Back to GetFilings.com






================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

-----------------------

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, 1998

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)

----------------



Massachusetts 04-3439366
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

101 Summer Street 02210
Boston, Massachusetts (Zip Code)
(Address of principal executive offices)


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:
93/4% Non-Cumulative Exchangable Preferred Stock, Series A
(Title of Class)


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 [ ] No [X]

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. [ ]

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, 1999. No common
stock was held by non-affiliates of the registrant.

================================================================================




PART I

Item 1. Business

General
Atlantic Preferred Capital Corporation is a Massachusetts corporation
incorporated on March 20, 1998. Atlantic Bank and Trust Company created
Atlantic Preferred Capital to acquire and hold real estate mortgage assets in a
cost-effective manner and to provide Atlantic Bank with an additional means of
raising capital for federal and state regulatory purposes. Atlantic Bank owns,
indirectly, all of the outstanding common stock of Atlantic Preferred Capital.
Atlantic Preferred Capital intends to operate in a manner which will allow it
to be taxed as a real estate investment trust, or a "REIT", under the Internal
Revenue Code of 1986, as amended. As a REIT, Atlantic Preferred Capital will
generally not be required to pay federal income tax if it distributes its
earnings to its stockholders and continues to meet a number of other
requirements.

On March 31, 1998, Atlantic Bank capitalized Atlantic Preferred Capital by
transferring mortgage loans valued at $140.7 million in exchange for 1,000
shares of Atlantic Preferred Capital's 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 93/4% 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 estimated net
proceeds to Atlantic Preferred Capital from the sale of Series A preferred
shares were approximately $12.8 million. Management of Atlantic Preferred
Capital intends to invest these proceeds in qualifying REIT assets.

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, 1998 were acquired from Atlantic Bank and it is
anticipated that substantially all additional mortgage assets will be acquired
from Atlantic Bank. As of December 31, 1998, Atlantic Preferred Capital held
loans acquired from Atlantic Bank with gross outstanding principal balances of
$163.8 million. Atlantic Preferred Capital's loan portfolio at December 31,
1998 consisted primarily of mortgage assets secured by commercial or
multi-family properties. Approximately 78.4% of Atlantic Preferred Capital's
loan portfolio at December 31, 1998 consisted of loans acquired by Atlantic
Bank at a discount from their outstanding principal balances. Atlantic Bank
originally purchased such loans consistent with its fundamental strategy of
identifying and acquiring loans which its management believes are undervalued
as a result of adverse market or economic circumstances. The remaining balance
of the loan portfolio consisted of loans originated by Atlantic Bank.

Atlantic Bank
Atlantic Bank and Trust Company, an FDIC-insured, Massachusetts-chartered
trust company, commenced operations in February, 1988. Atlantic Bank conducts
its business from its executive and main office in downtown Boston,
Massachusetts, and a branch in Chestnut Hill, Massachusetts, and through its
leasing subsidiary in Moberly, Missouri. At December 31, 1998, Atlantic Bank
had total assets of $472.8 million, deposits of $423.5 million and
stockholders' equity of $41.6 million. At December 31, 1998, under the
regulatory capital ratios developed and monitored by the federal bank
regulatory agencies and applicable to banks, Atlantic Bank's capital was
sufficient to enable it to be qualified as adequately capitalized.

Atlantic Bank focuses on selected business lines that management has
identified as having the potential to provide high levels of profitability
consistent with prudent banking practices. These business lines include:

o the acquisition of loans secured primarily by commercial real estate, other
business assets, and/or multi-family residential real estate from private
sector sellers and government agencies, generally at a discount from their
then outstanding principal balances;

o the origination of various types of secured commercial loans; and


1


o small-ticket equipment leasing to businesses and consumers through its
wholly-owned subsidiary, Dolphin Capital Corporation.

Atlantic Bank funds its activities with deposits consisting primarily of
certificates of deposit and money market accounts. Atlantic Bank also offers
retail deposit services, including checking and savings accounts, and related
services to businesses and individuals through the nationwide electronic
banking networks.

As a wholly-owned subsidiary of Atlantic Bank, the assets and liabilities
and results of operations of Atlantic Preferred Capital will be consolidated
with those of Atlantic Bank for Atlantic Bank's financial reporting and
regulatory capital purposes. As such, loans acquired by Atlantic Preferred
Capital from Atlantic Bank will nevertheless be treated as assets of Atlantic
Bank for purposes of compliance by Atlantic Bank with the FDIC's regulatory
capital requirements and in Atlantic Bank's financial statements. Interest
income on those loans will be treated as interest income of Atlantic Bank in
Atlantic Bank's financial statements.


Acquisition of Loan Portfolio
On March 31, 1998, Atlantic Bank 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 Atlantic Bank dated as of the same date
which provides the general terms for the acquisition by Atlantic Preferred
Capital of mortgage assets from Atlantic Bank. Under the master mortgage loan
purchase agreement, on September 30, 1998 Atlantic Preferred Capital purchased
additional mortgage loans with gross outstanding principal balances of $23.7
million for cash equal to their net carrying value of $21.6 million. On October
14, 1998 Atlantic Bank transferred mortgage loans with gross outstanding
principal 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,
Atlantic Bank delivers or causes to be delivered to Atlantic Preferred Capital
the mortgage note with respect to each mortgage asset (together with all
amendments and modifications thereto) endorsed in blank, the original or
certified copy of the mortgage (together with all amendments and modifications
thereto) with evidence of recording indicated thereon, if available, and an
original or certified copy of an assignment of the mortgage in recordable form.
Such documents are initially held by Atlantic Bank, acting as custodian for
Atlantic Preferred Capital pursuant to the terms of the master service
agreement.

Under the master mortgage loan purchase agreement, Atlantic Bank makes
certain representations and warranties with respect to the mortgage assets for
the benefit of Atlantic Preferred Capital regarding information provided with
respect to mortgage assets, liens, validity of the mortgage documents, and
compliance with laws. Atlantic Bank is obligated to repurchase any mortgage
asset sold by it to Atlantic Preferred Capital as to which there is a material
breach of any such representation or warranty, unless Atlantic Preferred
Capital permits Atlantic Bank to substitute other qualified mortgage assets for
such mortgage asset. Atlantic Bank also indemnifies Atlantic Preferred Capital
for damages or costs resulting from any such breach. The repurchase price for
any such mortgage asset is such asset's net carrying value plus accrued and
unpaid interest on the date of repurchase.


Management Policies and Programs
In administering Atlantic Preferred Capital's mortgage assets, Atlantic
Bank has a high degree of autonomy. Atlantic Preferred Capital's Board of
Directors, however, has adopted certain policies to guide the acquisition and
disposition of assets, use of capital and leverage, credit risk management and
certain other activities. These policies, which are discussed below, may be
amended or revised from time to time at the discretion of Atlantic Preferred
Capital's Board of Directors.

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 Atlantic Bank, on terms that are comparable to those that
could be obtained by Atlantic Preferred Capital if such mortgage assets were
purchased from unrelated


2


third parties, out of proceeds from the IPO, proceeds received in connection
with the repayment or disposition of mortgage assets or the contribution of
additional capital by Atlantic Bank. Atlantic Preferred Capital and Atlantic
Bank do not currently have specific policies with respect to the purchase by
Atlantic Preferred Capital from Atlantic Bank 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 Atlantic Bank, although non-performing loans may be acquired from time to
time as a part of a pool of loans or otherwise. Atlantic Preferred Capital may
also from time to time acquire mortgage assets from unrelated third parties.
Atlantic Preferred Capital has not to date adopted any arrangements or
procedures by which it would purchase mortgage assets from unrelated third
parties, and it has not entered into any agreements with any third parties with
respect to the purchase of mortgage assets. Atlantic Preferred Capital
anticipates that it would purchase mortgage assets from unrelated third parties
only if neither Atlantic Bank nor any of its affiliates had an amount or type
of mortgage asset sufficient to meet the requirements of Atlantic Preferred
Capital. Atlantic Preferred Capital currently anticipates that the mortgage
assets that it purchases will primarily include commercial mortgage loans,
although if Atlantic Bank develops an expertise in additional mortgage asset
products, Atlantic Preferred Capital may purchase such additional types of
mortgage assets. In addition, Atlantic Preferred Capital may also from time to
time acquire limited amounts of other assets eligible to be held by REITs.

In order to preserve its status as a REIT under the 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.

Atlantic Preferred Capital and Atlantic Bank currently intend to maintain
a policy whereby prior to foreclosure of any mortgage loan acquired by Atlantic
Preferred Capital from Atlantic Bank, the loan will be sold back to Atlantic
Bank at fair value less estimated selling costs of the property.

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 Atlantic Bank to Atlantic Preferred Capital.

Atlantic Preferred Capital may also issue additional series of preferred
stock. However, it may not issue additional shares of preferred stock ranking
senior to the Series A preferred shares without consent of holders of at least
two-thirds of the outstanding Series A preferred shares and may not issue
additional shares of preferred stock ranking on parity with the Series A
preferred shares without the approval of a majority of the independent
directors. Atlantic Preferred Capital does not currently intend to issue any
additional series of preferred stock. Prior to any future issuance of
additional shares of preferred stock, Atlantic Preferred Capital will take into
consideration Atlantic Bank's regulatory capital requirements and the cost of
raising and maintaining that capital at the time.

Conflicts of Interest Policies. Because of the nature of Atlantic
Preferred Capital's relationship with Atlantic Bank and its affiliates,
conflicts of interest have arisen and will arise with respect to certain
transactions, including without limitation, Atlantic Preferred Capital's
acquisition of mortgage assets from, or disposition of mortgage assets or
foreclosed property to, Atlantic Bank or its affiliates and the modification of
the master service agreement. It is Atlantic Preferred Capital's policy that
the terms of any financial dealings with Atlantic Bank and its affiliates will
be consistent with those available from third parties in the mortgage lending
industry. In addition, by May 1, 1999, Atlantic Preferred Capital intends to
elect two independent directors and establish an audit committee of the Board
of Directors which will


3


initially be comprised of the independent directors. Among other functions, the
audit committee will review transactions between Atlantic Preferred Capital and
Atlantic Bank and its affiliates. Under the terms of the advisory agreement,
certain activities of Atlantic Bank, 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 Atlantic Bank
and its affiliates may also arise in connection with making decisions that bear
upon the credit arrangements that Atlantic Bank or one of its affiliates may
have with a borrower. Conflicts could also arise in connection with actions
taken by Atlantic Bank as, indirectly, a controlling person of Atlantic
Preferred Capital. It is the intention of Atlantic Preferred Capital and
Atlantic Bank that any agreements and transactions between Atlantic Preferred
Capital, on the one hand, and Atlantic Bank or its affiliates, on the other
hand, including, without limitation, the master mortgage loan purchase
agreement, are fair to all parties and are consistent with market terms for
such types of transactions. The master service agreement provides that
foreclosures and dispositions of the mortgage assets are to be performed with a
view toward maximizing the recovery by Atlantic Preferred Capital as owner of
the mortgage assets, and Atlantic Bank shall service the mortgage assets solely
with a view toward the interests of Atlantic Preferred Capital, and without
regard to the interests of Atlantic Bank or any of its affiliates. However,
there can be no assurance that any such agreement or transaction will be on
terms as favorable to Atlantic Preferred Capital as would have been obtained
from unaffiliated third parties.

There are no provisions in Atlantic Preferred Capital's Restated Articles
of Organization limiting any officer, director, security holder or affiliate of
Atlantic Preferred Capital from having any direct or indirect pecuniary
interest in any mortgage asset to be acquired or disposed of by Atlantic
Preferred Capital or in any transaction in which Atlantic Preferred Capital has
an interest or from engaging in acquiring and holding mortgage assets. As
described herein, it is expected that Atlantic Bank and its affiliates will
have direct interests in transactions with Atlantic Preferred Capital
(including without limitation the sale of mortgage assets to Atlantic Preferred
Capital). It is not currently anticipated, however, that any of the officers or
directors of Atlantic Preferred Capital will have any interests in such
mortgage assets.

Other Policies. Atlantic Preferred Capital intends to operate in a manner
that will not subject it to regulation under the Investment Company Act of
1940, as amended. Atlantic Preferred Capital does not intend to:

(1) invest in the securities of other issuers for the purpose of
exercising control over such issuers;

(2) underwrite securities of other issuers;

(3) actively trade in loans or other investments;

(4) offer securities in exchange for property; or

(5) make loans to third parties, including without limitation officers,
directors or other affiliates of Atlantic Preferred Capital.

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, Atlantic Bank 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
Atlantic Bank's analysis.


4


Description of Loan Portfolio at December 31, 1998
Information with respect to Atlantic Preferred Capital's loan portfolio is
presented as of December 31, 1998. Atlantic Preferred Capital's loan portfolio
may or may not have the characteristics described below at future dates,
although Atlantic Preferred Capital intends to maintain at least 95% of its
portfolio in a combination of commercial mortgage loans and other mortgage
assets with the remainder of its portfolio in other assets eligible to be held
by REITs.

General. To date, all of Atlantic Preferred Capital's loans have been
acquired from Atlantic Bank for an aggregate consideration equal to $176.8
million, of which $21.6 million was paid in cash, $1.0 million was paid in
preferred stock, $139.7 million was paid in common stock and $14.5 million was
in the form of an additional capital contribution. At December 31, 1998,
Atlantic Preferred Capital's loan portfolio was comprised of 416 loans with
gross outstanding principal balances totaling approximately $163.8 million. Of
these loans, 336 were originally acquired by Atlantic Bank through purchases
and 80 were originated by Atlantic Bank in the normal course of business. At
December 31, 1998, Atlantic Preferred Capital's investment in purchased loans
net of related discount of $17.3 million totaled $111.2 million. Atlantic
Preferred Capital's portfolio of loans originated by Atlantic Bank net of
allowance for loans losses and net deferred loan income totaled $34.0 million
at December 31, 1998.

The following table sets forth information regarding the composition of
the loan portfolio:




December 31, 1998
(in thousands)
------------------

Purchased loan portfolio:
Mortgage loans on real estate:
Commercial ..................................... $ 70,578
One to four family ............................. 8,530
Multifamily .................................... 47,964
Land ........................................... 886
---------
Total ........................................ 127,958
Secured commercial .............................. 251
Other ........................................... 250
---------
Total purchased loan portfolio ............... 128,459
Less discount:
Non-amortizing portion (1) ..................... (10,737)
Amortizing portion ............................. (6,537)
---------
Total purchased loan portfolio, net .......... 111,185
---------
Originated loan portfolio (2):
Mortgage loans on real estate:
Commercial ..................................... 29,117
One to four family ............................. 3,809
Multifamily .................................... 1,890
Land ........................................... 572
---------
Total ........................................ 35,388
Less:
Net deferred loan income ...................... (76)
Allowance for loan losses ..................... (1,337)
---------
Total originated loan portfolio, net ......... 33,975
---------
Loans, net .................................. $ 145,160
=========


- ----------------
(1) Non-amortizing discount is an allocation of the total discount on purchased
loans accounted for on the cost recovery method until it is determined
that the amount and timing of collections are reasonably estimable and
collection is probable.
(2) Includes loans purchased by Atlantic Bank that have been renewed on terms
consistent with Atlantic Bank's loan policy and loan documentation
standards.


5


The following table sets forth certain information regarding the
geographic location of properties securing the mortgage loans in the loan
portfolio at December 31, 1998:




Percentage of Total
Location Number of Loans Principal Balance Principal Balance
- ----------------------- ----------------- ------------------- --------------------
(in thousands)

Massachusetts ......... 158 $ 47,165 28.87%
California ............ 41 41,824 25.60
Connecticut ........... 54 16,855 10.32
New Hampshire ......... 87 15,683 9.60
New York .............. 14 8,883 5.44
Rhode Island .......... 14 5,880 3.60
Maine ................. 5 4,475 2.74
Florida ............... 6 3,522 2.16
New Jersey ............ 5 3,395 2.08
Arizona ............... 1 3,385 2.07
Virginia .............. 3 3,237 1.98
All others ............ 20 9,042 5.54
--- -------- ------
408 $163,346 100.00%
=== ======== ======


The following tables set forth information regarding maturity, interest
rate and principal balance of the loans in the loan portfolio at December 31,
1998:




Percentage of Total
Period until maturity Number of Loans Principal Balance Principal Balance
- ------------------------------------------------ ----------------- ------------------- --------------------
(in thousands)

Six months or less ............................. 73 $ 30,447 18.58%
Greater than six months to one year ............ 14 3,814 2.33
Greater than one year to three years ........... 60 26,801 16.36
Greater than three years to five years ......... 42 26,142 15.96
Greater than five years to ten years ........... 107 27,443 16.75
Greater than ten years ......................... 120 49,200 30.02
--- -------- ------
416 $163,847 100.00%
=== ======== ======





Percentage of Total
Interest Rate at December 31, 1998 Number of Loans Principal Balance Principal Balance
- ------------------------------------ ----------------- ------------------- --------------------
(in thousands)

Less than 7.00% .................... 15 $ 2,381 1.45%
7.00 to 7.49 ....................... 24 22,543 13.76
7.50 to 7.99 ....................... 21 24,034 14.67
8.00 to 8.49 ....................... 40 17,722 10.82
8.50 to 8.99 ....................... 77 20,681 12.62
9.00 to 9.49 ....................... 53 23,165 14.14
9.50 to 9.99 ....................... 91 28,764 17.56
10.00 to 10.49 ..................... 37 12,077 7.37
10.50 to 10.99 ..................... 28 7,292 4.45
11.00 to 11.49 ..................... 14 3,128 1.91
11.50 to 11.99 ..................... 2 154 0.09
12.00 to 12.49 ..................... 9 1,194 0.73
12.50% and above ................... 5 712 0.43
--- -------- ------
416 $163,847 100.00%
=== ======== ======



6





Percentage of Total
Principal Balance Number of Loans Principal Balance Principal Balance
- ----------------------------------------------- ----------------- ------------------- --------------------
(in thousands)

Less than $50,000.............................. 50 $ 1,353 0.83%
Greater than $50,000 to $100,000............... 99 5,445 3.32
Greater than $100,000 to $250,000.............. 100 16,284 9.94
Greater than $250,000 to $500,000.............. 67 23,685 14.46
Greater than $500,000 to $1,000,000............ 57 41,672 25.43
Greater than $1,000,000 to $2,000,000.......... 29 38,376 23.42
Greater than $2,000,000 to $3,000,000.......... 12 29,199 17.82
Greater than $3,000,000 to $4,000,000.......... 1 3,385 2.07
Greater than $4,000,000 to $5,000,000.......... 1 4,448 2.71
--- -------- ------
416 $163,847 100.00%
=== ======== ======


Purchased Loan Portfolio. A substantial portion of the loan portfolio
consists of loans which were purchased by Atlantic Bank from third parties and
which management of Atlantic Bank considers to be undervalued due to market or
economic conditions or as a result of special circumstances which might have
required a seller to dispose of such assets. These loans are generally secured
by commercial real estate, multi-family residential real estate, one to four
family residential real estate or land located throughout the United States.
These loans were generally purchased at discounts from their then outstanding
principal balances and have been 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. Atlantic Bank 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 Atlantic Bank will bid to acquire
loans, Atlantic Bank 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, Atlantic Bank 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, Atlantic Bank conducts an
acquisition review. This review includes an evaluation of the seller's loan
documentation. The current value of the collateral is estimated utilizing
various methods considering, among other factors, the type of property, its
condition and location and its highest and best use. In some instances, real
estate brokers and/or appraisers with specific knowledge of the area may be
consulted. As the size and complexity of the collateral increases, Atlantic
Bank's efforts to value the collateral also increases. For larger, more complex
loans, Atlantic Bank personnel may visit the collateral property or conduct an
internal rental analysis of similar properties. New title searches and tax
reports may also be obtained. Atlantic Bank may also retain environmental


7


consultants to review potential environmental issues. The amount of resources
devoted to valuing collateral is determined on a case-by-case basis for each
loan reviewed.

Upon purchase of a loan pool, each loan in the pool is assigned to a loan
officer. In managing purchased loans, the loan officers seek, among other
things, to establish good working relationships with the borrowers. In the
event that a purchased loan becomes delinquent, or if it is delinquent at the
time of purchase, Atlantic Bank aggressively pursues repayment. In the event
that a delinquent purchased loan becomes non-performing, Atlantic Bank may
pursue a number of alternatives including restructuring the loans to levels
that are supported by existing collateral and debt service capabilities. During
the restructuring period, Atlantic Preferred Capital does not recognize
interest income on such loans unless regular payments are being made. In
instances where the loan is not restructured, Atlantic Bank aggressively
pursues repayment, foreclosure or, in certain instances, a
deed-in-lieu-of-foreclosure.

The following table sets forth certain information relating to the payment
status of Atlantic Preferred Capital's purchased loan portfolio at December 31,
1998:




(in thousands)
---------------

Current ................................................ $121,071
Over thirty days to eighty-nine days past due .......... 3,163
Ninety days or more past due ........................... 357
--------
Total performing purchased loans ....................... 124,591
Non-performing purchased loans ......................... 3,868
--------
Total purchased loan portfolio ......................... $128,459
========


Although Atlantic Bank purchases primarily performing loans, from
time-to-time Atlantic Bank 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 Atlantic Bank's
purchase date rather than from the origination date. For example, if Atlantic
Bank 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 Atlantic
Bank's purchase date. If Atlantic Bank 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.

Accounting for Purchased Loan Portfolio. Atlantic Preferred Capital
accounts for purchased loans under the guidance of AICPA Practice Bulletin 6,
Amortization of Discounts on Certain Acquired Loans, using unique and exclusive
static pools. Static pools are established based on Atlantic Bank's original
acquisition timing. Once a static pool is established, the loans remain in the
pool unless restructured on terms consistent with Atlantic Bank's loan policy
and documentation standards and transferred to Atlantic Preferred Capital's
originated loan portfolio.

At the time of acquisition, the excess of the contractual balance over the
amount of reasonably estimable and probable discounted future cash collections
is recorded as a non-amortizing discount. The non-amortizing discount is not
accreted into income until it is determined that the amount and timing of the
collections are reasonably estimable and collection is probable. The remaining
discount, which represents the excess of the amount of reasonably estimable and
probable discounted future cash collections over the acquisition amount is
accreted into interest income using a method which approximates the interest
method. If cash flows cannot be reasonably estimated and collection is not
probable, the cost recovery method of accounting is used, whereby any amounts
received are applied against the recorded amount of the loan.

Subsequent to acquisition, if cash flow projections improve, and it is
determined that the amount and timing of the collections are reasonably
estimable and collection is probable, the corresponding decrease in the
non-amortizing discount is transferred to the amortizing portion and is
accreted into interest income over the remaining lives of the loans on a method
which approximates the interest


8


method. Under Atlantic Bank's loan rating system, each loan is evaluated for
impairment and, where necessary, a portion of the respective loan pool's
non-amortizing discount is allocated to the loan and, if none is available, an
allowance is established through a provision for loan losses. In addition, if
this evaluation reveals that cash flows cannot be estimated or the collection
of the loan is not otherwise probable, the loan is accounted for on the cost
recovery method. Loans accounted for on the cost recovery method, in general,
consist of non-accrual loans. At December 31, 1998 no such allowance was
required on Atlantic Preferred Capital's purchased loan portfolio.

Effective January 1, 1999, Atlantic Bank and Atlantic Preferred Capital
changed on a prospective basis their method of accounting for purchased loan
discounts and the related recognition of discount loan income and provisions
for loan losses. This accounting change accounts for discount loan income and
loan loss provisions on an individual loan basis, rather than as previously
recognized in the aggregate on a static purchased pool basis and is being
accounted for as a "change in estimate" in accordance with Accounting
Principles Board Opinion No. 20. Accounting for loans on an individual basis
rather than a pool basis will allow Atlantic Preferred Capital to selectively
purchase qualified individual loans from Atlantic Bank, rather than purchasing
entire pools which may contain individual loans undesirable for a REIT.
Management does not anticipate any material impact on Atlantic Preferred
Capital's stockholders' equity on the effective date of the accounting change.
However, subsequent earnings will be affected by changes in individual loans
rather than by changes in the aggregate for purchased loan pools. Over the
lives of the respective loans, management does not anticipate that there will
be any material differences in the reported amounts of related discount loan
income and loan loss provisions, net.

The following table sets forth certain information relating to the
interest income on Atlantic Preferred Capital's purchased loans during the
period from inception through December 31, 1998:




Period from
inception through
December 31, 1998
-----------------------
(dollars in thousands)

Interest income:
Realized .................... $ 7,645
Accreted discount ........... 2,419
--------
Total ...................... $ 10,064
========
Average balance, net ......... $ 98,092
========
Yield ........................ 13.62%


Originated Loan Portfolio. At December 31, 1998, Atlantic Preferred
Capital's originated loan portfolio contained gross outstanding loans of $35.4
million, which were originated by Atlantic Bank. These loans consist of loans
which were originated in the normal course of business as well as loans
initially purchased by Atlantic Bank which were renewed on terms consistent
with its loan policy and documentation standards.

The majority of the loans in Atlantic Preferred Capital's originated loan
portfolio are located in New England and New York. At December 31, 1998,
originated loans in New England and New York totaled 88.9% and 9.2%,
respectively, of Atlantic Preferred Capital's originated loan portfolio.
Approximately 73.8% of the New England loans are located in Massachusetts.

The terms of commercial real estate loans originated or renewed by
Atlantic Bank are individually negotiated on a case-by-case basis. However,
these loans generally have a term of five years or less with adjustable rates
of interest based on the prime rate. Generally, mortgage loans on commercial
real estate are secured by a first lien on real property, all improvements
thereon and all furniture and equipment used in connection with the property as
well as a first assignment of all revenues or rents and grossed receipts
generated in connection with the property. Atlantic Bank's commercial real
estate loans generally provide recourse against the collateral property, and,
in most circumstances, require the borrower and/or its principals to be
personally liable for all or a portion of the loan.


9


Commercial real estate loans are generally written in amounts of up to 75%
of the appraised value of the underlying property. Appraisals on properties
securing commercial real estate loans originated by Atlantic Bank in excess of
$250,000 are performed by an independent fee appraiser designated by Atlantic
Bank before the loan is made. Appraisals on commercial real estate are reviewed
by a loan officer and management. These appraisals must be in compliance with
the Uniform Standards of Professional Appraisal Practice, which establishes the
minimum standards for appraisals. For real estate transactions less than
$250,000, Atlantic Bank, at a minimum, has an evaluation of the property
completed. An evaluation is completed by a real estate professional, but may be
less formal than an appraisal and does not have to comply with USPAP standards.
In addition, Atlantic Bank's underwriting procedures require verification of
the borrower's credit history, financial statements, references and income
projections for the property. For originated commercial mortgage loans Atlantic
Bank requires a minimum debt service coverage ratio of 1.25 to 1. In analyzing
the desirability of a commercial real estate loan, Atlantic Bank considers not
only the collateral coverage and debt service coverage ratio, but also the
following factors that are specific to real estate lending:

1. the location of the property, desirability of the market area, supply
of competing properties, and market specific economic factors;

2. the condition and age of the building and mechanical systems and the
need for renovations, repairs, or remediation of hazardous wastes or
materials;

3. the adaptability of the property to other uses or types of tenants;

4. the quality and variety of tenants, the length/terms of leases, the
existence of above or below market leases, and the percentage of
rental income derived from tenants related to the borrower;

5. compliance with zoning regulations;

6. the existence of use restrictions, easements, or right-of-ways that
may impact the value and marketability of the property; and

7. the borrower's ability to manage the particular type of real estate
property.

As servicing agent for Atlantic Preferred Capital's loan portfolio,
Atlantic Bank will continue to monitor Atlantic Preferred Capital's loans
through its review procedures and updated appraisals. Additionally, in order to
monitor the adequacy of cash flows on income-producing properties, Atlantic
Bank generally obtains financial statements and other information from the
borrower and the guarantor, including, but not limited to, information relating
to rental rates and income, maintenance costs and an update of real estate
property tax payments.

Allowance for Loan Losses for Originated Loans. The allowance for loan
losses is established through a provision for losses charged to earnings and
reduced by the loan charge-offs. Loans are charged-off when they are deemed to
be uncollectible, or partially charged-off when a portion of a loan is deemed
uncollectible. Recoveries are generally recorded only when cash payments are
received.

In determining the adequacy of the allowance, management initially
considers the loan loss allowances specifically allocated to individual
impaired loans, and next considers the level of general loan loss allowances
deemed appropriate for the balance of the portfolio based on factors including
general portfolio trends relative to asset and portfolio size, asset
categories, potential credit concentrations, non-accrual loan levels, risks
associated with changes in economic and business conditions and other factors.

Atlantic Preferred Capital's allowance for loan losses on originated loans
at December 31, 1998 was $1.3 million, all of which represented a general
allowance for loan losses. The determination of this allowance requires the use
of estimates and assumptions regarding the risks inherent in individual loans
and the loan portfolio in its entirety. In addition, regulatory agencies
periodically review the adequacy of the allowance and may require Atlantic
Preferred Capital to make additions to its allowance for loan losses. While
management believes these estimates and assumptions are reasonable, there can
be no assurance that they will be proven to be correct in the future. The
actual amount of future provisions that


10


may be required cannot be determined as of the date hereof, and such provisions
may exceed the amounts of past provisions. Management believes that Atlantic
Preferred Capital's allowance for loan losses is adequate to absorb the known
and inherent risks in Atlantic Preferred Capital's originated loans at each
date based on the facts known to management as of such date.

Atlantic Preferred Capital establishes a specific allowance against a
given loan when management perceives a problem with such loan that may result
in a loss. Atlantic Preferred Capital continues to monitor and modify its
allowances for general and specific loan losses as economic conditions dictate.
Although Atlantic Preferred Capital maintains its allowance for loan losses at
a level which management considers to be adequate to provide for potential
losses, there can be no assurance that such losses will not exceed the
estimated amounts.

There were no non-performing originated loans at December 31, 1998.

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 originated loan portfolio at December 31, 1998:




Allowance for % of
Loan Losses Loans
--------------- ----------
(dollars in thousands)

Loan Categories:
Commercial ........................ $1,108 3.80%
1 to 4 family residential ......... 128 3.36
Multi-family residential .......... 76 4.02
Land .............................. 25 4.37
------ ----
Total ............................ $1,337 3.78%
====== ====


Credit Risk Management Policy
In managing Atlantic Preferred Capital's loan portfolio in accordance with
the master service agreement and in purchasing and originating loans which may
ultimately be acquired by Atlantic Preferred Capital, Atlantic Bank utilizes
certain credit risk management procedures. These procedures are designed to
achieve an acceptable level of quality and to identify the need for management
to take action to address any potential losses or potential defaults in
existing loans. Each application for a loan is subject to a two-tier review by
Atlantic Bank's Management Loan Committee and either Atlantic Bank's Chairman
or President, or in the case of loans of $2.5 million or more, the Loan and
Investment Committee of Atlantic Bank's Board of Directors. Each lending
officer has primary responsibility to conduct credit and documentation reviews
of the loans for which he or she is responsible. Atlantic Bank's President and
Chairman are responsible for the general supervision of the loan portfolio and
adherence by the loan officers to Atlantic Bank's loan policies.

Loan officers evaluate the applicant's financial statements, credit
reports, business reports and plans and other data to determine if the credit
and collateral satisfy Atlantic Bank's standards as to historic debt service
coverage, reasonableness of projections, strength of management and sufficiency
of secondary repayment.

Under Atlantic Bank's credit risk management policies, management presents
to the Board of Directors of Atlantic Bank a monthly report of loan
delinquencies showing all loans which are more than 30 days past due. In
addition, loans are reviewed monthly by management to determine which credits
should be placed on non-performing status. Management and the Board of
Directors also review all loan evaluations made during periodic examinations by
the FDIC and the Commissioner of Banks of the Commonwealth of Massachusetts
(the "Commissioner").

Non-Performing Assets
The performance of Atlantic Preferred Capital's loan portfolio is
evaluated regularly by management. Atlantic Preferred Capital generally
classifies a loan as non-performing when any installment of principal or
interest is 90 days or more past due based upon the date of purchase for
purchased loans, unless,


11


in management's opinion, the net carrying value of the loan is well secured and
the collection of principal, or carrying value, and interest is probable. When
management determines the ultimate collection of principal or interest on a
loan is not probable, the loan is transferred to the "impaired" loan
classification. When a loan is placed on non-performing status, Atlantic
Preferred Capital's general policy is to reverse and charge against current
income previously accrued but unpaid interest. Such loans remain on non-
performing status until the earlier of legal foreclosure or relinquishment of
control of the collateral by the borrower, or until the borrower has
established a history of timely principal and interest payments. For additional
information see Notes 1 and 2 to the financial statements. At December 31,
1998, Atlantic Preferred Capital had no non-performing assets in its originated
portfolio.

A troubled debt restructuring is a loan on which Atlantic Preferred
Capital, for reasons related to the borrower's financial difficulties, grants a
concession to the borrower, such as a reduction in the loan's rate, a reduction
in the principal amount of the debt or an extension of the maturity date of the
loan, that Atlantic Preferred Capital would not otherwise consider. Certain
purchased loans are restructured by Atlantic Preferred Capital in order to
establish a payment plan which the borrower can maintain and which is
profitable to Atlantic Preferred Capital in light of its net investment in such
loan. When such a purchased loan has been acquired at a discount sufficient to
enable Atlantic Preferred Capital to make an appropriate profit on the loan
even after restructuring the debt and making certain concessions to the
borrower, Atlantic Preferred Capital does not deem such a restructuring to be a
troubled debt restructuring.

A purchased 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. An originated loan is considered
impaired when, based on current information and events, it is probable that
Atlantic Bank will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement.
Impairment is measured on a loan-by-loan basis by comparing Atlantic Preferred
Capital's recorded investment in the loan to the present value of expected
future cash flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent. In the case of Atlantic Preferred Capital's purchased
loan portfolio, the recorded investment represents Atlantic Preferred Capital's
purchase price net of any related non-amortizing discounts. Substantially all
of Atlantic Preferred Capital's loans which have been identified as impaired
have been measured by the fair value of the existing collateral. General
valuation allowances are maintained for all categories of originated loans. No
additional funds are committed to be advanced in connection with impaired
loans.

When Atlantic Preferred Capital classifies problem assets, it may
establish specific allowances for loan losses or specific non-amortizing
discount allocations in amounts deemed prudent by management. When Atlantic
Preferred Capital identifies problem assets as a loss, it will charge off such
amounts or set aside specific allowances or non-amortizing discount equal to
the total loss. All of Atlantic Preferred Capital's loans are reviewed monthly
to determine which loans are to be placed on non-accrual status. In addition,
Atlantic Preferred Capital's determination as to the classification of its
assets and the amount of its valuation allowances is reviewed by the
Commissioner and the FDIC during their examinations of Atlantic Bank, which may
result in the establishment of additional general or specific loss allowances.

Servicing
The mortgage assets are serviced by Atlantic Bank pursuant to the terms of
the master service agreement. Atlantic Bank in its role as servicer under the
terms of the master service agreement receives a fee equal to 0.20% per annum,
payable monthly, on the gross outstanding principal balances of loans serviced.
For the period from inception through December 31, 1998, Atlantic Preferred
Capital incurred $238,000 in servicing fees payable to Atlantic Bank.

The master service agreement requires Atlantic Bank to service the loan
portfolio in a manner substantially the same as for similar work performed by
Atlantic Bank for transactions on its own behalf. Atlantic Bank collects and
remits principal and interest payments, maintains perfected collateral
positions, submits and pursues insurance claims and initiates and supervises
foreclosure proceedings on the loan portfolio it services. Atlantic Bank also
provides accounting and reporting services required by Atlantic Preferred
Capital for such loans. Atlantic Bank may also be directed by Atlantic
Preferred


12


Capital, at any time during the servicing process, to dispose of any loans
which become classified, placed in a nonaccrual status, or are renegotiated due
to the financial deterioration of the borrower.

Atlantic Bank is required to pay all expenses related to the performance
of its duties under the master service agreement. Under the master mortgage
loan purchase agreement, Atlantic Bank is required to repurchase, at the
request of Atlantic Preferred Capital, any mortgage loan it sold to Atlantic
Preferred Capital in the event any such representation or warranty is untrue.
The repurchase price for any such mortgage loan is the outstanding net carrying
value thereof plus accrued and unpaid interest thereon at the date of
repurchase. Atlantic Bank may institute foreclosure proceedings, exercise any
power of sale contained in any mortgage or deed of trust, obtain a deed in lieu
of foreclosure or otherwise acquire title to a mortgaged property underlying a
mortgage loan by operation of law or otherwise in accordance with the terms of
the master service agreement.

The master service agreement may be terminated at any time by written
agreement between the parties or at any time by either party upon 30 days prior
written notice to the other party and appointment of a successor servicer. The
master service agreement will automatically terminate if Atlantic Preferred
Capital ceases to be an affiliate of Atlantic Bank.

Atlantic Bank remits daily to Atlantic Preferred Capital all principal and
interest collected on loans serviced by Atlantic Bank for Atlantic Preferred
Capital.

When any mortgaged property underlying a mortgage loan is conveyed by a
mortgagor, Atlantic Bank generally, upon notice thereof, will enforce any
due-on-sale clause contained in the mortgage loan, to the extent permitted
under applicable law and governmental regulations. The terms of a particular
mortgage loan or applicable law, however, may provide that Atlantic Bank is
prohibited from exercising the due-on-sale clause under certain circumstances
related to the security underlying the mortgage loan and the buyer's ability to
fulfill the obligations under the related mortgage note.

Employees
Atlantic Preferred Capital has three officers. Atlantic Preferred Capital
does not have any employees because it has retained Atlantic Bank to perform
all necessary functions pursuant to the advisory agreement and the master
service agreement. Each officer of Atlantic Preferred Capital currently is also
an officer and/or director of Atlantic Bank. Atlantic Preferred Capital will
maintain corporate records and audited financial statements that are separate
from those of Atlantic Bank. None of the officers or directors of Atlantic
Preferred Capital will have any direct or indirect pecuniary interest in any
mortgage asset to be acquired or disposed of by Atlantic Preferred Capital or
in any transaction in which Atlantic Preferred Capital has an interest or will
engage in acquiring and holding mortgage assets.

Competition
Atlantic Preferred Capital does not anticipate that it will engage in the
business of originating mortgage loans. It does anticipate that it will acquire
mortgage assets in addition to those in the loan portfolio and that
substantially all these mortgage assets will be acquired from Atlantic Bank.
Accordingly, Atlantic Preferred Capital does not expect to compete with
mortgage conduit programs, investment banking firms, savings and loan
associations, banks, thrift and loan associations, finance companies, mortgage
bankers or insurance companies in acquiring its mortgage assets from Atlantic
Bank. Atlantic Bank, however, faces significant competition in the purchase and
origination of mortgage loans, which could have an adverse effect on the
ability of Atlantic Preferred Capital to acquire mortgage loans. If Atlantic
Bank does not successfully compete in the origination and purchase of mortgage
loans, this could, therefore, have an adverse effect on Atlantic Preferred
Capital's business, financial condition and results of operations.

The banking industry in the United States is part of the broader financial
services industry. This industry also includes insurance companies, mutual
funds, consumer finance companies and the securities brokerage industry. In
recent years, intense market demands, technological and regulatory changes and
economic pressures have eroded industry classifications which were once clearly
defined. Existing banks have been forced to diversify their services, increase
returns on deposits and become more cost-effective as a result of competition
with one another and with other financial services


13


companies, including non-bank competitors. The breakdown in traditional roles
has been fueled by the pattern of rapidly fluctuating interest rates in the
United States and by significant changes in federal and state laws over the
past five years. These statutory changes and corresponding changes in governing
regulations have resulted in increasing homogeneity in the products and
financial services offered by financial institutions. As a result, some
non-bank financial institutions, such as money market funds, have become
increasingly strong competitors of banks in certain respects.

Numerous banks compete with Atlantic Bank for deposit accounts, the
origination of commercial loans and the acquisition of undervalued loans. With
respect to deposits, additional significant competition arises from corporate
and governmental debt securities, as well as money market mutual funds. The
factors in competing for deposit accounts include interest rates, the quality
and range of financial services offered and the convenience of office and
automated teller machine locations and office hours. The primary factors in
competing for loans are interest rates, loan origination fees and the quality
and range of lending services offered. The competition for both deposits and
loans has recently increased as a direct result of mergers of banks in New
England. Such mergers have provided the resulting banks with enhanced financial
resources and administrative capacity to compete for assets.

In these circumstances, small financial institutions, such as Atlantic
Bank, must offer financial products and services in a way which differentiates
them from the larger financial organization competitors. Atlantic Bank has
taken steps to do so by, among other things, working to establish continuing
customer relationships with the borrowers in its purchased loan portfolios.
Management believes that these relationships may be a source of lending and
other business in the future because, in certain instances, the banking and
other financial services needs of these borrowers are not adequately served by
Atlantic Bank's larger bank and non-bank financial services competitors.
Management believes that the recent consolidations and mergers by certain
larger banks in New England have enhanced the opportunities available to
Atlantic Bank to serve small-to-mid-sized businesses which may not be
well-served by larger banks.

Atlantic Bank faces strong competition in its market area both from other
more established banks and from non-bank financial institutions which are
aggressively expanding into markets traditionally served by banks. Most of
these competitors offer products and services similar to those offered by
Atlantic Bank, have facilities and financial resources greater than those of
Atlantic Bank and have other competitive advantages over Atlantic Bank. Among
the advantages of these larger institutions are their ability:

(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
Atlantic Bank will obtain sufficient deposits and purchase or originate a
sufficient volume of quality loans to operate profitably in this competitive
environment or that Atlantic Bank will maintain its competitive position in the
commercial lending market in the future.

In 1994, the U.S. Congress enacted legislation that will allow, under
different implementation guidelines, bank holding companies and banks to
acquire or merge with depository institutions across state lines. In 1996,
Massachusetts enacted interstate banking laws in response to the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994. The laws permit,
subject to certain deposit and other limitations, interstate acquisitions,
mergers and branching on a reciprocal basis. Competition in Atlantic Bank's
primary market area could increase in the event that financial institutions
from other jurisdictions branch into Massachusetts or merge with
Massachusetts-chartered banks.

Description of the Series A Preferred Shares
The following summary sets forth the material terms and provisions of the
Series A preferred shares, and is qualified in its entirety by reference to the
terms and provisions of the Restated Articles of Organization establishing the
Series A preferred shares.


14


General. The Series A preferred shares form a series of the preferred
stock of Atlantic Preferred Capital. The Series A preferred shares are validly
issued, fully paid and nonassessable. The holders of the Series A preferred
shares will have no preemptive rights with respect to any shares of the capital
stock of Atlantic Preferred Capital. The Series A preferred shares are not
subject to any sinking fund or other obligation of Atlantic Preferred Capital
for their repurchase or retirement. The Series A preferred shares are not
convertible into any other securities of Atlantic Preferred Capital. The Series
A preferred shares will be exchanged on a ten-for-one basis for preferred
shares of Atlantic Bank if directed by the FDIC under certain circumstances.
The Series A preferred shares rank senior to Atlantic Preferred Capital's
common stock and Series B preferred stock, as to dividends and in liquidation.

Dividends. Holders of Series A preferred shares shall be entitled to
receive, if, when and as declared by the Board of Directors of Atlantic
Preferred Capital out of assets of Atlantic Preferred Capital legally available
therefor, monthly cash dividends at the rate of 93/4% per annum of the
liquidation preference (equivalent to $0.975 per share per annum). If declared,
dividends on the Series A preferred shares for each monthly period shall be
payable on the fifteenth day of the following month, at such annual rate, to
holders of record on the last business day of the monthly dividend period.
Monthly dividend periods will commence on the first day of each month and on
the date of original issue for the initial dividend period. The amount of
dividends, if declared, payable for the initial period or any period shorter
than a full dividend period shall be computed on the basis of 30-day months, a
360-day year and the actual number of days elapsed in the period. Dividends in
each period will accrue from the first day of such period, whether or not
declared or paid for the prior monthly period.

The right of holders of Series A preferred shares to receive dividends is
noncumulative. Accordingly, if the Board of Directors fails to declare a
dividend on the Series A preferred shares for a monthly dividend period, then
holders of the Series A preferred shares will have no right to receive the
amount of the undeclared dividend for that period, and Atlantic Preferred
Capital will have no obligation to pay the undeclared dividend for that period,
whether or not dividends are declared and paid for any future period with
respect to either the Series A preferred shares, any other series of preferred
stock or the common stock. If less than full dividends are declared on the
Series A preferred shares by the Board of Directors for a monthly dividend
period, the holders of the Series A preferred shares will have no right to
receive the amount of such undeclared dividends for that period, and Atlantic
Preferred Capital will have no obligation to pay a full dividend for that
period, whether or not dividends are declared and paid for any future period
with respect to either the Series A preferred shares, any other series of
preferred stock or the common stock.

Authority to Issue Additional Shares. By vote of a majority the holders of
its common stock and each outstanding class of preferred stock, Atlantic
Preferred Capital may increase the number of its authorized shares. In
addition, the Board of Directors of Atlantic Preferred Capital has the
authority, subject to receipt of all applicable regulatory approvals, to issue
up to an additional 2,000,000 shares of preferred stock and determine the
preferences, voting powers, qualifications, and special or relative rights or
privileges thereof. A vote of the holders of two-thirds of the Series A
preferred shares is required, however, to create a class of shares that would
rank senior to the Series A preferred shares with regard to payment of
dividends or amounts upon liquidation and a majority of the independent
directors must approve the creation of a class of shares that would rank on
parity with the Series A preferred shares. The Board of Directors of Atlantic
Preferred Capital has no intention at the present time of submitting for a vote
of the Series A preferred shares or the independent directors a plan to create
any new class of shares.

Automatic Exchange. Each Series A preferred share will be automatically
exchanged for one tenth of one newly issued preferred share of Atlantic Bank
(with a liquidation preference of $100.00 per share) if the FDIC directs in
writing (a "Directive") an exchange of the Series A preferred shares for
preferred shares of Atlantic Bank because:

(1) Atlantic Bank becomes undercapitalized under applicable FDIC
regulations,

(2) Atlantic Bank is placed into bankruptcy, reorganization
conservatorship or receivership or

(3) the FDIC, in its sole discretion and even if Atlantic Bank is not
undercapitalized, anticipates it becoming undercapitalized in the near
term.


15


Upon the automatic exchange, each holder of Series A preferred shares
shall be unconditionally obligated to surrender to Atlantic Bank the
certificates representing each Series A preferred share of such holder, and
Atlantic Bank shall be unconditionally obligated to issue to such holder in
exchange for each such Series A preferred share a certificate representing one
tenth of one preferred share of Atlantic Bank. Any Series A preferred shares
purchased or redeemed by Atlantic Preferred Capital prior to the Time of
Exchange (as defined below) shall not be deemed outstanding and shall not be
subject to the automatic exchange. Atlantic Bank has entered into an agreement
with Atlantic Preferred Capital pursuant to which Atlantic Bank has, for so
long as any Series A preferred shares remain outstanding, unconditionally
agreed to issue preferred shares of Atlantic Bank in the automatic exchange and
to reserve sufficient shares of preferred stock therefor.

The automatic exchange shall occur as of 8:00 a.m. Eastern Time on the
date for such exchange set forth in the Directive, or, if such date is not set
forth in the Directive, as of 8:00 a.m. on the earliest possible date such
exchange could occur consistent with the Directive (the "Time of Exchange"), as
evidenced by the issuance by Atlantic Bank of a press release prior to such
time. As of the Time of Exchange, all of the Series A preferred shares will be
deemed canceled without any further action by Atlantic Preferred Capital, all
rights of the holders of Series A preferred shares as stockholders of Atlantic
Preferred Capital will cease, and such persons shall thereupon and thereafter
be deemed to be and shall be for all purposes the holders of preferred shares
of Atlantic Bank. Atlantic Preferred Capital will mail notice of the occurrence
of the exchange event to each holder of Series A preferred shares within 30
days of such event, and Atlantic Bank will deliver to each such holder
certificates for preferred shares of Atlantic Bank upon surrender of
certificates for Series A preferred shares. Until such replacement stock
certificates are delivered (or in the event such replacement certificates are
not delivered), certificates previously representing Series A preferred shares
shall be deemed for all purposes to represent preferred shares of Atlantic
Bank. All corporate action necessary for Atlantic Bank to issue the preferred
shares of Atlantic Bank will be completed upon completion of the offering.
Accordingly, once the Directive is issued, no action will be required to be
taken by holders of Series A preferred shares, by Atlantic Bank or by Atlantic
Preferred Capital, in order to effect the automatic exchange as of the Time of
Exchange.

Absent the occurrence of the automatic exchange, no preferred shares of
Atlantic Bank will be issued in connection with this offering. Upon the
occurrence of the automatic exchange, the preferred shares of Atlantic Bank so
issued would constitute 100% of the issued and outstanding preferred shares of
Atlantic Bank. Holders of preferred shares of Atlantic Bank would have the
equivalent dividend rights, liquidation preference, redemption provisions and
other attributes as to Atlantic Bank as holders of Series A preferred shares
have as to Atlantic Preferred Capital (except that the liquidation preference
and redemption price on the preferred shares of Atlantic Bank is $100.00, ten
times that on the Series A preferred shares). Any accrued and unpaid dividends
on the Series A preferred shares as of the Time of Exchange would be deemed to
be accrued and unpaid dividends on the preferred shares of Atlantic Bank on a
pro rata basis giving effect to the exchange ratio. The preferred shares of
Atlantic Bank will not be registered with the SEC and will be offered pursuant
to an exemption from registration under Section 3(a)(2) of the Securities Act
of 1933, as amended (the "Securities Act"). Atlantic Bank does not intend to
apply for listing of the preferred shares of Atlantic Bank on any national
securities exchange or for quotation on The Nasdaq Stock Market or any other
interdealer quotation system. There can be no assurance as to the liquidity of
the trading market for the preferred shares of Atlantic Bank, if issued.

Holders of Series A preferred shares cannot exchange their Series A
preferred shares for preferred shares of Atlantic Bank voluntarily. In
addition, absent the occurrence of the automatic exchange, holders of Series A
preferred shares will have no dividend, voting, liquidation preference or other
rights with respect to any security of Atlantic Bank; such rights as are
conferred by the Series A preferred shares exist solely as to Atlantic
Preferred Capital.

Voting Rights. Except as specified below or otherwise expressly required
by applicable law, the holders of the Series A preferred shares will not be
entitled to vote at any meeting of stockholders.

The consent of the holders of at least two-thirds of the outstanding
shares of each series of preferred stock of Atlantic Preferred Capital,
including the Series A preferred shares, will be required to:


16


(1) create any class or series of stock which shall, as to dividends or
distribution of assets, rank prior to the Series A preferred shares or
any other outstanding series of preferred stock of Atlantic Preferred
Capital other than a series which shall not have any right to object
to such creation or

(2) alter or change the provisions of Atlantic Preferred Capital's
Restated Articles of Organization so as to adversely affect the voting
powers, preferences or special rights of the holders of a series of
preferred stock of Atlantic Preferred Capital;

provided that if such amendment shall not adversely affect all series of
preferred stock of Atlantic Preferred Capital, such amendment need only be
approved by the holders of at least two-thirds of the shares of all series of
preferred stock adversely affected thereby. In addition, the consent of the
holders of all of the outstanding Series A preferred shares is required for
Atlantic Preferred Capital to incur indebtedness for borrowed money in excess
of 100% of Atlantic Preferred Capital's total stockholders' equity as of the
time of the proposed incurrence of indebtedness.

Redemption. The Series A preferred shares will not be redeemable prior to
February 1, 2004 (except upon the occurrence of a Tax Event, as defined below).
On or after such date, the Series A preferred shares will be redeemable at the
option of Atlantic Preferred Capital, in whole or in part, at any time or from
time to time on not less than 30 nor more than 60 days' notice by mail, at a
redemption price of $10.00 per share, plus the accrued and unpaid dividends
from the beginning of the month in which the redemption occurs to the date of
redemption, if any, thereon. Any such redemption may only be effected with the
prior approval of the FDIC (unless such approval is not required at the time of
redemption).

Atlantic Preferred Capital may, upon the occurrence of a Tax Event (as defined
below) and with the prior written approval of the FDIC, redeem the Series A
preferred shares, in whole (but not in part) at a redemption price of $10.00
per share, plus the monthly accrued and unpaid dividend from the beginning of
the month in which the redemption occurs to the date of redemption, if any,
thereon. "Tax Event" means the receipt by Atlantic Preferred Capital of an
opinion of counsel in form and substance satisfactory to Atlantic Preferred
Capital to the effect that, as a result of:

(1) any amendment to, clarification of, or change (including any announced
prospective change) in, the laws or treaties (or any regulations
thereunder) of the United States or any political subdivision or
taxing authority thereof or therein affecting taxation,

(2) any judicial decision, official administrative pronouncement,
published or private ruling, regulatory procedure, notice or
announcement (including any notice or announcement of intent to adopt
such procedures or regulations) ("Administrative Action") or

(3) any amendment to, clarification of, or change in the official position
or the interpretation of such Administrative Action or any
interpretation or pronouncement that provides for a position with
respect to such Administrative Action that differs from the
theretofore generally accepted position, in each case, by any
legislative body, court, governmental authority or regulatory body,
irrespective of the manner in which such amendment, clarification or
change is made known, which amendment, clarification or change is
effective or such pronouncement or decision is announced on or after
the date of issuance of the Series A preferred shares

that (a) dividends paid or to be paid by Atlantic Preferred Capital with
respect to its capital stock are not, or will not be, fully deductible by
Atlantic Preferred Capital for United States or Massachusetts income tax
purposes or (b) Atlantic Preferred Capital is otherwise unable to qualify as a
REIT pursuant to Section 856 of the Internal Revenue Code.

Rights upon Liquidation. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of Atlantic Preferred Capital, the
holders of the Series A preferred shares at the time outstanding will be
entitled to receive out of assets of Atlantic Preferred Capital available for
distribution to stockholders, before any distribution of assets is made to
holders of common stock or any other class of stock ranking junior to the
Series A preferred shares upon liquidation, liquidating distributions in the
amount of $10.00 per share, plus the monthly accrued and unpaid dividend
thereon, if any, from the beginning of the month in which the liquidation
occurs to the date of liquidation.


17


After payment of the full amount of the liquidating distributions to which they
are entitled, the holders of Series A preferred shares will have no right or
claim to any of the remaining assets of Atlantic Preferred Capital. In the
event that, upon any such voluntary or involuntary liquidation, dissolution or
winding up, the available assets of Atlantic Preferred Capital are insufficient
to pay the amount of the liquidation distributions on all outstanding Series A
preferred shares and the corresponding amounts payable on all shares of other
classes or series of capital stock of Atlantic Preferred Capital ranking on a
parity with the Series A preferred shares in the distribution of assets upon
any liquidation, dissolution or winding up of the affairs of Atlantic Preferred
Capital, then the holders of the Series A preferred shares and such other
classes or series of capital stock shall share ratably in any such distribution
of assets in proportion to the full liquidating distributions to which they
would otherwise be respectively entitled.

For such purposes, the consolidation or merger of Atlantic Preferred Capital
with or into any other entity, or the sale, lease or conveyance of all or
substantially all of its property or business, shall not be deemed to
constitute liquidation, dissolution or winding up of Atlantic Preferred
Capital.

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.


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 Atlantic Bank. These shares of
common stock were issued in reliance upon the exemption from registration under
Section 4(2) of the Securities Act of 1933, as amended. There is no established
public trading market for the common stock. As of March 15, 1999, there were
100 issued and outstanding shares of common stock, all of which were held by
one stockholder, Atlantic Bank.

During 1998, a dividend of $12.0 million was paid to the common
stockholder.

Preferred Stock

Series A Preferred Shares

The series A preferred shares are quoted on the Nasdaq National Market
under the symbol "ATLPP." As of February 28, 1999, there were 1,416,130 Series
A preferred shares issued and outstanding held by approximately 23 holders of
record. The following table reflects the respective high and low sales prices
of the Series A preferred shares for the period from January 28, 1999, the date
upon which trading of such shares commenced, through March 19, 1999. The table
also indicates the distributions paid by Atlantic Preferred Capital on the
Series A preferred shares during this period.




Price
------------------------
High Low Distributions
----------- ---------- ------------------

January 27, 1999 to March 19, 1999 $ 10.25 $ 9.50 $107,385 (1)


- ----------------
(1) Atlantic Preferred Capital declared a cash dividend of $.07583 per share to
stockholders of record on February 28, 1999. The dividend was paid on
March 15, 1999.


18


Series B Preferred Shares

Atlantic Preferred Capital has currently outstanding 1,000 Series B
preferred shares, of which 900 are held, directly or indirectly, by Atlantic
Bank. The other 100 Series B preferred shares are held by certain of Atlantic
Bank's employees (and/or the spouses of certain employees). All of the
outstanding Series B preferred shares were originally issued to Atlantic Bank
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 Series B preferred shares. During 1998, dividends of
approximately $60,000 were paid to holders of Series B preferred stock.


Uses of Proceeds From Registered Securities
On February 1, 1999, Atlantic Preferred Capital closed its initial pubic
offering of 1,260,000 Series A preferred shares. 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
IPO was made pursuant to (i) a Registration Statement on From S-11, originally
filed with the Securities and Exchange Commission in November 4, 1998, as
amended (Commission File No. 333-66677), which was declared effective on
January 27, 1999. The IPO commenced on January 28, 1999 and terminated shortly
thereafter after the sale into the public market of all of the registered
Series A preferred shares.

The Series A preferred shares sold in the IPO were offered for sale by s
syndicate of underwriters represented by Friedman, Billings, Ramsey & Co.,
Inc., Advent, Inc. and Janney Montgomery Scott Inc.

Atlantic Preferred Capital registered an aggregate of 1,449,000 Series A
preferred shares (including 189,000 shares issuable upon the exercise of the
underwriters' overallotment option) for sale in the IPO at a per share price of
$10.00, for an aggregate offering price of approximately $14.5 million. The
shares sold in the IPO, which totalled 1,416,130 for an aggregate price of
$14,161,300, were registered for the account of Atlantic Preferred Capital.

Atlantic Preferred Capital incurred the following expenses in connection
with the IPO:




Underwriting discounts and commissions: $ 566,000
Other estimated expenses: 800,000
-----------
Total estimated expenses: $ 1,366,000
===========


After deducting the expenses set forth above, the Company received
approximately $12.8 million in net proceeds of the IPO. The proceeds will be
invested in assets qualified to be held by a REIT.

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
Atlantic Bank 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


19


payment of dividends on the Series A preferred shares under these regulations
if Atlantic Bank were to fail to maintain a status of at least adequately
capitalized. Currently, an institution is considered adequately capitalized if
it has a Total Risk-based capital ratio of at least 8.0%, a Tier 1 Risk-based
capital ratio of at least 4.0% and a Tier 1 Leverage ratio of at least 4.0%. At
December 31, 1998, Atlantic Bank's Total Risk-based capital ratio was 9.92%,
Tier 1 Risk-based capital ratio was 9.06% and Tier 1 Leverage ratio was 8.11%.

In addition, the automatic exchange may take place under circumstances in
which Atlantic Bank will be considered less than adequately capitalized for
purposes of the FDIC's prompt corrective action regulations. Thus, at the time
of the automatic exchange, Atlantic Bank would likely be prohibited from paying
dividends on the preferred shares of Atlantic Bank. Further, Atlantic Bank's
ability to pay dividends on the preferred shares of Atlantic Bank following the
automatic exchange also would be subject to various restrictions under FDIC
regulations and a resolution of Atlantic Bank's Board of Directors. In the
event that Atlantic Bank did pay dividends on the preferred shares of Atlantic
Bank, such dividends would be paid out of its capital surplus.

Under certain circumstances, including a determination that Atlantic
Bank's relationship to Atlantic Preferred Capital results in an unsafe and
unsound banking practice, federal and state regulatory authorities will have
additional authority to restrict the ability of Atlantic Preferred Capital to
make dividend payments to its stockholders.

Common Stock. 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.

Series A Preferred Stock. Holders of Series A preferred shares shall be
entitled to receive, if, when and as declared by the Board of Directors of
Atlantic Preferred Capital out of assets of Atlantic Preferred Capital legally
available therefor, monthly cash dividends at the rate of 93/4% per annum of
the liquidation preference (equivalent to $0.975 per share per annum). If
declared, dividends on the Series A preferred shares for each monthly period
shall be payable on the fifteenth day of the following month, at such annual
rate, to holders of record on the last business day of the monthly dividend
period. Monthly dividend periods will commence on the first day of each month
and on the date of original issue for the initial dividend period. The amount
of dividends, if declared, payable for the initial period or any period shorter
than a full dividend period shall be computed on the basis of 30-day months, a
360-day year and the actual number of days elapsed in the period. Dividends in
each period will accrue from the first day of such period, whether or not
declared or paid for the prior monthly period.

The right of holders of Series A preferred shares to receive dividends is
noncumulative. Accordingly, if the Board of Directors fails to declare a
dividend on the Series A preferred shares for a monthly dividend period, then
holders of the Series A preferred shares will have no right to receive the
amount of the undeclared dividend for that period, and Atlantic Preferred
Capital will have no obligation to pay the undeclared dividend for that period,
whether or not dividends are declared and paid for any future period with
respect to either the Series A preferred shares, any other series of preferred
stock or the common stock. If less than full dividends are declared on the
Series A preferred shares by the Board of Directors for a monthly dividend
period, their holders of the Series A preferred shares will have no right to
receive the amount of such undeclared dividends for that period, and Atlantic
Preferred Capital will have no obligation to pay a full dividend for that
period, whether or not dividends are declared and paid for any future period
with respect to either the Series A preferred shares, any other series of
preferred stock or the common stock.

Series B Preferred Stock. The holders of Series B preferred shares are
entitled to receive annual dividends equal to eight percent (8%) of the
liquidation preference of the Series B preferred shares. Dividends on Series B
preferred shares are cumulative, and all accumulated and unpaid dividends are
paid before any dividends are paid on the common stock.


20


Item 6. Selected Consolidated 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.




As of and for the
Period from March 20, 1998
through December 31,1998
---------------------------
(dollars in thousands)

Financial Condition Data (Year End):
Total assets ................................................... $ 156,742
Purchased loans ................................................ 128,459
Total discount ................................................ (17,274)
Originated loans ............................................... 35,388
Allowance for loan losses ..................................... (1,337)
Cash and cash equivalents ...................................... 10,580
Stockholders' equity ........................................... 156,318
Non-performing loans ........................................... 3,868
Operations Data (Period):
Interest income ................................................ $ 13,412
Operating expenses ............................................. (297)
---------
Net income ..................................................... 13,115
Preferred stock dividends ...................................... (60)
---------
Net income available to common shareholder ..................... $ 13,055
=========
Net income per common share .................................... $ 131
Common shares outstanding ...................................... 100
Asset Quality Ratios:
Total non-performing assets to total assets .................... 2.47%
Non-performing purchased loans as a percentage of
purchased loans ............................................... 3.01
Non-performing originated loans as a percentage of
originated loans .............................................. --
Total discount as a percent of purchased loans ................. 13.45
Allowance for loan losses as a percent of originated
loans ......................................................... 3.78
Non-amortizing discount as a percent of non-performing purchased
loans ......................................................... 277.59




21


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

This Form 10-K contains statements that may be considered forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward looking statements use terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or similar expressions and
may include discussions of future strategy. Such statements are subject to
certain risks and uncertainties, including those discussed under the caption
"--Risk Factors," that could cause actual results to differ materially from
historical results and those presently anticipated or projected or contribute
to such differences. Atlantic Preferred Capital cautions readers not to place
undue reliance on such forward-looking statements, which speak only as of the
date made.

Overview
The principal business of Atlantic Preferred Capital is to acquire and
hold mortgage assets that will generate net income for distribution to
stockholders. Atlantic Preferred Capital currently intends to continue to
acquire all of its mortgage assets from Atlantic Bank. Atlantic Preferred
Capital may also from time to time utilize available funds to acquire other
assets that qualify as real estate assets under Section 856(c)(6)(B) of the
Internal Revenue Code pending investment in mortgage assets.

On March 31, 1998, Atlantic Preferred Capital commenced its operations
upon the sale to Atlantic Bank of 100 shares of Atlantic Preferred Capital's
common stock and 1,000 shares of preferred stock in exchange for the transfer
of loans with a net carrying value of $140.7 million, of which $1.0 million was
attributed to the preferred stock and $139.7 million was attributed to the
common stock.

Atlantic Bank administers the day-to-day activities of Atlantic Preferred
Capital in its roles as servicer under the master service agreement and as
advisor under the advisory agreement. Atlantic Preferred Capital pays Atlantic
Bank an annual servicing fee equal to 0.20% and an annual advisory fee equal to
0.05%, respectively, of the gross outstanding principal balances of loans in
the loan portfolio. Atlantic Bank and its affiliates have interests that are
not identical to those of Atlantic Preferred Capital. Consequently, conflicts
of interest will arise with respect to transactions, including, without
limitation:

(1) future acquisitions of mortgage assets from Atlantic Bank or its
affiliates;

(2) servicing of mortgage assets, particularly with respect to mortgage
assets that become classified or placed on nonaccrual status; and

(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 Atlantic Bank are fair to
all parties and consistent with market terms, including the price paid and
received for mortgage assets on their acquisition or disposition by Atlantic
Preferred Capital or in connection with the servicing of such mortgage assets.
However, there can be no assurance that such agreements or transactions will be
on terms as favorable to Atlantic Preferred Capital as those that could have
been obtained from unaffiliated third parties.

Results of Operations
Atlantic Preferred Capital reported total interest income of $13.4 million
for the period from inception on March 20, 1998 through December 31, 1998.
Interest income from loans was $13.3 million representing a total average yield
of 12.71% for the same period. After the inclusion of $132,000 in money market
account interest and the deduction of $297,000 in service and advisory fees and
$60,000 in preferred stock dividends, Atlantic Preferred Capital reported net
income available to the common stockholder of $13.1 million for the period from
inception through December 31, 1998.


22



The yield on Atlantic Preferred Capital's loan portfolio is summarized as
follows:




Period from inception
through December 31, 1998
--------------------------------------------
Average Balance Interest Yield
----------------- ---------- -----------
(dollars in thousands)

Purchased loans, net ......... $ 98,092 $10,064 13.62%
Originated loans ............. 40,579 3,216 10.52%
-------- -------
$138,671 $13,280 12.71%
======== =======


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.

Loan Portfolio
Through December 31, 1998, Atlantic Preferred Capital has acquired loans,
either through transfer or purchase from Atlantic Bank, having gross
outstanding principal balances at the time of acquisition of $198.7 million. In
addition, Atlantic Preferred Capital received $34.1 million of principal
payments on the loan portfolio during the same time period.

The outstanding principal balance of the loan portfolio at December 31,
1998 is summarized as follows:




Principal Balance Percentage of Total
------------------- --------------------
(dollars in thousands)

Mortgage loans on real estate:
Commercial real estate ......... $ 99,695 60.85%
One to four family ............. 12,339 7.53
Multifamily .................... 49,854 30.43
Land ........................... 1,458 0.89
-------- ------
Total ......................... 163,346 99.70
Secured commercial .............. 251 0.15
Other ........................... 250 0.15
-------- ------
Total ......................... $163,847 100.00%
======== ======


Atlantic Preferred Capital intends that each loan acquired from Atlantic
Bank in the future will be a whole loan, and will be originated or acquired by
Atlantic Bank in the ordinary course of its business. Atlantic Preferred
Capital also intends that all loans held by it will be serviced pursuant to the
master service agreement.

There were $3.9 million of mortgage loans on non-accrual status at
December 31, 1998. 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 balance of the allowance for loan losses was transferred from Atlantic
Bank at the time the loans were contributed to Atlantic Preferred Capital. In
the normal course of business, the allowance for loan losses will be adjusted
through a provision for loan losses charged to earnings and will be maintained
at a level considered adequate to provide for reasonably foreseeable loan
losses.

The provision and the level of the allowance are evaluated on a regular
basis by management and are based upon management's periodic review of the
collectibility of the loans in light of known and inherent risks in the nature
and volume of the loan portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral and
prevailing economic conditions. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant change. Ultimately,
losses may vary from current estimates and future additions to the allowance
may be necessary.


23


Loan losses are charged against the allowance when management believes the
collectibility of the loan balance is unlikely. Subsequent recoveries, if any,
are credited to the allowance.

During the period from inception through December 31, 1998, there were no
provisions, charge-offs or recoveries in the allowance for loan losses.

At December 31, 1998, Atlantic Preferred Capital's allowance for loan
losses as a percentage of total originated loans was 3.78%.

Effective January 1, 1999, Atlantic Preferred Capital will change, on a
prospective basis, its method of accounting for purchased loan discounts and
the related recognition of discount loan income and provisions for loan losses.
Such accounting change will account for discount loan income and loan loss
provisions on an individual loan basis, rather than as currently recognized in
the aggregate on a static purchased pool basis and will be accounted for as a
"change in estimate" in accordance with Accounting Principles Board Opinion No.
20. Management does not anticipate any material impact on stockholders' equity
on the effective date of the accounting change. However, 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.


24


The following table sets forth certain information regarding the
geographical location of properties securing the mortgage loans in the loan
portfolio at December 31, 1998:




Percentage of Total
Location Number of Loans Principal Balance Principal Balance
- ----------------------- ----------------- ------------------- --------------------
(in thousands)

Massachusetts ......... 158 $ 47,165 28.87%
California ............ 41 41,824 25.60
Connecticut ........... 54 16,855 10.32
New Hampshire ......... 87 15,683 9.60
New York .............. 14 8,883 5.44
Rhode Island .......... 14 5,880 3.60
Maine ................. 5 4,475 2.74
Florida ............... 6 3,522 2.16
New Jersey ............ 5 3,395 2.08
Arizona ............... 1 3,385 2.07
Virginia .............. 3 3,237 1.98
All others ............ 20 9,042 5.54
--- -------- ------
408 $163,346 100.00%
=== ======== ======


At December 31, 1998, 81.2% of Atlantic Preferred Capital's total loan
portfolio consisted of loans located in New England and California.
Consequently, these loans may be subject to a greater risk of default than
other comparable loans in the event of adverse economic, political or business
developments and natural hazards in New England or California that may affect
the ability of property owners to make payments of principal and interest on
the underlying mortgages.

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. Atlantic Preferred
Capital will have no debt outstanding following consummation of the offering,
and it does not currently intend to incur any indebtedness. The organizational
documents of Atlantic Preferred Capital limit the amount of indebtedness which
it is permitted to incur to no more than 100% of the total stockholders' equity
of Atlantic Preferred Capital. Any such debt may include intercompany advances
made by Atlantic Bank to Atlantic Preferred Capital.

Atlantic Preferred Capital may also issue additional series of preferred
stock. However, Atlantic Preferred Capital may not issue additional shares of
preferred stock senior to the Series A preferred shares without the consent of
holders of at least two-thirds of the Series A preferred shares outstanding at
that time. Additional shares of preferred stock ranking on a parity with the
Series A preferred shares may not be issued without the approval of a majority
of Atlantic Preferred Capital's independent directors.


25


Year 2000 Disclosure
The Year 2000 issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
change occurs, date sensitive systems recognize the year 2000 as 1900 or not at
all. This inability to recognize or properly treat the year 2000 may cause
systems to process critical financial and operational information incorrectly.

Atlantic Preferred Capital is dependent in virtually every phase of its
operations on Atlantic Bank, including the computer and other systems of
Atlantic Bank. Accordingly, Atlantic Preferred Capital is addressing the Year
2000 issue with respect to its operations through its relationship with
Atlantic Bank under the advisory agreement and the master service agreement.
During 1997, the management of Atlantic Bank developed an action plan to
address the Year 2000 issue. Atlantic Bank uses computer systems (including
hardware and software) primarily to track deposits and loans, transfer funds,
prepare financial reports, and perform financial calculations. Atlantic Bank's
deposit and loan processing is outsourced to Bisys Systems of Houston, Texas
("Bisys") under a service agreement. In 1998, Atlantic Bank acquired Dolphin.
After the acquisition, Dolphin initiated an action plan to address the Year
2000 issue. Dolphin uses computer systems to receive equipment leasing
applications over the internet, track lease payments, and perform financial
calculations.

Atlantic Bank's plan includes five phases as suggested by the FDIC and
other bank regulatory authorities: awareness, assessment, renovation,
validation, and testing. In 1997, Atlantic Bank substantially completed the
awareness and assessment phases of the plan with regard to its computer
systems, and has identified those areas that are considered mission critical.
Atlantic Bank began working with Bisys, reviewing their plans, and determining
how to validate the readiness of its system. Also in connection with the
awareness and assessment phases of the plan, Atlantic Bank raised the Year 2000
issue with its vendors, service providers, and customers. All vendors listed in
Atlantic Bank's accounts payable system were sent a questionnaire on the Year
2000 issue. Some vendors provided written responses to the questionnaires and
others were sent follow up letters and/or were called regarding any follow-up
questions or issues. Most of Atlantic Bank's vendors have responded to its
questionnaires and follow-up letters. Based on these responses, most of
Atlantic Bank's vendors have indicated that they have a plan to remediate their
systems as needed or are already Year 2000 compliant. Dolphin is in the process
of contacting its vendors.

Atlantic Bank is in the process of evaluating the risk of customer failure
to prepare for the Year 2000 issue, any associated effect of the ability of
customers to repay outstanding loans, and impact on the adequacy of the level
of the allowance for loan losses. Atlantic Bank currently considers Year 2000
risks in evaluating the adequacy of the allowance for loan and lease losses. In
accordance with applicable FDIC regulations, Atlantic Bank has also distributed
written materials to all of its depositors (including deposit brokers) with
over $250,000 on deposit regarding the Year 2000 issue, including a description
of Atlantic Bank's plan and the status of such plan. Atlantic Bank also
distributed questionnaires to its borrowers with loans totaling $500,000 or
more. Some of these depositors and borrowers provided written responses to the
questionnaires and others were sent follow-up letters and/or were called
regarding any follow-up questions or issues. All of these depositors and
approximately 40% of these borrowers have responded to the questionnaires and
follow-up letters and have indicated that they have a plan to remediate their
systems as needed or are already Year 2000 compliant. Atlantic Bank is
continuing to follow-up with those borrowers who have not yet responded.
Dolphin is in the process of contacting its lessees.

The plan calls for validation and testing with respect to all mission
critical systems. Mission critical systems include loan processing, deposit
processing, general ledger and funds transfer systems. Other systems that are
non-mission critical include the local area network, the network operating
system and desktop applications. In the first half of 1998, Atlantic Bank
upgraded its local area network, including the network operating system and
desktop application software. In addition, most of Atlantic Bank's desktop
systems were similarly upgraded. The manufacturer of the network operating
system and desktop application software has certified that all of these
products are Year 2000 compliant. Atlantic Bank has also conducted internal
testing on these products and has similarly concluded that they are Year 2000
compliant. Atlantic Bank has also installed a test lab simulating a Year 2000
environment with


26


possible date sensitive components, including computers, operating systems, and
base applications. Dolphin has successfully tested its lease application
system. The manufacturers of its network operating system and desktop
application software have certified that all of these products are Year 2000
compliant. Dolphin has also conducted internal testing on these products and
has similarly concluded that they are Year 2000 compliant. Dolphin will be
testing its lease accounting application system in April 1999.

Testing of the mission critical systems is being completed according to
the schedule prepared by Bisys and, with respect to the funds transfer system,
the Federal Reserve Bank of Boston. The test period runs from November 1998
through April 1999. During this period, the entire test process will be
performed twice. Atlantic Bank will have an opportunity to re-test any
applications that produce errors in the initial testing. Atlantic Bank believes
that it and its vendors, customers, and service providers are currently on
schedule in accordance with the plan.

Atlantic Bank's new executive offices had been renovated in 1997 and early
1998, with new building systems (such as fire and security alarm systems and
HVAC system) installed at such time. All of the contractors and suppliers of
such building systems have certified that their systems are Year 2000
compliant. The building and/or Atlantic Bank have tested such systems and have
similarly concluded that they are Year 2000 compliant. Dolphin is in the
process of contacting vendors in regards to its facility and related embedded
technology.

Atlantic Bank's risk management program includes emergency backup and
recovery procedures to be followed in the event of failure of a
business-critical system. These procedures are being expanded to include
specific procedures for potential Year 2000 issues, and contingency plans to
protect against Year 2000 related interruptions. Atlantic Bank recently
completed these contingency plans which include backup procedures,
identification of alternative suppliers, emergency plans to handle power
outages, telecommunication failures, etc. Dolphin is in the process of
developing contingency plans.

Based on its review to date, Atlantic Bank believes that the primary costs
of addressing the Year 2000 issue will include internal staffing, consulting,
system testing and modification. Atlantic Bank currently expects that the total
third party expenses associated with the plan will be approximately $150,000,
and will primarily be incurred from the third quarter of 1998 through year-end
1999. The costs are not considered to have a material affect on operating
expenses or budgets. Atlantic Bank plans to account for these costs as expense
items. The costs include an independent review by an external firm under an
engagement letter signed June 29, 1998.

While Atlantic Bank believes that it is taking reasonable steps with
respect to the Year 2000 issue, if the phases of the plan are not completed on
time, the costs associated with becoming Year 2000 compliant exceed Atlantic
Bank's estimates, third party providers are not Year 2000 compliant on a timely
basis, or customers with material loan obligations are unable to meet their
repayment obligations due to Year 2000 problems, the Year 2000 issue could have
a material impact on Atlantic Preferred Capital's financial results. In
addition, Atlantic Bank's efforts to address the Year 2000 issue are being
monitored by its federal banking regulators. Failure to be Year 2000 compliant
on a timely basis could subject Atlantic Bank to formal supervisory or
enforcement actions. Any of the foregoing issues could have a material adverse
impact on the ability of Atlantic Bank to service Atlantic Preferred Capital's
loan portfolio and otherwise manage its business which could have a material
adverse effect on Atlantic Preferred Capital's business, financial condition or
results of operations.

The preceding Year 2000 discussion contains various forward-looking
statements which represent Atlantic Bank's beliefs or expectations regarding
future events. When used in the Year 2000 discussion, the words "believes,"
"expects," "estimates" and similar expressions are intended to identify
forward-looking statements. Forward-looking statements include, without
limitation, Atlantic Bank's expectations as to when it will complete the phases
of the plan; its estimated costs; and its belief that its internal systems will
be Year 2000 compliant in a timely manner. All forward-looking statements
involve a number of risks and uncertainties that could cause the actual results
to differ materially from the projected results. Factors that may cause these
differences include, but are not limited to, the availability of qualified
personnel and other information technology resources; the ability to identify
and remediate all date


27


sensitive lines of computer code; and the actions of governmental agencies or
other third parties with respect to Year 2000 problems.

Risk Factors

o Series A preferred shares will be exchanged for preferred shares of
Atlantic Bank at the direction of the FDIC if Atlantic Bank becomes or may
in the near term become undercapitalized or is placed in conservatorship or
receivership. Upon such an exchange, holders of Series A preferred shares
would have an investment in Atlantic Bank and not in Atlantic Preferred
Capital at a time when Atlantic Bank's financial condition is
deteriorating. Atlantic Bank has significantly greater liabilities and
significantly less stockholders' equity than Atlantic Preferred Capital.
Upon a liquidation or receivership of Atlantic Bank, the claims of Atlantic
Bank's depositors and creditors and of the FDIC will have priority over the
claims of stockholders. As a result, holders of Series A preferred shares
likely would receive substantially less than they would have received in a
liquidation or receivership of Atlantic Preferred Capital. In fact, holders
of Series A preferred shares may not receive anything for their preferred
shares of Atlantic Bank.

o As a subsidiary of Atlantic Bank, federal or state regulators of Atlantic
Bank can restrict the ability of Atlantic Preferred Capital to transfer
assets, to make dividends to the holders of the Series A preferred shares,
or to redeem the Series A preferred shares.

o Dividends on the Series A preferred shares are not cumulative.
Consequently, if the Board of Directors of Atlantic Preferred Capital does
not declare a dividend on the Series A preferred shares for any monthly
period, holders of Series A preferred shares would not be entitled to
receive such dividend whether or not funds are or subsequently become
available. The Board of Directors may also determine, in its business
judgment, that it would be in the best interests of Atlantic Preferred
Capital to pay less than the full amount of the stated dividends on the
Series A preferred shares even if funds are available.

o Risks associated with mortgage loans generally, and particularly the
geographic concentration of Atlantic Preferred Capital's loan portfolio at
December 31, 1998 in the Northeast and California, could adversely affect
the mortgage assets held by Atlantic Preferred Capital and the value of the
Series A preferred shares. The quality of Atlantic Preferred Capital's loan
portfolio depends upon, among other things, the cash flow of borrowers,
regional economic conditions and commercial and multi-family real estate
values.

o If Atlantic Preferred Capital fails to maintain its status as a REIT for
federal income tax purposes, it will be subject to corporate income tax.

o Because the rate at which dividends are to be paid is fixed and a majority
of Atlantic Preferred Capital's mortgage assets bear interest at adjustable
rates, a significant decline in interest rates might adversely affect
Atlantic Preferred Capital's ability to pay dividends on the Series A
preferred shares.

o Atlantic Preferred Capital is dependent in virtually every phase of its
operations, including the servicing of its loan portfolio, on the diligence
and skill of the officers and employees of Atlantic Bank.

o Because of the relationship between Atlantic Preferred Capital and Atlantic
Bank, conflicts of interests will exist between Atlantic Preferred Capital
and Atlantic Bank.

o No trading market will exist for the preferred shares of Atlantic Bank
holders of Series A preferred shares would receive if an automatic exchange
occurs because those shares will not be listed on any securities exchange
or for quotation on The Nasdaq Stock Market or any other over-the-counter
market.

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


28


Preferred Capital's management reviews, among other things, the sensitivity of
Atlantic Preferred Capital's assets and liabilities to interest rate changes,
the book and market values of assets and liabilities, unrealized gains and
losses, purchase and sale activity, and maturities of investments. Atlantic
Bank'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 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.


29


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, 1998. 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.




December 31, 1998
---------------------------------------------------------------------------------------
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)

Rate-sensitive assets:
Interest-bearing deposits in banks .... $ 10,434 -- -- -- -- -- -- $ 10,434
4.89%
Fixed-rate purchased loans (1) ........ -- 9,409 1,665 2,364 4,190 3,475 11,517 32,620
9.30% 9.48% 8.79% 9.39% 8.49% 8.02%
Adjustable-rate purchased loans (1) ... 25,921 54,504 5,790 5,756 -- -- -- 91,971
8.47% 8.32% 9.44% 8.90%
Fixed-rate originated loans (1) ....... -- 1,005 -- 286 522 203 2,717 4,733
10.33% 9.00% 9.34% 9.50% 8.34%
Adjustable-rate originated loans (1) .. 28,178 979 892 67 45 49 445 30,655
9.49% 8.71% 8.32% 8.62% 9.09% 9.11% 9.23%
-------- ------- ------ ------ ------ ------ ------- --------
Total rate-sensitive assets ......... $ 64,535 $65,897 $8,347 $8,473 $4,757 $3,727 $14,679 $170,413
======== ======= ====== ====== ====== ====== ======= ========


(1) Loans are presented at gross amounts before deducting discounts on
purchased loans, the allowance for loan losses and net deferred loan
income.

The prepayment assumption reflected above is based on the experience and
management's estimate of prepayment activity for recently acquired loans. Given
the interest rate environment at December 31, 1998, management has assumed that
on average 10% of the outstanding fixed rate loans will prepay annually.
Originated adjustable-rate loans are generally indexed to prime with an average
spread of 100 to 200 basis points. The majority of purchased adjustable-rate
loans are also tied to prime with the remainder subject to various terms and
rate spreads established by the originating banks. The table does not include
loans which have been placed on non-accrual status. Assets that are subject to
immediate repricing are placed in the overnight column.


30


Item 8. Consolidated Financial Statements



Page
Independent Auditors' Report ......................... 32
Balance Sheet ........................................ 33
Statement of Income .................................. 34
Statement of Changes in Stockholders' Equity ......... 35
Statement of Cash Flows .............................. 36
Notes to Financial Statements ........................ 37



31


INDEPENDENT AUDITORS' REPORT


The Board of Directors
Atlantic Preferred Capital Corporation:

We have audited the accompanying balance sheet of Atlantic Preferred Capital
Corporation as of December 31, 1998 and the related statements of income,
changes in stockholders' equity and cash flows 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 audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Atlantic Preferred Capital
Corporation as of December 31, 1998 and the results of its operations and its
cash flows for the period from inception, March 20, 1998, through December 31,
1998 in conformity with generally accepted accounting principles.


/s/ Wolf & Company, P.C.

Boston, Massachusetts
February 5, 1999, except for Note 5 as to which the date is February 12, 1999


32


ATLANTIC PREFERRED CAPITAL CORPORATION

BALANCE SHEET

December 31, 1998





(in thousands)

ASSETS
Cash account with Bank ....................................................... $ 146
Money market account with Bank ............................................... 10,434
---------
Total cash and cash equivalents ............................................ 10,580
---------
Loans ........................................................................ 163,771
Less discount ............................................................... (17,274)
Less allowance for loan losses .............................................. (1,337)
---------
Loans, net ................................................................. 145,160
---------
Accrued interest receivable .................................................. 832
Other assets ................................................................. 170
---------
$ 156,742
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to Bank .................................................................. $ 125
Accrued expenses and other liabilities ....................................... 299
---------
Total liabilities .......................................................... 424
---------
Stockholders' equity:
Preferred stock, Series B, 8% cumulative, non-convertible; $.01 par value;
$1,000 liquidation value per share plus accrued dividends; 1,000 shares
authorized, issued and outstanding ......................................... --
Common stock, $.01 par value, 100 shares authorized, issued and outstanding.. --
Additional paid-in capital .................................................. 155,263
Retained earnings ........................................................... 1,055
---------
Total stockholders' equity ................................................. 156,318
---------
$ 156,742
=========


See accompanying notes to financial statements.


33



ATLANTIC PREFERRED CAPITAL CORPORATION

STATEMENT OF INCOME


Period from Inception, March 20, 1998, through December 31, 1998




(in thousands)

Interest income:
Interest and fees on loans ................................ $13,280
Interest income on money market account with Bank ......... 132
-------
Total interest income .................................... 13,412
Loan servicing and advisory expenses ....................... 297
-------
Net income ............................................... 13,115
Preferred stock dividends .................................. 60
-------
Earnings available to common shareholder ................... $13,055
=======


See accompanying notes to financial statements.


34



ATLANTIC PREFERRED CAPITAL CORPORATION

STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY


Period from Inception, March 20, 1998, through December 31, 1998




Preferred Stock
Common Stock Series B Additional Total
----------------- ----------------- Paid-in Retained -----------
Shares Amount Shares Amount Capital Earnings Amount
-------- -------- -------- -------- ----------- ------------ -----------
(Dollars in thousands)

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 dividend 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
=== === ===== === ========= ========= =========


See accompanying notes to financial statements.


35



ATLANTIC PREFERRED CAPITAL CORPORATION

STATEMENT OF CASH FLOWS


Period from Inception, March 20, 1998, through December 31, 1998




(in thousands)

Cash flows from operating activities:
Net income .......................................................................... $ 13,115
Adjustments to reconcile net income to net cash provided by operating activities:
Discount accretion ................................................................. (2,419)
Other, net ......................................................................... (578)
---------
Net cash provided by operating activities ......................................... 10,118
---------
Cash flows from investing activities:
Loan repayments ..................................................................... 34,131
Purchases of loans .................................................................. (21,609)
---------
Net cash provided by investing activities ......................................... 12,522
---------
Cash flows from financing activities:
Payment of preferred stock dividend ................................................. (60)
Payment of common stock dividend .................................................... (12,000)
---------
Net cash used in financing activities ............................................. (12,060)
---------
Net change in cash and cash equivalents .............................................. 10,580
Cash and cash equivalents at beginning of period ..................................... --
---------
Cash and cash equivalents at end of period ........................................... $ 10,580
=========
Supplemental information:
Value of loans transferred by the Company's common stockholder in exchange
for the issuance of common stock and preferred stock, Series B ..................... $ 140,740
Capital contribution from common stockholder in form of mortgage loans .............. 14,523


See accompanying notes to financial statements.


36



ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
Period from Inception, March 20, 1998, through 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. CHB Realty Corp., a wholly-owned subsidiary of Atlantic Bank and Trust
Company (the "Bank"), a federally insured Massachusetts trust company, owns all
of the Company's common stock (as defined below). The Bank is in compliance
with its regulatory capital requirements at December 31, 1998.

On March 31, 1998, the Company was initially capitalized with the issuance
to the Bank of 100 shares of the Company's common stock, $.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.

Subsequent to the initial capitalization of the Company, the Bank
contributed its 100 shares of common stock and 800 shares of preferred stock to
CHB Realty Corp.


Business

The Company's business is to acquire and hold real estate assets from the
Bank. The Bank's primary business lines include the acquisition of commercial
real estate loans from private sector sellers and government agencies and the
origination of various types of secured commercial loans.


Use of estimates

In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the balance sheet and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for losses on loans, the
allocation of purchase discount between amortizing and non-amortizing portions,
and the rate at which discount is accreted into interest income.


Cash equivalents

Cash equivalents include cash and money market accounts held at the Bank.


Loans

A substantial portion of the loan portfolio is represented by commercial
real estate loans in the Northeast and California areas. The ability of the
Company's debtors to honor their contracts is dependent upon the real estate
and general economic sectors.

Loans, as reported, have been reduced by discounts on loans purchased, net
deferred loan fees and the allowance for loan losses. Interest on loans is
recognized using the interest method.

Interest on loans is not accrued when the collectibility of principal and
interest is not probable or estimable. Interest income previously accrued on
such loans is reversed against current period interest income and the loan is
accounted for using the cost recovery method.

The Company accounts for Bank purchased loans under the guidance of AICPA
Practice Bulletin 6, Amortization of Discounts on Certain Acquired Loans, using
unique and exclusive static pools. Static pools are established based on the
Bank's original acquisition timing. Once a static pool is established, the
loans remain in the pool unless restructured on terms consistent with the
Bank's loan policy and documentation standards and transferred to the Company's
Bank originated loan portfolio.


37


ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued


1. Summary of Significant Accounting Policies (Continued)

At the time of acquisition, the excess of the contractual balance over the
amount of reasonably estimable and probable discounted future cash collections
is recorded as non-amortizing discount. The non-amortizing discount is not
accreted into income until it is determined that the amount and timing of the
collections are reasonably estimable and collection is probable. The remaining
discount, which represents the excess of the amount of reasonably estimable and
probable discounted future cash collections over the acquisition amount is
accreted into interest income using a method which approximates the interest
method and is not accreted on non-accrual loans. If cash flows cannot be
reasonably estimated and collection is not probable, the cost recovery method
of accounting is used, whereby any amounts received are applied against the
recorded amount of the loan.

Subsequent to acquisition, if cash flow projections improve, and it is
determined that the amount and timing of the collections are reasonably
estimable and collection is probable, the corresponding decrease in the
non-amortizing discount is transferred to the amortizing portion and is
accreted into interest income over the estimated remaining lives of the loans
on a method which approximates the interest method. Under the Company's loan
rating system, each loan is evaluated for impairment and, where necessary, a
portion of the respective loan pool's non-amortizing discount is allocated to
the loan and, if none is available, an allowance is established through a
provision for loan losses. In addition, if this evaluation reveals that cash
flows cannot be estimated or the collection of the loan is not otherwise
probable, the loan is accounted for on the cost recovery method. Loans
accounted for on the cost recovery method, in general, consist of non-accrual
loans.

Effective January 1, 1999, the Bank and the Company will change, on a
prospective basis, their method of accounting for purchased loan discounts and
the related recognition of discount loan income and provisions for loan losses.
Such accounting change will account for discount loan income and loan loss
provisions on an individual loan basis, rather than as currently recognized in
the aggregate on a static purchased pool basis and will be accounted for as a
"change in estimate" in accordance with Accounting Principles Board Opinion No.
20. Accounting for loans on an individual basis rather than a pool basis will
allow the Company to selectively purchase qualified individual loans from the
Bank, rather than purchasing entire pools which may contain individual loans
undesirable for a REIT. Management does not anticipate any material impact on
stockholders' equity on the effective date of the accounting change. However,
subsequent earnings will be affected by changes in individual loans rather than
by changes in the aggregate 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 and loan loss provisions, net.

Net deferred loan fees are amortized as an adjustment of the related loan
yields using a method which approximates the interest method.


Allowance for loan losses

The balance of the allowance for loan losses was transferred from the Bank
at the time of the initial transfer of loans to the Company. In the normal
course of business, the allowance for loan losses will be adjusted through a
provision for loan losses charged to earnings. Loan losses are charged against
the allowance when management believes the loan balance 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.


38


ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued


1. Summary of Significant Accounting Policies (Continued)

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 a creditor will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due or originally anticipated. 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 effective interest
rate, the loan's obtainable market price, or the fair value of the collateral
if the loan is collateral dependent. In the case of the Bank's purchased loan
portfolio, the recorded investment represents the Bank's purchase price net of
any related non-amortizing discounts. Substantially all of the Company's loans
which have been identified as impaired have been measured by the fair value of
existing collateral.

See discussion on change in accounting for purchased loans included in the
preceding section, Loans.

Income taxes

The Company will elect, for Federal income tax purposes, to be treated as
a Real Estate Investment Trust ("REIT") and intends to comply with the
provisions of the Internal Revenue Code of 1986, as amended (the "IRC").
Accordingly, the Company will not be subject to 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.


39



ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued


2. Loans, Net

A summary of the balances of loans at December 31, 1998 follows:




(In thousands)
---------------

Bank purchased loan portfolio:
Mortgage loans on real estate:
Commercial real estate ............................. $ 70,578
One to four family ................................. 8,530
Multifamily ........................................ 47,964
Land ............................................... 886
---------
Total ............................................ 127,958
Secured commercial ................................. 251
Other .............................................. 250
---------
Total Bank purchased loan portfolio .............. 128,459
Less discount:
Non-amortizing portion ............................ (10,737)
Amortizing portion ................................ (6,537)
---------
Total Bank purchased loan portfolio, net ......... 111,185
---------
Bank originated loans:
Mortgage loans on real estate:
Commercial real estate ............................. 29,117
One to four family ................................. 3,809
Multifamily ........................................ 1,890
Land ............................................... 572
---------
Total Bank originated loans ...................... 35,388
Less:
Allowance for loan losses ............................ (1,337)
Net deferred loan fees ............................... (76)
---------
Total Bank originated loans, net .................. 33,975
---------
Total loans, net .................................. $ 145,160
=========



40


ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued


Loans, Net (continued)

An analysis of the allowance for loan losses for the period ended December
31, 1998 follows:




(In thousands)
---------------

Balance at inception, March 20, 1998 ............... $ -
Transfer from Bank with loans transferred .......... 1,337
------
Balance at end of period ........................... $1,337
======


At December 31, 1998, impaired Bank purchased loans, net of non-amortizing
discount amounted to $4,579,000. These loans are accounted for in accordance
with Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan."

No additional funds are committed to be advanced in connection with
impaired loans.

For the period ended December 31, 1998, the average recorded investment in
impaired loans amounted to $1,871,000. The Company recognized $64,000 of
interest income on impaired loans, during the period that they were impaired,
primarily on the cash basis.

Non-accrual loans totaled $3,868,000 at December 31, 1998, for which no
non-amortizing discount was allocated. Interest not accrued on such loans
amounted to $272,000 at December 31, 1998. Non-accrual loans are accounted for
using the cost recovery method in accordance with AICPA Practice Bulletin 6.

3. Preferred Stock

On March 31, 1998, the Company issued 1,000 shares of its 8% Cumulative
Non-convertible Preferred Stock to the Bank. Subsequently, the Bank contributed
800 of its shares to CHB Realty Corp. Holders of the preferred stock are
entitled to receive, if declared by the Board of Directors of the Company,
dividends at a rate of 8% of the average daily outstanding liquidation amount,
as defined. Dividends accumulate at the completion of each completed period, as
defined, and payment dates are determined by the Board of Directors. The
preferred stock may be redeemed by the Company for its outstanding liquidation
amount plus accrued dividends upon the occurrence of certain events.

The preferred stock has a liquidation amount of $1,000 per share. In the
event of a voluntary or involuntary dissolution or liquidation of the Company,
preferred stockholders are entitled to the total liquidation amount, as
defined, plus any accrued and accumulated dividends.

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
period from inception through December 31, 1998 totaled $297,000 and are
included in accrued expenses and other liabilities.

During the period ended December 31, 1998, in addition to the loans
transferred to the Company by the Bank on March 31, 1998 (see Note 1), the
Company also purchased loans with a carrying value of $21,681,000 from the Bank
and the Bank 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.

5. Subsequent Event

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 gross
proceeds of approximately $13.6 million.

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


41


ATLANTIC PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, Concluded


Subsequent Event (concluded)

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.

6. Fair Value of Financial Instruments

SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of estimated fair values of all financial instruments where
it is practicable to estimate such values. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.

The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amounts of cash and money
market accounts approximate fair value.

Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. Fair values of other loans are estimated using discounted cash flow
analyses, with interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values of
non-performing loans are estimated primarily by using underlying collateral
values.

Accrued interest receivable: The carrying amount of accrued interest
receivable approximates fair value.

Financial liabilities: The carrying amounts of financial liabilities
approximate fair value.

The estimated fair values, and related carrying amounts, of the Company's
financial instruments at December 31, 1998 are as follows:




Carrying Fair
Amount Value
---------- ----------
(In thousands)

Financial assets:
Cash and cash equivalents ............................... $10,580 $10,580
Loans, net .............................................. 145,160 151,716
Accrued interest receivable ............................. 832 832

Financial liabilities:
Loan servicing and advisory fee payable to Bank ......... 297 297
Due to Bank ............................................. 125 125




42


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.




Name Age Position(s) Held
- --------------------- ----- --------------------

Richard Wayne 46 President, Director
John L. Champion 50 Treasurer, Director
Bradley M. Shron 41 Clerk
Nicholas W. Lazares 47 Director


The principal occupation for the last five years of each director and
officer of Atlantic Preferred Capital is set forth below.

Richard Wayne. Mr. Wayne has been the President and a Director of Atlantic
Preferred Capital since March 1998. Mr. Wayne is President and Co-Chief
Executive Officer of Atlantic Bank. Since 1991, Mr. Wayne has been the
President of Atlantic Bank. From March, 1980 to December 31, 1994, Mr. Wayne,
or a professional corporation of which he was the principal, was a partner in
the law firm of Wayne, Lazares and Chappell in Boston, Massachusetts.

John L. Champion. Mr. Champion has been the Treasurer and a Director of
Atlantic Preferred Capital since March 1998. Mr. Champion joined Atlantic Bank
in March, 1993 and is the Chief Financial Officer, the Treasurer and Executive
Vice President of Atlantic Bank.

Bradley M. Shron. Mr. Shron has been Clerk of Atlantic Preferred Capital
since March 1998. Mr. Shron has served as a Senior Vice President, Legal
Counsel and Assistant Clerk of Atlantic Bank since January 1997, General
Counsel since January 1998 and Clerk since April 1998. Mr. Shron joined
Atlantic Bank as a Vice President and Legal Counsel in April 1996. Prior to
joining Atlantic Bank, Mr. Shron was a partner at the Boston law firm of Riemer
and Braunstein from 1986 to 1996.

Nicholas W. Lazares. Mr. Lazares has been a Director of Atlantic Preferred
Capital since March 1998. Mr. Lazares is Chairman of the Board of Directors and
Co-Chief Executive Officer of Atlantic Bank. Since 1991, Mr. Lazares has been
Chairman of the Board of Directors of Atlantic Bank. From March, 1980 to
December 31, 1994, Mr. Lazares, or a professional corporation of which he was
the principal, was a partner in the law firm of Wayne, Lazares and Chappell in
Boston, Massachusetts.

Independent Directors
The terms of the Series A preferred shares require that, so long as any
Series A preferred shares are outstanding, certain actions by Atlantic
Preferred Capital be approved by a majority of its independent directors.
Atlantic Preferred Capital intends to elect two independent directors by May 1,
1999.


43


Audit Committee
By May 1, 1999, Atlantic Preferred Capital will establish 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

(3) review transactions between Atlantic Preferred Capital and Atlantic
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, 1999, the number and
percentage of outstanding shares of common stock and Series A 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, 1999.




Name and Address of Beneficial Owner(1) Amount of Shares (Class) Outstanding Shares
- ------------------------------------------- ---------------------------------- -------------------

Atlantic Bank and Trust Company 100 shares of common stock(2) 100.0%
900 Series B preferred shares(3) 90.0
John L. Champion(4)(5) 2 Series B preferred shares(6) *
Nicholas W. Lazares(5) 2 Series B preferred shares(6) *
Bradley M. Shron(4) 2 Series B preferred shares(6) *
Richard Wayne(4)(5) 2 Series B preferred shares(6) *
Others(7) 92 Series B preferred shares 9.2
All executive officers and directors as a 8 Series B Preferred Shares *
Group (4 persons)


- ----------------

(1) The address of each beneficial owner is c/o Atlantic Preferred Capital
Corporation, 101 Summer Street, Boston, Massachusetts 02110.

(2) Shares held of record by CHB Realty Corp., a wholly-owned subsidiary of
Atlantic Bank.

(3) Includes 800 shares held of record by CHB Realty Corp, a wholly-owned
subsidiary of Atlantic Bank.

(4) Executive officer of Atlantic Preferred Capital.

(5) Director of Atlantic Preferred Capital.

(6) Includes 1 share held of record by such executive officer/director's
spouse.

(7) Certain employees, executive officers and directors of Atlantic Bank.

* Less than 1%.


Item 13. Certain Relationships and Related Transactions

Servicing Agreement
The mortgage assets are serviced by Atlantic Bank pursuant to the terms of
the master service agreement. Atlantic Bank in its role as servicer under the
terms of the master service agreement receives a fee equal to 0.20% per annum,
payable monthly, on the gross outstanding principal balances of loans


44


serviced. For the period from inception through December 31, 1998, Atlantic
Preferred Capital incurred $238,000 in servicing fees payable to Atlantic Bank.


The master service agreement requires Atlantic Bank to service the loan
portfolio in a manner substantially the same as for similar work performed by
Atlantic Bank for transactions on its own behalf. Atlantic Bank collects and
remits principal and interest payments, maintains perfected collateral
positions, submits and pursues insurance claims and initiates and supervises
foreclosure proceedings on the loan portfolio it services. Atlantic Bank also
provides accounting and reporting services required by Atlantic Preferred
Capital for such loans. Atlantic Bank may also be directed by Atlantic
Preferred Capital, at any time during the servicing process, to dispose of any
loans which become classified, placed in a nonaccrual status, or are
renegotiated due to the financial deterioration of the borrower.

Atlantic Bank is required to pay all expenses related to the performance
of its duties under the master service agreement. Under the master mortgage
loan purchase agreement, Atlantic Bank is required to repurchase, at the
request of Atlantic Preferred Capital, any mortgage loan it sold to Atlantic
Preferred Capital in the event any such representation or warranty is untrue.
The repurchase price for any such mortgage loan is the outstanding net carrying
value thereof plus accrued and unpaid interest thereon at the date of
repurchase. Atlantic Bank may institute foreclosure proceedings, exercise any
power of sale contained in any mortgage or deed of trust, obtain a deed in lieu
of foreclosure or otherwise acquire title to a mortgaged property underlying a
mortgage loan by operation of law or otherwise in accordance with the terms of
the master service agreement.

The master service agreement may be terminated at any time by written
agreement between the parties or at any time by either party upon 30 days prior
written notice to the other party and appointment of a successor servicer. The
master service agreement will automatically terminate if Atlantic Preferred
Capital ceases to be an affiliate of Atlantic Bank.

Atlantic Bank remits daily to Atlantic Preferred Capital all principal and
interest collected on loans serviced by Atlantic Bank for Atlantic Preferred
Capital.

When any mortgaged property underlying a mortgage loan is conveyed by a
mortgagor, Atlantic Bank generally, upon notice thereof, will enforce any
due-on-sale clause contained in the mortgage loan, to the extent permitted
under applicable law and governmental regulations. The terms of a particular
mortgage loan or applicable law, however, may provide that Atlantic Bank is
prohibited from exercising the due-on-sale clause under certain circumstances
related to the security underlying the mortgage loan and the buyer's ability to
fulfill the obligations under the related mortgage note.


Advisory Agreement
Atlantic Preferred Capital has entered into the advisory agreement with
Atlantic Bank to administer the day-to-day operations of Atlantic Preferred
Capital. For the period from inception through December 31, 1998, Atlantic
Preferred Capital incurred $59,000 in servicing fees payable to Atlantic Bank.
As advisor, Atlantic Bank 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.

Atlantic Bank may, from time to time, subcontract all or a portion of its
obligations under the advisory agreement to one or more of its affiliates
involved in the business of managing mortgage assets or, with the approval of a
majority of the Board of Directors as well as a majority of the independent
directors, subcontract all or a portion of its obligations under the advisory
agreement to unrelated third parties. Atlantic Bank will not, in connection
with the subcontracting of any of its obligations under the advisory agreement,
be discharged or relieved in any respect from its obligations under the
advisory agreement. Atlantic Bank will be paid a monthly advisory fee equal to
0.05% per annum of the average gross outstanding balance of Atlantic Preferred
Capital's loans for the immediately preceding month, plus reimbursement for
certain expenses of Atlantic Preferred Capital incurred by Atlantic Bank as
advisor.


45


The advisory agreement has an initial term of five years, and will be
renewed automatically for additional one-year periods unless notice of
nonrenewal is delivered to Atlantic Bank by Atlantic Preferred Capital. After
the initial five year term, the advisory agreement may be terminated by
Atlantic Preferred Capital at any time upon 90 days' prior notice. As long as
any Series A preferred shares remain outstanding, any decision by Atlantic
Preferred Capital either not to renew the advisory agreement or to terminate
the advisory agreement must be approved by a majority of the Board of
Directors, as well as by a majority of the independent directors. Other than
the servicing fee and the advisory fee, Atlantic Bank will not be entitled to
any fee for providing advisory and management services to Atlantic Preferred
Capital.


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:




Exhibit No. Description
- ------------- ------------------------------------------------------------------------------

*3.1 Restated Articles or Organization of Atlantic Preferred Capital
*3.2 Amended and Restated By-laws of Atlantic Preferred Capital
4.1 Specimen of certificate representing Series A preferred shares(1)
10.1 Master Mortgage Loan Purchase Agreement between Atlantic Preferred Capital
and Atlantic Bank(1).
10.2 Master Service Agreement between Atlantic Preferred Capital and Atlantic
Bank(1).
10.3 Advisory Agreement between Atlantic Preferred Capital and Atlantic Bank (1).
10.4 Form of Letter Agreement between Atlantic Preferred Capital and Atlantic Bank
regarding issuance of certain securities (1).
*27.1 Financial Data Schedule


- ------------
* Filed herewith.

(1) Incorporated by reference to Atlantic Preferred Capital's registration
statement on Form S-11 No. 333-66677), filed November 4, 1998, as amended)



46



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.


ATLANTIC PREFERRED CAPITAL CORPORATION



Date: March 30, 1999 By: /s/ RICHARD WAYNE
------------------------------------
Richard Wayne
President

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.





Signature Title
- --------------------------- -----------------------------------


/s/ RICHARD WAYNE President and Director (Principal
- ------------------------- Executive Officer)
(Richard Wayne)


/s/ JOHN L. CHAMPION Treasurer and Director (Principal
- ------------------------- Financial Officer and Principal
(John L. Champion) Accounting Officer)


/s/ NICHOLAS W. LAZARES Director
- -------------------------
(Nicholas W. Lazares)



47