UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
For the Quarterly Period Ended September 30, 2008
Commission File Number 000-25193
CAPITAL CROSSING PREFERRED CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts
(State or other jurisdiction of incorporation or organization)
04-3439366
(I.R.S. Employer Identification Number)
101 Summer Street, Boston, Massachusetts
(Address of principal executive offices)
(617) 880-1000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
|
Accelerated filer
o
|
Non-accelerated filer
þ
(Do not check if a smaller reporting company)
|
Smaller reporting company
o
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
The number of shares outstanding of the registrants sole class of common stock was 100 shares,
$.01 par value per share, as of November 14, 2008. No common stock was held by non-affiliates of
the issuer.
Capital Crossing Preferred Corporation
Table of Contents
PART I
Item 1. Financial Statements
Capital Crossing Preferred Corporation
Balance Sheets
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash account with parent
|
|
$
|
208
|
|
|
$
|
208
|
|
Interest bearing deposits with parent
|
|
|
63,092
|
|
|
|
50,373
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
63,300
|
|
|
|
50,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of discounts and net deferred loan income
|
|
|
55,792
|
|
|
|
66,654
|
|
Less allowance for loan losses
|
|
|
(970
|
)
|
|
|
(1,180
|
)
|
|
|
|
|
|
|
|
Loans, net
|
|
|
54,822
|
|
|
|
65,474
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
223
|
|
|
|
298
|
|
Other assets
|
|
|
11
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
$
|
118,356
|
|
|
$
|
116,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
$
|
964
|
|
|
$
|
989
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
964
|
|
|
|
989
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, Series B, 8% cumulative, non-convertible;
$.01 par value; $1,000 liquidation value per share plus
accrued dividends; 1,000 shares authorized, 937 shares
issued and outstanding
|
|
|
|
|
|
|
|
|
Preferred stock, Series D, 8.50% non-cumulative, exchangeable;
$.01 par value; $25 liquidation value per share; 1,725,000 shares
authorized, 1,500,000 shares issued and outstanding
|
|
|
15
|
|
|
|
15
|
|
Common stock, $.01 par value, 100 shares authorized,
issued and outstanding
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
115,354
|
|
|
|
115,354
|
|
Retained earnings
|
|
|
2,023
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
117,392
|
|
|
|
115,369
|
|
|
|
|
|
|
|
|
|
|
$
|
118,356
|
|
|
$
|
116,358
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
1
Capital Crossing Preferred Corporation
Statements of Income
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
1,298
|
|
|
$
|
1,532
|
|
|
$
|
3,845
|
|
|
$
|
5,449
|
|
Interest on interest-bearing deposits
|
|
|
269
|
|
|
|
187
|
|
|
|
739
|
|
|
|
580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
1,567
|
|
|
|
1,719
|
|
|
|
4,584
|
|
|
|
6,029
|
|
Reduction in allowance for loan losses
|
|
|
55
|
|
|
|
85
|
|
|
|
210
|
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income, after reduction in allowance for loan losses
|
|
|
1,622
|
|
|
|
1,804
|
|
|
|
4,794
|
|
|
|
6,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee fee income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan servicing and advisory services
|
|
|
52
|
|
|
|
60
|
|
|
|
151
|
|
|
|
136
|
|
Other general and administrative
|
|
|
72
|
|
|
|
52
|
|
|
|
173
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
124
|
|
|
|
112
|
|
|
|
324
|
|
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1,498
|
|
|
|
1,692
|
|
|
|
4,470
|
|
|
|
6,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
816
|
|
|
|
816
|
|
|
|
2,447
|
|
|
|
3,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholder
|
|
$
|
682
|
|
|
$
|
876
|
|
|
$
|
2,023
|
|
|
$
|
2,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
2
Capital Crossing Preferred Corporation
Statements of Changes in Stockholders Equity
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended September 30, 2008
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Total
|
|
|
|
Series B
|
|
|
Series D
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
(in thousands)
|
|
Balance at December 31, 2007
|
|
|
1
|
|
|
$
|
|
|
|
|
1,500
|
|
|
$
|
15
|
|
|
|
|
|
|
$
|
|
|
|
$
|
115,354
|
|
|
$
|
|
|
|
$
|
115,369
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,470
|
|
|
|
4,470
|
|
Cumulative dividends on preferred stock, Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56
|
)
|
|
|
(56
|
)
|
Dividends on preferred stock, Series D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,391
|
)
|
|
|
(2,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
|
1
|
|
|
$
|
|
|
|
|
1,500
|
|
|
$
|
15
|
|
|
|
|
|
|
$
|
|
|
|
$
|
115,354
|
|
|
$
|
2,023
|
|
|
$
|
117,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Total
|
|
|
|
Series A
|
|
|
Series B
|
|
|
Series C
|
|
|
Series D
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
(in thousands)
|
|
Balance at December 31, 2006
|
|
|
1,416
|
|
|
$
|
14
|
|
|
|
1
|
|
|
$
|
|
|
|
|
1,840
|
|
|
$
|
18
|
|
|
|
1,500
|
|
|
$
|
15
|
|
|
|
|
|
|
$
|
|
|
|
$
|
172,640
|
|
|
$
|
|
|
|
$
|
172,687
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,089
|
|
|
|
6,089
|
|
Redemption of preferred stock, Series
A and C
|
|
|
(1,416
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,840
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,529
|
)
|
|
|
|
|
|
|
(32,561
|
)
|
Dividends on preferred stock, Series A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(314
|
)
|
|
|
(314
|
)
|
Cumulative dividends on preferred
stock, Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56
|
)
|
|
|
(56
|
)
|
Dividends on preferred stock, Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(430
|
)
|
|
|
(430
|
)
|
Dividends on preferred stock, Series D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,391
|
)
|
|
|
(2,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
|
|
|
$
|
|
|
|
|
1
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
1,500
|
|
|
$
|
15
|
|
|
|
|
|
|
$
|
|
|
|
$
|
140,111
|
|
|
$
|
2,898
|
|
|
$
|
143,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
3
Capital Crossing Preferred Corporation
Statements of Cash Flows
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Cash flows provided by operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,470
|
|
|
$
|
6,089
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Reduction in allowance for loan losses
|
|
|
(210
|
)
|
|
|
(284
|
)
|
Other, net
|
|
|
44
|
|
|
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
4,304
|
|
|
|
5,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by investing activities:
|
|
|
|
|
|
|
|
|
Loan repayments
|
|
|
10,862
|
|
|
|
17,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
10,862
|
|
|
|
17,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities:
|
|
|
|
|
|
|
|
|
Redemption of preferred stock, Series A and C
|
|
|
|
|
|
|
(32,561
|
)
|
Payment of preferred stock dividends
|
|
|
(2,447
|
)
|
|
|
(3,191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(2,447
|
)
|
|
|
(35,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
12,719
|
|
|
|
(12,957
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
50,581
|
|
|
|
83,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
63,300
|
|
|
$
|
70,943
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
4
Capital Crossing Preferred Corporation
Notes to Financial Statements
Three and Nine Months Ended September 30, 2008 and 2007
Note 1.
Basis of Presentation
Capital Crossing Preferred Corporation (Capital Crossing Preferred) is a Massachusetts
corporation organized on March 20, 1998, to acquire and hold real estate assets. Lehman Brothers
Bank, FSB (Lehman Bank), a subsidiary of Lehman Brothers Holdings Inc. (LBHI; LBHI with its
subsidiaries, Lehman Brothers), owns all of Capital Crossing Preferreds common stock. Lehman
Bank is in compliance with its regulatory capital requirements at September 30, 2008. Prior to the
merger with Lehman Bank, which is further discussed below, Capital Crossing Preferred was a
subsidiary of Capital Crossing Bank (Capital Crossing), a federally insured Massachusetts trust
company, and Capital Crossing owned all of Capital Crossing Preferreds common stock. Capital
Crossing Preferred operates in a manner intended to allow it to be taxed as a real estate
investment trust, or a REIT, under the Internal Revenue Code of 1986, as amended. As a REIT,
Capital Crossing Preferred generally will not be required to pay federal income tax if it
distributes its earnings to its shareholders and continues to meet a number of other requirements.
On March 31, 1998, Capital Crossing capitalized Capital Crossing Preferred by transferring
mortgage loans valued at $140.7 million in exchange for 1,000 shares of Capital Crossing
Preferreds 8% Cumulative Non-Convertible Preferred Stock, Series B, valued at $1.0 million and 100
shares of Capital Crossing Preferreds common stock valued at $139.7 million. The carrying value of
these loans approximated their fair values at the date of contribution.
In 1999, Capital Crossing Preferred completed the sale of 1,416,130 shares of Series A
preferred stock. In 2001, Capital Crossing Preferred completed the sale of 1,840,000 shares of
Series C preferred stock. In May 2004, Capital Crossing Preferred completed the sale of 1,500,000
shares of Series D preferred stock.
On February 14, 2007, Capital Crossing was acquired by Lehman Bank through a two step merger
transaction. An interim thrift subsidiary of Lehman Bank was merged into Capital Crossing.
Immediately following such merger, Capital Crossing was merged into Lehman Bank. Under the terms of
the agreement, Lehman Brothers paid $30.00 per share in cash in exchange for each outstanding share
of Capital Crossing.
Upon completion of the merger, Capital Crossing Preferreds Board of Directors amended Capital
Crossing Preferreds charter so that upon an Exchange Event, as defined therein, the Series A,
Series C and Series D preferred shares of Capital Crossing would be automatically exchanged for
preferred shares of Lehman Bank. On March 23, 2007, Capital Crossing Preferred redeemed the Series
A and C preferred shares. The Series B preferred shares and Series D preferred shares currently are
outstanding and remain subject to their existing terms and conditions, including their respective
call features.
As noted above, all of the common stock of Capital Crossing Preferred is owned by Lehman Bank,
a subsidiary of LBHI. On September 15, 2008, LBHI filed a voluntary petition under Chapter 11 of
the U.S. Bankruptcy Code. The bankruptcy filing, while affecting LBHI, has not had a material
impact on Capital Crossing Preferred or its operations and Capital Crossing Preferred will continue
to operate in the ordinary course of business.
The financial information as of September 30, 2008 and the results of operations for the three
and nine months ended September 30, 2008 and 2007 and, changes in stockholders equity and cash
flows for the nine months ended September 30, 2008 and 2007 are unaudited; however, in the opinion
of management, the financial information reflects all adjustments (consisting solely of normal
recurring accruals) necessary for a fair presentation in accordance with accounting principles
generally accepted in the United States of America (GAAP). The interim financial statements for
the three and nine months ended September 30, 2008 and 2007 are comparable as there were no changes
in accounting principles as a result of the merger. Interim results are not necessarily indicative
of results to be expected for the entire year. These interim financial statements are intended to
be read in conjunction with the financial statements presented in Capital Crossing Preferreds
Annual Report on Form 10-K as of, and for the year ended December 31, 2007.
In preparing financial statements in conformity with GAAP, management is required to make
estimates and assumptions that affect the reported amounts of assets and liabilities as of the date
of the balance sheet and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination of the allowance for
losses on loans, the allocation of purchase discount on loans between accretable and nonaccretable
portions, and the rate at which the discount is accreted into interest income.
Note 2.
Recent Accounting Pronouncements
In July 2006, to improve comparability in the reporting of income tax assets and liabilities
in the absence of guidance in existing income tax accounting standards, the Financial Accounting
Standards Board (FASB) issued Interpretation No. 48, Accounting for
5
Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109. Generally, this Interpretation clarifies the
accounting for uncertainty in income taxes recognized in a companys financial statements in
accordance with existing income tax accounting standards, and prescribes certain thresholds and
attributes for the financial statement recognition and measurement of tax positions taken or
expected to be taken in a tax return. The provisions of the Interpretation were applied on January 1,
2007, and did not have a material impact on the Capital Crossing Preferreds financial position or
results of operations. The earliest year open to examination is 2005.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements. This new standard defines fair values, establishes a framework for measuring
fair value in conformity with GAAP, and expands disclosures about fair value measurements. Prior to
this standard, there were varying definitions of fair value and limited guidance for applying those
definitions under GAAP. In addition, the guidance was dispersed among many accounting
pronouncements that require fair value measurements. This standard is intended to increase
consistency and comparability in fair value measurements and disclosures about fair value
measurements. The provisions of this standard are effective January 1, 2008. Since Capital Crossing
Preferred does not report any of its assets or liabilities at fair value on the balance sheet, the
adoption of this standard did not have a material impact on Capital Crossing Preferreds financial
statements.
Note 3.
Liquidation and Dissolution
On October 27, 2008, the Board of Directors of Capital Crossing Preferred unanimously
approved, subject to obtaining the approval of the Office of Thrift Supervision (OTS) to the
extent required by law or regulation or policy of the OTS, the voluntary complete liquidation and
dissolution of Capital Crossing Preferred. The liquidation and dissolution was approved by Lehman
Bank, in its capacity as the holder of all of the outstanding common stock of Capital Crossing
Preferred. On or before December 1, 2008, subject to obtaining any prior required approval of the
OTS, Capital Crossing Preferred intends to declare one or more liquidating distributions in cash to
the holders of shares of Series D preferred stock and Series B preferred stock representing the
full liquidation preferences on the Series D preferred stock and the Series B preferred stock of
$25.00 per share and $1,000 per share, respectively, plus any accrued but unpaid dividends thereon
from the beginning of the dividend period in which the liquidation occurs to the date of
liquidation.
In connection with the anticipated liquidation and dissolution, the Board of Directors also
approved the voluntarily delisting of the Series D preferred stock from The NASDAQ Stock Market,
which is expected to occur concurrently with the consummation of the liquidation and dissolution.
Upon consummation of the liquidation and dissolution, Capital Crossing Preferred will also
terminate its obligations to file reports with the Securities and Exchange Commission.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities
Act of 1933, as amended. For purposes of these Acts, any statement that is not a statement of
historical fact may be deemed a forward-looking statement. For example, statements containing the
words believes, anticipates, plans, expects, estimates, intends, may, projects,
will, would, and similar expressions may be forward-looking statements. Capital Crossing
Preferred cautions investors not to place undue reliance on any forward-looking statements in this
Quarterly Report on Form 10-Q. Capital Crossing Preferred undertakes no obligation to publicly
update any forward-looking statements, whether as a result of new information, future events or
otherwise. There are a number of factors that could cause Capital Crossing Preferreds actual
results to differ materially from those indicated by these forward-looking statements, including
without limitation the factors set forth below in Part II, Item 1A. Risk Factors. These factors
and the other cautionary statements made in this quarterly report should be read as being
applicable to all related forward-looking statements wherever they appear in this quarterly report.
If one or more of these factors materialize, or if any underlying assumptions prove incorrect,
Capital Crossing Preferreds actual results, performance, or achievements may vary materially from
any future results, performance, or achievements expressed or implied by these forward-looking
statements.
The following discussion of Capital Crossing Preferreds financial condition, results of
operations, capital resources and liquidity should be read in conjunction with the Financial
Statements and related Notes included elsewhere herein and the audited Financial Statements and
related Notes included in Capital Crossing Preferreds Annual Report on Form 10-K for the year
ended December 31, 2007 as filed with the Securities and Exchange Commission, (the SEC).
Executive Level Overview
On October 27, 2008, the Board of Directors of Capital Crossing Preferred unanimously
approved, subject to obtaining the approval of the OTS to the extent required by law or regulation
or policy of the OTS, the voluntary complete liquidation and dissolution of Capital Crossing
Preferred. The liquidation and dissolution was approved by Lehman Bank, in its capacity as the
holder of all of the outstanding common stock of Capital Crossing Preferred. In connection with
the anticipated liquidation and dissolution, the Board of Directors also approved the voluntarily
delisting of the Series D preferred stock from The NASDAQ Stock Market, which is expected to occur
concurrently with the consummation of the liquidation and dissolution. Upon consummation of the
liquidation and dissolution, Capital Crossing Preferred will also terminate its obligations to file
reports with the Securities and Exchange Commission.
6
Net income available to the common shareholder decreased $194,000, or 22.1%, to $682,000 for
the three months ended September 30, 2008 compared to $876,000 for the same period in 2007. The
decrease is primarily the result of a decrease in interest and fees on loans and a decrease in the
reduction in allowance for loan losses. Net income available to the common shareholder decreased
$875,000, or 30.2%, to $2.0 million for the nine months ended September 30, 2008 compared to $2.9
million for the same period in 2007. The decrease is primarily the result of a decrease in interest
and fees on loans and an increase in operating expenses, partially offset by a
decrease in preferred stock dividends. The decrease in interest and fees on loans for both
the three and nine month periods is primarily due to a smaller loan portfolio as a result of loan
amortization and repayments. The decrease in preferred stock dividends for the nine month period
is due to the redemption of the Series A and Series C preferred shares in March 2007.
All of the mortgage assets in Capital Crossing Preferreds loan portfolio at September 30,
2008 were acquired from Capital Crossing, previously the sole common shareholder. As of September
30, 2008, Capital Crossing Preferred held loans acquired from Capital Crossing with net investment
balances of $55.8 million.
Commercial mortgage loans constituted approximately 58.9% of the net loans in Capital Crossing
Preferreds loan portfolio at September 30, 2008. Commercial mortgage loans are generally subject
to greater risks than other types of loans. Capital Crossing Preferreds commercial mortgage loans,
like most commercial mortgage loans, generally lack standardized terms, tend to have shorter
maturities than other mortgage loans and may not be fully amortizing. For these reasons, Capital
Crossing Preferred may experience higher rates of default on its mortgage loans than it would if
its loan portfolio was more diversified and included a greater number of owner-occupied residential
or other mortgage loans.
Properties underlying Capital Crossing Preferreds current mortgage assets are also
concentrated primarily in California and New England. As of September 30, 2008, approximately 63.9%
of the balances of its mortgage loans were secured by properties located in California and 7.3% in
New England. In the instance where either region experiences adverse economic, political or
business conditions, Capital Crossing Preferred would likely experience higher rates of loss and
delinquency on its mortgage loans.
Since Capital Crossing Preferred is a subsidiary of Lehman Bank, federal bank regulatory
authorities will have the right to examine it and its activities and under certain circumstances,
to impose restrictions on Lehman Bank or Capital Crossing Preferred which could impact Capital
Crossing Preferreds ability to conduct its business according to its business objectives. For
instance, if Lehman Banks regulators determine that Lehman Banks relationship to Capital Crossing
Preferred results in an unsafe and unsound banking practice, the regulators could restrict Capital
Crossing Preferreds ability to transfer assets, to make distributions to its stockholders or even
require Lehman Bank to sever its relationship with or divest its ownership interest in Capital
Crossing Preferred.
Decisions regarding the utilization of Capital Crossing Preferreds cash are based, in large
part, on its future commitments to pay preferred stock dividends. During the three months ended
September 30, 2008, the loan portfolio was large enough to generate income resulting in net income,
which was 1.84 times fixed charges and preferred stock dividends. Future decisions regarding
mortgage asset acquisitions and returns of capital will be based on the level of preferred stock
dividends at the time and the required level of income necessary to generate adequate dividend
coverage.
Application of Critical Accounting Policies and Estimates
The SEC requires that all registrants discuss their most critical accounting policies in
managements discussion and analysis of financial condition and results of operations. The SEC
indicated that a critical accounting policy is one which is both important to the portrayal of
the companys financial condition and results and requires managements most difficult, subjective
or complex judgments, often as a result of the need to make estimates about the effect of matters
that are inherently uncertain. While Capital Crossing Preferreds significant accounting policies
are more fully described in Note 1 to the Financial Statements included in its Annual Report on
Form 10-K for the year ended December 31, 2007, the following is a summary of the accounting
policies believed by management to be most critical in their potential effect on Capital Crossing
Preferreds financial position or results of operations:
Discounts on Acquired Loans.
In accordance with Statement of Position (SOP) No. 03-3
Accounting for Certain Loans or Debt Securities Acquired in a Transfer, Capital Crossing
Preferred reviews acquired loans for differences between contractual cash flows and cash flows
expected to be collected from Capital Crossing Preferreds initial investment in the acquired loans
to determine if those differences are attributable, at least in part, to credit quality. If those
differences are attributable to credit quality, the loans contractually required payments
receivable in excess of the amount of its cash flows expected at acquisition, or nonaccretable
discount, is not accreted into income. SOP No. 03-3 requires that Capital Crossing Preferred
recognize the excess of all cash flows expected at acquisition over Capital Crossing Preferreds
initial investment in the loan as interest income using the interest method over the term of the
loan. This excess is referred to as accretable discount.
No loans acquired since the adoption of SOP No. 03-3 were within the scope of the SOP.
7
Loans which, at acquisition, do not have evidence of deterioration of credit quality since
origination are outside the scope of SOP No. 03-3. For such loans, the discount, representing the
excess of the amount of reasonably estimable and probable discounted future cash collections over
the purchase price, is accreted into interest income using the interest method over the term of the
loan. Prepayments are not considered in the calculation of accretion income. Additionally, discount
is not accreted on non-performing loans.
There is judgment involved in estimating the amount of Capital Crossing Preferreds future
cash flows on acquired loans. The amount and timing of actual cash flows could differ materially
from managements estimates, which could materially affect Capital Crossing Preferreds financial
condition and results of operations. Depending on the timing of an acquisition of loans, a
preliminary allocation may be utilized until a final allocation is established. Generally, the allocation
will be finalized no later than ninety days from the date of purchase.
If cash flows cannot be reasonably estimated for any loan, and collection is not probable, the
cost recovery method of accounting is used. Under the cost recovery method, any amounts received
are applied against the recorded amount of the loan. Nonaccretable discount is generally offset
against the related principal balance when the amount at which a loan is resolved or restructured
is determined. There is no effect on the income statement as a result of these reductions.
Subsequent to acquisition, if cash flow projections improve, and it is determined that the
amount and timing of the cash flows related to the nonaccretable discount are reasonably estimable
and collection is probable, the corresponding decrease in the nonaccretable discount is transferred
to the accretable discount and is accreted into interest income over the remaining life of the loan
on the interest method. If cash flow projections deteriorate subsequent to acquisition, the decline
is accounted for through a provision for loan losses included in earnings.
Allowance for Loan Losses.
Arriving at an appropriate level of allowance for loan losses
requires a high degree of judgment. Capital Crossing Preferred maintains an allowance for probable
loan losses that are inherent in its loan portfolio. The allowance for loan losses is increased or
decreased through a provision for loan losses or a reduction in the allowance for loan losses
included in earnings.
In determining the adequacy of the allowance for loan losses, management makes significant
judgments. Management initially reviews its loan portfolio to identify loans for which specific
allocations are considered prudent. Specific allocations include the results of measuring impaired
loans under Statement of Financial Accounting Standards (SFAS) No. 114 Accounting by Creditors
for Impairment of a Loan. Next, management considers the level of loan allowances deemed
appropriate for loans determined not to be impaired under SFAS No. 114. The allowance for these
loans is determined by a formula whereby the portfolio is stratified by type and internal risk
rating categories. Loss factors are then applied to each strata based on various considerations
including collateral type, loss experience, delinquency trends, current economic conditions,
industry standards, and regulatory guidelines. The allowance for loan losses is managements
estimate of the probable loan losses incurred as of the balance sheet date. There can be no
assurance that Capital Crossing Preferreds actual losses with respect to loans will not exceed its
allowance for loan losses.
The allowance for loan losses is increased through a provision for loan losses included in
earnings when management changes its estimate of probable losses inherent in the portfolio. The
allowance for loan losses is decreased upon sales or payoffs of loans for which a related allowance
remains unused. Reductions in connection with sales are included in the calculation of the gain or
loss, and reductions related to payoffs are recorded as a reduction in the allowance for loan
losses included in earnings. Loan losses are charged against the allowance when management believes
the net investment of the loan, or a portion thereof, is uncollectible. Subsequent recoveries, if
any, are credited to the allowance when cash payments are received. It is anticipated that the
allowance will continue to decline as reductions in the allowance for loan losses may continue to
be recorded if loans pay off and allowance allocations related to these loans are not required or
if additions due to loan impairment are not required.
Gains and losses on sales of loans are determined using the specific identification method.
The excess (deficiency) of any cash received as compared to the net investment is recorded as gain
(loss) on sales of loans. There were no loans held for sale at September 30, 2008 and there were no
loans sold during the nine months ended September 30, 2008.
8
Results of Operations for the Three Months Ended September 30, 2008 and 2007
Interest income
The following table sets forth the yields on Capital Crossing Preferreds earning assets for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
|
Balance
|
|
|
Income
|
|
|
Yield
|
|
|
Balance
|
|
|
Income
|
|
|
Yield
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net (1)
|
|
$
|
56,466
|
|
|
$
|
1,298
|
|
|
|
9.14
|
%
|
|
$
|
76,754
|
|
|
$
|
1,532
|
|
|
|
7.92
|
%
|
Interest-bearing deposits
|
|
|
61,181
|
|
|
|
269
|
|
|
|
1.75
|
|
|
|
67,224
|
|
|
|
187
|
|
|
|
1.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
117,647
|
|
|
$
|
1,567
|
|
|
|
5.30
|
%
|
|
$
|
143,978
|
|
|
$
|
1,719
|
|
|
|
4.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Non-performing loans are excluded from average balance calculations.
|
The decline in interest income for the three months ended September 30, 2008 compared to the
three months ended September 30, 2007 is primarily due to a decrease in the average balance of
loans and interest bearing deposits offset, in part, by an increase in the yield on loans and
interest-bearing deposits.
Average loans, net for the three months ended September 30, 2008 totaled $56.5 million
compared to $76.8 million for the same period in 2007. This decrease is primarily attributable to
loan pay-offs, amortization and sales of loans. No loans have been acquired by Capital Crossing
Preferred since 2005. For the three months ended September 30, 2008, the yield on the loan
portfolio increased to 9.14% compared to 7.92% for the same period in 2007. For the three months
ended September 30, 2008, interest and fee income recognized on loan payoffs increased $269,000 to
$275,000 from $6,000 for the three months ended September 30, 2007. The level of interest and fee
income recognized on loan payoffs varies for numerous reasons, as further discussed below. The
yield from regularly scheduled interest and accretion income decreased to 7.20% for the three
months ended September 30, 2008 from 7.89% for the same period in 2007 primarily due to decreases
in market rates.
Income on loans includes the portion of the purchase discount that is accreted into income
over the remaining lives of the related loans using the interest method. Because the carrying value
of the loan portfolio is net of purchase discount, the related yield on this portfolio generally is
higher than the aggregate contractual rate paid on the loans. The total yield includes the excess
of a loans expected discounted future cash flows over its net investment, recognized using the
interest method.
9
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 Lehman Banks acquisition of the
loan, interest collected if on non-performing status, prepayment fees and other loan fees (other
interest and fee income). The following table sets forth, for the periods indicated, the
components of interest and fees on loans. There can be no assurance regarding future interest
income, including the yields and related level of such income, or the relative portion attributable
to loan pay-offs as compared to other sources.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Interest
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Income
|
|
|
Yield
|
|
|
Income
|
|
|
Yield
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regularly scheduled interest and accretion income
|
|
$
|
1,023
|
|
|
|
7.20
|
%
|
|
$
|
1,526
|
|
|
|
7.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income recognized on loan payoffs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccretable discount
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
0.00
|
|
Accretable discount
|
|
|
271
|
|
|
|
1.91
|
|
|
|
5
|
|
|
|
0.03
|
|
Other interest and fee income
|
|
|
4
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275
|
|
|
|
1.94
|
|
|
|
6
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,298
|
|
|
|
9.14
|
%
|
|
$
|
1,532
|
|
|
|
7.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of loan payoffs and related discount income is influenced by several factors,
including the interest rate environment, the real estate market in particular areas, the timing of
transactions, and circumstances related to individual borrowers and loans. The amount of individual
loan payoffs is often times a result of negotiations between Capital Crossing Preferred and the
borrower. Based upon credit risk analysis and other factors, Capital Crossing Preferred will, in
certain instances, accept less than the full amount contractually due in accordance with the loan
terms.
The average balance of interest-bearing deposits decreased $6.0 million or 9.0% to $61.2
million for the three months ended September 30, 2008, compared to $67.2 million for the same
period in 2007. The changes in the average balances of interest-bearing deposits are the result of
periodic dividend payments and returns of capital offset by cash flows from loan repayments. The
interest rate on interest-bearing deposits increased to 1.75% for the three months ended September
30, 2008 compared to 1.10% for the same period in 2007 as a result of an increased rate paid by
Lehman Bank compared to the rate paid by Capital Crossing.
Reduction in allowance for loan losses
The determination of the allowance for loan losses requires managements use of significant
estimates and judgments. In making this determination, management considers known information
relative to specific loans, as well as collateral type, loss experience, delinquency trends,
current economic conditions, industry trends and regulatory guidelines, generally. Based on these
factors, management estimates the probable loan losses incurred as of the reporting date and
increases or decreases the allowance through a provision for loan losses or a reduction in the
allowance for loan losses, respectively. Capital Crossing Preferred recorded reductions in the
allowance for loan losses of $55,000 and $85,000 for the three months ended September 30, 2008 and
2007, respectively. The decrease in the allowance is attributable to the continued decrease in the
balance of loans due to payoffs and no significant change in the credit profile of the remaining
portfolio during the period. Should the loan portfolio continue to decline without utilization of
the allowance for loan losses, future reductions in the allowance for loan losses may be necessary.
Operating expenses
Loan servicing and advisory expenses decreased $8,000, or 13.3%, to $52,000 for the three
months ended September 30, 2008 from $60,000 for the three months ended September 30, 2007. The
decrease is primarily the result of a decrease in loan servicing expenses due to the decrease in
the average balance of the loan portfolio.
Other general and administrative expenses increased $20,000 or 38.5%, to $72,000 for the three
months ended September 30, 2008 compared to $52,000 for the three months ended September 30, 2007.
This increase is primarily attributable to an increase in legal fees related to loan collection
matters and an increase in external tax return preparation and audit expenses.
10
Results of Operations for the Nine Months Ended September 30, 2008 and 2007
Interest income
The following table sets forth the yields on Capital Crossing Preferreds earning assets for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
|
Balance
|
|
|
Income
|
|
|
Yield
|
|
|
Balance
|
|
|
Income
|
|
|
Yield
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net (1)
|
|
$
|
60,766
|
|
|
$
|
3,845
|
|
|
|
8.45
|
%
|
|
$
|
82,967
|
|
|
$
|
5,449
|
|
|
|
8.78
|
%
|
Interest-bearing deposits
|
|
|
56,431
|
|
|
|
739
|
|
|
|
1.75
|
|
|
|
69,485
|
|
|
|
580
|
|
|
|
1.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
117,197
|
|
|
$
|
4,584
|
|
|
|
5.22
|
%
|
|
$
|
152,452
|
|
|
$
|
6,029
|
|
|
|
5.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Non-performing loans are excluded from average balance calculations.
|
The decline in interest income for the nine months ended September 30, 2008 compared to the
nine months ended September 30, 2007 is primarily due to a decrease in the average balance of loans
and interest bearing deposits and a decrease in the yield on loans offset, in part, by an increase
in the yield on interest-bearing deposits.
Average loans, net for the nine months ended September 30, 2008 totaled $60.8 million compared
to $83.0 million for the same period in 2007. This decrease is primarily attributable to loan
pay-offs, amortization and sales of loans. No loans have been acquired by Capital Crossing
Preferred since 2005. For the nine months ended September 30, 2008, the yield on the loan portfolio
decreased to 8.45% compared to 8.78% for the same period in 2007. For the nine months ended
September 30, 2008, interest and fee income recognized on loan payoffs increased $81,000, or 18.4%,
to $521,000 from $440,000 for the nine months ended September 30, 2007. The level of interest and
fee income recognized on loan payoffs varies for numerous reasons, as further discussed below. The
yield from regularly scheduled interest and accretion income decreased to 7.31% for the nine months
ended September 30, 2008 from 8.07% for the same period in 2007 primarily due to decreases in
market rates.
Income on loans includes the portion of the purchase discount that is accreted into income
over the remaining lives of the related loans using the interest method. Because the carrying value
of the loan portfolio is net of purchase discount, the related yield on this portfolio generally is
higher than the aggregate contractual rate paid on the loans. The total yield includes the excess
of a loans expected discounted future cash flows over its net investment, recognized using the
interest method.
11
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 Lehman Banks acquisition of the
loan, interest collected if on non-performing status, prepayment fees and other loan fees (''other
interest and fee income). The following table sets forth, for the periods indicated, the
components of interest and fees on loans. There can be no assurance regarding future interest
income, including the yields and related level of such income, or the relative portion attributable
to loan pay-offs as compared to other sources.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Interest
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Income
|
|
|
Yield
|
|
|
Income
|
|
|
Yield
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regularly scheduled interest and accretion income
|
|
$
|
3,324
|
|
|
|
7.31
|
%
|
|
$
|
5,009
|
|
|
|
8.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income recognized on loan payoffs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccretable discount
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
0.09
|
|
Accretable discount
|
|
|
459
|
|
|
|
1.01
|
|
|
|
292
|
|
|
|
0.47
|
|
Other interest and fee income
|
|
|
62
|
|
|
|
0.13
|
|
|
|
92
|
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
521
|
|
|
|
1.14
|
|
|
|
440
|
|
|
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,845
|
|
|
|
8.45
|
%
|
|
$
|
5,449
|
|
|
|
8.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of loan payoffs and related discount income is influenced by several factors,
including the interest rate environment, the real estate market in particular areas, the timing of
transactions, and circumstances related to individual borrowers and loans. The amount of individual
loan payoffs is often times a result of negotiations between Capital Crossing Preferred and the
borrower. Based upon credit risk analysis and other factors, Capital Crossing Preferred will, in
certain instances, accept less than the full amount contractually due in accordance with the loan
terms.
The average balance of interest-bearing deposits decreased $13.1 million or 18.8% to $56.4
million for the nine months ended September 30, 2008, compared to $69.5 million for the 2007
period. The changes in the average balances of interest-bearing deposits are the result of periodic
dividend payments and returns of capital offset by cash flows from loan repayments. Additionally,
on March 23, 2007, Capital Crossing Preferred redeemed the Series A and Series C preferred shares,
which caused a decrease of $32.6 million in interest-bearing deposits. The interest rate on
interest-bearing deposits increased to 1.75% for the nine months ended September 30, 2008 compared
to 1.12% for the same period in 2007 as a result of an increased rate paid by Lehman Bank compared
to the rate paid by Capital Crossing.
Reduction in allowance for loan losses
The determination of the allowance for loan losses requires managements use of significant
estimates and judgments. In making this determination, management considers known information
relative to specific loans, as well as collateral type, loss experience, delinquency trends,
current economic conditions, industry trends and regulatory guidelines, generally. Based on these
factors, management estimates the probable loan losses incurred as of the reporting date and
increases or decreases the allowance through a provision for loan losses or a reduction in the
allowance for loan losses, respectively. Capital Crossing Preferred recorded reductions in the
allowance for loan losses of $210,000 and $284,000 for the nine months ended September 30, 2008 and
2007, respectively. The decrease in the allowance is attributable to the continued decrease in the
balance of loans due to payoffs and no significant change in the credit profile of the remaining
portfolio during the period. Should the loan portfolio continue to decline without utilization of
the allowance for loan losses, future reductions in the allowance for loan losses may be necessary.
Other income
On May 18, 2007, Lehman Bank paid off all its remaining outstanding Federal Home Loan Bank of
Boston (FHLBB) advances. Prior to that, Capital Crossing Preferred had guaranteed all of the
obligations of Lehman Bank under advances Lehman Bank had received from the FHLBB. These FHLBB
obligations were assumed by Lehman Bank pursuant to the merger. As a result of the repayment, the
guarantee was released. Capital Crossing Preferred received an annual fee of $80,000 under this
agreement. Guarantee fee income for the nine months ended September 30, 2007 was $30,000.
Operating expenses
12
Loan servicing and advisory expenses increased $15,000, or 11.0%, to $151,000 for the nine
months ended September 30, 2008 from $136,000 for the nine months ended September 30, 2007. The
increase is primarily the result of loan expense reimbursements collected from a borrower at the
time of payoff during the nine months ended September 30, 2007 that were previously expensed by
Capital Crossing Preferred related to loan collection matters. This increase was partially offset
by a decrease in loan servicing expenses
due to the decrease in the average balance of the loan portfolio.
Other general and administrative expenses increased $55,000 or 46.6%, to $173,000 for the nine
months ended September 30, 2008 compared to $118,000 for the nine months ended September 30, 2007.
This increase is primarily attributable to a decrease in legal fee reimbursements collected from
borrowers previously expensed by Capital Crossing Preferred related to certain loan collection
matters and an increase in external tax return preparation and audit expenses.
Preferred stock dividends
Preferred stock dividends decreased for the nine months ended September 30, 2008 compared to
the same period in 2007 due to the redemption of the Series A and Series C preferred shares on
March 23, 2007.
On or before December 1, 2008, in connection with its anticipated liquidation and dissolution,
subject to obtaining any prior required approval of the OTS, Capital Crossing Preferred intends to
declare one or more liquidating distributions in cash to the holders of shares of Series D
preferred stock and Series B preferred stock representing the full liquidation preferences on the
Series D preferred stock and the Series B preferred stock of $25.00 per share and $1,000 per share,
respectively, plus any accrued but unpaid dividends thereon from the beginning of the dividend
period in which the liquidation occurs to the date of liquidation. In connection with the
anticipated liquidation and dissolution, the Board of Directors also approved the voluntarily
delisting of the Series D preferred stock from The NASDAQ Stock Market, which is expected to occur
concurrently with the consummation of the liquidation and dissolution.
Changes in Financial Condition
Interest-bearing deposits with parent
Interest-bearing deposits with parent consist entirely of money market accounts with Lehman
Bank. The balance of interest-bearing deposits increased $12.7 million to $63.1 million at
September 30, 2008 compared to $50.4 million at December 31, 2007. The increase in the balance of
interest-bearing deposits is primarily a result of cash flows from loan repayments.
Loan portfolio
To date, all of Capital Crossing Preferreds 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,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Mortgage loans on real estate:
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
32,886
|
|
|
$
|
41,400
|
|
Multi-family residential
|
|
|
21,921
|
|
|
|
24,396
|
|
One-to-four family residential
|
|
|
1,000
|
|
|
|
877
|
|
|
|
|
|
|
|
|
Total
|
|
|
55,807
|
|
|
|
66,673
|
|
Other
|
|
|
13
|
|
|
|
13
|
|
|
|
|
|
|
|
|
Total loans, net of discounts
|
|
|
55,820
|
|
|
|
66,686
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(970
|
)
|
|
|
(1,180
|
)
|
Net deferred loan fees
|
|
|
(28
|
)
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
54,822
|
|
|
$
|
65,474
|
|
|
|
|
|
|
|
|
Capital Crossing Preferred acquires primarily performing commercial real estate and
multifamily residential mortgage loans. During the nine month periods ended September 30, 2008 and
September 30, 2007, Capital Crossing Preferred did not acquire any loans from Capital Crossing or
Lehman Bank.
13
Non-performing loans, net of discount, totaled $682,000 at September 30, 2008. There were no
non-performing loans at December 31, 2007. Loans generally are placed on non-performing status and
the accrual of interest and accretion of discount are generally discontinued when the
collectibility of principal and interest is not probable or estimable. Unpaid interest income
previously accrued on such loans is reversed against current period interest income. A loan is
returned to accrual status when it is brought current in accordance with managements anticipated
cash flows at the time of acquisition and collection of principal and interest is probable and
estimable.
Discounts on Acquired Loans.
For information relating to Capital Crossing Preferreds
accounting policies related to discounts on acquired loans, see Application of Critical Accounting
Policies and Estimates Discounts on Acquired Loans.
The following table sets forth certain information relating to the activity in the
nonaccretable discount for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Balance at beginning of period
|
|
$
|
155
|
|
|
$
|
156
|
|
|
$
|
155
|
|
|
$
|
215
|
|
Amounts collected under the cost recovery method
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
155
|
|
|
$
|
155
|
|
|
$
|
155
|
|
|
$
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses.
Capital Crossing Preferreds allowance for loan losses at September
30, 2008 was $970,000. The determination of this allowance requires the use of estimates and
assumptions regarding the risks inherent in individual loans and the loan portfolio in its
entirety. In addition, regulatory agencies periodically review the adequacy of the allowance for
loan losses and may require Capital Crossing Preferred to make additions to its allowance for loan
losses. While management believes its estimates and assumptions are reasonable, there can be no
assurance that they will be proven to be correct in the future. The actual amount of future
provisions that may be required cannot be determined, and such provisions may exceed the amounts of
past provisions. Management believes that the allowance for loan losses is adequate to absorb the
known and inherent risks in Capital Crossing Preferreds loan portfolio at each date based on the
facts known to management as of such date. Management continues to monitor and modify the
allowances for general and specific loan losses as economic conditions dictate.
The following table sets forth certain information relating to the activity in the allowance
for loan losses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Balance at beginning of period
|
|
$
|
1,025
|
|
|
$
|
1,320
|
|
|
$
|
1,180
|
|
|
$
|
1,519
|
|
Reduction in allowance for loan losses
|
|
|
(55
|
)
|
|
|
(85
|
)
|
|
|
(210
|
)
|
|
|
(284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
970
|
|
|
$
|
1,235
|
|
|
$
|
970
|
|
|
$
|
1,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Risk
Capital Crossing Preferreds income consists primarily of interest income. If there is a
decline in market interest rates, Capital Crossing Preferred may experience a reduction in interest
income and a corresponding decrease in funds available to be distributed to its shareholders. The
reduction in interest income may result from downward adjustments of the indices upon which the
interest rates on loans are based and from prepayments of mortgage loans with fixed interest rates,
resulting in reinvestment of the proceeds in lower yielding mortgage loans. Capital Crossing
Preferred does not intend to use any derivative products to manage its interest rate risk.
Significant Concentration of Credit Risk
Concentration of credit risk generally arises with respect to Capital Crossing Preferreds
loan portfolio when a number of borrowers engage in similar business activities, or activities in
the same geographical region. Concentration of credit risk indicates the relative sensitivity of
Capital Crossing Preferreds performance to both positive and negative developments affecting a
particular industry or
14
geographic region. Capital Crossing Preferreds balance sheet exposure to
geographic concentrations directly affects the credit risk of the loans within its loan portfolio.
At September 30, 2008, 63.9% and 7.3% of Capital Crossing Preferreds net real estate loan
portfolio consisted of loans in California and New England, respectively. At December 31, 2007,
59.0% and 6.8% of Capital Crossing Preferreds net real estate loan portfolio consisted of loans
located in California and New England, respectively. Consequently, the portfolio may experience a
higher default rate in the event of adverse economic, political or business developments or natural
hazards in California or New England that may affect the ability of property owners to make
payments of principal and interest on the underlying mortgages.
Liquidity Risk Management
The objective of liquidity management is to ensure the availability of sufficient cash flows
to meet all of Capital Crossing Preferreds financial commitments and to capitalize on
opportunities for Capital Crossing Preferreds business expansion. In managing liquidity risk,
Capital Crossing Preferred takes into account various legal limitations placed on a REIT.
Capital Crossing Preferreds principal liquidity needs are:
|
|
|
to maintain an adequate portfolio size through the acquisition of additional
mortgage assets as mortgage assets currently in the loan portfolio mature, pay down
or prepay, and
|
|
|
|
|
to pay dividends on the preferred shares and common shares.
|
The acquisition of additional mortgage assets is intended to be funded primarily through
repayment of principal balances of mortgage assets by individual borrowers. Capital Crossing
Preferred does not have and does not anticipate having any material capital expenditures. To the
extent that the Board of Directors determines that additional funding is required, Capital Crossing
Preferred may raise such funds through additional equity offerings, debt financing or retention of
cash flow (after consideration of provisions of the Internal Revenue Code requiring the
distribution by a REIT of at least 90% of its REIT taxable income and taking into account taxes
that would be imposed on undistributed income), or a combination of these methods. Capital Crossing
Preferred does not currently intend to incur any indebtedness. The organizational documents of
Capital Crossing Preferred limit the amount of indebtedness which it is permitted to incur without
the approval of the Series D preferred stockholders to no more than 100% of the total stockholders
equity of Capital Crossing Preferred. Any such debt may include intercompany advances made by
Lehman Bank to Capital Crossing Preferred.
Capital Crossing Preferred may also issue additional series of preferred stock. However,
Capital Crossing Preferred may not issue additional shares of preferred stock ranking senior to the
Series D preferred shares without the consent of holders of at least two-thirds of the Series D
preferred shares, each voting as a separate class, outstanding at that time. Additional shares of
preferred stock ranking on a parity with the Series D preferred shares may not be issued without
the approval of a majority of Capital Crossing Preferreds independent directors.
Impact of Inflation and Changing Prices
Capital Crossing Preferreds asset and liability structure is substantially different from
that of an industrial company in that virtually all assets of Capital Crossing Preferred are
monetary in nature. Management believes the impact of inflation on financial results depends upon
Capital Crossing Preferreds ability to react to changes in interest rates and by such reaction,
reduce the inflationary impact on performance. Interest rates do not necessarily move in the same
direction, or at the same magnitude, as the prices of other goods and services.
Various information shown elsewhere in this quarterly report will assist the reader in
understanding how Capital Crossing Preferred is positioned to react to changing interest rates and
inflationary trends. In particular, the discussion of market risk and other maturity and repricing
information of Capital Crossing Preferreds assets is contained in Item 3, Quantitative and
Qualitative Disclosures About Market Risk, of this quarterly report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices and interest rates. It
is the objective of Capital Crossing Preferred to attempt to control risks associated with interest
rate movements. Capital Crossing Preferreds market risk arises primarily from interest rate risk
inherent in holding loans. To that end, management actively monitors and manages the interest rate
risk exposure of Capital Crossing Preferred.
Capital Crossing Preferreds management reviews, among other things, the sensitivity of
Capital Crossing Preferreds assets to interest rate changes, the book and market values of assets,
purchase and sale activity, and anticipated loan pay-offs. Lehman Banks
15
senior management also
approves and establishes pricing and funding decisions with respect to Capital Crossing Preferreds
overall asset and liability composition.
Capital Crossing Preferreds 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 Preferreds interest-rate-sensitive assets
categorized by repricing dates and weighted average yields at September 30, 2008. For fixed rate
instruments, the repricing date is the maturity date. For adjustable-rate instruments, the
repricing date is deemed to be the earliest possible interest rate adjustment date. Assets that are
subject to immediate repricing are placed in the overnight column.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
Over One
|
|
|
Over Two
|
|
|
Over Three
|
|
|
Over Four
|
|
|
Over
|
|
|
|
|
|
|
|
|
|
|
One
|
|
|
to Two
|
|
|
to Three
|
|
|
to Four
|
|
|
to Five
|
|
|
Five
|
|
|
|
|
|
|
Overnight
|
|
|
Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Interest-bearing deposits
|
|
$
|
63,092
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
63,092
|
|
|
|
|
1.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate loans (1)
|
|
|
|
|
|
|
11,048
|
|
|
|
7,971
|
|
|
|
6,810
|
|
|
|
5,181
|
|
|
|
3,254
|
|
|
|
7,092
|
|
|
|
41,356
|
|
|
|
|
|
|
|
|
7.83
|
%
|
|
|
7.46
|
%
|
|
|
7.60
|
%
|
|
|
7.44
|
%
|
|
|
6.99
|
%
|
|
|
6.72
|
%
|
|
|
|
|
Adjustable-rate loans (1)
|
|
|
720
|
|
|
|
10,603
|
|
|
|
1,096
|
|
|
|
550
|
|
|
|
413
|
|
|
|
291
|
|
|
|
81
|
|
|
|
13,754
|
|
|
|
|
10.48
|
%
|
|
|
6.08
|
%
|
|
|
7.17
|
%
|
|
|
6.30
|
%
|
|
|
6.18
|
%
|
|
|
6.11
|
%
|
|
|
6.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rate-sensitive assets
|
|
$
|
63,812
|
|
|
$
|
21,651
|
|
|
$
|
9,067
|
|
|
$
|
7,360
|
|
|
$
|
5,594
|
|
|
$
|
3,545
|
|
|
$
|
7,173
|
|
|
$
|
118,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Loans are presented at net amounts before deducting the allowance for loan losses and exclude
non-performing loans.
|
Based on Capital Crossing Preferreds experience, management applies the assumption that, on
average, approximately 12% of the outstanding fixed and adjustable rate loans will prepay annually.
Item 4. Controls and Procedures
Capital Crossing Preferreds management, with the participation of its President and Chief
Financial Officer, evaluated the effectiveness of Capital Crossing Preferreds disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September
30, 2008. Based on this evaluation, Capital Crossing Preferreds President and Chief Financial
Officer concluded that, as of September 30, 2008, Capital Crossing Preferreds disclosure controls
and procedures were (1) designed to ensure that material information relating to Capital Crossing
Preferred is made known to the President and Chief Financial Officer by others within the entity,
particularly during the period in which this report was being prepared, and (2) effective, in that
they provide reasonable assurance that information required to be disclosed by Capital Crossing
Preferred in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SECs rules and forms.
No change to our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the quarter ended September 30, 2008 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
16
PART II
Item 1A. Risk Factors
There were no material changes in Capital Crossing Preferreds risk factors compared to those
previously disclosed in its Form 10-K for the year ended December 31, 2007.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On November 12, 2008
the Board of Directors of Capital Crossing Preferred elected Thomas
OSullivan, age 42, as Chief Financial Officer of Capital Crossing Preferred. Mr. OSullivan is the
Chief Financial Officer of Lehman Bank and receives no separate compensation from Capital Crossing
Preferred for his services. He has served in a variety of capacities at Lehman Brothers since 2000.
He serves as an officer of Capital Crossing Preferred so long as he is an employee of Lehman
Brothers.
Item 6. Exhibits
|
|
|
31.1
|
|
Certification pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) of the President.
|
|
|
|
31.2
|
|
Certification pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) of the Chief Financial Officer.
|
|
|
|
32
|
|
Certification pursuant to 18 U.S.C. Section 1350 of the President and Chief Financial Officer.
|
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Capital Crossing
Preferred Corporation has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CAPITAL CROSSING PREFERRED CORPORATION
|
|
|
|
|
|
|
|
Date: November 14, 2008
|
By:
|
/s/ Daniel Wallace
|
|
|
|
Daniel Wallace
|
|
|
|
President (Principal Executive Officer)
|
|
|
|
|
|
Date: November 14, 2008
|
By:
|
/s/ Thomas OSullivan
|
|
|
|
Thomas OSullivan
|
|
|
|
Chief Financial Officer (Principal Financial Officer)
|
|
18
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
Page
|
Exhibit
|
|
Item
|
|
Number
|
|
|
|
|
|
|
|
31.1
|
|
Certification pursuant to Exchange Act Rules
13a-15(e) and 15d-15(e) of the President.
|
|
|
20
|
|
|
|
|
|
|
|
|
31.2
|
|
Certification pursuant to Exchange Act Rules
13a-15(e) and 15d-15(e) of the Chief Financial
Officer.
|
|
|
21
|
|
|
|
|
|
|
|
|
32
|
|
Certification pursuant to 18 U.S.C. Section 1350
of the President and Chief Financial Officer.
|
|
|
22
|
|
19
Capital Crossing Preferred (MM) (NASDAQ:CCPCN)
Historical Stock Chart
From Aug 2024 to Sep 2024
Capital Crossing Preferred (MM) (NASDAQ:CCPCN)
Historical Stock Chart
From Sep 2023 to Sep 2024