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 June 30, 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
22,274,081 Outstanding as of August 8, 2001
INDEX
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Part I. Item 1. Financial Information Page
A. Consolidated Balance Sheets as of June 30, 2001 (unaudited) and 1
December 31, 2000 (audited)
B. Consolidated Statements of Income (unaudited) for the Three and Six Months 2
Ended June 30, 2001 and June 30, 2000
C. Consolidated Statements of Cash Flows (unaudited) for the Six Months 3
Ended June 30, 2001 and June 30, 2000
D. Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Consolidated Financial 12
Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures about Market Risk 21
Part II. Other Information
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 23
AMERICAN FINANCIAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
June 30, 2001 December 31, 2000
------------- -----------------
(In thousands, except share and per share data)
ASSETS
Cash and due from banks:
Non-interest bearing $ 19,510 $ 17,293
Interest bearing 24 21
------------- -------------
Total cash and due from banks 19,534 17,314
Federal funds sold 8,300 11,740
------------- -------------
Cash and cash equivalents 27,834 29,054
Investment securities available for sale (amortized cost of $261,483
at June 30, 2001 and $275,677 at December 31, 2000) 329,423 351,211
Mortgage-backed securities available for sale (amortized cost of
$234,779 at June 30, 2001 and $250,907 at December 31, 2000) 240,983 255,270
Loans, less allowance for loan losses of $10,900 at June 30, 2001
and $10,624 at December 31, 2000 1,197,280 1,151,048
Accrued interest and dividends receivable on investments 6,500 7,058
Accrued interest receivable on loans 5,954 5,954
Federal Home Loan Bank stock 13,146 12,194
Bank premises and equipment, net 12,966 13,348
Real estate owned 295 211
Cash surrender value of life insurance 61,615 45,022
Other assets 4,538 3,088
------------- -------------
Total assets $ 1,900,534 $ 1,873,458
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 1,122,153 1,126,336
Mortgagors' escrow and other deposits 37,846 19,554
FHLB advances and other borrowings 272,444 177,944
Deferred income tax liability 21,460 24,280
Accrued interest payable on deposits and FHLB advances 1,898 1,622
Other liabilities 13,848 9,755
------------- -------------
Total liabilities 1,469,649 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 289 289
Additional paid-in capital 284,380 282,676
Unallocated common stock held by ESOP (2,133,484 shares) (23,703) (23,703)
Stock-based compensation (213) (78)
Treasury stock (144,494) (56,707)
Retained earnings 270,046 263,452
Accumulated other comprehensive income 44,580 48,038
------------- -------------
Total stockholders' equity 430,885 513,967
------------- -------------
Total liabilities and stockholders' equity $ 1,900,534 $ 1,873,458
============= =============
See accompanying notes to consolidated financial statements.
1
AMERICAN FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands, except per share data)
Interest and dividend income:
Real estate mortgage loans $ 14,809 $ 13,389 $ 29,707 $ 26,547
Consumer and commercial loans 6,153 6,227 12,863 12,054
Mortgage-backed securities 4,121 5,775 8,380 11,519
Federal funds sold 208 38 478 208
Investment securities:
Interest-taxable 3,765 5,222 7,815 10,543
Interest-tax exempt 375 291 750 499
Dividends 946 788 1,829 1,452
---------- ---------- ---------- ----------
Total interest and dividend income 30,377 31,730 61,822 62,822
---------- ---------- ---------- ----------
Interest expense:
Deposits 11,863 11,673 24,027 23,158
Federal Home Loan Bank advances and other short-term
borrowings 3,828 2,805 7,257 5,728
---------- ---------- ---------- ----------
Total interest expense 15,691 14,478 31,284 28,886
---------- ---------- ---------- ----------
Net interest income before provision for loan losses 14,686 17,252 30,538 33,936
Provision for loan losses 100 570 400 1,120
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 14,586 16,682 30,138 32,816
---------- ---------- ---------- ----------
Non-interest income:
Service charges and fees 1,334 918 2,403 1,815
Investment commissions and advisory fees 501 469 890 914
Net gain on sale of investment securities 3,838 1,570 5,158 2,986
Increase in cash surrender value of life insurance 800 - 1,593 -
Other 116 89 222 178
---------- ---------- ---------- ----------
Total non-interest income 6,589 3,046 10,266 5,893
---------- ---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits 6,948 4,047 11,737 7,944
Occupancy expense 656 582 1,348 1,228
Furniture and fixture expense 443 416 867 859
Outside services 713 563 1,455 1,498
Advertising 528 411 951 760
Other 1,234 1,082 2,402 2,071
---------- ---------- ---------- ----------
Total non-interest expense 10,522 7,101 18,760 14,360
---------- ---------- ---------- ----------
Income before income taxes 10,653 12,627 21,644 24,349
Income taxes 3,403 4,240 6,944 8,387
---------- ---------- ---------- ----------
Net income $ 7,250 $ 8,387 $ 14,700 $ 15,962
========== ========== ========== ==========
Basic earnings per share $ 0.35 $ 0.31 $ 0.66 $ 0.60
Diluted earnings per share 0.34 0.31 0.64 0.60
Dividends per share 0.165 0.15 0.33 0.15
See accompanying notes to consolidated financial statements.
2
AMERICAN FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the six months ended
June 30,
---------------------------
2001 2000
---------- ----------
(In thousands)
Operating activities:
Net income $ 14,700 $ 15,962
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 400 1,120
Depreciation and amortization of bank premises and equipment 954 966
Gain on disposition of fixed assets - (4)
Net accretion of discounts (827) (494)
Decrease (increase) in accrued interest and dividends receivable 558 (241)
Gain on sale of investment securities available for sale (5,158) (2,986)
(Increase) decrease in other assets (1,450) 83
Increase in other liabilities 4,369 2,817
Increase in net deferred loan origination costs (943) (36)
Gain on sale of loans (4) (3)
Net gain on disposition of real estate owned (75) (141)
Increase in cash surrender value of life insurance (1,593) -
Change in deferred income tax (benefit) expense (526) 15
----------- -----------
Net cash provided by operating activities 10,405 17,058
----------- -----------
Investing activities:
Investment securities available for sale:
Purchases (16,135) (87,757)
Proceeds from sales 18,835 3,018
Proceeds from maturities 17,000 103,100
Mortgage-backed securities available for sale
Purchases - (14,528)
Principal paydowns 16,607 15,304
Proceeds from sale of loans 7,431 514
Net increase in loans (53,561) (53,872)
(Purchases) redemption of Federal Home Loan Bank stock (952) 4,208
Purchases of bank premises and equipment (598) (1,184)
Proceeds from the sales of real estate owned 437 703
Disposition of fixed assets 26 37
Purchase of life insurance (15,000) -
----------- -----------
Net cash used by investing activities (25,910) (30,457)
----------- -----------
Financing activities:
Increase in demand deposits, regular savings, NOW and money market accounts 41,800 19,859
Decrease in certificates of deposits and retirement accounts (45,983) (118)
Increase in mortgagors' escrow and other deposits 18,292 9,402
Long term advances from the Federal Home Loan Bank 94,500 40,000
Maturities of long term advances from the Federal Home Loan Bank - (81,500)
Short term advances from FHLB 7,565 219,532
Maturities of short term advances from FHLB (7,565) (213,432)
Advances from short and long term repurchase agreements - 31,353
Maturities of short term repurchase agreements - (21,353)
Dividends paid (8,106) (3,956)
Acquisition of common stock for stock-based compensation (135) (36)
Purchases of treasury stock (93,300) (3,169)
Net issue of stock 7,217 -
----------- -----------
Net cash provided (used) by financing activities 14,285 (3,418)
----------- -----------
Decrease in cash and cash equivalents (1,220) (16,817)
Cash and cash equivalents at beginning of period 29,054 30,604
----------- -----------
Cash and cash equivalents at end of period 27,834 13,787
=========== ===========
Supplemental information:
Cash paid during the period ended:
Income taxes 7,150 8,400
Interest paid on deposits and borrowings 31,008 28,944
Transfers of loans to real estate owned 446 138
See accompanying notes to consolidated financial statements.
3
AMERICAN FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS, STOCK OFFERING AND PENDING ACQUISITION
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 and to a lesser extent in Massachusetts
and Rhode Island. 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 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. The Conversion resulted in net proceeds of
$261.0 million after offering costs of $6.3 million.
On July 19, 2001, the Company and American Bank of Connecticut ("American
Bank") entered into a definitive agreement (the "Agreement") whereby the
Company will acquire all of the outstanding common stock of American Bank
for stock and cash equal to approximately $153 million. Immediately after
the completion of the acquisition, American Bank will be merged with and
into American Savings Bank. The Board of Directors of the Company expects
the transaction to close in the fourth quarter of 2001. The transaction
will be accounted for as a purchase (see Note 5), and is subject to
approval by American Bank shareholders and Federal and State regulatory
agencies.
Under certain circumstances, if the Agreement is terminated by the
Company for the reasons set forth in the Agreement before consummation of
the merger, American Bank of Connecticut may be required to pay the
Company cash of $6.1 million plus out of pocket expenses.
BASIS OF FINANCIAL STATEMENT PRESENTATION
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
4
AMERICAN FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
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 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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
5
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 June 30, 2001 and December 31, 2000. The
amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of investment and mortgage-backed securities at
June 30, 2001 and December 31, 2000 are as follows:
JUNE 30, 2001
-------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------------- ------------- --------------- ---------------
(In thousands)
Investment securities:
U.S. Treasury notes $ 5,025 $ 343 $ -- $ 5,368
U.S. Government agencies 19,760 944 -- 20,704
Corporate bonds and notes 170,777 4,976 (5) 175,748
Municipal bonds
Tax exempt 26,911 1,767 -- 28,678
Taxable 11,130 640 -- 11,770
Marketable equity securities 27,880 59,574 (299) 87,155
--------------- ------------ --------------- --------------
Total investment securities 261,483 68,244 (304) 329,423
--------------- ------------ --------------- --------------
Mortgage-backed securities:
U.S. Government & agency 124,736 2,533 (111) 127,158
U.S. Agency issued collateralized
mortgage obligations 110,043 3,783 (1) 113,825
--------------- ------------ --------------- --------------
Total mortgage-backed securities 234,779 6,316 (112) 240,983
--------------- ------------ --------------- --------------
Total available for sale $ 496,262 $ 74,560 $ (416) $ 570,406
=============== ============ =============== ==============
At June 30, 2001, the net unrealized gain on securities available for sale of
$74.1 million, net of income taxes of $29.5 million, is shown as accumulated
other comprehensive income of $44.6 million in stockholders' equity.
6
AMERICAN FINANCIAL HOLDINGS, INC
Notes to Consolidated Financial Statements
(Unaudited)
DECEMBER 31, 2000
----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-------------- ------------- --------------- -------------
(In thousands)
Investment securities:
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
============== ============ =============== =============
At December 31, 2000, the net unrealized gain on securities available for
sale of $79.9 million, net of income taxes of $31.9 million, is shown as
accumulated other comprehensive income of $48.0 million in stockholders'
equity.
7
AMERICAN FINANCIAL HOLDINGS, INC
Notes to Consolidated Financial Statements
(Unaudited)
(3) COMPREHENSIVE INCOME
The following tables represent components (and the related tax effects)
of other comprehensive income/ loss for the three and six month periods
ended June 30, 2001 and 2000.
THREE MONTHS ENDED
JUNE 30, 2001
-------------------------------------------------------
BEFORE
TAX INCOME TAX NET-OF-TAX
AMOUNT EFFECT AMOUNT
------ ------ ------
(In thousands)
Unrealized loss on available for sale securities:
Unrealized holding gain arising during
the period $ 274 $ (109) $ 165
Reclassification adjustment for net gains realized
during the period (3,838) 1,530 (2,308)
------------ ---------------- -------------
Other comprehensive loss $ (3,564) $ 1,421 $ (2,143)
============ ================ =============
Total comprehensive income was $5.1 million for the three-month period
ended June 30, 2001.
SIX MONTHS ENDED
JUNE 30, 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 $ (595) $ 237 $ (358)
Reclassification adjustment for gains realized
during the period (5,158) 2,058 (3,100)
------------ ---------------- -------------
Other comprehensive loss $ (5,753) $ 2,295 $ (3,458)
============ ================ =============
Total comprehensive income was $11.2 million for the six-month period
ended June 30, 2000.
8
AMERICAN FINANCIAL HOLDINGS, INC
Notes to Consolidated Financial Statements
(Unaudited)
THREE MONTHS ENDED
JUNE 30, 2000
-------------------------------------------------------
BEFORE
TAX INCOME TAX NET-OF-TAX
AMOUNT EFFECT AMOUNT
------ ------ ------
(In thousands)
Unrealized loss on available for sale securities:
Unrealized holding losses arising during
the period $ (3,298) $ 1,315 (1,983)
Reclassification adjustment for net gains realized
during the period (1,570) 626 (944)
------------ ---------------- -------------
Other comprehensive loss $ (4,868) $ 1,941 $ (2,927)
============ ================ =============
Total comprehensive income was $5.5 million for the three-month period
ending June 30, 2000.
SIX MONTHS ENDED
JUNE 30, 2000
---------------------------------------------------
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 $ 9,387 $ (3,744) $ 5,643
Reclassification adjustment for net gains realized
during the period (2,986) 1,192 (1,794)
------------ ---------------- -------------
Other comprehensive income $ 6,401 $ (2,552) $ 3,849
============ ================ =============
Total comprehensive income was $19.8 million for the six-month period
ending June 30, 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 incremental
9
AMERICAN FINANCIAL HOLDINGS, INC
Notes to Consolidated Financial Statements
(Unaudited)
common shares (using the treasury stock method) 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 stock is not
included in the calculation of basic earnings per share.
The weighted-average shares and earnings per share for the three and
six-month periods ended June 30 are detailed in the table below.
(In thousands, except per share data)
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
2001 2000 2001 2000
---------- ---------- ----------- -----------
Net income $ 7,250 $ 8,387 $ 14,700 $ 15,962
Weighted-average common shares outstanding 20,896 26,654 22,241 26,636
Diluted weighted-average common shares 21,499 26,886 22,829 26,753
Net income per common share:
Basic 0.35 0.31 0.66 0.60
Diluted 0.34 0.31 0.64 0.60
(5) ACCOUNTING STANDARDS
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 extingushments of liabilities occurring after March
31, 2001. The adoption of SFAS No. 140 did not have a material effect on
the Company's consolidated financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and other Intangible Assets". Among other things,
SFAS 141 requires the use of the purchase method to account for all
business combinations; use of the pooling-of-interests method is not
permitted for business combinations initiated after June 30, 2001. SFAS
No. 142 requires that goodwill no longer be amortized to expense, but
instead be reviewed for impairment. Amortization of goodwill ceases upon
adoption of SFAS No. 142, which for calendar year-end entities, such as
the Company, will be January 1, 2002. Intangible assets other than
goodwill (such as core deposit intangibles) are amortized to expense over
their estimated useful lives.
10
SFAS No. 142 applies to goodwill and other intangible assets acquired
after June 30, 2001 and accordingly, will be applied by the Company upon
its acquisition of American Bank of Connecticut (See note 1).
11
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 and six months ended June 30, 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 and 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 JUNE 30, 2001 AND DECEMBER 31, 2000.
Total assets at June 30, 2001 were $1.90 billion representing an increase of
$27.1 million or 1.4% over the December 31, 2000 level of $1,873 million. The
American Savings Bank's (the "Bank") Tier 1 leverage capital ratio was 17.3% at
June 30, 2001 compared to 19.3% at December 31, 2000. The Bank's total risk
based capital ratio was 30.6% at June 30, 2001 compared to 35.6% at December 31,
2000, and the Company's capital to assets ratio was 22.7% and 27.4% at June 30,
2001 and December 31, 2000, respectively.
The increase in assets was primarily a result of increases of $46.5 million, or
4.0% in gross loans, $16.6 million in the cash surrender value of bank owned
life insurance (BOLI), $1.5 million in other assets and approximately $952,000
in Federal Home Loan Bank Stock. These increases were primarily offset by
decreases of $21.8, million or 6.2% in investment securities, $14.3 million, or
5.6% in mortgage-backed securities, $1.2 million, or 4.2% in cash and cash
equivalents and $558,000, or 7.9%, in accrued interest and dividends receivable.
The increase in loans was primarily in one-to four-family mortgages, home
improvement and equity lines of credit secured by mortgages due to expansion of
the Company's loan market into Massachusetts and Rhode Island and to continued
penetration in Fairfield County, Connecticut. The increase in BOLI was due to
the Company paying the remaining 25%, or $15 million, of a $60 million single
premium bank owned life insurance contract. The period increase in cash
surrender value, which for the six-month period was $1.6 million, is expected to
provide a return in excess of other acceptable investments with comparable risk
and tax attributes. The loan originations and BOLI purchase were funded in part
with maturities and sales of investment and mortgage-backed securities. The
increase in FHLB stock was due to an increase in FHLB borrowings, which
increases the
12
FHLB stock holding requirements. The increase in other assets was due to a
reclassification between current and deferred taxes.
The decrease in investment securities was due to the Company's decision to take
advantage of market conditions and realize gains on investment sales to purchase
the BOLI and to fund loan growth. 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 proceeds from these maturities
were used to fund loan originations and the payment of the BOLI premium. The
decrease in cash and cash equivalents was due to the decrease of $3.4 million in
federal funds sold, partially offset by a $2.2 million increase in cash
primarily as the result of increased balances held at the Federal Reserve Bank.
The decrease in accrued interest was due in part to a lower level of investments
and mortgage-backed securities.
Deposits decreased $4.2 million, or 0.4%, to $1,122 million at June 30, 2001
from $1,126 million at December 31, 2000. The $4.2 million decrease resulted
primarily from a $46.0 million decrease in time and retirement accounts offset
by a $41.8 million increase in core accounts which consist of savings, money
market, NOW and customer demand deposit accounts. Time deposits decreased as
higher rate CD's matured and were replaced by lower cost core deposits. The core
deposit increase was due to market conditions and sales effort. Mortgagors
escrow and other deposits increased $18.3 million or 93.5% due primarily to the
timing of escrowed real estate tax payments to municipalities. Federal Home Loan
Bank advances and other borrowings increased $94.5 million to $272.4 million at
June 30, 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 and loan growth.
Nonperforming assets, consisting of nonperforming loans and real estate owned,
totaled $3.6 million at June 30, 2001 compared to $3.2 million at December 31,
2000. The ratios of nonperforming assets to total assets were 0.19% at June 30,
2001 and 0.17% at December 31, 2000. Real estate owned increased by $84,000 to
$295,000 at June 30, 2001 from $211,000 at December 31, 2000. The modest levels
of nonperforming assets reflect the current favorable economic conditions in the
Company's market area and the Company's strict underwriting guidelines and
collection practices. Future increases in nonperforming loans and other real
estate owned could occur if economic conditions decline.
The allowance for loan losses at June 30, 2001 and December 31, 2000 was $10.9
million and $10.6 million, respectively, which represented 330.9% of
nonperforming loans and 0.91% of total loans at June 30, 2001 as compared to
352.6% of nonperforming loans and 0.92% of total loans at December 31, 2000.
While management believes that, based on information currently available, the
allowance for loan losses is sufficient to cover probable losses inherent in its
loan portfolio at this time, no assurances can be given that the Bank's
allowance for loan losses will be sufficient to cover loan losses incurred by
the Bank or that future adjustments to the allowance for loan losses will not be
necessary if economic and other conditions differ substantially from the
economic and other assumptions used by management to determine the current level
of the allowance for loan losses.
13
The following table sets forth information regarding nonperforming loans and
other real estate owned:
JUNE 30, DECEMBER 31,
2001 2001
--------- -------------
(Dollars in thousands)
Non-accruing loans:
One-to four-family real estate $ 3,269 $ 2,709
Consumer 25 304
--------- ---------
Total 3,294 3,013
Real estate owned 295 211
--------- ---------
$ 3,589 $ 3,224
========= =========
Total non-performing loans as
a percentage of total loans 0.27% 0.26%
Total non-performing assets as
a percentage of total assets 0.19% 0.17%
Total stockholders' equity decreased $83.1 million to $430.9 million at June 30,
2001 compared to $514.0 million at December 31, 2000. This decrease resulted
from the repurchase by the Company of 4,440,338 common stock at a total cost of
$92.2 million, the payment of dividends totaling $8.1 million and a decrease of
$3.5 million in accumulated other comprehensive income. The decrease in other
comprehensive income resulted from a decrease in after-tax net unrealized gain
on investments, primarily in the equity portfolio. The decrease was partially
offset by net income of $14.7 million.
In keeping with its capital management strategy, management announced on June
18, 2001 that it had completed its fifth share repurchase program and that the
Board of Directors had authorized an additional repurchase of 10%, or 2,236,577
shares, of the Company's outstanding stock.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 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
the sale of investment securities, 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.
14
NET INCOME. Net income decreased by $1.1 million, or 13.6%, to $7.3 million for
the quarter ended June 30, 2001 compared to $8.4 million for the same period in
2000. The decrease was primarily driven by using proceeds from the sale and
maturity of investments and mortgage-backed securities to repurchase stock and
to purchase BOLI instead of reinvesting them in interest earning assets, and
higher interest and non-interest expenses. These factors were offset, in part,
by a decrease in the loan loss provision, increases in non-interest income and a
decrease in tax expense.
NET INTEREST INCOME. Net interest income decreased $2.6 million, or 14.9%, for
the three months ended June 30, 2001 compared to the three months ended June 30,
2000. The decrease was due primarily to 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 and repurchase treasury
shares, and an increase in interest expense due primarily to an increase of
$75.1 million in the average daily balance of FHLB borrowings.
Total interest and dividend income decreased $1.4 million, or 4.3%, to $30.4
million in the second quarter of 2001 as compared to $31.7 million in the second
quarter of 2000. The decrease in interest income was primarily due to a decrease
of $94.5 million in the average daily balance in interest earning assets to
$1,695.7 million for the three months ended June 30, 2001 compared to $1,790.2
million for the three months ended June 30, 2000, partially offset by a 9 basis
point increase in the yield on interest earning assets. Interest income on loans
increased $1.3 million, or 6.9%, to $21.0 million, primarily due to a $96.8
million increase in the average daily balance of loans outstanding for the
second quarter of 2001 as compared to the same period in 2000, partially offset
by a 15 basis point decrease in the yield on loans. Interest and dividend income
on a tax-equivalent basis on investment and mortgage-backed securities decreased
$2.8 million, or 23.2% for the quarter ended June 30, 2001 compared to the
second quarter of the prior year. The decrease resulted primarily from a $207.8
million decrease in the average daily balances offset by a 58 basis point
increase in the yield earned on such securities.
Total interest expense for the three months ended June 30, 2001 was $15.7
million, an increase of $1.2 million, or 8.4%, compared to $14.5 million for the
three months ended June 30, 2000. This increase was primarily due to a $75.1
million, or 40.0% increase in the average daily balance of Federal Home Loan
Bank advances and other borrowings to $262.8 million in the second quarter of
2001, as compared to $187.7 million for the same period in 2000 partially offset
by a 15 basis point decrease in the rate paid. Interest on deposits increased
$190,000 due primarily to an increase of 9 basis points in the rate paid
partially offset by a decrease of $5.8 million in the average daily balance.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $100,000 for the
three months ended June 30, 2001, a decrease of $470,000, or 82.5%, from the
$570,000 provision for the three months ended June 30, 2000. This decrease
reflects a decrease in net charge-offs and management's assessment of the losses
inherent in the loan portfolio including the impact of continuing growth. The
allowance for loan losses is maintained at a level believed by management to be
adequate to absorb losses in the portfolio. The adequacy of the allowance for
loan losses is regularly evaluated by management. Factors considered in
evaluating the adequacy of the allowance include previous loss experience,
current economic conditions and their effect on borrowers, the performance of
individual loans in relation to contract terms, and other pertinent factors.
While management uses the best available information to estimate the allowance
for loan losses, future additions to the allowance for loan losses may be
necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgments about information available to them at the time of their examinations.
15
NON-INTEREST INCOME. Non-interest income increased $3.5 million, or 116.3%, to
$6.6 million for the three months ended June 30, 2001 from $3.0 million for the
three months ended June 30, 2000, due to net gains on the sale of investment
securities of $2.3 million, an $800,000 increase in the cash surrender value of
BOLI and a $416,000 increase in service charges and fees. The increase in
service charges and fees was in part due to implementing fees charged for
foreign ATM transactions, increased collection rate in overdraft fees,
implementation of new fee schedules, and increased sales of fixed annuity
products which was driven by market conditions. The increase in gains on the
sale of investment securities is due to the Company selling securities to
diversify its portfolio and to take advantage of market conditions. The increase
in cash surrender value of life insurance was the result of the purchase of the
remainder of the $60 million contract of Bank Owned Life Insurance.
NON-INTEREST EXPENSE. Non-interest expense for the three months ended June 30,
2001 was $10.5 million, an increase of $3.4 million, or 48.2%, compared to $7.1
million for the three months ended June 30, 2000. The increase was primarily due
to an increase in salaries and benefits of $2.9 million which was mainly
attributable to the expense of $1.7 million related to the cost of accelerating
the vesting of stock-based benefits for certain retired directors, $718,000 for
the full quarter cost of restricted stock and increased costs for the Employee
Stock Ownership Plan resulting from the higher share price of the Company's
common stock. Other expenses increased $152,000 or 14.0% from $1.1 million to
$1.2 million primarily due to additional software maintenance to support
enhanced Internet capabilities and other productivity enhancing software.
Outside services expense increased $150,000 or 26.6% to $713,000. The increase
was primarily due to consulting charges for analysis of data processing security
safeguards and for human resource benefits.
INCOME TAX EXPENSE. Income taxes were $3.4 million for the three months ended
June 30, 2001 as compared to $4.2 million for the three months ended June 30,
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.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
NET INCOME. Net income decreased by $1.3 million, or 7.9%, to $14.7 million for
the six months ended June 30, 2001 compared to $16.0 million for the same period
in 2000. The decrease was primarily driven by using the proceeds from the sale
and maturity of securities to repurchase stock and to purchase BOLI instead of
reinvesting them in interest earning assets, and higher interest and
non-interest expenses. These factors were offset, in part, by a decrease in loan
loss provision, increases in non-interest income and a decrease in tax expense.
NET INTEREST INCOME. Net interest income decreased $3.4 million, or 10.0%, to
$30.5 million for the six months ended June 30, 2001 compared to the six months
ended June 30, 2000. The decrease was due in part to 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 and the reallocation of interest earning assets and increased borrowing
to fund treasury share purchases. 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 decreased $1.0 million to $61.8 million for
the six months ended June 30, 2001 as compared to $62.8 million for the six
months ended June 30, 2000. The decrease in interest income was primarily due to
a decrease of $87.1 million in the average daily balance in interest earning
assets to $1.70 billion for the six months ended June 30, 2001 compared to
$1,788 million for the six months ended June 30, 2000, partially offset by a 26
basis point increase in the yield on interest earning assets. Interest income on
loans increased $4.0 million, or 10.3%, to $42.6 million, primarily due to a
16
$102.9 million increase in the average daily balance of loans outstanding for
the six months of 2001 as compared to the same period in 2000. This was the
result of the Company's continued expansion in out of state markets and in
Fairfield County, Connecticut. Interest and dividend income on a tax-equivalent
basis on investment and mortgage-backed securities decreased $5.0 million, or
21.1%, for the six months ended June 30, 2001 compared to the same period of the
prior year. The decrease resulted primarily from a $200.2 million decrease in
the average daily balances partially offset by a 64 basis point increase in the
yield earned on such securities.
Total interest expense for the six months ended June 30, 2001 was $31.3 million,
an increase of $2.4 million, or 8.3%, compared to $28.9 million for the six
months ended June 30, 2000. This increase was primarily due to a $54.5 million
increase in the average daily balance of Federal Home Loan Bank advances and
other borrowings to $247.5 million in the first six months of 2001, as compared
to $193.0 million for the same period in 2000, partially offset by a 7 basis
point decrease in the rate paid. Interest on certificates of deposit increased
$591,000 due primarily to an increase of 43 basis points in the rate paid. The
rate increase was offset by a decrease of $37.8 million in the average daily
balances on these deposits.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $400,000 for the
six months ended June 30, 2001, a $720,000 decrease from the $1.1 million
provision for the six months ended June 30, 2000. This decrease reflects a
decrease in net charge-offs and management's assessment of the losses inherent
in the loan portfolio including the impact of continued growth. The allowance
for loan losses to loans was 0.91% and 0.90% of total loans at June 30, 2001 and
2000, respectively, while the net loans charged off decreased to $124,000 for
the six months ended June 30, 2001 from $168,000 for the six months ended June
30, 2000.
NON-INTEREST INCOME. Non-interest income increased $4.4 million, or 74.2%, to
$10.3 million for the six months ended June 30, 2001 from $5.9 million for the
six months ended June 30, 2000, primarily due to an increase in net gains on the
sale of investment securities of $2.2 million, a $1.6 million increase in the
cash surrender value of BOLI and a $588,000 increase in service charges and
fees. The increase in gains on the sale of investment securities was due to the
Company selling securities to diversify its portfolio and to take advantage of
market conditions. The increase in cash surrender value of life insurance was
the result of the payment of the remaining $15 million of a $60 million BOLI
contract. Service charges and fees increased in part due to implementing fees
charged for foreign ATM transactions, increased collection rate in overdraft
fees, implementation of revised deposit fees, and increased sales of fixed
annuity products which was driven by market conditions.
NON-INTEREST EXPENSE. Non-interest expense for the six months ended June 30,
2001 was $18.8 million, an increase of $4.4 million, or 30.6%, compared to $14.4
million for the six months ended June 30, 2000. The increase was primarily due
to increases in salaries and employee benefits, advertising and other expenses.
Salaries and benefits increased $3.8 million primarily due to expenses of $1.7
million related to the cost of accelerating the vesting of options for certain
retired directors, and costs associated with the stock based incentive plans.
Other expenses increased $331,000 or 16.0% from $2.1 million to $2.4 million
primarily due to additional software maintenance to support enhanced Internet
capabilities and other productivity enhancing software and forms. Advertising
expense increased $191,000 or 25.1% to $951,000 for the six month period ended
June 31, 2001 compared to $760,000 for the six month period ended June 30, 2000
due to the implementation of advertising campaigns during the first half of the
year to promote Internet Banking and small business lending and deposit
products.
INCOME TAX EXPENSE. Income taxes were $6.9 million for the six months ended June
30, 2001 as compared to $8.4 million for the six months ended June 30, 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.
17
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COSTS
The following tables present 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
JUNE 30, 2001 JUNE 30, 2000
--------------------------------------- -----------------------------------------
AVERAGE AVERAGE
AVERAGE BALANCE INTEREST YIELD/RATE AVERAGE BALANCE INTEREST YIELD/RATE
--------------- -------- ----------- --------------- -------- ----------
(DOLLARS IN THOUSANDS)
INTEREST EARNING ASSETS:
Loans (1) $ 1,161,023 $ 20,962 7.22% $ 1,064,22 $ 19,616 7.37%
Federal funds sold 18,495 208 4.50 2,555 38 5.95
Investment securities-taxable
and Interest-earning deposits 237,262 4,512 7.61 339,633 5,761 6.78
Investment securities-tax exempt(2) 26,905 576 8.56 20,913 448 8.57
Mortgage-backed securities 239,249 4,122 6.89 350,655 5,775 6.59
FHLB stock 12,739 199 6.25 12,194 249 8.17
------------ --------- ------- ------------ ---------- ------
Total interest-earning assets 1,695,673 $ 30,579 7.21% 1,790,172 $ 31,887 7.12%
Non-interest-earning assets 183,481 96,516
------------ ------------
Total assets $ 1,879,154 $ 1,886,688
============ ============
INTEREST-BEARING LIABILITIES:
Deposits
Money management accounts $ 82,370 $ 637 3.09% $ 62,206 $ 418 2.69%
NOW accounts 87,767 185 0.84 80,333 270 1.34
Savings and IRA passbook accounts 211,239 1,052 1.99 204,555 1,029 2.01
Certificates of deposit 717,746 9,989 5.57 757,801 9,956 5.26
------------ --------- ------ ------------ ---------- ------
Total interest-bearing deposits 1,099,122 11,863 4.32 1,104,895 11,673 4.23
FHLB advances and other borrowings(3) 262,825 3,828 5.83 187,691 2,805 5.98
------------ --------- ------- ------------ ---------- ------
Total interest-bearing liabilities 1,361,947 $ 15,691 4.61% 1,292,586 $ 14,478 4.48%
Non-interest bearing demand deposits 36,416 25,575
Other non-interest-bearing liabilities 45,573 29,015
------------ ------------
Total liabilities 1,443,936 1,347,176
Stockholders' equity 435,218 539,512
------------ ------------
Total liabilities and equity $ 1,879,154 $ 1,886,688
============ ============
Net interest-earning assets $ 333,726 $ 497,586
============ ============
Net interest income $ 14,888 $ 17,409
========= ==========
Interest rate spread 2.60% 2.64%
====== ======
Net interest margin (net
interest income as a percentage
of interest-earning assets) 3.51% 3.89%
====== ======
Ratio of interest-earning assets
to Interest-bearing liabilities 124.50% 138.50%
====== ======
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
18
FOR THE SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000
--------------------------------------- -----------------------------------------
AVERAGE AVERAGE
AVERAGE BALANCE INTEREST YIELD/RATE AVERAGE BALANCE INTEREST YIELD/RATE
--------------- -------- ----------- --------------- -------- ----------
(DOLLARS IN THOUSANDS)
INTEREST EARNING ASSETS:
Loans (1) $ 1,154,881 42,570 7.37% $ 1,051,999 $ 38,601 7.34%
Federal funds sold 19,190 478 4.98 7,267 208 5.72
Investment securities-taxable
and Interest-earning deposits 243,947 9,227 7.56 345,541 11,486 6.65
Investment securities-tax exempt(2) 26,901 1,155 8.59 18,085 768 8.49
Mortgage-backed securities 243,412 8,380 6.89 350,868 11,519 6.57
FHLB stock 12,474 417 6.69 14,183 509 7.18
-------------- ---------- ------ ------------- ----------- ------
Total interest-earning assets 1,700,805 $ 62,227 7.32% 1,787,943 $ 63,091 7.06%
Non-interest-earning assets 184,905 94,467
-------------- -------------
Total assets $ 1,885,710 $ 1,882,410
============== =============
INTEREST-BEARING LIABILITIES:
Deposits
Money management accounts $ 76,697 $ 1,199 3.13% $ 63,212 $ 842 2.66%
NOW accounts 87,618 395 0.90 77,333 523 1.35
Savings and IRA passbook 208,815 2,074 1.99 201,424 2,025 2.01
accounts
Certificates of deposit 723,952 20,359 5.62 761,778 19,768 5.19
-------------- ---------- ------ ------------- ----------- ------
Total interest-bearing 1,097,082 24,027 4.38 1,103,747 23,158 4.20
deposits
FHLB advances and other 247,455 7,257 5.87 192,973 5,728 5.94
borrowings (3) -------------- ---------- ------ ------------- ----------- ------
Total interest-bearing
liabilities 1,344,537 $ 31,284 4.65% 1,296,720 $ 28,886 4.46%
Non-interest bearing demand
deposits 31,702 24,369
Other non-interest-bearing
liabilities 45,173 26,037
-------------- -------------
Total liabilities 1,421,412 1,347,126
Stockholders' equity 464,298 535,284
-------------- -------------
Total liabilities and equity $ 1,885,710 $ 1,882,410
============== =============
Net interest-earning assets $ 356,268 $ 491,223
============== =============
Net interest income $ 30,943 $ 34,205
========== ==========
Interest rate spread 2.67% 2.60%
==== ====
Net interest margin (net
interest income as a percentage
of interest-earning assets) 3.64% 3.83%
==== ====
Ratio of interest-earning assets
to Interest-bearing liabilities 126.50% 137.88%
====== ======
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
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, purchases 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
19
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, sale and 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 mortgage 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 June 30, 2001, the Bank
exceeded all of its regulatory capital requirements and was considered "well
capitalized" under regulatory guidelines.
As previously discussed, on July 19, 2001, the Company and American Bank of
Connecticut ("American Bank") entered into a definitive agreement (the
"Agreement") whereby the Company will acquire all of the outstanding common
stock of American Bank for stock and cash equal to approximately $153 million.
Immediately after the completion of the acquisition, American Bank will be
merged with and into the Bank. The Board of Directors of the Company expects the
transaction to close in the fourth quarter of 2001. The transaction is subject
to approval by American Bank shareholders and Federal and State regulatory
agencies. Management expects the effects of this transaction on the liquidity
and capital of the Bank to be significant. Management is considering various
funding alternatives to pay the cash portion of the merger consideration and
will continue to plan for and monitor the liquidity and capital of the Bank as
the transaction closing date draws near. The Bank expects that it will still be
categorized as "well capitalized" after the acquisition.
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 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.
20
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 a 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 $59.3 million at June 30, 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. The table below sets forth, as of June 30,
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
increases and decreases in market interest rates of 200 basis points.
If interest rates increased 200 basis points, the average constant prepayment
rate (the "CPR") assumptions on mortgage loans and securities, including
Collateralized Mortgage Obligations ("CMO") and Mortgage-backed Securities
(MBS), were 12.87% and 13.51% on June 30, 2001 and December 31, 2000,
respectively. If interest rates decreased 200 basis points, the CPR prepayment
assumptions were 31.20% and 29.53% on June 30, 2001 and December 31, 2000,
respectively. At 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. At June 30, 2001, the rates paid on
non-maturity deposits were assumed to change as follows: savings and non-premium
rate money market accounts were assumed not to change under a rising or falling
interest rate environment; premium rate money market accounts were assumed to
increase 50 basis points if interest rates increased 200 basis points and not to
change if interest rates decreased 200 basis points; and NOW accounts were
assumed to increase by 40 basis points if interest rates increased 200 basis
points, and not to change if interest rates decreased 200 basis points. The
changes in assumptions at December 31, 2000 to June 30, 2001 were the result of
significantly lower levels of rates paid on NOW and premium rate money market
accounts compared to December 31, 2000,
21
such that management now believes it is more appropriate to assume that changes
in rates paid on these deposits would only occur in a rising rates environment.
Increase/ Estimated Changes in Annual Net Interest Income
-----------------------------------------------
(Decrease) June 30, 2001 December 31, 2000
------------- -----------------
in market (Dollars in thousands)
interest rates
in basis points $ % $ %
(Rate Shock) Change Change Change Change
------------------------------------------------------------------------------------------------
200 $ 932 1.48% $ 178 0.27%
(200) $(1,747) (2.77)% $(1,507) (2.27)%
Comparing the changes in net interest income on June 30, 2001 and December 31,
2000, the estimated change in net interest income decreased by $240,000 from
($1.51 million) to ($ 1.75 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 $754,000 from $178,000 to $932,000. 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.
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 and 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 The Company
held its annual meeting on April 30, 2001. At that meeting shareholders voted on
and approved the election of Robert T. Kenney, with 21,635,254 votes for and
435,268 votes withheld, Steven T. Martin, with 21,653,661 votes for and 416,861
votes withheld, and Laurence A. Tanner, with 21,566,484 votes for and 504,038
votes withheld, as directors for a three year term to expire in 2004. Two other
matters were voted on by shareholders. The first matter was ratification of the
appointment of KPMG LLP as independent auditors for the Company for the fiscal
year ending December 31, 2001, which passed with 21,784,337 shares of
shareholders present or voting by proxy casting votes for, 207,482 votes against
and 78,703 abstentions. The other item brought to a vote was the amendment to
the American Financial Holdings, Inc. 2000 Stock-Based Incentive Plan which also
passed with 18,007,877 votes of all shareholders eligible to vote voting for,
3,912,537 voting against, and 150,108 abstaining.
PART II. ITEM 5. OTHER INFORMATION
None
22
PART II. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
The following exhibits are included herein:
3.1 Certificate of Incorporation of American Financial Holdings, Inc.*
3.2 Bylaws of American Financial Holdings, Inc.*
10.1 American Financial Holdings, Inc. 2000 Stock-Based Incentive
Plan **
* Incorporated by reference into this document from the Exhibits to the
Form S-1 Registration Statement, and any amendments thereto,
Registration No. 333-84463
**Incorporated by reference into this document from the proxy statement
for the 2001 Annual Meeting filed March 26, 2001
b) Reports on Form 8-K
None
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: August 13, 2001 /s/ Robert T. Kenney
--------------------
Robert T. Kenney
Chairman, President and Chief Executive Officer
Date: August, 13, 2001 /s/ Charles J. Boulier, III
-----------------------------------
Charles J. Boulier,
Senior Executive Vice President, Chief Financial
Officer and Treasurer