As filed with the Securities and Exchange Commission on November 2, 1998
Registration Statement No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-11
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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ATLANTIC PREFERRED CAPITAL CORPORATION
(Exact name of Registrant as specified in its governing instruments)
---------------
Atlantic Preferred Capital Corporation
101 Summer Street
Boston, Massachusetts 02110
(617) 880-1000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
Richard Wayne
President
Atlantic Preferred Capital Corporation
101 Summer Street
Boston, Massachusetts 02110
(617) 880-1000
(Name, address, including zip code, and telephone number, including area code,
of Agent for Service)
---------------
Copies to:
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William P. Mayer, Esq. Scott N. Gierke, Esq.
Gregory J. Lyons, Esq. McDermott, Will & Emery
Goodwin, Procter & Hoar LLP 227 West Monroe Street
Exchange Place Chicago, Illinois 60606-5096
Boston, Massachusetts 02109-2881 (312) 372-2000
(617) 570-1000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------
CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Title of Securities Amount Being Offering Price Aggregate Amount of
Being Registered Registered (1) Per Share (2) Offering Price (2) Registration Fee
- -------------------------------------------- ---------------- ----------------- -------------------- -----------------
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Noncumulative Exchangeable Preferred Stock,
Series A, par value $.01 per share......... 1,380,000 $ 25.00 $34,500,000 $ 9,591.00
</TABLE>
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(1) Includes 180,000 shares of Series A Preferred Stock which the underwriters
have the option to purchase solely to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 2, 1998
PROSPECTUS
1,200,000 Shares
Atlantic Preferred Capital Corporation
% Non-cumulative Exchangeable Preferred Stock, Series A
(Liquidation preference $25 per share)
Exchangeable into Preferred Shares of
Atlantic Bank and Trust Company
The Series A Preferred Shares offered by Atlantic Preferred Capital
Corporation under this Prospectus will have the following terms, among others:
o Dividends payable at a rate of % per annum.
-- Dividends are non-cumulative and you will not receive them if they are
not declared by the Board of Directors of Atlantic Preferred Capital.
-- If declared, Atlantic Preferred Capital will pay dividends on the 15th
of January, April, July and October for the preceding quarter.
o The Series A Preferred Shares will be exchanged for preferred shares of
Atlantic Bank and Trust Company (the parent of Atlantic Preferred Capital)
if the Federal Deposit Insurance Corporation directs such an exchange in
writing under the following circumstances:
-- Atlantic Bank becomes "undercapitalized" under applicable regulations;
-- Atlantic Bank is placed in bankruptcy, reorganization, conservatorship
or receivership; or
-- The FDIC, in its sole discretion, determines that Atlantic Bank may
become "undercapitalized" in the near future.
o The Series A Preferred Shares are not exchangeable in any other
circumstance.
o The Atlantic Bank Preferred Shares which you would receive in an exchange
will have terms substantially equivalent to those of the Series A
Preferred Shares of Atlantic Preferred Capital.
o Atlantic Preferred Capital can redeem the Series A Preferred Shares at its
option on or after , 2003, with the prior consent of the FDIC.
o The Series A Preferred Shares are non-voting.
Prior to this offering, there has been no public market for the Series A
Preferred Shares. Atlantic Preferred Capital has applied to have the Series A
Preferred Shares quoted on The Nasdaq National Market under the symbol "ATLP."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DESCRIPTION OF RISK FACTORS
YOU SHOULD CONSIDER BEFORE YOU INVEST IN THESE SECURITIES.
----------------
Neither the Securities and Exchange Commission, any state securities
commission, the Commissioner of Banks of the Commonwealth of Massachusetts, nor
the Federal Deposit Insurance Corporation has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
The securities offered hereby are not deposit accounts of any bank and are not
insured to any extent by the Federal Deposit Insurance Corporation or any other
government agency.
Per Share Total
----------- --------------
Public Offering Price ............. $ 25.00 $30,000,000
Underwriting Discounts and Commissions
Proceeds to Atlantic Preferred Capital $ $
Atlantic Preferred Capital has granted the Underwriters a 30-day option to
purchase an additional 180,000 Series A Preferred Shares at the same price and
terms, solely to cover overallotments, if any.
It is expected that delivery of the Series A Preferred Shares will be made to
investors on or about , 1998.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
ADVEST, INC.
The date of this Prospectus is , 1998.
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
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TABLE OF CONTENTS
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Page
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PROSPECTUS SUMMARY ....................................................................... 1
The Company ............................................................................. 1
The Bank ................................................................................ 2
Loan Portfolio .......................................................................... 2
Current Portfolio ..................................................................... 2
Additional Assets ..................................................................... 3
Management .............................................................................. 3
Risk Factors ............................................................................ 3
The Offering ............................................................................ 5
RISK FACTORS ............................................................................. 7
Certain Risks Associated with the Bank .................................................. 7
Dividend and Other Regulatory Restrictions on Operations of the Company ................. 7
Dividends Not Cumulative ................................................................ 8
No Credit Enhancement or Special Hazard Insurance ....................................... 8
Real Estate Market Conditions ........................................................... 8
Risks Associated with Purchased Loans ................................................... 9
Risks Relating to Commercial Mortgage Loans ............................................. 9
Delays in Liquidating Defaulted Mortgage Loans .......................................... 9
Legal Considerations .................................................................... 9
Environmental Considerations ............................................................ 9
Tax Risks Related to REITs .............................................................. 10
Adverse Consequences of Failure to Qualify as a REIT .................................. 10
Adverse Effects of REIT Distribution Requirements. .................................... 10
Redemption upon Occurrence of a Tax Event. ............................................ 11
Automatic Exchange upon Occurrence of the Exchange Event. ............................. 11
Limited Operating History ............................................................... 11
Dependence Upon the Bank as Advisor and Servicer ........................................ 11
Relationship with the Bank and its Affiliates; Conflicts of Interest .................... 11
Risk of Future Revisions in Policies and Strategies by Board of Directors ............... 11
No Third Party Valuation of the Mortgage Assets; No Arm's-Length Negotiations with
Affiliates ............................................................................. 11
Interest Rate Risk ...................................................................... 12
No Prior Market for Series A Preferred Shares ........................................... 12
CORPORATE STRUCTURE AND BENEFITS TO THE BANK ............................................. 12
Structure ............................................................................... 12
Benefits to the Bank .................................................................... 13
USE OF PROCEEDS .......................................................................... 14
DIVIDEND POLICY .......................................................................... 14
CAPITALIZATION ........................................................................... 15
BUSINESS ................................................................................. 16
General ................................................................................. 16
Dividend Policy ......................................................................... 16
Acquisition of Loan Portfolio ........................................................... 16
Management Policies and Programs ........................................................ 17
Asset Acquisition and Disposition Policies. ........................................... 17
Capital and Leverage Policies. ........................................................ 17
Conflicts of Interest Policies. ....................................................... 17
</TABLE>
ii
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Other Policies. ............................................ 18
Description of Loan Portfolio at September 30, 1998 ......... 18
General ................................................... 18
Loan Portfolio Composition ................................ 19
Purchased Loan Portfolio .................................. 21
Accounting for Purchased Loan Portfolio ............... 22
Originated Loan Portfolio ................................. 23
Allowance for Loan Losses for Originated Loans ........ 23
Credit Risk Management Policy ............................... 24
Non-Performing Assets ....................................... 24
Servicing ................................................... 25
Employees ................................................... 26
Competition ................................................. 26
Legal Proceedings ........................................... 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................... 27
Overview .................................................... 27
Results of Operations ....................................... 27
Loan Portfolio .............................................. 28
Allowance for Loan Losses and Discount ...................... 28
Interest Rate Risk .......................................... 29
Significant Concentration of Credit Risk .................... 29
Liquidity Risk Management ................................... 29
Other Matters ............................................... 30
Year 2000 Disclosure ........................................ 30
MANAGEMENT ................................................... 31
Directors and Officers ...................................... 31
Independent Directors ....................................... 31
Audit Committee ............................................. 31
Management and Director Compensation ........................ 31
The Advisor ................................................. 31
DESCRIPTION OF THE SERIES A PREFERRED SHARES ................. 33
Series A Preferred Shares ................................... 33
Dividends ................................................... 33
Authority to Issue Additional Shares ........................ 33
Automatic Exchange .......................................... 33
Voting Rights ............................................... 34
Redemption .................................................. 35
Rights upon Liquidation ..................................... 35
DESCRIPTION OF CAPITAL STOCK ................................. 36
Authorized and Outstanding Capital Stock .................... 36
Common Stock ............................................... 36
Restrictions on Ownership and Transfer....................... 36
FEDERAL INCOME TAX CONSIDERATIONS ............................ 37
Taxation of the Company ..................................... 37
Requirements for Qualification .............................. 38
Income Tests ................................................ 39
</TABLE>
iii
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Asset Tests ............................................................. 40
Distribution Requirements ............................................... 41
Recordkeeping Requirements .............................................. 42
Excess Inclusion Income ................................................. 42
Failure to Qualify ...................................................... 42
Taxation of U.S. Stockholders ........................................... 42
Taxation of Tax-Exempt Stockholders ..................................... 44
Taxation of Non-US. Stockholders ........................................ 44
Other Tax Consequences .................................................. 46
ERISA CONSIDERATIONS ..................................................... 46
General ............................................................... 46
Plan Asset Regulation ................................................. 46
Effects of Plan Asset Status .......................................... 47
Prohibited Transactions ............................................... 47
CERTAIN INFORMATION REGARDING THE BANK ................................... 49
Operations of the Bank .................................................. 49
Summary Financial Information ........................................... 49
Profitability ......................................................... 49
Asset Quality ......................................................... 49
Regulatory Capitalization ............................................. 49
Lending Activities ...................................................... 50
Purchased Loan and Lease Portfolio ...................................... 50
Originated Loan and Lease Portfolio ..................................... 51
Small-Ticket Equipment Leasing .......................................... 51
Regulatory Capital Requirements ......................................... 51
General ............................................................... 51
Leverage Ratio ........................................................ 51
Risk-based Capital .................................................... 51
Regulatory Consequences of Failing to Meet Capital Requirements ....... 52
UNDERWRITING ............................................................. 54
LEGAL MATTERS ............................................................ 55
INDEPENDENT AUDITORS ..................................................... 55
AVAILABLE INFORMATION .................................................... 55
FINANCIAL STATEMENTS ..................................................... F-1
ANNEX I--OFFERING CIRCULAR
</TABLE>
iv
<PAGE>
PROSPECTUS SUMMARY
This summary provides highlights of information contained in other places
in this Prospectus. This summary is not complete and does not contain all of
the information that you should consider before investing in the Series A
Preferred Shares. You should read the entire Prospectus carefully, especially
the risks of investing in the Series A Preferred Shares discussed under "Risk
Factors."
The Company
Atlantic Preferred Capital Corporation (the "Company") is a Massachusetts
corporation incorporated on March 20, 1998. Atlantic Bank and Trust Company
(the "Bank") created the Company for the purpose of acquiring and holding real
estate mortgage assets ("Mortgage Assets") in a cost-effective manner and to
provide the Bank with an additional means of raising capital for federal and
state regulatory purposes. The Bank currently owns, indirectly, all of the
outstanding Common Stock of the Company. The Bank has indicated to the Company
that, for as long as any Series A Preferred Shares are outstanding, the Bank
intends to maintain its ownership of all of the outstanding Common Stock of the
Company. At September 30, 1998, the Company had $149.0 million in total assets
and no indebtedness. The Company does not anticipate incurring any indebtedness
in the foreseeable future.
As a wholly-owned subsidiary of the Bank, the assets and liabilities and
results of operations of the Company will be consolidated with those of the
Bank for the Bank's financial reporting and regulatory capital purposes. As
such, loans acquired by the Company from the Bank will nevertheless be treated
as assets of the Bank for purposes of compliance by the Bank with the FDIC's
regulatory capital requirements.
The Company intends to operate in a manner which will allow it to be taxed
as a real estate investment trust (a "REIT") under the Internal Revenue Code of
1986, as amended (the "Code"). As a REIT, the Company will generally not be
required to pay federal income tax if it distributes its earnings to its
stockholders and continues to meet a number of other requirements. The Company
and the Bank are undertaking the offering for two principal reasons: (1) to
increase the Bank's capital as a result of the qualification of the Series A
Preferred Shares as Tier 1 capital of the Bank under relevant regulatory
capital guidelines, and (2) to achieve the benefits of the tax deductibility of
the dividends payable on the capital stock of the Company as a result of the
Company's qualification as a REIT.
The Company currently expects to pay an aggregate amount of dividends with
respect to its outstanding shares of capital stock equal to approximately 100%
of the Company's "REIT taxable income" (which excludes capital gains).
Dividends will be declared at the discretion of the Board of Directors after
considering the Company's distributable funds, financial requirements, tax
considerations and other factors. For the following reasons, the Company
expects that both its cash available for distribution and its "REIT taxable
income" will be in excess of amounts needed to pay dividends on the Series A
Preferred Shares in the foreseeable future, although the Company cannot assure
you that this will be the case:
o the Company's loans are interest bearing and had a weighted average note
rate of 9.12% at September 30, 1998;
o the Series A Preferred Shares will represent only approximately 17% of
the Company's stockholders' equity;
o the Company expects that its interest earning assets will continue to
significantly exceed the liquidation preference of the Series A Preferred
Shares;
o the Company has not incurred and does not currently intend to incur any
indebtedness.
o the Company anticipates that, in addition to cash flows from operations,
additional cash will be available from principal payments on its Loan
Portfolio.
The Series A Preferred Shares would be exchanged (an "Automatic Exchange")
for shares of preferred stock of the Bank (the "Bank Preferred Shares") if the
FDIC so directs in writing. The FDIC may direct such an exchange if any of the
following events occurs (each, an "Exchange Event"):
o the Bank becomes "undercapitalized" under applicable regulations,
o the Bank is placed into bankruptcy, reorganization, conservatorship or
receivership or
1
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o the FDIC, in its sole discretion, anticipates the Bank becoming
"undercapitalized" in the near term.
The Bank Preferred Shares which you would receive in the event of an
Automatic Exchange will have substantially equivalent terms as the Series A
Preferred Shares. CONSEQUENTLY, IF THIS EXCHANGE OCCURS YOU WOULD OWN AN
INVESTMENT IN THE BANK AND NOT IN THE COMPANY AT A TIME WHEN THE BANK'S
FINANCIAL CONDITION IS DETERIORATING OR THE BANK HAS BEEN PLACED INTO
BANKRUPTCY, REORGANIZATION, CONSERVATORSHIP OR RECEIVERSHIP. THEREFORE, YOU
SHOULD CAREFULLY CONSIDER THE DESCRIPTION OF THE BANK SET FORTH UNDER "CERTAIN
INFORMATION REGARDING THE BANK" BEFORE INVESTING IN THE SERIES A PREFERRED
SHARES. For additional information you should refer to "Description of the
Series A Preferred Shares--Automatic Exchange." Based upon the Bank's most
recent quarterly financial reports filed with the FDIC, the Bank is considered
"well-capitalized" under applicable regulations. For a discussion of the
regulatory capital requirements applicable to the Bank, see "Certain
Information Regarding the Bank--Regulatory Capital Requirements."
The principal executive offices of the Company are located at 101 Summer
Street, Boston, Massachusetts 02110, and its telephone number is (617)
880-1000.
The Bank
Atlantic Bank and Trust Company, an FDIC-insured, Massachusetts-chartered
trust company, commenced operations in February, 1988. The Bank conducts its
business from its executive and main office in downtown Boston, Massachusetts,
and a branch in Chestnut Hill, Massachusetts, and through its leasing
subsidiary in Moberly, Missouri. At September 30, 1998, the Bank had total
assets of $456.7 million, deposits of $411.5 million and stockholders' equity
of $39.6 million. At September 30, 1998, the Bank's Tier 1 Leverage, Tier 1
Risk-based and Total Risk-based capital ratios (the regulatory capital ratios
developed and monitored by the federal bank regulatory agencies and applicable
to banks), were 8.09%, 9.53%, and 10.44%, respectively, sufficient to enable
the Bank to be qualified as being "well-capitalized" under such FDIC
regulations.
The Bank focuses on selected business lines that management has identified
as having the potential to provide high levels of profitability consistent with
prudent banking practices. These business lines include: (1) the acquisition of
loans secured primarily by commercial real estate, other business assets,
and/or multi-family residential real estate from private sector sellers and
government agencies, generally at a discount from their then outstanding
principal balances; (2) the origination of various types of secured commercial
loans; and (3) small-ticket equipment leasing to businesses and consumers
through its wholly-owned subsidiary, Dolphin Capital Corporation. The Bank
funds the foregoing activities with deposits consisting primarily of
certificates of deposit and money market accounts. The Bank also offers retail
deposit services, including checking and savings accounts, and related services
to businesses and individuals through the nationwide electronic banking
networks.
As used in this Prospectus, the terms "Atlantic" and the "Bank" refer to
Atlantic Bank and Trust Company and its subsidiaries and predecessors, unless
the context otherwise requires.
Loan Portfolio
Current Portfolio. As of September 30, 1998, the Company held loans
acquired from the Bank with a gross outstanding principal balance of $162.5
million (the "Loan Portfolio"). The Loan Portfolio consisted primarily of
Mortgage Assets secured by commercial or multi-family properties. Approximately
77.1% of the Loan Portfolio at September 30, 1998 consisted of loans acquired
by the Bank at a discount from their outstanding principal balances. The Bank
originally purchased such loans consistent with its fundamental strategy of
identifying and acquiring loans which management of the Bank believes are
undervalued as a result of adverse market or economic circumstances. The
remaining balance of the Loan Portfolio consists of loans originated by the
Bank. The Company acquires loans from the Bank at the Bank's net carrying value
for such loans.
2
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Certain information regarding the Company's Loan Portfolio is summarized
in the table below:
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At or for the period
from inception (March 20, 1998)
through September 30, 1998
--------------------------------
(dollars in thousands)
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Number of Loans .......................................... 437
Total loans .............................................. $ 162,547
Non-amortizing discounts ............................... (11,084)
Amortizing discounts ................................... (7,279)
Net deferred loan income ............................... (100)
Allowance for loan losses .............................. (1,337)
---------
Loans, net .......................................... $ 142,747
=========
Adjustable rate loans to total loans ..................... 76.14%
Fixed rate loans to total loans .......................... 23.86
Weighted average yield (1) ............................... 12.40
Weighted average note rate (2) ........................... 9.12
Non-accruing loans as a percentage of loans, net ......... 1.06
</TABLE>
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(1) Includes the effect of discount accretion on loans originally purchased
by the Bank weighted by outstanding principal balances, net of
discounts.
(2) Weighted by outstanding principal balances.
Additional Assets. The Company intends to acquire additional Mortgage
Assets and other REIT-qualified assets with proceeds received in connection
with this offering, the repayment or disposition of Mortgage Assets, the
issuance of additional shares of preferred stock or additional capital
contributions.
Management
Upon completion of this offering, the Board of Directors will be composed
of five members, two of whom will be independent directors. The Company
currently has three officers. The Company has no other employees and does not
anticipate that it will require additional employees. See "Management."
Risk Factors
A purchase of Series A Preferred Shares is subject to certain risks
described in more detail under "Risk Factors" commencing on page 7, including:
o A decline in the performance and capital levels of the Bank or the
placement of the Bank into bankruptcy, reorganization, conservatorship or
receivership could lead to the exchange of your purchased Series A
Preferred Shares for Bank Preferred Shares. In the event of such
exchange, you would have an investment in the Bank and not in the
Company. An investment in the Bank is subject to certain risks that are
distinct from the risks associated with an investment in the Company. For
example, an investment in the Bank would involve risks relating to the
capital levels of, and other federal and state regulatory requirements
applicable to, the Bank, the size and quality of the Bank's overall loan
portfolio and the performance of the Bank's leasing subsidiary. In the
event of a liquidation of the Bank or upon receivership of the Bank, the
claims of the Bank's depositors and creditors and of the FDIC will be
entitled to a priority of payment over the claims of holders of Bank
Preferred Shares. As a result, if the Bank were to be placed into
receivership after the Automatic Exchange or if the Automatic Exchange
were to occur after receivership of the Bank, you likely would receive
substantially less than you would have received had the Series A
Preferred Shares not been exchanged for Bank Preferred Shares, and, in
fact, you may not receive anything for your Bank Preferred Shares. You
should carefully consider the risks with respect to any investment in the
Bank set forth in the attached Offering Circular under the caption "Risk
Factors."
o As a subsidiary of the Bank, the Company is subject to the risk that
federal or state regulators of the Bank will restrict the ability of the
Company to transfer assets, to make distributions to stockholders,
including dividends to the holders of the Series A Preferred Shares, or
to redeem shares of preferred stock of the
3
<PAGE>
Company. Under certain circumstances, these restrictions could result in
the Company's failure to qualify as a REIT.
o Dividends on the Series A Preferred Shares are not cumulative.
Consequently, if the Board of Directors of the Company does not declare a
dividend on the Series A Preferred Shares for any quarterly period
(including if prevented by bank regulators), you would not be entitled to
recover such dividend whether or not funds are or subsequently become
available. The Board of Directors may also determine, in its business
judgment, that it would be in the best interests of the Company to pay
less than the full amount of the stated dividends on the Series A
Preferred Shares notwithstanding that funds are available.
o Risks associated with mortgage loans generally, and particularly the
geographic concentration of the Company's Loan Portfolio in the Northeast
and California, could adversely affect the Mortgage Assets held by the
Company and the value of the Series A Preferred Shares. The quality of
the Company's Loan Portfolio depends upon, among other things, the cash
flow of borrowers, regional economic conditions and commercial and
multi-family real estate values.
o If the Company fails to maintain its status as a REIT for federal income
tax purposes, it will be subject to corporate income tax.
o Because the rate at which dividends are to be paid is fixed and a
majority of the Company's Mortgage Assets bear interest at adjustable
rates, a significant decline in interest rates might adversely affect the
Company's ability to pay dividends on the Series A Preferred Shares.
o The Company is a recently organized corporation with a limited operating
history.
o The Company will be dependent in virtually every phase of its operations,
including the servicing of its Loan Portfolio, on the diligence and skill
of the officers and employees of the Bank.
o Because of the relationship between the Company and the Bank, conflicts
of interests may arise between the Company and the Bank.
4
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The Offering
<TABLE>
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Issuer ......................... Atlantic Preferred Capital Corporation, a Massachusetts
corporation created for the purpose of acquiring and
holding Mortgage Assets.
Securities Offered ............. 1,200,000 Series A Preferred Shares. The Company has
granted the Underwriters an option for 30 days to
purchase up to an additional 180,000 Series A Preferred
Shares at the initial public offering price solely to cover
over-allotments, if any.
Ranking ........................ The Series A Preferred Shares rank senior to the
Company's Common Stock. As such, you, as a holder of
Series A Preferred Shares, will receive full dividends
prior to the holders of Common Stock and in a liquidation
you will receive your full liquidation preference plus
accrued and unpaid dividends prior to the holders of
Common Stock receiving payment for their shares.
Additional shares of preferred stock ranking senior to the
Series A Preferred Shares may not be issued without the
approval of holders of more than two-thirds of the
Series A Preferred Shares. Additional shares of preferred
stock ranking on a parity with the Series A Preferred
Shares may not be issued without the approval of a
majority of the Company's independent directors.
Dividends ...................... Dividends on the Series A Preferred Shares are payable
at the rate of % per annum of the liquidation preference
(or $ per share), if, when and as declared by the
Board of Directors of the Company. If declared,
dividends are payable for the preceding quarter on the
15th day of January, April, July and October in each year.
Dividends accrue in each quarterly period from the first
day of such period, whether or not dividends are paid with
respect to the preceding quarterly period. Dividends on
the Series A Preferred Shares are not cumulative. If no
dividends, or less than full dividends, are declared on the
Series A Preferred Shares by the Company for a quarterly
dividend period, you will have no right to receive such
dividends for that period, and the Company will have no
obligation to pay a full or partial dividend for that period,
whether or not such dividends are declared and paid for any
future period with respect to either the Series A Preferred
Shares or the Common Stock. See "Description of the Series A
Preferred Shares--Dividends."
Liquidation Preference ......... The liquidation preference for each Series A Preferred
Share is $25.00, plus any quarterly accrued and unpaid
dividends. See "Description of the Series A Preferred
Shares--Rights Upon Liquidation."
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Redemption ................. The Series A Preferred Shares are not redeemable prior
to , 2003 except upon the occurrence of a
Tax Event as described in "Description of the Series A
Preferred Shares--Redemption". On and after
, 2003, the Series A Preferred Shares may
be redeemed for cash at the option of the Company, in
whole or in part, at a redemption price of $25.00 per
share, plus the accrued and unpaid dividends from the
beginning of the quarterly period to the date of
redemption, if any, thereon. The Series A Preferred
Shares are not convertible into any other securities of
the Company.
Automatic Exchange ......... The Series A Preferred Shares will be exchanged for
Bank Preferred Shares having an equivalent
liquidation preference and dividend rate if the FDIC
directs such an exchange in writing under certain
circumstances. See "Description of the Series A
Preferred Shares--Automatic Exchange."
Voting Rights .............. Holders of Series A Preferred Shares will not have any
voting rights, except as expressly required by law. On
any matter on which holders of the Series A Preferred
Shares may vote, each Series A Preferred Share will be
entitled to one vote. See "Description of the Series A
Preferred Shares--Voting Rights."
Ownership Limits ........... Beneficial ownership by a person or certain groups of
persons of more than 9.9% of any class or series of the
Company's stock, including the outstanding Series A
Preferred Shares, is restricted in order to preserve the
Company's status as a REIT for federal income tax
purposes.
Listing .................... The Company has applied to have the Series A
Preferred Shares included for quotation on The Nasdaq
National Market under the trading symbol "ATLP."
Use of Proceeds ............ The net proceeds to the Company from the offering will
be used to acquire additional Mortgage Assets from the
Bank or other REIT-qualified assets and to pay the
expenses of the offering. See "Use of Proceeds."
</TABLE>
6
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and risk factors
relating to the Bank and the Bank Preferred Shares set forth in the attached
Offering Circular before purchasing the Series A Preferred Shares offered by
this Prospectus. The discussion contained in this Prospectus contains
forward-looking statements that involve risk and uncertainties. These forward
looking statements use terminology such as "believes," "expects," "may,"
"will," "should" or "anticipates" or similar expressions and may include
discussions of future strategy. The risk factors described below apply to all
forward-looking statements wherever they appear in this Prospectus. The
Company's actual results could differ materially from the forward looking
statements. Important factors that could cause or contribute to such
differences include those discussed below. For a description of certain risk
factors relating to the Bank and the Bank Preferred Shares, you should
carefully consider the information contained in the section entitled "Risk
Factors and Other Considerations" in the attached Offering Circular.
Certain Risks Associated with the Bank
The purchase of Series A Preferred Shares involves a high degree of risk
with respect to the performance and capital levels of the Bank. A significant
decline in the performance and capital levels of the Bank or the placement of
the Bank into bankruptcy, reorganization conservatorship or receivership will
likely result in an Automatic Exchange of the Series A Preferred Shares for
Bank Preferred Shares. After such exchange, you would have an investment in the
Bank. Such an exchange would result in your becoming a preferred stockholder of
the Bank at a time when the Bank's financial condition was deteriorating or
when the Bank had been placed into bankruptcy, reorganization, conservatorship
or receivership. If the Automatic Exchange occurs, the FDIC would likely
prohibit the Bank from paying dividends on the Bank Preferred Shares.
Furthermore, in the event the Bank is placed into bankruptcy, reorganization,
conservatorship or receivership (whether before or after the Automatic
Exchange), the Bank would be unable to pay dividends on the Bank Preferred
Shares. An investment in the Bank is also subject to certain risks that are
distinct from the risks associated with an investment in the Company. For
example, an investment in the Bank would involve risks relating to the capital
levels of, and other federal and state regulatory requirements applicable to,
the Bank, and the performance of the Bank's overall loan portfolio and other
business lines. In the event of a liquidation of the Bank, the claims of
depositors and creditors of the Bank and of the FDIC would have priority over
your claims as a holder of the Bank Preferred Shares. As a result, if the Bank
were to be placed into receivership after the Automatic Exchange, or if the
Automatic Exchange were to occur after receivership of the Bank, you likely
would receive, if anything, substantially less than you would have received had
the Series A Preferred Shares not been exchanged for Bank Preferred Shares.
Because of a possibility of an Automatic Exchange, potential investors in the
Series A Preferred Shares should carefully consider the risks with respect to
an investment in the Bank set forth under "Certain Information Regarding the
Bank." See also "Description of the Series A Preferred Shares--Automatic
Exchange."
Dividend and Other Regulatory Restrictions on Operations of the Company
Because the Company is a subsidiary of the Bank, federal and state
regulatory authorities will have the right to examine the Company and its
activities. Under certain circumstances, including any determination that the
Bank's relationship to the Company results in an unsafe and unsound banking
practice, such regulatory authorities can restrict the ability of the Company
to transfer assets, to make distributions to its stockholders (including
dividends on the Series A Preferred Shares), or to redeem Series A Preferred
Shares. Federal and state regulators may even require the Bank to sever its
relationship with or divest its ownership of the Company. Such actions could
potentially result in the Company's failure to qualify as a REIT.
Federal bank regulators have established capital categories for banks
ranging from "significantly under capitalized" to "well-capitalized." See
"Certain Information Regarding the Bank--Regulatory Capital Requirements."
Payment of dividends on the Series A Preferred Shares could be subject to
regulatory limitations if the Bank became "undercapitalized" under applicable
FDIC regulations. A bank is "undercapitalized" under these regulations if its
Total risk-based capital ratio is less than 8.0%, its Tier 1 Risk-based capital
ratio is less than 4.0% or its Tier 1 Leverage ratio is less than 4.0%. At
September 30, 1998, the Bank had a Total Risk-based capital ratio of 10.44%, a
Tier 1 Risk-based capital ratio of 9.53% and a Tier 1 Leverage ratio of 8.09%,
which is sufficient for the Bank to be considered "well-capitalized" under
applicable FDIC regulations. Giving effect to this offering and assuming all of
the net proceeds are invested in assets bearing a 100% risk weighting, these
ratios would have been 12.61%, 11.78% and 10.11%, respectively.
7
<PAGE>
Under FDIC regulations, the ability of the Bank to make "capital
distributions" (defined to include payment of dividends, stock repurchases,
cash-out mergers and other distributions charged against the capital accounts
of an institution) varies depending primarily on the institution's earnings and
regulatory capital levels. While the Company believes that dividends on the
Series A Preferred Shares should not be considered "capital distributions" for
this purpose, the FDIC may not agree with this position. The Company currently
intends to pay annual dividends on the Series A Preferred Shares in an amount
up to the Company's net income for each year. The Company expects to declare
and pay such dividends on a quarterly basis. In any event, the dividend rate on
the Series A Preferred Shares will not exceed %. See "Dividend Policy."
Dividends Not Cumulative
Dividends on the Series A Preferred Shares are not cumulative.
Consequently, if the Board of Directors does not declare a dividend on the
Series A Preferred Shares for any quarterly period (including if prevented by
bank regulators), you will not be entitled to receive that dividend whether or
not funds are or subsequently become available. The Board of Directors may
determine that it would be in the best interests of the Company to pay less
than the full amount of the stated dividends or no dividends on the Series A
Preferred Shares for any quarter notwithstanding that funds are available.
Factors that the Board of Directors would consider in making this determination
include the Company's financial condition and capital needs, the impact of
current or pending legislation and regulations and general economic conditions.
You should note that to remain qualified as a REIT, the Company must distribute
annually at least 95% of its "REIT taxable income" (not including capital
gains) to stockholders. See "--Tax Risks Related to REITs," and "Federal Income
Tax Considerations--Taxation of the Company."
No Credit Enhancement or Special Hazard Insurance
The Company does not currently intend to obtain general credit
enhancements such as mortgagor bankruptcy insurance or to obtain special hazard
insurance for its Mortgage Assets, other than standard hazard insurance, which
will in each case only relate to individual mortgage loans. Accordingly, during
the time it holds mortgage loans for which third party insurance is not
obtained, the Company will be subject to risks of borrower defaults and
bankruptcies and special hazard losses that are not covered by standard hazard
insurance (such as those occurring from floods). The Company is covered by the
Bank's mortgage impairment policy, which provides certain coverage in instances
where a borrower's property insurance has lapsed. In addition, in the event of
a default on any mortgage loan held by the Company resulting from declining
property values or worsening economic conditions, among other factors, the
Company would bear the risk of loss of principal to the extent of any
deficiency between (1) the value of the related mortgaged property, plus any
payments from an insurer (or guarantor in the case of commercial mortgage
loans) and (2) the amount owing on the mortgage loan.
Real Estate Market Conditions
The results of the Company's operations will be affected by conditions in
the real estate markets in which its loans are concentrated. These conditions
are generally beyond the Company's control and include:
o local and other economic conditions affecting real estate values;
o the ability of tenants to make lease payments;
o the ability of a property to attract and retain tenants, which may in
turn be affected by local conditions;
o interest rate levels and the availability of credit to refinance mortgage
loans at or prior to maturity; and
o increased operating costs, including energy costs, real estate taxes and
costs of compliance with environmental controls and regulations.
In particular, the Company's current Mortgage Assets are concentrated
primarily in the Northeast and California. If either of these regions were to
experience natural disasters or weaker regional economic conditions and real
estate markets, the Company would likely experience higher rates of loss and
delinquency on mortgage loans than it would if the Mortgage Assets were more
geographically diverse.
The results of the Company's operations depend on, among other things, the
level of interest income generated by the Company's Mortgage Assets, the market
value of such Mortgage Assets and the supply of and demand for
8
<PAGE>
such Mortgage Assets. Further, the values of the Mortgage Assets, or the values
of properties securing the Mortgage Assets, may not have remained and may not
remain at their original levels.
Risks Associated with Purchased Loans
At September 30, 1998, approximately 77.1% of the Company's Loan Portfolio
consisted of loans purchased by the Bank and subsequently acquired by the
Company from the Bank. Because such loans were originated by third parties, the
Bank may not have been able to conduct the same level of due diligence on such
loans upon purchase that it would have conducted had it originated such loans.
Generally, while the Bank conducts an acquisition review, the Bank relies on
the underwriting standards of those originating parties of such loans, whose
standards may be substantially different than those of the Bank.
Risks Relating to Commercial Mortgage Loans
Commercial mortgage loans have risks distinct from those of other mortgage
loans. Commercial properties themselves tend to be unique and are more
difficult to value than residential real estate properties. Commercial mortgage
loans also tend to have shorter maturities than residential mortgage loans and
may not be fully amortizing, meaning that they may have a significant principal
balance or "balloon" payment due on maturity. Borrowers may not be able to
refinance such loans or otherwise make such payments upon maturity. In
addition, commercial real estate properties, particularly industrial and
warehouse properties, are generally subject to relatively greater environmental
risks than non-commercial properties and to the corresponding burdens and costs
of compliance with environmental laws and regulations. Also, there may be costs
and delays involved in enforcing rights of a property owner against tenants in
default under the terms of leases with respect to commercial properties. For
example, tenants may seek the protection of the bankruptcy laws which could
result in termination of lease contracts.
Delays in Liquidating Defaulted Mortgage Loans
The Company could encounter substantial delays in liquidating a property
securing defaulted mortgage loans, with corresponding delays in the receipt of
related proceeds by the Company. An action to foreclose on a property securing
a mortgage loan is regulated by state statutes and rules and is subject to many
of the delays and expenses of other lawsuits if defenses or counterclaims are
interposed. As a result, foreclosure may result in significant costs.
Furthermore, some states do not permit an action to obtain a deficiency
judgment after a nonjudicial sale of a mortgaged property. In the event of a
default by a mortgagor, these restrictions, among other things, may impede the
ability of the Company to foreclose on or sell the mortgaged property at all or
at a price sufficient to repay all amounts due on the related mortgage loan. In
addition, the servicer of the Company's Mortgage Assets deduct from collections
received all expenses reasonably incurred in attempting to recover amounts due
and not yet repaid on liquidated Mortgage Assets. These expenses include legal
fees and costs of legal action, real estate taxes and maintenance and
preservation expenses, thereby reducing amounts available to the Company.
Legal Considerations
Applicable state laws generally regulate interest rates and other charges
and require certain disclosures to borrowers. In addition, most states have
other laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which may
apply to the servicing and collection of certain Mortgage Assets. Violations of
these laws, policies and principles may limit the ability of the Company to
collect all or part of the principal of or interest on certain Mortgage Assets,
may entitle the borrower to a refund of amounts previously paid and could
subject the Company to damages and administrative sanctions.
Environmental Considerations
If the Company must foreclose on a defaulted mortgage loan, it may be
subject to environmental liabilities related to the underlying real property.
These liabilities could exceed the value of the real property. Hazardous
substances or wastes, contaminants, pollutants or sources thereof (as defined
by state and federal laws and regulations) may be discovered on properties
during the Company's ownership or after a sale thereof to a third party. If
such hazardous substances are discovered on a property which the Company has
acquired, the Company may be required to remove those substances and clean up
the property. In such a case the Company could be liable for all costs of any
removal and clean-up. The Company may not be able to recoup any of such costs
from any third party. The Company may also be liable to tenants and other users
of neighboring properties. In addition, the Company may find it difficult or
impossible to sell the property prior to or following any such clean-up.
9
<PAGE>
Tax Risks Related to REITs
Adverse Consequences of Failure to Qualify as a REIT. The Company intends
to operate so as to qualify as a REIT under the Code. In connection with the
offering, Goodwin, Procter & Hoar LLP ("GP&H") will render certain opinions,
described under "Federal Income Tax Considerations" below, regarding the
Company's qualification as a REIT. However, the Company cannot assure you that
it will continue to qualify as a REIT in the future. Qualification as a REIT
involves the application of highly technical and complex provisions of the Code
for which there are only limited judicial or administrative interpretations.
The Company is relying on the opinion of GP&H regarding various issues
affecting the Company's ability to qualify as a REIT. This legal opinion is not
binding on the Internal Revenue Service (the "IRS") or the courts. GP&H's
opinion represents only the view of counsel to the Company based on counsel's
review and analysis of existing law, which includes no controlling precedent
and which is subject to change, possibly on a retroactive basis. See "Federal
Income Tax Considerations--Requirements for Qualification." GP&H's opinion is
also based on various assumptions and is conditioned upon certain
representations made by the Company on or about the date of such opinion as to
factual matters, including representations regarding the nature of the
Company's assets and income and the future conduct of the Company's business.
Any inaccuracy in such assumptions and representations, including as a result
of activities of the Company subsequent to the date of the opinion, could
adversely affect this opinion and the Company's ability to qualify as a REIT.
Qualification and taxation as a REIT depends upon the Company's having met and
continuing to meet, through actual annual operating results, the distribution
levels, stock ownership and other various qualification tests imposed under the
Code. GP&H has not reviewed and will not review the Company's compliance with
those tests. Accordingly, no assurance can be given that the Company has
satisfied or will satisfy the REIT qualification tests on a continuing basis.
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 Company's stockholders, including the holders
of the Series A Preferred Shares, would be reduced for the year or years
involved. In addition, unless entitled to relief under certain statutory
provisions, the Company would be disqualified from treatment as a REIT for the
four taxable years following the year during which qualification was lost. The
failure to qualify as a REIT would reduce the net earnings of the Company
available for distribution to the stockholders (including owners of the Series
A Preferred Shares) because of the additional tax liability for the year or
years involved. A failure of the Company to qualify as a REIT would not by
itself give the Company the right to redeem the Series A Preferred Shares, nor
would it give the holders of the Series A Preferred Shares the right to have
their shares redeemed. See "Description of the Series A Preferred
Shares--Redemption."
Notwithstanding that the Company currently intends to operate in a manner
designed to qualify as a REIT, future economic, market, legal, tax or other
considerations may cause the Company to determine that it is in the best
interest of the Company and the holders of its Common Stock and Preferred Stock
to revoke the REIT election. The tax law prohibits the Company from electing
treatment as a REIT for the four taxable years following the year of such
revocation. See "Federal Income Tax Considerations."
Adverse Effects of REIT Distribution Requirements. In order to qualify as
a REIT, the Company generally is required each year to distribute to its
stockholders at least 95% of its net taxable income (excluding net capital
gains). The Company may retain 5% 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 it
with respect to any calendar year are less than the sum of (1) 85% of its
ordinary income for the calendar year, (2) 95% of its capital gains net income
for the calendar year and (3) 100% of any undistributed income from prior
periods. Under certain circumstances, federal or state regulatory authorities
may restrict the ability of the Company, as a subsidiary of the Bank, to make
distributions 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 Company's 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 expects that cash flow from operations, in addition
to proceeds from principal payments on its Loan Portfolio, will provide it with
sufficient liquidity to make such distributions for the foreseeable future. See
"--Dividend and Other Regulatory Restrictions on Operations of the Company."
10
<PAGE>
Redemption upon Occurrence of a Tax Event. At any time following the
occurrence of a Tax Event (as defined under "Description of the Series A
Preferred Shares--Redemption"), the Company will have the right to redeem the
Series A Preferred Shares in whole but not in part, subject to the prior
written approval of the FDIC. The occurrence of a Tax Event will not, however,
give the holders of the Series A Preferred Shares any right to have their
shares redeemed. See "Description of the Series A Preferred
Shares--Redemption."
Automatic Exchange upon Occurrence of the Exchange Event. Upon the
occurrence of the Exchange Event, the outstanding Series A Preferred Shares
will be automatically exchanged on a ten-for-one basis into Bank Preferred
Shares. See "Description of the Series A Preferred Shares--Automatic Exchange."
The Automatic Exchange will be taxable, and each holder of Series A Preferred
Shares will have a gain or loss, as the case may be, measured by the difference
between the holder's basis in the Series A Preferred Shares and the fair market
value of the Bank Preferred Shares received in the Automatic Exchange. See
"Federal Income Tax Considerations."
Limited Operating History
The Company is a recently organized corporation with operating results
only since its inception on March 20, 1998.
Dependence Upon the Bank as Advisor and Servicer
The Company depends on the diligence and skill of the officers and
employees of the Bank for the selection, structuring and monitoring of its
Mortgage Assets. In addition, the Company depends upon the expertise of the
Bank for the servicing of the Loan Portfolio. See "Business."
Relationship with the Bank and its Affiliates; Conflicts of Interest
The Bank and its affiliates are involved in virtually every aspect of the
Company's existence. The Bank administers the day-to-day activities of the
Company under an advisory agreement dated as of March 31, 1998 (the "Advisory
Agreement"). The Bank also acts as servicer of the Company's Loan Portfolio
under a master service agreement between the Bank and the Company dated as of
March 31, 1998 (the "Master Service Agreement"). All of the officers and
directors of the Company, other than the Independent Directors, are also
officers and/or directors of the Bank and/or affiliates of the Bank. The Bank
controls the election of all directors of the Company.
The Bank and its affiliates may have interests which are not identical to
those of the Company. Consequently, conflicts of interest may arise with
respect to transactions, including without limitation, the Company's
acquisition of the Mortgage Assets from the Bank and/or affiliates of the Bank;
servicing of Mortgage Assets; future dispositions of Mortgage Assets to the
Bank or affiliates of the Bank; and the modification of the Master Service
Agreement. It is the intention of the Company and the Bank that any agreements
and transactions between the Company, on the one hand, and the Bank and/or its
affiliates, on the other hand, are fair to all parties and consistent with
market terms, including the prices paid and received for Mortgage Assets, on
their acquisition or disposition by the Company or in connection with the
servicing of 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. See
"Business."
Risk of Future Revisions in Policies and Strategies by Board of Directors
The Board of Directors has established the investment policies and
operating policies and strategies of the Company. These policies may be amended
or revised from time to time at the discretion of the Board of Directors
without a vote of the Company's stockholders. The ultimate effect of any change
in the policies and strategies of the Company on you may be negative. See
"Business."
No Third Party Valuation of the Mortgage Assets; No Arm's-Length Negotiations
with Affiliates
The Company has not obtained third party valuations in connection with its
loan acquisitions to date and does not anticipate obtaining third party
valuations in connection with future acquisitions and dispositions of Mortgage
Assets. The Company will not obtain third party valuations even in
circumstances where an affiliate of the Company is selling the Mortgage Assets
to, or purchasing the Mortgage Assets from, the Company. Accordingly, the
consideration to be paid (or received) by the Company to (or from) the Bank or
any of its affiliates in connection with future acquisitions or dispositions of
Mortgage Assets may differ from their fair market value.
11
<PAGE>
Interest Rate Risk
The Company's income will consist primarily of interest earned on its
Mortgage Assets. The Company anticipates that a majority of its Mortgage Assets
will bear interest at adjustable rates. If there is a decline in interest rates
(as measured by the indices upon which the interest rates of the Mortgage
Assets are based), then the Company will experience a decrease in income
available to be distributed to its stockholders. If this occurs, the Company
may also experience an increase in prepayments on certain of its Mortgage
Assets and may find it difficult to purchase additional Mortgage Assets bearing
rates sufficient to support payment of dividends on the Series A Preferred
Shares. Because the dividend rate on the Series A Preferred Shares is fixed, a
significant decline in interest rates could materially adversely affect the
Company's ability to pay dividends on the Series A Preferred Shares.
No Prior Market for Series A Preferred Shares
Prior to the offering, there has been no public market for the Series A
Preferred Shares and there can be no assurance that an active trading market
will develop or be sustained or that the Series A Preferred Shares may be
resold at or above the initial public offering price.
CORPORATE STRUCTURE AND BENEFITS TO THE BANK
Structure
The following chart depicts the corporate structure of the Company and the
Bank upon completion of the offering:
[A graphic depiction of the corporate structure of the Company upon
completion of the offering, showing (i) the Bank as the sole beneficial owner of
the common stock of the Company, (ii) the investors in the Series A Preferred
Shares as the sole holders of the preferred stock of the Company, (iii) the
possible exchange of Series A Preferred Shares for Bank Preferred Shares, and
(iv) the existence of the Master Service Agreement and the Advisory Agreement.]
12
<PAGE>
Benefits to the Bank
The Bank expects to realize the following benefits in connection with the
offering and the operation of the Company:
o The Bank has received confirmation from the FDIC that it will be able to
include a percentage of the proceeds from the sale of the Series A
Preferred Shares as Tier 1 capital of the Bank under relevant regulatory
capital guidelines. However, the FDIC may exercise its sole discretion to
exclude the Series A Preferred Shares from Tier 1 capital if such shares
cease to provide meaningful capital support and a realistic ability to
absorb losses of the Bank or raise other supervisory concerns. The
increase in the Bank's Tier 1 Leverage, Tier 1 Risk-based and Total
Risk-based capital levels that will result from the treatment of the
Series A Preferred Shares as Tier 1 capital will enable the Bank to
increase its earning asset base while maintaining its well-capitalized
ratios. As of September 30, 1998, only $11.3 million from the offering
would have qualified as Tier 1 capital of the Bank because relevant
guidance from the FDIC limits the amount that may qualify as Tier 1
capital of the Bank to 25% of the Bank's total Tier 1 capital. The Bank
expects that the remaining proceeds from the offering will qualify as
Tier 1 capital, in the future, provided that the Bank's Tier 1 Leverage
capita1 increases through an increase in the amount of the common
stockholders' equity of the Bank. For a discussion of the capital
requirements applicable to the Bank, see "Certain Information Regarding
the Bank--Regulatory Capital Requirements."
o The dividends payable on the Company's capital stock, including the
Series A Preferred Shares, will be deductible for income tax purposes as
a result of the Company's qualification as a REIT.
o The treatment of the Series A Preferred Shares as core capital of the
Bank and the Company's ability to deduct, for income tax purposes, the
dividends payable on the Series A Preferred Shares as a result of the
Company's qualification as a REIT will provide the Bank with a more
cost-effective means of obtaining regulatory capital than if the Bank
were to issue preferred stock itself. Further, if the Bank issued a class
of preferred stock with dividend rights, the dividends payable on such
Bank preferred stock would not be deductible by the Bank for income tax
purposes.
o The Bank is entitled to receive annual servicing fees (intended primarily
to cover the Bank's expenses) and annual dividends in respect of the
Common Stock. For the first 12 months following completion of the
offering, these annual fees and dividends are anticipated to be as
follows:
<TABLE>
<S> <C>
Servicing Fee .................. $ 406,000(1)
------------
Common Stock Dividends ......... (2)
------------
$
------------
</TABLE>
- ----------------
(1) Assumes that for the first 12 months following completion of the
offering, the Company holds mortgage loans with the same outstanding
principal balances as those mortgage loans included in the Loan
Portfolio at September 30, 1998. See "Business--Servicing" for a
description of the basis upon which the servicing fees will be
calculated.
(2) The amount of dividends to be paid in respect of the Common Stock is
expected to be equal to the excess of the Company's "REIT taxable
income" (excluding capital gains) over the amount of dividends paid in
respect of preferred stock. The aggregate annual dividend amount of the
Series A Preferred Shares is approximately $ million. Assuming that (1)
the Mortgage Assets included in the Loan Portfolio at September 30,
1998 are held for the 12-month period following consummation of the
offering, (2) principal repayments are reinvested in additional
Mortgage Assets with characteristics similar to those of the Mortgage
Assets included in the Loan Portfolio at September 30, 1998, (3)
interest rates remain constant during such 12-month period, and (4)
there are no significant differences between "book" and taxable income.
The Company anticipates that the current Loan Portfolio will generate
"REIT taxable income" (excluding capital gains) of approximately $17.4
million, after payment of servicing fees, during such 12-month period.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Series
A Preferred Shares offered hereby, after deducting the Underwriting discount
and estimated expenses payable by the Company, are anticipated to be $28.2
million ($32.5 million if the underwriters' overallotment option is exercised
in full). The Company intends to use $1.1 million of such proceeds to retire
its existing preferred stock and the remainder for general corporate purposes,
including to acquire additional Mortgage Assets or other REIT-qualified assets.
Pending such use, the proceeds will be invested in U.S. government and/or
government agency securities.
DIVIDEND POLICY
The Company currently expects to pay an aggregate amount of dividends with
respect to its outstanding shares of capital stock equal to not less than 100%
of the Company's REIT taxable income (excluding capital gains). In order to
remain qualified as a REIT, the Company must distribute annually at least 95%
of its taxable income (excluding capital gains) to stockholders. The Company
anticipates that none of the dividends on the Series A Preferred Shares and
none or no material portion of the dividends on the Common Stock will
constitute non-taxable returns of capital.
Dividends will be declared at the discretion of the Board of Directors
after considering the Company's distributable funds, financial requirements,
tax considerations and other factors. The Company's distributable funds will
consist primarily of interest and principal payments on the Mortgage Assets
held by it, and the Company anticipates that most of such assets will bear
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 the Company to be able to pay dividends on the
Series A Preferred Shares. The Company currently expects that both its cash
available for distribution and its REIT taxable income will exceed the amount
needed to pay dividends on the Series A Preferred Shares, even in the event of
a significant decline in interest rate levels, because (1) the Loan Portfolio
is interest bearing, with a weighted average note rate equal to 9.12% at
September 30, 1998, (2) the Series A Preferred Shares represent approximately
17% of the Company's stockholders' equity, and (3) the Company does not
anticipate incurring any indebtedness.
The FDIC's prompt corrective action regulations prohibit entities such as
the Bank from making "capital distributions" (defined to include a transaction
that the FDIC determines, by order or regulation, to be "in substance a
distribution of capital") unless the institution is at least "adequately
capitalized" after the distribution. There can be no assurances that the FDIC
would not seek to restrict the Company's payment of dividends on the Series A
Preferred Shares under these regulations if the Bank were to fail to maintain a
status of at least "adequately capitalized." Currently, an institution is
considered "adequately capitalized" if it has a Total Risk-based capital ratio
of at least 8.0%, a Tier 1 Risk-based capital ratio of at least 4.0% and a Tier
1 Leverage ratio of at least 4.0%. At September 30, 1998, the Bank's Total
Risk-based capital ratio was 10.44%, Tier 1 Risk-based capital ratio was 9.53%
and Tier 1 Leverage ratio was 8.09%. Such ratios, adjusted to give effect to
the sale of the Series A Preferred Shares in the offering, and assuming all of
the net proceeds are invested in assets bearing a 100% risk weighting, would be
12.61%, 11.78% and 10.11%, respectively. In addition, the Automatic Exchange
may take place under circumstances in which the Bank will be considered less
than "adequately capitalized" for purposes of the FDIC's prompt corrective
action regulations. Thus, at the time of the Automatic Exchange, the Bank would
likely be prohibited from paying dividends on the Bank Preferred Shares.
Further, the Bank's ability to pay dividends on the Bank Preferred Shares
following the Automatic Exchange also would be subject to various restrictions
under FDIC regulations and a resolution of the Bank's Board of Directors. See
"Certain Information Regarding the Bank." In the event that the Bank did pay
dividends on the Bank Preferred Shares, such dividends would be paid out of the
Bank's capital surplus.
Under certain circumstances, including a determination that the Bank's
relationship to the Company results in an unsafe and unsound banking practice,
federal and state regulatory authorities will have additional authority to
restrict the ability of the Company to make dividend payments to its
stockholders.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998 (1) on an actual basis, and (2) as adjusted to give effect
to the sale of the 1,200,000 Series A Preferred Shares offered hereby and the
application of the estimated net proceeds therefrom as described in "Use of
Proceeds." This table should be read in conjunction with the Financial
Statements of the Company and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
As of September 30, 1998
------------------------------
Actual As Adjusted
---------- -----------------
(dollars in thousands)
<S> <C> <C>
Series A preferred stock, $.01 par value, no shares authorized, no
shares issued and outstanding, actual; and 1,380,000 shares
authorized, 1,200,000 shares issued and outstanding, as adjusted ........ $ -- $ 12
Series B 8% cumulative non-convertible preferred stock, $.01 par
value, 1,000 shares authorized, 1,000 shares issued and
outstanding, actual; no shares authorized, issued and outstanding,
as adjusted (1) ......................................................... -- --
Common stock, $.01 par value, 100 shares authorized, issued and
outstanding, actual and as adjusted ..................................... -- --
Additional paid-in capital (2) ........................................... 140,740 167,828
Retained earnings ........................................................ 8,063 8,063
-------- ----------
Total stockholders' equity ............................................ $148,803 $ 175,903(3)
======== ============
</TABLE>
- ----------------
(1) The Company has currently outstanding 1,000 shares of Series B 8%
cumulative non-convertible preferred stock, all of which shares are held,
directly or indirectly, by the Bank. In connection with this offering,
this preferred stock will be redeemed for approximately $1.1 million,
representing the aggregate liquidation preference thereof, and retired.
(2) The additional paid-in capital is represented by the value of loans
contributed by the Company's common stockholder. The as adjusted amount
reflects receipt and application of the net proceeds from the offering after
the reduction for underwriters' discounts and commissions and estimated
expenses in connection with this offering.
(3) If the underwriters' over-allotment option is exercised in full, (a) an
aggregate of 1,380,000 Series A Preferred Shares will be issued in the
offering, resulting in net proceeds of approximately $32,520,000 after
deducting the underwriters' discounts and commissions of $1,380,000 and
estimated expenses of $600,000, and (b) the total stockholders' equity
would amount to $180,223,000.
15
<PAGE>
BUSINESS
General
The Company's principal business objective is to acquire and hold Mortgage
Assets that will generate net income for distribution to stockholders. All of
the Mortgage Assets in the Company's Loan Portfolio were acquired from the Bank
and it is anticipated that substantially all additional Mortgage Assets will be
acquired from the Bank. As of September 30, 1998, the Company held loans
acquired from the Bank with gross outstanding principal balances of $162.5
million. The Loan Portfolio consisted primarily of Mortgage Assets secured by
commercial or multi-family properties. Approximately 77.1% of the Loan
Portfolio consisted of loans acquired by the Bank at a discount from their
outstanding principal balances. The Bank originally purchased such loans
consistent with its fundamental strategy of identifying and acquiring loans
which management of the Bank believes are undervalued as a result of adverse
market or economic circumstances. The remaining balance of the Loan Portfolio
consists of loans originated by the Bank.
Dividend Policy
The Company currently intends to pay an aggregate amount of dividends with
respect to its outstanding shares of capital stock equal to approximately 100%
of the Company's REIT taxable income. As of September 30, 1998, the weighted
average note rate of the loans included in the Loan Portfolio was approximately
9.12% per annum. The weighted average interest rate of the Loan Portfolio would
have to be less than approximately % for the Company to have less than
$ million of net interest income, without giving effect to the accretion
of any discount, after payment of servicing fees. The $ million would be
sufficient to pay an annual dividend on the Series A Preferred Shares at the
rate of %. Such calculation assumes that (1) the Mortgage Assets included in
the Loan Portfolio are held for the 12-month period following consummation of
this offering, (2) principal repayments are reinvested in additional Mortgage
Assets with characteristics and rates identical to those of the Mortgage Assets
included in the Loan Portfolio, and (3) interest rates remain constant during
such 12-month period. At current interest rates and based on the assumptions in
the preceding sentence, the Company anticipates that the Loan Portfolio will
generate interest income, without giving effect to the accretion of any
discount, of approximately $14.4 million, after payment of servicing fees,
during such 12-month period. Because the aggregate annual dividend payment on
the Series A Preferred Shares is anticipated to be approximately $ million,
the Company anticipates, based on the foregoing, that approximately $
million would be available for payment of dividends to holders of the
outstanding shares of Common Stock during such 12-month period. Accordingly,
the Company expects that it will, after paying quarterly dividends on the
Series A Preferred Shares, pay dividends to holders of its Common Stock. This
policy regarding the limitations on payment of dividends in respect of Common
Stock may not be modified without the approval of a majority of the Board of
Directors.
Acquisition of Loan Portfolio
On March 31, 1998, the Bank contributed to the Company loans with gross
outstanding principal balances of $158.3 million. On the same date, the Company
entered into a Mortgage Loan Purchase Agreement with the Bank (the "Master
Purchase Agreement") which provides the general terms for the acquisition by
the Company of Mortgage Assets from the Bank. Under the Master Purchase
Agreement, on September 30, 1998 the Company acquired additional mortgage loans
with gross outstanding principal balances of $23.7 million.
Pursuant to the terms of the Master Purchase Agreement, the Bank delivers
or causes to be delivered to the Company the mortgage note with respect to each
Mortgage Asset (together with all amendments and modifications thereto)
endorsed in blank, the original or certified copy of the mortgage (together
with all amendments and modifications thereto) with evidence of recording
indicated thereon, if available, and an original or certified copy of an
assignment of the mortgage in recordable form. Such documents are initially
held by the Bank, acting as custodian for the Company pursuant to the terms of
the Master Service Agreement. See "--Servicing " and "--Description of Loan
Portfolio at September 30, 1998--General."
Under the Master Purchase Agreement, the Bank makes certain
representations and warranties with respect to the Mortgage Assets for the
benefit of the Company regarding information provided with respect to Mortgage
Assets, liens, validity of the mortgage documents, and compliance with laws.
The Bank is obligated to repurchase any Mortgage Asset sold by it to the
Company as to which there is a material breach of any such representation or
warranty, unless the Company permits the Bank to substitute a qualified
Mortgage Asset for such Mortgage Asset.
16
<PAGE>
The Bank also indemnifies the Company for damages or costs resulting from any
such breach. The repurchase price for any such Mortgage Asset is such asset's
outstanding principal amount plus accrued and unpaid interest on the date of
repurchase.
Management Policies and Programs
In administering the Company's Mortgage Assets, the Bank has a high degree
of autonomy. The Company's Board of Directors, however, has adopted certain
policies to guide the acquisition and disposition of assets, use of capital and
leverage, credit risk management and certain other activities. These policies,
which are discussed below, may be amended or revised from time to time at the
discretion of the Company's Board of Directors without a vote of the Company's
stockholders, including holders of the Series A Preferred Shares. See also
"--Dividend Policy."
Asset Acquisition and Disposition Policies. Subsequent to the completion
of the offering, the Company anticipates that it will from time to time
purchase additional Mortgage Assets. The Company intends to acquire all or
substantially all of such Mortgage Assets from the 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, out of proceeds from this
offering, proceeds received in connection with the repayment or disposition of
Mortgage Assets or the contribution of additional capital by the Bank. The
Company may also from time to time, however, acquire Mortgage Assets from
unrelated third parties. The Company has not to date adopted any arrangements
or procedures by which it would purchase Mortgage Assets from unrelated third
parties, and the Company 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 the Bank nor any affiliate of the Bank 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 purchases will primarily
include commercial mortgage loans, although if the Bank develops an expertise
in additional Mortgage Asset products, the Company may purchase such additional
types of Mortgage Assets. In addition, the Company may also from time to time
acquire limited amounts of other assets eligible to be held by REITs.
In order to preserve its status as a REIT under the Code, substantially
all of the assets of the Company must consist of mortgage loans and other
qualified real estate assets of the type set forth in Section 856(c)(6)(B) of
the Code. Such other qualifying assets include cash, cash equivalents and
securities, including shares or interests in other REITs. See "Federal Income
Tax Considerations--Taxation of the Company."
The Company and the Bank currently intend to maintain a policy whereby
upon foreclosure of any mortgage loan acquired by the Company from the Bank,
the foreclosed property will be sold back to the Bank at fair value less
estimated selling costs.
Capital and Leverage Policies. 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 Code requiring the distribution
by a REIT of a certain percentage of taxable income and taking into account
taxes that would be imposed on undistributed taxable income), or a combination
of these methods.
The Company will have no debt outstanding following consummation of the
offering, and the Company does not currently intend to incur any indebtedness.
The organizational documents of the Company limit the amount of indebtedness
which the Company is permitted to incur to no more than 100% of the total
stockholders' equity of the Company. Any such debt incurred may include
intercompany advances made by the Bank to the Company.
The Company may also issue additional series of preferred stock. However,
the Company may not issue additional shares of preferred stock ranking senior
to the Series A Preferred Shares without consent of holders of at least
two-thirds of the outstanding shares of the Series A Preferred Shares and may
not issue additional shares of preferred stock ranking on parity with the
Series A Preferred Shares without the approval of a majority of the Independent
Directors. The Company does not currently intend to issue any additional series
of Preferred Stock. Prior to any future issuance of additional shares of
Preferred Stock, the Company will take into consideration the Bank's regulatory
capital requirements and the cost of raising and maintaining that capital at
the time.
Conflicts of Interest Policies. Because of the nature of the Company's
relationship with the Bank and its affiliates, it is likely that conflicts of
interest will arise with respect to certain transactions, including without
17
<PAGE>
limitation, the Company's acquisition of Mortgage Assets from, or disposition
of Mortgage Assets or foreclosed property to, the Bank or its affiliates and
the modification of the Master Service Agreement. It is the Company's policy
that the terms of any financial dealings with the Bank and its affiliates will
be consistent with those available from third parties in the mortgage lending
industry.
Conflicts of interest between the Company and the Bank and its affiliates
may also arise in connection with making decisions that bear upon the credit
arrangements that the Bank or one of its affiliates may have with a borrower.
Conflicts could also arise in connection with actions taken by the Bank as,
indirectly, a controlling person of the Company. It is the intention of the
Company and the Bank that any agreements and transactions between the Company,
on the one hand, and the Bank or its affiliates, on the other hand, including,
without limitation, the Master Purchase Agreement, are fair to all parties and
are consistent with market terms for such types of transactions. The Master
Service Agreement provides that foreclosures and dispositions of the Mortgage
Assets are to be performed with a view toward maximizing the recovery by the
Company as owner of the Mortgage Assets, and the Bank shall service the
Mortgage Assets solely with a view toward the interests of the Company, and
without regard to the interests of the Bank or any of its affiliates. 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 Company's Restated Articles of Organization
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 the Bank and its affiliates
will 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.
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 (1) invest in the securities of other issuers
for the purpose of exercising control over such issuers, (2) underwrite
securities of other issuers, (3) actively trade in loans or other investments,
(4) offer securities in exchange for property, or (5) make loans to third
parties, including without limitation officers, directors or other affiliates
of the Company. The Company may, under certain circumstances, purchase the
Series A Preferred Shares in the open market or otherwise. The Company has no
present intention of causing the Company to repurchase any shares of its
capital stock, and any such action would be taken only in conformity with
applicable federal and state laws and the requirements for qualifying as a
REIT.
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
Code to qualify as a REIT. However, future economic, market, legal, tax or
other considerations may cause the Board of Directors to determine that it is
in the best interests of the Company and its stockholders to revoke its REIT
status.
The Company intends to monitor and review its compliance with the
requirements of the Code regarding the Company's qualification as a REIT on a
quarterly basis and to have an independent public accounting firm selected by
the Board of Directors review the results of the Company's analysis.
Description of Loan Portfolio at September 30, 1998
Information with respect to the Company's Loan Portfolio is presented as
of September 30, 1998. The Company's Loan Portfolio may or may not have the
characteristics described below at future dates, although the Company intends
to maintain at least 95% of its portfolio in a combination of commercial
mortgage loans and other Mortgage Assets with the remainder of its portfolio in
other assets eligible to be held by REITs.
General. To date, all of the Company's loans have been acquired from the
Bank. At September 30, 1998, the Company's Loan Portfolio comprised of 437
loans with gross outstanding principal balances totaling approximately $162.5
million. Of these loans, 352 were originally acquired by the Bank through
purchases and 85 were originated by the Bank in the normal course of business.
At September 30, 1998, the Company's investment in purchased loans net of
related discount of $18.4 million totaled $107.0 million. The Company's
portfolio of loans originated by the Bank net of allowance for loans losses and
net deferred loan income totaled $35.8 million at September 30, 1998.
18
<PAGE>
The following table sets forth information regarding the composition of
the Loan Portfolio:
<TABLE>
<CAPTION>
September 30, 1998
(in thousands)
-------------------
<S> <C>
Purchased loan portfolio:
Mortgage loans on real estate:
Commercial ...................................... $ 75,718
One to four family .............................. 6,828
Multifamily ..................................... 40,241
Land ............................................ 2,058
---------
Total .......................................... 124,845
Secured commercial ................................ 255
Other ............................................. 251
---------
Total purchased loan portfolio ................. 125,351
Less discount:
Non-amortizing portion (1) ...................... (11,084)
Amortizing portion .............................. (7,279)
---------
Total purchased loan portfolio, net ............ 106,988
---------
Originated loan portfolio (2):
Mortgage loans on real estate:
Commercial ...................................... 30,306
One to four family .............................. 3,650
Multifamily ..................................... 2,441
Land ............................................ 799
---------
Total ........................................ 37,196
Less:
Net deferred loan income ....................... (100)
Allowance for loan losses ...................... (1,337)
Total originated loan portfolio, net ......... 35,759
---------
Loans, net .................................. $ 142,747
=========
</TABLE>
(1) Non-amortizing discount is an allocation of the total discount on
purchased loans accounted for on the cost recovery method until it is
determined that the amount and timing of collections are reasonably
estimable and collection is probable.
(2) Includes loans purchased by the Bank that have been renewed on terms
consistent with the Bank's loan policy and loan documentation standards.
19
<PAGE>
The following table sets forth certain information regarding the
geographic location of properties securing the mortgage loans in the Loan
Portfolio at September 30, 1998:
<TABLE>
<CAPTION>
Percentage of Total
Location Number of Loans Principal Balance Principal Balance
- ----------------------- ----------------- ------------------- --------------------
(in thousands)
<S> <C> <C> <C>
Massachusetts ......... 166 $ 50,466 31.14%
California ............ 33 31,585 19.49
Connecticut ........... 60 18,698 11.54
New Hampshire ......... 95 17,536 10.82
New York .............. 14 8,981 5.54
Rhode Island .......... 17 6,799 4.20
Maine ................. 5 4,506 2.78
Virginia .............. 3 3,253 2.01
Florida ............... 6 3,539 2.18
New Jersey ............ 5 3,442 2.12
Arizona ............... 1 3,401 2.10
All others ............ 23 9,835 6.08
--- -------- ------
428 $162,041 100.00%
=== ======== ======
</TABLE>
The following tables set forth information regarding maturity, interest
rate and outstanding principal of the loans in the Loan Portfolio at September
30, 1998:
<TABLE>
<CAPTION>
Percentage of Total
Period until maturity Number of Loans Principal Balance Principal Balance
- ------------------------------------------------ ----------------- ------------------- --------------------
(in thousands)
<S> <C> <C> <C>
Six months or less ............................. 83 $ 33,961 20.89%
Greater than six months to one year ............ 20 5,747 3.54
Greater than one year to three years ........... 79 26,970 16.59
Greater than three years to five years ......... 56 24,714 15.21
Greater than five years to ten years ........... 81 29,866 18.37
Greater than ten years ......................... 118 41,289 25.40
--- -------- ------
437 $162,547 100.00%
=== ======== ======
</TABLE>
<TABLE>
<CAPTION>
Percentage of Total
Interest Rate at September 30, 1998 Number of Loans Principal Balance Principal Balance
- ------------------------------------- ----------------- ------------------- --------------------
(in thousands)
<S> <C> <C> <C>
Less than 7.00% ..................... 17 $ 2,723 1.67%
7.00 to 7.49 ........................ 14 14,330 8.82
7.50 to 7.99 ........................ 20 22,088 13.59
8.00 to 8.49 ........................ 43 15,549 9.56
8.50 to 8.99 ........................ 43 9,734 5.99
9.00 to 9.49 ........................ 56 20,915 12.87
9.50 to 9.99 ........................ 47 17,572 10.81
10.00 to 10.49 ...................... 55 23,760 14.62
10.50 to 10.99 ...................... 92 25,254 15.54
11.00 to 11.49 ...................... 22 4,812 2.96
11.50 to 11.99 ...................... 10 3,240 1.99
12.00 to 12.49 ...................... 14 1,796 1.10
12.50% and above .................... 4 774 0.48
-- -------- ------
437 $162,547 100.00%
=== ======== ======
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Percentage of Total
Outstanding Principal Number of Loans Principal Balance Principal Balance
- ---------------------------------------------- ----------------- ------------------- --------------------
(in thousands)
<S> <C> <C> <C>
Less than $50,000............................. 83 $ 1,734 1.07%
Greater than $50,000 to $100,000.............. 71 5,443 3.35
Greater than $100,000 to $250,000............. 115 18,757 11.54
Greater than $250,000 to $500,000............. 75 27,015 16.62
Greater than $500,000 to $1,000,000........... 56 40,246 24.76
Greater than $1,000,000 to $2,000,000......... 22 29,613 18.22
Greater than $2,000,000 to $3,000,000......... 13 31,863 19.60
Greater than $3,000,000 to $4,000,000......... 1 3,401 2.09
Greater than $4,000,000 to $5,000,000......... 1 4,475 2.75
--- -------- ------
437 $162,547 100.00%
=== ======== ======
</TABLE>
Purchased Loan Portfolio. A substantial portion of the Loan Portfolio
consists of loans which were purchased by the Bank from third parties and which
management of the Bank considers to be undervalued due to market or economic
conditions or as a result of special circumstances which might have required a
seller to dispose of such assets. These loans are generally secured by
commercial real estate, multi-family residential real estate, one to four
family residential real estate or land located throughout the United States.
These loans were generally purchased at discounts from their then outstanding
principal balances and have been purchased from private sector sellers in the
financial services industry or from government agencies.
In order to determine the amount that the Bank will bid to acquire loans,
the Bank considers, among other factors, the yield expected to be earned, the
geographic location of the loans, servicing restrictions, if any, the type and
value of the collateral securing the loans, the length of time during which the
loans have performed in accordance with their repayment terms, the recourse
nature of the debt, the age and performance of the loans and the resources of
the borrowers or guarantors, if any. In addition to the factors listed above,
the Bank will also consider the amount it may realize through collection
efforts or foreclosure and sale of the collateral property, 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.
Prior to acquiring any portfolio of loans, the Bank conducts an
acquisition review. This review includes an evaluation of the seller's loan
documentation. The current value of the collateral is estimated utilizing
various methods considering, among other factors, the type of property, its
condition and location and its highest and best use. In some instances, real
estate brokers and/or appraisers with specific knowledge of the area may be
consulted. As the size and complexity of the collateral increases, the Bank's
efforts to value the collateral also increases. For larger, more complex loans,
Bank personnel may visit the collateral property or conduct an internal rental
analysis of similar properties. New title searches and tax reports may also be
obtained. The Bank may also retain environmental consultants to review
potential environmental issues. The amount of resources devoted to valuing
collateral is determined on a case-by-case basis for each loan reviewed.
Upon purchase of a loan pool, each loan in the pool is assigned to a loan
officer. In managing a purchased loan, the loan officers seek, among other
things, to establish good working relationships with the borrowers. In the
event that a purchased loan becomes delinquent, or if it is delinquent at the
time of purchase, the Bank aggressively pursues repayment. In the event that a
delinquent loan becomes non-performing, the Bank may pursue a number of
alternatives including restructuring the loans to levels that are supported by
existing collateral and debt service capabilities. During the restructuring
period, the Company does not recognize interest income on such loans unless
regular payments are being made. In instances where the loan is not
restructured, the Bank aggressively pursues repayment, foreclosure or, in
certain instances, a deed-in-lieu-of-foreclosure.
21
<PAGE>
The following table sets forth certain information relating to the payment
status of the Company's purchased loan portfolio at September 30, 1998:
<TABLE>
<CAPTION>
Performing loans: (in thousands)
- ----------------------------------------------------------- ---------------
<S> <C>
Current ................................................ $120,284
Over thirty days to eighty-nine days past due .......... 3,550
Ninety days or more past due ........................... 1
--------
123,835
--------
Non-performing loans: .................................. 1,516
--------
Total purchased loan portfolio ......................... $125,351
========
</TABLE>
The Company determines the contractual delinquency of purchased loans
prospectively from the Bank's purchase date rather than from the origination
date. Interest income on purchased nonperforming loans is generally recognized
upon receipt of payments based either on the original loan contracts or as
restructured by the Company.
Accounting for Purchased Loan Portfolio. Historically, all loans in a
purchased pool of loans have been accounted for on an aggregate basis. The
amortizing portion of discounts on purchased loan pools representing market
yield adjustments is accreted into interest income over the estimated lives of
the loans using a method which approximates the level interest method. The
remaining non-amortizing portion of discounts on loans purchased is accounted
for on the cost recovery method until it is determined that the amount and
timing of collections are reasonably estimable and collection is probable. At
such time, if the amount that is probable of collection is greater than the net
carrying value of the purchased loans, the difference is transferred from the
non-amortizing portion of the discount to the amortizing portion and is
accreted into interest income over the remaining lives of the loans on a method
approximating the level interest method. Under the Bank's loan rating system,
each loan is evaluated, and where necessary, specific allowances are
established and allocated from the respective loan pool's non-amortizing
discount, and, if none is available, from the respective loan pool's amortizing
discount, and further, if none is available, an allowance is established
through a provision for loan losses. At September 30, 1998 no such allowance
was required on the Company's purchased loan portfolio.
Effective January 1, 1999, based on a recent Proposed Statement of
Position, Accounting for Discounts Related to Credit Quality draft of July 21,
1998 prepared by a task force of the American Institute of Certified Public
Accountants, and the need to facilitate the transfer of qualified individual
loans to the Company, the Bank and the Company will change on a prospective
basis their method of accounting for purchased loan discounts and the related
recognition of discount loan income and provisions for loan losses. Such
accounting change will account for discount loan income and loan loss
provisions on an individual loan basis, rather than as currently recognized in
the aggregate on a purchased pool basis and will be accounted for as a "change
in estimate" in accordance with Accounting Principles Board Opinion No. 20.
Management does not anticipate any material impact on stockholders' equity on
the effective date of the accounting change. However, subsequent earnings will
be affected by changes in individual loans rather than by changes in the
aggregate for purchased loan pools. Over the lives of the respective loans,
management does not anticipate that there will be any material differences in
the reported amounts of related discount loan income and loan loss provisions,
net.
The following table sets forth certain information relating to the
interest income on the Company's purchased loans during the period from
inception through September 30, 1998:
<TABLE>
<CAPTION>
Period from
inception through
September 30, 1998
-----------------------
(dollars in thousands)
<S> <C>
Interest income:
Realized ................... $ 4,784
Accreted discount .......... 1,188
--------
Total ..................... $ 5,972
========
Average balance, net ......... $ 89,822
========
Yield ........................ 13.26%
</TABLE>
22
<PAGE>
Originated Loan Portfolio. At September 30, 1998, the Company's originated
loan portfolio contained gross outstanding loans of $37.2 million, which were
originated by the Bank. These loans consist of loans which were originated in
the normal course of business as well as loans purchased by the Bank which were
renewed on terms consistent with the Bank's loan policy and documentation
standards.
The majority of the loans in the Company's originated loan portfolio are
located in New England and New York. At September 30, 1998, originated loans in
New England and New York totaled 89.4% and 8.8%, respectively. Approximately
74.7% of the New England loans are located in Massachusetts.
The terms of commercial real estate loans originated or renewed by the
Bank are individually negotiated on a case-by-case basis. However, these loans
generally have a term of five years or less with adjustable rates of interest
based on the prime rate. Generally, mortgage loans on commercial real estate
are secured by a first lien on real property, all improvements thereon and all
furniture and equipment used in connection with the property as well as a first
assignment of all revenues or rents and grossed receipts generated in
connection with the property. The Bank's commercial real estate loans generally
provide recourse against the collateral property, and, in most circumstances,
require the borrower and/or its principals to be personally liable for all or a
portion of the loan.
Commercial real estate loans are generally written in amounts of up to 75%
of the appraised value of the underlying property. Appraisals on properties
securing commercial real estate loans originated by the Bank are generally
performed by an independent fee appraiser designated by the Bank before the
loan is made. Appraisals on commercial real estate are reviewed by a loan
officer and management. In addition, the Bank's underwriting procedures require
verification of the borrower's credit history, financial statements, references
and income projections for the property.
As servicing agent for the Company's Loan Portfolio, the Bank will
continue to monitor the Company's loans through its review procedures and
updated appraisals. Additionally, in order to monitor the adequacy of cash
flows on income-producing properties, the Bank generally obtains financial
statements and other information from the borrower and the guarantor,
including, but not limited to, information relating to rental rates and income,
maintenance costs and an update of real estate property tax payments.
Allowance for Loan Losses for Originated Loans. The allowance for loan
losses is established through a provision for losses charged to earnings and
reduced by the loan charge-offs. Loans are charged-off when they are deemed to
be uncollectible, or partially charged-off when a portion of a loan is deemed
uncollectible. Recoveries are generally recorded only when cash payments are
received.
In determining the adequacy of the allowance, management initially
considers the loan loss allowances specifically allocated to individual
impaired loans, and next considers the level of general loan loss allowances
deemed appropriate for the balance of the portfolio based on factors including
general portfolio trends relative to asset and portfolio size, asset
categories, potential credit concentrations, non-accrual loan levels, risks
associated with changes in economic and business conditions and other factors.
The Company's allowance for loan losses at September 30, 1998 was $1.3
million. The determination of this allowance requires the use of estimates and
assumptions regarding the risks inherent in individual loans and the loan
portfolio in its entirety. In addition, regulatory agencies periodically review
the adequacy of the allowance and may require the Company to make additions to
its allowance for loan losses. While management believes these estimates and
assumptions are reasonable, there can be no assurance that they will be proven
to be correct in the future. The actual amount of future provisions that may be
required cannot be determined as of the date hereof, and such provisions may
exceed the amounts of past provisions. Management believes that the Company's
allowance for loan losses is adequate to absorb the known and inherent risks in
the Company's originated loans at each date based on the facts known to
management as of such date.
The Company establishes a specific allowance against a given loan when
management perceives a problem with such loan that may result in a loss. The
Company continues to monitor and modify its allowances for general and specific
loan losses as economic conditions dictate. Although the Company maintains its
allowance for loan losses at a level which management considers to be adequate
to provide for potential losses, there can be no assurance that such losses
will not exceed the estimated amounts.
23
<PAGE>
There were no non-performing originated loans at September 30, 1998.
The following table sets forth management's allocation of the allowance
for loan losses by loan category and the percentage of loans in each category
to total loans with respect to the Company's originated loan portfolio at
September 30, 1998:
<TABLE>
<CAPTION>
At September 30, 1998
----------------------------
Allowance for % of
Loan Losses Loans
--------------- ----------
(dollars in thousands)
<S> <C> <C>
Loan Categories:
Commercial ........................ $1,124 3.71%
1 to 4 family residential ......... 120 3.29
Multi-family residential .......... 70 2.87
Land .............................. 23 2.88
------ ----
Total ........................... $1,337 3.59%
====== ====
</TABLE>
Credit Risk Management Policy
In managing the Company's loan portfolio in accordance with the Master
Service Agreement and in purchasing and originating loans which may ultimately
be acquired by the Company, the Bank utilizes certain credit risk management
procedures. These procedures are designed to achieve an acceptable level of
quality and to identify the need for management to take action to address any
potential losses or potential defaults in existing loans. Each application for
a loan is subject to a two-tier review by the Bank's Management Loan Committee
and either the Bank's Chairman or President, or in the case of loans of $2.5
million or more, the Loan and Investment Committee of the Bank's Board of
Directors. Each lending officer has primary responsibility to conduct credit
and documentation reviews of the loans for which he or she is responsible. The
Bank's President and Chairman are responsible for the general supervision of
the loan portfolio and adherence by the loan officers to the Bank's loan
policies.
Loan officers evaluate the applicant's financial statements, credit
reports, business reports and plans and other data to determine if the credit
and collateral satisfy the Bank's standards as to historic debt service
coverage, reasonableness of projections, strength of management and sufficiency
of secondary repayment.
Under the Bank's credit risk management policies management presents to
the Board of Directors a monthly report of loan delinquencies showing all loans
which are more than 30 days past due. In addition, loans are reviewed monthly
by management to determine which credits should be placed on non-performing
status. Management and the Board of Directors also review all loan evaluations
made during periodic examinations by the FDIC and the Commissioner of Banks of
the Commonwealth of Massachusetts (the "Commissioner").
Non-Performing Assets
The performance of the Company's loan portfolio is evaluated regularly by
management. The Company generally classifies a loan as non-performing when any
installment of principal or interest is 90 days or more past due based upon the
date of purchase for purchased loans, unless, in management's opinion, the net
carrying value of the loan is well secured and the collection of principal, or
carrying value, and interest is probable. When management determines the
ultimate collection of principal or interest on a loan is not probable, the
loan is transferred to the "impaired" loan classification. When a loan is
placed on non-performing status, the Company's general policy is to reverse and
charge against current income previously accrued but unpaid interest. Such
loans remain on non-performing status until the earlier of legal foreclosure or
relinquishment of control of the collateral by the borrower, or until the
borrower has established a history of timely principal and interest payments.
For additional information see Notes 1 and 2 to the Financial Statements. At
September 30, 1998, the Company had no non-performing assets in its originated
portfolio.
A troubled debt restructuring is a loan on which the Company, for reasons
related to the borrower's financial difficulties, grants a concession to the
borrower, such as a reduction in the loan's rate, a reduction in the principal
amount of the debt or an extension of the maturity date of the loan, that the
Company would not otherwise consider. Certain purchased loans are restructured
by the Company in order to establish a payment plan which the borrower
24
<PAGE>
can maintain and which is profitable to the Company in light of its net
investment in such loan. When such a purchased loan has been acquired at a
discount sufficient to enable the Company to make an appropriate profit on the
loan even after restructuring the debt and making certain concessions to the
borrower, the Company does not deem such a restructuring to be a "troubled debt
restructuring."
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. Impairment is measured on a loan-by-loan basis by
comparing the Company's recorded investment in the loan to the present value of
expected future cash flows discounted at the loan's effective interest rate,
the loan's obtainable market price, or the fair value of the collateral if the
loan is collateral dependent. In the case of the Company's purchased loan
portfolio, the recorded investment represents the Company's purchase price net
of any related non-amortizing discounts. Substantially all of the Company's
loans which have been identified as impaired have been measured by the fair
value of the existing collateral. General valuation allowances are maintained
for all categories of originated loans. No additional funds are committed to be
advanced in connection with impaired loans.
When the Company classifies problem assets, it may establish specific
allowances for loan losses or specific non-amortizing discount allocations in
amounts deemed prudent by management. When the Company identifies problem
assets as a loss, it will charge off such amounts or set aside specific
allowances or non-amortizing discount equal to the total loss. All of the
Company's loans are reviewed monthly to determine which loans are to be placed
on non-accrual status. In addition, the Company's determination as to the
classification of its assets and the amount of its valuation allowances is
reviewed by the Commissioner and the FDIC during their examinations of the
Bank, which may result in the establishment of additional general or specific
loss allowances.
Servicing
The Mortgage Assets are serviced by the Bank pursuant to the terms of the
Master Service Agreement. The Bank in its role as servicer under the terms of
the Master Service Agreement receives a fee equal to 0.25% per annum on the
gross outstanding principal balances of loans serviced.
The Master Service Agreement requires the Bank to service the Loan
Portfolio in a manner substantially the same as for similar work performed by
the Bank for transactions on its own behalf. The Bank collects and remits
principal and interest payments, maintains perfected collateral positions,
submits and pursues insurance claims and initiates and supervises foreclosure
proceedings on the Loan Portfolio it services. The Bank also provides
accounting and reporting services required by the Company for such loans. The
Bank may also be directed by the Company, at any time during the servicing
process, to dispose of any loans which becomes classified, placed in a
nonaccrual status, renegotiated due to the financial deterioration of the
borrower or which has been, more than once during the preceding 12 months, more
than 30 days past due in the payment of principal or interest.
The Bank is required to pay all expenses related to the performance of its
duties under the Master Service Agreement. The Bank is required to make
advances of taxes and required insurance premiums that are not collected from
borrowers with respect to any mortgage loan serviced by it, unless it
determines that such advances are nonrecoverable from the mortgagor, insurance
proceeds or other sources with respect to such mortgage loan. If such advances
are made, the Bank generally is reimbursed prior to the Company being
reimbursed out of proceeds related to such mortgage loan. The Bank also is
entitled to reimbursement by the Company for expenses incurred by it in
connection with the liquidation of defaulted mortgage loans serviced by it and
in connection with the restoration of mortgaged property. If claims are not
made or paid under applicable insurance policies or if coverage thereunder has
ceased, the Company will suffer a loss to the extent that the proceeds from
liquidation of the mortgaged property, after reimbursement of the Bank's
expenses in the sale, are less than the outstanding principal balance of the
related mortgage loans. The Bank is responsible to the Company for any loss
suffered as a result of the Bank's failure to make and pursue timely claims or
as a result of actions taken or omissions made by the Bank which causes the
policies to be canceled by the insurer. The Bank is required to repurchase, at
the request of the Company, any mortgage loan it sold to the Company in the
event any such representation or warranty is untrue. The repurchase price for
any such mortgage loan is the outstanding net principal balance thereof plus
accrued and unpaid interest thereon at the date of repurchase. The Bank may
institute foreclosure proceedings, exercise any power of sale contained in any
mortgage or deed of trust, obtain a deed in lieu of foreclosure or otherwise
acquire
25
<PAGE>
title to a mortgaged property underlying a mortgage loan by operation of law or
otherwise in accordance with the terms of the Master Service Agreement.
The Master Service Agreement may be terminated at any time by written
agreement between the parties or at any time by either party upon 30 days prior
written notice to the other party. The Master Service Agreement will
automatically terminate if the Company ceases to be an affiliate of the Bank.
The Bank remits daily to the Company all principal and interest collected
on loans serviced by the Bank for the Company.
When any mortgaged property underlying a mortgage loan is conveyed by a
mortgagor, the Bank generally, upon notice thereof, will enforce any
"due-on-sale" clause contained in the mortgage loan, to the extent permitted
under applicable law and governmental regulations. The terms of a particular
mortgage loan or applicable law, however, may provide that the Bank is
prohibited from exercising the "due-on-sale" clause under certain circumstances
related to the security underlying the mortgage loan and the buyer's ability to
fulfill the obligations under the related mortgage note.
Employees
The Company has three officers. The officers of the Company are described
below under "Management--
Directors and Officers." The Company does not have any employees because it has
retained the Bank to perform all necessary functions pursuant to the Master
Service Agreement. Each officer of the Company currently is also an officer
and/or director of the Bank. The Company will maintain corporate records and
audited financial statements that are separate from those of the Bank. None of
the officers or directors of the Company will have 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 will
engage in acquiring and holding Mortgage Assets.
Competition
The Company does not anticipate that it will engage in the business of
originating mortgage loans. It does anticipate that it will acquire Mortgage
Assets in addition to those in the Loan Portfolio and that substantially all
these Mortgage Assets will be acquired from the Bank. 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 the Bank. The Bank, however, faces significant competition
in the purchase and origination of mortgage loans, which could have an adverse
effect on the ability of the Company to acquire mortgage loans. If the Bank
does not successfully compete in the origination and purchase of mortgage
loans, this could, therefore, have an adverse effect on the Company's business,
financial condition and results of operations. See "Certain Information
Regarding the Bank."
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 Company's expenses, including the
costs of carrying non-performing assets. The Company is not currently a party
to any material proceedings.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The principal business of the Company is to acquire and hold Mortgage
Assets that will generate net income for distribution to stockholders. The
Company currently intends to continue to acquire all of its Mortgage Assets
from the Bank. The Company may also from time to time utilize available funds
to acquire other assets that qualify as real estate assets under Section
856(c)(6)(B) of the Code pending investment in Mortgage Assets.
On March 31, 1998, the Company commenced its operations upon the sale to
the Bank of 100 shares of the Company's Common Stock and 1,000 shares of
preferred stock in connection with the capital contribution of loans with a net
carrying value of $140.7 million. All shares of Common Stock and preferred
stock are held by the Bank. All shares of existing preferred stock will be
retired upon completion of this offering.
The Bank administers the day-to-day activities of the Company in its role
as Advisor under the Advisory Agreement. The Bank and its affiliates may have
interests that are not identical to those of the Company. Consequently,
conflicts of interest may arise with respect to transactions, including,
without limitation, future acquisitions of Mortgage Assets from the Bank or its
affiliates; servicing of Mortgage Assets, particularly with respect to Mortgage
Assets that become classified or placed on nonaccrual status, and the
modification of the Servicing Agreement.
It is the intention of the Company that any agreements and transactions
between the Company and the 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.
Results of Operations
The Company reported total interest income of $8.3 million for the period
from inception on March 20, 1998 through September 30, 1998. Interest income
from loans was $8.3 million representing a total average yield of 12.40% for
the same period. After the inclusion of $23,000 in money market account
interest and the deduction of $190,000 in service fees and $40,000 in preferred
stock dividends, the Company reported net income available to the common
stockholder of $8.1 million for the period from inception through September 30,
1998.
The yield on the Company's loan portfolio is summarized as follows:
<TABLE>
<CAPTION>
Period from inception
through September 30, 1998
--------------------------------------------
Average Balance Interest Yield
----------------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C>
Purchased loans, net ......... $ 89,822 $5,972 13.26%
Originated loans ............. 43,158 2,298 10.62%
-------- ------ -----
$132,980 $8,270 12.40%
======== ====== =====
</TABLE>
The Company intends to pay dividends on its Series A Preferred Shares and
Common Stock in amounts necessary to continue to preserve its status as a REIT
under the Code.
27
<PAGE>
Loan Portfolio
Through September 30, 1998, the Company has acquired loans, either through
a contribution or purchase from the Bank, having gross outstanding principal
balances at the time of acquisition of $183.2 million. In addition, the Company
received $19.6 million of principal payments on the Loan Portfolio from the
Bank as Servicer during the same time period.
The outstanding principal balance of the Loan Portfolio at September 30,
1998 is summarized as follows:
<TABLE>
<CAPTION>
Principal Balance Percent to Total
------------------- -----------------
(in thousands)
<S> <C> <C>
Mortgage loans on real estate:
Commercial real estate ......... $106,024 65.23%
One to four family ............. 10,478 6.44
Multifamily .................... 42,682 26.26
Land ........................... 2,857 1.76
-------- ------
Total ........................ 162,041 99.69
Secured commercial .............. 255 0.16
Other ........................... 251 0.15
-------- ------
Total ........................ $162,547 100.00%
======== ======
</TABLE>
The Company intends that each loan acquired from the Bank in the future
will be a whole loan, and will be originated or acquired by the Bank in the
ordinary course of its business. The Company also intends that all loans held
by the Company will be serviced pursuant to the Master Service Agreement.
There were $1.5 million of nonaccruing mortgage loans at September 30,
1998.
Allowance for Loan Losses and Discount
The balance of the allowance for loan losses was transferred from the Bank
at the time the loans were contributed to the Company. In the normal course of
business, the allowance for loan losses will be adjusted through a provision
for loan losses charged to earnings and will be maintained at a level
considered adequate to provide for reasonably foreseeable loan losses.
The provision and the level of the allowance are evaluated on a regular
basis by management and are based upon management's periodic review of the
collectibility of the loans in light of known and inherent risks in the nature
and volume of the loan portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral and
prevailing economic conditions. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant change. Ultimately,
losses may vary from current estimates and future additions to the allowance
may be necessary.
Loan losses are charged against the allowance when management believes the
collectibility of the loan balance is unlikely. Subsequent recoveries, if any,
are credited to the allowance.
During the period from inception through September 30, 1998, there were no
provisions, charge-offs or recoveries in the allowance for loan losses.
At September 30, 1998, the Company's allowance for loan losses as a
percentage of total originated loans was 3.59%.
The Company maintains an allowance for loan losses in connection with its
purchased loan portfolio by allocating a portion of the purchased discount to a
non-amortizing discount category for each pool of purchased loans. The
Company's non-amortizing discount totaled $11.1 million at September 30, 1998.
If, in the future, such allocation is not adequate to absorb estimated losses
in a particular pool in the portfolio, and assuming the amortizing portion of
the purchased loan discount has been exhausted, a provision for loan losses
would be charged to earnings, establishing an allowance for loan losses on the
purchased loan portfolio. Non-amortizing discount was 731.13% of non-performing
purchased loans at September 30, 1998.
28
<PAGE>
Interest Rate Risk
The Company's income consists primarily of interest income on Mortgage
Assets. The Company does not intend to use any derivative products to manage
its interest rate risk. If there is a decline in market interest rates, the
Company may experience a reduction in interest income on its mortgage loans and
a corresponding decrease in funds available to be distributed to its
shareholders. The reduction in interest income may result from downward
adjustments of the indices upon which the interest rates on loans are based and
from prepayments of mortgage loans with fixed interest rates, resulting in
reinvestment of the proceeds in lower yielding mortgage loans. There can be no
assurance that an interest rate environment in which there is a significant
decline in interest rates over an extended period of time would not adversely
affect the Company's ability to pay dividends on the Series A Preferred Shares.
Based on the outstanding balance of the Company's loans at September 30,
1998 and the historical yield on such loans, anticipated annual interest income
on the Company's loan portfolio would be approximately % of the projected
annual dividend on the Series A Preferred Shares.
Significant Concentration of Credit Risk
Concentration of credit risk arises when a number of borrowers engage in
similar business activities, or activities in the same geographical region, or
have similar economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
conditions. Concentration of credit risk indicates the relative sensitivity of
the Company's performance to both positive and negative developments affecting
a particular industry. The Company's balance sheet exposure to geographic
concentrations directly affects the credit risk of the loans within the
Company's loan portfolio. The following table sets forth certain information
regarding the geographical location of properties securing the mortgage loans
in the Loan Portfolio at September 30, 1998:
<TABLE>
<CAPTION>
Percentage of Total
Location Number of Loans Principal Balance Principal Balance
- ----------------------- ----------------- ------------------- --------------------
(in thousands)
<S> <C> <C> <C>
Massachusetts ......... 166 $ 50,466 31.14%
California ............ 33 31,585 19.49
Connecticut ........... 60 18,698 11.54
New Hampshire ......... 95 17,536 10.82
New York .............. 14 8,981 5.54
Rhode Island .......... 17 6,799 4.20
Maine ................. 5 4,506 2.78
Virginia .............. 3 3,253 2.01
Florida ............... 6 3,539 2.18
New Jersey ............ 5 3,442 2.12
Arizona ............... 1 3,401 2.10
All others ............ 23 9,835 6.08
--- -------- ------
428 $162,041 100.00%
=== ======== ======
</TABLE>
At September 30, 1998, 80.5% of the Company's total loan portfolio
consisted of loans located in New England and California. Consequently, these
loans may be subject to a greater risk of default than other comparable loans
in the event of adverse economic, political or business developments and
natural hazards in New England or California that may affect the ability of
property owners to make payments of principal and interest on the underlying
mortgages.
Liquidity Risk Management
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Company's financial commitments and to
capitalize on opportunities for the Company's business expansion. In managing
liquidity, the Company takes into account various legal limitations placed on a
REIT.
The Company's principal liquidity needs are to maintain the current
portfolio size through the acquisition of additional Mortgage Assets as
Mortgage Assets currently in the Loan Portfolio mature, pay down or prepay, and
to pay dividends on the Series A Preferred Shares. The acquisition of
additional Mortgage Assets is intended to be funded primarily through repayment
of principal balances of Mortgage Assets by individual borrowers. The
29
<PAGE>
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 Code requiring the distribution by a REIT of
at least 95% of its "REIT taxable income" and taking into account taxes that
would be imposed on undistributed income), or a combination of these methods.
The organizational documents of the Company do not contain any limitation on
the amount or percentage of debt, funded or otherwise, the Company might incur.
The Company may also issue additional series of preferred stock. However,
the Company may not issue additional shares of preferred stock senior to the
Series A Preferred Shares without the consent of holders of at least two-thirds
of the Series A Preferred Shares outstanding at that time. Additional shares of
preferred stock ranking on a parity with the Series A Preferred Shares may not
be issued without the approval of a majority of the Company's Independent
Directors.
Other Matters
As of September 30, 1998, the Company believed that it was in full
compliance with the REIT tax rules. The Company estimates that:
o its Qualified REIT Assets, as defined in the Code, to be 100% of its
total assets, as compared to the federal tax requirement that at least
75% of its total assets must be Qualified REIT assets;
o 99% of its revenues qualify for the 75% source of income test and 99% of
its revenues qualify for the 95% source of income test under the REIT
rules; and
o The Company anticipates meeting all REIT requirements regarding the
ownership of its Common Stock and the 1998 annual distribution and
administrative requirements.
However, no assurance can be given that the Company's estimates are
accurate or that the Company has met or will continue to meet the REIT
qualification requirements.
Year 2000 Disclosure
The Year 2000 issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
change occurs, date sensitive systems recognize the year 2000 as 1900 or not at
all. This inability to recognize or properly treat the year 2000 may cause
systems to process critical financial and operational information incorrectly.
The Company intends to address the Year 2000 issue through its Advisory
Agreement with the Bank. During 1997, Bank management developed an action plan
with goals, objectives and target dates related to Year 2000 compliance. In
1997, the Bank assessed, and continues to assess, the impact of the Year 2000
issue on its operations. Anticipated spending for the Year 2000 computer system
programming modifications will be expensed as incurred and, based upon
currently available information, is not expected to have a material impact on
the Bank's on-going results of operations. However, if the efforts initiated
under the plan are not completed on time, or if the cost of updating or
replacing the Bank's information systems exceeds the Bank's current estimates,
the Year 2000 issue could have a material adverse impact on the Company's
business, financial condition or results of operations.
The Bank also intends to determine the extent to which the Company may be
vulnerable to any failures by the Bank's service providers, other third party
vendors, and customers to remedy their own Year 2000 issues, and is in the
process of initiating formal communications with these parties. At this time,
the Company is unable to estimate the nature or extent of any potential adverse
impact resulting from the failure of these third parties to achieve Year 2000
compliance. However, there can be no assurance that these third parties will
not experience Year 2000 problems or that any problems would not have a
material effect on the Company's operations. Because the cost and timing of
Year 2000 compliance by third parties such as the Bank's service providers and
customers is not within the Company's control, no assurance can be given with
respect to the cost or timing of such efforts or any potential adverse effects
on the Company of any failure by these third parties to achieve Year 2000
compliance.
30
<PAGE>
MANAGEMENT
Directors and Officers
The following table sets forth certain information about the directors and
officers of the Company.
<TABLE>
<CAPTION>
Name Age Position(s) Held
- ---------------------------------- ----- --------------------
<S> <C> <C>
Richard Wayne ................ 46 President, Director
John L. Champion ............. 49 Treasurer, Director
Bradley M. Shron ............. 41 Clerk
Nicholas W. Lazares .......... 47 Director
</TABLE>
The principal occupation for the last five years of each director and
officer of the Company is set forth below.
Richard Wayne. Mr. Wayne is President and Co-Chief Executive Officer of
the Bank. Since 1991, Mr. Wayne has been the President of the Bank. From March,
1980 to December 31, 1994, Mr. Wayne, or a professional corporation of which he
was the principal, was a partner in the law firm of Wayne, Lazares and Chappell
in Boston, Massachusetts.
John L. Champion. Mr. Champion joined the Bank in March, 1993 and is the
Chief Financial Officer, the Treasurer and a Senior Vice President of Atlantic.
Previously, Mr. Champion was an executive vice president of Coolidge Bank and
Trust Company, Boston, Massachusetts, and was a certified public accountant
with KPMG Peat Marwick. In addition, Mr. Champion is a member of the
Massachusetts Society of Certified Public Accountants.
Bradley M. Shron. Mr. Shron has served as a Senior Vice President, Legal
Counsel and Assistant Clerk of the Bank since January 1997, General Counsel
since January 1998 and Clerk since April 1998. Mr. Shron joined the Bank as a
Vice President and Legal Counsel in April 1996. Prior to joining the Bank, Mr.
Shron was a partner at the Boston law firm of Riemer and Braunstein from 1986
to 1996.
Nicholas W. Lazares. Mr. Lazares is Chairman of the Board of Directors and
Co-Chief Executive Officer of the Bank. Since 1991, Mr. Lazares has been
Chairman of the Board of Directors of the Bank. From March, 1980 to December
31, 1994, Mr. Lazares, or a professional corporation of which he was the
principal, was a partner in the law firm of Wayne, Lazares and Chappell in
Boston, Massachusetts.
Independent Directors
The terms of the Series A Preferred Shares require that, so long as any
Series A Preferred Shares are outstanding, certain actions by the Company be
approved by a majority of the Independent Directors of the Company. The Company
intends to elect two Independent Directors, effective upon completion of the
offering.
Audit Committee
Upon consummation of the offering, the Company will establish an audit
committee which will review the engagement and independence of its auditors.
The audit committee will also review the adequacy of the Company's internal
accounting controls. The audit committee will initially be comprised of the
Independent Directors.
Management and Director Compensation
The Company intends to pay the Independent Directors fees for their
services as directors.
The Company will not pay any compensation to its officers or employees or
to directors who are not Independent Directors.
The Advisor
In connection with the consummation of the offering, the Company will
enter into the Advisory Agreement with the Bank to administer the day-to-day
operations of the Company. The Bank in its role as advisor under the terms of
the Advisory Agreement is herein referred to as the "Advisor". The Advisor will
be responsible for (1) monitoring the credit quality of the loan portfolio held
by the Company, (2) advising the Company with respect
31
<PAGE>
to the acquisition, management, financing and disposition of the Company's
loans and (3) maintaining custody of the documents related to the Company's
loan portfolio. The Advisor may, from time to time, subcontract all or a
portion of its obligations under the Advisory Agreement to one or more of its
affiliates involved in the business of managing Mortgage Assets or, with the
approval of a majority of the Board of Directors as well as a majority of the
Independent Directors, subcontract all or a portion of its obligations under
the Advisory Agreement to unrelated third parties. The Advisor will not, in
connection with the subcontracting of any of its obligations under the Advisory
Agreement, be discharged or relieved in any respect from its obligations under
the Advisory Agreement.
The Advisory Agreement has an initial term of five years, and will be
renewed automatically for additional five-year periods unless notice of
nonrenewal is delivered to the Advisor by the Company. The Advisory Agreement
may be terminated by the Company at any time upon 90 days' prior notice. As
long as any Series A Preferred Shares remain outstanding, any decision by the
Company either not to renew the Advisory Agreement or to terminate the Advisory
Agreement must be approved by a majority of the Board of Directors, as well as
by a majority of the Independent Directors. Other than the servicing fee, the
Advisor will not be entitled to any fee for providing advisory and management
services to the Company.
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DESCRIPTION OF THE SERIES A PREFERRED SHARES
The following summary sets forth the material terms and provisions of the
Series A Preferred Shares, and is qualified in its entirety by reference to the
terms and provisions of the Restated Articles of Organization establishing the
Series A Preferred Shares.
Series A Preferred Shares
The Series A Preferred Shares form a series of the preferred stock of the
Company. When issued, the Series A Preferred Shares will be validly issued,
fully paid and nonassessable. The holders of the Series A Preferred Shares will
have no preemptive rights with respect to any shares of the capital stock of
the Company. The Series A Preferred Shares will not be subject to any sinking
fund or other obligation of the Company for their repurchase or retirement. The
Series A Preferred Shares will be exchanged on a ten-for-one basis for Bank
Preferred Shares upon the occurrence of the Exchange Event.
Dividends
Holders of Series A Preferred Shares shall be entitled to receive, if,
when and as declared by the Board of Directors of the Company out of assets of
the Company legally available therefor, cash dividends at the rate of % per
annum of the liquidation preference (equivalent to $ per share per annum).
If declared, dividends on the Series A Preferred Shares shall be payable
quarterly in arrears on January 15, April 15, July 15 and October 15 of each
year, at such annual rate, commencing on , 1999. Dividends in each
quarterly period will accrue from the first day of such period, whether or not
declared or paid for the prior quarterly period. Each declared dividend shall
be payable to holders of record as they appear at the close of business on the
stock register of the Company on such record dates, not exceeding 45 days
preceding the payment dates thereof, as shall be fixed by the Board of
Directors of the Company.
The right of holders of Series A Preferred Shares to receive dividends is
noncumulative. Accordingly, if the Board of Directors fails to declare a
dividend on the Series A Preferred Shares for a quarterly dividend period, then
holders of the Series A Preferred Shares will have no right to receive a
dividend for that period, and the Company will have no obligation to pay a
dividend for that period, whether or not dividends are declared and paid for
any future period with respect to either series of preferred stock or the
Common Stock. If less than full dividends are declared on the Series A
Preferred Shares by the Board of Directors for a quarterly dividend period, you
will have no right to receive a full dividend for that period, and the Company
will have no obligation to pay a full dividend for that period, whether or not
dividends are declared and paid for any future period with respect to either
the Series A Preferred Shares or the Common Stock.
For a discussion of the tax treatment of distributions to stockholders,
see "Federal Income Tax Considerations--Taxation of U.S. Stockholders" and
"Federal Income Tax Considerations--Taxation of Non-U.S. Stockholders," and for
a discussion of certain potential regulatory limitations on the Company's
ability to pay dividends, see "Risk Factors--Dividend and Other Regulatory
Restrictions on Operations of the Company."
Authority to Issue Additional Shares
By vote of a majority of the Common Stock the Company may increase the
number of its authorized shares. A vote of the holders of two-thirds of the
Series A Preferred Shares is required, however, to create a class of shares
that would rank senior to the Series A Preferred Shares with regard to payment
of dividends or amounts upon liquidation and a majority of the Independent
Directors must approve the creation of a class of shares that would rank on
parity with the Series A Preferred Shares. The Board of Directors of the
Company has no intention at the present time of submitting for a vote of the
Series A Preferred Shares a plan to create a new class of shares.
Automatic Exchange
Each Series A Preferred Share will be exchanged for one tenth of one newly
issued Bank Preferred Share (with a liquidation preference of $250.00 per
share) if the FDIC directs in writing (a "Directive") an exchange of the Series
A Preferred Shares for Bank Preferred Shares because (1) the Bank becomes
"undercapitalized" under applicable FDIC regulations, (2) the Bank is placed
into bankruptcy, reorganization conservatorship or receivership or (3) the
FDIC, in its sole discretion and even if the Bank is not "undercapitalized,"
anticipates the Bank becoming "undercapitalized" in the near term. Upon the
Automatic Exchange, each holder of Series A Preferred Shares shall be
unconditionally obligated to surrender to the Bank the certificates
representing each Series A Preferred Share
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of such holder, and the Bank shall be unconditionally obligated to issue to
such holder in exchange for each such Series A Preferred Share a certificate
representing one tenth of one Bank Preferred Share. Any Series A Preferred
Shares purchased or redeemed by the Company prior to the Time of Exchange (as
defined below) shall not be deemed outstanding and shall not be subject to the
Automatic Exchange. The Bank has entered into an agreement with the Company
pursuant to which the Bank has, for so long as any Series A Preferred Shares
remain outstanding, unconditionally agreed to issue Bank Preferred Shares in
the Automatic Exchange and to reserve sufficient shares of preferred stock
therefor. The Bank will file with the Secretary of State of the Commonwealth of
Massachusetts a certificate establishing the Bank Preferred Shares immediately
prior to completion of this offering.
The Automatic Exchange shall occur as of 8:00 a.m. Eastern Time on the
date for such exchange set forth in the Directive, or, if such date is not set
forth in the Directive, as of 8:00 a.m. on the earliest possible date such
exchange could occur consistent with the Directive (the "Time of Exchange"), as
evidenced by the issuance by the Bank of a press release prior to such time. As
of the Time of Exchange, all of the Series A Preferred Shares will be deemed
canceled without any further action by the Company, all rights of the holders
of Series A Preferred Shares as stockholders of the Company will cease, and
such persons shall thereupon and thereafter be deemed to be and shall be for
all purposes the holders of Bank Preferred Shares. The Company will mail notice
of the occurrence of the Exchange Event to each holder of Series A Preferred
Shares within 30 days of such event, and the Bank will deliver to each such
holder certificates for Bank Preferred Shares upon surrender of certificates
for Series A Preferred Shares. Until such replacement stock certificates are
delivered (or in the event such replacement certificates are not delivered),
certificates previously representing Series A Preferred Shares shall be deemed
for all purposes to represent Bank Preferred Shares. All corporate action
necessary for the Bank to issue the Bank Preferred Shares will be completed
upon completion of the offering. Accordingly, once the Directive is issued, no
action will be required to be taken by holders of Series A Preferred Shares, by
the Bank or by the Company, in order to effect the Automatic Exchange as of the
Time of Exchange.
Absent the occurrence of the Automatic Exchange, no Bank Preferred Shares
will be issued in connection with this offering. Upon the occurrence of the
Automatic Exchange, the Bank Preferred Shares so issued would constitute 100%
of the issued and outstanding Bank Preferred Shares. Holders of Bank Preferred
Shares would have the equivalent dividend rights, liquidation preference,
redemption provisions and other attributes as to the Bank as holders of Series
A Preferred Shares have as to the Company (except that the liquidation
preference and redemption price on the Bank Preferred Shares is $250.00, ten
times that on the Series A Preferred Shares). Any accrued and unpaid dividends
on the Series A Preferred Shares as of the Time of Exchange would be deemed to
be accrued and unpaid dividends on the Bank Preferred Shares on a pro rata
basis giving effect to the exchange ratio. See "Certain Information Regarding
the Bank." The Bank Preferred Shares will not be registered with the Commission
and will be offered pursuant to an exemption from registration under Section
3(a)(2) of the Securities Act of 1933, as amended (the "Securities Act"). The
Bank does not intend to apply for listing of the Bank Preferred Shares on any
national securities exchange or for quotation on The Nasdaq Stock Market or any
other interdealer quotation system. There can be no assurance as to the
liquidity of the trading markets for the Bank Preferred Shares, if issued.
Holders of Series A Preferred Shares cannot exchange their Series A
Preferred Shares for Bank Preferred Shares voluntarily. In addition, absent the
occurrence of the Automatic Exchange, holders of Series A Preferred Shares will
have no dividend, voting, liquidation preference or other rights with respect
to any security of the Bank; such rights as are conferred by the Series A
Preferred Shares exist solely as to the Company.
Voting Rights
Except as expressly required by applicable law, the holders of the Series
A Preferred Shares will not be entitled to vote at any meeting of stockholders.
The consent of the holders of at least two-thirds of the outstanding
shares of each series of preferred stock of the Company, including the Series A
Preferred Shares, will be required to (a) create any class or series of stock
which shall, as to dividends or distribution of assets, rank prior to the
Series A Preferred Shares or any other outstanding series of preferred stock of
the Company other than a series which shall not have any right to object to
such creation or (b) alter or change the provisions of the Company's Restated
Articles of Organization so as to adversely affect the voting powers,
preferences or special rights of the holders of a series of preferred stock of
the Company; provided that if such amendment shall not adversely affect all
series of preferred stock of the Company, such amendment need only be approved
by at least the holders of two-thirds shares of all series of preferred stock
adversely affected thereby.
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Redemption
The Series A Preferred Shares will not be redeemable prior to , 2003
(except upon the occurrence of a Tax Event). On or after such date, the Series
A Preferred Shares will be redeemable at the option of the Company, in whole or
in part, at any time or from time to time on not less than 30 nor more than 60
days' notice by mail, at a redemption price of $25.00 per share, plus the
accrued and unpaid dividends from the beginning of the quarterly period to the
date of redemption, if any, thereon. Any such redemption may only be effected
with the prior approval of the FDIC (unless such approval is not required at
the time of redemption). Unless full dividends on the Series A Preferred Shares
have been or contemporaneously are declared and paid, no Series A Preferred
Shares shall be redeemed unless all outstanding Series A Preferred Shares are
redeemed and the Company shall not purchase or otherwise acquire any Series A
Preferred Shares, provided, however, that the Company may purchase or acquire
Series A Preferred Shares pursuant to a purchase or exchange offer made on the
same terms to holders of all outstanding Series A Preferred Shares.
The Company may, upon the occurrence of a Tax Event (as defined below) and
with the prior written approval of the FDIC, redeem the Series A Preferred
Shares, in whole (but not in part) at a redemption price of $25.00 per share,
plus the quarterly accrued and unpaid dividend to the date of redemption, if
any, thereon. "Tax Event" means the receipt by the Company of an opinion of a
nationally recognized law firm experienced in such matters to the effect that,
as a result of (1) any amendment to, clarification of, or change (including any
announced prospective change) in, the laws or treaties (or any regulations
thereunder) of the United States or any political subdivision or taxing
authority thereof or therein affecting taxation, (2) any judicial decision,
official administrative pronouncement, published or private ruling, regulatory
procedure, notice or announcement (including any notice or announcement of
intent to adopt such procedures or regulations) ("Administrative Action") or
(3) any amendment to, clarification of, or change in the official position or
the interpretation of such Administrative Action or any interpretation or
pronouncement that provides for a position with respect to such Administrative
Action that differs from the theretofore generally accepted position, in each
case, by any legislative body, court, governmental authority or regulatory
body, irrespective of the manner in which such amendment, clarification or
change is made known, which amendment, clarification or change is effective or
such pronouncement or decision is announced on or after the date of issuance of
the Series A Preferred Shares, there is more than an insubstantial risk that
(1) dividends paid or to be paid by the Company with respect to the capital
stock of the Company are not, or will not be, fully deductible by the Company
for United States federal income tax purposes or (2) the Company is, or will
be, subject to more than a de minimis amount of other taxes, duties or other
governmental charges.
Rights upon Liquidation
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series A Preferred Shares at the
time outstanding will be entitled to receive out of assets of the Company
available for distribution to stockholders, before any distribution of assets
is made to holders of Common Stock or any other class of stock ranking junior
to the Series A Preferred Shares upon liquidation, liquidating distributions in
the amount of $25.00 per share, plus the quarterly accrued and unpaid dividend
thereon, if any, to the date of liquidation.
After payment of the full amount of the liquidating distributions to which
they are entitled, the holders of Series A Preferred Shares will have no right
or claim to any of the remaining assets of the Company. In the event that, upon
any such voluntary or involuntary liquidation, dissolution or winding up, the
available assets of the Company are insufficient to pay the amount of the
liquidation distributions on all outstanding Series A Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of
capital stock of the Company ranking on a parity with the Series A Preferred
Shares in the distribution of assets upon any liquidation, dissolution or
winding up of the affairs of the Company, then the holders of the Series A
Preferred Shares and such other classes or series of capital stock shall share
ratably in any such distribution of assets in proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
For such purposes, the consolidation or merger of the Company with or into
any other entity, or the sale, lease or conveyance of all or substantially all
of the property or business of the Company, shall not be deemed to constitute
liquidation, dissolution or winding up of the Company.
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DESCRIPTION OF CAPITAL STOCK
Authorized and Outstanding Capital Stock
The authorized capital stock upon completion of this offering will consist
of 100 shares of Common Stock, all of which shares will be outstanding, and
1,380,000 Series A Preferred Shares, of which 1,200,000 shares will be
outstanding (assuming no exercise of the Underwriters' over-allotment option).
The following summary description of the capital stock of the Company is
qualified in its entirety by reference to the Company's Restated Articles of
Organization (the "Articles of Organization") and the Company's By-laws (the
"By-laws"), copies of which are filed as exhibits to the Registration Statement
of which this Prospectus is a part. The Articles of Organization and By-laws
have been adopted by the stockholders and the Board of Directors of the
Company. For a description of the Series A Preferred Shares see "Description of
Series A Preferred Shares."
Common Stock. Holders of Common Stock are entitled to one vote per share
on all matters to be voted on by stockholders. Holders of Common Stock are not
entitled to cumulative voting rights. Therefore, the holders of a plurality of
the shares voted in the election of directors can elect all of the directors
then standing for election. The holders of Common Stock have no preemptive
rights.
The holders of Common Stock are entitled to receive such dividends, if
any, as may be declared from time to time by the Board of Directors from funds
legally available therefor, subject to any preferential dividend rights of any
outstanding preferred stock.
Upon the dissolution or liquidation of the Company, holders of Common
Stock will be entitled to receive all assets of the Company available for
distribution to its stockholders, subject to any preferential rights of the
then outstanding preferred stock.
There are no redemption or sinking fund provisions with respect to the
Common Stock. All outstanding shares of Common Stock, including the shares
offered hereby, are, or will be upon completion of this offering, fully paid
and non-assessable and subject to any preferential dividend rights of any
outstanding preferred stock.
Restrictions on Ownership and Transfer
For the Company to qualify as a REIT under the Code, no more than 50% of
the value of its outstanding shares of capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year) or during a proportionate part of a shorter taxable year (the "Five or
Fewer Test") or certain groups of persons of more than 7.7% of any class or
series of the Company's stock, including the outstanding Series A Preferred
Shares, is restricted in order to preserve the Company's status as a REIT for
federal income tax purposes. The capital stock of the Company must also be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year (other than the first year) or during a proportionate part of a shorter
taxable year (the "One Hundred Persons Test"). Upon completion of this
offering, the Company anticipates it will comply with the One Hundred Persons
Test. The Restated Articles of Organization further provide that if any
transfer of the stock of the Company would cause the Company to be owned by
fewer than 100 persons, such transfer shall be null and void and the intended
transferee will acquire no rights to the stock.
Each stockholder shall upon demand be required to disclose to the Company
in writing any information with respect to the direct and indirect ownership of
capital stock as the Board of Directors deems necessary to comply with the
provisions of the Code applicable to REITs, to comply with the requirements of
any taxing authority or governmental agency, or to determine any such
compliance.
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FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
regarding the offering is based upon current law and is for general information
purposes only. The discussion contained herein does not address all aspects of
taxation that may be relevant to particular stockholders in light of their
personal investment or tax circumstances, or to certain types of stockholders
(including, without limitation, insurance companies, tax-exempt organizations
(except as described below), financial institutions and broker-dealers) subject
to special treatment under the federal income tax laws.
The statements in this discussion are based on current provisions of the
Code, existing, temporary, and currently proposed Treasury Regulations
promulgated under the Code, the legislative history of the Code, existing
administrative rulings and practices of the IRS, and judicial decisions. No
assurance can be given that future legislative, judicial, or administrative
actions or decisions, which may be retroactive in effect, will not affect the
accuracy of any statements in this Prospectus with respect to the transactions
entered into or contemplated prior to the effective date of such changes.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT WITH ITS TAX ADVISOR REGARDING
THE SPECIFIC TAX CONSEQUENCES TO IT OF THE PURCHASE, OWNERSHIP, AND SALE OF THE
SERIES A PREFERRED SHARES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF
SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
Taxation of the Company
The Company plans to make an election to be taxed as a REIT under sections
856 through 860 of the Code, commencing with the year ending on December 31,
1998.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth only the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its stockholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.
GP&H has acted as counsel to the Company in connection with the offering.
In GP&H's opinion, provided that the elections and other procedural steps
described in this discussion of "Federal Income Tax Considerations" are
completed by the Company in a timely fashion, the Company will be organized in
conformity with the requirements for qualification as a REIT pursuant to
sections 856 through 860 of the Code, and the Company's proposed method of
operation will enable it to continue to meet the requirements for qualification
and taxation as a REIT under the Code. Investors should be aware, however, that
opinions of counsel are not binding upon the IRS or any court. It must be
emphasized that the GP&H Opinion is based on various assumptions and is
conditioned upon certain representations made by the Company as to factual
matters, including representations regarding the nature of the Company's assets
and income and the future conduct of the Company's business. Such factual
assumptions and representations are described below in this discussion of
"Federal Income Tax Considerations" and are set out in the Opinion. Moreover,
such qualification and taxation as a REIT depends upon the Company's ability to
meet on a continuing basis, through actual annual operating results,
distribution levels, and stock ownership, the various qualification tests
imposed under the Code discussed below. GP&H will not review the Company's
compliance with those tests on a continuing basis. Accordingly, no assurance
can be given that the actual results of the Company's operations for any
particular taxable year will satisfy any such requirements. For a discussion of
the tax consequences of failure to qualify as a REIT, see "Federal Income Tax
Considerations--Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is distributed
currently to its stockholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and stockholder levels)
that generally results from an investment in a corporation. However, the
Company will be subject to federal income tax in the following circumstances.
First, the Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital gains.
See "--Distribution Requirements." Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its undistributed
items of tax
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preference, if any. Third, if the Company has (1) net income from the sale or
other disposition of "foreclosure property" that is held primarily for sale to
customers in the ordinary course of business or (2) other nonqualifying income
from foreclosure property, it will be subject to tax at the highest corporate
rate on such income. Fourth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property (other than foreclosure property) held primarily for sale to customers
in the ordinary course of business), such income will be subject to a 100% tax.
Fifth, if the Company should fail to satisfy the 75% gross income test or the
95% gross income test (as discussed below), but has maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on the gross income attributable to the greater
of the amount by which the Company fails the 75% or 95% gross income test,
multiplied by a fraction intended to reflect the Company's profitability.
Sixth, if the Company should fail to distribute during each calendar year at
least the sum of (1) 85% of its REIT ordinary income for such year, (2) 95% of
its REIT capital gain net income for such year (other than such capital gain
net income which the Company elects to retain and pay tax on), and (3) any
undistributed taxable income from prior periods, the Company would be subject
to a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. Seventh, if the Company acquires any asset from a "C"
corporation (i.e., a corporation generally subject to full corporate-level tax)
in a merger or other transaction in which the basis of the asset in the
Company's hands is determined by reference to the basis of the asset (or any
other asset) in the hands of a "C" corporation and the Company recognizes gain
on the disposition of such asset during the 10-year period beginning on the
date on which it acquired such asset, then to the extent of such asset's
"built-in-gain" (i.e., the excess of the fair market value of such asset at the
time of acquisition by the Company over the adjusted basis in such asset at
such time), the Company will be subject to tax at the highest regular corporate
rate applicable (as provided in Treasury Regulations that have not yet been
promulgated). The results described above with respect to the tax on
"built-in-gain" assume that the Company will elect pursuant to IRS Notice 88-19
to be subject to the rules described in the preceding sentence if it were to
make any such acquisition.
Requirements for Qualification
The Code defines a REIT as a corporation, trust, or association (1) that
is managed by one or more trustees or directors; (2) the beneficial ownership
of which is evidenced by transferable shares, or by transferable certificates
of beneficial interest; (3) that would be taxable as a domestic corporation but
for sections 856 through 860 of the Code; (4) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(5) the beneficial ownership of which is held by 100 or more persons; (6) not
more than 50% in value of the outstanding shares of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(7) that makes an election to be a REIT (or has made such election for a
previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in
order to elect and maintain REIT status; (8) that uses a calendar year for
federal income tax purposes and complies with the recordkeeping requirements of
the Code and Treasury Regulations promulgated thereunder; and (9) that meets
certain other tests, described below, regarding the nature of its income and
assets. The Code provides that conditions (1) to (4), inclusive, must be met
during the entire taxable year and that condition (5) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part
of a taxable year of less than 12 months. Conditions (5) and (6) will not apply
until after the first taxable year for which an election is made by the Company
to be taxed as a REIT. For purposes of determining stock ownership under the
5/50 Rule, a supplemental unemployment compensation benefits plan, a private
foundation, or a portion of a trust permanently set aside or used exclusively
for charitable purposes generally is considered an individual. A trust that is
a qualified trust under Code section 401(a), however, generally is not
considered an individual and beneficiaries of such trust are treated as holding
shares of a REIT in proportion to their actuarial interests in such trust for
purposes of the 5/50 Rule. If the Company complies with all the requirements
for ascertaining the ownership of its outstanding stock in a taxable year and
does not know or have reason to know that it violated the 5/50 Rule, the
Company will be deemed to have complied with the 5/50 Rule for such taxable
year.
In addition, the Company's Restated Articles of Organization provide for
restrictions regarding the transfer of the Series A Preferred Stock that are
intended to assist the Company in continuing to satisfy the share ownership
requirements described in clauses (5) and (6) above. Such transfer restrictions
are described in "Description of Capital Stock--Restrictions on Ownership and
Transfer." However, there can be no assurance that the Company will continue to
meet the share ownership requirements of the Code.
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The Company currently has no corporate subsidiaries, but may have
corporate subsidiaries in the future. Code section 856(i) provides that a
corporation that is a "qualified REIT subsidiary" shall not be treated as a
separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a "qualified REIT subsidiary" shall be treated as
assets, liabilities, and items of income, deduction, and credit of the REIT. A
"qualified REIT subsidiary" is a corporation, all of the capital stock of which
is held by the REIT. Thus, in applying the requirements described herein, any
"qualified REIT subsidiaries" of the Company will be ignored, and all assets,
liabilities, and items of income, deduction, and credit of such subsidiaries
will be treated as assets, liabilities, and items of income, deduction, and
credit of the Company.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of section 856 of the Code, including satisfying the
gross income and asset tests described below.
Income Tests
In order for the Company to qualify and to maintain its qualification as a
REIT, two requirements relating to the Company's gross income must be satisfied
annually. First, at least 75% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must consist of
defined types of income derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" and interest on obligations secured by mortgages on real
property or on interests in real property, and dividends or other distributions
on and gain from the sale of stock in other REITs) or from certain types of
temporary investment income. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year
must be derived from such real property, mortgages on real property, or
temporary investments, and from dividends, other types of interest, and gain
from the sale or disposition of stock or securities, or from any combination of
the foregoing.
The term "interest," as defined for purposes of the 75% and 95% gross
income tests, generally does not include any amount received or accrued
(directly or indirectly) if the determination of such amount depends in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "interest" solely by
reason of being based on a fixed percentage or percentages of receipts or
sales. In addition, an amount received or accrued generally will not be
excluded from the term "interest" solely by reason of being based on the income
or profits of a debtor if the debtor derives substantially all of its gross
income from the related property through the leasing of substantially all of
its interests in the property, to the extent the amounts received by the debtor
would be characterized as rents from real property if received by a REIT.
Furthermore, to the extent that interest from a loan that is based on the cash
proceeds from the sale of the property securing the loan constitutes a "shared
appreciation provision" (as defined in the Code), income attributable to such
participation feature will be treated as gain from the sale of the secured
property, which generally is qualifying income for purposes of the 75% and 95%
gross income tests.
Interest will qualify as "interest on obligations secured by mortgages on
real property or on interests in real property" if the obligation is secured by
a mortgage on real property having a fair market value at the time of
acquisition of the obligation at least equal to the principal amount of the
loan. However, if the Company receives interest income with respect to a
mortgage loan that is secured by both real property and other property and the
highest principal amount of the loan outstanding during a taxable year exceeds
the fair market value of the real property on the date the Company acquired or
originated the mortgage loan, the interest income will be apportioned between
the real property and the other property, which apportionment may cause the
Company to recognize income that is not qualifying income for purposes of the
75% gross income test.
The Company may receive income not described above that is not qualifying
income for purposes of one or both of the 75% and 95% gross income tests. The
Company will monitor the amount of nonqualifying income produced by its assets
and has represented that it will manage its portfolio in order to comply at all
times with the two gross income tests.
REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75% gross income test), less deductible expenses
directly connected with the production of such income. "Foreclosure property"
is defined as any real
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property (including interests in real property) and any personal property
incident to such real property (1) that is acquired by a REIT as the result of
such REIT having bid in such property at foreclosure, or having otherwise
reduced such property to ownership or possession by agreement or process of
law, after there was a default (or default was imminent) on a lease of such
property or on an indebtedness owed to the REIT that such property secured, (2)
for which the related loan was acquired by the REIT at a time when default was
not imminent or anticipated, and (3) for which such REIT makes a proper
election to treat such property as foreclosure property. The Company does not
anticipate that it will receive any income from foreclosure property that is
not qualifying income for purposes of the 75% gross income test, but, if the
Company does receive any such income, the Company will make an election to
treat the related property as foreclosure property.
Property acquired by the Company will not be eligible for the election to
be treated as foreclosure property ("Ineligible Property") if the related loan
was acquired by the Company at a time when default was imminent or anticipated.
In addition, income received with respect to such Ineligible Property may not
be qualifying income for purposes of the 75% or 95% gross income tests.
Net income derived from a prohibited transaction is subject to a 100% tax.
The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property) that is held
primarily for sale to customers in the ordinary course of a trade or business.
The Company intends to conduct its operations so that no asset owned by the
Company will be held for sale to customers and that a sale of any such asset
will not be in the ordinary course of the Company's business. Whether property
is held "primarily for sale to customers in the ordinary course of a trade or
business" depends, however, on the facts and circumstances in effect from time
to time, including those related to a particular property. Nevertheless, the
Company will attempt to comply with the terms of safe-harbor provisions in the
Code prescribing when asset sales will not be characterized as prohibited
transactions. Complete assurance cannot be given, however, that the Company can
comply with the safe-harbor provisions of the Code or avoid owning property
that may be characterized as property held "primarily for sale to customers in
the ordinary course of a trade or business."
From time to time, the Company may enter into hedging transactions with
respect to one or more of its assets or liabilities. Any such hedging
transactions could take a variety of forms, including, without limitation,
interest rate swap contracts, interest rate cap or floor contracts, futures or
forward contracts, and options. To the extent that the Company enters into such
a contract to hedge any indebtedness incurred to acquire or carry real estate
assets, any periodic income or gain from the disposition of such contract
should be qualifying income for purposes of the 95% gross income test, but not
the 75% gross income test. To the extent that the Company hedges with other
types of financial instruments or in other situations, it may not be entirely
clear how the income from those transactions will be treated for purposes of
the various income tests that apply to REITs under the Code. The Company
intends to structure any hedging transactions in a manner that does not
jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75% and 95% gross
income tests for any taxable year, it nevertheless may qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
Those relief provisions generally will be available if the Company's failure to
meet such tests is due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of those relief provisions. As
discussed above in "Federal Income Tax Considerations--Taxation of the
Company," even if those relief provisions apply, a 100% tax would be imposed on
the net income attributable to the greater of the amount by which the Company
fails the 75% or 95% gross income test multiplied by a fraction intended to
reflect the Company's profitability.
Asset Tests
The Company, at the close of each quarter of each taxable year, also must
satisfy three tests relating to the nature of its assets. First, at least 75%
of the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets," or, in cases where the Company raises new capital through stock or
long-term (at least five-year) debt offerings, temporary investments in stock
or debt instruments during the one-year period following the Company's receipt
of such capital. The term "real estate assets" includes interests in real
property, interests in mortgages on real property to the extent the principal
balance of a mortgage does not exceed the fair market value of the associated
real property, and shares
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of other REITs. For purposes of the 75% asset test, the term "interest in real
property" includes an interest in mortgage loans or land or improvements
thereon, such as buildings or other inherently permanent structures (including
items that are structural components of such buildings or structures), a
leasehold of real property, and an option to acquire real property (or a
leasehold of real property). Second, not more than 25% of the Company's total
assets may be represented by securities other than those in the 75% asset
class. Third, of the investments not included in the 75% asset class, the value
of any one issuer's securities owned by the Company may not exceed 5% of the
value of the Company's total assets, and the Company may not own more than 10%
of any one issuer's outstanding voting securities (except for its interests in
qualified REIT subsidiaries and other qualified REITs).
The Company expects that any interests in real property that it acquires
generally will be qualifying assets for purposes of the 75% asset test. The
Company will monitor the status of the assets that it acquires for purposes of
the various asset tests and has represented that it will manage its portfolio
in order to comply at all times with such tests.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(1) it satisfied the asset tests at the close of the preceding calendar quarter
and (2) the discrepancy between the value of the Company's assets and the asset
test requirements arose from changes in the market values of its assets and was
not wholly or partly caused by the acquisition of one or more non-qualifying
assets. If the condition described in clause (2) of the preceding sentence were
not satisfied, the Company still could avoid disqualification by eliminating
any discrepancy within 30 days after the close of the calendar quarter in which
it arose.
Distribution Requirements
In order to avoid corporate income taxation of the earnings that it
distributes, the Company is required to distribute with respect to each taxable
year dividends (other than capital gain dividends) to its stockholders in an
aggregate amount at least equal to (1) the sum of (A) 95% of its "REIT taxable
income" (computed without regard to the dividends paid deduction and its net
capital gain) and (B) 95% of the net income (after tax), if any, from
foreclosure property, minus (2) the sum of certain items of noncash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before the Company timely files its
federal income tax return for such year and if paid on or before the first
regular dividend payment date after such declaration. To the extent that the
Company does not distribute all of its net capital gain or distributes at least
95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be
subject to tax thereon at regular ordinary and capital gains corporate tax
rates. Furthermore, if the Company should fail to distribute during each
calendar year (or, in the case of distributions with declaration and record
dates falling in the last three months of the calendar year, by the end of the
January immediately following such year) at least the sum of (1) 85% of its
REIT ordinary income for such year, (2) 95% of its REIT capital gain income for
such year (other than capital gain net income which the Company elects to
retain and pay tax on), and (3) any undistributed taxable income from prior
periods, the Company would be subject to a 4% nondeductible excise tax on the
excess of such required distribution over the amounts actually distributed.
Pursuant to recently enacted legislation, the Company may elect to retain,
rather than distribute its net long-term capital gains. The effect of such an
election is that (1) the Company is required to pay the tax on such gains, (2)
U.S. stockholders (as defined below), while required to include their
proportionate share of the undistributed long-term capital gains in income,
will receive a credit or refund for their share of the tax paid by the Company
and (3) the basis of U.S. stockholders' shares would be increased by the amount
of the undistributed long-term capital gains (minus the amount of capital gains
tax paid by the Company) included in such U.S. stockholders' long-term capital
gains.
In certain circumstances, the Company's investments may generate income
for federal income tax purposes without a corresponding receipt of cash
("Phantom Income"). In order for the Company to meet REIT qualifications and/or
avoid tax at the REIT level on such Phantom Income, the Company may be forced
to use cash generated from other sources, including, without limitation, asset
sales and borrowings, to make required distributions.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirements for a year by paying "deficiency
dividends" to its stockholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Although the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends, it will be required to pay to the IRS interest based upon the amount
of any deduction taken for deficiency dividends.
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Recordkeeping Requirements
Pursuant to applicable Treasury Regulations, the Company must maintain
certain records and request on an annual basis certain information from its
stockholders designed to disclose the actual ownership of its outstanding
stock. Failure to comply with such recordkeeping requirements could result in
substantial monetary penalties to the Company. The Company intends to comply
with such requirements.
Excess Inclusion Income
The Company has purchased mortgage loans. If the Company is deemed to have
issued debt obligations having two or more maturities, the payments on which
correspond to payments on such mortgage loans, such arrangement will be treated
as a "taxable mortgage pool" for federal income tax purposes. If all or a
portion of the Company is considered a "taxable mortgage pool," the Company's
status as a REIT generally should not be impaired; however, a portion of the
Company's taxable income may be characterized as "excess inclusion income" and
allocated to the stockholders of the Company. Any excess inclusion income (1)
could not be offset by net operating losses of a stockholder, (2) would be
subject to tax as "unrelated business taxable income" to a tax-exempt
stockholder, (3) would be subject to the application of federal income tax
withholding (without reduction pursuant to any otherwise applicable income tax
treaty) with respect to amounts allocable to foreign stockholders, and (4)
would be taxable (at the highest corporate tax rate) to the Company, rather
than its stockholders, to the extent allocable to shares of stock of the
Company held by disqualified organizations (generally, tax-exempt entities not
subject to unrelated business income tax, including governmental
organizations).
Failure to Qualify
If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to
tax (including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the Company's stockholders in any
year in which the Company fails to qualify will not be deductible by the
Company nor will they be required to be made. In such event, to the extent of
the Company's current and accumulated earnings and profits, all distributions
to stockholders will be taxable as ordinary income and, subject to certain
limitations of the Code, corporate distributions may be eligible for the
dividends received deduction. Unless entitled to relief under specific
statutory provisions, the Company also will be disqualified from taxation as a
REIT for the four taxable years following the year during which the Company
ceased to qualify as a REIT. It is not possible to state whether in all
circumstances the Company would be entitled to statutory relief from its
failure to qualify as a REIT.
Taxation of U.S. Stockholders
As used herein, the term "U.S. stockholder" means a holder of Series A
Preferred Shares that for U.S. federal income tax purposes is not an entity
that has a special status under the Code (such as a tax-exempt organization or
a dealer in securities) and is (1) a citizen or resident of the United States,
(2) a corporation, partnership, or other entity created or organized in or
under the laws of the United States or of any political subdivision thereof,
(3) an estate whose income from sources without the United States is includible
in gross income for U.S. federal income tax purposes regardless of its
connection with the conduct of a trade or business within the United States, or
(4) any trust with respect to which (A) a U.S. court is able to exercise
primary supervision over the administration of such trust and (B) one or more
U.S. fiduciaries have the authority to control all substantial decisions of the
trust.
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. stockholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends or retained capital
gains) will be taken into account by such U.S. stockholders as ordinary income
and will not be eligible for the dividends received deduction generally
available to corporations. Distributions that are designated as capital gain
dividends by the Company will be taxed as long-term capital gains (to the
extent that they do not exceed the Company's actual net capital gain for the
taxable year) without regard to the period for which the stockholder has held
his Series A Preferred Shares. Corporate stockholders may be required to treat
up to 20% of certain capital gain dividends as ordinary income. Distributions
in excess of current and accumulated earnings and profits will not be taxable
to a stockholder to the extent that they do not exceed the adjusted basis of
the stockholder's Series A Preferred Shares, but rather will reduce the
adjusted basis of such stock. To the extent that such distributions in excess
of current and accumulated earnings and profits exceed the adjusted basis of a
stockholder's Series A Preferred Shares, such distributions will be included in
income as long-term capital gain (or short-term capital gain
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if the Series A Preferred Shares had been held for one year or less), provided
that the Series A Preferred Shares is a capital asset in the hands of the
stockholder. In addition, any distribution declared by the Company in October,
November, or December of any year and payable to a stockholder of record on a
specified date in any such month shall be treated as both paid by the Company
and received by the stockholder on December 31 of such year, provided that the
distribution is actually paid by the Company during January of the following
calendar year.
The Taxpayer Relief Act of 1997 (the "Relief Act") altered the taxation of
capital gain income. Under the Relief Act, individuals, trusts and estates that
hold certain investments for more than 18 months may be taxed at a maximum
long-term capital gain rate of 20% on the sale or exchange of those
investments. Individuals, trusts and estates that hold certain assets for more
than one year but not more than 18 months may be taxed at a maximum mid-term
capital gain rate of 28% on the sale or exchange of those investments. However,
the Internal Revenue Service Restructuring Reform Act of 1998 eliminated the 18
month holding period requirement, effective for taxable years ending after
December 31, 1997, and therefore the 20% long-term capital gains rates will
generally apply to capital assets held for more than one year. The Relief Act
also provided for a maximum rate of 25% for "unrecaptured Section 1250 gain"
for individuals, trusts and estates, special rules for "qualified 5-year gain,"
as well as other changes to prior law. The Relief Act allows the IRS to
prescribe regulations on how the Relief Act's new capital gain rates will apply
to sales of capital assets by or interests in "pass-thru entities," which
include REITs such as the Company. Notice 97-64, 1997-47 IRB 1, sets forth
guidance on certain of these issues pending the release of regulations and
provides, among other things, that a REIT may designate a capital gains
dividend as a 20% rate gain distribution, an unrecaptured Section 1250 gain
distribution or a 28% rate gain distribution. Absent any such designation, a
capital gains dividend will be treated as a 28% rate gain distribution. In
general, the Notice provides that a REIT must determine the maximum amounts
which may be designated in each class of capital gain dividends as if the REIT
were an individual whose ordinary income is subject to a marginal tax rate of
at least 28%. Similar rules will apply in the case of designated retained
capital gains. See "Federal Income Tax Considerations--Distribution
Requirements." The Company will notify stockholders after the close of its
taxable year as to the portions of the distributions attributable to that year
that constitute ordinary income, return of capital and capital gain (and, with
respect to capital gain dividends, the portions constituting 20% rate gain
distributions, unrecaptured Section 1250 gain distributions and 28% rate gain
distributions). The Company will also notify stockholders of the amounts of any
designated retained capital gains (including the amounts thereof constituting
20% rate gain, unrecaptured Section 1250 gain and 28% rate gain) and the
Company's taxes with respect to any designated retained capital gains. Final
regulations when issued may alter the rules of the temporary regulations. In
addition, the IRS has not prescribed regulations regarding the application of
the new rates to sales of interests in REITs such as the Company, and it
remains unclear how the new rules will affect such sales, if at all. Finally,
the IRS has not yet issued any guidance modifying the rule set forth in the
Notice to take into account the recent elimination of the 18 month holding
period required to be eligible for the preferential 20% capital gains rate.
Stockholders may not include in their individual income tax returns any
net operating losses or capital losses of the Company. Instead, such losses
would be carried over by the Company for potential offset against its future
income (subject to certain limitations). Taxable distributions from the Company
and gain from the disposition of the Series A Preferred Shares will not be
treated as passive activity income and, therefore, stockholders generally will
not be able to apply any "passive activity losses" (such as losses from certain
types of limited partnerships in which a stockholder is a limited partner)
against such income. In addition, taxable distributions from the Company
generally will be treated as investment income for purposes of the investment
interest limitations. Capital gains from the disposition of Series A Preferred
Shares (or distributions treated as such), however, will be treated as
investment income only if the stockholder so elects, in which case such capital
gains will be taxed at ordinary income rates. The Company will notify
stockholders after the close of the Company's taxable year as to the portions
of the distributions attributable to that year that constitute ordinary income
or capital gain.
The Company may invest in certain types of mortgage loans that may cause
it under certain circumstances to recognize Phantom Income and to experience an
offsetting excess of economic income over its taxable income in later years. As
a result, stockholders may from time to time be required to pay federal income
tax on distributions that economically represent a return of capital, rather
than a dividend. Such distributions would be offset in later years by
distributions representing economic income that would be treated as returns of
capital for federal income tax purposes. Accordingly, if the Company receives
Phantom Income, its stockholders may be required to pay federal income tax with
respect to such income on an accelerated basis, i.e., before such income is
realized by the stockholders in an economic sense. If there is taken into
account the time value of money, such an acceleration
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of federal income tax liabilities would cause stockholders to receive an
after-tax rate of return on an investment in the Company that would be less
than the after-tax rate of return on an investment with an identical before-tax
rate of return that did not generate Phantom Income. In general, as the ratio
of the Company's Phantom Income to its total income increases, the after-tax
rate of return received by a taxable stockholder of the Company will decrease.
The Company will consider the potential effects of Phantom Income on its
taxable stockholders in managing its investments.
In general, any gain or loss realized upon a taxable disposition of the
Series A Preferred Shares by a U.S. stockholder who is not a dealer in
securities will be treated as capital gain or loss. Any such capital gain or
loss generally will be long-term capital gain or loss if the Series A Preferred
Shares has been held for more than 12 months. In general, any loss upon a sale
or exchange of the Series A Preferred Shares by a U.S. stockholder who has held
such stock for six months or less (after applying certain holding period rules)
will be treated as long-term capital loss to the extent of distributions from
the Company required to be treated by that stockholder as long-term capital
gain.
The Company will report to its U.S. stockholders and to the IRS the amount
of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a stockholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (1) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (2) provides a
taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with the applicable requirements of
the backup withholding rules. A stockholder who does not provide the Company
with his correct taxpayer identification number also may be subject to
penalties imposed by the Service. Any amount paid as backup withholding will be
creditable against the stockholder's income tax liability.
Taxation of Tax-Exempt Stockholders
Tax exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"), as defined in
Section 512(a)(1) of the Code. While many investments in real estate generate
UBTI, the Service has issued a published ruling that dividend distributions
from a REIT to an exempt employee pension trust do not constitute UBTI,
provided that the shares of the REIT are not otherwise used in an unrelated
trade or business of the exempt employee pension trust. Based on that ruling,
amounts distributed by the Company to Exempt Organizations generally should not
constitute UBTI. However, a portion of the Company's taxable income may be
characterized as "excess inclusion income" which would be subject to tax as
UBTI. See "Federal Income Tax Considerations--Excess Inclusion Income." In
addition, if an Exempt Organization finances its acquisition of the Series A
Preferred Shares with debt, a portion of its income from the Company will
constitute UBTI pursuant to the "debt-financed property" rules. In addition, in
certain circumstances, a pension trust that owns more than 10% of the Company's
stock is required to treat a percentage of the dividends from the Company as
UBTI. This rule applies to a pension trust holding more than 10% of the
Company's stock only if (1) the percentage of income of the Company that is
UBTI (determined as if the Company were a pension trust) is at least 5%, (2)
the Company qualifies as a REIT by reason of the modification of the 5/50 Rule
that allows the beneficiaries of the pension trust to be treated as holding
shares of the Company in proportion to their actuarial interests in the pension
trust, and (3) either (A) one pension trust owns more than 25% of the value of
the Company's stock or (B) a group of pension trusts individually holding more
than 10% of the value of the Company's stock collectively owns more than 50% of
the value of the Company's stock.
Taxation of Non-U.S. Stockholders
The rules governing the U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. STOCKHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Stockholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gains dividends or returned capital
gains will be treated as dividends of ordinary income to the extent that they
are made out of current
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or accumulated earnings and profits of the Company. Such distributions
ordinarily will be subject to a withholding tax equal to 30% of the gross
amount of the distribution unless an applicable tax treaty reduces or
eliminates that tax. However, if income from the investment in the Series A
Preferred Shares is treated as effectively connected with the Non-U.S.
Stockholder's conduct of a U.S. trade or business, the Non-U.S. Stockholder
generally will be subject to federal income tax at graduated rates, in the same
manner as U.S. stockholders are taxed with respect to such distributions (and
also may be subject to the 30% branch profits tax in the case of a Non-U.S.
Stockholder that is a non-U.S. corporation). The Company expects to withhold
U.S. income tax at the rate of 30% on the gross amount of any such
distributions made to a Non-U.S. Stockholder unless (1) a lower treaty rate
applies and any required form evidencing eligibility for that reduced rate is
filed with the Company or (2) the Non-U.S. Stockholder files an IRS Form 4224
with the Company claiming that the distribution is effectively connected
income. Furthermore, on October 6, 1997, the U.S. Treasury Department issued
final Treasury regulations governing information reporting and the
certification procedures regarding withholding and backup withholding on
certain amounts paid to Non-U.S. Stockholders after December 31, 1999 (the "New
Withholding Regulations"). The New Withholding Regulations may alter the
procedure for claiming the benefits of an income tax treaty.
Distributions in excess of current and accumulated earnings and profits of
the Company will not be taxable to a Non-U.S. Stockholder to the extent that
such distributions do not exceed the adjusted basis of the stockholder's Series
A Preferred Stock, but rather will reduce the adjusted basis of such shares. To
the extent that distributions in excess of current and accumulated earnings and
profits exceed the adjusted basis of a Non-U.S. Stockholder's Series A
Preferred Shares, such distributions will give rise to tax liability if the
Non-U.S. Stockholder would otherwise be subject to tax on any gain from the
sale or disposition of his Series A Preferred Shares, as described below.
Because it generally cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of current and accumulated
earnings and profits, the entire amount of any distribution normally will be
subject to withholding at the same rate as a dividend. However, amounts so
withheld are refundable to the extent it is determined subsequently that such
distribution was, in fact, in excess of current and accumulated earnings and
profits of the Company. The Company is required to withhold 10% of any
distribution in excess of the Company's current and accumulated earnings and
profits. Consequently, although the Company intends to withhold at a rate of
30% on the entire amount of any distribution, to the extent that the Company
does not do so, any portion of a distribution not subject to withholding at a
rate of 30% will be subject to withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests (i.e., interests in real property located in the United
States and interests in U.S. corporations at least 50% of whose assets consist
of U.S. real property interests) will be taxed to a Non-U.S. Stockholder under
the provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). An interest in real property solely as a creditor does not
constitute a U.S. real property interest, but other interests in real property,
such as a participating mortgage loan, would be treated as a U.S. real property
interest subject to FIRPTA. Under FIRPTA, distributions attributable to gain
from sales of U.S. real property interests are taxed to a Non-U.S. Stockholder
as if such gain were effectively connected with a U.S. trade or business.
Non-U.S. Stockholders thus would be taxed at the normal capital gain rates
applicable to U.S. stockholders (subject to applicable alternative minimum tax
and a special alternative minimum tax in the case of nonresident alien
individuals). Distributions subject to FIRPTA also may be subject to the 30%
branch profits tax in the hands of a non-U.S. corporate stockholder not
entitled to treaty relief or exemption. The Company is required to withhold 35%
of any distribution that is designated by the Company as a capital gains
dividend. The amount withheld is creditable against the Non-U.S. Stockholder's
FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of his Series A
Preferred Shares generally will not be taxed under FIRPTA if the Company is a
"domestically controlled REIT," defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by non-U.S. persons. Although, it is currently
anticipated that the Company will be a "domestically controlled REIT" and,
therefore, the sale of the Series A Preferred Shares will not be subject to
taxation under FIRPTA, there can be no assurance that the Company will be a
"domestically-controlled REIT." Even if such gain is not subject to FIRPTA,
such gain will be taxable to a Non-U.S. Stockholder if (i) investment in the
Series A Preferred Shares is effectively connected with the Non-U.S.
Stockholder's U.S. trade or business, in which case the Non-U.S. Stockholder
will be subject to the same treatment as U.S. stockholders with respect to such
gain, or (ii) the Non-U.S. Stockholder is a nonresident alien individual who
was present in the U.S. for 183 days or more during the taxable year and
certain other conditions apply, in which case the nonresident alien individual
will be subject to a 30%
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tax on the individual's capital gains. If the gain on the sale of the Series A
Preferred Shares were to be subject to taxation under FIRPTA, the Non-U.S.
Stockholder would be subject to the same treatment as U.S. stockholders with
respect to such gain (subject to applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals, and the
possible application of the 30% branch profits tax in the case of non-U.S.
corporations).
Additional issues may arise pertaining to information reporting and backup
withholding with respect to Non-U.S. Stockholders. The New Withholding
Regulations alter the application of the information reporting and backup
withholding rules to Non-U.S. Stockholders. Non-U.S. Stockholders should
consult with a tax advisor with respect to any such information reporting and
backup withholding requirements. Backup withholding with respect to a Non-U.S.
Stockholder is not an additional tax. Rather, the amount of any backup
withholding with respect to a payment to a Non-U.S. Stockholder will be allowed
as a credit against any United States federal income tax liability of such
Non-U.S. Stockholder. If withholding results in an overpayment of taxes, a
refund may be obtained, provided that the required information is furnished to
the IRS.
Other Tax Consequences
The Company or the Company's stockholders may be subject to state and
local tax in various states and localities, including those states and
localities in which it or they transact business, own property, or reside. The
state and local tax treatment of the Company and its stockholders in such
jurisdictions may differ from the federal income tax treatment described above.
Consequently, prospective stockholders should consult their own tax advisors
regarding the effect of state and local tax laws upon an investment in the
Series A Preferred Shares.
ERISA CONSIDERATIONS
General
In evaluating the purchase of Series A Preferred Shares, a fiduciary of a
qualified profit-sharing, pension or stock bonus plan, including a plan for
self-employed individuals and their employees or any other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), a collective investment fund or separate account in which such plans
invest and any other investor using assets that are treated as the assets of an
employee benefit plan subject to ERISA (each, a "Plan" and collectively,
"Plans") should consider (1) whether the ownership of Series A Preferred Shares
is in accordance with the documents and instruments governing such Plan; (2)
whether the ownership of Series A Preferred Shares is solely in the interest of
Plan participants and beneficiaries and otherwise consistent with the
fiduciary's responsibilities and in compliance with the requirements of Part 4
of Title I of ERISA, including, in particular, the diversification, prudence
and liquidity requirements of Section 404 of ERISA and the prohibited
transaction provisions of Section 406 of ERISA and Section 4975 of the Code;
(3) whether the Company's assets are treated as assets of the Plan; and (4) the
need to value the assets of the Plan annually. In addition, the fiduciary of an
individual retirement arrangement under Section 408 of the Code (an "IRA")
considering the purchase of Series A Preferred Shares should consider whether
the ownership of Series A Preferred Shares would result in a non-exempt
prohibited transaction under Section 4975 of the Code.
The fiduciary investment considerations summarized below provide a general
discussion that does not include all of the fiduciary investment considerations
relevant to Plans and, where indicated, IRAs. This summary is based on the
current provisions of ERISA and the Code and regulations and rulings
thereunder, and may be changed (perhaps adversely and with retroactive effect)
by future legislative, administrative or judicial actions. PLANS AND IRAS THAT
ARE PROSPECTIVE PURCHASERS OF SERIES A PREFERRED SHARES SHOULD CONSULT WITH AND
RELY UPON THEIR OWN ADVISORS IN EVALUATING THESE MATTERS IN LIGHT OF THEIR OWN
PARTICULAR CIRCUMSTANCES.
Plan Asset Regulation
Under Department of Labor regulations governing what constitutes the
assets of a Plan or IRA ("Plan Assets") for purposes of ERISA and the related
prohibited transaction provisions of the Code (the "Plan Asset Regulation", 29
C.F.R. Sec.2510.3-101), when a Plan or IRA makes an equity investment in
another entity, the underlying assets of the entity will not be considered Plan
Assets if the equity interest is a "publicly-offered security".
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<PAGE>
For purposes of the Plan Asset Regulation, a "publicly-offered security"
is a security that is (a) "freely transferable", (b) part of a class of
securities that is "widely held," and (c) sold to the Plan or IRA as part of an
offering of securities to the public pursuant to an effective registration
statement under the Securities Act and part of a class of securities that is
registered under the Exchange Act within 120 days (or such later time as may be
allowed by the Commission) after the end of the fiscal year of the issuer
during which the offering of such securities to the public occurred. The Series
A Preferred Shares will be registered under the Securities Act and the Exchange
Act within the time periods specified in the Plan Asset Regulation.
The Plan Asset Regulation provides that a security is "widely held" only
if it is a part of the class of securities that is owned by 100 or more
investors independent of the issuer and of one another. A security will not
fail to be "widely held" because the number of independent investors falls
below 100 subsequent to the initial offering as a result of events beyond the
control of the issuer. The Company expects the Series A Preferred Shares to be
"widely held" upon the completion of the offering.
The Plan Asset Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The Plan Asset Regulation further provides
that when a security is part of an offering in which the minimum investment is
$10,000 or less, as is the case with the Offering, certain restrictions
ordinarily will not, alone or in combination, affect the finding that such
securities are "freely transferable." The Company believes that any
restrictions imposed on the transfer of the Series A Preferred Shares are
limited to the restrictions on transfer generally permitted under the Plan
Asset Regulation and are not likely to result in the failure of the Series A
Preferred Shares to be "freely transferable."
A Plan should not acquire or hold the Series A Preferred Shares if the
Company's underlying assets will be treated as the assets of such Plan.
However, the Company believes that under the Plan Asset Regulation the Series A
Preferred Shares should be treated as "publicly-offered securities" and,
accordingly, the underlying assets of the Company should not be considered to
be assets of any Plan or IRA investing in the Series A Preferred Shares.
Effects of Plan Asset Status
ERISA generally requires that the assets of a Plan be held in trust and
that the trustee, or an investment manager (within the meaning of Section 3(38)
of ERISA), have exclusive authority and discretion to manage and control the
assets of the Plan. As discussed above, the assets of the Company under current
law do not appear likely to be assets of the Plans receiving Series A Preferred
Shares as a result of the Offering. However, if the assets of the Company were
deemed to be assets of the Plans under ERISA, certain directors and officers of
the Company might be deemed fiduciaries with respect to the Plans that invest
in the Company and the prudence and other fiduciary standards set forth in
ERISA would apply to them and to all investments.
If the assets of the Company were deemed to be Plan Assets, transactions
between the Company and parties in interest or disqualified persons with
respect to the investing Plan or IRA could be prohibited transactions unless a
statutory or administrative exemption is available. In addition, investment
authority would also have been improperly delegated to such fiduciaries, and,
under certain circumstances, Plan fiduciaries who make the decision to invest
in the Series A Preferred Shares could be liable as co-fiduciaries for actions
taken by the Company that do not conform to the ERISA standards for investments
under Part 4 of Title I of ERISA.
Prohibited Transactions
Section 406 of ERISA provides that Plan fiduciaries are prohibited from
causing the Plan to engage in certain types of transactions. Section 406(a)
prohibits a fiduciary from knowingly causing a Plan to engage directly or
indirectly in, among other things: (a) a sale or exchange, or leasing, of
property with a party in interest; (b) a loan or other extension of credit with
a party in interest; (c) a transaction involving the furnishing of goods,
services or facilities with a party in interest; or (d) a transaction involving
the transfer of Plan assets to, or use of Plan assets by or for the benefit of,
a party in interest. Additionally, Section 406 prohibits a Plan fiduciary from
dealing with Plan assets in its own interest or for its own account, from
acting in any capacity in any transaction involving the Plan on behalf of a
party (or representing a party) whose interests are adverse to the interests of
the Plan, and from receiving any consideration for its own account from any
party dealing with the Plan in connection with a transaction involving Plan
assets. Similar provisions in Section 4975 of the Code apply to transactions
between disqualified persons and Plans and IRAs and result in the imposition of
excise taxes on such disqualified persons.
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<PAGE>
If a prohibited transaction has occurred, Plan fiduciaries involved in the
transaction could be required to (a) undo the transaction, (b) restore to the
Plan any profit realized on the transaction and (c) make good to the Plan any
loss suffered by it as a result of the transaction. In addition, parties in
interest or disqualified persons would be required to pay excise taxes or
penalties.
If the investment constituted a prohibited transaction under Section
408(e)(2) of the Code by reason of the Company engaging in a prohibited
transaction with the individual who established an IRA or his beneficiary, the
IRA would lose its tax-exempt status effective as of the first day of the
taxable year in which such prohibited transaction occurred. The entire balance
of the IRA would be treated as distributed to the individual who established
the IRA or his beneficiary. Such deemed distribution would be taxable as
ordinary income, and could also be subject to the 10% excise tax on premature
distributions. The other penalties for prohibited transactions would not apply.
Thus, the acquisition of the Series A Preferred Shares by a Plan could
result in a prohibited transaction if an Underwriter, the Company, the Bank or
any of their affiliates is a party in interest or disqualified person with
respect to the Plan. Any such prohibited transaction could be treated as exempt
under ERISA and the Code if the Series A Preferred Shares were acquired
pursuant to and in accordance with one or more "class exemptions" issued by the
Department of Labor, such as Prohibited Transaction Class Exemption ("PTCE")
75-1 (an exemption for certain transactions involving employee benefit plans
and broker-dealers (such as the Underwriters), reporting dealers, and banks),
PTCE 84-14 (an exemption for certain transactions determined by an independent
qualified professional asset manager), PTCE 90-1 (an exemption for certain
transactions involving insurance company pooled separate accounts), PTCE 91-38
(an exemption for certain transactions involving bank collective investment
funds), PTCE 95-60 (an exemption for certain transactions involving an
insurance company's general account) and PTCE 96-23 (an exemption for certain
transactions determined by a qualifying in-house asset manager).
A Plan should not acquire the Series A Preferred Shares pursuant to the
Offering if such acquisition will constitute a non-exempt prohibited
transaction.
Plan fiduciaries should also consider the consequences of holding more
than 10% of the Series A Preferred Shares if the Company is "predominantly
held" by qualified trusts. See "Federal Income Tax Considerations--Taxation of
U.S. Stockholders" and "--Taxation of Tax-Exempt Stockholders."
48
<PAGE>
CERTAIN INFORMATION REGARDING THE BANK
The following is a summary of certain information regarding the Bank. As
an integral part of this Prospectus, a copy of the Bank's offering circular
relating to the Bank Preferred Shares to be issued in the event of an Automatic
Exchange (the "Offering Circular"), including copies of the Bank's Quarterly
Report on Form 10-Q for the six months ended June 30, 1998 (the "Form 10-Q")
and the Bank's Annual Report on Form 10-K for the year ended December 31, 1997
(the "Form 10-K"), which are attached to the Offering Circular as Attachment A
and Attachment B, respectively, is attached hereto as Annex I and is
incorporated by reference herein. All material information relating to the Bank
as of such dates and for the periods then ended, including information relating
to the Bank's financial position and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," can be found in these
documents.
Operations of the Bank
The Bank, a FDIC-insured, Massachusetts-chartered trust company, commenced
operations in February, 1988. The Bank conducts its business from its executive
and main office in downtown Boston, Massachusetts, a branch in Chestnut Hill,
Massachusetts, and through its leasing subsidiary in Moberly, Missouri. At
September 30, 1998, the Bank had total assets of $456.7 million, deposits of
$411.5 million and shareholders' equity of $39.6 million. At September 30,
1998, the Bank's Tier 1 Leverage, Tier 1 Risk-based and Total Risk-based
capital ratios were 8.22%, 9.68%, and 10.43%, respectively, sufficient to
enable the Bank to be qualified as being "well-capitalized" under the FDIC's
regulations.
The Bank focuses on selected business lines that management has identified
as having the potential to provide high levels of profitability consistent with
prudent banking practices. These business lines include: (1) the acquisition of
loans secured primarily by commercial real estate, other business assets,
and/or multi-family residential real estate from private sector sellers and
government agencies at a discount from the outstanding balances; (2) the
origination of various types of secured commercial loans; and (3) small-ticket
equipment leasing to small businesses and consumers through its wholly-owned
subsidiary, Dolphin Capital Corporation. The Bank funds the foregoing
activities with deposits consisting primarily of certificates of deposit and
money market accounts. The Bank also offers retail deposit services, including
checking and savings accounts, and related services to businesses and
individuals through the nationwide electronic banking networks.
Summary Financial Information
Profitability. The Bank's net income has increased substantially in recent
years. For the nine months ended September 30, 1998, net income available to
common stockholders was $5.3 million, as compared to $4.1 million for the same
period in 1997. The Bank's net income has increased from $2.4 million in 1995
to $3.8 million in 1996 and $5.8 million in 1997. The Bank had net interest
income of $17.0 million for the nine months ended September 30, 1998 and a net
interest margin of 6.35% for the same period, as compared to net interest
income of $13.7 million for the same period in 1997. The Bank had net interest
income of $19.5 million, $13.7 million and $9.2 million for the years ended
December 31, 1997, 1996, and 1995, respectively, reflecting net interest
margins of 8.08%, 8.36% and 7.37%, respectively, for those periods. The Bank
achieved a return on average assets of 1.87% and a return on average equity of
20.20% in the nine months ended September 30, 1998. The Bank achieved a return
on average assets of 2.18%, 2.29%, and 1.70% and a return on average equity of
20.16%, 18.47%, and 20.69% for the years ended December 31, 1997, 1996, and
1995, respectively.
Asset Quality. At September 30, 1998, the Bank's net non-performing assets
totaled $9.3 million, or 2.04% of total assets, compared to $10.5 million or
3.27% of total assets at December 31, 1997. The Bank's non-performing assets
included $2.1 million of other real estate owned, net ("OREO") at September 30,
1998 and $3.6 million at December 31, 1997. During the nine month period ended
September 30, 1998, the Bank reduced its OREO by $1.5 million from December 31,
1997 and realized net gains on sales of OREO totaling $1.1 million. During the
year ended December 31, 1997, the Bank reduced its OREO by $1.1 million from
December 31, 1996 and realized net gains on sales of OREO totaling $1.1
million.
Regulatory Capitalization. At September 30, 1998, the Bank's Tier 1
Leverage, Tier 1 Risk-based and Total Risk-based capital ratios were 8.09%,
9.53%, and 10.44%, respectively, sufficient to enable the Bank to be qualified
as being "well-capitalized" under the FDIC's regulations. At September 30,
1998, on a pro forma basis after giving
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effect to the offering of Series A Preferred Shares by the Company (assuming
that the over-allotment option is not exercised) and the receipt of $28.2
million of the estimated net proceeds, and assuming all of the net proceeds are
invested in assets bearing a 100% risk weighting, the Bank's Tier 1 Leverage,
Tier 1 Risk-based and Total Risk-based capital ratios would have been 12.61%,
11.78% and 10.11%, respectively.
Lending Activities
At September 30, 1998, the Bank's gross loan and lease portfolio totaled
$387.6 million. At such date the Bank's investment in purchased loans, net of
related discount of $48.5 million and allowance for loan losses of $200,000,
totaled $272.4 million. The Bank's originated portfolio net of the allowance
for loan losses and net deferred loan income totaled $61.9 million at September
30, 1998. The Bank's gross loan portfolio at September 30, 1998 was comprised
primarily of purchased commercial real estate loans (49.6%), purchased other
mortgage loans on real estate (30.2%), and originated commercial real estate
loans (10.5%).
Purchased Loan and Lease Portfolio
A substantial portion of the Bank's business consists of purchasing loans
secured primarily by commercial real estate, other business assets and/or
multi-family residential real estate which management believes are undervalued
due to market, or economic conditions or as a result of special circumstances
which might require a seller to dispose of certain assets. These loans are
generally purchased at discounts from the principal balances and have been
purchased from private sector sellers in the financial services industry and
from government agencies. The Bank has historically purchased loans secured by
assets located in New England. The Bank has recently begun to seek loan
purchase opportunities outside of this area including, among other areas,
California and New York. In the nine months ended September 30, 1998 and in the
years ended 1997, 1996 and 1995, the Bank acquired loans and leases with a
gross outstanding principal balance of $146.6 million, $165.9 million, $164.5
million and $40.2 million with discounts of $18.5 million, $36.7 million, $80.1
million and $10.0 million, respectively. As of September 30, 1998, the gross
outstanding balance of such loans and leases was $321.1 million, and the Bank
had total non-amortizing discount of $32.0 million and amortizing discount of
$16.5 million related to these loans. The Bank's purchased loan and lease
portfolio accounted for 80.6%, 75.3%, 54.8%, and 46.2% of the Bank's loan
interest income in the nine month period ended September 30, 1998 and in the
fiscal years ended December 31, 1997, 1996 and 1995, respectively. The
recognition of loan purchase discount accreted into income accounted for 19.0%,
19.1%, 15.6% and 14.2% of the Bank's loan interest income during the nine month
period ended September 30, 1998 and in the fiscal years ended December 31,
1997, 1996, and 1995, respectively. The weighted average yield for the Bank's
purchased loans was 14.39%, 16.60%, 17.55%, and 19.25%, respectively, during
such periods.
In order to determine the amount that the Bank will bid to acquire loans
(principally pools of discounted loans), the Bank considers, among other
factors, the yield expected to be earned, the geographic location of the loans,
servicing restrictions, if any, the type and value of the collateral securing
the loans, the length of time during which the loans have performed in
accordance with its repayment terms, the recourse nature of the debt, the age
and performance of the loans and the resources of the borrowers and/or
guarantors. In addition to the factors listed above, the Bank will also
consider the amount it may realize through collection efforts or foreclosure
and sale of the collateral property, 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.
All bids are subject to the approval of the Bank's Chairman or President.
Prior to acquiring any loan or pool of loans, the Bank conducts an
acquisition review. This review includes an evaluation of the seller's loan
documentation. The current value of the collateral is estimated utilizing
various methods considering, among other factors, the type of property, its
condition and location and its highest and best use. In some instances, real
estate brokers and/or appraisers with specific knowledge of the area may be
consulted. As the size and complexity of the collateral increases, the Bank's
efforts to value the collateral also increases. For larger, more complex loans,
Bank personnel may visit the collateral real property or conduct an internal
rental analysis of competing commercial properties. New title searches and tax
reports may also be obtained. The Bank may also retain environmental
consultants to review potential environmental issues. The amount of resources
devoted to valuing collateral is determined on a case-by-case basis for each
loan reviewed.
Upon purchase of a loan pool, each loan is assigned to a loan officer. In
managing purchased loan accounts, the loan officers seek, among other things,
to establish good working relationships with the borrowers and to market the
Bank's other banking services to these customers. In the event that a purchased
loan becomes delinquent, or
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if it is delinquent at the time of purchase, the Bank aggressively pursues
repayment. In the event that a delinquent loan becomes non-performing, the Bank
may pursue a number of alternatives including restructuring the loans to levels
that are supported by existing collateral and debt service capabilities. During
this restructuring period, the Bank does not recognize interest income on such
loans unless regular payments are being made. In instances when the loan is not
restructured, the Bank aggressively pursues repayment, foreclosure or, in
certain instances, a deed-in-lieu-of-foreclosure.
Originated Loan and Lease Portfolio
Another primary line of business of the Bank is the origination of various
types of secured commercial loans. These loans are generally secured by
interests in commercial real estate, other business assets and/or single or
multi-family residential real estate. Each application for a loan is subject to
a two-tier review by the Bank's Management Loan Committee and either the Bank's
Chairman or President, or in the case of loans of $2.5 million or more, the
Loan and Investment Committee of the Bank's Board of Directors. Such originated
loans accounted for 24.7%, 45.2%, and 53.8% of the Bank's loan interest income
in the fiscal years ended December 31, 1997, 1996, and 1995, respectively. The
average annual yield of the Bank's originated loans was 11.32%, 12.62%, and
11.73%, respectively, for such periods.
Small-Ticket Equipment Leasing
The Bank's other primary line of business, small-ticket equipment leasing,
is conducted through its subsidiary, Dolphin Capital Corporation ("Dolphin").
The Bank entered into the small-ticket equipment leasing business as a means of
providing a new product line to complement its loan acquisition strategy and to
diversify its asset base. As of September 30, 1998, Dolphin had originated
leases totaling $17.5 million since it commenced operations on May 1, 1998.
Such leases are primarily for the acquisition of computers and other office
equipment. Dolphin's primary business strategy is to originate leases either
for ultimate sale to investors, retaining the lease servicing function as a
source of fee income, or for inclusion in the Bank's loan and lease portfolio.
Regulatory Capital Requirements
General. Under current FDIC prompt corrective action regulations (the
"Capital Regulations"), state-chartered, non-member banks (banks that are not
members of the Federal Reserve System), such as the Bank, are required to
comply with three separate minimum capital requirements: a "Tier 1 Leverage
capital ratio" (as defined below) and two "risk-based" capital ratios.
Leverage Ratio. The Capital Regulations establish a minimum 3% ratio of
Tier 1 capital (defined below) to total assets (the "Tier 1 Leverage capital
ratio") for the most highly rated state-chartered, non-member banks, with an
additional requirement of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively imposes a minimum Tier 1
Leverage capital ratio for such other banks of between 4% to 5% or more. Under
the Capital Regulations, highly rated banks are those that the FDIC determines
are not anticipating or experiencing significant growth and have
well-diversified risk, including no undue interest rate risk exposure,
excellent asset quality, high liquidity and good earnings. "Tier 1 capital"
generally includes common stockholders' equity (including retained earnings),
qualifying noncumulative perpetual preferred stock and any related surplus, and
minority interest in the equity accounts of fully consolidated subsidiaries.
Intangible assets, other than property valued purchased mortgage servicing
rights up to certain specified limits, must be deducted from Tier 1 capital. As
of September 30, 1998, the Bank's Tier 1 Leverage capital ratio was 8.09%.
Risk-based Capital. The risk-based capital requirements contained in the
Capital Regulations generally require state-chartered, non-member banks to
maintain a ratio of Tier 1 capital to risk-weighted assets ("Tier 1 Risk-based
capital ratio") of at least 4% and a ratio of total capital to risk-weighted
assets ("Total Risk-based capital ratio") of at least 8%. Risk-weighted assets
are determined by multiplying certain categories of a bank's assets, including
off-balance sheet asset equivalents, by an assigned risk weight of 0% to 100%
based on the credit risk associated with those assets specified in the Capital
Regulations. For purposes of the risk-based capital requirements, "total
capital" means Tier 1 capital plus supplementary capital, so long as the amount
of supplementary capital that is used to satisfy the requirement does not
exceed the amount of Tier 1 capital. "Supplementary capital" includes, among
other things, so-called permanent capital instruments (perpetual preferred
stock, mandatory redeemable preferred stock, intermediate-term preferred stock,
mandatory convertible subordinated debt and subordinated debt), and a certain
portion of the allowance for loan losses up to a maximum of 1.25% of
risk-weighted assets.
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As of September 30, 1998, the Bank's Tier 1 Risk-based capital ratio was 9.53%
and its Total Risk-based capital ratio was 10.44%.
Regulatory Consequences of Failing to Meet Capital Requirements. A number
of sanctions may be imposed on FDIC-insured banks that are not in compliance
with the Capital Regulations, including, among other things, restrictions on
asset growth and imposition of a capital directive that may require, among
other things, an increase in regulatory capital, reduction of rates paid on
savings accounts, cessation of or limitations on deposit-gathering, lending,
purchasing loans, making specified investments, or issuing new accounts, limits
on operational expenditures, an increase in liquidity and such other
restrictions or corrective actions as the FDIC may deem necessary or
appropriate. In addition, any FDIC-insured bank that is not meeting its capital
requirements must provide the FDIC with prior notice before the addition of any
new director or senior officer.
Under the FDIC's prompt corrective action regulations, a bank is deemed to
be (1) "well capitalized" if it has Total Risk-based capital of 10% or more, a
Tier 1 Risk-based capital ratio of 6% or more and a Tier 1 Leverage capital
ratio of 5% or more and is not subject to any written agreement, order, capital
directive, or corrective action directive, (2) "adequately capitalized" if it
has a Total Risk-based capital ratio of 8% ore more, a Tier 1 Risk-based
capital ratio of 4% or more and a Tier 1 Leverage capital ratio of 4% or more
(3% under certain circumstances) and does not meet the definition of "well
capitalized," (3) "undercapitalized" if it has a Total Risk-based capital ratio
that is less than 8%, a Tier 1 Risk-based capital ratio that is less than 4% or
a Tier 1 Leverage capital ratio that is less than 4% (3% under certain
circumstances), (4) "significantly undercapitalized" if it has a Total
Risk-based capital ratio that is less than 6%, a Tier 1 Risk-based capital
ratio that is less than 3% or a Tier 1 Leverage capital ratio that is less than
3%, and (5) "critically undercapitalized" if it has a ratio of tangible equity
to total assets that is equal to or less than 2%. Section 38 of the Federal
Deposit Insurance Act, as amended ("FDIA") and the regulations also specify
circumstances under which a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). As of September 30, 1998, the Bank's Tier 1
Leverage capital ratio, Tier 1 Risk-based capital ratio and Total Risk-based
capital ratio were 8.09%, 9.53%, and 10.44%, respectively, sufficient to enable
the Bank to be qualified as "well-capitalized" under such FDIC regulations.
Immediately upon becoming undercapitalized, an institution will become
subject to the provisions of Section 38 of the FDIA, which include (1)
restricting payment of capital distributions and management fees, (2) requiring
that the appropriate federal banking agency monitor the condition of the
institution and its efforts to restore its capital, (3) requiring submission of
a capital restoration plan, (4) restricting the growth of the institution's
assets, and (5) requiring prior approval of certain expansion proposals. The
appropriate federal banking agency for an undercapitalized institution also may
take any number of discretionary supervisory actions if the agency determines
that any of these actions is necessary to resolve the problems of the
institution at the least possible long-term cost to the deposit insurance fund,
subject in certain cases to specified procedures. These discretionary
supervisory actions include the following: requiring the institution to raise
additional capital; restricting transactions with affiliates; restricting
interest rates paid by the institution on deposits; requiring replacements of
senior executive officers and directors; restricting the activities of the
institution and its affiliates; requiring divestiture of the institution or the
sale of the institution to a willing purchaser; and any other supervisory
action that the agency deems appropriate.
The Federal Deposit Insurance Corporation Improvements Act of 1991, as
amended, provides for the appointment of a conservator or receiver for any
insured depository institution that is "critically undercapitalized," or that
is "undercapitalized" and (1) has no reasonable prospect of becoming
"adequately capitalized," (2) fails to become "adequately capitalized" when
required to do so under the prompt corrective action provisions, (3) fails to
submit an acceptable capital restoration plan within the prescribed time
limits, or (4) materially fails to implement an accepted capital restoration
plan. In addition, the FDIC will be required to appoint a receiver (or a
conservator) for a "critically undercapitalized" depository institution within
90 days after the institution becomes "critically undercapitalized" or to take
such other action that would better achieve the purpose of Section 38 of FDIA.
Such alternative action can be renewed for successive 90 day periods. With
limited exceptions, however, if the institution continues to be "critically
undercapitalized" on average during the quarter that begins 270 days after the
institution first became "critically undercapitalized," a receiver must be
appointed.
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The Bank's actual capital ratios and capital requirements as of September
30, 1998 are set forth in the following table:
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------------------------------------------
Minimum To Be Well
Capitalized Under Prompt
Minimum Capital Corrective Action
Actual Requirements Provisions
------------------------ ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----------- ---------- ---------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk weighted assets) ......... $36,989 10.44% $ 28,350 8.00% $35,437 10.00%
Tier 1 capital
(to risk weighted assets) ......... 33,787 9.53 14,175 4.00 21,262 6.00
Tier 1 capital
(to average assets) ............... 33,787 8.09 16,700- 4.00- 20,875 5.00
20,875 5.00
</TABLE>
53
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement dated , 1998 (the "Underwriting Agreement"), the
Underwriters named below (the "Underwriters") who are represented by Friedman,
Billings, Ramsey & Co., Inc. and Advest, Inc. (the "Representatives"), have
severally agreed to purchase from the Company the following respective numbers
of Series A Preferred Shares at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
Number of
Series A
Underwriter Preferred Shares
- --------------------------------------------------- -----------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc. .........
Advest, Inc. ...................................
Total ..................................... 1,200,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the Series A Preferred Shares offered hereby
if any of such shares are purchased.
The Company had been advised by the Underwriters that the Underwriters
propose to offer the Series A Preferred Shares to the public at the initial
public offering price set forth on the cover page of this Prospectus and to
certain securities dealers at such price less a concession not in excess of
$ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
offering, the public offering price, concession, allowance and reallowance may
be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 180,000
additional Series A Preferred Shares at the initial public offering price less
the underwriting discount set forth on the cover page of this Prospectus. To
the extent that the Underwriters exercise such option, each of the Underwriters
will have a firm commitment to purchase approximately the same percentage
thereof that the number of Series A Preferred Shares to be purchased by it
shown in the above table bears to 1,200,000 and the Company will be obligated,
pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Series A Preferred Shares offered hereby. If
the option is exercised, the Underwriters will offer such additional shares on
the same terms as those on which the 1,200,000 Series A Preferred Shares are
being offered.
The Underwriters have informed the Company that they do not expect sales
to accounts over which the Underwriters exercise discretionary authority to
exceed 5% of the total number of shares of Series A Preferred Shares offered by
them.
Prior to the offering, there has been no public market for the Series A
Preferred Shares. The Company has applied to have the Series A Preferred Shares
quoted on The Nasdaq National Market under the trading symbol "ATLP." The
trading of the Series A Preferred Shares on The Nasdaq National Market is
expected to commence within 30 days after the initial delivery of the Series A
Preferred Shares. The Underwriters have advised the Company that they intend to
make a market in the Series A Preferred Shares prior to the commencement of
trading on The Nasdaq National Market. The Underwriters will have no obligation
to make a market in the Series A Preferred Shares, however, and may cease
market making activities, if commenced, at any time.
The Company and the Bank have agreed to indemnify the Underwriters against
certain losses, claims, damages or liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
In connection with the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Series A Preferred Shares. Such transactions may include stabilization
transactions pursuant to which the Representatives may bid for or purchase
Series A Preferred Shares for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Series A Preferred Shares in connection with the
offering than they are committed to purchase from the Company, and in such case
the Representatives may purchase Series A Preferred Shares in the open market
following completion of the offering to cover all or a portion of such short
position. The Underwriters may also
54
<PAGE>
cover all or a portion of such short position by exercising the Underwriters'
over-allotment option referred to above. In addition, the Representatives, on
behalf of the Underwriters, may impose "penalty bids" under contractual
arrangements with the Underwriters whereby they may reclaim from an Underwriter
(or dealer participating in the offering) for the account of other
Underwriters, the selling concession with respect to Series A Preferred Shares
that are distributed in the offering but subsequently purchased for the account
of the Underwriters in the open market. Any of the transactions described in
this paragraph may result in the maintenance of the price of the Series A
Preferred Shares at a level above that which might otherwise prevail in the
open market. The imposition of a penalty bid might also affect the price of the
Series A Preferred Shares to the extent that it could discourage resales of the
security. Neither the Company nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the Series A
Preferred Shares. In addition, neither the Company nor any of the Underwriters
makes any representation that the Underwriters will engage in such transactions
or that such transactions, once commenced, will not be discontinued without
notice.
Friedman, Billings, Ramsey & Co., Inc. provides investment banking and
financial advisory services to the Company and the bank from time to time.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Goodwin,
Procter & Hoar LLP, Boston, Massachusetts, and for the Underwriters by
McDermott, Will & Emery, Chicago, Illinois.
INDEPENDENT AUDITORS
The audited financial statements of the Company as of September 30, 1998
and for the period from inception on March 20, 1998 to September 30, 1998
included in this Prospectus have been audited by Wolf & Company, P.C.,
independent auditors, as stated in their report appearing herein.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission a
registration statement on Form S-11 (referred to, together with all amendments,
exhibits, schedules and supplements thereto, as the "Registration Statement"),
under the Securities Act of 1933 and the rules and regulations thereunder, for
the registration of the Series A Preferred Shares. This Prospectus, which forms
a part of the Registration Statement, does not contain all the information set
forth in the Registration Statement, certain parts of which have been omitted
as permitted by SEC rules and regulations. For further information with respect
to the Company and the Series A Preferred Stock, you should refer to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document referred to herein are not
necessarily complete. Where such contract or other document is an exhibit to
the Registration Statement, each such statement is qualified in all respects by
the provisions of such exhibit.
You can inspect and copy the Registration Statement at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and the Commission's regional offices at
Seven World Trade Center, 13th Floor, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of all or any portion of the Registration Statement can be obtained from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the Registration
Statement is publicly available through the Commission's site on the Internet's
World Wide Web, located at http://www.sec.gov.
As a result of this Offering, the Company will become subject to the full
informational requirements of the Securities Exchange Act of 1934. The Company
will fulfill its obligations with respect to such requirements by filing
periodic reports and other information with the Commission.
55
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report .......................... F-2
Balance Sheet ......................................... F-3
Statement of Income ................................... F-4
Statement of Changes in Stockholders' Equity .......... F-5
Statement of Cash Flows ............................... F-6
Notes to Financial Statements ......................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Atlantic Preferred Capital Corporation:
We have audited the accompanying balance sheet of Atlantic Preferred Capital
Corporation as of September 30, 1998 and the related statements of income,
changes in stockholders' equity and cash flows for the period from inception,
March 20, 1998, through September 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Atlantic Preferred Capital
Corporation as of September 30, 1998 and the results of its operations and its
cash flows for the period from inception, March 20, 1998, through September 30,
1998 in conformity with generally accepted accounting principles.
WOLF & COMPANY, P.C.
Boston, Massachusetts
October 23, 1998
F-2
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
ASSETS
Cash account with Bank ................................................................... $ 146
Money market account with Bank ........................................................... 5,117
--------
Total cash and cash equivalents .................................................... 5,263
--------
Loans (Note 2) ........................................................................... 144,084
Less allowance for loan losses .......................................................... (1,337)
--------
Loans, net ......................................................................... 142,747
Accrued interest receivable .............................................................. 943
Accounts receivable from Bank ............................................................ 72
Other assets ............................................................................. 11
--------
$149,036
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Preferred stock dividends payable ........................................................ $ 40
Accrued expenses and other liabilities (Note 4) .......................................... 193
--------
Total liabilities .................................................................. 233
--------
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, issued and
outstanding (Note 3) .................................................................. --
Common stock, $.01 par value, 100 shares authorized, issued and outstanding.............. --
Additional paid-in capital .............................................................. 140,740
Retained earnings ....................................................................... 8,063
--------
Total stockholders' equity ......................................................... 148,803
--------
$149,036
========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
STATEMENT OF INCOME
Period from Inception, March 20, 1998, through September 30, 1998
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Interest income:
Interest and fees on loans ................................ $8,270
Interest income on money market account with Bank ......... 23
------
Total interest income ................................ 8,293
Loan servicing expense (Note 4) ............................ 190
------
Net income ........................................... 8,103
Preferred stock dividends .................................. 40
------
Earnings available to common shareholder ................... $8,063
======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Period from Inception, March 20, 1998, through September 30, 1998
<TABLE>
<CAPTION>
Preferred Stock
Common Stock Series B Additional
------------------- ------------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
-------- -------- -------- -------- ----------- ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock .............. 100 $-- -- $-- $ -- $ -- $ --
Issuance of Preferred Stock,
Series B ............................. -- -- 1,000 -- -- -- --
Capital contribution from
common stockholder ................... -- -- -- -- 140,740 -- 140,740
Net income ............................ -- -- -- -- -- 8,103 8,103
Cumulative dividend on
Preferred Stock, Series B ............ -- -- -- -- -- (40) (40)
--- --- ----- --- -------- ------ --------
Balance at September 30, 1998 ......... 100 $-- 1,000 $-- $140,740 $8,063 $148,803
=== === ===== === ======== ====== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
Period from Inception, March 20, 1998, through September 30, 1998
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Cash flows from operating activities:
Net income ...................................................................... $ 8,103
Adjustments to reconcile net income to net cash provided by operating activities:
Discount accretion ............................................................ (1,188)
Other, net .................................................................... 303
---------
Net cash provided by operating activities .................................. 7,218
---------
Cash flows from investing activities:
Loan repayments ................................................................. 19,654
Purchases of loans .............................................................. (21,609)
---------
Net cash used in investing activities ...................................... (1,955)
---------
Net change in cash and cash equivalents .......................................... 5,263
Cash and cash equivalents at beginning of period ................................. --
---------
Cash and cash equivalents at end of period ....................................... $ 5,263
=========
Supplemental information:
Capital contribution from common stockholder in form of mortgage loans .......... $ 140,740
=========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
Period from Inception, March 20, 1998, through September 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
Atlantic Preferred Capital Corporation (the "Company") is a Massachusetts
corporation organized on March 20, 1998, which acquires and holds real estate
assets. CHB Realty Corp., a wholly-owned subsidiary of Atlantic Bank and Trust
Company (the "Bank"), a federally insured Massachusetts trust company, owns all
of the Company's Common Stock (as described below). The Bank is in compliance
with its regulatory capital requirements at September 30, 1998.
On March 31, 1998, the Company was initially capitalized with the issuance
to the Bank of 100 shares of the Company's common stock (the "Common Stock"),
$.01 par value and the issuance of 1,000 shares of Preferred Stock, Series B
(the "Preferred Stock"), $.01 par value to the Bank.
The Bank then contributed to the Company a portfolio of loans at its
estimated fair value of $140,740,000. Such loans were recorded in the
accompanying balance sheet at the Bank's historical cost which approximated
their estimated fair values.
Subsequent to the initial contribution of loans, the Bank contributed its
100 shares of Common Stock and 800 shares of Preferred Stock to CHB Realty
Corp.
The Company intends to sell Series A Preferred Stock in an underwritten
public offering. The cost of this public offering will be paid by the Company
out of the proceeds from the sale of the Series A Preferred Stock.
Business
The Company's business is to acquire and hold real estate assets from the
Bank. The Bank's primary business lines include the acquisition of commercial
real estate loans from private sector sellers and government agencies and the
origination of various types of secured commercial loans.
Use of estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the balance sheet and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for losses on loans, the
allocation of purchase discount between amortizing and non-amortizing portions,
and the rate at which discount is accreted into interest income.
Cash equivalents
Cash equivalents include cash and money market accounts held at the Bank.
Loans
A substantial portion of the loan portfolio is represented by commercial
real estate loans in the Northeast and California areas. The ability of the
Company's debtors to honor their contracts is dependent upon the real estate
market and general economic conditions in those markets.
Loans, as reported, have been reduced by discounts on loans purchased, net
deferred loan fees and the allowance for loan losses. Interest on loans is
recognized on a simple interest basis.
The accrual of interest is discontinued when the collectibility of
principal and interest is uncertain, or payment of principal and interest have
become contractually delinquent ninety days or more. However, a loan may remain
on accrual status if the value of the collateral securing the loan is deemed
sufficient to cover principal or carrying
F-7
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
value and the accrual of interest thereon. Interest income previously accrued
on such discontinued interest loans is generally reversed against current
period interest income. Contractual delinquency on purchased loans is
determined prospectively from the Bank's purchase date rather than from the
origination date.
Generally, all loans in a Bank purchased pool of loans are accounted for
on an aggregate basis. The amortizing portion of discounts on purchased loan
pools representing market yield adjustments is accreted into interest income
over the lives of the loans, as adjusted for estimated prepayments, using a
method which approximates the level interest method. The remaining
non-amortizing portion of discounts on loans purchased is accounted for on the
cost recovery method until it is determined that the amount and timing of
collections are reasonably estimable and collection is probable. At such time,
if the amount that is probable of collection is greater than the net carrying
value of the purchased loans, the difference is transferred from the
non-amortizing portion of discount to the amortizing portion, and is accreted
into interest income over the remaining lives of the loans on a method
approximating the interest method. Under the Company's loan rating system, each
loan is evaluated for impairment, and where necessary, specific allowances are
established and allocated from the respective loan pool's non-amortizing
discount and if none available, from the respective loan pool's amortizing
discount, and further, if none available, an allowance is established through a
provision for loan losses charged to earnings.
Effective January 1, 1999, based on a recent Proposed Statement of
Position, Accounting for Discounts Related to Credit Quality draft of July 21,
1998 prepared by a task force of the American Institute of Certified Public
Accountants and the need to facilitate the transfer of qualified individual
loans to the Company, the Bank and the Company will change on a prospective
basis their method of accounting for purchased loan discounts and the related
recognition of discount loan income and provisions for loan losses. Such
accounting change will account for discount loan income and loan loss
provisions on an individual loan basis, rather than as currently recognized in
the aggregate on a purchased pool basis and will be accounted for as a "change
in estimate" in accordance with Accounting Principles Board Opinion No. 20.
Management does not anticipate any material impact on stockholders' equity on
the effective date of the accounting change. However, subsequent earnings will
be affected by changes in individual loans rather than by changes in the
aggregate for purchased loan pools. Over the lives of the respective loans,
management does not anticipate that there will be any material differences in
the reported amounts of related discount loan income and loan loss provisions,
net.
Net deferred loan fees are amortized as an adjustment of the related loan
yields using a method which approximates the interest method.
Allowance for loan losses
The balance of the allowance for loan losses was transferred from the Bank
at the time loans were contributed to the Company. In the normal course of
business, the allowance for loan losses will be adjusted through a provision for
loan losses charged to earnings and is maintained at a level considered adequate
to provide for reasonably foreseeable loan losses.
The provision and the level of the allowance are evaluated on a regular
basis by management and are based upon management's periodic review of the
collectibility of the loans in light of known and inherent risks in the nature
and volume of the loan portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral
and prevailing economic conditions. This evaluation is inherently subjective as
it requires estimates that are susceptible to significant change. Ultimately,
losses may vary from current estimates and future additions to the allowance
may be necessary.
Loan losses are charged against the allowance when management believes the
collectibility of the loan balance is unlikely. Subsequent recoveries, if any,
are credited to the allowance.
A loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
F-8
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are
not classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan-by-loan basis by
comparing the Company's recorded investment in the loan to the present value of
expected future cash flows discounted at the loan's effective interest rate,
the loan's obtainable market price, or the fair value of the collateral if the
loan is collateral dependent. In the case of the Bank's purchased loan
portfolio, the recorded investment represents the Bank's purchase price net of
any related non-amortizing discounts. Substantially all of the Company's loans
which have been identified as impaired have been measured by the fair value of
existing collateral.
See discussion on change in accounting for purchased loans included in the
preceding section, Loans.
Income taxes
The Company will elect, for Federal income tax purposes, to be treated as
a Real Estate Investment Trust ("REIT") and intends to comply with the
provisions of the Internal Revenue Code of 1986, as amended (the "IRC").
Accordingly, the Company will not be subject to Federal corporate income taxes
to the extent it distributes at least 100% of its REIT taxable income to
stockholders and as long as certain assets, income and stock ownership tests
are met in accordance with the IRC. Because management of the Company believes
it will qualify as a REIT for federal income tax purposes, no provision for
income taxes is included in the accompanying financial statements.
2. LOANS, NET
A summary of the balances of loans at September 30, 1998 follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Bank purchased loan portfolio:
Mortgage loans on real estate:
Commercial real estate ............................. $ 75,718
One to four family ................................. 6,828
Multifamily ........................................ 40,241
Land ............................................... 2,058
---------
Total ............................................ 124,845
Secured commercial .................................. 255
Other ............................................... 251
---------
Total Bank purchased loan portfolio .............. 125,351
Less discount:
Non-amortizing portion ............................. (11,084)
Amortizing portion ................................. (7,279)
---------
Total Bank purchased loan portfolio, net ......... 106,988
---------
Bank originated loans:
Mortgage loans on real estate:
Commercial real estate ............................. 30,306
One to four family ................................. 3,650
Multifamily ........................................ 2,441
Land ............................................... 799
---------
Total Bank originated loans ...................... 37,196
</TABLE>
F-9
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
2. LOANS, NET (concluded)
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Less:
Allowance for loan losses ................. (1,337)
Net deferred loan fees .................... (100)
------
Total Bank originated loans, net ......... 35,759
------
Total loans, net ....................... $142,747
========
</TABLE>
An analysis of the allowance for loan losses for the period ended
September 30, 1998 follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Balance at inception, March 20, 1998 ............... $ --
Transfer from Bank with loans contributed .......... 1,337
------
Balance at end of period ........................... $1,337
======
</TABLE>
At September 30, 1998, impaired Bank purchased loans, net of non-amortizing
discount, amounted to $2,163,000.
No additional funds are committed to be advanced in connection with impaired
loans.
For the period ended September 30, 1998, the average recorded investment on
impaired loans amounted to $1,180,000. The Company recognized $24,000 of
interest income on impaired loans, during the period that they were impaired,
primarily on the cash basis.
Non-accrual loans totaled $1,516,000 at September 30, 1998. Interest not
accrued on such loans amounted to $111,000 at September 30, 1998.
3. PREFERRED STOCK
On March 31, 1998, the Company initially issued 1,000 shares of its Series
B 8% Cumulative Non-convertible Preferred Stock to the Bank. Subsequently, the
Bank contributed 800 of its shares to CHB Realty Corp. Holders of the preferred
stock are entitled to receive, if declared by the Board of Directors of the
Company, dividends at a rate of 8% of the average daily outstanding liquidation
amount, as defined. Dividends accumulate at the completion of each Completed
Period, as defined, and payments dates are determined by the Board of
Directors. The preferred stock may be redeemed by the Company for its
outstanding liquidation amount plus accrued dividends upon the occurrence of
certain events.
The 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.
In connection with the Company's Series A Preferred Stock offering (see
Note 1), the Series B Preferred Stock will be retired and the Total Liquidation
Amount will be paid to the Series B Preferred stockholders.
4. RELATED PARTY TRANSACTIONS
The Bank performs advisory services and services the loans owned by the
Company. The servicing fee rate is 0.25% per annum of the outstanding principal
balance of the loans. Servicing fees for the period from inception through
September 30, 1998 totaled $190,000 and are included in accrued expenses and
other liabilities.
In addition to the loans contributed to the Company by the Bank on March
31, 1998 (see Note 1), the Company also purchased from the Bank loans with a
carrying value of $21,681,000 during the period ended September 30, 1998. The
carrying value approximated the fair value of the loans at the date of
purchase.
F-10
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Concluded)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of estimated fair values of all financial instruments where
it is practicable to estimate such values. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash and money market
accounts approximate fair value.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. Fair values of other loans are estimated using discounted cash
flow analyses, with interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. Fair values
of non-performing loans are estimated primarily by using underlying
collateral values.
Other financial assets: The carrying amounts of accrued interest
receivable and accounts receivable from Bank approximate fair value.
Financial liabilities: The carrying amounts of preferred stock dividends
payable to the Bank and CHB Realty Corp. and the servicing fee payable
to the Bank approximate fair value.
The estimated fair values, and related carrying amounts, of the Company's
financial instruments at September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
---------- ----------
(In thousands)
<S> <C> <C>
Financial assets:
Cash and cash equivalents ......... $ 5,263 $ 5,263
Loans, net ........................ 142,747 148,540
Other financial assets ............ 1,015 1,015
Financial liabilities .............. 230 230
</TABLE>
F-11
<PAGE>
ANNEX I--OFFERING CIRCULAR
<PAGE>
OFFERING CIRCULAR ANNEX I
138,000 Shares
Atlantic Bank and Trust Company
% Noncumulative Preferred Stock, Series C
(Liquidation preference $250 per share)
The Noncumulative Preferred Stock, par value $1.00 per share (the "Bank
Preferred Shares"), of Atlantic Bank and Trust Company, will be issued only
upon the automatic exchange of the % Noncumulative Exchangeable Preferred
Stock, Series A (the "REIT Preferred Shares") of Atlantic Preferred Capital
Corporation, an indirect wholly-owned subsidiary of the Bank, upon the
occurrence of certain events. See "Summary--Atlantic Bank and Trust
Company--REIT Preferred Offering". Dividends on the Bank Preferred Shares will
be payable at the same rate as the REIT Preferred Shares if, when and as
declared by the Board of Directors of the Bank. For a description of the terms
of the Bank Preferred Shares, see "Description of the Bank Preferred Shares"
herein.
The Bank Preferred Shares rank, in priority of payment of dividends and
rights upon the voluntary or involuntary dissolution, liquidation or winding up
of the Bank, junior to all claims of the Bank's creditors, including the claims
of the Bank's depositors, and of the Federal Deposit Insurance Corporation (the
"FDIC"). The Bank Preferred Shares rank superior and prior to the issued and
outstanding common stock and preferred stock of the Bank with respect to
dividend rights and rights upon voluntary or involuntary dissolution,
liquidation or winding up of the Bank, and to all other classes and series of
equity securities of the Bank hereafter issued, other than any class or series
expressly designated as being on parity with or senior to the Bank Preferred
Shares. The common stock of the Bank is the only class of equity securities
currently outstanding.
The REIT Preferred Shares have been registered with the Securities and
Exchange Commission (the "SEC") and are expected to be quoted on The Nasdaq
National Market under the symbol "ATLP". In the event the REIT Preferred Shares
are exchanged into Bank Preferred Shares, the Bank does not intend to apply for
listing of the Bank Preferred Shares on any securities exchange or for
quotation through the National Association of Securities Dealers Automated
Quotation System.
An investment in the Bank Preferred Shares involves a high degree of risk.
Investors should carefully consider the risk factors and other considerations
relating to the Bank and the Bank Preferred Shares. See "Risk Factors and Other
Considerations."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE MASSACHUSETTS COMMISSIONER OF BANKS, THE SECURITIES
AND EXCHANGE COMMISSION OR ANY OTHER FEDERAL AGENCY, OR BY ANY STATE SECURITIES
COMMISSION, NOR HAS SUCH OFFICE, CORPORATION, COMMISSION, OTHER AGENCY OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
OFFERING CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSIT ACCOUNTS OF ANY BANK AND ARE NOT
INSURED TO ANY EXTENT BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
The date of this Offering Circular is , 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
Available Information ........................................................ OC-2
Information With Respect to the Registrant ................................... OC-2
Offering Circular Summary .................................................... OC-3
Selected Consolidated Financial Data ......................................... OC-5
Risk Factors ................................................................. OC-7
Management ................................................................... OC-13
Management and Principal Stockholders ........................................ OC-19
Certain Relationships and Transactions ....................................... OC-21
Description of the Bank Preferred Shares ..................................... OC-22
Legal Matters ................................................................ OC-24
Attachment A--Quarterly Report of the Bank on Form 10-Q for the
quarter ended June 30, 1998 ................................................. A-1
Attachment B--Annual Report of the Bank on Form 10-K for the fiscal year ended
December 31, 1997 (table of contents at page (i)) ........................... B-1
</TABLE>
AVAILABLE INFORMATION
The Bank is subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in
accordance therewith, files reports and other information with the FDIC. Such
reports and other information may be inspected without charge and copied at
prescribed rates at the public reference facilities maintained by the FDIC at
801 17th Street, N.W. Washington, D.C. 20434.
INFORMATION WITH RESPECT TO THE REGISTRANT
As an integral part of this Offering Circular, the Bank has attached
complete copies (excluding exhibits) of its Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 (Attachment A) (the "Form 10-Q") and its Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 (Attachment B)
(the "Form 10-K"). All material information as of these periods relating to the
Bank, including information relating to the Bank's financial position and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," can be found in these documents.
OC-2
<PAGE>
OFFERING CIRCULAR SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Offering Circular and in the Form 10-Q
(Attachment A) and Form 10-K (Attachment B) attached hereto. You should read
the entire Offering Circular carefully, especially the risks of investing in
the Bank Preferred Shares discussed under "Risk Factors."
The Bank
Atlantic Bank and Trust Company, a FDIC-insured Massachusetts-chartered
trust company, commenced operations in February, 1988. The Bank conducts its
business from its executive and main offices in downtown Boston, Massachusetts,
a branch in Chestnut Hill, Massachusetts and through its leasing subsidiary in
Moberly, Missouri. At September 30, 1998, the Bank had total assets of $456.7
million, deposits of $411.5 million and shareholders' equity of $39.6 million.
At September 30, 1998, the Bank's Tier 1 Leverage, Tier 1 Risk-based and Total
Risk-based capital ratios were 8.09%, 9.53%, and 10.44%, which were sufficient
for the Bank to be considered "well-capitalized" under applicable FDIC
regulations.
The Bank focuses on selected business lines that management has identified
as having the potential to provide high levels of profitability consistent with
prudent banking practices. These business lines primarily include: (1) the
acquisition of loans secured primarily by commercial real estate, other
business assets, and/or multi-family residential real estate from private
sector sellers and government agencies at a discount from the outstanding
balances; (2) the origination of various types of secured commercial loans; and
(3) small-ticket equipment leasing to small businesses and consumers through
its wholly-owned subsidiary, Dolphin Capital Corporation. The Bank funds the
foregoing activities with deposits consisting primarily of certificates of
deposit and money market accounts. The Bank also offers retail deposit
services, including checking and savings accounts, and related services to
businesses and individuals through the nationwide electronic banking networks.
REIT Preferred Stock Offering
A registration statement has been filed with the SEC for the public
issuance of 1,200,000 shares of Noncumulative, Exchangeable Preferred Stock,
Series A (1,380,000 shares if the underwriters' over-allotment option is
exercised in full) ("Preferred Capital Shares") by Atlantic Preferred Capital
Corporation, a wholly-owned subsidiary of the Bank (the "Company") operated in
a manner intended to permit it to be taxed as a real estate investment trust
("REIT") for federal income tax purposes. The Bank created the Company for the
purpose of acquiring and holding real estate mortgage assets in a
cost-effective manner and providing the Bank with an additional means of
raising regulatory capital. The Series A Preferred Shares will be automatically
exchanged (an "Automatic Exchange") for Bank Preferred Shares if the FDIC
directs so in writing upon the occurrence of one of the following Exchange
Events: (1) the Bank becomes "undercapitalized" under applicable regulations,
(2) the Bank is placed into bankruptcy, reorganization, conservatorship or
receivership or (3) the FDIC, in its sole discretion, anticipates the Bank
becoming "undercapitalized" in the near term. Proceeds from the issuance of the
Series A Preferred Shares will be used by the Company for general corporate
purposes in furtherance of its business strategy, including the acquisition of
mortgage loans and other REIT-qualified assets from the Bank's portfolio.
Because the Company intends to operate in a manner so as to permit it to
qualify as a REIT for federal income tax purposes, dividends payable on the
Series A Preferred Shares will be deductible by the Company for such purposes.
The Offering
<TABLE>
<S> <C>
Securities Offered ......... 138,000 Bank Preferred Shares.
Exchange ................... The Bank Preferred Shares are to be issued, if ever, in connection with an
exchange of the Preferred Capital Shares of the Company, an indirect
subsidiary of the Bank. See "Exchange."
Ranking .................... The Bank Preferred Shares rank senior to the Bank's Common Stock. As such,
you, as a holder of Bank Preferred Shares, will receive full dividends prior to
the holders of Common Stock and junior preferred stock and in a liquidation
you will receive your full liquidation preference plus accrued and unpaid
dividends prior to the holders of Common Stock and junior preferred stock
receiving payment for their shares. Additional shares of preferred stock ranking
senior to the Bank Preferred Shares may not be issued without the approval of
holders of more than two-thirds of the Bank Preferred Shares. Additional shares
of preferred stock ranking on a parity with the Bank Preferred Shares may not
be issued without the approval of a majority of the Independent Directors.
</TABLE>
OC-3
<PAGE>
<TABLE>
<S> <C>
Dividends ...................... Dividends on the Bank Preferred Shares are payable at the rate of % per
annum of the liquidation preference (or $250.00 per share), if, when and as
declared by the Board of Directors of the Bank. If declared, dividends are
payable for the preceding quarter on the 15th day of January, April, July and
October in each year. Dividends on the Bank Preferred Shares are not
cumulative. If no dividends, or less than full dividends, are declared on the Bank
Preferred Shares by the Bank for a quarterly dividend period, you will have no right
to receive such dividends for that period, and the Bank will have no
obligation to pay a full or partial dividend for that period, whether or not such
dividends are declared and paid for any future period with respect to either the
Bank Preferred Shares, any class of junior preferred stock or the Common Stock.
If less than full dividends are paid on the Bank Preferred Shares for a
quarterly dividend period, the payment of dividends on the Common Stock
and any class of junior preferred stock will be prohibited for that period and
at least the following three quarterly dividend periods. See "Description of
the Bank Preferred Shares--Dividends." The Bank's ability to pay cash
dividends is subject to regulatory and other restrictions described herein.
Liquidation Preference ......... The liquidation preference for each Bank Preferred Share is $250.00, plus
any quarterly accrued and unpaid dividends. See "Description of Bank
Preferred Shares--Rights Upon Liquidation."
Redemption ..................... The Bank Preferred Shares are not redeemable prior to ,
2003, after which they are redeemable at the option of the Bank, with the
prior written approval of the FDIC. The Bank Preferred Shares are not
convertible into any other securities of the Bank.
Voting Rights .................. Holders of Bank Preferred Shares will not have any voting rights, except
as expressly provided by law. On any matter on which holders of the Bank
Preferred Shares may vote, each Bank Preferred Share will be entitled to one
vote. See "Description of Bank Preferred Shares--Voting Rights."
Use of Proceeds ................ The Bank Preferred Shares will only be issued in connection with an
exchange for the Preferred Capital Shares. The proceeds from the sale of the
Preferred Capital Shares were used by Atlantic Preferred Capital
Corporation to purchase a portfolio of mortgage assets and to pay expenses
associated with the offering of the Preferred Capital Shares. The exchange
of Preferred Capital Shares for Bank Preferred Shares will produce no
proceeds to the Bank.
Absence of a Public Market ..... There is currently no public market for the Bank Preferred Shares and such
shares will not be listed on any securities exchange or for quotation on The
Nasdaq Stock Market.
</TABLE>
RISK FACTORS
See "Risk Factors" for a discussion of the risk factors and other
considerations relating to the Bank and the Bank Preferred Shares.
OC-4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables present selected consolidated financial and other
data of the Bank at the dates and for the periods indicated. The financial
condition, operations and balance sheet data as of and for the years ended
December 31, 1997, 1996, 1995, 1994 and 1993 have been derived from financial
statements audited by Wolf & Company, P.C., independent certified public
accountants. In the opinion of management, the amounts shown at September 30,
1998 and 1997 and for the nine month periods then ended include all
adjustments, (consisting solely of normal recurring accruals) necessary for a
fair presentation of the consolidated results for such periods. The interim
results are not necessarily indicative of the results for an entire year. The
selected consolidated financial and other data should be read in conjunction
with, and are qualified in their entirety by reference to, the information in
the Consolidated Financial Statements and related Notes set forth in the
attached Form 10-K.
<TABLE>
<CAPTION>
As of and for the
Nine Months Ended
September 30,
-----------------------
1998 1997
----------- -----------
(unaudited)
(in thousands, except
per share data and
percentages)
<S> <C> <C>
Financial Condition Data (Period End):
Total assets ................................... $ 456,662 $ 300,426
Purchased loans and leases ..................... 321,115 213,534
Total discount ................................ (48,526) (37,252)
Allowance for losses on purchased loans ....... (200) --
Originated loans and leases .................... 64,348 67,283
Allowance for losses on originated loans
and leases .................................. (2,463) (2,259)
Investment securities .......................... 52,490 7,782
Cash and cash equivalents ...................... 41,524 39,015
Deposits ....................................... 411,475 266,630
Stockholders' equity ........................... 39,614 30,101
Non-performing loans ........................... 7,187 10,571
Other real estate owned, net ................... 2,107 4,389
Operations Data (Period):
Interest income ................................ $ 31,843 $ 23,138
Interest expense ............................... 14,887 9,395
--------- ---------
Net interest income ............................ 16,956 13,743
Provision for loan and lease losses ............ 819 275
--------- ---------
Net interest income after provision for
loan and lease losses ......................... 16,137 13,468
Gains on sales of investment securities, net ... 120 41
Gains on sales of loans and leases, net ........ 535 117
Other income ................................... 401 372
Operating expenses ............................. (9,877) (6,983)
--------- ---------
Income before income taxes...................... 7,316 7,015
Provision (benefit) for income taxes ........... 1,928 2,925
--------- ---------
Net income ..................................... 5,388 4,090
Preferred stock dividend ....................... (45) --
--------- ---------
Net income available for common stock
dividend ...................................... $ 5,343 $ 4,090
Per Share Data:
Net income --
Basic ......................................... $ 1.30 $ 1.01
Diluted ....................................... 1.20 0.95
Book value at end of period .................... 9.46 7.42
Tangible book value at end of period ........... 8.18 7.40
Weighted average shares outstanding
Basic ......................................... 4,099 4,039
Diluted ....................................... 4,435 4,298
<CAPTION>
As of and for the
Years Ended
December 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------
(in thousands, except per share data and percentages)
<S> <C> <C> <C> <C> <C>
Financial Condition Data (Period End):
Total assets ................................... $ 321,776 $ 230,789 $ 163,157 $131,614 $ 48,987
Purchased loans and leases ..................... 227,147 152,228 65,171 39,744 8,241
Total discount ................................ (40,184) (38,192) (13,295) (8,378) (732)
Allowance for losses on purchased loans ....... -- -- -- -- --
Originated loans and leases .................... 70,142 71,626 80,915 60,659 32,483
Allowance for losses on originated loans
and leases .................................. (2,273) (1,965) (1,265) (1,513) (614)
Investment securities .......................... 7,817 5,822 9,421 13,124 2,999
Cash and cash equivalents ...................... 46,200 30,287 10,131 16,578 4,373
Deposits ....................................... 285,522 199,575 149,053 119,956 43,368
Stockholders' equity ........................... 31,801 25,760 11,983 10,476 5,365
Non-performing loans ........................... 6,918 3,106 3,066 1,497 817
Other real estate owned, net ................... 3,591 4,688 6,040 7,448 1,045
Operations Data (Period):
Interest income ................................ $ 32,777 $ 22,162 $ 15,966 $ 5,986 $ 4,764
Interest expense ............................... 13,269 8,499 6,803 1,898 2,046
--------- --------- --------- -------- --------
Net interest income ............................ 19,508 13,663 9,163 4,088 2,718
Provision for loan and lease losses ............ 325 755 308 261 266
--------- --------- --------- -------- --------
Net interest income after provision for
loan and lease losses ......................... 19,183 12,908 8,855 3,827 2,452
Gains on sales of investment securities, net ... 41 -- 97 -- 205
Gains on sales of loans and leases, net ........ 117 96 92 288 283
Other income ................................... 370 442 521 418 510
Operating expenses ............................. (9,811) (6,940) (5,795) (3,525) (2,846)
--------- --------- --------- -------- --------
Income before income taxes...................... 9,900 6,506 3,770 1,008 604
Provision (benefit) for income taxes ........... 4,128 2,713 1,399 (128) (77)
--------- --------- --------- -------- --------
Net income ..................................... 5,772 3,793 2,371 1,136 681
Preferred stock dividend ....................... -- -- -- -- --
--------- --------- --------- -------- --------
Net income available for common stock
dividend ...................................... $ 5,772 $ 3,793 $ 2,371 $ 1,136 $ 681
Per Share Data:
Net income --
Basic ......................................... $ 1.43 $ 1.09 $ 1.06 $ 0.75 $ 0.45
Diluted ....................................... 1.34 1.06 1.06 0.75 0.45
Book value at end of period .................... 7.84 6.41 5.56 4.47 3.57
Tangible book value at end of period ........... 7.82 6.38 5.49 4.24 3.57
Weighted average shares outstanding
Basic ......................................... 4,043 3,480 2,238 1,505 1,502
Diluted ....................................... 4,316 3,594 2,243 1,505 1,502
</TABLE>
OC-5
<PAGE>
<TABLE>
<CAPTION>
As of and for the
Nine Months Ended
September 30,
---------------------
1998 1997
---------- ----------
(unaudited)
(in thousands, except
per share data and
percentages)
<S> <C> <C>
Selected Operating Ratios (Annualized):
Return on average assets ............................... 1.87% 2.16%
Return on average stockholders' equity ................. 20.20 19.64
Interest rate spread ................................... 6.06 7.66
Net interest margin .................................... 6.35 8.03
Non-interest income to average assets .................. .37 .28
Operating expenses to average assets ................... 3.43 3.69
Asset Quality Ratios:
Total non-performing assets to total assets ............ 2.04% 4.98%
Non-performing purchased loans as a percent of
purchased loans and leases ............................ 1.91 4.74
Non-performing originated loans as a percent of
originated loans and leases ........................... 1.63 .68
Discount as a percent of purchased loans and leases..... 15.11 17.45
Allowance for originated loan losses as a percent of
originated loans and leases ........................... 3.70 3.34
Non-amortizing discount and allowance for losses
on purchased loans as a percent of non-
performing purchased loans(1) ......................... 524.69 193.05
Allowance for originated loan losses as a percent of
non-performing originated loans and leases ............ 235.47 494.31
Capital Ratios:
Average stockholders' equity to average assets ......... 9.25% 11.00%
Tangible capital to assets ratio ....................... 7.52 9.99
Tier I Leverage capital ratio .......................... 8.09 11.38
Tier I Risk-based capital ratio ........................ 9.53 11.89
Total Risk-based capital ratio ......................... 10.44 12.79
<CAPTION>
As of and for the
Years Ended
December 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ------------ ------------ ---------- ----------
(in thousands, except per share data and percentages)
<S> <C> <C> <C> <C> <C>
Selected Operating Ratios (Annualized):
Return on average assets ............................... 2.18% 2.29% 1.70% 1.96% 1.16%
Return on average stockholders' equity ................. 20.16 18.47 20.69 19.45 13.77
Interest rate spread ................................... 7.71 7.83 7.15 6.91 4.47
Net interest margin .................................... 8.08 8.36 7.37 7.56 4.97
Non-interest income to average assets .................. .20 0.30 0.51 1.22 1.70
Operating expenses to average assets ................... 3.70 3.87 4.16 6.08 4.86
Asset Quality Ratios:
Total non-performing assets to total assets ............ 3.27% 3.38% 5.58% 6.80% 3.80%
Non-performing purchased loans as a percent of
purchased loans and leases ............................ 2.85 1.35 0.83 2.02 n/a
Non-performing originated loans as a percent of
originated loans and leases ........................... .64 1.45 3.09 1.13 2.50
Discount as a percent of purchased loans and leases..... 17.69 25.09 20.40 21.08 8.88
Allowance for originated loan losses as a percent of
originated loans and leases ........................... 3.22 2.72 1.54 2.47 1.88
Non-amortizing discount and allowance for losses
on purchased loans as a percent of non-
performing purchased loans(1) ......................... 342.18 1,184.41 1,419.70 402.24 n/a
Allowance for originated loan losses as a percent of
non-performing originated loans and leases ............ 505.11 187.68 50.04 218.33 75.15
Capital Ratios:
Average stockholders' equity to average assets ......... 10.79% 11.71% 8.22% 10.08% 8.43%
Tangible capital to assets ratio ....................... 9.86 11.11 7.25 7.56 10.95
Tier I Leverage capital ratio .......................... 10.55 12.05 7.48 13.92 10.15
Tier I Risk-based capital ratio ........................ 11.98 13.44 8.93 10.43 13.55
Total Risk-based capital ratio ......................... 12.84 14.47 9.88 11.68 14.79
</TABLE>
- -----------
(1) Non-amortizing discount is an allocation of total discount on purchased
loans accounted for on the cost recovery method until it is determined
that the amount and timing of collections are reasonably estimable and
collection is probable.
OC-6
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors before making an
investment in the Bank Preferred Shares offered by this Offering Circular. The
discussion contained in this Offering Circular contains forward-looking
statements that involve risk and uncertainties. These forward-looking
statements use terminology such as "believes," "expects," "may," "will,"
"should" or "anticipates" or similar expressions and may include discussions of
future strategy. The risk factors described below apply to all forward-looking
statements wherever they appear in this Offering Circular. The Bank's actual
results could differ materially from the forward looking statements. Important
factors that could cause or contribute to such differences include those
discussed below.
Non-Traditional Operating Strategy
The levels of profit reported by the Bank in recent years have been
attributable, in part, to a strategy which includes the identification and
purchase of discounted loans which are perceived to be undervalued due to
market, economic and competitive conditions. These investments have contributed
significantly to the increases in the Bank's net income over the past three
fiscal years. Currently, the Bank emphasizes the maintenance of its net
interest margin in order to address its interest rate and prepayment risks.
This approach, together with the Bank's non-traditional banking activities,
have resulted in increases in the Bank's net income. However, the Bank's
asset/liability management strategy and non-traditional banking activities
subject it to business risks not experienced by financial institutions engaged
in more traditional lending activities. As a result, the Bank may be subject to
fluctuations in its business which may have a material adverse impact on its
net income.
Availability and Pricing of Purchased Loans
Commencing in 1991 and increasing thereafter, the Bank purchased
performing loans and, commencing in 1996, non-performing loans, from private
sellers, the FDIC and other government agencies at discounts. Such loans were
historically acquired (1) from institutions which sought to eliminate certain
loans or categories of loans from their portfolios, and (2) in connection with
the failure or consolidation of certain New England financial institutions. The
prices paid to acquire discounted loans are based on the Bank's estimates of
the market value of such loans. At September 30, 1998, the Bank's net
outstanding purchased loan and lease portfolio totaled $272.4 million, or
59.6%, of the Bank's total assets. At September 30, 1998, the gross outstanding
purchased loan and lease portfolio totaled $321.1 million and consisted of
$192.0 million of commercial real estate loans and $129.1 million of other
purchased loans. Although management believes that it will continue to be able
to identify and purchase discounted loans from private sector sellers or the
FDIC during the reasonably foreseeable future, there can be no assurance that
the Bank will be able to continue to do so at the same volumes or levels of
discount or to obtain the same results as experienced in the past given the
competitive nature of certain discounted loan acquisitions, the decrease in the
number of failed or failing financial institutions that are being resolved by
the FDIC and the general increase in asset quality of financial institutions in
recent periods. Moreover, returns from the Bank's purchased loan portfolio may
decrease if markets become more efficient in the evaluation and pricing of such
loans, and if competition for the acquisition of such loans increases. There
can be no assurance that the Bank will be able to effect acquisitions of
discounted loans in the same manner and on the same terms as in the past or
that there will not be significant variations in the profitability of this
component of the Bank's operations.
Potential Increase in Non-Performing Assets
In part as a result of the anticipated growth of the Bank's purchased loan
portfolio and the continued acquisition of loan pools including both performing
and non-performing loans, the Bank's net non-performing assets, including OREO,
may increase in future periods. As of September 30, 1998, the Bank had $9.3
million of non-performing assets, of which $6.1 million were loans in the
Bank's purchased loan portfolio, $1.0 million were loans in the Bank's
originated loan portfolio and $2.1 million were OREO.
In addition, the Bank occasionally purchases loan pools including both
performing and non-performing loans. The Bank anticipates that it will continue
to make purchases of such non-performing assets, and may increase this activity
if management determines that such a strategy for the expansion of the loan
purchasing program is effective. Non-performing assets generally are
non-earning assets; however, OREO consisting of commercial real estate may
provide some operating income to the Bank even when classified as a
non-performing asset. High levels of such non-performing assets could adversely
affect the Bank's results of operations. Moreover, non-performing assets
OC-7
<PAGE>
require increased allocation of the Bank's resources to the management and
work-out of such assets and may be significantly affected by the economies and
markets for real estate in which they are located.
Commercial Real Estate Market
As of September 30, 1998, a significant portion of the Bank's total loan
portfolio was secured by interests in commercial real property located in the
Northeast and California and, to a lesser degree, in commercial property
located outside of the Northeast. As a result, the quality of the Bank's
collateral is dependent, in part, on the performance of the commercial real
estate market in the Northeast and California, generally, and adverse economic
conditions in the Bank's primary market area would adversely affect Atlantic's
financial condition and results of operations in the future.
Reserve Coverage for Originated Loans and Leases
As of September 30, 1998, the Bank's allowance for loan and lease losses
with respect to its originated loan portfolio as a percentage of such loans was
3.70%. There can be no assurance that the Bank's actual losses with respect to
its originated loans will not exceed such coverage. In certain circumstances,
losses in excess of such coverage could have a material adverse effect on the
Bank's results of operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Results of Operations--
Provisions, Allowances and Discounts" in the Bank's Annual Report on Form 10-K
for the year ended December 31, 1997 incorporated by reference herein and
attached hereto as Attachment B.
Competition for Secured Commercial Loans
The Bank competes with a number of financial institutions, many of which
are larger and have greater resources than the Bank, for the origination of
secured commercial loans. The primary factors in competing for such loans are
interest rates, loan origination fees and the quality and range of lending
services offered. There can be no assurance that the Bank will be able to
originate a sufficient volume of secured commercial loans or to originate such
loans on terms that will result in the same levels of profitability that the
Bank has previously experienced. See "BUSINESS--Originated Loan
Portfolio--Secured Commercial Loans."
Commercial Lending Risks
The Bank's commercial lending, especially to small businesses and
individuals, exposes it to the risks inherent in financings based upon analyses
of credit risk, the value of underlying collateral and other more intangible
factors which are considered in making such loans. There can be no assurance
that the Bank's profit margins will not be negatively impacted by errors in
such analyses and by loan defaults by certain of these borrowers. Further, the
ability of borrowers to repay such loans may be adversely affected by any
downturn in general economic conditions. See "BUSINESS--Originated Loan
Portfolio."
Fluctuations in Amounts of Non-Interest Income and Gains on Sales of Real
Estate Owned
In recent years, the Bank's operating results have been significantly
affected by non-interest income consisting primarily of the sale of
interest-earning assets. The Bank earned $528,000, $538,000, and $710,000 in
non-interest income for the years ended December 31, 1997, 1996, and 1995,
respectively. In addition, the Bank recorded $1.1 million, $886,000 and
$459,000 in net gains on sale of real estate for the years ended December 31,
1997, 1996 and 1995, respectively. Gains on the sales of loans and real estate
generally are dependent on various factors which are not necessarily within the
control of the Bank, including market and economic conditions. As a result,
there can be no assurance that the gains on sales of loans and real estate
reported by the Bank in future periods will be the same or greater than those
reported in prior periods or that there will not be substantial periodic
variations in the results from such activities. Future gains on sales of leases
held by Dolphin Capital Corporation will also likely be subject to significant
fluctuation.
OC-8
<PAGE>
Vulnerability to Interest Rate Risk
Like most financial institutions, the Bank's results of operations are
dependent on, among other things, its net interest income, which results from
the "margin" between interest earned on interest-earning assets, such as
investments and loans, and interest paid on interest-earning liabilities, such
as deposits. Interest rates are highly sensitive to many factors, including
governmental monetary policies and domestic and international economic and
political conditions. Conditions such as inflation, recession, unemployment,
money supply, international disorders and other factors beyond the control of
the Bank may also affect interest rates.
When interest-earning assets mature or reprice more quickly than
interest-bearing liabilities in a given period, a significant decrease in
market interest rates could adversely affect net interest income. Conversely, a
significant increase in market interest rates could result in increased net
interest income. Changes in interest rates also can affect the volume of loans
originated by the Bank, as well as the value of its loans and other
interest-earning assets and its ability to realize gains on the sale of assets.
An increase in interest rates that adversely affects the ability of borrowers
and prospective purchasers of OREO to service debt may also have a material
adverse effect on Atlantic's results of operations.
Changes in the interest earned by the Bank generally tend to be shortly
preceded or followed by corresponding changes in the interest paid by the Bank,
and such changes generally preserve the Bank's net interest margins. As the
Bank has expanded its purchased loan portfolio, it has acquired a number of
fixed rate loans. Such loans tend to increase the Bank's exposure to interest
rate risk. The Bank has funded such purchases with longer-term CDs in order to
offset a portion of the interest rate risk. The Bank closely monitors the rate
sensitivity of assets it acquires and, when purchased fixed rate loans are
restructured, seeks to ensure that such restructurings are performed on a
variable rate basis. As a general matter, the Bank will seek to manage its
business to limit its overall exposure to interest rate fluctuations, but there
can be no assurance that the Bank will be successful in doing so. Fluctuations
in market interest rates are neither predictable nor controllable and may have
a materially adverse impact on the operations and financial condition of the
Bank.
Reliance on Short-term Deposits
At September 30, 1998, $100.6 million, or 24.4%, of the Bank's deposits
consisted of demand deposit accounts, statement savings, money market deposit
accounts, and NOW accounts. The $310.9 million remaining balance of deposits
consisted of certificates of deposit, of which $229.0 million, or 55.7%, of the
Bank's total deposits, were due to mature within one year, reflecting consumer
preference for short-term investments as a result of the current relatively low
interest rate environment. The Bank has historically employed a wholesale
funding strategy consisting primarily of marketing certificates of deposit to a
national customer base. The Bank has been able to maintain sufficient liquidity
by offering rates of interest on certificates of deposit marginally in excess
of rates offered by other banks on comparable deposits. The ability of the Bank
to attract and maintain deposits, as well as the Bank's cost of funds, has
been, and will continue to be significantly affected by money market rates and
general economic conditions. In the event the Bank increases interest rates
paid to retain deposits, earnings may be adversely affected.
The Bank has entered into contractual agreements with six national
investment banking firms that provide the Bank with access to brokered
certificates of deposit. These range in maturity from six months to three
years, are non-cancelable and bear rates which are consistent with, or lower
than, the Bank's certificate of deposit program. Under current FDIC
regulations, banks that are categorized as "well-capitalized" can obtain
brokered certificates of deposit without prior approval of the FDIC. At
September 30, 1998, based upon the Bank's most recent consolidated Report of
Condition and Income filed with the FDIC, the Bank is categorized as
"well-capitalized." Brokered deposits generally are more responsive to changes
in interest rates than other deposits, and thus, are more likely to be
withdrawn from the Bank upon maturity as changes in interest rates and other
factors may make other investments more attractive to investors. In addition,
such funding sources may be more sensitive to significant changes in the
financial condition of the Bank than are other sources of funding. Brokered
deposits totaled $112.3 million at September 30, 1998.
OC-9
<PAGE>
New Business Initiatives
From time to time, the Bank considers entry into certain new lines of
business and the expansion of its existing businesses. In 1996, the Bank
expanded its purchased loan portfolio and for the first time acquired loan
pools including both performing and non-performing commercial loans. There can
be no assurance that the Bank will enter any new lines of business, or that, if
undertaken, such initiatives will not adversely affect the Bank's results of
operations. In addition, the entry into any new business lines would be likely
to involve the risks ordinarily attendant with the implementation of new
business initiatives including, among others, the absence of management
expertise with new lines of business, the incurrence of start-up costs and
competition with financial institutions which may have greater experience,
expertise and resources in any such areas than the Bank. For example, in May
1998 the Company formed Dolphin Capital Corporation, a small-ticket equipment
leasing subsidiary. Dolphin incurred a pre-tax loss of $1.9 million for the
five months ended September 30, 1998 as a result of the relatively high level
of operating expenses incurred to establish the sales and support systems
necessary to support growth.
Competition
The banking industry in the United States is part of the broader financial
services industry. This industry also includes insurance companies, mutual
funds, consumer finance companies and the securities brokerage industry. In
recent years, intense market demands, technological and regulatory changes and
economic pressures have eroded industry classifications which were once clearly
defined. Existing banks have been forced to diversify their services, increase
returns on deposits and become more cost-effective as a result of competition
with one another and with other financial services companies, including
non-bank competitors. The breakdown in traditional roles has been fueled by the
pattern of rapidly fluctuating interest rates in the United States and by
significant changes in federal and state laws over the past five years. These
statutory changes (and corresponding changes in governing regulations) have
resulted in increasing homogeneity in the products and financial services
offered by financial institutions. As a result, some non-bank financial
institutions, such as money market funds, have become increasingly strong
competitors of banks in certain respects.
Numerous banks compete with the Bank for deposit accounts, the origination
of commercial loans and the acquisition of undervalued loans. With respect to
deposits, additional significant competition arises from corporate and
governmental debt securities, as well as money market mutual funds. The factors
in competing for deposit accounts include interest rates, the quality and range
of financial services offered and the convenience of office and automated
teller machine locations and office hours. The primary factors in competing for
loans are interest rates, loan origination fees and the quality and range of
lending services offered. The competition for both deposits and loans has
recently increased as a direct result of mergers of banks in New England. Such
mergers have provided the resulting banks with enhanced financial resources and
administrative capacity to compete for assets.
In these circumstances, small financial institutions, such as the Bank,
must offer financial products and services in a way which differentiates them
from the larger financial organization competitors. The Bank has taken steps to
do so by, among other things, working to establish continuing customer
relationships with the borrowers in its purchased loan portfolios. Management
believes that these relationships may be a source of lending and other business
in the future because, in certain instances, the banking and other financial
services needs of these borrowers are not adequately served by the Bank's
larger bank and non-bank financial services competitors. Management believes
that the recent consolidations and mergers by certain larger banks in New
England have enhanced the opportunities available to the Bank to serve
small-to-mid-sized businesses which may not be well-served by larger banks.
The Bank faces strong competition in its market area both from other more
established banks and from non-bank financial institutions which are
aggressively expanding into markets traditionally served by banks. Most of
these competitors offer products and services similar to those offered by the
Bank, have facilities and financial resources greater than those of the Bank
and have other competitive advantages over the Bank. Among the advantages of
these larger institutions are their ability to make larger loans, to finance
extensive advertising campaigns, to access international money markets, to
conduct retail operations at a significant number of branches and, generally,
to allocate their investment assets to business lines of highest yield and
demand. For the reasons stated above, among others, there can be no assurance
that the Bank will obtain sufficient deposits and purchase or originate a
sufficient volume of quality loans to operate profitably in this competitive
environment or that the Bank will maintain its competitive position in the
commercial lending market in the future.
OC-10
<PAGE>
In 1994, the U.S. Congress enacted legislation that will allow, under
different implementation guidelines, bank holding companies and banks to
acquire or merge with depository institutions across state lines. In 1996,
Massachusetts enacted interstate banking laws in response to the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal"). The
laws permit, subject to certain deposit and other limitations, interstate
acquisitions, mergers and branching on a reciprocal basis. Competition in the
Bank's primary market area could increase in the event that financial
institutions from other jurisdictions branch into Massachusetts or merge with
Massachusetts-chartered banks. See "BUSINESS--Competition" in the Form 10-K.
Federal and State Government Regulation and Deregulation of the Financial
Services Industry
The Bank is subject to a complex body of federal and state banking laws
and regulations which are intended primarily for the protection of depositors.
In addition, the Bank is subject to changes in federal and state tax laws, as
well as changes in banking and credit regulations, accounting principles and
governmental economic and monetary policies. Changes in governmental economic
and monetary policy not only can affect the ability of the Bank to attract
deposits and make loans, but also can affect the demand for secured commercial
loans. The Bank will also be affected by various macroeconomic trends (such as
changes in unemployment and inflation rates) over which it has no control.
With legislative and regulatory attention focused on the regulation and
deregulation of the financial services industry generally, it cannot be
predicted what statutory and regulatory changes will be forthcoming. However,
several bills are pending in the U.S. Congress which, if enacted, could
significantly affect the operations and oversight of financial institutions.
Further, the laws and regulations which affect the Bank on a daily basis may be
changed at any time, and the interpretation of relevant laws and regulations is
also subject to change by the authorities who examine the Bank and interpret
those laws and regulations. There can be no assurance that any present or
future changes in the laws or regulations or in their interpretation will not
adversely and materially affect the Bank. See "Business--Supervision and
Regulation."
Economic Conditions in the National and Regional Market
Economic conditions at the local, regional and national levels may
significantly affect the operations of financial institutions. For example,
much of the United States, including the Northeast region, experienced a
significant economic decline in the late 1980's and early 1990's. This decline
adversely affected employment, the real estate markets and the banking industry
in the Bank's primary market area. As a result of this decline, loan repayment
delinquencies for banks increased and the underlying values of properties
securing loans declined. Additionally, numerous bank failures resulted in the
placement of properties in the hands of federal banking agencies with the
primary objective of liquidating these properties promptly. A significant
percentage of the loans in the Bank's purchased loan portfolio and
substantially all of the loans in the Bank's originated loan portfolio have
been made to businesses based in the Northeast and are secured by interests in
real property located in the Northeast. Poor economic conditions in the
Northeast region and the Bank's primary market area would adversely affect the
financial condition and results of operations of the Bank in the future.
Dependence on Key Employees
The success of the Bank will continue to depend heavily on the expertise
and guidance of its Chairman of the Board of Directors (the "Chairman"),
Nicholas W. Lazares, its President, Richard Wayne, each of whom also holds the
title of Co-Chief Executive Officer, and certain other senior executive
officers. The loss of the services of any of these key individuals would have a
material adverse effect on Atlantic. The Bank does not maintain key-man life
insurance with respect to any of these individuals. See "MANAGEMENT."
OC-11
<PAGE>
Anti-Takeover Provisions
Federal and state laws impose restrictions, including regulatory approval
requirements, on the acquisition of control of a bank such as the Bank. In
addition, the Bank's Articles of Organization, as amended (the "Articles"), and
Amended and Restated By-laws (the "By-laws") also contain anti-takeover
provisions establishing a staggered Board of Directors, a class of authorized
but unissued preferred stock, and super-majority voting requirements for
certain business combinations. In addition, the Bank has recently adopted a
shareholder rights agreement. The effect of the foregoing may be to delay or
prevent the acquisition of control of the Bank.
Environmental Liabilities
In the course of its business, the Bank has acquired, and may in the
future acquire through foreclosure, properties securing loans it has originated
or purchased which are in default. With respect to the Bank's OREO, there is a
risk that hazardous substances or wastes, contaminants or pollutants could be
discovered on such properties after acquisition by the Bank. In such event, the
Bank might be required to remove such substances from the affected properties
at its sole cost and expense. There can be no assurance that the cost of such
removal would not substantially exceed the value of the affected properties or
the loans secured by the properties, that the Bank would have adequate remedies
against the prior owner or other responsible parties or that the Bank would not
find it difficult or impossible to sell the affected properties either prior to
or following any such removal.
OC-12
<PAGE>
MANAGEMENT
General
The following table sets forth the name and age of each person who is
currently a Director or an executive officer of the Bank:
<TABLE>
<CAPTION>
Director/Officer
Age (as of of the Bank
Name Position September 30, 1998) Since Year
- --------------------------------- ------------------------------------- --------------------- -----------------
<S> <C> <C> <C>
Nicholas W. Lazares ......... Chairman of the Board of 47 1987
Directors, Co-Chief Executive
Officer, Director
Richard Wayne ............... President, Co-Chief Executive 46 1987
Officer, Director
John L. Champion ............ Chief Financial Officer, Treasurer, 49 1993
Senior Vice President
Demetrios J. Kyrios ......... Senior Vice President 39 1993
Edward F. Mehm .............. Senior Vice President 34 1996
Bradley M. Shron ............ Senior Vice President, General 41 1996
Counsel, Clerk
L. Dennis Kozlowski ......... Director 52 1987
Georgia Murray .............. Director 48 1989
Anthony L. Rodes ............ Director 72 1995
Alan R. Stone ............... Director 47 1992
Louis N. Vinios ............. Director 41 1995
</TABLE>
The business experience for each of the Directors and executive officers
of the Bank during at least the last five years is as follows:
Nicholas W. Lazares. Mr. Lazares is Chairman of the Board of Directors and
Co-Chief Executive Officer of the Bank. Since 1991, Mr. Lazares has been
Chairman of the Board of Directors of the Bank. From March, 1980 to December
31, 1994, Mr. Lazares, or a professional corporation of which he was the
principal, was a partner in the law firm of Wayne, Lazares and Chappell in
Boston, Massachusetts.
Richard Wayne. Mr. Wayne is President and Co-Chief Executive Officer of
the Bank. Since 1991, Mr. Wayne has been the President of the Bank. From March,
1980 to December 31, 1994, Mr. Wayne, or a professional corporation of which he
was the principal, was a partner in the law firm of Wayne, Lazares and Chappell
in Boston, Massachusetts.
John L. Champion. Mr. Champion joined the Bank in March, 1993 and is the
Chief Financial Officer, the Treasurer and a Senior Vice President of the Bank.
Previously, Mr. Champion was an executive vice president of Coolidge Bank and
Trust Company, Boston, Massachusetts, and a certified public accountant with
KPMG Peat Marwick.
Demetrios J. Kyrios. Mr. Kyrios joined the Bank in 1993. He was promoted
to Senior Vice President in 1994. From May, 1985 to July, 1988, Mr. Kyrios was
a senior lender at the Boston branch of the National Bank of Greece, and from
July, 1988 to February, 1993, he was a vice president at Mercantile Bank,
Boston, Massachusetts.
Edward F. Mehm. Mr. Mehm has served as a Senior Vice President since
January 1997. Mr. Mehm joined the Bank in October, 1996, as a Vice President.
Prior to joining the Bank, Mr. Mehm was a Vice President with Fleet Real Estate
Capital from 1993 to 1996.
OC-13
<PAGE>
Bradley M. Shron. Mr. Shron has served as a Senior Vice President, Legal
Counsel and Assistant Clerk of the Bank since January 1997, General Counsel
since January 1998 and Clerk since April, 1998. Mr. Shron joined the Bank as a
Vice President and Legal Counsel in April 1996. Prior to joining the Bank, Mr.
Shron was a partner at the Boston law firm of Riemer and Braunstein from 1986
to 1996.
L. Dennis Kozlowski. Since 1989, Mr. Kozlowski has been President of Tyco
International, Ltd. in Hamilton, Bermuda, and he currently holds the titles of
President, Chairman and Chief Executive Officer. Mr. Kozlowski is also a
director of Raytheon, Inc., Dynatech Corp., R.J.R. Nabisco Holdings Corp. and
Applied Power Corp.
Georgia Murray. Since 1987, Ms. Murray has been a Senior Vice President
and Director of The Boston Financial Group, Inc., a financial services company
in Boston, Massachusetts. Ms. Murray is also a director of the following
entities: 29 Franklin Street, Inc., Arch Street, Inc., Arch Street III, Inc.,
Arch Street IV, Inc., Arch Street V, Inc., Arch Street VI, Inc., Arch Street
VII, Inc., Arch Street VIII, Inc., BF Growth Properties, Inc., BFTG Residential
Properties, Inc. and BFTG Property Ventures, Inc.
Anthony L. Rodes. Mr. Rodes is retired from General Electric Corporation
where he was a manager from 1969 to 1986. Mr. Rodes was also a Deputy Managing
Director of the Hellenic Business Development and Investment Co., S.A., a
venture capital firm from 1986 to 1990.
Alan R. Stone. Since 1982, Mr. Stone has been President of Stone Legal
Resources Group with offices in Boston, Massachusetts and New York, New York.
Louis N. Vinios. Since 1979, Mr. Vinios has been an Executive Vice
President at J.P.A. Management Company, a real estate management and
development corporation in Boston, Massachusetts.
The Board of Directors and Its Committees
The Board of Directors held 12 meetings during fiscal year 1997. During
fiscal 1997, each of the Directors, except for Mr. Kozlowski, 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. The following is a description of
each of the committees of the Board of Directors of the Bank.
Executive Committee. The members of the Executive Committee of the Bank
are Messrs. Wayne and Lazares and Ms. Murray. The Executive Committee has the
capacity to address significant corporate and management matters between
meetings of the full Board of Directors. In 1997, the Executive Committee did
not meet formally and did not take any actions pursuant to the authority
granted to it by the Board of Directors.
Loan and Investment Committee. The Bank's Loan and Investment Committee
met as necessary during fiscal year 1997. The members of the Loan and
Investment Committee are Messrs. Lazares, Wayne, and Vinios and Ms. Murray. The
principal function of the Loan and Investment Committee is to establish the
Bank's credit policy and to approve certain purchases and sales of securities,
loans and other investments, including the terms and conditions thereof and the
security offered therefor. The Loan and Investment Committee reports its
activities to the Board of Directors at each regularly scheduled Board of
Directors' meeting.
Audit Committee. The Audit Committee met twice during fiscal year 1997.
The members of the Audit Committee are Messrs. Rodes (Chairman), Kozlowski and
Vinios. The primary function of the Audit Committee is to review the annual
audited financial statements of the Bank and the scope of the annual audit. The
Audit Committee also monitors the Bank's internal accounting controls and
recommends an independent auditor to the Board of Directors.
Community Reinvestment Act Committee. The Bank's Community Reinvestment
Act Committee ("CRA Committee") met twice during fiscal year 1997. The members
of the CRA Committee are Messrs. Stone (Chairman) and Wayne. The function of
the CRA Committee is to recommend to the Board of Directors policies and
practices to assist the Bank in meeting its obligations under the Community
Reinvestment Act. The CRA Committee also encourages the Bank to participate in
other community activities consistent with its community reinvestment
obligations.
Compensation Committee. The Compensation Committee met once during fiscal
year 1997. The members of the Compensation Committee are Mr. Kozlowski and Ms.
Murray. The function of the Compensation Committee is to review the level of
compensation paid to executive officers and Directors of the Bank.
The Bank does not maintain a nominating committee of the Board of
Directors.
OC-14
<PAGE>
Compensation of the Bank's Directors
For fiscal year 1997, Directors of the Bank who are not officers or
employees of the Bank (the "Outside Directors") received 1,000 shares of Common
Stock in lieu of Director's fees otherwise payable to such person.
Compensation of Executive Officers
Executive Officers of the Bank. The following table sets forth the
compensation received for services rendered to the Bank by the Chairman, the
President and the four other most highly compensated executive officers of the
Bank (the "Named Executive Officers") who earned in excess of $100,000 for the
years ended December 31, 1997, 1996 and 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual
Compensation
--------------------------
All Other
Principal Position Year Salary ($) Bonus ($) Compensation ($)
- ---------------------------------------------- ------ ------------ ----------- ---------------------
<S> <C> <C> <C> <C>
Nicholas W. Lazares, ......................... 1997 $211,765 $782,852 $6,843(1)(4)
Chairman of the Board of Directors and 1996 205,000 681,068 6,460(1)(4)
Co-Chief Executive Officer 1995 200,000 312,997 4,853(1)(4)
Richard Wayne, ............................... 1997 211,765 782,852 6,709(2)(4)
President and Co-Chief Executive Officer 1996 205,000 681,068 6,341(2)(4)
1995 200,000 312,997 4,720(2)(4)
Demetrios J. Kyrios, ......................... 1997 154,816 165,500 5,134(3)(4)
Senior Vice President 1996 121,327 100,000 3,600(4)
1995 100,000 72,500 2,050(4)
John L. Champion, ............................ 1997 132,239 93,189 4,779(4)
Treasurer, Chief Financial Officer and Senior 1996 128,365 60,000 2,976(4)
Vice President 1995 125,000 35,000 2,344(4)
Edward F. Mehm, .............................. 1997 100,000 90,000 3,161(4)
Senior Vice President 1996 15,385 30,000 --
1995 -- -- --
Bradley M. Shron ............................. 1997 100,000 70,000 --
Senior Vice President, Clerk and 1996 60,577 29,500 --
General Counsel 1995 -- -- --
</TABLE>
- ------------
(1) Includes $2,064, $1,960 and $2,333 relating to premiums on a split-dollar
life insurance policy for the years ended December 31, 1997, 1996 and
1995, respectively.
(2) Includes $1,930, $1,841 and $2,200 relating to premiums on a split-dollar
life insurance policy for the years ended December 31, 1997, 1996 and
1995, respectively.
(3) Includes $355 relating to premiums on a split-dollar life insurance policy
for the year ended December 31, 1997.
(4) Includes amounts contributed by the Bank under its Section 401(k) plan on
behalf of the Named Executive Officers.
Stock Options
There were no options granted to, or exercised by, the Bank's Named
Executive Officers in 1997. The following table sets forth information
concerning the number and value of unexercised options to purchase Common Stock
of the Bank held by Named Executive Officers of the Bank who held such options
at December 31, 1997.
OC-15
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at December 31, 1997 at December 31, 1997(1)
------------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------ ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
John L. Champion ............ 5,000 10,000 $ 36,250 $ 72,500
Demetrios J. Kyrios ......... 8,333 16,667 60,414 120,836
Nicholas W. Lazares ......... 228,128 -- 1,916,350 --
Richard Wayne ............... 228,128 -- 1,916,350 --
</TABLE>
- ------------
(1) Represents the market value of shares of Common Stock covered by
in-the-money options on December 31, 1997, less the aggregate option
exercise price. The closing market price of the Common Stock on December
31, 1997 was $14.00 per share.
Employment Agreements with Executive Officers
The Bank has entered into Executive Agreements with Nicholas W. Lazares
and Richard Wayne (each, an "Executive") for an initial term of three years. On
January 1, 1997 and on each January 1 thereafter, each Executive Agreement then
in effect is extended automatically for an additional one-year period unless,
within a specified time, either party to such Executive Agreement gives written
notice to the other of such party's election not to so extend the term of such
Executive Agreement.
Each Executive Agreement provides, among other things, for (1) an annual
base salary of $200,000, (2) annual minimum increases in base salary based on
the consumer price index, (3) bonus payments determined in accordance with the
Bonus Plan adopted by the Board of Directors, (4) insurance and other benefits,
and (5) in the event of (A) termination by the Executive upon certain defaults
by the Bank under his Executive Agreement, or (B) termination of the Executive
by the Bank without cause, aggregate payments (made in monthly installments)
equal to the Executive's annual salary then in effect and amounts payable under
the Bonus Plan through the terms of the Executive Agreement. The Bonus Plan
provides for the quarterly payment of cash bonuses to each Executive based on
the Bank's projected attainment of specified annual return on equity goals.
Each Executive Agreement and the Bonus Plan include provisions for
termination of the Executive for cause, whereupon payments and benefits cease.
Each Executive Agreement also includes certain confidentiality and non-
competition provisions.
1998 Stock Option and Incentive Plan
The 1998 Stock Option and Incentive Plan, as amended (the "1998 Plan"), is
administered by the Compensation Committee of the Board of Directors (the
"Committee"). The Committee, at its discretion, may grant a variety of stock
incentive awards based on the Common Stock of the Bank. Awards under the 1998
Plan include stock options (both incentive options and non-qualified options),
restricted stock and unrestricted stock. These awards are described in greater
detail below.
Subject to adjustment for stock splits, stock dividends and similar
events, the total number of shares of Common Stock that can be issued under the
1998 Plan is 200,000 shares, of which no more than 80,000 shares are available
for grants in the form of restricted stock or unrestricted stock. In order to
satisfy the performance-based compensation exception to the $1 million cap on
the Bank's tax deduction imposed by Section 162(m) of the Internal Revenue Code
of 1986, as amended (the "Code"), the 1998 Plan also provides that stock
options with respect to no more than 50,000 shares of Common Stock may be
granted to any one individual in any one calendar year. The shares issued by
the Bank under the 1998 Plan may be authorized but unissued shares, or shares
reacquired by the Bank. To the extent that awards under the 1998 Plan do not
vest or otherwise revert to the Bank, the shares of Common Stock represented by
such awards may be the subject of subsequent awards.
Plan Administration; Eligibility. The 1998 Plan is administered by the
Committee. All members of the Committee must be "non-employee directors" as
that term is defined under the rules promulgated by the Securities
OC-16
<PAGE>
and Exchange Commission and "outside directors" as that term is defined in
Section 162 of the Code and the regulations promulgated thereunder.
The Committee has full power to select the individuals to whom awards will
be granted, to make any combination of awards to participants, and to determine
the specific terms and conditions of each award, subject to the provisions of
the 1998 Plan. The Committee may permit Common Stock, and other amounts payable
pursuant to an award, to be deferred. In such instances, the Committee may
permit interest, dividend or deemed dividends to be credited to the amount of
deferrals.
Persons eligible to participate in the 1998 Plan are full or part-time
officers and other employees of the Bank or its subsidiaries and any member of
the Board of Directors of the Bank who is not an employee of the Bank or any
subsidiary ("Bank Independent Directors") who are responsible for or contribute
to the management, growth or profitability of the Bank and its subsidiaries, as
selected from time to time by the Committee.
Stock Options. The 1998 Plan permits the granting of (1) options to
purchase Common Stock intended to qualify as incentive stock options
("Incentive Options") under Section 422 of the Code and (2) options that do not
so qualify ("Non-Qualified Options"). The option exercise price of each option
is determined by the Committee but may not be less than 100% of the fair market
value of the Common Stock on the date of grant.
The term of each option is fixed by the Committee and may not exceed ten
years from date of grant in the case of an Incentive Option. The Committee
determines at what time or times each option may be exercised and, subject to
the provisions of the 1998 Plan, the period of time, if any, after retirement,
death, disability or termination of employment during which options may be
exercised. Options may be made exercisable in installments, and the
exercisability of options may be accelerated by the Committee.
Upon exercise of options, the option exercise price must be paid in full
either in cash or by certified or bank check or other instrument acceptable to
the Committee or, if the Committee so permits, by delivery (or attestation as
to ownership) of shares of Common Stock already owned by the optionee. The
exercise price may also be delivered to the Bank by a broker pursuant to
irrevocable instructions to the broker from the optionee.
At the discretion of the Committee, stock options granted under the 1998
Plan may include a "re-load" feature pursuant to which an optionee exercising
an option by the delivery (or attestation as to ownership) of shares of Common
Stock is automatically granted an additional stock option (with an exercise
price equal to the fair market value of the Common Stock on the date the
additional stock option is granted) to purchase that number of shares of Common
Stock equal to the number delivered to exercise the original stock option. The
Committee may also add this feature to existing options. The purpose of this
feature is to enable participants to maintain any equity interest in the Bank
without dilution.
To qualify as Incentive Options, options must meet additional Federal tax
requirements, including limits on the value of shares subject to Incentive
Options which first become exercisable in any one calendar year, and a shorter
term and higher minimum exercise price in the case of certain large
stockholders.
Bank Independent Directors Stock Grants. The 1998 Plan provides for the
automatic grant to Bank Independent Directors of shares of Common Stock in lieu
of the annual retainer fee due to each Bank Independent Director in January of
each year (or upon the election of a new Bank Independent Director). The number
of shares of Common Stock granted each year is determined by dividing the
amount of the annual retainer by the fair market value of the Common Stock. All
or a portion of the stock grant may be deferred at the option of each Bank
Independent Director in accordance with such rules and procedures as may from
time to time be established by the Board of Directors.
Restricted Stock. The Committee may also award shares of Common Stock to
full and part-time officers, other employees and Bank Independent Directors
subject to such conditions and restrictions as the Committee may determine
("Restricted Stock"). These conditions and restrictions may include the
achievement of certain performance goals and/or continued employment with the
Bank through a specified restricted period. The restricted period is at least
three years in the case of time-based vesting and at least one year in the case
of performance-based vesting. The purchase price of shares of Restricted Stock
is determined by the Committee. If the performance goals and other restrictions
are not attained, the employees forfeit their awards of Restricted Stock.
OC-17
<PAGE>
Unrestricted Stock. The Committee may also grant shares (at no cost or for
a purchase price determined by the Committee) which are free from any
restrictions under the 1998 Plan ("Unrestricted Stock"). Unrestricted Stock may
be issued to full and part-time officers and other employees and Bank
Independent Directors in recognition of past services or other valid
consideration, and may be issued in lieu of cash compensation to be paid to
such full and part-time officers and other employees. As discussed above,
Unrestricted Stock is issued annually to Bank Independent Directors in lieu of
the annual retainer fee.
Adjustments for Stock Dividends, Mergers, Etc. The Committee makes
appropriate adjustments in outstanding awards to reflect stock dividends, stock
splits and similar events. In the event of a merger, liquidation, sale of the
Bank or similar event, the Committee, in its discretion, may provide for
substitution or adjustments of outstanding options, or may terminate all
unexercised options with or without payment of cash consideration.
Amendments and Termination. The Board of Directors may at any time amend
or discontinue the 1998 Plan and the Committee may at any time amend or cancel
outstanding awards for the purpose of satisfying changes in the law or for any
other lawful purpose. However, no such action may be taken which adversely
affects any rights under outstanding awards without the holder's consent.
Further, Plan amendments that increase the number of shares under the 1998
Plan, that increase the number of options that may be granted to any one
individual in any year, or that reduce the exercise price below fair market
value shall be subject to approval by the Bank's stockholders.
Change of Control Provisions. The 1998 Plan provides that in the event of
a sale or merger of the Bank, all stock options shall automatically become
fully exercisable. In addition, at any time prior to such sale or merger, the
Committee may waive conditions and restrictions on any awards to the extent it
may determine appropriate.
Employee Savings Plan
Effective July 1, 1989, the Bank established a Section 401(k) plan (the
"401(k) Plan") to enable its employees to save on a pre-tax basis. Bank
employees 21 years or older are eligible to enter the 401(k) Plan on the
monthly entry date following completion of one year of employment with at least
1,000 hours of service. The age and service requirements were waived for
individuals employed by the Bank as of the effective date of the 401(k) Plan.
Participating employees may elect to contribute up to 20% of their annual
salary to the 401(k) Plan, or $9,500, as adjusted, whichever is less. The Bank
matches 100% of such qualifying contributions up to the first 3% of salary.
Forfeitures are reallocated to reduce the matching contributions. The Bank's
matching contributions become vested at a rate of 20% for each year of the
employee's service and are fully vested after five years. Prior to termination
of employment, participants may withdraw their contributions, exclusive of
income, only in the event of undue financial hardship. Benefits are payable
upon retirement, death, disability or separation from service, and may be
payable in cash in one lump sum, quarterly cash payments over a period of up to
15 years or in the form of an annuity contract.
OC-18
<PAGE>
MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth, to the best knowledge of the Bank, certain
information regarding the beneficial ownership of the Bank's Common Stock as of
September 30, 1998 by (1) each person known by the Bank to be the beneficial
owner of more than 5% of the outstanding Common Stock, (2) each of the Bank's
Directors, (3) each of the Executive Officers named in the Summary Compensation
Table and (4) all of the Bank's Executive Officers and Directors as a group.
<TABLE>
<CAPTION>
Beneficial Ownership
-----------------------------
Shares of
Name and Address of Beneficial Owner(1) Common Stock Percent
- -------------------------------------------------- ------------------ --------
<S> <C> <C>
John L. Champion(2)(3) ..................... 17,700(4) *
L. Dennis Kozlowski(5) ..................... 21,571 *
Demetrios J. Kyrios(2) ..................... 18,666(6) *
Nicholas W. Lazares(2)(5) .................. 336,298(7) 7.71
Edward F. Mehm(2) .......................... -- *
Georgia Murray(5) .......................... 15,800 *
Granite Capital Group ...................... 246,500(8) 5.96
126 East 56th Street
25th Floor
New York, NY 10022
Leon Okurowski(3) .......................... 284,969(9) 6.61
c/o U.S. Boston Capital Corp.
14D North Commons
Lincoln, MA 01773
Anthony L. Rodes(5) ........................ 20,270(10) *
Bradley M. Shron(2) ........................ -- *
Alan R. Stone(5) ........................... 38,086(11) *
Willard L. Umphrey(3) ...................... 345,132(12) 8.01
c/o U.S. Boston Capital Corp.
14D North Commons
Lincoln, MA 01773
Louis N. Vinios(5) ......................... 10,345 *
Richard Wayne(2)(5) ........................ 335,950(13) 7.70
Wellington Management Company, LLP ......... 398,000(14) 9.63
75 State Street
Boston, MA 02109
All Directors and officers as a group
(11 persons) .............................. 814,686 17.65
</TABLE>
- ------------
* Less than 1%.
(1) Unless otherwise indicated, the address for the named party is c/o
Atlantic Bank and Trust Company, 101 Summer Street, Boston, MA 02110.
(2) Executive officer.
(3) Former Director.
(4) The amount set forth includes 10,000 shares beneficially owned pursuant to
options to purchase shares of Common Stock exercisable within 60 days of
September 30, 1998.
(5) Director.
(6) The amount set forth includes 16,666 shares beneficially owned pursuant to
options to purchase shares of Common Stock exercisable within 60 days of
September 30, 1998.
(7) The amount set forth includes (1) 4,838 shares of Common Stock owned by
Mr. Lazares' wife and (2) 9,000 shares held by Mr. Lazares' wife as
trustee for their children. Mr. Lazares disclaims beneficial ownership of
OC-19
<PAGE>
those shares owned by his wife and held by his wife as trustee for his
children. Of the remaining 322,460 shares beneficially owned by Mr.
Lazares, 228,128 are beneficially owned pursuant to options to purchase
shares of Common Stock exercisable within 60 days of September 30, 1998 and
15,195 are held in the Nicholas W. Lazares Self-Employed Retirement Plan.
Mr. Lazares is the trustee of the Nicholas W. Lazares Self-Employed
Retirement Plan and, therefore, has sole voting and investment power with
respect to the shares. Mr. Lazares also holds 4,000 shares in the Nicholas
Lazares IRA and has sole investment and voting power with respect to such
shares.
(8) According to information received by the Bank from Granite Capital L.P.
("Granite Capital"), Granite Capital and its affiliates collectively hold
246,500 shares of Common Stock. The amount set forth includes (1) 214,400
shares of Common Stock owned by Granite Capital and (2) 32,100 shares of
Common Stock owned by Granite Capital Overseas Hedged Equity Fund Ltd.
("Granite Overseas"), an offshore investment corporation to which Granite
International Capital Group, L.P. ("Granite International") provides
investment advisory services. Granite International may be deemed to
beneficially own the 52,100 shares of Common Stock held by Granite
Overseas by nature of its investment advisory relationship. Granite
Advisory Corp. ("Granite Advisory") may be deemed to beneficially own the
52,100 shares of Common Stock held by Granite Overseas by the nature of
its position as the general partner of Granite International. Messrs.
Eisenberg and Harrison do not directly own any shares of Common Stock.
However, Messrs. Eisenberg and Harrison are general partners of Granite
Capital and secretary and president, respectively of Granite Advisory, the
general partner of Granite International. By the nature of these
positions, Messrs. Eisenberg and Harrison may be deemed to each
beneficially own 246,500 shares of Common Stock.
(9) The amount set forth is based upon a review of reports filed with the FDIC
and includes 17,456 shares owned by Mr. Okurowski's wife. Of the remaining
257,129 shares beneficially owned by Mr. Okurowski, 175,128 are
beneficially owned pursuant to options to purchase shares of Common Stock
exercisable within 60 days of September 30, 1998 and 28,421 shares were
held in the U.S. Boston Corporation Profit Sharing Retirement Plan (the
"PSRP") u/a/d 10/1/94 a/c Leon Okurowski. The trustees of the PSRP a/c
Leon Okurowski are Willard L. Umphrey and Leon Okurowski, and, therefore,
Mr. Okurowski has shared voting and investment power with respect to the
shares. The Bank also believes that Mr. Okurowski has shared investment
and voting power with respect to the 10,384 shares held by the PSRP a/c
Willard L. Umphrey (see Note 12).
(10) The amount set forth includes 14,270 shares owned by Mr. Rodes' wife. Mr.
Rodes disclaims beneficial ownership of those shares owned by his wife.
(11) Of the 38,086 shares beneficially owned by Mr. Stone, 16,362 are held in
The Alan R. Stone, Esq., Attorney Placement Consultants, Inc. Money
Purchase Pension Plan and 3,819 are held in the Alan R. Stone, Esq.,
Attorney Placement Consultants, Inc. Profit Sharing Plan and Trust. Mr.
Stone is a co-trustee of such plans, and, therefore, has shared voting and
investment power with respect to shares held by such plans.
(12) Based upon information received by the Bank from Mr. Umphrey, the amount
set forth includes (1) 2,703 shares owned jointly by Mr. Umphrey and his
wife, (2) 2,397 shares owned by Mr. Umphrey's wife, (3) 126,099 shares
held by the Willard L. Umphrey Revocable 1996 Trust (the "Trust") and (4)
10,384 shares held by the PSRP a/c Willard L. Umphrey. Of the remaining
203,549 shares beneficially owned by Mr. Umphrey, 175,128 shares of Common
Stock are beneficially owned pursuant to options to purchase shares of
Common Stock exercisable within 60 days of September 30, 1998. Mr. Umphrey
has sole voting and investment power with respect to the shares
beneficially owned pursuant to his options. The trustees of the PSRP a/c
Willard L. Umphrey are Willard L. Umphrey and Leon Okurowski, and,
therefore, Mr. Umphrey has shared voting and investment power with respect
to such shares. The Bank also believes that Mr. Umphrey has shared
investment and voting power with respect to the 28,421 shares held by the
PSRP a/c Leon Okurowski (see Note 9).
(13) The amount set forth includes (1) 8,752 shares owned by Mr. Wayne's wife
and (2) 5,100 shares acquired by Mr. Wayne's children pursuant to the
Uniform Gifts to Minors Act. Mr. Wayne disclaims beneficial ownership of
those shares owned by his wife and children. Of the remaining 322,098
shares beneficially owned by Mr. Wayne, 228,128 shares are beneficially
owned pursuant to options to purchase shares of Common Stock exercisable
within 60 days of September 30, 1998 and 17,290 are held in the Richard
Wayne IRA. Mr. Wayne has sole voting and investment power with respect to
the shares held in his IRA.
OC-20
<PAGE>
(14) According to information set forth in a Form F-11A, filed with the FDIC on
February 12, 1998, Wellington Management Company, LLP ("Wellington") in
its capacity as an investment adviser may be deemed to beneficially own
398,000 shares of Common Stock collectively held by numerous of
Wellington's investment counseling clients.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Interested Directors' Transactions. Certain of the Bank's Directors and
officers are at present, as in the past, directors, officers or stockholders of
corporations or members of partnerships which are deposit customers of the Bank
and which have transactions with the Bank in the ordinary course of business.
Loan transactions with Directors and officers of the Bank and with such
corporations and partnerships are subject to the Board of Directors' policy
regarding such credit transactions, which requires the transactions to be made
in the ordinary course of business and on the same terms, including interest
rates, collateral and repayment, as those prevailing at the time for comparable
transactions with other persons and which did not involve more than normal risk
of collectibility or present other features unfavorable to the Bank.
Atlantic Holdings and AB&T. On May 19, 1988, the Bank entered into a
Service Agreement (the "Service Agreement") with Atlantic Holdings Limited
Partnership, a Delaware limited partnership ("Atlantic Holdings"), and AB&T,
Inc., a Delaware corporation ("AB&T"), the general partner of Atlantic
Holdings. Two current Directors, Messrs. Lazares and Wayne, and two former
directors of the Bank, are shareholders and directors of AB&T and certain
Directors are limited partners of Atlantic Holdings. Under the Service
Agreement, the Bank furnishes services necessary to originate and facilitate
loans and investments and to enter into arrangements necessary to fund such
business activities. For the year ended December 31, 1997, the Bank received an
annual fee of $77,000 in consideration of its services. In 1996, the partners
of Atlantic Holdings approved the dissolution of that partnership, and Atlantic
Holdings is in the process of winding down its affairs.
As of December 31, 1997, Atlantic had two loans outstanding to Atlantic
Holdings which were made in connection with the Bank's sale of OREO to Atlantic
Holdings. The largest amount of indebtedness outstanding for each loan during
the fiscal year ended December 31, 1997 was $230,000 and $183,000, respectively,
and as of December 31, 1997, the outstanding balances of these two loans were
$195,000 and $168,000 respectively. The Bank paid $459,000 in lease payments to
Atlantic Holdings under a sub-lease for its executive and main offices in the
year ended December 31, 1997. The Bank also held deposits of Atlantic Holdings
of approximately $565,000 at December 31, 1997.
Wayne, Lazares & Chappell. Two of the Bank's Directors, Messrs. Wayne and
Lazares, were principals of professional corporations which, until January 1,
1995, were partners of the law firm of Wayne, Lazares & Chappell. In connection
with Messrs. Wayne and Lazares' sale of their respective partnership interests,
Wayne, Lazares & Chappell issued interest-bearing promissory notes in the
amount of $226,290 to each professional corporation owned by Mr. Wayne and Mr.
Lazares for repayment of amounts owed by the law firm. These notes were
cancelled as of December 31, 1996 for nominal non-cash consideration and as a
result, Messrs. Wayne and Lazares received no cash payments with respect to the
notes in 1997. Chappell, Cohen, DiFronzo & Zinnershine, the successor firm to
Wayne, Lazares & Chappell, as special counsel to the Bank, continues to provide
legal services to the Bank. For the year ended December 31, 1997, Chappell,
Cohen, DiFronzo & Zinnershine received $436,000 from the Bank for legal
services provided. The Bank held $384,000 in deposits of Chappell, Cohen,
DiFronzo & Zinnershine or its customers at December 31, 1997.
OC-21
<PAGE>
DESCRIPTION OF THE BANK PREFERRED SHARES
The following summary sets forth the material terms and provisions of the
Bank Preferred Shares, and is qualified in its entirety by reference to the
Bank's Articles and By-laws, copies of which may be obtained from the Bank.
General
Issuance of Shares. Under the provisions of Massachusetts banking law, the
issuance of capital stock by Atlantic, including the issuance of shares of
capital stock, requires the prior approval of the Commissioner. The Company
intends to submit a request to the Commissioner for approval of the issuance of
Bank Preferred Shares in exchange for REIT Preferred Shares upon the occurrence
of an Exchange Event.
Series of Preferred Stock
The Bank's Articles of Organization authorize its Board of Directors,
subject to the approval of the Commissioner, to issue one or more series of
Preferred Stock and to fix the voting powers, designations, preferences,
relative participating, optional or other special rights of each series and
their qualifications, limitations and restrictions thereof. Upon completion of
this offering the Bank's Board of Directors will have designated (1) 150,000
shares of the Preferred Stock as the Series A Junior Participating Cumulative
Preferred Stock, par value $1.00 per share, (the "Junior Preferred Shares")
under the Bank's Shareholder Rights Agreement, (2) 100 shares of Series B
Convertible Preferred Stock (the "Convertible Preferred Stock"), of which 100
shares were outstanding as of the date of this Offering Circular, and (3)
138,000 Bank Preferred Shares, of which no shares were outstanding as of the
date of this Offering Circular.
Series B Convertible Preferred Stock
The Convertible Preferred Stock forms a series of the preferred stock of
the Bank. The holders of the Convertible Preferred Stock have no preemptive
rights with respect to any shares of the capital stock of the Bank. On or prior
to May 1, 2000, each share of Convertible Preferred Stock is convertible at the
option of the holder into shares of Common Stock of the Bank, subject to
adjustment under certain circumstances. The Convertible Preferred Stock is not
subject to any sinking fund or other obligation of the Bank for their
repurchase or retirement.
Conversion. The holders of the Convertible Preferred Stock each have the
right until May 1, 2000 to convert all of their shares into shares of Common
Stock of the Bank; on that date, all outstanding shares of Convertible
Preferred Stock are convertible into the sum of (1) 29,780 shares of Common
Stock of the Bank plus (2) an additional number of shares of Common Stock equal
to the amount of the aggregate accrued and unpaid dividends divided by the then
fair market value of the Common Stock, in each case subject to weighted average
adjustment to give effect to dilutive issuances of Common Stock.
Dividends. Holders of Convertible Preferred Stock are be entitled to
receive on an as-converted basis pro rata cash dividends to the extent any cash
dividends are paid on the Common Stock. Additional dividends accrue at the rate
of 20% per annum of the liquidation preference of the convertible Preferred
Stock, less any dividends actually paid.
Voting Rights. The holders of Convertible Preferred Stock are entitled to
vote with the holders of Common Stock as a single class on all matters
submitted to the stockholders for a vote. Each share of Convertible Preferred
Stock entitles the holder thereof to one vote for each share of Common Stock
into which such share of Convertible Preferred Stock is then convertible.
Liquidation Rights. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Bank, the holders of the
Convertible Preferred Stock at the time outstanding will be entitled to receive
out of assets of the Bank available for distribution to stockholders, before
any distribution of assets is made to holders of Common Stock or any other
class of stock ranking junior to the Convertible Preferred Stock upon
liquidation, liquidating distributions in the amount of $5,381.30 per share,
plus the quarterly accrued and unpaid dividend thereon, if any, to the date of
liquidation.
OC-22
<PAGE>
After payment of the full amount of the liquidating distributions to which
they are entitled, the holders of Convertible Preferred Stock will have no
right or claim to any of the remaining assets of the Bank. In the event that,
upon any such voluntary or involuntary liquidation, dissolution or winding up,
the available assets of the Bank are insufficient to pay the amount of the
liquidation distributions on all outstanding Convertible Preferred Stock and
the corresponding amounts payable on all shares of other classes or series of
capital stock of the Bank ranking on a parity with the Convertible Preferred
Stock in the distribution of assets upon any liquidation, dissolution or
winding up of the affairs of the Bank, then the holders of the Convertible
Preferred Stock and such other classes or series of capital stock shall share
ratably in any such distribution of assets in proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
Redemption. Upon the election of the Bank in connection with merger, sale
or change in control of the Bank (each an "Extraordinary Transaction"), then,
as a part of and as a condition to the effectiveness of such Extraordinary
Transaction, unless the holders of Convertible Preferred Stock shall have
elected to convert their shares of Convertible Preferred Stock into shares of
Common Stock prior to the effective date of such Extraordinary Transaction, the
Bank shall, on the effective date of such Extraordinary Transaction, redeem all
(but not less than all) of the outstanding shares of Convertible Preferred
Stock for an cash in an amount equal to the Liquidation Value as of such date
plus accrued and unpaid dividends.
Bank Preferred Shares
The Bank Preferred Shares form a series of the preferred stock of the
Bank. When issued upon an Automatic Exchange, the Bank Preferred Shares will be
validly issued, fully paid and nonassessable. The holders of the Bank Preferred
Shares will have no preemptive rights with respect to any shares of the capital
stock of the Bank. The Bank Preferred Shares will not be subject to any sinking
fund or other obligation of the Bank for their repurchase or retirement.
Dividends
Holders of Bank Preferred Shares shall be entitled to receive, if, when
and as declared by the Board of Directors of the Bank out of assets of the Bank
legally available therefor, cash dividends at the rate of % per annum of the
liquidation preference (equivalent to $250.00 per share). If declared,
dividends on the Bank Preferred Shares shall be payable quarterly in arrears on
January 15, April 15, July 15 and October 15 of each year, at such annual rate,
commencing on , 1999. Dividends in each quarterly period will accrue from
the first day of such period, whether or not declared or paid for the prior
quarterly period. Each declared dividend shall be payable to holders of record
as they appear at the close of business on the stock register of the Bank on
such record dates, not exceeding 45 days preceding the payment dates thereof,
as shall be fixed by the Board of Directors of the Bank.
The right of holders of Bank Preferred Shares to receive dividends is
noncumulative. Accordingly, if the Board of Directors fails to declare a
dividend on the Bank Preferred Shares for a quarterly dividend period, then
holders of the Bank Preferred Shares will have no right to receive a dividend
for that period, and the Bank will have no obligation to pay a dividend for
that period, whether or not dividends are declared and paid for any future
period with respect to any other series of preferred stock or the Common Stock.
Authority to Issue Additional Shares
By vote of a majority of the Common Stock the Bank may increase the number
of its authorized shares. A two-thirds vote of the holders of Bank Preferred
Shares is required, however, to create a class of shares that would rank senior
to the Bank Preferred Shares with regard to payment of dividends or amounts
upon liquidation.
Voting Rights
Except as expressly required by applicable law, the holders of the Bank
Preferred Shares will not be entitled to vote at any meeting of shareholders.
The consent of the holders of at least two-thirds of the outstanding
shares of each series of preferred stock of the Bank, including the Bank
Preferred Shares, will be required (1) to create any class or series of stock
which shall, as to dividends or distribution of assets, rank prior to any
outstanding series of preferred stock of the Bank other than a series which
shall not have any right to object to such creation or (2) alter or change the
provisions
OC-23
<PAGE>
of the Bank's Restated Articles of Organization so as to adversely affect the
voting powers, preferences or special rights of the holders of a series of
preferred stock of the Bank; provided that if such amendment shall not
adversely affect all series of preferred stock of the Bank, such amendment need
only be approved by holders of at least two- thirds of the shares of all series
of preferred stock adversely affected thereby.
Redemption
The Bank Preferred Shares will not be redeemable prior to , 2003
(except upon the occurrence of a Tax Event). On or after such date, the Bank
Preferred Shares will be redeemable at the option of the Bank, in whole or in
part, at any time or from time to time on not less than 30 nor more than 60
days' notice by mail, at a redemption price of $250.00 per share, plus the
quarterly accrued and unpaid dividends from the beginning of the quarter in
which the redemption occurs to the date of redemption, if any, thereon. Any
such redemption may only be effected with the prior approval of the FDIC
(unless such approvals are not required at the time of redemption). Unless full
dividends on the Bank Preferred Shares have been or contemporaneously are
declared and paid, no Bank Preferred Shares shall be redeemed unless all
outstanding Bank Preferred Shares are redeemed and the Bank shall not purchase
or otherwise acquire any Bank Preferred Shares, provided, however, that the
Bank may purchase or acquire Bank Preferred Shares pursuant to a purchase or
exchange offer made on the same terms to holders of all outstanding Bank
Preferred Shares.
Rights upon Liquidation
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Bank, the holders of the Bank Preferred Shares at the time
outstanding will be entitled to receive out of assets of the Bank available for
distribution to stockholders, before any distribution of assets is made to
holders of Common Stock or any other class of stock ranking junior to the Bank
Preferred Shares upon liquidation, liquidating distributions in the amount of
$250.00 per share, plus the quarterly accrued and unpaid dividend thereon, if
any, to the date of liquidation.
After payment of the full amount of the liquidating distributions to which
they are entitled, the holders of Bank Preferred Shares will have no right or
claim to any of the remaining assets of the Bank. In the event that, upon any
such voluntary or involuntary liquidation, dissolution or winding up, the
available assets of the Bank are insufficient to pay the amount of the
liquidation distributions on all outstanding Bank Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of
capital stock of the Bank ranking on a parity with the Bank Preferred Shares in
the distribution of assets upon any liquidation, dissolution or winding up of
the affairs of the Bank, then the holders of the Bank Preferred Shares and such
other classes or series of capital stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
For such purposes, the consolidation or merger of the Bank with or into
any other entity, or the sale, lease or conveyance of all or substantially all
of the property or business of the Bank, shall not be deemed to constitute
liquidation, dissolution or winding up of the Bank.
LEGAL MATTERS
Certain legal matters, including the legality of the Bank Preferred Shares
being offered hereby, are being passed upon for the Bank by Goodwin, Procter &
Hoar LLP, Boston, Massachusetts.
OC-24
<PAGE>
Federal Deposit Insurance Corporation Washington, D.C. 20006
Form 10-Q
Quarterly Report Under Section 13 of The
Securities Exchange Act of 1934
For the quarter ended June 30, 1998
F.D.I.C. Insurance Certificate No. 27184-5
Atlantic Bank and Trust Company
------------------------------------------------
(Exact name of bank as specified in its charter)
Massachusetts
-------------------------------
(State or other jurisdiction of
incorporation or organization)
04-2988794
------------------------------------
(IRS Employer Identification Number)
101 Summer Street, Boston, Massachusetts
------------------------------------
(Address of principal executive office)
02110
--------------
(Zip Code)
(617) 880-1000
----------------------------------------------
(Bank's telephone number, including area code)
N/A
---------------------------------------------------
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the bank (1) has filed all reports required to
be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Bank was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Company's
common stock as of August 7, 1998
4,133,859
A-1
<PAGE>
Table of Contents
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 -- Financial Statements Page
Consolidated Balance Sheets ............................................ A-3
Consolidated Statements of Income ...................................... A-4
Consolidated Statements of Changes in Stockholders' Equity ............. A-5
Consolidated Statements of Cash Flows .................................. A-6
Notes to Consolidated Financial Statements ............................. A-7-8
Item 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition .................................................... A-9-12
Liquidity .............................................................. A-12
Asset and Liability Management ......................................... A-13
Impact of Inflation .................................................... A-13
Results of Operations .................................................. A-14-19
Item 3 -- Qualitative Disclosures about Market Risk ....................... A-20
PART II. OTHER INFORMATION
Item 4 -- Submission of Matters to a Vote of Security Holders ............. A-21
Signatures ............................................................. A-22
</TABLE>
A-2
<PAGE>
ITEM 1. Financial Statements
Atlantic Bank and Trust Company and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ -------------
(in thousands, except share
data)
<S> <C> <C>
ASSETS
Cash and due from banks ........................................... $ 3,029 $ 1,910
Federal funds sold ................................................ 51,200 44,290
-------- --------
Total cash and cash equivalents ................................ 54,229 46,200
-------- --------
Interest-bearing deposits in banks ................................ 349 238
Securities available for sale, at fair value ...................... 12,017 7,016
Federal Home Loan Bank of Boston stock, at cost ................... 965 563
Loans and leases .................................................. 317,141 257,105
Less allowance for loan and lease losses ......................... (2,695) (2,273)
-------- --------
Loans and leases, net .......................................... 314,446 254,832
-------- --------
Other real estate owned, net ...................................... 2,279 3,591
Premises and equipment, net ....................................... 13,342 6,736
Other assets ...................................................... 8,202 2,600
-------- --------
$405,829 $321,776
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing ............................................. $ 6,323 $ 5,622
Interest bearing ................................................. 356,112 279,900
-------- --------
Total deposits ................................................. 362,435 285,522
Accrued interest payable .......................................... 2,373 1,178
Accrued expenses and other liabilities ............................ 3,256 3,275
-------- --------
Total liabilities .............................................. 368,064 289,975
-------- --------
Stockholders' equity:
Serial preferred stock, $1 par value, 1,000,000 shares authorized;
none issued .................................................... -- --
Series B convertible preferred stock, no par value, 100 shares
authorized and issued .......................................... 538 --
Common stock, $1 par value, 15,000,000 shares authorized;
4,294,343 and 4,216,010 shares issued .......................... 4,294 4,216
Additional paid-in capital ....................................... 19,261 17,432
Retained earnings ................................................ 14,454 10,926
-------- --------
38,547 32,574
Treasury stock at cost--160,484 shares ........................... (793) (793)
Net unrealized gain on securities available for sale, after tax effect 11 20
-------- --------
Total stockholders' equity ..................................... 37,765 31,801
-------- --------
$405,829 $321,776
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
A-3
<PAGE>
Atlantic Bank and Trust Company and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
1998 1997 1998 1997
---------- ----------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans and leases ......... $10,163 $ 7,367 $18,799 $13,948
Interest and dividend income on investment
securities .................................. 182 145 290 224
Interest on federal funds sold and interest-
bearing deposits in banks ................... 868 321 1,647 693
------- ------- ------- -------
Total interest income ....................... 11,213 7,833 20,736 14,865
Interest expense on deposits ................... 5,154 3,182 9,447 6,024
------- ------- ------- -------
Net interest income ......................... 6,059 4,651 11,289 8,841
Provision for loan and lease losses ............ 471 50 596 275
------- ------- ------- -------
Net interest income, after provision for
loan and lease losses ...................... 5,588 4,601 10,693 8,566
------- ------- ------- -------
Other income:
Service fees .................................. 20 26 39 39
Gain on sales of securities ................... -- -- 42 --
Gain on sales of loans ........................ -- -- -- 117
Miscellaneous ................................. 72 81 19 179
------- ------- ------- -------
Total other income .......................... 92 107 100 335
------- ------- ------- -------
Operating expenses:
Compensation and related benefits ............. 1,960 1,273 3,749 2,636
Occupancy and equipment ....................... 439 272 737 527
Professional fees ............................. 437 427 548 690
Other real estate owned, (income) expenses,
net ......................................... (89) 50 (607) (288)
Other general and administrative .............. 932 435 1,525 823
------- ------- ------- -------
Total operating expenses .................... 3,679 2,457 5,952 4,388
------- ------- ------- -------
Income before provision for income taxes 2,001 2,251 4,841 4,513
Provision for income taxes ..................... 527 939 1,295 1,882
------- ------- ------- -------
Net income .................................. 1,474 1,312 3,546 2,631
Dividends on preferred stock ................... 18 -- 18 --
------- ------- ------- -------
Net income available to common
stockholders ............................... $ 1,456 $ 1,312 $ 3,528 $ 2,631
======= ======= ======= =======
Weighted average common shares outstanding:
Basic ......................................... 4,105 4,040 4,081 4,031
Diluted ....................................... 4,464 4,291 4,418 4,277
Earnings per common share:
Basic ......................................... $ 0.35 $ 0.32 $ 0.86 $ 0.65
Diluted ....................................... 0.33 0.31 0.80 0.62
</TABLE>
See accompanying notes to consolidated financial statements.
A-4
<PAGE>
Atlantic Bank and Trust Company and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
Preferred Accumulated
Common Stock Stock Additional Treasury Stock Other
Comprehensive -------------- -------------- Paid-in Retained -------------- Comprehensive
Income Shares Amount Shares Amount Capital Earnings Shares Amount Income Total
------------- ------ ------- ------ ------- --------- --------- ------ ------- ------------ -------
(In Thousands, Except Share Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 4,211 $4,211 -- $-- $17,326 $5,154 190 $ (936) $ 5 $25,760
Net income $2,631 -- -- -- -- -- 2,631 -- -- -- 2,631
Issuance of shares in lieu of
cash compensation to Directors -- 5 5 -- -- 51 -- -- -- -- 56
Reissuance of treasury stock
under stock options -- -- -- -- -- 25 -- (30) 143 -- 168
Amortization of compensation
costs related to stock options -- -- -- -- -- 15 -- -- -- -- 15
Increase in net unrealized gain
on securities available for
sale, after tax effect 11 -- -- -- -- -- -- -- -- 11 11
------ ----- ------ -- --- ------- ------ --- ------ --- -------
Balance at June 30, 1997 $2,642 4,216 $4,216 -- $-- $17,417 $7,785 160 $ (793) $16 $28,641
====== ===== ====== == === ======= ====== === ====== === =======
</TABLE>
<TABLE>
<CAPTION>
Preferred Accumulated
Common Stock Stock Additional Treasury Stock Other
Comprehensive -------------- -------------- Paid-in Retained -------------- Comprehensive
Income Shares Amount Shares Amount Capital Earnings Shares Amount Income Total
------------- ------ ------- ------ ------- --------- --------- ------ ------- ------------ -------
(In Thousands, Except Share Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 4,216 $4,216 -- $ -- $17,432 $10,926 160 $(793) $20 $31,801
Net income $ 3,546 -- -- -- -- -- 3,546 -- -- -- 3,546
Issuance of shares in lieu of
cash compensation to Directors -- 5 5 -- -- 99 -- -- -- -- 104
Issuance of common stock in
connection with acquisition -- 73 73 -- -- 1,714 -- -- -- -- 1,787
Issuance of preferred stock in
connection with acquisition -- -- -- -- 538 -- -- -- -- -- 538
Dividend accrued on preferred
stock (18) (18)
Amortization of compensation
costs related to stock options -- -- -- -- -- 16 -- -- -- -- 16
Decrease in net unrealized gain
on securities available for sale,
after tax effect (9) -- -- -- -- -- -- -- -- (9) (9)
------- ----- ------ -- ---- ------- ------- --- ----- ------ -------
Balance at June 30, 1998 $3,537 4,294 $4,294 -- $538 $19,261 $14,454 160 $(793) $11 $37,765
====== ===== ====== == ==== ======= ======= === ===== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
A-5
<PAGE>
Atlantic Bank and Trust Company and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
----------- -----------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................ $ 3,546 $ 2,631
Adjustments to reconcile net income to net cash used in operating
activities:
Provision for loan and lease losses ..................................... 596 275
Provision for other real estate owned losses ............................ -- 303
Gain on sales of securities available for sale .......................... (42) --
Depreciation and amortization of banking premises and equipment, net 344 209
Amortization and accretion, net ......................................... (4,039) (2,869)
Gain on sale of portfolio loans ......................................... -- (117)
Net gain on sale and disposition of other real estate owned ............. (702) (558)
Other, net .............................................................. (3,337) (2,934)
--------- ---------
Net cash used in operating activities ................................ (3,634) (3,060)
--------- ---------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits in banks ............. (111) 124
Purchases of securities available for sale ................................ (11,991) (4,997)
Sales of securities available for sale .................................... 7,025 --
Maturities of securities available for sale ............................... -- 1,000
Purchase of Federal Home Loan Bank of Boston stock ........................ (402) --
Amortization and payoffs on loans and leases, net of originations ......... 30,658 20,584
Sales of portfolio loans .................................................. -- 5,840
Purchases of loans ........................................................ (87,600) (65,668)
Additions to other real estate owned ...................................... (142) (196)
Sales of and payments received on other real estate owned ................. 2,963 2,794
Additions to banking premises and equipment, net .......................... (6,750) (406)
--------- ---------
Net cash used in investing activities ................................ (66,350) (40,005)
--------- ---------
Cash flows from financing activities:
Net increase in deposits ................................................ $ 76,913 $ 30,415
Proceeds from issuance of common stock in connection with
Acquisition (Note 3) ................................................... 1,100 --
Net increase in deposits ................................................ -- 168
--------- ---------
Net cash provided by financing activities ............................ 78,013 30,583
--------- ---------
Net change in cash and cash equivalents .............................. 8,029 (12,482)
Cash and cash equivalents at beginning of period ........................... 46,200 30,287
--------- ---------
Cash and cash equivalents at end of period ................................. $ 54,229 $ 17,805
========= =========
Supplemental cash flow information:
Interest paid on deposits ................................................. $ 8,252 $ 5,992
Income taxes paid ......................................................... 1,730 3,360
Non-cash investing activity:
Transfers from other real estate owned to loans ........................... 807 4,845
Issuance of shares in lieu of cash compensation to Directors .............. 104 56
Assets acquired in connection with acquisition ............................ 200 --
Liabilities acquired in connection with acquisition ....................... 414 --
Fair value of common stock issued in connection with the acquisition in
excess of proceeds received ............................................. 687 --
Issuance of preferred stock in connection with acquisition ................ 538 --
</TABLE>
See accompanying notes to consolidated financial statements.
A-6
<PAGE>
Atlantic Bank and Trust Company and Subsidiary
Notes to Consolidated Financial Statements
Three Months Ended June 30, 1998 and 1997
Note 1. Basis of Presentation
The consolidated interim financial statements of Atlantic Bank and Trust
Company (together with its subsidiaries the "Company") include the accounts of
Atlantic Bank and Trust Company and its subsidiaries, Dolphin Capital
Corporation ("Dolphin") and CHB Realty Corp ("CHB"), as well as CHB's
wholly-owned real estate investment trust established in 1998, Atlantic
Preferred Capital Corporation. These statements are intended to be read in
conjunction with the consolidated financial statements presented in the
Company's annual report for the year ended December 31, 1997.
Dolphin Capital Corporation is a leasing company located in Moberly,
Missouri which provides lease financing to individuals and businesses primarily
for the acquisition of computers and business equipment. Dolphin was
established on May 1, 1998 through the acquisition of certain operating assets
of Forrest Holdings, Inc. ("Forrest"), an Illinois-based leasing company. The
acquisition did not include leases originated by Forrest.
The consolidated financial information as of June 30, 1998, and the
results of operations for the three and six months ended June 30, 1998 and 1997
and the statements of changes in stockholders' equity and cash flows for the
three and six months ended June 30, 1998 and 1997 are unaudited; however, in
the opinion of management, the consolidated financial information reflects all
adjustments (consisting solely of normal recurring accruals) necessary for a
fair presentation in accordance with generally accepted accounting principles.
Interim results are not necessarily indicative of results to be expected for
the entire year.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the balance sheet and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for losses on loans and
leases, the valuation of real estate acquired in connection with foreclosures
or in satisfaction of loans, the allocation of purchase discount between
amortizing and non-amortizing portions, and amortization of discount on loans.
Note 2. Earnings per Common Share
Basic earnings per common share represents income available to common
stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to income that would result
from the assumed conversion. Potential additional common shares consist of
outstanding stock options and outstanding convertible preferred stock, and are
determined using the treasury stock and if-converted methods, respectively. The
assumed conversion of outstanding dilutive stock options would increase the
shares outstanding but would not require an adjustment to income as a result of
the conversion. At June 30, 1998, no adjustment was made to the earnings per
common share calculation relating to the outstanding convertible preferred
stock as it would have had an anti-dilutive effect on diluted earnings per
common share.
Note 3. Acquisition
On May 1, 1998, the Company acquired certain operating assets and
liabilities of certain subsidiaries of Forrest Holdings, Inc. ("Forrest")
pursuant to an Asset Purchase Agreement (the "Agreement") between the Company,
Forrest and a shareholder of Forrest (the "Principal Shareholder"). Through its
subsidiaries, Forrest provided lease financing for the acquisition of computers
and business equipment. The assets and liabilities acquired by the Company
consisted primarily of customer and vender relationships, computer equipment
and certain capital lease obligations. To conduct its leasing operations, the
Company established a wholly-owned subsidiary, Dolphin Capital Corporation
("Dolphin"), and assigned the assets acquired and liabilities assumed under the
Agreement to Dolphin. Dolphin commenced operations from its headquarters in
Moberly, Missouri, on May 1, 1998.
A-7
<PAGE>
The purchase price paid by the Company under the Agreement totaled $3.8
million and was comprised of $2.6 million of cash, 100 shares of the Company's
Series B convertible preferred stock having a liquidation value of $538,000 and
73,333 shares of the Company's common stock issued to the Principal
Shareholder. For purposes of this transaction, such shares of the Company's
common stock were deemed to have an aggregate fair market value of $1.1
million, a discount of $687,000 from the then-current market price of the
Company's common stock. The liabilities assumed by the Company exceeded the
fair value of tangible assets acquired by $214,000. Goodwill arising from the
transaction totaled $4.6 million, includes $497,000 of acquisition costs, and
is being amortized by the straight-line method over twenty years
In addition, pursuant to an agreement executed in connection with the
transactions contemplated by the Agreement, contingent payments of up to $1.1
million will be payable to the Principal Shareholder if Dolphin achieves
certain operating results, as defined by the Agreement, during its first three
years of operations. The ultimate effect of this contingency, if any, is not
determinable at this time.
The Company is currently negotiating the termination of this contingent
payment section of the Agreement as well as the employment contract of the
Principal Shareholder.
Note 4. Commitments and Contingencies
At June 30, 1998, the Company had outstanding commitments to originate
commercial real estate mortgage loans of approximately $1.9 million which are
not reflected on the consolidated balance sheet. Additionally, unadvanced funds
under commercial lines of credit and standby letters of credit totaled
approximately $1.2 million and $283,000, respectively, at June 30, 1998.
Note 5. Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," effective for fiscal years beginning after December 15,
1997. Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Certain FASB statements,
however, require entities to report specific changes in assets and liabilities,
such as unrealized gains and losses on securities available for sale, as a
separate component in the equity section of the balance sheet. Such items,
along with net income, are components of comprehensive income. SFAS No. 130
requires that all items of comprehensive income be reported in a financial
statement with the same prominence as other financial statements. Additionally,
SFAS No. 130 requires that the accumulated balance of other comprehensive
income be displayed separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. The Company adopted this
standard on January 1, 1998.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way public
business enterprises report information about operating segments in annual and
interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Generally, financial information is required to be reported on the basis that
it is used internally for evaluating segment performance and deciding how to
allocate resources to segments. SFAS No. 131 also requires descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used by the
enterprise in its general-purpose financial statements, and changes in the
measurement of segment amounts from period to period. Management is currently
evaluating the impact of SFAS No.131 on the Company's financial reporting.
A-8
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FINANCIAL CONDITION
Certain statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations contain "forward looking" information (as
defined in the Private Securities Litigation Reform Act of 1995). The words
"believe", "expect", "anticipate", "intend", "estimate", "assume" and other
similar expressions which are predictions of or indicate future events and
trends and which do not relate to historical matters identify forward looking
statements. Reliance should not be placed on forward looking statements because
they involve known and unknown risks, uncertainties and other factors, which
are in some cases beyond the control of the Company and may cause the actual
results, performance or achievement of the Company to differ materially from
anticipated future results, performance or achievements expressed or implied by
such forward looking statements. Factors affecting actual results may include,
among other things, changes in general, national or regional economic
conditions (and the market for commercial real estate in particular), changes
in loan default and charge-off rates, reductions in deposit levels
necessitating increased borrowing to fund loans and investments, changes in
interest rates, and changes in the assumptions used in making such forward
looking statements.
For further discussion identifying important factors that could cause
actual results to differ materially from those anticipated in forward looking
statements, see the Company's FDIC filings, in particular see the Company's
Forms F-1 and 10-K.
General
As of June 30, 1998, the Company had total assets of $405.8 million, an
increase of $84.1 million or 26.1% compared to total assets of $321.8 million
at December 31, 1997. The increase in assets was primarily attributable to the
continued expansion of the Company's purchased loan portfolio which was funded
by an increase in the Company's deposit portfolio. A more detailed discussion
and analysis of the Company's financial condition follows.
Investment Securities
The Company designates all investment securities held in the ordinary
course of business as securities available for sale. As of June 30, 1998, the
Company's securities available for sale were comprised of U.S. Treasury
securities totaling $12.0 million, or 3.0% of total assets, compared to $7.0
million, or 2.2% of total assets, at December 31, 1997. This increase reflects
the Company's policy to provide an adequate level of liquidity in order to meet
normal working capital needs and expansion of its loan and lease portfolios.
Loans and Leases
Net loans and leases increased from $254.8 million at December 31, 1997 to
$314.4 million at June 30, 1998, an increase of $59.6 million or 23.4%. A
summary of the Company's outstanding loan and lease balances at June 30, 1998
and December 31, 1997 follows.
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- -------------
(in thousands)
<S> <C> <C>
Purchased loan portfolio:
Mortgage loans on real estate:
Commercial .............................. $173,059 $ 156,138
Land .................................... 8,613 7,655
Other ................................... 107,265 59,804
-------- ---------
Total .................................. 288,937 223,597
Secured commercial ........................ 1,544 2,134
Other ..................................... 1,886 1,416
-------- ---------
Total purchased loan portfolio ......... 292,367 227,147
</TABLE>
A-9
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ --------------
(in thousands)
<S> <C> <C>
Less discount:
Non-amortizing portion .................................. (28,058) (22,132)
Amortizing portion ...................................... (17,539) (18,052)
------- -------
Total purchased loan portfolio, net .................... 246,770 186,963
------- -------
Originated loan and lease portfolio:
Mortgage loans on real estate: ............................
Commercial .............................................. 43,951 45,366
Land .................................................... 959 1,062
Other ................................................... 11,152 13,737
------- -------
Total mortgage loans on real estate .................... 56,062 60,165
Secured commercial loans .................................. 6,132 8,334
SBA loans ................................................. 1,142 1,221
Other loans ............................................... 687 810
Net deferred loan income .................................. (281) (388)
------- -------
Total originated loans, net ............................ 63,742 70,142
Direct finance leases:
Lease payments receivable ................................. 7,936 --
Residual value ............................................ 405 --
Initial direct costs ...................................... 195 --
Less unearned income ...................................... (1,907) --
------- -------
Net investment in direct finance leases ................ 6,629 --
Total originated loan and lease portfolio .............. 70,371 70,142
Less allowance for loan and lease losses ................... (2,695) (2,273)
------- -------
Total originated loan and lease portfolio, net ......... 67,676 67,869
------- -------
Loans and leases, net ................................ $ 314,446 $ 254,832
========= =========
</TABLE>
During the six months ended June 30, 1998, the Company continued to expand
its loan portfolio and established a lease portfolio. The largest component of
the total increase was in the purchased loan portfolio. On May 1, 1998, the
Company entered into the equipment leasing business through its subsidiary,
Dolphin Capital Corporation, as a means of providing a new product line to
complement its loan acquisition strategy.
Net purchased loans at June 30, 1998 represented 78.5% of the Company's
net loan and lease portfolios compared to 73.4% at December 31, 1997. The gross
purchased loan portfolio increased by $65.2 million or 28.7% at June 30, 1998
compared to December 31, 1997. The gross outstanding balance of loans purchased
for the six months ended June 30, 1998 totaled $100.2 million and were acquired
at an aggregate discount of $12.6 million or 12.6%. These loan purchases
consisted primarily of performing commercial real estate and other real estate
loans located in New England and California. Offsetting the growth in the
purchased loan portfolio were resolutions, repayments and renewals, including
purchased loans transferred to the originated loan portfolio after being
renewed on terms consistent with the Company's loan policy and documentation
standards, which when combined totaled $24.0 million.
In contrast to the purchased loan portfolio, the net originated loan
portfolio decreased from $67.9 million at December 31, 1997 to $67.7 million at
June 30, 1998. Loans originated for the six months ended June 30, 1998 totaled
$4.7 million. The combination of amortization and payoffs exceeded such
originations and transfers from the purchased loan portfolio.
Dolphin originated approximately 950 leases totaling to $6.6 million since
it commenced operations on May 1, 1998. Such leases are primarily for the
acquisition of computers and other office equipment. Dolphin's primary business
strategy is to originate leases either for ultimate sale to investors,
retaining the lease servicing function as a source of fee income, or for
inclusion in the Company's loan and lease portfolio. As of June 30, 1998 no
leases have been designated for sale.
A-10
<PAGE>
Non-Performing Loans
Non-performing loans at June 30, 1998 totaled $7.3 million, of which $6.6
million were purchased loans and $785,000 were originated loans, compared to
$6.9 million reported at December 31, 1997, of which $6.5 million were
purchased loans and $450,000 were originated loans.
Allowances for Loan and Lease Losses and Non-Amortizing Discount
The allowance for loan and lease losses at June 30, 1998 totaled $2.7
million and represented 343.3% of non-performing originated loans and leases
and 3.7% of total originated loans and leases. The allowance for loan losses at
December 31, 1997 totaled $2.3 million and represented 505.1% of non-performing
originated loans and 3.2% of total originated loans. An analysis of the
allowance for originated loan and lease losses follows.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period .............. $ 2,403 $ 2,233 $ 2,273 $ 1,965
Provision for loan and lease losses ......... 269 50 394 275
Recoveries .................................. 23 31 28 92
------- ------- ------- -------
2,695 2,314 2,695 2,332
Loans charged-off ........................... -- -- -- (18)
------- ------- ------- -------
Balance at end of period .................... $ 2,695 $ 2,314 $ 2,695 $ 2,314
======= ======= ======= =======
</TABLE>
In addition to the above activity, provisions for losses of $202,000 and
charge-offs of $202,000 were recorded in the allowance for losses on purchased
loans. These provisions were accounted for by a charge to earnings and such
charge-offs reduced the carrying value of two purchased loans for which no
discount was available for allocation from their respective pools.
The non-amortizing portion of discount on purchased loans is accounted for
on the cost recovery method until it is determined that the amount and timing
of collections are reasonably estimable and collection is probable. Under the
Company's loan rating system, each loan is evaluated, and where necessary,
specific allowances are established and allocated from the respective loan
pool's non-amortizing discount and, if available, from amortizing discount. If
no discount is available, an allowance is established through a charge to the
Company's income statement. Non-amortizing discount on loans purchased totaled
$28.1 million and $22.1 million at June 30, 1998 and December 31, 1997,
respectively, and represented 428.4% and 342.2% of non-performing purchased
loans, respectively. Total discount at June 30, 1998 and December 31, 1997
totaled $45.6 million and $40.2 million, respectively, and represented 15.6%
and 17.7% of total purchased loans, respectively. An analysis of non-amortizing
discount activity on purchased loans follows.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period ............... $ 28,898 $ 27,447 $ 22,132 $ 24,387
Acquisitions ................................. 2,519 7,012 10,941 20,628
Transfers to amortizing portion, net ......... (1,240) (2,774) (2,700) (3,619)
Charge-offs, net of recoveries ............... (2,119) (11,104) (2,315) (20,815)
-------- --------- -------- ---------
Balance at end of period ..................... $ 28,058 $ 20,581 $ 28,058 $ 20,581
======== ========= ======== =========
</TABLE>
Other Real Estate Owned, Net
At June 30, 1998, other real estate owned, net, totaled $2.3 million or
.6% of total assets compared to $3.6 million, or 1.1% of total assets, at
December 31, 1997. The overall decline in other real estate owned is a direct
result of the sale of properties with total carrying values of $3.0 million at
net gains of $702,000 during the six months ended June 30, 1998.
A-11
<PAGE>
Premises and Equipment, Net
Premises and equipment, net, totaled $13.3 million at June 30, 1998,
representing a 98.1% increase compared to $6.7 million at December 31, 1997.
This increase is primarily a result of renovations to the Company's new main
office, to which the Company relocated in mid-February 1998.
Deposits
Deposits increased $76.9 million or 26.9% during the six months ended June
30, 1998. The primary factor leading to the increase in deposits was the
introduction of a personal money market account in the fourth quarter of 1997.
Total money market accounts increased from $11.5 million at December 31, 1997
to $68.4 million at June 30, 1998, an increase of 496.1%. Total deposits also
increased as a result of an increase in the Company's certificate of deposit
portfolio. Most of the certificate of deposit growth is represented by brokered
deposits obtained through national investment banking firms which solicit
deposits from their customers. At June 30, 1998, brokered deposits totaled
$86.2 million, compared to $67.2 million at December 31, 1997. These deposits
bear original maturity dates ranging from six months to three years, are
non-cancelable and bear rates which are consistent with the Company's
certificate of deposit program.
Stockholders' Equity
Federally insured institutions such as the Company are required to
maintain minimum levels of regulatory capital. As of June 30, 1998, the Company
was categorized as well capitalized under the regulatory framework for prompt
corrective action, based on the most recent Consolidated Report of Condition
and Income filed with FDIC. The following table sets forth the regulatory
capital ratios of the Company at June 30, 1998.
<TABLE>
<CAPTION>
Minimum To Be Well
Capitalized Under The
Minimum For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----------- ---------- ---------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital ............ $35,955 10.94% $ 26,296 8.00% $32,871 10.00%
(to risk weighted assets)
Tier 1 capital ........... 33,260 10.12 13,148 4.00 19,722 6.00
(to risk weighted assets)
Tier 1 capital ........... 33,260 8.46 15,719- 4.00- 19,648 5.00
(to average assets) 19,648 5.00
</TABLE>
In addition, during 1998 the Company established Atlantic Preferred
Capital Corporation, a real estate investment trust. Under certain
circumstances preferred stock issuance's of a real estate investment trust can
qualify as Tier 1 capital for regulatory capital requirements.
Liquidity
The Company's principal sources of liquidity include certificates of
deposit obtained from wholesale and retail sources. At June 30, 1998, the
Company had $285.6 million of certificates of deposit. At the same date,
scheduled maturities of certificates of deposit for the periods ending June 30,
1999 and 2000 and thereafter, totaled $219.9 million, $60.7 million and $5.0
million, respectively. Certificates of deposit are generally more responsive to
changes in interest rates than core deposits, and thus are more likely to be
withdrawn from the Company upon maturity as changes in interest rates and other
factors are perceived by depositors to make other investments more attractive.
However, management believes it can adjust the rates paid on certificates of
deposit to retain deposits in changing interest rate environments and that such
deposits can provide a relatively cost effective and ready source of funds or
that it can further utilize its agreements with investment banking firms to
acquire additional brokered deposits.
Non-interest bearing checking accounts, NOW and money market checking
accounts and savings accounts generally are considered core deposits and
typically provide a relatively lower cost source of liquidity. The Company's
total deposits represented by such core deposits totaled $76.8 million, or
21.2% of the Company's total
A-12
<PAGE>
deposits at June 30, 1998, compared to $19.6 million, or 6.9%, of total
deposits at December 31, 1997. This increase is due to the introduction of a
personal money market account in the fourth quarter of 1997.
In addition, proceeds from the sales of loans and amortization and payoffs
of the loan portfolio contribute significant liquidity to the Company.
Generally, such amounts are reinvested into the Company's purchased loan
portfolio.
Asset and Liability Management
For a discussion of asset and liability management see Item 3. Qualitative
Disclosures about Market Risk on page 18.
Impact of Inflation
The consolidated financial statements and related consolidated financial
data presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
results of operations in terms of historical dollars without considering
changes in the relative purchasing power of money over time due to inflation.
The primary effect of inflation on the operations of the Company is reflected
in increased operating costs. Unlike most industrial companies, virtually all
assets of a financial institution are monetary in nature. As a result, interest
rates have a more significant effect on a financial institution's performance
than the effect of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices
of goods and services.
A-13
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 AND 1997
General
The Company reported consolidated net income of $1.5 million for the
second quarter of 1998, which represented a $162,000, or 12.0%, increase
compared to $1.3 million reported for the second quarter of 1997. Earnings per
share for the three months ended June 30, 1998 were $0.33 on a diluted basis
and $0.35 on a basic basis compared to $0.31 on a diluted basis and $0.32 on a
basic basis for the same period in 1997. The increase in net income resulted
principally from an increased level of net interest income, which was partially
offset by the operating expenses incurred by Dolphin, which recorded a pretax
loss of $1.1 million.
The following sections of this analysis discuss the components of net
interest income, the provision for loan and lease losses, other income and
operating expenses for the three months ended June 30, 1998 and 1997.
Interest Income
For the quarter ended June 30, 1998, total interest income increased to
$11.2 million compared to $7.8 million for the same period in 1997. The
improvement was primarily due to a greater volume of earning assets during the
period versus the corresponding period in the prior year. For the three months
ended June 30, 1998, average earning assets were $370.5 million compared to
$228.2 million for the second quarter of 1997. Average purchased loans and
average originated loans and leases for the current period amounted to $224.9
million and $68.4 million, respectively, versus $126.7 million and $68.1
million, respectively, for the second quarter of 1997.
Overall, interest income on the purchased loan portfolio increased $2.8
million in the second quarter of 1998 from the second quarter of 1997 as a
result of the increase in the average balance of 77.5%. This increase in volume
was partially offset by a 271 basis point decline in the yield on this
portfolio. This decline is primarily the result of a more competitive
marketplace for loan acquisitions, which affected the price of loans acquired,
and a lower interest rate environment. Loans purchased during the second
quarter of 1998 were purchased at 91% of the aggregate of gross outstanding
loan balances compared to 75% during the second quarter of 1997.
The average balance of short-term investments and investment securities
available for sale increased to $64.2 million and $13.0 million during the
second quarter of 1998, compared to $23.9 and $9.5 million, respectively, for
the same period in 1997. These significant increases were due to the investment
of funds in anticipation of funding loan acquisitions and the need to maintain
an appropriate level of liquidity in relationship to the Company's total asset
growth.
The weighted average yield on earning assets for the quarter ended June
30, 1998 was 12.14% as compared to 13.77% for the comparable period in 1997.
This decrease in the overall asset yield is primarily attributable to the
decline in the yield on the purchased loan portfolio in addition to the higher
percentage of lower yielding short-term investments held in the second quarter
of 1998.
Interest Expense
For the quarter ended June 30, 1998, interest expense totaled $5.2 million
compared to $3.2 million for the same period in 1997. This increase is
attributable primarily to a greater volume of deposits and, to a lesser extent,
an increase in the average rate paid.
For the three months ended June 30, 1998, average interest-bearing
deposits were $351.1 million compared to $219.1 million for the second quarter
of 1997. The Company has experienced growth in both core deposits and
certificates of deposit. During the fourth quarter of 1997, the Company
developed a new personal money market account, which it has been promoting as
an alternative to certificates of deposit. As a result, the Company's reliance
on certificates of deposit has decreased as the ratio of average certificates
of deposit to average interest-bearing deposits declined to 84.2% for the three
months ended June 30, 1998 from 96.2% for the same period in 1997.
Additionally, average money market accounts have increased $47.4 million from
the second quarter of 1997 to the second quarter of 1998.
The weighted average rate paid on interest bearing liabilities for the
quarter ended June 30, 1998 was 5.89% compared to 5.83% for the comparable
period in 1997. The increase in the rate paid is attributed to higher rates
A-14
<PAGE>
offered on new and maturing certificates of deposits during the period and
higher rates on insured money market accounts.
A summary of the weighted average yields on earning assets and the
weighted average rates paid on interest bearing liabilities for the three
months ended June 30, 1998 and 1997 follows.
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Weighted average yield earned on:
Short-term investments ....................... 5.42% 5.40%
Securities available for sale ................ 5.63 6.12
Purchased loans, net ......................... 14.77 17.48
Originated loans and leases, net ............. 11.01 10.87
Total interest-earning assets .............. 12.14 13.77
Weighted average rate paid on:
Now and savings .............................. 2.18 2.10
Insured money market ......................... 5.31 3.35
Certificates ................................. 6.02 5.94
Total interest-bearing liabilities ......... 5.89 5.83
Weighted average interest rate spread ......... 6.25 7.94
Net interest margin ........................... 6.56% 8.18%
</TABLE>
Provision for Loan and Lease Losses
The Company recorded $471,000 as a provision for loan and lease losses
during the three months ended June 30, 1998, an increase from $50,000 for the
comparable prior year period. The increase in the provision is partially a
result of a provision for losses established on leases originated during the
second quarter of 1998 at a rate of 4%, which amounted to $269,000. In
addition, the Company provided $202,000 to reduce the carrying value of two
purchased loans for which no discount was available for allocation from their
respective pools. Due to improved asset quality in the Company's originated
loans, in addition to a decrease in the size of the portfolio, no provision for
losses on originated loans was recorded. The provision for loan losses
represents a charge against current earnings and an addition to the allowance
for loan losses. The provision is determined by management on the basis of many
factors including the quality of specific loans, risk characteristics of the
loan and lease portfolio generally, the level of non-performing loans, current
economic conditions, trends in loan delinquency and charge-offs, and collateral
values of the underlying security.
Operating Expenses
Operating expenses for the three-month period ended June 30, 1998 totaled
$3.7 million compared to $2.5 million for the comparable 1997 period. This $1.2
million increase is primarily attributable to operating expenses incurred by
Dolphin which totaled $910,000 for the three months ended June 30, 1998.
Compensation and related benefits increased by $687,000 or 54.0% as a
result of an increase in the Company's staff, primarily at Dolphin, and salary
adjustments. The Company had 112 full time employees at June 30, 1998, of which
54 where employees of Dolphin, up from 47 employees at June 30, 1997.
Offsetting this overall increase was a decline in formula-based incentive
compensation amounting to $123,000 from the second quarter of 1997 to the
second quarter of 1998.
Occupancy and equipment expense for the three-month period ended June 30,
1998 increased $167,000 or 61.4% compared to the second quarter of 1997.
Increased expenses as a result of expanding office space needs for the
Company's banking operations amounted to $91,000. Expenses incurred by the
Company's leasing subsidiary amounted to $101,000 and related principally to
equipment expenses incurred to develop an effective lease origination platform.
In 1998 occupancy expense was partially offset by rental income from tenants at
the Company's new main office of $25,000 for the three months ended June 30,
1998. In 1997, income from tenants prior to renovation was classified as other
income.
A-15
<PAGE>
Professional services remained relatively consistent, increasing only
$10,000 from the second quarter of 1997 to the second quarter of 1998 despite
the significant asset and loan growth experienced by the Company. Legal fees
declined by $62,000 in the second quarter of 1998 compared to the second
quarter of 1997. This decline is primarily attributable to the recovery of
$138,000 of previously incurred legal fees from various borrowers. Consulting
and auditing fees increased by $43,000 and $33,000 as a result the Company's
overall growth.
For the quarter ended June 30, 1998, income from other real estate owned,
net, amounted to $89,000 primarily due to gains on sales of other real estate
owned of $95,000 offset by net operating expenses. For the quarter ended June
30, 1997, the Company realized net expenses from other real estate owned of
$50,000 due to provisions for losses of $202,000 which exceeded gains on sales
of $72,000 and net operating income of $80,000. The provision for losses in
1997 was incurred to establish a general reserve in the amount of $100,000, as
a result of the increased level of other real estate owned and to establish a
reserve with respect to one specific property.
Other general and administrative expenses for the three months ended June
30, 1998 increased to $932,000 from $435,000 in 1997, an increase of $497,000
or 114.3%. A majority of the increase is attributable to expenses incurred by
Dolphin of $261,000 during the three months ended June 30, 1998 and an
operating charge-off of $105,000 relating to certain apparent irregular
activity in a transaction account. Other expenses increased as a result of the
overall growth of the Company's banking operations.
Provision for Income Taxes
The Company's effective tax rate decreased from 41.7% to 26.3% for the
three months ended June 30, 1998 compared to the three months ended June 30,
1997. This is a result of the establishment of a real estate investment trust,
which reduced the Company's effective tax rate by approximately 6.5%, and the
recognition of a historic tax credit relating to the renovation of the
Company's new main office building which reduced the Company's effective tax
rate by approximately 8.5%. The historic tax credit will be recognized ratably
throughout 1998.
A-16
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
General
For the six months ended June 30, 1998, the Company reported consolidated
net income of $3.5 million, a 34.8% increase compared to net income of $2.6
million for the same period of 1997. On a diluted basis, earnings per share
were $0.80 for the six months ended June 30, 1998 compared to $0.62 for the six
months ended June 30, 1997. The increase in the Company's net income for the
six months ended June 30, 1998 over the same period of 1997 is primarily
attributable to an increase of $2.4 million in net interest income which more
than offset an increase in non-interest expense of $1.6 million, of which
$910,000 relates to Dolphin.
Interest Income
Interest income for the six months ended June 30, 1998, increased to $20.7
million from $14.9 million for the corresponding period of 1997, due primarily
to an increase in average earning assets. For the current period total average
earning assets were $349.1 million compared to $224.4 million for the
corresponding period in 1997. Average purchased loans and average originated
loans and leases for the first six months of 1998 aggregated $202.4 million and
$74.9 million compared to $121.4 million and $69.0 million, respectively, for
the corresponding period in 1997. This increase in the average balance of the
purchased loan portfolio also served to offset a decline in yield on the
purchased loan portfolio experienced as a result of a more competitive
marketplace for loan acquisitions, which affected the price of loans acquired,
and a lower interest rate environment. Loans purchased during the six months
ended June 30, 1998 were purchased at 87% of the gross loan balances compared
to 74% during the comparable period in 1997.
Interest income on investment securities and federal funds sold increased
by $1.0 million or 111.2% for the first six months of 1998 from the same 1997
period. Average total investments increased by $37.7 million from 1997 to 1998
because the Company increased its level of liquid assets.
The weighted average yield earned on earning assets for the six month
period ended June 30, 1998 was 11.98% compared to 13.36% for the same period in
1997. This decrease in the overall asset yield is primarily attributable to the
higher percentage of lower yielding short-term investments held in 1998 in
addition to the decline in the yield on the loan and lease portfolio.
Interest Expense
Interest expense for the six months ended June 30, 1998, amounted to $9.4
million compared to $6.0 million in 1997. This increase is principally due to
increases of $81.2 and $32.6 million in average certificates of deposit and
money market accounts, respectively. The average rate paid on interest bearing
liabilities increased to 5.90% for the six months ended June 30, 1998 from
5.80% for the comparable period in 1997.
A summary of the weighted average yields on earning assets and the
weighted average rates paid on interest bearing liabilities for the six months
ended June 30, 1998 and 1997 follows.
A-17
<PAGE>
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Weighted average yield earned on:
Short-term investments ....................... 5.40% 5.27%
Securities available for sale ................ 5.67 6.01
Purchased loans, net ......................... 14.99 16.69
Originated loans and leases, net ............. 10.10 11.41
Total interest-earning assets .............. 11.98 13.36
Weighted average rate paid on:
Now and savings .............................. 2.31 2.17
Insured money market ......................... 5.25 3.31
Certificates ................................. 6.02 5.92
Total interest-bearing liabilities ......... 5.90 5.80
Weighted average interest rate spread ......... 6.07 7.56
Net interest margin ........................... 6.52% 7.95%
</TABLE>
Provision for Loan and Lease Losses
The Company's provision for loan and lease losses was $596,000 and
$275,000 for the six months ended June 30, 1998 and 1997, respectively. The
increase in the provision is partially attributable to a $269,000 provision for
losses established on newly originated leases during the second quarter of
1998. In addition, the Company provided $202,000 to reduce the carrying value
of two purchased loans for which no discount was available for allocation from
their respective pools. Due to improved asset quality in the Company's
originated loan segment of its loan and lease portfolio, in addition to a
decrease in the size of the portfolio, the provision for loan losses for the
six months ended June 30, 1998 was decreased to $125,000 compared to $275,000
for the same period in 1997.
Other Income
Other income for the six months ended June 30, 1998 was $100,000 compared
to $335,000 for the same period in 1997. This decrease is partially due to
gains on sales of originated loans of $117,000 recognized in the first quarter
of 1997, which related to the sale of approximately $3.5 million of originated
asset-based loans. In 1997, other income also included $22,000 of net rental
income received from tenants of the Company's new main office prior to
renovation. In 1998, other income includes $107,000 of operating losses from
this building since rental income declined significantly during renovation.
Operating Expenses
Operating expenses for the six months ended June 30, 1998 and 1997 were
$6.0 million and $4.4 million, respectively. Operating expenses incurred by
Dolphin for the six months ended June 30, 1998 amounted to $910,000.
Compensation and related benefits increased by $1.1 million or 42.2% as a
result of an increase in the Company's staff, primarily at Dolphin, and salary
adjustments.
Occupancy and equipment expenses for the six months ended June 30, 1998
increased to $737,000 compared to $527,000 for the same period of 1997,
primarily due to increased furniture, computer equipment and relocation costs
amounting to $111,000. In addition, Dolphin incurred $84,000 of occupancy and
equipment expenses during the second quarter of 1998.
Expenditures for professional fees decreased to $548,000 during the first
six months of 1998 from $690,000 in the corresponding 1997 period. This decline
is primarily attributable to the recovery of $365,000 in collection costs from
various borrowers.
Income from other real estate owned, net, amounted to $607,000 compared to
$288,000 for the six months ended June 30, 1998 versus 1997. This increase is
primarily attributed to a provision for losses of $302,000 incurred in 1997 of
which $202,000 related to the establishment of a reserve on one specific
property. Additionally, net gains
A-18
<PAGE>
on sales of other real estate owned amounted to $702,000 during the six months
ended June 30, 1998, compared to net gains on sales of $559,000 for the
comparable period in 1997.
Other general and administrative expenses increased to $1,525,000 for the
six months ended June 30, 1998 compared to $823,000 for the same period in
1997. Expenses incurred by Dolphin amounting to $261,000 during six months
ended June 30, 1998 and an operating charge-off of $105,000 relating to certain
apparent irregular activity in a transaction account, accounted for the
majority of the increases. The Company's banking operations experienced
increases for the six months ended June 30, 1998 over the same period in 1997
related to growth in several categories, such as marketing, data processing,
supplies, loan expenses, travel, fees paid to directors and telephone.
Provision for Income Taxes
The Company's effective tax rate decreased from 41.7% to 26.8% for the six
months ended June 30, 1998 compared to the six months ended June 30, 1997. This
is a result of the establishment of a real estate investment trust, which
reduced the Company's effective tax rate by approximately 6.5%, and the
recognition of a historic tax credit relating to the renovation of the
Company's new main office building which reduced the Company's effective tax
rate by approximately 8.5%. The historic tax credit will be recognized ratably
throughout 1998.
A-19
<PAGE>
ITEM 3. Qualitative Disclosures about Market Risk
Asset and liability management is concerned with the timing and magnitude
of the repricing of assets and liabilities. It is the objective of the Company
to attempt to control risks associated with interest rate movements. Market
risk is the risk of loss from adverse changes in market prices and interest
rates. The Company's market rise arises primarily from interest rate risk
inherent in lending and leasing, investing in marketable securities, deposit
taking and borrowing activities. To that end, management actively monitors and
manages its interest rate risk exposure. The Company's asset and liability
management strategy is formulated and monitored regularly by the Company's
Chairman, its President and its Chief Financial Officer. The Company's Board of
Directors has established limits on the Company's sensitivity to interest rate
changes which it reviews on a quarterly basis. In addition, the Company's
senior management reviews, among other things, the sensitivity of the Company's
assets and liabilities to interest rate changes, the book and market values of
assets and liabilities, unrealized gains and losses, purchase and sale
activity, and maturities of investments. The Company's senior management also
approves and establishes pricing and funding decisions with respect to the
Company's overall asset and liability composition. As the Company continues to
expand its purchased loan portfolio, it may acquire a number of fixed rate
loans. Such loans tend to increase the Company's interest rate risk. The
Company monitors the rate sensitivity of assets it acquires and, when purchased
fixed rate loans are restructured, seeks to ensure that such restructurings
result in repayment terms based upon variable rates.
The Company's methods for evaluating interest rate risk include an
analysis of the Company's interest rate sensitivity "gap", which is defined as
the difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A gap is considered positive
when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds interest-rate sensitive
assets. During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income, while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income, while a positive gap would tend to affect net interest income
adversely. Because different types of assets and liabilities with the same or
similar maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income positively
or negatively even if an institution were perfectly matched in each maturity
category.
The Company also utilizes income simulation models to aid it in estimating
the company's interest rate risk exposure. The Board of Directors has
established limits on the potential impact of changes in interest rates on both
earnings and the economic value of the Company's equity.
A-20
<PAGE>
PART II
ITEM 4. Submission of Matters to a Vote of Security Holders
The annual meeting of Stockholders of Atlantic Bank and Trust Company was
held on Tuesday, April 28, 1998, for the purpose of (i) electing two Directors
of the Bank, each to serve a three year term as Class I Directors, (ii)
electing a Clerk of the Bank; and (iii) adopting the Bank's Stock Option and
Incentive Plan. The following table describes the results of the shareholder
votes.
<TABLE>
<CAPTION>
Votes in Favor Votes Withheld
---------------- ---------------
<S> <C> <C>
Election of the following Directors to
serve until the 2001 Annual Meeting:
L. Dennis Kozlowski 3,209,647 160,143
Anthony L. Rodes 3,215,039 154,751
<CAPTION>
Votes in Favor Votes Withheld
---------------- ---------------
<S> <C> <C>
Election of a Clerk of the Bank:
Bradley M. Shron 3,363,130 2,000
<CAPTION>
Votes in Favor Votes Against
---------------- ---------------
<S> <C> <C>
Adoption of the Bank's 1998 Stock
Option and Incentive Plan: 3,137,895 215,195
</TABLE>
A-21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed by the undersigned thereunto
duly authorized.
ATLANTIC BANK AND TRUST COMPANY
DATE: August 13, 1998
/s/ Richard Wayne
- -------------------------
Richard Wayne
President and Co-Chief Executive Officer
DATE: August 13, 1998
/s/ John L. Champion
- -------------------------
John L. Champion
Senior Vice-President and Chief Financial Officer
A-22
<PAGE>
================================================================================
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C. 20006
--------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________ to _________
FDIC Certificate Number 27184.5
ATLANTIC BANK AND TRUST COMPANY
(Exact name of Bank as specified in its charter)
--------------
<TABLE>
<S> <C>
Massachusetts 04-2988794
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Summer Street 02110
Boston, Massachusetts (Zip Code)
(Address of principal offices)
</TABLE>
(617) 880-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
--------------
Common Stock, par value $1.00 per share
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III or this Form 10-K or any
amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing sale price for the registrant's common
stock as quoted on the Nasdaq National Market System on March 6, 1998 was
$63,621,064.
As of March 6, 1998, there were 4,055,526 shares outstanding of the
registrant's Common Stock.
Documents Incorporated by Reference
Portions of the Atlantic Bank and Trust Company Notice of Annual Meeting
and Proxy Statement for the Annual Meeting of Stockholders to be held on April
28, 1998 are incorporated by reference into Part III of this report.
The Exhibit Index can be found on page 61.
================================================================================
B-1
<PAGE>
PART I
ITEM 1. BUSINESS
This Form 10-K contains certain statements that may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. The Bank's actual results could differ materially from those
projected in the forward-looking statements as a result, among other factors,
of changes in general, national or regional economic conditions, changes in
loan default and charge-off rates relating to a decline in the commercial real
estate market or otherwise, reductions in deposit levels necessitating
increased borrowing to fund loans and investments, changes in interest rates,
and changes in the assumptions used in making such forward-looking statements.
General
Atlantic Bank and Trust Company (the "Bank" or "Atlantic") was organized
as a Massachusetts-chartered trust company in December, 1987 and commenced
operations in February, 1988. The Bank has a wholly owned subsidiary, CHB
Realty, a Massachusetts corporation. Since its establishment and to an
increasing extent in more recent years, the Bank has operated as a commercial
bank primarily focused on purchasing and originating commercial loans that
finance the business activities of individuals and small companies. On December
31, 1994 the Bank acquired Chestnut Hill Bank & Trust Company in a merger (the
"Merger"). The Bank currently conducts business from its executive and main
offices in downtown Boston, Massachusetts and a branch in Chestnut Hill,
Massachusetts.
The Bank's primary business lines include: (i) the acquisition of
discounted commercial loans from private sector sellers and government
agencies; and (ii) the origination of various types of secured commercial
loans, including specialty loans to provide short-term financing for investment
of small businesses and individuals. The Bank funds the foregoing activities
with deposits consisting primarily of certificates of deposit. The Bank also
offers retail deposit services, including checking and savings accounts, and
related services to businesses and individuals through the nationwide
electronic banking networks. The Bank's deposits are insured by the Federal
Deposit Insurance Corporation's (the "FDIC") Bank Insurance Fund to the extent
authorized by law. The Bank also invests in federal funds and U.S. government
and government agency securities.
The Bank's only subsidiary is CHB Realty Corp. ("CHB Realty"), whose
function is the ownership and maintenance of certain other real estate owned.
Through the third quarter of 1996, the Bank had focused its efforts on
acquiring performing loans. During the fourth quarter of 1996, the Bank began
to selectively acquire mixed (performing and non-performing) loan portfolios.
The Bank assigns the non-performing portions of its mixed loan portfolios to a
separate department which has the primary objective of returning the loan to
performing status. Generally, the Bank's efforts to return non-performing loans
to performing status involve restructuring the loans to levels that are
supported by existing collateral and debt service capabilities. During this
restructuring period, the Bank does not recognize interest income on such loans
unless regular payments are being made. In instances when the loan is not
restructured, the Bank aggressively pursues repayment, foreclosure or, in
certain instances, a deed-in-lieu-of-foreclosure.
Loan Portfolio Composition
At December 31, 1997, the Bank's gross loan portfolio totaled $297.7
million. At such date the Bank's investment in purchased loans net of related
discount of $40.2 million totaled $187.0 million. The Bank's originated
portfolio net of the allowance for loan losses and net deferred loan income
totaled $67.9 million at December 31, 1997.
B-2
<PAGE>
The following table sets forth the composition of the Bank's loan
portfolio after deduction for discount on loans purchased, net deferred loan
income and the allowance for loan losses:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ------------ ----------- ------------ ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Purchased loan portfolio:
Mortgage loans on real estate:
Commercial $ 156,138 $ 93,220 $ 42,648 $ 22,941 $ 277
Land 7,655 6,566 4,140 3,429 --
Other(1) 59,804 48,293 14,885 8,467 1,386
--------- --------- -------- -------- -------
Total 223,597 148,079 61,673 34,837 1,663
Secured commercial 2,134 2,889 2,347 3,035 6,270
Other 1,416 1,260 1,151 1,872 308
--------- --------- -------- -------- -------
Total purchased loan portfolio 227,147 152,228 65,171 39,744 8,241
Less discount:
Non-amortizing portion(2) (22,132) (24,387) (7,638) (3,234) (194)
Amortizing portion (18,052) (13,805) (5,657) (5,144) (538)
--------- --------- -------- -------- -------
Total purchased loan portfolio, net 186,963 114,036 51,876 31,366 7,509
--------- --------- -------- -------- -------
Originated loan portfolio(3):
Mortgage loans on real estate:
Commercial $ 45,366 $ 29,069 $ 32,614 $ 18,773 $ 3,613
Land 1,062 1,391 2,215 3,033 1,918
Other(1) 13,737 20,397 18,185 11,705 3,455
--------- --------- -------- -------- -------
Total 60,165 50,857 53,014 33,511 8,986
Secured commercial 8,334 17,888 23,311 23,161 17,539
SBA loans 1,221 2,550 4,533 3,875 5,103
Other 810 831 1,029 796 1,068
--------- --------- -------- -------- -------
Total originated loans 70,530 72,126 81,887 61,343 32,696
Less:
Allowance for loan losses (2,273) (1,965) (1,265) (1,513) (614)
Net deferred loan income (388) (500) (972) (684) (213)
--------- --------- -------- -------- -------
Total originated loan portfolio, net 67,869 69,661 79,650 59,146 31,869
--------- --------- -------- -------- -------
Total loans, net $ 254,832 $ 183,697 $131,526 $ 90,512 $39,378
========= ========= ======== ======== =======
</TABLE>
- --------
(1) Consist primarily of loans originated for business purposes for which the
underlying collateral is conventional real estate.
(2) Non-amortizing discount is an allocation of the total discount on purchased
loans accounted for on the cost recovery method until it is determined
that the amount and timing of collections are reasonably estimable and
collection is probable.
(3) Includes loans purchased by the Bank that have been renewed on terms
consistent with the Bank's loan policy and loan documentation standards,
and loans acquired in connection with the Merger.
Lending Activity--Purchased Loan Portfolio
A substantial portion of the Bank's business consists of purchasing loans
secured primarily by commercial real estate, other business assets and/or
multi-family residential real estate which management believes are undervalued
due to market, or economic conditions or as a result of special circumstances
which might require a seller to dispose of certain assets. These loans are
generally purchased at discounts from the principal balances and have been
purchased from private sector sellers in the financial services industry and
from government agencies. The Bank has generally purchased loans secured by
assets located in the Northeast. However, as the Bank has gained further
experience with its purchased loan program it has begun to seek opportunities
outside of New England. This strategy allows the Bank to both broaden the range
of loans it is evaluating for purchase and to take advantage selectively of
improving local real estate markets. In 1997, 1996 and 1995, the Bank purchased
$165.9 million, $164.5 million and $40.2 million of such loans, respectively,
at aggregate discounts of $36.7 million, $80.1 million and $10.0 million,
respectively.
In order to determine the amount that the Bank will bid to acquire
discounted loans, the Bank considers, among other factors, the yield expected
to be earned, the geographic location of the loans, servicing restrictions, if
any, the type and value of the collateral securing the loan, the length of time
during which the loan has performed in accordance with its repayment terms, the
recourse nature of the debt, the age and performance of the loan and the
resources of the borrower. In addition to the factors listed above, the Bank
will also consider the amount it may realize through collection efforts or
foreclosure and sale of the collateral property, net of expenses, and the
length of time and costs
B-3
<PAGE>
required to complete the collection or foreclosure process in the event a loan
becomes non-performing or is non-performing at the purchase date. All bids are
subject to the approval of the Bank's Chairman or President.
Prior to acquiring any portfolio of loans, the Bank conducts an
acquisition review. This review includes an evaluation of the seller's loan
documentation. The current value of the collateral is estimated utilizing
various methods considering, among other factors, the type of property, its
condition and location and its highest and best use. In some instances, real
estate brokers and/or appraisers with specific knowledge of the area may be
consulted. As the size and complexity of the collateral increases, the Bank's
efforts to value the collateral also increases. For larger, more complex loans,
Bank personnel may visit the collateral real property or conduct an internal
rental analysis of competing commercial properties. New title searches and tax
reports may also be obtained. The Bank may also retain environmental
consultants to review potential environmental issues. The amount of resources
devoted to valuing collateral is determined on a case-by-case basis for each
loan reviewed.
Upon purchase of a loan pool, each loan is assigned to a loan officer. In
managing purchased loan accounts, the loan officers seek, among other things,
to establish good working relationships with the borrowers and to market the
Bank's other banking services to these customers. In the event that a purchased
loan becomes delinquent, or if it is delinquent at the time of purchase, the
Bank aggressively pursues repayment. In the event that a delinquent loan
becomes non-performing, the Bank may pursue a number of alternatives including
restructuring the loans to levels that are supported by existing collateral and
debt service capabilities. During this restructuring period, the Bank does not
recognize interest income on such loans unless regular payments are being made.
In instances when the loan is not restructured, the Bank aggressively pursues
repayment, foreclosure or, in certain instances, a deed-in-lieu-of-foreclosure.
Activity in the Purchased Loan Portfolio. The following table sets forth
the activity in the Bank's purchased loan portfolio during the years indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- -------------------- ------------------- ----------------- -----------------
No. of No. of No. of No. of No. of
Balance Loans Balance Loans Balance Loans Balance Loans Balance Loans
----------- ------- ----------- -------- ---------- -------- -------- -------- --------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $114,036 712 $ 51,876 368 $ 31,366 236 $ 7,509 156 $ 3,824 79
Acquisitions:
Loan balances .............. 165,903 371 164,520(1) 624 40,228 172 39,667 260 6,984 165
Discount ................... (36,712) -- (80,129) -- (10,003) -- (9,265) -- (890) --
-------- --- ---------- --- -------- --- ------- --- ------- ---
129,191 371 84,391 624 30,225 172 30,402 260 6,094 165
-------- --- ---------- --- -------- --- ------- --- ------- ---
Renewals, resolutions and
repayments(2) .............. (62,182) (247) (25,496) (280) (11,800) (40) (7,279) (180) (2,890) (88)
Accretion ................... 5,918 -- 3,265 -- 2,085 -- 734 -- 481 --
-------- ---- ---------- ---- -------- --- ------- ---- ------- ---
Balance at end of year ...... $186,963 836 $114,036 712 $ 51,876 368 $31,366 236 $ 7,509 156
======== ==== ========== ==== ======== === ======= ==== ======= ===
</TABLE>
- --------
(1) Includes certain non-performing loans acquired in the fourth quarter of
1996 with outstanding aggregate principal balances of $58,985,000 on which
purchase discount of $47,429,000 had been charged-off.
(2) Includes loans purchased by the Bank that have been renewed on terms
consistent with the Bank's loan policy and loan documentation standards.
B-4
<PAGE>
Payment Status of Purchased Loan Portfolio. The following table sets forth
certain information relating to the payment status of loans in the Bank's
purchased loan portfolio at the dates indicated:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- --------------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Performing loans:
Current ................................................. $ 217,825 $ 124,439 $ 63,808 $ 36,266 $8,153
Over thirty less than eighty-nine days past due ......... 2,854 25,244(1) 825 2,652 86
Ninety days or more past due ............................ -- 486 -- 22 2
--------- ----------- -------- -------- ------
220,679 150,169 64,633 38,940 8,241
Non-performing loans ..................................... 6,468 2,059 538 804 --
--------- ----------- -------- -------- ------
Purchased loan portfolio ............................... 227,147 152,228 65,171 39,744 8,241
Discount:
Non-amortizing portion .................................. (22,132) (24,387) (7,638) (3,234) (194)
Amortizing portion ...................................... (18,052) (13,805) (5,657) (5,144) (538)
--------- ----------- -------- -------- ------
Purchased loan portfolio, net .......................... $ 186,963 $ 114,036 $ 51,876 $ 31,366 $7,509
========= =========== ======== ======== ======
</TABLE>
- --------
(1) Includes $24,115,000 of loans purchased in the fourth quarter of 1996.
The contractual delinquency of purchased loans is determined prospectively
from the purchase date rather than from the origination date. Interest income
on purchased non-performing loans is generally recognized upon receipt of
payments based either on the original loan contracts or as restructured by the
Bank.
Activity of Non-Amortizing Portion of Discount on Purchased Loans. The
following table sets forth certain information relating to the activity of the
non-amortizing discount on purchased loans:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1997 1996 1995 1994
------------ ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of year ................. $ 24,387 $ 7,638 $ 3,234 $ 194
Acquisitions ................................. 29,765 69,897 6,630 3,788
Transfers to amortizing portion, net ......... (3,764) (1,951) 727 135
Charge-offs, net of recoveries:
Mortgage loans on real estate
Commercial ................................. (17,304) (20,934) (1,912) (659)
Land and other ............................. (9,458) (23,585) (607) (30)
Commercial .................................. (400) (1,159) -- (194)
Other ....................................... (1,094) (5,519) (434) --
--------- --------- -------- -------
Net charge-offs ............................ (28,256) (51,197) (2,953) (883)
--------- --------- -------- -------
Balance at end of year ....................... $ 22,132 $ 24,387 $ 7,638 $ 3,234
========= ========= ======== =======
</TABLE>
Accounting for Purchased Loan Portfolio. Generally, all loans in a
purchased pool of loans are accounted for on an aggregate basis. The amortizing
portion of discounts on purchased loan pools representing market yield
adjustments is accreted into interest income over the estimated lives of the
loans using a method which approximates the level interest method. The
remaining non-amortizing portion of discounts on loans purchased is accounted
for on the cost recovery method until it is determined that the amount and
timing of collections are reasonably estimable and collection is probable. At
such time, if the amount that is probable of collection is greater than the net
carrying value of the purchased loans, the difference is transferred from the
non-amortizing portion of the discount to the amortizing portion and is
accreted into interest income over the remaining lives of the loans on a method
approximating the level interest method. Under the Bank's loan rating system,
each loan is evaluated, and where necessary, specific allowances are
established and allocated from the respective loan pool's non-amortizing
discount, and, if none is available, from the respective loan pool's amortizing
discount, and further, if none is available, an allowance is established
through a charge to interest income.
B-5
<PAGE>
The following table sets forth certain information relating to the
interest income on the Bank's purchased loan portfolio during the years
indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1997 1996 1995
------------- ------------ ------------
(dollars in thousands)
<S> <C> <C> <C>
Interest income:
Realized .................... $ 17,349 $ 8,218 $ 4,722
Accreted discount ........... 5,918 3,265 2,085
--------- -------- --------
Total ...................... $ 23,267 $ 11,483 $ 6,807
========= ======== ========
Average balance, net ......... $ 140,141 $ 65,414 $ 35,352
========= ======== ========
Yield ........................ 16.60% 17.55% 19.25%
========= ======== ========
</TABLE>
Originated Loan Portfolio
The Bank's other primary line of business is the origination of various
types of secured commercial loans, including commercial real estate mortgage
loans and specialty loans to finance the investment and entrepreneurial
activities of business and individual customers. Additionally, this portfolio
includes loans purchased by the Bank that have been renewed on terms consistent
with the Bank's loan policy and documentation standards.
Mortgage Loans on Real Estate. The Bank originates a limited number of
loans for the purchase, construction and development of commercial real estate.
As of December 31, 1997, the Bank had originated loans outstanding in an
aggregate amount of $45.4 million secured by commercial real estate comprising
64.3% of the Bank's total originated loan portfolio, a significant portion of
which represent loans purchased by the Bank that have been renewed on terms
consistent with the Bank's loan policy and documentation standards. As of
December 31, 1997, Atlantic had loans in an aggregate amount of $14.8 million
secured by other collateral comprising 21.0% of the Bank's total originated
loan portfolio. The terms of commercial real estate loans originated or renewed
by the Bank are individually negotiated on a case-by-case basis. However, these
loans generally have a term of five years or less with adjustable rates of
interest based on the prime rate. Generally, mortgage loans on commercial real
estate are secured by a first lien on real property, all improvements thereon
and all fixtures and equipment used in connection therewith, as well as a first
assignment of all revenues or rents and gross receipts generated in connection
with the property. The Bank's commercial real estate loans generally provide
for recourse against the collateral property, and, in most circumstances,
require the borrower to be personally liable for all or a portion of the loan.
Commercial real estate loans are generally written in amounts up to 75% of
the appraised value of the underlying property. Appraisals on properties
securing commercial real estate loans originated by the Bank are generally
performed by an independent fee appraiser designated by the Bank before the
loan is made. Appraisals on commercial real estate are reviewed by the loan
officer and management. In addition, Atlantic's underwriting procedures require
verification of the borrower's credit history, financial statements, references
and income projections for the property.
The Bank continues to monitor originated and renegotiated commercial real
estate loans through its review process and updated appraisals. Additionally,
in order to monitor the adequacy of cash flows on income-producing properties,
the Bank generally obtains financial statements and other information from the
borrower and guarantor, including, but not limited to, information relating to
rental rates and income, maintenance costs and an update of real estate
property tax payments.
Secured Commercial Loans. The Bank originates secured commercial loans to
established business and individual customers. Generally, these loans consist
of term loans secured by real estate, accounts receivable and other business
assets. A majority of these loans bear interest rates based upon the prime rate
and adjust periodically, although there are some loans which are at fixed
rates. The Bank's secured lending activities include the origination of
commercial loans, generally secured by commercial real estate, other business
assets and/or single or multi-family residential real estate, to finance
individuals and businesses. The Bank's secured lending activities also include
the origination of specialty loans to finance the investment and
entrepreneurial activities of businesses and individuals. The Bank provides
certain individuals and businesses with such secured financing in a variety of
situations which
B-6
<PAGE>
require the Bank's expertise and responsiveness. In certain instances, the Bank
makes specialty loans to third parties to finance the acquisition by such
parties of discounted loan pools, including non-performing loan pools from
private sector sellers or government agencies. In making these loans, the Bank
collects higher administrative fees and may charge higher interest rates than
apply to the Bank's other types of loans.
Allowance for Loan Losses for Originated Loans
The Bank maintains an allowance for loan losses that is increased by
provisions charged against earnings and reduced by net loan charge-offs. Loans
are charged off when they are deemed to be uncollectible, or partially charged
off when a portion of a loan is deemed uncollectible. Recoveries are generally
recorded only when cash payments are received. In general, the Bank's loan loss
allowance policy requires the maintenance of allowances sufficient to satisfy
estimated probable losses arising from impaired real estate or other secured
commercial loans.
In determining the adequacy of the allowance, management initially
considers the loan loss allowances specifically allocated to individual
impaired loans, and next considers the level of general loan loss allowances
deemed appropriate for the balance of the portfolio based on factors including
general portfolio trends relative to asset and portfolio size, asset
categories, potential credit concentrations, non-accrual loan levels, risks
associated with changes in economic and business conditions and other factors.
The Bank's allowance for loan losses at December 31, 1997 was $2.3
million. The determination of this allowance requires the use of estimates and
assumptions regarding the risks inherent in individual loans and the loan
portfolio in its entirety. In addition, regulatory agencies periodically review
the adequacy of the allowance and may require the Bank to make additions to its
allowance for loan losses. While management believes these estimates and
assumptions are reasonable, there can be no assurance that they will be proven
to be correct in the future. The actual amount of future provisions that may be
required cannot be determined as of the date hereof, and such provisions may
exceed the amounts of past provisions. Management believes that the Bank's
allowance for loan losses is adequate to absorb the known and inherent risks in
the Bank's originated loan portfolio at each date based on the facts known to
management as of such date.
The Bank establishes a specific allowance against a given loan when
management perceives a problem with such loan that may result in a loss. The
Bank continues to monitor and modify its allowances for general and specific
loan losses as economic conditions dictate. Although the Bank maintains its
allowance for loan losses at a level which management considers to be adequate
to provide for potential losses, there can be no assurance that such losses
will not exceed the estimated amounts.
The following table provides certain information with respect to the
Bank's allowance for loan losses as well as charge-offs, recoveries and certain
related ratios with respect to the Bank's originated loan portfolio for the
years indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- ------------ ---------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at beginning of year ......................... $1,965 $1,265 $1,513 $614 $ 865
Provision for loan losses ............................ 325 755 308 261 266
Allowance acquired in connection with the Merger ..... -- -- -- 678 --
Transfer from allowance for losses on in-substance
foreclosures ........................................ -- -- 229 -- --
Charge offs:
Mortgage loans on real estate:
Commercial ......................................... (110) (75) (229) (2) (74)
Land and other real estate ......................... (18) (75) (290) -- (40)
Commercial .......................................... -- (30) (393) (52) (428)
SBA ................................................. -- -- (3) (40) (12)
Other ............................................... (78) -- (57) -- (40)
------ ------ ------- ------ ------
Total charge-offs .................................. (206) (180) (972) (94) (594)
------ ------ ------- ------ ------
</TABLE>
B-7
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Recoveries:
Mortgage loans on real estate:
Commercial ............................................... 55 1 107 31 73
Land and other real estate ............................... 56 70 -- -- --
Commercial ................................................ 68 6 17 14 4
SBA ....................................................... 1 -- 3 8 --
Other ..................................................... 9 48 60 1 --
-- -- --- -- --
Total recoveries ........................................ 189 125 187 54 77
--- --- --- -- --
Net charge-offs ........................................ (17) (55) (785) (40) (517)
--- --- ---- --- ----
Balance at end of year ..................................... $ 2,273 $ 1,965 $ 1,265 $ 1,513 $ 614
======= ======= ======= ======= =======
Loans:
Average originated loan portfolio ......................... $67,544 $74,974 $67,449 $33,389 $35,561
Total originated loan portfolio at end of year ............ 70,530 72,126 81,887 61,343 32,696
Ratios
Net loans charged off to average originated loans ......... 0.03% 0.07% 1.16% 0.12% 1.45%
Net loans charged off to total originated loans at
end of year .............................................. 0.02 0.08 0.96 0.07 1.58
Net loans charged off to allowance for loan losses
at end of year ........................................... 0.75 2.80 62.06 2.64 84.20
Allowance for loan losses to total originated loans
at end of year ........................................... 3.22 2.72 1.54 2.47 1.88
Allowance for loan losses to non-performing
originated loans at end of year .......................... 505.11 187.68 50.04 218.33 75.15
</TABLE>
The following table sets forth management's historical allocation of the
allowance for loan losses by loan category and the percentage of loans in each
category to total loans with respect to the Bank's originated loan portfolio at
the dates indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ------------------ ------------------- ---------------------
Allowance Allowance Allowance Allowance Allowance
for Loan % of for Loan % of for Loan % of for Loan % of for Loan % of
Losses Loans Losses Loans Losses Loans Losses Loans Losses Loans
--------- ------- --------- ------- ---------- ------- ---------- -------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loan Categories:
Mortgage loans on real estate:
Commercial .................. $1,514 2.15% $ 521 0.72% $ 472 0.58% $ 475 0.77% $ 66 0.20%
Land ........................ 32 0.04 19 0.03 35 0.04 110 0.18 45 0.14
Other ....................... 310 0.44 357 0.49 264 0.32 237 0.39 88 0.27
------ ---- ------ ---- ------ ---- ------ ---- ---- ----
Total ...................... 1,856 2.63 897 1.24 771 0.94 822 1.34 199 0.61
Secured commercial ........... 354 0.50 978 1.36 410 0.50 577 0.94 303 0.93
SBA .......................... 47 0.07 54 0.07 72 0.09 100 0.17 98 0.30
Other ........................ 16 0.02 36 0.05 12 0.01 14 0.02 14 0.04
------ ---- ------ ---- ------ ---- ------ ---- ---- ----
$2,273 3.22% $1,965 2.72% $1,265 1.54% $1,513 2.47% $614 1.88%
====== ==== ====== ==== ====== ==== ====== ==== ==== ====
</TABLE>
Credit Risk Management
In managing its loan portfolio, the Bank utilizes procedures designed to
achieve an acceptable level of quality and to identify the need for management
to take action to address any potential losses or potential defaults in
existing loans. Each application for a loan is subject to a two-tier review by
the Bank's Management Loan Committee and either the Bank's Chairman or
President, or in the case of loans of $2.5 million or more, the Loan and
Investment Committee of the Bank's Board of Directors. Each lending officer has
primary responsibility to conduct credit and documentation reviews of the loans
for which he or she is responsible. The Bank's President and Chairman are
responsible for the general supervision of the loan portfolio and adherence by
the loan officers to the Bank's loan policies.
B-8
<PAGE>
Loan officers evaluate the applicant's financial statements, credit
reports, business reports and plans and other data to determine if the credit
and collateral satisfy the Bank's standards as to historic debt service
coverage, reasonableness of projections, strength of management and sufficiency
of secondary repayment.
The Bank's management presents to the Board of Directors a monthly report
of loan delinquencies showing all loans which are more than 30 days past due.
In addition, loans are reviewed monthly by management to determine which
credits should be placed on non-performing status. Management and the Board of
Directors also review all loan evaluations made during periodic examinations by
the FDIC and the Commissioner of Banks of the Commonwealth of Massachusetts
(the "Commissioner").
Non-Performing Assets
Non-Performing Loans. The performance of the Bank's loan portfolio is
evaluated regularly by management. The Bank generally classifies a loan as
non-performing when any installment of principal or interest is 90 days or more
past due based upon the date of purchase for purchased loans, unless, in
management's opinion, the net carrying value of the loan is well secured and
the collection of principal, or carrying value, and interest is probable. When
management determines the ultimate collection of principal or interest on a
loan is not probable, the loan is transferred to the "impaired" loan
classification. When a loan is placed on non-performing status, the Bank's
general policy is to reverse and charge against current income previously
accrued but unpaid interest. Such loans remain on non-performing status until
the earlier of legal foreclosure or relinquishment of control of the collateral
by the borrower, or until the borrower has established a history of timely
principal and interest payments. For additional information see Notes 1 and 3
to the Consolidated Financial Statements.
The following table sets forth the amount of the Bank's non-performing
assets by category and restructured loans, at the dates indicated:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
----------- --------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans(1):
Purchased loan portfolio:
Mortgage loans on real estate
Commercial ....................................... $ 4,233 $1,609 $ 296 $ 407 $ --
Land and other real estate ....................... 2,235 450 200 267 --
Commercial ........................................ -- -- 42 128 --
Other ............................................. -- -- -- 2 --
------- ------ ------ ------ ------
Total non-performing purchased loans ............. 6,468 2,059 538 804 --
------- ------ ------ ------ ------
Originated loan portfolio:
Mortgage loans on real estate
Commercial ....................................... 299 -- 1,067 95 225
Land and other real estate ....................... 151 233 637 517 432
Commercial ........................................ -- 814 709 81 160
Other ............................................. -- -- 115 -- --
------- ------ ------ ------ ------
Total non-performing originated loans ............ 450 1,047 2,528 693 817
------- ------ ------ ------ ------
Total non-performing loans ...................... 6,918 3,106 3,066 1,497 817
------- ------ ------ ------ ------
Other real estate owned:
Acquired in the Merger ............................. 406 2,317 6,058 7,632 --
Transferred from purchased loan portfolio .......... 3,256 1,489 -- -- --
Transferred from originated loan portfolio ......... 30 982 -- 291 1,055
Less allowance for losses ......................... (101) (100) (18) (475) (10)
------- ------ ------ ------ ------
Total other real estate owned, net ............... 3,591 4,688 6,040 7,448 1,045
------- ------ ------ ------ ------
Total non-performing assets ..................... $10,509 $7,794 $9,106 $8,945 $1,862
======= ====== ====== ====== ======
Accruing troubled debt restructured loans ........... $ 345 $ 350 $1,715 $ 115 $ --
======= ====== ====== ====== ======
</TABLE>
B-9
<PAGE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ------------ ------------ ---------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing purchased loans to total purchased loans .. 2.85% 1.35% 0.83% 2.02% n/a
Non-performing originated loans to total originated loans 0.64 1.45 3.09 1.13 2.50
Non-performing assets to total assets .................... 3.27 3.38 5.58 6.80 3.80
Non-amortizing discount as a percentage of:
Non-performing purchased loans .......................... 342.18 1,184.41 1,419.70 402.24 n/a
Total purchased loans ................................... 9.74 16.02 11.72 8.14 2.35
Allowance for loan losses as a percentage of:
Non-performing originated loans ......................... 505.11 187.68 50.04 218.33 75.15
Total originated loans .................................. 3.22 2.72 1.54 2.47 1.88
</TABLE>
- --------
(1) Excludes loans acquired in the fourth quarters of 1997 and 1996 with net
carrying values of $2.2 million and $23.8 million at December 31, 1997 and
1996, respectively, which, while non-performing at the time of purchase
based on original loan contracts, are not classified as such unless they
become non-performing based on the acquisition dates. As of December 31,
1997 and 1996, the Bank had not yet begun to recognize interest income on
such loans.
A troubled debt restructuring is a loan on which the Bank, for reasons
related to the borrower's financial difficulties, grants a concession to the
borrower, such as a reduction in the loan's rate, a reduction in the principal
amount of the debt or an extension of the maturity date of the loan, that the
Bank would not otherwise consider. Certain purchased loans are restructured by
the Bank in order to establish a payment plan which the borrower can maintain
and which is profitable to the Bank in light of its net investment in such
loan. When such a purchased loan has been acquired at a discount sufficient to
enable the Bank to make an appropriate profit on the loan even after
restructuring the debt and making certain concessions to the borrower, the Bank
does not deem such a restructuring to be a "troubled debt restructuring."
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. Impairment is measured on a loan-by-loan basis by
comparing the Bank's recorded investment in the loan to the present value of
expected future cash flows discounted at the loan's effective interest rate,
the loan's obtainable market price, or the fair value of the collateral if the
loan is collateral dependent. In the case of the Bank's purchased loan
portfolio, the recorded investment represents the Bank's purchase price net of
any related non-amortizing discounts. Substantially all of the Bank's loans
which have been identified as impaired have been measured by the fair value of
the existing collateral. At December 31, 1997, the Bank's recorded investment
in impaired loans totaled $11.9 million, of which $795,000 related to
originated loans with no specific valuation allowance and $1.1 million related
to originated loans with specific valuation allowances of $270,000. General
valuation allowances are maintained for all categories of originated loans. At
December 31, 1997, the Bank's recorded investment in impaired purchased loans
amounted to $10.0 million, which is net of non-amortizing discount of $1.4
million. No additional funds are committed to be advanced in connection with
impaired loans. For the year ended December 31, 1997, the average recorded
investment in impaired loans totaled $13.7 million. The Bank recognized
$542,000 of interest income on impaired loans during the period that they were
impaired for the year ended December 31, 1997. Of the total interest income
recognized on impaired loans for the year ended December 31, 1997, $210,000 was
recognized on the cash basis and $332,000 was recognized on the accrual basis.
For additional information about "impaired loans," see Note 3 to the
Consolidated Financial Statements.
When the Bank classifies problem assets, it may establish specific
allowances for loan losses or specific non-amortizing discount allocations in
amounts deemed prudent by management. When the Bank identifies problem assets
as a loss, it will charge off such amounts or set aside specific allowances or
non-amortizing discount equal to the total loss. All of the Bank's loans are
reviewed monthly to determine which loans are to be placed on non-accrual
status. In addition, the Bank's determination as to the classification of its
assets and the amount of its valuation allowances is reviewed by the
Commissioner and the FDIC during their examinations of the Bank, which may
result in the establishment of additional general or specific loss allowances.
OREO. Other real estate owned, net ("OREO") acquired through foreclosure
is recorded at the lower of cost or fair value less estimated cost to sell. If
fair value at the date of foreclosure is lower than the balance of the related
B-10
<PAGE>
loan, the difference will be charged off to the allowance for loan losses at
the time of transfer. Valuations are periodically updated by management, and if
the value of a particular OREO property declines further, a specific provision
for losses on such property is established by a charge to operations.
For the year ended December 31, 1997, $5.9 million in OREO was acquired,
$7.9 million of OREO was sold at gains of $1.1 million, and $640,000 in
provision for losses was recorded, resulting in net OREO at December 31, 1997
of $3.6 million. At December 31, 1997, the Bank's OREO consisted of fifteen
properties, thirteen of which were transferred from the purchased loan
portfolio, one transferred from the originated portfolio and one was acquired
in connection with the Merger.
Holding and maintenance costs related to properties are recorded as
expenses in the period incurred. Deficiencies resulting from valuation
adjustments to OREO subsequent to acquisition are recognized as a valuation
allowance. Subsequent increases related to the valuation of OREO are reflected
as a reduction in the valuation allowance, but not below zero. Increases and
decreases in the valuation allowance are charged or credited to expense,
respectively. For additional information relating to OREO, see Note 4 to the
Consolidated Financial Statements.
Securities Available for Sale
The Bank's current investment policy provides for the purchase of U.S.
Treasury securities, obligations of federal agencies and municipalities and
certificates of deposit. The Bank's Board of Directors reviews all securities
transactions on a monthly basis.
The investment policy of the Bank is structured to provide an adequate
level of liquidity in order to meet anticipated deposit outflow, normal working
capital needs and expansion of the loan portfolio within guidelines approved by
the Board of Directors. The policy is also designed to mitigate the adverse
effects of changes in interest rates and shifts in the mix of the Bank's assets
and liabilities.
The Bank designates all investment securities held in the ordinary course
of business as securities available for sale. Securities available for sale
consist of U.S. Government Obligations which are to be held for indefinite
periods of time. These investment securities may be sold prior to maturity as
part of prudent asset/liability management in response to changes in interest
rates and/or prepayment risk as well as to meet liquidity needs.
The following table sets forth the maturity distribution of U.S.
Government obligations at December 31, 1997:
<TABLE>
<CAPTION>
Maturities
-------------------------------------
1 year Over 1 year
or less to 5 years Total
----------- ------------ --------
(dollars in thousands)
<S> <C> <C> <C>
Amount ......... $2,001 $5,015 $7,016
Yield .......... 5.71% 5.98% 5.90%
</TABLE>
For additional information relating to securities available for sale, see
Note 2 to the Consolidated Financial Statements.
Sources of Funds
The Bank's primary sources of funds are deposits, loan amortization and
prepayments of loan principal, borrowings, funds provided from operations and,
from time to time, sales of assets. The Bank has historically employed a
wholesale funding strategy consisting primarily of marketing certificates of
deposit to a national customer base. The Bank has been able to maintain
sufficient liquidity by offering interest rates on such certificates of deposit
marginally in excess of rates offered by other banks on comparable deposits. In
1997, the Bank entered into contractual agreements with six investment banking
firms that provide the Bank with access to brokered deposits. Brokered deposits
totaled $67.2 million at December 31, 1997. These deposits are non-cancelable
and bear interest rates which are consistent with the Bank's certificate of
deposit program. Brokered deposits generally are more responsive to changes in
interest rates than other deposits and, thus, are more likely to be withdrawn
from the Bank upon maturity as changes in interest rates and other factors make
other investments more attractive to investors.
B-11
<PAGE>
The Bank's deposits consist of statement savings accounts, commercial
demand deposit accounts, money market deposits, NOW accounts and certificates
of deposit. Due to the Bank's limited branch operations, certificates of
deposit bearing highly competitive rates of interest have been the Bank's
primary source of deposits. During the fourth quarter of 1997, the Bank
developed a new personal money market account and anticipates promoting this
account as an alternative to certificates of deposit.
The rates paid on deposit accounts offered by the Bank have allowed it to
be competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Bank manages the pricing of its deposits in keeping with
its asset/liability management and profitability objectives. Based on its
experience, the Bank believes that its statement savings, commercial demand
deposit, NOW, and money market accounts are relatively stable sources of
deposits.
The following table sets forth the average deposits in the various types
of deposit programs offered by the Bank at the dates indicated:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Demand ..................... $ 6,577 --% $ 7,645 --% $ 7,352 --%
NOW ........................ 1,598 1.87 1,518 1.91 1,470 1.84
Savings .................... 1,023 2.85 765 2.88 1,001 3.10
Money market ............... 5,911 3.47 6,123 3.45 7,588 3.03
Certificates of deposit .... 217,678 5.97 139,590 5.90 109,194 5.97
--------- -------- --------
$232,787 5.70% $155,641 5.46% $126,605 5.37%
========= ======== ========
</TABLE>
The following table summarizes certain information of the Bank's
certificates of deposit less than $100,000 and $100,000 or more classified by
time remaining until maturity as of December 31, 1997:
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------------
3 Months Over Over Over
or Less 3 to 6 Months 6 to 12 Months 12 Months Total
---------- --------------- ---------------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000 ...... $36,127 $35,058 $ 57,546 $ 9,545 $138,276
Certificates of deposit of $100,000 or more ..... 32,027 20,220 56,667 18,706 127,620
------- ------- -------- ------- --------
Total certificates of deposit ............... $68,154 $55,278 $114,213 $28,251 $265,896
======= ======= ======== ======= ========
</TABLE>
The following table summarizes certain information and locations of the
Bank's certificates of deposit as of December 31, 1997:
<TABLE>
<CAPTION>
Weighted
State Amount Average Rate
----------------- ----------- ------------
(dollars in thousands)
<S> <C> <C>
New York .................................. $70,896 5.64%
Massachusetts ............................. 47,724 5.87
Texas ..................................... 26,763 5.93
Florida ................................... 12,680 6.18
California ................................ 11,633 6.07
Ohio ...................................... 9,557 6.21
New Jersey ................................ 7,453 6.30
Indiana ................................... 5,852 6.13
Oklahoma .................................. 5,794 6.04
Illinois .................................. 5,684 6.16
Pennsylvania .............................. 5,664 6.05
Other states (below $5.0 million) ......... 56,196 6.09
------
$265,896 5.93%
========
</TABLE>
B-12
<PAGE>
Supervision and Regulation
General. As a Massachusetts-chartered trust company, the Bank is subject
to comprehensive regulation and examination by the FDIC which insures its
deposits to the maximum extent permitted by law and by the Commissioner. The
Bank is also subject to certain requirements established by the Board of
Governors of the Federal Reserve ("the Federal Reserve Board") and is a member
of Federal Home Loan Bank of Boston (the "FHLBB").
Federal Deposit Insurance Corporation. The FDIC insures the Bank's deposit
accounts up to a maximum of $100,000 per separately insured account. As a
state-chartered, FDIC-insured nonmember bank, the Bank is subject to
regulation, examination, and supervision by the FDIC and to reporting
requirements of the FDIC. The FDIC has adopted requirements setting minimum
standards for capital adequacy. Pursuant to FDIC requirements, the Bank must
maintain a Tier 1 capital to risk-weighted assets ratio of at least 4.00% and a
total capital to risk-weighted assets ratio of at least 8.00%. The FDIC also
imposes a leverage capital ratio of a minimum 3.00% for the most highly rated
banks and a leverage capital ratio between 4.00% and 5.00% or more for other
banks. The Bank exceeded all requirements applicable to it at December 31, 1997
as follows:
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------------
Minimum To Be Well
Capitalized Under
Prompt
Minimum Capital Corrective Action
Actual Requirements Provisions
------------------- --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
--------- --------- ---------- ---------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets) .......... $33,995 12.84% $21,181 8.00% $26,476 10.00%
Tier 1 capital (to risk weighted assets) ......... 31,722 11.98 10,591 4.00 15,886 6.00
Tier 1 capital (to average assets) ............... 31,722 10.55 12,025- 4.00- 15,031 5.00
15,031 5.00
</TABLE>
For additional information relating to regulatory capital requirements,
see Note 10 to the Consolidated Financial Statements.
Federal Home Loan Bank System. The Federal Home Loan Bank System functions
as a reserve credit source for its member financial institutions and is
governed by the Federal Housing Finance Board ("FHFB"). The Bank is a voluntary
member of the FHLBB. Members of the FHLBB are required to own capital stock
that is directly proportionate to the member's home mortgage loans and
borrowings from the FHLBB outstanding from time to time. FHLBB advances must be
secured by specific types of collateral and may only be obtained for the
purpose of providing funds for residential housing finance.
Federal Reserve Board Regulations. Regulation D promulgated by the Federal
Reserve Board requires all depository institutions, including the Bank, to
maintain reserves against its transaction accounts (generally, demand deposits,
NOW accounts and certain other types of accounts that permit payments or
transfer to third parties) or non-personal time deposits (generally, money
market deposit accounts or other savings deposits held by corporations or other
depositors that are not natural persons, and certain other types of time
deposits), subject to certain exemptions. Because required reserves must be
maintained in the form of either vault cash, a non-interest bearing account at
a Federal Reserve Bank or a pass-through account as defined by the Federal
Reserve Board, the effect of this reserve requirement is to reduce the amount
of the institution's interest-bearing assets.
Massachusetts Commissioner of Banks. The Bank is also subject to
regulation, examination and supervision by the Commissioner and to the
reporting requirements promulgated by the Commissioner. Massachusetts statutes
and regulations govern among other things, investment powers, lending powers,
deposit activities, maintenance of surplus reserve accounts, the distribution
of earnings, the payment of dividends, issuance of capital stock, branching,
acquisitions and mergers and consolidation. Any Massachusetts bank that does
not operate in accordance with the regulations, policies and directives of the
Commissioner may be subject to sanctions for noncompliance. The Commissioner
may, under certain circumstances suspend, or remove officers or directors who
have violated the law, conducted the Bank's business in a manner which is
unsafe, unsound or contrary to the depositor's interest, or been negligent in
the performance of their duties. In 1996, the Commissioner adopted rules that
give Massachusetts banks, and their subsidiaries, many powers equivalent to
those of national banks and adopted procedures expediting branching by strongly
capitalized banks.
B-13
<PAGE>
Federal Deposit Insurance Corporation Improvement Act of 1991. The Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") made extensive
changes to the federal banking laws. Among other things, FDICIA requires
federal bank regulatory agencies to take prompt corrective action to address
the problems of, and imposes significant restrictions on, under capitalized
banks. With certain exceptions, FDICIA prohibits state banks from making equity
investments and engaging, as principals, in activities such as insurance
underwriting. FDICIA requires banks to have divested any impermissible equity
investments by December 19, 1996. FDICIA also amends federal statutes governing
extensions of credit to directors, executive officers and principal
shareholders of banks, savings association and their holding companies, limits
the aggregate amount of depository institutions loans to insiders to the amount
of the institution's unimpaired capital and surplus, restricts depository
institutions that are not well capitalized from accepting brokered deposits
without an express waiver from the FDIC, and imposes certain advance notice
requirements before closing a branch office. Pursuant to the FDICIA, the FDIC
has adopted a framework of risk-based deposit insurance assessments that take
into account different categories and concentrations of bank assets and
liabilities. In late 1997, the FDIC proposed to revise its regulations relating
to FDICIA to generally ease the ability of state nonmember banks and their
subsidiaries to engage in certain activities permissible for a national bank
such as real estate development.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Under
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal"), different types of interstate transactions and activities are
permitted. Interstate transactions and activities provided for under the new
law include: (i) bank holding company acquisitions of separately held banks in
a state other than a bank holding company's home state; (ii) mergers between
insured banks with different home states, including consolidations of
affiliated insured banks; (iii) establishment of interstate branches either de
novo or by branch acquisition; and (iv) affiliate banks acting as agents for
one another for certain banking functions without being considered a "branch."
In general, subject to certain limitations, nationwide interstate banking
became effective one year after the date of enactment, irrespective of state
law limitations. Interstate mergers generally also are permissible and
affiliated banks may act as agents for one another. Each of the transactions
and activities may be approved by the appropriate federal bank regulator, with
separate and specific criteria established for each category.
The appropriate federal bank regulator is authorized to approve the
respective interstate transactions only if certain criteria are met. First, in
order for a banking institution (a bank or bank holding company) to receive
approval for an interstate transaction, it must be "adequately capitalized" and
"adequately managed." The phrase "adequately capitalized" is generally defined
as meeting or exceeding all applicable federal regulatory capital standards,
while the phrase "adequately managed" was left undefined. Second, the
appropriate federal bank regulator must consider the applicant's and its
affiliated institutions' records under the Community Reinvestment Act of 1978
(the "CRA") as well as the applicant's record under applicable state community
reinvestment laws. In 1996, Massachusetts enacted interstate banking laws in
response to Riegle-Neal. The laws permit, subject to certain deposit and other
limitations, interstate acquisitions, mergers and branching on a reciprocal
basis. The interstate banking law has made it easier for out-of-state
institutions to attempt to purchase or otherwise acquire or to compete with the
Bank in Massachusetts, and similarly has made it easier for Massachusetts banks
to compete outside the state.
The interstate law applies deposit "concentration limits" to interstate
acquisition and merger transactions. Specifically, a banking institution may
not receive federal approval for interstate expansion if it and its affiliates
would control (i) more than 10% of the deposits held by all insured depository
institutions in the United States, or (ii) 30% or more of the deposits of all
insured depository institutions in any state in which the banks or branches
involved in the transactions (or any affiliated depository institution)
overlap. States may, by statute, regulation or order, raise or lower the 30%
limit. In addition, the new law preempted certain existing state law
restrictions on interstate banking (such as regional compacts and reciprocity
requirements), effective one year after enactment. However, in order to receive
federal approval for an interstate merger or de novo branching transaction, an
applicant must still also comply with any non-discriminatory host state filing
and other requirements.
Financial Modernization. Various federal legislation proposals are pending
to "modernize" the nation's financial system. Although the proposals vary, most
generally would allow for some mixing of banking and commerce and generally
would repeal most laws limiting the ability of banks and securities companies
to be affiliated.
Community Reinvestment Act. The Community Reinvestment Act ("CRA") was
enacted to encourage every financial institution to help meet the credit needs
of its entire community, including low- and moderate-income
B-14
<PAGE>
neighborhoods, consistent with its safe and sound operation. Under the CRA,
state and federal regulators are required, in examining financial institutions
and when considering applications for approval of certain merger, acquisition
and other transactions, to take into account the institution's record in
helping to meet the credit needs of its entire community including low- and
moderate-income neighborhoods. In reviewing an institution's CRA record for
this purpose, state and federal regulators will consider reports of regulatory
examination, comments received from interested members of the public or
community groups, and the description of the institution's CRA activities in
its publicly available CRA statement, supplemented, as necessary, by the
institution. State and federal regulators have denied, delayed and officially
deferred proposed merger or acquisition transactions involving banking
organizations that were deemed by the relevant regulator to have unsatisfactory
records of CRA compliance. Under CRA regulations issued by the federal banking
agencies in the spring of 1995, the evaluation of a financial institution's
compliance with CRA focuses more heavily upon the institution's actual
performance in lending to, and investing in, its entire community. Although the
Bank's main office is in Boston, Massachusetts, and it maintains a single
branch office in Chestnut Hill, Massachusetts, the Bank currently purchases
loans and draws deposits from a variety of communities. See "Lending Activity
- -- Purchased Loan Portfolio" and "Sources of Funds." As a result of changes in
its business strategy in the last several years, the Bank believes that its CRA
compliance is appropriately based upon its performance in the various markets
from which it currently draws its deposits and makes or acquires its loans. The
Bank's current CRA rating is "satisfactory" based upon a review of its CRA
compliance in May 1997.
Competition
The Bank faces substantial competition in its New England market area both
from other larger more established banks and from non-bank financial
institutions. Most of these competitors offer products and services similar to
those offered by the Bank, have facilities and financial resources greater than
those of the Bank and have other competitive advantages over the Bank. Several
of the New England's largest commercial and savings banks have a significant
number of branch offices in the areas in which the Bank conducts its
operations.
Numerous banks and non-bank financial institutions compete with the Bank
for deposit accounts, the acquisition of undervalued loans and the origination
of commercial loans. With respect to deposits, additional significant
competition arises from corporate and governmental debt securities, as well as
money market mutual funds. The factors in competing for deposit accounts
include interest rates, the quality and range of financial services offered and
the convenience of office and automated teller machine locations and office
hours. The primary factors in competing for loans are interest rates, loan
origination fees and the quality and range of lending services.
The Bank's competition for acquiring loans is primarily non-bank financial
institutions which may or may not be subject to the same restrictions or
regulations that the Bank has as to geographic location and level of
non-performing loans.
The Bank has taken steps to offer financial products and services in a way
which differentiates it from the larger financial organization competitors
primarily by working to establish continuing customer relationships with the
borrowers in its purchased loan portfolios. Management believes that these
relationships may be a source of lending and other business in the future
because, in certain instances, the banking and other financial services needs
of these borrowers were not adequately served by the Bank's larger bank and
non-bank financial services competitors.
Further, as a result of legislation enacted in 1994, banks and bank
holding companies are permitted to acquire or merge with depository
institutions across state lines and allows banks to branch across state lines.
States are allowed to "opt-out" of certain of these provisions. In 1996,
Massachusetts enacted interstate banking laws in response to Riegle-Neal. The
laws permit, subject to certain deposit and other limitations, interstate
acquisitions, mergers and branching on a reciprocal basis. Competition in the
Bank's primary market area has increased as a result of financial institutions
from other jurisdictions branching into Massachusetts or merging with
Massachusetts-chartered banks.
Environmental Matters
In the course of its business, the Bank has acquired, and may in the
future acquire through foreclosure, properties securing loans it has originated
or purchased which are in default and involve environmental matters. With
respect to the Bank's OREO, there is a risk that hazardous substances or
wastes, contaminants or pollutants could be discovered on such properties after
acquisition by the Bank. In such event, the Bank might be required to remove
such substances from the affected properties at its sole cost and expense.
B-15
<PAGE>
Year 2000 Disclosure
The Year 2000 issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
change occurs, date sensitive systems recognize the year 2000 as 1900, or, not
at all. This inability to recognize or properly treat the year 2000 may cause
systems to process critical financial and operational information incorrectly.
During 1997, Bank management developed an action plan with goals,
objectives and target dates related to the Year 2000 compliance. In 1997, the
Bank assessed and continues to assess the impact of the Year 2000 issue on its
operations. Anticipated spending for the Year 2000 computer system programming
modifications will be expensed as incurred and, based upon currently available
information, is not expected to have a material impact on the Bank's on-going
results of operations. However, if the efforts initiated under the plan are not
completed on time, or if the cost of updating or replacing the Bank's
information systems exceeds the Bank's current estimates, the Year 2000 issue
could have a material adverse impact on the Bank's business, financial
condition or results of operations.
The Bank also intends to determine the extent to which the Bank may be
vulnerable to any failures by its service providers, other third party vendors,
and customers to remedy their own Year 2000 issues, and is in the process of
initiating formal communications with these parties. At this time, the Bank is
unable to estimate the nature or extent of any potential adverse impact
resulting from the failure of these third parties to achieve Year 2000
compliance, although the Bank does not currently anticipate any material
adverse impact. However, there can be no assurance that these third parties
will not experience Year 2000 problems or that any problems would not have a
material effect on the Bank's operations. Because the cost and timing of Year
2000 compliance by third parties such as service providers and customers is not
within the Bank's control, no assurance can be given with respect to the cost
or timing of such efforts or any potential adverse effects on the Bank of any
failure by these third parties to achieve Year 2000 compliance.
Employees
As of December 31, 1997, the Bank had 50 full time employees. The Bank's
employees are not represented by any union or other collective bargaining
group.
ITEM 2. PROPERTIES
Throughout 1997, the Bank was headquartered and conducted business from
its executive and main offices located at 200 State Street, Boston,
Massachusetts where it leased approximately 14,805 square feet of space under a
lease which expired in November, 1997 and was extended through February 1998.
Rental expense for the year ended December 31, 1997 amounted to $592,000 and
was comprised primarily of payments pursuant to the leases described above.
Additionally, the Bank operates one branch location at 1218-1220 Boylston
Street, Chestnut Hill, Massachusetts, a 3,000 square foot facility acquired by
the Bank in October, 1995 and renovated in 1996.
During 1995, the Bank acquired a 55,000 square foot office/retail building
located at 101 Summer Street, Boston, Massachusetts. Upon completion of certain
renovations, the Bank moved its main office and retail branch to this location
in February 1998. The Bank believes the new location will provide ample space
for its expected future growth and business expansion at a relatively low
incremental cost. For additional information relating to properties, see Note 5
to the Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Bank is a party to routine litigation incidental to its business,
including a variety of legal proceedings with borrowers or others. The Bank's
management does not expect that its ultimate liability, if any, upon the final
disposition of such pending proceedings will have a material adverse effect on
the Bank's consolidated financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
B-16
<PAGE>
PART II
ITEM 5. MARKET FOR BANK'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Bank's common stock, par value $1.00 per share (the "Common Stock"),
is quoted on the Nasdaq Stock Market under the symbol "ATLB." It was initially
listed on April 16, 1996, the effective date of the Bank's initial public
offering. The prices in the following table reflect the high and low prices for
the quarters indicated. All prices set forth below are based on information
provided by the National Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
Quarter ended High Low
- -------------------------------- --------- --------
<S> <C> <C>
1997
March 31 ...................... $12-3/4 $ 9-1/8
June 30 ..................... 12-1/4 10-1/2
September 30 ................ 14-7/16 11-5/8
December 31 ................. 15-7/8 13-7/8
1996
June 30 ..................... $ 7-3/4 $ 6-3/4
September 30 ................ 7 6-1/2
December 31 ................. 10-1/4 7
</TABLE>
At March 6, 1998, the Bank had approximately 826 record holders of its
Common Stock. The Bank's transfer agent, Registrar and Transfer, Co., Inc.,
determines the number of record holders.
The Bank has never declared or paid any cash dividends on its Common
Stock. The Bank currently intends to retain its future earnings, if any, to
fund the development and growth of its business, and therefore, does not
anticipate paying any cash dividends in the foreseeable future.
Massachusetts law limits the sources of funds which may be used to pay
dividends on the capital stock of a corporation, including a banking
corporation. The Bank's future dividend policy will be limited by this and
other regulatory restrictions, including any restrictions imposed in the Bank's
future by the FDIC. Any future decisions concerning the declaration and payment
of any dividend with respect to the Common Stock will depend on the results of
operations, financial condition and capital expenditure plans of the Bank, as
well as such other factors as the Bank's Board of Directors, in its sole
discretion, may consider relevant.
B-17
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------
(in thousands, except per share data and percentages)
<S> <C> <C> <C> <C> <C>
Financial Condition Data (Year End):
Total assets ............................................ $ 321,776 $ 230,789 $ 163,157 $131,614 $ 48,987
Purchased loans ......................................... 227,147 152,228 65,171 39,744 8,241
Total discount ......................................... (40,184) (38,192) (13,295) (8,378) (732)
Originated loans ........................................ 70,142 71,626 80,915 60,659 32,483
Allowance for loan losses .............................. (2,273) (1,965) (1,265) (1,513) (614)
Investment securities ................................... 7,817 5,822 9,421 13,124 2,999
Cash and cash equivalents ............................... 46,200 30,287 10,131 16,578 4,373
Deposits ................................................ 285,522 199,575 149,053 119,956 43,368
Stockholders' equity .................................... 31,801 25,760 11,983 10,476 5,365
Non-performing loans .................................... 6,918 3,106 3,066 1,497 817
Other real estate owned, net ............................ 3,591 4,688 6,040 7,448 1,045
Operations Data (Year):
Interest income ......................................... $ 32,777 $ 22,162 $ 15,966 $ 5,986 $ 4,764
Interest expense ........................................ 13,269 8,499 6,803 1,898 2,046
--------- --------- --------- -------- --------
Net interest income ..................................... 19,508 13,663 9,163 4,088 2,718
Provision for loan losses ............................... 325 755 308 261 266
--------- --------- --------- -------- --------
Net interest income after provision for loan losses ..... 19,183 12,908 8,855 3,827 2,452
Gains on sales of investment securities, net ............ 41 -- 97 -- 205
Gains on sales of loans, net ............................ 117 96 92 288 283
Other income ............................................ 370 442 521 418 510
Operating expenses ...................................... (9,811) (6,940) (5,795) (3,525) (2,846)
--------- --------- --------- -------- --------
Income before taxes ..................................... 9,900 6,506 3,770 1,008 604
Provision (benefit) for income taxes .................... 4,128 2,713 1,399 (128) (77)
--------- --------- --------- -------- --------
Net income .............................................. $ 5,772 $ 3,793 $ 2,371 $ 1,136 $ 681
========= ========= ========= ======== ========
Per Share Data:
Net income--
Basic .................................................. $ 1.43 $ 1.09 $ 1.06 $ 0.75 $ 0.45
Diluted ................................................ 1.34 1.06 1.06 0.75 0.45
Weighted average shares outstanding--
Basic .................................................. 4,043 3,480 2,238 1,505 1,502
Diluted ................................................ 4,316 3,594 2,243 1,505 1,502
Book value at end of year ............................... 7.84 6.41 5.56 4.47 3.57
Tangible book value at end of year ...................... 7.82 6.38 5.49 4.24 3.57
Selected Operating Ratios:
Return on average assets ................................ 2.18% 2.29% 1.70% 1.96% 1.16%
Return on average stockholders' equity .................. 20.16 18.47 20.69 19.45 13.77
Interest rate spread .................................... 7.71 7.83 7.15 6.91 4.47
Net interest margin ..................................... 8.08 8.36 7.37 7.56 4.97
Non-interest income to average assets ................... 0.20 0.30 0.51 1.22 1.70
Operating expenses to average assets .................... 3.70 3.87 4.16 6.08 4.86
Asset Quality Ratios:
Total non-performing assets to total assets(1) .......... 3.27% 3.38% 5.58% 6.80% 3.80%
Non-performing purchased loans as a percentage of
purchased loans(1) ..................................... 2.85 1.35 0.83 2.02 n/a
Non-performing originated loans as a percentage of
originated loans ....................................... 0.64 1.45 3.09 1.13 2.50
Total discount as a percent of purchased loans .......... 17.69 25.09 20.40 21.08 8.88
Allowance for loan losses as a percent of originated
loans .................................................. 3.22 2.72 1.54 2.47 1.88
Non-amortizing discount as a percent of non-
performing purchased loans(1)(2) ....................... 342.18 1,184.41 1,419.70 402.24 n/a
Allowance for loan losses as a percentage of non-
performing originated loans ............................ 505.11 187.68 50.04 218.33 75.15
</TABLE>
B-18
<PAGE>
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(in thousands, except per share data and percentages)
<S> <C> <C> <C> <C> <C>
Capital Ratios:
Average stockholders' equity to average assets ...... 10.79% 11.71% 8.22% 10.08% 8.43%
Tangible capital to assets .......................... 9.86 11.11 7.25 7.56 10.95
Tier 1 leverage capital ............................. 10.55 12.05 7.48 13.92 10.15
Tier 1 risk-based capital ........................... 11.98 13.44 8.93 10.43 13.55
Total risk-based capital ............................ 12.84 14.47 9.88 11.68 14.79
</TABLE>
- --------
(1) Total assets, purchased loans and non-amortizing discount include loans
acquired in the fourth quarters of 1997 and 1996 with net carrying values
of $2.2 million and $23.8 million, net of non-amortizing discount
amounting to $243,000 and $12.1 million, at December 31, 1997 and 1996,
respectively, which, while non-performing at the time of purchase based on
original loan contracts, are not classified as such unless they become
non-performing based on the acquisition dates.
(2) Non-amortizing discount is an allocation of total discount on purchased
loans accounted for on the cost recovery method until it is determined
that the amount and timing of collections are reasonably estimable and
collection is probable.
B-19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains certain statements that may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. The Bank's actual results could differ materially from those
projected in the forward-looking statements as a result, among other factors,
of changes in general, national or regional economic conditions, changes in
loan default and charge-off rates relating to a decline in the commercial real
estate market or otherwise, reductions in deposit levels necessitating
increased borrowing to fund loans and investments, changes in interest rates,
and changes in the assumptions used in making such forward-looking statements.
The following discussion of the Bank's consolidated financial condition
and results of operations and capital resources and liquidity should be read in
conjunction with the Selected Consolidated Financial Data and the Consolidated
Financial Statements and related Notes included elsewhere herein.
Results of Operations
The Bank reported net income of $5.8 million for the year ended 1997,
which represented a $2.0 million, or 52.2%, increase from net income of $3.8
million reported by the Bank for 1996. Earnings per share for the year ended
1997 were $1.34 on a diluted basis and $1.43 on a basic basis compared to $1.06
on a diluted basis and $1.09 on a basic basis in 1996. The increase in the
Bank's net income for 1997 was attributable to an increase of $5.8 million in
net interest income which more than offset an increase in non-interest expense
of $2.9 million. The Bank's return on average assets and return on average
equity were 2.18% and 20.16%, respectively, during 1997, compared to a return
on average assets and return on average equity of 2.29% and 18.47%,
respectively, during 1996.
The Bank reported net income of $3.8 million for the year ended 1996,
which represented a $1.4 million, or 60.0%, increase from net income of $2.4
million reported by the Bank for 1995. Earnings per share for the year ended
1996 were $1.06 on a diluted basis and $1.09 on a basic basis compared to $1.06
on both a diluted basis and basic basis in 1995. The Bank's outstanding common
stock increased by 1,862,500 shares as a result of its $9.9 million public
stock offering in April, 1996. The increase in the Bank's net income for 1996
was attributable to an increase of $4.5 million in net interest income which
more than offset an increase in non-interest expense of $1.1 million and a
decrease in other income of $172,000. The Bank's returns on average assets and
on average equity were 2.29% and 18.47%, respectively, during 1996, compared to
a return on average assets and return on average equity of 1.70% and 20.69%,
respectively, during 1995.
The increases in net income for 1997, 1996 and 1995 reflected substantial
growth in average interest-earning assets, with all increases largely
attributable to the expansion of the Bank's purchased loan portfolio. The
Bank's average interest-earning assets increased to $241.4 million during 1997
compared to $163.3 million during 1996 and $124.3 million during 1995. The
yield on interest-earning assets increased to 13.58% in 1997 compared to 13.57%
in 1996 and 12.85% in 1995. This increase in earning assets was funded by a
substantial increase in the Bank's certificate of deposit portfolio. The Bank's
average interest-bearing deposits increased substantially in 1997 to $226.2
million compared to $148.0 million during 1996 and $119.3 million during 1995.
Net Interest Income. The operations of the Bank are substantially
dependent on its net interest income: the difference between the interest
income earned on its interest-earning assets, including securities available
for sale, the purchased and originated loan portfolios, and the interest
expense paid on its interest-bearing liabilities. Net interest income is
determined by an institution's net interest spread (i.e., the difference
between the yield earned on its interest-earning assets and the rates paid on
its interest-bearing liabilities), the relative amount of interest-bearing
assets and interest-bearing liabilities and the degree of mismatch in the
maturity and repricing characteristics of its interest-earning assets and
interest-bearing liabilities.
Average Balance and Rate Analysis. The following table sets forth, for the
periods indicated, information regarding the total amount of income from
interest-earning assets and the resultant average yields, the interest expense
associated with interest-bearing liabilities, expressed in dollars and rates,
and the net interest spread and net interest margin. Information is based on
daily average balances during the indicated years:
B-20
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ----------------------------- -----------------------------
Average Average Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
-------- --------- ---------- --------- --------- ---------- -------- -------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold .................. $ 25,621 $ 1,385 5.41% $ 15,615 $ 809 5.18% $ 8,919 $ 515 5.77%
Interest-bearing deposits in banks... 268 9 3.36 368 12 3.26 453 19 4.19
Securities available for sale ....... 7,782 468 6.01 6,967 398 5.71 12,107 711 5.87
Purchased loan portfolio, net(1) .... 140,141 23,267 16.60 65,414 11,483 17.55 35,352 6,807 19.25
Originated loan portfolio, net(1) ... 67,544 7,648 11.32 74,974 9,460 12.62 67,449 7,914 11.73
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-earning assets ...... 241,356 32,777 13.58 163,338 22,162 13.57 124,280 15,966 12.85
-------- ------- ----- -------- ------- ----- -------- ------- -----
Interest-bearing liabilities:
NOW and savings ..................... 2,621 59 2.25 2,283 51 2.23 2,471 58 2.35
Insured money market ................ 5,911 205 3.47 6,123 211 3.45 7,588 230 3.03
Certificates ........................ 217,678 13,005 5.97 139,590 8,237 5.90 109,194 6,515 5.97
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing liabilities.. 226,210 13,269 5.87 147,996 8,499 5.74 119,253 6,803 5.70
-------- ------- ----- -------- ------- ----- -------- ------- -----
Excess of interest earnings assets
over interest-bearing liabilities ... $ 15,146 $ 15,342 $ 5,027
======== ======== ========
Net interest income .................. $19,508 $13,663 $ 9,163
======= ======= =======
Interest rate spread ................. 7.71 7.83 7.15
===== ===== =====
Net interest margin .................. 8.08% 8.36% 7.37%
===== ===== =====
</TABLE>
- --------
(1) Includes non-accrual loans.
Rate/Volume Analysis. The following table describes the extent to which
changes in interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities have affected the Bank's interest income and
expense during the years indicated. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (change in volume multiplied by prior
rate), (ii) changes in rate (change in rate multiplied by prior volume), and
(iii) total change in the rate and volume. Changes attributable to both volume
and rate have been allocated proportionately to the changes due to volume and
the changes due to rate:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1997 v. 1996 1996 v. 1995
----------------------------------- --------------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
------------------------------------ --------------------------------------
Rate Volume Total Rate Volume Total
---------- ---------- ---------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold ................... $ 37 $ 539 $ 576 $ (58) $ 352 $ 294
Interest-bearing deposits in banks.... -- (3) (3) (4) (3) (7)
Securities available for sale ........ 22 48 70 (19) (294) (313)
Purchased loan portfolio, net ........ (655) 12,439 11,784 (649) 5,325 4,676
Originated loan portfolio, net ....... (922) (890) (1,812) 623 923 1,546
------- ------ ------- ----- ----- -----
Total interest-earning assets ....... (1,518) 12,133 10,615 (107) 6,303 6,196
------- ------ ------- ----- ----- -----
Interest-bearing liabilities:
NOW and savings ...................... -- 8 8 (3) (4) (7)
Money market ......................... 1 (7) (6) 29 (48) (19)
Certificates ......................... 124 4,644 4,768 (72) 1,794 1,722
------- ------ ------- ----- ----- -----
Total interest-bearing liabilities... 125 4,645 4,770 (46) 1,742 1,696
------- ------ ------- ----- ----- -----
Increase (decrease) in net interest
income ............................... $(1,643) $7,488 $ 5,845 $ (61) $4,561 $4,500
======= ====== ======= ===== ====== ======
</TABLE>
1997 versus 1996. The Bank's net interest income increased by $5.8
million, or 42.8%, for 1997 as a result of an increase in the volume of
interest-earning assets. The net interest margin decreased to 8.08% in 1997
compared to 8.36% in 1996 due to a relatively unchanged yield on
interest-earning assets and a slightly higher cost of funds
B-21
<PAGE>
in 1997. The increase in the net interest income was primarily the result of
the substantial increase in the purchased loan portfolio, the highest yielding
component of the Bank's asset base. The weighted average yield on the Bank's
interest-earning assets increased slightly to 13.58% in 1997 from 13.57% in
1996. Income on earning assets is comprised of two components: interest earned
and the accretion of discount. Interest earned represents income recorded based
upon the contractual rates and gross outstanding balances of the individual
loans in the purchased and originated loan portfolios. The accretion of
discount represents that portion of purchase discount that is accreted into
income over the remaining lives of the related loans on a method approximating
the interest method. Because the carrying value of the purchased loan portfolio
is net of purchase discount, the related yield on this portfolio is relatively
high. This yield includes interest earned at the contractual rate calculated on
the gross loan balance and, generally, accretion of discount. During the years
ended December 31, 1997 and 1996, the yields on the Bank's purchased loan
portfolio were 16.60% and 17.55%, respectively. The decrease in the yield in
1997 was primarily the result of a higher level of non-performing loans, the
majority of which were acquired during the fourth quarter of 1996. Many of
these loans were restructured during 1997 and interest income was recognized
upon receipt of payments based either on the original loan contract or as
restructured by the Bank. The average balance of federal funds sold increased
during 1997 by $10.0 million compared to 1996. This increase was the primary
reason for the increase in interest income on federal funds sold of $576,000 in
1997 compared to 1996. The average balance of interest-bearing liabilities
increased by $78.2 million for 1997 compared to 1996 primarily as a result of
the growth of the Bank's primary funding source, its certificate of deposit
portfolio. The weighted average rate paid on the Bank's interest-bearing
liabilities increased to 5.87% in 1997 from 5.74% in 1996.The increase in the
rate paid is attributed to higher rates offered on new and maturing
certificates of deposit because the need for funds increased in 1997 as a
result of more loan acquisition opportunities. The Bank generally offers rates
that are comparable to rates on U.S. Government securities of similar
durations. The average rate paid on certificates of deposit increased to 5.97%
in 1997 from 5.90% in 1996.
1996 versus 1995. The Bank's net interest income increased by $4.5
million, or 49.1%, for 1996 as a result of an increase in the volume of
interest-earning assets combined with an increase in the net interest margin to
8.36% in 1996 compared to a net interest margin of 7.37% in 1995. The weighted
average yield on the Bank's interest-earning assets increased to 13.57% in 1996
from 12.85% in 1995. The increase in this yield was primarily the result of the
increase in the average balance of the purchased loan portfolio During the
years ended December 31, 1996 and 1995, the yields on the Bank's purchased loan
portfolio were 17.55% and 19.25%, respectively. The decrease in the yield in
1996 was primarily the result of the Bank's acquisition of non-performing
assets during the fourth quarter. At December 31, 1996 interest income had not
been recognized on purchased loans with a net carrying value of $23.8 million
which were non-performing at the time of purchase based upon original loan
contracts. The average balance of securities available for sale decreased
during 1996 by $5.1 million compared to 1995 as a result of maturing
investments that were primarily invested in Federal funds sold. This decline
was the primary reason for the decrease in interest income on securities
available for sale of $313,000 in 1996 compared to 1995. The average balance of
interest-bearing liabilities increased by $28.7 million for 1996 compared to
1995 primarily as a result of the growth of the Bank's certificate of deposit
portfolio. The weighted average rate paid on the Bank's interest-bearing
liabilities increased slightly to 5.74% in 1996 from 5.70% in 1995. The average
rate paid on certificates of deposit decreased to 5.90% in 1996 from 5.97% in
1995.
Provisions, Allowances and Discounts. Provisions for losses on loans in
the originated loan portfolio are charged to operations to maintain an
allowance for losses at a level which management considers adequate based upon
an evaluation of known and inherent risks in that portfolio. The allowance for
loan losses is based on the estimated collectibility of the loans, unless it is
probable that loans will be foreclosed, in which case the allowance for loan
losses is based on the estimated fair values of the properties securing the
loans. Management's periodic evaluation is based upon an analysis of the
originated loan portfolio, current economic conditions and other relevant
factors. Future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making the
evaluations. Due to improved asset quality in the Bank's originated loan
portfolio, in addition to a decrease in the size of the portfolio, the
provision declined to $325,000 in 1997 from $755,000 in 1996. The allowances
for loan losses were 505.11%, 187.68% and 50.04% of non-performing originated
loans as of December 31, 1997, 1996 and 1995, respectively.
The Bank maintains an allowance for loan losses in connection with its
purchased loan portfolio by allocating a portion of the purchased discount to a
non-amortizing discount category for each pool of purchased loans. The Bank's
B-22
<PAGE>
non-amortizing discount totaled $22.1 million, $24.4 million, and $7.6 million
at December 31, 1997, 1996 and 1995, respectively. If, in the future, such
reserve is not adequate to absorb estimated losses in a respective pool in the
portfolio, and assuming the amortizing portion of the purchased discount has
been exhausted, a provision would be charged to interest income. Non-amortizing
discount was 342.18%, 1,184.41% and, 1,419.70% of non-performing purchased
loans as of December 31, 1997, 1996 and 1995, respectively. See "Changes in
Financial Condition."
Other Income. Other income totaled $528,000 in 1997 compared to $538,000
in 1996 and $710,000 in 1995. Included in other income are gains on sales of
securities which totaled $41,000 in 1997 and $97,000 in 1995. Also included in
other income are gains on sales of loans which totaled $117,000 in 1997
compared to $96,000 in 1996 and $92,000 in 1995. The gains in 1997 represented
gains on the sale of originated asset-based commercial loans and the gains in
1996 and 1995 represented gains on the sale of the guaranteed portion of SBA
loans. Fees for the servicing of SBA loans totaled $53,000 in 1997 compared to
$91,000 in 1996, and $84,000 in 1995. Also included in other income is an
annual service fee of $77,000 in both 1997 and 1996, and $174,000 in 1995
earned under the Service Agreement with Atlantic Holdings Limited Partnership
("Atlantic Holdings"), pursuant to which the Bank furnishes Atlantic Holdings
with services necessary for it to originate, manage and facilitate loans and
investments. The decline in annual service fee income was primarily the result
of an amendment to the Service Agreement with Atlantic Holdings which reduced
the service fee due to lesser levels of loan activity. The balance of the
amounts reflected in other income are miscellaneous loan and deposit fees and
service charges.
Operating Expenses. The Bank's operating expenses increased by $2.9
million, or 41.4%, in 1997 compared to 1996 and by $1.1 million, or 19.8%, in
1996 compared to 1995. Such expenses include costs incurred in fulfilling the
Bank's obligations under its Service Agreement with Atlantic Holdings.
Compensation and related benefits increased by $1.4 million, or 31.6%, in
1997 compared to 1996 and by $1.1 million, or 33.1%, in 1996 compared to 1995.
These increases were primarily attributable to increases in salaries and
bonuses, the largest component of compensation and related benefits, which
increased by $1.2 million or 29.3% in 1997 compared to 1996 and by $1.1
million, or 34.2%, in 1996 compared to 1995. In addition, the increases in
compensation and related benefits were partially attributable to Bank-wide
salary increases and increases in the number of employees, as the Bank expanded
its staff to accommodate overall asset growth. The total number of employees
was 49, 47 and 32 at December 31, 1997, 1996 and 1995, respectively.
Occupancy and equipment expense consists of expenses associated with the
occupancy of the Bank's offices as well as computer and other office equipment.
Occupancy and equipment expense increased by $328,000, or 41.5%, in 1997
compared to 1996, and by $27,000 or 3.5%, in 1996 compared to 1995. The
increase in 1997 was primarily attributable to the expansion of the Bank's main
office and the related additional lease expense to accommodate an increase in
personnel, and an increase in related furniture and equipment expenses.
Occupancy and equipment expense includes lease costs of approximately $592,000,
$432,000 and $465,000 for 1997, 1996 and 1995, respectively. The decrease in
lease costs in 1996, compared to 1995, was primarily due to the elimination of
lease payments for the Bank's Chestnut Hill branch as the facility was acquired
by the Bank in 1995.
Professional fees consist primarily of legal, consulting, auditing and
recruiting services which increased by $220,000 in 1997 compared to 1996 and by
$392,000 in 1996 compared to 1995, due to costs incurred primarily in
connection with the acquisition, modification and resolution of a number of
purchased loans. Legal expenses also include fees paid in connection with
general corporate matters, loan collection matters related to non-performing
assets and an arbitration proceeding decided in favor of the Bank in 1996.
Net OREO income includes gains on sales of OREO, net operating income and
provision for losses on such properties. Net OREO income decreased by $374,000
in 1997 compared to 1996. This decrease is primarily attributed to a provision
for losses of $640,000 incurred in 1997 compared to a provision of $82,000
incurred in 1996. Additionally, in 1997 the Bank realized net gains on sales of
$1.1 million and net operating income of $64,000 compared to net gains on sales
of $886,000 and net operating income of $82,000 in 1996. In 1996, net OREO
income increased by $168,000 compared to 1995, which was primarily due to the
sales of properties acquired in connection with the Merger.
Other general and administrative expenses increased by $510,000, or 40.8%
in 1997 compared to 1996. This increase is primarily a result of increases in
expenses related to the Bank's overall asset growth including printing
B-23
<PAGE>
and supplies of $119,000, loan related expenses of $147,000, marketing expenses
of $70,000, data processing expenses of $59,000, telephone expenses of $32,000
and insurance expenses of $29,000. In 1996, other general and administrative
expenses decreased by $238,000, or 16.0% in 1996 compared to 1995, due to a
variety of changes in individual accounts including decreases in marketing
expense of $37,000, and customer real estate taxes paid by the Bank as a
protective measure of $46,000.
Provisions for income tax of $4.1 million, $2.7 million and $1.4 million
in 1997, 1996 and 1995, respectively, reflect increases in the Bank's income
before income taxes during these periods. The Bank's effective tax rate totaled
41.7%, 41.7% and 37.1% in 1997, 1996 and 1995, respectively. For additional
information relating to taxes, see Note 8 to the Consolidated Financial
Statements.
Changes in Financial Condition
General. The Bank's total assets increased by $91.0 million, or 39.4%, in
1997 compared to 1996, and increased by $67.6 million, or 41.5%, in 1996
compared to 1995. The increases in total assets during 1997 and 1996 were both
primarily attributable to the continued expansion of the Bank's purchased loan
portfolio.
The following table sets forth certain information relating to the Bank's
assets and liabilities at the dates indicated:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Assets:
Federal funds sold ................................... $ 44,290 $ 26,900 $ 6,400
Securities available for sale, at fair value ......... 7,016 4,996 8,994
Purchased loan portfolio, net ........................ 186,963 114,036 51,876
Originated loan portfolio, net ....................... 70,530 72,126 81,887
Other real estate owned, net ......................... 3,591 4,688 6,040
Total assets ......................................... 321,776 230,789 163,157
Liabilities:
Deposits ............................................. 285,522 199,575 149,053
Other liabilities .................................... 4,453 5,454 2,121
Total liabilities .................................... 289,975 205,029 151,174
Stockholders' equity ................................. 31,801 25,760 11,983
</TABLE>
Federal Funds Sold. The Bank invests in federal funds sold primarily in
anticipation of funding the acquisition of loan pools and to maintain an
adequate level of liquid assets. Federal funds sold increased by $17.4 million
or 64.6%, in 1997 compared to 1996 and by $20.5 million, or 320.3%, in 1996
compared to 1995, reflecting the Bank's growth in total assets.
Securities Available for Sale. The Bank invests in U.S. Government
obligations, which management has elected to classify as securities available
for sale. Such securities are reflected at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders' equity, net of tax effect.
Securities available for sale increased by $2.0 million or 40.4% in 1997
compared to 1996. In 1996, securities available for sale decreased by $4.0
million, or 44.5% compared to 1995. The decrease in 1996 reflected maturities
of securities during this period, the proceeds of which were utilized to fund
loan growth or to increase the Bank's liquidity position.
Purchased Loan Portfolio. The Bank purchases pools of performing and
non-performing secured commercial and commercial real estate loans. Purchases
have generally been made at a discount from the contractual balance of the
loans in each pool. The gross and net amount of the purchased loan portfolio as
of December 31, 1997 totaled $227.1 million and $187.0 million, respectively.
Of the Bank's $227.1 million gross amount of purchased loans at December 31,
1997, $156.1 million, or 68.7%, were commercial real estate loans and $67.5
million, or 29.7%, were land and other mortgage loans on real estate with the
remaining $3.5 million, or 1.6%, comprised of secured commercial
B-24
<PAGE>
and other loans. The gross purchased loan portfolio increased by $74.9 million,
or 49.2%, in 1997 compared to 1996 due to the acquisition of $165.9 million of
discounted loans during the period which more than offset the $62.2 million of
renewals, resolutions and repayments of discounted loans during the year. The
gross purchased loan portfolio increased by $87.1 million, or 133.6%, in 1996
compared to 1995 due to the acquisition of $164.5 million of discounted loans
during the period which more than offset the $25.5 million of renewals,
resolutions and repayments of discounted loans during the year. At December 31,
1997, non-performing purchased loans equaled $6.5 million or 2.8%, of the total
purchased loan portfolio. Non-performing purchased loans increased by $4.4
million in 1997 compared to 1996 and by $1.5 million in 1996 compared to 1995.
During the fourth quarter of 1996, the Bank began to acquire, on a selective
basis, loan pools comprised of both performing and non-performing loans. At
December 31, 1996, the Bank had loans with a net carrying value of $23.8
million that were non-performing at the time of purchase based on the original
loan contracts. These loans were not classified as non-performing by the Bank
at that date since the Bank determines non-performing loan status based upon
payment performance since the acquisition date of each loan. At December 31,
1997, $2.2 million of non-performing loans represented loans acquired in the
fourth quarter of 1997. For additional information relating to the Bank's
purchased loan portfolio, see Notes 1 and 3 to the Consolidated Financial
Statements.
Originated Loan Portfolio. The Bank's originated loan portfolio consists
primarily of loans which were originated by the Bank and loans purchased by the
Bank that have been renewed on terms consistent with the Bank's loan policy and
documentation standards. Of the Bank's $70.5 million of gross originated loans
at December 31, 1997, $45.4 million, or 64.3%, were commercial real estate
loans, $14.8 million, or 21.0%, were land and other mortgage loans on real
estate with the remaining $10.4 million, or 14.7%, comprised of secured
commercial and other loans.
Total originated loans decreased by $1.6 million, or 2.2% in 1997 compared
to 1996 and by $9.8 million, or 11.9%, in 1996 compared to 1995. The decrease
in both 1997 and 1996 was primarily attributable to a change in the Bank's
focus to expanding its purchased loan portfolio.
Non-performing originated loans totaled $450,000, or .6%, of the total
originated loan portfolio at December 31, 1997. Non-performing originated loans
decreased by $1.5 million in 1996 compared to 1995.
Other Real Estate Owned. OREO, net, decreased by $1.1 million or 23.4% in
1997 compared to 1996 and by $1.4 million, or 22.4%, in 1996 compared to 1995.
The Bank's OREO generated net operating income of $64,000 in 1997, $82,000 in
1996 and $296,000 in 1995. Sales of properties resulted in gains of $1.1
million, $886,000, and $459,000 for the years ended December 31, 1997, 1996 and
1995, respectively. As a result of the Bank's decision during 1996 to enter the
business of acquiring discounted non-performing loans, the primary source of
the Bank's OREO at December 31, 1997 was purchased non-performing loans that
had not been restructured. The Bank anticipates that its OREO may increase
periodically in the future.
Premises and equipment. Premises and equipment increased by $2.5 million,
or 60.0%, in 1997 compared to 1996 and by $309,000, or 7.9%, in 1996 compared
to 1995. The increase in 1997 is primarily attributed to $2.9 million of
renovations in progress related to the relocation of the Bank's main office
which occurred in February of 1998. It is anticipated that the total cost of
these renovations will amount to $8.2 million.
Deposits. Deposits increased by $85.9 million, or 43.1%, in 1997 as
compared to 1996 and by $50.5 million or 33.9% in 1996 as compared to 1995.
Both increases were attributable to increases in the Bank's certificate of
deposit portfolio as a means to fund loan growth.
At December 31, 1997, the Bank had $127.6 million of certificates of
deposit in amounts of $100,000 or more compared to $48.1 million and $26.6
million at December 31, 1996 and December 31, 1995, respectively. Brokered
deposits obtained through national investment banking firms which solicit
deposits from their customers increased from $198,000 in 1996 to $67.2 million
at December 31, 1997. These range in maturity from six months to three years,
are non-cancelable and bear rates which are consistent with, or lower than, the
Bank's certificate of deposit program. For additional information, see
"Liquidity, Commitments and Contingencies" and Notes 6 and 9 to the
Consolidated Financial Statements.
B-25
<PAGE>
Other Liabilities. The Bank's other liabilities, which consist of current
and deferred income taxes payable and accrued expenses, payables and other
liabilities, decreased by $1.0 million, or 18.4%, in 1997 compared to 1996.
This decrease is primarily the result of a decline in current and deferred
income taxes payable of $1.8 million offset by an increase in accrued interest
payable on deposit accounts of $584,000, which resulted from the timing of
dividend payments on brokered deposit accounts. In 1996, the Bank's other
liabilities increased by $3.4 million, or 212.5% compared to 1995 which were
due to increases in Federal and state taxes payable and general increases in a
variety of other categories, including accrued compensation and related
benefits, accounts payable and other miscellaneous liabilities. For additional
information relating to taxes, see Note 8 to the Consolidated Financial
Statements.
Stockholders' Equity. Stockholders' equity increased $6.0 million, or
23.5%, in 1997 compared to 1996 and by $13.8 million, or 115.0%, in 1996
compared to 1995. The increase in stockholders' equity in 1997 compared to 1996
was due to an increase in net income during the period. The increase in
stockholders' equity in 1996 compared to 1995 was attributable to net income
during the period and the completion of the Bank's initial public offering
which raised $9.9 million in capital after offering expenses. See the
Consolidated Statements of Changes in Stockholders' Equity and Note 10 to the
Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset and liability management is concerned with the timing and magnitude
of the repricing of assets and liabilities. It is the objective of the Bank to
attempt to control risks associated with interest rate movements. Market risk
is the risk of loss from adverse changes in market prices and interest rates.
The Bank's market risk arises primarily from interest rate risk inherent in
lending, investing in marketable securities, deposit taking, and borrowing
activities. To that end, management actively monitors and manages its interest
rate risk exposure. At December 31, 1997, the Bank's net interest-earning
assets which were estimated to mature or reprice within one year exceeded the
Bank's net interest-bearing liabilities with similar characteristics by $17.2
million, or 5.32%, of total assets. The Bank's asset and liability management
strategy is formulated and monitored by the Bank's Chairman, President and
Chief Financial Officer. The Bank's senior management reviews, among other
things, the sensitivity of the Bank's assets and liabilities to interest rate
changes, the book and market values of assets and liabilities, unrealized gains
and losses, purchase and sale activity, and maturities of investments. The
Bank's senior management also approves and establishes pricing and funding
decisions with respect to the Bank's overall asset and liability composition.
As the Bank has expanded its purchased loan portfolio it has acquired a number
of fixed rate loans. Such loans tend to increase the Bank's interest rate risk.
The Bank closely monitors the rate sensitivity of assets it acquires and, when
purchased fixed rate loans are restructured, seeks to ensure that such
restructurings are performed on a variable rate basis.
The Bank's methods for evaluating interest rate risk include an analysis
of the Bank's interest rate sensitivity "gap", which is defined as the
difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A gap is considered positive
when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds interest-rate sensitive
assets. During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income, while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income, while a positive gap would tend to affect net interest income
adversely. Because different types of assets and liabilities with the same or
similar maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income positively
or negatively even if an institution were perfectly matched in each maturity
category.
The Bank also utilizes income simulation models to aid it in estimating
the Bank's interest rate risk exposure. The Board of Directors has established
limits on the potential impact of changes in interest rates on both earnings
and the economic value of the Bank's equity.
B-26
<PAGE>
The following table sets forth the Bank's interest-rate sensitive assets and
liabilities categorized by repricing dates and weighted average rates at
December 31, 1997. 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.
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------------------------------------------
Within One to Two to Three Four to Over
One Two Three to Four Five Five
Overnight Year Years Years Years Years Years Total
--------- -------- --------- -------- --------- -------- ------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Federal funds sold ..................... $ 44,290 $ -- $ -- $ -- $ -- $ -- $ -- $ 44,290
5.41%
Interest-bearing deposits in banks ..... 238 -- -- -- -- -- -- 238
4.75%
Securities available for sale .......... -- 2,001 2,005 2,012 998 -- -- 7,016
5.63% 5.88% 5.94% 5.63%
Fixed-rate purchased loans, net ........ -- 32,609 10,931 10,209 8,009 6,415 26,740 94,913
9.10% 7.56% 8.46% 8.24% 8.57% 8.30%
Adjustable-rate purchased loans, net ... 97,559 26,702 163 924 379 39 -- 125,766
9.07% 9.82% 10.10% 9.45% 10.71% 9.61%
Fixed-rate originated loans, net ....... -- 2,502 45 652 301 528 3,154 7,182
8.32% 10.28% 8.66% 10.87% 9.34% 8.12%
Adjustable-rate originated loans, net .. 58,348 4,550 -- -- -- -- -- 62,898
10.30% 9.90%
-------- -------- ------- ------- ------- ------ ------- --------
Total rate-sensitive assets .......... $200,435 $ 68,364 $13,144 $13,797 $ 9,687 $6,982 $29,894 $342,303
======== ======== ======= ======= ======= ====== ======= ========
Rate-sensitive liabilities:
NOW .................................... $ 1,435 $ -- $ -- $ -- $ -- -- $ -- $ 1,435
1.98%
Savings and money market ............... 12,569 -- -- -- -- -- -- 12,569
3.47%
Certificates ........................... -- 237,645 21,544 6,345 80 182 100 265,896
5.92% 5.98% 6.30% 5.73% 5.93% 5.60%
-------- -------- ------- ------- ------- ------ ------- --------
Total rate-sensitive liabilities ..... $ 14,004 $237,645 $21,544 $ 6,345 $ 80 $ 182 $ 100 $279,900
======== ======== ======= ======= ======= ====== ======= ========
</TABLE>
The prepayment assumption reflected above is based on the Bank's
experience and management's estimate of prepayment activity for recently
acquired loans. Given the interest rate environment at December 31, 1997,
management applies the assumption that on average 10% of the outstanding fixed
rate loans will prepay annually. Originated adjustable-rate loans are generally
indexed to prime with an average spread of 100 to 200 basis points. The
majority of purchased adjustable-rate loans are also tied to prime with the
remainder subject to various terms and rate spreads established by the
originating banks. The table does not include loans which have been placed on
non-accrual status.
Assets and liabilities that are immediately repricable are placed in the
overnight column. Although NOW, savings and money market deposit accounts are
subject to immediate repricing or withdrawal, based on the Bank's history,
management considers these liabilities to have longer lives and less interest
rate sensitivity than term certificates.
B-27
<PAGE>
The following table sets forth certain information at December 31, 1997,
regarding the dollar amount of commercial and construction loans maturing based
on their contractual terms to maturity and includes the dollar amount of loans
which have predetermined or adjustable interest rates. Demand loans, loans
having no stated schedule of repayments and no stated maturity and overdrafts,
are reported as due in one year or less:
<TABLE>
<CAPTION>
Maturities
------------------------------------------------------
1 year Over 1 year
or less to 5 years Over 5 years Total
--------- ------------ -------------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Commercial loans ............................ $14,406 $5,834 $1,501 $21,741
Construction loans .......................... 1,419 606 -- 2,025
------- ------ ------ -------
$15,825 $6,440 $1,501 $23,766
======= ====== ====== =======
Interest terms on amounts due after one year:
Predetermined rates ........................ $ 417 $ -- $ 417
Adjustable rates ........................... 6,023 1,501 7,524
------ ------ -------
$6,440 $1,501 $ 7,941
====== ====== =======
</TABLE>
Liquidity, Commitments and Contingencies
Liquidity is a measurement of the Bank's ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, as well as to
fund deposit withdrawals, investment, loan resolution and lending activities
and other general business purposes. The primary sources of funds for liquidity
consist of deposits, and maturities and principal payments on loans and
securities and proceeds from sales thereof.
The Bank's liquidity is managed on a daily basis, monitored by the
Chairman, President and Chief Financial Officer and reviewed periodically with
the Board of Directors. This process is intended to ensure the maintenance of
sufficient funds to meet the needs of the Bank, including adequate cash flows
for the Bank's liquidity, commitments and contingencies.
The Bank's liquidity position may fluctuate depending upon the volume and
timing of loan acquisitions. In anticipation of large loan pool acquisitions,
the Bank will seek to increase its liquidity position by expanding its
certificate of deposit portfolio. Funding of loan acquisitions will decrease
the Bank's liquidity position.
The Bank has external sources of liquidity which it had not drawn upon at
December 31, 1997. As a member of the FHLBB, the Bank may borrow from the FHLBB
up to 2% of its total assets on an overnight basis for short-term liquidity
purposes. The Bank may also utilize certain investment securities including
FHLBB stock and real estate loans as collateral for term borrowings from the
FHLBB.
In addition, the Bank has entered into contractual agreements with six
investment banking firms that provide the Bank with access to brokered
certificates of deposit. Under current FDIC regulations, banks that are
categorized as "well-capitalized" can obtain brokered certificates of deposit,
without prior approval of the FDIC. At December 31, 1997, based upon the Bank's
most recent consolidated Report of Condition and Income filed with the FDIC,
the Bank is categorized as "well-capitalized."
Sources of liquidity include certificates of deposit obtained from
wholesale and retail sources. At December 31, 1997, the Bank had $265.9 million
of certificates of deposit, including $67.2 of brokered certificates of
deposit. At the same date, scheduled maturities of certificates of deposit
during the years ending December 31, 1998 and 1999 and thereafter totaled
$237.7 million, $21.5 million and $6.7 million, respectively. Certificates of
deposit generally are more responsive to changes in interest rates than core
deposits and, thus, are more likely to be withdrawn from the Bank upon maturity
as changes in interest rates and other factors are perceived by investors to
make other investments more attractive. However, management believes it can
adjust the rates paid on certificates of deposit to retain deposits in changing
interest rate environments and that brokered deposits can provide a relatively
cost-effective and stable alternate source of funds.
B-28
<PAGE>
Non-interest bearing checking accounts, NOW and money market checking
accounts and savings accounts generally are considered core deposits and
typically provide a stable source of liquidity. The amount of the Bank's total
deposits represented by such core deposits totaled $19.6 million, or 6.9%, of
the Bank's total deposits at December 31, 1997 compared to $15.9 million, or
7.9%, of total deposits at December 31, 1996.
At December 31, 1997, the Bank had commitments to originate $500,000 of
commercial and commercial real estate loans, commitments to lend up to $3.1
million under outstanding unused lines of credit and standby letters-of-credit
amounting to $47,000. Management believes that the Bank has adequate resources
to fund all of its commitments to the extent required and that substantially
all of such commitments will be funded in 1998. For additional information
relating to commitments and contingencies at December 31, 1997, see Note 9 to
the Consolidated Financial Statements.
Recent Accounting Development
For additional information relating to a recent accounting pronouncement,
see Note 1 to the Consolidated Financial Statements.
Additional Business Lines
From time to time, management evaluates diversifying the Bank's business
lines by expanding the types of financial services it offers. Management has
recently been considering the acquisition of a leasing operation, the outcome
of which cannot be determined with any certainty at this time.
B-29
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report ....................................... B-31
Consolidated Balance Sheets ........................................ B-32
Consolidated Statements of Income .................................. B-33
Consolidated Statements of Changes in Stockholders' Equity ......... B-34
Consolidated Statements of Cash Flows .............................. B-35
Notes to Consolidated Financial Statements ......................... B-37
</TABLE>
B-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Atlantic Bank and Trust Company:
We have audited the accompanying consolidated balance sheets of Atlantic
Bank and Trust Company and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Atlantic
Bank and Trust Company and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
February 6, 1998
B-31
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
(In Thousands, Except Share
Data)
<S> <C> <C>
ASSETS
Cash and due from banks ............................................... $ 1,910 $ 3,387
Federal funds sold .................................................... 44,290 26,900
--------- ---------
Total cash and cash equivalents ................................... 46,200 30,287
--------- ---------
Interest-bearing deposits in banks .................................... 238 335
Securities available for sale, at fair value (Note 2) ................. 7,016 4,996
Federal Home Loan Bank of Boston stock, at cost (Note 7) .............. 563 491
Loans (Note 3) ........................................................ 257,105 185,662
Less allowance for loan losses ....................................... (2,273) (1,965)
--------- ---------
Loans, net ........................................................ 254,832 183,697
--------- ---------
Other real estate owned, net (Note 4) ................................. 3,591 4,688
Premises and equipment, net (Note 5) .................................. 6,736 4,211
Other assets .......................................................... 2,600 2,084
--------- ---------
$ 321,776 $ 230,789
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing ................................................. $ 5,622 $ 8,046
Interest bearing ..................................................... 279,900 191,529
--------- ---------
Total deposits (Note 6) ........................................... 285,522 199,575
Accrued interest payable .............................................. 1,178 594
Accrued expenses and other liabilities (Note 8) ....................... 3,275 4,860
--------- ---------
Total liabilities ................................................. 289,975 205,029
--------- ---------
Commitments and contingencies (Note 9)
Stockholders' equity (Notes 10, 12 and 13):
Serial preferred stock, $1 par value, 1,000,000 shares authorized;
none issued ......................................................... -- --
Common stock, $1 par value, 15,000,000 shares authorized;
4,216,010 and 4,211,010 shares issued ............................... 4,216 4,211
Additional paid-in capital ........................................... 17,432 17,326
Retained earnings .................................................... 10,926 5,154
--------- ---------
32,574 26,691
Less treasury stock at cost--160,484 and 189,672 shares .............. (793) (936)
Net unrealized gain on securities available for sale, after tax effect
(Notes 2 and 8) ..................................................... 20 5
--------- ---------
Total stockholders' equity ........................................ 31,801 25,760
--------- ---------
$ 321,776 $ 230,789
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
B-32
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(In Thousands, Except Earnings Per
Share)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans .................................. $ 30,915 $ 20,943 $ 14,721
Interest and dividend income on investment securities ....... 468 398 711
Interest on federal funds sold and interest-bearing deposits
in banks ................................................... 1,394 821 534
-------- -------- --------
Total interest income .................................... 32,777 22,162 15,966
Interest expense on deposits ................................. 13,269 8,499 6,803
-------- -------- --------
Net interest income ...................................... 19,508 13,663 9,163
Provision for loan losses (Note 3) ........................... 325 755 308
-------- -------- --------
Net interest income, after provision for loan losses...... 19,183 12,908 8,855
-------- -------- --------
Other income:
Service fees (Note 13) ...................................... 77 77 174
Gain on sales of securities available for sale (Note 2) ..... 41 -- 97
Gain on sales of originated loans, net ...................... 117 96 92
Miscellaneous ............................................... 293 365 347
-------- -------- --------
Total other income ....................................... 528 538 710
-------- -------- --------
Operating expenses:
Compensation and related benefits (Notes 9, 11 and 12) ...... 5,991 4,552 3,420
Occupancy and equipment (Notes 5, 9 and 13) ................. 1,119 791 764
Professional fees (Note 13) ................................. 1,453 1,233 841
Other real estate owned, income, net (Note 4) ............... (512) (886) (718)
Other general and administrative ............................ 1,760 1,250 1,488
-------- -------- --------
Total operating expenses ................................. 9,811 6,940 5,795
-------- -------- --------
Income before for income taxes ........................... 9,900 6,506 3,770
Provision for income taxes (Note 8) .......................... 4,128 2,713 1,399
-------- -------- --------
Net income ............................................... $ 5,772 $ 3,793 $ 2,371
======== ======== ========
Weighted average shares outstanding:
Basic ....................................................... 4,043 3,480 2,238
Diluted ..................................................... 4,316 3,594 2,243
Earnings per share:
Basic ....................................................... $ 1.43 $ 1.09 $ 1.06
Diluted ..................................................... 1.34 1.06 1.06
</TABLE>
See accompanying notes to consolidated financial statements.
B-33
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net
Unrealized
Common Stock Gain (Loss)
------------------ Additional Retained Treasury Stock on Securities
Paid-in Earnings ------------------ Available
Shares Amount Capital (Deficit) Shares Amount for Sale Total
-------- --------- ----------- ----------- -------- --------- -------------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 2,344 $2,344 $ 9,206 $ (1,010) -- $ -- $ (64) $ 10,476
Net income ........................... -- -- -- 2,371 -- -- -- 2,371
Purchase of treasury stock ........... -- -- -- -- 190 (938) -- (938)
Reissuance of treasury stock for
Directors' shares ................... -- -- -- -- -- 2 -- 2
Decrease in unrealized loss on
securities available for sale,
after tax effect .................... -- -- -- -- -- -- 72 72
----- ------ ------- -------- --- ----- ----- -------
Balance at December 31, 1995 2,344 2,344 9,206 1,361 190 (936) 8 11,983
Net income ........................... -- -- -- 3,793 -- -- -- 3,793
Proceeds from sale of common
stock, net (Note 10) ................ 1,725 1,725 8,218 -- -- -- -- 9,943
Issuance of founders' shares
(Note 12) ........................... 137 137 (137) -- -- -- -- --
Issuance of shares in lieu of cash
compensation to Directors ........... 5 5 29 -- -- -- -- 34
Amortization of compensation
costs related to stock options ...... -- -- 10 -- -- -- -- 10
Decrease in unrealized gain on
securities available for sale,
after tax effect .................... -- -- -- -- -- -- (3) (3)
----- ------ ------- -------- --- ----- -------- -------
Balance at December 31, 1996 4,211 4,211 17,326 5,154 190 (936) 5 25,760
Net income ........................... -- -- -- 5,772 -- -- -- 5,772
Issuance of shares in lieu of cash
compensation to Directors ........... 5 5 51 -- -- -- -- 56
Reissuance of treasury stock
under stock options (Note 12)........ -- -- 25 -- (30) 143 -- 168
Amortization of compensation
costs related to stock options ...... -- -- 30 -- -- -- -- 30
Increase in unrealized gain on
securities available for sale,
after tax effect .................... -- -- -- -- -- -- 15 15
----- ------ ------- -------- --- ----- ------- -------
Balance at December 31, 1997 4,216 $4,216 $17,432 $ 10,926 160 $(793) $ 20 $ 31,801
===== ====== ======= ======== === ===== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
B-34
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- ------------
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................... $ 5,772 $ 3,793 $ 2,371
Adjustments to reconcile net income to net cash (used in)
from operating activities:
Provision for loan losses .................................. 325 755 308
Provision for other real estate owned losses ............... 640 82 37
Depreciation and amortization of banking premises
and equipment, net ........................................ 418 284 207
Other amortization and accretion, net ...................... (6,299) (4,036) (2,913)
SBA loans originated for sale .............................. -- (1,135) (2,780)
Sales of SBA loans ......................................... -- 1,641 2,570
Gain on sales of securities available for sale ............. (41) -- (97)
Gain on sales of loans ..................................... (117) (2) --
Net gain on sale and disposition of other real estate
owned ..................................................... (1,088) (886) (459)
Deferred tax (benefit) provision ........................... (804) 1,155 1,352
Other, net ................................................. (639) 2,283 (175)
---------- ---------- ---------
Net cash (used in) from operating activities .............. (1,833) 3,934 421
---------- ---------- ---------
Cash flows from investing activities:
Net decrease in interest-bearing deposits in banks ........... 97 92 116
Purchases of securities available for sale ................... (11,977) (27,970) (9,844)
Maturities of securities available for sale .................. 3,000 32,000 5,000
Sales of securities available for sale ....................... 7,031 -- 8,762
Purchase of Federal Home Loan Bank of Boston stock ........... (72) (491) --
Loan (originations), net of amortization and payoffs ......... 49,803 30,820 (6,641)
Purchases of loans ........................................... (129,191) (85,091) (30,225)
Sales of loans ............................................... 8,480 2,147 --
Additions to other real estate owned ......................... (498) (48) (436)
Sales of and payments received on other real estate
owned ....................................................... 7,901 4,891 1,836
Additions to banking premises and equipment, net ............. (2,943) (593) (3,597)
---------- ---------- ---------
Net cash used in investing activities ..................... (68,369) (44,243) (35,029)
---------- ---------- ---------
(continued)
</TABLE>
See accompanying notes to consolidated financial statements.
B-35
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Concluded)
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits ..................................... 85,947 50,522 29,097
Proceeds from sale of common stock, net ...................... -- 9,943 --
Payments to acquire treasury stock ........................... -- -- (938)
Proceeds from exercise of stock options ...................... 168
Proceeds from reissuance of treasury stock ................... -- -- 2
------ ------ ------
Net cash from financing activities ........................ 86,115 60,465 28,161
------ ------ ------
Net change in cash and cash equivalents ................. 15,913 20,156 (6,447)
Cash and cash equivalents at beginning of year ................ 30,287 10,131 16,578
------ ------ ------
Cash and cash equivalents at end of year ...................... $ 46,200 $ 30,287 $ 10,131
======== ======== ========
Supplemental cash flow information:
Interest paid on deposits .................................... $ 12,685 $ 8,487 $ 6,573
Income taxes paid, net ....................................... 5,907 460 117
Transfers from loans to other real estate owned .............. 5,858 2,687 561
Transfers from other real estate owned to loans .............. -- -- 791
Additional deferred tax assets in connection with Merger ..... -- -- 841
</TABLE>
See accompanying notes to consolidated financial statements.
B-36
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of Atlantic
Bank and Trust Company (the "Bank") and its wholly-owned subsidiary, CHB Realty
Corp., which holds other real estate owned. All significant intercompany
balances and transactions have been eliminated in consolidation.
Use of Estimates
In preparing consolidated financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the
allowance for losses on loans, the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans, the allocation of
purchase discount between amortizing and non-amortizing portions, and the rate
at which discount is accreted into interest income.
Business
The Bank's primary business lines include the acquisition of discounted
commercial loans from private sector sellers and government agencies and the
origination of various types of secured commercial loans. The Bank has
historically employed a wholesale funding strategy consisting primarily of
marketing certificates of deposits to a national customer base. Its primary
deposit products are certificates of deposit and money market accounts.
Cash equivalents
Cash equivalents include amounts due from banks and federal funds sold on
a daily basis.
Interest-bearing deposits in banks
Interest-bearing deposits in banks consist of deposits pledged in
connection with the development of other real estate owned.
Investments
Management has elected to classify all investment securities as securities
available for sale which are reflected at fair value. Unrealized gains and
losses are excluded from earnings and reported as a separate component of
stockholders' equity, net of tax effect.
Purchase premiums and discounts are amortized to earnings by a method that
approximates the interest method over the terms of the investments. Gains and
losses on disposition of investments are computed by the specific
identification method.
Loans
The Bank grants commercial, mortgage and Small Business Administration
("SBA") guaranteed loans to customers. A substantial portion of the loan
portfolio is represented by commercial loans in the New England area. The
ability of the Bank's debtors to honor their contracts is dependent upon the
real estate and general economic sectors.
Loans, as reported, have been reduced by discounts on loans purchased, net
deferred loan fees and the allowance for loan losses. Interest on loans is
recognized on a simple interest basis.
B-37
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(continued)
Loans (concluded)
The accrual of interest is discontinued when the collectibility of
principal and interest is uncertain, or payment of principal and interest have
become contractually delinquent ninety days or more. However, a loan may remain
on accrual status if the value of the collateral securing the loan is deemed
sufficient to cover principal or carrying value and the accrual of interest
thereon. Interest income previously accrued on such discontinued interest loans
is generally reversed against current period interest income. Contractual
delinquency on purchased loans is determined prospectively from the purchase
date rather than from the origination date.
The Bank sells the guaranteed portion of SBA loans to investors. Gains are
recognized on these sales based on the excess of the fair value of the sold
portion over cost at the time of sale. The excess fair value over the cost of
the retained portion is deferred and amortized to interest income by a method
which approximates the interest method over the estimated lives of the loans.
Generally, all loans in a purchased pool of loans are accounted for on an
aggregate basis. The amortizing portion of discounts on purchased loan pools
representing market yield adjustments is accreted into interest income over the
lives of the loans, as adjusted for estimated prepayments, using a method which
approximates the interest method. The remaining non-amortizing portion of
discounts on loans purchased is accounted for on the cost recovery method until
it is determined that the amount and timing of collections are reasonably
estimable and collection is probable. At such time, if the amount that is
probable of collection is greater than the net carrying value of the purchased
loans, the difference is transferred from the non-amortizing portion of
discount to the amortizing portion, and is accreted into interest income over
the remaining lives of the loans on a method approximating the interest method.
Under the Bank's loan rating system, each loan is evaluated, and where
necessary, specific allowances are established and allocated from the
respective loan pool's non-amortizing discount and if none is available, from
the respective loan pool's amortizing discount, and further, if none is
available, an allowance is established through a charge to interest income.
Net deferred loan fees are amortized as an adjustment of the related loan
yields using a method which approximates the interest method.
Allowance for loan losses
The allowance for loan losses is established through a provision for loan
losses charged to earnings and is maintained at a level considered adequate to
provide for reasonably foreseeable loan losses.
The provision and the level of the allowance are evaluated on a regular
basis by management and are based upon management's periodic review of the
collectibility of the loans in light of known and inherent risks in the nature
and volume of the loan portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral and
prevailing economic conditions. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant change. Ultimately,
losses may vary from current estimates and future additions to the allowance
may be necessary.
Loan losses are charged against the allowance when management believes the
collectibility of the loan balance is unlikely. Subsequent recoveries, if any,
are credited to the allowance.
A loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are
not classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed.
B-38
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(continued)
Allowance for loan losses (concluded)
Impairment is measured on a loan-by-loan basis by comparing the Bank's
recorded investment in the loan to the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's obtainable
market price, or the fair value of the collateral if the loan is collateral
dependent. In the case of the Bank's purchased loan portfolio, the recorded
investment represents the Bank's purchase price net of any related
non-amortizing discounts. Substantially all of the Bank's loans which have been
identified as impaired have been measured by the fair value of existing
collateral.
Other real estate owned
Other real estate owned is held for sale and carried at the lower of cost
or fair value less estimated costs to sell. Troubled loans are transferred to
other real estate owned upon completion of formal foreclosure proceedings.
Real estate properties acquired through foreclosure are initially recorded
at the lower of cost or fair value at the date of foreclosure. Costs relating
to the development and improvement of property are capitalized, whereas costs
relating to holding property are expensed.
Valuations are periodically performed by management, and an allowance for
losses is established through a charge to operations if the carrying value of a
property exceeds its fair value less estimated costs to sell.
Banking premises and equipment
Premises and equipment are carried at cost, less accumulated depreciation
and amortization computed on the straight-line method over the estimated useful
lives of the assets or terms of the leases, if shorter.
It is general practice to charge the cost of maintenance and repairs to
earnings when incurred; major expenditures for betterments are capitalized and
depreciated.
Excess of net assets acquired over cost
The excess of net assets acquired over cost pertains to the Chestnut Hill
Bank & Trust Company Merger (the "Merger") and is included in other
liabilities. The merger was accounted for using the purchase method of
accounting and the excess of net assets acquired over cost is amortized by the
straight-line method over 15 years.
Income taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted accordingly
through the provision for income taxes. The Bank's base amount of its federal
income tax reserve for loan losses is a permanent difference for which there is
no recognition of a deferred tax liability. However, the loan loss allowance
maintained for financial reporting purposes is a temporary difference with
allowable recognition of a related deferred tax asset, if it is deemed
realizable.
Stock compensation
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," the Bank has adopted a fair
value based method of accounting for employee stock option agreements.
Compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
B-39
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(concluded)
Earnings per share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share" which requires that earnings per share be
calculated on a basic and a dilutive basis. Basic earnings per share represents
income available to common stockholders divided by the weighted-average number
of common shares outstanding during the period. Diluted earnings per share
reflects additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to income
that would result from the assumed conversion. Potential common shares that may
be issued by the Bank relate solely to outstanding stock options, and are
determined using the treasury stock method. The assumed conversion of
outstanding dilutive stock options would increase the shares outstanding but
would not require an adjustment to income as a result of the conversion. The
Statement is effective for interim and annual periods ending after December 15,
1997, and requires the restatement of all prior-period earnings per share data
presented. Accordingly, the Bank has restated all earnings per share data
presented herein.
Recent accounting pronouncements
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. Accounting
principles generally require that recognized revenue, expenses, gains and
losses be included in net income. Certain FASB statements, however, require
entities to report specific changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities, as a separate
component in the equity section of the balance sheet. Such items, along with
net income, are components of comprehensive income. SFAS No. 130 requires that
all items of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Additionally,
SFAS No. 130 requires that the accumulated balance of other comprehensive
income be displayed separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. The Bank will adopt these
disclosure requirements beginning in the first quarter of 1998.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual and
interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Generally, financial information is required to be reported on the basis that
it is used internally for evaluating segment performance and deciding how to
allocate resources to segments. The Statement also requires descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used by the
enterprise in its general-purpose financial statements, and changes in the
measurement of segment amounts from period to period. Management has not yet
determined how the adoption of SFAS No. 131 will impact the Bank's financial
reporting.
(2) SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of U.S. government obligations
classified by contractual maturity follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1997 1996
------------------------ ------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ---------- ----------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Within 1 year .................. $ 1,999 $ 2,001 $ 3,996 $ 4,002
Over 1 year to 5 years ......... 4,983 5,015 992 994
------- ------- ------- -------
$ 6,982 $ 7,016 $ 4,988 $ 4,996
======= ======= ======= =======
</TABLE>
B-40
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
(2) SECURITIES AVAILABLE FOR SALE--(concluded)
Proceeds from the sale of securities available for sale for the year ended
December 31, 1997 and 1995 were $7,031,000 and $8,762,000, respectively. Gross
gains of $41,000 and $97,000 were realized in 1997 and 1995, respectively.
There were no sales of securities available for sale in 1996.
Gross unrealized gains were $34,000 and $8,000, at December 31, 1997 and
1996, respectively. There were no gross unrealized losses at December 31, 1997
and 1996.
At December 31, 1996, the Bank had pledged a U.S. Government obligation
with an amortized cost of $992,000 and fair value of $994,000, as collateral
against its bond and depository account with the U.S. Department of Justice.
(3) LOANS, NET
A summary of the balances of loans follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------------ -------------
(In Thousands)
<S> <C> <C>
Purchased loan portfolio:
Mortgage loans on real estate:
Commercial real estate ........................ $ 156,138 $ 93,220
Land .......................................... 7,655 6,566
Other ......................................... 59,804 48,293
--------- ---------
Total ....................................... 223,597 148,079
Secured commercial ............................. 2,134 2,889
Other .......................................... 1,416 1,260
--------- ---------
Total purchased loan portfolio .............. 227,147 152,228
Less discount:
Non-amortizing portion ........................ (22,132) (24,387)
Amortizing portion ............................ (18,052) (13,805)
--------- ---------
Total purchased loan portfolio, net ......... 186,963 114,036
--------- ---------
Originated loans:
Mortgage loans on real estate:
Commercial real estate ........................ 45,366 29,069
Land .......................................... 1,062 1,391
Other ......................................... 13,737 20,397
--------- ---------
Total ....................................... 60,165 50,857
Secured commercial ............................. 8,334 17,888
SBA loans ...................................... 1,221 2,550
Other .......................................... 810 831
--------- ---------
Total originated loans ...................... 70,530 72,126
Less:
Allowance for loan losses ...................... (2,273) (1,965)
Net deferred loan income ....................... (388) (500)
--------- ---------
Total originated loans, net ................. 67,869 69,661
--------- ---------
Total loans, net ............................ $ 254,832 $ 183,697
========= =========
</TABLE>
B-41
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
(3) LOANS, NET--(continued)
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year ..................... $ 1,965 $ 1,265 $ 1,513
Provision for loan losses ........................ 325 755 308
Transfer from allowance for losses on
in-substance foreclosures ....................... -- -- 229
Recoveries ....................................... 189 125 187
------- ------- -------
2,479 2,145 2,237
Loans charged-off ................................ (206) (180) (972)
------- ------- -------
Balance at end of year ........................... $ 2,273 $ 1,965 $ 1,265
======= ======= =======
</TABLE>
The following is a summary of the recorded investment in impaired loans
(See Note 1):
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
---------- ----------
(In Thousands)
<S> <C> <C>
Originated loans with no valuation allowance ...................... $ 795 $ 232
Originated loans with a corresponding valuation allowance ......... 1,118 3,535
------- -------
$ 1,913 $ 3,767
======= =======
Corresponding valuation allowance ................................. $ 270 $ 703
======= =======
Purchased loans, net of non-amortizing discount of $1,382,000--
1997; $576,000--1996 ............................................. $10,019 $ 2,717
======= =======
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997 1996 1995
---------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Average investment in impaired loans ................. $13,737 $5,393 $3,409
======= ====== ======
Interest income recognized on impaired loans ......... $ 542 $ 393 $ 160
======= ====== ======
Interest income recognized on a cash basis on
impaired loans ...................................... $ 210 $ 147 $ 105
======= ====== ======
</TABLE>
No additional funds are committed to be advanced in connection with
impaired loans.
Included in impaired loans at December 31, 1997 and 1996 are $597,000 and
$674,000 of restructured loans, respectively. Of these totals, $252,000 and
$324,000 are on non-accrual at December 31, 1997 and 1996, respectively.
Non-accrual loans classified as non-performing totaled $6,918,000 and
$3,106,000 at December 31, 1997 and 1996, respectively. Interest not accrued on
such loans amounted to $2,134,000 and $843,000 at December 31, 1997 and 1996,
respectively. Additionally loans purchased in the fourth quarters of 1997 and
1996 with net carrying values of $2,160,000 and $23,808,000, at December 31,
1997 and 1996, respectively, while non-performing at the time of purchase based
on original loan contracts, were not classified as such unless they become
non-performing based on
B-42
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
(3) LOANS, NET--(concluded)
the acquisition dates. As of December 31, 1997 and 1996, the Bank had not yet
begun to recognize interest income on such loans; many of the loans were in the
process of being restructured. Interest income was recognized upon receipt of
payments based either on the original loan contracts or as restructured by the
Bank.
Loans serviced for others amounted to $3,906,000 and $7,378,000 at
December 31, 1997 and 1996, respectively. There were no loans with unexpired
recourse provisions at December 31, 1997 or 1996.
(4) OTHER REAL ESTATE OWNED
Other real estate owned is comprised of:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
---------- ----------
(In Thousands)
<S> <C> <C>
Real estate acquired in settlement of loans ......... $ 3,692 $ 4,788
Less allowance for losses ........................... (101) (100)
------- -------
$ 3,591 $ 4,688
======= =======
</TABLE>
An analysis of the allowance for losses on other real estate owned is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year ...................... $ 100 $ 18 $ 475
Provision for losses .............................. 640 82 37
Allowance for in-substance foreclosures
transferred to allowance for loan losses ......... -- -- (229)
Charge-offs ....................................... (639) -- (265)
------ ----- ------
Balance at end of year ............................ $ 101 $ 100 $ 18
====== ===== ======
</TABLE>
Other real estate owned income, net included the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1996 1995
-------- ------ ------
(In Thousands)
<S> <C> <C> <C>
Net gain on sale of and disposition of properties ......... $1,088 $ 886 $ 459
Provision for losses ...................................... (640) (82) (37)
Rental income, net ........................................ 64 82 296
------ ----- -----
Other real estate owned income, net ....................... $ 512 $ 886 $ 718
====== ===== =====
</TABLE>
B-43
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
(5) BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of
premises and equipment and their estimated useful lives follows:
<TABLE>
<CAPTION>
December 31,
-------------------- Estimated
1997 1996 Useful Lives
--------- -------- -------------
(In Thousands)
<S> <C> <C> <C>
Land ................................................... $1,288 $ 1,288
Buildings .............................................. 2,559 2,460 20-25 years
Leasehold improvements ................................. 485 485 10 years
Furniture and equipment ................................ 1,060 856 3-7 years
Renovations in progress ................................ 2,851 211
------ -------
8,243 5,300
Less accumulated depreciation and amortization ......... 1,507) (1,089)
------ -------
$6,736 $ 4,211
====== =======
</TABLE>
Included in land and buildings at December 31, 1997 and 1996 is an office
building with a net book value amounting to $2,918,000 and $2,949,000,
respectively, located in Boston, Massachusetts that the Bank purchased for use
as its future main office. At December 31, 1997, this building was being
renovated. It is anticipated that the total cost of these renovations will
approximate $8,200,000. The Bank relocated to this location in February, 1998.
Depreciation and amortization expense for the years ended December 31,
1997, 1996 and 1995 amounted to $418,000, $284,000 and $207,000, respectively.
(6) DEPOSITS
A summary of deposit balances, by type, is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
------------ ------------
(In Thousands)
<S> <C> <C>
Demand ............................. $ 5,622 $ 8,046
--------- ---------
NOW ................................ 1,435 1,429
Savings ............................ 1,100 833
Money market ....................... 11,469 5,549
Certificates of deposit ............ 265,896 183,718
--------- ---------
Total interest bearing ......... 279,900 191,529
--------- ---------
Total deposits ................. $ 285,522 $ 199,575
========= =========
</TABLE>
B-44
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
(6) DEPOSITS--(concluded)
A summary of certificates of deposit by maturity is as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------- ------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------------ ---------- ------------ ---------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Within 1 year .................. $ 237,645 5.92% $ 176,819 5.83%
Over 1 year to 3 years ......... 27,889 6.05 4,484 6.06
Over 3 years ................... 362 5.79 2,415 6.90
--------- ---------
$ 265,896 5.93% $ 183,718 5.85%
========= =========
</TABLE>
Included in time deposits are certificates of deposits with minimum
denominations of $100,000 amounting to approximately $127,620,000 and
$48,115,000 at December 31, 1997 and 1996, respectively. Approximately
$211,842,000 and $129,624,000 in certificates of deposit are from geographical
areas outside of New England at December 31, 1997 and 1996, respectively. The
Bank accepts deposits made by brokers who place funds for their customers on
deposit with the Bank. At December 31, 1997 and 1996, brokered deposits
amounted to $67,212,000 and $198,000, respectively.
(7) AVAILABLE LINE OF CREDIT
The Bank has an available line of credit with the Federal Home Loan Bank
of Boston at an interest rate that adjusts daily. Borrowings under the line are
limited to 2% of the Bank's total assets and would be secured by a blanket lien
on qualified collateral, defined principally as 75% of the carrying value of
first mortgage loans on owner-occupied residential property and 90% of the
market value of U.S. government and federal agency securities.
(8) INCOME TAXES
Allocation of federal and state income taxes between current and deferred
portions is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996 1995
---------- ---------- -----------
(In Thousands)
<S> <C> <C> <C>
Current tax provision (benefit):
Federal ....................................... $ 3,666 $ 1,154 $ 190
Utilization of loss carryovers ................ (82) (84) (190)
State ......................................... 1,348 488 47
------- ------- -------
4,932 1,558 47
------- ------- -------
Deferred tax provision (benefit):
Federal ....................................... (577) 881 1,112
State ......................................... (227) 274 445
------- ------- -------
(804) 1,155 1,557
------- ------- -------
Reversal of valuation reserve due to current and
anticipated future income ..................... -- -- (205)
------- ------- -------
Total provision ............................ $ 4,128 $ 2,713 $ 1,399
======= ======= =======
</TABLE>
B-45
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
(8) INCOME TAXES--(continued)
The reasons for the differences between the statutory federal income tax
rate and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Statutory federal tax rate ................................ 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State tax ................................................ 7.5 7.7 8.3
Reversal of deferred tax asset valuation reserve ......... -- -- (5.5)
Other, net ............................................... 0.2 -- 0.3
---- ---- ----
Effective tax rates ....................................... 41.7% 41.7% 37.1%
==== ==== ====
</TABLE>
The components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
----------- -----------
(In Thousands)
<S> <C> <C>
Deferred tax liability:
Federal ........................................ $ 1,116 $ 1,685
State .......................................... 386 582
-------- --------
1,502 2,267
-------- --------
Deferred tax asset:
Federal ........................................ (1,030) (1,030)
State .......................................... (315) (287)
-------- --------
(1,345) (1,317)
Valuation reserve on deferred tax asset ......... 123 123
-------- --------
(1,222) (1,194)
-------- --------
Net deferred tax liability ...................... $ 280 $ 1,073
======== ========
</TABLE>
The tax effects of each type of income and expense item that gives rise to
deferred taxes follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
--------- ---------
(In Thousands)
<S> <C> <C>
Allowance for loan losses ............. $ 432 $ 537
Purchased loan discount ............... 118 921
Net operating loss carryovers ......... (118) (200)
Investments ........................... (123) (123)
Other ................................. (152) (185)
------ ------
157 950
Valuation reserve ..................... 123 123
------ ------
Net deferred tax liability ............ $ 280 $1,073
====== ======
</TABLE>
B-46
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
(8) INCOME TAXES--(concluded)
A summary of the change in the net deferred tax liability (asset) is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1996 1995
--------- ----------- ----------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year ............................. $1,073 $ (79) $ (258)
Deferred tax (benefit) provision ......................... (804) 1,155 1,557
Amount acquired in connection with merger, net ........... -- -- (90)
Reversal of valuation reserve:
Through operations ...................................... -- -- (205)
Applied to goodwill ..................................... -- -- (1,089)
Unrealized gain on securities available for sale ......... 11 (3) 6
------ -------- --------
Balance at end of year ................................... $ 280 $1,073 $ (79)
====== ======= ========
</TABLE>
The change in the valuation reserve is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1996 1995
------ ------ ----------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year ...................... $123 $123 $ 1,327
Amount acquired in connection with merger ......... -- -- 90
Reversal of valuation reserve:
Through operations ............................... -- -- (205)
Applied to goodwill .............................. -- -- (1,089)
---- ---- --------
Balance at end of year ............................ $123 $123 $ 123
==== ==== ========
</TABLE>
On December 31, 1994, the Bank consummated the Merger with Chestnut Hill.
A valuation reserve of $1,122,000 was established against the deferred tax
assets obtained from the Merger. By December 31, 1995, the Bank generated
sufficient ordinary taxable income so that a valuation reserve was no longer
required. The utilization of the valuation reserve associated with the Merger
reduced, in part, intangibles associated with the assets acquired. The
remainder of the reduction of the valuation reserve was recognized through
income. The remaining valuation reserve of $123,000 relates to an unrealized
capital loss on an investment whose realization would require the generation of
income taxable as a capital gain. The Bank does not anticipate generating such
capital gains.
At December 31, 1997, the Bank has an available net operating loss
carryforward for federal income tax purposes of approximately $346,000, which
expires in 2009, all of which is attributable to the Merger. The Bank
anticipates that this carryforward, while subject to annual limitation, will
eventually be realized.
(9) COMMITMENTS AND CONTINGENCIES
Litigation
The Bank is a party to routine litigation incidental to its business,
including a variety of legal proceedings with borrowers or others which
contribute significantly to expense, including the costs of carrying
non-performing assets. Management does not expect that the ultimate liability,
if any, upon the final disposition of such pending proceedings will have a
material adverse effect on the Bank's consolidated financial condition or
results of operations.
B-47
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
(9) COMMITMENTS AND CONTINGENCIES--(continued)
Loan commitments
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit. Such
commitments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss is represented by the contractual
amount of these commitments. The Bank uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.
The following financial instruments were outstanding whose contract
amounts represent credit risk:
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
-------- ---------
(In Thousands)
<S> <C> <C>
Commitments to grant loans ....................................... $ 500 $2,670
Unadvanced funds on commercial and other lines-of-credit ......... 3,051 4,101
Unadvanced funds on construction loans ........................... -- 78
Standby letters-of-credit ........................................ 47 150
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The commitments for lines-of-credit may
expire without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. Home equity
lines-of-credit are collateralized by real estate. Collateral held for
commercial lines-of-credit may include accounts receivable, inventory,
property, plant and equipment and income producing commercial properties.
Standby letters-of-credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Those
letters-of-credit are primarily issued to support private borrowing
arrangements and they expire within one year. The credit risk involved in
issuing letters-of-credit is essentially the same as that involved in extending
loan facilities to customers. The Bank generally holds deposit accounts as
collateral supporting those commitments if deemed necessary.
Operating lease commitments
Pursuant to the terms of noncancelable lease agreements in effect at
December 31, 1997, pertaining to banking premises, future minimum rent
commitments aggregate $109,000 through 1998.
Total rent expense for the years ended December 31, 1997, 1996 and 1995
approximated $592,000, $432,000 and $465,000, respectively.
Employment agreements
The Bank has entered into employment agreements, each dated December 22,
1994 and effective January 1, 1995 and amended as of July 11, 1995 (each such
agreement, as amended, an "Employment Agreement"), with two officers for an
initial term of three years. On January 1, 1996 and on each January 1
thereafter, each Employment Agreement then in effect shall be extended
automatically for an additional one-year period unless, within a specified
time, either party to such Employment Agreement gives written notice to the
other of such party's election not to so extend the term of such Employment
Agreement. Each effective Employment Agreement provides, among other things,
for (i) an annual base salary (ii) annual minimum increases in base salary
based on the consumer price index, (iii) bonus
B-48
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
(9) COMMITMENTS AND CONTINGENCIES--(concluded)
Employment agreements (concluded)
payments determined in accordance with the bonus plan (the "Bonus Plan")
adopted by the Board of Directors, (iv) insurance and other benefits, and (v)
in the event of (A) termination by the officer upon certain defaults by the
Bank under his Employment Agreement or (B) termination of the officer by the
Bank without cause, aggregate payments (made in monthly installments) equal to
the officer's annual salary then in effect and amounts payable under the Bonus
Plan through the term of the agreement. The Bonus Plan provides for the
quarterly payment of cash bonuses to the officers based on the Bank's projected
attainment of specified annual return on equity goals. Each Employment
Agreement and the Bonus Plan include provisions for termination of the officers
for cause, whereupon payments and benefits cease. Each Employment Agreement
also includes certain confidentially and non-competition provisions. Expense
under the Bonus Plan amounted to $1,566,000, $1,362,000 and $685,000,
respectively, for the years ended December 31, 1997, 1996 and 1995.
On July 10, 1995, the Board of Directors terminated a third officer's
employment pursuant to the terms of the Employment Agreement which was on the
same terms and subject to the same provisions as the Employment Agreements of
the two officers.
(10) STOCKHOLDERS' EQUITY
Common stock offering
Effective April 15, 1996, the Bank completed a common stock offering (the
"Offering"), issuing 1,725,000 shares with net proceeds of $9.9 million after
expenses of $883,000 related to the offering.
Minimum regulatory capital requirements
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of its assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier 1 capital (as defined) to average assets (as
defined). Management believes, as of December 31, 1997, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1997, the Bank is categorized as well capitalized under
the regulatory framework for prompt corrective action, based on the most recent
consolidated Report of Condition and Income filed with the Federal Deposit
Insurance Corporation. To be categorized as well capitalized, it must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set
forth in the following table. The Bank's actual capital amounts and ratios as
of December 31, 1997 and 1996 are also presented in the following tables.
B-49
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
(10) STOCKHOLDERS' EQUITY--(concluded)
Minimum regulatory capital requirements (concluded)
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------------------
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirements Action Provisions
------------------------ ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----------- ---------- ---------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital ............ $33,995 12.84% $ 21,181 8.00% $26,476 10.00%
(to risk weighted assets)
Tier 1 capital ........... 31,722 11.98 10,591 4.00 15,886 6.00
(to risk weighted assets)
Tier 1 capital ........... 31,722 10.55 12,025- 4.00- 15,031 5.00
(to average assets) 15,031 5.00
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------------------------
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirements Action Provisions
------------------------ ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----------- ---------- ---------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital ............ $27,601 14.47% $15,255 8.00% $19,069 10.00%
(to risk weighted assets)
Tier 1 capital ........... 25,636 13.44 7,628 4.00 11,442 6.00
(to risk weighted assets)
Tier 1 capital ........... 25,636 12.05 8,511- 4.00- 10,639 5.00
(to average assets) 10,639 5.00
</TABLE>
(11) EMPLOYEE BENEFIT PLANS
401(k) plan
The Bank maintains a savings plan which qualifies under Section 401(k) of
the Internal Revenue Code. Each employee reaching the age of 21 and having
completed at least 1,000 hours of service in one six-month period beginning
with such employee's date of employment, or anniversary thereof, becomes
eligible to be a participant in the plan. The plan provides for voluntary
contributions by participating employees in amounts up to twenty percent of
their annual compensation, subject to certain limitations. The Bank matches the
employee's voluntary contribution up to three percent of their compensation.
The Bank's contributions vest at a rate of 20% for each year of the employee's
service and fully vest after five years. Total expense for the years ended
December 31, 1997, 1996 and 1995 amounted to approximately $63,000, $38,000 and
$25,000, respectively, under this savings plan.
B-50
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
(12) STOCK OPTION AGREEMENTS AND SHAREHOLDER RIGHTS AGREEMENT
Stock Option Agreements
On January 13, 1988, the Bank entered into stock option agreements (the
"Stock Option Agreements") with certain individuals (the "Optionees"). Exercise
prices were intended to represent the market value of the Bank's stock on the
date of grant. These options expire in December 2087 and all are vested. In
addition, options to purchase up to twenty percent of any shares issued in
connection with future offerings were granted to the Optionees (the founders)
pursuant to the Stock Option Agreements.
On March 29, 1996, the Optionees and the Bank entered into agreements
pursuant to which the Stock Option Agreements were amended to cancel the
founders' rights to receive additional options upon issuances of stock
subsequent to the Offering. In consideration for cancellation of these rights,
the Bank issued the Optionees (the founders) an aggregate of 137,500 shares of
common stock immediately following the Offering. In accordance with SFAS No.
123, the Bank recorded the cost of issued shares as a charge to additional
paid-in capital.
In connection with the common stock Offering in 1996, the Optionees were
granted 345,000 stock options pursuant to the Stock Option Agreements. As these
options were granted in 1988 under a variable plan, they continue to be
accounted for in accordance with Accounting Principles Board Opinion No. 25.
Also, during 1996, certain officers of the Bank were granted an aggregate
of 48,000 options. These options were valued at $88,000, which is being
recognized over the vesting period of three years. The fair value of the
options were determined using the Black Scholes option pricing model with the
following assumptions: dividend yield of zero, expected volatility of 29%,
risk-free interest rate of 6%, and expected lives of 3 years. In accordance
with SFAS No. 123, the Bank recorded charges to expense amounting to $30,000
and $10,000 for the years ended December 31, 1997 and 1996, respectively.
Stock option activity is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------
1997 1996 1995
------------------------- ---------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ---------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ..... 883,700 $ 5.74 490,700 $ 4.93 543,700 $ 4.94
Granted .............................. -- -- 393,000 6.75 -- --
Exercised ............................ (29,188) 5.78 -- -- -- --
Cancelled ............................ -- -- -- -- (53,000) 5.00
------- ------- -------
Outstanding at end of year ........... 854,512 5.74 883,700 5.74 490,700 4.93
======= ======= =======
Exercisable at end of year ........... 822,512 5.70 835,700 5.68 490,700 4.93
======= ======= =======
</TABLE>
Options outstanding at December 31, 1997 consist of the following:
<TABLE>
<CAPTION>
Weighted
Average
Remaining
Exercise Number Contractual Number
Price Outstanding Life Exercisable
- --------------- ------------- ------------- ------------
<S> <C> <C> <C>
$4.80 161,952 90 years 161,952
5.00 313,360 90 years 313,360
6.75 379,200 80 years 347,200
------- -------
854,512 85 years 822,512
======= =======
</TABLE>
B-51
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
(12) STOCK OPTION AGREEMENTS AND SHAREHOLDER RIGHTS AGREEMENT--(concluded)
Shareholder Rights Agreement--(concluded)
Effective March 5, 1996, the Board of Directors adopted a Shareholder
Rights Agreement (the "Rights Agreement"). The purpose of the Rights Agreement
is, among other things, to ensure that stockholders of the Bank receive fair
and equal treatment in the event of any proposed acquisition of the Bank. The
adoption of the Rights Agreement could make it more difficult for a third party
to acquire, or could discourage a third party from acquiring, the Bank or a
large block of the Bank's common stock.
Pursuant to the terms of the Rights Agreement, the Board of Directors
declared a dividend distribution of one Preferred Stock Purchase Right (a
"Right") for each outstanding share of common stock of the Bank to stockholders
of record as of the close of the 1996 stock offering (the "Record Date"). Each
Right entitles the registered holder to purchase from the Bank a unit
consisting of one one-thousandth of a share (a "Unit") of Series A Junior
Participating Cumulative Preferred Stock, par value $1.00 per share (the
"Preferred Stock"), at a cash exercise price of $60.00 per Unit (the "Exercise
Price"), subject to adjustment.
Initially, the Rights are not exercisable and are attached to and trade
with the outstanding shares of common stock. The Rights will separate from the
common stock and will become exercisable upon the earliest of (i) the close of
business on the tenth calendar day (or such other calendar day as the Board of
Directors may determine) following the first public announcement that a person
or group of affiliated or associated persons has acquired beneficial ownership
of 15% of more of the outstanding shares of common stock (an "Acquiring
Person") (the date of said announcement being referred to as the "Stock
Acquisition Date"), (ii) the close of business on the tenth business day (or
such other calendar day as the Board of Directors may determine) following the
commencement of a tender offer or exchange offer that would result upon its
consummation in a person or group becoming the beneficial owner of 15% or more
of the outstanding shares of common stock or (iii) the determination by the
Board of Directors (with the concurrence of a majority of the "Independent
Directors" (as such term is defined in the Rights Agreement)) that any person
is an "Adverse Person" (the earliest of such dates being herein referred to as
the "Distribution Date").
Until the Distribution date (or earlier redemption, exchange or expiration
of the Rights), (a) the Rights will be evidenced by common stock certificates
and will be transferred with and only with such common stock certificates, (b)
new common stock certificates issued after the Record Date will contain a
notation incorporating the Shareholder Rights Agreement by reference, and (c)
the surrender for transfer of any certificates for common stock will also
constitute the transfer of the Rights associated with the common stock
represented by such certificate.
The Rights are not exercisable until the Distribution Date and will expire
in the year 2006, unless previously redeemed or exchanged by the Bank as
described below.
The Rights may be redeemed in whole, but not in part, at a price of $0.01
per Right (payable in cash, common stock or other consideration deemed
appropriate by the Board of Directors) by the Board of Directors only until the
earliest of (i) the date on which a person is declared to be an Adverse person,
(ii) the close of business on the tenth calendar day after the Stock
Acquisition Date, or (iii) the expiration date of the Rights Agreement.
Immediately upon the action of the Board of Directors ordering redemption of
the Rights, the Rights will terminate and thereafter the only right of the
holders of Rights will be to receive the redemption price.
(13) RELATED PARTY TRANSACTIONS
Certain shareholders and certain members of the Board of Directors of the
Bank (or their spouses) are limited partners in Atlantic Holdings Limited
Partnership ("Atlantic Holdings"), an investment partnership. Atlantic Holdings
owned 108,704 of the Bank's outstanding shares of common stock at December 31,
1996. During 1997, Atlantic Holdings distributed its shares of the Bank's
common stock to the partners.
B-52
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
(13) RELATED PARTY TRANSACTIONS--(concluded)
The Bank has engaged in the following significant transactions with
Atlantic Holdings:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996 1995
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Loans to Atlantic Holdings:
Secured by commercial real estate at BankBoston
prime plus 1-1/2% and amortizing over 20 years
Due June 1, 1999 .............................. $195 $ -- $ --
Due March 1, 1997 ............................. -- 230 277
Secured by real estate at Wall Street Journal
prime plus 2%, and amortizing over 15 years
Due September 30, 1998 ........................ 168 -- --
Due September 30, 1997 ........................ -- 183 197
Participation loans:
Bank as lead lender ............................ 50 50 50
Holdings as lead lender* ....................... -- 500 737
Atlantic Holdings' guarantee of loans originated by
the Bank ......................................... -- -- 500
Atlantic Holdings' deposits at the Bank ........... 565 341 17
Fees for administrative services rendered by the
Bank for the Partnership ......................... 77 77 174
Lease costs paid directly to the landlord by the
Bank to sub-let a portion of its quarters from the
Partnership ...................................... 154 -- --
Loans to officers and directors ................... -- -- 761
</TABLE>
* Foreclosed during 1996.
In addition, two of the Bank's officers were associated with a law firm
that provided services to the Bank or its customers. Effective January 1, 1995,
these officers resigned from the firm. The Bank also held deposits of the firm
or its customers of approximately $384,000, $59,000 and $565,000 at December
31, 1997, 1996 and 1995, respectively. The law firm, as special counsel to the
Bank, continues to provide legal services. For the years ended December 31,
1997, 1996 and 1995, respectively, the firm received approximately $436,000,
$547,000, and $518,000, respectively, from the Bank for legal services
provided. Additionally, the Bank paid $305,000, $312,000 and $318,000, for the
years ended December 31, 1997, 1996 and 1995, respectively, of lease costs
directly to the landlord to sub-let a portion of its quarters from the law
firm.
B-53
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of estimated fair values of all financial instruments where
it is practicable to estimate such values. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Bank.
The following methods and assumptions were used by the Bank in estimating
fair value disclosures for financial instruments:
Cash and cash equivalents
The carrying amounts of cash and federal funds sold approximate fair
values.
Interest-bearing deposits in banks
The carrying amounts of interest-bearing deposits approximate their fair
market values.
Securities available for sale
Fair values of investment securities are based on quoted market prices.
Federal Home Loan Bank of Boston stock
The carrying value of this stock approximates fair value based on the
redemption provisions of the Federal Home Loan Bank of Boston.
Loans
For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. Fair values of
other loans are estimated using discounted cash flow analyses, with interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values of non-performing loans are estimated
primarily by using underlying collateral values.
Deposits
The fair values disclosed for non-certificate accounts are, by definition,
equal to the amount payable on demand at the reporting date which is the
carrying amount. Fair values of certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
of time deposits.
Accrued interest
The carrying amounts of accrued interest approximate fair value.
Off-balance-sheet instruments
Fair values of off-balance-sheet lending commitments are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing, and
since they are not material, are not shown below.
B-54
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS--(concluded)
The estimated fair values, and related carrying amounts, of the Bank's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents ............. $ 46,200 $ 46,200 $ 30,287 $ 30,287
Interest-bearing deposits in
banks ............................... 238 238 335 335
Securities available for sale ......... 7,016 7,016 4,996 4,996
Federal Home Loan Bank of
Boston stock ........................ 563 563 491 491
Loans, net ............................ 254,832 271,561 183,697 196,108
Accrued interest receivable ........... 1,729 1,729 1,208 1,208
Financial liabilities:
Deposits .............................. 285,522 287,162 199,575 200,340
Accrued interest payable .............. 1,178 1,178 594 594
</TABLE>
B-55
<PAGE>
ATLANTIC BANK AND TRUST COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
Years Ended December 31, 1997, 1996 and 1995
(15) QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------------
1997 1996
------------------------------------------------ --------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------------ ----------- ----------- ----------- -------------- ----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend
income (1) ................. $9,639 $ 8,273 $ 7,833 $ 7,032 $ 7,147 $ 5,444 $ 4,826 $ 4,745
Interest expense ............ 3,874 3,371 3,182 2,842 2,539 2,142 1,820 1,998
------ ------- ------- ------- --------- ------- ------- -------
Net interest income ......... 5,765 4,902 4,651 4,190 4,608 3,302 3,006 2,747
Provision for loan
losses ..................... 50 -- 50 225 225 125 155 250
------ ------- ------- ------- --------- ------- ------- -------
Net interest income,
after provision for
loan losses ................ 5,715 4,902 4,601 3,965 4,383 3,177 2,851 2,497
Other income
(expense) .................. (2) 195 107 228 148 163 84 143
Operating expenses .......... 2,828 2,595 2,457 1,931 2,432(2) 1,666 1,230 1,612
------- ------- ------- ------- ----------- ------- ------- -------
Income before
provision for
income taxes ............... 2,885 2,502 2,251 2,262 2,099 1,674 1,705 1,028
Provision for income
taxes ...................... 1,203 1,043 939 943 875 698 729 411
------- ------- ------- ------- ----------- ------- ------- -------
Net income .................. $1,682 $ 1,459 $ 1,312 $ 1,319 $ 1,224 $ 976 $ 976 $ 617
======= ======= ======= ======= =========== ======= ======= =======
Earnings per share:
Basic ...................... $ 0.41 $ 0.36 $ 0.32 $ 0.33 $ 0.30 $ 0.24 $ 0.26 $ 0.29
======= ======= ======= ======= =========== ======= ======= =======
Diluted .................... $ 0.39 $ 0.34 $ 0.31 $ 0.31 $ 0.29 $ 0.24 $ 0.26 $ 0.28
======= ======= ======= ======= =========== ======= ======= =======
</TABLE>
Notes:
(1) Fluctuations are generally due to increases in the volume of loan
purchases, the level of non-performing assets and the volume of
non-performing loan resolutions during the quarter.
(2) Increase relates primarily to higher incentive based compensation and
expanded staffing in the fourth quarter of 1996.
B-56
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in the Bank's independent public accountants
and no matters of disagreement on accounting and financial disclosure with the
Bank's accountants.
PART III
The information called for by Part III (Items 10 through 13) is
incorporated herein by reference from Atlantic Bank and Trust Company Notice of
Annual Meeting and Proxy Statement for the Annual Meeting of Stockholders to be
held on April 28, 1998 and filed with the Federal Deposit Insurance
Corporation.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a) Contents:
(1) Financial Statements: All Consolidated Financial Statements are
included as Part II, Item 8 of this Report.
(2) All financial statement schedules are omitted because they are not
applicable, the data is not significant, or the required information
is shown elsewhere in this report.
(b) Reports on Form F-3:
None filed during the fourth quarter of 1997.
(c) Exhibits:
(1) Articles of Incorporation and Bylaws
(a) Amended and Restated Articles of Incorporation, as amended
October 28, 1996, of Atlantic Bank and Trust Company+
(b) Amended and Restated Bylaws of Atlantic Bank and Trust Company*
(2) Instruments Defining the Rights of Security Holders
(a) Amended and Restated Articles of Incorporation, as amended
October 28, 1996, of Atlantic Bank and Trust Company (See Exhibit
(1)(a) above)
(b) Amended and Restated Bylaws of Atlantic Bank and Trust Company
(See Exhibit (1)(b) above)
(c) Specimen Certificate of Atlantic Bank and Trust Company Common
Stock, $1.00 par value per share***
(d) Shareholder Rights Agreement, dated April 15, 1996, by and
between Atlantic Bank and Trust Company and Registrar and
Transfer Company****
(3) Material Contracts
(a) Stock Option Agreements
(i) Stock Option Agreement, dated January 13, 1988, as amended
March 29, 1996, by and between Atlantic Bank and Trust
Company and Nicholas W. Lazares**
(ii) Stock Option Agreement, dated January 13, 1988, as amended
March 29, 1996, by and between Atlantic Bank and Trust
Company and Richard Wayne**
(iii) Stock Option Agreement, dated January 13, 1988, as amended
March 29, 1996, by and between Atlantic Bank and Trust
Company and John J. McGeehan**
(iv) Stock Option Agreement, dated January 13, 1988, as amended
March 29, 1996, by and between Atlantic Bank and Trust
Company and Leon Okurowski**
(v) Stock Option Agreement, dated January 13, 1988, as amended
March 29, 1996, by and between Atlantic Bank and Trust
Company and Willard L. Umphrey**
(vi) Stock Option Agreement, dated December 22, 1994, as amended
August 22, 1996, by and between Atlantic Bank and Trust
Company and Nicholas W. Lazares*****
(vii) Stock Option Agreement, dated December 22, 1994, as amended
August 22, 1996, by and between Atlantic Bank and Trust
Company and Richard Wayne*****
B-57
<PAGE>
(viii) Stock Option Agreement, dated August 22, 1996, by and
between Atlantic Bank and Trust Company and John L.
Champion*****
(ix) Stock Option Agreement, dated August 22, 1996, by and
between Atlantic Bank and Trust Company and Demetrios J.
Kyrios*****
(x) Stock Option Agreement, dated August 22, 1996, by and
between Atlantic Bank and Trust Company and W. Kenneth
Weidman, Jr.*****
(b) Employment Agreements
(i) Employment Agreement, dated December 22, 1994, as amended,
by and between Nicholas W. Lazares and Atlantic Bank and
Trust Company*
(ii) Employment Agreement, dated December 22, 1994, as amended,
by and between Richard Wayne and Atlantic Bank and Trust
Company*
(c) Severance and Settlement Agreement and Release, dated December
31, 1996, as amended January 23, 1997, by and between Atlantic
Bank and Trust Company and Arthur M. Santos*****
(d) Executive Supplemental Benefit Agreements
(i) Split-Dollar Life Insurance Agreement, dated August 15,
1995, by and between Nicholas W. Lazares and Atlantic Bank
and Trust Company*
(ii) Split-Dollar Life Insurance Agreement, dated August 15,
1995, by and between Richard Wayne and Atlantic Bank and
Trust Company*
(iii) Split-Dollar Life Insurance Agreement, dated February 1,
1997, by and between Demetrios J. Kyrios and Atlantic Bank
and Trust Company+
(e) Lease, dated November 12, 1987, as amended, for 200 State Street,
Boston, MA expiring November, 1997*
(f) Amended and Restated Service Agreement, by and among Atlantic
Bank and Trust Company, Atlantic Holdings Limited Partnership and
AB&T, Inc., dated September 1, 1993*
(g) Underwriters Agreement, by and between Atlantic Bank and Trust
Company and Friedman, Billings, Ramsey & Co., Inc., dated April
15, 1996*****
(4) Statement Regarding Computation of Per Share Earnings
Such computation can be readily determined from the material
contained in this Annual Report on Form 10-K.
(5) Statement Regarding Computation of Ratios
As the Bank does not have any debt securities registered under
Section 12 of the Act, no ratio of earnings to fixed charges
appears in the Annual Report on Form 10-K.
(6) Annual Report to Security Holders
The Atlantic Bank and Trust Company 1997 Annual Report is furnished
only for the information of the Federal Deposit Insurance
Corporation and is not deemed to filed herewith.
(7) Letter Regarding Change in Accounting Principles
None
(8) Previously Unfiled Documents
None
(9) Subsidiaries of the Bank
CHB Realty Corp., a Massachusetts corporation.
+ Filed herewith
* Filed as Exhibit to the Registration Statement on Form F-1 filed with the
FDIC on March 19, 1996
** Filed as Exhibit to the Registration Statement on Form F-1/A
(Pre-Effective Amendment No. 2) filed with the FDIC on April 2, 1996
*** Filed as Exhibit to the Registration Statement on Form F-1/A
(Post-Effective Amendment No. 2) filed with the FDIC on April 17, 1996
**** Filed as Exhibit to the Registration Statement on Form F-10 filed with
the FDIC on April 15, 1996
***** Filed as an Exhibit to the Annual Report on Form F-2 filed with the FDIC
on March 18, 1997
B-58
<PAGE>
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Bank has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Atlantic Bank and Trust Company
By: /s/ Nicholas W. Lazares
--------------------
Nicholas W. Lazares
Chairman, Co-Chief Executive Officer and
Director
By: /s/ Richard Wayne
--------------------
Richard Wayne
President, Co-Chief Executive Officer and
Director
Date: March 24, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Bank and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Nicholas W. Lazares Chairman, Co-Chief March 24, 1998
- ---------------------------- Executive Officer and Director
Nicholas W. Lazares
/s/ Richard Wayne President, Co-Chief March 24, 1998
- ---------------------------- Executive Officer and Director
Richard Wayne
/s/ John L. Champion Senior Vice President and March 24, 1998
- ---------------------------- Chief Financial Officer
John L. Champion
/s/ Nancy E. Coyle Vice President and Controller March 24, 1998
- ----------------------------
Nancy E. Coyle
Director
- ----------------------------
L. Dennis Kozlowski
/s/ Georgia Murray Director March 24, 1998
- ----------------------------
Georgia Murray
/s/ Anthony L. Rodes Director March 24, 1998
- ----------------------------
Anthony L. Rodes
/s/ Alan R. Stone Director March 24, 1998
- ----------------------------
Alan R. Stone
Director
- ----------------------------
Louis N. Vinios
</TABLE>
B-59
<PAGE>
================================================================================
You should rely only on the information incorporated by reference or contained
in this prospectus or any supplement. We have not authorized anyone else to
provide you with different or additional information. We are not making an
offer of these securities in any state where the offer is not permitted. You
should not assume that the information in this prospectus or any supplement is
accurate as of any date other than the date on the front of those documents.
--------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Prospectus Summary .............................. 1
Risk Factors .................................... 7
Corporate Structure and
Benefits to the Bank ......................... 12
Use of Proceeds ................................. 14
Dividend Policy ................................. 14
Capitalization .................................. 15
Business ........................................ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................... 27
Management ...................................... 31
Description of the Series A Preferred Shares 33
Description of Capital Stock .................... 36
Federal Income Tax Considerations ............... 37
ERISA Considerations ............................ 46
Certain Information Regarding the Bank .......... 49
Underwriting .................................... 54
Legal Matters ................................... 55
Independent Auditors ............................ 55
Available Information ........................... 55
</TABLE>
Until ________, 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
1,200,000 Shares
Atlantic Preferred
Capital Corporation
__% Non-Cumulative Exchangeable
Preferred Stock, Series A
--------------------------------------------------------
P R O S P E C T U S
--------------------------------------------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
ADVEST, INC.
, 1998
================================================================================
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Registration Fee ..................... $ 9,591
NASD Fee ............................. 3,950
Nasdaq Listing Fee ................... 38,750
Printing Expenses .................... *
Legal Fees and Expenses .............. $300,000
Accounting Fees and Expenses ......... 40,000
Blue Sky Fees and Expenses ........... 5,000
Miscellaneous ........................ *
--------
Total ................................ $600,000
========
</TABLE>
- ------------
*To be completed by amendment.
ITEM 31. SALES TO SPECIAL PARTIES.
See response to Item 32 below.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth below is information regarding the number of shares of capital
stock of the Company since its inception in March, 1998. Further included is
the consideration received by the Company for such shares, and the information
relating to the section of the Securities Act of 1933, as amended (the
"Securities Act"), or the rule of the Securities and Exchange Commission under
which exemption from registration was claimed.
(1) On March 31, 1998, the Company issued 100 shares of its common stock to
Atlantic Bank and Trust Company (the "Bank") for an aggregate purchase
price of $140.7 million, in reliance on Section 4(2) of the Securities
Act. Subsequently, the Bank transferred the shares of common stock to CHB
Realty Corp., a wholly-owned subsidiary of the Bank ("CHB").
(2) On March 31, 1998, the Company issued 1,000 shares of its 8% Cumulative
Non-Convertible Preferred Stock, Series B to the Bank for an aggregate
purchase price of $1,000,000, in reliance on Section 4(2) of the
Securities Act. Subsequently, the Bank transferred 800 of such shares to
CHB.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is a Massachusetts corporation. Reference is made to Chapter
156B, Section 13 of the Massachusetts Business Corporation Law (the "MBCL"),
which enables a corporation in its original articles of organization or an
amendment thereto to eliminate or limit the personal liability of a director
for monetary damages for violations of the director's fiduciary duty, except
(1) for any breach of the director's duty of loyalty to the corporation or its
stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) pursuant to Sections
61 and 62 of the MBCL (providing for liability of directors for authorizing
illegal distributions and for making loans to directors, officers and certain
shareholders) or (4) for any transaction from which a director derived an
improper personal benefit.
Reference also is made to Chapter 156B, Section 67 of the MBCL, which
provides that a corporation may indemnify directors, officers, employees and
other agents and persons who serve at its request as directors, officers,
employees or other agents of another organization or who serve at its request
in any capacity with respect to any employee benefit plan, to the extent
specified or authorized by the articles of organization, a by-law adopted by
the stockholders or a vote adopted by the holders of a majority of the shares
of stock entitled to vote on the election of directors. Such indemnification
may include payment by the corporation of expenses incurred in defending a
civil or criminal action or proceeding in advance of the final disposition of
such action or proceeding, upon receipt of an undertaking by the person
indemnified to repay such payment if he shall be adjudicated to be not entitled
to indemnification under Section 67 which undertaking may be accepted without
reference to the financial ability of such person to make repayment. Any such
indemnification may be provided although the person to be indemnified is no
longer an officer, director, employee or agent of the corporation or of such
other organization or no longer
II-1
<PAGE>
serves with respect to any such employee benefit plan. No indemnification shall
be provided, however, for any person with respect to any matter as to which he
shall have been adjudicated in any proceeding not to have acted in good faith
in the reasonable belief that his action was in the best interest of the
corporation or to the extent that such matter relates to service with respect
to any employee benefit plan, in the best interests of the participants or
beneficiaries of such employee benefit plan.
The Restated Articles of Organization of the Company (see Exhibit 3.1)
provide for indemnification of the officers and directors of the Company to the
full extent permitted by applicable law.
The Company and its directors and officers are currently covered by
liability insurance.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
See F-1 of the Prospectus for a list of the financial statements included
as part of the Prospectus.
(b) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- -------------------------------------------------------------------------------------
<S> <C>
1* Form of Underwriting Agreement between the Company, the Bank and the Underwriters
3.1* Certificate of Incorporation of the Company
3.2* Form of Certificate of Designation establishing the Series A Preferred Shares
3(b)* By-laws of the Company
4* Specimen of certificate representing Series A Preferred Shares
5* Opinion of Goodwin, Procter & Hoar LLP, counsel to the Company, relating to Series A
Preferred Shares
8.1* Opinion of Goodwin, Procter & Hoar LLP, counsel to the Company, relating to certain
tax matters
10.1* Master Purchase Agreement between the Company and the Bank
10.2* Master Service Agreement between the Company and the Bank
10.3* Form of Advisory Agreement between the Company and the Bank
23.1 Consent of Wolf & Company, P.C.
23.2* Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5)
24 Powers of Attorney (included on signature page)
27 Financial Data Schedule
</TABLE>
- ------------
*To be filed by amendment
II-2
<PAGE>
ITEM 36. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described under Item 33
above, or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding), is asserted by such director, officer, or
controlling person in connection with the securities registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Boston, Massachusetts, on the 2nd day of November, 1998.
ATLANTIC PREFERRED CAPITAL CORPORATION
By: /s/ Richard Wayne
-------------------------------------
Richard Wayne, President
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints each of Richard Wayne and Nicholas W.
Lazares such person's true and lawful attorney-in-fact and agent with full
power of substitution and resubstitution , for such person and in such person's
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
(or to any other registration statement for the same offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act), and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto each said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that any said attorney-in-fact
and agent, or any substitute or substitutes of any of them, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- --------------------------- ------------------------------ -----------------
<S> <C> <C>
/s/ Richard Wayne President and Director November 2, 1998
- ------------------------- (Principal Executive Officer)
Richard Wayne
/s/ John L. Champion Treasurer and Director November 2, 1998
- ------------------------- (Principal financial and
John L. Champion accounting officer)
/s/ Nicholas W. Lazares Director November 2, 1998
- -------------------------
Nicholas W. Lazares
</TABLE>
II-4
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We consent to the incorporation in the Registration Statement on Form S-11
of our report dated October 23, 1998, relating to the balance sheet of Atlantic
Preferred Capital Corporation as of September 30, 1998 and the statements of
income, changes in stockholders' equity and cash flows for the period from
inception, March 20, 1998, through September 30, 1998, and incorporation of our
report dated February 6, 1998 relating to the consolidated balance sheets as of
December 31, 1997 and 1996 of Atlantic Bank and Trust Company and its
subsidiaries and the statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1997.
/s/ WOLF & COMPANY, P.C.
WOLF & COMPANY, P.C.
Boston, Massachusetts
November 2, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAR-20-1998
<PERIOD-END> SEP-30-1998
<CASH> 146,000
<INT-BEARING-DEPOSITS> 5,117,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 144,084,000
<ALLOWANCE> 1,337,000
<TOTAL-ASSETS> 149,036,000
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 233,000
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 148,803,000
<TOTAL-LIABILITIES-AND-EQUITY> 149,036,000
<INTEREST-LOAN> 8,270,000
<INTEREST-INVEST> 0
<INTEREST-OTHER> 23,000
<INTEREST-TOTAL> 8,293,000
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 8,293,000
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 190,000
<INCOME-PRETAX> 8,063,000
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,063,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 12.40
<LOANS-NON> 1,516,000
<LOANS-PAST> 1,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,337,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>