UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

 

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 ý  No o

 

The number of shares outstanding of the registrant’s sole class of common stock was 100 shares, $.01 par value per share, as of November 5, 2002.

 

 

Capital Crossing Preferred Corporation

Table of Contents

 

PART I - Financial Information
Item 1.	Financial Statements:
	a)		Balance Sheets
	b)		Statements of Income
	c)		Statements of Changes in Stockholders’ Equity
	d)		Statements of Cash Flows
	e)		Notes to Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Risk Factors and Other Factors Affecting Forward-Looking Statements
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
PART II - Other Information
Item 1.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders
Item 6.	Exhibits and Reports on Form 8-K
	Signatures
	Certifications
	Exhibit Index
		Exhibit 99.1 Certification signed by Richard Wayne, President (Principal Executive Officer) pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
		Exhibit 99.2 Certification signed by Edward F. Mehm, Treasurer (Principal Financial Officer) pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

PART I

 

Item 1. Financial Statements

 

Capital Crossing Preferred Corporation

Balance Sheets

 

		September 30, 2002			December 31, 2001
		(unaudited)
		(in thousands, except share data)
ASSETS
Cash account with Capital Crossing Bank		$	88		$	86
Interest-bearing deposits with Capital Crossing Bank		88,142			87,903
Total cash and cash equivalents		88,230			87,989
Certificate of deposit		100			100
Loans		301,948			166,446
Less discount and net deferred loan income		(34,802		)	(14,411		)
Less allowance for loan losses		(8,856		)	(4,659		)
Loans, net		258,290			147,376
Accrued interest receivable		1,251			896
Other assets		5			4
		$	347,876		$	236,365
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accrued expenses and other liabilities		$	446		$	417
Total liabilities		446			417
Stockholders’ equity:
Preferred stock, Series A, 9.75% non-cumulative, exchangeable; $.01 par value; $10 liquidation value per share; 1,449,000 shares authorized, 1,416,130 shares issued and outstanding		14			14
Preferred stock, Series B, 8% cumulative, non convertible; $.01 par value; $1,000 liquidation value per share plus accrued dividends; 1,000 shares authorized, 941 shares issued and outstanding		—			—
Preferred stock, Series C, 10.25% non-cumulative, exchangeable; $.01 par value; $10 liquidation value per share; 1,840,000 shares authorized, issued and outstanding		18			18
Common stock, $.01 par value, 100 shares authorized, issued and outstanding		—			—
Additional paid-in capital		329,475			235,742
Retained earnings		17,923			174
Total stockholders’ equity		347,430			235,948
		$	347,876		$	236,365

 

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

 

1

 

Capital Crossing Preferred Corporation

Statements of Income

(unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2002			2001			2002			2001
		(in thousands)
Interest income:
Interest and fees on loans		$	6,382		$	5,616		$	16,837		$	14,975
Interest on interest-bearing deposits		522			1,002			1,469			2,832
Total interest income		6,904			6,618			18,306			17,807
Other income:
Gain on sale of loans		1,915			—			2,432			—
Guarantee fee income		20			20			60			60
Total other income		1,935			20			2,492			60
Operating expenses:
Loan servicing and advisory services		202			103			463			322
Other general and administrative		32			30			79			67
Total operating expenses		234			133			542			389
Net income		8,605			6,505			20,256			17,478
Preferred stock dividends		836			836			2,507			1,727
Net income available to common stockholder		$	7,769		$	5,669		$	17,749		$	15,751

 

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

 

2

 

 

Capital Crossing Preferred Corporation

Statements of Changes in Stockholders’ Equity

(unaudited)

 

		Nine Months Ended September 30, 2002
		Preferred Stock						Preferred Stock								Preferred Stock															Additional								Total
		Series A						Series B								Series C								Common Stock							Paid-in				Retained				Stockholders’
		Shares		Amount				Shares			Amount					Shares			Amount					Shares				Amount			Capital				Earnings				Equity
		(dollars in thousands)
Balance at December 31, 2001		1,416,130			$	14		941				$	—			1,840,000				$	18				100			$	—		$	235,742			$	174			$		235,948
Net income		—			—			—				—				—				—					—			—			—				20,256				20,256
Capital contribution from common stockholder		—			—			—				—				—				—					—			—			93,733				—				93,733
Dividends on preferred stock, Series A		—			—			—				—				—				—					—			—			—				(1,035		)		(1,035				)
Cumulative dividends on preferred stock, Series B		—			—			—				—				—				—					—			—			—				(57		)		(57				)
Dividends on preferred stock, Series C		—			—			—				—				—				—					—			—			—				(1,415		)		(1,415				)
Balance at September 30, 2002		1,416,130			$	14		941				$	—			1,840,000				$	18				100			$	—		$	329,475			$	17,923			$		347,430
		Nine Months Ended September 30, 2001
		Preferred Stock						Preferred Stock								Preferred Stock															Additional									Total
		Series A						Series B								Series C									Common Stock						Paid-in				Retained					Stockholders’
		Shares			Amount			Shares				Amount				Shares				Amount					Shares			Amount			Capital				Earnings					Equity
		(dollars in thousands)
Balance at December 31, 2000		1,416,130			$	14		946				$	—			—				$	—				100			$	—		$	218,893			$	—				$		218,907
Net income		—			—			—				—				—				—					—			—			—				17,478					17,478
Issuance of preferred stock, Series C		—			—			—				—				1,840,000				18					—			—			16,854				—					16,872
Dividends on preferred stock, Series A		—			—			—				—				—				—					—			—			—				(1,036			)		(1,036			)
Cumulative dividends on preferred stock, Series B		—			—			—				—				—				—					—			—			—				(57			)		(57			)
Dividends on preferred stock, Series C		—			—			—				—				—				—					—			—			—				(634			)		(634			)
Repurchase of preferred stock, Series B		—			—			(5		)		—				—				—					—			—			(5			)	—					(5			)
Balance at September 30, 2001		1,416,130			$	14		941				$	—			1,840,000				$	18				100			$	—		$	235,742			$	15,751				$		251,525

 

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

 

3

 

 

Capital Crossing Preferred Corporation

Statements of Cash Flows

(unaudited)

 

		Nine Months Ended September 30,
		2002			2001
		(in thousands)
Cash flows from operating activities:
Net income		$	20,256		$	17,478
Adjustments to reconcile net income to net cash from operating activities:
Gain on sale of loans		(2,432		)	—
Other, net		525			164
Net cash from operating activities		18,349			17,642
Cash flows used in investing activities:
Amortization and payoffs on loans		64,539			34,402
Purchase of loans from Capital Crossing Bank		(90,341		)	(34,998		)
Proceeds from sales of loans		10,201			167
Net cash used in investing activities		(15,601		)	(429		)
Cash flows (used in) from financing activities:
Issuance of preferred stock, Series C		—			16,872
Repurchase of preferred stock, Series B		—			(5		)
Payment of preferred stock dividends		(2,507		)	(1,571		)
Net cash (used in) from financing activities		(2,507		)	15,296
Net change in cash and cash equivalents		241			32,509
Cash and cash equivalents at beginning of period		87,989			55,312
Cash and cash equivalents at end of period		$	88,230		$	87,821
Supplemental information:
Capital contributions from common stockholder in the form of mortgage loans		$	93,733		$	—

 

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

 

4

 

Capital Crossing Preferred Corporation

Notes to Financial Statements

Three and Nine Month Periods Ended September 30, 2002 and 2001

 

Note 1.   Basis of Presentation

 

Capital Crossing Preferred Corporation (“Capital Crossing Preferred”), is a Massachusetts corporation organized on March 20, 1998, to acquire and hold real estate assets. Capital Crossing Bank (“Capital Crossing”), a federally insured Massachusetts trust company, owns all of Capital Crossing Preferred’s common stock. At September 30, 2002, Capital Crossing was in compliance with its regulatory capital requirements.

 

On March 31, 1998, Capital Crossing Preferred was initially capitalized with the issuance to Capital Crossing of 100 shares of Capital Crossing Preferred’s common stock, $.01 par value, and 1,000 shares of Series B preferred stock, $.01 par value, with Capital Crossing transferring to Capital Crossing Preferred a portfolio of loans at its estimated fair value of $140,740,000. Such loans were recorded in the accompanying balance sheet at Capital Crossing’s historical cost, which approximated their estimated fair values.

 

In 1999, Capital Crossing Preferred completed the sale of 1,416,130 shares of Series A preferred stock.  In 2001, Capital Crossing Preferred completed the sale of 1,840,000 shares of Series C preferred stock.

 

The financial information as of September 30, 2002 and the results of operations for the three and nine months ended September 30, 2002 and 2001, changes in stockholders’ equity and cash flows for the nine months ended September 30, 2002 and 2001 are unaudited; however, in the opinion of management, the financial information reflects all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation of such financial information in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  Interim results are not necessarily indicative of results to be expected for the entire year.  These interim statements are intended to be read in conjunction with the financial statements presented in Capital Crossing Preferred’s Annual Report on Form 10-K as of and for the year ended December 31, 2001.

 

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

 

Note 2.   Commitments and Contingencies

 

Capital Crossing Preferred has guaranteed all of the obligations of Capital Crossing under advances Capital Crossing may receive from time to time from the Federal Home Loan Bank of Boston (“FHLBB”), and has agreed to pledge a significant amount of its assets in connection with those advances.  This guarantee would rank senior to the preferred shares upon liquidation. Capital Crossing Preferred’s obligations under this agreement are limited by applicable laws pertaining to fraudulent conveyance and fraudulent transfer. The assets pledged to the FHLBB will vary from time to time, however the potential exists for Capital Crossing Preferred to pledge all of its assets to the FHLBB to secure advances to Capital Crossing. In addition, Capital Crossing has pledged to the FHLBB all of the shares of Capital Crossing Preferred’s capital stock it owns as collateral for its FHLBB borrowings.  Under the terms of the pledge, if Capital Crossing becomes undercapitalized the FHLBB may require Capital Crossing to dissolve Capital Crossing Preferred such that the assets of Capital Crossing Preferred are distributed to Capital Crossing. In such circumstance, holders of the Series A and Series C preferred stock would receive their liquidation preference only to the extent there are available assets of Capital Crossing Preferred following satisfaction of its outstanding obligations, including its guarantee of Capital Crossing’s FHLBB borrowings.  At September 30, 2002, approximately $45.9 million, or 13.2%, of Capital Crossing Preferred’s assets had been pledged to and accepted by the FHLBB to secure advances to Capital Crossing.  Capital Crossing has also agreed with the FHLBB that it will not request or accept advances from the FHLBB in excess of Capital Crossing Preferred’s total stockholder’s equity, less the stockholder’s equity attributable to the Series A and Series C preferred shares. As of September 30, 2002, this restriction would limit Capital Crossing’s ability to receive advances in excess of approximately $314.9 million. As of September 30, 2002, Capital Crossing had $129.0 million in outstanding FHLBB borrowings.

 

5

 

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

 

Statements made or incorporated in this Quarterly Report on Form 10-Q include a number of 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.  Forward-looking statements include, without limitation, statements containing the words “anticipates,” “believes,” “estimates”, “assumes”, “expects,” “intends,” “future” and words of similar import which express management’s belief, expectations or intentions regarding the future performance of Capital Crossing Preferred.  These forward-looking statements are made as of the date of this report and we do not undertake to update them at anytime after the date hereof. Capital Crossing Preferred’s actual results could differ materially from those set forth in the forward-looking statements as a result, among other factors, of changes in general, national or regional economic conditions, changes in interest rates, changes in loan default and charge-off rates relating to a decline in the commercial real estate market or otherwise, the possible exchange of the preferred shares for preferred shares of Capital Crossing at the direction of the FDIC if Capital Crossing becomes or may in the near term become undercapitalized or is placed in conservatorship or receivership, risks associated with mortgage loans generally, and particularly the geographic concentration of Capital Crossing Preferred’s loan portfolio at September 30, 2002 in California and New England, and the failure by Capital Crossing Preferred to maintain its status as a real estate investment trust (“REIT”) for federal income tax purposes, changes in the assumptions used in making such forward-looking statements, and the factors discussed in the section entitled “Risk Factors and Other Forward-Looking Statements” of this Form 10-Q.

 

Results of Operations

 

Three Months Ended September 30, 2002 and 2001

 

Net income available to common stockholders increased $2.1 million, or 37.0%, to $7.8 million for the three months ended September 30, 2002 compared to $5.7 million for the three months ended September 30, 2001. This increase is primarily attributable to gains on sales of loans of $1.9 million for the three months ended September 30, 2002, compared to none in the same period in 2001.

 

The increase in total interest income was primarily attributable to an increase in interest income from loans of $766,000, or 13.6%, to $6.4 million for the three months ended September 30, 2002 compared to $5.6 million for the three months ended September 30, 2001, partially offset by a decline in interest on interest-bearing deposits of $480,000, or 47.9%, to $522,000 for the three months ended September 30, 2002 compared to $1.0 million for the same period in 2001. The increase in interest income is due to the significant growth in the loan portfolio offset by a decline in the yield on total interest-earning assets.

 

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

 

		Three Months Ended September 30,
		2002								2001
		Average Balance			Interest Income			Yield		Average Balance			Interest Income			Yield
		(dollars in thousands)
Loans, net(1)		$	271,789		$	6,382		9.32	%	$	151,242		$	5,616		14.73	%
Interest-bearing deposits		68,959			522			3.00		100,500			1,002			3.96
		$	340,748		$	6,904		8.04	%	$	251,742		$	6,618		10.43	%

 

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

 

The weighted average yield on loans decreased to 9.32% for the three months ended September 30, 2002 from 14.73% for the three months ended September 30, 2001. This decrease in yield on loans is attributable to the general decline in the rate environment since the 2001 period, as well as a decline in the level of interest and fee income recognized on loan payoffs. The level of interest and fee income recognized on loan payoffs varies for numerous reasons, as further discussed below. Average loans, net, for the three months ended September 30, 2002 totaled $271.8 million compared to $151.2 million for the three months ended September 30, 2001.  The increase in the average loan balance is primarily attributable to the acquisition of $183.2 million of loans from Capital Crossing during 2002, partially offset by loan amortization, payoffs and sales.

 

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.

 

6

 

When a loan is paid off, the excess of any cash received over the net investment is recorded as interest income. In addition to the amount of purchase discount that is recognized at that time, income may also include interest owed by the borrower prior to Capital Crossing’s acquisition of the loan, interest collected if on non-performing status and other loan fees (“other interest and fee income”). The following table sets forth, for the periods indicated, the components of interest and fees on loans. There can be no assurance regarding future interest income, including the yields and related level of such income, or the relative portion attributable to loan payoffs as compared to other sources, will increase or remain the same in the future.

 

 

The amount of loan payoffs and related 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 decision to payoff a loan rests with the borrower. The amount of individual loan payoffs is oftentimes a result of negotiations between Capital Crossing Preferred and the borrower. Based upon credit risk analysis and other factors, Capital Crossing Preferred will, in certain instances, accept less than the full amount contractually due in accordance with the loan terms.

 

The average balance of interest-bearing deposits decreased $31.5 million to $69.0 million for the three months ended September 30, 2002, compared to $100.5 million for 2001. This decrease is attributable to the purchase of $90.3 million of loans from Capital Crossing partially offset by cash accumulated from loan amortization, payoffs and sales. The yield on interest-bearing deposits decreased in 2002 because the rate paid by Capital Crossing on the money market account held by Capital Crossing Preferred decreased consistently with deposit interest rates generally compared to 2001.

 

The gain on sales of loans of $1.9 million is the result of the sale of nine loans to unaffiliated third parties. There were no loans sold to unaffiliated third parties during the three months ended September 30, 2001.

 

Loan servicing and advisory services for the three months ended September 30, 2002 increased $99,000, or 96.1%, to $202,000 compared to $103,000 for the three months ended September 30, 2001. This increase is due to the overall increase in the average balance of the loan portfolio.

 

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

 

Nine Months Ended September 30, 2002 and 2001

 

Net income available to common stockholders increased $2.0 million, or 12.7%, to $17.7 million for the nine months ended September 30, 2002 compared to $15.8 million for the nine months ended September 30, 2001.  This increase is primarily attributable to gains on sales of loans of $2.4 million for the nine months ended September 30, 2002 compared to none in the same period in 2001, and an increase in total interest income of $499,000, or 2.8%, to $18.3 million for the nine months ended September 30, 2002 compared to $17.8 million for the nine months ended September 30, 2001. These increases were partially offset by an increase in preferred stock dividends of $780,000, or 45.2%, to $2.5 million for the nine months ended September 30, 2002 compared to $1.7 million during the same period in 2001 as a result of the issuance of the Series C preferred stock on May 31, 2001.

 

The increase in total interest income was primarily attributable to an increase in interest income from loans of $1.9 million, or 12.4%, to $16.8 million for the nine months ended September 30, 2002 compared to $15.0 million for the nine months ended September 30, 2001, partially offset by a decline in interest on interest-bearing deposits of $1.4 million, or 48.1%, to $1.5 million for the nine months ended September 30, 2002 from $2.8 million for the same period in 2001. The increase in interest income from loans is attributable to the growth in the loan portfolio partially offset by a decline in the yield on interest-earning assets.

 

7

 

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

 

		Nine Months Ended September 30,
		2002								2001
		Average Balance			Interest Income			Yield		Average Balance			Interest Income			Yield
		(dollars in thousands)
Loans, net(1)		$	215,929		$	16,837		10.43	%	$	153,512		$	14,975		13.04	%
Interest-bearing deposits		70,741			1,469			2.78		83,606			2,832			4.53
		$	286,670		$	18,306		8.54	%	$	237,118		$	17,807		10.04	%

 

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

 

The weighted average yield on loans decreased to 10.43% for the nine months ended September 30, 2002 from 13.04% for the nine months ended September 30, 2001. This decrease in yield on loans is attributable to a decline in the interest rate environment since the 2001 period as well as a decline, relative to the overall yield on loans, in the level of interest and fee income recognized on loan payoffs. The level of interest and fee income recognized on loan payoffs varies for numerous reasons, as further discussed below. Average loans, net, for the nine months ended September 30, 2002 totaled $215.9 million compared to $153.5 million for the nine months ended September 30, 2001. The increase in the average loan balance is primarily attributable to the acquisition of $183.2 million of loans from Capital Crossing during 2002, partially offset by loan amortization payoffs and sales.

 

Income on loans includes the portion of the purchase discount that is accreted into income over the remaining lives of the related loans using the interest method. Because the carrying value of the loan portfolio is net of purchase discount, the related yield on this portfolio generally is higher than the aggregate contractual rate paid on the loans. The total yield includes the excess of a loan’s expected discounted future cash flows over its net investment, recognized using the interest method.

 

When a loan is paid off, the excess of any cash received over the net investment is recorded as interest income. In addition to the amount of purchase discount that is recognized at that time, income may also include interest owed by the borrower prior to Capital Crossing’s acquisition of the loan, interest collected if on non-performing status and other loan fees (“other interest and fee income”). The following table sets forth, for the periods indicated, the components of interest and fees on loans.  There can be no assurance regarding future interest income, including the yields and related level of such income, or the relative portion attributable to loan payoffs as compared to other sources, will increase or remain the same in the future.

 

 

The amount of loan payoffs and related 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 decision to payoff a loan rests with the borrower. The amount of individual loan payoffs is oftentimes a result of negotiations between Capital Crossing Preferred and the borrower. Based upon credit risk analysis and other factors, Capital Crossing Preferred will, in certain instances, accept less than the full amount contractually due in accordance with the loan terms.

 

8

 

The average balance of interest-bearing deposits decreased $12.9 million to $70.7 million for the nine months ended September 30, 2002, compared to $83.6 million for 2001.  This decrease is primarily a result of the purchase of $90.3 million of loans from Capital Crossing offset by cash accumulated from loan amortization payoffs and sales. The yield on interest-bearing deposits decreased in 2002 because the rate paid by Capital Crossing on the money market account held by Capital Crossing Preferred decreased consistently with deposit interest rates generally compared to 2001.

 

The gain on sales of loans of $2.4 million is the result of the sale of ten loans to unaffiliated third parties. There were no loans sold to unaffiliated third parties during the nine months ended September 30, 2001.

 

Loan servicing and advisory services expenses for the nine months ended September 30, 2002 increased $141,000, or 43.8%, to $463,000 compared to $322,000 for the nine months ended September 30, 2001. This increase was due to the overall increase in the average balance of the loan portfolio.

 

General and administrative expenses for the nine months ended September 30, 2002 increased $12,000, or 17.9%, to $79,000 compared to $67,000 for the nine months ended September 30, 2001.  This increase was due primarily to an increase in professional services, including consulting and legal services.

 

Preferred stock dividends increased $780,000, or 45.2%, to $2.5 million for the nine months ended September 30, 2002 compared to $1.7 million for the nine months ended September 30, 2001, as a result of dividends on Series C preferred stock issued on May 31, 2001.

 

Financial Condition

 

Interest-bearing Deposits with Capital Crossing Bank

 

Interest-bearing deposits consist of a money market account with balances of $88.1 million and $87.9 million, respectively, at September 30, 2002 and December 31, 2001. The balance at period end has remained relatively stable as proceeds from loan amortization, payoffs and sales have been utilized to purchase additional loans.

 

Loan Portfolio

 

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

 

		September 30, 2002			December 31, 2001
		(in thousands)
Mortgage loans on real estate:
Commercial real estate		$	208,175		$	106,291
Multi-family residential		85,117			55,868
One-to-four family residential		2,754			3,073
Land		5,902			1,214
Total, gross		301,948			166,446
Less:
Non-amortizing discount		(9,758		)	(6,062		)
Amortizing discount		(24,919		)	(8,257		)
Allowance for loan losses		(8,856		)	(4,659		)
Net deferred loan fees		(125		)	(92		)
Loans, net		$	258,290		$	147,376

 

Included in the $258.3 million and $147.4 million of total loans, net, at September 30, 2002 and December 31, 2001, are approximately $35.4 million and $22.2 million (of which $180,000 and $0 are non-performing), respectively, of net recorded investment in primarily commercial and multifamily real estate and secured commercial loans. The net recorded investment represents the amortized cost of these loans, where at acquisition, the amounts of reasonably estimable and probable discounted future cash collections were less than the contractual balances owed. These loans were purchased at a price to yield a market rate of interest after considering the credit quality of the loans at acquisition and the aforementioned expected future cash collections.  The excess of the contractual balances over the amount of reasonably estimable and probable discounted future cash collections represents the predominant portion of the $9.8 million and $6.1 million of non-amortizing discount at September 30, 2002 and at December 31, 2001, respectively.

 

Capital Crossing Preferred acquires primarily performing commercial real estate and multi-family residential mortgage loans.  Total net loans acquired during the nine months ended September 30, 2002 were $183.2 million consisting of $89.9 million of loans purchased from Capital Crossing and $93.3 million of loans contributed by Capital Crossing.

 

9

 

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

 

Non-performing loans, net of discount, totaled $439,000 and $153,000 at September 30, 2002 and December 31, 2001, respectively.

 

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 once a satisfactory payment history has been established or the credit is restructured at a level that conforms to the appropriate credit standards.

 

Allowance for Loan Losses

 

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 as deemed necessary. Loan losses are charged against the allowance for loan losses when management believes the loan balance, or a portion thereof, is uncollectible. Subsequent recoveries, if any, are credited to the allowance for loan losses.

 

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 for loan losses and may require Capital Crossing Preferred to make additions to its allowance for loan 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 losses is adequate to absorb the known and inherent risks in Capital Crossing Preferred’s loan portfolio at each date based on the facts known to management as of such date. Capital Crossing Preferred continues to monitor and modify its allowances for general and specific loan 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 judgment by management after consideration of qualitative and quantitative assessments of certain 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 as of the balance sheet date. 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.

 

In particular, the allowance for loan losses is influenced by certain concentrations within the portfolio, including the geographic concentration of loans in California and New England, which represented approximately 44.6% and 14.8%, respectively, of the total loan portfolio at September 30, 2002, and concentrations of loans to individual borrowers.

 

Capital Crossing Preferred also considers historical losses in assessing the adequacy of the allowance for loan losses.  Due to the limited operating history of Capital Crossing Preferred, historical losses are not currently an indicator of losses inherent in the portfolio.  Management will continue to monitor historical losses to assess the adequacy of the allowance for loan losses.

 

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

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2002			2001			2002			2001
		(in thousands)
Balance at beginning of period		$	8,896		$	3,792		$	4,659		$	3,795
Transfer from Capital Crossing with loans acquired		—			867			4,250			867
Transfer to Capital Crossing with loans sold		(40		)	—			(53		)	(3		)
Balance at end of period		$	8,856		$	4,659		$	8,856		$	4,659

 

Non-Amortizing Discount.  At the time of acquisition, the excess of the contractual loan balances over the amount of reasonably estimable and probable 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 generally is 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.  If cash flow projections deteriorate subsequent to acquisition, the decline is accounted for through the allowance for loan losses.

 

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

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2002			2001			2002			2001
		(in thousands)
Balance at beginning of period		$	9,256		$	5,109		$	6,062		$	6,704
Transfers to amortizing portion, net		(238		)	(610		)	(1,654		)	(1,623		)
Additions in connection with loans acquired from Capital Crossing		2,464			2,764			8,131			2,764
Net reductions related to resolutions and restructures		(1,724		)	—			(2,402		)	(398		)
Non-amortizing discount relating to loans sold to Capital Crossing		—			—			(379		)	(184		)
Balance at end of period		$	9,758		$	7,263		$	9,758		$	7,263

 

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 stockholders. 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 significant number of borrowers engage in similar business activities, or activities in the same geographical region. Concentration of credit risk indicates the relative sensitivity of Capital Crossing Preferred’s performance to both positive and negative developments affecting a particular industry or geographical region. Capital Crossing Preferred’s balance sheet exposure to geographic concentrations directly affects the credit risk of the loans within its loan portfolio.

 

At September 30, 2002, 44.6% and 14.8%, respectively, of Capital Crossing Preferred’s total loan portfolio consisted of loans located in California and New England. At December 31, 2001, 39.4% and 28.4%, respectively, of Capital Crossing Preferred’s total loan portfolio consisted of loans located in California and New England. Consequently, the portfolio may experience a higher default rate, than its current default rate, in the event of adverse economic, political or business developments or natural hazards in California or New England that may affect the ability of property owners to make payments of principal and interest on the underlying mortgages.

 

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Liquidity Risk Management

 

The objective of liquidity risk 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 repay, 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% of its REIT taxable income and taking into account taxes that would be imposed on undistributed income), or a combination of these methods. Except for its obligation to guarantee certain borrowings of Capital Crossing, Capital Crossing Preferred does not currently intend to incur any indebtedness. The organizational documents of Capital Crossing Preferred limit the amount of indebtedness which it is permitted to incur without the approval of the Series A and the Series C preferred stockholders to no more than 100% of the total stockholders’ equity of Capital Crossing Preferred. Any such debt may include intercompany advances made by Capital Crossing to Capital Crossing Preferred.

 

RISK FACTORS AND OTHER FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

 

This Form 10-Q contains statements that are “forward-looking statements.” Capital Crossing Preferred may also make forward-looking statements in other documents it files with the SEC, in press releases and other written materials, and in oral statements made by its officers, directors or employees. Forward-looking statements can be identified 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. Forward-looking statements should not be relied upon, 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. All of these factors should be carefully reviewed and 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 Capital Crossing Preferred does not undertake to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

 

A decline in Capital Crossing’s capital levels may result in the Series A and Series C preferred shares being subject to automatic exchange into preferred shares of Capital Crossing

 

The returns from an investment in the Series A or Series C preferred shares will depend to a significant extent on the performance and capital of Capital Crossing. A significant decline in the performance and capital levels of Capital Crossing or the placement of Capital Crossing into bankruptcy, reorganization, conservatorship or receivership could result in the automatic exchange of the Series A and Series C preferred shares for preferred shares of Capital Crossing, which would represent an investment in Capital Crossing and not in Capital Crossing Preferred. Under these circumstances:

 

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

 

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

 

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

 

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

 

The Series A and Series C preferred shares rank:

 

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

 

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

 

If Capital Crossing Preferred incurs significant indebtedness, it may not have sufficient funds to make dividend or liquidation payments on the Series A or Series C preferred shares. Upon Capital Crossing Preferred’s liquidation, its obligations to its creditors would rank senior to the Series A and Series C preferred shares. At September 30, 2002, Capital Crossing Preferred had approximately $95,000 in accounts payable and other liabilities which, upon its liquidation, would be required to be paid before any payments could be made to holders of the Series A or Series C preferred shares. In addition, upon Capital Crossing Preferred’s liquidation, dissolution or winding up, if it does not have sufficient funds to pay the full liquidation amount to the holders of the Series A and Series C preferred shares, such holders may receive less than the $10.00 per share liquidation amount.

 

The terms of the Series A and Series C preferred shares limit Capital Crossing Preferred’s ability to incur debt in excess of 100% of its stockholders’ equity without the approval of the holders of all of the outstanding Series A and Series C preferred shares but do not require that Capital Crossing Preferred obtain the approval of the holders of the Series A and Series C preferred shares to issue additional series of preferred shares which rank equal to the Series A and Series C preferred shares as to payment of dividends or amount upon liquidation. As a result, subject to these limitations, Capital Crossing Preferred may incur obligations which may further limit its ability to make dividend or liquidation payments in the future.

 

Bank regulators may limit the ability of Capital Crossing Preferred to implement its business plan and may restrict its ability to pay dividends

 

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

 

•                                          if Capital Crossing’s regulators determine that Capital Crossing’s relationship to Capital Crossing Preferred results in an unsafe and unsound banking practice, the regulators could restrict Capital Crossing Preferred’s ability to transfer assets, to make distributions to its stockholders, including dividends on its Series A and Series C preferred shares, or to redeem shares of Series A and Series C preferred stock or even require Capital Crossing to sever its relationship with or divest its ownership interest in Capital Crossing Preferred. Such actions could potentially result in Capital Crossing Preferred’s failure to qualify as a REIT.

 

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•                                          payment of dividends on the Series A and Series C preferred shares could also be subject to regulatory limitations if Capital Crossing becomes undercapitalized. Capital Crossing will be deemed undercapitalized if its total risk-based capital ratio is less than 8.0%, its Tier 1 risk-based capital ratio is less than 4.0% or its Tier 1 leverage ratio is less than 4.0%. At September 30, 2002, Capital Crossing had a total risk-based capital ratio of 14.83%, a Tier 1 risk-based capital ratio of 13.55% and a Tier 1 leverage ratio of 11.67%, which is sufficient for Capital Crossing to be considered well-capitalized. As part of its common stock repurchase program, Capital Crossing has also agreed with the FDIC to maintain, for so long as the repurchase program continues, its Tier 1 leverage ratio at least 8.00%. Capital Crossing Preferred makes no assurance that Capital Crossing 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’s risk-weighted assets, as opposed to its total assets, Capital Crossing’s assets are assigned to risk categories based on the relative credit risk of the asset in question. These risk weights consist of 0% for assets deemed least risky such as cash, claims backed by the full faith and credit of the U.S. government, and balances due from Federal Reserve banks; 20% for assets deemed slightly more risky such as portions of obligations conditionally guaranteed by the U.S. government or federal funds sold; 50% for assets deemed still more risky such as government issued–revenue bonds, one-to-four family residential first mortgage loans and well-collateralized multi–family residential first mortgage loans; and 100% for all other assets, including private sector loans such as commercial mortgage loans as well as bank-owned real estate.

 

•                                          while Capital Crossing Preferred believes that dividends on the Series A and Series C preferred shares should not be considered distributions by Capital Crossing, the FDIC may not agree with this position. Under FDIC regulations on capital distributions, the ability of Capital Crossing to make a capital distribution varies depending primarily on Capital Crossing’s earnings and regulatory capital levels. Capital distributions are defined to include payment of dividends, stock repurchases, cash-out mergers and other distributions charged against the capital accounts of an institution. The FDIC could limit or prohibit the payment of dividends on the Series A and Series C preferred shares if it determines that the payment of those dividends is a capital distribution by Capital Crossing and that Capital Crossing’s earnings and regulatory capital levels are below specified levels.

 

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

 

Capital Crossing Preferred does not generally obtain general credit enhancements such as mortgagor bankruptcy insurance or obtain special hazard insurance for its mortgage assets, other than standard hazard insurance, which will in each case only relate to individual mortgage loans. Accordingly, Capital Crossing Preferred 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. In the event of a default on any mortgage loan held by Capital Crossing Preferred resulting from declining property values or worsening economic conditions, among other factors, it would bear the risk of loss of principal to the extent of any deficiency between (1) the value of the related mortgaged property, plus any payments from an insurer or guarantor in the case of commercial mortgage loans, and (2) the amount owing on the mortgage loan.

 

Capital Crossing Preferred’s results will be affected by factors beyond its control

 

Capital Crossing Preferred’s mortgage loan portfolio is subject to local economic conditions which could affect the value of the real estate assets underlying its loans and therefore, its results of operations will be affected by various conditions in the real estate market, all of which are beyond its control, such as:

 

•                                          local and other economic conditions affecting real estate values;

 

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

 

•                                          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.

 

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Capital Crossing Preferred’s loans are concentrated in California and New England and adverse conditions in those markets could adversely affect its operations

 

Properties underlying Capital Crossing Preferred’s current mortgage assets are concentrated primarily in California and New England. As of September 30, 2002, approximately 44.6% of its mortgage assets were secured by properties located in California and 14.8% in New England. Adverse economic, political or business developments or natural hazards may affect these areas and the ability of property owners in these areas to make payments of principal and interest on the underlying mortgages. If either region experienced adverse economic, political or business conditions, Capital Crossing Preferred would likely experience higher rates of loss and delinquency on its mortgage loans than if its loans were more geographically diverse.

 

A substantial majority of Capital Crossing Preferred’s loans were originated by other parties whose level of due diligence may be different than Capital Crossing’s level of due diligence

 

At September 30, 2002, approximately 93.7% of Capital Crossing Preferred’s loan portfolio consisted of loans originated by third parties that were purchased by Capital Crossing and subsequently acquired by Capital Crossing Preferred 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.

 

More than half of Capital Crossing Preferred’s loan portfolio is made up of commercial mortgage loans which are riskier than other types of loans

 

Commercial mortgage loans constituted approximately 68.9% of the loans in Capital Crossing Preferred’s loan portfolio at September 30, 2002 and generally subject it to greater risks than other types of loans. Capital Crossing Preferred’s commercial mortgage loans, like most commercial mortgage loans, generally lack standardized terms, tend to have shorter maturities than residential mortgage loans and may not be fully amortizing, meaning that they have a principal balance or “balloon” payment due on maturity. The commercial real estate properties underlying Capital Crossing Preferred’s commercial mortgage loans also tend to be unique and are more difficult to value than 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. Because of these risks related to Capital Crossing Preferred’s commercial mortgage loans, Capital Crossing Preferred may experience higher rates of default on its mortgage loans than it would if its loan portfolio was more diversified and included a greater number of residential and other mortgage loans.

 

Capital Crossing Preferred may not be able to purchase loans at the same volumes or with the same yields as it has historically purchased

 

To date Capital Crossing Preferred has purchased all of the loans in its portfolio from Capital Crossing. Historically, Capital Crossing has acquired such loans (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, Capital Crossing Preferred cannot provide assurance that Capital Crossing will be able to purchase loans at the same volumes or with the same yields as it has historically purchased. This may interfere with Capital Crossing Preferred’s ability to maintain the requisite level of mortgage assets to maintain its qualification as a REIT. If volumes of loans purchased decline or the yields on these loans decline further, Capital Crossing Preferred would experience a material adverse effect on its business, financial condition and results of operations.

 

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Capital Crossing Preferred could be held responsible for environmental liabilities of properties it acquires through foreclosure

 

If Capital Crossing Preferred is forced to foreclose on a defaulted mortgage loan to recover its investment it may be subject to environmental liabilities related to the underlying real property. Approximately 68.9% of the loans in Capital Crossing Preferred’s portfolio at September 30, 2002 were commercial mortgage loans, which generally are subject to relatively greater environmental risks than other types of loans. Hazardous substances or wastes, contaminants, pollutants or sources thereof may be discovered on properties during Capital Crossing Preferred’s ownership or after a sale to a third party. The amount of environmental liability could exceed the value of the real property. There can be no assurance that Capital Crossing Preferred would not be fully liable for the entire cost of any removal and clean-up on an acquired property, that the cost of removal and clean-up would not exceed the value of the property or that Capital Crossing Preferred could recoup any of the costs from any third party. In addition, Capital Crossing Preferred may find it difficult or impossible to sell the property prior to or following any such remediation.

 

Capital Crossing Preferred is dependent in virtually every phase of its operations on the diligence and skill of the management of Capital Crossing

 

Capital Crossing, which holds all of Capital Crossing Preferred’s common stock, is involved in virtually every aspect of Capital Crossing Preferred’s existence.  Capital Crossing Preferred has five officers and no other employees and does not have any independent corporate infrastructure.  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.  All of Capital Crossing Preferred’s officers are also officers of Capital Crossing.  Under an advisory agreement between Capital Crossing Preferred and Capital Crossing, Capital Crossing administers day-to-day activities, including monitoring of Capital Crossing Preferred’s credit quality and advising it with respect to the acquisition, management, financing and disposition of mortgage assets and its operations generally.  Under a master service agreement between Capital Crossing Preferred and Capital Crossing, Capital Crossing services Capital Crossing Preferred’s loan portfolio.  The advisory agreement has an initial term of five years with an automatic renewal feature and the master service agreement has a one-year term with an automatic renewal feature.  Both the master service agreement and the advisory agreement are subject to earlier termination upon provision of 30 days and 90 days notice, respectively.  Capital Crossing may subcontract all or a portion of its obligations under the advisory agreement to its affiliates or, with the approval of a majority of the Board of Directors as well as a majority of the independent directors, subcontract its obligations under the advisory agreement to unrelated third parties.  Capital Crossing will not, in connection with the subcontracting of any of its obligations under the advisory agreement, be discharged or relieved from its obligations under the advisory agreement.  The loss of the services of Capital Crossing, or the inability of Capital Crossing to effectively provide such services whether as a result of the loss of key members of Capital Crossing’s management, early termination of the agreements or otherwise, and Capital Crossing Preferred’s inability to replace such services on favorable terms, or at all, could adversely affect Capital Crossing Preferred’s ability to conduct its operations.

 

Capital Crossing Preferred’s relationship with Capital Crossing may create conflicts of interest

 

Capital Crossing and its affiliates may have interests which are not identical to Capital Crossing Preferred’s and therefore conflicts of interest have arisen and may arise in the future with respect to transactions between Capital Crossing Preferred and Capital Crossing such as:

 

Acquisition of mortgage assets.  Capital Crossing Preferred anticipates that it will from time to time continue to purchase additional mortgage assets. Capital Crossing Preferred intends to acquire all or substantially all of such mortgage assets from Capital Crossing, on terms that are comparable to those that could be obtained by Capital Crossing Preferred if such mortgage assets were purchased from unrelated third parties. Neither Capital Crossing Preferred nor Capital Crossing currently have specific policies with respect to the purchase by Capital Crossing Preferred from Capital Crossing of particular loans or pools of loans, other than that such assets must be eligible to be held by a REIT. Although these purchases are structured to take advantage of the underwriting procedures of Capital Crossing, and while Capital Crossing Preferred believes that any agreements and transactions between it, on the one hand, and Capital Crossing and/or its affiliates on the other hand, are fair to all parties and consistent with market terms, neither Capital Crossing Preferred nor Capital Crossing have obtained any third-party valuation to confirm whether Capital Crossing Preferred will be paying fair market value for these loans, nor does Capital Crossing Preferred anticipate doing so in the future. Additionally, through limiting Capital Crossing Preferred’s source of purchased mortgage assets solely to those originated or purchased by Capital Crossing, Capital Crossing Preferred’s portfolio will generally reflect the nature, scope and risk of Capital Crossing’s portfolio rather than a more diverse portfolio composed of mortgage loans also purchased from other lenders.

 

16

 

Servicing of Capital Crossing Preferred mortgage assets by Capital Crossing.  Capital Crossing Preferred’s loans are serviced by Capital Crossing pursuant to the terms of the master service agreement. Capital Crossing in its role as servicer under the terms of the master service agreement receives a fee equal to 0.20% per annum, payable monthly, on the gross outstanding principal balances of loans serviced. The master service agreement requires Capital Crossing to service the loan portfolio in a manner substantially the same as for similar work performed by Capital Crossing for transactions on its own behalf. This will become especially important as Capital Crossing services any loans which become classified or are placed on non-performing status, or are renegotiated due to the financial deterioration of the borrower. While Capital Crossing Preferred believes that Capital Crossing will diligently pursue collection of any non-performing loans, Capital Crossing Preferred cannot provide assurance that this will be the case. Capital Crossing Preferred’s ability to make timely payments of dividends will depend in part upon Capital Crossing’s prompt collection efforts on behalf of Capital Crossing Preferred.

 

Future dispositions by Capital Crossing Preferred of mortgage assets to Capital Crossing or its affiliates.  The master service agreement provides that foreclosures and dispositions of the mortgage assets are to be performed with a view toward maximizing Capital Crossing Preferred’s recovery as owner of the mortgage assets, and Capital Crossing shall service the mortgage assets solely with a view toward Capital Crossing Preferred’s interests, and without regard to the interests of Capital Crossing or any of its affiliates. However, Capital Crossing Preferred cannot provide assurance that any such agreement or transaction will be on terms as favorable to it as would have been obtained from unaffiliated third parties. Capital Crossing may seek to exercise its influence over Capital Crossing Preferred’s affairs so as to cause the sale of the mortgage assets owned by Capital Crossing Preferred and their replacement by lesser quality loans purchased from Capital Crossing or elsewhere which could adversely affect Capital Crossing Preferred’s business and its ability to make timely payments of dividends.

 

Future modifications of the advisory agreement or master service agreement.  Should Capital Crossing Preferred seek to modify either the advisory agreement or the master service agreement, it would rely upon its officers, all of whom are also officers of Capital Crossing, and/or its directors, three of whom are also officers of Capital Crossing. Thus, Capital Crossing Preferred’s officers and/or directors would be responsible for taking positions with respect to such agreements that, while in Capital Crossing Preferred’s best interests, would not be in the best interests of Capital Crossing. Although the termination, modification or decision not to renew the advisory agreement and/or the master service agreement requires the approval of a majority of Capital Crossing Preferred’s independent directors, Capital Crossing, as holder of all of Capital Crossing Preferred’s outstanding common stock, controls the election of all Capital Crossing Preferred directors, including the independent directors. Capital Crossing Preferred cannot provide assurance that such modifications will be on terms as favorable to it as those that could have been obtained from unaffiliated third parties.

 

The terms of Capital Crossing Preferred’s guarantee of obligations of Capital Crossing.  Capital Crossing Preferred has guaranteed all of the obligations of Capital Crossing under advances Capital Crossing may receive from time to time from the FHLBB, and has agreed to pledge a significant amount of it’s assets in connection with those advances. The assets Capital Crossing Preferred pledges to the FHLBB will vary from time to time; however, the potential exists for Capital Crossing Preferred to pledge all of its assets to the FHLBB to secure advances to Capital Crossing. In addition, Capital Crossing has pledged to the FHLBB all of the shares of Capital Crossing Preferred’s capital stock it owns as collateral for its FHLBB borrowings. Under the terms of the pledge, if Capital Crossing becomes undercapitalized the FHLBB may require Capital Crossing to dissolve Capital Crossing Preferred such that the assets of Capital Crossing Preferred are distributed to Capital Crossing. In this circumstance the holders of Series A and Series C Preferred shares would receive their liquidation preference only to the extent there are available assets of Capital Crossing Preferred following satisfaction of its outstanding obligations, including its guarantee of Capital Crossing’s FHLBB borrowings. At September 30, 2002, approximately $45.9 million, or 13.2%, of Capital Crossing Preferred assets have been pledged to and accepted by the FHLBB to secure advances to Capital Crossing. Capital Crossing has also agreed with the FHLBB that it will not request or accept advances from the FHLBB in excess of Capital Crossing Preferred’s total stockholders equity, less the stockholders equity attributable to the Series A and Series C preferred shares. As of September 30, 2002, this restriction would limit Capital Crossing’s ability to receive advances in excess of approximately $314.9 million. As of September 30, 2002, Capital Crossing had $129.0 million in outstanding FHLBB borrowings. The guarantee and pledge were approved by Capital Crossing Preferred’s independent directors, subject to certain requirements and limitations, including the requirement that Capital Crossing pay Capital Crossing Preferred a guarantee fee. Any default by Capital Crossing on its obligations which would require Capital Crossing Preferred to satisfy its guarantee could adversely affect its business and its ability to make timely payments of dividends.

 

The master loan purchase agreement was not the result of arm’s-length negotiations.  Capital Crossing Preferred acquires loans pursuant to the master mortgage loan purchase agreement between Capital Crossing Preferred and Capital Crossing, at an amount equal to Capital Crossing’s net carrying value for those mortgage assets. While Capital Crossing Preferred believes that the master mortgage loan purchase agreement was fair to all parties and consistent with market terms, all of it’s officers and three of its directors are also officers and/or directors of Capital Crossing and/or affiliates of Capital Crossing. Capital Crossing, as holder of all of Capital Crossing Preferred’s outstanding common stock, controls the election of all Capital Crossing Preferred directors, including the independent directors. Capital Crossing Preferred cannot provide assurance that the master mortgage loan purchase agreement was entered into on terms as favorable to Capital Crossing Preferred as those that could have been obtained from unaffiliated third parties.

 

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Neither Capital Crossing Preferred nor Capital Crossing have specific policies with respect to the purchase by Capital Crossing Preferred from Capital Crossing of particular loans or pools of loans

 

The lack of specific policies with respect to the purchase by Capital Crossing Preferred of loans from Capital Crossing could result in Capital Crossing Preferred acquiring lower quality mortgage assets from Capital Crossing than if such policies were otherwise in place. Neither Capital Crossing Preferred nor Capital Crossing currently have specific policies with respect to the purchase by Capital Crossing Preferred from Capital Crossing of particular loans or pools of loans, other than that such assets must be eligible to be held by a REIT. Capital Crossing Preferred’s Board of Directors has adopted certain policies to guide the acquisition and disposition of assets but these policies may be revised from time to time at the discretion of the Board of Directors without a vote of Capital Crossing Preferred’s stockholders. Capital Crossing Preferred intends to acquire all or substantially all of the additional mortgage assets it may acquire in the future from Capital Crossing on terms that are comparable to those that could be obtained by Capital Crossing Preferred if such mortgage assets were purchased from unrelated third parties, but Capital Crossing Preferred cannot provide assurance that this will always be the case.

 

Capital Crossing Preferred’s Board of Directors has broad discretion to revise Capital Crossing Preferred’s strategies

 

Capital Crossing Preferred’s Board of Directors has established Capital Crossing Preferred’s investment and operating strategies. These strategies may be revised from time to time at the discretion of the Board of Directors without a vote of Capital Crossing Preferred’s stockholders. Changes in Capital Crossing Preferred’s strategies could have a negative effect on shareholders.

 

Capital Crossing Preferred does not obtain third-party valuations and therefore it may pay more or receive less than fair market value for its mortgage assets

 

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

 

Capital Crossing Preferred may pay more than fair market value for mortgages it purchases from Capital Crossing because it does not engage in arm’s-length negotiations with Capital Crossing

 

Capital Crossing Preferred acquires mortgage assets from Capital Crossing under a master mortgage loan purchase agreement between it and Capital Crossing, at an amount equal to Capital Crossing’s net carrying value for those mortgage assets. Because Capital Crossing is an affiliate of Capital Crossing Preferred’s, Capital Crossing Preferred does not engage in any arm’s-length negotiations regarding the consideration to be paid. Accordingly, if Capital Crossing’s net carrying value exceeds the fair market value of the mortgage assets, Capital Crossing Preferred would pay Capital Crossing more than the fair market value for those mortgaged assets.

 

A decline in interest rates could reduce Capital Crossing Preferred earnings and affect its ability to pay dividends

 

Capital Crossing Preferred’s income consists primarily of interest earned on its mortgage assets and short-term investments. A significant portion of Capital Crossing Preferred’s mortgage assets bear interest at adjustable rates. If there is a decline in interest rates, then Capital Crossing Preferred will experience a decrease in income available to be distributed to its stockholders. If interest rates decline, Capital Crossing Preferred may also experience an increase in prepayments on its mortgage assets and may find it difficult to purchase additional mortgage assets bearing rates sufficient to support payment of dividends on the Series A and Series C preferred shares. Because the dividend rates on the Series A and Series C preferred shares are fixed, a significant decline in interest rates could materially adversely affect Capital Crossing Preferred’s ability to pay dividends on the Series A and Series C preferred shares.

 

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Tax Risks Related to REITs

 

If Capital Crossing Preferred fails to qualify as a REIT, it will be subject to federal income tax at regular corporate rates. If Capital Crossing Preferred fails to qualify as a REIT for any taxable year, it would be subject to federal income tax, including any applicable alternative minimum tax, on its taxable income at regular corporate rates. As a result, the amount available for distribution to Capital Crossing Preferred’s stockholders would be reduced for the year or years involved. In addition, unless entitled to relief under statutory provisions, Capital Crossing Preferred would be disqualified from treatment as a REIT for the four taxable years following the year which qualification was lost. The failure to qualify as a REIT would reduce Capital Crossing Preferred’s net earnings available for distribution to its stockholders because of the additional tax liability for the year or years involved. Capital Crossing Preferred’s failure to qualify as a REIT would not by itself give it the right to redeem the Series A or Series C preferred shares, nor would it give the holders of the Series A or Series C preferred shares the right to have their shares redeemed.

 

Although Capital Crossing Preferred currently intends to operate in a manner designed to qualify as a REIT, future economic, market, legal, tax or other considerations may cause it to determine that it is in its best interest and in the best interest of holders of its common stock and preferred stock to revoke its REIT election. The tax law prohibits Capital Crossing Preferred from electing treatment as a REIT for the four taxable years following the year of any such revocation.

 

If Capital Crossing Preferred does not distribute 90% of its net taxable income, it may not qualify as a REIT.  In order to qualify as a REIT, Capital Crossing Preferred generally is required each year to distribute to its stockholders at least 90% of its net taxable income, excluding net capital gains. Capital Crossing Preferred may retain the remainder of REIT taxable income or all or part of its net capital gain, but will be subject to tax at regular corporate rates on such income. In addition, Capital Crossing Preferred is subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions considered as paid by Capital Crossing Preferred with respect to any calendar year are less than the sum of (1) 85% of its ordinary income for the calendar year, (2) 95% of its capital gains net income for the calendar year and (3) 100% of any undistributed income from prior periods. Under certain circumstances, federal or state regulatory authorities may restrict Capital Crossing Preferred’s ability, as a subsidiary of Capital Crossing, to make distributions to its stockholders in an amount necessary to retain its REIT qualification. Such a restriction could result in Capital Crossing Preferred failing to qualify as a REIT. To the extent Capital Crossing Preferred’s REIT taxable income may exceed the actual cash received for a particular period, Capital Crossing Preferred may not have sufficient liquidity to make distributions necessary to retain its REIT qualification.

 

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

 

(1)                                  dividends paid by Capital Crossing Preferred with respect to its capital stock are not fully deductible by it for income tax purposes; or

 

(2)                                  Capital Crossing Preferred are otherwise unable to qualify as a REIT.

 

The occurrence of such changes in the tax laws or regulations will not, however, give the holders of the Series A or Series C preferred shares any right to have their shares redeemed.

 

Capital Crossing Preferred has imposed ownership limitations to protect its ability to qualify as a REIT, however, if ownership of the common stock of Capital Crossing becomes concentrated in a small number of individuals Capital Crossing Preferred may fail to qualify as a REIT. To maintain Capital Crossing Preferred’s status as a REIT, not more than 50% in value of Capital Crossing Preferred’s outstanding shares may be owned, directly or indirectly, by five or fewer individuals, as defined in the Internal Revenue Code, or the Code, to include certain entities, during the last half of each taxable year. Capital Crossing Preferred currently satisfies this requirement because for this purpose Capital Crossing Preferred’s common stock held by Capital Crossing is treated as held by Capital Crossing’s stockholders. However, it is possible that the ownership of Capital Crossing might become sufficiently concentrated in the future such that five or fewer individuals would be treated as having constructive ownership of more than 50% of the value of Capital Crossing Preferred’s stock. Capital Crossing Preferred may have difficulty monitoring the daily ownership and constructive ownership of its outstanding shares and, therefore, Capital Crossing Preferred cannot provide assurance that it will continue to meet the share ownership requirement. This risk may be increased in the future as Capital Crossing implements common stock repurchase programs because repurchases may cause ownership in Capital Crossing to become more concentrated. In addition, while the fact that the Series A and the Series C preferred shares may be redeemed or exchanged will not affect Capital Crossing Preferred’s REIT status prior to any such redemption or exchange, the redemption or exchange of all or a part of the Series A and Series C preferred shares could adversely affect Capital Crossing Preferred’s ability to satisfy the share ownership requirements in the future.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

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

 

In addition to the estimated changes in interest income resulting from the repricing of contractual loan rates, interest income can change substantially due to fluctuations in the amount of discount income and other interest and fee income recognized as a result of loan payoffs. The level of loan payoffs and related interest 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. Refer to pages 6-8 for a further analysis and discussion of the fluctuations in discount income.

 

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 payoffs. Capital Crossing’s senior management also approves and establishes pricing and funding decisions with respect to Capital Crossing Preferred’s overall asset and liability composition.

 

Capital Crossing Preferred’s methods for evaluating interest rate risk include an analysis of its interest-earning assets maturing or repricing within a given time period. Since Capital Crossing Preferred has no interest–bearing liabilities, a period of rising interest rates would tend to result in an increase in net interest income. A period of falling interest rates would tend to adversely affect net interest income.

 

The following table sets forth Capital Crossing Preferred’s interest-rate-sensitive assets categorized by repricing dates and weighted average yields at September 30, 2002. For fixed rate instruments, the repricing date is the maturity date. For adjustable-rate instruments, the repricing date is deemed to be the earliest possible interest rate adjustment date. Assets that are subject to immediate repricing are placed in the overnight column.

 

		Overnight			Within One Year			One to Two Years			Two to Three Years			Three to Four Years			Four to Five Years			Over Five Years			Total
		(dollars in thousands)
Interest-bearing deposits		$	88,142		$	100		$	—		$	—		$	—		$	—		$	—		$	88,242
Average interest rate		3.30		%	2.13		%
Fixed-rate loans(1)		—			59,510			29,070			19,093			13,557			9,988			27,270			158,488
Average interest rate					8.57		%	8.09		%	7.79		%	7.71		%	7.65		%	7.35		%
Adjustable-rate loans(1)		30,416			70,334			6,946			523			—			—			—			108,219
Average interest rate		7.41		%	6.97		%	8.79		%	8.84		%
Total rate-sensitive assets		$	118,558		$	129,944		$	36,016		$	19,616		$	13,557		$	9,988		$	27,270		$	354,949

 

(1)                                  Loans are presented at net amounts before deducting the allowance for loan losses and exclude non-performing loans.

 

Based on Capital Crossing Preferred’s experience, management applies the assumption that, on average, approximately 20% of the outstanding fixed and adjustable rate loans will prepay annually.

 

At September 30, 2002, the fair value of net loans was $261,946,000 as compared to the net carrying value of net loans of $258,290,000.  The fair value of interest-bearing deposits approximates carrying value.

 

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Item 4.  Controls and Procedures

 

As required by new Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, within the 90-day period prior to the filing of this report and under the supervision and with the participation of management, including the President and Treasurer, Capital Crossing Preferred has evaluated the effectiveness of the design and operation of its disclosure controls and procedures.  Based upon such evaluation, the President and Treasurer have concluded that such disclosure controls and procedures are effective in ensuring that material information relating to Capital Crossing Preferred is made known to the certifying officers by others within Capital Crossing Preferred during the period covered by this report.  There were no significant changes in Capital Crossing Preferred’s internal controls for financial reporting or in other factors that could significantly affect such internal controls subsequent to the date of such evaluation.  In connection with the new rules, Capital Crossing Preferred currently is in the process of further reviewing and documenting its disclosure controls and procedures, including its internal accounting controls, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that its systems evolve with its business.

 

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Part II

 

Item 1.  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

 

                On August 14, 2002, Capital Crossing, as the holder of 100 shares of Capital Crossing Preferred's voting common stock comprising all of the issued and outstanding voting common stock), executed a Written Consent of the Sole Common Stockholder unanimously approving the following resolutions as of June 3, 2002,  (i) setting the number of directors of Capital Crossing Preferred at six; and (ii) electing the following persons to serve as directors of Capital Crossing Preferred until the next annual meeting of the stockholders and until their successors are elected and qualify to so serve:  Nicholas W. Lazares, Richard Wayne, Edward F. Mehm, Jeffrey P. Ross, Michael J. Fox and Douglas Shaw.  Mr. Fox resigned as a director of Capital Crossing Preferred as of August 1, 2002.

 

Item 6.  Exhibits and Reports on Form 8-K

 

(a)                                  Exhibits.

 

99.1                           Certification pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 signed by Richard Wayne, President (Chief Executive Officer).

 

99.2                           Certification pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 signed by Edward F. Mehm, Treasurer (Principal Financial Officer).

 

(b)                                 Reports on Form 8-K.

 

No reports on Form 8-K were filed in the quarter ended September 30, 2002.

 

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SIGNATURES

 

Pursuant to the requirements 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.

 

 

Date: November 8, 2002	By: /s/ Richard Wayne
		Richard Wayne
		President  (Principal Executive Officer)
Date: November 8, 2002	By: /s/ Edward F. Mehm
		Edward F. Mehm
		Treasurer (Principal Financial Officer)

 

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CERTIFICATIONS

I, Richard Wayne, certify that:

 

1.                                       I have reviewed this quarterly report on Form 10-Q of Capital Crossing Preferred Corporation;

 

2.                                       Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.                                       Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.                                       The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b)                                     evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)                                      presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a)                                      all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b)                                     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.                                       The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: November 8, 2002	By: /s/ Richard Wayne
		Richard Wayne
		President  (Principal Executive Officer)

 

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I, Edward F. Mehm, certify that:

 

1.                                       I have reviewed this quarterly report on Form 10-Q of Capital Crossing Preferred Corporation;

 

2.                                       Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.                                       Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.                                       The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b)                                     evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)                                      presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a)                                      all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b)                                     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.                                       The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: November 8, 2002	By: /s/ Edward F. Mehm
		Edward F. Mehm
		Treasurer (Principal Financial Officer)

 

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EXHIBIT INDEX

 

Exhibit		Name
99.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 signed by Richard Wayne, President (Chief Executive Officer).
99.2		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 signed by Edward F. Mehm, Treasurer (Principal Financial Officer).

 

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