UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) JANUARY 18, 2002
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 incorporation or organization) (I.R.S. Employer Identification No.)
102 WEST MAIN STREET, NEW BRITAIN, CONNECTICUT 06051
(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code: (860) 612-3366
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
The Registrant hereby amends the items, financial statements, exhibits or other
portions of its Current Report on Form 8-K dated January 18, 2002 and filed on
January 29, 2002 as set forth herein.
TABLE OF CONTENTS
ITEM. 7 FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS
(a) Financial Statements of Businesses Acquired
Audited Consolidated Balance Sheets of American Bank of Connecticut as of
December 31, 2001 and 2000, and the Related Consolidated Statements of
Earnings, Stockholders' Equity, Comprehensive Income (Loss) and Cash Flows
for the Years Ended December 31, 2001, 2000, and 1999.....................3
(b) Pro Forma Financial Information
American Financial Holdings, Inc. Unaudited Pro Forma Consolidated
Condensed Balance Sheet as of December 31, 2001..........................30
American Financial Holdings, Inc. Unaudited Pro Forma Consolidated
Condensed Statement of Income for the Year Ended December 31, 2001.......31
American Financial Holdings, Inc. Notes to Unaudited Pro Forma
Consolidated Condensed Financial Statements..............................31
(c) Exhibits
Exhibit No. Description
---------- -----------
23 Consent of KPMG LLP
2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American Financial Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of American Bank of
Connecticut and subsidiaries (the "Bank") as of December 31, 2001 and 2000, and
the related consolidated statements of earnings, comprehensive income (loss),
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2001. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Bank of
Connecticut and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
As described in note 1 to the consolidated financial statements, the Bank was
acquired by American Financial Holdings, Inc. on January 18, 2002.
/s/ KPMG LLP
----------------
KPMG LLP
Hartford, Connecticut
January 18, 2002
3
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
(Dollars in thousands)
ASSETS 2001 2000
------------ ------------
Cash and amounts due from depository institutions $ 15,398 $ 14,838
Federal funds sold 117,400 15,100
------------ ------------
Total cash and cash equivalents 132,798 29,938
------------ ------------
Investment securities available for sale, at fair value (note 3)
(amortized cost $105,878 in 2001; $224,825 in 2000) 105,349 223,555
Mortgage-backed securities available for sale, at fair value (note 3)
(amortized cost $217,197 in 2001; $185,994 in 2000) 221,400 187,832
------------ ------------
Total investment and mortgage-backed securities 326,749 411,387
------------ ------------
Loans receivable (note 4):
Residential real estate 240,985 246,291
Commercial real estate 82,073 80,743
Real estate construction 39,834 29,656
Commercial 58,162 64,592
Consumer and other 3,097 2,767
Allowance for loan losses (8,396) (7,360)
------------ ------------
Loans, net 415,755 416,689
------------ ------------
Premises and equipment, net (note 5) 5,088 5,757
Accrued income receivable 4,100 6,213
Intangible assets 12,451 14,345
Cash surrender value of bank-owned life insurance 17,965 16,988
Deferred income taxes, net (note 9) 1,776 3,089
Prepaid expenses and other assets (note 2) 8,772 2,681
------------ ------------
Total assets $ 925,454 $ 907,087
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 7):
Demand deposits $ 49,663 $ 44,759
Checking deposits 81,363 80,927
Savings deposits 333,520 292,167
Time deposits 266,981 299,503
------------ ------------
Total deposits 731,527 717,356
Borrowings from the Federal Home Loan Bank (note 8) 107,000 114,000
Accrued interest payable 591 1,379
Accrued expenses and other liabilities 2,164 2,333
------------ ------------
Total liabilities 841,282 835,068
------------ ------------
Stockholders' equity:
Common stock, one dollar par value per share; authorized
12,000,000 shares; issued and outstanding 5,007,734 and
4,762,000 shares in 2001 and 2000, respectively 5,008 4,762
Additional paid-in capital 12,385 7,032
Retained earnings 63,939 60,788
Accumulated other comprehensive income 3,752 372
Unearned ESOP shares (912) (935)
------------ ------------
Total stockholders' equity 84,172 72,019
------------ ------------
Total liabilities and stockholders' equity $ 925,454 $ 907,087
============ ============
See accompanying notes to consolidated financial statements.
4
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended December 31, 2001, 2000 and 1999
(Dollars in thousands, except per share data)
2001 2000 1999
------------ ------------- ------------
Interest income:
Interest and fees on loans $ 33,307 $ 32,884 $ 31,341
Interest and dividends on investment securities 8,600 11,590 10,569
Interest on mortgage-backed securities 14,953 11,265 5,335
Other interest income 2,077 2,202 1,129
------------ ------------- ------------
Total interest income 58,937 57,941 48,374
------------ ------------- ------------
Interest expense:
Deposits:
NOW accounts 897 963 814
Savings deposits 10,827 10,534 7,064
Time deposits 16,141 15,119 11,674
------------ ------------- ------------
27,865 26,616 19,552
Borrowings 6,313 9,303 8,080
------------ ------------- ------------
Total interest expense 34,178 35,919 27,632
------------ ------------- ------------
Net interest income 24,759 22,022 20,742
Provision for loan losses (note 4) 1,100 525 450
------------ ------------- ------------
Net interest income after
provision for loan losses 23,659 21,497 20,292
------------ ------------- ------------
Non-interest income:
Stock option premiums (note 3) 2,289 2,528 1,803
Net (loss) gain on the sales of securities (note 3) (1,768) 1,585 1,801
Income on investment in limited
partnership (note 2) 1,716 49 54
Increase in cash surrender value of
bank-owned life insurance 977 916 748
Other 2,056 1,428 1,354
------------ ------------- ------------
Total non-interest income 5,270 6,506 5,760
------------ ------------- ------------
Non-interest expenses:
Salaries and employee benefits (note 6) 8,784 6,945 6,908
Net occupancy expense 2,512 2,206 1,855
Amortization of intangible assets 1,894 858 249
Other 4,469 2,842 3,381
------------ ------------- ------------
Total non-interest expense 17,659 12,851 12,393
------------ ------------- ------------
Earnings before income taxes 11,270 15,152 13,659
Income taxes (note 9) 3,170 4,107 3,558
------------ ------------- ------------
Net earnings $ 8,100 $ 11,045 $ 10,101
============ ============= ============
Earnings per share (note 10):
Basic $ 1.71 $ 2.36 $ 2.18
Diluted 1.64 2.30 2.10
See accompanying notes to consolidated financial statements.
5
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Years ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
------------ ------------ -------------
Net earnings $ 8,100 $ 11,045 $ 10,101
------------ ------------ -------------
Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) arising during the
year on securities available for sale
(net of income tax expense (benefit) of
$902, $4,294 and $(5,584) for 2001, 2000
and 1999, respectively) 1,345 8,218 (10,840)
Unrealized holding gain arising during the
year on limited partnership investment
(net of income tax expense of $962 for 2001) 1,509 -- --
Less reclassification adjustment for net
realized losses (gains) on securities available
for sale included in net income (net of
income tax expense (benefit) of $335, $(345)
and $(828) for 2001, 2000 and 1999,
respectively) 526 (660) (1,606)
------------ ------------ --------------
Other comprehensive income (loss) 3,380 7,558 (12,446)
------------ ------------ --------------
Comprehensive income (loss) $ 11,480 $ 18,603 $ (2,345)
============ ============ ==============
See accompanying notes to consolidated financial statements.
6
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
----------- ----------- -----------
Common stock:
Balance at beginning of year $ 4,762 $ 4,745 $ 4,703
Stock options exercised 246 17 42
----------- ----------- -----------
Balance at end of year 5,008 4,762 4,745
----------- ----------- -----------
Additional paid-in capital:
Balance at beginning of year 7,032 6,841 6,126
Stock options exercised 4,964 174 649
Compensation expense recognized for
variable stock options 368 -- --
Allocated ESOP shares 21 17 66
----------- ----------- -----------
Balance at end of year 12,385 7,032 6,841
----------- ----------- -----------
Retained earnings:
Balance at beginning of year 60,788 54,409 48,658
Net earnings 8,100 11,045 10,101
Cash dividends ($1.04, $1.00 and $0.94 per
share in 2001, 2000 and 1999, respectively) (5,018) (4,735) (4,411)
Compensation expense recognized for
restricted stock 69 69 61
----------- ----------- -----------
Balance at end of year 63,939 60,788 54,409
----------- ----------- -----------
Accumulated other comprehensive income (loss):
Balance at beginning of year 372 (7,186) 5,260
Other comprehensive income (loss) 3,380 7,558 (12,446)
----------- ----------- -----------
Balance at end of year 3,752 372 (7,186)
----------- ----------- -----------
Unearned ESOP shares:
Balance at beginning of year (935) (1,214) (1,492)
Allocated shares 23 279 278
----------- ----------- -----------
Balance at end of year (912) (935) (1,214)
----------- ----------- -----------
Total stockholders' equity $ 84,172 $ 72,019 $ 57,595
=========== =========== ===========
See accompanying notes to consolidated financial statements.
7
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
----------- ----------- -----------
Operating activities:
Net earnings $ 8,100 $ 11,045 $ 10,101
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for loan losses 1,100 525 450
Provision for depreciation and amortization 2,062 680 800
Loss (gain) on sales of securities 1,768 (1,585) (1,801)
Purchases of trading securities (131) (2,027) (6,665)
Proceeds from sales of trading securities 131 1,719 6,665
Decrease (increase) in accrued income receivable 2,113 (1,376) (738)
(Decrease) increase in accrued expenses and other liabilities (169) 102 217
(Decrease) increase in accrued interest payable (788) 684 5
Increase in cash surrender value of bank-owned life insurance (977) (916) (748)
Deferred income tax benefit (886) (628) (356)
Write-down and losses on real estate owned 7 148 302
(Increase) decrease in prepaid expenses and other assets (3,447) 1,852 (2,186)
Amortization of intangible assets 1,894 858 249
Compensation expense on variable stock options 368 -- --
----------- ----------- -----------
Net cash provided by operating activities 11,145 11,081 6,295
----------- ----------- -----------
Investing activities:
Purchases of investment securities available for sale (158,344) (121,652) (117,021)
Proceeds from sales of investment securities available for sale 145,927 94,538 69,138
Proceeds from maturities of investment securities available for sale 108,960 7,910 28,378
Principal paydowns on investment securities available for sale 18,393 -- --
Purchases of mortgage-backed securities available for sale (149,490) (175,690) (62,188)
Proceeds from sales of mortgage-backed securities available for sale 33,977 74,120 --
Principal paydowns on mortgage-backed securities available for sale 85,546 18,230 20,655
Net increase in loans (456) (19,350) (18,446)
Purchase of bank-owned life insurance -- -- (5,000)
Net purchases of premises and equipment (384) (1,404) (780)
Proceeds from sales of other real estate owned 110 1,201 839
----------- ----------- -----------
Net cash provided by (used in) investing activities 84,239 (122,097) (84,425)
----------- ----------- -----------
Financing activities:
Deposits assumed in acquisition of branches, net of premium -- 94,498 --
Net increase in deposits, exclusive of acquisition 14,171 70,608 48,161
Proceeds from FHLB borrowings 23,000 131,302 99,547
Repayments of FHLB borrowings (30,000) (181,302) (48,147)
Dividends paid (5,018) (4,735) (4,411)
Proceeds from restricted stock and stock options exercised 5,300 277 818
Decrease in unearned ESOP shares 23 279 278
----------- ----------- -----------
Net cash provided by financing activities 7,476 110,927 96,246
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 102,860 (89) 18,116
Cash and cash equivalents at beginning of year 29,938 30,027 11,911
----------- ----------- -----------
Cash and cash equivalents at end of year $ 132,798 $ 29,938 $ 30,027
=========== =========== ===========
Supplemental information:
Non-cash investing activities:
Transfer of loans to real estate owned $ 290 $ 786 $ 945
Cash paid during the year for:
Interest on deposits and borrowings 34,966 35,235 27,627
Income taxes 5,150 3,990 3,240
=========== =========== ===========
See accompanying notes to consolidated financial statements.
8
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(1) ACQUISITION OF THE BANK
On July 19, 2001, American Bank of Connecticut (the "Bank") announced
that it had entered into an Agreement and Plan of Merger ("Agreement") by
and among American Financial Holdings, Inc., ("AFH"), a Delaware
corporation and American Savings Bank of New Britain ("ASB") a
Connecticut state-chartered stock savings bank and wholly-owned
subsidiary of AFH, providing for the acquisition of the Bank by AFH and
related merger of the Bank into ASB. During the fourth quarter of 2001,
the merger was approved by the regulatory agencies and the shareholders
of the Bank. Under the terms of the Agreement, AFH paid or tendered $30
in cash, or a combination of AFH common stock and cash, for each share of
Bank common stock. The acquisition was completed on January 18, 2002.
(2) SUMMARY OF ACCOUNTING POLICIES
The Bank is a Connecticut state-chartered stock savings bank
headquartered in Waterbury, Connecticut. The Bank's market area is
comprised of the cities of Waterbury, Torrington and contiguous towns. In
addition to retail banking, the Bank also engages in residential,
commercial and commercial real estate lending and business banking. The
Bank originates loans primarily for retention in its own portfolio. The
Bank operates and reports results as a single business without segments.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the Bank
and its wholly-owned subsidiaries, BKC Passive Investment Corporation, a
Connecticut passive investment company, and BKC Financial Services, Inc.,
a subsidiary established to sell non-deposit investment products
(hereinafter referred to collectively as the "Bank"). All inter-company
accounts are eliminated in the consolidation.
The consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America. 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. A material estimate that is particularly susceptible to
change in the near term is the allowance for loan losses, which is
discussed below.
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash amounts due from depository institutions and
Federal funds sold. Generally, Federal funds are sold for a one-day
period.
Certain prior year amounts have been reclassified to conform with the
2001 presentation.
CASH AND DUE FROM BANKS
The Bank is subject to requirements of the Federal Reserve Bank of Boston
to maintain certain average cash reserve balances. At December 31, 2001
and 2000, these reserves were $386,000 and $337,000, respectively.
9 (Continued)
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
SECURITIES AND OTHER INVESTMENTS
Securities classified as available for sale are intended to be held for
indefinite periods of time, but not necessarily to maturity.
Available-for-sale securities are reported at fair value with unrealized
gains or losses reported in stockholders' equity (accumulated other
comprehensive income or loss), net of income tax effect. Federal Home
Loan Bank stock is a non-marketable equity security reported at cost.
Debt securities for which there exists the ability and intent to hold to
maturity are classified as held to maturity and are reported at amortized
cost. The amortization of premiums and accretion of discounts are
recorded over the life of the security. Trading account assets are held
in anticipation of short-term market movements and are carried at fair
value. Any resulting gain or loss is reflected in the Bank's statement of
earnings.
The Bank periodically writes call options, which are obligations to sell
a fixed quantity of securities at the option holder's request at a stated
price within a specified term. The Bank owns or has entered into
commitments to purchase underlying securities for all call options sold.
Premium income from the sale of call options is recorded as a liability
and, together with the call option, is marked to market with the
resulting unrealized gains or losses recognized in earnings currently.
Upon either the expiration or exercise of the option, the remaining
premium is recognized in income in the statement of earnings.
Gains and losses on sales of securities are determined on the specific
identification method and are recognized upon realization. The Bank's
Investment Committee reviews the debt and equity security portfolio on a
quarterly basis to determine if any "other-than-temporary" impairment
conditions exist. If such a condition exists, the debt or equity security
is written down to the fair market value and the loss is recognized in
the Bank's statement of earnings.
The Bank owns other assets that are not marketable securities, including
limited partnerships and investment funds. Management reflects the
related unrealized gains and losses (net of taxes) in accumulated other
comprehensive income. At December 31, 2001, other assets include an
investment in limited partnership carried at a fair value of $4,429,000,
and accumulated other comprehensive income includes an unrealized gain of
$1,509,000 (after taxes of $962,000) with respect to this investment.
Income of $1,716,000 was recognized on this partnership investment in
2001, primarily representing the Bank's share of the gain from the
partnership's sale of an appreciated equity security.
LOAN INCOME RECOGNITION
Interest on loans is credited to income as earned based on the rate
applied to principal amounts outstanding. The Bank discontinues the
accrual of interest on loans over 90 days delinquent, and any interest
previously accrued is reversed. Interest ultimately collected is credited
to income in the period of recovery.
Loan origination fees and certain direct origination costs are deferred
and recognized over the life of the loan as an adjustment of yield,
utilizing the interest method.
10 (Continued)
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
The allowance for losses on loans is established through provisions
charged against income and is maintained at a level considered adequate
to provide for probable loan losses based on management's evaluation of
known and inherent risks in the loan portfolio. When a loan or a portion
of a loan is considered uncollectible, it is charged against the
allowance. Recoveries of loans previously charged-off are credited to the
allowance when received.
Management's evaluation of the allowance for loan losses is based on a
continuing review of the loan portfolio, which includes many factors,
including identification and review of individual problem situations that
may affect the borrower's ability to repay; review of current
charge-offs, delinquencies, and nonperforming loan data; review of
regulatory examinations and related evaluations of loans; an assessment
of current economic conditions; and changes in the size and character of
the loan portfolio.
The Bank considers a loan impaired when it is probable it will be unable
to collect all amounts due, both principal and interest, according to the
contractual terms of the loan agreement. When a loan is impaired,
impairment is measured based on the present value of expected future cash
flows of the impaired loan discounted at the loan's original effective
interest rate, or as a practical expedient, the fair value of the
collateral of a collateral-dependent loan. When a loan has been deemed to
be impaired, a valuation allowance is established for the amount of such
impairment, as part of the total allowance for loan losses. The Bank
excludes large groups of smaller-balance homogeneous loans, including
residential mortgages and consumer loans, which are collectively
evaluated for impairment. In general, interest income is recognized on
impaired loans on a cash basis.
Management believes that the allowance for loan losses, including losses
on impaired loans, is adequate. While management uses the best available
information to recognize losses on loans, future additions to the
allowance for loan losses may be necessary based on changes in economic
conditions, particularly in the Bank's market area. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies
may require the Bank to recognize additions to the allowance based on
their judgments about information available to them at the time of their
examination.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation,
except for land, which is carried at cost. Depreciation of office
premises and equipment is recognized on the straight-line basis over the
estimated useful lives of related assets, and amortization of leasehold
improvements is recognized on the straight-line basis over the terms of
the related leases. Maintenance and repairs are charged to expense as
incurred, while improvements are capitalized.
REAL ESTATE OWNED
Real estate acquired through foreclosure is recorded at the lower of the
loan balance or fair market value of the property, determined by an
appraisal, less estimated costs of disposal at the date of acquisition.
Subsequent adjustments are made to the carrying value for declines in
market value. Holding costs, net of rental income, are charged to income
in the period incurred.
11 (Continued)
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
INTANGIBLE ASSETS
Intangible assets consist of goodwill arising from the purchase of branch
offices and the associated deposit accounts. Goodwill is being amortized
on a straight-line basis over periods ranging from 7 to 15 years. On a
periodic basis, the Bank reviews the intangible assets for events or
changes in circumstances that may indicate that the carrying amount of
goodwill may not be recoverable. No impairment losses were recognized
through December 31, 2001.
BANK-OWNED LIFE INSURANCE
The investment in bank-owned life insurance represents the cash surrender
value of the life insurance policies on officers of the Bank. Increases
in the cash surrender value are recorded as non-interest income.
INCOME TAXES
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets are also recognized for tax net operating
loss carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in future
years. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
COMPREHENSIVE INCOME
Comprehensive income represents the sum of net income and any changes in
equity from non-owner sources that bypass the statement of earnings, such
as net unrealized gains and losses on securities and other investments.
The purpose of reporting comprehensive income is to report a measure of
all changes in equity of an enterprise that result from recognized
transactions and other economic events, other than transactions with
owners.
EARNINGS PER SHARE
Basic earnings per share ("EPS") excludes all dilution and is computed by
dividing income available to common shareholders (net income less
dividends on preferred stock, if any) by the weighted average number of
common shares outstanding during the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock (such as stock options) were exercised or converted
into common stock that then shares in the earnings of the Bank.
STOCK-BASED COMPENSATION
The Bank accounts for stock-based compensation in accordance with
Accounting Principles Board ("APB") Opinion No. 25, and related
interpretations. Compensation expense is not recognized for fixed stock
options if the exercise price of the option equals the fair value of the
underlying stock at the grant date. In the case of variable stock
options, such as options that become exercisable only if certain events
occur, compensation expense is determined on the measurement date in an
amount equal to the intrinsic value (excess of market price over exercise
price), and recognized in the statement of earnings on the vesting date
or over the vesting period (if applicable). The fair value of restricted
stock awards, measured at the grant date, is amortized to compensation
expense on a straight-line basis over the vesting period.
12 (Continued)
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation, allows an entity to continue to use APB
Opinion No. 25 and make the required disclosure of pro-forma net income
and EPS as if stock-based compensation had been accounted for using the
fair-value-based method of SFAS No. 123.
(3) INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The following is a comparative summary of the amortized cost, gross
unrealized gains and losses, and fair value of available for sale
securities. There were no held to maturity securities in 2001, 2000 or
1999.
DECEMBER 31, 2001
----------------------------------------------------------------
AMORTIZED
COST GROSS GAINS GROSS LOSSES FAIR VALUE
--------------- ------------- ------------- ---------------
(in thousands)
Mortgage-backed securities $ 217,197 $ 4,288 $ 85 $ 221,400
Asset-backed securities 34,500 353 52 34,801
Corporate bonds 20,464 496 836 20,124
State and political subdivisions 5,969 117 72 6,014
Other debt securities 645 12 3 654
Equity funds 31,212 82 -- 31,294
Common stock 2,710 -- 597 2,113
Preferred stock 678 7 36 649
Federal Home Loan Bank stock 9,700 -- -- 9,700
--------------- ------------ ------------- ---------------
Total available for sale $ 323,075 $ 5,355 $ 1,681 $ 326,749
=============== ============ ============= ===============
DECEMBER 31, 2000
----------------------------------------------------------------
AMORTIZED
COST GROSS GAINS GROSS LOSSES FAIR VALUE
--------------- ------------- ------------- ---------------
(in thousands)
Mortgage-backed securities $ 185,994 $ 2,028 $ 190 $ 187,832
U.S. Treasury and federal agencies 131,189 218 536 130,871
Corporate and other bonds 19,044 45 731 18,358
State and political subdivisions 4,570 93 3 4,660
Other debt securities 25 -- -- 25
Common stock 38,382 1,869 1,390 38,861
Preferred stock 21,915 281 1,116 21,080
Federal Home Loan Bank stock 9,700 -- -- 9,700
--------------- ------------ ------------- ---------------
Total available for sale $ 410,819 $ 4,534 $ 3,966 $ 411,387
=============== ============ ============= ===============
Gross realized gains from sales or calls of securities during 2001, 2000
and 1999 were approximately $3,751,000, $5,572,000 and $4,804,000,
respectively. Gross realized losses from sales or calls during 2001, 2000
and 1999 were approximately $5,519,000, $3,679,000 and $2,679,000,
respectively.
Gross realized losses on sales of trading securities during 2000 and 1999
were approximately $308,000 and $537,000, respectively. Gross realized
gains from sales of trading securities in 1999 were approximately
$78,000. In addition, the Bank recognized $2,289,000, $2,528,000 and
$1,803,000 of income from option trading activities for 2001, 2000 and
1999, respectively.
(Continued)
13
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
At December 31, 2001, mortgage-backed securities of $601,000 were pledged
as collateral for public deposits and treasury, tax and loan deposits.
The amortized cost and fair value of mortgage-backed and other debt
securities at December 31, 2001 are shown below by remaining period to
contractual maturity. The expected maturities of mortgage-backed
securities can differ from contractual maturities because borrowers on
the underlying mortgage loans have the ability to make prepayments. The
expected maturities of other debt securities may differ from contractual
maturities because issuers may have the ability to call the obligations
prior to maturity.
AMORTIZED COST FAIR VALUE
-------------------- --------------------
(in thousands)
Mortgage-backed securities:
Due in one year or less $ 1,192 $ 1,219
Due after one year through five years 7,006 7,149
Due after five years through ten years 3,142 3,191
Due after ten years 205,857 209,841
-------------------- --------------------
Total mortgage-backed securities $ 217,197 $ 221,400
==================== ====================
Other debt securities:
Due in one year or less $ 31,912 $ 31,993
Due after one year through five years 1,695 1,749
Due after five years through ten years 3,962 4,003
Due after ten years 24,009 23,848
-------------------- --------------------
Total other debt securities $ 61,578 $ 61,593
==================== ====================
14 (Continued)
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(4) LOANS
Loans receivable at December 31 consisted of the following:
2001 2000
-------------------- --------------------
(in thousands)
Real estate loans secured by:
Residential property:
1-4 family $ 237,210 $ 241,315
Multi-family 3,775 4,976
Commercial property 82,073 80,743
-------------------- --------------------
323,058 327,034
Real estate construction loans 39,834 29,656
-------------------- --------------------
Total mortgage loans 362,892 356,690
Commercial loans 58,162 64,592
Consumer loans 2,913 2,678
Other loans 184 89
-------------------- --------------------
Total loans 424,151 424,049
Allowance for loan losses (8,396) (7,360)
-------------------- --------------------
Total loans, net $ 415,755 $ 416,689
==================== ====================
NON-ACCRUAL LOANS
Non-accrual loans as of December 31, 2001, 2000 and 1999 were $1,273,000,
$1,623,000 and $731,000, respectively. The gross amount of interest that
would have accrued at the original contract rate on non-accrual loans is
$84,000, $89,000 and $62,000 for 2001, 2000 and 1999, respectively. The
Bank had a recorded investment in impaired loans and related allowance,
which is component of the total allowance for the loan losses, of
$7,027,000 and $2,271,000, respectively, at December 31, 2001, compared
to $4,435,000 and $1,304,000, respectively, at December 31, 2000. The
average recorded investment in impaired loans during 2001, 2000 and 1999
was $5,731,000, $4,399,000 and $5,052,000, respectively. Interest income
recognized on impaired loans, which also approximated cash received, was
$528,000, $345,000 and $337,000 during 2001, 2000 and 1999, respectively.
15 (Continued)
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
RELATED PARTY TRANSACTIONS
Loans to officers, directors, principal security holders, and their
associates considered to be related parties, aggregated $9,070,000 at
December 31, 2001. At December 31, 2000, loans to such persons totaled
approximately $9,375,000. Unused loan commitments made to such persons
totaled approximately $300,000 and $400,000 at December 31, 2001 and
2000, respectively. Related party loans were made in the ordinary course
of business on substantially the same terms, including interest rate and
collateral, as those prevailing at the time for comparable transactions
with other persons. All loans to related parties were current as to
principal and interest payments at December 31, 2001 and 2000.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK AND OFF-BALANCE
SHEET RISK
The Bank's lending activities are limited principally to borrowers within
the State of Connecticut, with a large emphasis on the greater Waterbury
and Torrington area. Primarily a lender on residential real estate
properties, the Bank also makes loans secured by commercial real estate,
commercial loans, and consumer loans for a variety of purposes. The
strength of the state and local economy is a primary factor in
determining the ability of borrowers to meet their repayment obligations.
The Bank is subject to off-balance sheet risk involving primarily
commitments to extend credit on home equity loans secured by residential
property and, to a lesser extent, unsecured lines of credit. These
commitments involve, to varying degrees, elements of credit risk in
excess of the amounts recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of non-performance by the
other party to the commitment to extend credit is represented by the
contractual amount of the commitment. The Bank uses the same credit
policies in making commitments as it does for on-balance sheet
instruments. In extending commitments, the Bank evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral
obtained upon extension of credit is based on management's credit
evaluation. Since certain of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
Outstanding mortgage loan commitments (generally of a two-month duration)
totaled $2,852,000 at December 31, 2001 and $4,815,000 at December 31,
2000. Other unused commitments, primarily on commercial loans, totaled
$44,395,000 at December 31, 2001 and $42,896,000 at December 31, 2000. In
addition, unused home equity lines of credit totaling $23,494,000 and
$21,926,000 were outstanding at December 31, 2001 and 2000, respectively.
At December 31, 2001 and 2000, the Bank had approximately $3,660,000 and
$4,356,000, respectively, in contingent liabilities on outstanding
letters of credit.
16 (Continued)
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses for the years ended
December 31 follows:
2001 2000 1999
------------------- ------------------- -------------------
(in thousands)
Balance at beginning of year $ 7,360 $ 6,762 $ 6,745
------------------- ------------------- -------------------
Loans charged-off:
Real estate mortgage loans (102) (41) (1,134)
Consumer loans (16) -- (1)
Commercial and all other loans (25) (121) (42)
------------------- ------------------- -------------------
(143) (162) (1,177)
------------------- ------------------- -------------------
Recoveries:
Real estate mortgage loans 28 16 103
Consumer loans 3 -- 1
Commercial and all other loans 48 219 640
------------------- ------------------- -------------------
79 235 744
------------------- ------------------- -------------------
Net (charge-offs) recoveries (64) 73 (433)
Provision for loan losses 1,100 525 450
------------------- ------------------- -------------------
Balance at end of year $ 8,396 $ 7,360 $ 6,762
=================== =================== ===================
(5) PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31:
2001 2000
-------------------- --------------------
(in thousands)
Land $ 1,074 $ 1,074
Office buildings 4,127 4,124
Furniture, fixtures, and equipment 5,429 5,235
Leasehold improvements 2,598 2,588
-------------------- --------------------
13,228 13,021
Less accumulated depreciation and amortization 8,140 7,264
-------------------- --------------------
Total premises and equipment, net $ 5,088 $ 5,757
==================== ====================
17 (Continued)
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
Total depreciation and amortization expense was approximately $1,052,000
for 2001, $839,000 for 2000 and $697,000 for 1999.
(6) EMPLOYEE BENEFITS
The Bank maintains a non-contributory, defined benefit pension plan
covering substantially all its employees. The benefits are based on years
of service and employees' compensation. Benefits for post-1986 plan
members are integrated with social security benefits.
The following table sets forth the plan's funded status and amounts
recognized in the consolidated balance sheets at December 31:
2001 2000
-------------------- --------------------
(in thousands)
Funded status:
Projected benefit obligation $ (10,335) $ (10,018)
Fair value of plan assets 10,144 9,884
Unrecognized transition asset (259) (293)
Unrecognized net actuarial gain 277 418
-------------------- --------------------
Accrued pension cost $ (173) $ (9)
==================== ====================
The following tables set forth changes in the plan's benefit obligation
and assets for the years ended December 31:
2001 2000
-------------------- --------------------
(in thousands)
Change in benefit obligation:
Projected benefit obligation at beginning of year $ 10,018 $ 9,442
Service cost 266 235
Interest cost 713 677
Actuarial (gain) loss (134) 182
Benefits paid (528) (518)
-------------------- --------------------
Projected benefit obligation at end of year $ 10,335 $ 10,018
==================== ====================
2001 2000
-------------------- --------------------
(in thousands)
Change in plan assets:
Fair value of plan assets at beginning of year $ 9,884 $ 9,917
Actual return on plan assets 788 485
Benefits paid (528) (518)
-------------------- --------------------
Fair value of plan assets at end of year $ 10,144 $ 9,884
==================== ====================
18 (Continued)
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
Net periodic pension expense for the years ended December 31 included the
following components:
2001 2000 1999
--------------- ---------------- -----------------
(in thousands)
Service cost $ 266 $ 235 $ 218
Interest cost 713 677 639
Expected return on plan assets (806) (802) (757)
Net amortization and deferral (9) (29) (21)
--------------- ---------------- -----------------
Net periodic pension expense $ 164 $ 81 $ 79
=============== ================ =================
The weighted average discount rates and rates of increase in future
compensation levels used in determining the actuarial present values of
the projected benefit obligation for 2001, 2000 and 1999 were 7.25% and
4%, respectively. The expected long-term rate of return on plan assets
was 9.0% for 2001, and 9.25% for 2000 and 1999.
The pension plan held in its asset portfolio 50,680 shares of common
stock of the Bank at December 31, 2001 and 53,680 shares as of December
31, 2000. Other assets of the plan include equity funds, bond funds and a
guarantee deposit account.
The Bank also maintains a supplemental retirement plan for the purpose of
providing additional unfunded, non-qualified benefits for a select group
of Bank employees. In 2001, 2000 and 1999, expense of $711,000, $250,000
and $85,000 was recognized under this supplemental plan.
The Bank sponsors a leveraged employee stock ownership plan ("ESOP") that
covers substantially all employees. The Bank makes annual contributions
to the ESOP equal to the ESOP's debt service less dividends received by
the ESOP. All dividends on unallocated shares are used to pay debt
service. As the debt is repaid, shares are allocated to active employees,
based on the proportion of debt service paid in the year. The shares
pledged as collateral are reported as unearned ESOP shares in the balance
sheets. ESOP compensation expense was $110,000 in 2001, $303,000 in 2000
and $314,000 in 1999.
The ESOP shares as of December 31 were as follows:
2001 2000
-------------------- --------------------
(in thousands)
Allocated shares 76,818 79,630
Unreleased shares 69,468 69,533
-------------------- --------------------
Total ESOP shares 146,286 149,163
==================== ====================
Fair value of unreleased shares at December 31 $ 2,167,402 $ 1,590,567
==================== ====================
19 (Continued)
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(7) Deposits
Deposit balances and weighted average interest rates at December 31 are
summarized as follows:
2001 2000
----------------------------------- --------------------------------
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
--------------- ------------------ ------------- -----------------
(dollars in thousands)
Demand deposit accounts $ 49,663 --% $ 44,759 --%
NOW accounts 81,363 0.66 80,927 1.05
Saving accounts 333,520 2.00 292,167 4.89
--------------- -------------
464,546 1.74 417,853 3.62
--------------- -------------
Time deposits with original maturities of:
3 months 14,039 2.41 3,019 3.41
6 months 20,500 2.73 8,767 4.14
7 months 6,388 2.77 3,578 4.89
9 months 7,819 3.30 16,177 5.86
11 months 10,316 3.68 15,761 6.18
1 year 35,867 3.43 15,462 4.85
13 months 25,085 4.00 74,957 6.23
14 months 4,005 3.64 5,319 4.17
15 months 19,663 5.17 19,651 6.10
18 months 26,338 4.52 45,108 5.54
2 years 67,048 6.12 64,233 6.25
30 months 5,572 5.73 -- --
3 years 20,114 5.57 24,013 6.09
5 years 4,227 5.27 3,458 5.52
--------------- -------------
Total time deposits 266,981 4.52 299,503 5.87
--------------- -------------
Total deposits $ 731,527 2.63% $ 717,356 4.19%
=============== =============
Included in time deposits were approximately $43,391,000 and $53,741,000
of individual deposits of $100,000 or more as of December 31, 2001 and
2000, respectively. Interest expense on time deposits of $100,000 or more
was $2,145,000, $2,094,000 and $1,328,000 for 2001, 2000 and 1999,
respectively.
20 (Continued)
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
A summary of individual time deposits of $100,000 or more at December 31
follows, by remaining period to maturity:
2001 2000
-------------------- --------------------
(in thousands)
Under three months $ 14,343 $ 12,326
Three to six months 6,715 15,925
Six to twelve months 14,987 12,624
Over twelve months 7,346 12,866
-------------------- --------------------
Total $ 43,391 $ 53,741
==================== ====================
(8) BORROWINGS FROM THE FEDERAL HOME LOAN BANK
Federal Home Loan Bank ("FHLB") advances at December 31 are as follows:
2001 2000
-------------------- --------------------
(in thousands)
5.07% - 5.81% due 2001 $ -- $ 30,000
5.08% due 2002 5,000 5,000
5.46% - 5.87% due 2003 27,000 27,000
5.30% - 5.79% due 2004 10,000 10,000
4.55% - 7.18% due 2005 28,000 5,000
4.95% - 6.25% due 2006 and thereafter 37,000 37,000
-------------------- --------------------
Total FHLB advances $ 107,000 $ 114,000
==================== ====================
Advances are shown above by final maturity date. Advances callable
between the years 2002 and 2004 total $42,000,000 at December 31, 2001.
The Bank is required to maintain sufficient collateral (primarily unpaid
balances of first mortgage loans on residential property) to meet the
collateral maintenance level required by the FHLB. In addition, all stock
in the FHLB is pledged as collateral to secure advances. The Bank's
available Ideal Way Line of Credit approximates 1.00% of the Bank's total
assets, with a rate determined and reset by the FHLB on a daily basis.
There were no Ideal Way advances outstanding at December 31, 2001 and
2000.
21 (Continued)
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(9) INCOME TAXES
Components of the income tax expense reported in the consolidated
statements of earnings are as follows for the years ended December 31:
2001 2000 1999
------------------- -------------------- --------------------
(in thousands)
Current:
Federal $ 4,056 $ 4,735 $ 3,775
State -- -- 139
------------------- -------------------- --------------------
4,056 4,735 3,914
------------------- -------------------- --------------------
Deferred:
Federal (886) (628) (217)
State -- -- (139)
------------------- -------------------- --------------------
(886) (628) (356)
------------------- -------------------- --------------------
$ 3,170 $ 4,107 $ 3,558
=================== ==================== ====================
Components of the deferred tax assets and deferred tax liabilities at
December 31 are presented below:
2001 2000
-------------------- --------------------
(in thousands)
Deferred tax assets:
Allowance for loan losses $ 3,270 $ 2,726
Asset writedowns for book purposes 246 318
Amortization of intangible assets 587 472
Book depreciation over tax 243 165
State net operating loss carryforward 1,400 734
Other deductible temporary differences 696 622
-------------------- --------------------
6,442 5,037
Less valuation allowance 2,042 1,104
-------------------- --------------------
4,400 3,933
-------------------- --------------------
Deferred tax liabilities:
Net unrealized gain on securities available for sale and
limited partnership investment 2,394 195
Accrued income not currently taxable 75 133
Tax bad debt reserve subject to recapture 82 165
Other taxable temporary differences 73 351
-------------------- --------------------
2,624 844
-------------------- --------------------
Net deferred tax asset $ 1,776 $ 3,089
==================== ====================
22 (Continued)
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
The Bank has established a valuation allowance for its entire state
deferred tax asset following the creation of a Connecticut Passive
Investment Company subsidiary. Income of the passive investment company
subsidiary and dividends paid to its parent are exempt from the
Connecticut Corporation Business Tax and, accordingly, the Bank no longer
expects to realize its state deferred tax asset. During 2001, the Bank
increased its valuation allowance by $938,000 to offset the increase in
the state deferred tax asset.
State tax net operating loss carryforwards for 1999, 2000 and 2001 are
approximately $6,800,000, $9,100,000 and $12,400,000, respectively, and
expire in 2004, 2020 and 2021, respectively.
The actual income tax expense differs from the "expected" income tax
expense (computed by applying the statutory U.S. federal corporate tax
rate of 34% to earnings before income taxes) for the years ended December
31 as follows:
2001 2000 1999
------------------- -------------------- --------------------
(in thousands)
Federal income tax at statutory rate $ 3,832 $ 5,152 $ 4,644
Dividends received deduction (459) (685) (656)
Tax-exempt income (73) (124) (189)
Income on bank-owned life insurance (332) (311) (254)
Non-deductible merger costs and other
reconciling items 202 75 13
------------------- -------------------- --------------------
Actual income tax expense $ 3,170 $ 4,107 $ 3,558
=================== ==================== ====================
Tax law changes enacted in 1996 eliminated the percentage of taxable
income method and imposed a requirement to recapture into taxable income
(over a six-year period) all bad debt reserves accumulated after 1987.
The Bank previously recognized a deferred tax liability with respect to
these post-1987 reserves. The tax law changes also provided that taxes
associated with the recapture of pre-1998 bad debt reserves would become
payable under more limited circumstances than under prior law. Under the
tax laws, as amended, events that would result in recapture of the Bank's
pre-1998 bad debt reserves of $2,020,000 include repurchases and other
redemptions of the Bank's stock and distributions to shareholders' in
excess of specified amounts. The Bank does not anticipate having such
reserves recaptured into taxable income. The potential recapture
liability for which no deferred taxes have been provided was
approximately $687,000 at December 31, 2001.
23 (Continued)
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(10) EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted EPS computations for the years ended December 31:
AVERAGE
NET INCOME SHARES
(IN THOUSANDS) OUTSTANDING EPS
------------------- ------------------- ----------------
Year ended December 31, 2001
----------------------------
Basic EPS $ 8,100 4,747,958 $ 1.71
Effect of dilutive stock options 202,359
-------------------
Diluted EPS 8,100 4,950,317 1.64
=================== =================== ================
Year ended December 31, 2000
----------------------------
Basic EPS $ 11,045 4,676,399 $ 2.36
Effect of dilutive stock options 117,590
-------------------
Diluted EPS 11,045 4,793,989 2.30
=================== =================== ================
Year ended December 31, 1999
----------------------------
Basic EPS $ 10,101 4,628,623 $ 2.18
Effect of dilutive stock options 174,556
-------------------
Diluted EPS 10,101 4,803,179 2.10
=================== =================== ================
(11) COMMITMENTS
At December 31, 2001, the Bank was obligated through 2006 under various
non-cancelable operating leases for properties used for branch purposes.
The leases generally contain renewal options and escalation clauses that
provide for increased rental payments in future periods and, in one
lease, a purchase option.
Minimum operating lease payments due in each of the five years subsequent
to December 31, 2001 are as follows:
2002 $ 296,000
2003 191,000
2004 146,000
2005 86,000
2006 28,000
Rent expense for operating leases was $370,000, $287,000 and $266,000 in
2001, 2000 and 1999, respectively.
24 (Continued)
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Bank is required to disclose the estimated fair value of its
financial instruments in accordance with SFAS No. 107. Financial
instruments defined in SFAS No. 107 include cash and cash equivalents,
securities, loans, deposits, borrowings and certain off-balance sheet
items. Fair value estimates are made at a specific point in time based on
relevant market information, where available, or other more subjective
information if a market for the financial instrument does not exist.
These estimates incorporate assumptions and other matters of judgment,
and may not reflect the true financial impact that would result from
selling the entire portfolio of a financial instrument on one date,
including any income tax consequences.
The following is a summary of the carrying amount and estimated fair
value of the Bank's financial instruments at December 31:
2001 2000
-------------------------------------- -----------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------------ ---------------- --------------- -----------------
(in thousands)
Financial assets:
Cash and cash equivalents $ 132,798 $ 132,798 $ 29,938 $ 29,938
Investment securities available
for sale 105,349 105,349 223,555 223,555
Mortgage-backed securities
available for sale 221,400 221,400 187,832 187,832
Loans, net:
Mortgage loans 362,892 364,029 356,690 355,592
Commercial loans 58,162 57,418 64,592 64,209
Consumer and other loans 3,097 3,087 2,767 2,771
------------------ ---------------- --------------- -----------------
Total financial assets $ 883,698 $ 884,081 $ 865,374 $ 863,897
================== ================ =============== =================
Financial liabilities:
Deposits $ 731,527 $ 735,579 $ 717,356 $ 718,201
Borrowings from the FHLB 107,000 113,734 114,000 112,193
------------------ ---------------- -------------- -----------------
Total financial liabilities $ 838,527 $ 849,313 $ 831,356 $ 830,394
================== ================ ============== =================
For cash and cash equivalents, the carrying amount equals the estimated
fair value.
For securities, fair value is estimated using quoted market prices or
dealer quotes, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar
securities.
25 (Continued)
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
In developing the estimated fair values of loans, the Bank's portfolio
was segregated by type of loan, performing status, and interest rate
(fixed or variable). In general, fair values were estimated by
discounting contractual cash flows adjusted for prepayment estimates,
using discount rates developed by reference to secondary market data. All
non-performing loans were valued using the discounted cash flow method
and a discount rate commensurate with the anticipated risks and repayment
period.
The fair values of deposits with no stated maturity, including
non-interest bearing, NOW and savings accounts, are equal to the amounts
payable on demand. The fair values of time deposits are based on the
discounted value of contractual cash flows, using rates offered at
December 31 for deposits with similar remaining maturities.
The fair values of FHLB borrowings were estimated using rates available
at December 31 for debt of similar terms and remaining maturities.
The fair values of accrued interest receivable, accrued interest payable
and loan commitments approximate the carrying amounts at December 31,
2001 and 2000.
(13) STOCK-BASED COMPENSATION
The Bank's stock incentive plan includes the 1984, 1993 and 1998
Incentive Stock Option Plans. The 1984 and the 1993 plans allow for
grants of stock options to key employees allowing them to purchase a
total of 720,000 shares of the Bank's common stock. The 1998 plan allows
for grants of stock options to both the staff and key employees. A total
of 480,000 shares may be granted under the 1998 plan. Under these plans,
the option price shall at least equal the fair market value of such
shares on the date the options are granted, and all options expire not
later than ten years from the date of grant. All options became fully
vested in January 2002 upon completion of the acquisition of the Bank
which is described in note 1.
As provided by SFAS No. 123, which became effective for the Bank on
January 1, 1997, the Bank continues to apply APB Opinion No. 25 and
related interpretations in accounting for its stock-based compensation
plans. Accordingly, no compensation expense has been recognized for its
fixed stock options, which constitute the majority of the grants made
under the plans. Compensation expense has been recognized for the Bank's
variable stock options which were granted in 1998 and subsequent years,
and which become exercisable if the market price of the Bank's common
stock reaches a specified level and remains at that level for a specified
period. The compensation expense is measured when the market price
reaches the specified level, or when it is deemed probable that the price
will reach that level. The expense equals the excess of the market price
over the exercise price on the measurement date, and is recognized on the
vesting date or over the vesting period (if applicable).
26 (Continued)
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
In contrast, SFAS No. 123 requires recognition of expense for the fair
value of all stock option awards (both fixed and variable), measured on
the grant date. Under SFAS No. 123, the expense equals the grant-date
fair value of the awards, estimated using an option pricing model, which
is recognized over the vesting period (if any). Accordingly, the amount
of expense recognized in any given period using the fair-value-based
method of SFAS No. 123 may be greater or less than the expense recognized
using the intrinsic-value-based method of APB Opinion No. 25. Had
compensation expense for the Bank's stock-based compensation plans been
determined consistent with SFAS No. 123, the Bank's net earnings and
earnings per share for the years ended December 31 would have changed to
the pro forma amounts indicated below:
2001 2000 1999
---------------------------------------------------------------
Net earnings (in thousands):
As reported $ 8,100 $ 11,045 $ 10,101
Pro forma 8,225 10,917 9,622
Basic earnings per share:
As reported 1.71 2.36 2.18
Pro forma 1.73 2.33 2.08
Diluted earnings per share:
As reported 1.64 2.30 2.10
Pro forma 1.66 2.28 2.00
For purposes of the preceding disclosure, under SFAS No. 123, fair value
has been estimated on the date of each grant using the binomial
option-pricing model with the following weighted average assumptions:
dividend yield of 5.0%; expected volatility of 26% in 2001, 24% in 2000
and 22% in 1999; risk-free interest rates averaging 4.8% in 2001, 5.7% in
2000 and 5.21% in 1999; and expected lives of five years.
A summary of the status of the Bank's stock option plans as of December
31, 2001, 2000 and 1999, and changes during the years then ended, is
presented below.
2001 2000 1999
--------------------------- --------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------ ------------ ------------ ------------ ------------ ------------
Beginning of year 838,900 $ 17.72 821,300 $ 17.32 622,900 $ 14.93
Granted 40,500 20.76 75,300 19.29 322,300 21.53
Exercised (245,434) 18.19 (20,100) 9.64 (42,300) 15.63
Forfeited (20,350) 20.63 (37,600) 16.29 (81,600) 16.54
------------ ------------ ------------ ------------ ------------ ------------
Outstanding at December 31 613,616 $ 17.59 838,900 $ 17.72 821,300 $ 17.32
============ ============ ============ ============ ============ ============
Exercisable at December 31 497,066 $ 18.11 564,430 $ 18.07 526,000 $ 18.12
Weighted average fair
value of options
granted during the year $ 3.69 $ 3.37 $ 3.33
27 (Continued)
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
The following table summarizes information about the Bank's stock options
at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ---------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------------------- -------------- -------------- -------------- -------------- --------------
$9.19 - 13.69 193,200 2.5 years $ 10.69 142,000 $ 10.50
$15.56 - 23.00 408,166 7.2 years 20.56 343,066 20.93
$23.38 - 27.38 12,250 6.3 years 27.29 12,000 27.38
-------------- --------------
Total 613,616 5.7 years $ 17.59 497,066 $ 18.11
============== ==============
At December 31, 2001, there were 12,000 shares of restricted stock
outstanding with associated unearned compensation included as a reduction
of retained earnings of $138,000. Compensation expense recorded with
respect to restricted stock totaled $69,000 in 2001, $69,000 in 2000 and
$169,000 in 1999.
(14) REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Bank's consolidated financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments by the
regulators about capital components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total capital to risk-weighted assets, of
total Tier 1 Capital to risk-weighted assets, and of Tier 1 Capital to
average assets. Management believes, as of December 31, 2001 and 2000,
that the Bank met all capital adequacy requirements to which it was
subject.
As of December 31, 2001, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework
from prompt corrective action. To be categorized as well capitalized, the
Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier
1 leverage ratios as set forth in the table. There have been no
conditions or events since that notification that management believes
have changed the Bank's category.
28 (Continued)
AMERICAN BANK OF CONNECTICUT
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
The Bank's actual capital amounts and ratios are summarized below in
comparison to the required regulatory amounts:
DECEMBER 31, 2001
---------------------------------------------------------------------------------------
FOR CAPITAL ADEQUACY
ACTUAL PURPOSES TO BE WELL CAPITALIZED
--------------------------- --------------------------- ---------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ ------------ ------------ ------------ ------------ ------------
(dollars in thousands)
Total Capital (to Risk
Weighted Assets) $ 73,817 14.9% $ 39,693 8.0% $ 49,616 10.0%
Tier 1 Capital (to Risk
Weighted Assets) 67,588 13.6 19,846 4.0 29,769 6.0
Tier 1 Capital (to Average
Assets) 67,588 7.3 36,887 4.0 46,109 5.0
DECEMBER 31, 2000
---------------------------------------------------------------------------------------
FOR CAPITAL ADEQUACY
ACTUAL PURPOSES TO BE WELL CAPITALIZED
--------------------------- --------------------------- ---------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ ------------ ------------ ------------ ------------ ------------
(dollars in thousands)
Total Capital (to Risk
Weighted Assets) $ 63,430 12.4% $ 40,867 8.0% $ 51,084 10.0%
Tier 1 Capital (to Risk
Weighted Assets) 57,032 11.2 20,434 4.0 30,650 6.0
Tier 1 Capital (to Risk
Weighted Assets) 57,032 6.4 35,714 4.0 44,642 5.0
The Bank's ability to pay dividends is subject to Connecticut banking
law. The Bank may not declare a dividend in excess of its retained net
profits from the current and prior two years. Also, the Bank may not pay
a dividend if the effect of the dividend would be to reduce its capital
below regulatory requirements.
29
On January 18, 2002, American Financial Holdings, Inc. ("American Financial")
through its subsidiary, American Savings Bank, (the "Bank") acquired American
Bank of Connecticut ("ABC"). American Financial acquired all of the outstanding
common stock of ABC. The unaudited pro forma consolidated condensed financial
statements reflect the effects of the ABC acquisition, assuming that the
acquisition occurred January 1, 2001 for the statement of income and at December
31, 2001 for the balance sheet.
American Financial Holdings, Inc. and American Bank of Connecticut Unaudited Pro
Forma Consolidated Condensed Balance Sheet as of December 31, 2001.
Pro Forma
American American Pro Forma American
Financial Bank Adjustments Financial
---------------- --------------- ------------------- --------------
(in thousands)
ASSETS:
Cash and due from banks $ 22,133 $ 15,398 $ - $ 37,531
Federal funds sold 17,050 117,400 (73,863) (A) 60,587
Securities available for sale 536,394 326,749 (1,895) (B) 861,248
Loans receivable, net 1,214,847 415,755 383 (C) 1,630,985
Bank premises and equipment, net 13,490 5,088 (1,000) (D) 17,578
Cash surrender value of life insurance 63,144 17,965 - 81,109
Goodwill - 12,451 67,995 (E) 80,446
Core deposit intangibles - - 15,597 (F) 15,597
---------------- --------------- ------------------ --------------
Total intangible assets - 12,451 83,592 96,043
---------------- --------------- ------------------ --------------
Other assets 33,538 14,648 9,098 (G) 57,284
---------------- --------------- ------------------ --------------
Total Assets $ 1,900,596 $ 925,454 $ 16,315 $ 2,842,365
================ =============== ================== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 1,124,249 $ 731,527 $ 4,052 (H) $ 1,859,828
FHLB advances and other borrowings 311,444 107,000 3,697 (I) 422,141
Other liabilities 69,956 2,755 6,905 (J) 79,616
---------------- --------------- ------------------ --------------
Total liabilities 1,505,649 841,282 14,654 2,361,585
---------------- --------------- ------------------ --------------
Stockholders' Equity
Preferred stock - - - -
Common stock 289 5,008 (5,008) (K) 289
Additional paid-in capital 285,953 12,385 6,996 (K) 305,334
Unallocated common stock held by ESOP (22,386) (912) (912) (K) (22,386)
Stock-based compensation (266) - - (266)
Treasury stock (188,746) - 66,452 (K) (122,294)
Retained earnings 278,315 63,939 (63,939) (K) 278,315
Accumulated other comprehensive income 41,788 3,752 (3,752) (K) 41,788
---------------- --------------- ------------------ --------------
Total stockholders' equity 394,947 84,172 1,661 480,780
---------------- --------------- ------------------ --------------
Total Liabilities and Stockholders' Equity $ 1,900,596 $ 925,454 $ 16,315 $ 2,842,365
================ =============== ================== ==============
30
American Financial Holdings, Inc. and American Bank of Connecticut, Inc.,
Unaudited Pro Forma Consolidated Condensed Balance Sheet as of December 31,
2001.
Pro Forma
American American Pro Forma American
Financial Bank Adjustments Financial
---------------- --------------- ------------------- --------------
(in thousands except per share amounts)
Interest income $ 121,028 $ 58,937 $ (3,029) (L) $ 176,936
Interest expense 61,240 34,178 (810) (M) 94,608
---------------- --------------- ----------------- --------------
Net interest income before
provision for loan losses 59,788 24,759 (2,219) 82,328
Provision for loan losses 450 1,100 - 1,550
Non-interest income 18,654 5,270 - 23,924
Non-interest expense 36,046 17,659 373 (N) 54,078
---------------- --------------- ----------------- --------------
Income before income taxes 41,946 11,270 (2,592) 50,624
Income taxes 13,316 3,170 (907) (O) 15,579
---------------- --------------- ----------------- --------------
Net income $ 28,630 $ 8,100 $ (1,685) $ 35,045
================ =============== ================= ==============
Earnings per share - basic $ 1.40 $ 1.71 $ 1.48
Earnings per share - diluted 1.33 1.64 1.40
Weighted average shares
outstanding - basic 20,446,613 4,747,958 23,655,328
Weighted average shares
outstanding - diluted 21,556,293 4,950,317 25,038,280
The accompanying notes are an integral part of the unaudited pro forma
consolidated condensed financial statements.
1. ACQUISITION
On January 18, 2002, American Financial Holdings, Inc. through its
subsidiary, American Savings Bank, (the "Bank"), acquired American Bank of
Connecticut. American Financial acquired all of the outstanding common
stock of ABC for $73.9 million of cash, excluding transaction costs, and
issued 3,208,715 shares of American Financial common stock.
31
The acquisition was accounted for as a purchase and the purchase price was
allocated based on the estimated fair market values of the assets and
liabilities acquired. The preliminary allocation of the purchase price is as
follows:
(In thousands)
Total purchase price $ 161,561
-----------------
Nets assets of American Bank based on historical
carrying amounts as of January 18, 2002 80,699
Elimination pre-existing goodwill reflected in net assets (12,496)
Increase (decrease) in net assets to reflect estimated fair
value adjustments under the purchase method of
accounting:
Loans 383
Bank premises and equipment (1,000)
Other assets
7,942
Federal Home Loan Bank borrowings (3,697)
Prepaid pension
1,156
Accrual of liability for merger related costs (5,804)
Deferred tax effect of fair value adjustments
and merger-related costs (1,101)
Time deposits (4,052)
-----------------
Fair value of net assets acquired 62,030
-----------------
Total purchase price in excess of fair value of net
assets acquired 99,531
Identifiable intangible assets (core deposit intangible) 15,597
-----------------
Goodwill $ 83,934
=================
The merger has been accounted for by American Financial under the purchase
method of accounting in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations, and SFAS No. 142, "Goodwill
and Other Intangible Assets." In accordance with Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," intangible
assets other than goodwill (such as core deposit intangibles) must be amortized
over their estimated useful lives. Goodwill will not be amortized to expense,
but instead will be reviewed for impairment at least annually and to the extent
goodwill is impaired, its carrying value will be written down to its implied
fair value and a charge to earnings will be made.
The pro forma information presented is theoretical in nature and not necessarily
indicative of future consolidated results of operations of the Company or the
consolidated results of operations which would have resulted had the Company
acquired the stock of ABC during the periods presented. The unaudited pro forma
consolidated condensed financial statements reflect the effects of the ABC
acquisition, assuming that the acquisition occurred January 1, 2001 for the
statement of income and at December 31, 2001 for the balance sheet.
32
2. PRO FORMA ADJUSTMENTS
(A) Represents the cash portion consideration of the purchase price.
(B) Represents the cost basis amount of an adjustment of American Bank
stock (89,700 shares) held by American Financial.
(C) Represents adjustments to record the acquired loans at fair value
based on interest rates at December 31, 2001, resulting in a net
premium of $383,000.
(D) Represents the fair market value adjustment relating to premises and
equipment.
(E) The net adjustment of $68.0 million represents (i) an increase of $80.0
million to record the estimated goodwill related to the merger and (ii)
a decrease of $12.5 million to eliminate the pre-existing goodwill
related to prior branch acquisitions by American Bank.
(F) Represents an adjustment to record American Bank's core deposit
intangible ("CDI") at 2.16% of core deposits. The CDI will be amortized
using an accelerated method over a 10-year period.
(G) Represents the (i) adjustment to record the difference in the projected
benefit obligation and fair value of plan assets in American Banks
pension plan of $1.2 million and (ii) an increase in net deferred tax
assets for the estimated tax effects of fair value adjustments and
merger related costs of $6.8 million and (iii) adjustment of $1.1
million to record the estimated tax refund from the Internal Revenue
Service for the 2001 tax year.
(H) Represents the fair market value adjustment relating to time deposit
liabilities resulting in a net premium of $4.1 million.
(I) Represents an adjustment to record American Bank's Federal Home Loan
Bank borrowings at fair value based on interest rates as of January 15,
2002 resulting in a net premium of $3.7 million.
(J) Represents a deferred tax liability of $5.5 million recognized with
respect to the non-deductible portion of the core deposit intangible, a
deferred tax asset associated with the American Bank goodwill of $4.4
million resulting in a net deferred tax liability of $1.1 million, and
the accrual of the following estimated merger-related costs totaling
$5.8 million: payments of $2.0 million to officers and employees of
American Bank pursuant to changes in control provisions of certain
agreements and severance arrangements; and merger-related costs of $3.8
million.
(K) Represents (i) the elimination of American Bank's historical
stockholders' equity balances, (ii) the issuance by American Financial
of 3,208,715 common shares as the stock portion of the merger
consideration, at a total market value of $73.8 million ($66.5 million
from treasury stock and $7.3 million from additional paid-in capital)
based on the agreed upon price of $23.01 at July 18, 2001 with an
exchange ratio of 1.304 shares and (iii) an adjustment of $12.0 million
to record the fair value of American Bank vested options that were
exchanged for vested options of American Financial.
33
(L) Represents (i) a $93,000 reduction in dividend income for the 89,700
shares of American Bank common stock held by American Financial, (ii) a
$2.9 million reduction in interest income based on an annual average
yield of approximately 3.8% for the $73.9 million cash portion of the
purchase - see adjustment (A) above, and (iii) a $70,000 adjustment to
amortize loan premium as a result of recording acquired loans at fair
value. See adjustment (C) above. Premiums are being amortized over 5.5
years.
(M) Represents the annual amortization of the time deposit fair value
adjustment using a straight line method over five years. See adjustment
(H) above.
(N) Represents the following:
(In thousands)
Adjustment to record the amortization of the core deposit intangible
using an accelerated method over a 10 year period. See adjustment
(F) above.
$ 2,836
Adjustment to record the amortization of the pension asset. See adjustment (256)
(G) above.
Adjustment to record the decrease in depreciation expense as a result
of writing-down certain premises and equipment. See adjustment (D)
above.
(309)
Adjustment to record the reversal of amortization of American Bank's
pre-existing goodwill. See adjustment (E) above. (1,898)
--------------
373
==============
(O) Represents the tax effect at a federal rate of 35.0% of the pro forma
adjustments (L), (M) and (N) above, reflected in the Consolidated
Condensed Statement of Income.
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: April 2, 2002 /s/ Charles J. Boulier, III
-----------------------------------
Charles J. Boulier, III
Senior Executive Vice President,
Chief Financial Officer and Treasurer
34