United States
Securities and Exchange Commission
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the quarter ended March 31, 2000 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, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X ] No [ ]
Common Stock Par Value $.01 Per Share
28,871,100 Outstanding as of May 8, 2000
Index
-----
Part I. Item 1. Financial Information (unaudited) Page
A. Consolidated Balance Sheets as of March 31, 2000 and 1
December 31, 1999
B. Consolidated Statements of Income for the Three Months 2
Ended March 31, 2000 and March 31, 1999
C. Consolidated Statements of Cash Flows for the Three Months 3
Ended March 31, 2000 and March 31, 1999
D. Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Consolidated Financial 8
Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosure about Market Risk 14
Part II. Other Information 16
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Securities Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit 18
American Financial Holdings, Inc.
Consolidated Balance Sheets
(Unaudited)
March 31, 2000 December 31, 1999
-------------- -----------------
(In thousands)
Assets
Cash and due from banks:
Non-interest bearing $ 12,870 $ 23,290
Interest bearing 16 5,014
----------- -----------
Total cash and due from banks 12,886 28,304
Federal funds sold 13,750 2,300
----------- -----------
Cash and cash equivalents 26,636 30,604
Investment securities available for sale (amortized cost of
$362,643 at March 31, 2000 and $378,763 at December 31, 1999) 432,747 435,832
Mortgage-backed securities available for sale (amortized cost of
$355,745 at March 31, 2000 and $348,281 at December 31, 1999) 347,120 341,421
Loans, less allowance for loan losses of $9,241 at March 31, 2000 and
$8,820 at December 31, 1999 1,052,054 1,029,531
Real estate owned 58 445
Accrued interest and dividends receivable on investments 8,602 8,833
Accrued interest receivable on loans 5,572 5,697
Federal Home Loan Bank stock 12,194 16,402
Bank premises and equipment, net 13,486 13,373
Other assets 1,858 4,015
----------- -----------
Total assets $ 1,900,327 $ 1,886,153
=========== ===========
Liabilities and Stockholders' Equity
Deposits $ 1,135,241 $ 1,118,881
Mortgagors' escrow deposits 5,492 356
FHLB advances and other borrowings 186,944 214,444
Deferred income tax liability 16,335 11,835
Accrued interest payable on deposits and FHLB advances 1,365 1,556
Other liabilities 9,146 7,629
----------- -----------
Total liabilities 1,354,523 1,354,701
Stockholders' Equity
Preferred stock, $.01 par value; authorized 10,000,000 shares,
none issued - -
Common stock, $.01 par value; authorized 120,000,000 shares,
28,871,100 shares issued and outstanding 289 289
Additional paid-in capital 282,148 282,148
Unallocated common stock held by ESOP (2,252,010 shares) (25,020) (25,020)
Stock-based compensation (160) (160)
Retained earnings 251,582 244,007
Accumulated other comprehensive income 36,965 30,188
----------- -----------
545,804 531,452
----------- -----------
Total liabilities and stockholders' equity $ 1,900,327 $ 1,886,153
=========== ===========
See accompanying notes to consolidated financial statements.
1
American Financial Holdings, Inc.
Consolidated Statements of Income
(Unaudited) For the Three Months Ended March 31
-----------------------------------
2000 1999
--------- ---------
(In thousands, except per share data)
Interest and dividend income:
Real estate mortgage loans $ 13,158 $ 11,515
Consumer loans 5,826 5,094
Mortgage-backed securities 5,744 2,762
Federal funds sold 170 498
Investment securities:
Interest-taxable 5,321 4,120
Interest-tax exempt 209 -
Dividends 664 691
--------- ---------
Total interest and dividend income 31,092 24,680
Interest expense:
Deposits 11,485 11,605
Federal Home Loan Bank advances and other short-term borrowings 2,923 1,793
--------- ---------
Total interest expense 14,408 13,398
Net interest income before provision for loan losses 16,684 11,282
Provision for loan losses 550 600
--------- ---------
Net interest income after provision for loan losses 16,134 10,682
Non-interest income:
Service charges and fees 1,301 1,069
Net gain on sale of investment securities 1,416 2,822
Net gain on sale of loans 2 44
Other 128 108
--------- ---------
Total non-interest income 2,847 4,043
Non-interest expense:
Salaries and employee benefits 3,897 3,860
Occupancy expense 648 578
Furniture and fixture expense 441 383
Charitable contributions 35 236
Outside services 935 747
Advertising 349 404
Other 954 883
--------- ---------
Total non-interest expense 7,259 7,091
Income before income taxes 11,722 7,634
Income taxes 4,147 2,521
--------- ---------
Net income $ 7,575 $ 5,113
========== =========
Basic earnings per share 0.28 n/a
Diluted earnings per share 0.28 n/a
See accompanying notes to consolidated financial statements.
2
AMERICAN FINANCIAL HOLDINGS, INC.
Consolidated Statements of Cash Flows
(unaudited)
For the three months ended
--------------------------
March 31,
--------------------------
2000 1999
----------- -----------
(In thousands)
Operating activities:
Net income $ 7,575 $ 5,113
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 550 600
Depreciation and amortization off bank premises and equipment 468 439
Loss on disposition of fixed assets 2 --
Accretion of discounts (193) (475)
Decrease (increase) in accrued interest and dividends receivable 356 (125)
Gain on sale of investment securities (1,416) (2,822)
Decrease in other assets 2,157 614
Increase in other liabilities 1,326 1,722
Increase in net deferred loan origination costs (87) (511)
Gain on sale of loans (2) (44)
Net gain on disposition of real estate owned (87) (89)
Increase in deferred income tax 6 --
----------- -----------
Net cash provided by operating activities 10,655 4,422
----------- -----------
Investing activities:
Investment securities available for sale:
Purchases (53,928) (92,520)
Proceeds from sales 1,435 2,868
Proceeds from maturities 70,100 135,000
Mortgage-backed securities available for sale
Purchases (14,527) (42,112)
Principal paydowns 7,186 13,680
Proceeds from sale of loans 197 7,684
Redemption (purchases) of Federal Home Loan Bank stock 4,208 (1,037)
Net increase in loans (23,254) (15,472)
Purchases of bank premises and equipment (583) (1,194)
Proceeds from the sales of real estate owned 547 629
----------- -----------
Net cash (used) provided by investing activities (8,619) 7,526
----------- -----------
Financing activities:
Increase (decrease) in deposits 16,360 (2,983)
Increase (decrease) in mortgagors' escrow deposits 5,136 (5,548)
Advances from the Federal Home Loan Bank 2,500 --
Maturities of advances from the Federal Home Loan Bank (30,000) --
----------- -----------
Net cash used by financing activities (6,004) (8,531)
----------- -----------
(Decrease) increase in cash and cash equivalents (3,968) 3,417
Cash and cash equivalents at beginning of period 30,604 55,822
----------- -----------
Cash and cash equivalents at end of period $ 26,636 $ 59,239
============= =============
Supplemental information:
Interest paid on deposits and borrowings $ 14,599 $ 13,040
Transfers of loans to real estate owned 73 539
See accompanying notes to consolidated financial statements.
3
AMERICAN FINANCIAL HOLDINGS, INC
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Financial Statement Presentation
American Financial Holdings, Inc. (the "Company") 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 located primarily in Connecticut. The
Company is subject to the regulation of certain state and federal
agencies and undergoes periodic examination by those regulatory
authorities.
The Bank completed its conversion from a mutual savings bank to a stock
savings bank (the "Conversion") on November 30, 1999. Concurrent with the
Bank's conversion, the Parent Company was formed, acquired all of the
Bank's common stock and issued its common stock in a subscription and
direct community offering to the public.
As part of the Conversion, the Bank issued all of its 1,000 outstanding
shares of common stock to the Company for 50% of the net proceeds from
the Company's sale of common stock in the subscription and direct
community offering. As a result of the subscription and direct community
offering, the Company sold 25,395,875 shares of its common stock at a
price of $10 per share to persons having subscription rights, and
1,336,625 shares to the Bank's Employee Stock Ownership Plan (the
"ESOP"). The Company also contributed 2,138,600 shares to American
Savings Charitable Foundation. The Conversion resulted in net proceeds of
$261.0 million after offering costs of $6.3 million.
The accompanying unaudited consolidated interim financial statements have
been prepared in conformity with generally accepted accounting principles
and with the instructions to Form 10-Q. Accordingly, certain information
and disclosures required by generally accepted accounting principles 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 American Financial's 1999
annual report filed on Form 10-K. The consolidated financial statements
include the accounts of the Parent Company, the Bank and the Bank's
wholly-owned subsidiaries, American Investment Services, Inc. and
American Savings Bank Mortgage Servicing Company. All significant
intercompany transactions have been eliminated in consolidation. In
preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and revenues
and expenses for the period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to
changes in the near-term relate to the determination of the allowance for
loan losses.
All adjustments, consisting of only normal recurring adjustments, which
in the opinion of management are necessary for fair presentation of
financial position, results of operations and cash flows, have been made.
The results of operations for interim periods are not necessarily
indicative of the results that may be expected for another interim period
or a full year.
4
AMERICAN FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(2) Investment and Mortgage-Backed Securities
The Company classified all investment and mortgage-backed securities as
available for sale as of March 31, 2000 and December 31, 1999. The
amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of investments and mortgage-backed securities at
March 31, 2000 and December 31, 1999 are as follows:
March 31, 2000
-----------------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
--------------- ------------- --------------- ---------------
(In Thousands)
Investments:
U.S. Treasury notes $ 5,035 $ 126 $ -- $ 5,161
U.S. Government agencies 39,708 13 (474) 39,247
Corporate bonds and notes 271,948 314 (3,011) 269,251
Municipal bonds 28,138 97 (323) 27,912
Marketable equity securities 17,814 73,620 (258) 91,176
--------------- ------------ --------------- --------------
362,643 74,170 (4,066) 432,747
--------------- ------------ --------------- --------------
Mortgage-backed securities:
U.S. Government & agency 218,332 129 (6,485) 211,976
U.S Agency issued collateralized
mortgage obligations 137,413 71 (2,340) 135,144
--------------- ------------ --------------- --------------
355,745 200 (8,825) 347,120
--------------- ------------ --------------- --------------
Total available for sale $ 718,388 $ 74,370 $ (12,891) $ 779,867
=============== ============ =============== ==============
5
AMERICAN FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
December 31, 1999
----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------- --------------- -------------
(In Thousands)
Investments:
U.S. Treasury notes $ 5,037 $ 131 $ -- $ 5,168
U.S. Government agencies 45,502 -- (382) 45,120
Corporate bonds and notes 267,341 -- (3,180) 264,161
Municipal bonds 22,738 -- (478) 22,260
Marketable equity securities 13,145 61,291 (313) 74,123
Auction market preferred stocks 25,000 -- -- 25,000
-------------- ------------ --------------- -------------
378,763 61,422 (4,353) 435,832
-------------- ------------ --------------- -------------
Mortgage-backed securities:
U.S. Government & agency 224,916 102 (5,157) 219,861
U.S. Agency issued collateralized
mortgage obligations 123,365 -- (1,805) 121,560
-------------- ------------ --------------- -------------
348,281 102 (6,962) 341,421
-------------- ------------ --------------- -------------
Total available for sale $ 727,044 $ 61,524 $ (11,315) $ 777,253
============== ============ =============== =============
(3) Comprehensive Income
The following tables represent components and the related tax effects
allocated to other comprehensive income for the three-month periods ended
March 31, 2000 and March 31, 1999.
Three months ended
March 31, 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 $ 12,686 $ (5,058) $ 7,628
Less: reclassification adjustment for gains realized
during the period (1,416) 565 (851)
------------ ---------------- -------------
Other comprehensive income $ 11,270 $ (4,493) $ 6,777
============ ================ =============
6
AMERICAN FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Three months ended
March 31, 1999
-------------------------------------------------------
Before tax Income tax Net-of-tax
amount effect amount
------------ ----------------- ----------------
Unrealized loss on available for sale securities: (In Thousands)
Unrealized holding losses arising during
the period $ (1,923) 817 $ (11,060)
Less: reclassification adjustment for gains realized
during the period (2,822) 1,200 (1,622)
------------ ----------------- ----------------
Other comprehensive loss $ (4,745) $ 2,017 $ (2,728)
============ ================= ================
(4) Earnings per share
Basic earnings per share is calculated by dividing net income available
to common stockholders by the weighted-average number of shares of common
stock outstanding during the period. Diluted earnings per share is
computed in a manner similar to that of basic earnings per share except
that the weighted-average number of common shares outstanding is
increased to include the number of additional common shares that would
have been outstanding if all potentially dilutive common shares (such as
stock options and unvested restricted stock) were issued during the
period. Unallocated common shares held by the ESOP are not included in
the weighted-average number of common shares outstanding for either basic
or diluted earnings per share calculations.
The weighted-average number of shares used in the computation of basic
earnings per common share and diluted earnings per common share for the
three month period ended March 31, 2000 was 26,633,953 and 26,646,502,
respectively. Earnings per share data for the three-month period ended
March 31, 1999 does not apply, since the Bank was a mutual savings bank
with no outstanding stock.
(5) Accounting Standards
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," addresses the accounting
for derivative instruments, including certain derivative instruments
embedded in other contracts and hedging activities. As amended, the
statement is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. On that date, hedging relationships shall
be designed in accordance with the statement. Earlier application is
encouraged. Earlier application of selected provisions of the statement
is not permitted. The statement shall not be applied retroactively to
financial statements of prior periods. The statement is not expected to
affect the Company because it does not currently purchase derivative
instruments or enter into hedging activities.
7
Part I. Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
American Financial Holdings, Inc. (the "Company") consolidated results of
operations depend primarily on net interest income, or the difference between
interest income earned on the Company's interest-earning assets, such as loans
and securities, and the interest expense on the Company's interest-bearing
liabilities, such as deposits and borrowings. The Company also generates
non-interest income primarily from service charges and other fees earned on
fee-based activities such as trust operations, insurance sales, and investment
services provided by the American Savings Bank's (the "Bank") wholly owned
subsidiary, American Investment Services, Inc. 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.
Forward Looking Statements
This quarterly report contains forward-looking statements that are based on
assumptions and describe 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 include, but are not limited to, changes in
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality and composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area 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. The Company does not undertake - and specifically disclaims
any obligation - to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect events or circumstances after
the date of the statements or to reflect the occurrence of anticipated or
unanticipated events.
Comparison of Financial Condition at March 31, 2000 and December 31, 1999.
Total assets at March 31, 2000 were $1.90 billion representing an increase of
$14.2 million or .75% from $1.89 billion at December 31, 1999. The Company's
Tier 1 leverage ratio was 20.89% at March 31, 2000 compared to 23.0% at December
31, 1999. The Company's total risk-based capital ratio was 39.2% at March 31,
2000 compared to 38.0% at December 31, 1999.
The increase in assets was primarily a result of a $22.5 million net increase in
loans and a $2.6 million net increase in investment and mortgage-backed
securities available for sale, partially offset by a $4.0 million decrease in
cash and cash equivalents and a $4.2 million decrease in Federal Home Loan Bank
Stock. The increase in loans was primarily in one-to-four family adjustable rate
mortgages and home equity lines of credit and was due to strong housing market
and expansion of the Company's loan markets. The increase in investment and
mortgage-backed securities available for sale is due to management's strategy to
enhance yield on its interest-earning assets by investing in mortgage-backed
securities, primarily collateralized mortgage obligations, with maturities or
average lives ranging from two to five years. The decrease in cash and cash
equivalents was primarily due to more cash being kept on hand at year-end in
anticipation of potential customer withdrawals as a result of Year 2000. The
decrease in Federal Home Loan Bank Stock was due to the reduction in Federal
Home Loan Bank advances, as the level of Federal
8
Home Loan Bank stock required is lessened as the level of outstanding Federal
Home Loan Bank advances decreases. Upon the reduction in advances, management
elected to reduce its stock position and reinvest the proceeds in a higher
yielding security.
Deposits increased $16.4 million or 1.5% to $1,135 million at March 31, 2000
from $1,119 million at December 31, 1999. The $16.4 million increase resulted
primarily from a $16.9 million increase in certificate of deposits and
individual retirement accounts and a $6.1 million increase in core accounts such
as savings, money market and NOW accounts, offset by a $6.7 million decrease in
other deposits. The increases in the time accounts and the core deposits were
primarily due to special programs and attractive pricing geared to attract new
deposits. The decrease in other deposits was primarily attributed to a decrease
in the amount of bank checks outstanding. Mortgagors' escrow deposits increased
$5.1 million from $356 thousand at December 31, 1999 to $5.5 million at March
31, 2000 due to timing of payments made for property taxes in December of 1999.
Advances from the Federal Home Loan Bank decreased $27.5 million to $186.9
million at March 31, 2000 from $214.4 million at December 31, 1999. The decrease
was due to $30 million of maturities offset by new advances of $2.5 million. The
net deferred income tax liability increased $4.5 million to $16.3 million at
March 31, 2000 compared to $11.8 million at December 31, 1999, primarily due to
an increase in the net unrealized gain on total securities available for sale.
Nonperforming assets, consisting of nonperforming loans and real estate owned,
totaled $3.2 million at March 31, 2000 compared to $3.0 million at December 31,
1999. Nonperforming assets to total assets were 0.17% and 0.16% at March 31,
2000 and December 31, 1999, respectively. Real estate owned declined from $445
thousand at December 31, 1999 to $58 thousand at March 31, 2000 due to a greater
amount of dispositions of foreclosed properties than the amount of foreclosed
properties transferred to real estate owned.
Total equity increased $14.4 million to $545.8 million at March 31, 2000
compared to $531.5 million at December 31, 1999. This increase resulted from net
income of $7.6 million, and an increase of $6.8 million in accumulated other
comprehensive income for the three months ended March 31, 2000. The increase in
other comprehensive income resulted from an increase in after-tax net unrealized
gains on investments, primarily in the equity portfolio as of March 31, 2000.
Comparison of Operating Results for the Three Months Ended March 31, 2000 and
1999
Net Income. Net income increased by $2.5 million, or 48.0%, to $7.6 million for
the quarter ended March 31, 2000 compared to $5.1 million for the same period in
1999. The increase was primarily driven by the increase in interest and dividend
income of $6.4 million generated from earnings on the additional capital of
approximately $261 million as a result of the Bank's conversion to a public
company. These factors were partially offset by a $1.1 million increase in
interest expense on Federal Home Loan Bank advances, a $1.4 million decrease in
gains on the sale of investment securities and a $1.6 million increase in income
tax expense.
Net Interest Income. Net interest income increased $5.4 million, or 47.9% for
the three months ended March 31, 2000 compared to the three months ended March
31, 1999. The increase was primarily the result of increased interest income
resulting from an increase in the average daily balance and yields of interest
earning assets. The increase in the average daily balance was due to the
reinvestment of additional capital from the conversion to a public company. The
increase in yields on interest earning assets is due to management's investment
strategy of moving to higher yielding investments via the extension of average
maturity primarily through collateralized mortgage obligations.
9
Total interest and dividend income was $31.1 million in the first quarter of
2000 as compared to $24.7 million in the first quarter of 1999. The increase in
interest income was primarily due to a $318.5 million increase in average daily
interest-earning assets to $1.785 billion for the three months ended March 31,
2000, compared to $1.466 billion for the three months ended March 31, 1999 and
to an increase in the yield on interest-earning assets to 6.99% from 6.73% for
the three months ended March 31, 2000 and March 31, 1999, respectively. Interest
income on loans increased $2.4 million, or 14.3%, to $18.9 million, primarily
due to a $130.7 million increase in the average daily balance of loans
outstanding for the first quarter of 2000 as compared to the same period in
1999. Interest and dividend income on a tax-equivalent basis on investment and
mortgage-backed securities increased $4.3 million, or 58.8% for the quarter
ended March 31, 2000 compared to the first quarter of the prior year. The
increase resulted primarily from a $209.6 million increase in the average daily
balances, and a 67 basis point increase in the yield earned on such securities.
The increase in yield in the first quarter of 2000 reflects the gradual increase
in general market interest rates that took place over 1999 and 2000 and
management's strategy to extend the average maturity of investments and
mortgage-backed securities, thereby capturing higher yields.
Total interest expense for the three months ended March 31, 2000 was $14.4
million, an increase of $1.0 million, or 7.5%, compared to $13.4 million for the
three months ended March 31, 1999. This increase was primarily due to a $74.5
million increase in the average daily balance of Federal Home Loan Bank advances
and other borrowings to $198.1 million in the first quarter of 2000, as compared
to $123.5 million for the same period in 1999.
Provision for Loan Losses. The provision for loan losses was $550 thousand for
the three months ended March 31, 2000, a $50 thousand decrease from the $600
thousand provision for the three months ended March 31, 1999. This decrease
reflects management's assessment of the losses inherent in the loan portfolio,
as well as current market conditions. At March 31, 2000 and March 31, 1999 the
allowance for loan losses was $9.2 million and $7.9 million respectively, which
represented 292.43% of nonperforming loans and 0.88% of total loans at March 31,
2000 as compared to 246.27% of nonperforming loans and 0.86% of total loans at
March 31, 1999.
Non-interest Income. Non-interest income decreased $1.2 million, or 29.6%, to
$2.8 million for the three months ended March 31, 2000, primarily due to a
decrease of $1.4 million in gains on the sales of investment securities. During
1999, the Company took advantage of favorable equity market conditions by
selling appreciated equity securities. The Company reinvested the proceeds in
actively traded diversified equity mutual funds in order to diversify risk as
the equity securities portfolio was heavily weighted in financial institution
equities. In the first quarter of 2000, the Company sold a portion of its
appreciated equity securities, again due to favorable market conditions. Service
charges and fees increased $232 thousand in the first quarter of 2000 over the
same period in 1999, primarily as a result of increased commissions from the
Company's investment services subsidiary, American Investment Services, Inc.
Non-interest Expense. Non-interest expense for the three months ended March 31,
2000 was $7.3 million, an increase of $168 thousand, or 2.3%, compared to $7.1
million for the three months ended March 31, 1999. The increase was primarily
due to an increase in outside services offset by a decrease in charitable
contributions. Outside services increased $188 thousand or 2.3% to $935 thousand
for the three months ended March 31, 2000 compared to $747 thousand in the same
period in 1999, primarily due to increased professional and examination fees
associated with being a public company. Charitable contributions decreased $201
thousand, or 85.1%, to $35 thousand for the three months ended March 31, 2000
compared to $236 thousand in the same period in 1999. In the first quarter of
1999 the Bank accrued a contribution of approximately $200 thousand to the
American Savings Bank Foundation, Inc., while no similar accrual was made during
the three months ended March 31, 2000.
10
Income Tax Expense. Income taxes were $4.1 million for the quarter ended March
31, 2000 as compared to $2.5 million for the quarter ended March 31, 1999. The
effective rates were 35.4 % and 33.0% for the three months ended March 31, 2000
and 1999, respectively. The increase in income taxes was primarily due to an
increase in income before income taxes.
Average Balances, Interest and Average Yields/Cost
The following table presents certain information for the periods indicated
regarding average balances of assets and liabilities, as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and the resulting
average yields and costs. The yields and costs for the periods indicated are
derived by dividing annualized income or expense by the average balances of
assets or liabilities, respectively, for the periods presented. Average balances
were derived from daily balances.
11
American Financial Holdings, Inc.
Consolidated Average Balance Sheets and Yield/Rate Analysis
(Unaudited)
For the Quarters Ended
March 31, 2000 March 31, 1999
-------------------------------------------- ----------------------------------------------
Average Average
Average Balance Interest Yield/Rate Average Balance Interest Yield/Rate
--------------- -------- ---------- --------------- -------- ----------
(Dollars in Thousands)
Interest earnings assets:
Loans (1) $ 1,039,776 $ 18,984 7.30 % $ 909,090 16,609 7.31 %
Federal funds sold 11,980 170 5.71 42,090 498 4.80
Investment securities-taxable 346,088 5,662 6.58 329,689 4,621 5.68
Investment securities-tax exempt (2) 15,258 321 8.46 - - -
Mortgage-backed securities 351,081 5,744 6.54 173,116 2,762 6.38
FHLB stock 16,171 260 6.47 9,466 155 6.64
Interest-earning deposits 4,411 63 5.74 2,819 35 5.04
------------- ---------- ----------- ---------- --------- -------
Total interest-earning assets 1,784,765 31,204 6.99 1,466,270 24,680 6.73
Non-interest-earning assets 92,651 103,383
------------- ----------
Total assets $ 1,877,416 $1,569,653
============= ==========
Interest-bearing liabilities:
Deposits
Money management accounts $ 64,219 $ 424 2.66 $ 64,079 $ 433 2.74
NOW accounts 74,333 252 1.36 65,528 219 1.36
Savings and IRA passbook accounts 198,292 996 2.02 195,642 972 2.01
Certificates of deposit 765,755 9,813 5.15 779,567 9,981 5.19
------------- --------- ----------- ---------- ----------- -------
Total interest-bearing deposits 1,102,599 11,485 4.19 1,104,816 11,605 4.26
FHLB advances and other borrowings 198,056 2,923 5.94 123,512 1,793 5.89
------------- --------- ------------ ---------- ----------- -------
Total interest-bearing
liabilities 1,300,655 14,408 4.46 % 1,228,328 13,398 4.42 %
Non-interest bearing demand deposits 23,344 23,924
Non-interest-bearing liabilities 22,338 36,897
------------- ----------
Total liabilities 1,346,337 1,289,149
Stockholders' Equity 531,079 280,504
------------- -----------
Total liabilities and equity $ 1,877,416 $ 1,569,653
============= ===========
Net interest-earning assets $ 484,110 $ 237,942
============= ==========
Net interest income $ 16,796 $ 11,282
========= =========
Interest rate spread 2.53 % 2.31 %
==== ====
Net interest margin (net
interest income as a percentage of
interest-earning assets) 3.76 % 3.08 %
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities 137.22 % 119.37 %
====== ======
Note 1- Average balances include nonaccrual loans
Note 2- Tax exempt interest is calculated on a tax equivalent basis.
Liquidity and Capital Resources
The Company's main sources of liquidity are dividends from the Bank and proceeds
from capital offerings, while the main outflows are the payments of dividends
and operating expenses. The Bank's ability to pay dividends to the Company is
subject to regulatory restrictions which limit its ability to pay dividends,
without prior approval, to an amount not to exceed the sum of the Bank's net
profit for the year in question combined with its retained net profits from the
preceding two calendar years. Regulations also prohibit the payment of dividends
from 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.
12
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. Primary sources of funds consist of
deposit inflows, loan repayments, maturities, paydowns, and sales of investments
and mortgage-backed securities and borrowings from the Federal Home Loan Bank.
While maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit outflows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and
competition.
The primary investing activities of the Bank are: (1) the origination of
residential one- to four-family mortgage loans and, to a lesser extent,
multi-family loans, single-family construction loans, home equity loans and
lines of credit and consumer loans; and (2) the investment in mortgage-backed
securities, U.S. Government and agency obligations, corporate equity securities
and debt obligations. These activities are funded primarily by principal and
interest payments on loans, maturities of securities, deposit growth and Federal
Home Loan Bank advances. Deposit flows are affected by the overall level of
interest rates, the interest rates and products offered by the Bank and its
local competitors and other factors. The Bank 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 such deposits will remain with
the Bank. The Bank closely monitors its liquidity position on a daily basis. If
the Bank should require funds beyond its ability to generate them internally,
additional sources of funds are available through Federal Home Loan Bank
advances and through repurchase agreement borrowing facilities with
broker/dealers.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies including a risk-based capital measure. The
risk-based capital guidelines include both a definition of capital and a
framework for calculating risk-weighted assets by assigning balance sheet assets
and off-balance sheet items to broad risk categories. At March 31, 2000, the
Bank exceeded all of its regulatory capital requirements and was considered
"well capitalized" under regulatory guidelines.
The capital from the Conversion completed in November 1999 significantly
increased liquidity and capital resources. The Company's financial condition and
results of operations have been enhanced by the proceeds from the Conversion,
resulting in increased net interest-earning assets and net income.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented in this report
have been prepared in conformity with generally accepted accounting principles,
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.
13
Part I. Item 3. Qualitative and Quantitative Disclosures about Market Risk
Qualitative Aspects of Market Risk. The Company's most significant form of
market risk is interest rate risk. The principal objectives of the Company's
interest rate risk management are to evaluate the interest rate risk inherent in
certain balance sheet accounts, determine the level of risk appropriate given
the Company's business strategy, operating environment, capital and liquidity
requirements and performance objectives, and manage the risk consistent with the
Board of Directors' approved guidelines. The Company has an Asset/Liability
Committee responsible for reviewing its asset/liability policies and interest
rate risk position, which meets monthly and reports trends and interest rate
risk position to the Finance Committee of the Board of Directors quarterly and
the whole Board of Directors annually. The extent of the movement of interest
rates is an uncertainty that could have a negative impact on the earnings of the
Company.
In recent years, the Company has used the following strategies to manage
interest rate risk:
(1) emphasizing the origination of adjustable-rate loans and generally selling
longer term fixed-rate loans as market interest rate conditions dictate; (2)
emphasizing shorter term consumer loans; (3) maintaining a high quality
securities portfolio that provides adequate liquidity and flexibility to take
advantage of opportunities that may arise from fluctuations in market interest
rates, the overall maturity of which is monitored in relation to the repricing
of its loan portfolio; and (4) using Federal Home Loan Bank advances 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 $73.4 million at March 31, 2000
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 March 31,
2000 and December 31, 1999 estimated changes in the Company's net interest
income for the next twelve month period which may result given instantaneous
changes in market interest rates of 200 basis points up and down.
In an up 200 basis point environment the average constant prepayment rate (the
"CPR") assumptions on mortgage loans and securities were 16.0% and 12.5% on
March 31, 2000 and December 31, 1999, respectively. In a down 200 basis point
environment the CPR prepayment assumptions on mortgage loans and securities were
26.3% and 25.5% on March 31, 2000 and December 31, 1999 respectively. On both
March 31, 2000 and December 31, 1999, the rates paid on non-maturity deposits
(savings, money market and NOW accounts) were assumed not to change under either
interest rate environment.
14
Increase/ Estimated Changes in Annual Net Interest Income
(Decrease) -----------------------------------------------
in market March 31, 2000 December 31, 1999
interest rates -------------- -----------------
in basis points $ % $ %
(Rate Shock) Change Change Change Change
------------------------------------------------------------------------
200 $(1,796) (2.66)% $ (279) (0.43)%
Static - - - -
(200) (323) (0.48) (1,907) (2.92)
Comparing the changes in net interest income at March 31, 2000 and December 31,
1999, the estimated change in net interest income improved by $1.6 million from
($1.9 million) to ($323,000) under a down 200 basis point environment.
Correspondingly, under an up 200 basis point environment, the estimated change
in net interest income worsened by $1.5 million from ($279,000) to ($1.8
million). The change in the Company's interest rate risk profile at March 31,
2000 as compared to December 31, 1999 was primarily attributed to an extension
of four months in the average maturity of the investment portfolio and a
decrease in the average maturity of time deposits.
15
Part II. Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. Such routine
proceedings, in the aggregate, are believed by management to be immaterial to
the Company's financial condition or results of operations.
Part II. Item 2. Changes in Securities and Use of Proceeds
None
Part II. Item 3. Defaults upon Senior Securities
None
Part II. Item 4. Submission of Matters to a Vote of Security Holders
None
Part II. Item 5. Other Information
None
Part II. Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
The following exhibits are included herein:
2.1 Amended Plan of Conversion (including the Certificate of
Incorporation and Bylaws of American Savings Bank)*
3.1 Certificate of Incorporation of American Financial Holdings,
Inc.*
3.2 Bylaws of American Financial Holdings, Inc.*
27 Financial Data Schedule
* Incorporated by reference into this document from the Exhibits to the
Form S-1 Registration Statement, and any amendments thereto,
Registration No. 333-84463
b) Reports on Form 8-K
None.
16
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
American Financial Holdings, Inc.
Date: May 11, 2000 /s/ Robert T. Kenney
_____________________________________________
Robert T. Kenney
Chairman, President and Chief Executive Officer
Date: May 11, 2000 /s/ Charles J. Boulier, III
_____________________________________________
Charles J. Boulier, III
Executive Vice President, Chief Financial
Officer and Treasurer
17