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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-25193
ATLANTIC PREFERRED CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MASSACHUSETTS 04-3439366
(State of incorporation) (IRS Employer Identification No.)
101 SUMMER STREET 02210
BOSTON, MASSACHUSETTS (zip code)
(Address of principal executive
offices)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 880-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
9 3/4% NON-CUMULATIVE EXCHANGEABLE PREFERRED STOCK, SERIES A
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The number of shares outstanding of the registrant's sole class of common
stock was 100 shares, $.01 par value per share, as of March 15, 2000. No common
stock was held by non-affiliates of the registrant.
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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. Atlantic Preferred Capital'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 and lease default and charge-off rates relating to a decline in
the commercial real estate market or otherwise, changes in market conditions
affecting the sale and purchase of loans on a discounted basis.
GENERAL
Atlantic Preferred Capital Corporation ("Atlantic Preferred Capital") is a
Massachusetts corporation incorporated on March 20, 1998. Capital Crossing Bank
("Capital Crossing"), formerly Atlantic Bank and Trust Company, organized
Atlantic Preferred Capital to acquire and hold real estate mortgage assets in a
cost-effective manner and to provide Capital Crossing with an additional means
of raising capital for federal and state regulatory purposes. Capital Crossing
owns all of the outstanding common stock of Atlantic Preferred Capital. Atlantic
Preferred Capital operates in a manner which allows 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.
On March 31, 1998, Capital Crossing capitalized Atlantic Preferred Capital
by transferring mortgage loans valued at $140.7 million in exchange for 1,000
shares of Atlantic Preferred Capital's 8% Cumulative Non-Convertible Preferred
Stock, Series B, valued at $1.0 million and 100 shares of Atlantic Preferred
Capital's common stock valued at $139.7 million.
On February 1, 1999, Atlantic Preferred Capital closed its initial public
offering of 1,260,000 shares of its 9 3/4% Non-cumulative exchangeable preferred
stock, Series A. On February 12, 1999, Atlantic Preferred Capital sold an
additional 156,130 Series A preferred shares in connection with the
underwriters' exercise of their overallotment option. The net proceeds to
Atlantic Preferred Capital from the sale of Series A preferred shares were
$12.6 million.
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 December 31, 1999 were acquired from Capital Crossing and it is
anticipated that substantially all additional mortgage assets will be acquired
from Capital Crossing. As of December 31, 1999, Atlantic Preferred Capital held
loans acquired from Capital Crossing with gross outstanding principal balances
of $150.9 million. Atlantic Preferred Capital's loan portfolio at December 31,
1999 consisted primarily of mortgage assets secured by commercial or
multi-family properties.
Capital Crossing 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 Capital
Crossing 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. Capital Crossing 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:
(1) future acquisitions of mortgage assets from Capital Crossing or its
affiliates;
(2) servicing of mortgage assets, particularly with respect to mortgage
assets that become classified or placed on nonaccrual status; and
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(3) 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 Capital Crossing 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.
CAPITAL CROSSING BANK
Capital Crossing was organized as a Massachusetts-chartered trust company in
December 1987, and commenced operations in February 1988. Capital Crossing
operates as a commercial bank primarily focused on purchasing and originating
commercial loans and leases that finance the business activities of individuals
and small companies. To the extent authorized by law, Capital Crossing's
deposits are insured by the Bank Insurance Fund of the Federal Deposit Insurance
Corporation (the "FDIC"). Capital Crossing conducts business from its executive
and main office in downtown Boston, Massachusetts, and a branch in Chestnut
Hill, Massachusetts, through its website at www.capitalcrossing.com and through
its leasing subsidiary in Moberly, Missouri. At December 31, 1999, Capital
Crossing had total assets of $639.9 million, deposits of $541.5 million and
stockholders' equity of $72.7 million. At December 31, 1999, under the
regulatory capital ratios developed and monitored by the federal bank regulatory
agencies and applicable to banks, Capital Crossing's capital was sufficient to
enable it to be qualified as "well capitalized."
Capital Crossing focuses on selected business lines that management has
identified as having the potential to provide higher levels of profitability
consistent with prudent banking practices. These business lines include:
- the acquisition and origination of loans secured primarily by commercial
real estate, multi-family residential real estate and one-to-four family
residential real estate, generally at a discount from their then
outstanding principal balances; and
- providing lease financing to businesses and individuals through its
wholly-owned subsidiary, Dolphin Capital Corp.
Capital Crossing funds its activities with deposits consisting primarily of
certificates of deposit and money market accounts. Capital Crossing also offers
retail deposit services, including checking and savings accounts, and related
services to businesses and individuals through the nationwide electronic banking
networks.
As a majority-owned subsidiary of Capital Crossing, the assets and
liabilities and results of operations of Atlantic Preferred Capital are
consolidated with those of Capital Crossing for Capital Crossing's financial
reporting and regulatory capital purposes. As such, loans acquired by Atlantic
Preferred Capital from Capital Crossing will nevertheless be treated as assets
of Capital Crossing for purposes of compliance by Capital Crossing with the
FDIC's regulatory capital requirements and in Capital Crossing's consolidated
financial statements. Interest income on those loans will be treated as interest
income of Capital Crossing in Capital Crossing's consolidated financial
statements.
ACQUISITION OF LOAN PORTFOLIO
On March 31, 1998, Capital Crossing transferred to Atlantic Preferred
Capital loans with gross outstanding principal balances of $159.7 million in
exchange for 1,000 Series B preferred shares and 100 shares of Atlantic
Preferred Capital's common stock. Atlantic Preferred Capital entered into a
master mortgage loan purchase agreement with Capital Crossing dated as of the
same date which provides the general terms for the acquisition by Atlantic
Preferred Capital of mortgage assets from Capital Crossing.
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During 1999, Atlantic Preferred Capital purchased mortgage assets with gross
outstanding principal balances of $37.4 million for cash equal to their net
carrying value of $36.3 million. During 1998, mortgage assets with gross
outstanding principal balances of $23.7 million were purchased for cash equal to
their net carrying value of $21.6 million. During 1998, Capital Crossing
transferred mortgage loans with gross outstanding balances of $15.5 million in
the form of a capital contribution equal to their net carrying value of
$14.5 million.
Pursuant to the terms of the master mortgage loan purchase agreement,
Capital Crossing 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.
Such documents are initially held by Capital Crossing, acting as custodian for
Atlantic Preferred Capital pursuant to the terms of the master service
agreement.
Under the master mortgage loan purchase agreement, Capital Crossing 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. Capital Crossing 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 Capital Crossing to substitute other qualified mortgage assets for such
mortgage asset. Capital Crossing 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, Capital
Crossing 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.
ASSET ACQUISITION AND DISPOSITION POLICIES. 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 Capital Crossing 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, proceeds received in connection with the
repayment or disposition of mortgage assets or the contribution of additional
capital by Capital Crossing. Atlantic Preferred Capital and Capital Crossing do
not currently have specific policies with respect to the purchase by Atlantic
Preferred Capital from Capital Crossing of particular loans or pools of loans,
other than that such assets must be eligible to be held by a REIT. Atlantic
Preferred Capital intends generally to acquire only performing loans from
Capital Crossing. Atlantic Preferred Capital may also from time to time acquire
mortgage assets from unrelated third parties. To date, Atlantic Preferred
Capital has not adopted any arrangements or procedures by which it would
purchase mortgage assets from unrelated third parties, and it has not entered
into any agreements with any third parties with respect to the purchase of
mortgage assets. Atlantic Preferred Capital anticipates that it would purchase
mortgage assets from unrelated third parties only if neither Capital Crossing
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 Capital Crossing 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.
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In order to preserve its status as a REIT under the Internal Revenue Code,
substantially all of the assets of Atlantic Preferred Capital must consist of
mortgage loans and other qualified assets of the type set forth in
Section 856(c)(6)(B) of the Internal Revenue 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.
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 Internal
Revenue 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.
Atlantic Preferred Capital has no debt outstanding 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 Capital Crossing to Atlantic Preferred Capital. Atlantic Preferred Capital
has guaranteed certain obligations of Capital Crossing and has agreed to pledge
certain of its assets in connection with advances Capital Crossing may receive
from time to time by the Federal Home Loan Bank of Boston ("FHLBB"). The
advances from the FHLBB will be used by Capital Crossing primarily for the
purchase of mortgage assets. These assets generally would be available for
contribution to or purchase by Atlantic Preferred Capital. The guaranty and
pledge were approved by the independent directors of Atlantic Preferred Capital,
subject to certain requirements and limitations.
Atlantic Preferred Capital may also issue additional series of preferred
stock. However, it may not issue any new class or series of capital stock
ranking senior to the Series A preferred shares without the consent of the
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 Capital Crossing'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 Capital Crossing 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, Capital Crossing 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 Capital Crossing and its affiliates will be
consistent with those available from third parties in the mortgage lending
industry. In addition, Atlantic Preferred Capital has elected two independent
directors and has established an audit committee of the Board of Directors which
is comprised of the independent directors. Among other functions, the audit
committee will review transactions between Atlantic Preferred Capital and
Capital Crossing and its affiliates. Under the terms of the advisory agreement,
certain activities of Capital Crossing, as advisor for Atlantic Preferred
Capital, are subject to the approval of the Board of Directors of Atlantic
Preferred Capital, including the approval of a majority of the independent
directors.
Conflicts of interest between Atlantic Preferred Capital and Capital
Crossing and its affiliates may also arise in connection with decisions bearing
upon the credit arrangements that Capital Crossing or one of its affiliates may
have with a borrower. Conflicts could also arise in connection with actions
taken by Capital Crossing as a controlling person of Atlantic Preferred Capital.
It is the intention of Atlantic Preferred Capital and Capital Crossing that any
agreements and transactions between Atlantic Preferred Capital, on the one hand,
and Capital Crossing or its affiliates, on the other hand, including, without
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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 Capital Crossing
shall service the mortgage assets solely with a view toward the interests of
Atlantic Preferred Capital, and without regard to the interests of Capital
Crossing 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 Capital Crossing 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.
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.
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 Internal Revenue 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, Capital Crossing intends to monitor and review
Atlantic Preferred Capital's compliance with the requirements of the Internal
Revenue 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
Capital Crossing's analysis.
DESCRIPTION OF LOAN PORTFOLIO AT DECEMBER 31, 1999 AND 1998
Information with respect to Atlantic Preferred Capital's loan portfolio is
presented as of December 31, 1999 and 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.
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To date, all of Atlantic Preferred Capital's loans have been acquired from
Capital Crossing. At December 31, 1999 and 1998, Atlantic Preferred Capital's
loan portfolio was comprised of 394 and 416 loans, respectively, with gross
outstanding principal balances totaling $150.9 million and $163.8 million
respectively.
The following table sets forth information regarding the composition of the
loan portfolio:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Loan portfolio:
Mortgage loans on real estate:
Commercial................................................ $ 98,748 $ 99,695
Multi-family.............................................. 42,677 49,854
One-to-four family........................................ 8,415 12,339
Land...................................................... 820 1,458
-------- --------
150,660 163,346
-------- --------
Secured commercial.......................................... 232 251
Other....................................................... 29 250
-------- --------
Total loan portfolio.................................. 150,921 163,847
Less:
Non-amortizing discount (1)............................... (7,318) (10,737)
Amortizing discount....................................... (5,544) (6,537)
Net deferred loan fees.................................... (41) (76)
Allowance for loan losses................................. (2,855) (1,337)
-------- --------
Loans, net............................................ $135,163 $145,160
======== ========
</TABLE>
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(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.
The following table sets forth certain information regarding the geographic
location of properties securing the mortgage loans in the loan portfolio at
December 31, 1999:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
LOCATION NUMBER OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------- --------------- ----------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
California.................................... 40 $ 40,297 26.75%
Massachusetts................................. 123 38,545 25.58
Connecticut................................... 79 16,468 10.93
New Hampshire................................. 66 9,509 6.31
New York...................................... 19 9,181 6.09
Rhode Island.................................. 16 5,781 3.84
Arizona....................................... 2 4,816 3.20
Florida....................................... 6 4,131 2.74
New Jersey.................................... 8 3,882 2.58
Virginia...................................... 3 3,169 2.10
Maine......................................... 5 3,043 2.02
All others.................................... 21 11,838 7.86
--- -------- ------
388 $150,660 100.00%
=== ======== ======
</TABLE>
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The following tables set forth information regarding maturity, interest rate
and principal balance of all loans in the loan portfolio at December 31, 1999:
<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............................ 70 $ 19,423 12.87%
Greater than six months to one year........... 18 12,552 8.32
Greater than one year to three years.......... 58 33,695 22.33
Greater than three years to five years........ 36 15,863 10.51
Greater than five years to ten years.......... 95 26,358 17.46
Greater than ten years........................ 117 43,030 28.51
--- -------- ------
394 $150,921 100.00%
=== ======== ======
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
INTEREST RATE AT DECEMBER 31, 1999 NUMBER OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------- --------------- ----------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Less than 7.00%............................... 39 $ 9,048 6.00%
7.00 to 7.49.................................. 28 19,350 12.82
7.50 to 7.99.................................. 21 17,534 11.62
8.00 to 8.49.................................. 42 18,848 12.49
8.50 to 8.99.................................. 26 6,913 4.58
9.00 to 9.49.................................. 44 18,486 12.25
9.50 to 9.99.................................. 58 23,500 15.57
10.00 to 10.49................................ 39 13,691 9.07
10.50 to 10.99................................ 64 17,120 11.34
11.00 to 11.49................................ 12 3,461 2.29
11.50 to 11.99................................ 11 1,405 0.93
12.00 to 12.49................................ 5 782 0.52
12.50% and above.............................. 5 783 0.52
--- -------- ------
394 $150,921 100.00%
=== ======== ======
</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............................. 58 $ 1,511 1.00%
Greater than $50,000 to $100,000.............. 89 5,629 3.73
Greater than $100,000 to $250,000............. 99 16,067 10.65
Greater than $250,000 to $500,000............. 58 19,251 12.76
Greater than $500,000 to $1,000,000........... 48 35,040 23.21
Greater than $1,000,000 to $2,000,000......... 28 37,636 24.93
Greater than $2,000,000 to $3,000,000......... 12 28,146 18.65
Greater than $3,000,000 to $4,000,000......... 1 3,315 2.20
Greater than $4,000,000 to $5,000,000......... 1 4,326 2.87
--- -------- ------
394 $150,921 100.00%
=== ======== ======
</TABLE>
A substantial portion of the loan portfolio consists of loans which were
purchased by Capital Crossing from third parties and which management of Capital
Crossing 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
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were generally purchased at discounts from their then outstanding principal
balances and have been 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. Capital Crossing does not utilize any
specific threshold underwriting criteria in evaluating individual loans or pools
of loans for purchase, but rather evaluates each individual loan or pool of
loans, as applicable, on a case by case basis in making a purchase decision as
described in more detail below.
In order to determine the amount that Capital Crossing will bid to acquire
loans, Capital Crossing considers, among other factors:
(1) the yield expected to be earned,
(2) the geographic location of the loans,
(3) servicing restrictions, if any,
(4) the type and value of the collateral securing the loans,
(5) the length of time during which the loans have performed in accordance
with their repayment terms,
(6) the recourse nature of the debt,
(7) the age and performance of the loans and
(8) the resources of the borrowers or guarantors, if any.
In addition to the factors listed above, Capital Crossing also considers 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, Capital Crossing conducts an
acquisition review. This review includes an evaluation of the seller's loan
documentation. The current value of the collateral is determined by its in-house
appraisal group considering, among other factors, the type of property, its
condition and location and its highest and best use. In many cases, real estate
brokers and/or appraisers with specific knowledge of the local real estate
market are also consulted. As the size and complexity of the collateral
increases, Capital Crossing's efforts to value the collateral also increases.
For larger, more complex loans, Capital Crossing 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. Capital
Crossing's in-house environmental department reviews available information with
respect to each property to assess potential environmental risk. 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, Capital Crossing aggressively pursues repayment. In the event that a
delinquent purchased loan becomes non-performing, Capital Crossing 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, Capital Crossing aggressively pursues repayment,
foreclosure or, in certain instances, a deed-in-lieu-of-foreclosure.
Although Capital Crossing purchases primarily performing loans, from
time-to-time Capital Crossing purchases delinquent or non-performing loans as a
part of a pool of purchased loans. Atlantic Preferred Capital determines the
contractual delinquency of purchased loans prospectively from Capital Crossing's
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purchase date rather than from the origination date. For example, if Capital
Crossing acquires a loan that is past due at the time of acquisition, such loan
would not be considered delinquent until it was 90 days past due from Capital
Crossing's purchase date. If Capital Crossing acquires a non-performing loan,
management evaluates the collectibility of principal and interest and interest
would not be accrued when the collectibility of principal and interest is not
probable or estimable. 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.
As servicing agent for Atlantic Preferred Capital's loan portfolio, Capital
Crossing 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, Capital Crossing
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.
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. Prior to January 1, 1999,
this guidance was applied using unique and exclusive static pools. Static pools
were established based on Capital Crossing's original acquisition timing. Once a
static pool was established, the loans remained in the pool, unless restructured
on terms consistent with Atlantic Preferred Capital's loan policy and
documentation standards and transferred to Atlantic Preferred Capital's
originated loan portfolio.
Prior to January 1, 1999, at the time of acquisition of purchased pools of
loans, the excess of the contractual balances over the amount of reasonably
estimable and probable discounted future cash collections for the pool was
recorded as non-amortizing discount. The remaining discount, which represented
the excess of the amount of reasonably estimable and probable discounted future
cash collections over the acquisition amount, referred to as the amortizing
discount, was accreted into interest income using the interest method and was
not accreted on non-accrual loans. The non-amortizing discount was not accreted
into income until it was determined that the amount and timing of the related
cash flows were reasonably estimable and collection was probable. If cash flows
could not be reasonably estimated for any loan within a pool, and collection was
not probable, the cost recovery method of accounting was used. Under the cost
recovery method, any amounts received were applied against the recorded amount
of the loan.
Subsequent to acquisition, if cash flow projections improved and it was
determined that the amount and timing of the cash flows related to the
non-amortizing discount were reasonably estimable and collection was probable,
the corresponding decrease in the non-amortizing discount was transferred to the
amortizing portion and was accreted into interest income over the estimated
remaining lives of the loans on the interest method. Under our loan rating
system, each loan was evaluated for impairment and, where necessary, a portion
of the respective loan pool's non-amortizing discount was allocated to the loan.
If no non-amortizing discount was available, an allowance was established
through a provision for loan losses. In addition, if this evaluation revealed
that cash flows could not be estimated or the collection of the loan was not
otherwise probable, the loan was accounted for on the cost recovery method.
Effective January 1, 1999, Atlantic Preferred Capital changed, 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.
Under this accounting change, discount loan income and loan loss provisions are
accounted for on an individual loan basis, rather than as previously recognized
in the aggregate on a static purchased pool basis and was 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
allows Atlantic Preferred Capital to selectively acquire qualified individual
loans from Capital Crossing, rather than acquiring entire pools which may
contain individual loans that do not meet the criteria for
10
<PAGE>
favorable tax treatment allowed for REITs. There was no impact on stockholders'
equity as a result of the accounting change. However, the timing of subsequent
earnings will be affected by changes in the amount of estimated collections on
individual loans rather than by changes in the aggregate amount of estimated
collections on 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, loan loss provisions and
loan charge-offs and recoveries.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is evaluated on a
regular basis by management and is 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 revision as more
information becomes available.
In the normal course of business, the allowance for loan losses will be
adjusted, if necessary, through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes the loan
balance, or a portion thereof, is uncollectible. Subsequent recoveries, if any,
are credited to the allowance.
Under pool accounting, discounts were available for allocation to all loans
purchased in a pool; under loan-by-loan accounting, all available discount is
allocated to individual loans. Accordingly, in connection with the accounting
change described above, $860,000 of non-amortizing discount was transferred to
the allowance for loan losses, representing general reserve allocations on
outstanding purchased loan balances. As a result of this transfer, the ratio of
the allowance for loan losses to total loans, net of discounts and deferred loan
income increased from 0.91% at December 31, 1998 to 2.07% at December 31, 1999.
The transfer had no effect on the amount of total loans, gross.
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.
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, the level of risks associated with
changes in economic and business conditions and other factors.
The following table sets forth certain information relating to the payment
status of Atlantic Preferred Capital's loan portfolio:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current..................................................... $149,277 $156,459
Over thirty days to eighty-nine days past due............... 173 3,163
Ninety days or more past due................................ -- 357
-------- --------
Total performing loans...................................... 149,450 159,979
Non-accrual loans........................................... 1,471 3,868
-------- --------
Total loan portfolio........................................ $150,921 $163,847
======== ========
</TABLE>
11
<PAGE>
The following table sets forth certain information relating to the activity
in the non-amortizing discount for the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period.............................. $10,737 $ --
Additions in connection with loans purchased or
transferred............................................... 10 12,761
Transfers (to) amortizing discount.......................... (2,048) (1,057)
Transfer to allowance for loan losses (1)................... (860) --
Net reductions related to resolutions and restructures...... (521) (967)
------- -------
$ 7,318 $10,737
======= =======
</TABLE>
- ------------------------
(1) Effective January 1, 1999, $860,000 was transferred from non-amortizing
discount to the allowance for loan losses, representing general reserve
allocations. See "Business--Accounting for Purchased Loan Portfolio."
The following table sets forth management's allocation of the allowance for
loan losses by loan category and the percentage of the allowance allocated to
each category to total loans in each category with respect to Atlantic Preferred
Capital's loan portfolio at the dates indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 1998
---------------------- ----------------------
ALLOWANCE ALLOWANCE
FOR LOAN % OF LOANS FOR LOAN % OF LOANS
LOSSES TO TOTAL LOSSES TO TOTAL
--------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan Categories:
Commercial........................................ $2,081 65.43% $1,108 60.85%
Multi-family residential.......................... 665 28.28 76 30.43
One-to-four family residential.................... 97 5.58 128 7.53
Land.............................................. 2 0.54 25 0.89
Other............................................. 10 0.17 -- 0.30
------ ------ ------ ------
Total........................................... $2,855 100.00% $1,337 100.00%
====== ====== ====== ======
</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, Capital Crossing 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 Capital
Crossing's Management Loan Committee and either Capital Crossing's Chairman or
President, or in the case of loans of $2.5 million or more, the Loan and
Investment Committee of Capital Crossing'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. Capital Crossing's President
and Chairman are responsible for the general supervision of the loan portfolio
and adherence by the loan officers to Capital Crossing'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 Capital Crossing's standards as to historic
12
<PAGE>
debt service coverage, reasonableness of projections, strength of management and
sufficiency of secondary repayment.
Under Capital Crossing's credit risk management policies, management
presents to the Board of Directors of Capital Crossing a monthly report of loan
delinquencies showing all loans which are more than 30 days past due. In
addition, loans are reviewed monthly by management to determine which credits
should be placed on non-performing status. Management and the Board of Directors
also review all loan evaluations made during periodic examinations by the FDIC
and the Commissioner of Banks of the Commonwealth of Massachusetts (the
"Commissioner").
NON-PERFORMING ASSETS
The performance of Atlantic Preferred Capital's loan portfolio is evaluated
regularly by management. Atlantic Preferred Capital generally classifies a loan
as non-performing when the collectibility of principal and interest is not
probable or estimable. 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.
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 whereby any amounts received are
applied against the recorded amount of the loan. Loans accounted for on the cost
recovery method, in general, consist of non-accrual loans.
Loans are returned to accrual status and the cost recovery method of
accounting for amounts received ceases when the loan is brought current in
accordance with management's anticipated cash flows at the time of loan
acquisition or origination.
A loan is considered impaired when, based on current information and events,
it is determined that estimated cash flows are less than the cash flows
estimated at the date of purchase. A loan originated by Capital Crossing 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
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 loans or a portion thereof, 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 Capital Crossing, which
may result in the establishment of additional general or specific loss
allowances.
13
<PAGE>
The following table sets forth the amount at the dates indicated of
non-performing assets by category:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual loans:
Commercial................................................ $1,471 $1,811
Multi-family.............................................. -- 2,057
------ ------
1,471 3,868
Less:
Amortizing discount (1)................................... (58) --
Non-amortizing discount................................... (298) --
------ ------
Non-accrual loans, net.................................. 1,115 3,868
Other real estate owned..................................... 434 --
------ ------
Non-performing assets, net.............................. $1,549 $3,868
====== ======
Non-accrual loans, net, as a percent of loans, net of
discount and deferred loan income......................... 0.81% 2.64%
Non-performing assets, net, as a percent of total assets.... 0.92 2.47
</TABLE>
- ------------------------
(1) Prior to January 1, 1999, amortizing discounts were accounted for on a
static pool basis only. Accordingly, at December 31, 1998, there was no
allocation of amortizing discounts to impaired or non-accrual loans.
SERVICING
The mortgage assets are serviced by Capital Crossing pursuant to the terms
of the master service agreement. Capital Crossing 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 years ended December 31, 1999 and 1998, Atlantic Preferred
Capital incurred $328,000 and $238,000, respectively in servicing fees payable
to Capital Crossing.
The master service agreement requires Capital Crossing to service the loan
portfolio in a manner substantially the same as for similar work performed by
Capital Crossing for transactions on its own behalf. Capital Crossing collects
and remits principal and interest payments, maintains perfected collateral
positions, submits and pursues insurance claims and initiates and supervises
foreclosure proceedings on the loan portfolio it services. Capital Crossing also
provides accounting and reporting services required by Atlantic Preferred
Capital for such loans. Capital Crossing may also be directed by Atlantic
Preferred Capital, at any time during the servicing process, to dispose of any
loans which become classified, placed on non-accrual status, or are renegotiated
due to the financial deterioration of the borrower.
Capital Crossing 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, Capital Crossing 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. Capital Crossing 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
14
<PAGE>
of a successor servicer. The master service agreement will automatically
terminate if Atlantic Preferred Capital ceases to be an affiliate of Capital
Crossing.
Capital Crossing remits daily to Atlantic Preferred Capital all principal
and interest collected on loans serviced by Capital Crossing for Atlantic
Preferred Capital.
When any mortgaged property underlying a mortgage loan is conveyed by a
mortgagor, Capital Crossing 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 Capital Crossing 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. Atlantic Preferred Capital
does not have any employees because it has retained Capital Crossing 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 Capital Crossing. Atlantic Preferred Capital will
maintain corporate records and audited financial statements that are separate
from those of Capital Crossing. 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 Capital Crossing.
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 Capital Crossing.
Capital Crossing, 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 Capital Crossing
does not successfully compete in the origination and purchase of mortgage loans,
there could be 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 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 Capital Crossing 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
15
<PAGE>
in competing for deposit accounts include interest rates, the quality and range
of financial services offered, the convenience of office and automated teller
machine locations and office hours and the reliability and convenience of
banking services provided by Capital Crossing through its website. 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 Capital
Crossing, must offer financial products and services in a way which
differentiates them from the larger financial organization competitors. Capital
Crossing 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 Capital Crossing'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
Capital Crossing to serve small-to-mid-sized businesses which may not be
well-served by larger banks.
Capital Crossing 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 Capital
Crossing, have facilities and financial resources greater than those of Capital
Crossing and have other competitive advantages over Capital Crossing. Among the
advantages of these larger institutions are their ability:
(1) to make larger loans,
(2) to finance extensive advertising campaigns,
(3) to access international money markets,
(4) to conduct retail operations at a significant number of branches and,
(5) 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
Capital Crossing will obtain sufficient deposits and purchase or originate a
sufficient volume of quality loans to operate profitably in this competitive
environment or that Capital Crossing 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 Capital Crossing's primary
market area could increase in the event that financial institutions from other
jurisdictions branch into Massachusetts or merge with Massachusetts-chartered
banks.
In 1999, the U.S. Congress enacted the "Gramm-Leach-Bliley Act of 1999" (the
"1999 Act"). Under the 1999 Act, banks are no longer prohibited from associating
with, or having management interlocks with, a business organization engaged
principally in securities activities. The 1999 Act permits bank holding
companies that elect to become financial holding companies to engage in defined
securities and insurance activities as well as to affiliate with securities and
insurance activities. The 1999 Act also permits banks to have financial
subsidiaries that may engage in certain activities not otherwise permissible for
banks.
16
<PAGE>
ITEM 2. PROPERTIES
None.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the period
covered by this report.
17
<PAGE>
PART II
ITEM 5. MARKET FOR ATLANTIC PREFERRED CAPITAL'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
COMMON STOCK
In connection with its formation on March 20, 1998 Atlantic Preferred
Capital issued 100 shares of its common stock to Capital Crossing. These shares
of common stock were issued in reliance upon the exemption from registration
under Section 4(2) of the Securities Act of 1933, as amended. There is no
established public trading market for the common stock. As of March 8, 2000,
there were 100 issued and outstanding shares of common stock, all of which were
held by Capital Crossing.
During 1999, dividends of $18.8 million were paid to the common stockholder.
DIVIDEND POLICY
GENERAL. 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.
The FDIC's prompt corrective action regulations prohibit entities such as
Capital Crossing from making "capital distributions," which 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 Capital
Crossing 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 December 31,
1999, Capital Crossing's Total Risk-based capital ratio was 16.03%, Tier 1
Risk-based capital ratio was 14.78% and Tier 1 Leverage ratio was 13.96%.
In addition, an automatic exchange of the Series A preferred shares for
shares of Capital Crossing Preferred Stock may occur if, among other things,
Atlantic Preferred Capital becomes "undercapitalized." This automatic exchange
may take place under circumstances in which Capital Crossing will be considered
less than adequately capitalized for purposes of the FDIC's prompt corrective
action regulations. Thus, at the time of the automatic exchange, Capital
Crossing would likely be prohibited from paying dividends on the preferred
shares of Capital Crossing. Further, Capital Crossing's ability to pay dividends
on the preferred shares of Capital Crossing following the automatic exchange
also would be subject to various restrictions under FDIC regulations and a
resolution of Capital Crossing's Board of Directors. In the event that Capital
Crossing did pay dividends on the preferred shares of Capital Crossing, such
dividends would be paid out of its capital surplus.
Under certain circumstances, including a determination that Capital
Crossing'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.
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.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of Atlantic Preferred Capital herein has been
derived from the Financial Statements of Atlantic Preferred Capital, which
statements have been audited by Wolf & Company, P.C., independent public
accountants, as indicated by their report with respect thereto included
elsewhere in this Form 10-K. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements included elsewhere herein.
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
YEAR ENDED PERIOD FROM MARCH 20, 1998
DECEMBER, 31 THROUGH DECEMBER 31,
1999 1998
----------------- --------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
FINANCIAL CONDITION DATA (YEAR END):
Total assets........................................... $168,873 $156,742
Loans, gross........................................... 150,921 163,847
Total discount (1)................................... (12,862) (17,274)
Allowance for loan losses (1)........................ (2,855) (1,337)
Deferred loan fees................................... (41) (76)
-------- --------
Loans, net............................................. 135,163 145,160
-------- --------
Cash and cash equivalents.............................. 32,333 10,580
Stockholders' equity................................... 168,667 156,318
Non-accrual loans, net (1)............................. 1,115 3,868
Other real estate owned, net........................... 434 --
OPERATIONS DATA (PERIOD):
Interest income........................................ $ 19,987 $ 13,412
Operating expenses..................................... (127) (297)
-------- --------
Net income............................................. 19,860 13,115
Preferred stock dividends.............................. (1,338) (60)
-------- --------
Net income available to common shareholder............. $ 18,522 $ 13,055
======== ========
SELECTED OTHER INFORMATION:
Non-performing assets, net, as a percent of total
assets............................................... 0.92% 2.47%
Non-performing loans, net, as a percentage of loans,
net of discount and deferred loan income............. 0.81 2.64
Total discount as a percent of gross loans............. 8.52 10.54
Allowance for loan losses as a percent of total loans,
net of discount and deferred loan fees............... 2.07 0.91
Allowance for loan losses as a percent of
non-performing loans, net............................ 256.05 34.57
</TABLE>
- ------------------------
(1) Effective January 1, 1999, $860,000 was transferred from non-amortizing
discount to the allowance for loan losses, representing general reserve
allocations. See "Business-Accounting for Purchased Loan Portfolio."
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM INCEPTION (MARCH 20, 1998) THROUGH
DECEMBER 31, 1998
Net income available to common stockholders increased $5.5 million, or
41.9%, to $18.5 million for 1999 compared to $13.1 million for 1998. Total
interest income increased $6.6 million, or 49.0%, to $20.0 million for 1999
compared to $13.4 million for 1998. Interest and fees on loans for 1999
increased $5.8 million or 44.0%, to $19.1 million compared to $13.3 million for
1998.
The yields on Atlantic Preferred Capital's earning assets are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM MARCH 20, 1998
DECEMBER 31, 1999 THROUGH DECEMBER 31, 1998
------------------------------ ------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD BALANCE INTEREST YIELD
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans, net.................................... $145,520 $19,118 13.14% $138,671 $13,280 12.71%
Money market account.......................... 29,297 869 2.97 3,912 132 3.37
-------- ------- ----- -------- ------- -----
Total interest-earning assets................. $174,817 $19,987 11.43% $142,583 $13,412 9.41%
======== ======= ===== ======== ======= =====
</TABLE>
The weighted average yield on Atlantic Preferred Capital's interest-earning
assets increased to 11.43% for 1999 from 9.41% for 1998. This was due largely to
the positive impact on yields primarily from loan pay-offs of discounted loans
in addition to a rising interest rate environment in 1999. During 1999 and 1998,
the yield on Atlantic Preferred Capital's loan portfolio was 13.14% and 12.71%,
respectively. The average balance of Atlantic Preferred Capital's money market
account increased $25.4 million to $29.3 million for 1999 compared to
$3.9 million for 1998.
For the year ended December 31, 1999, Atlantic Preferred Capital realized
gains on sales of other real estate owned of $396,000 as a result of the sales
of two properties.
Loan servicing and advisory expenses increased $113,000 or 38.0% from
$297,000 in 1998 to $410,000 for 1999. This increase is the result of twelve
months of servicing expense in 1999 compared to nine months in 1998 as well as
an increase in the average outstanding loan balances.
Other general and administrative expenses of $113,000 in 1999 consisted
primarily of professional expenses of $61,000 and shareholder relation expenses
of $15,000.
Atlantic Preferred Capital intends to pay dividends on its preferred and
common stock in amounts necessary to continue to preserve its status as a REIT
under the Internal Revenue Code.
20
<PAGE>
FINANCIAL CONDITION
LOAN PORTFOLIO
The outstanding principal balance of the loan portfolio is summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1999 1998
---------------------- ----------------------
PRINCIPAL PERCENTAGE PRINCIPAL PERCENTAGE
BALANCE OF TOTAL BALANCE OF TOTAL
--------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans on real estate:
Commercial real estate............................ $ 98,748 65.43% $ 99,695 60.85%
Multi-family residential.......................... 42,677 28.28 49,854 30.43
One-to-four family residential.................... 8,415 5.58 12,339 7.53
Land.............................................. 820 0.54 1,458 0.89
-------- ------ -------- ------
Total........................................... 150,660 99.83 163,346 99.70
Secured commercial.................................. 232 0.15 251 0.15
Other............................................... 29 0.02 250 0.15
-------- ------ -------- ------
Total......................................... $150,921 100.00% $163,847 100.00%
======== ====== ======== ======
</TABLE>
Atlantic Preferred Capital intends that each loan acquired from Capital
Crossing in the future will be a whole loan, and will be originated or acquired
by Capital Crossing 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 $1.1 million and $3.9 million of mortgage loans on non-accrual
status at December 31, 1999 and 1998, respectively. Loans are generally placed
on non-accrual status and interest is not accrued when the collectibility of
principal and interest is not probable or estimable. Unpaid interest income
previously accrued on such loans is reversed against current period interest
income and the loan is accounted for using the cost recovery method, whereby any
amounts received are applied against the recorded amount of the loan.
ALLOWANCE FOR LOAN LOSSES AND DISCOUNT
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the loan balance or a
portion thereof, is uncollectible. Subsequent recoveries, if any, are credited
to the allowance.
The allowance for loan losses is evaluated on a regular basis by management
and is 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 revision as more information becomes available.
Ultimately, losses may vary from current estimates and future additions to the
allowance may be necessary.
Effective January 1, 1999, Atlantic Preferred Capital changed, 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.
Under this accounting change, discount loan income and loan loss provisions are
accounted for on an individual loan basis, rather than as previously recognized
in the aggregate on a static purchased pool basis and was accounted for as a
"change in estimate" in accordance with Accounting Principles Board Opinion
No. 20. There was no impact on stockholders' equity as a result of the
accounting
21
<PAGE>
change. However, the timing of subsequent earnings will be affected by changes
in the amount of estimated collections on individual loans rather than by
changes in the aggregate amount of estimated collections on 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, loan loss provisions and loan recoveries, net. For
additional information relating to the method of accounting for purchased loans,
see Note 1 to the Financial Statements.
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.
SIGNIFICANT CONCENTRATION OF CREDIT RISK
Concentration of credit risk generally arises with respect to Atlantic
Preferred Capital's loan portfolio when a number of borrowers engage in similar
business activities, or activities in the same geographical region.
Concentration of credit risk indicates the relative sensitivity of Atlantic
Preferred Capital's performance to both positive and negative developments
affecting a particular industry. There is no existing concentration of credit
risk with respect to Atlantic Preferred Capital's loan portfolio with respect to
borrowers engaged in similar business activities, as there is no particular type
of commercial real estate property which represents more than 10% of Atlantic
Preferred Capital's total loan portfolio. 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 December 31, 1999:
<TABLE>
<CAPTION>
LOCATION NUMBER OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------- --------------- ----------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
California..................... 40 $ 40,297 26.75%
Massachusetts.................. 123 38,545 25.58
Connecticut.................... 79 16,468 10.93
New Hampshire.................. 66 9,509 6.31
New York....................... 19 9,181 6.09
Rhode Island................... 16 5,781 3.84
Arizona........................ 2 4,816 3.20
Florida........................ 6 4,131 2.74
New Jersey..................... 8 3,882 2.58
Virginia....................... 3 3,169 2.10
Maine.......................... 5 3,043 2.02
All others..................... 21 11,838 7.86
--- -------- ------
388 $150,660 100.00%
=== ======== ======
</TABLE>
At December 31, 1999, 76.07% 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
22
<PAGE>
and natural hazards in New England or California that may affect the ability of
property owners to make payments of principal and interest on the underlying
mortgages.
LIQUIDITY RISK MANAGEMENT
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of 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:
(1) 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
(2) 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
Internal Revenue 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. Except for its
obligation to guarantee certain commitments of Capital Crossing, Atlantic
Preferred Capital 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 without the approval of certain
stockholders to no more than 100% of the total stockholders' equity of Atlantic
Preferred Capital. Any such debt may include intercompany advances made by
Capital Crossing 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.
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 Atlantic
Preferred Capital 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. Atlantic Preferred Capital's market risk arises primarily
from interest rate risk inherent in holding loans. To that end, management
actively monitors and manages its interest rate risk exposure.
Atlantic Preferred Capital's management reviews, among other things, the
sensitivity of Atlantic Preferred Capital's assets to interest rate changes, the
book and market values of assets, purchase and sale activity, and anticipated
loan pay-offs. Capital Crossing's senior management also approves and
establishes pricing and funding decisions with respect to Atlantic Preferred
Capital's overall asset and liability composition.
Atlantic Preferred Capital's methods for evaluating interest rate risk
include an analysis of its 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
23
<PAGE>
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
adversely affect net interest income. 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 following table sets forth the Atlantic Preferred Capital's
interest-rate-sensitive assets and liabilities categorized by repricing dates
and weighted average rates at December 31, 1999. 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, 1999
--------------------------------------------------------------------------------------
WITHIN ONE TO TWO TO THREE FOUR TO OVER
ONE TWO THREE TO FOUR FIVE FIVE
OVERNIGHT YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
--------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Interest-bearing deposits
in banks..................... $32,393 $ -- $ -- $ -- $ -- $ -- $ -- $ 32,393
3.40%
Fixed-rate loans (1)........... -- 20,952 8,783 4,524 2,634 1,670 3,423 41,986
-- 9.19% 8.80% 8.55% 8.36% 8.29% 8.08%
Adjustable-rate loans (1)...... 45,530 51,866 8,034 1,408 56 62 508 107,464
9.46% 8.21% 8.83% 8.21% 8.79% 8.78% 9.25%
------- ------- ------- ------ ------ ------ ------ --------
Total rate-sensitive
assets..................... $77,923 $72,818 $16,817 $5,932 $2,690 $1,732 $3,931 $181,843
======= ======= ======= ====== ====== ====== ====== ========
</TABLE>
- ------------------------
(1) Loans are presented at gross amounts before deducting discounts on purchased
loans, the allowance for loan losses and net deferred loan fees and excludes
non-accrual loans.
The prepayment assumption reflected above is based on the experience and
management's estimate of prepayment activity for recently acquired loans. Given
the interest rate environment at December 31, 1999, management has assumed that
on average 20% of the outstanding fixed rate loans will prepay annually.
Adjustable-rate loans originated by Capital Crossing are generally indexed to
prime with an average spread of 100 to 200 basis points. The majority of
adjustable-rate loans purchased by Capital Crossing 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 that are subject to immediate repricing are placed in
the overnight column.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report................................ 26
Balance Sheets.............................................. 27
Statements of Income........................................ 28
Statements of Changes in Stockholders' Equity............... 29
Statements of Cash Flows.................................... 30
Notes to Financial Statements............................... 31
</TABLE>
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Atlantic Preferred Capital Corporation:
We have audited the accompanying balance sheets of Atlantic Preferred
Capital Corporation as of December 31, 1999 and 1998 and the related statements
of income, changes in stockholders' equity and cash flows for the year ended
December 31, 1999 and for the period from inception (March 20, 1998) through
December 31, 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of Atlantic Preferred Capital
Corporation as of December 31, 1999 and 1998 and the results of its operations
and its cash flows for the year ended December 31, 1999 and for the period from
inception (March 20, 1998) through December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ Wolf & Company, P.C.
[LOGO]
Boston, Massachusetts
February 4, 2000
26
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash account with Capital Crossing Bank..................... $ 40 $ 146
Money market account with Capital Crossing Bank............. 32,293 10,434
-------- --------
Total cash and cash equivalents......................... 32,333 10,580
-------- --------
Certificate of deposit...................................... 100 --
-------- --------
Loans, net of deferred loan fees............................ 150,880 163,771
Less discount............................................. (12,862) (17,274)
Less allowance for loan losses............................ (2,855) (1,337)
-------- --------
Loans, net.............................................. 135,163 145,160
-------- --------
Accrued interest receivable................................. 812 832
Other real estate owned..................................... 434 --
Other assets................................................ 31 170
-------- --------
$168,873 $156,742
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to Capital Crossing Bank................................ $ -- $ 125
Accrued expenses and other liabilities...................... 206 299
-------- --------
Total liabilities....................................... 206 424
-------- --------
Stockholders' equity:
Preferred stock, Series A, 9 3/4% non-cumulative,
exchangeable; $.01 par value; $10 liquidation value per
share; 1,449,000 shares authorized, 1,416,130 shares
issued and outstanding at December 31, 1999; none
authorized, issued and outstanding at December 31,
1998.................................................... 14 --
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............................................. -- --
Common stock, $.01 par value, 100 shares authorized,
issued and
outstanding............................................. -- --
Additional paid-in capital................................ 167,839 155,263
Retained earnings......................................... 814 1,055
-------- --------
Total stockholders' equity.............................. 168,667 156,318
-------- --------
$168,873 $156,742
======== ========
</TABLE>
See accompanying notes to financial statements.
27
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 20,
1998)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Interest income:
Interest and fees on loans................................ $19,118 $13,280
Interest income on money market account with Capital
Crossing Bank........................................... 869 132
------- -------
Total interest income................................. 19,987 13,412
------- -------
Operating expenses:
Loan servicing and advisory............................... 410 297
Other real estate owned income............................ (396) --
Other general and administrative.......................... 113 --
------- -------
Total operating expenses.............................. 127 297
------- -------
Net income.............................................. 19,860 13,115
Preferred stock dividends................................... 1,338 60
------- -------
Net income available to common shareholder.................. $18,522 $13,055
======= =======
</TABLE>
See accompanying notes to financial statements.
28
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM INCEPTION
(MARCH 20, 1998) THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK
COMMON STOCK SERIES A SERIES B ADDITIONAL
------------------- --------------------- ------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
-------- -------- ---------- -------- -------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 20,
1998..................... -- $ -- -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock... 100 -- -- -- -- -- 139,740 -- 139,740
Issuance of preferred
stock, Series B.......... -- -- -- -- 1,000 -- 1,000 -- 1,000
Capital contribution from
common stockholder....... -- -- -- -- -- -- 14,523 -- 14,523
Net income................. -- -- -- -- -- -- -- 13,115 13,115
Cumulative dividends on
preferred stock, Series
B........................ -- -- -- -- -- -- -- (60) (60)
Common stock dividend...... -- -- -- -- -- -- -- (12,000) (12,000)
--- -------- ---------- -------- ----- -------- -------- -------- --------
Balance at December 31,
1998..................... 100 -- -- -- 1,000 -- 155,263 1,055 156,318
Net proceeds from issuance
of preferred stock,
Series A................. -- -- 1,416,130 14 -- -- 12,576 -- 12,590
Net income................. -- -- -- -- -- -- -- 19,860 19,860
Dividends on preferred
stock,
Series A................. -- -- -- -- -- -- -- (1,258) (1,258)
Cumulative dividends on
preferred stock, Series
B........................ -- -- -- -- -- -- -- (80) (80)
Common stock dividends..... -- -- -- -- -- -- -- (18,763) (18,763)
--- -------- ---------- -------- ----- -------- -------- -------- --------
Balance at December 31,
1999..................... 100 $ -- 1,416,130 $ 14 1,000 $ -- $167,839 $ 814 $168,667
=== ======== ========== ======== ===== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
29
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 20,
1998)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $19,860 $ 13,115
Adjustments to reconcile net income to net cash provided
by operating activities:
Net gain on sale and disposition of other real estate
owned................................................. (396) --
Other, net.............................................. -- (578)
------- --------
Net cash provided by operating activities............. 19,464 12,537
------- --------
Cash flows from investing activities:
Loan repayments........................................... 44,557 31,712
Purchases of loans from Capital Crossing Bank............. (36,263) (21,609)
Sales of other real estate owned.......................... 1,471 --
Purchase of certificate of deposit........................ (100) --
------- --------
Net cash provided by investing activities............. 9,665 10,103
------- --------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock, Series A... 12,590 --
Payment of preferred stock dividends...................... (1,203) (60)
Payment of common stock dividend.......................... (18,763) (12,000)
------- --------
Net cash used in financing activities................. (7,376) (12,060)
------- --------
Net change in cash and cash equivalents..................... 21,753 10,580
Cash and cash equivalents at beginning of period............ 10,580 --
------- --------
Cash and cash equivalents at end of period.................. $32,333 $ 10,580
======= ========
Supplemental information:
Value of loans transferred by Atlantic Preferred Capital's
common stockholder in exchange for the issuance of
common stock and preferred stock, Series B.............. $ -- $140,740
Capital contribution from common stockholder in form of
mortgage loans.......................................... -- 14,523
Transfers from loans to other real estate owned........... 1,509 --
Income taxes paid......................................... 31 --
</TABLE>
See accompanying notes to financial statements.
30
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM INCEPTION
(MARCH 20, 1998) TO DECEMBER 31, 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, to acquire and hold real estate assets.
Capital Crossing Bank (the "Bank"), a federally insured Massachusetts trust
company, owns all of the Company's common stock (as defined below). The Bank is
in compliance with its regulatory capital requirements at December 31, 1999.
On March 31, 1998, the Company was initially capitalized with the issuance
to the Bank of 100 shares of the Company's common stock, $.01 par value, and
1,000 shares of Series B preferred stock, $.01 par value, 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.
In 1999, the Company completed the sale of 1,416,130 shares of Series A
preferred stock. See Note 3.
BUSINESS
The Company's business is to hold real estate assets acquired from the Bank.
The Bank's primary business lines include the acquisition of commercial real
estate and multi-family residential real estate loans from sellers in the
financial service industry.
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 New England and California. The ability of the Company's
debtors to honor their contracts is dependent upon the real estate and general
economic sectors in these regions.
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 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
31
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM INCEPTION
(MARCH 20, 1998) TO DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income and the loan is accounted for using the cost recovery method whereby any
amounts received are applied against the recorded amount of the loan. Loans
accounted for on the cost recovery method, in general, consist of non-accrual
loans.
Loans are returned to accrual status and the cost recovery method of
accounting for amounts received ceases when the loan is brought current in
accordance with management's anticipated cash flows at the time of loan
acquisition or origination.
Net deferred loan fees are amortized as an adjustment of the related loan
yields using the interest method.
The Company accounts for purchased loans under the guidance of AICPA
Practice Bulletin 6, AMORTIZATION OF DISCOUNTS ON CERTAIN ACQUIRED LOANS. Prior
to January 1, 1999, this guidance was applied using unique and exclusive static
pools. Static pools were established based on the original acquisition timing.
Once a static pool was established, the loans remained in the pool, unless
restructured on terms consistent with the Company's loan policy and
documentation standards and transferred to the Company's originated loan
portfolio.
Prior to January 1, 1999, at the time of acquisition of purchased pools of
loans, the excess of the contractual balances over the amount of reasonably
estimable and probable discounted future cash collections for the pool was
recorded as non-amortizing discount. The remaining discount, which represented
the excess of the amount of reasonably estimable and probable discounted future
cash collections over the acquisition amount was accreted into interest income
using the interest method and was not accreted on non-accrual loans. The
non-amortizing discount was not accreted into income until it was determined
that the amount and timing of the related cash flows were reasonably estimable
and collection was probable. If cash flows could not be reasonably estimated for
any loan within a pool, and collection was not probable, the cost recovery
method of accounting was used. Under the cost recovery method, any amounts
received were applied against the recorded amount of the loan.
Subsequent to acquisition, if cash flow projections improved, and it was
determined that the amount and timing of the cash flows related to the
non-amortizing discount were reasonably estimable and collection was probable,
the corresponding decrease in the non-amortizing discount was transferred to the
amortizing portion and was accreted into interest income over the estimated
remaining lives of the loans on the interest method. Under the Company's loan
rating system, each loan was evaluated for impairment and, where necessary, a
portion of the respective loan pool's non-amortizing discount was allocated to
the loan. If no non-amortizing discount was available, an allowance was
established through a provision for loan losses. In addition, if this evaluation
revealed that cash flows could not be estimated or the collection of the loan
was not otherwise probable, the loan was accounted for on the cost recovery
method.
Effective January 1, 1999, the Company changed, 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. Under this accounting
change, discount loan income and loan loss provisions are accounted for on an
individual loan basis, rather than as previously recognized in the aggregate on
a static purchased pool basis and was 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 allows the Company
32
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM INCEPTION
(MARCH 20, 1998) TO DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to selectively acquire qualified individual loans from the Bank rather than
acquiring entire pools which may contain individual loans that do not meet the
criteria for favorable tax treatment allowed for a REIT. There was no impact on
stockholders' equity as a result of the accounting change. However, the timing
of subsequent earnings will be affected by changes in the amount of estimated
collections on individual loans rather than by changes in the aggregate amount
of estimated collections on 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, loan loss
provisions and loan recoveries, net.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses was transferred from the Bank at the time of
the initial transfer of loans to the Company and, beginning in 1999, additional
transfers are made in connection with the accounting change described below.
Subsequent to the date of transfer, the allowance for loan losses will be
adjusted, if necessary, through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes the loan
balance, or a portion thereof, is uncollectible. Subsequent recoveries, if any,
are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management
and is 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 revision as more information becomes available.
Under pool accounting, discounts were available for allocation to all loans
purchased in a pool; under loan-by-loan accounting, all available discount is
allocated to individual loans. Accordingly, in connection with the accounting
change described above, $860,000 of non-amortizing discount was transferred to
the allowance for loan losses, representing general reserve allocations on
outstanding purchased loan balances. Allocations from purchase discounts to the
allowance for loan losses are made on all loans purchased on or after
January 1, 1999.
A loan purchased by the Bank is considered impaired when, based on current
information and events, it is determined that estimated cash flows are less than
the cash flows estimated at the date of purchase. A loan originated by the Bank
is considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. 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. Loan 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
33
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM INCEPTION
(MARCH 20, 1998) TO DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 a
purchased loan, the recorded investment represents the Company's principal
balance of the loan net of any related amortizing and non-amortizing discounts
in 1999, and net of any related non-amortizing discounts in 1998. Prior to
January 1, 1999, amortizing discounts were accounted for on a static pool basis
only. See the previous discussion of the aforementioned accounting change under
Loans. Substantially all of the Company's loans which have been identified as
impaired have been measured by the fair value of existing collateral.
OTHER REAL ESTATE OWNED
Assets acquired through, or in lieu of, loan foreclosure are held for sale
and are initially recorded at the lower of cost or fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically updated by management and the assets are carried at
the lower of carrying amount or fair value less estimated costs to sell.
Revenues and expenses from operations and changes in the valuation allowance are
included in other real estate owned income, net.
INCOME TAXES
The Company has elected, 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 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, distribution 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.
34
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM INCEPTION
(MARCH 20, 1998) TO DECEMBER 31, 1998
2. LOANS, NET
A summary of the balances of loans at December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans on real estate:
Commercial real estate.................................... $ 98,748 $ 99,695
Multi-family residential.................................. 42,677 49,854
One-to-four family residential............................ 8,415 12,339
Land...................................................... 820 1,458
-------- --------
Total................................................... 150,660 163,346
Secured commercial.......................................... 232 251
Other....................................................... 29 250
-------- --------
Total loans, gross...................................... 150,921 163,847
Less:
Non-amortizing discount................................... (7,318) (10,737)
Amortizing discount....................................... (5,544) (6,537)
Allowance for loan losses................................. (2,855) (1,337)
Net deferred loan fees.................................... (41) (76)
-------- --------
Loans, net.............................................. $135,163 $145,160
======== ========
</TABLE>
Activity in the allowance for loan losses for the year ended December 31,
1999 and for the period from inception (March 20, 1998) through December 31,
1998 follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period.............................. $1,337 $ --
Additions in connection with loans purchased or
transferred............................................... 658 1,337
Transfer from non-amortizing discount (see Note 1).......... 860 --
------ ------
Balance at end of period.................................... $2,855 $1,337
====== ======
</TABLE>
35
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM INCEPTION
(MARCH 20, 1998) TO DECEMBER 31, 1998
2. LOANS, NET (CONCLUDED)
Information pertaining to impaired and non-accrual loans at December 31,
1999 and 1998 follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Impaired loans, net of non-amortizing discount:
Without a valuation allowance............................. $1,541 $4,579
With a valuation allowance................................ 4,227 --
------ ------
5,768 4,579
Amortizing discount(1)...................................... (133) --
------ ------
Total impaired loans........................................ $5,635 $4,579
====== ======
Valuation allowance related to impaired loans............... $ 525 $ --
====== ======
Non-accrual loans, net of non-amortizing discount........... $1,173 $3,868
Amortizing discount(1)...................................... (58) --
------ ------
Total non-accrual loans..................................... $1,115 $3,868
====== ======
</TABLE>
(1) Prior to January 1, 1999, amortizing discounts were accounted for on a
static pool basis only. Accordingly, at December 31, 1998, there was no
allocation of amortizing discounts to impaired or non-accrual loans.
Information pertaining to impaired loans for the year ended December 31,
1999 and for the period from inception (March 20, 1998) through December 31,
1998 follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Average investment in impaired loans........................ $6,561 $1,871
====== ======
Interest income recognized on impaired loans................ $ 431 $ 64
====== ======
Interest income recognized on a cash basis on impaired
loans..................................................... $ 105 $ --
====== ======
</TABLE>
No additional funds are committed to be advanced in connection with impaired
loans.
3. PREFERRED STOCK
On March 31, 1998, the Company issued 1,000 shares of its 8% Cumulative
Non-convertible Preferred Stock, Series B, to the Bank. Holders of Series B
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 payment dates are determined by the Board of
Directors. Series B preferred stock may be redeemed by the Company for its
outstanding liquidation amount plus accrued dividends upon the occurrence of
certain events.
36
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM INCEPTION
(MARCH 20, 1998) TO DECEMBER 31, 1998
3. PREFERRED STOCK (CONCLUDED)
Series B preferred stock has a liquidation amount of $1,000 per share. In
the event of a voluntary or involuntary dissolution or liquidation of the
Company, preferred stockholders are entitled to the total liquidation amount, as
defined, plus any accrued and accumulated dividends.
On February 12, 1999, the Company completed the sale of 1,416,130 shares of
Non-cumulative Exchangeable Preferred Stock, Series A, with a dividend rate of
9.75% and a liquidation preference of $10 per share, which raised net proceeds
of $12,590,000, after related offering costs of $1,571,000.
Series A preferred stock is exchangeable for preferred shares of the Bank if
the Federal Deposit Insurance Corporation (FDIC) so directs, when or if the Bank
becomes or may in the near term become undercapitalized or the Bank is placed
into conservatorship or receivership. Series A preferred stock is redeemable at
the option of the Company on or after February 1, 2004, with the prior consent
of the FDIC.
4. RELATED PARTY TRANSACTIONS
The Bank performs advisory services and services the loans owned by the
Company. The servicing and advisory fee rate is .25% per annum of the
outstanding principal balance of the loans. Servicing and advisory fees for the
year ended December 31, 1999 and for the period from inception through
December 31, 1998 totaled $410,000 and $297,000, respectively, of which $33,000
and $297,000, respectively, 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 periodically purchases loans from the
Bank. The Company purchased loans with carrying values, including accrued
interest, of $36,263,000 and $21,609,000 during 1999 and 1998, respectively.
During 1998, the Bank also contributed loans with a carrying value of
$14,523,000 to the Company. The carrying value of these loans approximated their
fair values at the date of purchase or contribution.
The Company has guaranteed certain obligations of the Bank and has agreed to
pledge certain of its assets in connection with advances the Bank may receive
from time to time by the Federal Home Loan Bank of Boston. At December 31, 1999
the Bank had no outstanding advances from the Federal Home Loan Bank of Boston.
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.
37
<PAGE>
ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM INCEPTION
(MARCH 20, 1998) TO DECEMBER 31, 1998
5. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONCLUDED)
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.
ACCRUED INTEREST RECEIVABLE: The carrying amount of accrued interest
receivable approximates fair value.
The estimated fair values, and related carrying amounts, of the Company's
financial instruments at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents......................... $ 32,333 $ 32,333 $ 10,580 $ 10,580
Loans, net........................................ 135,163 140,595 145,160 151,716
Accrued interest receivable....................... 812 812 832 832
</TABLE>
38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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............................................... 47 President, Director
John L. Champion............................................ 51 Treasurer, Director
Bradley M. Shron............................................ 43 Clerk
Nicholas W. Lazares......................................... 48 Director
Jeffrey Ross................................................ 55 Director
Michael J. Fox, M.D. ....................................... 53 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, Co-Chief Executive
Officer and a director of Capital Crossing.
John L. Champion. Mr. Champion has been the Treasurer and a Director of
Atlantic Preferred Capital since March 1998. Mr. Champion joined Capital
Crossing Bank in March 1993 and is the Chief Financial Officer, Treasurer and
Executive Vice President of Capital Crossing.
Bradley M. Shron. Mr. Shron has been Clerk of Atlantic Preferred Capital
since March 1998. Mr. Shron has served as a Senior Vice President, General
Counsel and Clerk of Capital Crossing since January 1998. Mr. Shron served as
Senior Vice President, Legal Counsel and Assistant Clerk from 1997 to 1998.
Mr. Shron joined Capital Crossing as a Vice President and Legal Counsel in
April 1996. Prior to joining Capital Crossing, Mr. Shron was a partner at the
Boston law firm of Riemer and Braunstein.
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 Capital Crossing.
Jeffrey Ross. Since October 1999, Mr. Ross has served as the Managing
Partner of Ross Fialkow Capital Partners of Boston, Massachusetts. From 1998
until October 1999, Mr. Ross acted as a management and investment consultant.
During 1997, Mr. Ross was President and Chief Executive Officer of Hearthstone
Assisted Living of Houston, Texas. Mr. Ross has been a director of Atlantic
Preferred Capital since April 1999.
Michael J. Fox. Since 1997, Mr. Fox has been President and Chief Executive
Officer of Healthcare Advisors, Inc., a consulting firm. From 1998 to 1999,
Mr. Fox also served as a Senior Vice President of Alkermes, Inc. From 1991 to
1996, Mr. Fox was Senior Vice President of Astra AB-USA. Mr. Fox has been a
director of Atlantic Preferred Capital since January 2000.
AUDIT COMMITTEE
Atlantic Preferred Capital has established an audit committee which will,
among other things:
(1) review the engagement and independence of its auditors;
(2) review the adequacy of Atlantic Preferred Capital's internal accounting
controls; and
39
<PAGE>
(3) review transactions between Atlantic Preferred Capital and Capital
Crossing Bank.
ITEM 11. EXECUTIVE 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 15, 2000, the number and
percentage of outstanding shares of common stock, Series A preferred shares and
Series B preferred shares beneficially owned by (i) all persons known by
Atlantic Preferred Capital to own more than five percent of such shares;
(ii) each director of Atlantic Preferred Capital; (iii) each executive officer
of Atlantic Preferred Capital; and (iv) all executive officers and directors of
Atlantic Preferred Capital as a group. The persons or entities named in the
table have sole voting and sole investment power with respect to each of the
shares beneficially owned by such person or entity. The calculations were based
on a total of 100 shares of common stock and 1,416,130 Series A preferred shares
and 1,000 Series B preferred shares outstanding as of March 15, 2000.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER(1) AMOUNT OF SHARES (CLASS) OUTSTANDING SHARES
- --------------------------------------- -------------------------------- ------------------
<S> <C> <C>
Capital Crossing Bank........................ 100 shares of common stock 100.0%
900 Series B preferred shares 90.0
John L. Champion(2)(3)....................... 2 Series B preferred shares(4) *
Nicholas W. Lazares(3)....................... 2 Series B preferred shares(4) *
Bradley M. Shron(2).......................... 2 Series B preferred shares(4) *
Richard Wayne(2)(3).......................... 2 Series B preferred shares(4) *
Jeffrey Ross(3).............................. 0 *
Michael J. Fox(3)............................ 0 *
All executive officers and directors as a
Group
(4 persons)................................ 8 Series B Preferred Shares *
</TABLE>
- ------------------------
(1) The address of each beneficial owner is c/o Atlantic Preferred Capital
Corporation, 101 Summer Street, Boston, Massachusetts 02110.
(2) Executive officer of Atlantic Preferred Capital.
(3) Director of Atlantic Preferred Capital.
(4) Includes 1 share held of record by such executive officer/director's spouse.
* Less than 1%.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SERVICING AGREEMENT
The mortgage assets are serviced by Capital Crossing pursuant to the terms
of the master service agreement. Capital Crossing 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 year ended December 31, 1999, Atlantic Preferred Capital
incurred $328,000 in servicing fees payable to Capital Crossing Bank.
The master service agreement requires Capital Crossing to service the loan
portfolio in a manner substantially the same as for similar work performed by
Capital Crossing for transactions on its own behalf. Capital Crossing collects
and remits principal and interest payments, maintains perfected collateral
40
<PAGE>
positions, submits and pursues insurance claims and initiates and supervises
foreclosure proceedings on the loan portfolio it services. Capital Crossing also
provides accounting and reporting services required by Atlantic Preferred
Capital for such loans. Capital Crossing 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.
Capital Crossing 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, Capital Crossing 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. Capital Crossing 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 Capital Crossing.
Capital Crossing remits daily to Atlantic Preferred Capital all principal
and interest collected on loans serviced by Capital Crossing for Atlantic
Preferred Capital.
When any mortgaged property underlying a mortgage loan is conveyed by a
mortgagor, Capital Crossing 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 Capital Crossing 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.
ADVISORY AGREEMENT
Atlantic Preferred Capital has entered into the advisory agreement with
Capital Crossing to administer the day-to-day operations of Atlantic Preferred
Capital. For the year ended December 31, 1999, Atlantic Preferred Capital
incurred $82,000 in servicing fees payable to Capital Crossing. As advisor,
Capital Crossing is responsible for:
(1) monitoring the credit quality of the loan portfolio held by Atlantic
Preferred Capital,
(2) advising Atlantic Preferred Capital with respect to the acquisition,
management, financing and disposition of its loans and other assets and
(3) maintaining the corporate and shareholder records of Atlantic Preferred
Capital.
Capital Crossing 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. Capital Crossing 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. Capital Crossing 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 Capital Crossing as
advisor.
41
<PAGE>
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 Capital Crossing 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, Capital Crossing will not be entitled to any fee for providing
advisory and management services to Atlantic Preferred Capital.
GUARANTY AND PLEDGE OF ASSETS
Atlantic Preferred Capital has guaranteed certain obligations of the Bank
and has agreed to pledge certain of its assets in connection with advances the
Bank may receive from time to time by the Federal Home Loan Bank of Boston
(FHLB). At December 31, 1999, the Bank had no outstanding FHLB advances.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a) Contents:
(1) Financial Statements: All Financial Statements are included as Part II,
Item 8 of this Report.
(2) All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instruction or are inapplicable and therefore
have been omitted.
(b) Reports on Form 8-K: None filed during the period covered by this
report.
(c) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
3.1 Restated Articles or Organization of Atlantic Preferred
Capital(1)
3.2 Amended and Restated By-laws of Atlantic Preferred
Capital(2)
4.1 Specimen of certificate representing Series A preferred
shares(3)
10.1 Master Mortgage Loan Purchase Agreement between Atlantic
Preferred Capital and Capital Crossing Bank(3).
10.2 Master Service Agreement between Atlantic Preferred Capital
and Capital Crossing Bank(3).
10.3 Advisory Agreement between Atlantic Preferred Capital and
Capital Crossing Bank(3).
10.4 Form of Letter Agreement between Atlantic Preferred Capital
and Capital Crossing Bank regarding issuance of certain
securities(3).
*27.1 Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated by reference to Exhibit 3.1 of Atlantic Preferred Capital's
Annual Report on Form 10-K filed March 31, 1999 (Commission File
No. 000-25193).
(2) Incorporated by reference to Exhibit 3.2 of Atlantic Preferred Capital's
Annual Report on Form 10-K filed with the Securities and Exchange Commission
on March 31, 1999 (Commission File No. 000-25193).
(3) Incorporated by reference to Atlantic Preferred Capital's registration
statement on Form S-11 (No. 333-66677), filed November 3, 1998, as amended.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
ATLANTIC PREFERRED CAPITAL CORPORATION
Date: March 27, 2000 By: /s/ RICHARD WAYNE
-----------------------------------------
Richard Wayne
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant in
the capacities and on the dated indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S> <C>
/s/ RICHARD WAYNE President and Director
------------------------------------------- (Principal Executive
(Richard Wayne) Officer)
Treasurer and Director
/s/ JOHN L. CHAMPION (Principal Financial
------------------------------------------- Officer and Principal
(John L. Champion) Accounting Officer)
/s/ NICHOLAS W. LAZARES
------------------------------------------- Director
(Nicholas W. Lazares)
/s/ JEFFREY ROSS
------------------------------------------- Director
(Jeffrey Ross)
------------------------------------------- Director
(Michael J. Fox)
</TABLE>
43
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 40
<INT-BEARING-DEPOSITS> 32,393
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 138,018
<ALLOWANCE> 2,855
<TOTAL-ASSETS> 168,873
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 206
<LONG-TERM> 0
0
14
<COMMON> 0
<OTHER-SE> 168,653
<TOTAL-LIABILITIES-AND-EQUITY> 168,873
<INTEREST-LOAN> 19,118
<INTEREST-INVEST> 0
<INTEREST-OTHER> 869
<INTEREST-TOTAL> 19,987
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 19,987
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 127
<INCOME-PRETAX> 19,860
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,860
<EPS-BASIC> 185,220
<EPS-DILUTED> 185,220
<YIELD-ACTUAL> 11.43
<LOANS-NON> 1,115
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,337
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,855
<ALLOWANCE-DOMESTIC> 2,855
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
