UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
December 31,
2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number
000-25193
CAPITAL CROSSING PREFERRED
CORPORATION
(Exact name of registrant as specified in its charter)
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Massachusetts
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04-3439366
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(State of incorporation)
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(IRS Employer
Identification No.)
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1271 Avenue of the Americas,
46
th
Floor
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10020
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New York, New York
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(Zip code)
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(Address of principal executive offices)
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Registrants telephone number, including area code:
(212) 377-1503
Securities registered pursuant to Section 12(b) of the
Act:
8.50% Non-Cumulative Exchangeable Preferred Stock, Series D
(Title of Class)
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
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No
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
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No
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Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files.) Yes
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statement incorporated by reference in Part III
of this
Form 10-K
or any amendment to this
Form 10-K.
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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):
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Large accelerated filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller reporting company
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(Do not check if a smaller reporting
company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
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No
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The number of shares outstanding of the registrants sole
class of common stock was 100 shares, $.01 par value
per share, as of March 31, 2010. No common stock was held
by non-affiliates of the registrant.
TABLE OF CONTENTS
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PART I
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ITEM 1. BUSINESS
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ITEM 1A. RISK FACTORS
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ITEM 1B. UNRESOLVED STAFF COMMENTS
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ITEM 2. PROPERTIES
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ITEM 3. LEGAL PROCEEDINGS
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ITEM 4. (REMOVED AND RESERVED).
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PART II
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ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
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ITEM 6. SELECTED FINANCIAL DATA
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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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BALANCE SHEETS
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STATEMENTS OF OPERATIONS
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STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
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STATEMENTS OF CASH FLOWS
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NOTES TO FINANCIAL STATEMENTS
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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ITEM 9A(T). CONTROLS AND PROCEDURES
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ITEM 9B. OTHER INFORMATION
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PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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ITEM 11. EXECUTIVE COMPENSATION
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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PART IV
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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SIGNATURES
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EXHIBIT INDEX
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EX-10.6 Termination to the Asset Exchange Agreement entered into on February 5, 2009, between the Company and Aurora Bank FSB, dated July 20, 2009
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EX-10.7 Asset Exchange Agreement between the Company and Aurora Bank FSB, dated November 18, 2009
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EX-10.8 Amended and Restated Master Service Agreement between the Company and Aurora Bank FSB, dated March 29, 2010
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EX-10.9 Amended and Restated Advisory Agreement between the Company and Aurora Bank FSB, dated March 29, 2010
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EX-12.1 Computation of Earnings to Fixed Charges
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EX-31.1 Certification pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) of the President
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EX-31.2 Certification pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) of the Chief Financial Officer
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EX-32 Certification pursuant to 18 U.S.C. Section 1350 of the President and Chief Financial Officer
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PART I
This report contains, and from time to time Capital Crossing
Preferred Corporation (the Company) may make,
certain statements that constitute forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Words such as
expects, anticipates,
believes, estimates and other similar
expressions or future or conditional verbs such as
will, should, would and
could are intended to identify such forward-looking
statements. These statements are not historical facts, but
instead represent the Companys current expectations, plans
or forecasts of its future results, growth opportunities,
business outlook, loan growth, credit losses, liquidity position
and other similar matters, including, but not limited to, the
ability to pay dividends with respect to the Series B and
Series D preferred stock, future bank regulatory actions
that may impact the Company and the effect of the bankruptcy of
Lehman Brothers Holdings Inc. on the Company. These statements
are not guarantees of future results or performance and involve
certain risks, uncertainties and assumptions that are difficult
to predict and often are beyond the Companys control.
Actual outcomes and results may differ materially from those
expressed in, or implied by, the Companys forward-looking
statements. You should not place undue reliance on any
forward-looking statement and should consider all uncertainties
and risks, including, among other things, the risks set forth
under Item 1A. Risk Factors, as well as those
discussed in any of the Companys other subsequent
Securities and Exchange Commission filings. Forward-looking
statements speak only as of the date they are made, and the
Company undertakes no obligation to update any forward-looking
statement to reflect the impact of circumstances or events that
arise after the date the forward-looking statement was made.
Possible events or factors could cause results or performance to
differ materially from what is expressed in our forward-looking
statements. These possible events or factors include, but are
not limited to, those risk factors discussed under Item 1A.
Risk Factors in this report and the following:
limitations by regulatory authorities on the Companys
ability to implement its business plan and restrictions on its
ability to pay dividends; further regulatory limitations on the
business of Aurora Bank FSB that are applicable to the Company;
negative economic conditions that adversely affect the general
economy, housing prices, the job market, consumer confidence and
spending habits which may affect, among other things, the credit
quality of our loan portfolios (the degree of the impact of
which is dependent upon the duration and severity of these
conditions); the level and volatility of interest rates; changes
in consumer, investor and counterparty confidence in, and the
related impact on, financial markets and institutions;
legislative and regulatory actions which may adversely affect
the Companys business and economic conditions as a whole;
the impact of litigation and regulatory investigations; various
monetary and fiscal policies and regulations; changes in
accounting standards, rules and interpretations and the impact
on the Companys financial statements; and changes in the
nature and quality of the types of loans held by the Company.
General
The Company is a Massachusetts corporation organized on
March 20, 1998, to acquire and hold real estate assets. The
Companys current principal business objective is to hold
mortgage assets that will generate net income for distribution
to stockholders. The Company may acquire additional mortgage
assets in the future, although management currently has no
intention of acquiring additional assets. Aurora Bank FSB
(individually and together with its subsidiaries, Aurora
Bank), formerly known as Lehman Brothers Bank, FSB, an
indirect wholly-owned subsidiary of Lehman Brothers Holdings
Inc. (LBHI and together with its subsidiaries,
Lehman Brothers), owns all of the Companys
common stock. Capital Crossing Bank was the sole common
stockholder of the Company until February 14, 2007. The
Company 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, the
Company 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.
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Bankruptcy
of Lehman Brothers Holdings Inc.
On September 15, 2008, LBHI, the indirect parent company of
Aurora Bank, filed a voluntary petition under Chapter 11 of
the U.S. Bankruptcy Code. The bankruptcy filing of LBHI has
materially and adversely affected the capital and liquidity of
Aurora Bank, the parent of the Company. This has led to
increased regulatory constraints being placed on Aurora Bank by
its bank regulatory authorities, primarily the Office of Thrift
Supervision (the OTS). Certain of these constraints
apply to Aurora Banks subsidiaries, including the Company.
As more fully discussed below, both the bankruptcy filing of
LBHI and the increased regulatory constraints placed on Aurora
Bank have negatively impacted the Companys ability to
conduct its business according to its business objectives.
Aurora
Bank Regulatory Actions and Capital Levels
On January 26, 2009, the OTS entered a cease and desist
order against Aurora Bank (the Order). The Order,
among other things, required Aurora Bank to file various
privileged prospective operating plans with the OTS to manage
the liquidity and operations of Aurora Bank going forward,
including a strategic plan. The Order requires Aurora Bank to
ensure that each of its subsidiaries, including the Company,
complies with the Order, including the operating restrictions
contained in the Order. These operating restrictions, among
other things, restrict transactions with affiliates, contracts
outside the ordinary course of business and changes in senior
executive officers, board members or their employment
arrangements without prior written notice to the OTS. In
addition, on February 4, 2009, the OTS issued a prompt
corrective action directive to Aurora Bank (the PCA
Directive). The PCA Directive required Aurora Bank to,
among other things, raise its capital ratios such that it will
be deemed to be adequately capitalized and places
additional constraints on Aurora Bank and its subsidiaries,
including the Company. More detailed information can be found in
the Order and the PCA Directive themselves, copies of which are
available on the OTS website (www.ots.treas.gov).
During 2009, the bankruptcy court approved or issued orders
permitting LBHI to take certain actions intended to strengthen
the capital position of Aurora Bank, including: (1) the
contribution of up to an aggregate of $180 million in cash
to Aurora Bank, (2) the transfer of ownership of certain
servicing rights to a subsidiary of Aurora Bank, (3) the
waiver of the payment by Aurora Bank and its subsidiaries of
certain servicing fees payable to LBHI and (4) the
termination of unfunded loan commitments of Aurora Bank and its
subsidiaries with specified borrowers. The capital contributions
from LBHI were received between February 2009 and December 2009
and totaled approximately $451 million. These actions,
together with others taken by Aurora Bank, resulted in Aurora
Bank being adequately capitalized as of
December 31, 2009. Also during 2009, the bankruptcy court
issued orders permitting Aurora Bank and LBHI to enter into debt
facilities, including: (1) the establishment of a
repurchase facility between Aurora Bank and LBHI with a
$450 million maximum amount, and (2) the establishment
of a servicing advancement bridge facility between a subsidiary
of Aurora Bank and LBHI up to a maximum amount of
$500 million.
On June 26, 2009, the OTS notified Aurora Bank that, as a
result of the Order and the PCA Directive, the prior approval of
the OTS is currently required before payment by the Company of
dividends on the Series B and Series D preferred stock
is made. As a result of the notice from the OTS, the Board of
Directors of the Company (the Board of Directors)
voted not to declare or pay preferred stock dividends that would
have been payable on July 15, October 15, 2009, and
January 15, 2010. Aurora Bank has made a formal request to
the OTS to approve the payment of future dividends on the
preferred stock and responded to requests from the OTS for
additional information on the payment of these dividends;
however, the OTS has not yet ruled on this request and there can
be no assurance that such approval will be received from the OTS
or when or if such OTS approval requirement will be removed.
Furthermore, even if approval is received from the OTS, any
future dividends on the preferred stock will be payable only
when, as and if declared by the Board of Directors.
As of December 31, 2009, Aurora Bank achieved an
adequately capitalized designation under applicable
regulatory guidelines according to a recent public filing by
Aurora Bank with the OTS and taking
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into account the Order and PCA Directive. The classification of
Aurora Banks capitalization level, however, is subject to
review and acceptance by the OTS.
Recent
Developments
Asset Exchange.
On November 18, 2009, the
Company and its parent, Aurora Bank, entered into an Asset
Exchange Agreement (the November Asset Exchange)
pursuant to which Aurora Bank agreed to assign various
one-to-four
family residential mortgage loans (Residential
Loans) to the Company in exchange for the Company
assigning certain commercial and multi-family mortgage loans to
Aurora Bank. Pursuant to the November Asset Exchange, the
Residential Loans assigned to the Company would be of equal or
greater value to the commercial and multi-family loans assigned
to Aurora Bank. The November Asset Exchange was subject to the
receipt of a non-objection from the OTS, which was granted on
August 17, 2009. The November Asset Exchange was
consummated on November 18, 2009 (with an effective date as
of November 1, 2009) which resulted in the Company
receiving residential mortgage loans, including jumbo mortgage
loans, with a closing value of $199,000 greater than the value
of the commercial and multi-family loans transferred to Aurora
Bank. There can be no assurance that the Residential Loans
transferred to the Company will maintain their current value, or
in the future, continue to exceed the value of the commercial
and multi-family loans transferred to Aurora Bank. The November
Asset Exchange has altered the asset mix of the Company to
consist primarily of residential mortgage assets.
At December 31, 2009, the Company had total assets of
$82.0 million, including cash and cash equivalents of
$51.8 million, and total liabilities of less than
$0.4 million. As a result, in part, of the issuance of the
Order and the PCA Directive by the OTS, there is uncertainty
regarding the Companys ability to continue as a going
concern. The 2009 financial statements do not include any
adjustments that might result from the outcome of any regulatory
action by the OTS, which could affect our ability to continue as
a going concern. Aurora Bank is currently working with LBHI and
the applicable regulators to resolve the issues arising from
LBHIs bankruptcy.
Dividend Payments.
Following the payment of
the 1st quarter 2009 dividends to its Series B and
Series D preferred shareholders, the OTS required Aurora
Bank, as parent of the Company, to submit a formal request for
non-objection determination to permit the resumption of normal
payment of dividends. Beginning in March 2009, dialogue and
correspondence commenced with the OTS relating specifically to
the resumption of dividend payments, which resulted in the
submission of the formal request on July 28, 2009. Aurora
Bank and the Company have informed the OTS that failure to
permit the distribution of dividends may jeopardize the REIT
status of the Company. In order to qualify as a REIT,
distributions must be declared by the end of the third quarter
of the following fiscal year and paid by the end of the fourth
quarter. Aurora Bank and the Company continue to be actively
engaged in dialogue with the OTS regarding the resumption of
dividend payments. There can be no assurance that the OTS will
grant the non-objection request, nor can there be any assurance
that any further dividends will be paid or that the status of
the Company as a REIT will be maintained. At December 31,
2009, the Company had $56,000 of dividends in arrears related to
the Companys 8% Series B preferred stock.
Business
Strategies and Operations
The Companys principal business objective is to hold
mortgage assets that will generate net income for distribution
to stockholders. The Company may acquire additional mortgage
assets in the future, although management currently has no
intention of acquiring additional assets. All of the mortgage
assets in the Companys loan portfolio at December 31,
2009 were acquired from Capital Crossing Bank or Aurora Bank and
it is anticipated that substantially all additional mortgage
assets, if any are acquired in the future, will be acquired from
Aurora Bank. The Companys loan portfolio at
December 31, 2009 consisted of mortgage assets secured by
residential, multi-family and commercial properties.
Aurora Bank is responsible for the administration of the
day-to-day
activities of the Company in its roles as servicer under a
master service agreement between Aurora Bank and the Company
(the Master Service Agreement or MSA)
and as advisor under an advisory agreement (the Advisory
Agreement or AA).
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Through December 31, 2009, the Company paid Aurora Bank an
annual servicing fee for the loans it services equal to 0.20%,
payable monthly, and an annual advisory fee equal to 0.05% on
all loans, also payable monthly, of the gross average unpaid
principal balances of loans, respectively, in the loan portfolio
for the immediately preceding month. Aurora Bank and its
affiliates have interests that are not identical to those of the
Company. Consequently, conflicts of interest may arise with
respect to transactions, including, without limitation:
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future acquisitions of mortgage assets from Aurora Bank or its
affiliates;
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servicing of mortgage assets, particularly with respect to
mortgage assets that become classified or placed on
non-performing status; and
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the modification of the AA and the MSA.
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Both the Advisory Agreement and the MSA were amended on
March 29, 2010 with effect as of January 1, 2010. The
amended Advisory Agreement and the amended MSA change the fees
paid by the Company to reflect the increased costs associated
with such services. See further discussion in Notes to
Financial Statements at Note 9, Subsequent Events. It
is the intention of the Company that any agreements and
transactions between the Company and Aurora Bank are fair to all
parties and consistent with market terms, including the price
paid and received for mortgage assets on their acquisition or
disposition by the Company or in connection with the servicing
of such mortgage assets. However, there can be no assurance that
such agreements or transactions will be on terms as favorable to
the Company as those that could have been obtained from
unaffiliated third parties.
Aurora
Bank
Aurora Bank is an indirect wholly owned subsidiary of Lehman
Brothers and its home office is located in Wilmington, Delaware.
Aurora Bank is a member of the Federal Home Loan Bank System and
its deposits are insured by the Deposit Insurance Fund, which is
administered by the Federal Deposit Insurance Corporation
(FDIC). At December 31, 2008, under the
regulatory capital guidelines applicable to banks developed and
monitored by the federal bank regulatory agencies, Aurora Bank
was deemed to be significantly undercapitalized.
On January 26, 2009, the OTS entered a cease and desist
order against Aurora Bank (the Order). The Order,
among other things, required Aurora Bank to file various
privileged prospective operating plans with the OTS to manage
the liquidity and operations of Aurora Bank going forward,
including a strategic plan. The Order requires Aurora Bank to
ensure that each of its subsidiaries, including the Company,
complies with the Order, including the operating restrictions
contained in the Order. These operating restrictions, among
other things, restrict transactions with affiliates, contracts
outside the ordinary course of business and changes in senior
executive officers, board members or their employment
arrangements without prior written notice to the OTS. In
addition, on February 4, 2009, the OTS issued a prompt
corrective action directive to Aurora Bank (the PCA
Directive). The PCA Directive required Aurora Bank to,
among other things, raise its capital ratios such that it will
be deemed to be adequately capitalized and places
additional constraints on Aurora Bank and its subsidiaries,
including the Company. More detailed information can be found in
the Order and the PCA Directive themselves, copies of which are
available on the OTS website (www.ots.treas.gov).
During 2009, LBHI contributed additional capital to Aurora Bank,
which improved Aurora Banks capital position. At
December 31, 2009, Aurora Banks total risk-based
capital ratio was mathematically in the well
capitalized category, however, due to the continuation of
the provisions of the Order and the PCA Directive, Aurora Bank
was deemed to be adequately capitalized. The Order
and the PCA Directive were still effective as of the issuance of
this annual report.
The OTS has informed Aurora Bank, as the parent of the Company,
that prior approval of the OTS is required under the Order and
the PCA Directive for payment by the Company of dividends on the
Series B and Series D preferred stock. Aurora Bank has
made a formal request to the OTS for the resumption of dividend
payments. There can be no assurance that such approvals will be
received from the OTS or when or
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if the OTS releases Aurora Bank from the Order and the PCA.
Furthermore, any future dividends on the Series B and
Series D preferred stock will be payable only when, as and
if declared by the Board of Directors.
As a majority-owned subsidiary of Aurora Bank, the assets and
liabilities and results of operations of the Company are
consolidated with those of Aurora Bank for Aurora Banks
financial reporting and regulatory capital purposes. Any loans
that may in the future be acquired by the Company from Aurora
Bank, therefore, will be treated as assets of Aurora Bank for
purposes of compliance by Aurora Bank with the OTS
regulatory capital requirements and reported in Aurora
Banks consolidated financial statements. Interest income
on such loans will be reported as interest income of Aurora Bank
in Aurora Banks consolidated financial statements.
Management
Policies and Programs
In order to preserve its status as a REIT under the Internal
Revenue Code, substantially all of the assets of the Company
must consist of mortgage loans and other qualified assets of the
type set forth in Section 856(c)(4)(A) of the Internal
Revenue Code. Such other qualifying assets include cash, cash
equivalents and securities, including shares or interests in
other REITs, although the Company does not currently intend to
invest in shares or interests in other REITs.
The administration of the Company has been significantly
impacted by the OTS issuance of the Order and the PCA
Directive to Aurora Bank. The Order requires Aurora Bank to
ensure that each of its subsidiaries, including the Company,
complies with the Order, including the operating restrictions
contained in the Order. These operating restrictions, among
other things, restrict transactions with affiliates, contracts
outside the ordinary course of business and changes in senior
executive officers, board members or their employment
arrangements without prior written notice to the OTS. Until the
termination of the Order and the PCA Directive, effectively, any
cash or in-kind distribution, any asset acquisition or
disposition, or any significant change in the business of
operations of the Company will be subject to prior approval of
the OTS.
The OTS has informed Aurora Bank, as the parent of the Company,
that prior approval of the OTS is required under the Order and
the PCA Directive for payment by the Company of dividends on the
Series D preferred stock. Aurora Bank has made a formal
request to the OTS for the resumption of dividend payments.
There can be no assurance that such approvals will be received
from the OTS or when or if the OTS releases Aurora Bank from the
Order and the PCA. Furthermore, any future dividends on the
Series B and Series D preferred stock will be payable
only when, as and if declared by the Board of Directors.
Asset Acquisition and Disposition
Policies.
Although management currently has no
intention of acquiring additional assets, subject to prior
approval by the OTS, the Company may, from time to time,
purchase additional mortgage assets. To the extent any
acquisitions are made, the Company intends to acquire all or
substantially all of any such mortgage assets from Aurora Bank
on terms that are comparable to those that could be obtained by
the Company if such mortgage assets were purchased from
unrelated third parties. The Company and Aurora Bank do not
currently have specific policies with respect to the purchase by
the Company from Aurora Bank of particular loans or pools of
loans, other than that such assets must be eligible to be held
by a REIT. The Company intends generally to acquire only
performing loans from Aurora Bank. The Company may also acquire
mortgage assets from unrelated third parties. To date, the
Company has not adopted any arrangements or procedures by which
it would purchase mortgage assets from unrelated third parties,
and it has not entered into any agreements with any third
parties with respect to the purchase of mortgage assets. The
Company anticipates that it would purchase mortgage assets from
unrelated third parties only if neither Aurora Bank nor any of
its affiliates had an amount or type of mortgage asset
sufficient to meet the requirements of the Company. The Company
currently anticipates that the mortgage assets that it may
purchase will primarily include residential, multi-family and
commercial mortgage loans, although if Aurora Bank develops an
expertise in additional mortgage asset products, the Company may
purchase such additional types of qualified mortgage assets. In
addition, the Company may also acquire limited amounts of other
assets eligible to be held by REITs.
Capital and Leverage Policies.
To the extent
that the Board of Directors determines, subject to regulatory
approval, that additional funding is required, the Company may
raise such funds through additional equity offerings, debt
financing or retention of cash flow (after consideration of
provisions of the Internal
6
Revenue Code requiring the distribution by a REIT of not less
than 90% of its REIT taxable income and taking into account
taxes that would be imposed on undistributed taxable income), or
a combination of these methods.
The Company has no debt outstanding, and it currently does not
intend to incur any indebtedness. The organizational documents
of the Company limit the amount of indebtedness which it is
permitted to incur without approval of the Series D
preferred stockholders to no more than 100% of its total
stockholders equity. Any such debt incurred may include
intercompany advances made by Aurora Bank to the Company.
The Company, subject to regulatory approval, may also issue
additional series of preferred stock. However, it may not issue
additional shares of preferred stock ranking senior to the
Series D preferred stock without consent of holders of at
least two-thirds of the outstanding Series D preferred
stock. Although the Companys charter does not prohibit or
otherwise restrict Aurora Bank or its affiliates from owning or
voting its shares of Series D preferred stock, to the
Companys knowledge the amount of shares of Series D
preferred stock held by Aurora Bank or its affiliates is
insignificant (less than 1%). Similarly, the Company may not
issue additional shares of preferred stock ranking on parity
with the Series D preferred stock without the approval of a
majority of its independent directors (as defined in the
Companys charter). Prior to any future issuance of
additional shares of preferred stock, the Company will take into
consideration Aurora Banks regulatory capital requirements
and the cost of raising and maintaining that capital at the time.
Conflicts of Interest Policies.
Because of the
nature of the Companys relationship with Aurora Bank and
its affiliates, conflicts of interest may arise with respect to
certain transactions, including without limitation, the
Companys acquisition of mortgage assets from, or return of
mortgage assets to Aurora Bank, or disposition of mortgage
assets or foreclosed property to, Aurora Bank or its affiliates
and the modification of the MSA. It is the Companys policy
that the terms of any financial dealings with Aurora Bank and
its affiliates will be consistent with those available from
unaffiliated third parties in the mortgage lending industry. In
addition, the Company maintains an Audit Committee of its Board
of Directors, which is comprised solely of independent directors
who satisfy the standards for independence promulgated by the
Nasdaq Stock Market, Inc. Among other functions, the Audit
Committee (or the Board of Directors as a whole) will review
transactions between the Company and Aurora Bank and its
affiliates. Under the terms of the AA, Aurora Bank may not
subcontract its duties to an unaffiliated third party without
the approval of the Companys Board of Directors, including
the approval of a majority of its independent directors.
Furthermore, under the terms of the AA, Aurora Bank provides
advice and recommendations with respect to all aspects of the
Companys business and operations, subject to the control
and discretion of the Board of Directors.
Conflicts of interest between the Company and Aurora Bank and
its affiliates may also arise in connection with decisions
bearing upon the credit arrangements that Aurora Bank or one of
its affiliates may have with a borrower. Conflicts could also
arise in connection with actions taken by Aurora Bank as a
controlling person of the Company. It is the intention of the
Company and Aurora Bank that any agreements and transactions
between the Company and Aurora Bank or its affiliates are fair
to all parties and are consistent with market terms for such
types of transactions. The MSA provides that foreclosures and
dispositions of the mortgage assets are to be performed in a
manner substantially the same as for similar work performed by
Aurora Bank for transactions on its own behalf. However, there
can be no assurance that any such agreement or transaction will
be on terms as favorable to the Company as would have been
obtained from unaffiliated third parties.
There are no provisions in the Companys charter limiting
any officer, director, security holder or affiliate of the
Company from having any direct or indirect pecuniary interest in
any mortgage asset to be acquired or disposed of by the Company
or in any transaction in which the Company has an interest or
from engaging in acquiring and holding mortgage assets. As
described herein, it is expected that Aurora Bank and its
affiliates may have direct interests in transactions with the
Company (including, without limitation, the sale of mortgage
assets to the Company). It is not currently anticipated,
however, that any of the officers or directors of the Company
will have any interests in such mortgage assets.
7
Other Policies.
The Company intends to operate
in a manner that will not subject it to regulation under the
Investment Company Act of 1940, as amended. The Company does not
intend to:
|
|
|
|
|
invest in the securities of other issuers for the purpose of
exercising control over such issuers;
|
|
|
|
underwrite securities of other issuers;
|
|
|
|
actively trade in loans or other investments;
|
|
|
|
offer securities in exchange for property; or
|
|
|
|
make loans to third parties, including without limitation
officers, directors or other affiliates of the Company.
|
The Company may, under certain circumstances, and subject to
applicable federal and state laws and the requirements for
qualifying as a REIT, purchase Series D preferred stock in
the open market or otherwise, for redemption by the Company. Any
such redemption may only be effected with the prior approval of
the OTS while the Order and the PCA Directive are in place.
The Company currently intends to make investments and operate
its business at all times in such a manner as to be consistent
with the requirements of the Internal Revenue Code to qualify as
a REIT. However, future economic, market, legal, regulatory, tax
or other considerations may cause the Board of Directors to
determine that it is in the best interests of the Company and
its stockholders to revoke its REIT status which would have the
immediate result of subjecting the Company to federal and state
income tax at regular corporate rates.
Under the AA, Aurora Bank monitors and reviews the
Companys compliance with the requirements of the Internal
Revenue Code regarding the Companys qualification as a
REIT on a quarterly basis and has an independent public
accounting firm, selected by the Board of Directors, annually
review the results of the analysis.
Servicing
Pursuant to the terms of the MSA, loans in the Companys
portfolio are serviced by Aurora Bank; additionally, the
residential loans in the Companys portfolio obtained in
the November Asset Exchange are sub-serviced by third parties
and their sub-servicers. Through December 31, 2009, Aurora
Bank in its role as servicer under the terms of the MSA received
an annual servicing fee equal to 0.20%, payable monthly, on the
gross average unpaid principal balances of loans serviced for
the immediately preceding month. For the years ended
December 31, 2009, 2008 and 2007, the Company incurred
$102,000, $158,000 and $199,000, respectively, in servicing
fees. Additionally, loan servicing expense includes third party
expenses associated with the collection of certain
non-performing loans. In 2007, loan servicing expenses were
offset by the recovery of third party servicing fees, previously
expensed by the Company of $54,000 due to the resolution of a
loan.
The MSA requires Aurora Bank to service the loan portfolio in a
manner substantially the same as for similar work performed by
Aurora Bank for transactions on its own behalf. Aurora Bank
collects and remits principal and interest payments on at least
a monthly basis; maintains perfected collateral positions;
submits and pursues insurance claims; and initiates and
supervises foreclosure proceedings on the loan portfolio it
services. Aurora Bank also provides accounting and reporting
services required by the Company for such loans. The Company may
also direct Aurora Bank to dispose of any loans which become
classified, placed on non-performing status, or are modified due
to financial deterioration of the borrower. Aurora Bank may
institute foreclosure proceedings and foreclose, manage and
protect the mortgaged premises, including exercising any power
of sale contained in any mortgage or deed of trust, obtaining a
deed-in-lieu-of-foreclosure
or otherwise acquiring title to a mortgaged property underlying
a mortgage loan by operation of law or otherwise in accordance
with the terms of the MSA.
The MSA may be terminated at any time by written agreement
between the parties. The MSA will automatically terminate if the
Company ceases to be an affiliate of Aurora Bank.
8
When any mortgaged property underlying a mortgage loan is
conveyed by a mortgagor, Aurora Bank generally, upon notice of
the conveyance, will enforce any
due-on-sale
clause contained in the mortgage loan, to the extent permitted
under applicable law and governmental regulations. The terms of
a particular mortgage loan or applicable law, however, may
prohibit Aurora Bank from exercising the
due-on-sale
clause under certain circumstances related to the collateral
underlying the mortgage loan and the borrowers ability to
fulfill the obligations under the related mortgage note.
The MSA was amended on March 29, 2010 with effect as of
January 1, 2010. The amended MSA changes the fees paid by
the Company to reflect the fees payable to each sub-servicer.
See further discussion in Notes to Financial
Statements at Note 9, Subsequent Events. It is the
intention of the Company that any agreements and transactions
between the Company and Aurora Bank are fair to all parties and
consistent with market terms.
Advisory
Services
The Company has entered into an Advisory Agreement pursuant to
which Aurora Bank administers the
day-to-day
operations of the Company. Through December 31, 2009,
Aurora Bank was paid an annual advisory fee equal to 0.05%,
payable monthly, of the gross average unpaid principal balances
of the Companys loans for the immediately preceding month,
plus reimbursement for certain expenses incurred by Aurora Bank
as advisor. For the years ended December 31, 2009, 2008 and
2007, the Company incurred $25,000, $34,000, and $45,000,
respectively, in advisory fees. As advisor, Aurora Bank is
responsible for:
|
|
|
|
|
monitoring the credit quality of the loan portfolio held by the
Company;
|
|
|
|
advising the Company with respect to the acquisition,
management, financing and disposition of its loans and other
assets; and
|
|
|
|
maintaining the corporate and shareholder records of the Company.
|
Aurora Bank may, from time to time, subcontract all or a portion
of its obligations under the AA to one or more of its affiliates
involved in the business of managing mortgage assets or, with
the approval of a majority of Board of Directors as well as a
majority of its independent directors, subcontract all or a
portion of its obligations under the AA to unrelated third
parties. Aurora Bank will not, in connection with the
subcontracting of any of its obligations under the AA, be
discharged or relieved in any respect from its obligations under
the AA.
The AA had an initial term of five years, and currently is
renewed each year for an additional one-year period unless the
Company delivers notice of nonrenewal to Aurora Bank. The
Company may terminate the AA at any time upon ninety days
prior notice. As long as any Series D preferred stock
remains outstanding, any decision by the Company either not to
renew the AA or to terminate the AA must be approved by a
majority of its Board of Directors, as well as by a majority of
its independent directors. Other than the servicing fee and the
advisory fee, Aurora Bank is not entitled to a fee for providing
advisory and management services to the Company.
The AA was amended on March 29, 2010 with effect as of
January 1, 2010. The amended AA changes the fees paid by
the Company to reflect the increased costs associated with such
services. See further discussion in Notes to Financial
Statements at Note 9, Subsequent Events. It is the
intention of the Company that any agreements and transactions
between the Company and Aurora Bank are fair to all parties and
consistent with market terms.
Description
of Loan Portfolio
To date, all of the Companys mortgage loans have been
acquired or were contributed from Capital Crossing Bank or
Aurora Bank. It is anticipated that substantially all additional
mortgage assets, if any additional assets are acquired in the
future, will be acquired or contributed from Aurora Bank,
currently, the sole common stockholder. The Companys loan
portfolio may or may not have the characteristics described
below at future dates.
9
Loans Held For Sale.
On
February 5, 2009, the Company and Aurora Bank entered into
an Asset Exchange Agreement (the February Asset
Exchange) pursuant to which the Company agreed to transfer
207 loans secured primarily by commercial real estate and
multi-family residential real estate in exchange for 205 loans
secured primarily by residential real estate. The commercial and
multi-family loans represented substantially all of the
Companys assets, excluding cash and interest-bearing
deposits as of December 31, 2008. As a result of entering
into the February Asset Exchange, the Company reclassified all
of its loan assets as held for sale. The February Asset Exchange
was subject to certain conditions to closing as well as the
receipt of a non-objection letter from the OTS. On July 20,
2009, the Company and Aurora Bank mutually agreed to terminate
the February Asset Exchange. The February Asset Exchange was
terminated following receipt of a letter from the OTS failing to
grant Aurora Banks requests for non-objection with respect
to the February Asset Exchange. Notwithstanding the termination
of the February Asset Exchange prior to its consummation, the
Company continues to record these loan assets at the lower of
their accreted cost or market value. Prior to February 5,
2009, the Companys loan assets were considered held for
investment and recorded at accreted cost, which accounts for the
amortization of any purchase discount and deferred fees, less an
allowance for loan losses.
The loans held for sale acquired in the November Asset Exchange
are presented at fair value. Fair value is defined as the price
at which an asset or liability could be exchanged in a current
transaction between knowledgeable, willing parties. Where
available, fair value is based on observable market prices or
parameters or derived from such prices or parameters. Where
observable prices or inputs are not available, valuation models,
prepared by management and third party valuation specialists,
are applied.
Fair value of the Companys loan portfolio was estimated
based upon an analysis prepared by management and a third party
valuation specialist. The valuation specialist uses various
proprietary cash flow models to price the residential portfolio.
The valuation was primarily based on discussion with industry
professionals who have historically bought and sold similar
assets to determine recent trades price to estimate the amount
at which a third party might purchase the loans and their yield
requirements. Specific inputs to the valuation specialists
model included, but were not limited to, property location, loan
type (the adjustable rate, adjustable rate reset period and
interest only period), loan age, payment and delinquency
history, original loan to value ratio (LTV), and the
original debt to income ratio of the borrowers. Significant
assumptions used within the valuation specialists model
included, but were not limited to, estimated rates of loan
delinquency, potential for recovery versus foreclosure,
projected debt to income ratio of the borrowers, estimated
current LTV as well as the projected LTV at default, rate reset
risk and the corresponding payment shock. The valuation of the
loan portfolio involves some level of management estimation and
judgment, the degree of which is dependent on the terms of the
loans and the availability of market prices and inputs.
The November Asset Exchange resulted in the Company receiving 74
residential mortgage loans, including jumbo mortgage loans,
recorded at their fair value at the option of the Company, for
93 commercial and multi-family loans transferred to Aurora Bank.
The Company uses carrying value to reflect loans valued at the
lower of their accreted cost or market value, or at their fair
value, as applicable to the individual loans valuation
method as selected by the Company in accordance with accounting
standards.
10
A summary of the balances of loans follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Unpaid
|
|
|
|
Carrying
|
|
|
Principal
|
|
|
Carrying
|
|
|
Principal
|
|
|
|
Value
|
|
|
Balance
|
|
|
Value
|
|
|
Balance
|
|
|
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
Mortgage loans on real estate, held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Multi-family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
22,531
|
|
|
|
32,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for sale, at fair value
|
|
|
22,531
|
|
|
|
32,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans on real estate, held for sale:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
6,380
|
|
|
$
|
11,324
|
|
|
$
|
|
|
|
$
|
|
|
Multi-family residential
|
|
|
693
|
|
|
|
1,203
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
219
|
|
|
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for sale, at lower of accreted cost or market
value
|
|
|
7,292
|
|
|
|
12,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans on real estate, held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
6,380
|
|
|
$
|
11,324
|
|
|
$
|
|
|
|
$
|
|
|
Multi-family residential
|
|
|
693
|
|
|
|
1,203
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
22,750
|
|
|
|
32,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for sale
|
|
|
29,823
|
|
|
|
44,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans on real estate, held for investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31,660
|
|
|
$
|
36,506
|
|
Multi-family residential
|
|
|
|
|
|
|
|
|
|
|
20,384
|
|
|
|
22,144
|
|
One-to-four
family residential
|
|
|
|
|
|
|
|
|
|
|
981
|
|
|
|
1,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for investment, at accreted cost
|
|
|
|
|
|
|
|
|
|
|
53,025
|
|
|
|
59,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
(915
|
)
|
|
|
|
|
Net deferred loan fees
|
|
|
|
|
|
|
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
29,823
|
|
|
|
|
|
|
$
|
52,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Though the table compares the carrying value of these loans
against unpaid principal balance, these loans are carried at the
lower of accreted cost or market value and the carrying value
cannot exceed the acquired cost of these loans.
|
11
The following table sets forth certain information regarding the
geographic location of properties securing the mortgage loans in
the loan portfolio at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Number of
|
|
|
Carrying
|
|
|
Total Carrying
|
|
Location
|
|
Loans
|
|
|
Value
|
|
|
Value
|
|
|
|
(Dollars In Thousands)
|
|
|
California
|
|
|
58
|
|
|
$
|
13,336
|
|
|
|
44.72
|
%
|
Maryland
|
|
|
7
|
|
|
|
2,039
|
|
|
|
6.84
|
|
Virginia
|
|
|
6
|
|
|
|
1,946
|
|
|
|
6.52
|
|
Washington
|
|
|
4
|
|
|
|
1,319
|
|
|
|
4.42
|
|
Texas
|
|
|
5
|
|
|
|
1,125
|
|
|
|
3.77
|
|
Massachusetts
|
|
|
14
|
|
|
|
1,091
|
|
|
|
3.66
|
|
Michigan
|
|
|
3
|
|
|
|
910
|
|
|
|
3.05
|
|
Florida
|
|
|
9
|
|
|
|
936
|
|
|
|
3.14
|
|
Missouri
|
|
|
4
|
|
|
|
673
|
|
|
|
2.26
|
|
All others
|
|
|
57
|
|
|
|
6,448
|
|
|
|
21.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167
|
|
|
$
|
29,823
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth information regarding maturity,
contractual interest rate, contractual interest rate structure,
and unpaid principal balance (UPB) of all loans in
the loan portfolio at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Number of
|
|
|
Carrying
|
|
|
Total Carrying
|
|
Period Until Maturity
|
|
Loans
|
|
|
Value
|
|
|
Value
|
|
|
|
(Dollars In Thousands)
|
|
|
Six months or less
|
|
|
10
|
|
|
$
|
278
|
|
|
|
0.93
|
%
|
Greater than six months to one year
|
|
|
3
|
|
|
|
63
|
|
|
|
0.21
|
|
Greater than one year to three years
|
|
|
15
|
|
|
|
681
|
|
|
|
2.28
|
|
Greater than three years to five years
|
|
|
8
|
|
|
|
351
|
|
|
|
1.18
|
|
Greater than five years to ten years
|
|
|
16
|
|
|
|
806
|
|
|
|
2.70
|
|
Greater than ten years
|
|
|
115
|
|
|
|
27,644
|
|
|
|
92.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167
|
|
|
$
|
29,823
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Number of
|
|
|
Carrying
|
|
|
Total Carrying
|
|
Contractual Interest Rate
|
|
Loans
|
|
|
Value
|
|
|
Value
|
|
|
|
(Dollars In Thousands)
|
|
|
Less than 4.00%
|
|
|
15
|
|
|
$
|
780
|
|
|
|
2.62
|
%
|
4.00 to 4.49
|
|
|
59
|
|
|
|
7,078
|
|
|
|
23.73
|
|
4.50 to 4.99
|
|
|
31
|
|
|
|
8,092
|
|
|
|
27.13
|
|
5.00 to 5.49
|
|
|
38
|
|
|
|
11,536
|
|
|
|
38.68
|
|
5.50 to 5.99
|
|
|
6
|
|
|
|
1,213
|
|
|
|
4.07
|
|
6.00 to 7.99
|
|
|
8
|
|
|
|
357
|
|
|
|
1.20
|
|
8.00 to 9.99
|
|
|
5
|
|
|
|
517
|
|
|
|
1.73
|
|
10.00% and above
|
|
|
5
|
|
|
|
250
|
|
|
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167
|
|
|
$
|
29,823
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Number of
|
|
|
Carrying
|
|
|
Total Carrying
|
|
Contractual Interest Structure
|
|
Loans
|
|
|
Value
|
|
|
Value
|
|
|
|
(Dollars In Thousands)
|
|
|
Fixed Interest Rate
|
|
|
59
|
|
|
|
6,193
|
|
|
|
20.77
|
|
Variable Interest Rate
|
|
|
108
|
|
|
|
23,630
|
|
|
|
79.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167
|
|
|
$
|
29,823
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Number of
|
|
|
Carrying
|
|
|
Total Carrying
|
|
Unpaid Principal Balance
|
|
Loans
|
|
|
Value
|
|
|
Value
|
|
|
|
(Dollars In Thousands)
|
|
|
$50,000 and less
|
|
|
29
|
|
|
$
|
408
|
|
|
|
1.37
|
%
|
Greater than $50,000 to $100,000
|
|
|
24
|
|
|
|
925
|
|
|
|
3.10
|
|
Greater than $100,000 to $250,000
|
|
|
31
|
|
|
|
3,158
|
|
|
|
10.59
|
|
Greater than $250,000 to $500,000
|
|
|
58
|
|
|
|
14,426
|
|
|
|
48.37
|
|
Greater than $500,000 to $1,000,000
|
|
|
25
|
|
|
|
10,906
|
|
|
|
36.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167
|
|
|
$
|
29,823
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Purchasing Activities.
All of the
Companys commercial loans and multi-family residential
loans were purchased or contributed from Capital Crossing Bank,
previously the sole common stockholder. Capital Crossing Bank
originally purchased such loans from third parties. All of the
Companys residential loans were acquired from Aurora Bank.
It is anticipated that substantially all additional loans, if
any loans are acquired by the Company in the future, will be
acquired from Aurora Bank, currently the sole common
stockholder. Existing loans primarily are secured by commercial,
multi-family or
one-to-four
family residential real estate located throughout the United
States. These loans generally were purchased from sellers in the
financial services industry or government agencies. Aurora Bank
does not intend to utilize any specific threshold underwriting
criteria in evaluating individual loans or pools of loans for
purchase, but rather anticipates that it will evaluate each
individual loan, if it is purchasing an individual loan, or pool
of loans, if it is purchasing a pool of loans, on a case by case
basis in making a purchase decision as described in more detail
below.
The estimated value of the real property collateralizing a loan
will be determined by considering, among other factors, the type
of property, its condition and location and its highest and best
use in its marketplace. In many cases, real estate brokers
and/or
appraisers with specific knowledge of the local real estate
market will be consulted. For larger loans, typically a site
inspection of the real property collateralizing the loan and an
internal rental analysis of similar commercial properties in the
local area is undertaken. An analysis of the current and likely
future cash flows generated by the collateral to repay the loan
and consideration of minimum debt service coverage ratios,
consisting of the ratio of net operating income to total
principal and interest payments will be made. New tax and title
searches may also be obtained to verify the status of any prior
liens on the collateral. Additionally, if necessary,
environmental specialists will review available information with
respect to each property collateralizing a loan to assess
potential environmental risk.
In order to determine the amount that the Company is willing to
bid to acquire individual loans or loan pools, the Company will
consider, among other factors:
|
|
|
|
|
the collateral securing the loan;
|
|
|
|
the financial resources of the borrowers or guarantors, if any;
|
|
|
|
the recourse nature of the loan;
|
|
|
|
the age and performance of the loan;
|
|
|
|
the length of time during which the loan has performed in
accordance with its repayment terms;
|
|
|
|
geographic location;
|
|
|
|
the yield expected to be earned; and
|
|
|
|
servicing restrictions, if any.
|
13
In addition to the factors listed above, the Company will also
consider the amount it may realize through collection efforts or
foreclosure and sale of the collateral, net of expenses, and the
length of time and costs required to complete the collection or
foreclosure process in the event a loan becomes non-performing
or is non-performing at the purchase date.
Loan Servicing and Asset Resolution.
In
the event that a purchased loan becomes delinquent, or if it is
delinquent at the time of purchase, Aurora Bank, as servicer,
promptly initiates collection activities. If a delinquent loan
becomes non-performing, Aurora Bank may pursue a number of
alternatives with the goal of maximizing the overall return on
each loan in a timely manner. During this period, the Company
does not recognize interest income on such loans unless regular
payments are being made. In instances when a loan is not
returned to performing status, Aurora Bank may seek resolution
through negotiating a discounted pay-off with borrowers, which
may be accomplished through refinancing by the borrower with
another lender, restructuring the loan to a level that is
supported by existing collateral and debt service capabilities,
foreclosure, sale of the collateral, or other loss mitigation
activities.
Asset
Quality
Payment Status of Loan Portfolio.
The
following table sets forth certain information relating to the
payment status of loans, net in the loan portfolio at the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars In Thousands)
|
|
|
Current
|
|
$
|
29,353
|
|
|
$
|
49,641
|
|
|
$
|
65,735
|
|
Over thirty days to eighty-nine days past due
|
|
|
152
|
|
|
|
1,788
|
|
|
|
951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total performing loans, net
|
|
|
29,505
|
|
|
|
51,429
|
|
|
|
66,686
|
|
Non-performing loans (ninety days or more past due)
|
|
|
318
|
|
|
|
1,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,823
|
|
|
$
|
53,025
|
|
|
$
|
66,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys determination that a purchased loan is
delinquent is made prospectively based upon the repayment
schedule of the loan following the date of purchase by Aurora
Bank or Capital Crossing Bank, as appropriate, and not from the
origination date of the loan. Thus, if a borrower was previously
in default under the loan (and the loan was not initially
purchased as a non-performing loan), such default is
disregarded by the Company in making a determination as to
whether or not the purchased loan is delinquent. For example, if
Aurora Bank acquires a loan that is past due at the time of
acquisition, that loan would not be considered delinquent until
it was ninety days past due from Aurora Banks purchase
date. If Aurora Bank acquires a loan which is contractually
delinquent, management evaluates the collectability of principal
and interest, and interest would not be accrued when the
collectability of principal and interest is not probable or
estimable. Interest income on purchased non-performing loans is
accounted for using either the cash basis or the cost recovery
method, whereby any amounts received are applied against the
recorded amount of the loan. A determination as to which method
is used is made on a
case-by-case
basis.
As servicing agent for the Companys commercial loan
portfolio, Aurora Bank monitors the Companys loans through
its review procedures and updated appraisals. Additionally, in
order to monitor the adequacy of cash flows on income-producing
properties, Aurora Bank may obtain financial statements and
other information from the borrower and the guarantor,
including, but not limited to, information relating to rental
rates and income, maintenance costs and an update of real estate
property tax payments.
Non-Performing Assets.
The performance
of the Companys loan portfolio is evaluated regularly by
Aurora Bank. Management generally classifies a loan as
non-performing when the collectability of principal and interest
is ninety days or more past due or the collection of principal
and interest is not probable or estimable.
The accrual of interest on loans is discontinued when loan
payments are ninety days or more past due or the collectability
of principal and interest is not probable or estimable. Interest
income previously accrued on
14
such loans is reversed against current period interest income,
and the loan is accounted for using either the cash basis or the
cost recovery method whereby any amounts received are applied
against the recorded amount of the loan. This determination is
made on a
case-by-case
basis. Loans accounted for on the cost recovery method, in
general, consist of non-performing loans. When the Company
identifies problem loans, or a portion thereof, as a loss, it
will charge-off such amounts. The Companys loans are
reviewed monthly to determine which loans are to be placed on
non-performing status.
Loans are returned to accrual status when the loan is brought
current and collection of principal and interest is probable and
estimable.
A summary of the loans on non-accrual status is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Unpaid
|
|
|
|
Carrying
|
|
|
Principal
|
|
|
Carrying
|
|
|
Principal
|
|
|
Carrying
|
|
|
Principal
|
|
|
|
Value
|
|
|
Balance
|
|
|
Value
|
|
|
Balance
|
|
|
Value
|
|
|
Balance
|
|
|
|
(Dollars In Thousands)
|
|
|
Mortgage loans on real estate on non-accrual status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
318
|
|
|
$
|
792
|
|
|
$
|
1,596
|
|
|
$
|
1,764
|
|
|
$
|
|
|
|
$
|
|
|
Multi-family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
318
|
|
|
|
792
|
|
|
|
1,596
|
|
|
|
1,764
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans on non-accrual status
|
|
|
318
|
|
|
|
792
|
|
|
|
1,596
|
|
|
|
1,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans, net, as a percent of loans, net of
discount and deferred loan income
|
|
|
1.07
|
%
|
|
|
|
|
|
|
3.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans, net, as a percent of total assets
|
|
|
0.39
|
%
|
|
|
|
|
|
|
1.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans decreased as of December 31, 2009 as
compared to December 31, 2008 as payments were received on
non-performing loans. Additionally, one non-accrual loan was
transferred out in the November Asset Exchange and one loan
became non-performing during 2009. As of December 31, 2009
and 2008, there were seven loans, representing five borrowers,
which were non-performing.
Discount
and Allowance for Loan Losses
Discounts on Acquired Loans.
Prior to
February 5, 2009, the Companys loan assets were
considered held for investment and recorded at accreted cost,
which accounts for the amortization of any purchase discount and
deferred fees, less an allowance for loan losses. The Company
reviewed acquired loans for differences between contractual cash
flows and cash flows expected to be collected from the
Companys initial investment in the acquired loans to
determine if those differences were attributable, at least in
part, to credit quality. If those differences were 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, was not
accreted into income. Prior to February 5, 2009, the
Company recognized the excess of all cash flows expected at
acquisition over the Companys initial investment in the
loan as interest income using the interest method over the term
of the loan.
For loans which, at acquisition, did not have evidence of
deterioration of credit quality since origination, the discount,
representing the excess of the amount of reasonably estimable
and probable discounted future cash collections over the
purchase price, was accreted into interest income using the
interest method over the term of the loan. Prepayments were not
considered in the calculation of accretion income. Additionally,
discount was not accreted on non-performing loans.
15
Judgment was involved in estimating the amount of the
Companys future cash flows on acquired loans. The amount
and timing of actual cash flows could differ materially from
managements estimates, which could materially affect the
Companys financial condition and results of operations.
Depending on the timing of an acquisition of loans, a
preliminary allocation may have been utilized until a final
allocation was established. Generally, the allocation was
finalized no later than ninety days from the date of purchase.
If cash flows could not be reasonably estimated for any loan,
and collection was not probable, the cost recovery method of
accounting was used. Under the cost recovery method, any amounts
received were applied against the recorded amount of the loan.
Nonaccretable discount was generally offset against the related
unpaid principal balance when the amount at which a loan was
resolved or restructured. There was no effect on the income
statement as a result of these reductions.
Subsequent to acquisition, if cash flow projections improved,
and it was determined that the amount and timing of the cash
flows related to the nonaccretable discount were reasonably
estimable and collection was probable, the corresponding
decrease in the nonaccretable discount was transferred to the
accretable discount and was accreted into interest income over
the remaining life of the loan on the interest method. If cash
flow projections deteriorated subsequent to acquisition, the
decline was accounted for through a provision for loan losses
included in earnings.
Allowance for Loan Losses.
Prior to
February 5, 2009, the Companys loan assets were
considered held for investment and recorded at accreted cost,
which accounts for the amortization of any purchase discount and
deferred fees, less an allowance for loan losses. The allowance
for loan losses was increased or decreased through a provision
for loan losses or a reduction in the allowance for loan losses
included in earnings. The Companys allowance for loan
losses at December 31, 2008 was $915,000.
In determining the adequacy of the allowance for loan losses,
management made significant judgments. Aurora Bank initially
reviewed the Companys loan portfolio to identify loans for
which specific allocations were considered prudent and reported
its findings to management. Specific allocations included the
results of measuring impaired loans. Next, management, working
with Aurora Bank, considered the level of loan allowances deemed
appropriate for loans determined not to be impaired. The
allowance for these loans was determined by a formula whereby
the portfolio was stratified by type and internal risk rating
categories. Loss factors were 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 was managements estimate of the probable loan
losses incurred as of the balance sheet date, however, there is
assurance that the Companys actual losses with respect to
loans would not exceed its allowance for loan losses.
The allowance for loan losses was increased through a provision
for loan losses included in earnings when management changed its
estimate of probable losses inherent in the portfolio. The
allowance for loan losses was decreased upon sales or payoffs of
loans for which a related allowance remained unused. Reductions
in connection with sales were included in the calculation of the
gain or loss, and reductions related to payoffs were recorded as
a reduction in the allowance for loan losses included in
earnings. Loan losses were charged against the allowance when
management believed the net investment of the loan, or a portion
thereof, was uncollectible. Subsequent recoveries, if any, were
credited to the allowance when cash payments were received. The
expectation was that the allowance would continue to decline as
reductions in the allowance for loan losses continued to be
recorded if loans paid off and allowance allocations related to
these loans were not required or if additions due to loan
impairment were not required.
16
The following table sets forth managements allocation of
the allowance for loan losses by loan category and the
percentage of the loans in each category to total loans in each
category with respect to the loan portfolio at the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Allowance
|
|
|
Net
|
|
|
Allowance
|
|
|
Net
|
|
|
Allowance
|
|
|
Net
|
|
|
|
for Loan
|
|
|
Loans
|
|
|
for Loan
|
|
|
Loans
|
|
|
for Loan
|
|
|
Loans
|
|
|
|
Losses
|
|
|
to Total
|
|
|
Losses
|
|
|
to Total
|
|
|
Losses
|
|
|
to Total
|
|
|
|
(Dollars in Thousands)
|
|
|
Loan Categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
|
|
|
|
|
%
|
|
$
|
698
|
|
|
|
59.7
|
%
|
|
$
|
912
|
|
|
|
62.1
|
%
|
Multi-family residential
|
|
|
|
|
|
|
|
|
|
|
214
|
|
|
|
38.4
|
|
|
|
265
|
|
|
|
36.6
|
|
One-to-four
family residential
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
1.9
|
|
|
|
3
|
|
|
|
1.3
|
|
Total
|
|
$
|
|
|
|
|
0
|
%
|
|
$
|
915
|
|
|
|
100.0
|
%
|
|
$
|
1,180
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees
The Company has four employees, including the President and
Chief Financial Officer. All employees of the Company currently
are also officers of Aurora Bank or its affiliates. The Company
maintains corporate records and audited financial statements
that are separate from those of Aurora Bank. The Company does
not have any other employees because it has retained Aurora Bank
to perform all necessary functions pursuant to the AA and the
MSA. There are no provisions in the Companys charter
limiting any of the officers or directors from having any direct
or indirect pecuniary interest in any mortgage asset to be
acquired or disposed of by the Company or in any transaction in
which the Company has an interest or from engaging in acquiring
and holding mortgage assets. None of the officers or directors
currently has, nor is it anticipated that they will have, any
such interest in the Companys mortgage assets.
Competition
The Company does not anticipate that it will engage in the
business of originating mortgage loans. Although management
currently has no intention of acquiring additional assets,
subject to prior approval by the OTS, the Company may acquire
mortgage assets in addition to those in the loan portfolio and
anticipates that substantially all these mortgage assets, if any
assets are acquired in the future, will be acquired from Aurora
Bank. The amount of future acquisitions of mortgage assets will
be determined based upon the preferred dividend required to be
paid by the Company and the level of assets required to produce
an adequate dividend coverage ratio and other factors determined
to be relevant at the time. Accordingly, the Company does not
expect to compete with mortgage conduit programs, investment
banking firms, savings and loan associations, banks, thrift and
loan associations, finance companies, mortgage bankers or
insurance companies in acquiring its mortgage assets from Aurora
Bank. Aurora Bank, however, may face significant competition in
the purchase of mortgage loans, which could have an adverse
effect on the ability of the Company to acquire mortgage loans.
If Aurora Bank does not successfully compete in the purchase of
mortgage loans, there could be an adverse effect on the
Companys business, financial condition and results of
operations.
The banking industry in the United States is part of the broader
financial services industry which also includes insurance
companies, mutual funds, consumer finance companies and
securities brokerage firms. In recent years, intense market
demands, technological and regulatory changes and economic
pressures have eroded industry classifications which were once
clearly defined. More specifically, in 1999, the
U.S. Congress enacted the Gramm-Leach-Bliley Act of
1999 (the 1999 Act), under which banks are no
longer prohibited from associating with, or having management
interlocks with, a business organization engaged principally in
securities activities. The 1999 Act permits bank holding
companies that elect to become financial holding companies to
engage in defined securities and insurance activities as well as
to affiliate with securities and insurance companies. The 1999
Act also permits banks to have financial subsidiaries that may
engage in certain activities not otherwise permissible for banks.
17
Numerous banks and non-bank financial institutions have
historically competed with Aurora Bank for deposit accounts and
the acquisition of loans. Aurora Bank is subject to restrictions
imposed by the Order and the PCA Directive. With respect to
deposits, additional significant competition may arise from
corporate and government debt securities, as well as money
market mutual funds. The primary factors in competing for
deposit accounts include interest rates, the quality and range
of financial services offered and the convenience of office and
automated teller machine locations and office hours. Aurora
Banks competition for acquiring loans may include non-bank
financial institutions which may or may not be subject to the
same restrictions or regulations as Aurora Bank is. The primary
factor in competing for purchased loans is price.
Continuing realignment within the financial services sector
could eliminate some competitors or introduce new ones.
Likewise, government programs aimed at addressing the current
credit crisis could facilitate additional companies and
government sponsored entities to compete with Aurora Bank for
attractive investments.
Environmental
Matters
In the course of its business, the Company has acquired, and may
in the future acquire through foreclosure, properties securing
loans it has purchased which are in default and involve
environmental matters. With respect to other real estate owned,
there is a risk that hazardous substances or wastes,
contaminants or pollutants could be discovered on such
properties after acquisition. In such event, the Company may be
required to remove such substances from the affected properties
at its sole cost and expense and may not be able to recoup any
of such costs from any third party.
A number of risk factors, including, without limitation, the
risks factors set forth below, may cause the Companys
actual results to differ materially from anticipated future
results, performance or achievements expressed or implied in any
forward-looking statements contained in this Annual Report on
Form 10-K.
All of these factors should be carefully reviewed, and the
reader of this Annual Report on
Form 10-K
should be aware that there may be other factors that could cause
difference in future results, performance or achievements.
General
Business Risks
Changes
in the performance of Aurora Bank may result in the
Series D preferred stock being subject to automatic
exchange into preferred shares of Aurora Bank at any
time.
The returns from an investment in the Series D preferred
stock will depend to a significant extent on the performance and
capital of Aurora Bank. If (i) Aurora Bank is
undercapitalized, (ii) or if the OTS anticipates that
Aurora Bank will become undercapitalized, (iii) or if
Aurora Bank is placed into bankruptcy, reorganization,
conservatorship or receivership, the OTS may direct the
automatic exchange of the preferred shares of the Company for
preferred shares of Aurora Bank, which would represent an
investment in Aurora Bank and not in the Company. Under these
circumstances:
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a holder of Series D preferred stock would be a preferred
stockholder of Aurora Bank if Aurora Banks financial
condition deteriorates or if Aurora Bank is placed into
bankruptcy, reorganization, conservatorship or receivership and,
accordingly, it is unlikely that Aurora Bank would be in a
financial position to pay any dividends on the preferred shares
of Aurora Bank. An investment in Aurora Bank is also subject to
risks that are distinct from the risks associated with an
investment in the Company. For example, an investment in Aurora
Bank would involve risks relating to the capital levels of, and
other federal regulatory requirements applicable to, Aurora Bank
and the performance of Aurora Banks overall loan portfolio
and other business lines. Aurora Bank also has significantly
greater liabilities than does the Company;
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if a liquidation of Aurora Bank occurs, the claims of depositors
and creditors of Aurora Bank and of the OTS would have priority
over the claims of holders of the preferred shares of Aurora
Bank, and
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18
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therefore, a holder of Series D preferred stock likely
would receive, if anything, substantially less than such holder
would receive had the Series D preferred stock not been
exchanged for preferred shares of Aurora Bank; and
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the exchange of the Series D preferred stock for preferred
shares of Aurora Bank would be a taxable event to a holder of
Series D preferred stock 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 holders basis
in the Series D preferred stock and the fair market value
of Aurora Bank preferred shares received in the exchange.
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At December 31, 2009, under the regulatory capital
guidelines applicable to banks developed and monitored by the
federal bank regulatory agencies, Aurora Bank was deemed to be
adequately capitalized.
Bank
regulators may continue to limit the ability of the Company to
implement its business plan and may restrict its ability to
declare and pay dividends, to redeem the Series D preferred
stock or to enter into asset sales or exchanges.
Because the Company is a subsidiary of Aurora Bank, federal
regulatory authorities have the right to examine it and its
activities and to impose restrictions on Aurora Bank or the
Company which impact the Companys ability to conduct its
business according to its business objectives, which could
materially adversely affect the financial condition and results
of operations of the Company.
On January 26, 2009, the OTS entered the Order against
Aurora Bank which, among other things, required Aurora Bank to
file various privileged prospective operating plans with the OTS
to manage the liquidity and operations of Aurora Bank going
forward, including a strategic plan. The strategic plan required
that Aurora Bank set out the actions necessary for it to achieve
either a (i) merger with or acquisition by another entity,
or such other transaction as the OTS may approve or
(ii) voluntary dissolution. Furthermore, the OTS issued the
PCA Directive on February 4, 2009. The PCA Directive had
the effect of requiring Aurora Bank to immediately take any
actions necessary to result in the acquisition of Aurora Bank by
another depository institution holding company or the merger of
Aurora Bank with another depository institution or such other
transaction(s) as the OTS may approve pursuant to a plan of
voluntary dissolution of Aurora Bank since Aurora Bank failed to
achieve adequately capitalized status by February 28, 2009.
During 2009, LBHI contributed additional capital to Aurora Bank,
which improved Aurora Banks capital position under
applicable regulatory capital guidelines pending further review
of such designation by the OTS.
The Order and the PCA Directive both require Aurora Bank to
ensure that each of its subsidiaries, including the Company,
complies with the Order and the PCA Directive, including the
operating restrictions contained in both the Order and the PCA
Directive. These operating restrictions, among other things,
restrict transactions with affiliates, capital distributions to
shareholders (including redemptions), transfers or exchanges of
assets, contracts outside the ordinary course of business and
changes in senior executive officers, board members or their
employment arrangements without prior written notice to the OTS.
The OTS has informed Aurora Bank that prior approval of the OTS
is required for payment by the Company of dividends on the
Series B and Series D preferred stock. Aurora Bank has
made a formal request to the OTS for the resumption of dividend
payments. There can be no assurance, however, that future
dividends on the Series B and Series D preferred stock
will be approved or when or if the OTS will remove any such
approval requirement. Furthermore, any future dividends on the
Series B and Series D preferred stock will be payable
only when, as and if declared by the Board of Directors.
The OTS may also require Aurora Bank to sever its relationship
with or divest its ownership interest in the Company or certain
of the Companys assets. Such actions could potentially
result in the Companys failure to qualify as a REIT.
As a result, in part, of the Order and the PCA Directive, there
is uncertainty regarding the Companys ability to continue
as a going concern. The 2009 financial statements do not include
any adjustments that might result from future regulatory
actions, which could affect our ability to continue as a going
concern.
19
If the
OTS does not approve Aurora Banks request to permit the
payment of future dividends, the Company will be prohibited from
paying dividends in the future and therefore may fail to qualify
as a REIT.
On June 26, 2009, the OTS notified Aurora Bank that the
prior approval of the OTS is currently required before payment
by the Company of dividends on the Series B and
Series D preferred stock as a result of the Order and the
PCA Directive. As a result of the notice from the OTS, the Board
of Directors voted not to declare or pay the Series B and
Series D preferred stock dividend that would have been
payable on July 15, 2009, October 15, 2009, and
January 15, 2010. Aurora Bank has made a formal request to
the OTS to approve the payment of future dividends on the
Series B and Series D preferred stock. If the OTS does
not approve this request, the Company will be prohibited from
paying future dividends, which could result in the Company
failing to qualify as a REIT. In order to qualify as a REIT, the
Company generally is required each year to distribute to its
stockholders at least 90% of its net taxable income, excluding
net capital gains. The Company 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, the Company is subject to a 4% nondeductible excise
tax on the amount, if any, by which certain distributions
considered as paid by the Company 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.
The
bankruptcy of LBHI may limit the ability of LBHI to contribute
capital to Aurora Bank and negatively impact the timing and
amount of payments received by Aurora Bank with respect to debts
owed to Aurora Bank by LBHI.
On September 15, 2008, LBHI filed a voluntary petition for
relief under Chapter 11 of Title 11 of the United
States Code in the United States Bankruptcy Court for the
Southern District of New York. Aurora Bank is an indirect
subsidiary of LBHI. Even though Aurora Bank has not been placed
into bankruptcy, reorganization, conservatorship or receivership
and the Company has not filed for bankruptcy protection, the
bankruptcy of LBHI may limit the ability of LBHI to contribute
capital to Aurora Bank now or in the future. In addition, the
timing and amount of any payments received by Aurora Bank with
respect to debts owed to Aurora Bank by LBHI may be limited by
the bankruptcy of LBHI. The current capitalization of Aurora
Bank, the potential inability of LBHI to contribute capital to
Aurora Bank and the uncertainty with respect to debt payments
from LBHI increases the risk that the OTS may direct the
automatic exchange of the Series D preferred stock of the
Company for preferred shares of Aurora Bank.
As a result, in part, of the bankruptcy of LBHI, there is
uncertainty regarding the Companys ability to continue as
a going concern. The 2009 financial statements do not include
any adjustments that might result from the bankruptcy of LBHI,
which could affect our ability to continue as a going concern.
The
failure of Aurora Bank could result in the loss of the
Companys funds on deposit with Aurora Bank, which could
reduce the amount of cash available to pay distributions,
including dividends on the Series B and Series D
preferred stock.
As of December 31, 2009, the Federal Deposit Insurance
Corporation, or FDIC, will only insure amounts up to
$250,000 per depositor in any particular bank. As of
December 31, 2009, the Company had approximately
$51.6 million of interest bearing deposits with Aurora
Bank, which is significantly in excess of federally-insured
levels. If Aurora Bank were to fail or be placed into
receivership, the Company may lose any amount of deposit value
over any federally-insured amounts. The loss of deposit value
could reduce the amount of cash we have available to pay
distributions, including dividends on the Series B and
Series D preferred stock.
20
The
Companys business and financial results are significantly
affected by general business and economic conditions.
The U.S. economy has experienced a severe economic downturn
recently. Business activity across a wide range of industries
and regions has suffered significant declines with many showing
reduced earnings or, in some cases, losses. The
U.S. economy has seen increased levels of commercial and
consumer delinquencies and defaults, lack of consumer confidence
and spending, reduced availability of commercial credit and
increased unemployment and underemployment.
We do not expect that these difficult conditions are likely to
improve significantly in the near future. A worsening of these
conditions would likely exacerbate the adverse effects of these
difficult market conditions and lead to additional foreclosures,
delinquencies and bankruptcies, which could have a negative
impact on the financial condition and results of operations of
the Company.
The
Company is subject to extensive government regulation and
supervision.
The Company, as a result of the ownership of all of its common
stock by Aurora Bank, is subject to extensive federal regulation
and supervision. Banking regulations are primarily intended to
protect depositors funds, federal deposit insurance funds
and the banking system as a whole, not shareholders. These
regulations have an effect on the Companys capital
structure, dividend policy and growth, among other things.
Congress and federal regulatory agencies continually review
banking laws, regulations and policies for possible changes.
Changes to statutes, regulations or regulatory policies,
including changes in interpretation or implementation of
statutes, regulations or policies, could affect the Company in
substantial and unpredictable ways. Failure to comply with laws,
regulations or policies could result in, among other things,
sanctions by regulatory agencies, civil money penalties
and/or
reputation damage, which could have a material adverse effect on
the Companys business, financial condition and results of
operations.
The
Companys results will be affected by factors beyond its
control.
The Companys 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:
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local and other economic conditions affecting real estate values;
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the continued financial stability of a borrower and the
borrowers ability to make mortgage payments;
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the ability of tenants to make lease payments;
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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;
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regional experiences of adverse business conditions or natural
disasters;
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interest rate levels and the availability of credit to refinance
mortgage loans at or prior to maturity; and
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increased operating costs, including energy costs, real estate
taxes and costs of compliance with environmental controls and
regulations.
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The
Companys loans are concentrated in California and adverse
conditions in that market could adversely affect its
operations.
Properties underlying the Companys current mortgage assets
are concentrated in California. As of December 31, 2009,
approximately 45% of the carrying value of its mortgage loans
were secured by properties located in California. 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. Beginning in 2007 and throughout 2008 and
2009, the housing and real estate sectors in California were
particularly hard hit by the recession with higher overall
foreclosure rates than the national average. If California
experiences further adverse economic, political or business
conditions, or natural
21
hazards, the Company will likely experience higher rates of loss
and delinquency on its mortgage loans than if its loans were
more geographically diverse.
A
substantial majority of the Companys loans were originated
by other parties.
All of the mortgage assets in the Companys loan portfolio
at December 31, 2009 were acquired from Capital Crossing
Bank or Aurora Bank. If the Company acquires additional mortgage
assets, it is anticipated that substantially all of such
mortgage assets will be acquired from Aurora Bank, currently the
sole common stockholder. Loans purchased by Aurora Bank will
most likely consist of loans originated by third parties, and
therefore will not be subject to the same level of due diligence
that Aurora Bank would have conducted had it originated the
loans. In addition, loans originated by third parties may lack
current financial information and may have incomplete legal
documentation and outdated appraisals. Although it is
anticipated that Aurora Bank would conduct a comprehensive
acquisition review, it also may rely on certain information
provided by the parties that originated the loans, whose
underwriting standards may be substantially different than
Aurora Banks. 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
rights of ways that may impact the property value and the
borrowers ability to manage the property and service the
mortgage. As a result, Aurora Bank may not have information with
respect to an acquired loan which, if known at the time of
acquisition, would have caused it to reduce its bid price or not
bid for the loan at all. This may adversely affect the
Companys yield on loans or cause it to increase its
provision for loan losses. In addition, Aurora Bank may acquire
loans as part of a pool that, given the opportunity to review
and underwrite at the outset, it would not have originated.
Loans such as these could have a higher risk of becoming
non-performing in the future and adversely affect the
Companys results of operations.
A portion
of the Companys loan portfolio is made up of commercial
mortgage loans, which are generally riskier than other types of
loans.
Commercial mortgage loans constituted approximately 21% of the
carrying value of the Companys loan portfolio at
December 31, 2009. Commercial mortgage loans are generally
subject to greater risks than other types of loans. The
Companys commercial mortgage loans, like most commercial
mortgage loans, generally lack standardized terms, may have
shorter maturities than other mortgage loans and may not be
fully amortizing, meaning that they have an unpaid principal
balance or balloon payment due on maturity. The
commercial real estate properties underlying the Companys
commercial mortgage loans also tend to be unique and are more
difficult to value than other 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 commercial mortgage loans, the Company
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. Higher rates of default will cause the
Companys level of impaired loans to increase, which may
have a material adverse affect on its results of operations.
The
November Asset Exchange resulted in the Company owning a
portfolio consisting primarily of residential mortgage
loans.
On November 18, 2009, the Company and its parent, Aurora
Bank, entered into the November Asset Exchange pursuant to which
Aurora Bank agreed to assign various
one-to-four
family residential mortgage loans (Residential
Loans) to the Company in exchange for the Company
assigning certain commercial and multi-family residential
mortgage loans to Aurora Bank. Pursuant to the November Asset
Exchange, the Residential Loans assigned to the Company would be
of equal or greater value to the commercial and multi-family
loans assigned to Aurora Bank. The November Asset Exchange was
subject to the receipt of a non-objection from the OTS, which
was granted on August 17, 2009. The November Asset Exchange
was consummated on November 18, 2009 (with an effective
date as of November 1, 2009) which resulted in the
Company receiving residential mortgage loans, including jumbo
mortgage loans, with a closing value of
22
$199,000 greater than the value of the commercial and
multi-family loans transferred to Aurora Bank. There can be no
assurance that the Residential Loans transferred to the Company
will maintain their current value, or in the future, continue to
exceed the value of the commercial and multi-family loans
transferred to Aurora Bank in the future. The November Asset
Exchange has altered the asset mix of the Company to consist
primarily of residential mortgage assets.
Continued
declines in home prices would negatively impact the performance
of residential mortgages.
Over the past two years, there has been a steep decline in the
national housing market with home prices falling dramatically
and increases in foreclosures. The global recession has brought
increased levels of unemployment and underemployment. If housing
prices continue to fall and unemployment and underemployment
continue to rise, the number of defaults, and related
foreclosures, on residential mortgages will remain at their
current elevated levels or possibly increase. In addition,
governmental initiatives could impact the ability of lenders to
foreclose on residential properties and realize the value of the
collateral for residential loans that are in default. These
factors could have a material adverse effect on a portfolio of
loans secured primarily by residential real estate.
The
realizable value of the Companys loan portfolio may differ
from fair value.
The Company accounts for certain of its loans held for sale at
the lower of the accreted cost or market value. The fair value
of the Companys loan portfolio is estimated based upon an
analysis prepared by management and a third party valuation
specialist which considered, among other factors, information,
to the extent available, about then current sale prices, bids,
credit quality, liquidity and other available information for
loans with similar characteristics as the Companys loan
portfolio. The analysis also considered the geographical
location and geographical concentration of the loans in the
Companys portfolio in its analysis. The valuation of the
loan portfolio involves management estimation and judgment, the
degree of which is dependent on the terms of the loans and the
availability of market prices and inputs. The realizable value
of the loan portfolio may differ from fair value and actual
losses could materially and adversely affect the Companys
results of operations.
The
Company may not be able to purchase loans at the same volumes or
with the same yields as it has historically purchased.
To date, the Company has purchased all of the loans in its
portfolio from Capital Crossing Bank or Aurora Bank.
Historically, Capital Crossing Bank had acquired such loans:
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from institutions which sought to eliminate certain loans or
categories of loans from their portfolios;
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from institutions participating in securitization programs;
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from failed or consolidating financial institutions; and
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from government agencies.
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Management currently has no intention of acquiring any new
loans. Future loan purchases, if any, will depend on the
availability of pools of loans offered for sale and Aurora
Banks ability to submit successful bids or negotiate
satisfactory purchase prices. Historically, the acquisition of
loans has been highly competitive and the Company cannot provide
assurance that Aurora Bank will be able to purchase loans at the
same volumes or with the same yields as it has historically
purchased or that the Company will acquire any loans from Aurora
Bank or at all. This may interfere with the Companys
ability to maintain the requisite level of mortgage assets to
maintain its qualification as a REIT. If volumes of loans owned
by the Company decline or the yields on these loans decline, the
Company could experience a material adverse effect on its
financial condition.
23
The
Company could be held responsible for environmental liabilities
of properties it acquires through foreclosure.
If the Company chooses 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 21% of the carrying value in the Companys
portfolio at December 31, 2009, 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 the
Companys 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 the Company 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 the Company
could recoup any of the costs from any third party. In addition,
the Company may find it difficult or impossible to sell the
property prior to or following any such remediation. The
incurrence of any significant environmental liabilities with
respect to a property securing a mortgage loan could have a
material adverse effect on the Companys financial
condition.
The
Company is dependent in virtually every phase of its operations
on the diligence and skill of the management of Aurora
Bank.
Aurora Bank, which holds all of the Companys common stock,
is involved in virtually every aspect of the Companys
operations and is able to approve unilaterally almost all
corporate actions of the Company as its sole common shareholder.
The Company has four employees and does not have any independent
corporate infrastructure. The employees of the Company currently
are also officers of Aurora Bank or its affiliates. The Company
does not have any other employees because it has retained Aurora
Bank to perform all necessary functions pursuant to the AA and
the MSA.
Under the Advisory Agreement between the Company and Aurora
Bank, Aurora Bank is responsible for administering the
day-to-day
activities, including monitoring of the Companys credit
quality and advising it with respect to the acquisition,
management, financing and disposition of mortgage assets and its
operations generally. Under the MSA between the Company and
Aurora Bank, Aurora Bank services the Companys held for
sale loans and oversees the servicing of the residential loan
portfolio acquired in the November Asset Exchange. The AA has an
initial term of five years with an automatic renewal feature and
the MSA has a one-year term with an automatic renewal feature.
Both the MSA and the AA are subject to earlier termination upon
30 days and 90 days notice, respectively. Aurora Bank
may subcontract all or a portion of its obligations under the AA
to its affiliates or, with the approval of a majority of the
Board of Directors including a majority of the Companys
independent directors, subcontract its obligations under the AA
to unrelated third parties. Aurora Bank will not, in connection
with the subcontracting of any of its obligations under the AA,
be discharged or relieved from its obligations under the AA.
The loss of the services of Aurora Bank, or the inability of
Aurora Bank to effectively provide such services whether as a
result of the loss of key members of Aurora Banks
management, early termination of the agreements or otherwise,
and the Companys inability to replace such services on
favorable terms, or at all, could adversely affect the
Companys ability to conduct its operations.
Both the Advisory Agreement and the MSA were amended on
March 29, 2010 with effect as of January 1, 2010. The
amended Advisory Agreement and the amended MSA have implemented
higher fees paid by the Company that reflect the incrementally
increased costs over time associated with such services. See
further discussion in Notes to Financial Statements
at Note 9, Subsequent Events. It is the intention of the
Company that any agreements and transactions between the Company
and Aurora Bank are fair to all parties and consistent with
market terms.
24
The
Companys relationship with Aurora Bank may create
conflicts of interest.
Aurora Bank and its affiliates may have interests which are not
identical to the Companys and therefore conflicts of
interest have arisen and may arise in the future with respect to
transactions between the Company and Aurora Bank such as:
Acquisition of mortgage
assets.
Although management currently has no
intention of acquiring additional assets, subject to prior
approval by the OTS, the Company may from time to time purchase
additional mortgage assets. If the Company acquires any
additional mortgage assets, it is anticipated that substantially
all of such mortgage assets will be acquired from Aurora Bank on
terms that are comparable to those that could be obtained by the
Company if such mortgage assets were purchased from unrelated
third parties. Neither the Company nor Aurora Bank currently
have specific policies with respect to the purchase by the
Company from Aurora Bank of particular loans or pools of loans,
other than that such assets must be eligible to be held by a
REIT. Although any purchases will be structured to take
advantage of the underwriting procedures of Aurora Bank, and
while the Company believes that any agreements and transactions
between it, on the one hand, and Aurora Bank
and/or
its
affiliates on the other hand, will be fair to all parties and
consistent with market terms, neither the Company nor Aurora
Bank are required to obtain a third-party valuation to confirm
that the Company is paying fair market value. Additionally,
through limiting the Companys source of purchased mortgage
assets solely to those originated or purchased by Aurora Bank,
the Companys portfolio will generally reflect the nature,
scope and risk of Aurora Banks portfolio rather than a
more diverse portfolio composed of mortgage loans also purchased
from other lenders.
Servicing of the Companys mortgage assets by Aurora
Bank.
The Companys commercial loans are
serviced by Aurora Bank pursuant to the terms of a servicing
agreement. Through December 31, 2009, Aurora Bank in its
role as servicer under the terms of the servicing agreement
received an annual servicing fee equal to 0.20%, payable
monthly, on the gross average unpaid principal balances of loans
serviced for the immediately preceding month. The servicing
agreement requires Aurora Bank to service the loan portfolio in
a manner substantially the same as for similar work performed by
Aurora Bank for transactions on its own behalf. This will become
especially important as Aurora Bank 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 the Company believes that Aurora Bank will diligently
pursue collection of any non-performing loans, the Company
cannot provide assurance that this will be the case. The
Companys ability to make timely payments of dividends will
depend in part upon Aurora Banks prompt collection efforts
on behalf of the Company.
Future dispositions by the Company of mortgage assets to
Aurora Bank or its affiliates.
The MSA
provides that foreclosures and dispositions of the mortgage
assets are to be performed in a manner substantially the same as
for similar work performed by Aurora Bank on its own behalf.
However, the Company 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. Aurora
Bank may seek to exercise its influence on the Companys
affairs so as to cause the sale of the mortgage assets owned by
the Company and their replacement by lesser quality loans
purchased from Aurora Bank or elsewhere which could adversely
affect the Companys business and its ability to make
timely payments of dividends.
Future modifications of the Advisory Agreement or Master
Service Agreement.
Should the Company modify
either the Advisory Agreement or the Master Service Agreement,
it would rely upon its officers, all of whom are also officers
of Aurora Bank or its affiliates. Thus, the Companys
officers
and/or
directors would be responsible for taking positions with respect
to such agreements that, while in the Companys best
interests, may not be in the best interests of Aurora Bank. In
such instance, Aurora Bank has the ability to block any
modification that is not in its best interests. Although the
termination, modification or decision not to renew the AA
and/or
the
MSA requires the approval of a majority of the Companys
independent directors, Aurora Bank, as holder of all of the
Companys outstanding common stock, controls the election
of all the Companys directors, including the independent
directors. The Company cannot provide assurance that such
modifications, if available to it, will be on terms as favorable
to it as those that could have been obtained from unaffiliated
third parties. Both the Advisory Agreement and the MSA were
amended on March 29, 2010 with effect as of
25
January 1, 2010. The amended Advisory Agreement and the
amended MSA change the fees paid by the Company to reflect the
increased costs associated with such services. See further
discussion in Notes to Financial Statements at
Note 9, Subsequent Events. It is the intention of the
Company that any agreements and transactions between the Company
and Aurora Bank are fair to all parties and consistent with
market terms.
The
Companys controls and procedures may fail or be
circumvented.
Management is responsible for the Companys internal
controls, disclosure controls and procedures, and corporate
governance policies and procedures. Any system of controls,
however well designed and operated, is based in part on certain
assumptions and can provide only reasonable, not absolute,
assurances that the objectives of the system are met. Any
failure or circumvention of the Companys controls and
procedures or failure to comply with regulations related to
controls and procedures could have a material adverse effect on
the Companys business, results of operations and financial
condition.
The Board
of Directors has broad discretion to revise the Companys
strategies.
The Board of Directors has established the Companys
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 the Companys stockholders.
Changes in the Companys strategies could have a negative
effect on shareholders.
Fluctuations
in interest rates could reduce the Companys earnings and
affect its ability to pay dividends.
The Companys income consists primarily of interest earned
on its mortgage assets and short-term investments. Approximately
80% of the Companys performing mortgage assets bear
interest at adjustable rates. If there is a decline in interest
rates, then the Company will experience a decrease in income
available to be distributed to its stockholders, which remains
subject to OTS approval. If interest rates decline, the Company
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 B and Series D preferred stock.
Conversely, an increase in mortgage rates could result in
decreased interest income and increased non-interest expense
related to workouts and other collection efforts. An increase in
interest rates that adversely affects the ability of borrowers
to pay the principal or interest on the Companys loans may
lead to an increase in non-performing assets, which could have a
material adverse affect on the Companys results of
operations. Because the dividend rates on the Series B and
Series D preferred stock are fixed, a significant decline
or increase in interest rates, either of which could result in
lower net income, could materially adversely affect the
Companys ability to pay dividends on the Series B and
Series D preferred stock which remains subject to OTS
approval. In addition, negative fluctuations in interest rates
could reduce the interest paid on cash deposits of the Company,
which could also materially adversely affect the Companys
ability to pay dividends on the Series B and Series D
preferred stock.
The
Company is subject to the risk of litigation, and the outcome of
proceedings it may become involved in could materially adversely
affect the Companys business and ability to pay dividends
on the Series B and Series D preferred
stock.
From time to time, the Company may be involved in litigation
incidental to its business, including without limitation, a
variety of legal proceedings with borrowers. Although the
Company intends to vigorously defend against all potential
actions, there can be no assurance that the ultimate outcome of
any actions will not cause a loss or materially adversely affect
the Companys business or ability to pay dividends on the
Series B and Series D preferred stock.
26
Tax Risks
Related to REITs
If the
Company fails to qualify as a REIT, it will be subject to
federal and state income tax at regular corporate
rates.
If the Company 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 the Companys stockholders would be reduced
for the year or years involved. In addition, unless entitled to
relief under statutory provisions, the Company 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 the Companys net earnings
available for distribution to its stockholders because of the
additional tax liability for the year or years involved. The
Companys failure to qualify as a REIT would not by itself
give the holders of the Series B and Series D
preferred stock the right to have their shares redeemed.
Although the Company currently intends to operate in a manner
designed to qualify as a REIT, future economic, market, legal,
regulatory, 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 the Company from
electing treatment as a REIT for the four taxable years
following the year of any such revocation.
If the
Company does not distribute 90% of its net taxable income, it
may not qualify as a REIT.
In order to qualify as a REIT, the Company generally is required
each year to distribute to its stockholders at least 90% of its
net taxable income, excluding net capital gains. The Company 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, the Company is
subject to a 4% nondeductible excise tax on the amount, if any,
by which certain distributions considered as paid by the Company
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. In order to qualify as a REIT, distributions must be
declared by the end of the third quarter of the following fiscal
year and paid by the end of the fourth quarter. Federal
regulatory authorities have restricted the Companys
ability, as a subsidiary of Aurora Bank, to make distributions
in 2009 to its stockholders in an amount necessary to retain its
REIT qualification. Such a restriction could result in the
Company failing to qualify as a REIT. To the extent the
Companys REIT taxable income may exceed the actual cash
received for a particular period, the Company may not have
sufficient liquidity to make distributions necessary to retain
its REIT qualification.
The Company is subject to the payment of an excise tax for
fiscal year 2009. Notwithstanding Aurora Banks request for
non-objection determination to the OTS for the resumption of
normal dividend payments to its Series B and Series D
preferred shareholders in accordance with its available net
taxable income which must be distributed to maintain REIT status
of the Company, the OTS did not grant a non-objection
determination as of December 31, 2009. Accordingly, the
Company is subject to the payment of a 4% nondeductible excise
tax as set forth above. Based upon the payment of dividends for
the first quarter of 2009, and the non-payment of dividends for
the second, third and fourth quarters of 2009, the Company is
required to pay approximately $60,000 in non-deductable excise
tax for the fiscal year 2009.
The
Company may redeem the Series B and Series D preferred
stock 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, the Company will have
the right to redeem the Series B and Series D
preferred stock in whole, subject to the prior written approval
of the OTS. The Company would have the right to redeem the
Series B and Series D
27
preferred stock if it received an opinion of counsel to the
effect that, as a result of changes to the tax laws or
regulations:
|
|
|
|
|
dividends paid by the Company with respect to its capital stock
are not fully deductible by it for income tax purposes; or
|
|
|
|
the Company is 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 B and
Series D preferred stock any right to have their shares
redeemed.
The
Company has imposed ownership limitations to protect its ability
to qualify as a REIT, however, if ownership of the common stock
of Aurora Bank becomes concentrated in a small number of
individuals the Company may fail to qualify as a REIT.
To maintain the Companys status as a REIT, not more than
50% in value of the Companys outstanding shares may be
owned, directly or indirectly, by five or fewer individuals, as
defined in the Internal Revenue Code to include certain
entities, during the last half of each taxable year. The Company
currently satisfies this requirement because all of the
Companys common stock is held by Aurora Bank, which is a
wholly-owned indirect subsidiary of LBHI. Therefore, for
purposes of maintaining the Companys status as a REIT, the
Companys stock is treated as held by LBHIs
stockholders. However, it is possible that the ownership of LBHI
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 the
Companys stock. The Company may have difficulty monitoring
the daily ownership and constructive ownership of its
outstanding shares and, therefore, the Company cannot provide
assurance that it will continue to meet the share ownership
requirement. This risk may be exacerbated by the bankruptcy of
LBHI if, as a result of the bankruptcy proceedings of LBHI, five
or fewer individuals indirectly acquire constructive ownership
of more than 50% of the value of the Companys stock. In
addition, while the fact that the Series B and
Series D preferred stock may be redeemed or exchanged will
not affect the Companys REIT status prior to any such
redemption or exchange, the redemption or exchange of all or a
part of the Series B and Series D preferred stock
could adversely affect the Companys ability to satisfy the
share ownership requirements in the future.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
The Company conducts all of its business out of offices
maintained by Aurora Bank. The mailing address is 1271 Avenue of
the Americas, 46th Floor, New York, NY 10020. The Company
does not reimburse Aurora Bank for the use of such space.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
From time to time, the Company may be involved in routine
litigation incidental to its business, including a variety of
legal proceedings with borrowers, which would contribute to the
Companys expenses, including the costs of carrying
non-performing assets.
|
|
ITEM 4.
|
(REMOVED
AND RESERVED).
|
Not applicable.
28
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
|
Common
Stock
In connection with its formation on March 20, 1998, the
Company issued 100 shares of its common stock to Capital
Crossing Bank. These shares of common stock were issued in
reliance upon the exemption from registration under
Section 4(2) of the Securities Act of 1933, as amended.
There is no established public trading market for the common
stock. As of March 31, 2010, there were 100 issued and
outstanding shares of common stock, all of which were held by
Aurora Bank.
On February 14, 2007, Capital Crossing Bank was acquired by
Aurora Bank through a two step merger transaction. An interim
thrift subsidiary of Aurora Bank was merged into Capital
Crossing Bank. Immediately following such merger, Capital
Crossing Bank was merged into Aurora 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 Bank.
Effective as of April 27, 2009, Lehman Brothers Bank, FSB,
the owner of all of the Companys common stock, formally
changed its name to Aurora Bank FSB.
During 2009, no dividends or returns of capital were paid to the
common shareholder. During 2008 and 2007, dividends of
$2.8 million, and $4.2 million, respectively, were
paid to the common stockholder. In addition, during 2008 and
2007, returns of capital totaling $20.2 million and
$24.8 million, respectively, were paid to the common
stockholder.
Preferred
Stock
On March 31, 1998, Capital Crossing Bank capitalized the
Company by transferring mortgage loans valued at
$140.7 million in exchange for 1,000 shares of the
Companys 8% Cumulative Non-Convertible Preferred Stock,
Series B, valued at $1.0 million and 100 shares
of the Companys common stock valued at
$139.7 million. The carrying value of these loans
approximated their fair values at the date of contribution.
On May 11, 2004, the Company closed its public offering of
1,500,000 shares of its 8.50% Non-cumulative exchangeable
preferred stock, Series D. The net proceeds to the Company
from the sale of Series D preferred stock was
$35.3 million. The Series D preferred stock became
redeemable at the option of the Company effective July 15,
2009, with the prior approval of the OTS.
All shares of the Companys 9.75% Non-cumulative
exchangeable preferred stock, Series A, and 10.25%
Non-cumulative exchangeable preferred stock, Series C, were
redeemed on March 23, 2007. The Series B preferred
stock and Series D preferred stock remain outstanding and
subject to their existing terms and conditions, including the
call feature with respect to the Series D preferred stock.
At December 31, 2008, under the regulatory capital
guidelines applicable to banks developed and monitored by the
federal bank regulatory agencies, Aurora Bank was deemed to be
significantly undercapitalized. During 2009, LBHI
contributed additional capital to Aurora Bank, which improved
Aurora Banks capital position. At December 31, 2009,
Aurora Banks total risk-based capital ratio was
mathematically in the well capitalized category,
however, due to the continuation of the provisions of the Order
and the PCA Directive, Aurora Bank was deemed to be
adequately capitalized. The Order and the PCA
Directive were still effective as of the issuance of this annual
report. As such, the OTS may direct in writing at any time the
automatic exchange of the Series B and Series D
preferred stock for preferred shares of Aurora Bank.
Dividend
Policy
Until the second quarter of 2009, the Company historically has
paid an aggregate amount of dividends with respect to its
outstanding shares of capital stock equal to substantially all
of its REIT taxable income. The Company, subject to directives
of the OTS, 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. In
29
order to remain qualified as a REIT, the Company must distribute
annually at least 90% of its REIT taxable income, excluding
capital gains, to stockholders. Because in general it will be in
the Companys interest, and in the interests of its
stockholders, to remain qualified as a REIT, this tax
requirement creates a significant incentive to declare and pay
dividends when the Company has sufficient resources and ability
to do so. Aurora Bank, as holder of all of the Companys
common stock, controls the election of all of its directors and
also has a significant interest in having full dividends paid on
its preferred shares. The Company anticipates that none of the
dividends on outstanding preferred shares will constitute
non-taxable returns of capital.
Dividends will be declared at the discretion of the Board of
Directors after considering the Companys distributable
funds, financial requirements, tax considerations, regulatory,
and other factors. The Companys distributable funds will
consist primarily of interest and principal payments on the
mortgage assets, interest on deposits, and the Company
anticipates that a significant portion of such assets will earn
interest at adjustable rates. Accordingly, if there is a decline
in interest rates, the Company will experience a decrease in
income available to be distributed to its stockholders. In a
period of declining interest rates, the Company also may find it
difficult to purchase additional mortgage assets bearing rates
sufficient for it to be able to pay dividends on the
Series B and Series D preferred stock.
The Order and the PCA Directive both require Aurora Bank to
ensure that each of its subsidiaries, including the Company,
complies with the Order and the PCA Directive, including the
operating restrictions contained in both the Order and the PCA
Directive. These operating restrictions, among other things,
restrict transactions with affiliates, capital distributions to
shareholders (including redemptions), transfers or exchanges of
assets, contracts outside the ordinary course of business and
changes in senior executive officers, board members or their
employment arrangements without prior written notice to the OTS.
The OTS has informed Aurora Bank that prior approval of the OTS
is required for payment by the Company of dividends on the
Series B and Series D preferred stock. Aurora Bank has
made a formal request for a non-objection determination to the
OTS to permit the resumption of normal dividend payments. As of
the date of filing of this report, the OTS had not provided the
non-objection. There can be no assurance, that future dividends
on the Series B and Series D preferred stock will
receive approval from the OTS. Furthermore, any future dividends
on the Series B and Series D preferred stock will be
payable only when, as and if declared by the Board of Directors.
As a result of the PCA and the Order, the OTS may direct in
writing at any time the automatic exchange of the Series D
preferred stock for preferred shares of Aurora Bank. If the OTS
directs the automatic exchange of the Series D preferred
stock for Aurora Bank preferred shares at this time, holders of
the Series D preferred stock would become holders of Aurora
Bank preferred stock at a time when Aurora Bank is subject to
the Order and PCA Directive. Thus, Aurora Bank would likely be
prohibited from paying dividends on its preferred shares,
including its preferred shares issued in exchange for the
Companys Series D preferred stock. Further, Aurora
Banks ability to pay dividends on its preferred shares
following the automatic exchange also would be subject to
various restrictions under OTS regulations and would be payable
only when, as and if declared by Aurora Banks board of
directors. Any such dividends would be paid out of Aurora
Banks capital surplus.
30
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in Thousands)
|
|
|
Financial condition data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
82,039
|
|
|
$
|
96,067
|
|
|
$
|
116,358
|
|
|
$
|
173,903
|
|
|
$
|
203,326
|
|
Loans held for sale, at fair value
|
|
|
22,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale, at lower of accreted cost or market value
|
|
|
7,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for investment, net
|
|
|
|
|
|
|
53,025
|
|
|
|
66,686
|
|
|
|
90,957
|
|
|
|
116,116
|
|
Allowance for loan losses
|
|
|
|
|
|
|
(915
|
)
|
|
|
(1,180
|
)
|
|
|
(1,519
|
)
|
|
|
(1,981
|
)
|
Deferred loan fees
|
|
|
|
|
|
|
(27
|
)
|
|
|
(32
|
)
|
|
|
(47
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
29,823
|
|
|
$
|
52,083
|
|
|
$
|
65,474
|
|
|
$
|
89,391
|
|
|
$
|
114,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
51,823
|
|
|
$
|
43,757
|
|
|
$
|
50,581
|
|
|
$
|
83,900
|
|
|
$
|
88,406
|
|
Stockholders equity
|
|
|
81,695
|
|
|
|
95,136
|
|
|
|
115,369
|
|
|
|
172,687
|
|
|
|
202,096
|
|
Non-performing loans, net
|
|
|
318
|
|
|
|
1,596
|
|
|
|
|
|
|
|
416
|
|
|
|
333
|
|
Operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest income
|
|
$
|
3,564
|
|
|
$
|
6,175
|
|
|
$
|
8,133
|
|
|
$
|
10,920
|
|
|
$
|
12,374
|
|
Reduction in allowance for loan losses
|
|
|
915
|
|
|
|
265
|
|
|
|
339
|
|
|
|
406
|
|
|
|
516
|
|
Loss on loans held for sale
|
|
|
(16,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
76
|
|
|
|
1,120
|
|
|
|
80
|
|
Operating expenses
|
|
|
(1,040
|
)
|
|
|
(410
|
)
|
|
|
(299
|
)
|
|
|
(326
|
)
|
|
|
(511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(12,824
|
)
|
|
|
6,030
|
|
|
|
8,249
|
|
|
|
12,120
|
|
|
|
12,459
|
|
Preferred stock dividends declared
|
|
|
(816
|
)
|
|
|
(3,262
|
)
|
|
|
(4,006
|
)
|
|
|
(6,529
|
)
|
|
|
(6,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholder
|
|
$
|
(13,640
|
)
|
|
$
|
2,768
|
|
|
$
|
4,243
|
|
|
$
|
5,591
|
|
|
$
|
5,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings to fixed charges and preferred stock dividends
|
|
|
N/A
|
|
|
|
1.85
|
X
|
|
|
2.06
|
X
|
|
|
1.86
|
X
|
|
|
1.91
|
X
|
Selected other information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets, net, as a percent of total assets(1)
|
|
|
0.39
|
%
|
|
|
1.66
|
%
|
|
|
0.00
|
%
|
|
|
0.24
|
%
|
|
|
0.16
|
%
|
Non-performing loans, net, as a percentage of loans, net of
discount and deferred loan income(1)
|
|
|
1.07
|
|
|
|
3.01
|
|
|
|
0.00
|
|
|
|
0.46
|
|
|
|
0.29
|
|
Allowance for loan losses as a percent of total loans, net of
discount and deferred loan fees(2)
|
|
|
|
|
|
|
1.73
|
|
|
|
1.77
|
|
|
|
1.67
|
|
|
|
1.71
|
|
Allowance for loan losses as a percent of non-performing loans,
net(2)
|
|
|
|
|
|
|
57.33
|
|
|
|
0.00
|
|
|
|
365.14
|
|
|
|
594.89
|
|
|
|
|
(1)
|
|
The calculated percentage was impacted by the change in the
composition of the Companys portfolio of loans resulting
from the exchange with Aurora Bank during 2009.
|
|
(2)
|
|
Concurrent with the February Asset Exchange Agreement for the
exchange of loans with Aurora Bank, during the first quarter of
2009, the Company reclassified all of its loan assets as held
for sale and recorded a valuation allowance to reflect these
loan assets at the lower of their accreted cost or market value.
Additionally, concurrent with the November Asset Exchange, loan
assets were acquired that are recorded at their fair value.
|
31
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This report contains certain statements that constitute
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Words such as
expects, anticipates,
believes, estimates and other similar
expressions or future or conditional verbs such as
will, should, would, and
could are intended to identify such forward-looking
statements. These statements are not historical facts, but
instead represent the Companys current expectations, plans
or forecasts of its future results, growth opportunities,
business outlook, loan growth, credit losses, liquidity position
and other similar matters, including, but not limited to, the
ability to pay dividends with respect to the Series B and
Series D preferred stock, future bank regulatory actions
that may impact the Company and the effect of the bankruptcy of
LBHI on the Company. These statements are not guarantees of
future results or performance and involve certain risks,
uncertainties and assumptions that are difficult to predict and
often are beyond the Companys control. Actual outcomes and
results may differ materially from those expressed in, or
implied by, the Companys forward-looking statements. You
should not place undue reliance on any forward-looking statement
and should consider all uncertainties and risks, including,
among other things, the risks set forth under Item 1A
Risk Factors, as well as those discussed in any of
the Companys other subsequent Securities and Exchange
Commission filings. Forward-looking statements speak only as of
the date they are made, and the Company undertakes no obligation
to update any forward-looking statement to reflect the impact of
circumstances or events that arise after the date the
forward-looking statement was made.
Possible events or factors could cause results or performance to
differ materially from what is expressed in our forward-looking
statements. These possible events or factors include, but are
not limited to, those risk factors discussed under Item 1A
Risk Factors in this report and the following:
limitations by regulatory authorities on the Companys
ability to implement its business plan and restrictions on its
ability to pay dividends; further regulatory limitations on the
business of Aurora Bank that are applicable to the Company;
negative economic conditions that adversely affect the general
economy, housing prices, the job market, consumer confidence and
spending habits which may affect, among other things, the credit
quality of our loan portfolios (the degree of the impact of
which is dependent upon the duration and severity of these
conditions); the level and volatility of interest rates; changes
in consumer, investor and counterparty confidence in, and the
related impact on, financial markets and institutions;
legislative and regulatory actions which may adversely affect
the Companys business and economic conditions as a whole;
the impact of litigation and regulatory investigations; various
monetary and fiscal policies and regulations; changes in
accounting standards, rules and interpretations and the impact
on the Companys financial statements; and changes in the
nature and quality of the types of loans held by the Company.
Executive
Level Overview
Aurora Bank, an indirect wholly-owned subsidiary of Lehman
Brothers Holdings Inc. (LBHI and together with its
subsidiaries, Lehman Brothers), owns all of the
Companys common stock. Capital Crossing Bank was the sole
common stockholder of the Company until February 14, 2007.
The Series B preferred stock and Series D preferred
stock remain outstanding and remain subject to their existing
terms and conditions, including the call feature with respect to
the Series D preferred stock.
All of the mortgage assets in the Companys loan portfolio
at December 31, 2009 were acquired from Capital Crossing
Bank or Aurora Bank and it is anticipated that substantially all
additional mortgage assets, if any are acquired in the future,
will be acquired from Aurora Bank. As of December 31, 2009,
the Company held loans acquired from Capital Crossing Bank and
Aurora Bank with a carrying value of $29.8 million and an
unpaid principal balance of $44.9 million.
Residential loans constituted approximately 79% of the total
loans in the Companys loan portfolio at December 31,
2009. Commercial mortgage loans constituted approximately 21% of
the total loans in the Companys loan portfolio at
December 31, 2009. Commercial mortgage loans are generally
subject to greater risks than other types of loans. The
Companys commercial mortgage loans, like most commercial
mortgage loans, generally lack standardized terms, tend to have
shorter maturities than other mortgage loans and may
32
not be fully amortizing. As of December 31, 2009, 98.9% of
the carrying value of all loans was classified as performing.
Properties underlying the Companys current mortgage assets
are concentrated primarily in California and comprised
approximately 45% of the total carrying value of the loan
portfolio as of December 31, 2009. Beginning in 2007 and
throughout 2008 and 2009, the housing and real estate sectors in
California were hit particularly hard by the recession with
higher overall foreclosure rates than the national average. If
California experiences continued or further adverse economic,
political or business conditions, or natural hazards, the
Company will likely experience higher rates of loss and
delinquency on its mortgage loans than if its loans were more
geographically diverse.
Decisions regarding the utilization of the Companys cash
are based, in large part, on its future commitments to pay
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
and other factors determined to be relevant at the time.
Net income (loss) available to common shareholder decreased
$16.4 million, to a net loss of $13.6 million in 2009
compared to $2.8 million in net income in 2008 and
decreased $1.4 million, or 34.8%, in 2008 compared to
$4.2 million in net income in 2007. The decrease from 2008
to 2009 is primarily the result of the $16.3 million fair
value adjustment established upon reclassifying the loans to
held for sale and recording these loans at fair value. Fair
value at December 31, 2009 was 30.0% below the net
investment balance of these loans and reflects the impact that
adverse economic conditions have had on the fair value of these
loans. Additionally, total interest income decreased
$2.6 million and operating expenses increased
$0.6 million offset by an increase in the reduction in the
allowance for loan losses of $0.7 million and a reduction
in preferred stock dividends of $2.5 million compared to
2008. The decrease from 2007 to 2008 is primarily the result of
a decline in interest income partially offset by a decrease in
preferred stock dividends due to the redemption of all of the
Companys 9.75% Non-Cumulative Exchangeable Preferred
Stock, Series A and 10.25% Non-Cumulative Exchangeable
Preferred Stock, Series C preferred shares on
March 23, 2007.
Impact of
Economic Recession
The U.S. economy was in a recession in 2008 and portions of
2009. Dramatic declines in the housing market over the past two
plus years, with falling home prices and increasing
foreclosures, unemployment and underemployment, have negatively
impacted the credit performance of mortgage loans and resulted
in significant write-downs of asset values by financial
institutions, including government-sponsored entities as well as
major commercial and investment banks. Reflecting concern about
the stability of the financial markets generally and the
strength of counterparties, many lenders and institutional
investors have reduced or ceased providing funding to borrowers,
including to other financial institutions. This market turmoil
and tightening of credit have led to an increased level of
delinquencies, decreased consumer spending, lack of confidence,
increased market volatility and widespread reduction of business
activity generally. The resulting economic pressure on
borrowers, and lack of confidence in the financial markets have
negatively impacted the credit quality of our commercial loan
portfolio and may impact the credit quality of our residential
loan portfolio. The depth and breadth of the downturn as well as
the resulting impacts on the credit quality of both our
commercial and residential loan portfolios remain unclear. We
expect, however, continued market turbulence and economic
uncertainty to continue well into 2010. This may result in
higher credit losses and provisions for loan losses in future
periods.
Bankruptcy
of LBHI
On September 15, 2008, LBHI filed a voluntary petition for
relief under Chapter 11 of the U.S. Bankruptcy Code.
Aurora Bank is an indirect subsidiary of LBHI. Aurora Bank has
not been placed into bankruptcy, reorganization, conservatorship
or receivership and the Company has not filed for bankruptcy
protection. We expect, however, that the bankruptcy of LBHI may
limit the ability of LBHI to contribute capital to Aurora Bank
now or in the future. In addition, the timing and amount of any
payments received by
33
Aurora Bank with respect to debts owed to Aurora Bank by LBHI
may be limited by the bankruptcy of LBHI, which could in turn
negatively impact the assets, capital levels and regulatory
capital ratios of Aurora Bank. During 2009, LBHI contributed
additional capital to Aurora Bank, which improved Aurora
Banks capital position. As discussed elsewhere in this
report, the Company is dependent in virtually every phase of its
operations on the management of Aurora Bank and as a subsidiary
of Aurora Bank is subject to regulation by federal banking
authorities. The bankruptcy of LBHI and its potential negative
effects on Aurora Bank has resulted in increased oversight, and
we expect will continue to result in increased oversight, of the
Company by the OTS and may result in further restrictions on the
Companys ability to conduct its business.
Asset
Exchange
On November 18, 2009, the Company and its parent, Aurora
Bank, entered into an Asset Exchange Agreement (the
November Asset Exchange) pursuant to which Aurora
Bank agreed to assign various single family residential mortgage
loans (Residential Loans) to the Company in exchange
for the Company assigning certain commercial and multi-family
mortgage loans to Aurora Bank. Pursuant to the November Asset
Exchange, the Residential Loans assigned to the Company would be
of equal or greater value to the commercial and multi-family
loans assigned to Aurora Bank. The November Asset Exchange was
subject to non-objection by the OTS, which was granted on
August 17, 2009. The November Asset Exchange was
consummated on November 18, 2009 (with an effective date of
November 1, 2009) which resulted in the Company
receiving residential mortgage loans, including jumbo mortgage
loans, with a closing value of $199,000 greater than the value
of the commercial and multi-family mortgage loans transferred to
Aurora Bank. There can be no assurance that the Residential
Loans transferred to the Company will maintain their current
value, or in the future, continue to exceed the value of the
commercial and multi-family mortgage loans transferred to Aurora
Bank. The November Asset Exchange altered the asset mix of the
Company to consist primarily of residential mortgage assets.
Regulatory
Actions Involving Aurora Bank
On January 26, 2009, the OTS entered a Cease and Desist
Order against Aurora Bank. The Order, among other things,
required Aurora Bank to file various privileged prospective
operating plans with the OTS to manage the liquidity and
operations of Aurora Bank going forward. The Order requires
Aurora Bank to ensure that each of its subsidiaries, including
the Company, complies with the Order, including the operating
restrictions contained in the Order. These operating
restrictions, among other things, restrict transactions with
affiliates, contracts outside the ordinary course of business
and changes in senior executive officers, board members or their
employment arrangements without prior written notice to the OTS.
In addition, on February 4, 2009 the OTS issued a prompt
corrective action directive to Aurora Bank. The PCA Directive
requires Aurora Bank to, among other things, raise its capital
ratios such that it will be deemed to be adequately
capitalized and places additional constraints on Aurora
Bank and its subsidiaries, including the Company. The Order and
the PCA Directive were still effective as of the issuance of
this annual report. More detailed information can be found in
the Order and the PCA Directive themselves, copies of which are
available on the OTS website (www.ots.treas.gov).
The OTS has informed Aurora Bank that prior approval of the OTS
is required under the Order or the PCA Directive for payment by
the Company of dividends on the Series B and Series D
preferred stock. There can be no assurance that such approvals
will be received from the OTS or when or if the OTS releases
Aurora Bank from the Order and the PCA. Furthermore, any future
dividends on the Series B and Series D preferred stock
will be payable only when, as and if declared by the Board of
Directors. The capitalization of Aurora Bank has resulted in
increased oversight, and we expect will continue to result in
increased oversight, of the Company by the OTS and may result in
further restrictions on the Companys ability to conduct
its business.
At December 31, 2009, the Company had total assets of
$82.0 million, including cash and cash equivalents of
$51.8 million, and total liabilities of less than
$0.4 million. However, as a result of the bankruptcy of
LBHI and the issuance of the Order and the PCA Directive by the
OTS, there is uncertainty regarding the Companys ability
to continue as a going concern. The 2009 financial statements do
not include
34
any adjustments that might result from the outcome of any
regulatory action by the OTS or the bankruptcy of LBHI, which
could affect our ability to continue as a going concern.
Application
of Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results
of operations are based upon our financial statements, which
have been prepared in accordance with U.S. generally
accepted accounting principles, or GAAP. The preparation of
these financial statements in conformity with GAAP requires us
to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses in
the reporting period. Our actual results may differ from these
estimates. We have provided a summary of our significant
accounting policies in Note 2 to our financial statements
included elsewhere in this report. We describe below those
accounting policies that require material subjective or complex
judgments and that have the most significant impact on our
financial condition and results of operations. Our management
evaluates these estimates on an ongoing basis, based upon
information currently available and on various assumptions
management believes are reasonable as of the date on the front
cover of this report.
Loans Held for Sale.
As of December 31,
2008, the Company classified all of its loan assets as held for
investment and reported at their accreted cost.
On February 5, 2009, the Company and Aurora Bank entered
into an Asset Exchange Agreement (the February Asset
Exchange) pursuant to which the Company agreed to transfer
the entire loan portfolio secured primarily by commercial real
estate and multi-family residential real estate to Aurora Bank
in exchange for loans secured primarily by residential real
estate. As a result, during the first quarter of 2009 the
Company reclassified all of its loan assets as held for sale and
recorded a fair value adjustment. The February Asset Exchange
was terminated prior to its consummation. As the Company
explored potential alternative transactions, these loan assets
continued to be classified as held for sale and were reported at
the lower of their accreted cost or market value.
Fair value of the Companys loan portfolio was estimated
based upon an analysis prepared by management and a third party
valuation specialist. The valuation specialist uses various
proprietary cash flow models to price the portfolio. The
valuation was primarily based on discussion with industry
professionals who have historically bought and sold similar
assets to determine recent trades price to estimate the amount
at which a third party might purchase the loans and their yield
requirements. Specific inputs to the valuation specialists
model included, but were not limited to, property location, loan
type (the adjustable rate, adjustable rate reset period and
interest only period), loan age, payment and delinquency
history, original loan to value ratio (LTV), and the
original debt to income ratio of the borrowers. Significant
assumptions used within the valuation specialists model
included, but were not limited to, estimated rates of loan
delinquency, potential for recovery versus foreclosure,
projected debt to income ratio of the borrowers, estimated
current LTV as well as the projected LTV at default, rate reset
risk and the corresponding payment shock. The valuation of the
loan portfolio involves some level of management estimation and
judgment, the degree of which is dependent on the terms of the
loans and the availability of market prices and inputs.
The February Asset Exchange was subject to certain conditions to
closing as well as the receipt of a non-objection letter from
the OTS. On July 20, 2009, the Company and Aurora Bank
mutually agreed to terminate the February Asset Exchange. The
February Asset Exchange was terminated following receipt of a
letter from the OTS failing to grant Aurora Banks requests
for non-objection with respect to the February Asset Exchange.
The November Asset Exchange resulted in the Company receiving 74
residential mortgage loans, including jumbo mortgage loans,
recorded at their fair value at the option of the Company, for
93 commercial and multi-family loans transferred to Aurora Bank.
35
The loans held for sale acquired in the November Asset Exchange
are presented at fair value. Fair value is defined as the price
at which an asset or liability could be exchanged in a current
transaction between knowledgeable, willing parties. Where
available, fair value is based on observable market prices or
parameters or derived from such prices or parameters. Where
observable prices or inputs are not available, valuation models
are applied. These valuation techniques involve some level of
management estimation and judgment, the degree of which is
dependent on the price transparency for the instruments or
market and the instruments complexity.
The amount by which the carrying value of the Companys
loan assets changes as a result of an updated valuation is
recorded as an unrealized gain or loss and is included in the
determination of net income in the period in which the change
occurs.
Discounts on Acquired Loans.
Prior to
February 5, 2009 and reclassifying the loans as held for
sale, the Company reviewed acquired loans for differences
between contractual cash flows and cash flows expected to be
collected from the Companys initial investment in the
acquired loans to determine if those differences were
attributable, at least in part, to credit quality. If those
differences were 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, was not accreted into income. Prior to
February 5, 2009, the Company recognized the excess of all
cash flows expected at acquisition over the Companys
initial investment in the loan as interest income using the
interest method over the term of the loan.
There was judgment involved in estimating the amount of the
Companys future cash flows on acquired loans. The amount
and timing of actual cash flows could differ materially from
managements estimates, which could materially affect the
Companys financial condition and results of operations.
Depending on the timing of an acquisition of loans, a
preliminary allocation may have been utilized until a final
allocation was established. Generally, the allocation was
finalized no later than ninety days from the date of purchase.
Subsequent to acquisition, if cash flow projections improved,
and it was determined that the amount and timing of the cash
flows related to the nonaccretable discount were reasonably
estimable and collection was probable, the corresponding
decrease in the nonaccretable discount was transferred to the
accretable discount and was accreted into interest income over
the remaining life of the loan on the interest method. If cash
flow projections deteriorated subsequent to acquisition, the
decline was accounted for through a provision for loan losses
included in earnings.
Allowance for Loan Losses.
Prior to
February 5, 2009, the Companys loan assets were
considered held for investment and recorded at accreted cost,
which accounts for the amortization of any purchase discount and
deferred fees, less an allowance for loan losses. Since the loan
portfolio is now classified as held for sale, the Company no
longer maintains an allowance for loan losses. In prior periods,
arriving at an appropriate level of allowance for loan losses
required a high degree of judgment. The allowance for loan
losses was increased or decreased through a provision for loan
losses.
In determining the adequacy of the allowance for loan losses,
management made significant judgments. Aurora Bank initially
reviewed the Companys loan portfolio to identify loans for
which specific allocations were considered prudent. Specific
allocations included the results of measuring impaired loans.
Next, management considered the level of loan allowances deemed
appropriate for loans determined not to be impaired. The
allowance for these loans was determined by a formula whereby
the portfolio was stratified by type and internal risk rating
categories. Loss factors were then applied to each strata based
on various considerations including collateral type, loss
experience, delinquency trends, current economic conditions and
industry standards. The allowance for loan losses was
managements estimate of the probable loan losses incurred
as of the balance sheet date.
The determination of the allowance for loan losses required
managements use of significant estimates and judgments. In
making this determination, management considered known
information relative to specific loans, as well as collateral
type, loss experience, delinquency trends, current economic
conditions and industry trends, generally. Based on these
factors, management estimated the probable loan losses incurred
as of the reporting date and increased or decreased the
allowance through a change in the provision for loan losses.
36
Loan losses were charged against the allowance when management
believed the net investment of the loan, or a portion thereof,
was uncollectible. Subsequent recoveries, if any, were credited
to the allowance when cash payments were received.
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.
Results
of Operations for the Years Ended December 31, 2009, 2008
and 2007
Interest
income
The yields on the Companys interest-earning assets are
summarized as follows:
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Years Ended December 31,
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2009
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2008
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2007
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Average
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Average
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Average
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Balance
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Interest
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Yield
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Balance
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Interest
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Yield
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Balance
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Interest
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Yield
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(Dollars in Thousands)
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Loans, net(1)
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$
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46,167
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$
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3,057
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6.62
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%
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$
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58,937
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$
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5,152
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8.74
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%
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$
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79,766
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$
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7,265
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9.11
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%
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Interest-bearing deposits
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47,455
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507
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1.07
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58,438
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1,023
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1.75
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70,464
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868
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1.23
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Total interest-earning assets
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$
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93,622
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$
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3,564
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3.81
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%
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$
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117,375
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$
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6,175
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5.26
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%
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$
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150,230
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$
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8,133
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5.41
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%
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(1)
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For purposes of providing a meaningful yield comparison, the
forgoing table reflects the average accreted cost of the loans,
net of discounts, or alternatively, the unpaid principal balance
for loans acquired in the November Asset Exchange, and not the
fair value of the loan portfolio. Non-performing loans are
excluded from average balance calculations.
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The decline in interest income from 2008 to 2009 is a result of
a decrease in the average balance of loans and a decrease in the
yield on loans. The average balance of the loans for 2009 (as
defined above) totaled $46.2 million compared to
$58.9 million for 2008. This decrease is primarily
attributable to loan payments and the November Asset Exchange.
For the year ended December 31, 2009, the yield on the loan
portfolio decreased to 6.62% compared to 8.74% for 2008. For the
year ended December 31, 2009, interest and fee income
recognized on loan payoffs decreased $536,000, or 61%, to
$344,000 from $880,000 for 2008. 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 5.87% for the year
ended December 31, 2009 from 7.25% for the same period in
2008 primarily due to a $739,000 reduction in interest income
resulting from the discontinuance of the amortization of
purchase discount and fees on loans as a result of the loans
being reclassified to held for sale during the first quarter of
2009, a reduction in average balances and decreases in market
interest rates.
The average balance of interest-bearing deposits decreased
$10.8 million or 18.6% to $47.6 million for the year
ended December 31, 2009, compared to $58.4 million for
2008. The changes in the average balances of interest-bearing
deposits are the result of periodic dividend payments and
returns of capital partially offset by cash flows from loan
repayments. In July 2009, the rate earned on interest-bearing
deposits decreased from 1.75% to 0.30%, resulting in a decrease
in interest income and yield for the year ended
December 31, 2009.
Prior to February 5, 2009, when a loan was paid off, the
excess of any cash received over the net investment was recorded
as interest income. In addition to the amount of purchase
discount that was recognized at that time, income may also have
included interest owed by the borrower prior to the
Companys acquisition of the loan, interest collected if on
non-performing status, prepayment fees and other loan fees. For
periods after February 5, 2009, when a loan is paid off,
the excess of any cash received over the net investment is
considered in the assessment of the valuation allowance. The
following table sets forth, for the periods indicated, the
components of interest and fees on loans. There can be no
assurance regarding future
37
interest income, including the yields and related level of such
income, or the relative portion attributable to loan payoffs as
compared to other sources.
The decline in interest income from 2007 to 2008 is a result of
a decrease in the average balance of loans and a decrease in the
yield of loans. Average loans, net for 2008 totaled
$58.9 million compared to $79.8 million for 2007. This
decrease is primarily attributable to loan payments, sales and
amortization of loans. For 2008, the yield on the loan portfolio
decreased to 8.74% compared to 9.11% for 2007. During 2008, the
yield related to interest and fee income recognized on loan
payoffs increased to 1.49% compared to 1.11% for 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
7.25% for 2008 from 8.00% for 2007 primarily as a result of
decreases in market interest rates. The interest rate on
interest-bearing deposits increased to 1.75% for 2008 compared
to 1.23% for 2007 as a result of an increased rate paid by
Aurora Bank compared to the rate paid by Capital Crossing Bank.
Interest income from interest bearing deposits increased despite
the decrease in the average balance of interest-bearing deposits
as a result of the higher interest rate paid by Aurora Bank for
all of 2008 as compared to 2007 when the lower Capital Crossing
Bank interest rate was paid on interest-bearing deposits for
part of the year.
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Years Ended December 31,
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2009
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2008
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2007
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Interest
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Interest
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Interest
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Income
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Yield
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Income
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Yield
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Income
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Yield
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(Dollars in Thousands)
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Regularly scheduled interest and accretion income
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$
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2,713
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5.87
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%
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$
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4,272
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7.25
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%
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$
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6,381
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8.00
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%
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Interest and fee income recognized on loan pay-offs:
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Nonaccretable discount
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0.00
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0.00
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58
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0.07
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Accretable discount
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309
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0.67
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818
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1.39
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690
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0.87
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Other interest and fee income
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35
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0.08
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62
|
|
|
|
0.10
|
|
|
|
136
|
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
344
|
|
|
|
0.75
|
|
|
|
880
|
|
|
|
1.49
|
|
|
|
884
|
|
|
|
1.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,057
|
|
|
|
6.62
|
%
|
|
$
|
5,152
|
|
|
|
8.74
|
%
|
|
$
|
7,265
|
|
|
|
9.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of loan pay-offs and related discount income is
influenced by several factors, including the interest rate
environment, the real estate market in particular areas, the
timing of transactions, and circumstances related to individual
borrowers and loans. The amount of individual loan payoffs is
often a result of negotiations between the Company and the
borrower. Based upon credit risk analysis and other factors, the
Company will, in certain instances, accept less than the full
amount contractually due in accordance with the loan terms.
Reductions
in allowance for loan losses
The Company recorded reductions in the allowance for loan losses
of $915,000, $265,000, and $339,000 for the years ended
December 31, 2009, 2008 and 2007, respectively, to reflect
the reclassification of loans held for sale in 2009 and, in
prior years, to reverse unused loss reserves related to loans
that have been paid off. The reduction in the allowance for loan
losses is based on the volume and types of loan payoffs. As
loans pay off, a reduction in the allowance for loan losses is
recorded to reduce allowance allocations related to the loans
that have paid-off for which a related allowance remains unused.
The allowance for loan losses is based on the size of the
portfolio and its historical performance. The determination of
this allowance required managements use of estimates and
assumptions regarding the risks inherent in individual loans and
the loan portfolio in its entirety.
Other
income
Other than the November Asset Exchange, there were no loan sales
during 2009 or 2008. During 2007, there was one loan sale to an
unaffiliated third party comprised of two loans with carrying
values of $333,000, resulting in a total gain of $46,000.
38
On May 18, 2007, Aurora Bank paid off all outstanding
Federal Home Loan Bank of Boston (FHLBB) advances.
Prior to that, the Company had guaranteed all of the obligations
of Aurora Bank under the advances Aurora Bank had received from
FHLBB. These FHLBB obligations were assumed by Aurora Bank
pursuant to the merger of Capital Crossing Bank into Aurora
Bank. As a result of the repayment, the guarantee was released.
The Company received an annual fee of $80,000 under this
agreement. Guarantee fee income for the year ended
December 31, 2007 was $30,000.
Operating
expenses
Loan servicing and advisory expenses increased $53,000, or
23.1%, to $282,000 in 2009 from $229,000 in 2008 and increased
by $39,000, or 20.5%, from $190,000 in 2007. The increase in
2009 is primarily due to legal fees incurred in collection
efforts on loans serviced. The increase in 2008 is primarily due
a reimbursement of $54,000 of loan expenses in 2007, partially
offset by a decrease in the average balance of the loan
portfolio.
Other general and administrative expenses increased $577,000, or
318.8% to $758,000 in 2009 from $181,000 in 2008 and increased
66.1% from $109,000 in 2007. The increase in 2009 is primarily
attributable to an increase in legal fees, excise tax, external
audit expenses and printing costs. The increase in 2008 is
primarily attributable to increased legal fees and external
audit expenses.
Preferred
stock dividends
Preferred stock dividends decreased in 2009 because the
dividends that would have been payable on July 15 and
October 15, 2009 were not declared or paid as a result of
notice from the OTS that the prior approval of the OTS was
required before payment of dividends on any preferred stock.
Aurora Bank has made a formal request to the OTS to approve the
payment of future dividends on the preferred stock and responded
to requests from the OTS for additional information on the
payment of these dividends; however, the OTS has not yet ruled
on this request and there can be no assurance that such approval
will be received from the OTS or when or if such OTS approval
requirement will be removed. If the OTS does not approve this
request, the Company will be prohibited from paying future
dividends, which could result in the Company failing to qualify
as a REIT. Furthermore, even if approval is received from the
OTS, any future dividends on the preferred stock will be payable
only when, as and if declared by the Board of Directors. The
Company, subject to directives of the OTS, intends to pay
dividends on its preferred stock and common stock in amounts
necessary to continue to preserve its status as a REIT under the
Internal Revenue Code.
Financial
Condition
Interest-bearing
Deposits with Parent
Interest-bearing deposits with parent consist entirely of money
market accounts. The balance of interest-bearing deposits
increased $8.1 million to $51.6 million at
December 31, 2009 compared to $43.5 million at
December 31, 2008. The increase in the balance of
interest-bearing deposits is the result of cash flows from loan
repayments offset by preferred stock dividend payments. In July
2009, the rate earned on interest-bearing deposits decreased
from 1.75% to 0.30%, resulting in a decrease in interest income
and yield for the year ended December 31, 2009.
39
Loan
Portfolio
The loan portfolio is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Unpaid
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Principal
|
|
|
Percentage
|
|
|
Principal
|
|
|
Percentage
|
|
|
|
Balance
|
|
|
of Total
|
|
|
Balance
|
|
|
of Total
|
|
|
|
(Dollars in Thousands)
|
|
|
Mortgage loans on real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
6,380
|
|
|
|
21.40
|
%
|
|
$
|
31,660
|
|
|
|
59.71
|
%
|
Multi-family residential
|
|
|
693
|
|
|
|
2.32
|
|
|
|
20,384
|
|
|
|
38.44
|
|
One-to-four
family residential
|
|
|
22,750
|
|
|
|
76.28
|
|
|
|
981
|
|
|
|
1.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,823
|
|
|
|
100.00
|
%
|
|
$
|
53,025
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has historically acquired primarily performing
commercial real estate and multi-family residential mortgage
loans. On November 18, 2009, the Company and its parent,
Aurora Bank, entered into the November Asset Exchange pursuant
to which Aurora Bank agreed to assign various single family
residential mortgage loans to the Company in exchange for the
Company assigning certain commercial and multi-family mortgage
loans to Aurora Bank. The November Asset Exchange has altered
the asset mix of the Company to consist primarily of residential
mortgage assets. During 2007 and 2008, the Company did not
acquire any loans from Capital Crossing Bank or Aurora Bank.
The Company intends that each loan acquired from Aurora Bank in
the future, if any, will be a whole loan, and will be originated
or acquired by Aurora Bank in the ordinary course of its
business. The Company also intends that all loans held by it
will be serviced pursuant to the MSA with Aurora Bank.
Non-performing loans, net of discount, totaled $318,000 at
December 31, 2009 representing seven loans and five
borrowers. Non-performing loans, net of discount, totaled
$1.6 million at December 31, 2008 representing seven
loans and five borrowers. 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 collectability
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.
Interest
Rate Risk
The Companys income consists primarily of interest income.
If there is a decline in market interest rates, the Company 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. The Company does not
intend to use any derivative products to manage its interest
rate risk. The majority of the Companys loan portfolio
consists of variable rate loans with contractual interest rates
that are affected by changes in market interest rates. In
addition, negative fluctuations in interest rates could reduce
the amount of interest paid on interest bearing cash deposits of
the Company, which could negatively impact the amount of cash
available to pay dividends on the Series B and
Series D preferred stock. The Company is not able to
precisely quantify the potential impact on its operating results
or funds available for distribution to stockholders from
material changes in interest rates.
Significant
Concentration of Credit Risk
The Company had cash and cash equivalents of $51.8 million
as of December 31, 2009. These funds were held in interest
bearing and non-interest bearing accounts with Aurora Bank. The
Federal Deposit
40
Insurance Corporation (FDIC) provides coverage on
these accounts which as of December 31, 2009 was limited to
$250,000. Cash in excess of FDIC coverage limitations is subject
to credit risk.
Concentration of credit risk generally arises with respect to
the Companys 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 the Companys performance to both
positive and negative developments affecting a particular
industry. The Companys balance sheet exposure to
geographic concentrations directly affects the credit risk of
the loans within its loan portfolio.
At December 31, 2009, 45% of the carrying value of the
Companys mortgage loans consisted of loans collateralized
by properties located in California. Consequently, the portfolio
may experience a higher default rate in the event of adverse
economic, political or business developments or natural hazards
in California that may affect the ability of property owners to
make payments of principal and interest on the underlying
mortgages. The housing and real estate sectors in California
have been particularly impacted by the recession with higher
overall foreclosure rates than the national average. If
California experiences further adverse economic, political or
business conditions, or natural hazards, the Company will likely
experience higher rates of loss and delinquency on its mortgage
loans than if its loans were more geographically diverse.
Liquidity
Risk Management
The objective of liquidity management is to ensure the
availability of sufficient cash flows to meet all of the
Companys financial commitments. In managing liquidity
risk, the Company takes into account various legal limitations
placed on a REIT. The Companys principal liquidity need is
to pay dividends on its preferred shares and common shares.
If and to the extent that any additional assets are acquired in
the future, such acquisitions are intended to be funded
primarily through repayment of unpaid principal balances of
mortgage assets by individual borrowers and cash on hand. The
Company 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, the
Company 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. The Company does not currently intend to incur any
indebtedness. The organizational documents of the Company 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
the Company. Any such debt may include intercompany advances
made by Aurora Bank to the Company.
The Company may also issue additional series of preferred stock,
subject to OTS approval. However, the Company may not issue
additional shares of preferred stock ranking senior to the
Series D preferred stock without the consent of holders of
at least two-thirds of the Series D preferred stock
outstanding at that time. Although the Companys charter
does not prohibit or otherwise restrict Aurora Bank or its
affiliates from holding and voting shares of Series D
preferred stock, to the Companys knowledge, the amount of
shares of Series D preferred stock held by Aurora Bank or
its affiliates is insignificant (less than 1%). Additional
shares of preferred stock ranking on a parity with the
Series D preferred stock may not be issued without the
approval of a majority of the Companys independent
directors.
Impact of
Inflation and Changing Prices
The Companys asset and liability structure is
substantially different from that of an industrial company in
that virtually all assets of the Company are monetary in nature.
Management believes the impact of inflation on financial results
depends upon the Companys 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.
41
Various information shown elsewhere in this annual report will
assist the reader in understanding how the Company 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 the Companys assets is contained
in Item 7A, Quantitative and Qualitative Disclosure About
Market Risk, of this annual report.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Market risk is the risk of loss from adverse changes in market
prices and interest rates. It is the objective of the Company to
attempt to manage risks associated with interest rate movements.
Currently, approximately 80% of the Companys loan
portfolio is comprised of floating rate loans with contractual
interest rates that may fluctuate based on changes in market
interest rates. In addition, negative fluctuations in interest
rates could reduce the amount of interest paid on interest
bearing cash deposits of the Company. The Companys market
risk arises primarily from interest rate risk inherent in
holding loans. To that end, Aurora Bank actively monitors the
interest rate risk exposure of the Company pursuant to the
Advisory Agreement and reports to management of the Company.
Aurora Bank reviews, among other things, the sensitivity of the
Companys assets to interest rate changes, the book and
market values of assets, purchase and sale activity, and
anticipated loan pay-offs and reports the findings to the
Companys management. Aurora Banks senior management
also approves and establishes pricing and funding decisions with
respect to the Companys overall asset and liability
composition.
The Companys methods for evaluating interest rate risk
include an analysis of its interest-earning assets maturing or
repricing within a given time period. Since the Company has no
interest-bearing liabilities, a period of rising interest rates
would tend to result in an increase in net interest income. A
period of falling interest rates would tend to adversely affect
net interest income.
The following table sets forth the Companys
interest-rate-sensitive assets categorized by repricing dates
and weighted average yields at December 31, 2009. For fixed
rate instruments, the repricing date is the maturity date. For
adjustable-rate instruments, the repricing date is deemed to be
the earliest possible interest rate adjustment date. Assets that
are subject to immediate repricing are placed in the overnight
column.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
Over One
|
|
|
Over Two
|
|
|
Over Three
|
|
|
Over Four
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
to Two
|
|
|
to Three
|
|
|
to Four
|
|
|
to Five
|
|
|
Over Five
|
|
|
|
|
|
Fair
|
|
|
|
Overnight
|
|
|
One Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Total
|
|
|
Value
|
|
|
|
(Dollars in Thousands)
|
|
|
Interest-bearing deposits
|
|
$
|
51,639
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
51,639
|
|
|
$
|
51,639
|
|
|
|
|
.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate loans(1)
|
|
|
249
|
|
|
|
544
|
|
|
|
1,180
|
|
|
|
435
|
|
|
|
539
|
|
|
|
385
|
|
|
|
7,104
|
|
|
|
10,436
|
|
|
|
6,010
|
|
|
|
|
14.50
|
%
|
|
|
4.46
|
%
|
|
|
6.06
|
%
|
|
|
4.26
|
%
|
|
|
4.99
|
%
|
|
|
4.20
|
%
|
|
|
4.20
|
%
|
|
|
|
|
|
|
|
|
Adjustable-rate loans(1)
|
|
|
385
|
|
|
|
8,293
|
|
|
|
24,802
|
|
|
|
139
|
|
|
|
31
|
|
|
|
35
|
|
|
|
|
|
|
|
33,685
|
|
|
|
23,495
|
|
|
|
|
4.46
|
%
|
|
|
4.85
|
%
|
|
|
4.94
|
%
|
|
|
4.79
|
%
|
|
|
7.27
|
%
|
|
|
7.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rate-sensitive assets
|
|
$
|
52,273
|
|
|
$
|
8,837
|
|
|
$
|
25,982
|
|
|
$
|
574
|
|
|
$
|
570
|
|
|
$
|
420
|
|
|
$
|
7,104
|
|
|
$
|
95,760
|
|
|
$
|
81,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Loans are presented at unpaid principal balance and exclude
non-performing loans.
|
Based on the Companys experience, management applies the
assumption that, on average, approximately 17.6% of loans will
prepay annually.
At December 31, 2009, the fair value of net loans was
$29.8 million as compared to the unpaid principal balance
of $44.9 million. The fair value of interest-bearing
deposits approximates carrying value.
42
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
Page
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
44
|
|
Balance Sheets
|
|
|
45
|
|
Statements of Operations
|
|
|
46
|
|
Statements of Changes in Stockholders Equity
|
|
|
47
|
|
Statements of Cash Flows
|
|
|
48
|
|
Notes to Financial Statements
|
|
|
49
|
|
43
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Capital Crossing Preferred Corporation:
We have audited the accompanying balance sheets of Capital
Crossing Preferred Corporation (the Company) as of
December 31, 2009 and 2008, and the related statements of
operations, changes in stockholders equity, and cash flows
for each of the three years in the period ended
December 31, 2009. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Capital Crossing Preferred Corporation as of
December 31, 2009 and 2008, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2009, in conformity with
U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared
assuming that Capital Crossing Preferred Corporation will
continue as a going concern. As more fully described in
Note 3 to the financial statements, on September 15,
2008, Lehman Brothers Holdings Inc. (Lehman
Brothers), indirect parent company to Aurora Bank FSB
(Aurora Bank), and ultimate parent company of
Capital Crossing Preferred Corporation, filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code.
As further described in Note 3 to the financial statements,
Aurora Bank, the sole owner of the common stock of Capital
Crossing Preferred Corporation, is subject to a Cease and Desist
Order, dated January 26, 2009, and a Prompt Corrective
Action Directive, dated February 4, 2009, issued by the
Office of Thrift Supervision (the OTS), requiring
Aurora Bank, among other matters, to submit a capital
restoration plan and a liquidity management plan, and imposing
restrictions on certain activities of Aurora Bank and Capital
Crossing Preferred Corporation. The bankruptcy of Lehman
Brothers and the ability of the OTS to regulate and restrict the
business and operations of Capital Crossing Preferred
Corporation, in light of the Cease and Desist Order and the
Prompt Corrective Action Directive, raise substantial doubt
about Capital Crossing Preferred Corporations ability to
continue as a going concern. The 2009 financial statements do
not include any adjustments that might result from the outcome
of this uncertainty.
New York, New York
March 31, 2010
44
CAPITAL
CROSSING PREFERRED CORPORATION
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars In Thousands, except share data)
|
|
|
ASSETS
|
Cash account with parent
|
|
$
|
184
|
|
|
$
|
208
|
|
Interest bearing deposits with parent
|
|
|
51,639
|
|
|
|
43,549
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
51,823
|
|
|
|
43,757
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale, at fair value
|
|
|
22,531
|
|
|
|
|
|
Loans held for sale, at lower of accreted cost or market value
|
|
|
7,292
|
|
|
|
|
|
Loans, held for investment, net of deferred loan income of $27
|
|
|
|
|
|
|
52,998
|
|
Allowance for loan losses
|
|
|
|
|
|
|
(915
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
29,823
|
|
|
|
52,083
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
393
|
|
|
|
224
|
|
Other assets
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
82,039
|
|
|
$
|
96,067
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Accrued expenses and other liabilities
|
|
$
|
344
|
|
|
$
|
931
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
344
|
|
|
|
931
|
|
|
|
|
|
|
|
|
|
|
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 issued and
outstanding
|
|
|
15
|
|
|
|
15
|
|
Common stock, $.01 par value, 100 shares authorized,
issued and outstanding
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
95,320
|
|
|
|
95,121
|
|
Retained deficit
|
|
|
(13,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
81,695
|
|
|
|
95,136
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
82,039
|
|
|
$
|
96,067
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
45
CAPITAL
CROSSING PREFERRED CORPORATION
STATEMENTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars In Thousands)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
3,057
|
|
|
$
|
5,152
|
|
|
$
|
7,265
|
|
Interest on interest-bearing deposits
|
|
|
507
|
|
|
|
1,023
|
|
|
|
868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
3,564
|
|
|
|
6,175
|
|
|
|
8,133
|
|
Reduction in allowance for loan losses
|
|
|
915
|
|
|
|
265
|
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
4,479
|
|
|
|
6,440
|
|
|
|
8,472
|
|
Noninterest income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on loans held for sale
|
|
|
(16,263
|
)
|
|
|
|
|
|
|
|
|
Gains on sales of loans
|
|
|
|
|
|
|
|
|
|
|
46
|
|
Guarantee fee income
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income (loss)
|
|
|
(16,263
|
)
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan servicing and advisory services
|
|
|
282
|
|
|
|
229
|
|
|
|
190
|
|
Other general and administrative
|
|
|
758
|
|
|
|
181
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,040
|
|
|
|
410
|
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(12,824
|
)
|
|
|
6,030
|
|
|
|
8,249
|
|
Preferred stock dividends
|
|
|
816
|
|
|
|
3,262
|
|
|
|
4,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholder
|
|
$
|
(13,640
|
)
|
|
$
|
2,768
|
|
|
$
|
4,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
46
CAPITAL
CROSSING PREFERRED CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Years Ended December 31, 2009, 2008 and 2007
(Dollars In Thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Retained
|
|
|
Total
|
|
|
|
Series A
|
|
|
Series B
|
|
|
Series C
|
|
|
Series D
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Earnings
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Equity
|
|
|
|
(Dollars in Thousands)
|
|
|
Balance at December 31, 2006
|
|
|
1,416
|
|
|
$
|
14
|
|
|
|
1
|
|
|
|
|
|
|
|
1,840
|
|
|
$
|
18
|
|
|
|
1,500
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
$
|
172,640
|
|
|
$
|
|
|
|
$
|
172,687
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,249
|
|
|
|
8,249
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75
|
)
|
|
|
(75
|
)
|
Dividends on preferred stock, Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(430
|
)
|
|
|
(430
|
)
|
Dividends on preferred stock, Series D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,187
|
)
|
|
|
(3,187
|
)
|
Return of capital to common stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,757
|
)
|
|
|
|
|
|
|
(24,757
|
)
|
Common stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,243
|
)
|
|
|
(4,243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
115,354
|
|
|
|
|
|
|
|
115,369
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,030
|
|
|
|
6,030
|
|
Cumulative dividends on preferred stock, Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75
|
)
|
|
|
(75
|
)
|
Dividends on preferred stock, Series D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,187
|
)
|
|
|
(3,187
|
)
|
Return of capital to common stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,233
|
)
|
|
|
|
|
|
|
(20,233
|
)
|
Common stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,768
|
)
|
|
|
(2,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
95,121
|
|
|
|
|
|
|
|
95,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,824
|
)
|
|
|
(12,824
|
)
|
Cumulative dividends on preferred stock, Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
|
|
(19
|
)
|
Dividends on preferred stock, Series D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(797
|
)
|
|
|
(797
|
)
|
Parent contribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
199
|
|
|
|
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
|
|
|
$
|
|
|
|
|
1
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
1,500
|
|
|
$
|
15
|
|
|
|
|
|
|
$
|
|
|
|
$
|
95,320
|
|
|
$
|
(13,640
|
)
|
|
$
|
81,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
47
CAPITAL
CROSSING PREFERRED CORPORATION
STATEMENTS OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars In Thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(12,824
|
)
|
|
$
|
6,030
|
|
|
$
|
8,249
|
|
Adjustments to reconcile net (loss) income to net cash from
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in allowance for loan losses
|
|
|
(915
|
)
|
|
|
(265
|
)
|
|
|
(339
|
)
|
Loss on loans held for sale
|
|
|
16,263
|
|
|
|
|
|
|
|
|
|
Gain on sale of loans
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
Other, net
|
|
|
(52
|
)
|
|
|
18
|
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
2,472
|
|
|
|
5,783
|
|
|
|
7,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in certificates of deposit
|
|
|
|
|
|
|
|
|
|
|
200
|
|
Loan repayments
|
|
|
7,225
|
|
|
|
13,656
|
|
|
|
23,923
|
|
Proceeds from loan sales
|
|
|
|
|
|
|
|
|
|
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
7,225
|
|
|
|
13,656
|
|
|
|
24,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of preferred stock, Series A and C
|
|
|
|
|
|
|
|
|
|
|
(32,561
|
)
|
Payment of preferred stock dividends
|
|
|
(1,631
|
)
|
|
|
(3,262
|
)
|
|
|
(4,006
|
)
|
Payment of common stock dividend
|
|
|
|
|
|
|
(2,768
|
)
|
|
|
(4,243
|
)
|
Return of capital to common stockholder
|
|
|
|
|
|
|
(20,233
|
)
|
|
|
(24,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(1,631
|
)
|
|
|
(26,263
|
)
|
|
|
(65,567
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
8,066
|
|
|
|
(6,824
|
)
|
|
|
(33,319
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
43,757
|
|
|
|
50,581
|
|
|
|
83,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
51,823
|
|
|
$
|
43,757
|
|
|
$
|
50,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure for non-cash activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution from Aurora Bank
|
|
$
|
199
|
|
|
$
|
|
|
|
$
|
|
|
See accompanying notes to financial statements.
48
CAPITAL
CROSSING PREFERRED CORPORATION
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2009, 2008 and 2007
Capital Crossing Preferred Corporation (the Company)
is a Massachusetts corporation organized on March 20, 1998,
to acquire and hold real estate assets. The Companys
principal business objective is to hold mortgage assets that
will generate net income for distribution to stockholders. The
Company may acquire additional mortgage assets in the future,
although management currently has no intention of acquiring
additional assets. Aurora Bank, FSB (Aurora Bank),
an indirect wholly owned subsidiary of Lehman Brothers Holdings
Inc. (LBHI; LBHI with its subsidiaries, Lehman
Brothers), owns all of the Companys common stock.
Prior to the merger with Aurora Bank, which is further discussed
below, the Company was a subsidiary of Capital Crossing Bank
(Capital Crossing), a federally insured
Massachusetts trust company, and Capital Crossing owned all of
the Companys common stock. The Company 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, the Company
generally will not be required to pay federal or state 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 Bank capitalized the
Company by transferring mortgage loans valued at
$140.7 million in exchange for 1,000 shares of the
Companys 8% Cumulative Non-Convertible Preferred Stock,
Series B, valued at $1.0 million and 100 shares
of the Companys common stock valued at
$139.7 million. The carrying value of these loans
approximated their fair values at the date of contribution.
On May 11, 2004, the Company closed its public offering of
1,500,000 shares of its 8.50% Non-Cumulative Exchangeable
Preferred Stock, Series D. The net proceeds to the Company
from the sale of Series D preferred stock was
$35.3 million. The Series D preferred stock is
redeemable at the option of the Company on or after
July 15, 2009, with the prior consent of the Office of
Thrift Supervision (the OTS).
On February 14, 2007, Capital Crossing was acquired by
Aurora Bank through a two-step merger transaction. An interim
thrift subsidiary of Aurora Bank was merged into Capital
Crossing. Immediately following such merger, Capital Crossing
was merged into Aurora 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.
All shares of the Companys 9.75% Non-Cumulative
Exchangeable Preferred Stock, Series A and 10.25%
Non-Cumulative Exchangeable Preferred Stock, Series C were
redeemed on March 23, 2007. The Series B preferred
stock and Series D preferred stock remain outstanding and
remain subject to their existing terms and conditions, including
the call feature with respect to the Series D preferred
stock.
Business
The Companys principal business objective is to hold
mortgage assets that will generate net income for distribution
to stockholders. The Company may acquire additional mortgage
assets in the future, although management currently has no
intention of acquiring additional assets. All of the mortgage
assets in the Companys loan portfolio at December 31,
2009 were acquired from Capital Crossing Bank or Aurora Bank and
it is anticipated that substantially all additional mortgage
assets, if any are acquired in the future, will be acquired from
Aurora Bank. Aurora Bank administers the
day-to-day
activities of the Company in its roles as servicer under the
Master Service Agreement (MSA) entered into between
Aurora Bank and the Company and as advisor under the Advisory
Agreement (AA) entered into between Aurora Bank and
the Company. Through December 31, 2009, the Company paid
Aurora Bank an annual servicing fee equal to 0.20%, payable
monthly, and an annual advisory fee equal to 0.05%, also payable
monthly, of the gross average unpaid principal balances of loans
in the loan portfolio it services for the immediately preceding
month. Both the AA and the MSA were amended on March 29,
2010 with effect as of January 1, 2010. The amended AA and
the
49
CAPITAL
CROSSING PREFERRED CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2009, 2008 and 2007
|
|
1.
|
ORGANIZATION
(Continued)
|
amended MSA change the fees paid by the Company to reflect the
increased costs associated with such services. See further
discussion at Note 9, Subsequent Events. It is the
intention of the Company that any agreements and transactions
between the Company and Aurora Bank are fair to all parties and
consistent with market terms.
Recent
Developments
Asset Exchange.
On November 18, 2009, the
Company and its parent, Aurora Bank, entered into an Asset
Exchange Agreement (the November Asset Exchange)
pursuant to which Aurora Bank agreed to assign various
one-to-four
family residential mortgage loans (Residential
Loans) to the Company in exchange for the Company
assigning certain commercial and multi-family mortgage loans to
Aurora Bank. Pursuant to the November Asset Exchange, the
Residential Loans assigned to the Company were to be of equal or
greater value to the commercial and multi-family loans assigned
to Aurora Bank. The November Asset Exchange was subject to the
receipt of a non-objection from the OTS, which was granted on
August 17, 2009. The November Asset Exchange was
consummated on November 18, 2009 (with an effective date as
of November 1, 2009) which resulted in the Company
receiving residential mortgage loans, including jumbo mortgage
loans, with a closing value of $199,000 greater than the value
of the commercial and multi-family loans transferred to Aurora
Bank.
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of presentation
Our financial statements are prepared in conformity with
accounting principles generally accepted in the United States
(GAAP) which require management to make estimates
and assumptions that affect the amounts reported on the
financial statements and accompanying notes. The following is a
description of the more significant accounting policies which we
follow in preparing and presenting our financial statements.
Certain prior period amounts reflect reclassifications to
conform with the current periods presentation.
Use of
estimates
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. Material estimates that
are particularly susceptible to significant change in the near
term relate to the determination of the fair value of loans held
for sale. The fair value of the loan portfolio was estimated
based upon an internal analysis by management and a third party
valuation specialist which considered, among other things,
information, to the extent available, about then current sale
prices, bids, credit quality, liquidity and other available
information for loans with similar characteristics as the
Companys loan portfolio. For a more detailed discussion of
the basis for the estimates of the fair value of the
Companys loan portfolio, please see Note 7, Fair
Value of Financial Instruments, below. Prior to February 5,
2009, material estimates also included 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.
Cash
and Cash Equivalents
Cash and cash equivalents include cash and interest bearing
deposits held at Aurora Bank with original maturities of ninety
days or less. The majority of the cash is held in a money market
account that bears
50
CAPITAL
CROSSING PREFERRED CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2009, 2008 and 2007
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
interest at rates determined by Aurora Bank which generally
follow federal funds rates. The money market account has a
limitation on the number of monthly withdrawals, but there is no
limit on the amount of the withdrawals either individually or in
the aggregate.
Loans
Held for Sale
On February 5, 2009, the Company and Aurora Bank entered
into an Asset Exchange Agreement (the February Asset
Exchange) pursuant to which the Company agreed to transfer
the entire loan portfolio secured primarily by commercial real
estate and multi-family residential real estate to Aurora Bank
in exchange for loans secured primarily by residential real
estate. As a result, during the first quarter of 2009 the
Company reclassified all of its loan assets as held for sale,
recorded a fair value adjustment and reported these loans at the
lower of the their accreted cost or market value. The February
Asset Exchange was terminated prior to its consummation.
Effective November 1, 2009, the Company and Aurora Bank
entered into and consummated the November Asset Exchange
pursuant to which the Company again agreed to an exchange of
loans with Aurora Bank, though with a lesser quantity of loans
than the February Asset Exchange. As of December 31, 2009,
the Company continues to report the portion of the loan assets
that were retained after the November Asset Exchange at the
lower of their accreted cost or market value. For these retained
loans, the carrying value of the loans will be recognized only
up to the cost on the date they were classified as held for
sale. The Company has elected the fair value option for the
loans that were received from the November Asset Exchange. For
these acquired loans, the carrying value of the loans will be
equivalent to fair value which may reflect an unrealized gain or
loss relative to the cost of the loans.
The fair value of the Companys loan portfolio is estimated
based upon an analysis prepared by management and a third party
valuation specialist which considers, among other factors,
information, to the extent available, about then current sale
prices, bids, credit quality, liquidity and other available
information for loans with similar characteristics as the
Companys loan portfolio. The geographical location and
geographical concentration of the loans in the Companys
portfolio is considered in the analysis. The valuation of the
loan portfolio involves some level of management estimation and
judgment, the degree of which is dependent on the terms of the
loans and the availability of market prices and inputs.
The amount by which the carrying cost of the Companys loan
assets differed from the fair value was recorded as an
unrealized gain or loss and included in the determination of net
income in the period in which the change occurred.
Loans are generally placed on nonaccrual status when, in
managements judgment, full payment of principal or
interest by the borrower is in doubt, or generally when the loan
is ninety days or more past due as to either principal or
interest. Previously accrued but unpaid interest is reversed and
charged against interest income. Interest payments received on
nonaccrual loans are recorded as interest income unless there is
doubt as to the collectability of the recorded investment. In
those cases, cash received is recorded as a reduction of
principal. Loans are charged off when they are determined to be
uncollectible.
Discounts
on Acquired Loans
Prior to February 5, 2009, the Companys loan assets
were considered held for investment and recorded at accreted
cost, which accounts for the amortization of any purchase
discount and deferred fees, less an allowance for loan losses.
The Company reviewed acquired loans for differences between
contractual cash flows and cash flows expected to be collected
from the Companys initial investment in the acquired loans
to
51
CAPITAL
CROSSING PREFERRED CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2009, 2008 and 2007
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
determine if those differences were attributable, at least in
part, to credit quality. If those differences were 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, was not
accreted into income. The Company recognized the excess of all
cash flows expected at acquisition over the Companys
initial investment in the loan as interest income using the
interest method over the term of the loan.
There was judgment involved in estimating the amount of the
Companys future cash flows on acquired loans. The amount
and timing of actual cash flows could differ materially from
managements estimates, which could materially affect the
Companys financial condition and results of operations.
Depending on the timing of an acquisition of loans, a
preliminary allocation may have been utilized until a final
allocation was established. Generally, the allocation was
finalized no later than ninety days from the date of purchase.
Subsequent to loan acquisition, if cash flow projections
improved, and it was determined that the amount and timing of
the cash flows related to the nonaccretable discount were
reasonably estimable and collection was probable, the
corresponding decrease in the nonaccretable discount was
transferred to the accretable discount and was accreted into
interest income over the remaining life of the loan using the
interest method. If cash flow projections deteriorated
subsequent to acquisition, the decline was accounted for through
a provision for loan losses included in earnings.
Any remaining discount relating to the purchase of the loans by
the Company is not amortized as interest income during the
period the loans are classified as held for sale. Deferred
income associated with loans held for sale is deferred until the
related loan is paid in full or sold.
Allowance
for Loan Losses
Prior to February 5, 2009, the Companys loan assets
were considered held for investment and recorded at accreted
cost, which accounts for the amortization of any purchase
discount and deferred fees, less an allowance for loan losses.
Since the loan portfolio is now classified as held for sale and
recorded either at fair value, or the lower of its accreted cost
or at fair value, the Company no longer maintains an allowance
for loan losses. In prior periods, arriving at an appropriate
level of allowance for loan losses required a high degree of
judgment. The allowance for loan losses was increased or
decreased through a provision for loan losses.
In determining the adequacy of the allowance for loan losses,
management made significant judgments. Aurora Bank initially
reviewed the Companys loan portfolio to identify loans for
which specific allocations were considered prudent. Specific
allocations included the results of measuring impaired loans.
Further, the allowance for these loans was determined by a
formula whereby the portfolio was stratified by type and
internal risk rating categories. Loss factors were then applied
to each strata based on various considerations including
collateral type, loss experience, delinquency trends, current
economic conditions and industry standards. The allowance for
loan losses was managements estimate of the probable loan
losses incurred as of the balance sheet date.
The determination of the allowance for loan losses required
managements use of significant estimates and judgments. In
making this determination, management considered known
information relative to specific loans, as well as collateral
type, loss experience, delinquency trends, current economic
conditions and industry trends, generally. Based on these
factors, management estimated the probable loan losses incurred
as of the reporting date and increased or decreased the
allowance through a change in the provision for loan losses.
52
CAPITAL
CROSSING PREFERRED CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2009, 2008 and 2007
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Loan losses were charged against the allowance when management
believed the net investment of the loan, or a portion thereof,
was uncollectible. Subsequent recoveries, if any, were credited
to the allowance when cash payments were received.
Gains and losses on sales of loans are determined using the
specific identification method. The excess or deficiency of any
cash received as compared to the net investment was recorded as
gain or loss on sales of loans.
Transfers
of financial assets
Transfers of financial assets are accounted for as sales when
control over the assets is surrendered. Control over transferred
assets is deemed to be surrendered when (1) the assets are
isolated from the Company, (2) the transferee obtains the
right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred
assets, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to
repurchase them before their maturity.
Revenue
Recognition
The Company recognizes interest income on loans as revenue as it
is earned. This revenue is included in Interest and fees on
loans on the Statements of Operations. Any remaining discount
relating to the purchase of the loans by the Company is not
amortized as interest income during the period the loans are
classified as held for sale. Deferred income associated with
loans held for sale is deferred until the related loan is paid
in full or sold.
Taxes
The Company has elected, for federal income tax purposes, to be
treated as a REIT and intends to comply with the provisions of
the Internal Revenue Code of 1986, as amended (the
IRC). Accordingly, the Company will not be subject
to corporate income taxes to the extent it distributes at least
90% of its REIT taxable income to stockholders and as long as
certain assets, income, distribution and stock ownership tests
are met in accordance with the IRC. Management has evaluated the
requirements for REIT status and believes that the Company
qualifies as a REIT for federal and state income tax purposes.
As such, no provision for income taxes is included in the
accompanying financial statements.
For the year ended December 31, 2009, the Company accrued
an excise tax liability of $60,000 which is included in Other
general and administrative expenses. The Company was subject to
excise tax equal to 4% of the undistributed portion of adjusted
ordinary income. The excise tax liability resulted from the
Company not distributing 85% of its ordinary income from 2009.
Concentration
of Credit Risk
The Company had cash and cash equivalents of $51.8 million
as of December 31, 2009. These funds were held in interest
bearing and non-interest bearing accounts with Aurora Bank. The
Federal Deposit Insurance Corporation (FDIC)
provides coverage on these accounts which as of
December 31, 2009 was limited to $250,000. Cash in excess
of FDIC coverage limitations is subject to credit risk.
Concentration of credit risk generally arises with respect to
the Companys 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 the Companys performance to both
positive and negative
53
CAPITAL
CROSSING PREFERRED CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2009, 2008 and 2007
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
developments affecting a particular industry. The Companys
balance sheet exposure to geographic concentrations directly
affects the credit risk of the loans within its loan portfolio.
At December 31, 2009, approximately 45% of the
Companys net real estate loan portfolio consisted of loans
collateralized by properties located in California.
Consequently, the portfolio may experience a higher default rate
in the event of adverse economic, political or business
developments or natural hazards in California that may affect
the ability of property owners to make payments of principal and
interest on the underlying mortgages. The housing and real
estate sectors in California have been particularly impacted by
the recession with higher overall foreclosure rates than the
national average. If California experiences further adverse
economic, political or business conditions, or natural hazards,
the Company will likely experience higher rates of loss and
delinquency on its mortgage loans than if its loans were more
geographically diverse.
Recent
Accounting Pronouncements
In October 2008, the Financial Accounting Standards Board (FASB)
issued a staff position on determining the fair value of a
financial asset when the market for that asset is not active
which clarified the application of a previously issued standard
in the determination of the fair value of a financial asset when
a market for that asset is not active. The provisions of this
staff position were effective for the Companys financial
assets and liabilities for the fiscal period beginning
January 1, 2009. The adoption of this staff position did
not have a material impact on the Companys financial
position, results of operations or disclosures.
In April 2009, the FASB issued a staff position on determining
fair value when the volume and level of activity for the asset
or liability have significantly decreased and identifying
transactions that are not orderly. This guidance amended the
prior standards on fair value measurements to provide additional
guidance on estimating fair value when the volume and level of
activity for an asset or liability have significantly decreased
in relation to normal market activity for the asset or liability
or if circumstances indicate that a transaction is not orderly.
The staff position requires reporting entities to disclose
information regarding changes in valuation techniques and
related inputs. The staff position is effective for the
Companys annual reporting period ended December 31,
2009. The adoption of this guidance did not have a material
impact on the Companys financial statements.
In May 2009, the FASB issued a standard, as amended in February
2010, on subsequent events which established general standards
of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued.
The standard as amended requires an entity to evaluate
subsequent events through the date the financial statements are
issued. It is effective with the Companys annual reporting
period ended December 31, 2009. The adoption of this
guidance did not have a material impact on the Companys
consolidated financial statements or disclosures.
In June 2009, the FASB completed and issued the Accounting
Standards Codification (ASC or the Codification) which has
become the single source of authoritative US GAAP to be applied
by nongovernmental entities superseding all pre-existing
accounting and reporting standards other than the rules of the
SEC. The standard is effective for the Companys annual
reporting period ended December 31, 2009. In accordance
with the Codification, citations to accounting literature in
these financial statements are presented in plain English. The
adoption of the Codification did not have a material impact on
the Companys financial position, results of operations or
disclosures.
54
CAPITAL
CROSSING PREFERRED CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2009, 2008 and 2007
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
In September 2009, the FASB issued a standards update with
implementation guidance on accounting for uncertainty in income
taxes and disclosure amendments for nonpublic entities. The
update addresses techniques for attributing tax positions,
uncertainty in income taxes and tax payments to legal entities.
This update to the standards is effective for the Companys
annual reporting period ended December 31, 2009. The
adoption of the standards update did not have a material impact
on the Companys financial statements.
In January 2010, the FASB issued a standards update on improving
disclosures about fair value measurements. The update requires
expanded disclosures including the techniques and inputs used to
measure fair value, transfers in and out of Levels I and
II, and disaggregation of components within the reconciliation
of Level 3 fair value measurements. This update to the
standards is effective for the Companys annual reporting
period ended December 31, 2009 except for the
disaggregation of components within the reconciliation of
Level III items which is effective for the Companys
annual reporting period ended December 31, 2010. We have
included the appropriate disclosures in Note 7, Fair Value
of Financial Instruments.
|
|
3.
|
BANKRUPTCY
OF LBHI AND REGULATORY ACTIONS INVOLVING AURORA BANK
|
Bankruptcy
of Lehman Brothers Holding Inc.
Bankruptcy of Lehman Brothers Holdings Inc.
On
September 15, 2008, LBHI, the indirect parent company of
Aurora Bank, filed a voluntary petition under Chapter 11 of
the U.S. Bankruptcy Code. The bankruptcy filing of LBHI has
materially and adversely affected the capital and liquidity of
Aurora Bank, the parent of the Company. This has led to
increased regulatory constraints being placed on Aurora Bank by
its bank regulatory authorities, primarily the OTS. Certain of
these constraints apply to Aurora Banks subsidiaries,
including the Company. As more fully discussed below, both the
bankruptcy filing of LBHI and the increased regulatory
constraints placed on Aurora Bank have negatively impacted the
Companys ability to conduct its business according to its
business objectives.
Regulatory
Actions Involving Aurora Bank
Aurora Bank Regulatory Actions and Capital
Levels.
On January 26, 2009, the OTS entered
a cease and desist order against Aurora Bank (the
Order). The Order, among other things, required
Aurora Bank to file various privileged prospective operating
plans with the OTS to manage the liquidity and operations of
Aurora Bank going forward, including a strategic plan. The Order
requires Aurora Bank to ensure that each of its subsidiaries,
including the Company, complies with the Order, including the
operating restrictions contained in the Order. These operating
restrictions, among other things, restrict transactions with
affiliates, contracts outside the ordinary course of business
and changes in senior executive officers, board members or their
employment arrangements without prior written notice to the OTS.
In addition, on February 4, 2009 the OTS issued a prompt
corrective action directive to Aurora Bank (the PCA
Directive). The PCA Directive requires Aurora Bank to,
among other things, raise its capital ratios such that it will
be deemed to be adequately capitalized and places
additional constraints on Aurora Bank and its subsidiaries,
including the Company. More detailed information can be found in
the Order and the PCA Directive themselves, copies of which are
available on the OTS website.
During 2009, the bankruptcy court approved or issued orders
permitting LBHI to take certain actions intended to strengthen
the capital position of Aurora Bank, including: (1) the
contribution of up to an aggregate of $180 million in cash
to Aurora Bank, (2) the transfer of ownership of certain
servicing rights to a subsidiary of Aurora Bank, (3) the
waiver of the payment by Aurora Bank and its subsidiaries of
certain servicing fees payable to LBHI and (4) the
termination of unfunded loan commitments of Aurora Bank and its
55
CAPITAL
CROSSING PREFERRED CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2009, 2008 and 2007
|
|
3.
|
BANKRUPTCY
OF LBHI AND REGULATORY ACTIONS INVOLVING AURORA
BANK (Continued)
|
subsidiaries with specified borrowers. The capital contributions
from LBHI were received between February 2009 and December 2009
and totaled approximately $451 million. These actions,
together with others taken by Aurora Bank, resulted in Aurora
Bank being adequately capitalized as of
December 31, 2009. Also during 2009, the bankruptcy court
issued orders permitting Aurora Bank and LBHI to enter into debt
facilities, including: (1) the establishment of a
repurchase facility between Aurora Bank and LBHI with a
$450 million maximum amount, and (2) the establishment
of a servicing advancement bridge facility between a subsidiary
of Aurora Bank and LBHI up to a maximum amount of
$500 million.
At December 31, 2009, the Company had total assets of
$82.0 million, including cash and cash equivalents of
$51.8 million, and total liabilities of less than
$0.4 million. However, as a result of the bankruptcy of
LBHI and the issuance of the Order and the PCA Directive by the
OTS, there is uncertainty regarding the Companys ability
to continue as a going concern. The 2009 financial statements do
not include any adjustments that might result from the outcome
of any regulatory action by the OTS or the bankruptcy of LBHI,
which could affect our ability to continue as a going concern.
Aurora Bank is currently working with LBHI and the applicable
regulators to resolve the issues arising from LBHIs
bankruptcy.
Dividend Payments.
Following the payment of
the 1st quarter 2009 dividends to its Series B and
Series D preferred shareholders, the OTS required Aurora
Bank, as parent of the Company, to submit a formal request for
non-objection determination to permit the resumption of normal
payment of dividends. Beginning in March 2009, dialogue and
correspondence commenced with the OTS relating specifically to
the resumption of divided payments, which resulted in the
submission of the formal request on July 28, 2009. Aurora
Bank and the Company have informed the OTS that failure to
permit the distribution of dividends may cause the Company to
fail to qualify as a REIT and therefore be subject to federal
and state income taxes of approximately $1.1 million for
the 2009 tax year, excluding penalties and interest. If the
Company no longer qualifies as a REIT, it may be subject to
federal and state income taxes for future years. In order to
qualify as a REIT, distributions must be declared by the end of
the third quarter of the following fiscal year and paid by the
end of the fourth quarter. Aurora Bank and the Company continue
to be actively engaged in dialogue with the OTS regarding the
resumption of dividend payments. There can be no assurance that
the OTS will grant the non-objection request, nor can there be
any assurance that any further dividends will be paid or that
the Company will continue to qualify as a REIT. At
December 31, 2009, the Company had $56,000 of dividends in
arrears related to the Companys 8% Series B preferred
stock.
On November 18, 2009, the Company and Aurora Bank entered
into and consummated the November Asset Exchange pursuant to
which the Company agreed to transfer 93 loans secured primarily
by commercial real estate and multi-family residential real
estate to Aurora Bank in exchange for 74 loans secured primarily
by residential real estate. There were no other acquisitions,
sales or exchanges of loans during 2009. As of December 31,
2009, the loan portfolio was comprised primarily of loans
secured by
one-to-four
family residential real estate loans, the majority of which were
located in California. Comparatively, as of December 31,
2008, a substantial portion of the loan portfolio was comprised
of loans secured by commercial and multi-family real estate
located in California, New England and Nevada.
The Company uses carrying value to reflect loans valued at the
lower of their accreted cost or market value, or at their fair
value, as applicable to the individual loans valuation
method as selected by the Company in accordance with accounting
standards.
56
CAPITAL
CROSSING PREFERRED CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2009, 2008 and 2007
A summary of the balance of loans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Unpaid
|
|
|
|
Carrying
|
|
|
Principal
|
|
|
Carrying
|
|
|
Principal
|
|
|
|
Value
|
|
|
Balance
|
|
|
Value
|
|
|
Balance
|
|
|
|
(Dollars In Thousands)
|
|
|
Mortgage loans on real estate, held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Multi-family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
22,531
|
|
|
|
32,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for sale, at fair value
|
|
|
22,531
|
|
|
|
32,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans on real estate, held for sale(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
6,380
|
|
|
$
|
11,324
|
|
|
$
|
|
|
|
$
|
|
|
Multi-family residential
|
|
|
693
|
|
|
|
1,203
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
219
|
|
|
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for sale, at lower of accreted cost or market
value
|
|
|
7,292
|
|
|
|
12,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans on real estate, held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
6,380
|
|
|
$
|
11,324
|
|
|
$
|
|
|
|
$
|
|
|
Multi-family residential
|
|
|
693
|
|
|
|
1,203
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
22,750
|
|
|
|
32,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for sale
|
|
|
29,823
|
|
|
|
44,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans on real estate, held for investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31,660
|
|
|
$
|
36,506
|
|
Multi-family residential
|
|
|
|
|
|
|
|
|
|
|
20,384
|
|
|
|
22,144
|
|
One-to-four
family residential
|
|
|
|
|
|
|
|
|
|
|
981
|
|
|
|
1,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for investment, at accreted cost
|
|
|
|
|
|
|
|
|
|
|
53,025
|
|
|
|
59,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
(915
|
)
|
|
|
|
|
Net deferred loan fees
|
|
|
|
|
|
|
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
29,823
|
|
|
|
|
|
|
$
|
52,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Though the table compares the carrying value of these loans
against unpaid principal balance, these loans are carried at the
lower of accreted cost or market value and the carrying value
cannot exceed the acquired cost of these loans.
|
57
CAPITAL
CROSSING PREFERRED CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2009, 2008 and 2007
A summary of the loans on non-accrual status is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Unpaid
|
|
|
|
Carrying
|
|
|
Principal
|
|
|
Carrying
|
|
|
Principal
|
|
|
|
Value
|
|
|
Balance
|
|
|
Value
|
|
|
Balance
|
|
|
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
Mortgage loans on real estate on non-accrual status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
318
|
|
|
$
|
792
|
|
|
$
|
1,596
|
|
|
$
|
1,764
|
|
Multi-family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans on non-accrual status
|
|
|
318
|
|
|
|
792
|
|
|
|
1,596
|
|
|
|
1,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollars In Thousands)
|
|
Average carrying value in non-accrual loans
|
|
$
|
1,532
|
|
|
$
|
495
|
|
|
$
|
153
|
|
Interest income recognized on non-accrual loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
68
|
|
Interest income recognized on a cash basis on non-accrual loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
68
|
|
Activity in the allowance for loan losses follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars In Thousands)
|
|
|
Balance at beginning of year
|
|
$
|
915
|
|
|
$
|
1,180
|
|
|
$
|
1,519
|
|
Credit for loan losses
|
|
|
|
|
|
|
(265
|
)
|
|
|
(339
|
)
|
Reversal of allowance
|
|
|
(915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
|
|
|
$
|
915
|
|
|
$
|
1,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On March 31, 1998, the Company issued 1,000 shares of
its 8% Cumulative Non-Convertible Preferred Stock,
Series B, to Capital Crossing. Holders of Series B
preferred stock are entitled to receive, if declared by the
Board of Directors, dividends at a rate of 8% of the average
daily outstanding liquidation amount, as defined. Dividends
accumulate at the completion of each completed period, as
defined, and payment dates are determined by the Board of
Directors.
Series B preferred stock has a liquidation amount of $1,000
per share. In the event of a voluntary or involuntary
dissolution or liquidation of the Company, preferred
stockholders are entitled to the total liquidation amount, as
defined, plus any accrued and accumulated dividends.
On February 12, 1999, the Company completed a public
offering of 1,416,130 shares of Non-Cumulative Exchangeable
Preferred Stock, Series A, with a dividend rate of 9.75%
and a liquidation preference of $10 per share, which raised net
proceeds of $12,590,000, after related offering costs of
$1,571,000. On March 23, 2007, the Company redeemed the
Series A preferred stock.
58
CAPITAL
CROSSING PREFERRED CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2009, 2008 and 2007
|
|
5.
|
PREFERRED
STOCK (Continued)
|
On May 31, 2001, the Company completed a public offering of
1,840,000 shares of Non-Cumulative Exchangeable Preferred
Stock, Series C, with a dividend rate of 10.25% and a
liquidation preference of $10 per share, which raised net
proceeds of $16,872,000, after related offering costs of
$1,528,000. On March 23, 2007, the Company redeemed the
Series C preferred stock.
On May 11, 2004, the Company completed a public offering of
1,500,000 shares of Non-Cumulative Exchangeable Preferred
Stock, Series D, with a dividend rate of 8.50% and a
liquidation preference of $25 per share, which raised net
proceeds of $35,259,000, after related offering costs of
$2,241,000. The Series D preferred stock is exchangeable
for preferred shares of Aurora Bank if the OTS so directs. The
OTS could order this action if Aurora Bank becomes or may in the
near term become undercapitalized or if Aurora Bank is placed
into conservatorship or receivership. At December 31, 2008,
under the regulatory capital guidelines applicable to banks
developed and monitored by the federal bank regulatory agencies,
Aurora Bank was deemed to be significantly
undercapitalized. During 2009, LBHI contributed additional
capital to Aurora Bank, which improved Aurora Banks
capital position. As of December 31, 2009, Aurora Bank
maintained its status as adequately capitalized
under applicable regulatory guidelines according to a recent
public filing by Aurora Bank with the OTS and taking into
account the Order and PCA Directive. As a result of the Order
and PCA Directive, the OTS may direct in writing at any time the
automatic exchange of the Series D preferred stock for
preferred shares of Aurora Bank. Series D preferred stock
is redeemable at the option of the Company on or after
July 15, 2009, with the prior consent of the OTS.
Shares of preferred stock have been and may again be issued from
time-to-time
in one or more series, subject to the receipt of regulatory
approval, and the Board of Directors is authorized to determine
the rights, preferences, privileges, and restrictions, including
the dividend rights, conversion rights, voting rights, terms of
redemption, redemption price or prices, and liquidation
preferences, of any series of preferred stock, and to fix the
number of shares of any such series of preferred stock without
any further vote or action by the shareholders. However, the
Company may not issue additional shares of preferred stock
ranking senior to the Series D preferred stock without
consent of holders of at least two-thirds of the outstanding
Series D preferred stock. The voting and other rights of
the holders of common stock will be subject to, and may be
adversely affected by, the rights of holders of any preferred
stock that may be issued in the future. The issuance of shares
of preferred stock, while providing desirable flexibility in
connection with acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting stock of Aurora Bank.
|
|
6.
|
RELATED
PARTY TRANSACTIONS
|
Aurora Bank performs advisory services and services the loans
owned by the Company. Through December 31, 2009, Aurora
Bank in its role as servicer under the terms of the MSA received
an annual servicing fee equal to 0.20%, payable monthly, on the
gross average unpaid principal balances of loans serviced for
the immediately preceding month. Through December 31, 2009,
under the Advisory Agreement, Aurora Bank was paid an annual
advisory fee equal to 0.05%, payable monthly, of the gross
average unpaid principal balances of the Companys loans
for the immediately preceding month, plus reimbursement for
certain expenses incurred by Aurora Bank as advisor. Servicing
and advisory fees for the years ended December 31, 2009,
2008 and 2007 totaled $127,000, $192,000, and $244,000,
respectively, of which $21,000 and $12,000, respectively, are
included in accrued expenses and other liabilities at
December 31, 2009 and 2008, respectively. In 2007, loan
servicing fees were offset by the recovery of third party
servicing fees, previously expensed by the Company, of $54,000
due to the resolution of a loan.
59
CAPITAL
CROSSING PREFERRED CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2009, 2008 and 2007
|
|
6.
|
RELATED
PARTY TRANSACTIONS (Continued)
|
All of the mortgage assets in the Companys loan portfolio
at December 31, 2009 were purchased from Capital Crossing
(previously the Companys sole common stockholder or
parent) or Aurora Bank. See November Asset Exchange in
Note 1 above for the transaction to exchange commercial and
multi-family loans for residential loans during 2009.
It is anticipated that substantially all additional mortgage
assets, purchased or contributed in the future, if any, will be
purchased from Aurora Bank, the Companys sole common
stockholder. No loans were purchased or contributed from Aurora
Bank in 2008 or 2007.
The following table summarizes capital transactions between the
Company and its sole common shareholder or parent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollars In Thousands)
|
|
Returns of capital to parent
|
|
$
|
|
|
|
$
|
20,233
|
|
|
$
|
24,757
|
|
Common stock dividends paid to parent
|
|
|
|
|
|
|
2,768
|
|
|
|
4,243
|
|
Series B preferred stock dividends paid to parent
|
|
|
18
|
|
|
|
72
|
|
|
|
72
|
|
Contribution of capital in the form of loans (November
Asset Exchange)
|
|
|
199
|
|
|
|
|
|
|
|
|
|
On May 18, 2007, Aurora Bank paid off all of its remaining
outstanding Federal Home Loan Bank of Boston (FHLBB)
advances. Prior to that, the Company had guaranteed all of the
obligations of Aurora Bank under advances received from the
FHLBB. As a result, the Company had agreed to pledge a
significant amount of its assets. These FHLBB guarantee
obligations were assumed by Aurora Bank pursuant to the merger
of Capital Crossing Bank, the sole shareholder of the Company at
the time. As a result of the repayment, the guarantee was
released. The Company received an annual fee of $80,000 under
this agreement. Guarantee fee income for the year ended
December 31, 2007 was $30,000.
The Companys cash and cash equivalents balances of
$51,823,000 and $43,757,000 at December 31, 2009 and 2008,
respectively, consist entirely of deposits with Aurora Bank.
|
|
7.
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
Fair
Value Measurements
Prior to February 5, 2009, the Companys loan assets
were considered held for investment and recorded at accreted
cost, which accounts for the amortization of any purchase
discount and deferred fees, less an allowance for loan losses.
As a result of entering into the February Asset Exchange, the
Companys loans were reclassified as held for sale and were
reported at the lower of their accreted cost or market value. A
valuation allowance was recorded to recognize the excess of
accreted cost over fair value. The February Asset Exchange was
terminated prior to consummation. However, while the Company
explored potential alternative transactions, the Companys
loan assets continued to be recorded at the lower of accreted
cost or market value.
For the loans acquired through the November Asset Exchange, the
Company elected the fair value option. As of December 31,
2009, the Companys portfolio of loans consisted of two
categories. Loans held for sale continue to be reported at the
lower of their accreted cost or market value. The carrying value
of those loans will be recognized only up to the cost on the
date they were classified as held for sale. Loans that were
received in the November Asset Exchange are reported at fair
value. The amount by which the carrying value
60
CAPITAL
CROSSING PREFERRED CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2009, 2008 and 2007
|
|
7.
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS (Continued)
|
of the Companys loan assets changes as a result of an
updated valuation is recorded as an unrealized gain or loss and
is included in the determination of net income in the period in
which the change occurs.
Accounting standards define fair value and establish a fair
value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The fair value is the
price at which an asset or liability could be exchanged in a
current transaction between knowledgeable, willing parties in an
orderly market. Where available, fair value is based on
observable market prices or inputs or derived from such prices
or inputs. Where observable prices or inputs are not available,
other valuation methodologies are applied.
At December 31, 2009, the fair value of the Companys
loan portfolio was estimated based upon an analysis prepared by
management and a third party valuation specialist. The valuation
specialist uses various proprietary cash flow models to price
the portfolio. The valuation was primarily based on discussion
with industry professionals who have historically bought and
sold similar assets to determine recent trades price to estimate
the amount at which a third party might purchase the loans and
their yield requirements. Specific inputs to the valuation
specialists model included, but were not limited to,
property location, loan type (the adjustable rate, adjustable
rate reset period and interest only period), loan age, payment
and delinquency history, original loan to value ratio
(LTV), and the original debt to income ratio of the
borrowers. Significant assumptions used within the valuation
specialists model included, but were not limited to,
estimated rates of loan delinquency, potential for recovery
versus foreclosure, projected debt to income ratio of the
borrowers, estimated current LTV as well as the projected LTV at
default, rate reset risk and the corresponding payment shock.
The valuation of the loan portfolio involves some level of
management estimation and judgment, the degree of which is
dependent on the terms of the loans and the availability of
market prices and inputs.
Accounting standards require the categorization of financial
assets and liabilities based on a hierarchy of the inputs to the
valuation techniques used to measure fair value. The hierarchy
gives the highest priority to quoted prices in active markets
for identical assets or liabilities (Level I) and the
lowest priority to valuation methods using unobservable inputs
(Level III). The three levels are described below:
Level I Inputs are unadjusted, quoted prices in
active markets for identical assets or liabilities at the
measurement date.
Level II Inputs are either directly or
indirectly observable for the asset or liability through
correlation with market data at the measurement date and for the
duration of the instruments anticipated life.
Level III Inputs reflect managements best
estimate of what market participants would use in pricing the
asset or liability at the measurement date. Consideration is
given to the risk inherent in the valuation technique and the
risk inherent in the inputs to the model.
61
CAPITAL
CROSSING PREFERRED CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2009, 2008 and 2007
|
|
7.
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS (Continued)
|
The categorization within the fair value hierarchy is based on
the lowest level of significant input to its valuation. The
categorization of the level of judgment in the fair value
determination of the Companys loans at December 31,
2009 was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
|
|
(Dollars In Thousands)
|
|
|
Loans Held for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
$
|
6,380
|
|
|
$
|
6,380
|
|
Multi-family residential
|
|
|
|
|
|
|
|
|
|
|
693
|
|
|
|
693
|
|
One-to-four
family residential
|
|
|
|
|
|
|
|
|
|
|
22,750
|
|
|
|
22,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
29,823
|
|
|
$
|
29,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table presented below summarizes the change in balance sheet
carrying value associated with Level III loans during the
year ended December 31, 2009. Caution should be utilized
when evaluating reported net revenues for Level III loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Net
|
|
|
|
|
|
Asset
|
|
|
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
Transfers
|
|
|
Net
|
|
|
Exchange,
|
|
|
Gains/(Losses),
|
|
|
December 31,
|
|
|
|
2008
|
|
|
In
|
|
|
Payments
|
|
|
Net(2)
|
|
|
Net(1)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
|
|
|
Loans Held for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
|
|
|
$
|
29,775
|
|
|
$
|
(3,291
|
)
|
|
$
|
(11,235
|
)
|
|
$
|
(8,869
|
)
|
|
$
|
6,380
|
|
Multi-family residential
|
|
|
|
|
|
|
19,982
|
|
|
|
(1,334
|
)
|
|
|
(10,776
|
)
|
|
|
(7,179
|
)
|
|
|
693
|
|
One-to-four
family residential
|
|
|
|
|
|
|
970
|
|
|
|
(303
|
)
|
|
|
22,298
|
|
|
|
(215
|
)
|
|
|
22,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
50,727
|
|
|
$
|
(4,928
|
)
|
|
$
|
287
|
|
|
$
|
(16,263
|
)
|
|
$
|
29,823
|
|
|
|
|
(1)
|
|
The current period losses from changes in values of
Level III loans represent losses on loans held for sale and
reflects changes in values of those loans only for the period(s)
in which the loans were classified as Level III.
|
|
(2)
|
|
Excludes $88,000 of accrued interest receivable transferred out
in the November Asset Exchange for a net contributed capital of
$199,000.
|
Fair
Value of Financial Instruments
Accounting standards require disclosure of estimated fair values
of all financial instruments where it is practicable to estimate
such values. In determining the fair value measurements for
financial assets and liabilities, the Company utilizes quoted
prices, when available. If quoted prices are not available, the
Company estimates fair value using present value or other
valuation techniques that utilize inputs that are observable for
the asset or liability, either directly or indirectly, when
available. When observable inputs are not available, inputs may
be used that are unobservable and, therefore, reflect the
Companys own assumptions about the assumptions market
participants would use in pricing the asset or liability based
on the best information available in the circumstances.
Accounting standards exclude certain financial instruments and
all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented may not
represent the underlying value of the Company.
62
CAPITAL
CROSSING PREFERRED CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2009, 2008 and 2007
|
|
7.
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS (Continued)
|
The following methods and assumptions were used by the Company
in estimating fair value of financial instruments:
Cash and cash equivalents:
The carrying value
of cash and interest-bearing deposits approximate fair value
because of the short-term maturity of these instruments.
Loans:
The fair value of the Companys
loan portfolio was estimated based upon an analysis prepared by
management and a third party valuation specialist which
considered, among other factors, information, to the extent
available, about the then current sale prices, bids, credit
quality, liquidity and other available information for loans
with similar characteristics as the Companys loan
portfolio. The valuation of the loan portfolio involves some
level of management estimation and judgment, the degree of which
is dependent on the terms of the loans and the availability of
market prices and inputs.
Accrued interest receivable:
The carrying
value of accrued interest receivable approximates fair value
because of the short-term nature of these financial instruments.
The estimated fair values, and related carrying value, of the
Companys financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
|
Carrying
|
|
|
|
Carrying
|
|
|
|
|
Value
|
|
Fair Value
|
|
Value
|
|
Fair Value
|
|
|
(Dollars In Thousands)
|
|
Cash and cash equivalents
|
|
$
|
51,823
|
|
|
$
|
51,823
|
|
|
$
|
43,757
|
|
|
$
|
43,757
|
|
Loans, net
|
|
|
29,823
|
|
|
|
29,823
|
|
|
|
52,083
|
|
|
|
37,046
|
|
Accrued interest receivable
|
|
|
393
|
|
|
|
393
|
|
|
|
224
|
|
|
|
224
|
|
|
|
8.
|
QUARTERLY
DATA (UNAUDITED)
|
Supplemental
Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(Dollars In Thousands)
|
|
|
Interest income
|
|
$
|
749
|
|
|
$
|
914
|
|
|
$
|
881
|
|
|
$
|
1,020
|
|
|
$
|
1,591
|
|
|
$
|
1,567
|
|
|
$
|
1,495
|
|
|
$
|
1,522
|
|
Credit for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
915
|
|
|
|
55
|
|
|
|
55
|
|
|
|
40
|
|
|
|
115
|
|
Gain (loss) on loans held for sale
|
|
|
488
|
|
|
|
(541
|
)
|
|
|
(1,029
|
)
|
|
|
(15,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
201
|
|
|
|
181
|
|
|
|
328
|
|
|
|
330
|
|
|
|
86
|
|
|
|
124
|
|
|
|
109
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
1,036
|
|
|
|
192
|
|
|
|
(476
|
)
|
|
|
(13,576
|
)
|
|
|
1,560
|
|
|
|
1,498
|
|
|
|
1,426
|
|
|
|
1,546
|
|
Preferred stock dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
816
|
|
|
|
815
|
|
|
|
816
|
|
|
|
815
|
|
|
|
816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholder
|
|
$
|
1,036
|
|
|
$
|
192
|
|
|
$
|
(476
|
)
|
|
$
|
(14,392
|
)
|
|
$
|
745
|
|
|
$
|
682
|
|
|
$
|
611
|
|
|
$
|
730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
CAPITAL
CROSSING PREFERRED CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2009, 2008 and 2007
|
|
9.
|
SUBSEQUENT
EVENTS (UNAUDITED)
|
The Company assessed events that occurred subsequent to
December 31, 2009 for potential disclosure and recognition
on the financial statements. Beyond the items listed below, no
additional events have occurred that would require disclosure in
or adjustment to the Companys financial statements.
|
|
|
|
|
The Master Servicing Agreement with Aurora Bank was amended on
March 29, 2010. The amended agreement, among other things,
changes fees to account for the fees payable to each
subservicer. The provisions in the amended agreement were
effective retroactively to January 1, 2010.
|
|
|
|
The Advisory Agreement with Aurora Bank was amended on
March 29, 2010. The amended agreement, among other things,
changes the management fee to $25,000 per month to reflect the
increase in cost for such services. The provisions in the
amended agreement were effective retroactively to
January 1, 2010.
|
64
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
Not applicable.
|
|
ITEM 9A(T).
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
The Companys management, with the participation of its
President and Chief Financial Officer, evaluated the
effectiveness of the Companys disclosure controls and
procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended, the
Exchange Act) as of December 31, 2009. Based on
this evaluation, the Companys President and Chief
Financial Officer concluded that, as of December 31, 2009,
the Companys disclosure controls and procedures were
(1) designed to ensure that material information relating
to the Company 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 the Company 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.
Changes
in Internal Control Over Financial Reporting
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 year ended
December 31, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
Managements
Report on Internal Control over Financial
Reporting
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act
Rule 13a-15(f).
Under the supervision and with the participation of management,
including the Companys President and Chief Financial
Officer, an evaluation of the effectiveness of the
Companys internal control over financial reporting was
conducted. In making this assessment, management followed the
criteria in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this assessment, management
determined that the Companys internal control over
financial reporting was effective as of December 31, 2009
based on the criteria in Internal Control-Integrated Framework
issued by COSO.
This annual report does not include an attestation report of the
Companys registered public accounting firm regarding
internal control over financial reporting. Managements
report was not subject to attestation by the Companys
registered public accounting firm pursuant to temporary rules of
the SEC that permit the Company to provide only
managements report in this annual report.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
65
PART III
|
|
ITEM 10.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
Directors
and Executive Officers
The names and ages of each of the Companys directors and
executive officers and their principal occupation and business
experience for at least the last five years are set forth below.
The executive officers hold office until their successors are
duly elected and qualified.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position(s) Held
|
|
Thomas OSullivan
|
|
|
43
|
|
|
President, Director
|
Robert J. Leist, Jr.
|
|
|
60
|
|
|
Chief Financial Officer
|
Michael Milversted
|
|
|
62
|
|
|
Director
|
William Wesp
|
|
|
58
|
|
|
Director
|
Lana Franks
|
|
|
46
|
|
|
Director
|
Eric Graham
|
|
|
40
|
|
|
Director
|
Thomas OSullivan.
On January 25,
2010, the Board of Directors elected Mr. OSullivan as
President of the Company. On March 4, 2010, he was elected
as a director and Chairman of the Board of Directors of the
Company. He also served as a director of the Company from
December 2008 to January 2009. Mr. OSullivan is also
Chief Financial Officer of Aurora Bank and receives no separate
compensation from the Company for his services. He has served in
a variety of capacities at Lehman Brothers since 2000.
Mr. OSullivan served as the Chief Financial Officer
of the Company from 2008 to 2010. He serves as an officer of the
Company so long as he is an employee of Aurora Bank.
Robert J. Leist, Jr.
On March 4, 2010,
the Board of Directors elected Mr. Leist as Chief Financial
Officer of the Company. Mr. Leist has served as Senior Vice
President and Controller of Aurora Loan Services since his
employment in February 2007, and of Aurora Bank since September,
2009. From April 1999 to January 2007, he served as Senior Vice
President and Chief Accounting Officer of Ocwen Financial
Corporation. Mr. Leist serves as an officer of the Company so
long as he is an employee of Aurora Bank. He receives no
separate compensation from the Company for his services
Michael Milversted.
Mr. Milversted has
been a director of the Company since May 2007. He is retired.
Prior to his retirement, he was an employee of Lehman Brothers
and served in a variety of capacities, including Treasurer of
Lehman Brothers and Chief Financial Officer of Lehman Brothers
Bank, FSB.
William Wesp.
On January 28, 2009,
Mr. Wesp was elected a director of the Company. He is also
a Director of Aurora Bank FSB, as approved by the Office of
Thrift Supervision in July, 2009. Mr. Wesp is retired.
Prior to his retirement, he served on the Board of Directors of
Conceco Finance Corporation from
2001-2003.
Mr. Wesp served as Lehman Brothers Bank, FSB Chief
Executive Officer from
1999-2000.
Lana Franks.
On December 8, 2008, the
Board of Directors appointed Ms. Franks a director.
Ms. Franks is retired. Prior to her retirement, she was an
employee of Lehman Brothers and served in a variety of
positions. She was also President of the Company from December
2008 to January 2010.
Eric Graham.
Mr. Graham was elected as a
director of the Company on December 3, 2009.
Mr. Graham is a securities and corporate finance lawyer, a
certified public accountant, and has many years of legal and
accounting experience with real estate investment trusts. He is
retired. Prior to his retirement Mr. Graham was a partner
at Goodwin Procter LLP, where he worked from
1997-2010.
There are no known family relationships between any director or
executive officer and any other director or executive officer of
the Company.
The Board of Directors has established a process for
shareholders of the Company to communicate with the
Companys Audit Committee or any member thereof. A
shareholder who is interested in communicating
66
directly with the Audit Committee or any member thereof may do
so by email at the following address:
Bankboardsecretary@AuroraBankFSB.com.
The Board
of Directors and its Committees
The Company and the Board of Directors have determined that
Messrs. Milversted, Wesp and Graham satisfy the standards
for independence promulgated by the Nasdaq Stock Market, Inc.
(Nasdaq) and the standards for independence
contained in the Companys charter.
The Board of Directors held nine meetings and did not act by
written consent during 2009. During 2009, each director attended
at least 75% of the total number of meetings of the Board of
Directors and of the committees of which he or she was a member
during their incumbency.
The Board of Directors has established two standing committees.
The following is a description of each committee of the Board of
Directors:
Audit Committee.
The Company has an Audit
Committee, which consists of Messrs. Milversted, Wesp and
Graham. Each member of the Audit Committee satisfies the
standards for independence promulgated by Nasdaq. The Audit
Committee reports its activities to the Board of Directors. The
principal purpose of the Audit Committee is to assist the Board
of Directors in fulfilling its oversight of:
|
|
|
|
|
The quality and integrity of the Companys financial
statements;
|
|
|
|
The Companys compliance with legal and regulatory
requirements;
|
|
|
|
The qualifications and independence of the Companys
independent auditors; and
|
|
|
|
The performance of the Companys internal audit and
compliance functions and its independent auditors.
|
The Audit Committee held three meetings in 2009.
Mr. Milversted, the Audit Committee Chairman, meets the
qualifications of an audit committee financial
expert as defined in the applicable rules promulgated by
the Securities and Exchange Commission. The Companys
financial results are consolidated into those of Aurora Bank and
such results are also reviewed by the Audit Committee of the
Board of Directors of Aurora Bank as a component of Aurora
Banks consolidated financial results.
Nominating and Corporate Governance
Committee.
The Company has a Nominating and
Corporate Governance Committee, which consists of
Messrs. Milversted and Wesp. Each member of the Nominating
and Corporate Governance Committee satisfies the standards for
independence promulgated by Nasdaq. The purpose of the
Nominating and Corporate Governance Committee is to:
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Identify and review the qualifications of individuals identified
by the Companys parent or other voting stockholders to
become directors and select, or recommend that the Board of
Directors select, the candidates for all directorships to be
filled by the Board of Directors or by the stockholders;
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Develop and recommend to the Board of Directors a set of
corporate governance principles applicable to the
Company; and
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Otherwise take a leadership role in overseeing the corporate
governance of the Company.
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In identifying or reviewing candidates for membership on the
Board of Directors, the Nominating and Corporate Governance
Committee takes into account the criteria for board membership
established by the Board of Directors from time to time and all
other factors it considers appropriate, which may include
strength of character, mature judgment, career specialization,
relevant technical skills, diversity and the extent to which the
candidate would fill a present need on the Board of Directors.
The Nominating and Corporate Governance Committee weighs
diversity as one of many of the factors it considers appropriate
when taking into account the criteria for board membership. In
2009, the full Board of Directors performed the duties of the
Nominating and Corporate Governance Committee.
67
Code of
Ethics and Other Matters
On May 8, 2007, the Board of Directors adopted the Lehman
Brothers Code of Ethics. The Company will provide a copy of the
Lehman Brothers Code of Ethics free of charge to any stockholder
who sends a written request to that effect to Capital Crossing
Preferred Corporation, 1271 Avenue of the Americas,
46th Floor, New York, NY 10020, Attention: Secretary.
The Company does not hold annual shareholder meetings because
Aurora Bank holds all of the outstanding voting securities of
the Company and therefore would be the only shareholder entitled
to vote at any such meeting. Accordingly, the Company does not
have a policy with respect to whether its directors should
attend annual shareholder meetings.
The Board of Directors has determined that the Company is a
controlled company, as defined in
Rule 4350(c)(5) of the listing standards of Nasdaq, based
on Aurora Banks beneficial ownership of 100% of the
outstanding voting common stock of the Company. Accordingly, the
Company is exempt from certain requirements of the Nasdaq
listing standards, including the requirement to maintain a
majority of independent directors on its Board of Directors.
Compensation
of Directors
In 2009, the Company paid its independent directors an annual
fee of $10,000 each for their services as independent directors.
The Company does not pay any compensation to its other
directors. No director of the Company was granted stock awards,
option awards, any bonus or other non-equity incentive or any
other type or form of compensation by the Company in 2009.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires that the
Companys executive officers and directors and persons who
own more than 10% of its outstanding shares of Series D
preferred stock file reports of ownership and changes in
ownership with the Securities Exchange Commission and Nasdaq.
Executive officers, directors and greater than 10% stockholders
are required by applicable regulations to furnish the Company
with copies of all reports filed by such persons pursuant to the
Exchange Act and the rules and regulations promulgated
thereunder. Based on a review of the Companys records and
except as set forth below, the Company believes that all reports
required by the Exchange Act were filed on a timely basis.
During 2009, following the election of Mr. Wesp as a
director of the Company, Mr. Wesp inadvertently failed to
timely file a Form 3. The required Form 3 report was
subsequently filed. During 2009, following the election of
Mr. Graham as a director of the Company, Mr. Graham
inadvertently failed to timely file a Form 3. The required
Form 3 report was subsequently filed.
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ITEM 11.
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EXECUTIVE
COMPENSATION
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The Company does not pay any compensation to its executive
officers.
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ITEM 12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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The following table sets forth, as of March 31, 2010,
(i) the number and percentage of outstanding shares of each
class of voting stock beneficially owned by each person known by
the Company to be the beneficial owner of more than 5% of such
shares; and (ii) the number and percentage of outstanding
equity securities of the Company beneficially owned by
(a) each director of the Company; (b) each executive
officer of the Company; and (c) all executive officers and
directors of the Company as a group. The persons or entities
named in the table have sole voting and sole investment power
with respect to each of the shares beneficially owned by such
person or entity. The calculations were based on a total of
100 shares of common stock,
68
937 shares of Series B preferred stock and
1,500,000 shares of Series D preferred stock
outstanding as of such date.
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Percentage of
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Name and Address of Beneficial Owner(1)
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Amount of Shares (Class)
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Outstanding Shares
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Lehman Brothers Holdings Inc.(4)
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100 shares of common stock
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100.0
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%
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900 shares of Series B preferred stock
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96.1
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%
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Thomas OSullivan(2)(3)
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*
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Robert J. Leist, Jr.(2)
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*
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Michael Milversted(3)
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*
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William Wesp(3)
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*
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Lana Franks(3)
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*
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Eric Graham(3)
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*
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All executive officers and directors as a Group (6 persons)
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*
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The following table sets forth, as of March 31, 2010, the
number and percentage of outstanding shares of each class of
equity securities of LBHI beneficially owned by (i) each
director of the Company; (ii) each executive officer of the
Company; and (iii) all executive officers and directors of
the Company as a group. The persons or entities named in the
table have sole voting and sole investment power with respect to
each of the shares beneficially owned by such person or entity.
The calculations were based on a total of 694,401,926
outstanding shares of common stock as of June 30, 2008.
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Percentage of
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Name and Address of Beneficial Owner(1)
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Amount of Shares (Class)
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Outstanding Shares
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Thomas OSullivan(2)(3)
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384 shares of common stock (5)
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*
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Robert J. Leist, Jr.(2)
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*
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Michael Milversted(3)
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1,400 shares of common stock
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*
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William Wesp(3)
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*
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Lana Franks(3)
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(5)
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*
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Eric Graham(3)
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*
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All executive officers and directors as a Group (6 persons)
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1,784 shares of common stock (5)
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*
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*
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Less than 1%.
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(1)
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The address of each beneficial owner is
c/o Capital
Crossing Preferred Corporation, 1271 Avenue of the Americas,
46
th
Floor, New York, NY 10020.
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(2)
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Executive officer of the Company.
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(3)
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Director of the Company.
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(4)
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Shares are held of record by Aurora Bank. The address of Aurora
Bank is 1271 Avenue of the Americas,
46
th
Floor, New York, NY 10020.
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(5)
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Excludes ownership of vested and unvested restricted share units
and stock options, which due to the bankruptcy of LBHI are
considered by the beneficial owner not to be exercisable for
shares of LBHI common stock.
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ITEM 13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
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Because of the nature of the Companys relationship with
Aurora Bank and its affiliates, the Company engages, and will
continue to engage, in transactions with related parties. It is
the Companys policy that the terms of any financial
dealings with Aurora Bank and its affiliates will be consistent
with those available from unaffiliated third parties in the
mortgage lending industry. In addition, the Company maintains an
Audit
69
Committee of its Board of Directors, which is comprised solely
of independent directors who satisfy the standards for
independence promulgated by Nasdaq. The Company and the Board of
Directors have determined that Messrs. Milversted, Graham
and Wesp satisfy the standards for independence promulgated by
Nasdaq and the standards for independence contained in the
Companys charter. Among other functions, the Audit
Committee (or the Board of Directors as a whole) will review
transactions between the Company and Aurora Bank and its
affiliates.
Servicing
Agreement
The Companys loan portfolio is serviced by Aurora Bank
pursuant to the terms of the Master Servicing Agreement
(MSA). Through December 31, 2009, Aurora Bank
in its role as servicer under the terms of the MSA received an
annual servicing fee equal to 0.20%, payable monthly, on the
gross average unpaid principal balances of loans serviced for
the immediately preceding month. For the years ended
December 31, 2009, 2008 and 2007, the Company incurred
$102,000, $158,000 and $199,000, respectively, in servicing fees.
The MSA requires Aurora Bank to service the loan portfolio in a
manner substantially the same as for similar work performed by
Aurora Bank for transactions on its own behalf. Aurora Bank
collects and remits principal and interest payments on at least
a monthly basis, and maintains perfected collateral positions,
submits and pursues insurance claims and initiates and
supervises foreclosure proceedings on the loan portfolio it
services. Aurora Bank also provides accounting and reporting
services required by the Company for such loans. The Company may
also direct Aurora Bank to dispose of any loans which become
classified, placed on non-performing status, or are modified due
to financial deterioration of the borrower. Aurora Bank may
institute foreclosure proceedings and foreclose, manage and
protect the mortgaged premises, including exercising any power
of sale contained in any mortgage or deed of trust, obtaining a
deed-in-lieu-of-foreclosure
or otherwise acquiring title to a mortgaged property underlying
a mortgage loan by operation of law or otherwise in accordance
with the terms of the MSA.
The MSA may be terminated at any time by written agreement
between the parties or at any time by either party upon
30 days prior written notice to the other party and
appointment of a successor servicer. The MSA will automatically
terminate if the Company ceases to be an affiliate of Aurora
Bank.
When any mortgaged property underlying a mortgage loan is
conveyed by a mortgagor, Aurora Bank generally, upon notice of
the conveyance, will enforce any
due-on-sale
clause contained in the mortgage loan, to the extent permitted
under applicable law and governmental regulations. The terms of
a particular mortgage loan or applicable law, however, may
prohibit Aurora Bank from exercising the
due-on-sale
clause under certain circumstances related to the collateral
underlying the mortgage loan and the borrowers ability to
fulfill the obligations under the related mortgage note.
The MSA was amended on March 29, 2010 with effect as of
January 1, 2010. The amended MSA changes the fees paid by
the Company to reflect the fees payable to each
sub-servicer.
See further discussion in Notes to Financial
Statements at Note 9, Subsequent Events. It is the
intention of the Company that any agreements and transactions
between the Company and Aurora Bank are fair to all parties and
consistent with market terms.
Advisory
Agreement
The Company has entered into an Advisory Agreement
(AA) pursuant to which Aurora Bank administers the
day-to-day
operations of the Company. Through December 31, 2009,
Aurora Bank was paid an annual advisory fee equal to 0.05%,
payable monthly, of the gross average unpaid principal balances
of the Companys loans for the immediately preceding month,
plus reimbursement for certain expenses incurred by Aurora Bank
as advisor. For the years ended December 31, 2009, 2008 and
2007, the Company incurred $25,000, $34,000, and $45,000,
respectively, in advisory fees. As advisor, Aurora Bank is
responsible for:
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monitoring the credit quality of the loan portfolio held by the
Company;
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advising the Company with respect to the acquisition,
management, financing and disposition of its loans and other
assets; and
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maintaining the corporate and shareholder records of the Company.
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70
Aurora Bank may, from time to time, subcontract all or a portion
of its obligations under the AA to one or more of its affiliates
involved in the business of managing mortgage assets or, with
the approval of a majority of Board of Directors as well as a
majority of its independent directors, subcontract all or a
portion of its obligations under the AA to unrelated third
parties. Aurora Bank will not, in connection with the
subcontracting of any of its obligations under the AA, be
discharged or relieved in any respect from its obligations under
the AA.
The AA had an initial term of five years, and currently is
renewed each year for an additional one-year period unless the
Company delivers notice of nonrenewal to Aurora Bank. The
Company may terminate the AA at any time upon ninety days
prior notice. As long as any Series D preferred stock
remains outstanding, any decision by the Company either not to
renew the AA or to terminate the AA must be approved by a
majority of its Board of Directors, as well as by a majority of
its independent directors. Other than the servicing fee and the
advisory fee, Aurora Bank is not entitled to a fee for providing
advisory and management services to the Company.
The AA was amended on March 29, 2010 with effect as of
January 1, 2010. The amended AA changes the fees paid by
the Company to reflect the increased costs associated with such
services. See further discussion in Notes to Financial
Statements at Note 9, Subsequent Events. It is the
intention of the Company that any agreements and transactions
between the Company and Aurora Bank are fair to all parties and
consistent with market terms.
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ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Audit Fees.
The Company incurred fees from
Ernst & Young of $123,000 and $92,500 for its
professional services rendered for the audit of the
Companys financial statements for the years ended
December 31, 2009 and 2008, respectively, and the reviews
of the financial statements included in its quarterly reports on
Form 10-Q
during the year.
Audit-Related Fees.
There were no fees billed
to the Company by Ernst & Young for assurance and
related services that are reasonably related to the performance
of the audit and review of the Companys financial
statements that are not already reported in the paragraph
immediately above for the years 2009 and 2008 respectively.
Tax Fees.
The Company did not pay
Ernst & Young any fees for tax compliance, tax advice,
tax planning services or other services for 2009 or 2008.
All Other Fees.
There were no fees billed to
the Company by Ernst & Young for products and services
other than as set forth above for the years 2009 and 2008.
Approval Policies.
The Audit Committee has the
sole authority to review and approve the engagement of the
independent registered public accounting firm to perform audit
services or any permissible non-audit services. All
audit-related and non-audited related services to be provided by
the independent registered public accounting firm must be
approved in advance by the Audit Committee.
PART IV
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ITEM 15.
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EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
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(a) Contents:
(1) Financial Statements: All Financial Statements are
included as Part II, Item 8 of this Report.
(2) All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instruction or are
inapplicable and therefore have been omitted.
71
(b) Exhibits:
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Exhibit No.
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Description
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3
|
.1
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Restated Articles of Organization of the Company, effective
February 15, 2007, incorporated by reference from the
Companys Current Report on
Form 8-K
dated February 15, 2007.
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3
|
.2
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Amended and Restated By-laws of the Company, incorporated by
reference from the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 1998.
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10
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.1
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Master Mortgage Loan Purchase Agreement between the Company and
Capital Crossing Bank, incorporated by reference from the
Companys registration statement on
Form S-11
(No. 333-66677),
filed November 3, 1998, as amended (the 1998
Form S-11).
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10
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.2
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Master Service Agreement between the Company and Capital
Crossing Bank, incorporated by reference from the 1998
Form S-11.
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10
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.3
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Advisory Agreement between the Company and Capital Crossing
Bank, incorporated by reference from the 1998
Form S-11.
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10
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.4
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Form of Letter Agreement between the Company and Capital
Crossing Bank regarding issuance of certain securities,
incorporated by reference from the 1998
Form S-11.
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10
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.5
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Asset Exchange Agreement between the Company and Lehman Bank,
dated February 5, 2009, incorporated by reference from the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008.
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+10
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.6
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Termination to the Asset Exchange Agreement entered into on
February 5, 2009, between the Company and Aurora Bank FSB,
dated July 20, 2009.
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+10
|
.7
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Asset Exchange Agreement between the Company and Aurora Bank
FSB, dated November 18, 2009.
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+10
|
.8
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Amended and Restated Master Service Agreement between the
Company and Aurora Bank FSB, dated March 29, 2010.
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+10
|
.9
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Amended and Restated Advisory Agreement between the Company and
Aurora Bank FSB, dated March 29, 2010.
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+12
|
.1
|
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Computation of Earnings to Fixed Charges
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14
|
.1
|
|
Code of Ethics, incorporated by reference from the
Companys Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2007.
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+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.
|
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Capital Crossing
Preferred Corporation
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By:
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/s/
Thomas
OSullivan
|
Thomas OSullivan
President (Principal Executive Officer)
Date: March 31, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the registrant in the capacities and on the dated
indicated.
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Signature
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Title
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Date
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|
|
|
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/s/
Thomas
OSullivan
Thomas
OSullivan
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|
President, Director
|
|
March 31, 2010
|
|
|
|
|
|
/s/
Robert
J. Leist, Jr.
Robert
J. Leist, Jr.
|
|
Chief Financial Officer
|
|
March 31, 2010
|
|
|
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|
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/s/
William
Wesp
William
Wesp
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|
Director
|
|
March 31, 2010
|
|
|
|
|
|
/s/
Michael
Milversted
Michael
Milversted
|
|
Director
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|
March 31, 2010
|
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|
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|
Lana
Franks
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|
Director
|
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|
|
|
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/s/
Eric
Graham
Eric
Graham
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Director
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March 31, 2010
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73
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
Name
|
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10
|
.6
|
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Termination to the Asset Exchange Agreement entered into on
February 5, 2009, between the Company and Aurora Bank FSB,
dated July 20, 2009.
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|
10
|
.7
|
|
Asset Exchange Agreement between the Company and Aurora Bank
FSB, dated November 18, 2009.
|
|
10
|
.8
|
|
Amended and Restated Master Service Agreement between the
Company and Aurora Bank FSB, dated March 29, 2010.
|
|
10
|
.9
|
|
Amended and Restated Advisory Agreement between the Company and
Aurora Bank FSB, dated March 29, 2010.
|
|
12
|
.1
|
|
Computation of Earnings to Fixed Charges
|
|
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
|
74
Grafico Azioni Capital Crossing Preferred (MM) (NASDAQ:CCPCN)
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Grafico Azioni Capital Crossing Preferred (MM) (NASDAQ:CCPCN)
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