612 135,163 145,160
-------- -------- --------
Cash and cash equivalents......................... 55,312 32,333 10,580
Stockholders' equity.............................. 218,907 168,667 156,318
Non-performing loans, net (1)..................... 220 1,115 3,868
Other real estate owned, net...................... -- 434 --
OPERATIONS DATA (PERIOD):
Interest income................................... $ 22,762 $ 19,987 $ 13,412
Other income...................................... 163 -- --
Operating expenses................................ (343) (127) (297)
-------- -------- --------
Net income........................................ 22,582 19,860 13,115
Preferred stock dividends......................... (1,459) (1,338) (60)
-------- -------- --------
Net income available to common shareholder........ $ 21,123 $ 18,522 $ 13,055
======== ======== ========
SELECTED OTHER INFORMATION:
Non-performing assets, net, as a percent of total
assets.......................................... 0.10% 0.92% 2.47%
Non-performing loans, net, as a percentage of
loans, net of discount and deferred loan
income.......................................... 0.13 0.81 2.64
Total discount as a percent of gross loans........ 6.71 8.52 10.54
Allowance for loan losses as a percent of total
loans, net of discount and deferred loan fees... 2.28 2.07 0.91
Allowance for loan losses as a percent of
non-performing loans, net....................... 1,725.00 256.05 34.57
- ------------------------
(1) Effective January 1, 1999, $860,000 was transferred from non-amortizing
discount to the allowance for loan losses, representing general reserve
allocations. See "Business--Accounting for Purchased Loan Portfolio."
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999 AND PERIOD FROM INCEPTION (MARCH 20,
1998) THROUGH DECEMBER 31, 1998
Net income available to common shareholders increased $2.6 million, or 14.0%
to $21.1 million for 2000 compared to $18.5 million for 1999 and increased
$5.5 million, or 41.9%, in 1999 compared to $13.1 million for 1998. Total
interest income increased $2.8 million or 13.9%, to $22.8 million for 2000
compared to $20.0 million for 1999 and increased $6.6 million, or 49.0%, in 1999
compared to $13.4 million for 1998.
The yields on Capital Crossing Preferred's interest-earning assets are
summarized as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------- PERIOD FROM MARCH 20, 1998
2000 1999 THROUGH DECEMBER 31, 1998
------------------------------ ------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD BALANCE INTEREST YIELD BALANCE INTEREST YIELD
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Loans, net..................... $171,579 $19,897 11.60% $145,520 $19,118 13.14% $138,671 $13,280 12.71%
Interest-bearing deposits...... 59,805 2,865 4.79 29,297 869 2.97 3,912 132 3.37
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-earning
assets....................... $231,384 $22,762 9.84% $174,817 $19,987 11.43% $142,583 $13,412 11.96%
======== ======= ===== ======== ======= ===== ======== ======= =====
The weighted average yield on Capital Crossing Preferred's interest-earning
assets was 9.84% for 2000, 11.43% for 1999 and 11.96% in 1998. The decrease in
yield from 1999 to 2000 was the result of several factors. First, discount and
other interest income recognized at the time of individual loan payoffs
decreased during 2000. Secondly, during 2000, the Bank contributed
$80.4 million of loans, which had a lower yield than the loans that were in the
portfolio at the time of contribution. Thirdly, Capital Crossing Preferred
invested in a higher amount of interest-bearing deposits during 2000, which
lowered the overall yield. The weighted average yield on Capital Crossing
Preferred's interest-earning assets declined from the 1998 period to 1999
primarily due to a higher average balance of lower yielding short-term
investments in 1999 compared to 1998. The yield on Capital Crossing Preferred's
loan portfolio increased from the 1998 period to 1999 due to the positive impact
of pay-offs of discounted loans in addition to a rising interest rate
environment in 1999.
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
income"). The following table sets forth, for the periods indicated, the
components of interest and fees on loans.
21
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.
YEARS ENDED DECEMBER 31,
-----------------------------------------
2000 1999
------------------- -------------------
INTEREST INTEREST
INCOME YIELD INCOME YIELD
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Regularly scheduled interest and accretion income........... $17,851 10.41% $15,905 10.93%
Interest and fee income recognized on loan payoffs:
Non-amortizing discount................................... 413 0.24 934 0.64
Amortizing discount....................................... 394 0.23 1,750 1.20
Other interest and fee income............................. 1,239 0.72 529 0.37
------- ----- ------- -----
2,046 1.19 3,213 2.21
------- ----- ------- -----
$19,897 11.60% $19,118 13.14%
======= ===== ======= =====
The information in the above table is not presented for 1998 as purchase
discount was accounted for on a static pool basis prior to January 1, 1999.
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 average balance of interest-bearing deposits increased $30.5 million to
$59.8 million for 2000 compared to $29.3 million for 1999 and increased
$25.4 million in 1999 compared to $3.9 million for 1998. The overall increase in
the average balance was a result of cash flow from loan repayments. The yield on
interest-bearing deposits increased in 2000 because Capital Crossing Preferred
transferred a portion of interest-bearing deposits from a money market account
to higher yielding certificates of deposit. In addition, the yield on the money
market account increased in 2000 compared to 1999.
Other income consists of guarantee fees and gains on sales of loans.
Guarantee fee income for the year ended December 31, 2000 increased $40,000.
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 under this agreement. During the year ended December 31, 2000,
non-accrual loans with a carrying value of $322,000 were sold to third parties
at a gain of $123,000. Additionally, $1.6 million of non-performing loans were
sold to Capital Crossing Bank at their net carrying values prior to foreclosure
as permitted by the servicing agreement.
Increases and decreases in operating expenses are detailed in the following
paragraphs.
Loan servicing and advisory expenses increased $66,000, or 16.1%, to
$476,000 in 2000 from $410,000 in 1999 and by $113,000, or 38.0%, from $297,000
in 1998. This increase was the result of an increase in the average outstanding
loan balances each year.
For the years ended December 31, 2000, Capital Crossing Preferred realized
gains on sales of other real estate owned of $246,000 as a result of the sale of
one property. The gain of $396,000 for the year ended December 31, 1999,
consisted of the gain on sale of two properties. No gain on other real estate
owned was recognized for the year ended 1998.
Other general and administrative expenses of $113,000 in 2000 and 1999
consisted primarily of professional expenses of $64,000 and $61,000,
respectively, shareholder relation expenses of $19,000 and $15,000,
respectively, and printing expenses of $24,000 and $8,000, respectively.
22
Capital Crossing Preferred intends to pay dividends on its preferred 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 BANK
Interest-bearing deposits with Capital Crossing Bank consist of a money
market account with a balance of $37.7 million at December 31, 2000 and
certificates of deposit which totaled $17.5 million at December 31, 2000 and
mature in February 2001. At December 31, 1999, the balance consisted entirely of
a money market account.
LOAN PORTFOLIO
The outstanding principal balance of the loan portfolio is summarized as
follows:
DECEMBER 31,
------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------------------
PRINCIPAL PERCENTAGE PRINCIPAL PERCENTAGE PRINCIPAL PERCENTAGE
BALANCE OF TOTAL BALANCE OF TOTAL BALANCE OF TOTAL
--------- ---------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
Mortgage loans on real estate:
Commercial real estate............... $ 98,842 55.38% $ 98,748 65.43% $ 99,695 60.85%
Multi-family residential............. 72,520 40.64 42,677 28.28 49,854 30.43
One-to-four family residential....... 6,268 3.51 8,415 5.58 12,339 7.53
Land................................. 587 0.33 820 0.54 1,458 0.89
-------- ------ -------- ------ -------- ------
Total............................ 178,217 99.86 150,660 99.83 163,346 99.70
Secured commercial..................... 209 0.12 232 0.15 251 0.15
Other.................................. 29 0.02 29 0.02 250 0.15
-------- ------ -------- ------ -------- ------
Total loans, gross............... $178,455 100.00% $150,921 100.00% $163,847 100.00%
======== ====== ======== ====== ======== ======
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.
There was $220,000 and $1.1 million of mortgage loans on non-accrual status
at December 31, 2000 and 1999, respectively. The decline in non-accrual loans
was due primarily to the sales of non-accrual loans with a carrying value of
$1.9 million during 2000.
Loans generally are placed on non-accrual 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.
ALLOWANCE FOR LOAN LOSSES AND DISCOUNT
The allowance for loan losses is based upon losses estimated to have
occurred and is established through a provision for loan losses charged to
earnings and by additions in connection with loan acquisitions. Loan losses are
charged against the allowance when management believes the loan balance, or a
portion thereof, is uncollectible. Subsequent recoveries, if any, are credited
to the allowance.
23
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of the
loans in light of known and inherent risks in the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral, and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available. In addition, regulatory agencies periodically review the adequacy of
the allowance and may require Capital Crossing Preferred to make additions to
its allowance for loan and lease losses. While management believes these
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 and lease losses is adequate to absorb the known and inherent risks in
Capital Crossing Preferred's loan and lease portfolio at each date based on the
facts known to management as of such date. Capital Crossing Preferred continues
to monitor and modify its allowances for general and specific loan and lease
losses as economic conditions dictate.
Capital Crossing Preferred performs periodic reviews of 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 No. 114. General risk allocations
are determined by a formula whereby the loan portfolio is stratified by loan
type and by internal risk rating categories. Loss factors are then applied to
each strata based on various considerations including historic loss experience,
delinquency trends, current economic conditions, industry standards and
regulatory guidelines. An additional allowance is maintained based on a
judgmental process whereby management considers qualitative and quantitative
assessments of other factors including regional credit concentration, industry
concentration, results of regulatory examinations, historical loss ranges,
portfolio composition, economic conditions such as interest rates and energy
costs and other changes in the portfolio. The allowance for loan losses is
management's best estimate of the probable loan losses incurred as of the
balance sheet date. The allowance is increased by provisions charged to earnings
and by recoveries of amounts previously charged-off, and is reduced by
charge-offs on loans. Any remaining unallocated portion is reviewed for adequacy
in relation to the overall loan portfolio and in recognition of estimates
inherent in the calculation methodology.
INTEREST RATE RISK
Capital Crossing Preferred's income consists primarily of interest income on
mortgage assets. Capital Crossing Preferred does not intend to use any
derivative products to manage its interest rate risk. If there is a decline in
market interest rates, Capital Crossing Preferred may experience a reduction in
interest income on its mortgage loans 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.
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. The majority of Capital Crossing Preferred's
loans are located in New England and California.
24
The following table sets forth certain information regarding the
geographical location of properties securing the mortgage loans in the loan
portfolio at December 31, 2000:
PERCENTAGE OF TOTAL
LOCATION NUMBER OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------- --------------- ----------------- -------------------
(IN THOUSANDS)
California.................................... 358 $ 74,479 41.79%
Massachusetts................................. 95 26,008 14.59
Connecticut................................... 67 15,350 8.61
New York...................................... 16 7,784 4.37
New Hampshire................................. 55 7,658 4.30
New Jersey.................................... 10 7,066 3.96
Washington, D.C............................... 2 5,265 2.95
Rhode Island.................................. 13 5,008 2.81
Texas......................................... 4 4,966 2.79
Arizona....................................... 4 4,876 2.74
All others.................................... 34 19,757 11.09
--- -------- ------
658 $178,217 100.00%
=== ======== ======
At December 31, 2000, 31.2% and 41.8%, respectively, of Capital Crossing
Preferred's total real estate loan portfolio consisted of loans located in New
England and California. At December 31, 1999, 49.3% and 26.8%, respectively, of
Capital Crossing Preferred's total loan portfolio consisted of loans in New
England and California. Consequently, the portfolio may experience a higher
default rate in the event of adverse economic, political or business
developments or natural hazards in New England or California 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:
(1) to maintain the current portfolio size through the acquisition of
additional mortgage assets as mortgage assets currently in the loan
portfolio mature, pay down or prepay, and
(2) 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%
(95% for taxable years beginning before January 1, 2001) 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 certain stockholders to no more
than 100% of the total stockholders' equity of Capital Crossing
25
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 preferred shares without the
consent of holders of at least two-thirds of the Series A preferred shares
outstanding at that time. Additional shares of preferred stock ranking on a
parity with the Series A preferred shares may not be issued without the approval
of a majority of Capital Crossing Preferred's independent directors.
At its meeting on March 8, 2001, the independent Directors of Capital
Crossing Preferred approved the offering of up to $15 million in shares of
Series C Preferred Stock and up to an additional $2,250,000 in shares of Series
C Preferred Stock to cover underwriters over-allotments, if any.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset and liability management is concerned with the timing and magnitude of
the repricing of assets and liabilities. It is the objective of Capital Crossing
Preferred to attempt to control risks associated with interest rate movements.
Market risk is the risk of loss from adverse changes in market prices and
interest rates. 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-rate sensitivity "gap", which is defined as
the difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A gap is considered positive
when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds interest-rate sensitive
assets. During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income, while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income, while a positive gap would tend to adversely affect net interest income.
Because different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income positively
or negatively even if an institution were perfectly matched in each maturity
category.
26
The following table sets forth the Capital Crossing Preferred's
interest-rate-sensitive assets and liabilities categorized by repricing dates
and weighted average rates at December 31, 2000. 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.
DECEMBER 31, 2000
--------------------------------------------------------------------------------------
WITHIN ONE TO TWO TO THREE FOUR TO OVER
ONE TWO THREE TO FOUR FIVE FIVE
OVERNIGHT YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
--------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Rate-sensitive assets:
Interest-bearing deposits in banks..... $55,327 $ -- $ -- $ -- $ -- $ -- $ -- $ 55,327
5.30% -- -- -- -- -- --
Fixed-rate loans(1).................... -- 31,358 7,941 4,639 3,427 2,506 6,602 56,473
-- 9.29% 9.08% 8.86% 8.93% 8.90% 8.57%
Adjustable-rate loans(1)............... 31,876 83,492 3,098 620 2,676 -- -- 121,762
10.78% 8.76% 8.26% 8.98% 7.77% -- --
------- -------- ------- ------ ------ ------ ------ --------
Total rate-sensitive assets............ $87,203 $114,850 $11,039 $5,259 $6,103 $2,506 $6,602 $233,562
======= ======== ======= ====== ====== ====== ====== ========
- ------------------------------
(1) Loans are presented at gross amounts before deducting discounts on purchased
loans, the allowance for loan losses and net deferred loan fees and excludes
non-accrual loans.
Adjustable rate loans originated by Capital Crossing are generally indexed
to prime with an average spread of 100 to 200 basis points. A significant
portion of Capital Crossing's purchased adjustable rate loans are tied to the
11th District Monthly Weighted Average Cost of Funds Index (COFI) with the
remainder subject to various indices and rate spreads established by the
originating banks. The COFI index reflects the actual interest expense
recognized during a given period by all savings institution members of the
Federal Home Loan Bank of San Francisco.
The prepayment assumption reflected above is based on the historical
prepayment experience and management's estimate of prepayment activity for
recently acquired loans. Given the interest rate environment at December 31,
2000 and recent prepayment expense, management has assumed that, on average, 18%
of the outstanding fixed rate loans will prepay annually. The table does not
include loans which have been placed on non-accrual status. Assets that are
subject to immediate repricing are placed in the overnight column.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
THIS FORM 10-K CONTAINS STATEMENTS THAT ARE "FORWARD-LOOKING STATEMENTS." WE
MAY ALSO MAKE WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS IN OTHER DOCUMENTS WE
FILE WITH THE SEC, IN PRESS RELEASES AND OTHER WRITTEN MATERIALS, AND IN ORAL
STATEMENTS MADE BY OUR OFFICERS, DIRECTORS OR EMPLOYEES. YOU CAN IDENTIFY
FORWARD-LOOKING STATEMENTS BY THE USE OF THE WORDS "BELIEVE," "EXPECT,"
"ANTICIPATE," "INTEND," "ESTIMATE," "ASSUME" AND OTHER SIMILAR EXPRESSIONS WHICH
PREDICT OR INDICATE FUTURE EVENTS AND TRENDS AND WHICH DO NOT RELATE TO
HISTORICAL MATTERS. YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS, BECAUSE
THEY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, SOME OF
WHICH ARE BEYOND THE CONTROL OF CAPITAL CROSSING PREFERRED. THESE RISKS,
UNCERTAINTIES AND OTHER FACTORS MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS OF CAPITAL CROSSING PREFERRED TO BE MATERIALLY DIFFERENT FROM THE
ANTICIPATED FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY
THE FORWARD-LOOKING STATEMENTS.
SOME OF THE FACTORS THAT MIGHT CAUSE THESE DIFFERENCES INCLUDE THOSE SET
FORTH BELOW. YOU SHOULD CAREFULLY REVIEW ALL OF THESE FACTORS, AND YOU SHOULD BE
AWARE THAT THERE MAY BE OTHER FACTORS THAT COULD CAUSE THESE DIFFERENCES. THESE
FORWARD-LOOKING STATEMENTS WERE BASED ON INFORMATION, PLANS AND ESTIMATES AT THE
DATE OF THIS REPORT, AND WE DO NOT PROMISE TO UPDATE ANY FORWARD-LOOKING
STATEMENTS TO REFLECT CHANGES IN UNDERLYING ASSUMPTIONS OR FACTORS, NEW
INFORMATION, FUTURE EVENTS OR OTHER CHANGES.
27
BANK REGULATORS MAY LIMIT OUR ABILITY TO IMPLEMENT OUR BUSINESS PLAN AND MAY
RESTRICT OUR ABILITY TO PAY DIVIDENDS
Because we are a subsidiary of Capital Crossing Bank, federal and state
regulatory authorities will have the right to examine us and our activities and
under certain circumstances, to impose restrictions on Capital Crossing Bank or
us which could impact our ability to conduct our business according to our
business plan, which could materially adversely affect our financial condition
and results of operations:
- if Capital Crossing Bank's regulators determine that Capital Crossing
Bank's relationship to us results in an unsafe and unsound banking
practice, the regulators could restrict our ability to transfer assets, to
make distributions to our stockholders, including dividends on the Series
A preferred shares, or to redeem shares of Series A preferred stock or
even require Capital Crossing Bank to sever its relationship with or
divest its ownership interest in us. Such actions could potentially result
in our failure to qualify as a REIT.
- payment of dividends on the Series A preferred shares could also be
subject to regulatory limitations if Capital Crossing Bank becomes
undercapitalized. Capital Crossing Bank will be deemed undercapitalized if
its total risk-based capital ratio is less than 8.0%, its Tier 1 risk-
based capital ratio is less than 4.0% or its Tier 1 leverage ratio is less
than 4.0%. At December 31, 2000, Capital Crossing Bank had a total
risk-based capital ratio of 13.52%, a Tier 1 risk-based capital ratio of
12.26% and a Tier 1 leverage ratio of 10.48%, which is sufficient for
Capital Crossing Bank to be considered well-capitalized. As part of its
common stock repurchase program, Capital Crossing Bank has agreed with the
FDIC to maintain, for so long as the repurchase program continues, capital
levels of one percent in excess of the regulatory minimums required to be
categorized as well-capitalized. We cannot assure you that Capital
Crossing Bank will be well-capitalized under applicable regulations as of
any future date. For purposes of calculating these capital ratios as a
percentage of Capital Crossing Bank's risk-weighted assets, as opposed to
its total assets, Capital Crossing Bank's assets are assigned to risk
categories based on the relative credit risk of the asset in question.
These risk weights consist of 0%, for assets deemed least risky such as
cash, claims backed by the full faith and credit of the U.S. government,
and balances due from Federal Reserve banks, 20%, for assets deemed
slightly more risky such as portions of loans conditionally guaranteed by
the U.S. government or federal funds sold, 50%, for assets deemed still
more risky such as government issued-revenue bonds, one-to-four family
residential first mortgage loans and well-collateralized multi-family
residential first mortgage loans, and 100% for all other assets, including
private sector loans such as commercial mortgage loans as well as
bank-owned real estate.
- while we believe that dividends on the Series A preferred shares should
not be considered distributions by Capital Crossing Bank, the FDIC may not
agree with this position. Under FDIC regulations on capital distributions,
the ability of Capital Crossing Bank to make a capital distribution varies
depending primarily on Capital Crossing Bank's earnings and regulatory
capital levels. Capital distributions are defined to include payment of
dividends, stock repurchases, cash-out mergers and other distributions
charged against the capital accounts of an institution. The FDIC could
limit or prohibit the payment of dividends on the Series A preferred
shares if it determines that the payment of those dividends is a capital
distribution by Capital Crossing Bank and that Capital Crossing Bank's
earnings and regulatory capital levels are below specified levels.
WE DO NOT HAVE INSURANCE TO COVER OUR EXPOSURE TO BORROWER DEFAULTS AND
BANKRUPTCIES AND SPECIAL HAZARD LOSSES THAT ARE NOT COVERED BY OUR STANDARD
HAZARD INSURANCE POLICIES
We do not generally obtain general credit enhancements such as mortgagor
bankruptcy insurance or obtain special hazard insurance for our mortgage assets,
other than standard hazard insurance,
28
which will in each case only relate to individual mortgage loans. Accordingly,
we will be subject to risks of borrower defaults and bankruptcies and special
hazard losses, such as losses occurring from floods, that are not covered by
standard hazard insurance.
OUR RESULTS WILL BE AFFECTED BY FACTORS BEYOND OUR CONTROL
Our mortgage loan portfolio is subject to local economic conditions which
could affect the value of the real estate assets underlying our loans and
therefore, our results of operations will be affected by various conditions in
the real estate market, many of which are beyond our control, such as:
- local and other economic conditions affecting real estate values;
- the continued financial stability of a borrower and the borrower's ability
to make mortgage payments;
- the ability of tenants to make lease payments;
- the ability of a property to attract and retain tenants, which may in turn
be affected by local conditions, such as oversupply of space or a
reduction in demand for rental space in the area;
- interest rate levels and the availability of credit to refinance mortgage
loans at or prior to maturity; and
- increased operating costs, including energy costs, real estate taxes and
costs of compliance with environmental controls and regulations.
OUR LOANS ARE CONCENTRATED IN CALIFORNIA AND NEW ENGLAND AND ADVERSE CONDITIONS
IN THOSE MARKETS COULD ADVERSELY AFFECT OUR OPERATIONS
Properties underlying our current mortgage assets are concentrated primarily
in California, particularly in southern California, and New England. As of
December 31, 2000, approximately 41.8% of our mortgage assets were secured by
properties located in California and 31.2% in New England. Adverse economic,
political or business developments or natural hazards may affect these areas and
the ability of property owners in these areas to make payments of principal and
interest on the underlying mortgages. If either region experienced adverse
economic, political or business conditions, we would likely experience higher
rates of loss and delinquency on our mortgage loans than if our loans were more
geographically diverse.
A SUBSTANTIAL MAJORITY OF OUR LOANS WERE ORIGINATED BY OTHER PARTIES WHOSE LEVEL
OF DUE DILIGENCE MAY BE DIFFERENT THAN CAPITAL CROSSING'S LEVEL OF DUE DILIGENCE
At December 31, 2000, approximately 89.2% of our loan portfolio consisted of
loans originated by third parties, purchased by Capital Crossing and
subsequently acquired by us from Capital Crossing. Because these loans were
originated by third parties, Capital Crossing generally is not able to conduct
the same level of due diligence on these loans that it would have conducted had
it originated them. Generally, while Capital Crossing conducts an acquisition
review, it relies on the underwriting standards of the parties originating the
loans it acquires. The standards of these loan originators may be substantially
different than those of Capital Crossing. These differences may include less
rigorous appraisal requirements and debt service coverage ratios, and less
rigorous analysis of property location and environmental factors, building
condition and age, tenant quality, compliance with zoning regulations, any use
restrictions, easements or right of ways that may impact the value and the
borrower's ability to manage the property. Other disadvantages of purchased
loans versus originated loans may include the lack of current financial
information, incomplete legal documentation and outdated appraisals.
29
MORE THAN HALF OF OUR LOAN PORTFOLIO IS MADE UP OF COMMERCIAL MORTGAGE LOANS
WHICH ARE RISKIER THAN OTHER TYPES OF LOANS
Commercial mortgage loans constituted approximately 55.4% of the loans in
our loan portfolio at December 31, 2000 and generally subject us to greater
risks than other types of loans. Commercial mortgage loans generally lack
standardized terms, tend to have shorter maturities than residential mortgage
loans and may not be fully amortizing, meaning that they have a principal
balance or "balloon" payment due on maturity. Commercial real estate properties
also tend to be unique and are more difficult to value than residential real
estate properties. They are also subject to relatively greater environmental
risks than other types of loans and to the corresponding burdens and costs of
compliance with environmental laws and regulations.
WE MAY NOT BE ABLE TO PURCHASE LOANS AT THE SAME VOLUMES OR WITH THE SAME YIELDS
AS WE HAVE HISTORICALLY PURCHASED
To date we have purchased all of the loans in our portfolio, from Capital
Crossing. Historically, Capital Crossing has acquired such loans (1) from
institutions which sought to eliminate certain loans or categories of loans from
their portfolios, (2) from institutions participating in securitization
programs, (3) from failed or consolidating financial institutions and (4) from
government agencies. Future loan purchases will depend on the availability of
pools of loans offered for sale and Capital Crossing's ability to submit
successful bids or negotiate satisfactory purchase prices. The acquisition of
whole loans is highly competitive. Consequently, we cannot assure you that
Capital Crossing will be able to purchase loans at the same volumes or with the
same yields as it has historically purchased. This may interfere with Capital
Crossing Preferred's ability to maintain the requisite level of mortgage assets
to maintain its qualification as a REIT. In addition, our yields on purchased
loans have declined over the last three years. If volumes of loans purchased
decline or the yields on these loans decline further, we would experience a
material adverse effect on our business, financial condition and results of
operations.
WE COULD BE HELD RESPONSIBLE FOR ENVIRONMENTAL LIABILITIES OF PROPERTIES WE
ACQUIRE THROUGH FORECLOSURE
If we are forced to foreclose on a defaulted mortgage loan to recover our
investment we may be subject to environmental liabilities related to the
underlying real property. Hazardous substances or wastes, contaminants,
pollutants or sources thereof may be discovered on properties during our
ownership or after a sale to a third party. The amount of environmental
liability could exceed the value of the real property. There can be no assurance
that we would not be fully liable for the entire cost of any removal and
clean-up on an acquired property, that the cost of removal and clean-up would
not exceed the value of the property or that we could recoup any of the costs
from any third party.
WE ARE DEPENDENT IN VIRTUALLY EVERY PHASE OF OUR OPERATIONS ON THE DILIGENCE AND
SKILL OF THE MANAGEMENT OF CAPITAL CROSSING
Capital Crossing, which holds all of our common stock, is involved in
virtually every aspect of our existence. We have five officers and no other
employees and do not have any independent corporate infrastructure. Under an
advisory agreement between us and Capital Crossing, Capital Crossing administers
our day-to-day activities, including monitoring of our credit quality and
advising us with respect to the acquisition, management, financing and
disposition of mortgage assets and our operations generally. Under a master
service agreement between us and Capital Crossing, Capital Crossing services our
loan portfolio. The advisory agreement has an initial term of five years with an
automatic renewal feature and the master service agreement has a one year term
with an automatic renewal feature. The loss of the services of Capital Crossing,
or the inability of Capital Crossing to effectively provide such services
whether as a result of the loss of key members of Capital Crossing's management
or otherwise, and our inability to replace such services on favorable terms, or
at all, could adversely affect our ability to conduct our operations.
30
OUR RELATIONSHIP WITH CAPITAL CROSSING MAY CREATE POTENTIAL CONFLICTS OF
INTEREST
Capital Crossing and its affiliates may have interests which are not
identical to ours and therefore conflicts of interest have arisen and may arise
in the future with respect to transactions between us and Capital Crossing such
as:
- our acquisition of mortgage assets from Capital Crossing and/or its
affiliates;
- the servicing of our mortgage assets by Capital Crossing;
- future dispositions by us of mortgage assets to Capital Crossing or its
affiliates;
- the modification of the advisory agreement or the master service
agreement; and
- the terms of our guarantee of obligations of the Bank.
OUR BOARD OF DIRECTORS HAS BROAD DISCRETION TO REVISE OUR STRATEGIES
Our Board of Directors has established our investment and operating
strategies. These strategies may be revised from time to time at the discretion
of the Board of Directors without a vote of our stockholders. Changes in our
strategies could have a negative effect on you.
WE DO NOT OBTAIN THIRD-PARTY VALUATIONS AND THEREFORE WE MAY PAY MORE OR RECEIVE
LESS THAN FAIR MARKET VALUE FOR OUR MORTGAGE ASSETS
To date, we have not obtained third party valuations as part of our loan
acquisitions or dispositions and do not anticipate obtaining third party
valuations for future acquisitions and dispositions of mortgage assets. We do
not intend to obtain third party valuations even where we are acquiring mortgage
assets from, or disposing mortgage assets to, one of our affiliates, including
Capital Crossing. Accordingly, we may pay our affiliates, including Capital
Crossing, more than the fair market value of mortgage assets we acquire and we
may receive less than the fair market value of the mortgage assets we sell based
on a third-party valuation.
WE MAY PAY MORE THAN FAIR MARKET VALUE FOR MORTGAGES WE PURCHASE FROM CAPITAL
CROSSING BECAUSE WE DO NOT ENGAGE IN ARM'S-LENGTH NEGOTIATIONS WITH CAPITAL
CROSSING
We acquire mortgage assets from Capital Crossing under a master mortgage
loan purchase agreement between us and Capital Crossing, at an amount equal to
Capital Crossing's net carrying value for those mortgage assets. Because Capital
Crossing is an affiliate of ours, we do not engage in any arm's-length
negotiations regarding the consideration to be paid. Accordingly, if Capital
Crossing's net carrying value exceeds the fair market value of the mortgage
assets, we would pay Capital Crossing more than the fair market value for those
mortgage assets.
A DECLINE IN INTEREST RATES COULD REDUCE OUR EARNINGS AND AFFECT OUR ABILITY TO
PAY DIVIDENDS
Our income consists primarily of interest earned on our mortgage assets and
short-term investments. A significant portion of our mortgage assets bear
interest at adjustable rates. If there is a decline in interest rates, then we
will experience a decrease in income available to be distributed to our
stockholders. If interest rates decline, we may also experience an increase in
prepayments on our mortgage assets and may find it difficult to purchase
additional mortgage assets bearing rates sufficient to support payment of
dividends on the Series A preferred shares. Because the dividend rates on the
Series A preferred shares is fixed, a significant decline in interest rates
could materially adversely affect our ability to pay dividends on the Series A
preferred shares.
31
TAX RISKS RELATED TO REITS
IF WE FAIL TO QUALIFY AS A REIT, WE WILL BE SUBJECT TO FEDERAL INCOME TAX AT
REGULAR CORPORATE RATES
If we fail to qualify as a REIT for any taxable year, we would be subject to
federal income tax, including any applicable alternative minimum tax, on our
taxable income at regular corporate rates. As a result, the amount available for
distribution to our stockholders, including the holders of the Series A
preferred shares, would be reduced for the year or years involved. In addition,
unless entitled to relief under statutory provisions, we would be disqualified
from treatment as a REIT for the four taxable years following the year during
which qualification was lost. The failure to qualify as a REIT would reduce our
net earnings available for distribution to our stockholders, including holders
of the Series A preferred shares, because of the additional tax liability for
the year or years involved. Our failure to qualify as a REIT would not by itself
give us the right to redeem the Series A preferred shares, nor would it give the
holders of the Series A preferred shares the right to have their shares
redeemed.
Although we currently intend to operate in a manner designed to qualify as a
REIT, future economic, market, legal, tax or other considerations may cause us
to determine that it is in our best interest and in the best interest of holders
of our common stock and preferred stock to revoke our REIT election. The tax law
prohibits us from electing treatment as a REIT for the four taxable years
following the year of any such revocation.
IF WE DO NOT DISTRIBUTE 90% OF OUR NET TAXABLE INCOME, WE MAY NOT QUALIFY AS
A REIT
In order to qualify as a REIT, we generally are required each year to
distribute to our stockholders at least 90% (95% for taxable years beginning
before January 1, 2001) of our net taxable income, excluding net capital gains.
We may retain the remainder of REIT taxable income or all or part of our net
capital gain, but will be subject to tax at regular corporate rates on such
income. In addition, we are subject to a 4% nondeductible excise tax on the
amount, if any, by which certain distributions considered as paid by us with
respect to any calendar year are less than the sum of (1) 85% of our ordinary
income for the calendar year, (2) 90% of our capital gains net income for the
calendar year and (3) 100% of any undistributed income from prior periods. Under
certain circumstances, federal or state regulatory authorities may restrict our
ability, as a subsidiary of Capital Crossing, to make distributions to our
stockholders in an amount necessary to retain our REIT qualification. Such a
restriction could result in us failing to qualify as a REIT. To the extent our
REIT taxable income may exceed the actual cash received for a particular period,
we may not have sufficient liquidity to make distributions necessary to retain
our REIT qualification.
WE MAY REDEEM THE SERIES A PREFERRED SHARES AT ANY TIME UPON THE OCCURRENCE
OF A TAX EVENT
At any time following the occurrence of certain changes in the tax laws or
regulations concerning REITs, we will have the right to redeem the Series A
preferred shares in whole, subject to the prior written approval of the FDIC. We
would have the right to redeem the Series A preferred shares if we received an
opinion of counsel to the effect that, as a result of changes to the tax laws or
regulations:
(1) dividends paid by us with respect to our capital stock are not fully
deductible by us for income tax purposes; or
(2) we are otherwise unable to qualify as a REIT.
The occurrence of such changes in the tax laws or regulations will not,
however, give the holders of the Series A preferred shares any right to have
their shares redeemed.
32
WE HAVE IMPOSED OWNERSHIP LIMITATIONS TO PROTECT OUR ABILITY TO QUALIFY AS A
REIT, HOWEVER, IF OWNERSHIP OF THE COMMON STOCK OF CAPITAL CROSSING BECOMES
CONCENTRATED IN A SMALL NUMBER OF INDIVIDUALS WE MAY FAIL TO QUALIFY AS A
REIT
To maintain our status as a REIT, not more than 50% in value of our
outstanding shares may be owned, directly or indirectly, by five or fewer
individuals, as defined in the Internal Revenue Code, the Code, to include
certain entities, during the last half of each taxable year. We currently
satisfy this requirement because for this purpose our common stock held by
Capital Crossing is treated as held by Capital Crossing's stockholders. However,
it is possible that the ownership of Capital Crossing might become sufficiently
concentrated in the future such that five or fewer individuals would be treated
as having constructive ownership of more than 50% of the value of our stock. We
may have difficulty monitoring the daily ownership and constructive ownership of
our outstanding shares and, therefore, we cannot assure you that we will
continue to meet the share ownership requirement. This risk may be increased in
the future as Capital Crossing implements its common stock repurchase program
because repurchases may cause ownership in Capital Crossing to become more
concentrated. In addition, while the fact that the Series A preferred shares may
be redeemed or exchanged will not affect our REIT status prior to any such
redemption or exchange, the redemption or exchange of all or a part of the
Series A preferred shares could adversely affect our ability to satisfy the
share ownership requirements in the future.
To protect against the risk of losing our status as a REIT, our restated
articles of organization, subject to limited exceptions, provide that no single
person, which may include certain "groups" of persons, may beneficially own more
than 9.8% of the aggregate amount of our outstanding capital stock. Under these
rules, beneficial owners of shares of common stock of Capital Crossing will be
treated as beneficial owners of our capital stock and the value of such shares
of Capital Crossing common stock will be aggregated with the value of any
Series A preferred shares and Series B preferred shares owned for purposes of
determining whether that limit is met. Any transfer of shares of capital stock
or of any security convertible into shares of preferred stock that would create
a direct or indirect ownership of shares of preferred stock in excess of that
limit, or that would result in our disqualification as a REIT, including any
transfer that results in the shares of capital stock being owned by fewer than
100 persons or results in us being closely held within the meaning of
Section 856(h) of the Code or results in our constructive ownership of 10% or
more of the ownership interests in one of our tenants within the meaning of
Section 318 of the Code as modified by Section 856(d)(5) of the Code, shall be
null and void, and the intended transferee will acquire no rights to the shares
of preferred stock. Our Board of Directors may, in its sole discretion, waive
the stock ownership limit if evidence satisfactory to the Board of Directors is
presented that the changes in ownership will not jeopardize our REIT status and
the Board of Directors otherwise decides that such action is in our best
interest.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
--------
Independent Auditors' Reports............................... 35
Balance Sheets.............................................. 37
Statements of Income........................................ 38
Statements of Changes in Stockholders' Equity............... 39
Statements of Cash Flows.................................... 40
Notes to Financial Statements............................... 41
34
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
CAPITAL CROSSING PREFERRED CORPORATION:
We have audited the accompanying balance sheet of Capital Crossing Preferred
Corporation, (formerly Atlantic Preferred Capital Corporation), as of
December 31, 2000 and the related statement of income, changes in stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides 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, 2000 and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Boston, Massachusetts
January 22, 2001
35
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
CAPITAL CROSSING PREFERRED CORPORATION:
We have audited the accompanying balance sheet of Capital Crossing Preferred
Corporation (formerly Atlantic Preferred Capital Corporation) as of
December 31, 1999 and the related statements of income, changes in stockholders'
equity and cash flows for the year ended December 31, 1999 and for the period
from inception (March 20, 1998) through December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, 1999 and the results of its operations and its
cash flows for the year ended December 31, 1999 and for the period from
inception (March 20, 1998) through December 31, 1998 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
February 4, 2000
36
CAPITAL CROSSING PREFERRED CORPORATION
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
-------- --------
(IN THOUSANDS)
ASSETS
Cash account with Capital Crossing Bank..................... $ 85 $ 40
Interest bearing deposits with Capital Crossing Bank........ 55,227 32,293
-------- --------
Total cash and cash equivalents....................... 55,312 32,333
-------- --------
Certificate of deposit...................................... 100 100
-------- --------
Loans, net of deferred loan income.......................... 178,373 150,880
Less discount............................................. (11,966) (12,862)
Less allowance for loan losses............................ (3,795) (2,855)
-------- --------
Loans, net............................................ 162,612 135,163
-------- --------
Accrued interest receivable................................. 1,159 812
Other real estate owned..................................... -- 434
Other assets................................................ -- 31
-------- --------
$219,183 $168,873
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities...................... $ 276 $ 206
-------- --------
Total liabilities........................................... 276 206
-------- --------
Stockholders' equity:
Preferred stock, Series A, 9 3/4% non-cumulative,
exchangeable; $.01 par value; $10 liquidation value per
share; 1,449,000 shares authorized, 1,416,130 shares
issued and outstanding at December 31, 2000 and 1999.... 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, 946 shares
issued and outstanding at December 30, 2000,
1,000 shares authorized issued and outstanding at
December 31, 1999....................................... -- --
Common stock, $.01 par value, 100 shares authorized,
issued and outstanding.................................. -- --
Additional paid-in capital................................ 218,893 167,839
Retained earnings......................................... -- 814
-------- --------
Total stockholders' equity............................ 218,907 168,667
-------- --------
$219,183 $168,873
======== ========
See accompanying notes to financial statements.
37
CAPITAL CROSSING PREFERRED CORPORATION
STATEMENTS OF INCOME
PERIOD FROM
INCEPTION
(MARCH 20,
YEAR ENDED 1998)
DECEMBER 31, THROUGH
------------------- DECEMBER 31,
2000 1999 1998
-------- -------- ------------
(IN THOUSANDS)
Interest income:
Interest and fees on loans................................ $19,897 $19,118 $13,280
Interest on interest-bearing deposits..................... 2,865 869 132
------- ------- -------
Total interest income................................. 22,762 19,987 13,412
------- ------- -------
Other income:
Guarantee fee income...................................... 40 -- --
Gains on sales of loans................................... 123 -- --
------- ------- -------
Total other income.................................... 163 -- --
------- ------- -------
Operating expenses:
Loan servicing and advisory............................... 476 410 297
Other real estate owned income............................ (246) (396) --
Other general and administrative.......................... 113 113 --
------- ------- -------
Total operating expenses.............................. 343 127 297
------- ------- -------
Net income.............................................. 22,582 19,860 13,115
Preferred stock dividends................................... 1,459 1,338 60
------- ------- -------
Earnings available to common shareholder.................... $21,123 $18,522 $13,055
======= ======= =======
See accompanying notes to financial statements.
38
CAPITAL CROSSING PREFERRED CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000 AND 1999 AND PERIOD FROM INCEPTION
(MARCH 20, 1998) THROUGH DECEMBER 31, 1998
PREFERRED STOCK PREFERRED STOCK
COMMON STOCK SERIES A SERIES B ADDITIONAL
------------------- -------------------- ------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
-------- -------- --------- -------- -------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at March 20, 1998... -- $ -- -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock.... 100 -- -- -- -- -- 139,740 -- 139,740
Issuance of preferred stock,
Series B.................. -- -- -- -- 1,000 -- 1,000 -- 1,000
Capital contribution from
common stockholder........ -- -- -- -- -- -- 14,523 -- 14,523
Net income.................. -- -- -- -- -- -- -- 13,115 13,115
Cumulative dividends on
preferred stock, Series
B......................... -- -- -- -- -- -- -- (60) (60)
Common stock dividend....... -- -- -- -- -- -- -- (12,000) (12,000)
--- ---- --------- ---- ----- ---- -------- -------- --------
Balance at December 31,
1998...................... 100 -- -- -- 1,000 -- 155,263 1,055 156,318
Net proceeds from issuance
of preferred stock, Series
A......................... -- -- 1,416,130 14 -- -- 12,576 -- 12,590
Net income.................. -- -- -- -- -- -- -- 19,860 19,860
Dividends on preferred
stock, Series A........... -- -- -- -- -- -- -- (1,258) (1,258)
Cumulative dividends on
preferred stock, Series
B......................... -- -- -- -- -- -- -- (80) (80)
Common stock dividend....... -- -- -- -- -- -- -- (18,763) (18,763)
--- ---- --------- ---- ----- ---- -------- -------- --------
Balance at December 31,
1999...................... 100 -- 1,416,130 14 1,000 -- 167,839 814 168,667
Net income.................. -- -- -- -- -- -- -- 22,582 22,582
Capital contribution from
common stockholder........ -- -- -- -- -- -- 80,433 -- 80,433
Dividends on preferred
stock, Series A........... -- -- -- -- -- -- -- (1,381) (1,381)
Cumulative dividends on
preferred stock, Series
B......................... -- -- -- -- -- -- -- (78) (78)
Repurchase of preferred
stock, Series B........... -- -- -- -- (54) -- (54) -- (54)
Return of capital to common
stockholder............... -- -- -- -- -- -- (29,325) -- (29,325)
Common stock dividend....... -- -- -- -- -- -- -- (21,937) (21,937)
--- ---- --------- ---- ----- ---- -------- -------- --------
Balance at December 31,
2000...................... 100 $ -- 1,416,130 $ 14 946 $ -- $218,893 $ -- $218,907
=== ==== ========= ==== ===== ==== ======== ======== ========
See accompanying notes to financial statements.
39
CAPITAL CROSSING PREFERRED CORPORATION
STATEMENTS OF CASH FLOWS
PERIOD FROM
INCEPTION
(MARCH 20,
1998)
YEARS ENDED DECEMBER 31, THROUGH
--------------------------- DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
(IN THOUSANDS)
Cash flows from operating activities:
Net income................................................ $ 22,582 $ 19,860 $ 13,115
Adjustments to reconcile net income to net cash provided
by operating activities:
Net gain on sale and disposition of other real estate
owned............................................... (246) (396) --
Gain on sales of loans................................ (123) -- --
Other, net............................................ (246) -- (578)
-------- -------- --------
Net cash provided by operating activities........... 21,967 19,464 12,537
-------- -------- --------
Cash flows from investing activities:
Loan repayments........................................... 51,077 44,557 31,712
Purchases of loans from Capital Crossing Bank............. -- (36,263) (21,609)
Sales of other real estate owned.......................... 680 1,471 --
Sales of loans............................................ 2,030 --
Purchase of certificate of deposit........................ -- (100) --
-------- -------- --------
Net cash provided by investing activities........... 53,787 9,665 10,103
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock, Series A... -- 12,590 --
Repurchase of preferred stock, Series B................... (54) -- --
Return of capital to common stockholder................... (29,325) -- --
Payment of preferred stock dividends...................... (1,459) (1,203) (60)
Payment of common stock dividend.......................... (21,937) (18,763) (12,000)
-------- -------- --------
Net cash used in financing activities............... (52,775) (7,376) (12,060)
-------- -------- --------
Net change in cash and cash equivalents..................... 22,979 21,753 10,580
Cash and cash equivalents at beginning of period............ 32,333 10,580 --
-------- -------- --------
Cash and cash equivalents at end of period.................. $ 55,312 $ 32,333 $ 10,580
======== ======== ========
Supplemental information:
Value of loans transferred by Capital Crossing Preferred's
common stockholder in exchange for the issuance of
common stock and preferred stock, Series B.............. $ -- $ -- $140,740
Capital contribution from common stockholder in form of
mortgage loans.......................................... 80,433 -- 14,523
Transfers from loans to other real estate owned........... -- 1,509 --
Income taxes paid......................................... -- 31 --
See accompanying notes to financial statements.
40
CAPITAL CROSSING PREFERRED CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000 AND 1999 AND PERIOD FROM INCEPTION (MARCH 20,
1998) TO DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Capital Crossing Preferred Corporation (the "Company"), formerly Atlantic
Preferred Capital Corporation, is a Massachusetts corporation organized on
March 20, 1998, to acquire and hold real estate assets. Capital Crossing Bank
(the "Bank"), a federally insured Massachusetts trust company, owns all of the
Company's common stock (as defined below). The Bank is in compliance with its
regulatory capital requirements at December 31, 2000.
On March 31, 1998, the Company was initially capitalized with the issuance
to the Bank of 100 shares of the Company's common stock, $.01 par value, and
1,000 shares of Series B preferred stock, $.01 par value, with the Bank
transferring to the Company a portfolio of loans at its estimated fair value of
$140,740,000. Such loans were recorded in the accompanying balance sheet at the
Bank's historical cost, which approximated their estimated fair values.
In 1999, the Company completed the sale of 1,416,130 shares of Series A
preferred stock. See Note 3.
BUSINESS
The Company's business is to hold real estate assets acquired from the Bank.
The Bank's primary business lines include the acquisition of commercial real
estate and multi-family residential real estate loans from sellers in the
financial services industry.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, 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 amortizing and non-amortizing portions, and the rate
at which discount is accreted into interest income.
CASH EQUIVALENTS
Cash equivalents include cash and interest-bearing deposits held at the
Bank.
LOANS
A substantial portion of the loan portfolio is composed of commercial real
estate and multi-family loans in California and New England. The ability of the
Company'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.
41
CAPITAL CROSSING PREFERRED CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999 AND PERIOD FROM INCEPTION (MARCH 20,
1998) TO DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS (CONTINUED)
Accrual of interest on loans and discount accretion are discontinued when
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 or origination.
Net deferred loan fees and costs are amortized as an adjustment of the
related loan yields using the interest method.
The Company accounts for purchased loans under the guidance of AICPA
Practice Bulletin 6, AMORTIZATION OF DISCOUNTS ON CERTAIN ACQUIRED LOANS. Prior
to January 1, 1999, this guidance was applied using unique and exclusive static
pools. Static pools were established based on the original acquisition timing.
Once a static pool was established, the loans remained in the pool, unless
restructured on terms consistent with the Company's loan policy and
documentation standards and transferred to the Company's originated loan
portfolio.
Prior to January 1, 1999, at the time of acquisition of purchased pools of
loans, the excess of the contractual balances over the amount of reasonably
estimable and probable discounted future cash collections for the pool was
recorded as non-amortizing discount. The remaining discount, which represented
the excess of the amount of reasonably estimable and probable discounted future
cash collections over the acquisition amount was accreted into interest income
using the interest method and was not accreted on non-accrual loans. The
non-amortizing discount was not accreted into income until it was determined
that the amount and timing of the related cash flows were reasonably estimable
and collection was probable. If cash flows could not be reasonably estimated for
any loan within a pool, and collection was not probable, the cost recovery
method of accounting was used. Under the cost recovery method, any amounts
received were applied against the recorded amount of the loan.
Subsequent to acquisition, if cash flow projections improved, and it was
determined that the amount and timing of the cash flows related to the
non-amortizing discount were reasonably estimable and collection was probable,
the corresponding decrease in the non-amortizing discount was transferred to the
amortizing portion and was accreted into interest income over the estimated
remaining lives of the loans on the interest method. Under the Company's loan
rating system, each loan was evaluated for impairment and, where necessary, a
portion of the respective loan pool's non-amortizing discount was allocated to
the loan. If no non-amortizing discount was available, an allowance was
established through a provision for loan losses. In addition, if this evaluation
revealed that cash flows could not be estimated or the collection of the loan
was not otherwise probable, the loan was accounted for on the cost recovery
method.
42
CAPITAL CROSSING PREFERRED CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999 AND PERIOD FROM INCEPTION (MARCH 20,
1998) TO DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS (CONCLUDED)
Effective January 1, 1999, the Company changed, on a prospective basis, its
method of accounting for purchased loan discounts and the related recognition of
discount loan income and provisions for loan losses. Under this accounting
change, discount loan income and loan loss provisions are accounted for on an
individual loan basis, rather than as previously recognized in the aggregate on
a static purchased pool basis and was accounted for as a "change in estimate" in
accordance with Accounting Principles Board Opinion No. 20. Accounting for loans
on an individual basis rather than a pool basis allows the Company to
selectively acquire qualified individual loans from the Bank rather than
acquiring entire pools which may contain individual loans that do not meet the
criteria for favorable tax treatment allowed for a REIT. There was no impact on
stockholders' equity as a result of the accounting change. However, the timing
of subsequent earnings will be affected by changes in the amount of estimated
collections on individual loans rather than by changes in the aggregate amount
of estimated collections on purchased loan pools. Over the lives of the
respective loans, management does not anticipate that there will be any material
differences in the reported amounts of related discount loan income, loan loss
provisions and loan charge-offs and recoveries.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses was transferred from the Bank at the time of
the initial transfer of loans to the Company and, beginning in 1999, additional
transfers are made in connection with the accounting change described below.
Subsequent to the date of transfer, the allowance for loan losses will be
adjusted, if necessary, through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes the loan
balance, or a portion thereof, is uncollectible. Subsequent recoveries, if any,
are credited to the allowance. In determining the adequacy of the allowance for
loan losses, management initially considers the loan allowances specifically
allocated to individual impaired loans. Next, management considers the level of
general loan and lease loss allowances deemed appropriate for the balance of the
portfolio. Factors considered include known and inherent risks in the nature and
volume of the loan portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral and
prevailing economic conditions. An additional allowance is maintained based on a
judgmental process whereby management considers qualitative and quantitative
assessments of other factors including regional credit concentration, industry
concentration, results of regulatory examinations, historical loss ranges,
portfolio composition, economic conditions such as interest rates and energy
costs and other changes in the portfolio. The allowance for loan losses is
management's estimate of the probable loan losses incurred as of the balance
sheet date. The allowance is increased by provisions charged to earnings,
allocations of purchase discount, and recoveries of amounts previously
charged-off, and is reduced by charge-offs on loans.
Under pool accounting, discounts were available for allocation to all loans
purchased in a pool; under loan-by-loan accounting, all available discount is
allocated to individual loans. Accordingly, in connection with the accounting
change described above, $860,000 of non-amortizing discount was transferred to
the allowance for loan losses, representing general reserve allocations on
outstanding purchased loan balances. Allocations from purchase discounts to the
allowance for loan losses are made on all loans purchased on or after
January 1, 1999.
43
CAPITAL CROSSING PREFERRED CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999 AND PERIOD FROM INCEPTION (MARCH 20,
1998) TO DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
ALLOWANCE FOR LOAN LOSSES (CONCLUDED)
A loan purchased by the Bank is considered impaired when, based on current
information and events, it is determined that estimated cash flows are less than
the cash flows estimated at the date of purchase. A loan originated by the Bank
is considered impaired when, based on current information and events, it is
probable that the Company 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 the Company'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 the Company's loans which have been identified as impaired have been measured
by the fair value of existing collateral.
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.
INCOME TAXES
The Company 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, the
Company 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 the Company believes it will
qualify as a REIT for federal income tax purposes, no provision for income taxes
is included in the accompanying financial statements.
44
CAPITAL CROSSING PREFERRED CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999 AND PERIOD FROM INCEPTION (MARCH 20,
1998) TO DECEMBER 31, 1998
2. LOANS, NET
A summary of the balances of loans at December 31, 2000 and 1999 follows:
2000 1999
-------- --------
(IN THOUSANDS)
Mortgage loans on real estate:
Commercial real estate.................................... $ 98,842 $ 98,748
Multi-family residential.................................. 72,520 42,677
One-to-four family residential............................ 6,268 8,415
Land...................................................... 587 820
-------- --------
Total................................................. 178,217 150,660
Secured commercial.......................................... 209 232
Other....................................................... 29 29
-------- --------
Total loans, gross.................................... 178,455 150,921
Less:
Non-amortizing discount................................... (6,704) (7,318)
Amortizing discount....................................... (5,262) (5,544)
Allowance for loan losses................................. (3,795) (2,855)
Net deferred loan fees.................................... (82) (41)
-------- --------
Loans, net............................................ $162,612 $135,163
======== ========
Activity in the allowance for loan losses for the years ended December 31,
2000 and 1999 and the period from inception (March 20, 1998) through
December 31, 1998 follows:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Balance at beginning of period.............................. $2,855 $1,337 $ --
Additions in connection with loans purchased or
transferred............................................... 1,215 658 1,337
Charge-offs................................................. (275) -- --
Transfer from non-amortizing discount (see Note 1).......... -- 860 --
------ ------ ------
Balance at end of period.................................... $3,795 $2,855 $1,337
====== ====== ======
45
CAPITAL CROSSING PREFERRED CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999 AND PERIOD FROM INCEPTION (MARCH 20,
1998) TO DECEMBER 31, 1998
2. LOANS, NET (CONCLUDED)
Information pertaining to impaired and non-accrual loans at December 31,
2000 and 1999 follows:
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Impaired loans:
Without a valuation allowance............................. $ 815 $1,408
With a valuation allowance................................ 3,069 4,227
------ ------
Total impaired loans........................................ $3,884 $5,635
====== ======
Valuation allowance related to impaired loans............... $ 315 $ 525
====== ======
Total non-accrual loans..................................... $ 220 $1,115
====== ======
Information pertaining to impaired loans for the years ended December 31,
2000 and 1999 and for the period from inception (May 20, 1998) through
December 31, 1998 follows:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Average investment in impaired loans........................ $5,395 $6,561 $1,871
====== ====== ======
Interest income recognized on impaired loans................ $ 330 $ 431 $ 64
====== ====== ======
Interest income recognized on a cash basis on impaired
loans..................................................... $ 302 $ 105 $ --
====== ====== ======
Included in impaired loans at December 31, 2000 is one restructured loan,
totaling $326,000, which was not on non-accrual. There were no restructured
loans in 1999 or 1998.
3. PREFERRED STOCK
On March 31, 1998, the Company issued 1,000 shares of its 8% Cumulative
Non-convertible Preferred Stock, Series B, to the Bank. Holders of Series B
preferred stock are entitled to receive, if declared by the Board of Directors
of the Company, 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 the Company 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 the
Company, preferred stockholders are entitled to the total liquidation amount, as
defined, plus any accrued and accumulated dividends.
On February 12, 1999, the Company completed the sale 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.
46
CAPITAL CROSSING PREFERRED CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999 AND PERIOD FROM INCEPTION (MARCH 20,
1998) TO DECEMBER 31, 1998
3. PREFERRED STOCK (CONCLUDED)
Series A preferred stock is exchangeable for preferred shares of the Bank if
the Federal Deposit Insurance Corporation (FDIC) so directs, when or if the Bank
becomes or may in the near term become undercapitalized or the Bank is placed
into conservatorship or receivership. Series A preferred stock is redeemable at
the option of the Company on or after February 1, 2004, with the prior consent
of the FDIC.
4. RELATED PARTY TRANSACTIONS
The Bank performs advisory services and services the loans owned by the
Company. The servicing and advisory fee rate is .25% per annum of the average
outstanding principal balance of the loans. Servicing and advisory fees for the
years ended December 31, 2000 and 1999 and for the period from inception through
December 31, 1998 totaled $476,000, $410,000 and $297,000, respectively, of
which $39,000, $33,000 and $297,000, respectively, are included in accrued
expenses and other liabilities.
In addition to the loans transferred to the Company by the Bank on
March 31, 1998 (see Note 1), the Company periodically purchases loans from the
Bank. The Company purchased loans with carrying values, including accrued
interest, of $36,263,000 and $21,609,000 during 1999 and 1998, respectively.
There were no loans purchased during 2000. During 2000 and 1998, the Bank also
contributed loans carrying values of $80,433,000 and $14,523,000, respectively,
to the Company. The carrying value of these loans approximated their fair values
at the date of purchase or contribution.
Effective July 1, 2000, the Company entered into an agreement to make
certain assets available to be pledged in connection with borrowings of the
Bank. The Company receives an annual fee of $80,000 under this agreement.
Guarantee fee income for the year ended December 31, 2000 was $40,000.
47
CAPITAL CROSSING PREFERRED CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999 AND PERIOD FROM INCEPTION (MARCH 20,
1998) TO DECEMBER 31, 1998
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards 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.
Statement 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 the Company.
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts of cash and money market
accounts approximate fair value because of the short-term maturity of these
instruments.
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 the Company's
financial instruments at December 31, 2000 and 1999 are as follows:
2000 1999
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
Financial assets:
Cash and cash equivalents......................... $ 55,312 $ 55,312 $ 32,333 $ 32,333
Loans, net........................................ 162,612 167,000 135,163 140,595
Accrued interest receivable....................... 1,159 1,159 812 812
48
CAPITAL CROSSING PREFERRED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
YEARS ENDED DECEMBER 31, 2000 AND 1999 AND PERIOD FROM INCEPTION (MARCH 20,
1998) TO DECEMBER 31, 1998
6. QUARTERLY DATA (UNAUDITED)
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
2000 1999
----------------------------------------- -----------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Interest income...................... $6,954 $6,198 $5,828 $3,782 $5,876 $4,978 $5,063 $4,070
Other income......................... 20 143 -- -- -- -- -- --
Operating expenses................... 111 153 159 (80) 117 123 105 (218)
------ ------ ------ ------ ------ ------ ------ ------
Net income........................... 6,863 6,188 5,669 3,862 5,759 4,855 4,958 4,288
Preferred stock dividends............ 363 364 366 366 365 364 367 242
------ ------ ------ ------ ------ ------ ------ ------
Net income available to common
stockholder........................ $6,500 $5,824 $5,303 $3,496 $5,394 $4,491 $4,591 $4,046
====== ====== ====== ====== ====== ====== ====== ======
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information about the directors and
executive officers of Capital Crossing Preferred.
NAME AGE POSITION(S) HELD
- ---- -------- ----------------
Richard Wayne......................... 48 President, Director
John L. Champion...................... 52 Vice President, Treasurer, Director
Bradley M. Shron...................... 44 Vice President, Clerk
Nicholas W. Lazares................... 49 Director
Jeffrey Ross.......................... 56 Director
Michael J. Fox, M.D................... 54 Director
The principal occupation for the last five years of each director and
executive officer of Capital Crossing Preferred is set forth below.
RICHARD WAYNE. Mr. Wayne has been the President and a Director of Capital
Crossing Preferred since March 1998. Mr. Wayne is President, Co-Chief Executive
Officer and a Director of Capital Crossing.
JOHN L. CHAMPION. Mr. Champion has been the Treasurer and a Director of
Capital Crossing Preferred since March 1998 and a Vice President since April
1999. Mr. Champion is Capital Crossing's Chief Financial Officer, Treasurer and
Executive Vice President.
BRADLEY M. SHRON. Mr. Shron has been Clerk of Capital Crossing Preferred
since March 1998 and a Vice President since April 1999. Mr. Shron is Capital
Crossing's General Counsel, Clerk and an Executive Vice President.
NICHOLAS W. LAZARES. Mr. Lazares has been a Director of Capital Crossing
Preferred since March 1998. Mr. Lazares is Chairman of the Board of Directors
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. From 1998
until October 1999, Mr. Ross acted as a management and investment consultant.
During 1997, Mr. Ross was President and Chief Executive Officer of Hearthstone
Assisted Living of Houston, Texas. Mr. Ross has been a Director of Capital
Crossing Preferred since April 1999.
MICHAEL J. FOX, M.D., M.B.A. Since December 2000, Mr. Fox has been
President and Chief Operating Officer of Penwest Pharmaceuticals Company, Inc.
Mr. Fox is also a co-founder of and currently serves as Vice President of
Business Development of E-Tractions.com, Inc. From 1997 to December 2000,
Mr. Fox served as President and Chief Executive Officer of Healthcare
Advisors, Inc., a consulting firm. From 1998 to 1999, Mr. Fox also served as a
Senior Vice President of Alkermes, Inc. From 1991 to 1996, Mr. Fox was Senior
Vice President of Astra AB-USA. Mr. Fox has been a Director of Capital Crossing
Preferred since January 2000.
50
AUDIT COMMITTEE
Capital Crossing Preferred has established an audit committee which will,
among other things:
(1) review the engagement and independence of its auditors;
(2) review the adequacy of Capital Crossing Preferred's internal accounting
controls and financial reporting process; and
(3) review transactions between Capital Crossing Preferred and Capital
Crossing Bank.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (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
Common Stock, 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.
Due to an administrative oversight by Capital Crossing Preferred, one
director, Michael J. Fox, inadvertently failed to file on a timely basis with
the SEC, a Form 3 disclosing that he had been elected as a director of Capital
Crossing Preferred. The Form 3 was subsequently filed with the SEC and copies
sent to Nasdaq.
ITEM 11. EXECUTIVE COMPENSATION
Capital Crossing Preferred pays the independent directors a per meeting fee
of $1,250 for their services as directors. Capital Crossing Preferred will not
pay any compensation to its officers or employees or to directors who are not
independent directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 8, 2001, the number and
percentage of outstanding shares of common stock, Series A preferred shares and
Series B preferred shares beneficially owned by (i) all persons known by Capital
Crossing Preferred to own 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 100
51
shares of common stock and 1,416,130 Series A preferred shares and 942 Series B
preferred shares outstanding as of March 8, 2001.
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 95.5%
John L. Champion (2)(3)............... 2 Series B preferred shares (4) *
Nicholas W. Lazares (3)............... 2 Series B preferred shares (4) *
Bradley M. Shron (2).................. -- *
Richard Wayne (2)(3).................. 2 Series B preferred shares (4) *
Jeffrey Ross (3)...................... -- *
Michael J. Fox, M.D., M.B.A. (3)...... -- *
All executive officers and directors as
a Group (6 persons)................. 6 Series B preferred shares *
- ------------------------
(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 1 share held of record by such executive officer/director's spouse.
* Less than 1%.
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 the master service agreement. Capital Crossing in its
role as servicer under the terms of the master service agreement receives a fee
equal to 0.20% per annum, payable monthly, on the gross outstanding principal
balances of loans serviced. For the year ended December 31, 2000, Capital
Crossing Preferred incurred $381,000 in servicing fees payable 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, at any time during the servicing process, to dispose of any
loans which become classified, placed on non-accrual 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 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
52
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 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.
53
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. For the year ended December 31, 2000, Capital Crossing Preferred
incurred $95,000 in servicing fees payable to Capital Crossing. As advisor,
Capital Crossing is responsible for:
(1) monitoring the credit quality of the loan portfolio held by Capital
Crossing Preferred;
(2) advising Capital Crossing Preferred with respect to the acquisition,
management, financing and disposition of its loans and other assets; and
(3) 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. Capital Crossing
is paid a monthly advisory fee equal to 0.05% per annum of the average gross
outstanding balance of Capital Crossing Preferred's loans for the immediately
preceding month, plus reimbursement for certain expenses incurred by Capital
Crossing as advisor.
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 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 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, 2000, Capital Crossing had no outstanding FHLBB advances.
At March 8, 2001, the amount of Capital Crossing's borrowings from the FHLBB
were $139.0 million. 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 Bank. Capital Crossing Preferred
receives an annual fee of $80,000 from Capital Crossing under this agreement.
PART IV
ITEM 14. 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.
54
(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 filed during the period covered by this
report.
(c) Exhibits:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1(a) Restated Articles or Organization of Capital Crossing
Preferred (1).
3.1(b) Articles of Amendment to Restated Articles of Organization
of Capital Crossing Preferred reflecting change of its name
filed with the Secretary of the Commonwealth on March 12,
2001 (filed herewith).
3.2 Amended and Restated By-laws of Capital Crossing Preferred
(2).
4.1 Specimen of certificate representing Series A preferred
shares (3).
10.1 Master Mortgage Loan Purchase Agreement between Capital
Crossing Preferred and Capital Crossing Bank (3).
10.2 Master Service Agreement between Capital Crossing Preferred
and Capital Crossing Bank (3).
10.3 Advisory Agreement between Capital Crossing Preferred and
Capital Crossing
Bank (3).
10.4 Form of Letter Agreement between Capital Crossing Preferred
and Capital Crossing Bank regarding issuance of certain
securities (3).
- ------------------------
(1) Incorporated by reference to Exhibit 3.1 of Capital Crossing Preferred's
Annual Report on Form 10-K filed March 31, 1999 (Commission File
No. 000-25193).
(2) Incorporated by reference to Exhibit 3.2 of Capital Crossing Preferred's
Annual Report on Form 10-K filed with the Securities and Exchange Commission
on March 31, 1999 (Commission File No. 000-25193).
(3) Incorporated by reference to Capital Crossing Preferred's registration
statement on Form S-11 (No. 333-66677), filed November 3, 1998, as amended.
55
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
Date: March 12, 2001 PRESIDENT
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
--------- -----
/s/ RICHARD WAYNE
------------------------------------------- President and Director (Principal Executive
(Richard Wayne) Officer)
/s/ JOHN L. CHAMPION Vice President, Treasurer and Director
------------------------------------------- (Principal Financial Officer and Principal
(John L. Champion) Accounting Officer)
/s/ NICHOLAS W. LAZARES
------------------------------------------- Director
(Nicholas W. Lazares)
/s/ JEFFREY ROSS
------------------------------------------- Director
(Jeffrey Ross)
/s/ MICHAEL J. FOX
------------------------------------------- Director
(Michael J. Fox)
56