For the past seven years, Capital Crossing Bank in Boston has pursued growth a strategy different from that of most other community banks: Instead of originating loans, it buys them in bulk at a discount.
While the practice is common for finance companies, such as GE Capital and Tyco Capital, Capital Crossing has shown that banks can also succeed in this line of business. Its assets and have increased by about 1,400% since 1994, and net income growth has averaged 74% a year. 
"You couldn't have accomplished that if you were doing it one loan at a time," said Richard Wayne, the president of $950 million-asset Capital Crossing and one of its two co-chief executive officers, along with chairman Nicholas W. Lazares. "People say what we do is riskier, but I disagree. I think it's smarter."
Capital Crossing, which has bought $1.4 billion of loan pools since 1994, made its biggest single purchase two months ago, when it acquired a $301 million pool of more than 3,300 loans from the Small Business Administration.
The SBA purchase was especially significant because it solidified Capital Crossing's position on the "A-list of purchasers," Mr. Wayne said. "We've established some significant relationships, and now, as we've become even more prominent, even more people are talking to us."
Many of the loans Capital Crossing buys from other lenders are nonperforming, and Scott Kauffman, an analyst at Friedman Billings Ramsey & Co. in Arlington, Va., said the market for distressed assets is almost certain to grow as the economy weakens.
"They might do even better in a downturn," he said.
Charles S. Howard, the president and chief executive officer of $529 million-asset Mahaska Investment Co. of Oskaloosa, Iowa, one of the handful of other banking companies that actively purchase loan pools, agreed with his assessment.
Mahaska entered the loan-buying business in 1988, at the front end of the last economic slowdown, and "the recession created this opportunity," Mr. Howard said. "It goes against most bankers' instincts. Most of them are trying to get loans like these off of their books."
Along with Capital Crossing and Mahaska, other community banking companies buying problem loans include $2.4 billion-asset Beal Bank of Plano, Tex., and $5.5 billion-asset FBOP Corp. of Oak Park, Ill.
Capital Crossing entered the business out of desperation. Mr. Lazares and Mr. Wayne - both tax lawyers - helped found the bank, then a traditional community bank named Atlantic Bank and Trust Co., in 1987, and both served on its board of directors. But four years later the bank was hemorrhaging money and close to collapsing.
"We were about one loan away from going out of business," Mr. Lazares recalled.
Faced with the loss of their investment, the pair took day-to-day control in 1991.
"We were a bank without a purpose," Mr. Lazares said. "We weren't going anywhere, so we took the whole bank apart and reassembled it."
The pair spent a few years learning the ropes, then made two big changes: The bank bid on its first loan pool in 1994, and in 1999 its name was changed to Capital Crossing.
As they began pursuing additional opportunities, Mr. Lazares said Capital Crossing had to persuade its regulators it could collect on the loans it had bought.
"Convincing them was a process," he said. "Eventually, though, they developed a sense of confidence in our skills and our ability to managed this business."
Indeed, the bank's asset quality is comparable to those with a more traditional way of doing business. Nonperforming loans and repossessed real estate totaled $4.3 million, or 0.56% of assets, at midyear. In seven years it has charged off just $3 million of the loans it bought.
"Their specialty is conducting due diligence and acquiring loans at very favorable rates," Mr. Kauffman said.
Capital Crossing's success at servicing the loan pools it buys virtually guarantees a profit, because the loans are bought at a discount. For example, the SBA pool it bought in August was discounted by $72 million.
With that cushion in place, the bank can afford to encourage pre-payments, collect its money, and record its discount-driven earnings up front, instead of spreading them out over the remaining terms of the loans. On average, Capital Crossing's loan portfolio turns over every three years, according to Mr. Lazares.
In the past two years the bank has hired several new loan officers and made an effort to originate more commercial loans to small and midsize businesses in the Boston area, but Mr. Wayne said loan origination would remain a sideline.
"Purchasing wholesale loans will always be the cornerstone of our business," he said. "Growth is brutal if you have to go out and build brick by brick."
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