As filed with the Securities and Exchange Commission on January 8, 1999
Registration Statement No. 333-66677
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-11
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------
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:
<TABLE>
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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
</TABLE>
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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. [ ]
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 JANUARY 8, 1999
[RED_HERRING]
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.
[/RED_HERRING]
PROSPECTUS
[LOGO]
ATLANTIC PREFERRED CAPITAL CORPORATION
1,200,000 Shares
% 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 monthly 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
monthly on the 15th day of each month for the preceding month.
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 preferred shares of Atlantic Bank 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 , 2004, 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 "ATLPP."
See "Risk Factors" beginning on page 7 for a description of risk factors
you should consider before you invest in these securities, including:
o The potential exchange of Series A Preferred Shares for preferred
shares of Atlantic Bank.
o Bank regulatory restrictions on the operations and dividends of
Atlantic Preferred Capital.
o Dividends are not cumulative.
---------------
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.
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public Offering Price ...................................... $25.00 $30,000,000
Underwriting Discounts and Commissions ..................... $ $
Proceeds to Atlantic Preferred Capital, before expenses .... $ $
</TABLE>
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
on the same 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 , 1999.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
ADVEST, INC.
JANNEY MONTGOMERY SCOTT INC.
The date of this prospectus is , 1999.
<PAGE>
TABLE OF CONTENTS
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Page
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PROSPECTUS SUMMARY ........................................................... 1
Atlantic Preferred Capital Corporation ..................................... 1
Atlantic Bank .............................................................. 3
Automatic Exchange of Series A Preferred Shares ............................ 3
Risk Factors ............................................................... 4
The Offering ............................................................... 5
RISK FACTORS ................................................................. 7
Potential Exchange of Series A Preferred Shares for Bank Preferred
Shares; Investment Risks in Bank Preferred Shares are Distinct
from Investment Risks in Series A Preferred Shares ....................... 7
Bank Regulatory Restrictions on the Operations and Dividends
of Atlantic Preferred Capital ............................................ 7
Dividends Not Cumulative ................................................... 8
No Insurance to Cover Risks of Borrower Defaults and Bankruptcies
and Special Hazard Losses that are not Covered by Standard Insurance ...... 8
Exposure to Adverse Regional Real Estate Market Conditions
in the Northeast and California .......................................... 9
Substantial Majority of Loans Not Originated by Atlantic Bank .............. 9
Commercial Mortgage Loans Constitute a Disproportionate Percentage
of Atlantic Preferred Capital's Loan Portfolio ............................ 9
Environmental Liabilities of Atlantic Preferred Capital
Associated with Foreclosed Properties ..................................... 10
Tax Risks Related to REITs ................................................. 10
Dependence Upon Atlantic Bank as Advisor and Servicer ...................... 11
Conflicts of Interest between Atlantic Preferred Capital
and Atlantic Bank and its Affiliates ...................................... 12
Future Revisions in Policies and Strategies by Board of Directors
may adversely affect Holders of Series A Preferred Shares ................. 12
No Third Party Valuation of the Mortgage Assets ............................ 12
No Arm's-Length Negotiations between Atlantic Preferred Capital
and its Affiliates ........................................................ 12
No Experience Operating as a REIT .......................................... 13
Interest Rate Risk ......................................................... 13
No Prior Market for Series A Preferred Shares .............................. 13
BACKGROUND, CORPORATE STRUCTURE AND BENEFITS TO ATLANTIC BANK ................ 14
Formation of Atlantic Preferred Capital .................................... 14
Structure .................................................................. 14
Benefits to Atlantic Bank .................................................. 15
USE OF PROCEEDS .............................................................. 16
DIVIDEND POLICY .............................................................. 16
CAPITALIZATION ............................................................... 17
BUSINESS ..................................................................... 18
General .................................................................... 18
Dividend Policy ............................................................ 18
Acquisition of Loan Portfolio .............................................. 18
Management Policies and Programs ........................................... 19
Description of Loan Portfolio at September 30, 1998 ........................ 21
Credit Risk Management Policy .............................................. 27
Non-Performing Assets ...................................................... 28
Servicing .................................................................. 28
Employees .................................................................. 29
Competition ................................................................ 29
Legal Proceedings .......................................................... 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................................... 31
Overview ................................................................... 31
Results of Operations ...................................................... 31
Loan Portfolio ............................................................. 32
Allowance for Loan Losses and Discount ..................................... 32
Interest Rate Risk ......................................................... 33
Significant Concentration of Credit Risk ................................... 33
Liquidity Risk Management .................................................. 34
Other Matters .............................................................. 34
Year 2000 Disclosure ....................................................... 34
</TABLE>
i
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Page
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MANAGEMENT .................................................................... 37
Directors and Officers ...................................................... 37
Independent Directors ....................................................... 37
Audit Committee ............................................................. 37
Management and Director Compensation ........................................ 38
Advisory Agreement .......................................................... 38
DESCRIPTION OF THE SERIES A PREFERRED SHARES .................................. 39
Series A Preferred Shares ................................................... 39
Dividends ................................................................... 39
Authority to Issue Additional Shares ........................................ 39
Automatic Exchange .......................................................... 40
Voting Rights ............................................................... 41
Redemption .................................................................. 41
Rights upon Liquidation ..................................................... 42
DESCRIPTION OF CAPITAL STOCK .................................................. 43
Authorized and Outstanding Capital Stock .................................... 43
Restrictions on Ownership and Transfer ...................................... 44
Limitation of Liability and Indemnification ................................. 45
FEDERAL INCOME TAX CONSEQUENCES ............................................... 46
Taxation of Atlantic Preferred Capital ...................................... 46
Requirements for Qualification .............................................. 47
Income Tests ................................................................ 49
Asset Tests ................................................................. 50
Distribution Requirements ................................................... 51
Recordkeeping Requirements .................................................. 52
Excess Inclusion Income ..................................................... 52
Failure to Qualify .......................................................... 52
Tax Treatment of Automatic Exchange ......................................... 52
Taxation of U.S. Stockholders ............................................... 52
Taxation of Tax-Exempt Stockholders ......................................... 54
Taxation of Non-US Stockholders ............................................. 55
Other Tax Consequences ...................................................... 56
ERISA CONSIDERATIONS .......................................................... 57
General ..................................................................... 57
Plan Asset Regulation ....................................................... 57
Effects of Plan Asset Status ................................................ 58
Prohibited Transactions ..................................................... 58
CERTAIN INFORMATION REGARDING ATLANTIC BANK ................................... 60
Operations of Atlantic Bank ................................................. 60
Summary Financial Information ............................................... 60
Selected Consolidated Financial Data ........................................ 62
Risk Factors ................................................................ 64
Lending Activities .......................................................... 65
Purchased Loan and Lease Portfolio .......................................... 65
Originated Loan and Lease Portfolio ......................................... 66
Small-Ticket Equipment Leasing .............................................. 66
Regulatory Capital Requirements ............................................. 66
UNDERWRITING .................................................................. 69
LEGAL MATTERS ................................................................. 70
INDEPENDENT AUDITORS .......................................................... 70
AVAILABLE INFORMATION ......................................................... 71
FINANCIAL STATEMENTS .......................................................... F-1
ANNEX I--OFFERING CIRCULAR
</TABLE>
ii
<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."
Atlantic Preferred Capital Corporation
General. Atlantic Preferred Capital Corporation is a Massachusetts
corporation incorporated on March 20, 1998. Atlantic Bank and Trust Company
created Atlantic Preferred Capital for the purpose of acquiring and holding
real estate mortgage assets in a cost-effective manner and to provide Atlantic
Bank with an additional means of raising capital for federal and state
regulatory purposes. Atlantic Bank currently owns, indirectly, all of the
outstanding common stock of Atlantic Preferred Capital. Atlantic Bank has
indicated to Atlantic Preferred Capital that, for as long as any Series A
Preferred Shares are outstanding, Atlantic Bank intends to maintain its
ownership of all of the outstanding common stock of Atlantic Preferred Capital.
At September 30, 1998, Atlantic Preferred Capital had $149.0 million in total
assets and no indebtedness. Atlantic Preferred Capital does not anticipate
incurring any indebtedness in the foreseeable future.
Atlantic Preferred Capital intends to operate in a manner which will allow
it to be taxed as a real estate investment trust, or a "REIT", under the
Internal Revenue Code of 1986, as amended. As a REIT, Atlantic Preferred
Capital 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. Atlantic Preferred Capital and Atlantic Bank are
undertaking the offering for two principal reasons:
o to increase Atlantic Bank's regulatory capital as a result of a portion
of the proceeds from the offering of Series A Preferred Shares being
included as "Tier 1" capital of Atlantic Bank under relevant regulatory
capital guidelines; and
o to achieve the benefits of the tax deductibility of the dividends
payable on the capital stock of Atlantic Preferred Capital as a result
of Atlantic Preferred Capital's qualification as a REIT.
As a wholly-owned subsidiary of Atlantic Bank, the assets and liabilities
and results of operations of Atlantic Preferred Capital will be consolidated
with those of Atlantic Bank for Atlantic Bank's financial reporting and
regulatory capital purposes. As such, loans acquired by Atlantic Preferred
Capital from Atlantic Bank will nevertheless be treated as assets of Atlantic
Bank for purposes of compliance by Atlantic Bank with the FDIC's regulatory
capital requirements and in Atlantic Bank's financial statements. Interest
income on those loans will be treated as interest income of Atlantic Bank in
Atlantic Bank's financial statements.
Loan Portfolio. As of September 30, 1998, Atlantic Preferred Capital held
loans acquired from Atlantic Bank with a gross outstanding principal balance of
$162.5 million and a net carrying value of $142.7 million. Atlantic Preferred
Capital's loan portfolio at September 30, 1998, consisted primarily of mortgage
assets secured by commercial or multi-family properties. Approximately 77.1% of
this portfolio consisted of loans purchased by Atlantic Bank at a discount from
their outstanding principal balances. Atlantic Bank originally purchased these
loans consistent with its fundamental strategy of identifying and acquiring
loans which management of Atlantic Bank believes are undervalued as a result of
adverse market or economic circumstances. The remaining balance of Atlantic
Preferred Capital's loan portfolio consisted of loans originated by Atlantic
Bank. Atlantic Preferred Capital acquires loans from Atlantic Bank at Atlantic
Bank's net carrying value for such loans.
1
<PAGE>
Certain information regarding Atlantic Preferred Capital's loan portfolio is
summarized in the table below:
<TABLE>
<CAPTION>
At or for the period
from inception on
March 20, 1998
through September 30, 1998
---------------------------
(dollars in thousands)
<S> <C>
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
Ratio of earnings to fixed charges and preferred stock dividends (3) 202.6 x
</TABLE>
- ----------------
(1) Includes the effect of discount accretion on loans originally purchased by
Atlantic Bank weighted by outstanding principal balances, net of
discounts.
(2) Weighted by outstanding principal balances.
(3) The ratio of earnings to fixed charges and preferred stock dividends was
computed by dividing earnings by preferred stock dividends. For this
purpose, earnings consist of earnings available to common shareholders plus
preferred stock dividends. Atlantic Preferred Capital did not have any fixed
charges for the period.
Dividends. Atlantic Preferred Capital currently expects to pay an
aggregate amount of dividends with respect to its outstanding shares of capital
stock equal to approximately 100% of Atlantic Preferred Capital's "REIT taxable
income." Dividends will be declared at the discretion of the Board of Directors
after considering Atlantic Preferred Capital's distributable funds, financial
requirements, tax considerations and other factors. For the following reasons,
Atlantic Preferred Capital expects that both its cash available for
distribution and its "REIT taxable income" will exceed amounts needed to pay
dividends on the Series A Preferred Shares in the foreseeable future, although
Atlantic Preferred Capital cannot assure you that this will be the case:
o Atlantic Preferred Capital'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
Atlantic Preferred Capital's stockholders' equity;
o Atlantic Preferred Capital expects that its interest earning assets will
continue to significantly exceed the liquidation preference of the
Series A Preferred Shares;
o Atlantic Preferred Capital has not incurred and does not currently
intend to incur any indebtedness.
o Atlantic Preferred Capital anticipates that, in addition to cash flows
from operations, additional cash will be available from principal
payments on its loan portfolio.
Management. The Board of Directors of Atlantic Preferred Capital is
currently composed of three members, each of whom is an executive officer of
Atlantic Bank. Within 90 days of the completion of this offering, Atlantic Bank
will elect two additional independent directors who will be neither employees
of Atlantic Preferred Capital nor employees, officers or directors of Atlantic
Bank. Atlantic Preferred Capital currently has three officers. Atlantic
Preferred Capital has no other employees and does not anticipate that it will
require additional employees. All of the day-to-day business affairs of
Atlantic Preferred Capital are
2
<PAGE>
managed by Atlantic Bank. As such, conflicts of interest will arise from time
to time between Atlantic Preferred Capital and Atlantic Bank. These conflicts
of interest relate to, among other things, the amount of the service and
advisory fees paid to Atlantic Bank, the amount and type of loans acquired by
Atlantic Preferred Capital from Atlantic Bank, as well as the treatment of new
business opportunities identified by Atlantic Bank. Atlantic Preferred Capital
and Atlantic Bank have adopted policies that all financial dealings between
them will be fair to all parties and consistent with market terms.
The principal executive offices of Atlantic Preferred Capital are located
at 101 Summer Street, Boston, Massachusetts 02110, and its telephone number is
(617) 880-1000.
Atlantic Bank
Atlantic Bank and Trust Company, an FDIC-insured, Massachusetts-chartered
trust company, commenced operations in February, 1988. Atlantic 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, Atlantic Bank
had total assets of $456.7 million, deposits of $411.5 million and
stockholders' equity of $39.6 million. At September 30, 1998, under the
regulatory capital ratios developed and monitored by the federal bank
regulatory agencies and applicable to banks, Atlantic Bank's capital was
sufficient to enable it to be qualified as "well-capitalized." During the three
months ended December 31, 1998, Atlantic Bank continued its growth through loan
acquisitions. As a result of these loan acquisitions, Atlantic Bank anticipates
that its regulatory capital ratios at December 31, 1998 will be lower than at
September 30, 1998, although Atlantic Bank anticipates that its capital ratios
at such date will be sufficient for it to qualify as "adequately-capitalized."
However, after giving effect to this offering and as a result of the inclusion
of a portion of the proceeds from this offering in Atlantic Bank's "Tier 1"
capital, Atlantic Bank expects that its capital ratios would have been
sufficient for it to qualify as "well-capitalized" at December 31, 1998 had
this offering been consummated on that date.
Atlantic 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:
o 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;
o the origination of various types of secured commercial loans; and
o small-ticket equipment leasing to businesses and consumers through its
wholly-owned subsidiary, Dolphin Capital Corporation.
Atlantic Bank funds its activities with deposits consisting primarily of
certificates of deposit and money market accounts. Atlantic Bank also offers
retail deposit services, including checking and savings accounts, and related
services to businesses and individuals through the nationwide electronic
banking networks.
Automatic Exchange of Series A Preferred Shares
The Series A Preferred Shares would be exchanged automatically for shares
of preferred stock of Atlantic Bank (the "Bank Preferred Shares") if the
Federal Deposit Insurance Corporation so directs in writing. The FDIC may
direct such an exchange if any of the following events occurs:
o Atlantic Bank becomes "undercapitalized" under applicable regulations,
o Atlantic Bank is placed into bankruptcy, reorganization, conservatorship
or receivership or
o the FDIC, in its sole discretion, anticipates that Atlantic Bank may
become "undercapitalized" in the near term.
In an automatic exchange, for every ten Series A Preferred Shares you own,
you would receive one Bank Preferred Share with a liquidation preference of
$250.00 per share, the equivalent liquidation preference to the ten Series A
Preferred Shares you owned previously. The Bank Preferred Shares which you
would receive in the event of an automatic exchange will otherwise have
substantially equivalent terms as the Series A Preferred Shares. If an
automatic
3
<PAGE>
exchange occurs you would own an investment in Atlantic Bank and not in Atlantic
Preferred Capital at a time when Atlantic Bank's financial condition is
deteriorating or Atlantic Bank has been placed into bankruptcy, reorganization,
conservatorship or receivership. Therefore, you should carefully consider the
description of Atlantic Bank set forth under "Certain Information Regarding
Atlantic 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." For a discussion of the regulatory capital requirements
applicable to Atlantic Bank, see "Certain Information Regarding Atlantic
Bank--Regulatory Capital Requirements."
Risk Factors
A purchase of Series A Preferred Shares is subject to a number of risks
described in more detail under "Risk Factors" commencing on page 7. These risks
include:
o A decline in the performance or capital levels of Atlantic Bank or the
placement of Atlantic Bank into bankruptcy, reorganization,
conservatorship or receivership could lead to the automatic exchange of
your Series A Preferred Shares for Bank Preferred Shares. Upon such an
exchange, you would have an investment in Atlantic Bank and not in
Atlantic Preferred Capital at a time when Atlantic Bank's financial
condition is deteriorating. Atlantic Bank has significantly greater
liabilities and significantly less stockholders' equity than Atlantic
Preferred Capital. Upon a liquidation or receivership of Atlantic Bank,
the claims of Atlantic Bank's depositors and creditors and of the FDIC
will have priority over your claims. As a result, you likely would
receive substantially less than you would have received in a liquidation
or receivership of Atlantic Preferred Capital. In fact, you may not
receive anything for your Bank Preferred Shares. You should carefully
consider this and the other risks of investment in Atlantic Bank
described in the attached offering circular under the caption "Risk
Factors."
o As a subsidiary of Atlantic Bank, federal or state regulators of
Atlantic Bank can restrict the ability of Atlantic Preferred Capital to
transfer assets, to make dividends to the holders of the Series A
Preferred Shares, or to redeem the Series A Preferred Shares.
o Dividends on the Series A Preferred Shares are not cumulative.
Consequently, if the Board of Directors of Atlantic Preferred Capital
does not declare a dividend on the Series A Preferred Shares for any
monthly period, you would not be entitled to receive 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 Atlantic Preferred Capital to pay less than the
full amount of the stated dividends on the Series A Preferred Shares
even if funds are available.
o Risks associated with mortgage loans generally, and particularly the
geographic concentration of Atlantic Preferred Capital's loan portfolio
at September 30, 1998 in the Northeast and California, could adversely
affect the mortgage assets held by Atlantic Preferred Capital and the
value of the Series A Preferred Shares. The quality of Atlantic
Preferred Capital'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 Atlantic Preferred Capital 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 Atlantic Preferred Capital's mortgage assets bear interest
at adjustable rates, a significant decline in interest rates might
adversely affect Atlantic Preferred Capital's ability to pay dividends
on the Series A Preferred Shares.
o Atlantic Preferred Capital 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 Atlantic Bank.
o Because of the relationship between Atlantic Preferred Capital and
Atlantic Bank, conflicts of interests will exist between Atlantic
Preferred Capital and Atlantic Bank.
o No trading market will exist for the Bank Preferred Shares you would
receive if an automatic exchange occurs because those shares will not be
listed on any securities exchange or for quotation on The Nasdaq Stock
Market or any other over-the-counter market.
4
<PAGE>
The Offering
<TABLE>
<S> <C>
Issuer ......................... Atlantic Preferred Capital Corporation, a Massachusetts
corporation created for the purpose of acquiring and holding
real estate mortgage assets.
Securities Offered ............. 1,200,000 Series A Preferred Shares. Atlantic Preferred
Capital 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 Atlantic
Preferred Capital'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
at least 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 Atlantic Preferred Capital's
independent directors.
Dividends ...................... Dividends on the Series A Preferred Shares are payable
monthly at the rate of % per annum of the liquidation
preference (or $ per share), if, when and as declared by the
Board of Directors of Atlantic Preferred Capital. If declared,
dividends for each monthly period are payable on the 15th day
of the following month. Dividends accrue in each monthly
period from the first day of such period, whether or not
dividends are paid with respect to the preceding monthly
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 Atlantic Preferred
Capital for a monthly dividend period, you will have no right
to receive the amount of any undeclared dividends for that
period, and Atlantic Preferred Capital will have no obligation to
pay undeclared dividends 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 Atlantic
Preferred Capital's common stock.
Liquidation Preference ......... The liquidation preference for each Series A Preferred Share
is $25.00, plus any accrued and unpaid dividends only for
the month in which the liquidation occurs.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Redemption ................. The Series A Preferred Shares are not redeemable prior to
, 2004 except upon the occurrence of a change in
the tax laws, or regulations or administrative interpretations that
creates more than an insubstantial risk that dividends on
Atlantic Preferred Capital's capital stock are not or will not be
fully deductible for United States income tax purposes or that
Atlantic Preferred Capital is or will be subject to more than a
de minimis amount of taxes. On and after , 2004,
the Series A Preferred Shares may be redeemed for cash at the
option of Atlantic Preferred Capital, 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 month in which the
redemption occurs to the date of redemption, if any, thereon.
The Series A Preferred Shares are not convertible into any
other securities of Atlantic Preferred Capital.
Automatic Exchange ......... Each Series A Preferred Share will be exchanged automatically
for one tenth of one Bank Preferred Share having substantially
equivalent terms if the FDIC directs such an exchange in the
event Atlantic Bank becomes "undercapitalized" under applicable
regulations, Atlantic Bank is placed into bankruptcy,
reorganization, conservatorship or receivership or the FDIC, in
its sole discretion, anticipates Atlantic Bank becoming
"undercapitalized" in the near term.
Voting Rights .............. Holders of Series A Preferred Shares will not have any voting
rights, except as set forth below and as otherwise 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. Additional shares of preferred stock
ranking senior to the Series A Preferred Shares may not be
issued and changes to the provisions of Atlantic Preferred
Capital's Restated Articles of Organization that adversely affect
the rights of the holders of Series A Preferred Shares may not
be made without the approval of at least two-thirds of the
holders of outstanding Series A Preferred Shares. In addition,
Atlantic Preferred Capital may not incur indebtedness in excess
of 100% of its stockholders' equity without the approval of the
holders of all of the outstanding Series A Preferred Shares.
Ownership Limits ........... Beneficial ownership by a person or groups of persons of
more than 9.8% of any class or series of Atlantic Preferred
Capital's stock, including the outstanding Series A Preferred
Shares, is restricted in order to preserve Atlantic Preferred
Capital's status as a REIT for federal income tax purposes.
Listing .................... Atlantic Preferred Capital has applied to have the Series A
Preferred Shares included for quotation on The Nasdaq
National Market under the trading symbol "ATLPP."
Use of Proceeds ............ Atlantic Preferred Capital currently anticipates using $1.1
million of the net proceeds from the offering to retire its
existing preferred stock and the remainder for general
corporate purposes, including to acquire additional mortgage
assets or other REIT-qualified assets.
</TABLE>
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RISK FACTORS
You should carefully consider the following risk factors, as well as the
risk factors relating to Atlantic 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. Atlantic
Preferred Capital'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 Atlantic Bank and the Bank Preferred Shares, you should
carefully consider the information contained in the section entitled "Risk
Factors" in the attached offering circular.
Potential Exchange of Series A Preferred Shares for Bank Preferred Shares;
Investment Risks in Bank Preferred Shares are Distinct from Investment Risks in
Series A Preferred Shares
The purchase of Series A Preferred Shares involves a high degree of risk
with respect to the performance and capital levels of Atlantic Bank. A
significant decline in the performance and capital levels of Atlantic Bank or
the placement of Atlantic 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 be a
preferred stockholder of Atlantic Bank at a time when Atlantic Bank's financial
condition was deteriorating or when Atlantic Bank had been placed into
bankruptcy, reorganization, conservatorship or receivership. If the automatic
exchange occurs, the FDIC would likely prohibit Atlantic Bank from paying
dividends on the Bank Preferred Shares. Furthermore, in the event Atlantic Bank
is placed into bankruptcy, reorganization, conservatorship or receivership
(whether before or after the automatic exchange), it would be unable to pay
dividends on the Bank Preferred Shares. An investment in Atlantic Bank is also
subject to certain risks that are distinct from the risks associated with an
investment in Atlantic Preferred Capital. For example, an investment in
Atlantic Bank would involve risks relating to the capital levels of, and other
federal and state regulatory requirements applicable to, Atlantic Bank, and the
performance of Atlantic Bank's overall loan portfolio and other business lines.
Atlantic Bank has significantly greater liabilities and significantly less
stockholders' equity than Atlantic Preferred Capital. In the event of a
liquidation of Atlantic Bank, the claims of depositors and creditors of
Atlantic Bank and of the FDIC would have priority over your claims as a holder
of the Bank Preferred Shares. As a result, if Atlantic Bank were to be placed
into receivership after the automatic exchange, or if the automatic exchange
were to occur after receivership of Atlantic 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 the
possibility of an automatic exchange, potential investors in the Series A
Preferred Shares should carefully consider the risks with respect to an
investment in Atlantic Bank set forth under "Certain Information Regarding
Atlantic Bank." See also "Description of the Series A Preferred
Shares--Automatic Exchange."
Bank Regulatory Restrictions on the Operations and Dividends of Atlantic
Preferred Capital
Because Atlantic Preferred Capital is a subsidiary of Atlantic Bank,
federal and state regulatory authorities will have the right to examine
Atlantic Preferred Capital and its activities. Under certain circumstances,
including any determination that Atlantic Bank's relationship to Atlantic
Preferred Capital results in an unsafe and unsound banking practice, such
regulatory authorities can restrict the ability of Atlantic Preferred Capital
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 Atlantic Bank to sever
its relationship with or divest its ownership of Atlantic Preferred Capital.
Such actions could potentially result in Atlantic Preferred Capital's failure
to qualify as a REIT.
In addition, Atlantic Preferred Capital's ability, in certain instances,
to pay dividends on the Series A Preferred Shares may vary depending on
Atlantic Bank's ability to meet certain performance and/or regulatory capital
levels under applicable FDIC regulations. Under the FDIC regulations on capital
categories for banks, which categories range from "significantly under
capitalized" to "well-capitalized," if Atlantic Bank became "undercapitalized,"
Atlantic Preferred Capital's ability to pay dividends on the Series A Preferred
Shares may
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<PAGE>
be restricted by the FDIC. See "Certain Information Regarding Atlantic
Bank--Regulatory Capital Requirements." A bank is "undercapitalized" under
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, Atlantic 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 Atlantic Bank to be considered
"well-capitalized" under such regulations. Giving effect to this offering and
assuming all of the net proceeds are invested in assets which, under applicable
FDIC regulations, have been assigned a risk weight of 100% (on a scale of 0 to
100%) based on the credit risk associated with such assets, however, these
ratios would have been 12.61%, 11.78% and 10.11%, respectively. During the
three months ended December 31, 1998, Atlantic Bank continued its growth
through loan acquisitions. As a result of these loan acquisitions, Atlantic
Bank anticipates that its regulatory capital ratios at December 31, 1998 will
be lower than at September 30, 1998, although Atlantic Bank anticipates that
its capital ratios at such date will be sufficient for it to qualify as
"adequately-capitalized." However, on a pro forma basis, after giving effect to
this offering as described above, Atlantic Bank expects that its capital ratios
would have been sufficient for it to qualify as "well-capitalized" at December
31, 1998. No assurance can be given, however, that Atlantic Bank will be "well-
capitalized" under these regulations as of any future date.
Under FDIC regulations on capital distributions, the ability of Atlantic
Bank to make a capital distribution varies depending primarily on Atlantic
Bank's earnings and regulatory capital levels. Capital distributions are
defined to include payment of dividends, stock repurchases, cash-out mergers
and other distributions charged against the capital accounts of an institution.
While Atlantic Preferred Capital believes that dividends on the Series A
Preferred Shares should not be considered capital distributions of Atlantic
Bank, the FDIC may not agree with this position. Accordingly, in the event that
the FDIC determines that the payment of a dividend on the Series A Preferred
Shares by Atlantic Preferred Capital is a capital distribution by Atlantic
Bank, and that Atlantic Bank's earnings and regulatory capital levels are below
certain specified levels, then the FDIC could limit or prohibit the payment of
dividends on the Series A Preferred Shares.
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 monthly 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 Atlantic Preferred Capital
to pay less than the full amount of the stated dividends or no dividends on the
Series A Preferred Shares for any month notwithstanding that funds are
available. Factors that the Board of Directors would consider in making this
determination include Atlantic Preferred Capital'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, Atlantic Preferred Capital must distribute annually at least 95% of its
"REIT taxable income" (not including capital gains) to its stockholders.
Atlantic Preferred Capital currently intends to distribute approximately 100%
of its earnings to its stockholders. As a result, if Atlantic Preferred Capital
does not generate sufficient earnings in a particular month to pay dividends on
the Series A Preferred Shares, Atlantic Preferred Capital may not have
sufficient cash available to pay those dividends.
No Insurance to Cover Risks of Borrower Defaults and Bankruptcies and Special
Hazard Losses that are not Covered by Standard Insurance
Atlantic Preferred Capital 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, Atlantic Preferred Capital will be subject to risks of borrower
defaults and bankruptcies and special hazard losses, such as losses occurring
from floods, that are not covered by standard hazard insurance. Atlantic
Preferred Capital is covered by Atlantic 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 Atlantic Preferred Capital resulting from declining property
values or worsening economic conditions, among
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other factors, Atlantic Preferred Capital 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.
Exposure to Adverse Regional Real Estate Market Conditions in the Northeast and
California
The results of Atlantic Preferred Capital's operations will be affected by
conditions in the real estate markets in which its loans are concentrated.
These conditions are generally beyond Atlantic Preferred Capital'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.
Atlantic Preferred Capital's current mortgage assets are concentrated
primarily in the Northeast and California. The following table sets forth the
concentration of the loans in Atlantic Preferred Capital's loan portfolio as of
September 30, 1998, as a percentage of the total principal balance of such
loans, that were secured by properties in the indicated states:
<TABLE>
<CAPTION>
State Percentage
- ----- -----------
<S> <C>
Massachusetts ......................................... 31.14%
California ............................................ 19.49
Connecticut ........................................... 11.54
New Hampshire ......................................... 10.82
New York .............................................. 5.54
</TABLE>
These regions may experience natural disasters or weaker regional economic
conditions and real estate markets than other regions, as did the commercial
real estate market in New England during the early 1990s. Because of the
concentration of its loan portfolio in the Northeast and California, in the
event either region experienced such conditions, Atlantic Preferred Capital
would likely experience higher rates of loss and delinquency on its mortgage
loans than it would if its loans were more geographically diverse.
Substantial Majority of Loans Not Originated by Atlantic Bank
At September 30, 1998, approximately 77.1% of Atlantic Preferred Capital's
loan portfolio consisted of loans purchased by Atlantic Bank and subsequently
acquired by Atlantic Preferred Capital from Atlantic Bank. Because these loans
were originated by third parties, Atlantic Bank generally is not able to
conduct the same level of due diligence on such loans upon purchase that it
would have conducted had it originated the loans. Other disadvantages may
include lack of current financial information, incomplete legal documentation,
and outdated appraisals. Generally, while Atlantic Bank conducts an acquisition
review, Atlantic Bank also relies on the underwriting standards of those
originating parties of such loans, whose standards may be substantially
different than those of Atlantic Bank.
Commercial Mortgage Loans Constitute a Disproportionate Percentage of Atlantic
Preferred Capital's Loan Portfolio
Commercial mortgage loans constituted approximately 65% of the loans in
Atlantic Preferred Capital's loan portfolio at September 30, 1998. Generally,
holders of commercial mortgage loans are subject to greater risks than holders
of other loans. The terms of commercial mortgage loans are typically based in
part on the value of the commercial property and such 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 these loans or otherwise make such
payments upon maturity. In addition, commercial real estate properties,
particularly
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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 bankruptcy laws which could result in termination of lease contracts.
Because of these risks related to commercial mortgage loans, Atlantic Preferred
Capital may experience higher rates of default on its mortgage loans than it
would if its loan portfolio was more diversified and included a greater number
of residential or other mortgage loans.
Environmental Liabilities of Atlantic Preferred Capital Associated with
Foreclosed Properties
If Atlantic Preferred Capital 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 Atlantic Preferred Capital's ownership or after a sale
thereof to a third party. If such hazardous substances are discovered on a
property which Atlantic Preferred Capital has acquired, Atlantic Preferred
Capital may be required to remove those substances and clean up the property.
In such a case Atlantic Preferred Capital could be liable for all costs of any
removal and clean-up. Atlantic Preferred Capital may not be able to recoup any
of such costs from any third party. Atlantic Preferred Capital may also be
liable to tenants and other users of neighboring properties. In addition,
Atlantic Preferred Capital may find it difficult or impossible to sell the
property prior to or following any such clean-up.
Tax Risks Related to REITs
Adverse Consequences of Failure to Qualify as a REIT. Atlantic Preferred
Capital intends to operate so as to qualify as a REIT under the Internal
Revenue Code of 1986, as amended (the "Code"). In connection with the offering,
Goodwin, Procter & Hoar LLP will render certain opinions, described under
"Federal Income Tax Consequences" below, regarding the Atlantic Preferred
Capital's qualification as a REIT. However, Atlantic Preferred Capital 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. Atlantic Preferred Capital is relying on the
opinion of Goodwin, Procter regarding various issues affecting its ability to
qualify as a REIT. This legal opinion is not binding on the Internal Revenue
Service or the courts. Goodwin, Procter's opinion represents only the view of
counsel to Atlantic Preferred Capital 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
Consequences--Requirements for Qualification." Goodwin, Procter's opinion is
also based on various assumptions and is conditioned upon certain
representations made by Atlantic Preferred Capital on or about the date of such
opinion as to factual matters, including representations regarding the nature
of its assets and income and the future conduct of its business. Any inaccuracy
in such assumptions and representations, including as a result of activities of
Atlantic Preferred Capital subsequent to the date of the opinion, could
adversely affect Goodwin, Procter's ability to render this opinion and Atlantic
Preferred Capital's ability to qualify as a REIT. Qualification and taxation as
a REIT depends upon Atlantic Preferred Capital 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.
Goodwin, Procter has not reviewed and will not review Atlantic Preferred
Capital's compliance with those tests. Accordingly, no assurance can be given
that Atlantic Preferred Capital has satisfied or will satisfy the REIT
qualification tests on a continuing basis.
If Atlantic Preferred Capital 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 Atlantic Preferred Capital'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, Atlantic Preferred Capital 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 Atlantic Preferred Capital's net earnings available for
distribution to its stockholders (including holders of the Series A Preferred
Shares) because of the additional
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tax liability for the year or years involved. A failure of Atlantic Preferred
Capital to qualify as a REIT would not by itself give Atlantic Preferred
Capital 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 Atlantic Preferred Capital currently intends to
operate in a manner designed to qualify as a REIT, future economic, market,
legal, tax or other considerations may cause Atlantic Preferred Capital to
determine that it is in the best interest of Atlantic Preferred Capital and the
holders of its common stock and preferred stock to revoke the REIT election.
The tax law prohibits Atlantic Preferred Capital from electing treatment as a
REIT for the four taxable years following the year of such revocation. See
"Federal Income Tax Consequences."
Adverse Effects of REIT Distribution Requirements. In order to qualify as
a REIT, Atlantic Preferred Capital generally is required each year to
distribute to its stockholders at least 95% of its net taxable income
(excluding net capital gains). Atlantic Preferred Capital 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, Atlantic Preferred
Capital 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 Atlantic Preferred Capital, as a subsidiary of Atlantic Bank, to make
distributions to its stockholders in an amount necessary to retain its REIT
qualification. Such a restriction could result in Atlantic Preferred Capital
failing to qualify as a REIT. To the extent Atlantic Preferred Capital's REIT
taxable income may exceed the actual cash received for a particular period,
Atlantic Preferred Capital may not have sufficient liquidity to make
distributions necessary to retain its REIT qualification. Atlantic Preferred
Capital 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 "Bank
Regulatory Restrictions on the Operations and Dividends of Atlantic Preferred
Capital."
Redemption upon Occurrence of a Tax Event. At anytime following the
occurrence of a Tax Event (as defined under "Description of the Series A
Preferred Shares--Redemption"), Atlantic Preferred Capital 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 is a Taxable Event. Upon the occurrence of certain
events, 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
Consequences."
Dependence Upon Atlantic Bank as Advisor and Servicer
Atlantic Preferred Capital is dependent in virtually every phase of its
operations on the diligence and skill of the management of Atlantic Bank.
Atlantic Preferred Capital has three officers and no other employees. It does
not have any independent corporate infrastructure. Under an advisory agreement
between Atlantic Preferred Capital and Atlantic Bank, Atlantic Bank administers
the day-to-day activities of Atlantic Preferred Capital, including monitoring
of the credit quality of Atlantic Preferred Capital's loan portfolio and
advising Atlantic Preferred Capital with respect to the acquisition,
management, financing and disposition of mortgage assets and Atlantic Preferred
Capital's operation generally. Under a master service agreement between
Atlantic Preferred Capital and Atlantic Bank, Atlantic Bank services Atlantic
Preferred Capital's loan portfolio. See "Business." The advisory agreement has
an initial term of five years with an automatic renewal feature and the master
service agreement has a one year term with an automatic renewal feature. The
loss of the services of Atlantic Bank, or the inability of Atlantic Bank to
effectively provide such services whether as
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a result of the loss of key members of Atlantic Bank's management or otherwise,
and the inability of Atlantic Preferred Capital to replace such services on
favorable terms, or at all, could adversely affect Atlantic Preferred Capital's
ability to conduct its operations.
Conflicts of Interest between Atlantic Preferred Capital and Atlantic Bank and
its Affiliates
Atlantic Bank and its affiliates have interests which are not identical to
those of Atlantic Preferred Capital. Because Atlantic Bank and its affiliates
are involved in virtually every aspect of Atlantic Preferred Capital's
existence, including providing services under the advisory agreement and the
master service agreement, conflicts of interest have arisen and will arise with
respect to transactions between Atlantic Preferred Capital and Atlantic Bank.
Such transactions include Atlantic Preferred Capital's acquisition of mortgage
assets from Atlantic Bank and/or its affiliates; the servicing by Atlantic Bank
of Atlantic Preferred Capital's mortgage assets; future dispositions by
Atlantic Preferred Capital of mortgage assets to Atlantic Bank or its
affiliates; and the modification of the advisory agreement or the master
service agreement. While Atlantic Preferred Capital believes that any
agreements and transactions between it, on the one hand, and Atlantic Bank
and/or its affiliates, on the other hand, were fair to all parties and
consistent with market terms and that future agreements and transactions will
be on such terms, neither Atlantic Preferred Capital nor Atlantic Bank obtained
third party valuations of the mortgage assets acquired by Atlantic Preferred
Capital from Atlantic Bank, and Atlantic Preferred Capital did not consider any
third party advisors or servicers. Furthermore, while transactions and
agreements were and will be approved by the directors and/or the officers of
Atlantic Preferred Capital, on the one hand, and the directors and/or officers
of Atlantic Bank, on the other, all of the officers and a majority of the
directors of Atlantic Preferred Capital are also officers and/or directors of
Atlantic Bank and/or affiliates of Atlantic Bank. Atlantic Bank, as holder of
all of the outstanding shares of common stock of Atlantic Preferred Capital,
controls the election of all directors, including the independent directors, of
Atlantic Preferred Capital. There can be no assurance that such agreements or
transactions were or will be on terms as favorable to Atlantic Preferred
Capital as those that could have been obtained from unaffiliated third parties.
See "Business."
Future Revisions in Policies and Strategies by Board of Directors may adversely
affect Holders of Series A Preferred Shares
The Board of Directors has established the investment policies and
operating policies and strategies of Atlantic Preferred Capital. These policies
may be amended or revised from time to time at the discretion of the Board of
Directors without a vote of Atlantic Preferred Capital's stockholders. The
ultimate effect of any change in the policies and strategies of Atlantic
Preferred Capital on you may be negative. See "Business."
No Third Party Valuation of the Mortgage Assets
Atlantic Preferred Capital 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. Atlantic Preferred Capital will not obtain third party
valuations even in circumstances where it is acquiring mortgage assets from, or
disposing mortgage assets to, one of its affiliates, including Atlantic Bank.
Accordingly, the consideration paid to an affiliate of Atlantic Preferred
Capital, including Atlantic Bank, for mortgage assets may be more than the fair
market value of the mortgage assets based on a third party valuation, and the
consideration received from an affiliate of Atlantic Preferred Capital,
including Atlantic Bank, may less than the fair market value of the mortgage
assets based on a third party valuation.
No Arm's-Length Negotiations between Atlantic Preferred Capital and its
Affiliates
Under a master mortgage loan purchase agreement between Atlantic Preferred
Capital and Atlantic Bank, Atlantic Preferred Capital acquires mortgage assets
from Atlantic Bank for consideration equal to Atlantic Bank's net carrying
value for those mortgage assets. Atlantic Preferred Capital and Atlantic Bank
do not engage in any arm's-length negotiations on the consideration to be paid.
Accordingly, if Atlantic Bank's net carrying value exceeds the fair market
value of the mortgage assets, the consideration paid by Atlantic Preferred
Capital to Atlantic Bank for those mortgage assets will be more than the fair
market value of the mortgage assets.
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No Experience Operating as a REIT
In order for Atlantic Preferred Capital to qualify and to maintain its
qualification as a REIT, it must meet and continue to meet the requirements of
certain highly technical and complex provisions of the Code. Neither Atlantic
Preferred Capital nor Atlantic Bank has previously operated as a REIT nor has
any executive officer of Atlantic Preferred Capital or Atlantic Bank been
involved with operating a REIT. The failure of Atlantic Preferred Capital to
qualify as a REIT for any taxable year would reduce Atlantic Preferred
Capital's net earnings available for distribution to its stockholders
(including holders of the Series A Preferred Shares).
Interest Rate Risk
Atlantic Preferred Capital's income will consist primarily of interest
earned on its mortgage assets. Atlantic Preferred Capital anticipates that a
significant portion 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 Atlantic
Preferred Capital will experience a decrease in income available to be
distributed to its stockholders. If this occurs, Atlantic Preferred Capital 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
Atlantic Preferred Capital'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.
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BACKGROUND, CORPORATE STRUCTURE AND BENEFITS TO ATLANTIC BANK
Formation of Atlantic Preferred Capital
Atlantic Bank organized Atlantic Preferred Capital on March 20, 1998. On
March 31, 1998, Atlantic Bank capitalized Atlantic Preferred Capital by
transferring mortgage loans valued at $140.7 million in exchange for 1,000
shares of Atlantic Preferred Capital's Series B Preferred Stock valued at $1.0
million and 100 shares of Atlantic Preferred Capital's common stock valued at
$139.7 million. Atlantic Bank created Atlantic Preferred Capital for the
purpose of acquiring and holding real estate mortgage assets in a cost-effective
manner and to provide Atlantic Bank with an additional means of raising capital
for federal and state regulatory purposes.
Structure
The following chart depicts the corporate structure of Atlantic Preferred
Capital and Atlantic 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, the Advisory Agreement and
the Master Mortgage Loan Purchase Agreement.]
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Benefits to Atlantic Bank
Atlantic Bank expects to realize the following benefits in connection with
the offering and the operation of Atlantic Preferred Capital:
o Atlantic Bank has received confirmation from the FDIC that it will be
able to include a portion of the proceeds from the sale of the Series A
Preferred Shares as Tier 1 capital of Atlantic 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 Atlantic Bank or raise other
supervisory concerns. The increase in Atlantic Bank's Tier 1 Leverage,
Tier 1 Risk-based and Total Risk-based capital levels that will result
from the treatment of the proceeds from this offering as Tier 1 capital
will enable Atlantic Bank to increase its earning asset base while
maintaining well-capitalized ratios. As of September 30, 1998, only
$11.3 million from the offering would have qualified as Tier 1 capital
of Atlantic Bank because relevant guidance from the FDIC limits the
amount that may qualify as Tier 1 capital of Atlantic Bank to 25% of
Atlantic Bank's total Tier 1 capital. Atlantic Bank expects that the
remaining proceeds from the offering will qualify as Tier 1 capital, in
the future, provided that its Tier 1 Leverage capital increases through
an increase in the amount of the common stockholders' equity of Atlantic
Bank. For a discussion of the capital requirements applicable to
Atlantic Bank, see "Certain Information Regarding Atlantic
Bank--Regulatory Capital Requirements."
o The dividends payable on Atlantic Preferred Capital's capital stock,
including the Series A Preferred Shares, will be deductible for income
tax purposes as a result of Atlantic Preferred Capital's qualification
as a REIT.
o The treatment of the proceeds from this offering as Tier 1 capital of
Atlantic Bank and Atlantic Preferred Capital's ability to deduct, for
income tax purposes, the dividends payable on the Series A Preferred
Shares as a result of its qualification as a REIT will provide Atlantic
Bank with a more cost-effective means of obtaining regulatory capital
than if Atlantic Bank were to issue preferred stock itself. Further, if
Atlantic Bank issued a class of preferred stock with dividend rights,
the dividends payable on that preferred stock would not be deductible by
Atlantic Bank for income tax purposes.
o Atlantic Preferred Capital currently anticipates paying Atlantic Bank
approximately $1.1 million in cash upon redemption of Atlantic Preferred
Capital's existing preferred stock using a portion of the net proceeds
of this offering.
o Atlantic Bank is entitled to receive annual servicing and advisory fees
intended primarily to cover its expenses and is expected to receive
annual dividends in respect of the common stock. For the period from
inception through September 30, 1998, Atlantic Preferred Capital paid
Atlantic Bank servicing fees of $152,000 and advisory fees of $38,000.
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 .......................................... $325,000(1)
Advisory Fee ........................................... 81,000(1)
--------
Common Stock Dividends ................................. (2)
--------
$
========
</TABLE>
----------------
(1) Assumes that for the first 12 months following completion of the
offering, Atlantic Preferred Capital holds mortgage loans with the same
outstanding principal balances as those mortgage loans included in its
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 Atlantic Preferred
Capital's common stock is expected to be equal to the excess of Atlantic
Preferred Capital'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 identical 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, Atlantic Preferred
Capital 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.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by Atlantic Preferred Capital from the
sale of the Series A Preferred Shares offered hereby, after deducting the
underwriting discount and estimated expenses payable by Atlantic Preferred
Capital, are anticipated to be $28.2 million ($32.5 million if the
underwriters' overallotment option is exercised in full). Atlantic Preferred
Capital currently anticipates using $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. Dividends on the existing preferred stock
anticipated to be retired accrue at a rate of 8% per annum.
DIVIDEND POLICY
Atlantic Preferred Capital currently expects to pay an aggregate amount of
dividends with respect to its outstanding shares of capital stock equal to
substantially all of its REIT taxable income (excluding capital gains). In
order to remain qualified as a REIT, Atlantic Preferred Capital must distribute
annually at least 95% of its REIT taxable income (excluding capital gains) to
stockholders. Atlantic Preferred Capital anticipates that none of the dividends
on the Series A Preferred Shares and none or no material portion of the
dividends on its common stock will constitute non-taxable returns of capital.
Dividends will be declared at the discretion of the Board of Directors
after considering Atlantic Preferred Capital's distributable funds, financial
requirements, tax considerations and other factors. Atlantic Preferred
Capital's distributable funds will consist primarily of interest and principal
payments on the mortgage assets held by it, and Atlantic Preferred Capital
anticipates that a majority of such assets will bear interest at adjustable
rates. Accordingly, if there is a decline in interest rates, Atlantic Preferred
Capital will experience a decrease in income available to be distributed to its
stockholders. In a period of declining interest rates, Atlantic Preferred
Capital also may find it difficult to purchase additional mortgage assets
bearing rates sufficient for it to be able to pay dividends on the Series A
Preferred Shares. Atlantic Preferred Capital 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 decline in yield on interest earning assets to as low as %
(assuming the mortgage assets included in the loan portfolio at September 30,
1998 are held for the relevant dividend period), 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 will represent
approximately 17% of Atlantic Preferred Capital's stockholders' equity, and (3)
Atlantic Preferred Capital does not anticipate incurring any indebtedness.
The FDIC's prompt corrective action regulations prohibit entities such as
Atlantic 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 Atlantic Preferred Capital's payment
of dividends on the Series A Preferred Shares under these regulations if
Atlantic 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, Atlantic 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 have been 12.61%,
11.78% and 10.11%, respectively. During the three months ended December 31,
1998, Atlantic Bank continued its growth through loan acquisitions. As a result
of these loan acquisitions, Atlantic Bank anticipates that its regulatory
capital ratios at December 31, 1998 will be lower than at September 30, 1998,
although Atlantic Bank anticipates that its capital ratios at such date will be
sufficient for it to qualify as "adequately-capitalized." However, on a pro
forma basis, after giving effect to this offering as described above, Atlantic
Bank expects that its capital ratios would have been sufficient for it to
qualify as "well-capitalized" at December 31, 1998.
In addition, the automatic exchange may take place under circumstances in
which Atlantic Bank will be considered less than "adequately capitalized" for
purposes of the FDIC's prompt corrective action regulations.
16
<PAGE>
Thus, at the time of the automatic exchange, Atlantic Bank would likely be
prohibited from paying dividends on the Bank Preferred Shares. Further,
Atlantic 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 Atlantic Bank's Board of Directors. See
"Certain Information Regarding Atlantic Bank." In the event that Atlantic Bank
did pay dividends on the Bank Preferred Shares, such dividends would be paid
out of its capital surplus.
Under certain circumstances, including a determination that Atlantic
Bank's relationship to Atlantic Preferred Capital results in an unsafe and
unsound banking practice, federal and state regulatory authorities will have
additional authority to restrict the ability of Atlantic Preferred Capital to
make dividend payments to its stockholders.
CAPITALIZATION
The following table sets forth the capitalization of Atlantic Preferred
Capital 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 Atlantic Preferred Capital 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(1)(2) ...................................... 140,740 167,828
Retained earnings ..................................................... 8,063 8,063
-------- ----------
Total stockholders' equity ......................................... $148,803 $ 175,903(3)
======== ============
</TABLE>
- ----------------
(1) Atlantic Preferred Capital 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 Atlantic Bank. In connection with this
offering, this preferred stock is currently anticipated to 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
transferred by Atlantic Preferred Capital's common stockholder in payment
for the issuance of common stock and Series B Preferred Stock, described
above. 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 and estimated
expenses, and (b) the total stockholders' equity as adjusted would amount to
$180,223,000.
17
<PAGE>
BUSINESS
General
Atlantic Preferred Capital'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 Atlantic Preferred Capital's loan
portfolio at September 30, 1998 were acquired from Atlantic Bank and it is
anticipated that substantially all additional mortgage assets will be acquired
from Atlantic Bank. As of September 30, 1998, Atlantic Preferred Capital held
loans acquired from Atlantic Bank with gross outstanding principal balances of
$162.5 million. Atlantic Preferred Capital's loan portfolio at September 30,
1998 consisted primarily of mortgage assets secured by commercial or
multi-family properties. Approximately 77.1% of Atlantic Preferred Capital's
loan portfolio at September 30, 1998 consisted of loans acquired by Atlantic
Bank at a discount from their outstanding principal balances. Atlantic Bank
originally purchased such loans consistent with its fundamental strategy of
identifying and acquiring loans which its management believes are undervalued
as a result of adverse market or economic circumstances. The remaining balance
of the loan portfolio consisted of loans originated by Atlantic Bank.
Dividend Policy
Atlantic Preferred Capital currently intends to pay an aggregate amount of
dividends with respect to its outstanding shares of capital stock equal to
substantially all of Atlantic Preferred Capital's REIT taxable income. Atlantic
Preferred Capital must distribute at least 95% of its REIT taxable income
annually to qualify as a REIT. As of September 30, 1998, the weighted average
note rate of the loans included in Atlantic Preferred Capital's 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 Atlantic
Preferred Capital 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 payment
characteristics and rates identical to those that were prepaid, and (3)
interest rates remain constant during such 12-month period. At current interest
rates and based on the assumptions in the preceding sentence, Atlantic
Preferred Capital 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, Atlantic
Preferred Capital 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,
Atlantic Preferred Capital expects that it will, after paying monthly 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, Atlantic Bank transferred to Atlantic Preferred Capital
loans with gross outstanding principal balances of $158.3 million in exchange
for 1,000 shares of 8% cumulative non-convertible preferred stock valued at
$1.0 million and all of the outstanding shares of Atlantic Preferred Capital's
common stock valued at $139.7 million. Atlantic Preferred Capital entered into
a master mortgage loan purchase agreement with Atlantic Bank dated as of the
same date which provides the general terms for the acquisition by Atlantic
Preferred Capital of mortgage assets from Atlantic Bank. Under the master
mortgage loan purchase agreement, on September 30, 1998 Atlantic Preferred
Capital purchased additional mortgage loans with gross outstanding principal
balances of $23.7 million for cash equal to their net carrying value of $21.7
million.
Pursuant to the terms of the master mortgage loan purchase agreement,
Atlantic Bank delivers or causes to be delivered to Atlantic Preferred Capital
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.
18
<PAGE>
Such documents are initially held by Atlantic Bank, acting as custodian for
Atlantic Preferred Capital pursuant to the terms of the master service
agreement. See "--Servicing" and "--Description of Loan Portfolio at September
30, 1998--General."
Under the master mortgage loan purchase agreement, Atlantic Bank makes
certain representations and warranties with respect to the mortgage assets for
the benefit of Atlantic Preferred Capital regarding information provided with
respect to mortgage assets, liens, validity of the mortgage documents, and
compliance with laws. Atlantic Bank is obligated to repurchase any mortgage
asset sold by it to Atlantic Preferred Capital as to which there is a material
breach of any such representation or warranty, unless Atlantic Preferred
Capital permits Atlantic Bank to substitute other qualified mortgage assets for
such mortgage asset. Atlantic Bank also indemnifies Atlantic Preferred Capital
for damages or costs resulting from any such breach. The repurchase price for
any such mortgage asset is such asset's net carrying value plus accrued and
unpaid interest on the date of repurchase.
Management Policies and Programs
In administering Atlantic Preferred Capital's mortgage assets, Atlantic
Bank has a high degree of autonomy. Atlantic Preferred Capital'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 Atlantic Preferred
Capital's Board of Directors without a vote of its 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, Atlantic Preferred Capital anticipates that it will from time
to time purchase additional mortgage assets. Atlantic Preferred Capital intends
to acquire all or substantially all of such mortgage assets from Atlantic Bank,
on terms that are comparable to those that could be obtained by Atlantic
Preferred Capital 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 Atlantic Bank. Atlantic Preferred Capital may also from
time to time, however, acquire mortgage assets from unrelated third parties.
Atlantic Preferred Capital has not to date adopted any arrangements or
procedures by which it would purchase mortgage assets from unrelated third
parties, and it has not entered into any agreements with any third parties with
respect to the purchase of mortgage assets. Atlantic Preferred Capital
anticipates that it would purchase mortgage assets from unrelated third parties
only if neither Atlantic Bank nor any of its affiliates had an amount or type
of mortgage asset sufficient to meet the requirements of Atlantic Preferred
Capital. Atlantic Preferred Capital currently anticipates that the mortgage
assets that it purchases will primarily include commercial mortgage loans,
although if Atlantic Bank develops an expertise in additional mortgage asset
products, Atlantic Preferred Capital may purchase such additional types of
mortgage assets. In addition, Atlantic Preferred Capital 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 Atlantic Preferred Capital 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,
although Atlantic Preferred Capital does not currently intend to invest in
shares or interests in other REITs. See "Federal Income Tax
Consequences--Taxation of Atlantic Preferred Capital."
Atlantic Preferred Capital and Atlantic Bank currently intend to maintain
a policy whereby upon foreclosure of any mortgage loan acquired by Atlantic
Preferred Capital from Atlantic Bank, the foreclosed property will be sold back
to Atlantic 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, Atlantic Preferred Capital 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 not less than 95% of its REIT taxable income and
taking into account taxes that would be imposed on undistributed taxable
income), or a combination of these methods.
19
<PAGE>
Atlantic Preferred Capital will have no debt outstanding following
consummation of the offering, and it does not currently intend to incur any
indebtedness. The organizational documents of Atlantic Preferred Capital limit
the amount of indebtedness which it is permitted to incur to no more than 100%
of the total stockholders' equity of Atlantic Preferred Capital. Any such debt
incurred may include intercompany advances made by Atlantic Bank to Atlantic
Preferred Capital.
Atlantic Preferred Capital may also issue additional series of preferred
stock. However, it 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 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. Atlantic Preferred Capital does not currently intend to issue any
additional series of preferred stock. Prior to any future issuance of
additional shares of preferred stock, Atlantic Preferred Capital will take into
consideration Atlantic 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 Atlantic
Preferred Capital's relationship with Atlantic Bank and its affiliates,
conflicts of interest have arisen and will arise with respect to certain
transactions, including without limitation, Atlantic Preferred Capital's
acquisition of mortgage assets from, or disposition of mortgage assets or
foreclosed property to, Atlantic Bank or its affiliates and the modification of
the master service agreement. It is Atlantic Preferred Capital's policy that
the terms of any financial dealings with Atlantic Bank and its affiliates will
be consistent with those available from third parties in the mortgage lending
industry.
Conflicts of interest between Atlantic Preferred Capital and Atlantic Bank
and its affiliates may also arise in connection with making decisions that bear
upon the credit arrangements that Atlantic Bank or one of its affiliates may
have with a borrower. Conflicts could also arise in connection with actions
taken by Atlantic Bank as, indirectly, a controlling person of Atlantic
Preferred Capital. It is the intention of Atlantic Preferred Capital and
Atlantic Bank that any agreements and transactions between Atlantic Preferred
Capital, on the one hand, and Atlantic Bank or its affiliates, on the other
hand, including, without limitation, the master mortgage loan 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 Atlantic Preferred Capital as owner of
the mortgage assets, and Atlantic Bank shall service the mortgage assets solely
with a view toward the interests of Atlantic Preferred Capital, and without
regard to the interests of Atlantic 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 Atlantic Preferred Capital as would have been obtained
from unaffiliated third parties.
There are no provisions in Atlantic Preferred Capital's Restated Articles
of Organization limiting any officer, director, security holder or affiliate of
Atlantic Preferred Capital from having any direct or indirect pecuniary
interest in any mortgage asset to be acquired or disposed of by Atlantic
Preferred Capital or in any transaction in which Atlantic Preferred Capital has
an interest or from engaging in acquiring and holding mortgage assets. As
described herein, it is expected that Atlantic Bank and its affiliates will
have direct interests in transactions with Atlantic Preferred Capital
(including without limitation the sale of mortgage assets to Atlantic Preferred
Capital). It is not currently anticipated, however, that any of the officers or
directors of Atlantic Preferred Capital will have any interests in such
mortgage assets.
Other Policies. Atlantic Preferred Capital intends to operate in a manner
that will not subject it to regulation under the Investment Company Act of
1940, as amended. Atlantic Preferred Capital 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 Atlantic Preferred Capital.
20
<PAGE>
Atlantic Preferred Capital may, under certain circumstances, purchase the
Series A Preferred Shares in the open market or otherwise. Atlantic Preferred
Capital has no present intention of repurchasing any shares of its capital
stock, other than its currently outstanding preferred 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.
Atlantic Preferred Capital 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 Atlantic Preferred Capital and
its stockholders to revoke its REIT status.
Under the advisory agreement, Atlantic Bank intends to monitor and review
Atlantic Preferred Capital's compliance with the requirements of the Code
regarding Atlantic Preferred Capital's qualification as a REIT on a quarterly
basis and to have an independent public accounting firm selected by the Board
of Directors of Atlantic Preferred Capital review the results of Atlantic
Bank's analysis.
Description of Loan Portfolio at September 30, 1998
Information with respect to Atlantic Preferred Capital's loan portfolio is
presented as of September 30, 1998. Atlantic Preferred Capital's loan portfolio
may or may not have the characteristics described below at future dates,
although Atlantic Preferred Capital 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 Atlantic Preferred Capital's loans have been
acquired from Atlantic Bank for an aggregate consideration equal to $162.4
million, of which $21.7 million was paid in cash, $1.0 million was paid in
preferred stock and $139.7 million was paid in common stock. At September 30,
1998, Atlantic Preferred Capital'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 Atlantic Bank through purchases
and 85 were originated by Atlantic Bank in the normal course of business. At
September 30, 1998, Atlantic Preferred Capital's investment in purchased loans
net of related discount of $18.4 million totaled $107.0 million. Atlantic
Preferred Capital's portfolio of loans originated by Atlantic Bank net of
allowance for loans losses and net deferred loan income totaled $35.8 million
at September 30, 1998. Certain loans in the loan portfolio have been prepaid.
On March 31, 1998, loans with principal balances of $154.7 million were
acquired by Atlantic Preferred Capital. Through September 30, 1998, principal
payments of $21.6 million have been received on these loans. Included in the
total principal payment are loan payoffs prior to maturity totaling $1.1
million.
21
<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 Atlantic Bank that have been renewed on terms
consistent with Atlantic Bank's loan policy and loan documentation
standards.
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>
22
<PAGE>
The following tables set forth information regarding maturity, interest
rate and principal balance 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>
<TABLE>
<CAPTION>
Percentage of Total
Principal Balance 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 Atlantic Bank from third parties and
which management of Atlantic 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
23
<PAGE>
purchased from private sector sellers in the financial services industry, such
as banks, including investment banking institutions, or from government
agencies such as the FDIC.
In order to determine the amount that Atlantic Bank will bid to acquire
loans, Atlantic 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, Atlantic 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, Atlantic 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, Atlantic
Bank's efforts to value the collateral also increases. For larger, more complex
loans, Atlantic 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. Atlantic 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 purchased loans, 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, Atlantic Bank aggressively pursues repayment. In the event
that a delinquent purchased loan becomes non-performing, Atlantic 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, Atlantic Preferred Capital does not recognize
interest income on such loans unless regular payments are being made. In
instances where the loan is not restructured, Atlantic Bank aggressively
pursues repayment, foreclosure or, in certain instances, a deed-in-lieu-of-
foreclosure.
The following table sets forth certain information relating to the payment
status of Atlantic Preferred Capital's purchased loan portfolio at September
30, 1998:
<TABLE>
<CAPTION>
(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
--------
Total performing purchased loans ....................... 123,835
Non-performing purchased loans ......................... 1,516
--------
Total purchased loan portfolio ......................... $125,351
========
</TABLE>
Atlantic Preferred Capital determines the contractual delinquency of
purchased loans prospectively from Atlantic Bank's purchase date rather than
from the origination date. Interest income on purchased non-performing loans is
generally recognized on the cost recovery method, whereby any amounts received
are applied against the recorded amount of the loan.
Accounting for Purchased Loan Portfolio. Atlantic Preferred Capital
accounts for purchased loans under the guidance of AICPA Practice Bulletin 6,
Amortization of Discounts on Certain Acquired Loans, using unique and exclusive
static pools. Static pools are established based on Atlantic Bank's original
acquisition timing. Once a static pool is established, the loans in the pool
are not changed.
At the time of acquisition, the excess of the contractual balance over the
amount of reasonably estimable and probable discounted future cash collections
is recorded as a non-amortizing discount. The non-amortizing
24
<PAGE>
discount is not accreted into income until it is determined that the amount and
timing of the collections are reasonably estimable and collection is probable.
The remaining discount, which represents the excess of the amount of reasonably
estimable and probable discounted future cash collections over the acquisition
amount is accreted into interest income using a method which approximates the
interest method. If cash flows cannot be reasonably estimated and collection is
not probable, the cost recovery method of accounting is used, whereby any
amounts received are applied against the recorded amount of the loan.
Subsequent to acquisition, if cash flow projections improve, and it is
determined that the amount and timing of the collections are reasonably
estimable and collection is probable, the corresponding decrease in the non-
amortizing discount is transferred to the amortizing portion and is accreted
into interest income over the remaining lives of the loans on a method which
approximates the interest method. Under Atlantic Bank's loan rating system,
each loan is evaluated for impairment and, where necessary, a portion of the
respective loan pool's non-amortizing discount is allocated to the loan and, if
none is available, an allowance is established through a provision for loan
losses charged to earnings. In addition, if this evaluation reveals that cash
flows cannot be estimated or the collection of the loan is not otherwise
probable, the loan is accounted for on the cost recovery method. Loans
accounted for on the cost recovery method, in general, consist of non-accrual
loans. At September 30, 1998 no such allowance was required on Atlantic
Preferred Capital's purchased loan portfolio.
Effective January 1, 1999, Atlantic Bank and Atlantic Preferred Capital
changed 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. This accounting change accounts for discount loan income and
loan loss provisions on an individual loan basis, rather than as previously
recognized in the aggregate on a static purchased pool basis and is being
accounted for as a "change in estimate" in accordance with Accounting Principles
Board Opinion No. 20. Accounting for loans on an individual basis rather than a
pool basis will allow Atlantic Preferred Capital to selectively purchase
qualified individual loans from Atlantic Bank, rather than purchasing entire
pools which may contain individual loans undesirable for a REIT. Management does
not anticipate any material impact on Atlantic Preferred Capital's 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 Atlantic Preferred Capital'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>
Originated Loan Portfolio. At September 30, 1998, Atlantic Preferred
Capital's originated loan portfolio contained gross outstanding loans of $37.2
million, which were originated by Atlantic Bank. These loans consist of loans
which were originated in the normal course of business as well as loans
initially purchased by Atlantic Bank which were renewed on terms consistent
with its loan policy and documentation standards.
The majority of the loans in Atlantic Preferred Capital'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, of Atlantic Preferred Capital's originated loan portfolio.
Approximately 74.7% of the New England loans are located in Massachusetts.
25
<PAGE>
The terms of commercial real estate loans originated or renewed by
Atlantic 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. Atlantic 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 Atlantic Bank in excess of
$250,000 are performed by an independent fee appraiser designated by Atlantic
Bank before the loan is made. Appraisals on commercial real estate are reviewed
by a loan officer and management. These appraisals must be in compliance with
the Uniform Standards of Professional Appraisal Practice (USPAP), which
establishes the minimum standards for appraisals. For real estate transactions
less than $250,000, Atlantic Bank, at a minimum, has an evaluation of the
property completed. An evaluation is completed by a real estate professional,
but may be less formal than an appraisal and does not have to comply with USPAP
standards. In addition, Atlantic Bank's underwriting procedures require
verification of the borrower's credit history, financial statements, references
and income projections for the property. For originated commercial mortgage
loans Atlantic Bank requires a minimum debt service coverage ratio of 1.25 to
1. In analyzing the desirability of a commercial real estate loan, Atlantic
Bank considers not only the collateral coverage and debt service coverage
ratio, but also the following factors that are specific to real estate lending:
o the location of the property, desirability of the market area, supply of
competing properties, and market specific economic factors;
o the condition and age of the building and mechanical systems and the
need for renovations, repairs, or remediation of hazardous wastes or
materials;
o the adaptability of the property to other uses or types of tenants;
o the quality and variety of tenants, the length/terms of leases, the
existence of above or below market leases, and the percentage of rental
income derived from tenants related to the borrower;
o compliance with zoning regulations;
o the existence of use restrictions, easements, or right-of-ways that may
impact the value and marketability of the property; and
o the borrower's ability to manage the particular type of real estate
property.
As servicing agent for Atlantic Preferred Capital's loan portfolio,
Atlantic Bank will continue to monitor Atlantic Preferred Capital's loans
through its review procedures and updated appraisals. Additionally, in order to
monitor the adequacy of cash flows on income-producing properties, Atlantic
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.
Atlantic Preferred Capital's allowance for loan losses on originated loans
at September 30, 1998 was $1.3 million, all of which represented a general
allowance for loan losses. The determination of this allowance
26
<PAGE>
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 Atlantic Preferred Capital 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 Atlantic Preferred Capital's
allowance for loan losses is adequate to absorb the known and inherent risks in
Atlantic Preferred Capital's originated loans at each date based on the facts
known to management as of such date.
Atlantic Preferred Capital establishes a specific allowance against a
given loan when management perceives a problem with such loan that may result
in a loss. Atlantic Preferred Capital continues to monitor and modify its
allowances for general and specific loan losses as economic conditions dictate.
Although Atlantic Preferred Capital 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.
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 Atlantic Preferred Capital'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 Atlantic Preferred Capital's loan portfolio in accordance with
the master service agreement and in purchasing and originating loans which may
ultimately be acquired by Atlantic Preferred Capital, Atlantic 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
Atlantic Bank's Management Loan Committee and either Atlantic Bank's Chairman
or President, or in the case of loans of $2.5 million or more, the Loan and
Investment Committee of Atlantic 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. Atlantic Bank's President and
Chairman are responsible for the general supervision of the loan portfolio and
adherence by the loan officers to Atlantic 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 Atlantic Bank's standards as to historic debt service
coverage, reasonableness of projections, strength of management and sufficiency
of secondary repayment.
Under Atlantic Bank's credit risk management policies, management presents
to the Board of Directors of Atlantic Bank 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").
27
<PAGE>
Non-Performing Assets
The performance of Atlantic Preferred Capital's loan portfolio is
evaluated regularly by management. Atlantic Preferred Capital 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,
Atlantic Preferred Capital'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, Atlantic Preferred Capital had no non-performing assets in its originated
portfolio.
A troubled debt restructuring is a loan on which Atlantic Preferred
Capital, 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 Atlantic Preferred Capital would not otherwise consider. Certain
purchased loans are restructured by Atlantic Preferred Capital in order to
establish a payment plan which the borrower can maintain and which is
profitable to Atlantic Preferred Capital in light of its net investment in such
loan. When such a purchased loan has been acquired at a discount sufficient to
enable Atlantic Preferred Capital to make an appropriate profit on the loan
even after restructuring the debt and making certain concessions to the
borrower, Atlantic Preferred Capital 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 Atlantic Preferred Capital 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 Atlantic Preferred Capital'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 Atlantic Preferred Capital's purchased loan portfolio, the
recorded investment represents Atlantic Preferred Capital's purchase price net
of any related non-amortizing discounts. Substantially all of Atlantic
Preferred Capital'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 Atlantic Preferred Capital classifies problem assets, it may
establish specific allowances for loan losses or specific non-amortizing
discount allocations in amounts deemed prudent by management. When Atlantic
Preferred Capital 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 Atlantic Preferred Capital's loans are reviewed monthly
to determine which loans are to be placed on non-accrual status. In addition,
Atlantic Preferred Capital'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 Atlantic Bank, which may
result in the establishment of additional general or specific loss allowances.
Servicing
The mortgage assets are serviced by Atlantic Bank pursuant to the terms of
the master service agreement. Atlantic Bank in its role as servicer under the
terms of the master service agreement receives a fee equal to 0.20% per annum,
payable monthly, on the gross outstanding principal balances of loans serviced.
For the period from inception through September 30, 1998, Atlantic Preferred
Capital incurred $152,000 in servicing fees and $38,000 in advisory fees
payable to Atlantic Bank.
The master service agreement requires Atlantic Bank to service the loan
portfolio in a manner substantially the same as for similar work performed by
Atlantic Bank for transactions on its own behalf. Atlantic 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
28
<PAGE>
portfolio it services. Atlantic Bank also provides accounting and reporting
services required by Atlantic Preferred Capital for such loans. Atlantic Bank
may also be directed by Atlantic Preferred Capital, at any time during the
servicing process, to dispose of any loans which become classified, placed in a
nonaccrual status, or are renegotiated due to the financial deterioration of
the borrower.
Atlantic Bank is required to pay all expenses related to the performance
of its duties under the master service agreement. Under the master mortgage
loan purchase agreement, Atlantic Bank is required to repurchase, at the
request of Atlantic Preferred Capital, any mortgage loan it sold to Atlantic
Preferred Capital in the event any such representation or warranty is untrue.
The repurchase price for any such mortgage loan is the outstanding net carrying
value thereof plus accrued and unpaid interest thereon at the date of
repurchase. Atlantic 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 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 and appointment of a successor servicer. The
master service agreement will automatically terminate if Atlantic Preferred
Capital ceases to be an affiliate of Atlantic Bank.
Atlantic Bank remits daily to Atlantic Preferred Capital all principal and
interest collected on loans serviced by Atlantic Bank for Atlantic Preferred
Capital.
When any mortgaged property underlying a mortgage loan is conveyed by a
mortgagor, Atlantic 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 Atlantic 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
Atlantic Preferred Capital has three officers. The officers of Atlantic
Preferred Capital are described below under "Management--Directors and
Officers." Atlantic Preferred Capital does not have any employees because it
has retained Atlantic Bank to perform all necessary functions pursuant to the
advisory agreement and the master service agreement. Each officer of Atlantic
Preferred Capital currently is also an officer and/or director of Atlantic
Bank. Atlantic Preferred Capital will maintain corporate records and audited
financial statements that are separate from those of Atlantic Bank. None of the
officers or directors of Atlantic Preferred Capital will have any direct or
indirect pecuniary interest in any mortgage asset to be acquired or disposed of
by Atlantic Preferred Capital or in any transaction in which Atlantic Preferred
Capital has an interest or will engage in acquiring and holding mortgage
assets.
Competition
Atlantic Preferred Capital 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 Atlantic Bank.
Accordingly, Atlantic Preferred Capital 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 Atlantic
Bank. Atlantic Bank, however, faces significant competition in the purchase and
origination of mortgage loans, which could have an adverse effect on the
ability of Atlantic Preferred Capital to acquire mortgage loans. If Atlantic
Bank does not successfully compete in the origination and purchase of mortgage
loans, this could, therefore, have an adverse effect on Atlantic Preferred
Capital's business, financial condition and results of operations.
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
29
<PAGE>
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 Atlantic 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 Atlantic
Bank, must offer financial products and services in a way which differentiates
them from the larger financial organization competitors. Atlantic 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
Atlantic 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
Atlantic Bank to serve small-to-mid-sized businesses which may not be
well-served by larger banks.
Atlantic 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
Atlantic Bank, have facilities and financial resources greater than those of
Atlantic Bank and have other competitive advantages over Atlantic 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 Atlantic Bank will obtain sufficient deposits and purchase
or originate a sufficient volume of quality loans to operate profitably in this
competitive environment or that Atlantic Bank will maintain its competitive
position in the commercial lending market in the future.
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. The laws permit,
subject to certain deposit and other limitations, interstate acquisitions,
mergers and branching on a reciprocal basis. Competition in Atlantic 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.
Legal Proceedings
From time to time, Atlantic Preferred Capital may be involved in routine
litigation incidental to its business, including a variety of legal proceedings
with borrowers, which would contribute to Atlantic Preferred Capital's
expenses, including the costs of carrying non-performing assets. Atlantic
Preferred Capital is not currently a party to any material proceedings.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The principal business of Atlantic Preferred Capital is to acquire and
hold mortgage assets that will generate net income for distribution to
stockholders. Atlantic Preferred Capital currently intends to continue to
acquire all of its mortgage assets from Atlantic Bank. Atlantic Preferred
Capital 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, Atlantic Preferred Capital commenced its operations
upon the sale to Atlantic Bank of 100 shares of Atlantic Preferred Capital's
common stock and 1,000 shares of preferred stock in exchange for the transfer
of loans with a net carrying value of $140.7 million, of which $1.0 million was
attributed to the preferred stock and $139.7 million was attributed to the
common stock. All outstanding shares of Atlantic Preferred Capital's common
stock and preferred stock are held by Atlantic Bank. All shares of existing
preferred stock are anticipated to be retired upon completion of this offering
using approximately $1.1 million of the net proceeds from this offering.
Atlantic Bank administers the day-to-day activities of Atlantic Preferred
Capital in its roles as servicer under the master service agreement and as
advisor under the advisory agreement. Atlantic Preferred Capital pays Atlantic
Bank an annual servicing fee equal to 0.20% and an annual advisory fee equal to
0.05%, respectively, of the gross outstanding principal balances of loans in
the loan portfolio. Atlantic Bank and its affiliates have interests that are
not identical to those of Atlantic Preferred Capital. Consequently, conflicts
of interest will arise with respect to transactions, including, without
limitation, future acquisitions of mortgage assets from Atlantic 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 advisory agreement and the master service agreement.
It is the intention of Atlantic Preferred Capital that any agreements and
transactions between Atlantic Preferred Capital and Atlantic 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 Atlantic
Preferred Capital 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 Atlantic Preferred Capital as those that could have
been obtained from unaffiliated third parties.
Results of Operations
Atlantic Preferred Capital 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 and advisory fees and
$40,000 in preferred stock dividends, Atlantic Preferred Capital reported net
income available to the common stockholder of $8.1 million for the period from
inception through September 30, 1998.
The yield on Atlantic Preferred Capital'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>
Atlantic Preferred Capital 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.
31
<PAGE>
Loan Portfolio
Through September 30, 1998, Atlantic Preferred Capital has acquired loans,
either through transfer or purchase from Atlantic Bank, having gross
outstanding principal balances at the time of acquisition of $183.2 million. In
addition, Atlantic Preferred Capital received $19.6 million of principal
payments on the loan portfolio 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 Percentage of 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>
Atlantic Preferred Capital intends that each loan acquired from Atlantic
Bank in the future will be a whole loan, and will be originated or acquired by
Atlantic Bank in the ordinary course of its business. Atlantic Preferred
Capital also intends that all loans held by it will be serviced pursuant to the
master service agreement.
There were $1.5 million of mortgage loans on non-accrual status at
September 30, 1998. Loans are generally placed on non-accrual status when the
collectibility of principal and interest is not probable or estimable.
Allowance for Loan Losses and Discount
The balance of the allowance for loan losses was transferred from Atlantic
Bank at the time the loans were contributed to Atlantic Preferred Capital. 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, Atlantic Preferred Capital's allowance for loan
losses as a percentage of total originated loans was 3.59%.
Atlantic Preferred Capital has historically maintained 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. Effective January 1, 1999, Atlantic Preferred
Capital began accounting for the allowance for loan losses on an individual
loan basis rather than on a purchased pool basis. Atlantic Preferred Capital'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 with respect
to particular loans in the portfolio, and assuming the non-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
32
<PAGE>
purchased loan portfolio. Non-amortizing discount was 731.13% of non-performing
purchased loans at September 30, 1998.
Interest Rate Risk
Atlantic Preferred Capital's income consists primarily of interest income
on mortgage assets. Atlantic Preferred Capital does not intend to use any
derivative products to manage its interest rate risk. If there is a decline in
market interest rates, Atlantic Preferred Capital 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 Atlantic Preferred Capital's
ability to pay dividends on the Series A Preferred Shares.
Based on the outstanding balance of Atlantic Preferred Capital's loans at
September 30, 1998 and the historical yield on such loans, anticipated annual
interest income on Atlantic Preferred Capital'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
Atlantic Preferred Capital's performance to both positive and negative
developments affecting a particular industry. Atlantic Preferred Capital's
balance sheet exposure to geographic concentrations directly affects the credit
risk of the loans within its 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 Atlantic Preferred Capital'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.
33
<PAGE>
Liquidity Risk Management
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of Atlantic Preferred Capital's financial
commitments and to capitalize on opportunities for Atlantic Preferred Capital's
business expansion. In managing liquidity, Atlantic Preferred Capital takes
into account various legal limitations placed on a REIT.
Atlantic Preferred Capital'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. Atlantic
Preferred Capital 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, Atlantic Preferred Capital 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. Atlantic Preferred Capital will have no debt outstanding following
consummation of the offering, and it does not currently intend to incur any
indebtedness. The organizational documents of Atlantic Preferred Capital limit
the amount of indebtedness which it is permitted to incur to no more than 100%
of the total stockholders' equity of Atlantic Preferred Capital. Any such debt
may include intercompany advances made by Atlantic Bank to Atlantic Preferred
Capital.
Atlantic Preferred Capital may also issue additional series of preferred
stock. However, Atlantic Preferred Capital 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 Atlantic Preferred Capital's independent directors.
Other Matters
As of September 30, 1998, Atlantic Preferred Capital believed that it was
in full compliance with the REIT tax rules. Atlantic Preferred Capital
estimates:
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; and
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.
Atlantic Preferred Capital also 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
Atlantic Preferred Capital's estimates are accurate or that Atlantic Preferred
Capital 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.
Atlantic Preferred Capital is dependent in virtually every phase of its
operations on Atlantic Bank, including the computer and other systems of
Atlantic Bank. Accordingly, Atlantic Preferred Capital is addressing the Year
2000 issue with respect to its operations through its relationship with
Atlantic Bank under the advisory agreement and the master service agreement.
During 1997, the management of Atlantic Bank developed an action plan to
address the Year 2000 issue. Atlantic Bank uses computer systems (including
hardware and software) primarily to track deposits and loans, transfer funds,
prepare financial reports, and perform financial calculations. Atlantic Bank's
deposit and loan processing is outsourced to Bisys Systems of Houston, Texas
("Bisys") under a service agreement.
34
<PAGE>
Atlantic Bank's plan includes five phases as suggested by the FDIC and
other bank regulatory authorities: awareness, assessment, renovation,
validation, and testing. In 1997, Atlantic Bank substantially completed the
awareness and assessment phases of the plan with regard to its computer
systems, and has identified those areas that are considered mission critical.
Atlantic Bank began working with Bisys, reviewing their plans, and determining
how to validate the readiness of its system. Also in connection with the
awareness and assessment phases of the plan, Atlantic Bank raised the Year 2000
issue with its vendors, service providers, and customers. All vendors listed in
Atlantic Bank's accounts payable system were sent a questionnaire on the Year
2000 issue. Vendors provided written responses to the questionnaires and others
were sent follow up letters and/or were called regarding any follow-up
questions or issues. A majority of Atlantic Bank's vendors have responded to
its questionnaires and follow-up letters. Based on these responses, the
majority of Atlantic Bank's vendors have indicated that they have a plan to
remediate their systems as needed.
Atlantic Bank is in the process of evaluating the risk of customer failure
to prepare for the Year 2000 issue, any associated effect of the ability of
customers to repay outstanding loans, and impact on the adequacy of the level
of the allowance for loan losses. Atlantic Bank currently considers Year 2000
risks in evaluating the adequacy of the allowance for loan and lease losses. In
accordance with applicable FDIC regulations, Atlantic Bank has also distributed
written materials to all of its customers regarding the Year 2000 issue,
including a description of Atlantic Bank's plan and the status of such plan.
Atlantic Bank also distributed questionnaires to its customers with loans
totaling $500,000 or more. Such customers provided written responses to the
questionnaires and others were sent follow-up letters and/or were called
regarding any follow-up questions or issues. A majority of these customers of
Atlantic Bank have responded to its questionnaires and follow-up letters. Based
on these responses, a majority of Atlantic Bank's significant customers have
indicated that they have a plan to remediate their systems as needed.
The plan calls for validation and testing with respect to all mission
critical systems. In the first half of 1998, Atlantic Bank upgraded its local
area network, including the network operating system and desktop application
software. In addition, most of Atlantic Bank's desktop systems were similarly
upgraded. The manufacturer of the network operating system and desktop
application software has certified that all of these products are Year 2000
compliant. Atlantic Bank has also conducted internal testing on these products
and has similarly concluded that they are Year 2000 compliant. Atlantic Bank
has also installed a test lab simulating a Year 2000 environment with possible
date sensitive components, including computers, operating systems, and base
applications.
Testing of the Bisys systems is being completed according to the schedule
prepared by Bisys. The test period runs from November 1998 through April 1999.
During this period, the entire test process will be performed twice. Atlantic
Bank will have an opportunity to re-test any applications that produce errors
in the initial testing. Atlantic Bank believes that it and its vendors,
customers, and service providers are currently on schedule in accordance with
the plan.
Atlantic Bank's new executive offices had been renovated in 1997 and early
1998, with new building systems (such as fire and security alarm systems and
HVAC system) installed at such time. All of the contractors and suppliers of
such building systems have certified that their systems are Year 2000
compliant. The building and/or Atlantic Bank have tested such systems and have
similarly concluded that they are Year 2000 compliant.
Atlantic Bank's risk management program includes emergency backup and
recovery procedures to be followed in the event of failure of a
business-critical system. These procedures are being expanded to include
specific procedures for potential Year 2000 issues, and contingency plans to
protect against Year 2000 related interruptions. Atlantic Bank recently
completed these contingency plans which include backup procedures,
identification of alternative suppliers, emergency plans to handle power
outages, telecommunication failures, etc.
Based on its review to date, Atlantic Bank believes that the primary costs
of addressing the Year 2000 issue will include internal staffing, consulting,
system testing and modification. Atlantic Bank currently expects that the total
third party expenses associated with the plan will be approximately $150,000,
and will primarily be incurred from the third quarter of 1998 through year-end
1999. The costs are not considered to have a material affect on operating
expenses or budgets. Atlantic Bank plans to account for these costs as expense
items. The costs include an independent review by Arthur Andersen LLP under an
engagement letter signed June 29, 1998.
35
<PAGE>
While Atlantic Bank believes that it is taking reasonable steps with
respect to the Year 2000 issue, if the phases of the plan are not completed on
time, the costs associated with becoming Year 2000 compliant exceed Atlantic
Bank's estimates, third party providers are not Year 2000 compliant on a timely
basis, or customers with material loan obligations are unable to meet their
repayment obligations due to Year 2000 problems, the Year 2000 issue could have
a material impact on Atlantic Preferred Capital's financial results. In
addition, Atlantic Bank's efforts to address the Year 2000 issue are being
monitored by its federal banking regulators. Failure to be Year 2000 compliant
on a timely basis could subject Atlantic Bank to formal supervisory or
enforcement actions. Any of the foregoing issues could have a material adverse
impact on the ability of Atlantic Bank to service Atlantic Preferred Capital's
loan portfolio and otherwise manage its business which could have a material
adverse effect on Atlantic Preferred Capital's business, financial condition or
results of operations.
The preceding Year 2000 discussion contains various forward-looking
statements which represent Atlantic Bank's beliefs or expectations regarding
future events. When used in the Year 2000 discussion, the words "believes,"
"expects," "estimates" and similar expressions are intended to identify
forward-looking statements. Forward-looking statements include, without
limitation, Atlantic Bank's expectations as to when it will complete the phases
of the plan; its estimated costs; and its belief that its internal systems will
be Year 2000 compliant in a timely manner. All forward-looking statements
involve a number of risks and uncertainties that could cause the actual results
to differ materially from the projected results. Factors that may cause these
differences include, but are not limited to, the availability of qualified
personnel and other information technology resources; the ability to identify
and remediate all date sensitive lines of computer code; and the actions of
governmental agencies or other third parties with respect to Year 2000
problems.
36
<PAGE>
MANAGEMENT
Directors and Officers
The following table sets forth certain information about the directors and
officers of Atlantic Preferred Capital.
<TABLE>
<CAPTION>
Name Age Position(s) Held
- ---------------------------------- ----- --------------------
<S> <C> <C>
Richard Wayne ................ 46 President, Director
John L. Champion ............. 50 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 Atlantic Preferred Capital is set forth below.
Richard Wayne. Mr. Wayne has been the President and a Director of Atlantic
Preferred Capital since March 1998. Mr. Wayne is President and Co-Chief
Executive Officer of Atlantic Bank. Since 1991, Mr. Wayne has been the
President of Atlantic 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 has been the Treasurer and a Director of
Atlantic Preferred Capital since March 1998. Mr. Champion joined Atlantic Bank
in March, 1993 and is the Chief Financial Officer, the Treasurer and a Senior
Vice President of Atlantic Bank. 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 been Clerk of Atlantic Preferred Capital
since March 1998. Mr. Shron has served as a Senior Vice President, Legal
Counsel and Assistant Clerk of Atlantic Bank since January 1997, General
Counsel since January 1998 and Clerk since April 1998. Mr. Shron joined
Atlantic Bank as a Vice President and Legal Counsel in April 1996. Prior to
joining Atlantic Bank, Mr. Shron was a partner at the Boston law firm of Riemer
and Braunstein from 1986 to 1996.
Nicholas W. Lazares. Mr. Lazares has been a Director of Atlantic Preferred
Capital since March 1998. Mr. Lazares is Chairman of the Board of Directors and
Co-Chief Executive Officer of Atlantic Bank. Since 1991, Mr. Lazares has been
Chairman of the Board of Directors of Atlantic 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 Atlantic
Preferred Capital be approved by a majority of its independent directors.
Atlantic Preferred Capital intends to elect two independent directors within 90
days after completion of the offering.
Audit Committee
Within 90 days after consummation of the offering, Atlantic Preferred
Capital will establish an audit committee which will review the engagement and
independence of its auditors. The audit committee will also review the adequacy
of Atlantic Preferred Capital's internal accounting controls. The audit
committee will initially be comprised of the independent directors.
37
<PAGE>
Management and Director Compensation
Atlantic Preferred Capital intends to pay the independent directors fees
for their services as directors. Atlantic Preferred Capital will not pay any
compensation to its officers or employees or to directors who are not
independent directors.
Advisory Agreement
Atlantic Preferred Capital has entered into the advisory agreement with
Atlantic Bank to administer the day-to-day operations of Atlantic Preferred
Capital. As advisor, Atlantic Bank is responsible for monitoring the credit
quality of the loan portfolio held by Atlantic Preferred Capital, advising
Atlantic Preferred Capital with respect to the acquisition, management,
financing and disposition of its loans and other assets and maintaining the
corporate and shareholder records of Atlantic Preferred Capital. Atlantic Bank
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. Atlantic Bank 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. Atlantic Bank will be paid a monthly advisory fee equal to 0.05% per
annum of the average gross outstanding balance of Atlantic Preferred Capital's
loans for the immediately preceding month, plus reimbursement for certain
expenses of Atlantic Preferred Capital incurred by Atlantic Bank as advisor.
The advisory agreement has an initial term of five years, and will be
renewed automatically for additional one-year periods unless notice of
nonrenewal is delivered to Atlantic Bank by Atlantic Preferred Capital. After
the initial five year term, the advisory agreement may be terminated by
Atlantic Preferred Capital at any time upon 90 days' prior notice. As long as
any Series A Preferred Shares remain outstanding, any decision by Atlantic
Preferred Capital 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 and the advisory fee, Atlantic Bank will not be entitled to
any fee for providing advisory and management services to Atlantic Preferred
Capital.
38
<PAGE>
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
Atlantic Preferred Capital. 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 Atlantic Preferred Capital. The Series A Preferred Shares
will not be subject to any sinking fund or other obligation of Atlantic
Preferred Capital for their repurchase or retirement. The Series A Preferred
Shares are not convertible into any other securities of Atlantic Preferred
Capital. The Series A Preferred Shares will be exchanged on a ten-for-one basis
for Bank Preferred Shares if directed by the FDIC under certain circumstances.
The Series A Preferred Shares will rank senior to Atlantic Preferred Capital's
common stock and, to the extent outstanding after this offering, existing
preferred stock, as to dividends and in liquidation.
Dividends
Holders of Series A Preferred Shares shall be entitled to receive, if,
when and as declared by the Board of Directors of Atlantic Preferred Capital
out of assets of Atlantic Preferred Capital legally available therefor, monthly
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 for each monthly period shall be payable on the fifteenth
day of the following month, at such annual rate, commencing on , 1999, to
holders of record on the last business day of the monthly dividend period.
Monthly dividend periods will commence on the first day of each month and on
the date of original issue for the initial dividend period. The amount of
dividends, if declared, payable for the initial period or any period shorter
than a full dividend period shall be computed on the basis of 30-day months, a
360-day year and the actual number of days elapsed in the period. Dividends in
each period will accrue from the first day of such period, whether or not
declared or paid for the prior monthly period.
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 monthly dividend period, then
holders of the Series A Preferred Shares will have no right to receive the
amount of the undeclared dividend for that period, and Atlantic Preferred
Capital will have no obligation to pay the undeclared 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, any other 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 monthly dividend
period, their holders of the Series A Preferred Shares will have no right to
receive the amount of such undeclared dividends for that period, and Atlantic
Preferred Capital 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, any other series of
preferred stock or the common stock.
For a discussion of the tax treatment of distributions to stockholders,
see "Federal Income Tax Consequences--Taxation of U.S. Stockholders" and
"--Taxation of Non-U.S. Stockholders," and for a discussion of certain
potential regulatory limitations on Atlantic Preferred Capital's ability to pay
dividends, see "Risk Factors--Bank Regulatory Restrictions on the Operations
and Dividends of Atlantic Preferred Capital."
Authority to Issue Additional Shares
By vote of a majority the holders of its common stock and each outstanding
class of preferred stock, Atlantic Preferred Capital may increase the number of
its authorized shares. In addition, the Board of Directors of Atlantic
Preferred Capital has the authority, subject to receipt of all applicable
regulatory approvals, to issue up to an additional 2,000,000 shares of
preferred stock and determine the preferences, voting powers, qualifications,
and special or relative rights or privileges thereof. 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
39
<PAGE>
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 Atlantic Preferred Capital has no intention at the present time
of submitting for a vote of the Series A Preferred Shares or the independent
directors a plan to create any new class of shares.
Automatic Exchange
Each Series A Preferred Share will be automatically 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)
Atlantic Bank becomes "undercapitalized" under applicable FDIC regulations, (2)
Atlantic Bank is placed into bankruptcy, reorganization conservatorship or
receivership or (3) the FDIC, in its sole discretion and even if Atlantic Bank
is not "undercapitalized," anticipates it becoming "undercapitalized" in the
near term. Upon the automatic exchange, each holder of Series A Preferred
Shares shall be unconditionally obligated to surrender to Atlantic Bank the
certificates representing each Series A Preferred Share of such holder, and
Atlantic 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 Atlantic Preferred Capital prior to the Time of Exchange (as
defined below) shall not be deemed outstanding and shall not be subject to the
automatic exchange. Atlantic Bank has entered into an agreement with Atlantic
Preferred Capital pursuant to which Atlantic 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. Atlantic 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 Atlantic 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 Atlantic Preferred Capital, all
rights of the holders of Series A Preferred Shares as stockholders of Atlantic
Preferred Capital 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. Atlantic Preferred Capital 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 Atlantic 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 Atlantic
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 Atlantic Bank
or by Atlantic Preferred Capital, 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 Atlantic Bank as holders of
Series A Preferred Shares have as to Atlantic Preferred Capital (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 Atlantic Bank." The Bank Preferred Shares will not be
registered with the SEC 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"). Atlantic 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 market for the Bank
Preferred Shares, if issued.
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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 Atlantic Bank; such rights as are conferred by the Series A
Preferred Shares exist solely as to Atlantic Preferred Capital.
Voting Rights
Except as specified below or otherwise 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 Atlantic Preferred Capital,
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 Atlantic Preferred Capital other than a series
which shall not have any right to object to such creation or (b) alter or
change the provisions of Atlantic Preferred Capital'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 Atlantic
Preferred Capital; provided that if such amendment shall not adversely affect
all series of preferred stock of Atlantic Preferred Capital, such amendment
need only be approved by the holders of at least two-thirds of the shares of
all series of preferred stock adversely affected thereby. In addition, the
consent of the holders of all of the outstanding Series A Preferred Shares is
required for Atlantic Preferred Capital to incur indebtedness for borrowed
money in excess of 100% of Atlantic Preferred Capital's total stockholders'
equity as of the time of the proposed incurrence of indebtedness.
Redemption
The Series A Preferred Shares will not be redeemable prior to , 2004
(except upon the occurrence of a Tax Event, as defined below). On or after such
date, the Series A Preferred Shares will be redeemable at the option of
Atlantic Preferred Capital, 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 month 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 approval is not required at the time of
redemption).
Atlantic Preferred Capital 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 monthly accrued and unpaid dividend from the
beginning of the month in which the redemption occurs to the date of
redemption, if any, thereon. "Tax Event" means the receipt by Atlantic
Preferred Capital of an opinion of counsel in form and substance satisfactory
to Atlantic Preferred Capital 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
that (a) dividends paid or to be paid by Atlantic Preferred Capital with
respect to its capital stock are not, or will not be, fully deductible by
Atlantic Preferred Capital for United States federal or Massachusetts income
tax purposes or (b) Atlantic Preferred Capital is otherwise unable to qualify
as a REIT pursuant to Section 856 of the Code.
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Rights upon Liquidation
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of Atlantic Preferred Capital, the holders of the Series A Preferred
Shares at the time outstanding will be entitled to receive out of assets of
Atlantic Preferred Capital 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 monthly accrued and unpaid dividend thereon, if any, from the beginning of
the month in which the liquidation occurs 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 Atlantic Preferred Capital. In the
event that, upon any such voluntary or involuntary liquidation, dissolution or
winding up, the available assets of Atlantic Preferred Capital 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 Atlantic Preferred Capital 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 Atlantic Preferred
Capital, 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 Atlantic Preferred
Capital with or into any other entity, or the sale, lease or conveyance of all
or substantially all of its property or business, shall not be deemed to
constitute liquidation, dissolution or winding up of Atlantic Preferred
Capital.
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DESCRIPTION OF CAPITAL STOCK
Authorized and Outstanding Capital Stock
The authorized capital stock giving effect to the authorization and the
issuance of the Series A Preferred Shares in connection with this offering will
consist of 100 shares of common stock, all of which shares will be outstanding,
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),
1,000 shares of 8% Cumulative Nonconvertible Preferred Stock, Series B (the
"Series B Preferred Shares"), all of which are anticipated to be redeemed and
retired using a portion of the net proceeds of this offering, 2,000,000 shares
of undesignated preferred stock, none of which will be outstanding and
3,380,000 shares of excess preferred stock, none of which will be outstanding.
The following summary description of the capital stock of Atlantic Preferred
Capital is qualified in its entirety by reference to Atlantic Preferred
Capital's Restated Articles of Organization and Atlantic Preferred Capital's
By-laws, copies of which are filed as exhibits to the Registration Statement of
which this prospectus is a part. The Restated Articles of Organization and
By-laws have been adopted by the stockholders and the Board of Directors of
Atlantic Preferred Capital. For a description of the Series A Preferred Shares
see "Description of the 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 Atlantic Preferred Capital, holders
of common stock will be entitled to receive all assets of Atlantic Preferred
Capital 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.
Series B Preferred Shares. Holders of Series B Preferred Shares are not
entitled to vote at stockholder meetings and are not entitled to notice of such
meetings except where specifically required by law. Holders of the Series B
Preferred Shares have no preemptive rights with respect to any shares of the
capital stock of Atlantic Preferred Capital, and the Series B Preferred Shares
are not convertible into any other securities of Atlantic Preferred Capital.
The holders of Series B Preferred Shares are entitled to receive annual
dividends equal to eight percent (8%) of the liquidation preference of the
Series B Preferred Shares. Dividends on Series B Preferred Shares are
cumulative, and all accumulated and unpaid dividends are paid before any
dividends are paid on the common stock.
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of Atlantic Preferred Capital, the holders of the Series B Preferred
Shares are entitled to receive out of the assets of Atlantic Preferred Capital
available for distribution to stockholders, and before any amount is paid or
distributed to holders of common stock or any class of junior preferred shares,
a liquidation amount of $1,000 per share, plus any accumulated and unpaid
dividends.
Atlantic Preferred Capital currently anticipates redeeming all of the
outstanding Series B Preferred Shares using a portion of the net proceeds of
this offering. If and to the extent the Series B Preferred Shares are not so
redeemed, they will rank junior to the Series A Preferred Shares as to
dividends and in liquidation.
Undesignated Preferred Stock. Under the Restated Articles of Organization,
the Board of Directors is authorized, subject to receipt of all applicable
regulatory approvals, if any, without further action of the stockholders, to
issue up to 2,000,000 shares of preferred stock in one or more classes and to
determine the
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preferences, voting powers, qualifications and special or relative rights or
privileges of (1) any class of such preferred stock before the issuance of any
shares of that class or (2) one or more series within a class of such preferred
stock before the issuance of any shares of that series.
Restrictions on Ownership and Transfer
For Atlantic Preferred Capital 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").
In order to protect Atlantic Preferred Capital against the risk of losing
its status as a REIT, the Restated Articles of Organization, subject to certain
exceptions, provide that no single person (which may include certain "groups"
of persons) may "beneficially own" more than 9.8% (the "Aggregate Equity Stock
Ownership Limit") of the aggregate number of outstanding shares of capital
stock of Atlantic Preferred Capital. Under the Restated Articles of
Organization, a person generally "beneficially owns" shares if (1) such person
has direct ownership of such shares, (2) such person has indirect ownership of
such shares taking into account the constructive ownership rules of Section 544
of the Code, as modified by Section 856(h)(1)(B) of the Code, or (3) such
person would be deemed to "beneficially own" such shares pursuant to Rule 13d-3
under the Securities Exchange Act of 1934. Any transfer of shares of capital
stock or of any security convertible into shares of preferred stock that would
create a direct or indirect ownership of shares of preferred stock in excess of
the Aggregate Equity Stock Ownership Limit, or that would result in the
disqualification of Atlantic Preferred Capital as a REIT, including any
transfer that results in the shares of capital stock being owned by fewer than
100 persons or results in Atlantic Preferred Capital being "closely held"
within the meaning of Section 856(h) of the Code or results in Atlantic
Preferred Capital constructively owning 10% or more of the ownership interests
in a tenant of Atlantic Preferred Capital within the meaning of Section 318 of
the Code as modified by Section 856(d)(5) of the Code, shall be null and void,
and the intended transferee will acquire no rights to the shares of preferred
stock. The Board of Directors may, in its sole discretion, waive the Aggregate
Equity Stock Ownership Limit if evidence satisfactory to the Board of Directors
is presented that the changes in ownership will not jeopardize Atlantic
Preferred Capital's REIT status and the Board of Directors otherwise decides
that such action is in the best interest of Atlantic Preferred Capital.
If any purported transfer of preferred stock of Atlantic Preferred Capital
or any other event would otherwise result in any person violating the Aggregate
Equity Stock Ownership Limit, or the Restated Articles of Organization, then
any such purported transfer will be void and of no force or effect with respect
to the purported transferee (the "Prohibited Transferee") as to that number of
shares in excess of the applicable limit and the Prohibited Transferee shall
acquire no right or interest in such excess preferred shares. Any such excess
preferred shares described above will be converted automatically into an equal
number of shares of excess preferred stock (the "Excess Preferred Shares") and
transferred automatically, by operation of law, to a trust, the beneficiary of
which will be a qualified charitable organization selected by Atlantic
Preferred Capital (the "Beneficiary"). As soon as practical after the transfer
of shares to the trust, the trustee of the trust (who shall be designated by
Atlantic Preferred Capital and be unaffiliated with Atlantic Preferred Capital
and any Prohibited Transferee or Prohibited Owner) will be required to sell
such Excess Preferred Shares to a person or entity who could own such shares
without violating the applicable limit, and distribute to the Prohibited
Transferee an amount equal to the lesser of the price paid by the Prohibited
Transferee for such Excess Preferred Shares or the sales proceeds received by
the trust for such Excess Preferred Shares. In the case of any Excess Preferred
Shares resulting from any event other than a transfer, or from a transfer for
no consideration (such as a gift), the trustee will be required to sell such
Excess Preferred Shares to a qualified person or entity and distribute to the
Prohibited Owner an amount equal to the lesser of the fair market value of such
Excess Preferred Shares as of the date of such event or the sales proceeds
received by the trust for such Excess Preferred Shares. In either case, any
proceeds in excess of the amount distributable to the Prohibited Transferee or
Prohibited Owner, as applicable, will be distributed to the Beneficiary. Prior
to a sale of any such Excess Preferred Shares by the trust, the trustee will be
entitled to receive in trust for the Beneficiary, all dividends and other
distributions paid by Atlantic Preferred Capital with respect to such Excess
Preferred Shares.
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In addition, shares of preferred stock of Atlantic Preferred Capital held
in the trust shall be deemed to have been offered for sale to Atlantic
Preferred Capital, or its designee, at a price per share equal to the lesser of
(1) the price per share in the transaction that resulted in such transfer to
the trust (or, in the case of a devise or gift, the market price at the time of
such devise or gift) and (2) the market price on the date Atlantic Preferred
Capital, or its designee, accepts such offer. Atlantic Preferred Capital shall
have the right to accept such offer for a period of 90 days. Upon such a sale
to Atlantic Preferred Capital, the interest of the Beneficiary in the shares
sold shall terminate and the trustee shall distribute the net proceeds of the
sale to the Prohibited Owner.
Each stockholder shall upon demand be required to disclose to Atlantic
Preferred Capital in writing any information with respect to the direct,
indirect and constructive ownership of preferred 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.
Each holder of more than 5%, or such lower percentage as may be required
pursuant to applicable regulations under the Code, of any class or series of
preferred stock shall upon demand be required to disclose to Atlantic Preferred
Capital 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.
Limitation of Liability and Indemnification
Atlantic Preferred Capital is a Massachusetts corporation. Section 13 of
the Massachusetts Business Corporation Law (the "MBCL") 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.
Section 67 of the MBCL 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, by-laws 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 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 Atlantic Preferred Capital
provide for indemnification of the officers and directors of Atlantic Preferred
Capital to the full extent permitted by applicable law.
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FEDERAL INCOME TAX CONSEQUENCES
The following summary of material federal income tax consequences
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 Atlantic Preferred Capital's election to be
taxed as 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 Atlantic Preferred Capital
Atlantic Preferred Capital 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.
Goodwin Procter & Hoar LLP has acted as counsel to Atlantic Preferred
Capital in connection with the offering. In Goodwin, Procter's opinion,
provided that the elections and other procedural steps described in this
discussion of "Federal Income Tax Consequences" are duly and timely completed
by Atlantic Preferred Capital in accordance with the applicable provisions of
the Code, Atlantic Preferred Capital will be organized in conformity with the
requirements for qualification as a REIT pursuant to sections 856 through 860
of the Code, and Atlantic Preferred Capital'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 Goodwin, Procter opinion is based on various assumptions and is conditioned
upon certain representations made by Atlantic Preferred Capital as to factual
matters, including representations regarding the nature of its assets and
income and the past and future conduct of its business. Such factual
assumptions and representations are described below in this discussion of
"Federal Income Tax Consequences" and are set out in the Goodwin, Procter
opinion. Moreover, such qualification and taxation as a REIT depends upon
Atlantic Preferred Capital'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. Goodwin,
Procter has not reviewed and will not review Atlantic Preferred Capital's
compliance with those tests on a continuing basis. Accordingly, no assurance
can be given that the actual results of Atlantic Preferred Capital'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
"--Failure to Qualify."
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If Atlantic Preferred Capital 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, Atlantic Preferred Capital will be subject to federal income tax in
the following circumstances:
First, it 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, it may be subject to the "alternative
minimum tax" on its undistributed items of tax preference, if any.
Third, if Atlantic Preferred Capital 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,
then it will be subject to tax at the highest corporate rate on such
income.
Fourth, if Atlantic Preferred Capital 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 Atlantic Preferred Capital 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 Atlantic Preferred Capital fails the 75% or
95% gross income test, multiplied by a fraction intended to reflect Atlantic
Preferred Capital's profitability.
Sixth, if Atlantic Preferred Capital 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 Atlantic Preferred Capital elects to
retain and pay tax on), and
(3) any undistributed taxable income from prior periods,
then Atlantic Preferred Capital would be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed.
Seventh, if Atlantic Preferred Capital 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 Atlantic
Preferred Capital's hands is determined by reference to the basis of the asset
(or any other asset) in the hands of a "C" corporation and Atlantic Preferred
Capital 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 Atlantic Preferred Capital
over the adjusted basis in such asset at such time), Atlantic Preferred Capital
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
Atlantic Preferred Capital 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;
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(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 IRS 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 Atlantic Preferred
Capital to be taxed as a REIT. As described in clause (4), Atlantic Preferred
Capital will fail to qualify as a REIT if it is treated as a financial
institution for purposes of the Code. The term "financial institution" includes
a bank, which is generally defined under the Code as a business in which a
substantial part of its transactions include receiving deposits and making
loans. Although 100% of Atlantic Preferred Capital's common stock is owned by
Atlantic Bank, Atlantic Preferred Capital has operated, and intends to continue
to operate, as a separate corporate entity, in which case the ownership
interest held by Atlantic Bank would not affect Atlantic Preferred Capital's
REIT qualification. However, there can be no assurance that the IRS will not
challenge the separate existence of Atlantic Preferred Capital. Any such
challenge, if successful, could disqualify Atlantic Preferred Capital 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 Atlantic Preferred Capital 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, Atlantic
Preferred Capital will be deemed to have complied with the 5/50 Rule for such
taxable year.
Upon consummation of the offering, Atlantic Preferred Capital
anticipates satisfying the 100-Holder requirement described in clause (5) by
reason of the issuance of the Series A Preferred Shares to more than 100
holders. Atlantic Preferred Capital currently satisfies, and is expected to
continue to satisfy after the offering, the 5/50 Rule described in clause (6),
because for those purposes its common stock held by Atlantic Bank is treated as
held by Atlantic Bank's shareholders. In addition, Atlantic Preferred Capital's
Restated Articles of Organization provide for restrictions regarding the
transfer of the Series A Preferred Shares that are intended to assist Atlantic
Preferred Capital in continuing to satisfy the share ownership requirements of
clauses (5) and (6). Such transfer restrictions are described in "Description of
Capital Stock--Restrictions on Ownership and Transfer." However, it is possible
that the ownership of Atlantic Bank might become sufficiently concentrated in
the future such that five or fewer individuals would be treated as having
constructive ownership of more than 50% of the value of Atlantic Preferred
Capital. In addition, the redemption or exchange of all or a part of the Series
A Preferred Shares upon the occurrence of a certain tax event or an exchange
event could adversely affect Atlantic Preferred Capital's ability to satisfy the
share ownership requirements. See "Description of the Series A Preferred
Shares--Redemption," "--Automatic Exchange." Accordingly, there can be no
assurance that Atlantic Preferred Capital will continue to meet the share
ownership requirements of the Code on a continuing basis.
Atlantic Preferred Capital 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
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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 Atlantic Preferred Capital 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 Atlantic
Preferred Capital.
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 Atlantic Preferred Capital to qualify and to maintain its
qualification as a REIT, two requirements relating to Atlantic Preferred
Capital's gross income must be satisfied annually. First, at least 75% of
Atlantic Preferred Capital'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 Atlantic Preferred Capital'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 Atlantic Preferred Capital 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
Atlantic Preferred Capital acquired or originated the mortgage loan, the
interest income will be apportioned between the real property and the other
property, which apportionment may cause Atlantic Preferred Capital to recognize
income that is not qualifying income for purposes of the 75% gross income test.
Atlantic Preferred Capital 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. Atlantic Preferred Capital 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 property (including interests in real property) and any
personal property incident to such real
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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. Atlantic Preferred Capital 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
Atlantic Preferred Capital does receive any such income, it will make an
election to treat the related property as foreclosure property.
Property acquired by Atlantic Preferred Capital will not be eligible for
the election to be treated as foreclosure property if the related loan was
acquired by it 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.
Atlantic Preferred Capital intends to conduct its operations so that no asset
owned by it will be held for sale to customers and that a sale of any such
asset will not be in the ordinary course of the its 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. In appropriate
circumstances, Atlantic Preferred Capital 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 Atlantic Preferred Capital will 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."
If Atlantic Preferred Capital 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 Atlantic Preferred
Capital's failure to meet such tests is due to reasonable cause and not due to
willful neglect, Atlantic Preferred Capital 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 Atlantic Preferred Capital would be entitled
to the benefit of those relief provisions. As discussed above in "--Taxation of
Atlantic Preferred Capital," 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 Atlantic Preferred Capital fails the 75% or 95% gross income test
multiplied by a fraction intended to reflect Atlantic Preferred Capital's
profitability.
Asset Tests
Atlantic Preferred Capital, 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 its total assets must be represented by
cash or cash items (including certain receivables), government securities,
"real estate assets," or, in cases where Atlantic Preferred Capital 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 its 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 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 Atlantic Preferred Capital'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 Atlantic Preferred Capital may not exceed 5% of
the
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value of Atlantic Preferred Capital's total assets, and Atlantic Preferred
Capital 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).
Atlantic Preferred Capital expects that any interests in real property
that it acquires generally will be qualifying assets for purposes of the 75%
asset test. Atlantic Preferred Capital 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 Atlantic Preferred Capital 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 Atlantic
Preferred Capital'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, Atlantic Preferred
Capital 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, Atlantic Preferred Capital 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 Atlantic
Preferred Capital 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 Atlantic Preferred Capital 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
Atlantic Preferred Capital 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 Atlantic Preferred Capital
elects to retain and pay tax on), and (3) any undistributed taxable income from
prior periods, Atlantic Preferred Capital 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,
Atlantic Preferred Capital may elect to retain, rather than distribute its net
long-term capital gains. The effect of such an election is that (1) Atlantic
Preferred Capital 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 Atlantic Preferred Capital
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 Atlantic Preferred Capital) included in such U.S. stockholders'
long-term capital gains.
In certain circumstances, Atlantic Preferred Capital's investments may
generate income for federal income tax purposes without a corresponding receipt
of cash ("phantom income"). In order for Atlantic Preferred Capital to meet
REIT qualifications and/or avoid tax at the REIT level on such phantom income,
it may be forced to use cash generated from other sources, including, without
limitation, asset sales and borrowings, to make required distributions.
Under certain circumstances, Atlantic Preferred Capital 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 its deduction for dividends paid for the earlier year. Although
Atlantic Preferred Capital 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, Atlantic Preferred Capital
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 Atlantic Preferred Capital.
Atlantic Preferred Capital intends to comply with such requirements.
Excess Inclusion Income
Atlantic Preferred Capital has purchased or otherwise acquired mortgage
loans. If it 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 Atlantic Preferred Capital
is considered a "taxable mortgage pool," its status as a REIT generally should
not be impaired; however, a portion of Atlantic Preferred Capital's taxable
income may be characterized as "excess inclusion income" and allocated to its
stockholders. 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 Atlantic Preferred Capital, rather than its
stockholders, to the extent allocable to shares of stock of Atlantic Preferred
Capital held by disqualified organizations (generally, tax-exempt entities not
subject to unrelated business income tax, including governmental
organizations).
Failure to Qualify
If Atlantic Preferred Capital fails to qualify for taxation as a REIT in
any taxable year, and the relief provisions do not apply, it will be subject to
tax (including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to Atlantic Preferred Capital's
stockholders in any year in which Atlantic Preferred Capital fails to qualify
will not be deductible by Atlantic Preferred Capital nor will they be required
to be made. In such event, to the extent of Atlantic Preferred Capital'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,
Atlantic Preferred Capital also will be disqualified from taxation as a REIT
for the four taxable years following the year during which it ceased to qualify
as a REIT. It is not possible to state whether in all circumstances Atlantic
Preferred Capital would be entitled to statutory relief from its failure to
qualify as a REIT.
Tax Treatment of Automatic Exchange
Upon a Directive, the outstanding Series A Preferred Shares will be
automatically exchanged on a ten-for-one basis for Bank Preferred Shares. See
"Description of the Series A Preferred Shares--Automatic Exchange." The
automatic exchange will be a taxable exchange with respect to which each holder
of the Series A Preferred Shares will result in a gain or loss, as the case may
be, measured by the difference between the basis of such holder in the Series A
Preferred Shares and the fair market value of the Bank Preferred Shares
received in the automatic exchange. Because the Bank Preferred Shares will not
be listed on any securities exchange or for quotation on The Nasdaq Stock
Market or on any over-the-counter market, each individual holder will be
required to determine the fair market value of Bank Preferred Shares received
to determine the tax effect of the automatic exchange. Assuming that such
holder's Series A Preferred Shares were held as capital assets for more than
one year prior to the automatic exchange, any gain or loss will be a long-term
capital gain or loss. Long-term capital losses are deductible, subject to
certain limitations. The basis of the holder in the Bank Preferred Shares will
be their fair market value at the time of the automatic exchange.
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,
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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 Atlantic Preferred Capital qualifies as a REIT, distributions
made to Atlantic Preferred Capital'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 Atlantic Preferred Capital will be
taxed as long-term capital gains (to the extent that they do not exceed
Atlantic Preferred Capital'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 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 Atlantic Preferred Capital 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 Atlantic
Preferred Capital and received by the stockholder on December 31 of such year,
provided that the distribution is actually paid by Atlantic Preferred Capital
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 Atlantic Preferred Capital. 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 "--Distribution Requirements." Atlantic
Preferred Capital 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). Atlantic Preferred Capital 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 Atlantic Preferred Capital'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 Atlantic Preferred Capital, and it remains
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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 Atlantic Preferred Capital. Instead,
such losses would be carried over by Atlantic Preferred Capital for potential
offset against its future income (subject to certain limitations). Taxable
distributions from Atlantic Preferred Capital 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 Atlantic Preferred Capital 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. Atlantic Preferred Capital 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 or
capital gain.
Atlantic Preferred Capital 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 Atlantic
Preferred Capital 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 of
federal income tax liabilities would cause stockholders to receive an after-tax
rate of return on an investment in Atlantic Preferred Capital 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 Atlantic Preferred Capital's phantom income to its total income
increases, the after-tax rate of return received by a taxable stockholder of
Atlantic Preferred Capital will decrease. Atlantic Preferred Capital 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
Atlantic Preferred Capital required to be treated by that stockholder as
long-term capital gain.
Atlantic Preferred Capital 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 Atlantic Preferred Capital with his correct taxpayer identification
number also may be subject to penalties imposed by the IRS. 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 IRS has issued a
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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 Atlantic Preferred
Capital to Exempt Organizations generally should not constitute UBTI. However,
a portion of Atlantic Preferred Capital's taxable income may be characterized
as "excess inclusion income" which would be subject to tax as UBTI. See
"--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 Atlantic Preferred Capital will constitute UBTI pursuant to the
"debt-financed property" rules. In addition, in certain circumstances, a
pension trust that owns more than 10% of Atlantic Preferred Capital's stock is
required to treat a percentage of the dividends from Atlantic Preferred Capital
as UBTI. This rule applies to a pension trust holding more than 10% of Atlantic
Preferred Capital's stock only if (1) the percentage of income of Atlantic
Preferred Capital that is UBTI (determined as if Atlantic Preferred Capital
were a pension trust) is at least 5%, (2) Atlantic Preferred Capital 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 Atlantic
Preferred Capital 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
Atlantic Preferred Capital's stock or (B) a group of pension trusts
individually holding more than 10% of the value of Atlantic Preferred Capital's
stock collectively owns more than 50% of the value of its 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 Atlantic Preferred Capital of U.S. real property
interests and are not designated by Atlantic Preferred Capital 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 or accumulated earnings
and profits of Atlantic Preferred Capital. 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). Atlantic Preferred Capital 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 Atlantic
Preferred Capital or (2) the Non-U.S. Stockholder files an IRS Form 4224 with
Atlantic Preferred Capital 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
Atlantic Preferred Capital 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 Shares, 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
55
<PAGE>
refundable to the extent it is determined subsequently that such distribution
was, in fact, in excess of current and accumulated earnings and profits of
Atlantic Preferred Capital. Atlantic Preferred Capital is required to withhold
10% of any distribution in excess of its current and accumulated earnings and
profits. Consequently, although Atlantic Preferred Capital intends to withhold
at a rate of 30% on the entire amount of any distribution, to the extent that
it 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 Atlantic Preferred Capital qualifies as a REIT,
distributions that are attributable to gain from sales or exchanges by Atlantic
Preferred Capital 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. Atlantic
Preferred Capital is required to withhold 35% of any distribution that it
designates 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 Atlantic Preferred
Capital 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 Atlantic Preferred Capital 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 it 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% 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
Atlantic Preferred Capital or its 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 Atlantic Preferred Capital 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.
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<PAGE>
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 Atlantic Preferred Capital 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".
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 Securities Exchange Act of 1934 within 120 days (or such
later time as may be allowed by the SEC) 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 Securities Exchange Act of 1934 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. Atlantic Preferred Capital 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 this offering, certain restrictions
ordinarily will not, alone or in combination, affect the finding that such
securities are "freely transferable." Atlantic Preferred Capital 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."
57
<PAGE>
A Plan should not acquire or hold the Series A Preferred Shares if
Atlantic Preferred Capital's underlying assets will be treated as the assets of
such Plan. However, Atlantic Preferred Capital 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
Atlantic Preferred Capital 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 Atlantic Preferred
Capital 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 Atlantic Preferred Capital were deemed to be assets of the Plans
under ERISA, certain directors and officers of Atlantic Preferred Capital might
be deemed fiduciaries with respect to the Plans that invest in Atlantic
Preferred Capital and the prudence and other fiduciary standards set forth in
ERISA would apply to them and to all investments.
If the assets of Atlantic Preferred Capital were deemed to be Plan Assets,
transactions between Atlantic Preferred Capital 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 Atlantic Preferred
Capital 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.
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 Atlantic Preferred Capital 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, Atlantic Preferred
Capital, Atlantic 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
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<PAGE>
("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 this
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 Atlantic Preferred Capital is
"predominantly held" by qualified trusts. See "Federal Income Tax
Consequences--Taxation of U.S. Stockholders" and "--Taxation of Tax-Exempt
Stockholders."
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<PAGE>
CERTAIN INFORMATION REGARDING ATLANTIC BANK
The following is a summary of certain information regarding Atlantic Bank.
As an integral part of this prospectus, a copy of Atlantic Bank's offering
circular relating to the Bank Preferred Shares to be issued in the event of an
automatic exchange, including copies of Atlantic Bank's Quarterly Report on
Form 10-Q for the nine months ended September 30, 1998 in substantially the
form filed with the FDIC (the "Form 10-Q") and Atlantic Bank's Annual Report on
Form 10-K for the year ended December 31, 1997 in substantially the form filed
with the FDIC (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
Atlantic Bank as of such dates and for the periods then ended, including
information relating to Atlantic 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 Atlantic Bank
Atlantic Bank, a FDIC-insured, Massachusetts-chartered trust company,
commenced operations in February, 1988. The common stock of Atlantic Bank is
traded on The Nasdaq National Market under the symbol "ATLB" and Atlantic Bank
files periodic reports with the FDIC. Atlantic 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, Atlantic Bank had total assets of $456.7
million, deposits of $411.5 million and shareholders' equity of $39.6 million.
At September 30, 1998, Atlantic 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 Atlantic Bank to be qualified as being "well-capitalized"
under the FDIC's regulations. During the three months ended December 31, 1998,
Atlantic Bank continued its growth through loan acquisitions. As a result of
these loan acquisitions, Atlantic Bank anticipates that its regulatory capital
ratios at December 31, 1998 will be lower than at September 30, 1998, although
Atlantic Bank anticipates that its capital ratios at such date will be
sufficient for it to qualify as "adequately-capitalized." However, after giving
effect to this offering and as a result of the inclusion of a portion of the
proceeds from this offering in Atlantic Bank's "Tier 1" capital, Atlantic Bank
expects that its capital ratios would have been sufficient for it to qualify as
"well-capitalized" at December 31, 1998 had this offering been consummated on
that date.
Atlantic 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.
Atlantic Bank funds the foregoing activities with deposits consisting
primarily of certificates of deposit and money market accounts. Atlantic 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. Atlantic 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. Atlantic Bank's net income increased from $2.4
million in 1995 to $3.8 million in 1996 and $5.8 million in 1997. Atlantic 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 and net interest margin of 8.03% for the
same period in 1997. Atlantic 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. Atlantic Bank achieved a return on average
assets of 1.87% and a return on
60
<PAGE>
average equity of 20.20% in the nine months ended September 30, 1998. Atlantic
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, Atlantic 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. Atlantic 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, Atlantic 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, Atlantic 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, Atlantic 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 for it to be qualified as being
"well-capitalized" under the FDIC's regulations. At September 30, 1998, on a
pro forma basis after giving effect to the offering of Series A Preferred
Shares by Atlantic Preferred Capital (assuming that the underwriters
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, Atlantic Bank's Tier 1 Leverage, Tier 1
Risk-based and Total Risk-based capital ratios would have been 10.11%, 11.78%
and 12.61%, respectively. During the three months ended December 31, 1998,
Atlantic Bank continued its growth through loan acquisitions. As a result of
these loan acquisitions, Atlantic Bank anticipates that its regulatory capital
ratios at December 31, 1998 will be lower than at September 30, 1998, although
Atlantic Bank anticipates that its capital ratios at such date will be
sufficient for it to qualify as "adequately-capitalized." However, on a pro
forma basis, after giving effect to this offering as described above, Atlantic
Bank expects that its capital ratios would have been sufficient for it to
qualify as "well-capitalized" at December 31, 1998.
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<PAGE>
Selected Consolidated Financial Data
The following tables present selected consolidated financial and other
data of Atlantic 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 and Form 10-Q.
<TABLE>
<CAPTION>
As of and for the As of and for the
Nine Months Ended Years Ended
September 30, December 31,
--------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- -------- --------- -------- -------- --------
(unaudited)
(in thousands, except per share data and percentages)
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Condition Data (Period End):
Total assets .................................... $456,662 $300,426 $321,776 $230,789 $163,157 $131,614 $48,987
Purchased loans and leases ...................... 321,115 213,534 227,147 152,228 65,171 39,744 8,241
Total discount ................................. (48,526) (37,252) (40,184) (38,192) (13,295) (8,378) (732)
Allowance for losses on purchased
loans ........................................ (200) -- -- -- -- -- --
Originated loans and leases ..................... 64,348 67,283 70,142 71,626 80,915 60,659 32,483
Allowance for losses on originated
loans and leases ............................. (2,463) (2,259) (2,273) (1,965) (1,265) (1,513) (614)
Investment securities ........................... 52,490 7,782 7,817 5,822 9,421 13,124 2,999
Cash and cash equivalents ....................... 41,524 39,015 46,200 30,287 10,131 16,578 4,373
Deposits ........................................ 411,475 266,630 285,522 199,575 149,053 119,956 43,368
Stockholders' equity ............................ 39,614 30,101 31,801 25,760 11,983 10,476 5,365
Non-performing loans ............................ 7,187 10,571 6,918 3,106 3,066 1,497 817
Other real estate owned, net .................... 2,107 4,389 3,591 4,688 6,040 7,448 1,045
Operations Data (Period):
Interest income ................................. $ 31,843 $ 23,138 $ 32,777 $ 22,162 $ 15,966 $ 5,986 $ 4,764
Interest expense ................................ 14,887 9,395 13,269 8,499 6,803 1,898 2,046
-------- -------- -------- -------- -------- -------- -------
Net interest income ............................. 16,956 13,743 19,508 13,663 9,163 4,088 2,718
Provision for loan and lease losses ............. 819 275 325 755 308 261 266
-------- -------- -------- -------- -------- -------- -------
Net interest income after provision for
loan and lease losses .......................... 16,137 13,468 19,183 12,908 8,855 3,827 2,452
Gains on sales of investment securities,
net ............................................ 120 41 41 -- 97 -- 205
Gains on sales of loans and leases, net ......... 535 117 117 96 92 288 283
Other income .................................... 401 372 370 442 521 418 510
Operating expenses .............................. (9,877) (6,983) (9,811) (6,940) (5,795) (3,525) (2,846)
-------- -------- -------- -------- -------- -------- -------
Income before income taxes....................... 7,316 7,015 9,900 6,506 3,770 1,008 604
Provision (benefit) for income taxes ............ 1,928 2,925 4,128 2,713 1,399 (128) (77)
-------- -------- -------- -------- -------- -------- -------
Net income ...................................... 5,388 4,090 5,772 3,793 2,371 1,136 681
Preferred stock dividend ........................ (45) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------
Net income available for common
stock dividend ................................. $ 5,343 $ 4,090 $ 5,772 $ 3,793 $ 2,371 $ 1,136 $ 681
======== ======== ======== ======== ======== ======== =======
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
As of and for the As of and for the
Nine Months Ended Years Ended
September 30, December 31,
------------------- ------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- --------- -------- -------- -------- -------- -------
(unaudited)
(in thousands, except per share data and percentages)
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Data:
Net income --
Basic .......................................... $ 1.30 $ 1.01 $ 1.43 $ 1.09 $ 1.06 $ 0.75 $ 0.45
Diluted ........................................ 1.20 0.95 1.34 1.06 1.06 0.75 0.45
Book value at end of period ..................... 9.46 7.42 7.84 6.41 5.56 4.47 3.57
Tangible book value at end of period ............ 8.18 7.40 7.82 6.38 5.49 4.24 3.57
Weighted average shares outstanding
Basic .......................................... 4,099 4,039 4,043 3,480 2,238 1,505 1,502
Diluted ........................................ 4,435 4,298 4,316 3,594 2,243 1,505 1,502
Selected Operating Ratios (Annualized):
Return on average assets ........................ 1.87% 2.16% 2.18% 2.29% 1.70% 1.96% 1.16%
Return on average stockholders'
equity ......................................... 20.20 19.64 20.16 18.47 20.69 19.45 13.77
Interest rate spread ............................ 6.06 7.66 7.71 7.83 7.15 6.91 4.47
Net interest margin ............................. 6.35 8.03 8.08 8.36 7.37 7.56 4.97
Non-interest income to average assets ........... .37 .28 .20 0.30 0.51 1.22 1.70
Operating expenses to average assets ............ 3.43 3.69 3.70 3.87 4.16 6.08 4.86
Asset Quality Ratios:
Total non-performing assets to total assets 2.04% 4.98% 3.27% 3.38% 5.58% 6.80% 3.80%
Non-performing purchased loans as a
percent of purchased loans and leases .......... 1.91 4.74 2.85 1.35 0.83 2.02 n/a
Non-performing originated loans as a
percent of originated loans and leases ......... 1.63 .68 .64 1.45 3.09 1.13 2.50
Discount as a percent of purchased
loans and leases ............................... 15.11 17.45 17.69 25.09 20.40 21.08 8.88
Allowance for originated loan losses as a
percent of originated loans and leases ......... 3.70 3.34 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) ............................. 524.69 193.05 342.18 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 .................... 235.47 494.31 505.11 187.68 50.04 218.33 75.15
Capital Ratios:
Average stockholders' equity to
average assets ................................. 9.25% 11.00% 10.79% 11.71% 8.22% 10.08% 8.43%
Tangible capital to assets ratio ................ 7.52 9.99 9.86 11.11 7.25 7.56 10.95
Tier I Leverage capital ratio ................... 8.09 11.38 10.55 12.05 7.48 13.92 10.15
Tier I Risk-based capital ratio ................. 9.53 11.89 11.98 13.44 8.93 10.43 13.55
Total Risk-based capital ratio .................. 10.44 12.79 12.84 14.47 9.88 11.68 14.79
</TABLE>
- ----------------
(1) Non-amortizing discount is the excess of the contractual balance of
purchased loans over the amount of reasonably estimable and probable
discounted future cash collections and would not be accreted into income
until it is determined that the amount and timing of the collections are
reasonably estimable and collection is probable.
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<PAGE>
Risk Factors
The purchase of Series A Preferred Shares involves a high degree of risk
with respect to the performance and capital levels of Atlantic Bank. A
significant decline in the performance and capital levels of Atlantic Bank or
the placement of Atlantic Bank into bankruptcy, reorganization, conservatorship
or receivership will likely result in an automatic exchange of the Series A
Preferred Shares for Bank Preferred Shares. You would then be a preferred
shareholder of Atlantic Bank. An investment in Atlantic Bank is subject to
certain risks that are distinct from the risks associated with an investment in
Atlantic Preferred Capital. These risks are described in more detail in the
attached offering circular under the caption "Risk Factors" commencing on page
OC-8. These risks include:
o The levels of profits reported by Atlantic Bank in recent years have
been attributable, in part, to its general asset/liability strategy
including purchasing discounted loans which are perceived to be
undervalued, and engaging in other non-traditional banking activities.
This strategy and these activities subject Atlantic Bank to business
risks not experienced by financial institutions engaged in more
traditional lending activities. As a result, Atlantic Bank may be
subject to fluctuations in its business which may have a material
adverse impact on its net income.
o As part of its business strategy, Atlantic Bank identifies and purchases
discounted loans from private sector sellers or the FDIC. Although
management of Atlantic Bank believes that it will continue to be able to
pursue this strategy during the reasonably foreseeable future, there can
be no assurance that Atlantic 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.
o In part as a result of the anticipated growth of Atlantic Bank's
purchased loan portfolio and the continued acquisition of loan pools
including both performing and non-performing loans, Atlantic Bank's net
non-performing assets, including OREO, may increase in future periods.
High levels of such non-performing assets could adversely affect
Atlantic Bank's results of operations. Moreover, non-performing assets
require increased allocation of Atlantic Bank's resources and may be
significantly affected by the economies and markets for real estate in
which they are located.
o A significant portion of Atlantic Bank's total loan portfolio is secured
by interests in commercial real estate property located in the Northeast
and California. As a result, the quality of Atlantic 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 Atlantic Bank's primary market area would adversely affect
Atlantic Bank's financial condition and results of operations in the
future.
o No assurance can be given that Atlantic Bank will be able to compete
with other financial institutions for the origination of secured
commercial loans, or that Atlantic Bank will be able to originate a
sufficient volume of loans or originate loans on such terms that will
result in the same levels of profitability that Atlantic Bank has
previously experienced.
o Atlantic Bank faces risks inherent in commercial lending including
errors in analyses of credit risk, errors in valuing underlying
collateral and other more intangible factors which are considered in
making such loans. There can be no assurance that Atlantic Bank's profit
margins will not be negatively impacted by errors in such analyses and
by loan defaults of certain borrowers. Further, the ability of borrowers
to repay such loans may be adversely affected by any downturn in general
economic conditions.
o Atlantic Bank's results of operations are dependent upon, among other
things, its net interest income, which results from the "margin" between
interest earned on interest-earning assets, such as investments, and
interest paid on interest-bearing liabilities, such as deposits.
Interest rates are highly sensitive to many factors beyond the control
of Atlantic Bank, including governmental monetary policies, domestic and
international economic and political conditions, inflation, recession,
unemployment and money supply. Changes in interest rates can affect
Atlantic Bank's profitability in respect to net interest income, the
volume of loans it originates, and the ability of borrowers and
purchaser of OREO to service debt. As Atlantic Bank has expanded its
purchased loan portfolio, it has acquired a number of fixed rate loans
which increase its exposure to interest rate risk. Although Atlantic
Bank funds such purchases with longer term CDs and takes other steps to
limit its overall
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<PAGE>
exposure to interest rate fluctuations, there can be no assurance that it
will be successful in doing so. Fluctuations in market interest rates are
neither predictable nor controllable and may have a materially adverse
impact on Atlantic Bank's operations and financial condition.
Lending Activities
At September 30, 1998, Atlantic Bank's gross loan and lease portfolio
totaled $387.6 million. At such date its investment in purchased loans, net of
related discount of $48.5 million and allowance for loan losses of $200,000,
totaled $272.4 million. Atlantic Bank's originated portfolio net of the
allowance for loan losses and net deferred loan income totaled $61.9 million at
September 30, 1998. Atlantic 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 Atlantic 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. Atlantic Bank has historically purchased loans
secured by assets located in New England. It 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, Atlantic 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 Atlantic
Bank had total non-amortizing discount of $32.0 million and amortizing discount
of $16.5 million related to these loans. Atlantic Bank's purchased loan and
lease portfolio accounted for 80.6%, 75.3%, 54.8%, and 46.2% of its 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 Atlantic 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 Atlantic
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 it will bid to acquire loans
(principally pools of discounted loans), Atlantic 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, Atlantic 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 Atlantic Bank's Chairman or President.
Prior to acquiring any loan or pool of loans, Atlantic 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, Atlantic
Bank's efforts to value the collateral also increases. For larger, more complex
loans, Atlantic 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. Atlantic 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.
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<PAGE>
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
Atlantic 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, Atlantic Bank aggressively pursues repayment. In the event that a
delinquent loan becomes non-performing, it 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,
Atlantic Bank does not recognize interest income on such loans unless regular
payments are being made. In instances when the loan is not restructured,
Atlantic 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 Atlantic 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 Atlantic Bank's Management Loan Committee and either its
Chairman or President, or in the case of loans of $2.5 million or more, the
Loan and Investment Committee of its Board of Directors. Such originated loans
accounted for 24.7%, 45.2%, and 53.8% of Atlantic Bank's loan interest income
in the fiscal years ended December 31, 1997, 1996, and 1995, respectively. The
average annual yield of Atlantic Bank's originated loans was 11.32%, 12.62%,
and 11.73%, respectively, for such periods.
Small-Ticket Equipment Leasing
Atlantic Bank's other primary line of business, small-ticket equipment
leasing, is conducted through its subsidiary, Dolphin Capital Corporation
("Dolphin"). Atlantic 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 Atlantic
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 Atlantic 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, Atlantic 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
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<PAGE>
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. As of September 30, 1998, Atlantic 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% or 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, Atlantic 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
it to be qualified as "well-capitalized" under such FDIC regulations. During
the three months ended December 31, 1998, Atlantic Bank continued its growth
through loan acquisitions. As a result of these loan acquisitions, Atlantic
Bank anticipates that its regulatory capital ratios at December 31, 1998 will
be lower than at September 30, 1998, although Atlantic Bank anticipates that
its capital ratios at such date will be sufficient for it to qualify as
"adequately-capitalized." However, on a pro forma basis, after giving effect to
this offering and assuming all of the net proceeds are invested in assets which,
under applicable FDIC regulations, have been assigned a risk weight of 100%,
Atlantic Bank expects that its capital ratios would have been sufficient for it
to qualify as "well-capitalized" at December 31, 1998.
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.
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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.
Atlantic 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>
68
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement dated , 1999 , the underwriters named below who are
represented by Friedman, Billings, Ramsey & Co., Inc., Advest, Inc. and Janney
Montgomery Scott Inc. (the "Representatives"), have severally agreed to
purchase from Atlantic Preferred Capital 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. ...................................
Janney Montgomery Scott 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.
Atlantic Preferred Capital 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 following table sets forth the per share and total underwriting
discounts and commissions and expenses to be paid to the underwriters by
Atlantic Preferred Capital. The amounts are shown assuming both no exercise and
full exercise of the underwriters' overallotment option.
<TABLE>
<S> <C> <C>
No Exercise Full Exercise
------------- --------------
Underwriting Discounts and Commissions:
Per share ..........................
Total ..............................
Expenses: .............................
</TABLE>
Atlantic Preferred Capital 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
Atlantic Preferred Capital 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 Atlantic Preferred Capital 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. Atlantic Preferred Capital has applied to have the Series A
Preferred Shares quoted on The Nasdaq National Market under the trading symbol
"ATLPP." 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 Representatives have advised Atlantic Preferred
Capital that they intend to make a market in the Series A
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<PAGE>
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.
Atlantic Preferred Capital and Atlantic 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.
Atlantic Preferred Capital has agreed to reimburse Friedman, Billings,
Ramsey & Co., Inc. for its actual out-of-pocket expenses incurred in connection
with this offering, including certain fees and disbursements of underwriters'
counsel.
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 Atlantic Preferred Capital,
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 cover all or a portion of
such short position by exercising their 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 Atlantic Preferred
Capital 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 Atlantic Preferred Capital 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 Atlantic Bank from time to time.
LEGAL MATTERS
Certain legal matters will be passed upon for Atlantic Preferred Capital
by Goodwin, Procter & Hoar LLP, Boston, Massachusetts, and for the underwriters
by McDermott, Will & Emery, Chicago, Illinois.
INDEPENDENT AUDITORS
The audited financial statements of Atlantic Preferred Capital 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.
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AVAILABLE INFORMATION
Atlantic Preferred Capital 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 Atlantic Preferred Capital 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 filed as an exhibit to the Registration Statement
are not necessarily complete and 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 SEC at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, and the SEC'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 SEC, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the Registration Statement is publicly
available through the SEC's site on the Internet's World Wide Web, located at
http://www.sec.gov.
As a result of this offering, Atlantic Preferred Capital will become
subject to the full informational requirements of the Securities Exchange Act
of 1934. Atlantic Preferred Capital will fulfill its obligations with respect
to such requirements by filing periodic reports and other information with the
SEC.
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<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 and advisory expenses (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 $-- -- $-- $139,740 $ -- $139,740
Issuance of Preferred Stock,
Series B ............................. -- -- 1,000 -- 1,000 -- 1,000
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:
Value of loans transferred by the Company's common stockholder in exchange for the
issuance of common stock and Preferred Stock, Series B ......................... $ 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, with the Bank transferring
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 capitalization of the Company, 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 using the interest method.
Interest on loans is not accrued when the collectibility of principal and
interest is not probable or estimable. Interest income previously accrued on
such loans is reversed against current period interest income and the loan is
accounted for using the cost recovery method.
F-7
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company accounts for Bank purchased loans under the guidance of AICPA
Practice Bulletin 6, Amortization of Discounts on Certain Acquired Loans, using
unique and exclusive static pools. Static pools are established based on the
Bank's original acquisition timing. Once a static pool is established, the
loans in the pool are not changed.
At the time of acquisition, the excess of the contractual balance over the
amount of reasonably estimable and probable discounted future cash collections
is recorded as a non-amortizing discount. The non-amortizing discount is not
accreted into income until it is determined that the amount and timing of the
collections are reasonably estimable and collection is probable. The remaining
discount, which represents the excess of the amount of reasonably estimable and
probable discounted future cash collections over the acquisition amount is
accreted into interest income using a method which approximates the interest
method. If cash flows cannot be reasonably estimated and collection is not
probable, the cost recovery method of accounting is used, whereby any amounts
received are applied against the recorded amount of the loan.
Subsequent to acquisition, if cash flow projections improve, and it is
determined that the amount and timing of the collections are reasonably
estimable and collection is probable, the corresponding decrease in the
non-amortizing discount is transferred to the amortizing portion and is
accreted into interest income over the remaining lives of the loans on a method
which approximates the interest method. Under the Company's loan rating system,
each loan is evaluated for impairment and, where necessary, a portion of the
respective loan pool's non-amortizing discount is allocated to the loan and, if
none is available, an allowance is established through a provision for loan
losses charged to earnings. In addition, if this evaluation reveals that cash
flows cannot be estimated or the collection of the loan is not otherwise
probable, the loan is accounted for on the cost recovery method. Loans
accounted for on the cost recovery method, in general, consist of non-accrual
loans.
Effective January 1, 1999, 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 static purchased pool basis and will be accounted for as a
"change in estimate" in accordance with Accounting Principles Board Opinion No.
20. Accounting for loans on an individual basis rather than a pool basis will
allow the Company to selectively purchase qualified individual loans from the
Bank, rather than purchasing entire pools which may contain individual loans
undesirable for a REIT. 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
F-8
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
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. 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:
</TABLE>
F-9
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
2. LOANS, NET (concluded)
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
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
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. These loans are accounted for in accordance
with Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan."
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. Non-amortizing
discount allocated to these loans amounted to $100,000 at September 30, 1998.
No discount accretion has been recognized on such loans. Interest not accrued
on such loans amounted to $111,000 at September 30, 1998. These loans are
accounted for using the cost recovery method in accordance with AICPA Practice
Bulletin 6.
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.
F-10
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
3. PREFERRED STOCK (concluded)
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 and advisory fee rate is 0.25% per annum of the
outstanding principal balance of the loans. Servicing and advisory 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 transferred 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-11
<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-12
<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, Series C, par value $1.00 per share (the
"Bank Preferred Shares"), of Atlantic Bank and Trust Company ("the Bank"), 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 "Offering Circular Summary--The Bank--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 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 "ATLPP". 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."
These securities have not been approved or disapproved by the Federal
Deposit Insurance Corporation, the Commissioner of Banks of the Commonwealth of
Massachusetts, 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 , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
Available Information ..................................................... OC-2
Information With Respect to the Bank ...................................... OC-2
Offering Circular Summary ................................................. OC-3
Selected Consolidated Financial Data ...................................... OC-6
Risk Factors .............................................................. OC-8
Management ................................................................ OC-14
Management and Principal Stockholders ..................................... OC-20
Certain Relationships and Transactions .................................... OC-22
Description of the Bank Preferred Shares .................................. OC-23
Legal Matters ............................................................. OC-25
Attachment A--Quarterly Report of the Bank on Form 10-Q for the
quarter ended September 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 BANK
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 September 30, 1998 in substantially the form filed with the
FDIC (Attachment A) (the "Form 10-Q") and its Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 in substantially the form filed with
the FDIC (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. During the three months ended December 31, 1998, the Bank
continued its growth through loan acquisitions. As a result of these loan
acquisitions, the Bank anticipates that its regulatory capital ratios at
December 31, 1998 will be lower than at September 30, 1998, although the Bank
anticipates that its capital ratios at such date will be sufficient for it to
qualify as "adequately-capitalized." However, after giving effect to the
offering of the REIT Preferred Shares and as a result of the inclusion of a
portion of the proceeds from the offering of the REIT Preferred Shares in the
Bank's "Tier 1" capital, the Bank expects that its capital ratios would have
been sufficient for it to qualify as "well-capitalized" at December 31, 1998
had the offering of the REIT Preferred Shares been consummated on that date.
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), 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 REIT
Preferred Shares will be automatically exchanged (an "Automatic Exchange") for
Bank Preferred Shares if the FDIC directs so in writing (a "Directive") upon
the occurrence of one of the following 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 REIT 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 REIT Preferred Shares will be deductible by the
Company for such purposes.
OC-3
<PAGE>
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 REIT Preferred Shares of the Company, an indirect
subsidiary of the Bank. See "--REIT Preferred Stock Offering."
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, Series B Convertible Preferred
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 at
least 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.
Dividends ..................... Dividends on the Bank Preferred Shares are payable monthly 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 for each monthly period are payable on the 15th day
of the following month. Dividends accrue in each monthly period from
the first day of such period, whether or not dividends are paid with
respect to the preceeding monthly period. 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
monthly dividend period, you will have no right to receive the amount
of any undeclared dividends for that period, and the Bank will have no
obligation to pay undeclared dividends for that period, whether or not
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. 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 accrued and unpaid dividends only for the month in which the
liquidation occurs. See "Description of the Bank Preferred Shares--
Rights Upon Liquidation."
Redemption .................... The Bank Preferred Shares are not redeemable prior to ,
2004, 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.
</TABLE>
OC-4
<PAGE>
<TABLE>
<S> <C>
Voting Rights ................ Holders of Bank Preferred Shares will not have any voting rights,
except as set forth below and as otherwise 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. Additional
shares of preferred stock senior to the Bank Preferred Shares may not be
issued and changes to the provisions of Atlantic Bank's articles of
organization that adversely affect the rights of the holders of the Bank
Preferred Shares may not be made without the approval of the holders
of at least two-thirds of the outstanding Bank Preferred Shares. See
"Description of the Bank Preferred Shares--Voting Rights."
Use of Proceeds .............. The Bank Preferred Shares will only be issued in connection with an
exchange for the REIT Preferred Shares. The net proceeds from the sale
of the REIT Preferred Shares will be used by the Company for general
corporate purposes, including to acquire additional mortgage assets or
other REIT-qualified assets. The exchange of REIT Preferred Shares for
Bank Preferred Shares would 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-5
<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 and Form 10-Q.
<TABLE>
<CAPTION>
As of and for the As of and for the
Nine Months Ended Years Ended
September 30, December 31,
----------------------- --------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ---------- ----------- ----------- ----------- ---------
(unaudited)
(in thousands, except per share data and percentages)
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Condition Data (Period End):
Total assets ................................... $456,662 $ 300,426 $ 321,776 $ 230,789 $ 163,157 $131,614 $ 48,987
Purchased loans and leases ..................... 321,115 213,534 227,147 152,228 65,171 39,744 8,241
Total discount ................................ (48,526) (37,252) (40,184) (38,192) (13,295) (8,378) (732)
Allowance for losses on purchased loans ....... (200) -- -- -- -- -- --
Originated loans and leases .................... 64,348 67,283 70,142 71,626 80,915 60,659 32,483
Allowance for losses on originated loans
and leases .................................. (2,463) (2,259) (2,273) (1,965) (1,265) (1,513) (614)
Investment securities .......................... 52,490 7,782 7,817 5,822 9,421 13,124 2,999
Cash and cash equivalents ...................... 41,524 39,015 46,200 30,287 10,131 16,578 4,373
Deposits ....................................... 411,475 266,630 285,522 199,575 149,053 119,956 43,368
Stockholders' equity ........................... 39,614 30,101 31,801 25,760 11,983 10,476 5,365
Non-performing loans ........................... 7,187 10,571 6,918 3,106 3,066 1,497 817
Other real estate owned, net ................... 2,107 4,389 3,591 4,688 6,040 7,448 1,045
Operations Data (Period):
Interest income ................................ $ 31,843 $ 23,138 $ 32,777 $ 22,162 $ 15,966 $ 5,986 $ 4,764
Interest expense ............................... 14,887 9,395 13,269 8,499 6,803 1,898 2,046
-------- --------- --------- --------- --------- -------- --------
Net interest income ............................ 16,956 13,743 19,508 13,663 9,163 4,088 2,718
Provision for loan and lease losses ............ 819 275 325 755 308 261 266
-------- --------- --------- --------- --------- -------- --------
Net interest income after provision for
loan and lease losses ......................... 16,137 13,468 19,183 12,908 8,855 3,827 2,452
Gains on sales of investment securities, net ... 120 41 41 -- 97 -- 205
Gains on sales of loans and leases, net ........ 535 117 117 96 92 288 283
Other income ................................... 401 372 370 442 521 418 510
Operating expenses ............................. (9,877) (6,983) (9,811) (6,940) (5,795) (3,525) (2,846)
-------- --------- --------- --------- --------- -------- --------
Income before income taxes...................... 7,316 7,015 9,900 6,506 3,770 1,008 604
Provision (benefit) for income taxes ........... 1,928 2,925 4,128 2,713 1,399 (128) (77)
-------- --------- --------- --------- --------- -------- --------
Net income ..................................... 5,388 4,090 5,772 3,793 2,371 1,136 681
Preferred stock dividend ....................... (45) -- -- -- -- -- --
-------- --------- --------- --------- --------- -------- --------
Net income available for common stock
dividend ...................................... $ 5,343 $ 4,090 $ 5,772 $ 3,793 $ 2,371 $ 1,136 $ 681
Per Share Data:
Net income --
Basic ......................................... $ 1.30 $ 1.01 $ 1.43 $ 1.09 $ 1.06 $ 0.75 $ 0.45
Diluted ....................................... 1.20 0.95 1.34 1.06 1.06 0.75 0.45
Book value at end of period .................... 9.46 7.42 7.84 6.41 5.56 4.47 3.57
Tangible book value at end of period ........... 8.18 7.40 7.82 6.38 5.49 4.24 3.57
Weighted average shares outstanding
Basic ......................................... 4,099 4,039 4,043 3,480 2,238 1,505 1,502
Diluted ....................................... 4,435 4,298 4,316 3,594 2,243 1,505 1,502
</TABLE>
OC-6
<PAGE>
<TABLE>
<CAPTION>
As of and for the As of and for the
Nine Months Ended Years Ended
September 30, December 31,
------------------- ------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- ------- ------- ------- ------- -------
(unaudited)
(in thousands, except per share data and percentages)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operating Ratios (Annualized):
Return on average assets ............................... 1.87% 2.16% 2.18% 2.29% 1.70% 1.96% 1.16%
Return on average stockholders' equity ................. 20.20 19.64 20.16 18.47 20.69 19.45 13.77
Interest rate spread ................................... 6.06 7.66 7.71 7.83 7.15 6.91 4.47
Net interest margin .................................... 6.35 8.03 8.08 8.36 7.37 7.56 4.97
Non-interest income to average assets .................. .37 .28 .20 0.30 0.51 1.22 1.70
Operating expenses to average assets ................... 3.43 3.69 3.70 3.87 4.16 6.08 4.86
Asset Quality Ratios:
Total non-performing assets to total assets ............ 2.04% 4.98% 3.27% 3.38% 5.58% 6.80% 3.80%
Non-performing purchased loans as a percent of
purchased loans and leases ............................ 1.91 4.74 2.85 1.35 0.83 2.02 n/a
Non-performing originated loans as a percent of
originated loans and leases ........................... 1.63 .68 .64 1.45 3.09 1.13 2.50
Discount as a percent of purchased loans and leases..... 15.11 17.45 17.69 25.09 20.40 21.08 8.88
Allowance for originated loan losses as a percent of
originated loans and leases ........................... 3.70 3.34 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) ......................... 524.69 193.05 342.18 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 ............ 235.47 494.31 505.11 187.68 50.04 218.33 75.15
Capital Ratios:
Average stockholders' equity to average assets ......... 9.25% 11.00% 10.79% 11.71% 8.22% 10.08% 8.43%
Tangible capital to assets ratio ....................... 7.52 9.99 9.86 11.11 7.25 7.56 10.95
Tier I Leverage capital ratio .......................... 8.09 11.38 10.55 12.05 7.48 13.92 10.15
Tier I Risk-based capital ratio ........................ 9.53 11.89 11.98 13.44 8.93 10.43 13.55
Total Risk-based capital ratio ......................... 10.44 12.79 12.84 14.47 9.88 11.68 14.79
</TABLE>
- ---------------
(1) Non-amortizing discount is the excess of the contractual balance of
purchased loans over the amount of reasonably estimable and probable
discounted future cash collections and would not be accreted into income
until it is determined that the amount and timing of the collections are
reasonably estimable and collection is probable.
OC-7
<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
OC-8
<PAGE>
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 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 Form 10-K.
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" in the Form 10-K.
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" in the Form 10-K.
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-9
<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.
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<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 Bank 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
OC-11
<PAGE>
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.
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" in the Form 10-K.
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-12
<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-13
<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, 50 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-14
<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 1992, Mr. Kozlowski has been Chairman and Chief
Executive Officer of Tyco International, Ltd. in Hamilton, Bermuda. Mr.
Kozlowski is also a director of Raytheon, Inc., Applied Power Corp. and
V.S.O.P., Inc.
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.
Mr. Stone is also a Director of Stone Legal Resources Group, Inc.
Louis N. Vinios. Since 1979, Mr. Vinios has been an Executive Vice
President at J.P.A. Management Co., Inc., 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.
OC-15
<PAGE>
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.
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 1996 128,365 60,000 2,976(4)
Senior 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.
OC-16
<PAGE>
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.
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
OC-17
<PAGE>
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 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, subject
to certain restrictions. 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
OC-18
<PAGE>
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.
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 upon prior written
notice 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 and, if
necessary, approval of applicable regulatory authorities.
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-19
<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
January 1, 1999 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) .......................... 200 *
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) ......................... 10,065 *
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) .............................. 814,606 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
January 1, 1999.
(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
January 1, 1999.
(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
OC-20
<PAGE>
ownership of 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 January 1, 1999 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 January 1, 1999 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 the trustee of such plans, and, therefore, has sole 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 January 1, 1999. 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
OC-21
<PAGE>
shares of Common Stock exercisable within 60 days of January 1, 1999 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.
(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 $154,000 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. Additionally, the
Bank paid $305,000 of its lease costs directly to the landlord to sub-let a
portion of its quarters from the law firm for the year ended December 31, 1997.
Watermark Donut Company. On October 14, 1998 the Bank entered into a Lease
Agreement with Watermark Donut Company ("Watermark"). Messrs. Wayne and
Lazares, both directors of the Bank, are directors and holders of approximately
a 20% interest each in Watermark. The term of the lease is for five years with
two five year renewal periods. Pursuant to the Lease Agreement, Watermark shall
pay the Bank $44,044 per year, plus a percentage of the gross sales of
Watermark at the premises in excess of certain specified levels.
OC-22
<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
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 has submitted 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 Automatic
Exchange.
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. The Convertible Preferred Stock will rank junior to
the Bank Preferred Shares, if issued, as to dividends and in liquidation.
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 May 1, 2000, all outstanding shares of Convertible
Preferred Stock shall convert 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 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-23
<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. The
Bank Preferred Shares will not be convertible into any other securities of the
Bank.
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 monthly at the rate of %
per annum of the liquidation preference (equivalent to $250.00 per share). If
declared, dividends on the Bank Preferred Shares for each monthly period shall
be payable on the fifteenth day of the following month, at such annual rate,
commencing on the first scheduled dividend payment date following the date of
the Automatic Exchange, to holders of record on the last business day of the
monthly dividend period. Monthly dividend periods will commence on the first
day of each month and on the date of original issue for the initial dividend
period. The amount of dividends, if declared, payable for the initial dividend
period or any period shorter than a full dividend period shall be computed on
the basis of 30-day months, a 360-day year and the actual number of days
elapsed in the period. Dividends in each monthly period will accrue from the
first day of such period, whether or not declared or paid for the prior monthly
period.
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 monthly dividend period, then
holders of the Bank Preferred Shares will have no right to receive the amount
of the undeclared dividend for that period, and the Bank will have no
obligation to pay the undeclared dividend for that period, whether or not
dividends are declared and paid for any future period with respect to the Bank
Preferred Shares, any other series of preferred stock or the Common Stock. If
less than full dividends are declared on the Bank Preferred Shares by the Board
of Directors for a monthly dividend period, then holders of the Bank Preferred
Shares will have no right to receive the amount of such undeclared dividends
for that period, and the Bank 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 the Bank Preferred Shares, 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.
OC-24
<PAGE>
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 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
, 2004. 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 monthly accrued and unpaid
dividends from the beginning of the month 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).
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, Series B Preferred
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 monthly accrued and unpaid dividend thereon, if any, from the
beginning of the month in which the liquidation occurs 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-25
<PAGE>
Attachment A
------------
Federal Deposit Insurance Corporation
Washington, D.C. 20006
Form 10-Q
Quarterly Report Pursuant to Section 13 of The
Securities Exchange Act of 1934
For the quarterly period ended September 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
November 9, 1998
4,133,859
<PAGE>
Table of Contents
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 -- Financial Statements Page
Consolidated Balance Sheets .......................................................... 2
Consolidated Statements of Income .................................................... 3
Consolidated Statements of Changes in Stockholders' Equity ........................... 4
Consolidated Statements of Cash Flows ................................................ 5-6
Notes to Consolidated Financial Statements ........................................... 7-10
Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of
Operation
Financial Condition .................................................................. 11-16
Liquidity ............................................................................ 17
Asset and Liability Management ....................................................... 18
Impact of Inflation .................................................................. 18
Year 2000 Issues ..................................................................... 18-20
Results of Operations ................................................................ 21-28
Item 3 -- Qualitative Disclosures about Market Risk ................................... 29
Signatures ........................................................................... 30
</TABLE>
A-1
<PAGE>
ITEM 1. Financial Statements
Atlantic Bank and Trust Company and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- -------------
(in thousands, except share
data)
<S> <C> <C>
ASSETS
Cash and due from banks ............................................... $ 5,524 $ 1,910
Federal funds sold .................................................... 36,000 44,290
-------- ---------
Total cash and cash equivalents ...................................... 41,524 46,200
-------- ---------
Interest-bearing deposits in banks .................................... 365 238
Securities available for sale, at fair value .......................... 51,160 7,016
Federal Home Loan Bank of Boston stock, at cost ....................... 965 563
Loans and leases ...................................................... 336,937 257,105
Less allowance for loan and lease losses ............................. (2,663) (2,273)
-------- ---------
Loans and leases, net .............................................. 334,274 254,832
-------- ---------
Other real estate owned, net .......................................... 2,107 3,591
Premises and equipment, net ........................................... 15,522 6,736
Goodwill, net ......................................................... 5,238 --
Other assets .......................................................... 5,507 2,600
-------- ---------
$456,662 $ 321,776
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing ................................................. $ 6,299 $ 5,622
Interest bearing ..................................................... 405,176 279,900
-------- ---------
Total deposits ..................................................... 411,475 285,522
Accrued interest payable .............................................. 1,627 1,178
Accrued expenses and other liabilities ................................ 3,946 3,275
-------- ---------
Total liabilities .................................................... 417,048 289,975
-------- ---------
Stockholders' equity: .................................................
Serial preferred stock, $1 par value, 999,900 and 1,000,000
authorized; 100 shares designated and issued as Series B ........... -- --
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 ........................................... 19,269 17,432
Retained earnings .................................................... 16,269 10,926
-------- ---------
40,370 32,574
Treasury stock at cost--160,484 shares ............................... (793) (793)
Net unrealized gain on securities available for sale, after tax effect 37 20
-------- ---------
Total stockholders' equity ......................................... 39,614 31,801
-------- ---------
$456,662 $ 321,776
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
A-2
<PAGE>
Atlantic Bank and Trust Company and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 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 ................... $ 10,069 $ 7,877 $ 28,868 $ 21,825
Interest and dividend income on investment
securities ............................................ 189 131 479 355
Interest on federal funds sold and interest-bearing
deposits in banks ..................................... 849 265 2,496 958
-------- -------- -------- --------
Total interest income ................................. 11,107 8,273 31,843 23,138
Interest expense on deposits ............................. 5,440 3,371 14,887 9,395
-------- -------- -------- --------
Net interest income ..................................... 5,667 4,902 16,956 13,743
Provision for loan and lease losses ...................... 223 -- 819 275
-------- -------- -------- --------
Net interest income, after provision for loan and
lease losses .......................................... 5,444 4,902 16,137 13,468
-------- -------- -------- --------
Other income:
Service fees ............................................ 266 19 305 58
Gain on sales of securities ............................. 78 41 120 41
Gain on sales of loans and leases ....................... 535 -- 535 117
Miscellaneous ........................................... 77 135 96 314
-------- -------- -------- --------
Total other income .................................... 956 195 1,056 530
-------- -------- -------- --------
Operating expenses:
Compensation and related benefits ....................... 2,537 1,405 6,286 4,041
Occupancy and equipment ................................. 483 305 1,220 832
Professional fees ....................................... 430 410 978 1,100
Other real estate owned, (income) expenses, net ......... (406) 16 (1,013) (272)
Other general and administrative ........................ 881 459 2,406 1,282
-------- -------- -------- --------
Total operating expenses .............................. 3,925 2,595 9,877 6,983
-------- -------- -------- --------
Income before provision for income taxes .............. 2,475 2,502 7,316 7,015
Provision for income taxes ............................... 633 1,043 1,928 2,925
-------- -------- -------- --------
Net income .............................................. 1,842 1,459 5,388 4,090
Dividends on preferred stock ............................. 27 -- 45 --
-------- -------- -------- --------
Net income available to common stockholders ............. $ 1,815 $ 1,459 $ 5,343 $ 4,090
======== ======== ======== ========
Weighted average common shares outstanding:
Basic ................................................... 4,134 4,056 4,099 4,039
Diluted ................................................. 4,467 4,336 4,435 4,298
Earnings per common share:
Basic ................................................... $ 0.44 $ 0.36 $ 1.30 $ 1.01
Diluted ................................................. 0.41 0.34 1.20 0.95
</TABLE>
See accompanying notes to consolidated financial statements.
A-3
<PAGE>
Atlantic Bank and Trust Company and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock
Comprehensive ------------------- Preferred Stock
Income Shares Amount Shares Amount
--------------- -------- ---------- -------- --------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 4,211 $ 4,211 $
Net income $ 4,090 -- -- -- --
Issuance of shares in lieu of cash
compensation to Directors -- 5 5 -- --
Reissuance of treasury stock under
stock options -- -- -- -- --
Amortization of compensation costs
related to stock options -- -- -- -- --
Increase in net unrealized gain on
securities available for sale, after
tax effect 4 -- -- -- --
------- ----- ------- ---- -----
Balance at September 30, 1997 $ 4,094 4,216 $ 4,216 -- $ --
======= ===== ======= ==== =====
<CAPTION>
Treasury
------------- Stock Accumulated
Additional ---------- Other
Paid-in Retained Comprehensive
Capital Earnings Shares Amount Income Total
------------ ---------- -------- ----------- -------------- -----------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 17,326 $ 5,154 190 $ (936) $ 5 $ 25,760
Net income -- 4,090 -- -- -- 4,090
Issuance of shares in lieu of cash
compensation to Directors 51 -- -- -- -- 56
Reissuance of treasury stock under
stock options 25 -- (30) 143 -- 168
Amortization of compensation costs
related to stock options 23 -- -- -- -- 23
Increase in net unrealized gain on
securities available for sale, after
tax effect -- -- -- -- 4 4
-------- ------- --- ------- --- --------
Balance at September 30, 1997 $ 17,425 $ 9,244 160 $ (793) $ 9 $ 30,101
======== ======= === ======= === ========
</TABLE>
<TABLE>
<CAPTION>
Common Stock
Comprehensive ------------------- Preferred Stock
Income Shares Amount Shares Amount
--------------- -------- ---------- -------- --------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 4,216 $ 4,216 -- $ --
Net income $ 5,388 -- -- -- --
Issuance of shares in lieu of cash
compensation to Directors -- 5 5 -- --
Issuance of common stock in
connection with acquisition -- 73 73 -- --
Issuance of preferred stock in
connection with acquisition -- -- -- -- 538
Dividend accrued on preferred stock -- -- -- -- --
Amortization of compensation costs
related to stock options -- -- -- -- --
Increase in net unrealized gain on
securities available for sale, after
tax effect 17 -- -- -- --
------- ----- ------- -- ----
Balance at September 30, 1998 $ 5,405 4,294 $ 4,294 -- $538
======= ===== ======= == ====
<CAPTION>
Treasury
------------- Stock Accumulated
Additional ---------- Other
Paid-in Retained Comprehensive
Capital Earnings Shares Amount Income Total
------------ ---------- -------- ----------- -------------- -----------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 17,432 $ 10,926 160 $ (793) $ 20 $ 31,801
Net income -- 5,388 - - - 5,388
Issuance of shares in lieu of cash
compensation to Directors 99 -- -- -- -- 104
Issuance of common stock in
connection with acquisition 1,714 -- -- -- -- 1,787
Issuance of preferred stock in
connection with acquisition -- -- -- -- -- 538
Dividend accrued on preferred stock -- 45 -- -- -- (45)
Amortization of compensation costs
related to stock options 24 -- -- -- -- 24
Increase in net unrealized gain on
securities available for sale, after
tax effect -- -- -- -- 17 17
-------- -------- --- ------- ---- --------
Balance at September 30, 1998 $ 19,807 $ 16,269 160 $ (793) $ 37 $ 39,614
======== ======== === ======= ==== ========
</TABLE>
See accompanying notes to consolidated financial statements.
A-4
<PAGE>
Atlantic Bank and Trust Company and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended September
30,
---------------------------
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................................. $ 5,388 $ 4,090
Adjustments to reconcile net income to net cash used in operating
activities:
Provision for loan and lease losses ................................... 819 275
Provision for other real estate owned losses .......................... -- 452
Gain on sales of securities available for sale ........................ (120) (41)
Depreciation and amortization of banking premises and
equipment, net ....................................................... 588 313
Amortization and accretion, net ....................................... (5,883) (4,211)
Gain on sales of portfolio loans and leases ........................... (535) (117)
Net gain on sale and disposition of other real estate owned ........... (1,138) (710)
Other, net ............................................................ (2,126) (2,834)
---------- ---------
Net cash used in operating activities ................................ (3,007) (2,783)
---------- ---------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits in banks ........... (127) 115
Purchases of securities available for sale .............................. (57,100) (12,049)
Sales of securities available for sale .................................. 11,100 7,031
Maturities of securities available for sale ............................. 2,000 3,000
Purchase of Federal Home Loan Bank of Boston stock ...................... (402) --
Amortization and payoffs on loans and leases, net of originations ....... 42,851 33,613
Sales of portfolio loans and leases ..................................... 9,785 5,840
Purchases of loans ...................................................... (128,044) (98,401)
Cash paid to acquire Dolphin (Note 3) ................................... (3,914) --
Additions to other real estate owned .................................... (142) (270)
Sales of and payments received on other real estate owned ............... 4,445 6,210
Additions to banking premises and equipment, net ........................ (9,174) (801)
---------- ---------
Net cash used in investing activities ................................ (128,722) (55,712)
---------- ---------
Cash flows from financing activities: ....................................
Net increase in deposits .............................................. $ 125,953 $ 67,055
Proceeds from issuance of common stock in connection with
Acquisition (Note 3) ................................................. 1,100 --
Proceeds from exercise of stock options ............................... -- 168
---------- ---------
Net cash provided by financing activities ............................. 127,053 67,223
---------- ---------
Net change in cash and cash equivalents ............................... (4,676) 8,728
Cash and cash equivalents at beginning of period ......................... 46,200 30,287
---------- ---------
Cash and cash equivalents at end of period ............................... $ 41,524 $ 39,015
========== =========
Supplemental cash flow information:
Interest paid on deposits ............................................... $ 14,438 $ 9,356
Income taxes paid ....................................................... 2,730 4,531
Non-cash investing activity: .............................................
Transfers from other real estate owned to loans ......................... 1,681 5,383
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 noted to consolidated financial statements.
A-5
<PAGE>
Atlantic Bank and Trust Company and Subsidiaries
Notes to Consolidated Financial Statements
Three and Nine Month Periods Ended September 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 Atlantic Preferred Capital Corporation ("APCC") which was formed
in March 1998. 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 formed on
May 1, 1998 and on such date acquired 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 September 30, 1998, and the
results of operations for the three and nine months ended September 30, 1998
and 1997 and the statements of changes in stockholders' equity and cash flows
for the and nine months ended September 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 September 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 to individuals and businesses
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
A-6
<PAGE>
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.
The purchase price paid by the Company under the Agreement totaled $3.8
million and was comprised of $2.5 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 issued at a price 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 the acquired
tangible assets acquired by $214,000.
In addition, pursuant to an agreement executed in connection with the
transactions contemplated by the Agreement, the Company would have been
required to make certain contingent payments of up to $1.1 to the Principal
Shareholder if Dolphin achieved certain operating results, as defined by the
Agreement, during its first three years of operations. This agreement was
amended in exchange for cash consideration of $850,000 paid to the Principal
Shareholder. This amount was included in goodwill. Under the amended agreement,
the Principal Shareholder will be entitled to contingent payments in an amount
up to $325,000 should certain earnings thresholds be met. Goodwill arising from
the transaction totaled $5.3 million, includes $525,000 of acquisition costs,
and is being amortized by the straight-line method over twenty years.
Note 4. Commitments and Contingencies
At September 30, 1998, the Company had outstanding commitments to
originate commercial real estate mortgage loans of approximately $1.8 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 $617,000 and $236,000, respectively, at September 30,
1998.
In addition, the Company has sold leases with recourse provisions. At
September 30, 1998, the outstanding balance of such leases was approximately
$8.3 million. A liability of $302,000 has been established in connection with
the recourse obligation.
Note 5. Recent Accounting Pronouncements
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 APCC, the Company will change on a prospective basis its 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.
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.
A-7
<PAGE>
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 and lease default and charge-off rates, reductions in deposit levels
necessitating increased borrowing to fund loans, leases and investments,
changes in interest rates, the timely resolution of the Year 2000 issue by the
Company, its customers and suppliers, 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
(registration statement) Form F-1 and Annual Report on Form 10-K for the year
ended December 31, 1997.
General
As of September 30, 1998, the Company had total assets of $456.7 million,
an increase of $134.9 million or 41.9% 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 deposits. 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 September 30, 1998,
the Company's securities available for sale were comprised of U.S. Treasury
securities totaling $51.2 million, or 11.2% 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 the expansion of its loan and lease
portfolios.
Loans and Leases
Net loans and leases increased from $254.8 million at December 31, 1997 to
$334.3 million at September 30, 1998, an increase of $79.4 million or 31.2%. A
summary of the Company's outstanding loan and lease balances at September 30,
1998 and December 31, 1997 follows.
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- -------------
(in thousands)
<S> <C> <C>
Purchased loan and lease portfolio:
Mortgage loans on real estate:
Commercial ........................................ $ 191,976 $ 156,138
Multifamily ....................................... 84,663 39,955
One to four family ................................ 32,201 19,849
Land .............................................. 7,433 7,655
--------- ---------
Total ................................................ 316,273 223,597
Secured commercial .................................. 2,075 2,134
Direct finance leases, net .......................... 1,079 --
Other ............................................... 1,688 1,416
--------- ---------
Total purchased loan and lease portfolio ......... 321,115 227,147
</TABLE>
A-9
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- --------------
(in thousands)
<S> <C> <C>
Less:
Non-amortizing discount ................................. (32,021) (22,132)
Amortizing discount ..................................... (16,505) (18,052)
Allowance for loan losses ............................... (200) --
------- -------
Total purchased loan portfolio, net .................... 272,389 186,963
------- -------
Originated loan and lease portfolio:
Mortgage loans on real estate:
Commercial .............................................. 40,879 45,366
Land .................................................... 799 1,062
One to four family ...................................... 4,472 5,096
Multifamily ............................................. 4,445 8,641
------- -------
Total mortgage loans on real estate .................... 50,595 60,165
Secured commercial loans ................................ 5,119 8,334
SBA loans ............................................... 1,111 1,221
Other loans ............................................. 399 810
Net deferred loan income ................................ (243) (388)
------- -------
Total originated loans, net ............................ 56,981 70,142
Direct finance leases:
Lease payments receivable ............................... 8,590 --
Residual value .......................................... 671 --
Initial direct costs .................................... 340 --
Less unearned income .................................... (2,234) --
------- -------
Net investment in direct finance leases ................ 7,367 --
Total originated loan and lease portfolio .............. 64,348 70,142
Less allowance for loan and lease losses .................. (2,463) (2,273)
------- -------
Total originated loan and lease portfolio, net ......... 61,885 67,869
------- -------
Loans and leases, net ................................ $ 334,274 $ 254,832
========= =========
</TABLE>
During the nine months ended September 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. Dolphin provides small ticket
lease financing 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.
Net purchased loans and leases at September 30, 1998 represented 81.5% of
the Company's net loan and lease portfolios compared to 73.4% at December 31,
1997. The gross purchased loan and lease portfolio at September 30, 1998
increased by $94.0 million or 41.4% to $321.1 million compared to $227.1
million at December 31, 1997. The gross outstanding balance of loans and leases
purchased for the nine months ended September 30, 1998 totaled $146.6 million
and were acquired at an aggregate discount of $18.5 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 and lease 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 $48.1 million.
In contrast to the purchased loan and lease portfolio, the net originated
loan and lease portfolio decreased by $6.0 million or 8.8% from $67.9 million
at December 31, 1997 to $61.9 million at September 30, 1998. Loans originated
for the nine months ended September 30, 1998 totaled $6.4 million and lease
originations since Dolphin's inception on May 1, 1998 have totaled $17.5
million. The combination of amortization and payoffs and lease sales exceeded
such originations and transfers from the purchased loan portfolio. During the
quarter ended September 30,
A-10
<PAGE>
1998, Dolphin sold leases of approximately $9.5 million. These sales resulted
in a gain of $535,000, net of a recourse liability of $302,000.
Non-Performing Loans
Non-performing loans at September 30, 1998 totaled $7.2 million, of which
$6.1 million were purchased loans and $1.1 million were originated loans,
compared to a total of $6.9 million 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 originated loan and lease losses at September 30, 1998
totaled $2.5 million and represented 235.5% 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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period .............. $ 2,695 $ 2,314 $ 2,273 $ 1,965
Provision for loan and lease losses ......... 23 -- 417 275
Recoveries .................................. 15 38 43 130
------- ------- ------- -------
2,733 2,352 2,733 2,370
Loans and leases charged-off ................ (270) (93) (270) (111)
------- ------- ------- -------
Balance at end of period .................... $ 2,463 $ 2,259 $ 2,463 $ 2,259
======= ======= ======= =======
</TABLE>
In addition to the above activity, an allowance for loan losses for
purchased loans was established during 1998. In instances for which no discount
was available for allocation from the respective loan pools, provisions were
accounted for by a charge to earnings and charge-offs reduced the carrying
value of purchased loans. An analysis of the allowance losses on purchased
loans follows.
<TABLE>
<CAPTION>
Three Months
Ended Nine Months Ended
September 30, September 30,
--------------- -----------------
1998 1997 1998 1997
------ ------ --------- -----
(in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period ......... $ -- $-- $ -- $--
Provision for loan losses .............. 200 -- 402 --
Recoveries ............................. -- -- -- --
---- --- ------ ---
200 -- 402 --
Loans charged-off ...................... -- -- (202) --
---- --- ------ ---
Balance at end of period ............... $200 $-- $ 200 $--
==== === ====== ===
</TABLE>
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 and allowance for losses on
loans purchased totaled $32.2 million and $22.1 million at September 30, 1998
and December 31, 1997, respectively and represented 524.7% and 342.2% of
non-performing purchased loans, respectively. Total discount at September 30,
1998 and December 31, 1997 was $48.5 million and $40.2 million, respectively,
and represented 15.1% and 17.7% of total purchased loans and leases,
respectively. An analysis of non-amortizing discount activity on purchased
loans follows.
A-11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period ...................... $ 28,058 $ 20,581 $ 22,132 $ 24,387
Acquisitions ........................................ 5,597 1,829 16,538 22,457
Transfers to (from) amortizing portion, net ......... (821) 359 (3,521) (3,260)
Charge-offs, net of recoveries ...................... (813) (3,244) (3,128) (24,059)
-------- -------- -------- ---------
Balance at end of period ............................ $ 32,021 $ 19,525 $ 32,021 $ 19,525
======== ======== ======== =========
</TABLE>
Other Real Estate Owned, Net
At September 30, 1998, other real estate owned, net, totaled $2.1 million
or 0.5% 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 result
of the sale of certain properties with total carrying values of $3.3 million at
net gains of $1.1 million during the nine months ended September 30, 1998.
Premises and Equipment, Net
Premises and equipment, net, totaled $15.5 million at September 30, 1998,
representing a 130.4% 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, which the Company relocated to in mid-February 1998.
Deposits
Deposits increased $126.0 million or 44.1% during the nine months ended
September 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 705.2% or $80.9 million from $11.5
million at December 31, 1997 to $92.4 million at September 30, 1998. 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 by the Company through national investment
banking firms which solicit deposits from their customers. At September 30,
1998, brokered deposits totaled $112.3 million, compared to $67.2 million at
December 31, 1997. These deposits bear original maturity dates ranging from six
months to five 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 September 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 the Federal Deposit Insurance Corporation
("FDIC") on November 2, 1998. The following table sets forth the regulatory
capital ratios of the Company at September 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 ................ $36,989 10.44% $28,350 8.00% $35,437 10.00%
(to risk weighted assets)
Tier 1 capital ............... 33,787 9.53 14,175 4.00 21,262 6.00
(to risk weighted assets)
Tier 1 capital ............... 33,787 8.09 16,700- 4.00- 20,875 5.00
(to average assets) ......... 20,875 5.00
</TABLE>
A-12
<PAGE>
In addition, during 1998 the Company established a subsidiary, Atlantic
Preferred Capital Corporation ("APCC"), which the Company intends to operate so
as to enable it to qualify as a real estate investment trust under the Internal
Revenue Code of 1986. On November 2, 1998, APCC filed a registration statement
with the Securities and Exchange Commission in connection with the proposed
sale of $30.0 million of preferred stock in an underwritten public offering.
The preferred stock of APCC is exchangeable for preferred stock of the Company
upon a written directive from the FDIC if (I) the Company is "undercapitalized"
in accordance with Applicable FDIC regulations, (ii) the Company is placed in
bankruptcy, reorganization, conservatorship or receivership, or (iii) the FDIC
determines, in its sole discretion, that the Company will become
undercapitalized in the near term. The preferred stock of the Company issued in
such an exchange would have substantially equivalent terms as the preferred
stock of APCC, including an aggregate liquidation preference of $20.0 million
over holders of the Company's common stock. Under certain limited circumstances
stock of APCC would be exchanged for preferred stock of the Company. A
percentage of the proceeds from the sale of the preferred stock is expected to
be included in the Company's capital under relevant regulatory capital
guidelines.
Liquidity
The Company's principal sources of liquidity include certificates of
deposit obtained from wholesale and retail sources. At September 30, 1998, the
Company had $310.9 million of certificates of deposit. At the same date,
scheduled maturities of certificates of deposit for the periods ending
September 30, 1999 and 2000 and thereafter, totaled $229.0 million, $56.9
million and $25.0 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 either adjust
the rates paid on certificates of deposit or further utilize its agreements
with investment banking firms to acquire additional brokered deposits to retain
and increase deposits in changing interest rate environments and that such
deposits can provide a relatively cost effective and ready source of funds.
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 $100.6 million, or
24.4% of the Company's total deposits at September 30, 1998, compared to $19.6
million, or 6.9%, of total deposits at December 31, 1997. This increase is
primarily due to the introduction of a personal money market account in the
fourth quarter of 1997.
In addition, amortization and payoffs of the loan and lease portfolios and
proceeds from the sales of loans and leases contribute significant liquidity to
the Company. Generally, such amounts are reinvested into the Company's
purchased loan portfolio. While the Company has not historically relied on
Federal Home Loan Bank of Boston borrowings as a source of liquidity, such
borrowings are available.
Asset and Liability Management
For a discussion of asset and liability management see Item 3. Qualitative
Disclosures about Market Risk on page A-21.
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>
Year 2000 Issues
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
During 1997, the Company developed a Year 2000 Project Plan (the "Plan")
to address the computer-related issues concerning the Year 2000 issue (the
transition from the year 1999 to 2000). The Company uses computer systems
(including hardware and software) primarily to track deposits and loans,
transfer funds, prepare financial reports, and perform financial calculations.
The Company's deposit and loan processing is outsourced to Bisys Systems of
Houston, TX ("Bisys") under a Service Agreement.
The Plan includes five phases as suggested by the FFIEC, the FDIC, and
other bank regulatory authorities: awareness, assessment, renovation,
validation, and testing. In 1997, the Company substantially completed the
awareness and assessment phases of the Plan with regard to its computer
systems, and has identified those areas that are considered mission critical.
The Company began working with Bisys, reviewing their plans, and determining
how to validate the readiness of its systems. The Plan calls for validation and
testing with respect to all mission critical systems. Testing of internal
systems was completed in September 1998. Testing of the Bisys systems is being
completed according to the schedule prepared by Bisys. The test period runs
from November, 1998 through April 1999. During this period, the entire test
process will be performed twice. The Company will have an opportunity to
re-test any applications that produce errors in the initial testing. Management
believes that the Company is currently on schedule in accordance with the Plan.
Based on its review to date, the Company believes that the primary cost of
the Year 2000 compliance will include internal staffing, consulting, system
testing and modification. The Company currently expects that the total costs
associated with the project will be approximately $150,000, and will primarily
be incurred in the third quarter of 1998 through year-end 1999. The costs are
not considered to have a material affect on operating expenses or budgets. The
Company plans to account for these costs as expense items. The costs include an
independent review by Arthur Andersen LLP under an arrangement letter signed
June 29, 1998.
The Company is in the process of evaluating the risk of customer failure
to prepare for the Year 2000 issue, any associated effect of the ability of
customers to repay outstanding loans, and impact on the adequacy of the level
of the allowance for loan losses. The Company cuurently considers Year 2000
risks in evaluating the adequacy of the allowance for loan and lease losses.
Questionnaires were mailed to the larger borrowers, depositors, and vendors.
Responses are being tracked. To date, no negative responses have been received.
Brochures written by the FDIC were printed and mailed to every borrowing and
depositing customer. Because these efforts are now ongoing, the Company is
unable to assess the likelihood of any material adverse effect at this time.
Embedded systems throughout the Company's premises are also being
reviewed. Vendors have been contacted and asked to certify that their systems
are compliant. Systems have been or will be tested where possible. Because
these efforts are now ongoing, the Company is unable to assess the likelihood
of any material adverse effect at this time.
The Company's risk management program includes emergency backup and
recovery procedures to be followed in the event of failure of a
business-critical system. These procedures are being expanded to include
specific procedures for potential Year 2000 issues, and contingency plans to
protect against Year 2000 related interruptions. These plans include backup
procedures, identification of alternative suppliers, emergency plans to handle
power outages, telecommunications failures, etc., and are scheduled to be
complete by December 31, 1998.
While the Company believes that it is taking reasonable steps with respect
to the year 2000 issue, if the phases of the plan are not completed on time,
the costs associated with becoming Year 2000 compliant exceed the Company's
estimates, third party providers are not Year 2000 compliant on a timely basis,
or customers with material loan obligations are unable to meet their repayment
obligations due to Year 2000 problems, the Year 2000 issue could have a
material impact on the Company's financial results. In addition, the Company's
efforts to address the Year 2000 issue are being monitored by its federal
banking regulators. Failure to be year 2000 compliant on a timely basis could
subject the Company to formal supervisory or enforcement actions.
The preceding "Year 2000" discussion contains various forward-looking
statements with represent the Company's beliefs or expectations regarding
future events. When used in the Year 2000 discussion, the words "believes,"
"expects," "estimates" and similar expressions are intended to identify
forward-looking statements.
A-14
<PAGE>
Forward-looking statements include, without limitation, the Company's
expectations as to when it will complete the phases of the Plan; its estimated
costs; and its belief that its internal systems will be Year 2000 compliant in
a timely manner. All forward-looking statements involve a number of risks and
uncertainties that could cause the actual results to differ materially from the
projected results. Factors that may cause these differences include, but are
not limited to, the availability of qualified personnel and other technology
resources; the ability to identify and remediate all date sensitive lines of
computer code; and the actions of governmental agencies or other third parties
with respect to Year 2000 problems.
A-15
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
General
The Company reported consolidated net income available to common
stockholders of $1.8 million for the third quarter of 1998, which represented a
$356,000, or 24.4%, increase compared to $1.5 million reported for the third
quarter of 1997. Earnings per share for the three months ended September 30,
1998 were $0.41 on a diluted compared to $0.34 on a diluted 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
$781,000.
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 September 30, 1998 and 1997.
Interest Income
For the quarter ended September 30, 1998, total interest income increased
$2.8 million, or 34.3% to $11.1 million compared to $8.3 million for the same
period in 1997. The improvement was primarily due to a greater volume of
earning assets during the period compared to the corresponding period in the
prior year. For the three months ended September 30, 1998, average earning
assets were $387.1 million compared to $237.8 million for the third quarter of
1997. Average purchased loans and leases and average originated loans and
leases for the third quarter of 1998 amounted to $243.3 million and $68.0
million, respectively, compared to $142.8 million and $67.2 million,
respectively, for the third quarter of 1997.
Overall, interest income on the purchased loan portfolio increased $2.3
million, or 39.4%, from $5.9 million in the third quarter of 1997 to $8.2
million in the third quarter of 1998. The increase in interest income was
primarily caused by an increase in the average balance of $100.5 million, or
70.4%, to $243.3 million in the third quarter of 1998 from $142.8 million in the
corresponding period in 1997. This increase in volume was partially offset by a
298 basis point decline between the corresponding periods in 1997 and 1998 in
the yield on this portfolio. This decline is primarily the result of a more
competitive marketplace for loan acquisitions over the past twelve months, which
affected the price of loans acquired, and a lower interest rate environment.
The average balance of short-term investments and investment securities
available for sale increased to $61.7 million and $14.2 million during the
third quarter of 1998, compared to $19.2 and $8.5 million, respectively, for
the same period in 1997. These 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 relation to the Company's total assets.
The weighted average yield on earning assets for the quarter ended
September 30, 1998 was 11.38% as compared to 13.80% 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 and a higher
percentage of lower yielding short-term investments held in the third quarter
of 1998.
Interest Expense
For the quarter ended September 30, 1998, interest expense increased $2.0
million, or 61.4%, to $5.4 million compared to $3.4 million for the same period
in 1997. This increase is attributable primarily to a greater volume of
deposits.
For the three months ended September 30, 1998, average interest-bearing
deposits were $372.7 million compared to $225.1 million for the third 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 77.3% for the three
months ended September 30, 1998 from 96.6% for the same period in 1997.
Additionally, average money market accounts have increased $77.4 million from
the third quarter of 1997 to the third quarter of 1998.
A-16
<PAGE>
The weighted average rate paid on interest bearing liabilities for the
quarter ended September 30, 1998 was 5.79% compared to 5.94% for the comparable
period in 1997. The decrease in the rate paid is primarily attributed to the
increase in the average balance of money market accounts relative to the
average balance of certificates of deposits.
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 September 30, 1998 and 1997 follows.
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Weighted average yield earned on:
Short-term investments ....................... 5.46% 5.46%
Securities available for sale ................ 5.28 6.09
Purchased loans and leases, net .............. 13.41 16.39
Originated loans and leases, net ............. 10.79 11.69
Total interest-earning assets ................ 11.38 13.80
Weighted average rate paid on:
Now and savings .............................. 2.15 2.23
Insured money market ......................... 5.31 3.38
Certificates ................................. 5.95 6.04
Total interest-bearing liabilities ........... 5.79 5.94
Weighted average interest rate spread ......... 5.59 7.86
Net interest margin ........................... 5.81% 8.18%
</TABLE>
Provision for Loan and Lease Losses
The Company recorded $223,000 as a provision for loan and lease losses
during the three months ended September 30, 1998. No provision was recorded for
the comparable prior year period in 1997. The increase in the provision is
partially a result of a provision for losses established on leases during the
third quarter of 1998, which amounted to $123,000. In addition, the Company
provided $200,000 for losses on purchased loans for which no discount was
available for allocation. Due to improved asset quality in the Company's
originated loans, in addition to a decrease in the size of the portfolio, a
credit for losses on originated loans of $100,000 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 and lease
delinquency and charge-offs, and collateral values of the underlying security.
Operating Expenses
Operating expenses for the three-month period ended September 30, 1998
increased $1.3 million, or 51.3%, to $3.9 million compared to $2.6 million for
the comparable 1997 period. This increase is primarily attributable to
operating expenses incurred by Dolphin which totaled $1.4 million for the three
months ended September 30, 1998.
Compensation and related benefits increased by $1.1 million, or 80.6%, to
$2.5 million for the third quarter of 1998 as a result of an increase in the
Company's staff, primarily at Dolphin, and salary adjustments. The Company had
127 full time employees at September 30, 1998, an increase from 51 employees at
September 30, 1997. Of the Company's total employees at September 30, 1998, 61
where employees of Dolphin.
Occupancy and equipment expense for the three-month period ended September
30, 1998 increased $178,000 or 58.4% compared to the third quarter of 1997.
Increased expenses as a result of expanding office space needs for the
Company's banking operations amounted to $98,000. Expenses incurred by Dolphin
amounted to $135,000 and related principally to equipment expenses. In 1998
occupancy expense was partially offset by rental income from tenants at the
Company's new main office of $55,000 for the three months ended September 30,
1998. In 1997, the Company did not occupy the building and such income was
classified as other income.
Professional services remained relatively consistent, increasing only
$20,000, or 4.9%, in the third quarter of 1998 from $410,000 the third quarter
of 1997 despite the significant asset and loan growth experienced by the
A-17
<PAGE>
Company. Legal fees declined by $57,000 in the third quarter of 1998 compared
to the third quarter of 1997. Consulting and auditing fees increased by $49,000
and $27,000 as a result the Company's overall growth.
For the quarter ended September 30, 1998, income from other real estate
owned, net, amounted to $406,000 primarily due to gains on sales of other real
estate owned of $436,000 offset by net operating expenses. For the quarter
ended September 30, 1997, the Company realized net expenses from other real
estate owned of $16,000 due to provisions for losses of $150,000 and net
operating expenses of $17,000 which exceeded gains on sales of $152,000. The
provision for losses in 1997 was incurred to establish a reserve with respect
to one specific property.
Other general and administrative expenses for the three months ended
September 30, 1998 increased to $881,000 from $459,000 for the same period in
1997, an increase of $422,000 or 91.9%. A majority of the increase is
attributable to expenses incurred by Dolphin of $306,000 during the three
months ended September 30, 1998. Other increases were 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 25.6% for the
three months ended September 30, 1998 compared to the three months ended
September 30, 1997. This is a result of the establishment of APCC, which is
operated in a manner so as to enable it to qualify as a real estate investment
trust, 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. The historic tax credit is being recognized ratably throughout 1998.
A-18
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
General
For the nine months ended September 30, 1998, the Company reported
consolidated net income available to common stockholders of $5.3 million, a
30.6% or $1.3 million increase compared to net income of $4.1 million for the
same period of 1997. On a diluted basis, earnings per share were $1.20 for the
nine months ended September 30, 1998 compared to $0.95 for the nine months
ended September 30, 1997. The increase in the Company's net income for the nine
months ended September 30, 1998 over the same period of 1997 is primarily
attributable to an increase of $3.2 million in net interest income and an
increase in non-interest income of $526,000 which, when combined, more than
offset an increase in non-interest expense of $2.9 million. The majority of the
increase in non-interest income and expense relates to the activities of
Dolphin.
Interest Income
Interest income for the nine months ended September 30, 1998, increased
$8.7 million or 37.6% to $31.8 million from $23.1 million for the corresponding
period of 1997, due primarily to an increase in average earning assets. For the
nine months ended September 30, 1998, total average earning assets were $357.3
million compared to $228.9 million for the corresponding period in 1997.
Average purchased loans and leases and average originated loans and leases for
the first nine months of 1998 aggregated $216.2 million and $67.9 million
compared to $128.6 million and $68.4 million, respectively, for the
corresponding period in 1997. This increase in the average balance of the
purchased loan and lease portfolio also served to offset a 219 basis point
decline in yield on the purchased loan and lease portfolio experienced as a
result of a more competitive marketplace for loan acquisitions over the past
twelve months, which generally lowered the discount at which loans were
acquired, and a lower interest rate environment. Loans purchased during the
nine months ended September 30, 1998 were purchased at 87% of the gross loan
balances compared to 78% during the comparable period in 1997.
Interest income on investment securities and short-term investments sold
increased by $1.7 million, or 126.6%, for the first nine months of 1998 from
$1.3 million the same 1997 period. Average total investments increased by $41.2
million from the corresponding periods in 1997 to 1998 because the Company
increased its level of liquid assets.
The weighted average yield earned on earning assets for the nine month
period ended September 30, 1998 was 11.92% compared to 13.51% 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 nine months ended September 30, 1998, amounted to
$14.9 million compared to $9.4 million in 1997 representing a $5.5 million, or
58.5% increase. This increase is principally due to increases of $77.6 million
and $47.7 million in average certificates of deposit and money market accounts,
respectively. The average rate paid on interest bearing liabilities increased
slightly to 5.86% for the nine months ended September 30, 1998 from 5.85% 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 nine months
ended September 30, 1998 and 1997 follows.
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Weighted average yield earned on:
Short-term investments ................... 5.42% 5.32%
Securities available for sale ............ 5.51 6.04
Purchased loans and leases, net .......... 14.39 16.58
Originated loans and leases, net ......... 11.02 11.50
Total interest-earning assets .......... 11.92 13.51
</TABLE>
A-19
<PAGE>
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Weighted average rate paid on:
Now and savings .............................. 2.26 2.19
Insured money market ......................... 5.28 3.33
Certificates ................................. 6.00 5.96
Total interest-bearing liabilities ......... 5.86 5.85
Weighted average interest rate spread ......... 6.06 7.66
Net interest margin ........................... 6.35% 8.03%
</TABLE>
Provision for Loan and Lease Losses
The Company's provision for loan and lease losses was $819,000 and
$275,000 for the nine months ended September 30, 1998 and 1997, respectively.
The increase in the provision is partially attributable to a $392,000 provision
for losses on originated leases during the nine months ended September 30,
1998. In addition, the Company provided $402,000 for purchased loans for which
no discount was available for allocation. Due to improved asset quality in the
Company's originated loan portfolio, in addition to a decrease in the size of
the portfolio, the provision for originated loan losses for the nine months
ended September 30, 1998 was decreased to $25,000 compared to $275,000 for the
same period in 1997.
Other Income
Other income for the nine months ended September 30, 1998 was $1,056,000
compared to $530,000 for the same period in 1997. This increase is primarily
due to gains on sales of leases of $535,000, net of a liability for recourse of
$302,000, and lease servicing fees of $247,000. In 1997, gains on sales of
originated loans amounted to $117,000, which related to the sale of
approximately $3.5 million of originated asset-based loans. In 1997, other
income also included $93,000 of net rental income received from tenants of the
Company's new main office prior to renovation. In 1998, other income includes
$108,000 of operating losses from this building since rental income declined
significantly during renovation.
Operating Expenses
Operating expenses increased $2.9 million, or 41.4%, to $9.9 million from
$7.0 million for the same period in 1997. Operating expenses of $2.3 million
were incurred by Dolphin for the nine months ended September 30, 1998.
Compensation and related benefits increased by $2.2 million or 55.6% as a
result of an increase in the Company's staff, primarily at Dolphin.
Compensation and related benefits for Dolphin amounted to $1.4 million for the
nine months ended September 30, 1998.
Occupancy and equipment expenses for the nine months ended September 30,
1998 increased to $1,220,000 compared to $832,000 for the same period of 1997,
primarily due to increased furniture and computer expenses, $236,000 of which
were incurred by Dolphin in 1998.
Expenditures for professional fees decreased to $978,000 during the first
nine months of 1998 from $1,100,000 in the corresponding 1997 period. This
decline is primarily attributable to a lower level of legal fees, net of legal
fees recovered from customers.
Income from other real estate owned, net, amounted to $1,013,000 for the
nine months ended September 30, 1998 compared to $272,000 for the comparable
period in 1998. This increase is primarily attributed to a provision for losses
of $452,000 incurred in 1997 of which $411,000 related to the establishment of
reserves on two specific properties. Additionally, net gains on sales of other
real estate owned amounted to $1,138,000 during the nine months ended September
30, 1998, compared to net gains on sales of $710,000 for the comparable period
in 1997.
Other general and administrative expenses increased to $2.4 million for
the nine months ended September 30, 1998 compared to $1.3 million for the same
period in 1997. Expenses incurred by Dolphin of $567,000 during nine months
ended September 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 nine months ended September 30, 1998 over the same period in
1997 related to growth
A-20
<PAGE>
in several categories, such as marketing, data processing, supplies, loan
expenses, expense related to issuance of common stock in lieu fees to directors
and telephone.
Provision for Income Taxes
The Company's effective tax rate decreased from 41.7% to 26.4% for the
nine months ended September 30, 1998 compared to the nine months ended
September 30, 1997. This is a result of the establishment of APCC, which is
operated in a manner so as to enable it to qualify as a real estate investment
trust, and the recognition of a historic tax credit relating to the renovation
of the Company's new main office building. The historic tax credit is being
recognized ratably throughout 1998.
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-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: November 13, 1998
/s/ Richard Wayne
- -------------------------------
Richard Wayne
President and Co-Chief Executive Officer
DATE: November 13, 1998
/s/ John L. Champion
- -------------------------------
John L. Champion
Senior Vice-President and Chief Financial Officer
A-22
<PAGE>
Attachment B
------------
================================================================================
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 incorporation or organization) (I.R.S. Employer 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 [ ] 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
-------------------- -------------------------
No. of No. of
Balance Loans Balance Loans
----------- -------- ---------------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of year $ 114,036 712 $ 51,876 368
Acquisitions:
Loan balances .................. 165,903 371 164,520(1) 624
Discount ....................... (36,712) -- (80,129) --
--------- --- ------------- ---
129,191 371 84,391 624
--------- --- ------------- ---
Renewals, resolutions and
repayments(2) .................. (62,182) (247) (25,496) (280)
Accretion ....................... 5,918 -- 3,265 --
--------- ---- ------------- ----
Balance at end of year .......... $ 186,963 836 $ 114,036 712
========= ==== ============= ====
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1995 1994 1993
--------------------- -------------------- -------------------
No. of No. of No. of
Balance Loans Balance Loans Balance Loans
------------ -------- ----------- -------- ----------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 31,366 236 $ 7,509 156 $ 3,824 79
Acquisitions:
Loan balances .................. 40,228 172 39,667 260 6,984 165
Discount ....................... (10,003) -- (9,265) -- (890) --
---------- --- -------- --- --------- ---
30,225 172 30,402 260 6,094 165
---------- --- -------- --- --------- ---
Renewals, resolutions and
repayments(2) .................. (11,800) (40) (7,279) (180) (2,890) (88)
Accretion ....................... 2,085 -- 734 -- 481 --
---------- --- -------- ---- --------- ---
Balance at end of year .......... $ 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
---------------------- ----------------------
Allowance Allowance
for Loan % of for Loan % of
Losses Loans Losses Loans
----------- ---------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Loan Categories:
Mortgage loans on real estate:
Commercial ..................... $1,514 2.15% $ 521 0.72%
Land ........................... 32 0.04 19 0.03
Other .......................... 310 0.44 357 0.49
------ ---- ------ ----
Total ......................... 1,856 2.63 897 1.24
Secured commercial .............. 354 0.50 978 1.36
SBA ............................. 47 0.07 54 0.07
Other ........................... 16 0.02 36 0.05
------ ---- ------ ----
$2,273 3.22% $1,965 2.72%
====== ==== ====== ====
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1995 1994 1993
---------------------- ---------------------- ---------------------
Allowance Allowance Allowance
for Loan % of for Loan % of for Loan % of
Losses Loans Losses Loans Losses Loans
----------- ---------- ----------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loan Categories:
Mortgage loans on real estate:
Commercial ..................... $ 472 0.58% $ 475 0.77% $ 66 0.20%
Land ........................... 35 0.04 110 0.18 45 0.14
Other .......................... 264 0.32 237 0.39 88 0.27
------ ---- ------ ---- ---- ----
Total ......................... 771 0.94 822 1.34 199 0.61
Secured commercial .............. 410 0.50 577 0.94 303 0.93
SBA ............................. 72 0.09 100 0.17 98 0.30
Other ........................... 12 0.01 14 0.02 14 0.04
------ ---- ------ ---- ---- ----
$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)
New York .................................. $ 70,896 5.64%
<S> <C> <C>
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
---------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
---------- ---------- ------------ ---------- ---------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold ................... $ 25,621 $ 1,385 5.41% $ 15,615 $ 809 5.18%
Interest-bearing deposits in banks.... 268 9 3.36 368 12 3.26
Securities available for sale ........ 7,782 468 6.01 6,967 398 5.71
Purchased loan portfolio, net(1) ..... 140,141 23,267 16.60 65,414 11,483 17.55
Originated loan portfolio, net(1) .... 67,544 7,648 11.32 74,974 9,460 12.62
-------- ------- ----- -------- ------- -----
Total interest-earning assets ....... 241,356 32,777 13.58 163,338 22,162 13.57
-------- ------- ----- -------- ------- -----
Interest-bearing liabilities:
NOW and savings ...................... 2,621 59 2.25 2,283 51 2.23
Insured money market ................. 5,911 205 3.47 6,123 211 3.45
Certificates ......................... 217,678 13,005 5.97 139,590 8,237 5.90
-------- ------- ----- -------- ------- -----
Total interest-bearing liabilities... 226,210 13,269 5.87 147,996 8,499 5.74
-------- ------- ----- -------- ------- -----
Excess of interest earnings assets
over interest-bearing liabilities .... $ 15,146 $ 15,342
======== ========
Net interest income ................... $19,508 $13,663
======= =======
Interest rate spread .................. 7.71 7.83
===== =====
Net interest margin ................... 8.08% 8.36%
===== =====
<CAPTION>
Year Ended December 31,
----------------------------------
1995
----------------------------------
Average Average
Balance Interest Yield/Rate
----------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold ................... $ 8,919 $ 515 5.77%
Interest-bearing deposits in banks.... 453 19 4.19
Securities available for sale ........ 12,107 711 5.87
Purchased loan portfolio, net(1) ..... 35,352 6,807 19.25
Originated loan portfolio, net(1) .... 67,449 7,914 11.73
--------- ------- -----
Total interest-earning assets ....... 124,280 15,966 12.85
--------- ------- -----
Interest-bearing liabilities:
NOW and savings ...................... 2,471 58 2.35
Insured money market ................. 7,588 230 3.03
Certificates ......................... 109,194 6,515 5.97
--------- ------- -----
Total interest-bearing liabilities... 119,253 6,803 5.70
--------- ------- -----
Excess of interest earnings assets
over interest-bearing liabilities .... $ 5,027
=========
Net interest income ................... $ 9,163
=======
Interest rate spread .................. 7.15
=====
Net interest margin ................... 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 ............................ 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 $3.3 million, or 157.1% 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
One Two
Overnight Year Years
----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C>
Rate-sensitive assets:
Federal funds sold .......................... $ 44,290 $ -- $ --
5.41%
Interest-bearing deposits in banks .......... 238 -- --
4.75%
Securities available for sale ............... -- 2,001 2,005
5.63% 5.88%
Fixed-rate purchased loans (1) .............. -- 32,609 10,931
9.10% 7.56%
Adjustable-rate purchased loans (1) ......... 97,559 26,702 163
9.07% 9.82% 10.10%
Fixed-rate originated loans (1) ............. -- 2,502 45
8.32% 10.28%
Adjustable-rate originated loans (1) ........ 58,348 4,550 --
-------
10.30% 9.90%
-------- --------
Total rate-sensitive assets ............... $200,435 $ 68,364 $13,144
======== ======== =======
Rate-sensitive liabilities:
NOW ......................................... $ 1,435 $ -- $ --
1.98%
Savings and money market .................... 12,569 -- --
3.47%
Certificates ................................ -- 237,645 21,544
--------
5.92% 5.98%
-------- -------
Total rate-sensitive liabilities .......... $ 14,004 $237,645 $21,544
======== ======== =======
<CAPTION>
December 31, 1997
--------------------------------------------------------
Two to Three Four to Over
Three to Four Five Five
Years Years Years Years Total
----------- ---------- ---------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Federal funds sold .......................... $ -- $ -- $ -- $ -- $ 44,290
Interest-bearing deposits in banks .......... -- -- -- -- 238
Securities available for sale ............... 2,012 998 -- -- 7,016
5.94% 5.63%
Fixed-rate purchased loans (1) .............. 10,209 8,009 6,415 26,740 94,913
8.46% 8.24% 8.57% 8.30%
Adjustable-rate purchased loans (1) ......... 924 379 39 -- 125,766
9.45% 10.71% 9.61%
Fixed-rate originated loans (1) ............. 652 301 528 3,154 7,182
8.66% 10.87% 9.34% 8.12%
Adjustable-rate originated loans (1) ........ -- -- -- -- 62,898
------- ------- ------ ------- --------
Total rate-sensitive assets ............... $13,797 $ 9,687 $6,982 $29,894 $342,303
======= ======= ====== ======= ========
Rate-sensitive liabilities:
NOW ......................................... $ -- $ -- -- $ -- $ 1,435
Savings and money market .................... -- -- -- -- 12,569
Certificates ................................ 6,345 80 182 100 265,896
--------
6.30% 5.73% 5.93% 5.60%
------- ------- ------ -------
Total rate-sensitive liabilities .......... $ 6,345 $ 80 $ 182 $ 100 $279,900
======= ======= ====== ======= ========
</TABLE>
- -----------------
(1) Loans are presented at gross amounts before deducting discounts on
purchased loans, the allowance for loan losses and net deferred loan
income.
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 million 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>
Common Stock
------------------- Additional Retained
Paid-in Earnings
Shares Amount Capital (Deficit)
-------- ---------- ------------ ---------------
(In Thousands)
<S> <C> <C> <C> <C>
Balance at December 31, 1994 2,344 $ 2,344 $ 9,206 $ (1,010)
Net income ........................... -- -- -- 2,371
Purchase of treasury stock ........... -- -- -- --
Reissuance of treasury stock for
Directors' shares ................... -- -- -- --
Decrease in unrealized loss on
securities available for sale,
after tax effect .................... -- -- -- --
----- ------- -------- ---------
Balance at December 31, 1995 2,344 2,344 9,206 1,361
Net income ........................... -- -- -- 3,793
Proceeds from sale of common
stock, net (Note 10) ................ 1,725 1,725 8,218 --
Issuance of founders' shares
(Note 12) ........................... 137 137 (137) --
Issuance of shares in lieu of cash
compensation to Directors ........... 5 5 29 --
Amortization of compensation
costs related to stock options ...... -- -- 10 --
Decrease in unrealized gain on
securities available for sale,
after tax effect .................... -- -- -- --
----- ------- -------- ---------
Balance at December 31, 1996 4,211 4,211 17,326 5,154
Net income ........................... -- -- -- 5,772
Issuance of shares in lieu of cash
compensation to Directors ........... 5 5 51 --
Reissuance of treasury stock
under stock options (Note 12)........ -- -- 25 --
Amortization of compensation
costs related to stock options ...... -- -- 30 --
Increase in unrealized gain on
securities available for sale,
after tax effect .................... -- -- -- --
----- ------- -------- ---------
Balance at December 31, 1997 4,216 $ 4,216 $ 17,432 $ 10,926
===== ======= ======== =========
<CAPTION>
Net
Unrealized
Gain (Loss)
Treasury Stock on Securities
-------------------- Available
Shares Amount for Sale Total
-------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 -- $ -- $ (64) $10,476
Net income ........................... -- -- -- 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 190 (936) 8 11,983
Net income ........................... -- -- -- 3,793
Proceeds from sale of common
stock, net (Note 10) ................ -- -- -- 9,943
Issuance of founders' shares
(Note 12) ........................... -- -- -- --
Issuance of shares in lieu of cash
compensation to Directors ........... -- -- -- 34
Amortization of compensation
costs related to stock options ...... -- -- -- 10
Decrease in unrealized gain on
securities available for sale,
after tax effect .................... -- -- (3) (3)
--- ------- ----- -------
Balance at December 31, 1996 190 (936) 5 25,760
Net income ........................... -- -- -- 5,772
Issuance of shares in lieu of cash
compensation to Directors ........... -- -- -- 56
Reissuance of treasury stock
under stock options (Note 12)........ (30) 143 -- 168
Amortization of compensation
costs related to stock options ...... -- -- -- 30
Increase in unrealized gain on
securities available for sale,
after tax effect .................... -- -- 15 15
--- ------- ----- -------
Balance at December 31, 1997 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
------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------------ ----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend
income (1) ................. $9,639 $ 8,273 $ 7,833 $ 7,032
Interest expense ............ 3,874 3,371 3,182 2,842
------ ------- ------- -------
Net interest income ......... 5,765 4,902 4,651 4,190
Provision for loan
losses ..................... 50 -- 50 225
------ ------- ------- -------
Net interest income,
after provision for
loan losses ................ 5,715 4,902 4,601 3,965
Other income
(expense) .................. (2) 195 107 228
Operating expenses .......... 2,828 2,595 2,457 1,931
------- ------- ------- -------
Income before
provision for
income taxes ............... 2,885 2,502 2,251 2,262
Provision for income
taxes ...................... 1,203 1,043 939 943
------- ------- ------- -------
Net income .................. $1,682 $ 1,459 $ 1,312 $ 1,319
======= ======= ======= =======
Earnings per share:
Basic ...................... $ 0.41 $ 0.36 $ 0.32 $ 0.33
======= ======= ======= =======
Diluted .................... $ 0.39 $ 0.34 $ 0.31 $ 0.31
======= ======= ======= =======
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1996
--------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------------- ----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend
income (1) ................. $ 7,147 $ 5,444 $ 4,826 $ 4,745
Interest expense ............ 2,539 2,142 1,820 1,998
--------- ------- ------- -------
Net interest income ......... 4,608 3,302 3,006 2,747
Provision for loan
losses ..................... 225 125 155 250
--------- ------- ------- -------
Net interest income,
after provision for
loan losses ................ 4,383 3,177 2,851 2,497
Other income
(expense) .................. 148 163 84 143
Operating expenses .......... 2,432(2) 1,666 1,230 1,612
----------- ------- ------- -------
Income before
provision for
income taxes ............... 2,099 1,674 1,705 1,028
Provision for income
taxes ...................... 875 698 729 411
----------- ------- ------- -------
Net income .................. $ 1,224 $ 976 $ 976 $ 617
=========== ======= ======= =======
Earnings per share:
Basic ...................... $ 0.30 $ 0.24 $ 0.26 $ 0.29
=========== ======= ======= =======
Diluted .................... $ 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 is accurate as of any
date other than the date of this prospectus.
--------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-------
<S> <C>
Prospectus Summary ................................................... 1
Risk Factors ......................................................... 7
Background, Corporate Structure and Benefits to Atlantic Bank ........ 14
Use of Proceeds ...................................................... 16
Dividend Policy ...................................................... 16
Capitalization ....................................................... 17
Business ............................................................. 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations .......................................... 31
Management ........................................................... 37
Description of the Series A Preferred Shares ......................... 39
Description of Capital Stock ......................................... 43
Federal Income Tax Consequences ...................................... 46
ERISA Considerations ................................................. 57
Certain Information Regarding Atlantic Bank .......................... 60
Underwriting ......................................................... 69
Legal Matters ........................................................ 70
Independent Auditors ................................................. 70
Available Information ................................................ 71
Financial Statements ................................................. F-1
Annex 1--Offering Circular
</TABLE>
Until , 1999 (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
[LOGO]
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.
JANNEY MONTGOMERY
SCOTT INC.
, 1999
================================================================================
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
All expenses other than the registration fee, the NASD fee and the Nasdaq
listing fee are estimated.
<TABLE>
<S> <C>
Registration Fee .................................... $ 9,591
NASD Fee ............................................ 3,950
Nasdaq Listing Fee .................................. 38,750
Printing Expenses ................................... 200,000
Legal Fees and Expenses ............................. 300,000
Accounting Fees and Expenses ........................ 40,000
Blue Sky Fees and Expenses .......................... 5,000
Miscellaneous ....................................... 2,709
--------
Total ............................................... $600,000
========
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES.
See response to Item 33 below.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth below is information regarding the number of shares of capital
stock of Atlantic Preferred Capital since its inception in March, 1998. Further
included is the consideration received by Atlantic Preferred Capital 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, Atlantic Preferred Capital issued 100 shares of its
common stock to Atlantic Bank for an aggregate purchase price of $139.7
million, in reliance on Section 4(2) of the Securities Act. Subsequently,
Atlantic Bank transferred the shares of common stock to CHB Realty Corp.,
a wholly-owned subsidiary of Atlantic Bank ("CHB").
(2) On March 31, 1998, Atlantic Preferred Capital issued 1,000 shares of its 8%
Cumulative Non-Convertible Preferred Stock, Series B to Atlantic Bank for
an aggregate purchase price of $1,000,000, in reliance on Section 4(2) of
the Securities Act. Subsequently, Atlantic Bank transferred 800 of such
shares to CHB.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Atlantic Preferred Capital is a Massachusetts corporation. Section 13 of
the Massachusetts Business Corporation Law (the "MBCL") 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.
Section 67 of the MBCL 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, by-laws 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 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
II-1
<PAGE>
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 Atlantic Preferred Capital
provide for indemnification of the officers and directors of Atlantic Preferred
Capital to the full extent permitted by applicable law.
Atlantic Preferred Capital and its directors and officers are currently
covered by liability insurance.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 36. 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 Atlantic Preferred Capital, Atlantic Bank and the
underwriters
3.1 Articles of Organization of Atlantic Preferred Capital
*3.2 Form of Restated Articles of Organization of Atlantic Preferred Capital
3.3 By-laws of Atlantic Preferred Capital
3.4 Form of Amended and Restated By-laws of Atlantic Preferred Capital
4 Specimen of certificate representing Series A Preferred Shares
5 Opinion of Goodwin, Procter & Hoar LLP, counsel to Atlantic Preferred Capital, relating to
Series A Preferred Shares
**8 Opinion of Goodwin, Procter & Hoar LLP, counsel to Atlantic Preferred Capital, relating to
certain tax matters
10.1 Master Mortgage Loan Purchase Agreement between Atlantic Preferred Capital and Atlantic
Bank
10.2 Master Service Agreement between Atlantic Preferred Capital and Atlantic Bank
10.3 Advisory Agreement between Atlantic Preferred Capital and Atlantic Bank
10.4 Form of Letter Agreement between Atlantic Preferred Capital and Atlantic Bank regarding
issuance of Bank Preferred Shares
12.1 Statement regarding computation of ratios
*23.1 Consent of Wolf & Company, P.C.
23.2 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5)
24 Powers of Attorney
27 Financial Data Schedule
</TABLE>
- ------------
* Filed herewith.
** To be filed by amendment.
II-2
<PAGE>
ITEM 37. 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 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 34 above, or
otherwise, the Registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities 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 Securities 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 Securities 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 Securities 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 Amendment No. 2
to the Registration Statement (File No. 333-66677) to be signed on its behalf
by the undersigned, thereunto duly authorized, in Boston, Massachusetts, on the
8th day of January, 1999.
ATLANTIC PREFERRED CAPITAL CORPORATION
By: /s/ John L. Champion
-------------------------------------
John L. Champion, Treasurer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the 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>
* President and Director January 8, 1999
- ------------------------- (Principal Executive Officer)
Richard Wayne
/s/ John L. Champion Treasurer and Director January 8, 1999
- ------------------------- (Principal financial and
John L. Champion accounting officer)
* Director January 8, 1999
- -------------------------
Nicholas W. Lazares
* By: /s/ John L. Champion
--------------------
John L. Champion, Attorney-in-Fact
</TABLE>
II-4
FEDERAL IDENTIFICATION
NO. __________________
____________
Examiner
The Commonwealth of Massachusetts
William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
RESTATED ARTICLES OF ORGANIZATION
(General Laws, Chapter 156B, Section 74)
____________
Name
Approved
<TABLE>
<S> <C>
We, Richard Wayne , *President,
-----------------------------------------------------
and Bradley M. Shron , *Clerk,
-----------------------------------------------------
of Atlantic Preferred Capital Corporation
-----------------------------------------------------,
(Exact name of corporation)
located at 101 Summer Street, Boston, MA 02110
-----------------------------------------------------,
(Street address of corporation Massachusetts)
do hereby certify that the following Restatement of the Articles of Organization was duly
adopted at a meeting held on _______________, 19__ by a vote of the directors/or:
</TABLE>
<TABLE>
<S> <C>
100 shares of Common of 100 shares outstanding,
--------- -------------------------------------- -----------
(type, class & series, if any)
shares of of shares outstanding, and
--------- -------------------------------------- -----------
(type, class & series, if any)
shares of of shares outstanding,
--------- -------------------------------------- -----------
(type, class & series, if any)
</TABLE>
**being at least a majority of each type, class or series
outstanding and entitled to vote thereon: /**being at least
two-thirds of each type, class or series outstanding and entitled
to vote thereon and of each type, class or series of stock whose
rights are adversely affected thereby:
C [ ] ARTICLE I
P [ ] The name of the corporation is:
M [ ] Atlantic Preferred Capital Corporation
R.A. [ ]
ARTICLE II
The purpose of the corporation is to engage in the following
business activities:
See Attached Article II
*Delete the inapplicable words. **Delete the inapplicable clause.
Note: If the space provided under any article or item on this form
is insufficient, additions shall be set forth on separate 8-1/2 x
11 sheets of paper with a left margin of at least 1 inch. Additions
__________ to more than one article may be made on a single sheet so long as
P.C. each article requiring each addition is clearly indicated.
<PAGE>
ARTICLE III
State the total number of shares and par value, if any, of each class of stock
which the corporation is authorized to issue:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
WITHOUT PAR VALUE WITH PAR VALUE
- -----------------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common:
- -----------------------------------------------------------------------------------------
**** See Attached Article III ****
- -----------------------------------------------------------------------------------------
Preferred: Preferred:
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
ARTICLE IV
If more than one class of stock is authorized, state a distinguishing
designation for each class. Prior to the issuance of any shares of a class, if
shares of another class are outstanding, the corporation must provide a
description of the preferences, voting powers, qualifications, and special or
relative rights or privileges of that class and of each other class of which
shares are outstanding and of each series then established within any class.
See Attached Article IV
ARTICLE V
The restrictions, if any, imposed by the Articles of Organization upon the
transfer of shares of stock of any class are:
See Attached Article V
ARTICLE VI
**Other lawful provisions, if any, for the conduct and regulation of the
business and affairs of the corporation, for its voluntary dissolution, or for
limiting, defining, or regulating the powers of the corporation, or of its
directors or stockholders, or of any class of stockholders:
See Attached Articles VI A. and VI B.
**If there are no provisions state "None".
Note: The preceding six (6) articles are considered to be permanent and may ONLY
be changed by filing appropriate Articles of Amendment.
<PAGE>
ARTICLE VII
The effective date of the restated Articles of Organization of the corporation
shall be the date approved and filed by the Secretary of the Commonwealth. If a
later effective date is desired, specify such date which shall not be more than
thirty days after the date of filing.
ARTICLE VIII
The information contained in Article VIII is not a permanent part of the
Articles of Organization.
a. The street address (post office boxes are not acceptable) of the principal
office of the corporation in Massachusetts is:
101 Summer Street, Boston, Massachusetts 02110
b. The name, residential address and post office address of each director and
officer of the corporation is as follows:
<TABLE>
<CAPTION>
NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS
<S> <C> <C> <C>
President: Richard Wayne 25 Trailside Road Same
Weston, MA 02193
Treasurer: John L. Champion 24 Wethersfield Drive Same
Andover, MA 01810
Clerk: Bradley M. Shron 38 Robert Frost Road Same
Sudbury, MA 01776
Directors: Nicholas W. Lazares 255 Adams Street Same
Milton, MA 02186
Richard Wayne Same as above Same
John L. Champion Same as above Same
</TABLE>
c. The fiscal year (i.e., tax year) of the corporation shall end on the last day
of the month of: December
d. The name and business address of the resident agent, if any, of the
corporation is: None
**We further certify that the foregoing Restated Articles of Organization affect
no amendments to the Articles of Organization of the corporation as heretofore
amended, except amendments to the following articles. Briefly describe
amendments below:
1. Authorizes issuance of 1,380,000 shares of non-cumulative exchangeable
preferred stock, Series A.
2. Authorizes issuance of 2,000,000 shares of undesignated preferred shares.
3. Authorizes issuance of 3,380,000 shares of excess preferred shares.
SIGNED UNDER THE PENALTIES OF PERJURY, this __________ day of ________________,
19 _____,
_________________________________________________________________, *President,
_________________________________________________________________, *Clerk,
*Delete the inapplicable words. **If there are no amendments, state 'None'.
<PAGE>
Restated Articles of Organization of Atlantic Preferred Capital Corporation
Continuation Sheet
Article II. PURPOSE
- ----------- -------
2.1 Purpose. The Corporation is being formed to engage in the real
estate business and to engage in any other lawful act or activity for which
corporations may be organized under the Massachusetts Business Corporation Law.
The foregoing purposes shall be in no way limited or restricted by reference to,
or inference from, the terms of any other clause of these Restated Articles of
Organization, and each shall be regarded as independent. The foregoing purposes
are also to be construed as powers of the Corporation, and shall be in addition
to and not in limitation of the general powers of corporations under the laws of
the Commonwealth of Massachusetts. However, notwithstanding the foregoing and
any other provisions of the Articles of Organization, the Corporation may be
operated solely for the purpose of performing functions which Atlantic Bank and
Trust Company or any successor (the "Bank") is empowered to perform directly in
accordance with Chapter 167F, ss. 2(7) of the General Laws of the Commonwealth
of Massachusetts.
2.2 Real Estate Investment Trust. Without limiting the generality of
the foregoing purposes, business and objects, at such time or times as the Board
of Directors of the Corporation determines that it is in the interest of the
Corporation and its stockholders that the Corporation engage in the business of,
and conduct its business and affairs so as to qualify as, a real estate
investment trust (as that phrase is defined under Section 856 of the Internal
Revenue Code of 1986, as amended (the "Code")), the purpose of the Corporation
shall include engaging in the business of a real estate investment trust
("REIT"). This reference to such purpose shall not make unlawful or unauthorized
any otherwise lawful act or activity that the Corporation may take that is
inconsistent with such purpose.
1
<PAGE>
Article III. AUTHORIZED STOCK; NUMBER OF SHARES AND PAR VALUE
- ------------ ------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
WITHOUT PAR VALUE WITH PAR VALUE
- ---------------------------------------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common: 100 $0.01
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Preferred: Series A 1,380,000 $0.01
Preferred:
- ---------------------------------------------------------------------------------------------------------------
Series B 1000 $0.01
Preferred:
- ---------------------------------------------------------------------------------------------------------------
Undesignated 2,000,000 $0.01
Preferred:
- ---------------------------------------------------------------------------------------------------------------
Excess 3,380,000 $0.01
Preferred:
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
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Article IV. AUTHORIZED STOCK; RIGHTS AND PREFERENCES
- ----------- ----------------------------------------
4.1 Common Stock.
4.1.1 Dividend Rights. Holders of Common Stock are entitled to
receive dividends when, as and if declared by the Board of Directors out of
funds legally available therefor; provided, however, that no dividends with
respect to Common Stock shall be declared or paid unless and until dividends
payable to holders of Preferred Stock have been declared and paid in accordance
with Section 4.3.2 hereof.
4.1.2 Liquidation Rights. In the event of any voluntary or
involuntary liquidation, dissolution, or winding-up of, or any distribution of
the assets of, the Corporation, the assets of the Corporation shall be
distributed to the holders of the Common Stock and the Preferred Stock, but as
to the Preferred Stock only according to the terms of the Preferred Stock,
including, without limitation, Section 4.3 hereof. Distributions may be made to
holders of Common Stock of the Corporation prior to, contemporaneously with, or
following any such distributions to the holders of Preferred Stock of the
Corporation subject to the rights of the holders of such Preferred Stock.
Payment(s) to holders of the Common Stock of the Corporation pursuant to this
Section 4.1.2 may be made in cash, in-kind, or in any combination thereof.
4.1.3 Voting Rights. Except as otherwise specifically provided
for herein or by law, all rights to vote and all voting power incident to the
stock of the Corporation shall be vested exclusively in the holders of the
Common Stock. Each share of Common Stock shall have one vote on matters to be
voted upon by holders of Common Stock.
4.1.4 Ranking. Although holders of Common Stock rank junior to
holders of Preferred Stock as to dividends and liquidation rights, nothing
contained in these Articles of Organization shall preclude the holders of the
Common Stock of the Corporation, subject to compliance with Sections 4.3.2 and
4.3.6 hereof, from receiving dividends or other distributions prior to,
contemporaneously with, or following any dividends or distributions being paid
to the holders of Preferred Stock.
4.2 Undesignated Preferred Stock. Of the Six Million Seven Hundred
Sixty-One Thousand (6,761,000) shares of Preferred Stock authorized to be issued
by the Corporation, Two Million (2,000,000) shares shall consist of undesignated
preferred stock (the "Undesignated Preferred Stock"), which may be issued from
time to time in accordance with this Section 4.2. Subject to the approval of the
provisions of any series of Preferred Stock by the Commissioner of Banks of the
Commonwealth of Massachusetts (the "Commissioner"), if required by law, the
Board of Directors of the Corporation is authorized by vote or votes, from time
to time adopted, to provide for the issuance of preferred stock in one or more
series and to fix and state the voting powers, designations, preferences and
relative participating, optional or other special rights of the shares of each
series and the qualifications, limitations and
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restrictions thereof, including, but not limited to, determination of one or
more of the following:
(i) the distinctive serial designation and the number
of shares constituting such series;
(ii) the dividend rates or the amount of dividends to
be paid on the shares of such series, whether dividends shall be
cumulative and, if so, from which date or dates, the payment date or
dates for dividends and the participating or other special rights, if
any, with respect to dividends;
(iii) the voting powers, if any, of shares of such
series;
(iv) whether the shares of such series shall be
redeemable and, if so, the price or prices at which, and the terms and
conditions or which, such shares may be redeemed;
(v) the amount or amounts payable upon the shares of
such series in the event of voluntary or involuntary liquidation,
dissolution or winding up of the Corporation;
(vi) whether the shares of such series shall be
entitled to the benefit of a sinking or retirement fund to be applied
to the purchase or redemption of such shares, and if so entitled, the
amount of such fund and the manner of its application, including the
price or prices at which such shares may be redeemed or purchased
through the application of such fund;
(vii) whether the shares of such series shall be
convertible into, or exchangeable for, shares of any other class or
classes of stock of the Bank, and if so convertible or exchangeable,
the conversion price or prices, or the rate or rates of exchange, and
the adjustments thereof, if any, at which such conversion of exchange
may be made, and any other terms and conditions of such conversion or
exchange;
(viii) the price or other consideration for which the
shares of such series shall be issued; and
(ix) whether the shares of such series which are
redeemed or converted shall have the status of authorized but unissued
shares of preferred stock and whether such shares may be reissued as
shares of the same or any other series of stock.
Unless otherwise provided by law, any such vote shall become effective
when the Corporation files with the Secretary of State of the Commonwealth of
Massachusetts a certificate of establishment of one or more series of preferred
stock signed by the President or
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any Vice President and by the Clerk or Assistant Clerk of the Corporation,
setting forth a copy of the vote of the Board of Directors establishing and
designating the series and fixing and determining the relative rights and
preferences thereof, the date of adoption of such vote and a certification that
such vote was duly adopted by the Board of Directors.
4.3 Series A and Series B Preferred Stock.
4.3.1 Designation. In addition to the Undesignated Preferred
Stock and the Excess Preferred Stock provided for in Section 4.5, there shall be
designated two series of Preferred Stock, which shall consist of (a) One Million
Three Hundred Eighty Thousand (1,380,000) shares of "_% Non-cumulative
Exchangeable Preferred Stock, Series A ("Series A Preferred Stock")," and (b)
One Thousand (1,000) shares of 8% Cumulative Non-convertible Preferred Stock,
Series B (the "Series B Preferred Stock"). Each share of Series A Preferred
Stock shall have a total liquidation amount of Twenty-Five Dollars ($25) per
share, plus any accrued and unpaid dividends thereon from the beginning of the
dividend period in which the liquidation occurs to the date of liquidation (the
"Total Series A Liquidation Amount") and each share of Series B Preferred Stock
shall have a total liquidation amount of One Thousand Dollars ($1,000) per
share, plus any accumulated and unpaid dividends (the "Total Series B
Liquidation Amount" and together with the Total Series A Liquidation Amount the
"Total Liquidation Amount"), to be distributed, in the event of a voluntary or
involuntary dissolution, liquidation, or winding up of the Corporation, pursuant
to Section 4.3.6 hereof. The Total Series A Liquidation Amount less the
aggregate amount of Liquidating Distributions (as defined in Section 4.2.6
hereof) previously paid per share of Series A Preferred Stock at any time shall
be referred to herein as the "Outstanding Series A Liquidation Amount," the
Total Series B Liquidation Amount less the aggregate amount of Liquidating
Distributions previously paid per share of Series B Preferred Stock at any time
shall be referenced herein as the "Outstanding Series B Liquidation Amount" and
the Outstanding Series A Liquidation Amount and the Outstanding Series B
Liquidation Amount shall be referred to herein collectively as the "Outstanding
Liquidation Amount." From and after the time that the Outstanding Liquidation
Amount is zero, or after a redemption in accordance with Sections 4.3.3 or 5.4
hereof, the holders of shares of the Preferred Stock shall have no right or
claim to any of the remaining assets of the Corporation. The holders of the
Series B Preferred Stock shall rank junior to the holders of the Series A
Preferred Stock as to dividends and in liquidation, in accordance with the terms
of these Restated Articles of Organization.
4.3.2 Dividend Rights.
(i) Dividends on the Series A Preferred Stock are payable at
the annual rate of ___ percent (__%) of the average daily Outstanding Series A
Liquidation Amount. Dividends are not cumulative and, if declared, are payable
monthly in arrears on the fifteenth day of each month, commencing
______________, 1999, to holders of record on the last business day of the
immediately preceding month. Monthly dividend periods will commence on the first
day of each month and on the date of original issue for the initial dividend
period.
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The amount of dividends, if declared, payable for the initial dividend period or
any period shorter than a full dividend period shall be computed on the basis of
30-day months, a 360-day year and the actual number of days elapsed in the
period. If no dividend is declared on the Series A Preferred Stock by the
Corporation for a dividend period, holders of the Series A Preferred Stock will
have no right to receive a dividend for that period, and the Corporation will
have no obligation to pay a dividend for that period, whether or not dividends
are declared and paid for any future period. Dividends in each dividend period
shall accrue from the first day of such period, whether or not declared or paid
in the prior period.
(ii) Dividends on the Series B Preferred Stock are payable at
the annual rate of eight percent (8%) of the average daily Outstanding Series B
Liquidation Amount. Dividends are cumulative and, if declared, are payable
quarterly in arrears on the fifteenth day of January, April, July, and October
in each year, commencing April 15, 1999. Dividends on the Series B Preferred
Stock shall be cumulative and, if not paid for any quarterly period, shall be
paid together with all accumulated and unpaid dividends, but without interest
thereon, before any dividends shall be paid (other than dividends payable in
shares of stock of the Corporation) on the Common Stock of the Corporation;
provided, however, that no dividends with respect to Series B Preferred Stock
shall be paid unless and until dividends payable to holders of Series A
Preferred Stock have been paid in accordance with Section 4.3.2 hereof. No
interest, or sum of money in lieu of interest, shall be payable in respect of
any accumulated but unpaid dividends.
4.3.3 Redemption.
(i) Shares of Series A Preferred Stock are not redeemable
prior to ___________, 2004, except upon the occurrence of a Tax Event (as
defined in paragraph (ii of this Section 4.3.3). The Corporation may, at its
option, redeem all outstanding shares of the Series A Preferred Stock, in whole
or in part, at any time or from time to time and with the prior written approval
of the Federal Deposit Insurance Corporation (the "FDIC") or other applicable
federal or state regulatory agency (if such approval is required at the time of
redemption), on or after _________, 2004, at a per share redemption price equal
to $25.00 for each share of Series A Preferred Stock, plus accrued and unpaid
dividends thereon from the beginning of the dividend period in which the
redemption occurs to the date fixed for redemption.
(ii) The Corporation may, at any time after the occurrence of
a Tax Event (as defined below) and with the prior written consent of the FDIC or
any successor agency, redeem all issued and outstanding shares of Series A
Preferred Stock, in whole, but not in part, at a redemption price equal to the
then Outstanding Liquidation Amount per share. "Tax Event" means the receipt by
the Corporation of an opinion of counsel in form and substance satisfactory to
the Corporation to the effect that, as a result of (A) 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,
(B) any judicial decision, official
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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 (C) 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
Stock, that (x) dividends paid or to be paid by the Corporation with respect to
the capital stock of the Corporation are not, or will not be, fully deductible
by the Corporation for United States federal or Massachusetts income tax
purposes or (y) the Corporation is otherwise unable to qualify as a real estate
investment trust pursuant to Section 856 of the Internal Revenue Code of 1986,
as amended.
(iii) In the event the Corporation shall determine to redeem
shares of Series A Preferred Stock, notice of such redemption shall be given by
first class mail, postage prepaid, mailed not less than 30 nor more than 60 days
prior to the redemption date, to each holder of record of the shares to be
redeemed, at such holder's address as the same appears on the stock register of
the Corporation. Each such notice shall state: (A) the redemption date; (B) the
redemption price; (C) the place or places where certificates for such shares are
to be surrendered for payment of the redemption price; and (D) that dividends on
the shares to be redeemed will cease to accrue on the redemption date.
(iv) Notice having been mailed as aforesaid, from and after
the redemption date (unless default shall be made by the Corporation in
providing money for the payment of the redemption price) dividends on the shares
of Series A Preferred Stock so called for redemption shall cease to accrue, said
shares shall no longer be deemed to be outstanding, and all rights of the
holders thereof as stockholders of the Corporation (except the right to receive
from the Corporation the redemption price) shall cease. Upon surrender in
accordance with said notice of the certificates for any shares so redeemed
(properly endorsed or assigned for transfer, if the Board of Directors of the
Corporation or a duly authorized committee thereof shall so require and the
notice shall so state), such shares shall be redeemed by the Corporation at the
redemption price aforesaid.
(v) The shares of Series A Preferred Stock which shall at any
time have been redeemed shall, after such redemption, have the status of
authorized but unissued shares of Preferred Stock.
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4.3.4 Exchange.
(i) Subject to the terms and conditions of this Section 4.3.4,
each share of Series A Preferred Stock will be exchanged automatically (the
"Automatic Exchange") for one-tenth of one share of ___% Noncumulative Preferred
Stock, Series A (the "Bank Preferred Shares"), of Atlantic Bank and Trust
Company, a Massachusetts chartered trust company (the "Bank"). The issuance of
the Bank Preferred Shares has been duly authorized by the board of directors of
the Bank. Prior to or contemporaneously with the filing of these Amended and
Restated Articles, the Bank shall file with the Massachusetts Secretary of State
a certificate of designation establishing the Bank Preferred Shares. The
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of the
Bank Preferred Shares shall be substantially identical to the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of the Series A Preferred
Stock established by these Restated Articles of Organization; provided, however,
that the liquidation amount on the Bank Preferred Shares shall be $250.00 per
share.
(ii) The Automatic Exchange will occur only if the FDIC so
directs in writing (a "Directive") because (i) the Bank becomes
"undercapitalized" under prompt corrective action regulations, (ii) the Bank is
placed into conservatorship or receivership or (iii) the FDIC, in its sole
discretion, anticipates the Bank becoming "undercapitalized" in the near term.
The issuance of a Directive by the FDIC shall be referred to herein as the
"Exchange Event."
(iii) Upon the Exchange Event, each holder of Series A
Preferred Stock shall be unconditionally obligated to surrender to the Bank the
certificates representing each share of Series A Preferred Stock held by such
holder and from and after the Exchange Event each such share of Series A
Preferred Stock shall represent solely the right to receive one-tenth of one
Bank Preferred Share in accordance with this Section 4.3.4. The Corporation
shall use its best efforts to cause the Bank to promptly issue Bank Preferred
Shares upon the occurrence of the Exchange Event and, in that regard, has
obtained an unconditional covenant from the Bank to issue Preferred Bank Shares
upon the Exchange Event in accordance with this Section 4.3.4.
(iv) 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. As
of the Time of Exchange, all of the shares of Series A Preferred Stock required
to be exchanged will be deemed canceled without any further action by the
Corporation, all rights of the holders of Series A Preferred Stock as
stockholders of the Corporation shall cease, and such persons shall thereupon
and thereafter be deemed to be and shall be for all purposes the holders of Bank
Preferred Shares. Notice of the occurrence of the Exchange Event shall be given
by first-class mail, postage prepaid, mailed within 30 days of
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such event, to each holder of record of the Series A Preferred Stock, at such
holder's address as the same appears on the stock register of the Corporation.
Each such notice shall indicate the place or places where certificates for the
Series A Preferred Stock are to be surrendered by the holders thereof, and the
Bank shall deliver to each such holder certificates for Bank Preferred Shares
upon surrender of certificates for the Series A Preferred Stock. Until such
replacement stock certificates are delivered (or in the event such replacement
certificates are not delivered), certificates previously representing the shares
of Series A Preferred Stock shall be deemed for all purposes to represent Bank
Preferred Shares.
(v) Any shares of Series A Preferred Stock purchased or
redeemed by the Corporation in accordance with Section 4.3.3 hereof prior to the
Time of Exchange shall not be deemed outstanding and shall not be subject to the
Automatic Exchange. In the event of the Automatic Exchange, any accrued and
unpaid dividends on the shares of Series A Preferred Stock as of the Time of
Exchange would be deemed to be accrued and unpaid dividends on the Bank
Preferred Shares.
4.3.5 Conversion. The holders of shares of Preferred Stock
shall not have any rights to convert such shares into shares of any other class
or series of capital stock of the Corporation.
4.3.6 Liquidation Rights.
(i) In the event of a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation, through the adoption of a plan of
liquidation or otherwise (a "Liquidation Event"), the holders of the shares of
Series A Preferred Stock shall be entitled to receive and to be paid out of the
assets of the Corporation available for distribution to its stockholders,
whether such assets are capital, surplus or earning and before any amount shall
be paid or distributed to the holders of Common Stock, the Series B Preferred
Stock or any other class or series of capital stock ranking on liquidation
junior to the Series A Preferred Stock, with respect to each outstanding share
of Preferred Stock (A) one or more liquidating distributions (each, a
"Liquidating Distribution") totaling, on a per share basis, in the aggregate,
the Total Series A Liquidation Amount. Each Liquidating Distribution shall be
paid on such date (each, a "Series A Liquidation Date"), and, subject to the
foregoing aggregate distribution payment requirements, be in such amount (each,
a "Series A Liquidation Amount"), as the Board of Directors, or any duly
authorized committee thereof, may, in its sole discretion, deem appropriate;
provided, however, that in the event that the Series A Liquidation Amount is
paid on more than one Series A Liquidation Date, then the Series A Liquidation
Amount paid on the last Series A Liquidation Date must be equal to at least
sixty percent (60%) of the Series A Liquidation Amount. Payment(s) to holders of
the Total Series A Preferred Stock of the Corporation pursuant to this Section
4.3.6 may be made in cash only.
(ii) Upon a Liquidation Event, the holders of the shares of
Series B Preferred Stock shall be entitled to receive and to be paid out of the
assets of the Corporation
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available for distribution to its stockholders whether such assets are capital,
surplus or earning and before any amount shall be paid or distributed to the
holders of Common Stock or any other class or series of capital stock ranking on
liquidation junior to the Series B Preferred Stock, with respect to each
outstanding share of Series B Preferred Stock (A) one or more Liquidating
Distributions totaling, on a per share basis, in the aggregate, the Total Series
B Liquidation Amount. Each Liquidating Distribution shall be paid on such date
(each, a "Series B Liquidation Date"), and, subject to the foregoing aggregate
distribution payment requirements, be in such amount (each, a "Series B
Liquidation Amount"), as the Board of Directors, or any duly authorized
committee thereof, may, in its sole discretion, deem appropriate; provided,
however, that in the event that the Series B Liquidation Amount is paid on more
than one Series B Liquidation Date, then the Series B Liquidation Amount paid on
the last Series B Liquidation Date must be equal to at least sixty percent (60%)
of the Total Series B Liquidation Amount. Payment(s) to holders of the Series B
Preferred Stock of the Corporation pursuant to this Section 4.3.6 may be made in
cash only.
(iii) Prior to the occurrence of any Liquidation Event, the
Corporation will furnish each holder of Preferred Stock notice of such
Liquidation Event in the same manner described in Section 4.3.5 hereof for an
Exchange Event, together with a certificate prepared by the chief financial
officer of the Corporation describing in detail the facts of such Liquidation
Event, stating in detail the amount(s) per share of Preferred Stock each holder
of Preferred Stock would receive pursuant to the provisions of this Section
4.3.6 and stating in detail the facts upon which such amount was determined.
4.3.7 Voting Rights. The holders of shares of Preferred Stock
shall have no right to vote at any meeting of stockholders or otherwise and
shall not be entitled to notice of any such meeting, except in each case as
specifically provided in this Section 4.3.7 or as may be specifically required
by law. So long as any shares of Series A Preferred Stock shall be outstanding,
the Corporation shall not, without first having provided the written notice of
such proposed action to each holder of outstanding shares of Series A Preferred
Stock and having obtained the affirmative vote or written consent of the holders
of not less than sixty-six and two-thirds percent of the outstanding shares of
Series A Preferred Stock (or in the case of clause (iii) below, all of the
outstanding shares of Series A Preferred Stock), voting as a single class, with
each share of Series A Preferred Stock entitling the holder thereof to one vote
per share of Series A Preferred Stock held by such holder:
(i) amend, alter or repeal any provision of, or add any
provision to, the Corporation's Articles of Organization or by-laws if such
action would alter or change the preferences, rights, privileges or powers of,
or the restrictions provided for the benefit of, the Series A Preferred Stock;
(ii) create, obligate itself to create, authorize or issue any
new class or classes of stock or new series of common stock or preferred stock
or any security convertible into or evidencing the right to purchase shares of
any new class or series of common stock or
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<PAGE>
preferred stock or any new capital stock of the Corporation having preference
over the Series A Preferred Stock in any respect; or
(iii) incur indebtedness for borrowed money in excess of 100%
of the Corporation's total stockholders' equity as of the time of such proposed
incurrence of indebtedness.
4.3.8 Approval of Independent Directors.
(i) So long as any shares of Series A Preferred Stock are
outstanding, the Corporation shall not, without first obtaining the approval of
a majority of the Independent Directors (as defined below) take any of the
following actions:
(a) issue shares of additional preferred stock
ranking on a parity with the Series A Preferred Stock;
(b) the redemption of any shares of Common Stock;
(c) the termination or modification of, or the
election not to renew, the Advisory Agreement, dated as of March 31,
1998, by and between the Corporation and the Bank or the Master Service
Agreement, dated as of March 31, 1998, by and between the Corporation
and the Bank, or the subcontracting of any duties under said
agreements to third parties unaffiliated with the Bank;
(d) any dissolution, liquidation or termination of
the Corporation prior to ___________, 2004;
(e) the determination to revoke the Corporation's
status as a real estate investment trust.
(ii) In assessing the benefits to the Corporation of any
proposed action requiring their consent, the Independent Directors shall take
into account the interests of holders of shares of both the Common Stock and the
Preferred Stock, including, without limitation, the holders of the Series A
Preferred Stock. In considering the interests of the holders of the preferred
stock, including, without limitation, holders of the Series A Preferred Stock,
the Independent Directors shall owe the same duties that the Independent
Directors owe to holders of shares of Common Stock.
(iii) For purposes of these Restated Articles of Organization
"Independent Director" means any director of the Corporation who is not at the
time of determination an officer or employee of the Corporation or a director,
officer or employee of the Bank or any affiliate of the Bank.
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<PAGE>
4.4 No Preemptive Rights. No holder of Common Stock or Preferred Stock
shall be entitled as a matter of right to subscribe for or purchase, or have any
preemptive right with respect to, any part of any new or additional issue of
stock of any class whatsoever, or of securities convertible into any stock of
any class whatsoever, whether now or hereafter authorized and whether issued for
cash or other consideration or by way of dividend.
4.5 Excess Preferred Stock. Of the Six Million Seven Hundred Sixty-One
Thousand (6,761,000) shares of Preferred Stock authorized to be issued from time
to time by the Corporation, Three Million Three Hundred Eighty Thousand
(3,380,000) shares shall consist of excess preferred stock ("Excess Preferred
Stock"), which may be issued from time to time in accordance with this Section
4.5. For the purposes of this Section 4.5, terms not otherwise defined shall
have the meanings set forth in Article V.
4.5.1 Conversion into Excess Preferred Stock.
(a) If, notwithstanding the other provisions
contained in these Articles, from and after the date of the Initial
Public Offering and prior to the Restriction Termination Date, there is
a purported Transfer or Non-Transfer Event such that any Person would
Beneficially Own shares of Equity Stock in excess of the Ownership
Limit, then, (i) except as otherwise provided in Section 5.4, the
purported transferee shall be deemed to be a Prohibited Owner and shall
acquire no right or interest (or, in the case of a Non-Transfer Event,
the Person holding record title to the shares of Preferred Stock, if
any, Beneficially Owned by such Beneficial Owner shall have no right or
interest) in such number of shares of Preferred Stock which would cause
such Beneficial Owner to Beneficially Own shares of Equity Stock in
excess of the Ownership Limit, (ii) such number of shares of Preferred
Stock, if any, in excess of the Ownership Limit (rounded up to the
nearest whole share) shall be automatically converted into an equal
number of shares of Excess Preferred Stock and transferred to a Trust
in accordance with Section 4.5.4 and (iii) the Prohibited Owner shall
submit the certificates representing such number of shares of Preferred
Stock to the Corporation, accompanied by all requisite and duly
executed assignments of transfer thereof, for registration in the name
of the Trustee of the Trust. Such conversion into Excess Preferred
Stock and transfer to a Trust shall be effective as of the close of
trading on the Trading Day prior to the date of the purported Transfer
or Non-Transfer Event, as the case may be, even though the certificates
representing the shares of Preferred Stock so converted may be
submitted to the Corporation at a later date.
(b) If, notwithstanding the other provisions
contained in these Articles, from and after the date of the Initial
Public Offering and prior to the Restriction Termination Date there is
a purported Transfer or Non-Transfer Event that, if effective, would
(i) result in the Corporation being "closely held" within the meaning
of Section 856(h) of the Code, (ii) cause the Corporation to
Constructively Own 10% or more of the ownership interest in a tenant of
the Corporation's or a Subsidiary's real
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property within the meaning of Section 856(d)(2)(B) of the Code or
(iii) result in the shares of Preferred Stock being beneficially owned
by fewer than 100 persons within the meaning of Section 856(a)(5) of
the Code, then (x) the purported transferee shall be deemed to be a
Prohibited Owner and shall acquire no right or interest (or, in the
case of a Non-Transfer Event, the Person holding record title to the
shares of Preferred Stock, if any, Beneficially Owned by such
Beneficial Owner shall have no right or interest) in such number of
shares of Preferred Stock, the ownership of which by such purported
transferee or record holder would (A) result in the Corporation being
"closely held" within the meaning of Section 856(h) of the Code, (B)
cause the Corporation to Constructively Own 10% or more of the
ownership interests in a tenant of the Corporation's or a Subsidiary's
real property within the meaning of Section 856(d)(2)(B) of the Code or
(C) result in the shares of Preferred Stock being beneficially owned by
fewer than 100 persons within the meaning of Section 856(a)(5) of the
Code, (y) such number of shares of Preferred Stock (rounded up to the
nearest whole share) shall be automatically converted into an equal
number of shares of Excess Preferred Stock and transferred to a Trust
in accordance with Section 4.5.4 and (z) the Prohibited Owner shall
submit certificates representing such number of shares of Preferred
Stock to the Corporation, accompanied by all requisite and duly
executed assignments of transfer thereof, for registration in the name
of the Trustee of the Trust. Such conversion into Excess Preferred
Stock and transfer to a Trust shall be effective as of the close of
trading on the Trading Day prior to the date of the purported Transfer
or Non-Transfer Event, as the case may be, even though the certificates
representing the shares of Preferred Stock so converted may be
submitted to the Corporation at a later date.
(c) Upon the occurrence of such a conversion of
shares of Preferred Stock into an equal number of shares of Excess
Preferred Stock, such shares of Preferred Stock shall be automatically
retired and canceled, without any action required by the Board of
Directors of the Corporation, and shall thereupon be restored to the
status of authorized but unissued shares of the particular class or
series of Preferred Stock from which such Excess Preferred Stock was
converted and may be reissued by the Corporation as that particular
class or series of Preferred Stock.
(d) The provisions of this Section 4.5 shall not
apply to any Equity Stock held of record directly by Atlantic Bank and
Trust Company (or any successor in interest thereto) or any Person at
least a majority of the outstanding capital stock or other equity
interests of which are owned, directly or indirectly, or which is
otherwise controlled, by Atlantic Bank and Trust Company (or any
successor in interest thereto) (each an "Atlantic Subsidiary") or to
any Transfers between Atlantic Bank and Trust Company (or any successor
thereto) and an Atlantic Subsidiary or between Atlantic Subsidiaries.
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4.5.2 Remedies for Breach. If the Corporation, or its
designees, shall at any time determine in good faith that a Transfer has taken
place in violation of Section 5.2 or that a Person intends to acquire or has
attempted to acquire Beneficial Ownership or Constructive Ownership of any
shares of Preferred Stock in violation of Section 5.2, the Corporation shall
take such action as it deems advisable to refuse to give effect to or to prevent
such Transfer or acquisition, including, but not limited to, refusing to give
effect to such Transfer on the stock transfer books of the Corporation or
instituting proceedings to enjoin such Transfer or acquisition, but the failure
to take any such action shall not affect the automatic conversion of shares of
Preferred Stock into Excess Preferred Stock and their transfer to a Trust in
accordance with Section 4.5.1.
4.5.3 Notice of Restricted Transfer. Any Person who acquires
or attempts to acquire shares of Preferred Stock in violation of Section 5.2, or
any Person who owns shares of Preferred Stock that were converted into shares of
Excess Preferred Stock and transferred to a Trust pursuant to Sections 4.5.1 and
4.5.4, shall immediately give written notice to the Corporation of such event
and shall provide to the Corporation such other information as the Corporation
may request in order to determine the effect, if any, of such Transfer or Non-
Transfer Event, as the case may be, on the Corporation's status as a REIT.
4.5.4 Ownership in Trust. Upon any purported Transfer or
Non-Transfer Event that results in Excess Preferred Stock pursuant to Section
4.5.1, (i) the Corporation shall create, or cause to be created, a Trust, and
shall designate a Trustee and name a Beneficiary thereof and (ii) such Excess
Preferred Stock shall be automatically transferred to such Trust to be held for
the exclusive benefit of the Beneficiary. Any conversion of shares of Preferred
Stock into shares of Excess Preferred Stock and transfer to a Trust shall be
effective as of the close of trading on the Trading Day prior to the date of the
purported Transfer or Non-Transfer Event that results in the conversion. Shares
of Excess Preferred Stock so held in trust shall remain issued and outstanding
shares of stock of the Corporation.
4.5.5 Dividend Rights. Each share of Excess Preferred Stock
shall be entitled to the same dividends and distributions (as to both timing and
amount) as may be declared by the Board of Directors with respect to shares of
Preferred Stock of the same class or series from which such Excess Preferred
Stock was converted. The Trustee, as record holder of the shares of Excess
Preferred Stock, shall be entitled to receive all dividends and distributions
and shall hold all such dividends or distributions in trust for the benefit of
the Beneficiary. The Prohibited Owner with respect to such shares of Excess
Preferred Stock shall repay to the Trust the amount of any dividends or
distributions received by it that are (i) attributable to any shares of
Preferred Stock that have been converted into shares of Excess Preferred Stock
and (ii) dividends or distributions which were distributed by the Corporation to
stockholders of record on a record date which was on or after the date that such
shares were converted into shares of Excess Preferred Stock. The Corporation
shall take all measures that it determines reasonably necessary to recover the
amount of any such dividend or distribution paid to a Prohibited Owner,
including, if necessary, withholding any portion of future dividends or
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distributions payable on shares of Preferred Stock Beneficially Owned by the
Person who, but for the provisions of Articles IV and V, would Constructively
Own or Beneficially Own the shares of Preferred Stock that were converted into
shares of Excess Preferred Stock; and, as soon as reasonably practicable
following the Corporation's receipt or withholding thereof, shall pay over to
the Trust for the benefit of the Beneficiary the dividends so received or
withheld, as the case may be.
4.5.6 Rights upon Liquidation. In the event of any voluntary
or involuntary liquidation of, or winding up of, or any distribution of the
assets of, the Corporation, each holder of shares of Excess Preferred Stock
shall be entitled to receive, ratably with each other holder of shares of
Preferred Stock of the same class or series from which such Excess Preferred
Stock was converted and Excess Preferred Stock which was converted from such
same class or series of Preferred Stock, that portion of the assets of the
Corporation that is available for distribution to the holders of such Preferred
Stock and such Excess Preferred Stock. The Trust shall distribute to the
Prohibited Owner the amounts received upon such liquidation, dissolution, or
winding up, or distribution; provided, however, that the Prohibited Owner shall
not be entitled to receive amounts in excess of, in the case of a purported
Transfer in which the Prohibited Owner gave value for shares of Preferred Stock
and which Transfer resulted in the conversion of the shares into shares of
Excess Preferred Stock, the product of (x) the price per share, if any, such
Prohibited Owner paid for the shares of Preferred Stock and (y) the number of
shares of Preferred Stock which were so converted into Excess Preferred Stock,
and, in the case of a Non-Transfer Event or purported Transfer in which the
Prohibited Owner did not give value for such shares (e.g., if the shares were
received through a gift or devise) and which Non-Transfer Event or purported
Transfer, as the case may be, resulted in the conversion of the shares into
shares of Excess Preferred Stock, the product of (x) the price per share equal
to the Market Price on the date of such Non-Transfer Event or purported Transfer
and (y) the number of shares of Preferred Stock which were so converted into
Excess Preferred Stock. Any remaining amount in such Trust shall be distributed
to the Beneficiary.
4.5.7 Voting Rights. Each share of Excess Preferred Stock
shall entitle the holder to no voting rights other than those voting rights
which accompany a class of stock under Massachusetts law. The Trustee, as record
holder of the Excess Preferred Stock, shall be entitled to vote all shares of
Excess Preferred Stock. Any vote by a Prohibited Owner as a purported holder of
shares of Preferred Stock prior to the discovery by the Corporation that such
shares of Preferred Stock have been converted into shares of Excess Preferred
Stock shall, subject to applicable law, (i) be rescinded and shall be void ab
initio with respect to such shares of Excess Preferred Stock and (ii) be recast
in accordance with the desires of the Trustee acting for the benefit of the
Beneficiary; provided, however, that if the Corporation has already taken
irreversible corporate action, then the Trustee shall not have the authority to
rescind and recast such vote.
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4.5.8 Designation of Permitted Transferee.
(a) As soon as practicable after the Trustee acquires
Excess Preferred Stock, but in an orderly fashion so as not to
materially adversely affect the trading price of Preferred Stock, the
Trustee shall designate one or more Persons as Permitted Transferees
and sell to such Permitted Transferees any shares of Excess Preferred
Stock held by the Trustee; provided, however, that (i) any Permitted
Transferee so designated purchases for valuable consideration (whether
in a public or private sale) the shares of Excess Preferred Stock and
(ii) any Permitted Transferee so designated may acquire such shares of
Excess Preferred Stock without violating any of the restrictions set
forth in Section 5.2 and without such acquisition resulting in the
conversion of the shares of Preferred Stock so acquired into shares of
Excess Preferred Stock and the transfer of such shares to a Trust
pursuant to Sections 4.5.1 and 4.5.4. The Trustee shall have the
exclusive and absolute right to designate Permitted Transferees of any
and all shares of Excess Preferred Stock. Prior to any transfer by the
Trustee of shares of Excess Preferred Stock to a Permitted Transferee,
the Trustee shall give not less than five Trading Days' prior written
notice to the Corporation of such intended transfer and the Corporation
must have waived in writing its purchase rights under Section 4.5.10.
(b) Upon the designation by the Trustee of a
Permitted Transferee in accordance with the provisions of this Section
4.5.8, the Trustee shall cause to be transferred to the Permitted
Transferee shares of Excess Preferred Stock acquired by the Trustee
pursuant to Section 4.5.4. Upon such transfer of shares of Excess
Preferred Stock to the Permitted Transferee, such shares of Excess
Preferred Stock shall be automatically converted into an equal number
of shares of Preferred Stock of the same class and series from which
such Excess Preferred Stock was converted. Upon the occurrence of such
a conversion of shares of Excess Preferred Stock into an equal number
of shares of Preferred Stock, such shares of Excess Preferred Stock
shall be automatically retired and canceled, without any action
required by the Board of Directors of the Corporation, and shall
thereupon be restored to the status of authorized but unissued shares
of Excess Preferred Stock and may be reissued by the Corporation as
Excess Preferred Stock. The Trustee shall (i) cause to be recorded on
the stock transfer books of the Corporation that the Permitted
Transferee is the holder of record of such number of shares of
Preferred Stock, and (ii) distribute to the Beneficiary any and all
amounts held with respect to such shares of Excess Preferred Stock
after making payment to the Prohibited Owner pursuant to Section 4.5.9.
(c) If the Transfer of shares of Excess Preferred
Stock to a purported Permitted Transferee would or does violate any of
the transfer restrictions set forth in Section 5.2, such Transfer shall
be void ab initio as to that number of shares of Excess Preferred Stock
that cause the violation of any such restriction when such shares are
converted into shares of Preferred Stock (as described in clause (b)
above) and the purported Permitted Transferee shall be deemed to be a
Prohibited Owner and shall
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acquire no rights in such shares of Excess Preferred Stock or Preferred
Stock. Such shares of Preferred Stock shall be automatically
re-converted into Excess Preferred Stock and transferred to the Trust
from which they were originally Transferred. Such conversion and
transfer to the Trust shall be effective as of the close of trading on
the Trading Day prior to the date of the Transfer to the purported
Permitted Transferee and the provisions of this Article IV shall apply
to such shares, including, without limitation, the provisions of
Sections 4.5.8 through 4.5.10 with respect to any future Transfer of
such shares by the Trust.
4.5.9 Compensation to Record Holder of Shares of Preferred
Stock That Are Converted into Shares of Excess Preferred Stock. Any Prohibited
Owner shall be entitled (following acquisition of the shares of Excess Preferred
Stock and subsequent designation of and sale of Excess Preferred Stock to a
Permitted Transferee in accordance with Section 4.5.8 or following the
acceptance of the offer to purchase such shares in accordance with Section
4.5.10) to receive from the Trustee following the sale or other disposition of
such shares of Excess Preferred Stock the lesser of (i) (a) in the case of a
purported Transfer in which the Prohibited Owner gave value for shares of
Preferred Stock and which Transfer resulted in the conversion of such shares
into shares of Excess Preferred Stock, the product of (x) the price per share,
if any, such Prohibited Owner paid for the shares of Preferred Stock and (y) the
number of shares of Preferred Stock which were so converted into Excess
Preferred Stock and (b) in the case of a Non-Transfer Event or purported
Transfer in which the Prohibited Owner did not give value for such shares (e.g.,
if the shares were received through a gift or devise) and which Non-Transfer
Event or purported Transfer, as the case may be, resulted in the conversion of
such shares into shares of Excess Preferred Stock, the product of (x) the price
per share equal to the Market Price on the date of such Non-Transfer Event or
purported Transfer and (y) the number of shares of Preferred Stock which were so
converted into Excess Preferred Stock or (ii) the proceeds received by the
Trustee from the sale or other disposition of such shares of Excess Preferred
Stock in accordance with Section 4.5.8 or Section 4.5.10. Any amounts received
by the Trustee in respect of such shares of Excess Preferred Stock and in excess
of such amounts to be paid to the Prohibited Owner pursuant to this Section
4.5.9 shall be distributed to the Beneficiary in accordance with the provisions
of Section 4.5.8. Each Beneficiary and Prohibited Owner shall waive any and all
claims that it may have against the Trustee and the Trust arising out of the
disposition of shares of Excess Preferred Stock, except for claims arising out
of the gross negligence or willful misconduct of, or any failure to make
payments in accordance with this Section 4.5 by such Trustee.
4.5.10 Purchase Right in Excess Preferred Stock. Shares of
Excess Preferred Stock shall be deemed to have been offered for sale to the
Corporation or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such shares of Excess Preferred
Stock (or, in the case of a Non-Transfer Event or Transfer in which the
Prohibited Owner did not give value for the shares (e.g., if the shares were
received through a gift or devise), the Market Price on the date of such
Non-Transfer Event or Transfer in which the Prohibited Owner did not give value
for the shares) or (ii) the Market Price on the
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date the Corporation, or its designee, accepts such offer. The Corporation shall
have the right to accept such offer for a period of 90 days following the later
of (a) the date of the Non-Transfer Event or purported Transfer which results
in such shares of Excess Preferred Stock or (b) the date the Board of Directors
first determined that a Transfer or Non-Transfer Event resulting in shares of
Excess Preferred Stock has occurred, if the Corporation does not receive a
notice of such Transfer or Non-Transfer Event pursuant to Section 4.5.3.
4.6 Classification of Stock. The Board of Directors may classify or
reclassify any unissued shares of Stock from time to time by setting or changing
the preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends and other distributions, qualifications, and terms
and conditions of redemption for each class or series, including, but not
limited to, the reclassification of unissued shares of Common Stock to shares of
Preferred Stock or unissued shares of Preferred Stock to shares of Common Stock
or the issuance of any rights plan or similar plan.
4.7 Issuance of Stock. The Board of Directors may authorize the
issuance from time to time of shares of Stock of any class or series, whether
now or hereafter authorized, or securities or rights convertible into shares of
Stock, for such consideration as the Board of Directors may deem advisable (or
without consideration in the case of a share split or dividend), subject to such
restrictions or limitations, if any, as may be set forth in these Articles or
the By-laws of the Corporation.
4.8 Ambiguity. In the case of an ambiguity in the application of any of
the provisions of this Article IV, the Board of Directors shall have the power
to determine the application of the provisions of this Article IV with respect
to any situation based on the facts known to it.
4.9 Legend. Each certificate for shares of Preferred Stock shall bear
substantially the following legend:
"The shares of Atlantic Preferred Capital Corporation (the
"Corporation") represented by this certificate are subject to
restrictions set forth in the Corporation's Restated Articles
of Organization which prohibit in general (a) any Person from
Beneficially Owning shares of Equity Stock in excess of the
Ownership Limit, and (b) any Person from acquiring or
maintaining any ownership interest in the stock of the
Corporation that is inconsistent with (i) the requirements of
the Code pertaining to real estate investment trusts or (ii)
the Articles of Incorporation of the Corporation, and the
holder of this certificate by his or her acceptance hereof
consents to be bound by such restrictions. Capitalized terms
used in this paragraph and not defined herein are defined in
the Corporation's Restated
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Articles of Organization, as the same may be amended from time
to time.
The Corporation will furnish without charge, to each
stockholder who so requests, a copy of the relevant provisions
of the Articles of Incorporation and By-laws of the
Corporation, a copy of the provisions setting forth the
designations, preferences, privileges and rights of each class
of stock or series thereof that the Corporation is authorized
to issue and the qualifications, limitations and restrictions
of such preferences and/or rights. Any such request may be
addressed to the Secretary of the Corporation or to the
transfer agent named on the face hereof."
4.10 Severability. Each provision of this Article IV shall be severable
and an adverse determination as to any such provision shall in no way affect the
validity of any other provision.
4.11 Articles and By-laws. All persons who shall acquire capital stock
in the Corporation shall acquire the same subject to the provisions of these
Articles and the By-laws.
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Article V. LIMITATIONS ON TRANSFER AND OWNERSHIP OF STOCK
- ---------- ----------------------------------------------
5.1 Definitions. For purposes of this Article V, the following terms
shall have the meanings set forth below:
"Beneficial Ownership," when used with respect to ownership of
shares of Equity Stock by any Person, shall mean all shares of Equity Stock
which are (i) directly owned by such Person, (ii) indirectly owned by such
Person (if such Person is an "individual" as defined in Section 542(a)(2) of the
Code) taking into account the constructive ownership rules of Section 544 of the
Code, as modified by Section 856(h)(1)(B) of the Code, or (iii) beneficially
owned by such Person pursuant to Rule 13d-3 under the Securities Exchange Act of
1934, as amended, provided that in determining the number of shares Beneficially
Owned by a Person or group, no share shall be counted more than once although
applicable to two or more of clauses (i), (ii) and (iii) of this definition or
(in the case of a group) although Beneficially Owned by more than one Person in
such group, and provided further that any shares of Common Stock owned directly
or indirectly by Atlantic Bank & Trust Company or CHB Realty Corp. shall not be
deemed to be Beneficially Owned by them. (Whenever a Person Beneficially Owns
shares of Equity Stock that are not actually outstanding (e.g., shares issuable
upon the exercise of an option or convertible security) ("Option Shares"), then,
whenever these Articles require a determination of the percentage of outstanding
shares of a class of Equity Stock Beneficially Owned by that Person, the Option
Shares Beneficially Owned by that Person shall also be deemed to be
outstanding.) The terms "Beneficial Owner," "Beneficially Owns" and
"Beneficially Owned" shall have the correlative meanings.
"Beneficiary" shall mean, with respect to any Trust, one or
more organizations described in each of Section 170(b)(1)(A) (other than clauses
(vii) and (viii) thereof) and Section 170(c)(2) of the Code that are named by
the Corporation as the beneficiary or beneficiaries of such Trust, in accordance
with the provisions of Section 7.4.4 of Article VII.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Constructive Ownership" shall mean ownership of shares of
Equity Stock by a Person who is or would be treated as a direct or indirect
owner of such shares of Equity Stock through the application of Section 318 of
the Code, as modified by Section 856(d)(5) of the Code. The terms "Constructive
Owner," "Constructively Owns" and "Constructively Owned" shall have correlative
meanings.
"Equity Stock" shall mean Common Stock, Preferred Stock (other
than Excess Preferred Stock) and any other class or series of capital stock or
equity securities of the Corporation.
"Initial Public Offering" shall mean the closing of the first
underwritten public offering of shares of Series A Preferred Stock.
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"Market Price" of Preferred Stock on any date shall mean the
average of the Closing Price for shares of such Preferred Stock for the five
consecutive Trading Days ending on such date. The "Closing Price" on any date
shall mean (A) where there exists a public market for the Corporation's
Preferred Stock, the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the shares of Preferred Stock are
not listed or admitted to trading on the New York Stock Exchange, as reported in
the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which the
shares of Preferred Stock are listed or admitted to trading or, if the shares of
Preferred Stock are not listed or admitted to trading on any national securities
exchange, the last quoted price, or if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by the
Nasdaq Stock Market, Inc. or, if such system is no longer in use, the principal
other automated quotation system that may then be in use or (B) if no public
market for the Preferred Stock exists, the Closing Price will be determined by a
single, independent appraiser selected by a committee composed of Independent
Directors which appraiser shall appraise the Market Price for such Preferred
Stock within such guidelines as shall be determined by the committee of
Independent Directors.
"Non-Transfer Event" shall mean an event other than a
purported Transfer that would cause any Person to Beneficially Own shares of
Equity Stock in excess of the Ownership Limit. Non-Transfer Events include but
are not limited to (i) the granting of any option or entering into any agreement
for the sale, transfer or other disposition of shares (or of Beneficial
Ownership of shares) of Equity Stock or (ii) the sale, transfer, assignment or
other disposition of interests in any Person or of any securities or rights
convertible into or exchangeable for shares of Equity Stock or for interests in
any Person that results in changes in Beneficial Ownership of shares of Equity
Stock. The term "Non-Transfer Event" shall include a transfer of Equity Stock
other than Preferred Stock.
"Ownership Limit" shall mean Beneficial Ownership of 9.8% of
the Corporation, represented by aggregate ownership of one or more class,
classes or series of Equity Stock.
"Permitted Transferee" shall mean any Person designated as a
Permitted Transferee in accordance with the provisions of Section 4.5.8.
"Person" shall mean (a) an individual or any corporation,
partnership, estate, trust, association, private foundation, joint stock company
or any other entity and (b) a "group" as that term is used for purposes of
Section 13(d)(3) of the Exchange Act; but shall not include an underwriter that
participates in a public offering of Preferred Stock for a period of 90 days
following purchase by such underwriter of such Preferred Stock.
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"Preferred Stock" shall mean a particular class (other than
Excess Preferred Stock) or series of preferred stock of the Corporation. The use
of the term "Preferred Stock" or any term defined by reference to the term
"Preferred Stock" shall refer to the particular class or series of stock which
is appropriate under the context.
"Prohibited Owner" shall mean, with respect to any purported
Transfer or Non-Transfer Event, any Person who is prevented from becoming or
remaining the owner of record title to shares of Preferred Stock by the
provisions of Section 4.5.1.
"Restriction Termination Date" shall mean the first day on
which the Board of Directors determines that it is no longer in the best
interests of the Corporation to attempt to, or continue to, qualify under the
Code as a real estate investment trust (a "REIT").
"Trading Day" shall mean a day on which The Nasdaq National
Market or the principal national securities market or exchange on which any of
the shares of Preferred Stock are listed or admitted to trading is open for the
transaction of business or, if none of the shares of Preferred Stock are listed
or admitted to trading on any national securities market or exchange or the
Nasdaq Stock Market, any day other than a Saturday, a Sunday or a day on which
banking institutions in the State of New York are authorized or obligated by law
or executive order to close.
"Transfer" (as a noun) shall mean any sale, transfer, gift,
assignment, devise or other disposition of shares (or of Beneficial Ownership of
shares) of Preferred Stock, whether voluntary or involuntary, whether of record,
constructively or beneficially and whether by operation of law or otherwise.
"Transfer" (as a verb) shall have the correlative meaning.
"Trust" shall mean any separate trust created and administered
in accordance with the terms of Section 4.5, for the exclusive benefit of any
Beneficiary.
"Trustee" shall mean any Person or entity, unaffiliated with
both the Corporation and any Prohibited Owner (and, if different than the
Prohibited Owner, the Person who would have had Beneficial Ownership of the
Shares that would have been owned of record by the Prohibited Owner), designated
by the Corporation to act as trustee of any Trust, or any successor trustee
thereof.
5.2 Restriction on Ownership and Transfer.
5.2.1 Restriction.
(a) Except as provided in Section 5.4 and in Section
5.2.1(c), from and after the date of the Initial Public Offering and
until the Restriction Termination Date, no Person shall Beneficially
Own shares of Equity Stock in excess of the Ownership Limit.
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(b) Except as provided in Section 5.4 and in Section
5.2.1(c), from and after the date of the Initial Public Offering and
until the Restriction Termination Date, any purported Transfer (whether
or not the result of a transaction entered into through the facilities
of any national securities exchange or the Nasdaq Stock Market, Inc. or
any other automated quotation system) that, if effective, would result
in any Person Beneficially Owning shares of Equity Stock in excess of
the Ownership Limit shall be void ab initio as to the Transfer of that
number of shares of Preferred Stock which would be otherwise
Beneficially Owned by such Person in excess of the Ownership Limit, and
the intended transferee shall acquire no rights in such shares of
Preferred Stock.
(c) The provisions of this Section 5.2 shall not
apply to any Equity Stock held of record directly by Atlantic Bank and
Trust Company (or any successor thereto) or any Atlantic Subsidiary or
to any Transfers between Atlantic Bank and Trust Company (or any
successor thereto) and an Atlantic Subsidiary or between Atlantic
Subsidiaries.
5.2.2 Transfers Resulting in "Closely-Held" Corporation. From
and after the date of the Initial Public Offering and until the Restriction
Termination Date, any purported Transfer (whether or not the result of a
transaction entered into through the facilities of any national securities
exchange or the Nasdaq Stock Market, Inc. or any other automated quotation
system) of shares of Preferred Stock that, if effective, would result in the
Corporation being "closely held" within the meaning of Section 856(h) of the
Code shall be void ab initio as to the Transfer of that number of shares of
Preferred Stock that would cause the Corporation to be "closely held" within the
meaning of Section 856(h) of the Code, and the intended transferee shall acquire
no rights in such shares of Preferred Stock.
5.2.3 Transfers Causing 10% Ownership of Tenants. From and
after the date of the Initial Public Offering and until the Restriction
Termination Date, any purported Transfer (whether or not the result of a
transaction entered into through the facilities of any national securities
exchange or the Nasdaq Stock Market, Inc. or any other automated quotation
system) of shares of Preferred Stock that, if effective, would cause the
Corporation to Constructively Own 10% or more of the ownership interests in a
tenant of the real property of the Corporation or any direct or indirect
subsidiary (whether a corporation, partnership, limited liability company or
other entity) of the Corporation (a "Subsidiary"), within the meaning of Section
856(d)(2)(B) of the Code, shall be void ab initio as to the Transfer of that
number of shares of Preferred Stock that would cause the Corporation to
Constructively Own 10% or more of the ownership interests in a tenant of the
real property of the Corporation or a Subsidiary within the meaning of Section
856(d)(2)(B) of the Code, and the intended transferee shall acquire no rights in
such shares of Preferred Stock.
5.2.4 Transfers Resulting in Beneficial Ownership by Fewer
than 100 Persons. From and after the date of the Initial Public Offering and
until the Restriction Termination
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Date, any purported Transfer (whether or not the result of a transaction entered
into through the facilities of any national securities exchange or the Nasdaq
Stock Market, Inc. or any other automated quotation system) that, if effective,
would result in shares of Preferred Stock being beneficially owned by fewer than
100 persons within the meaning of Section 856(a)(5) of the Code shall be void ab
initio and the intended transferee shall acquire no rights in such shares of
Preferred Stock.
5.3 Owners Required to Provide Information. Until the Restriction
Termination Date:
5.3.1 5% Beneficial Owners. Every Beneficial Owner of more
than 5%, or such lower percentages as are then required pursuant to regulations
under the Code, of the outstanding shares of any class or series of Preferred
Stock of the Corporation as of any dividend record date on the Corporation's
Preferred Stock shall, within 30 days after January 1 of each year, provide to
the Corporation a written statement or affidavit stating the name and address of
such Beneficial Owner, the number of shares of Preferred Stock Beneficially
Owned by such Beneficial Owner as of each such dividend record date, and a
description of how such shares are held. Each such Beneficial Owner shall
provide to the Corporation such additional information as the Corporation may
request in order to determine the effect, if any, of such Beneficial Ownership
on the Corporation's status as a REIT and to ensure compliance with the
Ownership Limit.
5.3.2 Other Beneficial Owners. Each Person who is a Beneficial
Owner of shares of Preferred Stock and each Person (including the stockholder of
record) who is holding shares of Preferred Stock for a Beneficial Owner shall
provide to the Corporation a written statement or affidavit stating such
information as the Corporation may request in order to determine the
Corporation's status as a REIT and to ensure compliance with the Ownership
Limit.
5.4. Exception. The Board of Directors, upon receipt of a ruling from
the Internal Revenue Service or an opinion of counsel or other evidence or
undertakings acceptable to it, may, in its sole discretion, waive the
application of the Ownership Limit to a Person subject, as the case may be, to
any such limit, provided that (A) the Board of Directors obtains such
representations and undertakings from such Person as are reasonably necessary to
ascertain that such Person's Beneficial Ownership or Constructive Ownership of
shares of Preferred Stock will now and in the future (i) not result in the
Corporation being "closely held" within the meaning of Section 856(h) of the
Code, (ii) not cause the Corporation to Constructively Own 10% or more of the
ownership interests of a tenant of the Corporation or a Subsidiary within the
meaning of Section 856(d)(2)(B) of the Code and to violate the 95% gross income
test of Section 856(c)(2) of the Code, and (iii) not result in the shares of
Preferred Stock of the Corporation being beneficially owned by fewer than 100
persons within the meaning of Section 856(a)(5) of the Code and (B) such Person
agrees in writing that any violation or attempted violation of (x) such other
limitation as the Board of Directors may establish at the time of such
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waiver with respect to such Person or (y) such other restrictions and conditions
as the Board of Directors may in its sole discretion impose at the time of such
waiver with respect to such Person, will result, as of the time of such
violation even if discovered after such violation, in the conversion of such
shares in excess of the original limit applicable to such Person into shares of
Excess Preferred Stock pursuant to Section 4.5.1.
5.5 Nasdaq Stock Market Transactions. Notwithstanding any provision
contained herein to the contrary, nothing in these Articles shall preclude the
settlement of any transaction entered into through the facilities of the Nasdaq
Stock Market, Inc. or any other automated quotation system or any national
securities exchange. In no event shall the existence or application of the
preceding sentence have the effect of deterring or preventing the conversion of
Preferred Stock into Excess Preferred Stock as contemplated herein.
5.6 Ambiguity. In the case of an ambiguity in the application of any of
the provisions of this Article V, including any definition contained in Section
5.1, the Board of Directors shall have the power to determine the application of
the provisions of this Article V with respect to any situation based on the
facts known to it.
5.7 Remedies Not Limited. Except as set forth in Section 5.5, nothing
contained in this Article V or Article IV shall limit the authority of the
Corporation to take such other action as it deems necessary or advisable to
protect the Corporation and the interests of its stockholders by preservation of
the Corporation's status as a REIT and to ensure compliance with the Ownership
Limit.
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Article VI A. LIMITATION OF LIABILITY OF DIRECTORS
- ------------- ------------------------------------
6A.1 No director of this Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director notwithstanding any provision of law imposing such liability;
provided, however, that this Article shall not eliminate or limit any liability
of a director (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Sections 61 or 62 of the Massachusetts Business Corporation Law, or (iv) with
respect to any transaction from which the director derived an improper personal
benefit.
6A.2 If Massachusetts law is hereafter amended to authorize the further
limitation of the legal liability of the directors of this Corporation, the
liability of the directors shall then be deemed to be limited to the fullest
extent then permitted by Massachusetts law as so amended. Any repeal or
modification of this paragraph of this Article VI A which may hereafter be
effected by the stockholders of this Corporation shall be prospective only, and
shall not adversely affect any limitation on the liability of a director for
acts or omissions prior to such repeal or modification.
Article VI B. TRANSACTIONS WITH INTERESTED PERSONS
- ------------- ------------------------------------
6B.1 Unless entered into in bad faith, no contract or transaction by
this Corporation shall be void, voidable or in any way affected by reason of the
fact that it is with an Interested Person.
6B.2 For the purposes of this Article, "Interested Person" means any
person or organization in any way interested in this Corporation whether as an
officer, director, stockholder, employee or otherwise, and any other entity in
which any such person or organization or this Corporation is in any way
interested.
6B.3 Unless such contract or transaction was entered into in bad faith,
no Interested Person, because of such interest, shall be liable to this
Corporation or to any other person or organization for any loss or expense
incurred by reason of such contract or transaction or shall be accountable for
any gain or profit realized from such contract or transaction.
6B.4 The provisions of this Article shall be operative notwithstanding
the fact that the presence of an Interested Person was necessary to constitute a
quorum at a meeting of directors or stockholders of this Corporation at which
such contract or transaction was authorized or that the vote of an Interested
Person was necessary for the authorization of such contract or transaction.
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Article VI C. STOCKHOLDERS' MEETINGS
- ------------- ----------------------
Meetings of stockholders of this Corporation may be held anywhere in
the United States.
Article VI D. AMENDMENT OF BY-LAWS
- ------------- --------------------
The by-laws may provide that the Board of Directors as well as the
stockholders may make, amend or repeal the by-laws of this Corporation, except
with respect to any provision thereof which by law, by these Articles or by the
by-laws requires action by the stockholders.
Article VI E. ACTING AS A PARTNER
- ------------- -------------------
This Corporation may be a partner in any business enterprise which it
would have power to conduct by itself.
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THE COMMONWEALTH OF MASSACHUSETTS
RESTATED ARTICLES OF ORGANIZATION
(General Laws, Chapter 156B, Section 74)
=============================================
I hereby approve the within Restated Articles
of Organization and, the filing fee in the
amount of $__________ having been paid, said
articles are deemed to have been filed with me
this ________ day of ________________, 19____.
Effective Date: ______________________________
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
Gregory J. Lyons, Esq.
--------------------------------------
Goodwin, Procter & Hoar LLP
--------------------------------------
Exchange Place - Boston, MA 02109-2881
--------------------------------------
Telephone: (617) 570-1000
---------------------------
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We consent to the incorporation in this Amendment No. 2 to 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
January 8, 1999
