UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, For the quarter ended March 31, 2001 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, For the transition period from _____________ to
_____________.
COMMISSION FILE NUMBER 0-27399
AMERICAN FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1555700
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
102 WEST MAIN STREET
NEW BRITAIN, CONNECTICUT 06051
(Address of principal executive offices) (Zip code)
(860) 832-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Common Stock Par Value $.01 Per Share
23,136,207 Outstanding as of May 9, 2001
INDEX
-----
Part I. Item 1. Financial Information Page
A. Consolidated Balance Sheets as of March 31, 2001 (unaudited) 1
and December 31, 2000 (audited)
B. Consolidated Statements of Income (unaudited) for the Three 2
Months Ended March 31, 2001 and March 31, 2000
C. Consolidated Statements of Cash Flows (unaudited) for the 3
Three Months Ended March 31, 2001 and March 31, 2000
D. Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Consolidated Financial 9
Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures about 15
Market Risk
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
AMERICAN FINANCIAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
March 31, 2001 December 31, 2000
-------------- -----------------
(In thousands, except share and per share data)
ASSETS
Cash and due from banks:
Non-interest bearing $ 15,497 $ 17,293
Interest bearing 24 21
------------ ------------
Total cash and due from banks 15,521 17,314
Federal funds sold 18,850 11,740
------------ ------------
Cash and cash equivalents 34,371 29,054
Investment securities available for sale (amortized cost
of $282,039 at March 31, 2001 and $275,677 at December 31, 2000) 352,522 351,211
Mortgage-backed securities available for sale (amortized cost of
$245,932 at March 31, 2001 and $250,907 at December 31, 2000) 253,157 255,270
Loans, less allowance for loan losses of $10,858 at March 31, 2001 and
$10,624 at December 31, 2000 1,148,081 1,151,048
Accrued interest and dividends receivable on investments 6,742 7,058
Accrued interest receivable on loans 5,940 5,954
Federal Home Loan Bank stock 12,703 12,194
Bank premises and equipment, net 13,096 13,348
Real estate owned 340 211
Cash surrender value of life insurance 60,814 45,022
Other assets 2,473 3,088
------------ ------------
Total assets $ 1,890,239 $ 1,873,458
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 1,122,318 $ 1,126,336
Mortgagors' escrow and other deposits 18,808 19,554
FHLB advances and other borrowings 252,444 177,944
Deferred income tax liability 23,407 24,280
Accrued interest payable on deposits and FHLB advances 2,235 1,622
Other liabilities 13,473 9,755
------------ ------------
Total liabilities 1,432,685 1,359,491
Stockholders' Equity
Preferred stock, $.01 par value; authorized 10,000,000 shares,
none issued - -
Common stock, $.01 par value; authorized 120,000,000 shares,
28,871,100 shares issued and outstanding 289 289
Additional paid-in capital 282,660 282,676
Unallocated common stock held by ESOP (2,133,484 shares) (23,703) (23,703)
Stock-based compensation (186) (78)
Treasury stock (114,854) (56,707)
Retained earnings 266,625 263,452
Accumulated other comprehensive income 46,723 48,038
------------ ------------
457,554 513,967
------------ ------------
Total liabilities and stockholders' equity $ 1,890,239 $ 1,873,458
============ ============
See accompanying notes to consolidated financial statements.
1
AMERICAN FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months Ended March 31
---------------------------------------
2001 2000
-------------- ---------------
(In thousands, except per share data)
Interest and dividend income:
Real estate mortgage loans $ 14,898 $ 13,158
Consumer and commercial loans 6,710 5,826
Mortgage-backed securities 4,259 5,744
Federal funds sold 270 170
Investment securities:
Interest-taxable 4,050 5,321
Interest-tax exempt 375 209
Dividends 883 664
------------ ------------
Total interest and dividend income 31,445 31,092
Interest expense:
Deposits 12,164 11,485
Federal Home Loan Bank advances and other short-term borrowings 3,429 2,923
------------ ------------
Total interest expense 15,593 14,408
Net interest income before provision for loan losses 15,852 16,684
Provision for loan losses 300 550
------------ ------------
Net interest income after provision for loan losses 15,552 16,134
Non-interest income:
Service charges and fees 1,069 897
Investment commissions and advisory fees 389 445
Net gain on sale of investment securities 1,320 1,416
Net (loss) gain on sale of loans (5) 2
Increase in cash surrender value of life insurance 793 -
Other 111 87
------------ ------------
Total non-interest income 3,677 2,847
Non-interest expense:
Salaries and employee benefits 4,789 3,897
Occupancy expense 692 648
Furniture and fixture expense 424 441
Charitable contributions 35 35
Outside services 742 935
Advertising 423 349
Other 1,133 954
------------ ------------
Total non-interest expense 8,238 7,259
Income before income taxes 10,991 11,722
Income taxes 3,541 4,147
------------ ------------
Net income $ 7,450 $ 7,575
============ ============
Basic earnings per share 0.32 0.28
Diluted earnings per share 0.31 0.28
Dividends per share 0.165 -
See accompanying notes to consolidated financial statements.
2
AMERICAN FINANCIAL HOLDINGS, INC.
Consolidated Statements of Cash Flows
(unaudited)
For the three months ended
March 31,
-------------------------------------
2001 2000
-------------- ---------------
(In thousands)
Operating activities:
Net income $ 7,450 $ 7,575
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 300 550
Depreciation and amortization of bank premises and equipment 468 468
Loss on disposition of fixed assets - 2
Accretion of discounts (413) (193)
Decrease in accrued interest and dividends receivable 330 356
Gain on sale of investment securities (1,320) (1,416)
Decrease in other assets 615 2,157
Increase in other liabilities 4,331 1,326
Decrease (increase) in net deferred loan origination costs 65 (87)
Loss (gain) on sale of loans 5 (2)
Net gain on disposition of real estate owned (27) (87)
Increase in cash surrender value of life insurance (792) -
Increase in deferred income tax - 6
------------ ------------
Net cash provided by operating activities 11,012 10,655
------------ ------------
Investing activities:
Investment securities available for sale:
Purchases (11,985) (53,928)
Proceeds from sales 2,622 1,435
Proceeds from maturities 4,500 70,100
Mortgage-backed securities available for sale
Purchases - (14,527)
Principal paydowns 5,210 7,186
Proceeds from sale of loans 1,538 197
Proceeds from sale of real estate owned 140 547
Redemption (purchases) of Federal Home Loan Bank stock (509) 4,208
Net decrease (increase) in loans 817 (23,254)
Purchases of bank premises and equipment (216) (583)
Purchase of life insurance (15,000) -
------------ ------------
Net cash used by investing activities (12,883) (8,619)
------------ ------------
Financing activities:
(Decrease) increase in deposits (4,018) 16,360
(Decrease) increase in mortgagors' escrow deposits (746) 5,136
Advances from the Federal Home Loan Bank 182,500 2,500
Maturities of advances from the Federal Home Loan Bank (108,000) (30,000)
Acquisition of common stock for stock-based compensation plans (108) -
Purchases of treasury stock (59,188) -
Issue of stock 1,025 -
Cash dividends paid (4,277) -
------------ ------------
Net cash provided (used) by financing activities 7,188 (6,004)
------------ ------------
Increase (decrease) in cash and cash equivalents 5,317 (3,968)
Cash and cash equivalents at beginning of period 29,054 30,604
------------ ------------
Cash and cash equivalents at end of period $ 34,371 $ 26,636
============ ============
Supplemental information:
Interest paid on deposits and borrowings $ 14,980 $ 14,599
Transfers of loans to real estate owned 242 73
See accompanying notes to consolidated financial statements.
3
AMERICAN FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
American Financial Holdings, Inc. (the "Company" or the "Parent Company")
is a savings and loan holding company. The Company's subsidiary, American
Savings Bank (the "Bank"), provides a wide range of banking, financing,
fiduciary and other financial services to individuals and businesses
located primarily in Connecticut. The Company is subject to the
regulation of certain state and federal agencies and undergoes periodic
examination by those regulatory authorities.
The Bank completed its conversion from a mutual savings bank to a stock
savings bank (the "Conversion") on November 30, 1999. Concurrent with the
Bank's conversion, the Parent Company was formed, acquired all of the
Bank's common stock and issued its common stock in a subscription and
direct community offering to the public.
As part of the Conversion, the Bank issued all of its 1,000 outstanding
shares of common stock to the Company for 50% of the net proceeds from
the Company's sale of common stock in the subscription and direct
community offering. As a result of the subscription and direct community
offering, the Company sold 25,395,875 shares of its common stock at a
price of $10 per share to persons having subscription rights, and
1,336,625 shares to the Bank's Employee Stock Ownership Plan (the
"ESOP"). The Company also contributed 2,138,600 shares to American
Savings Charitable Foundation. The Conversion resulted in net proceeds of
$261.0 million after offering costs of $6.3 million.
The accompanying unaudited consolidated interim financial statements have
been prepared in conformity with accounting principles generally accepted
in the United States of America and with the instructions to Form 10-Q.
Accordingly, certain information and disclosures required by accounting
principles generally accepted in the United States of America for
complete financial statements are not included herein. The interim
statements should be read in conjunction with the financial statements of
the Company and notes thereto included in the Company's 2000 annual
report filed on Form 10-K. The consolidated financial statements include
the accounts of the Parent Company, the Bank and the Bank's wholly-owned
subsidiaries, American Investment Services, Inc. and American Savings
Bank Mortgage Servicing Company. All significant intercompany
transactions have been eliminated in consolidation. In preparing the
consolidated financial statements, 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 revenues and expenses
for the period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to changes in the
near-term include to the determination of the allowance for loan losses.
All adjustments, consisting of only normal recurring adjustments, which
in the opinion of management are necessary for fair presentation of
financial position, results of operations and cash flows, have been made.
The results of operations for interim periods are not necessarily
indicative of the results that may be expected for another interim period
or a full year.
4
AMERICAN FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(2) INVESTMENT AND MORTGAGE-BACKED SECURITIES
The Company classified all investment and mortgage-backed securities as
available for sale as of March 31, 2001 and December 31, 2000. The
amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of investments and mortgage-backed securities at
March 31, 2001 and December 31, 2000 are as follows:
MARCH 31, 2001
-------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------------- ------------- --------------- ---------------
(In thousands)
Investments:
U.S. Treasury notes $ 5,027 $ 400 $ -- $ 5,427
U.S. Government agencies 24,751 1,139 -- 25,890
Corporate bonds and notes 190,424 5,325 (9) 195,740
Municipal bonds
Tax exempt 26,903 1,987 -- 28,890
Taxable 11,119 606 -- 11,725
Marketable equity securities 23,815 61,498 (463) 84,850
--------------- ------------ --------------- --------------
Total investment securities 282,039 70,955 (472) 352,522
--------------- ------------ --------------- --------------
Mortgage-backed securities:
U.S. Government & agency 134,825 3,222 -- 138,047
U.S. Agency issued collateralized
Mortgage obligations 111,107 4,003 -- 115,110
--------------- ------------ --------------- --------------
Total mortgage-backed securities 245,932 7,225 -- 253,157
--------------- ------------ --------------- --------------
Total available for sale $ 527,971 $ 78,180 $ (472) $ 605,679
=============== ============ =============== ==============
5
AMERICAN FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
DECEMBER 31, 2001
-------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------------- ------------- --------------- ---------------
(In thousands)
Investments:
U.S. Treasury notes $ 5,029 $ 318 $ -- $ 5,347
U.S. Government agencies 24,742 734 (12) 25,464
Corporate bonds and notes 187,800 2,500 (68) 190,232
Municipal bonds
Tax exempt 26,894 1,629 -- 28,523
Taxable 11,108 407 (1) 11,514
Marketable equity securities 20,104 70,560 (533) 90,131
-------------- ------------ --------------- -------------
Total investment securities 275,677 76,148 (614) 351,211
-------------- ------------ --------------- -------------
Mortgage-backed securities:
U.S. Government & agency 139,377 1,581 (90) 140,868
U.S. Agency issued collateralized
mortgage obligations 111,530 2,872 -- 114,402
-------------- ------------ --------------- -------------
Total mortgage-backed securities 250,907 4,453 (90) 255,270
-------------- ------------ --------------- -------------
Total available for sale $ 526,584 $ 80,601 $ (704) $ 606,481
============== ============ =============== =============
(3) COMPREHENSIVE INCOME
The following tables represent components and the related tax effects
allocated to other comprehensive income for the three month periods ended
March 31, 2001 and March 31, 2000.
THREE MONTHS ENDED
MARCH 31, 2001
------------------------------------------------------
BEFORE
TAX INCOME TAX NET-OF-TAX
AMOUNT EFFECT AMOUNT
------ ------ ------
(In thousands)
Unrealized loss on available for sale securities:
Unrealized holding loss arising during
the period $ (869) $ 347 $ (522)
Reclassification adjustment for gains realized
during the period (1,320) 527 (793)
------------ ---------------- -------------
Other comprehensive income $ (2,189) $ 874 $ (1,315)
============ ================ =============
Total comprehensive income was $6.1 million for the three-month period ending March 31, 2001.
6
AMERICAN FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
THREE MONTHS ENDED
MARCH 31, 2001
------------------------------------------------------
BEFORE
TAX INCOME TAX NET-OF-TAX
AMOUNT EFFECT AMOUNT
------ ------ ------
(In thousands)
Unrealized gain on available for sale securities:
Unrealized holding gains arising during
the period $ 12,686 $ (5,058) 7,628
Reclassification adjustment for gains realized
during the period (1,416) 565 (851)
------------ ---------------- -------------
Other comprehensive income $ 11,270 $ (4,493) $ 6,777
============ ================ =============
Total comprehensive income was $14.4 million for the three-month period
ending March 31, 2000.
(4) EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income available to
common stockholders by the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings per share is computed in a
manner similar to that of basic earnings per share except that the
weighted-average number of common shares outstanding is increased to include
the number of additional common shares that would have been outstanding if
all potentially dilutive common shares (such as stock options and unvested
restricted stock) were issued during the period. Unallocated common shares
held by the ESOP are not included in the weighted-average number of common
shares outstanding for either basic or diluted earnings per share
calculations. Unvested restricted shares are not included in the calculation
of basic earnings per share.
The weighted-average shares and earnings per share for the three-month
periods ended March 31 are detailed in the table below.
(In thousands, except per share data)
2001 2000
---------------- ----------------
Net income $ 7,450 $ 7,575
Weighted-average common shares outstanding 23,588 26,607
Diluted weighted-average common shares 24,157 26,607
Net income per common share:
Basic $ 0.32 $ 0.28
Diluted $ 0.31 $ 0.28
7
AMERICAN FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(5) ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," addresses the accounting
for derivative instruments, including certain derivative instruments
embedded in other contracts and hedging activities. As amended, the
statement is now effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. Upon adoption, hedging relationships were
to be designed in accordance with the statement. Early adoption is
permitted; however retroactive application is prohibited. This statement
has not impacted the Company since the Company does not engage in hedging
activities or utilize derivative instruments.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," a
replacement of SFAS No. 125. SFAS 140 addresses implementation issues that
were identified in applying SFAS No. 125. This statement revises the
standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it
carries over most of SFAS No. 125 provisions without reconsideration. SFAS
No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. SFAS No.
140 is effective for recognition and reclassification of collateral and
for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. This statement is to be
applied prospectively with certain exceptions. Other than those
exceptions, early or retroactive application is not permitted. Management
does not expect the adoption of SFAS No. 140 to have a material effect on
the Company's financial position or results of operations.
8
Part I. Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis discusses changes in the financial condition and results
of operations at and for the three months ended March 31, 2001 and 2000, and
should be read in conjunction with American Financial Holdings, Inc.'s (the
"Company") Unaudited Consolidated Financial Statements and the notes thereto,
appearing in Part I, Item 1 of this document.
FORWARD LOOKING STATEMENTS
This quarterly report contains forward-looking statements that are based on
assumptions and may contain descriptions of future plans, strategies, and
expectations of the Company. These forward-looking statements are generally
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. The Company's ability to predict
results accurately or the actual operations of the Company are effected by many
factors which include, but are not limited to, changes in interest rates,
general economic conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality and composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition, demand for
financial services in the Company's market area, real estate values in the
Company's market area and accounting principles. These risks and uncertainties
should be considered in evaluating forward-looking statements and undue reliance
should not be placed on these statements. Except as required by applicable law
or regulation the Company does not undertake - and specifically disclaims any
obligation - to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of the statements or to reflect the occurrence of anticipated or
unanticipated events.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2001 AND DECEMBER 31, 2000.
Total assets at March 31, 2001 were $1,890 million representing an increase of
$16.8 million or 0.9% over the December 31, 2000 level of $1,873 million. The
American Savings Bank's (the "Bank") Tier 1 leverage capital ratio was 19.1% at
March 31, 2001 compared to 19.3% at December 31, 2000. The Bank's total risk
based capital ratio was 34.8% at March 31, 2001 compared to 35.6% at December
31, 2000, and the Company's capital to assets ratio was 24.2% and 27.4% at March
31, 2001 and December 31, 2000, respectively.
The increase in assets was primarily a result of the increase in the cash
surrender value of life insurance of $15.8 million. On January 3, 2001 the
Company paid the remaining 25%, or $15 million, of a $60 million single premium
bank owned life insurance contract. The annual increase in cash surrender value
is expected to provide a return in excess of other acceptable investments with
comparable risk and tax attributes. Other increases in assets were $1.3 million
or 0.4% in investment securities from $351.2 million at December 31, 2000 to
$352.5 million at March 31, 2001, $7.1 million or 60.6% to $18.9 million in
federal funds sold at March 31, 2001 from $11.7 million at December 31, 2000.
These increases were offset by decreases of $2.1 million or 0.9% in
mortgage-backed securities and $3.0 million or 0.3% in the loan portfolio, and a
decrease in cash and due from banks of $1.8 million or 10.4%. The decrease in
mortgage-backed securities was due to maturing securities which the Company
chose not to re-invest due to the lower yields available during the period. The
decrease in the loan portfolio was primarily in first mortgage loans due to
pay-offs attributable to the lower rate environment that existed during that
period. The decrease in cash was the result of a decrease in balances held at
the Federal Reserve Bank.
9
Deposits decreased $4.0 million, or 0.4%, to $1,122 million at March 31, 2001
from $1,126 million at December 31, 2000. The $4.0 million decrease resulted
primarily from a $27.1 million decrease in time and retirement accounts offset
by a $23.1 million increase in core accounts which consist of savings, money
market, NOW and customer demand deposit accounts. Federal Home Loan Bank
advances and other borrowings increased $74.5 million to $252.4 million at March
31, 2001 from $177.9 million at December 31, 2000. The increase in FHLB advances
and other borrowings was used primarily to fund treasury stock purchases. Other
liabilities increased by $4.3 million, or 38.1% from $11.4 million at December
31, 2000 to $15.7 million at March 31, 2001.
Nonperforming assets, consisting of nonperforming loans and real estate owned,
totaled $3.3 million at March 31, 2001 compared to $3.2 million at December 31,
2000. Nonperforming assets to total assets were 0.17% both at March 31, 2001 and
December 31, 2000. Real estate owned increased by $129,000 to $340,000 at March
31, 2001 from $211,000 at December 31, 2000. The relatively low level of other
real estate owned reflects the current favorable economic conditions in the
Company's market area and the Company's strict underwriting guidelines. Future
losses could occur if the economic conditions decline.
The allowance for loan losses at March 31, 2001 and December 31, 2000 was $10.9
million and $10.6 million respectively, which represented 368.3% of
nonperforming loans and 0.94% of total loans at March 31, 2001 as compared to
352.6% of nonperforming loans and 0.92% of total loans at December 31, 2000.
Total equity decreased $56.4 million to $457.6 million at March 31, 2001
compared to $514.0 million at December 31, 2000. This decrease resulted from the
purchase by the Company of 2,869,185 shares of common stock totaling $59.2
million, the net payment of dividends totaling $4.3 million and a decrease of
$1.3 million in accumulated other comprehensive income. The decrease was
partially offset by net income of $7.5 million. The decrease in other
comprehensive income resulted from a decrease in after-tax net unrealized loss
on investments, primarily in the equity portfolio.
In keeping with its capital management strategy, management announced on April
25, 2001 that it had completed its fourth share repurchase program and that the
Board of Directors had authorized an additional repurchase of 5%, or 1,178,485
shares, of its outstanding stock.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2001
AND 2000
GENERAL
The Company's consolidated results of operations depend primarily on net
interest income, or the difference between interest income earned on the
Company's interest-earning assets, such as loans and securities, and the
interest expense on the Company's interest-bearing liabilities, such as deposits
and borrowings. The Company also generates non-interest income primarily from
service charges and other fees earned on fee-based activities such as trust
operations, insurance sales, and investment services provided by the Bank's
wholly owned subsidiary, American Investment Services, Inc. ("AIS"). The
Company's non-interest expenses primarily consist of employee compensation and
benefits, occupancy expense, professional services, furniture and fixture
expense, advertising and other operating expenses. Results of operations are
also affected by general economic and competitive conditions, notably changes in
market interest rates, and government policies and regulation.
NET INCOME. Net income decreased by $125,000, or 1.7%, to $7.5 million for the
quarter ended March 31, 2001 compared to $7.6 million for the same period in
2000. The decrease was primarily driven by using funds to repurchase stock
instead of investing in interest earning assets, and higher interest and
non-
10
interest expenses. These increased expenses were offset, in part, by
decreases in loan loss reserves, increases in non-interest income and a decrease
in tax expense.
NET INTEREST INCOME. Net interest income decreased $832,000, or 5.0%, for the
three months ended March 31, 2001 compared to the three months ended March 31,
2000. The decrease was primarily the result of decreased interest income
resulting from the reallocation of assets from the mortgage-backed and
investment portfolios to fund a single premium bank owned life insurance
contract. The decrease in the average daily balance of the mortgage-backed and
investment portfolios was also partially offset by an increase in the average
daily balance in the loan portfolio.
Total interest and dividend income increased $353,000 to $31.4 million in the
first quarter of 2001 as compared to $31.1 million in the first quarter of 2000.
The increase in interest income was primarily due to a 40 basis point increase
in the yield earned on interest earning assets, offset by a $78.8 million
decrease in average daily balance of interest-earning assets to $1.71 billion
for the three months ended March 31, 2001, compared to $1.78 billion for the
three months ended March 31, 2000. Interest income on loans increased $2.6
million, or 13.8%, to $21.6 million, primarily due to a $108.9 million increase
in the average daily balance of loans outstanding for the first quarter of 2001
as compared to the same period in 2000 and also to a 22 basis point increase in
the yield on loans. Interest and dividend income on a tax-equivalent basis on
investment and mortgage-backed securities decreased $2.2 million, or 19.0% for
the quarter ended March 31, 2001 compared to the first quarter of the prior
year. The decrease resulted primarily from a $191.6 million decrease in the
average daily balances offset by a 69 basis point increase in the yield earned
on such securities. The increase in yield in the first quarter of 2001 was a
reflection of generally higher market rates that existed during that period.
Total interest expense for the three months ended March 31, 2001 was $15.6
million, an increase of $1.2 million, or 8.2%, compared to $14.4 million for the
three months ended March 31, 2000. This increase was primarily due to a $33.7
million increase in the average daily balance of Federal Home Loan Bank advances
and other borrowings to $231.9 million in the first quarter of 2001, as compared
to $198.3 million for the same period in 2000 and to a 7 basis point increase in
the rate paid. Interest on certificates of deposit decreased $558,000 due
primarily to a decrease in the average daily balance of $35.5 million, partially
offset by a 61 basis point increase in the rate paid on these deposits.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $300,000 for the
three months ended March 31, 2001, a $250,000 decrease from the $550,000
provision for the three months ended March 31, 2000. This decrease reflects a
decrease in net charge-offs and management's assessment of the losses inherent
in the loan portfolio. Additionally, the allowance for loan losses to loans
increased to 0.94% from 0.87 % for the three months ended March 31, 2001 and
March 31, 2000 respectively while the net loans charged off decreased to $66,000
from $129,000 for the three months ended March 31, 2001 and 2000 respectively.
NON-INTEREST INCOME. Non-interest income increased $830,000, or 29.2%, to $3.7
million for the three months ended March 31, 2001 from $2.8 million for the
three months ended March 31, 2000, primarily due to a $793,000 increase in the
cash surrender value of life insurance. Service charges and fees increased
$172,000 in the first quarter of 2001 over the same period in 2000, in part due
to implementing fees charged for foreign ATM transactions and increased
collection rate in overdraft fees. Investment advisory fees and commissions,
which are fees derived from the Bank's investment services subsidiary, AIS,
decreased by $56,000 in part due to staff realignment required for the
positioning of AIS to offer investment advisory services. Investment advisory
services will allow AIS to transition from one-time commissions to fee-based
revenues. This transition is expected to reduce revenue levels for AIS over the
next several quarters but is expected to generate higher revenues in advisory
fee income thereafter.
11
NON-INTEREST EXPENSE. Non-interest expense for the three months ended March 31,
2001 was $8.2 million, an increase of $979,000, or 13.5%, compared to $7.3
million for the three months ended March 31, 2000. The increase was due to an
increase in salaries and benefits of $892,000 primarily due to costs associated
with the Employee Stock Ownership Plan and the Incentive Plans. Other expenses
increased $179,000 or 18.8% from $954,000 to $1.1 million primarily due to
additional expenses to support increased loan and deposit activity. Outside
service expense decreased $193,000 or 20.6% to $742,000. The decrease was the
result of increased professional and exam fees that were paid in the first
quarter of last year in conjunction with the conversion to a public company.
INCOME TAX EXPENSE. Income taxes were $3.5 million for the three months ended
March 31, 2001 as compared to $4.1 million for the three months ended March 31,
2000. The decrease in income taxes was primarily due to a decrease in income
before income taxes and the effect of a greater percentage of tax exempt income.
12
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COST
The following table presents certain information for the periods indicated
regarding average balances of assets and liabilities, as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and the resulting
average yields and costs. The yields and costs for the periods indicated are
derived by dividing annualized income or expense by the average balances of
assets or liabilities, respectively, for the periods presented. Average balances
were derived from daily balances.
FOR THE THREE MONTHS ENDED
MARCH 31, 2001 MARCH 31, 2000
----------------------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE BALANCE INTEREST YIELD/RATE AVERAGE BALANCE INTEREST YIELD/RATE
--------------- ---------- ------------ --------------- ---------- ------------
(DOLLARS IN THOUSANDS)
INTEREST EARNING ASSETS:
Loans (1) $ 1,148,671 $ 21,608 7.52 % $ 1,039,776 $ 18,984 7.30 %
Federal funds sold 19,893 270 5.43 11,980 170 5.68
Investment securities-taxable
and Interest-earning deposits 250,705 4,715 7.52 350,499 5,725 6.53
Investment securities-tax
exempt (2) 26,897 577 8.58 15,258 321 8.42
Mortgage-backed securities 247,622 4,259 6.88 351,081 5,744 6.54
FHLB stock 12,206 218 7.14 16,171 260 6.43
--------------- ---------- ----------- ------------- ----------- -------
Total interest-earning 1,705,994 $ 31,647 7.42 % 1,784,765 $ 31,204 6.99 %
assets
Non-interest-earning assets 186,337 93,367
--------------- -------------
Total assets $ 1,892,331 $ 1,878,132
============== ============
INTEREST-BEARING LIABILITIES:
Deposits
Money management accounts $ 70,961 $ 562 3.21 % $ 64,219 $ 424 2.65 %
NOW accounts 87,468 209 0.97 74,333 252 1.37
Savings and IRA passbook 206,364 1,022 2.01 198,292 996 2.02
accounts
Certificates of deposit 730,226 10,371 5.76 765,755 9,813 5.15
--------------- ---------- ----------- ------------- ----------- -------
Total interest-bearing deposits 1,095,019 12,164 4.51 1,102,599 11,485 4.19
FHLB advances and other borrowings (3) 231,914 3,429 6.00 198,256 2,923 5.93
--------------- ---------- ----------- ------------- ----------- -------
Total interest-bearing 1,326,933 $ 15,593 4.77 % 1,300,855 $ 14,408 4.45 %
liabilities
Non-interest bearing demand deposits 26,935 23,164
Other non-interest-bearing liabilities 44,762 23,058
--------------- -------------
Total liabilities 1,398,630 1,347,077
Stockholders' equity 493,701 531,055
--------------- -------------
Total liabilities and equity $ 1,892,331 $ 1,878,132
============== ============
Net interest-earning assets $ 379,061 $ 483,910
============== ============
Net interest income $ 16,054 $ 16,796
========= ========
Interest rate spread 2.65 % 2.54 %
==== ====
Net interest margin (net interest
income as a percentage of interest-earning 3.76 % 3.76 %
assets) ==== ====
Ratio of interest-earning assets to
Interest-bearing liabilities 128.57 % 137.20 %
====== ======
Note 1 - Average balances include nonaccrual loans.
Note 2 - Tax exempt interest is calculated on a tax equivalent basis.
Note 3 - Includes mortgage escrow accounts
13
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability to meet current and future short-term financial
obligations. The Company further defines liquidity as the ability to respond to
the needs of depositors and borrowers as well as maintaining the flexibility to
take advantage of investment opportunities. The Company's main sources of
liquidity are dividends from the Bank, while the main outflows are the payments
of dividends, purchase of treasury stock and operating expenses. The Bank can
not pay dividends to the Company without prior approval, in excess of the sum of
the Bank's net profits for the current year combined with its retained net
profits from the preceding two calendar years. Regulations also prohibit the
payment of dividends by the Bank if doing so would cause it to be
"undercapitalized". Further restrictions prohibit the payment of dividends if
such dividends would reduce stockholders' equity below the amount of the
liquidation account required by the Connecticut conversion regulations. The
Bank's primary sources of funds consist of deposit inflows, loan repayments,
maturities, paydowns, and sales of investments and mortgage-backed securities
and borrowings from the Federal Home Loan Bank. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
outflows and mortgage prepayments are greatly influenced by general interest
rates, economic conditions and competition.
The primary investing activities of the Bank are: (1) the origination of
residential one-to four-family mortgage loans, single-family construction loans,
home equity loans and lines of credit and consumer loans; and (2) the investment
in mortgage-backed securities, U.S. Government and agency obligations, corporate
equity securities and debt obligations. These activities are funded primarily by
principal and interest payments on loans, maturities of securities, deposit
growth and Federal Home Loan Bank advances. Deposit flows are affected by the
overall level of interest rates, the interest rates and products offered by the
Bank and its local competitors and other factors. The Bank closely monitors its
liquidity position on a daily basis. If the Bank should require funds beyond its
ability to generate them at a reasonable rate internally, additional sources of
funds are available through Federal Home Loan Bank advances and through
repurchase agreement borrowing facilities with broker/dealers. Additionally,
the Bank has outstanding loan commitments that consist of unused lines of credit
available through ready reserve lines of credit, equity lines of credit and
commitments for mortgages loans.
The Bank relies primarily on competitive rates, customer service, and
long-standing relationships with customers to retain deposits. From time to
time, the Bank will also offer special competitive promotions to its customers
to increase retention and promote deposit growth. Based upon the Bank's
historical experience with deposit retention, management believes that, although
it is not possible to predict future terms and conditions upon renewal, a
significant portion of maturing deposits will remain with the Bank.
The Bank is subject to various regulatory capital requirements administered by
the state and federal banking agencies including a risk-based capital measure.
The risk-based capital guidelines include both a definition of capital and a
framework for calculating risk-weighted assets by assigning balance sheet assets
and off-balance sheet items to broad risk categories. At March 31, 2001, the
Bank exceeded all of its regulatory capital requirements and was considered
"well capitalized" under regulatory guidelines.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented in this report
have been prepared in conformity with accounting principles generally accepted
in the United States of America, which require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike many
14
industrial companies, substantially all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the general level of
inflation. Over short periods of time, interest rates may not necessarily move
in the same direction or in the same magnitude as inflation.
PART I. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
QUALITATIVE ASPECTS OF MARKET RISK. The Company's most significant form of
market risk is interest rate risk. The principal objectives of the Company's
interest rate risk management are to evaluate the interest rate risk inherent in
certain balance sheet accounts, determine the level of risk appropriate given
the Company's business strategy, operating environment, capital and liquidity
requirements and performance objectives, and manage the risk consistent with the
Board of Directors' approved guidelines. The Company has an Asset/Liability
Committee responsible for reviewing its asset/liability policies and interest
rate risk position, which meets monthly and reports trends and interest rate
risk position to the Finance Committee of the Board of Directors quarterly and
the whole Board of Directors annually. The extent of the movement of interest
rates is an uncertainty that could have a negative impact on the earnings of the
Company.
In recent years, the Company has used the following strategies to manage
interest rate risk: (1) emphasizing the origination of adjustable-rate loans and
generally selling longer term fixed-rate loans as market interest rate
conditions dictate; (2) emphasizing shorter term consumer loans; (3) maintaining
a high quality securities portfolio that provides adequate liquidity and
flexibility to take advantage of opportunities that may arise from fluctuations
in market interest rates, the overall maturity of which is monitored in relation
to the repricing of its loan portfolio; and (4) using Federal Home Loan Bank
advances and repurchase agreements to better structure maturities of its
interest rate sensitive liabilities. The Company currently does not participate
in hedging programs, interest rate swaps or other activities involving the use
of off-balance sheet derivative financial instruments.
The Company's market risk also includes equity price risk. The marketable equity
securities portfolio had net unrealized gains of $61.0 million at March 31, 2001
which is included, net of taxes, in accumulated other comprehensive income, a
separate component of the Company's capital. If equity security prices decline
due to unfavorable market conditions or other factors, the Company's capital
would decrease.
QUANTITATIVE ASPECTS OF MARKET RISK. The Company uses a simulation model to
measure the potential change in net interest income, incorporating various
assumptions regarding the shape of the yield curve, the pricing characteristics
of loans, deposits and borrowings, prepayments on loans and securities and
changes in balance sheet mix. The assumptions that have the greatest impact on
the estimated changes in annual net interest income are prepayment assumptions
on mortgage loans and securities. As a result of the assumptions used, these
computations should not be relied upon as indicative of actual results. Further,
these computations do not reflect any actions that management may undertake in
responses to changes in interest rates. The table below sets forth, as of March
31, 2001 and December 31, 2000 estimated changes in the Company's net interest
income for the next twelve month period which may result given instantaneous
changes in market interest rates of 200 basis points up and down.
In an up 200 basis point environment, the average constant prepayment rate (the
"CPR") assumptions on mortgage loans and securities were 14.05% and 15.96% on
March 31, 2001 and December 31, 2000, respectively. In a down 200 basis point
environment, the CPR prepayment assumptions on mortgage loans and securities
were 29.62% and 29.59% on March 31, 2001 and December 31, 2000, respectively. On
both March 31, 2001 and December 31, 2000, the rates paid on non-maturity
deposits (savings, money management and NOW accounts) were assumed not to change
under either interest rate environment.
15
Estimated Changes in Annual Net Interest Income
Increase/ -----------------------------------------------
(Decrease) March 31, 2001 December 31, 2000
in market -------------- -----------------
interest rates (Dollars in thousands)
in basis points $ % $ %
(Rate Shock) Change Change Change Change
---------------------------------------------------------------------------------
200 $ 1,177 1.83% $178 0.27%
Static - - - -
(200) $(1,865) (2.90)% $(1,507) (2.27)%
Comparing the changes in net interest income on March 31, 2001 and December 31,
2000, the estimated change in net interest income decreased by $358,000 from
($1.51 million) to ($1.87 million) under a down 200 basis point environment.
Correspondingly, under an up 200 basis point environment, the estimated change
in net interest income improved by $999,000 from $178,000 to $1.18 million.
These changes are attributable to an increase in asset sensitivity, which
resulted from the growth of short-term assets, and an extension in certificate
of deposits maturities which reduced the amount of maturities over the next
year. Overall this represents a modest change in the basic interest rate risk
profile of the Company.
16
PART II. ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. Such routine
proceedings, in the aggregate, are believed by management to be immaterial to
the Company's financial condition or results of operations.
PART II. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
PART II. ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
PART II. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II. ITEM 5. OTHER INFORMATION
None
PART II. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
The following exhibits are included herein:
2.1 Amended Plan of Conversion (including the Certificate of
Incorporation and Bylaws of American Savings Bank) *
3.1 Certificate of Incorporation of American Financial Holdings,
Inc.*
3.2 Bylaws of American Financial Holdings, Inc.*
* Incorporated by reference into this document from the Exhibits to the
Form S-1 Registration Statement, and any amendments thereto,
Registration No. 333-84463
b) Reports on Form 8-K
None.
17
SIGNATURES
Pursuant to the requirements 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.
American Financial Holdings, Inc.
Date: May 15, 2001 /s/ Robert T. Kenney
--------------------
Robert T. Kenney
Chairman, President and Chief Executive Officer
Date: May 15, 2001 /s/ Charles J. Boulier, III
--------------------------
Charles J. Boulier, III
Executive Vice President, Chief Financial
Officer and Treasurer
18