<PAGE>
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 September 30, 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, (or for such shorter period that the regisrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X ] No [_]
Common Stock Par Value $.01 Per Share
27,456,100 Outstanding as of November 6, 2000
<PAGE>
Index
-----
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Item 1. Financial Information (unaudited)
A. Consolidated Balance Sheets as of September 30, 2000 and 1
December 31, 1999
B. Consolidated Statements of Income for the Three and Nine Months 2
Ended September 30, 2000 and September 30, 1999
C. Consolidated Statements of Cash Flows for the Nine Months 3
Ended September 30, 2000 and September 30, 1999
D. Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Consolidated Financial 10
Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures about Market Risk 18
Part II. Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
<PAGE>
American Financial Holdings, Inc.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(In thousands,except share data)
Assets
<S> <C> <C>
Cash and due from banks:
Non-interest bearing $ 15,071 $ 23,290
Interest bearing 25 5,014
------------ ---------------
Total cash and due from banks 15,096 28,304
Federal funds sold 32,100 2,300
------------ ---------------
Cash and cash equivalents 47,196 30,604
Investment securities available for sale (amortized cost of
$300,420 at September 30, 2000 and $378,763 at December 31, 1999) 374,054 435,832
Mortgage-backed securities available for sale (amortized cost of
$285,977 at September 30, 2000 and $348,281 at December 31, 1999) 283,489 341,421
Loans, less allowance for loan losses of $10,189 at September 30, 2000
and $8,820 at December 31, 1999 1,129,435 1,029,531
Real estate owned 79 445
Accrued interest and dividends receivable on investments 7,288 8,833
Accrued interest receivable on loans 6,230 5,697
Federal Home Loan Bank stock 12,194 16,402
Bank premises and equipment, net 13,390 13,373
Other assets 2,690 4,015
------------ ---------------
Total assets $ 1,876,045 $ 1,886,153
============ ===============
Liabilities and Stockholders' Equity
Deposits $ 1,108,419 $ 1,100,486
Mortgagors' escrow and other deposits 16,286 18,751
FHLB advances and other borrowings 202,944 214,444
Deferred income tax liability 20,199 11,835
Accrued interest payable on deposits and FHLB advances 1,608 1,556
Other liabilities 10,059 7,629
------------ -------------
Total liabilities 1,359,515 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 289 289
Additional paid-in capital 282,148 282,148
Unallocated common stock held by ESOP (25,020) (25,020)
Stock-based compensation (196) (160)
Treasury stock at cost, 2,519,840 shares at September 30, 2000 (43,143) -
Retained earnings 259,675 244,007
Accumulated other comprehensive income 42,777 30,188
------------ -------------
516,530 531,452
------------ -------------
Total liabilities and stockholders' equity $ 1,876,045 $ 1,886,153
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------- ----------------- ------------
(In thousands, except per share data)
Interest and dividend income:
<S> <C> <C> <C> <C>
Real estate mortgage loans $ 14,118 $ 12,448 $ 40,665 $ 35,685
Consumer loans 6,699 5,378 18,753 15,676
Mortgage-backed securities 5,351 3,600 16,870 9,489
Federal funds sold 123 70 331 957
Investment securities:
Interest-taxable 4,750 4,249 15,293 12,523
Interest-tax exempt 372 - 871 -
Dividends 930 484 2,382 1,648
------------ ------------- ------------- ------------
Total interest and dividend income 32,343 26,229 95,165 75,978
------------ ------------- ------------- ------------
Interest expense:
Deposits 12,222 11,256 35,381 34,368
Federal Home Loan Bank advances and other
borrowings 3,243 2,716 8,971 6,430
------------ ------------- ------------- ------------
Total interest expense 15,465 13,972 44,352 40,798
------------ ------------- ------------- ------------
Net interest income before provision for loan losses 16,878 12,257 50,813 35,180
Provision for loan losses 400 540 1,520 1,480
------------ ------------- ------------- ------------
Net interest income after provision for loan losses 16,478 11,717 49,293 33,700
---------- ------------- ------------- ------------
Non-interest income:
Service charges and fees 1,072 868 2,888 2,485
Investment advisory fees and commissions 302 391 1,216 1,092
Net gains on sale of investment securities
available for sale 1,793 207 4,779 5,431
Other 90 82 268 280
---------- ------------- ------------- ------------
Total non-interest income 3,257 1,548 9,151 9,288
---------- ------------- ------------- ------------
Non-interest expense:
Salaries and employee benefits 5,459 3,652 13,403 10,400
Occupancy expense 559 588 1,789 1,753
Furniture and fixture expense 430 415 1,287 1,224
Charitable contributions 1 238 45 688
Outside services 480 537 1,978 1,608
Advertising 330 283 1,090 958
Other 1,013 904 3,040 2,620
---------- ------------- ------------- ------------
Total non-interest expense 8,272 6,617 22,632 19,251
---------- ------------- ------------- ------------
Income before income taxes 11,463 6,648 35,812 23,737
Income taxes 3,833 2,642 12,220 8,273
---------- ------------- ------------- ------------
Net income $ 7,630 $ 4,006 $ 23,592 $ 15,464
============ ============= ============= ============
Basic earnings per share 0.30 n/a 0.90 n/a
Diluted earnings per share 0.29 n/a 0.89 n/a
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
AMERICAN FINANCIAL HOLDINGS, INC.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
------------------------------
2000 1999
---------- ---------
(In thousands)
Operating activities:
<S> <C> <C>
Net income $ 23,592 $ 15,464
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 1,520 1,480
Depreciation and amortization of bank premises and equipment 1,471 1,437
Gain on disposition of fixed assets (4) --
Net accretion of discounts (905) (543)
Decrease (increase) in accrued interest and dividends receivable 1,012 (1,539)
Gain on sale of investment and mortgage-backed securities available for sale (4,779) (5,431)
Decrease (increase) in other assets 1,325 (116)
Increase in other liabilities 2,482 256
Increase in net deferred loan origination costs (286) (1,560)
Gain on sale of loans (4) (57)
Net gain on disposition of real estate owned (244) (301)
Deferred income tax expense 15 1,277
-------- --------
Net cash provided by operating activities 25,195 10,367
-------- --------
Investing activities:
Investment securities available for sale:
Purchases (89,227) (218,646)
Proceeds from sales 59,206 8,068
Proceeds from maturities 115,600 247,500
Mortgage-backed securities available for sale
Purchases (14,527) (137,358)
Proceeds from sales 47,615 -
Principal paydowns 27,665 40,288
Proceeds from sale of loans 773 11,063
Redemption (purchases) of Federal Home Loan Bank stock 4,208 (2,364)
Net increase in loans (102,189) (109,567)
Purchases of bank premises and equipment (1,521) (2,413)
Proceeds from the sales of real estate owned 892 1,901
Disposition of fixed assets 37 -
-------- --------
Net cash provided (used) by investing activities 48,532 (161,528)
-------- --------
Financing activities:
Increase in demand deposits, regular savings, NOW and money market accounts 10,109 16,782
Decrease in certificates of deposit and retirement accounts (2,176) (22,223)
Decrease in mortgagors' escrow and other deposits (2,465) (8,799)
Long term advances from the Federal Home Loan Bank 109,000 148,300
Maturities of long term advances from the Federal Home Loan Bank (130,500) (33,800)
Overnight advances from Federal Home Loan Bank 318,743 34,966
Maturities of overnight advances from Federal Home Loan Bank (318,743) (34,966)
Advances from short and long term reverse repurchase agreements 36,666 30,745
Maturities of short term reverse repurchase agreements (26,666) (9,812)
Dividends paid (7,924) --
Acquisition of of common stock for stock-based compensation (36) --
Purchases of treasury stock (43,143) --
-------- --------
Net cash (used) provided by financing activities (57,135) 121,193
-------- --------
Increase (decrease) in cash and cash equivalents 16,592 (29,968)
Cash and cash equivalents at beginning of period 30,604 55,822
-------- --------
Cash and cash equivalents at end of period $ 47,196 $ 25,854
======== ========
Supplemental information:
Cash paid during the period:
Income taxes $ 10,785 $ 6,425
Interest on deposits and borrowings 44,300 39,826
Transfers of loans to real estate owned 282 1,221
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
AMERICAN FINANCIAL HOLDINGS, INC
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Financial Statement Presentation
American Financial Holdings, Inc. (the "Company" or the "Parent Company")
is a savings and loan holding company. The Company's subsidiary, American
Savings Bank (the "Bank"), provides a wide range of banking, financing,
fiduciary and other financial services to individuals 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 the Company'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 include to the determination of the
allowance for loan losses.
All adjustments, consisting of only normal recurring adjustments, which in
the opinion of management are necessary for fair presentation of financial
position, results of operations and cash flows, have been made. The results
of operations for interim periods are not necessarily indicative of the
results that may be expected for another interim period or a full year.
4
<PAGE>
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 September 30, 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
September 30, 2000 and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
September 30, 2000
-------------------------------------------------------------------------
Amortized Cost Gross Gross Fair Value
Unrealized Unrealized
Gains Losses
---------------- --------------- ----------------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Investments:
U.S. Treasury notes $ 5,031 $ 198 $ -- $ 5,229
U.S. Government agencies 24,733 164 (72) 24,825
Corporate bonds and notes 209,041 702 (550) 209,193
Municipal bonds
Tax exempt 26,883 558 (25) 27,416
Taxable 11,097 27 (76) 11,048
Marketable equity securities 23,635 73,214 (506) 96,343
---------------- --------------- ----------------- ------------
300,420 74,863 (1,229) 374,054
---------------- --------------- ----------------- ------------
Mortgage-backed securities:
U.S. Government & agency 149,484 86 (1,699) 147,871
U.S Agency issued collateralized
mortgage obligations 136,493 135 (1,010) 135,618
---------------- --------------- ----------------- ------------
285,977 221 (2,709) 283,489
---------------- --------------- ----------------- ------------
Total available for sale $ 586,397 $ 75,084 $ (3,938) $ 657,543
================ =============== ================= ============
</TABLE>
5
<PAGE>
AMERICAN FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ---------
(In thousands)
<S> <C> <C> <C> <C>
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
Tax exempt 13,537 -- (311) 13,226
Taxable 9,201 -- (167) 9,034
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
=========== ============ ============ =========
</TABLE>
(3) Comprehensive Income
The following tables represent components and the related tax effects
allocated to other comprehensive income for the three and nine-month
periods ended September 30, 2000 and September 30, 1999.
<TABLE>
<CAPTION>
Three months ended
September 30, 2000
-----------------------------------------------------------
Before
Tax Income tax Net-of-tax
Amount effect amount
------------ --------------- -------------
(In thousands)
<S> <C> <C> <C>
Unrealized gain on available for sale securities:
Unrealized holding gains arising during $ 16,329 $ (6,511) $ 9,818
the period
Reclassification adjustment for gains realized
during the period (1,793) 715 (1,078)
---------- ------------- -----------
Other comprehensive income $ 14,536 $ (5,796) $ 8,740
========== ============= ============
</TABLE>
6
<PAGE>
AMERICAN FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30, 2000
-----------------------------------------------------------
Before
Tax Income tax Net-of-tax
Amount Effect Amount
------------ --------------- -------------
(In thousands)
<S> <C> <C> <C>
Unrealized gain on available for sale securities:
Unrealized holding gains arising during
the period $ 25,716 $ (10,254) $ 15,462
Reclassification adjustment for gains realized
during the period (4,779) 1,906 (2,873)
---------- ------------- -----------
Other comprehensive income $ 20,937 $ (8,348) $ 12,589
========== ============= ===========
<CAPTION>
Three months ended
September 30, 1999
-----------------------------------------------------------
Before
Tax Income tax Net-of-tax
Amount Effect Amount
------------ --------------- -------------
(In thousands)
<S> <C> <C> <C>
Unrealized loss on available for sale securities:
Unrealized holding losses arising during
the period $ (9,958) $ 4,239 $ (5,719)
Reclassification adjustment for gains realized
during the period (207) 88 (119)
---------- -------------- ------------
Other comprehensive loss $ (10,165) $ 4,327 $ (5,838)
========== ============== ============
<CAPTION>
Nine months ended
September 30, 1999
-----------------------------------------------------------
Before tax Income tax Net-of-tax
amount effect amount
------------- ---------------- --------------
(In thousands)
<S> <C> <C> <C>
Unrealized loss on available for sale securities:
Unrealized holding losses arising during $ (12,746) 5,417 $ (7,329)
the period
Reclassification adjustment for gains realized
during the period (5,431) 2,305 (3,126)
------------ --------------- -------------
Other comprehensive loss $ (18,177) $ 7,722 $ (10,455)
============= ================ ==============
</TABLE>
7
<PAGE>
AMERICAN FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(4) Earnings Per Share
Basic earnings per share is calculated by dividing net income available to
common stockholders by the weighted-average number of shares of common
stock outstanding during the period. Diluted earnings per share is computed
in a manner similar to that of basic earnings per share except that the
weighted-average number of common shares outstanding is increased to
include the number of additional common shares that would have been
outstanding if all potentially dilutive common shares (such as stock
options and unvested restricted stock) were issued during the period.
Unallocated common shares held by the ESOP are not included in the
weighted-average number of common shares outstanding for either basic or
diluted earnings per share calculations. Unvested restricted shares are not
included in the calculation of basic earnings per share.
The weighted-average shares and earnings per share are detailed in the
table below. Earnings per share data for the three-month and nine-month
periods ended September 30, 1999 does not apply, since the Bank was a
mutual savings bank with no outstanding stock.
<TABLE>
<CAPTION>
(In thousands, except per share data) For the three months ended For the nine months ended
September 30, 2000 September 30, 2000
-------------------------- -------------------------
<S> <C> <C>
Net income $ 7,630 $23,592
Weighted-average common shares outstanding 25,185 26,195
Diluted weighted-average common shares 26,448 26,654
Net income per common share:
Basic $ 0.30 $ 0.90
Diluted $ 0.29 $ 0.89
</TABLE>
(5) Accounting Standards
Statement of Financial Accounting Standards ("SFAS") 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
by SFAS No. 137, the statement is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. In June 2000, FASB issued SFAS
No. 138, which amends certain accounting and reporting standards of SFAS
No. 133. This statement is to be adopted concurrently with SFAS No. 133. On
that date, hedging relationships shall be designated in accordance with
SFAS No. 133 as amended. 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. These statements are not expected to affect the Company
because it does not currently purchase derivative instruments or enter into
hedging activities.
8
<PAGE>
AMERICAN FINANCIAL HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities", a
replacement of SFAS No. 125. SFAS 140 addresses implementation issues that
were identified in applying SFAS No. 125. This statement revises the
standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it
carries over most of SFAS No. 125 provisions without reconsideration. SFAS
No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. SFAS No. 140
is effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. This statement is to be
applied prospectively with certain exceptions. Other than those exceptions,
early or retroactive application is not permitted. Management does not
expect the adoption of SFAS No. 140 to have a material effect on the
Company's financial position or results of operations.
9
<PAGE>
Part I. Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis discusses changes in the financial condition and results
of operations at and for the three and nine months ended September 30, 2000 and
1999, and should be read in conjunction with American Financial Holdings, Inc.'s
Consolidated Financial Statements and the notes thereto, appearing in Part I,
Item 1 of this document.
Forward Looking Statements
This quarterly report contains forward-looking statements that are based on
assumptions and may contain descriptions of future plans, strategies, and
expectations of the Company. These forward-looking statements are generally
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. The Company's ability to predict
results accurately or the actual operations of the Company 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 September 30, 2000 and December 31, 1999.
Total assets at September 30, 2000 were $1.88 billion representing a decrease of
$10.1 million or 0.5% over the December 31, 1999 level of $1.89 billion. The
Bank's Tier 1 leverage capital ratio was 21.1% at September 30, 2000 compared to
23.0% at December 31, 1999. The Bank's total risk based capital ratio was 39.7%
at September 30, 2000 compared to 38.0% at December 31, 1999.
The decrease in assets was primarily a result of the decrease of investment and
mortgage-backed securities totaling $120.0 million and a $4.2 million decrease
in Federal Home Loan Bank stock, partially offset by an increase of $100.0
million in the loan portfolio and a $16.6 million increase in cash and cash
equivalents. The increase in loans was primarily in one-to-four family
adjustable rate mortgages and home equity lines of credit and was due to a
strong demand in the Company's primary housing market and expansion of the
Company's loan markets. The decrease in investment and mortgage-backed
securities available for sale is primarily due to sales and maturities. The
increase in cash and cash equivalents was primarily due to shifting investment
and mortgage-backed securities to higher yielding short-term cash equivalents.
The decrease in Federal Home Loan Bank Stock was due to the reduction in Federal
Home Loan Bank advances, as the minimum level of Federal 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 $8.0 million, or 0.7%, to $1,108 million at September 30,
2000 from $1,100 million at December 31, 1999. The $8.0 million increase
resulted primarily from a $8.3 million increase in core accounts such as
savings, money market and NOW accounts and a $2.2 million increase in demand
deposit accounts offset by a decrease of $2.5 million in time deposit accounts.
Mortgagors' escrow and other deposits decreased $2.5 million from $18.8 million
at December 31, 1999 to $16.3 million at
10
<PAGE>
September 30, 2000 due primarily to a decrease in the amount of bank checks
outstanding. Advances from the Federal Home Loan Bank and other borrowings
decreased $11.5 million to $202.9 million at September 30, 2000 from $214.4
million at December 31, 1999. The decrease was due to $130.5 million of
maturities in FHLB borrowings offset by new FHLB borrowings of $109.0 million
and net new advances of $10.0 million under repurchase agreements. The net
deferred income tax liability increased $8.4 million to $20.2 million at
September 30, 2000 compared to $11.8 million at December 31, 1999, primarily due
to an increase in the deferred tax liability attributable 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 $3.9 million at September 30, 2000 compared to $3.0 million at December
31, 1999. Asset quality remained strong as nonperforming assets to total assets
were 0.21% and 0.16% at September 30, 2000 and December 31, 1999, respectively.
Real estate owned declined from $445 thousand at December 31, 1999 to $79
thousand at September 30, 2000 due to a greater amount of dispositions of
foreclosed properties than the amount of foreclosed properties transferred to
real estate owned. This was the result of current favorable economic conditions
in the local housing market.
The allowance for loan losses at September 30, 2000 and December 31, 1999 was
$10.2 million and $8.8 million respectively, which represented 270.2% of non-
performing loans and 0.90% of total loans at September 30, 2000 as compared to
350% of non-performing loans and 0.85% of total loans at December 31, 1999.
Total equity decreased $14.9 million to $516.5 million at September 30, 2000
compared to $531.5 million at December 31, 1999. This decrease resulted from
the purchase of American Financial Holdings, Inc. treasury stock of $17.9
million to fund the stock awards granted under the American Financial Holdings,
Inc. 2000 Stock-Based Incentive Plan (the "Incentive Plan"), the purchase by the
Company of treasury stock totaling $25.3 million and the net payment of
dividends totaling $7.9 million. The decrease was partially offset by net
income of $23.6 million, and an increase of $12.6 million in accumulated other
comprehensive income. 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 September 30, 2000.
In keeping with its capital management strategy, management announced on June
26, 2000 its plan to repurchase up to 5.0% of the Company's outstanding shares
in open market transactions. As of September 30, 2000, 4.9% of the shares had
been repurchased. In addition, the Company, through the use of an independent
trustee, purchased 3.8% of its outstanding shares on the open market to fund the
recently approved stock awards under the Incentive Plan. The effect of the
stock repurchase and purchase by the trustee for the incentive Plan purchases
was to reduce the amount of the Company's equity.
Comparison of Operating Results for the Three Months Ended September 30, 2000
and 1999
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
11
<PAGE>
economic and competitive conditions, notably changes in market interest rates,
and government policies and regulation.
Net Income. Net income increased by $3.6 million, or 90.5%, to $7.6 million for
the quarter ended September 30, 2000 compared to $4.0 million for the same
period in 1999. The increase was primarily driven by the increase in interest
and dividend income of $6.1 million generated from earnings on the additional
capital of approximately $261.0 million raised as a result of the Bank's
conversion to a public company, less $43.2 million in capital used to fund
purchases of treasury stock, and an increase of $1.6 million on the net gains on
the sale of investment securities. These increases were partially offset by an
increases of $1.5 million for interest expense on deposits, Federal Home Loan
advances and other borrowings, a $1.7 million increase in non-interest expense
and $1.2 million in income tax expense.
Net Interest Income. Net interest income increased $4.6 million, or 37.7%, for
the three months ended September 30, 2000 compared to the three months ended
September 30, 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
net of capital used to fund purchases of treasury stock. The increase in yields
on interest earning assets was due to management's investment strategy of moving
to higher yielding investments, primarily by purchasing a combination of
corporate bonds and mortgage-backed securities with modest extension in duration
in the portfolio and by selling lower yielding investments and mortgage-backed
securities.
Total interest and dividend income was $32.3 million in the third quarter of
2000 as compared to $26.2 million in the third quarter of 1999. The increase in
interest income was primarily due to a $240.6 million increase in average daily
balance of interest-earning assets to $1.78 billion for the three months ended
September 30, 2000, compared to $1.54 billion for the three months ended
September 30, 1999 and to an increase in the yield on interest-earning assets to
7.32% from 6.82% for the three months ended September 30, 2000 and September 30,
1999, respectively. Interest income on loans increased $3.0 million, or 16.8%,
to $20.8 million, primarily due to a $123.7 million increase in the average
daily balance of loans outstanding for the third 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 $3.3 million, or 40.3%
for the quarter ended September 30, 2000 compared to the third quarter of the
prior year. The increase resulted primarily from a $118.3 million increase in
the average daily balances and a 90 basis point increase in the yield earned on
such securities. The increase in yield in the third quarter of 2000 reflects
management's decision to sell lower yielding investments and mortgage-backed
securities, and their strategy to extend the average maturity of investments and
mortgage-backed securities, which have correspondingly higher yields. The
interest on interest-earning deposits decreased $66 thousand due to the decrease
of $5.1 million in average daily balances.
Total interest expense for the three months ended September 30, 2000 was $15.5
million, an increase of $1.5 million, or 10.7%, compared to $14.0 million for
the three months ended September 30, 1999. This increase was primarily due to a
$23.1 million increase in the average daily balance of Federal Home Loan Bank
advances and other borrowings to $207.9 million in the third quarter of 2000, as
compared to $184.8 million for the same period in 1999 and to higher interest
rates. Interest on certificates of deposit increased $971 thousand. Although
the average daily balance on certificates of deposit decreased by $16.1 million,
the decrease was more than offset by an increase in the average rate paid on
those deposits, due to higher market interest rates, of 63 basis points.
Interest expense on FHLB advances and other borrowings increased $565 thousand
due to an increase in the average daily balance of $23.1 million and a 46 basis
point increase in the average rate paid.
Provision for Loan Losses. The provision for loan losses was $400 thousand for
the three months ended September 30, 2000, a $140 thousand decrease from the
$540 thousand provision for the three months
12
<PAGE>
ended September 30, 1999. This decrease reflects management's assessment of the
losses inherent in the loan portfolio. Additionally, the allowance for loan
losses to loans increased from 0.85 % to 0.90% for the nine months ended 2000
and 1999 respectively while the loans charged off decreased from $177 thousand
to $57 thousand for the three months ended September 30, 2000 and 1999
respectively.
Non-interest Income. Non-interest income increased $1.7 million, or 110.4%, to
$3.3 million for the three months ended September 30, 2000, primarily due to an
increase of $1.6 million in net gains on the sales of investment securities and
mortgage-backed securities. The Company sold approximately $96.8 million in
investment and mortgage-backed securities at an average book yield of 5.85%.
The proceeds were used to fund (1) higher yielding loans; (2) the Company's
stock repurchase program and (3) treasury stock purchased to be used for stock
awards under the Incentive Plan. The loss on sale was $3.6 million, which was
offset with gains on the sale of equity securities and equity mutual funds and
mortgage-backed securities. Service charges and fees increased $204 thousand in
the third quarter of 2000 over the same period in 1999, in part due to an
increase in fees charged for transaction account services due to an increased
number of accounts. Investment advisory fees and commissions, which are fees
derived from the Bank's investment services subsidiary, American Investment
Services, Inc., ("AIS") decreased by $89 thousand in part due to staff training
and realignment required for the introduction of investment advisory services.
With this introduction, AIS will begin transitioning from one-time commissions
to fee-based revenues in order to grow and annuitize the business. This
transition is expected to reduce revenue levels over the next several quarters
but is expected to generate higher revenues in advisory fee income after this
period.
Non-interest Expense. Non-interest expense for the three months ended September
30, 2000 was $8.3 million, an increase of $1.7 million, or 25.0%, compared to
$6.6 million for the three months ended September 30, 1999. The increase was
due to an increase in salaries and benefits of $1.8 million primarily due to
costs associated with the Employee Stock Ownership Plan and the Incentive Plans.
Additionally, a one-time $422,000 charge was incurred to reflect the cost of
immediately vesting stock based benefits of a deceased director. This was the
first full quarter that reflected all of the costs associated with the Incentive
Plan and the Employee Stock Ownership Plan. It is expected that compensation
expense for the last quarter of 2000 will correspondingly be higher than the
same period in 1999 due to the implementation of the shareholder approved
Incentive Plan. Other expenses increased $109 thousand or 12.1% from $904
thousand to $1.0 million primarily due to additional expenses necessitated by
being a public company. Charitable contributions decreased $237 thousand, to $1
thousand for the three months ended September 30, 2000. In the third 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 September 30, 2000. Beginning in 2000 the majority of
charitable contributions were made by American Savings Bank Charitable
Foundation.
Income Tax Expense. Income taxes were $3.8 million for the three months ended
September 30, 2000 as compared to $2.6 million for the three months ended
September 30, 1999. The effective rates were 33.4% and 39.7% for the three
months ended September 30, 2000 and 1999, respectively. The increase in income
taxes was primarily due to an increase in income before income taxes offset by a
lower effective tax rate. The lower effective tax rate was the result of a
lower level of nondeductible expenses in 2000, and to a lesser extent, a higher
level of tax exempt municipal bond income.
Comparison of Operating Results for the Nine Months Ended September 30, 2000 and
1999
Net Income. Net income increased by $8.1 million, or 52.6%, to $23.6 million for
the nine months ended September 30, 2000 compared to $15.5 million for the same
period in 1999. The increase was primarily driven by the increase in interest
and dividend income of $19.2 million generated from earnings on the additional
capital of approximately $261.0 million raised as a result of the Bank's
conversion to a public company less capital used to fund purchases of treasury
stock for the repurchase program and treasury
13
<PAGE>
stock to be used for stock awards under the Incentive Plan. These factors were
partially offset by a $2.5 million increase in interest expense on Federal Home
Loan Bank advances and other borrowings, a $1.0 million increase in interest
expense on deposits, a $137 thousand decrease in total non-interest income, a
$3.4 million increase in non-interest expense and a $3.9 million increase in
income tax expense.
Net Interest Income. Net interest income increased $15.6 million, or 44.4%, for
the nine months ended September 30, 2000 compared to the nine months ended
September 30, 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
less capital used to fund purchases of treasury stock. The increase in yields
on interest earning assets is due to management's investment strategy of moving
to higher yielding investments, primarily by purchasing a combination of
corporate bonds and mortgage-backed securities with modest extension in duration
in the portfolio and selling lower yielding investments and mortgage-backed
securities.
Total interest and dividend income was $95.2 million in the nine months ended
September 30, 2000 as compared to $76.0 million in the corresponding period last
year. The increase in interest income was primarily due to a $277.5 million
increase in average daily balance of interest-earning assets to $1.78 billion
for the nine months ended September 30, 2000, compared to $1.51 billion for the
nine months ended September 30, 1999 and to an increase in the yield on
interest-earning assets to 7.14% from 6.72% for the nine months ended September
30, 2000 and September 30, 1999, respectively. Interest income on loans
increased $8.1 million, or 15.7%, to $59.4 million, primarily due to a $120.4
million increase in the average daily balance of loans outstanding for the nine-
month period of 2000 as compared to the same period in 1999 and a 19 basis point
increase in the average yield. Interest and dividend income on a tax-equivalent
basis on investment and mortgage-backed securities increased $12.0 million, or
52.3% for the nine months ended September 30, 2000 compared to the same period
of the prior year. The increase resulted primarily from a $175.7 million
increase in the average daily balances, and a 81 basis point increase in the
yield earned on such securities. The increase in yield in the nine month period
of 2000 reflects the gradual increase in general market interest rates that has
taken place since September 1999, and management's strategy to extend the
average maturity of investments and mortgage-backed securities, which have
correspondingly higher yields and selling lower yielding investments and
mortgage-backed securities.
Total interest expense for the nine months ended September 30, 2000 was $44.4
million, an increase of $3.6 million, or 8.7%, compared to $40.8 million for the
nine months ended September 30, 1999. This increase was primarily due to a
$53.4 million increase in the average daily balance of Federal Home Loan Bank
advances and other borrowings to $197.8 million in the nine month period of
2000, as compared to $144.5 million for the same period in 1999 and to higher
interest rates.
Provision for Loan Losses. The provision for loan losses was $1.52 million for
the nine months ended September 30, 2000, a $40 thousand increase from the $1.48
million provision for the nine months ended September 30, 1999. This increase
reflects management's assessment of the losses inherent in the loan portfolio
including the impact of continual growth in the loan portfolio offset by a
decline of $465 thousand in charge-offs from $689 thousand in the nine months
ended September 30, 1999.
Non-interest Income. Non-interest income decreased $137 thousand, or 1.5%, to
$9.2 million for the nine months ended September 30, 2000, primarily due to a
decrease of $652 thousand in net gains on sales of investment securities.
During 1999, the Company took advantage of favorable equity market conditions by
selling appreciated equity securities for a gain of $5.0 million. During 2000
the Company sold $96.8 million in corporate and mortgage-backed securities at a
loss of $3.6 million and $5.2 million in equity securities and equity mutual
funds at a net gain on sale of $8.4 million These sales reduced the
14
<PAGE>
Company's lower yielding investments and mortgage-backed securities and its
exposure to the equity markets, particularly the financial services sector.
Service charges and fees increased $403 thousand or 16.2% in the nine-month
period of 2000 over the same period in 1999, primarily as a result of increase
in fees charged on transaction account services. Investment advisory fees and
commissions from the Bank's investment services subsidiary, American Investment
Services, Inc., increased $124 thousand or 11.4% to 1.2 million in the nine-
month period ended September 30, 2000 over the same period last year due to an
increased level of sales. However, due to a staff training and realignment in
the third quarter required for the introduction of investment advisory services,
it is expected that this transition will reduce revenue levels over the next
several quarters but generate higher revenues in advisory fee income after this
period.
Non-interest Expense. Non-interest expense for the nine months ended September
30, 2000 was $22.6 million, an increase of $3.4 million, or 17.6%, compared to
$19.3 million for the nine months ended September 30, 1999. The increase was
primarily due to an increase in salaries and benefits of $3.0 million primarily
due to costs associated with the employee stock ownership and stock based
Incentive Plan. It is expected that compensation expense will rise during the
remaining three months of 2000 due to the continued funding of the stock awards
granted under the Incentive Plan and the Employee Stock Ownership Plan.
Additionally, outside services increased $370 thousand or 23.0% from $1.6
million to $2.0 million due primarily to increased professional services
necessitated by being a public company. Advertising expense increased $132
thousand, or 13.8%, from $958 thousand to $1.1 million due to the promotional
campaign to take advantage of in-market branch consolidations and promotion of
the equity line of credit product. Other expenses increased $420 thousand or
16.0% from $2.6 million to $3.0 million primarily due to annual statement
preparation, regulatory filing fees and annual meeting costs necessitated by
being a public company. Charitable contributions decreased $643 thousand, or
93.5%, to $45 thousand for the nine months ended September 30, 2000 compared to
$688 thousand in the same period in 1999. In the first nine months of 1999, the
Bank accrued a contribution of approximately $600 thousand to the American
Savings Bank Foundation, Inc., while no similar accrual was made during the nine
months ended September 30, 2000. As a result of the creation of the Company
sponsored foundations, the company expects that substantially all of the
charitable contributions will be made indirectly by the foundations in future
periods.
Income Tax Expense. Income taxes were $12.2 million for the nine months ended
September 30, 2000 as compared to $8.3 million for the nine months ended
September 30, 1999. The effective rates were 34.1% and 34.9% for the nine months
ended September 30, 2000 and 1999, respectively. The increase in income taxes
was primarily due to an increase in income before income taxes.
15
<PAGE>
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.
<TABLE>
<CAPTION>
For the Three Months Ended
Sept 30, 2000 Sept. 30, 1999
------------------------------------------ -------------------------------------
Average Average
Average Balance Interest Yield/Rate Average Balance Interest Yield/Rate
--------------- ---------- ---------- --------------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (1) $1,102,552 $20,817 7.55% $ 978,804 $17,826 7.28%
Federal funds sold 7,477 123 6.58 5,632 70 4.97
Investment securities-taxable 308,237 5,435 7.05 306,334 4,491 5.86
Investment securities- tax exempt (2) 26,605 559 8.40 - - -
Mortgage-backed securities 320,833 5,354 6.68 231,004 3,600 6.23
FHLB stock 12,194 245 8.04 10,470 176 6.72
Interest-earning deposits 38 0.2 2.11 5,129 66 5.15
---------- ------- ---- ---------- ------- ------
Total interest-earning assets 1,777,936 $32,533 7.32 1,537,373 $26,229 6.82%
Non-interest-earning assets 111,370 117,702
---------- ----------
Total assets $1,889,306 $1,655,075
========== ==========
Interest-bearing liabilities:
Deposits
Money management accounts $ 60,823 $ 415 2.71% $ 66,042 $ 449 2.70%
NOW accounts 80,521 274 1.35 71,251 243 1.35
Savings and IRA passbook accounts 203,839 1,037 2.02 208,355 1,044 1.99
Certificates of deposit 749,440 10,496 5.57 765,545 9,520 4.93
---------- ------- ---- ---------- ------- ------
Total interest-bearing deposits 1,094,623 12,222 4.44 1,111,193 11,256 4.02
FHLB advances and other borrowings 207,907 3,243 6.21 184,787 2,716 5.83
---------- ------- ---- ---------- ------- ------
Total interest-bearing liabilities 1,302,530 $15,465 4.72% 1,295,980 $13,972 4.28%
Non-interest bearing demand deposits 26,285 24,145
Other non-interest-bearing liabilities 35,705 49,994
---------- ----------
Total liabilities 1,364,520 1,370,119
Stockholders' equity 524,786 284,956
---------- ----------
Total liabilities and equity $1,889,306 $1,655,075
========== ==========
Net interest-earning assets $ 475,406 $ 241,393
========== ==========
Net interest income $17,068 $12,257
======= =======
Interest rate spread 2.60% 2.54%
====== ======
Net interest margin (net interest income
as a percentage of interest-earning 3.84% 3.19%
assets) ====== ======
Ratio of interest-earning assets to
Interest-bearing liabilities 136.50% 118.63%
====== ======
</TABLE>
Note 1- Average balances include nonaccrual loans.
Note 2- Tax exempt interest is calculated on a tax
equivalent basis.
16
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended
Sept. 30, 2000 Sept. 30, 1999
------------------------------------------ -------------------------------------
Average Average
Average Balance Interest Yield/Rate Average Balance Interest Yield/Rate
--------------- -------- ---------- --------------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (1) $1,068,974 $59,418 7.41% $ 948,608 $51,361 7.22%
Federal funds sold 7,338 331 6.01 26,608 957 4.80
Investment securities-taxable 331,252 16,858 6.79 315,660 13,520 5.71
Investment securities- tax exempt (2) 20,946 1,323 8.42 - - -
Mortgage-backed securities 340,783 16,870 6.60 201,575 9,489 6.28
FHLB stock 13,515 754 7.44 10,127 483 6.36
Interest-earning deposits 1,776 63 4.73 4,505 168 4.97
------------- ------- ----- ---------- ------- -----
Total interest-earning assets 1,784,584 $95,617 7.14% 1,507,083 75,978 6.72%
Non-interest-earning assets 100,195 104,059
------------- ----------
Total assets $1,884,779 $1,611,142
============= ==========
Interest-bearing liabilities:
Deposits
Money management accounts $ 62,410 $ 1,257 2.69% $ 65,235 $ 1,318 2.70%
NOW accounts 78,403 797 1.36 69,150 702 1.36
Savings and IRA passbook accounts 202,234 3,062 2.02 205,625 3,039 1.98
Certificates of deposit 757,635 30,265 5.34 776,117 29,309 5.05
------------- ------- ----- ---------- ------- -----
Total interest-bearing deposits 1,100,682 35,381 4.29 1,116,127 34,368 4.12
FHLB advances and other borrowings 197,840 8,971 6.06 144,471 6,430 5.95
------------- ------- ----- ---------- ------- -----
Total interest-bearing liabilities 1,298,522 $44,352 4.56% 1,260,598 $40,798 4.33%
Non-interest bearing demand deposits 25,144 24,351
Other non-interest-bearing liabilities 29,353 42,798
------------- ----------
Total liabilities 1,353,019 1,327,747
Stockholders' equity 531,760 283,395
------------- ----------
Total liabilities and equity $1,884,779 $1,611,142
============= ==========
Net interest-earning assets $ 486,062 $ 246,485
============= ==========
Net interest income $51,265 $35,180
======= =======
Interest rate spread 2.58% 2.39%
====== ======
Net interest margin (net interest income
as a percentage of interest-earning 3.83% 3.11%
assets) ====== ======
Ratio of interest-earning assets to
interest-bearing liabilities 137.43% 119.55%
====== ======
</TABLE>
Note 1- Average balances include nonaccrual loans.
Note 2- Tax exempt interest is calculated on a tax
equivalent basis.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future short-term financial
obligations. The Company further defines liquidity as the ability to respond to
the needs of depositors and borrowers as well as maintaining the flexibility to
take advantage of investment opportunities. The Company's main sources of
liquidity are dividends from the Bank and proceeds from capital offerings, while
the main outflows are the payments of dividends, purchase of treasury stock 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 by the Bank if doing so would cause it to be "undercapitalized".
Further restrictions prohibit the payment of dividends if such dividends would
reduce stockholders' equity below the amount of the liquidation account required
by the Connecticut conversion regulations. The Bank's primary sources of funds
consist of deposit inflows, loan repayments, maturities, paydowns, and sales of
investments and
17
<PAGE>
mortgage-backed securities and borrowings from the Federal Home Loan Bank. While
maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit outflows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
The primary investing activities of the Bank are: (1) the origination of
residential one to four-family mortgage loans, single-family construction loans,
home equity loans and lines of credit and consumer loans; and (2) the investment
in mortgage-backed securities, U.S. Government and agency obligations, corporate
equity securities and debt obligations. These activities are funded primarily by
principal and interest payments on loans, maturities of securities, deposit
growth and Federal Home Loan Bank advances. Deposit flows are affected by the
overall level of interest rates, the interest rates and products offered by the
Bank and its local competitors and other factors. The Bank 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 has outstanding loan commitments that consist of unused lines of credit
available through ready reserve lines of credit, equity lines of credit and
commitments for mortgages loans.
The Bank is subject to various regulatory capital requirements administered by
the state and federal banking agencies including a risk-based capital measure.
The risk-based capital guidelines include both a definition of capital and a
framework for calculating risk-weighted assets by assigning balance sheet assets
and off-balance sheet items to broad risk categories. At September 30, 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.
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
18
<PAGE>
Company has an Asset/Liability Committee responsible for reviewing its
asset/liability policies and interest rate risk position, which meets monthly
and reports trends and interest rate risk position to the Finance Committee of
the Board of Directors quarterly and the whole Board of Directors annually. The
extent of the movement of interest rates is an uncertainty that could have a
negative impact on the earnings of the Company.
In recent years, the Company has used the following strategies to manage
interest rate risk:
(1) emphasizing the origination of adjustable-rate loans and generally selling
longer term fixed-rate loans as market interest rate conditions dictate; (2)
emphasizing shorter term consumer loans; (3) maintaining a high quality
securities portfolio that provides adequate liquidity and flexibility to take
advantage of opportunities that may arise from fluctuations in market interest
rates, the overall maturity of which is monitored in relation to the repricing
of its loan portfolio; and (4) using Federal Home Loan Bank advances and
repurchase agreements to better structure maturities of its interest rate
sensitive liabilities. The Company currently does not participate in hedging
programs, interest rate swaps or other activities involving the use of off-
balance sheet derivative financial instruments.
The Company's market risk also includes equity price risk. The marketable equity
securities portfolio had net unrealized gains of $72.7 million at September 30,
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 September
30, 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 14.6% and 12.5% on
September 30, 2000 and December 31, 1999, respectively. In a down 200 basis
point environment, the CPR prepayment assumptions on mortgage loans and
securities were 26.1% and 25.5% on September 30, 2000 and December 31, 1999,
respectively. On both September 30, 2000 and December 31, 1999, the rates paid
on non-maturity deposits (savings, money management and NOW accounts) were
assumed not to change under either interest rate environment.
Increase/ Estimated Changes in Annual Net Interest Income
-----------------------------------------------
(Decrease) September 30, 2000 December 31, 1999
------------------ -----------------
in market (Dollars in thousands)
interest rates
in basis points $ $ % %
(Rate Shock) Change Change Change Change
-------------------------------------------------------------
200 $ 26 0.04% $ ( 279) (0.43)%
Static - - - -
(200) $(1,754) (2.64)% $(1,907) (2.92)%
19
<PAGE>
Comparing the changes in net interest income on September 30, 2000 and December
31, 1999, the estimated change in net interest income improved by $0.153 million
from ($1.9 million) to ($ 1.8 million) under a down 200 basis point environment.
Correspondingly, under an up 200 basis point environment, the estimated change
in net interest income improved by $0.305 million from ($0.279 million) to
$0.026 million. The change in the basic interest rate risk profile on September
30, 2000 as compared to December 31, 1999 was primarily attributed to the
reduction in the asset sensitivity of the balance sheet. This essentially
occurred because of the reinvestment of the auction market preferred stock
portfolio into longer-term assets and the reinvestment of investment portfolio
cash flows into primarily three to five year securities.
20
<PAGE>
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.
21
<PAGE>
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: November 9, 2000 /s/ Robert T. Kenney
--------------------
Robert T. Kenney
Chairman, President and Chief Executive
Officer
Date: November 9, 2000 /s/Charles J. Boulier, III
--------------------------
Charles J. Boulier, III
Executive Vice President, Chief Financial
Officer and Treasurer
22
